Our opinion on the current state of KIO

Kumba Iron Ore, predominantly owned and controlled by Anglo American with a 79% stake, is a leading iron mining operation in South Africa. The COVID-19 pandemic significantly impacted its share price, which plummeted to R223 in March 2020. However, it saw a recovery to R668 before experiencing a decline following the March 2022 quarterly results. A critical aspect of Kumba's business model is its heavy reliance on exports, which constitute 94% of its total sales, making the company less dependent on the domestic market but susceptible to the rand's fluctuations and challenges in rail transport to ports.

In response to its reliance on Eskom and to ensure sustainability in its operations, Kumba has announced plans to construct a 100mw solar park over the next three years. The company has also faced operational challenges due to heavy rain and poor rail performance. A significant setback occurred on 10th October 2022, when a force majeure declared by Transnet led to a substantial loss of production and exports, significantly impacting Kumba's revenue.

For the year ending on 31st December 2023, Kumba reported a 16% increase in revenue and a 26% rise in headline earnings per share (HEPS). The company highlighted its achievement of an average realised Free On Board (FOB) export price of US$117/tonne, which is 15% above the benchmark. Furthermore, Kumba achieved cost savings of R1.0 billion, resulting in C1 unit costs of US$41/tonne and an improved EBITDA margin of 53%, up from 50%. Despite these financial successes, the company is contemplating 490 retrenchments as part of its operational adjustments.

Kumba's shares are currently trading at a price-to-earnings (P/E) ratio of 7.75 and offer a dividend yield (DY) of 6.82%. These figures indicate that the company's stock may offer a reasonable compensation level for investors considering the inherent commodity risk and its status as a rand-hedge share. Kumba's strategic focus on enhancing operational efficiency, reducing dependency on Eskom through renewable energy investments, and navigating the challenges of export logistics underscores its resilience and potential for sustained growth in the face of industry and economic headwinds.