File image: Reuters
File image: Reuters

Amsa's threat of Saldanha closure affects Kumba

By Dineo Faku Time of article published Nov 13, 2019

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JOHANNESBURG - Kumba Iron Ore, Africa’s biggest iron ore producer, has trimmed down its 2019 sales guidance following the decision by ArcelorMittal South Africa (Amsa) to wind down its struggling Saldanha steelworks project in a bid to curb further financial losses.

The subsidiary of global diversified mining giant Anglo American plc yesterday told investors that it had reduced its sales guidance to between 41.5million and 42.5million tons from its previous estimates of 42million and 43million tons.

Kumba said that production for the full year remained unchanged at between 42m and 43m tons.

It said it would continue to monitor the Saldanha developments.

“Kumba will continue to assess the effect of Amsa strategic asset footprint review on domestic sales and will update the market in due course,” Kumba said. “Importantly, export sales contribute 94percent towards the company’s total sales and Kumba’s high-quality iron ore products are well-positioned in global markets, with ongoing customer demand and a stable export order book.”

On Monday, Amsa shocked the market when it said that it would place the Saldanha operation on care and maintenance, charging that the unit’s structural cost advantage had been eroded and was no longer competitive in the export markets due to raw material and regulated prices.

Amsa said Saldanha had incurred substantial losses in the past and the short- to medium-term outlook remained bleak.

It said that the process of winding down Saldanha’s steel operations was expected to be completed during the first quarter of 2020.

The announcement drew the ire of the government, with the Department of Trade and Industry saying it was disappointed at the move that could affect nearly 1000 workers across the company.

“This comes despite significant efforts by the government and public agencies to provide additional support to Amsa over the last few months, and to ensure a solution which would result in the elimination of job losses across the company and the continuation of the Saldanha Works,” said spokesperson Sidwell Medupe.

Luvuyo Booi, an equity research analyst at Johannesburg-based Noah Capital Markets said the closure of the Saldanha unit would have a minimal impact on Kumba, which sold about 3million tons of iron ore to Amsa out of total sales of 42.5million tons, which was about 7 percent of sales.

He said that the potential risk to Kumba earnings before interest, tax, depreciation and amortisation (Ebitda) in the event that ArcelorMittal closes down (the Saldanha operations) was about R3.1billion, based on 2019 first half sensitivity analysis and using a 7.5percent discount on domestic sales.

“However, the decline in sales in 2019 financial year is about 1.5 million tons, therefore the potential Ebitda decline is about R1.55bn,” Booi said, adding that Kumba could possibly consider to divert a portion of those volumes to the export market to fully utilise the port and rail facilities.

“This will require some tough negotiations with other iron ore and manganese producers using the multi-purpose terminal at the port and will therefore not happen overnight. To the extent that Kumba is able to deliver on this, there will be an upside for the business as iron ore exports generate more income than domestic sales,” Booi said.

Kumba rose 2.34percent on the JSE yesterday to close at R368.44.


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