Analysts work angles on Kumba Iron Ore bonanza

WITH an increase in iron ore demand, Anglo American’s Kumba Iron Ore is bringing in an outstanding R2-billion in cash flow a month — and the question of the group letting the asset go now seems absurd, according to some commentators.

Not that it would be short of buyers, now that it has resolved some of its issues: settling with the South African Revenue Service, closing the unprofitable Thabazimbi mine and completing its restructuring.

This week, Kumba Iron Ore’s 2016 annual results showed that the company had cut the R4.6-billion net debt of the previous year.

Kumba produces at about twice the cost of its competitors but delivers a premium-grade ore that is increasingly in demand.

China is trying to meet its gas emissions-reduction target, and the premium iron ore produced by Kumba is a more environmentally friendly product for manufacturing steel.

Kumba offers a 64%-66% grade of iron ore; the next best is about 54%.

But, as Kumba CEO Themba Mkhwanazi said this week, the company produces iron ore at about $27 (R350) a ton compared to its peers, which produce at $13 to $20 a ton. Global iron ore producers produce 150 million to 350 million tons per year, whereas Kumba produces about 45 million tons.

“We operate in a highly competitive environment and when you look at where Kumba is relative to its peers in terms of the cost curve, there is still more work for us to do to remain competitive, such as productivity improvement [and cost base],” Mkhwanazi said.

Big producers ought perhaps to want to buy out Kumba to gain the advantage in the premium oregrade market, but most analysts think this is not the case.

René Carlo Hochreiter, an analyst at Noah Capital Markets, said he did not think they would be willing to bid for Kumba because of the political environment in South Africa.

He added that, given the rewards Kumba is reaping from the asset, Anglo would be stupid to give it away now at any price — unless of course “it’s a hell of a big price”.

Wade Napier, an analyst at Avior Capital Markets, concurred, saying global iron ore miners would probably be unwilling to buy Kumba because in terms of geography Australia is closer to China than South Africa is — and because the big players produce iron at half the price.

“At the current price its unlikely you would find a willing buyer, given that most people expect the price to fall,” he added.

Napier forecasts the price will average $80 a ton in the first quarter and fall to about $65 a ton in the second.

It was trading at its highest this week at $92.23 a ton.

Kumba suspended dividends this year to preserve the 24% increase in cash flow. It will reevaluate this throughout the year. It forecasts an iron ore price of $50 to $60 a ton this year.