No dividend for three years, more job cuts at Kumba
Slumping iron ore market forces producer’s hand as slow recovery is predicted, writes
The dire state of the global iron ore market could mean Kumba Iron Ore will not pay its shareholders a dividend for three years, up until after the end of 2017.
Given the tough conditions, the company last year suspended its dividend, cut R4 billion in costs, reduced its net debt by 42% to R4.6 billion and slashed thousands of jobs.
Kumba chief executive Norman Mbazima said the company would look at restating its dividend every six months.
The company cut its dividend last year for the first time since it listed on the JSE in November 2006.
Wade Napier, an analyst at Avior Research, said it was difficult to predict when Kumba might resume its dividend because he suspected the iron ore price was still at risk of declining.
“However, if prices stay at $45 [R714] a ton, then Kumba could potentially pay a dividend in the first half of 2018,” Napier added.
Stephen Meintjes, an analyst at Momentum SP Reid, said that without a recovery in the iron ore price, it was unlikely that Kumba would resume its dividend either this year or in 2017.
“We will go with Kumba’s view that the international iron ore price will remain subdued,” Meintjes added.
Kumba’s share plunged this week after the group said it was facing a blow in the form of an extra multibillion-rand tax charge as it reported a sharp drop in its annual profit.
Mbazima said the SA Revenue Service (Sars) had conducted a tax audit of Kumba for the period from 2006 to 2010, and this audit could result in extra tax of about R1.8 billion, excluding any potential interest and penalties.
This news, together with the dismal results, caused Kumba’s share price on the JSE on Tuesday to fall by as much as 12.3%, which brought the company’s total share price losses over the past year to 82%.
Avior’s Napier said: “Firstly, I feel the rally that saw Kumba’s share price ... overdone and the share price became expensive. Therefore, the decline today [Tuesday] was potentially investors banking profit as well as the negative sentiment surrounding a potential additional tax charge.”
The mining company reported a 66% drop in headline earnings for last year to R3.8 billion, partly due to the 42% decline in the iron ore price to $56 a ton.
The drop in the iron ore price was due to increased supply from Australia and Brazil, and lower crude steel production in China and elsewhere.
“The price decline severely impacted earnings and profitability,” Mbazima said.
Annual operating profit declined by 86% to R19.2 billion.
Mbazima said the company was aiming to reduce its breakeven cash price to below $40 a ton, with even a cash breakeven cost of $32 a ton on the cards based on the current rand exchange to the US dollar as well as prevailing freight and lump iron ore premium.
Momentum’s Meintjes said it was a welcome development that Kumba had got stuck into cutting its costs. “Kumba should survive now,” Meintjes added. “The market was recently pricing in that Kumba would continue making losses. The company is making a turnaround.”
London-based equities broker SP Angel said in a note that: “Kumba has been working hard to control costs and conserve cash against the sharp fall in iron ore prices.
“It looks as if their breakeven is not too far from current iron ore prices.”
Total job losses at Kumba since the downturn in the iron ore price started will rise to over 6 300 once the group’s latest restructuring is complete.
Kumba is in the process of cutting 2 633 permanent jobs and 1 300 contractor positions at its Sishen mine.
These cuts added to the 800 jobs lost at the company’s Thabazimbi mine, 1 356 positions slashed at the group’s head office and 250 support staff jobs, Mbazima said. This would bring the total jobs lost to 6 339.
Frikkie Kotzee, Kumba chief financial officer, said the latest job cuts at the Sishen mine would cost the firm R300 million to complete and would achieve cost savings of R550 million from this year.