Solid financial results  driven by record volumes produced, railed and exported



Commenting on 2012, CEO of Kumba Iron Ore, Norman Mbazima said:

"The most important aspect of our work is safeguarding the safety and health of everyone in our organisation and ensuring they go home unharmed every day.  Fatalities are a life-changing experience for the bereaved and have an extremely negative effect on any company.We do everything we can to avoid them.  Our hearts go out to the families of the two employees, Sarah Obudilwe and Wickus Coetsee, who regrettably passed away in work-related incidents during the past year.

"We remain committed to zero harm at all the group's sites and management has intensified the focus on compliance to operational safety standards and the ongoing dedication of every employee to the zero harm principles." 

Turning to the financial results, Mbazima added:

"We are pleased with another year of solid growth. We have delivered a healthy profit, declaring a R4bn final cash dividend for shareholders, while continuing to invest in our long-term strategy and vision, despite a challenging mining environment and falling iron ore
prices.

"This was another year of strong operational performance. We achieved record production of 43.1Mt, aided by the excellent performance at Kolomela mine, despite the unprotected strike at Sishen mine in the fourth quarter. Kolomela mine, which significantly exceeded its
production ramp up schedule produced 8.5Mt.Record export sales of 39.7Mt achieved is particularly noteworthy and directly related to the continued demand from Asian markets, mainly China."

KEY FEATURES:  FINANCIAL

  • Export sales volumes increased 7% to 39.7Mt
  • A decrease of 23% in export iron ore prices realised to$122/tonne
  • Operating profit down 28% to R23.2bn (2011: R32.0bn);operating profit margin declining to 51% (2011: 66%)
  • Cash generated from operations of R25.3bn
  • Headline earnings reduced 28% to R12.2bn or R37.97 per share
  • Final cash dividend of R12.50 per share declared         
  • BEE shareholders have received in excess of R17bn in dividends over the past six years     
  • Contribution to the South African fiscus through income tax and mineral royalty over the past six years of R32.5bn.

KEY FEATURES: OPERATIONAL

  • Record total production up 4% to 43.1Mt
  • Kolomela mine continued its ramp-up ahead of schedule and delivered an outstanding performance in 2012, producing 8.5Mt      
  • Total production at Sishen mine decreased by 13% to 33.7Mt mainly owing to the impact of the unprotected strike in the fourth quarter
  • A record 40Mt was railed on the iron ore export channel, an increase of 2%, including 8.6 Mt railed from Kolomela mine
  • Kumba was recognised as the "Best Employer" in the mining category by Deloitte and the CRF Institute.

On outlook for 2013, Norman Mbazima added:

"Despite the challenges of 2012, I believe that we are well placed to continue delivering to all our stakeholders. Our strategy of optimising the value of current operations, capturing value across the value chain and achieving the group's growth aspirations, has again been validated by the Group's performance. This ability to mitigate potential negative impacts and ensure growth bodes well for the sustainable delivery of shareholder value into the future.

"As guided previously, waste mining at Sishen mine is anticipated to increase by an additional 30Mtpa in line with the planned ramp up that commenced in 2009.  To make up mining volumes lost as a result of the strike, 10Mt to 20Mt more waste is anticipated to be mined in 2013, which will put upward pressure on unit cash costs. Annual production volumes from Sishen mine are expected to increase from the 33.7Mt achieved in 2012, to at least 37Mt in 2013.

"Kolomela mine will produce at design capacity of 9Mt for the full year, which will enhance the group's ability to supply to the market during 2013. Waste mining at Kolomela mine is expected to increase as the new pits are opened up, which will put upward pressure on unit
cash costs. Kolomela mine's cash unit cost is expected to be ~R180/tonne."

Export sales volumes in 2013 are expected to be similar to those in 2012. Domestic sales volumes from Sishen mine to AMSA are anticipated to be 4.8Mt, in line with the interim pricing agreement.

Kumba's operating profit remains highly sensitive to iron ore prices and the Rand/US Dollar exchange rate.

Market overview

Demand for iron ore globally is largely dependent on the state of the steel industry worldwide and, more specifically, on that of the steel manufacturing sector in China. The country is the largest steel producer and consumer of iron ore in the world and accounts for more than two-thirds of global seaborne iron ore imports.

Global crude steel production increased by 2%, to 1,550Mt, driven primarily by China. In the rest of the world, crude steel production was essentially flat at 833Mt.  

Seaborne iron ore supplies were impacted by adverse weather conditions in both Brazil and Australia in the first quarter of 2012, in addition to on-going Indian supply disruptions. For the year as a whole, seaborne supplies reached a level of 1,064Mt, up 0.5%.

2012 was characterised by considerable market volatility, especially in the third quarter, when prices fell from $138/tonne at the start of the quarter to $89/tonne by early September. Iron ore prices reached a high of $151/tonne (62% Fe CFR China) in April 2012, before stabilising around US$130/tonne towards the end of the year.  For 2012 as a whole, index prices averaged $130/tonne, down 23% on 2011's average of US$169/tonne. 

Outlook

A similar level of growth in global crude steel production is expected for 2013 with China's crude steel production forecast to grow and reach 740Mt, whilst growth in crude steel production in other developing countries is expected to be counter balanced by reduced production in some of the developed markets. In 2013, Indian iron ore production is expected to remain under pressure as a result of domestic policy changes. However new supply capacity, primarily from Australia, is expected to partially offset this reduction in Indian supply.

The start of 2013 has seen a rapid price recovery in iron ore prices. The consensus view is that this rally will not be sustained throughout the year. However, some positive sentiment in relation to Chinese steel consumption growth has been restored and is expected to provide support to prices throughout the year. Seaborne iron ore supply growth may lead to iron ore prices softening in the second half of 2013, but overall Kumba's view is that on average, iron ore prices should be firmer than in 2012.



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