Our opinion on the current state of KIO

Kumba Iron Ore (KIO), a premier iron mining operation, is predominantly owned (79%) by Anglo American. The company's share price experienced significant volatility, plummeting to R223 in March 2020 due to the COVID-19 pandemic, then recovering to R668 before dropping again after the March 2022 quarterly results. A key aspect of Kumba's operations is that exports constitute 94% of its total sales, rendering the company less reliant on the domestic market but susceptible to rand appreciation and the efficiency of rail transport to ports. To mitigate its dependence on Eskom, Kumba has plans to construct a 100mw solar park within the next three years.

Kumba has faced operational challenges, including severe weather conditions and poor rail performance. On 10th October 2022, the company announced significant production losses due to Transnet's force majeure, estimating a daily production loss of 50,000 tons, escalating to 90,000 tons after seven days. This situation was expected to lead to a loss of approximately 120,000 tons in exports, costing the company around $8.5 million daily in production and $11.7 million in lost export revenue.

For the first half of the year ending 30th June 2023, Kumba reported an 11% decrease in revenue and a 17% drop in headline earnings per share (HEPS). Despite these challenges, the company achieved an EBITDA of R19.8 billion, with a 52% EBITDA margin, supported by an average realized free-on-board (FOB) export price of US$106 per wet metric tonne (wmt), slightly above the benchmark price. The period also saw a 6% increase in production but a significant R6 billion loss attributed to copper cable theft.

The production report for the quarter ending 30th September 2023 indicated a 2% decrease in total production and a 6% fall in iron ore sales, impacted by equipment failures at Transnet and adverse weather conditions at Saldanha Bay Port. As a result, sales saw a 12% decrease compared to Q3 2022 and a 6% decrease from Q2 2023.

Revising its 2023 guidance, Kumba now anticipates production to be between 35 and 36 million tonnes (down from the previously expected 35 to 37 million tonnes) and sales forecasts adjusted to 36 to 37 million tonnes (previously 36 to 38 million tonnes). Cost expectations for Sishen and Kolomela mines have also been updated.

The fourth-quarter production update for 2023 revealed a 27% decline in iron ore production, primarily due to continued rail performance issues, although sales increased by 36% for the quarter and 1% annually. Trading at a P/E multiple of 10.84 and offering a dividend yield (DY) of 5.73%, Kumba's shares appear to offer some compensation for the inherent commodity risk and its status as a rand-hedge investment.