Kumba Iron Ore results, dividend is excellent

This morning we received 6 month results from Kumba Iron ore which were flat. That certainly does not paint the whole picture, there are lots of moving parts here. Headline earnings came in at R7.7bn for the period. This was the same as last year. However the drivers were different. The rand was on average 16% weaker which partially offset a 7% weaker average iron ore price. Overall revenue was up 4% even though sales volumes decreased 5% to 22.1 million tonnes (Mt).


This translated to headline earnings per share of R24.13 with the majority of that (R20.10) being paid out as a dividend. This is Anglo's cash cow and they are certainly milking it. Estimates are for R45 earnings for the full year. This is of course very hard to determine because both the iron ore price and the Rand have been extremely volatile. Using this forward estimate we have the stock trading on 10.5 times 2013 earnings and a dividend yield around 8%. That is an amazing yield.


Operationally we saw a 10% decline in production from Sishen to 16.1 Mt. This mine is still feeling the impact of the strike in the second half of last year. They took the opportunity to ramp up production, especially with waste stripping which may hamper margins slightly but will give the mine more flexibility. Kolomela has been a great success story as the ramp up starts to stabilise and fast reaching capacity. The mine produced 5.3Mt of iron ore, an increase of 62%. The mine now contributes 24% to overall production. That is very impressive for a mine that only started production less than 2 years ago.


And what do they think of the overall market? They explain the movements in the iron ore price for the first half of the year quite nicely. This is interesting.

"Global crude steel production increased by 3% to 787 Mt for the first half of 2013 (2012: 766 Mt), with Chinas record production of 385 Mt being 8% higher (2012: 356 Mt). However, faced with strong pressure on steel margins, Chinese steel mills reduced iron ore inventory levels and, as a result, demand for seaborne iron ore grew at a slower pace than crude steel production. Europe's ongoing struggle with austerity measures translated into a 4% decrease in production, with the rest of the world contributing the difference. The improvement in the outlook for the Japanese domestic auto industry has driven increased domestic crude steel production with anticipation of higher finished steel export volumes."


And looking ahead? Here is what they think of the iron ore market for the rest of the year.


"Steel fundamentals remain under pressure as the Chinese economy slows down, with manufacturing activity receding as a result of declining export orders. Iron ore prices are expected to remain under pressure as supply exceeds demand in the second half of the year, though restocking by steel mills may support prices in the near term."


I guess that explains why the stock is fairly cheap. And I agree, infrastructure spend does look like it's slowing in China. But China is not the be all and end all, the long term picture for infrastructure demand in India and many countries in Africa is still huge. The company rightfully state that their main objective is to satisfy domestic demand and focus on their own operations. This is the only South African mining company I would invest in for that juicy dividend and strong production from Kolomela while Sishen production stabilises. It will be a bumpy ride though as the Rand and Iron ore price fluctuates.