Earnings more than double in successful year for iron ore firm, but no dividend paid
Earnings more than double
KUMBA Iron Ore, the listed supplier of iron ore to the global steel industry, held off on paying a dividend despite chief executive,Themba Mkhwanazi stating it had been a successful financial year in which the group more than double earnings.
Despite a strong financial and operational performance, the company’s share price on the JSE slumped 7.16 percent to close at R209.35.
In the year to December, Kumba’s Sishen and Kolomela mines delivered a total of 41.5 million tons of iron ore, while group revenue went up 13 percent from R36.1 billion recorded last year to R40.8bn.
Operating profit increased by 78 percent to R15.3bn. In December, the company had a net cash position of R6.2bn.
The group, however, said it would take a wait-and-see stance on the resumption of dividend in the face of market uncertainty.
Kumba chief financial officer Frikkie Kotzee said the company considered factors such as iron ore prices, exchange rate and freight rates in its decision not to declare a dividend.
“The prudent stance is also appropriate, given the Anglo American portfolio review,” said Kotzee, who also announced his resignation from Kumba after a five-year stint with the miner. Kotzee said he would remain with the company until the general meeting on May 11.
Mkhwanazi said it was vital for the company to learn from the lessons of the past few years when there was a downward swing in iron ore prices.
“We, therefore, believe that it is of overriding importance to have a conservative capital structure at this time.
“We have widely acknowledged uncertainty about commodity prices and a business that has just finished radical configuration,” he said.
Mkhwanazi said Kumba would keep the resumption of dividends under review and would provide a further update at half year.
“Previously, we have made it our policy that we will always return excess cash back to our shareholders. That policy does not change. The bigger driver that influenced of our decision was more around the volatility in terms of the variables in the market,” Mkhwanazi said.
Previous lows
Iron ore prices basically doubled over the course of last year, recovering from previous lows of less than $40 (R533.63) in December 2015, he said.
While iron ore prices had continued to trade at more than $80 “we believe that the price risk going forward is skewed towards the downside”. Mkhwanazi said a significant pit reconfiguration and restructuring at Sishen was successfully completed.
“This, along with stringent cost measures, contributed to a material reset to our cost base. The rise in prices and the notable success in having full value recognised for Kumba’s premium product alongside our cost reduction efforts resulted in improved margins and a strong cash flow generated.”
He said following the reconfiguration of the Sishen pit to a low-cost base, its operating performance needed to be stabilised through the use of technology. For the year to December, Sishen produced 28.4 million tons, while Kolomela produced 12.7 million tons of iron ore.
“In 2017, my emphasis will be on continuing to improve our performance in anticipation of what could be another tough year ahead, including higher waste, mining cost inflation and further market volatility.”
He said the company exercised strict capital discipline by assessing every item of proposed capital expenditure. Kumba also considered cancelling, reducing the cost or delaying capital expenditure.
Meanwhile, Kumba has reached a R2.5bn settlement agreement with the SA Revenue Service in relation to, among others, assessments received for the years 2006 and 2010.