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Kumba Fundamental Update 22 May 2018 by Mark Ingham


Kumba is maintaining its production target at 44 to 45 million for the year and is targeting margin expansion and life-of-mine extension.

The company intends to lower exposure to China from 66% to 60% over time, say three years.

Iron pricing is budgeted at $60/ton to $70/ton but they do expect prices to slow by year end.

Extent of low grade iron ore inventory in China underpins premiums on high grade ore and a discount on low grade ore – which benefits Kumba. Changes in the iron ore market tend to favour Kumba on quality, be that lump premium or iron ore premium. Kumba produces 65% lump/64% Fe and this gets them an export premium to iron ore 62% Fe per dry metric ton. Kumba product has a higher iron ore content than some Australian competitors. Kolomela is at 64% Fe grade on a saleable proved basis with Sishen at 65%, Thabazimbi at 64% and the average for Kumba at 65%.


Favourable supporting conditions in the short term expected. From my recent visit to Hong Kong, it seems as though Chinese steel production capacity utilisation is likely to be maintained this year, which implies an average steel price of $66/ton and thus right in the range Kumba have just flagged. The 65% price premium has increased relative to 58% and 62% this past two years. Whilst there is no steel growth in China, scrap supply be an important factor with mills using high grade ore on maintained profit margins.

Kumba is focusing on expanding margin from higher price realisation and lower cost base. Expect drive on quality product and efficiencies. Margin last year was 36% and I see up to 38% to 39% as possible.

Life-of-mine aim is beyond current 13 to 14 years via use of technology, exploration, and better execution. Logistics logjams can only be achieved tough in collaboration with Transnet.

The currency has weakened from below R12/$ recently to R12,85/$ but that is still below the R13,30/$ average for F2017. However, a R1/$ weakening has a R3 billion impact on operating profit, and vice versa. If the export price firms by $1/ton, it has a R0,5 billion positive effect on operating profit. I currently estimate breakeven price for Kimba at around $45/ton so there is ample headroom given pricing environment.

EPS likely to be R25 this year and possible as high as R30, which would be the same as F2017. As a result, it is supportive for a generous dividend as cash flows are solid, with cash flow per share close to R45. It is conceivable we could se the dividend maintained at R30 per share.  

I mentioned in April that R260 per share looked interesting as a trading bottom and since then we have seen the price bounce back up to R290.

Bottom line is that current industry and company fundamentals are favourable for KIO. The stock is sensitive to variables and is appealing to punters who enjoy a volatile play.  


Wishing you profitable investing, until next time.

Mark N Ingham     


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