Kumba Iron Ore trading update

One that we missed yesterday was the Kumba update. Well we didn't miss it ourselves, we just didn't have time to write about it. Fortunately, we are long term investors, so jumping on news as it comes out is not our (therefore your) priority. So here it is, a day late.


"Kumba is currently finalising its results for the twelve months ended 31 December 2012 ("the period"), which will be released on SENS on or about 12 February 2013. Headline earnings and basic earnings for the period are likely to be between R11,650 million and R12,450 million, with headline earnings per share ("HEPS") and earnings per share ("EPS") to be between R36.30 and R38.80.



Headline earnings and basic earnings reported for the 12 months ended 31 December 2011 (as released on SENS on 9 February 2012) ("the comparative period") were R17,048 million and R17,042 million respectively while HEPS and EPS reported for the comparative period were R53.13 and R53.11 respectively.



The decrease in earnings is largely attributable to a decrease in export iron ore prices in the period and the impact on production following the illegal strike at Sishen Mine."



This was to be expected. Take a look at this graph (which I took from the Index Mundi website) showing us how iron ore moved over the second half of last year. If you have a look at the Kumba price over the same period it takes a similar shape.

There are three important factors to consider when determining the price of a single commodity miner. The price at which they can sell their product, this is out of their hands. Then there is the cost of bringing the stuff out of the ground and of course how much of the ore they can bring out the ground in a given year. That is determined by the miner's efficiency.



The price of the commodity changes with the market and this is what determines the share price moves on a daily basis. That is why these numbers have been determined by the market already. The strike was also widely publicised, and that of course affects production.



So what does the market expect from Kumba and iron ore as a commodity? The stock trades at R577, earnings are to come in at let's call it R37.50. That is a historic multiple of 15.3. This has been pushed up by the iron ore rally which will mean forward earnings will be much stronger than last year. Currently forecasts expect R48.45 for 2013. The miner will also be hoping that no strikes take place this year.



When looking at Kumba you also have to consider the fantastic dividend yield because they pay out most of their earnings. Last year the cover was 1.2 so if they maintain that and you bought shares today you will get a yield of 5.35%. Overall I am optimistic on iron ore, but I am cautious about owning miners in SA and the volatility of a single commodity stock.