Kumba Iron Ore : Interim Results for the six months ended June 2015

Kumba Iron Ore Limited ('Kumba' or 'the group') announces its results for the six months ended 30 June 2015.

KEY FEATURES

• Operations reconfigured to achieve significantly lower cost of production
• 46% drop in average iron ore index price to US$60/tonne
• Total sales volumes increased by 16% to record 26 Mt
• We spent R202.3 million on community development initiatives
• Production of 22.6 Mt, down 1%
• Controllable costs per tonne reduced by 16%
• Normalised earnings down 52% to R9.78 per share
• Thabazimbi closure announced on 16 July 2015
• No interim dividend

INTRODUCTION

The group's safety performance remains a key priority ending the six months without any loss of life. The lost-time injury frequency rate (LTIFR) was 0.22 (2014: 0.20). While there has been a marginal increase in the number of lost-time injuries, they have been of a less severe nature. The total recordable case frequency rate (TRCFR), a measure of frequency of injuries, was 0.77 (2014: 0.78).

The focus on key safety improvement drivers remains in place with continued emphasis on preventing any loss of life or injury through the implementation of critical engineering controls and operational risk management.

The past six months continued to be turbulent and challenging for iron ore producers with further decline and volatility in prices. New low cost supply aided by the realisation of efficiencies across the sector, lower freight rates and producer currencies have resulted in a structural change in the iron ore market and a flattening in the cost curve. This has been exacerbated by muted demand. These changes in market fundamentals have necessitated a robust review of Kumba's business in order to improve its competitive position and reduce cash costs.

RECONFIGURING OF OPERATIONS

As a result of the challenging market conditions, Kumba has undertaken a number of key interventions, which are expected to result in a reduction in the group's cash breakeven price to $45/tonne (62% Fe CFR China) from the $63/tonne in 2014. These initiatives include reducing overhead costs, reinforcing capital discipline, reconfiguring the operations and maintaining the focus on product quality through the production of lump products.

Material revisions have been made to the mine plan at Sishen. The pit has been reconfigured for lower prices and optimised for cash flow in the near term with a downward revision of waste and production. Kolomela's waste profile has also been optimised to conserve cash and production is expected to increase incrementally.

Capital expenditure has been reduced and re-phased and reducing overheads (head office and mines) continues to be a key priority. The restructuring of the head office was completed with a resultant reduction of 40%, or 133, permanent positions in the workforce (61% reduction including fixed term employees). On 9 July 2015 the company commenced with the proposed restructuring of support services at the operations and stay-in-business capital projects functions, which is expected to result in further overhead cost savings.

THABAZIMBI MINE

Thabazimbi is a high cost mine with difficult mining conditions, which was exacerbated by a slope failure during June 2015. After considering all options for the future of the mine, the closure of Thabazimbi was announced on 16 July 2015 as the mine has reached the end of its economic life.

NO INTERIM DIVIDEND

The volatile and depressed market conditions have significantly reduced pricing certainty in the near term. In line with the board's policy, the dividend is reviewed at each interim and annual reporting period. Taking cognisance of the pressure of lower cash generation, the initiatives required to preserve cash as outlined above, and in order to maintain financial flexibility, the board has decided not to declare an interim 2015 dividend.

OVERVIEW OF SIX MONTHS ENDED 30 JUNE 2015

Total tonnes mined (excluding Thabazimbi) were up by 16% to 160.5 Mt (2014: 138.5 Mt). Total production declined marginally to 22.6 Mt due to lower production at Sishen of 16.1 Mt, and a continued strong performance at Kolomela of 5.9 Mt. Total sales volumes increased by 16% to 26 Mt (2014: 22.5 Mt) on the back of record export sales of 23.2 Mt (2014: 19.7 Mt), as a result of good logistics performance and shipments totalling 2.3 Mt through the Multi-Purpose Terminal (MPT) at the port of Saldanha.

Headline earnings were 61% lower at R2.5 billion (2014: R6.5 billion), mainly as a result of realised iron ore export prices, which weakened by 41% to $61/tonne (2014: $104/tonne), partially offset by the favourable impact of a 12% weakening of the Rand against the US Dollar. Whilst operating expenses increased by 4%, the controllable costs per tonne reduced by 16%. Attributable and headline earnings for the period were R7.82 and R7.85 per share respectively. Normalised earnings, which exclude the derecognition of a deferred tax asset of R801 million (R617 million attributable to Kumba shareholders), was 52% lower than the comparative period at R9.78 per share (2014: R20.28).

MARKET OVERVIEW

Global crude steel production contracted 2.4% to 809 Mt for the first half of 2015 (2014: 829 Mt). China's production of 406 Mt was 2.4% lower than the record production of 416 Mt in 1H 2014, with high Chinese exports supporting soft domestic demand. Global seaborne iron ore supply was flat at 662 Mt on the back of 6% growth out of Australia and 11% from Brazil, offset by a decline from India and the rest of the world. Non-traditional supply sources continue to be displaced by low cost capacity expansions. Temporary supply bottlenecks were experienced by major iron ore producers in the early parts of the year, whereas record port shipments in June 2015 and ongoing supply ramp-up, including the commissioning of Roy Hill in Australia, will support supply growth in the second half of the year.

