South Africa: Kumba Hit By R150 Million Restructuring Costs

KUMBA Iron Ore’s share price fell 1,3%, or 150c, to R114 on Friday after it released a trading update warning shareholders that it would incur once-off costs of R150m as a result of the restructuring of Kumba Resources.

This is almost three times the estimate of R45,4m detailed in Kumba’s prelisting statement issued in October.

An analyst said he had expected costs would be higher than the company’s October estimate, but R150m was almost double what he expected.

Friday’s share price was well below the target level set by investment house Merrill Lynch, which said in a research note released on Friday it recommended Kumba Iron Ore as a “buy” up to R135 a share. The report was written when the shares were at R109.

Merrill Lynch said a premium was justified for Kumba Iron Ore’s shares over those of larger iron ore producers as Kumba was a focused purely on iron ore and larger groups were more diversified.

Kumba Iron Ore was listed as a separate entity in November after Kumba Resources was split into an iron ore company and a coal and base-metals company and empowerment shareholders were introduced. It is the world’s fifth-largest iron ore producer, with expected output of 31-million tons last year, Merrill Lynch said.

Kumba said results for the two months to December, due to be released on February 15, would show headline earnings of R250m-R275m. Pro-forma figures for the year to December would show headline earnings of R2,5bn- R2,7bn. The analyst said he had expected about R2,9bn for the year.

Merrill Lynch said last year’s early settlement between Brazilian iron ore producer Companhia Vale do Rio Doce and Baosteel of a contract price increase of 9,5% for this year showed the strength in the market.

It thought two of Kumba’s advanced projects, the Sishen 2 expansion and Faleme, had the potential to double output to 78-million tons by 2015 and add another 10% to net present value. Reserves at the Sishen mine provided a life of 35 years at current production, and resources were equivalent to 105 years.

There was more potential at Faleme.

Kumba was also strongly geared to the rand, and a 10% depreciation in the rand would add 15% to earnings for the current financial year, Merrill Lynch said.

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