Kumba Iron Ore chief executive Norman Mbazima has highlighted that a “sharp decline and volatility in the iron ore price over the past year, has been a significant factor for Kumba Iron Ore and the mining industry in general.”
“We have responded decisively to position our business to withstand a longer period of lower iron ore prices. A shift in strategy from a volume to a value-based strategy led to a reconfiguration of our mines to reduce the amount of waste and to save costs.”
Speaking at the announcement of the 2015 annual results, he provided details on the shift in focus, reporting that the Shishen’s pit “was restructured to a lower cost shell, production at Kolomela was increased by ramping up low cost tonnes and optimising the waste profile, and mining at Thabazimbi was stopped.”
He highlighted that strict cost saving and ‘structural’ changes to costs had been achieved through savings on “capital expenditure, overheads, study costs and headcount reduction.” This falls in line with objectives set by Kumba with a view to preserving cash flow, reducing debt and positioning the business to “grow sustainable free cash flow and shareholder returns over the long term.”
Kumba’s full year results reflected the challenging market conditions, with the realised FOB iron ore price declining 42% to $53/t largely resulting in a 66% decrease in headline earnings to R11.82 per share (2014: R34.32).
Basic earnings per share were R1.46 (2014: R33.44) due to a significant impairment charge of R6 billion relating to Sishen mine as a consequence of the low price environment and actions taken to restructure the business. Total production declined 7% to 44.9 Mt due to operational challenges at Sishen mine.
However, Kolomela continued to perform well, and record export sales of 43.5 Mt were achieved by the company.
Capital conservation measures and the suspension of the dividend helped to improve the Group’s net debt position to R4.6 billion, down 42%.
It achieved an average cash breakeven price of $49/t for the year as lower realised lump premiums and reduced production partially offset cost savings.
Towards the end of 2015 Kumba was operating at a cash breakeven price of $41/t, well below the target of $45/t, aided by the weaker local currency and lower freight rates.
Positioning Kumba for the future
On 28 January 2016, the company commenced a consultation process in terms of section 189 of the Labour Relations Act at Sishen. The restructuring of the mine will impact approximately 2 633 Kumba employees. Contractors at the mine have commenced with their restructuring process and approximately 1 300 contractors will be affected.
Extensive consultations are being conducted with all stakeholders. In line with the Group’s cash preservation strategy, the board has decided to maintain its suspension of the dividend.