Average index iron ore prices (CFR China 62% Fe) in the first half of 2015 were down 46% at $60/tonne for the period (2014: $111/tonne). Index prices have steadily declined from the beginning of the year to historical lows as a result of increased supply availability with major projects reaching execution, and subdued seasonal demand recovery as mills deleveraged inventories.

OPERATIONAL PERFORMANCE

Sishen mine

Total tonnes mined at Sishen increased by 17% to 125.6 Mt (2014: 107.2 Mt). Total waste mined was 107.7 Mt (2014: 86.9 Mt), an increase of 24%. Sishen production of 16.1 Mt decreased 5% (2014: 17 Mt) due to blending capacity constraints to the plants as a result of limited availability of high quality full bench ore in the second quarter of 2015.

The implementation of the Operating Model in the North mine continues to yield improved operating equipment productivity and is now being rolled out to the pre-strip waste mining and heavy mining equipment maintenance areas. In addition, after obtaining the appropriate licences, Sishen has started using two new waste dumps to the west of the current pit. This will further facilitate waste removal by reducing hauling distances and lift factors.

Kolomela mine

Kolomela mine continued to perform strongly. Total tonnes mined at Kolomela mine rose by 12% to 34.9 Mt, (2014: 31.3 Mt), of which waste mined was 26.3 Mt (2014: 24.4 Mt), an increase of 8%. Waste mined reduced as planned by 15% from 2H 2014. Going forward waste volumes are expected to reduce from 42 - 46 Mtpa to 35 - 38 Mtpa for 2015, ramping up thereafter. The mine produced 5.9 Mt of ore, an increase of 7% (2014: 5.5 Mt).

Thabazimbi mine

Thabazimbi produced 0.6 Mt of ore (2014: 0.3 Mt), while waste mining volumes decreased by 45% to 8.4 Mt (2014: 15.4 Mt). A monitored slope failure took place in the Kumba pit on 6 June 2015. No injuries were sustained as the pit was evacuated as a precaution (refer to note 13 in the notes to the interim financial statements).

Logistics

Volumes railed on the Sishen-Saldanha Iron Ore Export Channel were 11% higher at 21.8 Mt (including 0.7 Mt railed to Saldanha Steel) (2014: 19.7 Mt). Kumba shipped 23 Mt (2014: 19.3 Mt) from the Saldanha port destined for the export market, up 19%, including 2.3 Mt shipped through the multi-purpose terminal (MPT) at the Saldanha port.

FINANCIAL RESULTS

Revenue

The group's total revenue of R20.5 billion for the period was 23% lower than the R26.4 billion for the comparable period in 2014, mainly as a result of the significant 41% drop in average realised iron ore export price to US$61/tonne (2014: US$104/tonne). In addition, lower freight rates resulted in a R541 million reduction in shipping revenue. This was partially offset by the 12% decline in the Rand/US$ exchange rate (1H2015: R11.91/US$1 compared to 1H2014: R10.68/US$1) and 16% higher total sales volumes.

Operating expenses

Operating expenses rose by 4% to R14.7 billion from R14.1 billion in the first half of 2014; principally as a result of:

• 15.7 Mt growth in total mining volumes;
• inflationary pressure on input costs of 4.4%;
• higher selling and distribution costs on the back of 31% higher volumes railed from Kolomela, annual contractual tariff escalations, and the MPT volumes which attract a higher port tariff; offset by
• Input cost savings from primary equipment operating efficiencies and lower diesel prices;
• Corporate office overhead cost reduced by R138 million to R691 million (2014: R829 million) as part of the drive to achieve a lower sustainable overhead cost base, and
• R448 million lower freight cost.

The reduction in permanent and fixed term employees at the corporate office is expected to contribute savings of R200 million per annum going forward. Further savings were achieved through aggressive management of overheads and by curtailing project and technical studies, partially offset by inflation and currency movements.

Unit cash costs at Sishen mine of R299 per tonne increased by 10% (FY2014: R272 per tonne). This is primarily as a result of input cost pressures (+R5/tonne), which were contained at a 2% increase, higher mining volumes (+R36/tonne) and lower production volumes (+R29/tonne), partially offset by higher deferred waste stripping costs (-R42/tonne).

Kolomela mine incurred unit cash costs of R185 per tonne (FY2014: R208 per tonne), an 11% decrease despite higher mining volumes, mainly as a result of the capitalisation of ex-pit ore. Higher deferred waste stripping costs benefited unit costs by R9/tonne.

Operating profit

Kumba's operating profit margin decreased to 28% (2014: 47%). The group's mining operating margin was 32% (2014: 51%) excluding the net freight loss incurred on shipping operations. Operating profit decreased by 53% to R5.8 billion (2014: R12.3 billion). The lower revenue and increase in operating expenses outlined previously impacted profitability.

