Don’t get weighed down
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