Kumba Iron Ore production report

Yesterday we had a production and sales report for the quarter ended 31 December 2011 from Kumba Iron Ore. Total production increased by 4% thanks to the Kolomela mine being commissioned five months ahead of schedule with shipments starting in December 2011. There was actually a decline in production from the Sishen mine due to feedstock constraints in the separation process.

How's this for a sign of the times. Of the 11.2Mt produced in the quarter 9.6Mt were exported, increasing 7% from last year. That is 86% of all Iron ore mined sent overseas. 1.2Mt was sold locally which is down 28% from last year thanks to all the production problems at ArcelorMittal. Thanks to the Chinese for saving us yet again. The inefficiencies at ArcelorMittal are unacceptable in my opinion and really not good for our economy.

The Kolomela mine was a bigger contributor to the overall mix than I originally thought. Construction on the mine which is also situated in the Northern Cape started in 2008 and huge credit to the guys for getting production up so quickly. In fact it still says on their website that production is only expected in the first half of 2012. For this quarter Kolomela produced a very impressive 1.167 million tonnes, 10.5% of total production. At full capacity the mine is expected to produce 9 million tonnes per annum by 2013 (2.25Mt per quarter). At current levels that will increase Kumbas production by 25% so good prospects for the future. The mine is expected to produce between 4Mt and 5Mt this year.

We already know via a trading update that Kumba are looking to make between R16.5Bn and R17.9Bn for the year. According to this production update that is on the back of 37.1Mt of sales. To be honest I believe any shortfalls in local demand will be absorbed by international requirements. The biggest factor for Kumba is maintaining internal efficiencies, ramping up production and transport within South Africa. It seems like Transnet are getting their act together (I hope I don't eat my words there) and Kumba have a great history in terms of production. All is boding well for the future of this Iron ore miner. We are definitely happy to add at current valuations of less than 10 and a dividend yield of 8%.