Cash flow

Cash flow of R8.7 billion was generated. Capital expenditure of R3.3 billion was incurred, R3.0 billion on stay-in-business (SIB) activities (including deferred stripping of R1.5 billion), and R0.3 billion on the Dingleton project. Phase 2 of the Dingleton project, the relocation of the 428 remaining houses, buildings and businesses, is progressing well and expected to be completed by the end of 2016.At 30 June 2015 the group had a net debt position of R6.1 billion (2014: R687 million).

REGULATORY UPDATE

SIOC has not yet been awarded the 21.4% Sishen mining right, which it applied for early in 2014 following the Constitutional Court judgement on the matter in December 2013. The Constitutional Court ruled that SIOC held a 78.6% undivided share of the Sishen mining right and that, based on the provisions of the MPRDA, only SIOC can apply for, and be granted, the residual 21.4% share of the mining right at the Sishen mine. The grant of the mining right may be made subject to such conditions considered by the Minister to be appropriate. Kumba is actively continuing its engagement with the DMR in order to finalise the grant of the residual right.

ORE RESERVES AND MINERAL RESOURCES

There have been no material changes to the ore reserves and mineral resources as disclosed in the 2014 Kumba Integrated Report.

EVENTS AFTER THE REPORTING PERIOD

On 9 July the company commenced with the proposed restructuring of support services at the Sishen and Kolomela and stay-in-business capital projects functions. On 16 July 2015, the closure of Thabazimbi was announced.

OUTLOOK

Iron ore prices are expected to remain under pressure as Australian and Brazilian producers increase supply, and demand growth from China slows.

Sishen's production profile has been moderated to 33 Mt in 2015 and the revised life-of-mine (LoM) plan has resulted in the waste target for 2015 being revised down from 240 Mtpa to 200 Mtpa with a ramp up to 230 Mt from 2018. The production outlook has been set at 36 Mt for 2016 - 2017, rising gradually to 38 Mt thereafter, with the average LOM stripping ratio remaining at 3.9. The new plan brings about reduced flexibility from a mine engineering perspective which will be mitigated through a greater focus on the quality of the execution in the pit and the execution of the operating model.

Mining at Kolomela will now concentrate on two primary pits with the third pre-stripped pit being re-phased to 2019. As a result, expected waste volumes have reduced from 42 - 46 Mtpa to 35 - 38 Mtpa for 2015, ramping up thereafter. Production is expected to ramp up to 13 Mt within the next two years, with a reduction of 2 years in the LoM as a result of the annual production capacity increase. The LoM stripping ratio is 3.3. In support of the anticipated higher production the mine is also increasing its logistics capacity through reclaiming and loading efficiencies and improving train turnaround times. Kolomela is expected to produce in excess of 11 Mt in 2015 with waste of 35 Mt.

Export sales volumes for the year are expected to exceed 43 Mt. Domestic sales volumes of up to 6.25 Mt are contracted to ArcelorMittal S.A. in terms of the supply agreement, which are now to be supplied from the Northern Cape.

The group expects total capital expenditure for 2015 to be in the range of R6.9 billion to R7.2 billion, including unapproved capital expenditure. Capital expenditure has been reduced and re-phased to conserve cash, with a significant reduction in stay in business capital of between R7.8 billion and R8.4 billion over the next three years, mainly due to reduced fleet, related infrastructure and housing requirements. Capital expenditure will increase from 2018 to 2020 to support the waste ramp up at Sishen as mentioned above. Deferred stripping has been reduced by R2.0 billion to R2.1 billion over the next three years largely due to the revised waste mining profile at Sishen.

The reconfiguration of Sishen and Kolomela through revised mine plans and organisational restructuring, together with the closure of Thabazimbi, has a major impact on the business and will result in a challenging second half of 2015. The cost savings initiatives on overheads and capital expenditure to achieve the targeted cash conservation will add further complexity as the company navigates the remainder of this year. The management of Kumba is confident that the measures we are taking will enable Kumba to remain a viable and resilient business through these challenging times for the iron ore industry.

Profitability remains sensitive to iron ore export prices and the Rand/US$ exchange rate.

CHANGES IN DIRECTORATE

Ms Khanyisile Kweyama tendered her resignation from the board with effect from 29 April 2015. Mr Gert Gouws tendered his resignation as a non-executive director from the board with effect from 8 May 2015.

The board thanks Ms Kweyama and Mr Gouws for their contributions and guidance during their respective tenures and wishes them all the best in their future endeavours.

The board announced the appointment of Mr Andile Sangqu as a non-executive director with effect from 29 June 2015. Mr Sangqu is the Executive Head of Anglo American South Africa and is appointed onto the company's board as a shareholder representative of Anglo American.

Any reference to future financial performance included in this announcement has not been reviewed or reported on by the company's external auditors.

The presentation in support of the company's results for the six months ended 30 June 2015 will be available on the company's website www.angloamericankumba.com at 07h30 CAT and the webcast will be available from 11h30 CAT on 21 July 2015.

View full PDF of this press release (732KB, opens in a new window)