LOWER PROF­ITS PRE­DICTED

Finweek English Edition - - INVESTMENT -

Kumba Iron Ore re­sults were strong and the stock now sits on a div­i­dend yield of al­most 8%, but I have two con­cerns. The mi­nor one is the strip ra­tios at its Sishen mine. In short, it is get­ting less iron ore per ton mined as it has al­ready mined the higher qual­ity ore body. This is part and par­cel of the sec­tor, as min­ers will al­ways start with the juici­est part and then slowly move to less prof­itable ore bod­ies, but of big­ger con­cern is the de­mand and sup­ply equa­tion that ul­ti­mately prices ev­ery com­mod­ity. The great­est de­mand for iron ore comes from China and the risk is a slow­down in de­mand there. The other side of the equa­tion is sup­ply and we know there is a lot more sup­ply com­ing on to the mar­ket and for the price to re­main sta­ble, we need this ex­tra sup­ply to be met with in­creased de­mand. That’s the prob­lem: a lack of in­creas­ing de­mand will see the price drop. Kumba is one of the world’s most low-cost pro­duc­ers so it will still make prof­its but they’ll be lower.

Erik Venter,

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