Don’t get weighed down

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­

Kumba Iron Ore’s rally from 2 530c/share to 11 200c/share since the mid­dle of Jan­uary took many in­vestors by sur­prise. The rally has been par­tic­u­larly un­ex­pected given the bear­ish com­ments by CEO Nor­man Mbaz­ima in De­cem­ber 2015, when he an­nounced that Kumba would cut its 2016 pro­duc­tion tar­get by about 28% to 26m tons at its Sishen mine to adapt to lower iron ore prices and con­cerns over growth in China – the world’s big­gest iron ore con­sumer.

Mbaz­ima said at the time that Sishen will tar­get costs of $30 a ton, with a break-even price of $40 a ton in 2016. At the time of writ­ing, the bench­mark spot price for iron ore was up around 35% since the start of Jan­uary and was trad­ing just be­low $59 a ton, down from an av­er­age price of $135 a ton in 2013. The rally in iron ore prices has been the main rea­son for the jump in Kumba shares. How­ever, global over­sup­ply of iron ore is still an is­sue, which ques­tions the longevity of that up­side.

An­other con­cern is the Fe­bru­ary an­nounce­ment by An­glo Amer­i­can, which owns nearly 70% of Kumba Iron Ore, that it no longer sees this in­vest­ment as core to its op­er­a­tions. An­glo said it is weigh­ing op­tions to exit its stake, ei­ther through sell­ing off its shares or spin­ning off the busi­ness. Kumba is also fac­ing a R5.5bn tax bill (which in­cludes R3.7bn in in­ter­est and penal­ties) for the 20112013 fi­nan­cial years, a claim it is dis­put­ing. The tax bill con­sti­tutes around 24% of Kumba’s cur­rent mar­ket cap­i­tal­i­sa­tion. How to trade it: Kumba is al­ready cor­rect­ing from highs at 11 200c/share, and could fall fur­ther if prior lows at 7 100c/share fail to hold – the cur­rent up­trend would be breached, and the 5 400c/share level would come into play. Main­tain a tight trail­ing stop-loss. Oth­er­wise, an up­ward re­ver­sal above 9 250c/share would end the cor­rec­tion, po­ten­tially pro­mot­ing gains back to the 11 200c/share level and be­yond.

Nor­man Mbaz­ima CEO of Kumba Iron Ore

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