Kumba, an Anglo American subsidiary, has seen its share price spike after the collapse of a tailings dam owned by Brazil’s iron ore giant Vale in January, which has boosted iron ore prices.
“Kumba is expected to deliver a stronger financial performance, underpinned by higher average iron ore export prices and a weaker average rand/US dollar exchange rate,” the company said in a trading update.
Kumba, which operates the Sishen and Kolomela mines in the Northern Cape, said it was eyeing headline earnings and basic earnings in June to gain at least R4.76 billion and R4.7bn, respectively, from R2.97bn and R2.94bn in the same period in 2018.
The company also said headline earnings a share and earnings a share would increase by at least R14.90 and R14.73 a share, respectively, from R9.31 and R9.21 a share, respectively.
Kumba shares closed at R402 a share, 2.77percent lower compared to the previous close, but it surged since the start of the year after the Vale tailings dam broke, leading to a flood that killed almost 170 people.
The accident in January resulted in Vale suspending iron ore production and the close of mines, sending iron ore prices into a frenzy on supply fears.
Luvuyo Booi, an investment analyst at Noah Capital, said Kumba’s improved earnings were on the back of the higher iron ore prices following the Vale incident earlier this year.
Booi also said that there was a good incentive for a price recovery, given that Vale’s 90 million tons-a-year capacity had been taken off the market.
“Kumba did not do well in the previous financial year as headline earnings and dividend per share were flat at R30/share due to derailments that affected its exports,” said Booi, referring to the unusually high number of derailments on the railway line linking Kumba’s Northern Cape mines to the Saldanha port.
The company declared a force majeure last March, telling customers it could not meet its contractual obligations owing to the derailments, which contributed to a drop in export sales in the first quarter of 2018.
“With economists expecting the rand to be in the R14 to R14.50 range, it is the iron ore that is going to help Kumba’s fortunes going forward,” said Booi, adding that the company was unable to increase its sales volumes as it had limited rail capacity. "What they can do and have done is to improve the quality of iron ore production to earn more for premium iron ore.”
Vale, which produces about a quarter of the iron ore traded by sea, with a capacity of 90million tons a year, announced it would place 10percent of its output offline to decommission 10 dams similar to the one which burst in January.