Kumba dilemma to sell while iron is hot

THE fate of Kumba Iron Ore, which is up for sale by parent Anglo American, gets increasingly interesting as the price of ore scales new heights.

The base metal reached a new peak of $83.65 a ton earlier this week after a rally last year that lifted the price 82.5%.

The gains are on the back of market speculation that China will maintain demand for overseas ore, and expectations that President Donald Trump will announce plans for increased spending on US infrastructure.

Kumba’s shares have rallied 342% since last year, outperforming the world’s largest iron-ore producers. BHP Billiton’s value rose 47.5% and Rio Tinto’s rose 39.4%.

Peter Major, mining analyst at Cadiz Corporate Solutions, said now was the best time for Anglo American to sell Kumba.

“[Prices] are above the longterm average, they are above the mean and mining gets harder every year in South Africa,” said Major.

“A year ago there were no buyers but a lot of sellers. Now they [Anglo] refuse to sell and people want to buy. It’s a good time to get rid of Kumba. I don’t trust these prices.”

In December Kumba said it expected its earnings to increase about 20% to R4.5-billion in 2016 compared with R3.79billion in the previous year.

The stock has been outperforming the JSE on the back of a 93.3% increase in iron-ore imports by China last year.

Sentendra Naidoo, a fund manager at Capricorn Capital, said China had positive growth in the fourth quarter and would try not to let this slip.

Ian Cruikshanks, chief economist at the South African Institute of Race Relations, said expectations that China would stimulate the economy at a slightly higher rate were driving the iron ore-rally.

“Expectations are that the US is going to stimulate its economy. It’s been promised that it will have significant fiscal expenditure and tax rates will be cut, spending will be increased, and all that will stimulate the economy,” he said.

Cruikshanks said that even with the promise of investment in infrastructure, it was not imminent.

This meant rallies in commodity prices were short term and might last for the next three months or so.

He said that as long as the iron-ore price held, Anglo American should hold on to Kumba.

Naidoo agreed that Anglo American was right to hold on to the asset, but the company needed to find a balance between selling this year or next when it was not clear how iron ore would perform.

“A sale to another company will be the best situation, but a sale will be hard because they are not the cheapest producers in the world,” said Naidoo. “Australians can produce iron ore far cheaper.”

Naidoo said a spin-off might work in South Africa, to create a BEE mining champion of which Kumba would form the base.

“But it will have to be combined with other metals because you never want iron ore by itself, producing at a high cost,” Naidoo said.