No reprieve in sight
Kumba shares continue to slide on the JSE. After an all-time high of over R600 in early 2013, the miner is now trading 90% lower at under R60 at the time of writing. In time the company’s fortunes will turn and while some are suggesting that the miner may go bust, I think that is unlikely. However, with iron ore prices continuing to fall and expected prices at under $50 a ton for 2016 and 2017, the tough times are here to stay for a while. For the half-year to June, it made headline earnings per share (HEPS) of R7.85 and if Kumba can do that again in the second half, then there will be no dividend. But it does put the stock on a price-to-earnings ratio (P/E) of around 4 times. Even a drop in HEPS would see a P/E of maybe 6 times. This is seemingly very cheap, but with a very tough couple of years still ahead I would not be rushing in to buy the stock. Iron ore production is still being increased globally while demand remains very weak. If the price goes below $40 a ton, things will start to get very messy at Kumba.