No div­i­dend for three years, more job cuts at Kumba

Slump­ing iron ore mar­ket forces pro­ducer’s hand as slow re­cov­ery is pre­dicted, writes

CityPress - - Business -

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.

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