Kumba Iron Ore trading update.

We had a trading update from Kumba Iron Ore for the 6 months ended 30 June 2011 this morning. Headline earnings per share look to be around R26.80 compared to R20.28 for the 6 month period in 2010. The increase is attributable to higher iron ore prices which was slightly offset by the strengthening of the rand.

Wow, that is fantastic growth off what already looked like a high base, 24.3%. Last year for the second six months earnings came in at 24.38. So let's assume they manage to keep up this 10% per half year growth, they should be able to make R29.50 for the next 6 months and R56.28 for the year. The share trades at R500 and a forward PE of 8.8. Valuations look cheap for a company who have managed to grow these earnings from R9.74 in 2007-2008. That's 5 fold!

Another important factor to note is that Anglo own 65.25% of Kumba and the best way for them to extract these earnings is through dividends. This means that Kumba pay a fantastic dividend. Last year they paid a total of R34.50 from earnings of R44.50, a dividend cover of just less than 1.3. If they stick to this cover which I believe they will, we should be expecting dividends to the value of R43.30. So if you bought them today at R500 you would be expecting a yield of 8.6%. Tell that to a developed market participant and I doubt he'd believe you. That is fantastic.

I'm not going to go into the details of their assets and iron ore mining, Sasha did that quite recently. What I will do is look at the fundamentals behind iron ore and whether the Iron ore price which has benefited Kumba so much is going to remain at these levels. The short answer is yes. China still needs to urbanise 350 million people by 2030. India even more. Then Africa is next. Who cares if things are slowing down in Europe? Everything has been built there already. And to be honest, watching the Tour de France, we have had an ongoing chuckle in the office about how broken things all look in Europe. Or not.

The fundamentals are there to keep these prices at these high levels if not higher. At these price levels and yields I would definitely call Kumba a buy. For most clients we have exposure to Iron Ore via BHP Billiton but for those looking for Iron ore alone, Kumba would be my pick.