LOWER PROFITS PREDICTED
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.