Our opinion on the current state of KUMBA-IO(KIO)

Kumba Iron Ore (KIO), a subsidiary mainly controlled by Anglo American with a 79% stake, is one of the top iron mining operations, renowned for its substantial success in the industry. The company’s share price experienced significant volatility, dropping to R223 in March 2020 due to the COVID-19 pandemic, but it managed a strong recovery to R668 before facing another decline after the March 2022 quarterly results.

Kumba's business model heavily relies on exports, which constitute 94% of its total sales. This large percentage indicates that while the company is less dependent on the local South African market, it remains susceptible to fluctuations in the rand's value and logistical challenges related to rail transport to ports. In response to operational challenges and to lessen its dependence on Eskom, Kumba plans to construct a 100mw solar park over the next three years.

In October 2022, the company faced significant disruptions due to a force majeure declared by Transnet, leading to substantial production losses—estimated at about 50,000 tons per day initially, escalating to 90,000 tons after seven days. This incident severely impacted the company’s ability to meet its export commitments, resulting in considerable financial losses estimated at around $8.5 million per day in production and $11.7 million in lost export revenue.

Despite these challenges, Kumba reported a strong financial performance for the year ending 31st December 2023, with a 16% increase in revenue and a 26% rise in headline earnings per share (HEPS). The company achieved an average realized FOB export price of US$117 per tonne, which was 15% above the benchmark, and managed to reduce its C1 unit costs to US$41 per tonne, thanks to cost savings of R1.0 billion. These factors contributed to a resilient EBITDA margin of 53%, up from 50%, and a robust closing net cash position of R13.2 billion.

However, Kumba is considering reducing its workforce by 490 employees, indicating ongoing efforts to streamline operations and manage costs. For the first quarter ending 31st March 2024, Kumba reported a 2% decrease in total production and a 10% reduction in sales, primarily driven by a 12% decrease in production at the Kolomela mine. In contrast, production at the Sishen mine increased by 4%, supported by healthy buffer stocks.

The company's shares are currently trading at a price-to-earnings (P/E) multiple of 6.43 and offer a dividend yield of 8.23%. These figures suggest that while the investment presents risks associated with commodity price fluctuations and operational challenges, it also offers potential high returns through dividends.

Additionally, the ongoing offer by BHP to purchase Anglo American includes plans for the unbundling of Kumba. This proposal adds another layer of uncertainty regarding Kumba’s future, making it a potentially volatile but rewarding investment for those willing to navigate the complexities of the commodity market and corporate restructuring.