Kumba up against Sars and DMR

Kumba Iron Ore has objected to findings by the South African Revenue Service (Sars), which sees it facing an additional tax bill of R1.8 billion, before interest and penalties.

The matter relates to an audit, in which Sars indicated potential adjustments of R6.5 billion to its taxable income, from 2006 to 2010. Kumba has objected to the basis for the proposed adjustments and is awaiting a response from Sars. “We feel that we have paid all the taxes that we needed to pay,” CEO Norman Mbazima told reporters in a conference call.

The Anglo American subsidiary has also lodged an appeal to the Minister of Mineral Resources Mosebenzi Joseph Zwane, arguing against conditions for the inclusion of the residual 21.4% mining right into its existing mining right for Sishen. Kumba is arguing that the Mineral and Petroleum Resources Development Act (MPRDA) does not allow for the imposition of conditions relating to domestic supply, procurement and skills development. Mbazima, who said operations at its flagship mine will not be affected, expects the matter to be resolved outside the courts.

Restructuring at Sishen, Africa’s largest iron ore mine, saw total production decline by 7% to 44.9 million tonnes (Mt) in the financial year ended December 31, 2015. However, a solid performance by Kolomela helped the company achieve record export sales of 43.5Mt.

But a 42% decline in iron ore prices due to strong supply growth, particularly from Australia and Brazil, and weak economic growth in China, its largest market, weighed on earnings. As did a R6 billion impairment charge, relating to the reconfiguration of Sishen’s pit to a low cost shell.

Headline earnings per share fell 66% to R11.82, while basic earnings per share fell from R33.44 to R1.46. Annual revenue decreased by 24% to R47.6 billion. Excluding the impairment, Kumba’s operating profit decreased by 56% to R8.6 billion while its operating profit margin decreased to 24% from 41% a year earlier.

Through “strict capital discipline and significant structural changes”, Kumba reduced controllable costs by R4 billion, cut its net debt position by 42% to R4.6 billion and suspended the dividend. A combination of rand weakness and lower freight rates saw its average cash breakeven price of $49/t for the year fall below to $41/t toward the end of 2015. It had targeted a breakeven price of $45/t.

A team of JPMorgan analysts, led by Fraser Jamieson, said the key positive in Kumba’s results is the fall in net debt coupled with a reduction in the break-even price. “Kumba has reduced break-even cost to [around] $41/t vs $63/t in 2014, meaning it should be minor cash flow positive at the $43/t spot iron ore price,” the analysts said.

With Kumba’s break-even price in line with current spot prices, Carole Ferguson, a director and senior research analyst at SP Angel, said the company has worked hard to bring down mine costs. But she appeared doubtful about its prospects, “I think 2016 is going to remain tough for Kumba, and they need iron ore prices to improve from here”.

Kumba does not expect a significant recovery in iron ore prices over the medium term and will undertake further cash conservation measures. It expects to reduce its break-even price to below $40/t. A new mine plan for Sishen, job cuts and salary freezes for senior and mid-management is expected to reduce controllable costs by about $10/t.

Mbazima stressed that the company would maintain balance sheet “integrity”. “Our main priority is to deleverage the balance sheet even further to ensure that we are robust enough to withstand a longer period of lower prices,” he said.

To listen to the radio interview with Moneyweb editor Ryk van Niekerk and Kumba CEO Norman Mbazima, please click here.

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