Our opinion on the current state of KIO

Kumba (KIO) is a highly successful iron mining operation which is owned (79%) and controlled by Anglo American. The share price fell to as little as R223 in March 2020 because of COVID-19 but has recovered to R668 before falling on the March 2022 quarterly results. Importantly, exports make up 94% of the company's total sales - which means that it is not heavily dependent on local sales but is vulnerable to any strengthening of the rand and the effectiveness of rail transport to ports. The company is planning to build a 100mw solar park over the next 3 years to reduce its reliance on Eskom. The company has had to contend with heavy rain and bad rail performance. On 10th October 2022, Kumba announced that, because of the force majeure at Transnet, it would lose about 50 000 tons of production per day, rising to 90 000 tons after 7 days as a direct result of the Transnet force majeure. Furthermore, they said they would lose about 120 000 tons of exports which will cost them about $8,5m a day in production and $11,7m in lost export revenue. In its results for the six months to 30th June 2023 the company reported revenue down 11% and headline earnings per share (HEPS) down 17%. The company said, "We delivered an earnings before interest, tax, depreciation and amortisation (EBITDA) of R19.8 billion and an EBITDA margin of 52%, underpinned by an average realised free-on-board (FOB) export price of US$106/wet metric tonne (wmt), 4% above the average benchmark price. Production increased by 6%." The company lost R6bn to copper cable theft during the period. In a production report on the 3 months to 30th September 2023 the company reported total production down 2% and iron ore sales down 6%. The company said, "...multiple Transnet equipment failures and adverse weather conditions at Saldanha Bay Port in September impacted ship loading. As a consequence, sales decreased by 12% relative to Q3 2022 and by 6% compared to Q2 2023." In an update on the company's 2023 guidance the company said it expected, "...production of between 35 - 36 million tonnes (previously 35 – 37 million tonnes) and sales at 36 – 37 million tonnes (previously 36 – 38 million tonnes). Sishen's unit cost is anticipated to increase to between R570 – 590 per tonne (previously R540 - 570 per tonne). Kolomela's unit cost is expected to improve to between R480 – 500 per tonne (previously R510 - 540 per tonne)". The share trades at a multiple of 11,75 and a dividend yield (DY) of 5,29% - which seems to compensate the investor to some extent for the commodity risk in this rand-hedge share.