The selloff that made Kumba Iron Ore Ltd. the worst-performing stock among South Africa’s largest companies is poised to persist as a rout that pushed prices for the steel-making ingredient to 10-year lows deepens.
Kumba, the Pretoria-based unit of Anglo American that operates the continent’s largest iron ore mine, fell 41 percent this year, the biggest decline on the FTSE/JSE Africa Top40 Index, and the second-most after Aquarius Platinum Ltd. among 171 securities listed on the Johannesburg Stock Exchange’s all- share benchmark gauge.
The decline followed an almost 80 percent drop in iron ore prices since the start of 2014 after the some of the biggest producers — Rio Tinto Group, BHP Billiton Ltd., Fortescue Metals Group Ltd. and Vale SA — fueled a supply surplus by boosting low-cost output and as China’s economy grew at the slowest pace in more than two decades. Kumba responded by reducing dividends, slashing capital expenditure and cutting jobs as margins declined.
“There is still downside until such time as we see meaningful cuts in iron ore production worldwide,” Troye Brady, an analyst at Noah Capital Markets (Pty) Ltd. in Johannesburg, who has a sell recommendation on the stock, said on Thursday. “In a market as highly oversupplied as iron ore, it’s very hard to determine the bottom.”
Ore with 62 percent ferrous content at the Chinese port of Qingdao rose 0.6 percent to $48.34 a dry ton on Thursday, according to Metal Bulletin Ltd. Prices fell to $47.08 on April 2, the lowest since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks for ore delivered to China compiled by Clarkson Plc.
Cash Costs
Prices may drop to as low as $30 a ton before the four largest producers, which account for about 60 percent of global seaborne iron ore trade, cut capacity, Kenneth Hoffman, an analyst at Bloomberg Intelligence, wrote in a March 31 report. China may give subsidies to domestic iron-ore miners, according to the state-run Shanghai Securities News.
The support may keep high-cost producers in business, risking a prolonging of “the global glut that’s hammering prices,” Yi Zhu of Bloomberg Intelligence wrote in a report on April 8.
Unit costs at Kumba’s Sishen mine were $30.60 a ton in 2014 and $24.84 at Kolomela, it’s two largest operations, the company said on Feb. 10. It is considering shutting its Thabazimbi mine.
Kumba may need to cut back on spending to maintain production at the Sishen mine, lowering future output, Noah’s Brady said.
Under Review
“They’ll do whatever they can to prevent that,” he said. “At the same time if prices stay at fifty dollars or go even lower they’ll have to do something.”
Kumba cut dividend payouts by 42 percent in 2014, the company said when it released full-earnings on Feb. 10. At that time, ore prices were trading at about $62 a ton. The company raised its dividend cover to 1.7 times from 1.3 times and may increase it even further, meaning less money as a proportion of earnings is being set aside for shareholders, Chief Executive Officer Norman Mbazima said.
Kumba spokeswoman Yvonne Mfolo declined to comment in an e- mailed response to questions.
Ore prices will remain “lower for longer,” even though a modest recovery would give a significant lift to Kumba’s profitability, Stephen Meintjes, an analyst at Imara SP Reid in Johannesburg, said by phone.
“I don’t think it can go very much lower,” Meintjes said. “The best one could do, would be to sit tight.”
Parent’s Pain
The stock’s 14-day relative strength index has traded below the 30 level seen by some technical traders as a signal that an asset is oversold since March 25. Kumba has two buy recommendations from analysts, eight hold ratings and eight sells, according to data compiled by Bloomberg.
Kumba’s woes are hurting its parent Anglo American, Ben Davis, a commodities analyst at Liberum Capital Ltd. in London, said by phone. Output of steel-making ingredients contributed 35 percent of the London-based company’s adjusted earnings before interest, tax, depreciation and amortization in 2013.
“For many a year it was the hallowed operation that was certainly doing its bit,” Davis said. “It appears like it is a bit of a disaster at the moment.”
Source: .moneyweb.co.za