BUSINESS MAVERICK: Why investing in high-flying Kumba may not be a good idea

Kumba Iron Ore has been good to its stakeholders. Generous in fact. For the six months to June 2019, the company reported an increase in headline earnings by 239% to R10.1-billion and declared an interim cash dividend of R9.9-billion or R30.79 per share. This represents a payout ratio of 98% of headline earnings, above its target range of 50% to 75% of headline earnings.

Kumba had to deal with unplanned maintenance at Sishen, which cut into production volumes. The company reported that total tonnes mined decreased marginally by 2% to 138Mt, while production volumes reduced by 11% to 201.1 Mt for the period under review. The company’s operational efficiency increased from 63% to 67%, which, together with its focus on cost optimisation, delivered savings of R460-million. This underpinned its earnings before interest, tax, depreciation and amortisation margin of 58% and its break-even price of US$32/tonne.

Whitburn says the lucrative iron ore price might prove to be Kumba’s Achilles heel. He says the current price serves as an incentive for newcomers to enter the fray and existing producers to invest in existing capacity. This could bring additional supply online. With most of the company’s cash being paid out to shareholders, concerns have been raised that investing in local capacity – which includes main mines Sishen and Kolomela – is not on the agenda.Anglo has been pumping cash into iron ore site Minas-Rio in Brazil. It has been reported that the price tag for buying and building it has reached $13-billion already, and the project is yet to come to a close.

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