Kumba Iron Ore record results

Kumba Iron Ore with another whopping set of results this morning with headline earnings up 106% to a staggering R14.3bn. This huge increase has much to do with a 92% weighted average surge in export iron ore prices and a 6% increase in export sales due to more efficient operations. So clearly benefitting from the huge demand coming out of China. Headline earnings per share for the year were R44.67 with a whopping R21 a share dividend declared. At a share price of R463 the stock looks cheap especially with demand from the east not showing any signs of easing in the near or long term future.

There market overview speaks about China's robust growth even though authorities are trying to slow the economy down and curb inflation. China's steel production increased year on year by 9% in 2010 but more interestingly Europe, Japan and South Korea saw a 24% increase in year on year steel production. But I thought those countries were finished and China was our last hope for global growth? Obviously not.

Actual global exports to China decreased by 2% but that is because prices were up so much for the year. But the rest of the world pulled through with a 5% increase in iron ore demand. I love how they refer to the regions as China and 'the rest of the world'. How things have changed.

The group managed to increase total sales volumes by 8% to 43.2Mt with exports contributing 36.1Mt to those sales. China was responsible for 61% of exports while exports to Japan, Europe and Korea was up 54% and made up the other 39%.

So prices are up, demand is up and they are more efficient in production.

The only thing against them is the strengthening of the rand and Transnet's inefficiencies. I saw an interesting fact yesterday, more steel is poured in one day than gold has been poured in history. I know gold is a precious metal but wouldn't you rather invest in a commodity that is used in cars and buildings and affects every single person on the planet's everyday life? I see iron ore demand carrying on with its surge so if Kumba can keep production on the up and avoid the hassle of mining in South Africa, the share price will follow.

I want to add to this. This is the cheapest that the stock, Kumba, has looked since the parting of ways from the coal business. Let me explain. End of '06 the historical earnings multiple was 22 times, 28 the year after that in '07. '08 was an anomaly OK, that was the year that investment banks leveraged to the hilt fell over the edge of the waterfall and into the nether below. Like Lehman. In '09 the stock traded on 14 times earnings. And now the stock trades at around 10 times earnings. What is the market telling you? A dividend increase of four fold in five years. A low of nearly 100 ZAR a share in the 2006 year, the stock now trades above 450 ZAR. And don't get me started on cash generation, that would make you shudder.


But back to that question, what is the market telling you right now? Why is the stock trading on ten times historic earnings with a historic dividend yield of 8 percent? The analyst community is suggesting 50 ZAR plus of earnings for this year and the year after that 60 ZAR. So again, why is the stock so cheap? I guess in part the overhang from the ICT slash Sishen Iron Ore Company saga, which will be resolved in the courts. And then the other issue is Transnet. The rails and the ports......that is another issue entirely. I suspect the first one is more important than the second one, and will be some sort of high noon showdown in court. Or, perhaps Kumba will agree with ICT on a business solution to this, with the main shareholder Anglo just deciding that this is the best way out. But methinks not. Someone is going to look bad, either Kumba or the DMR, and it won't be *nice*.