Anglo production stumbles on Kumba weakness

Anglo American presented the market with production numbers on Friday, for their third quarter to end September. The shocker was the iron ore (Kumba mostly) division, down 24 percent when measured against the corresponding quarter last year. Down 16 percent when compared against the prior quarter. But year to date down only 9 percent. Sishen. Point your finger there. In the commentary these were the lines that you needed to look at: Production at Sishen mine was impacted by ongoing pit constraints and section 54 regulatory safety stoppages in August 2013. The Sishen mine pit is currently operating at a quarterly run rate of approximately 8 Mt. A plan to address the current pit constraints and a longer term operational strategy is expected to be presented by the end of the year. Wow. This certainly came from left field. Left field, the term comes from the left fielder (on a baseball field) having to throw all the way to first base. In cricket terminology this must be like trying to throw the stumps down at the bowlers end from long leg, whilst the batsmen are trying to take a quick single. A scenario that I envisage with Arjuna Ranatunga and Fanie de Villiers, you figure out which one is the batsman!


Kumba Iron Ore, the standalone company's share price reacted violently, down seven and a half percent to 438 Rand a share, down an extra one and a half percent today to now be trading at a 52 week low. And I guess the knock on impact to Anglo American, the parent company (Anglo owns nearly 70 percent of Kumba) might be worse, because Anglo have relied on the strong cash flows associated with the very generous dividend policy over at Kumba Iron Ore. What is true however, is that the iron ore price has been stronger than many anticipated. And the currency has been weak, so those two factors might offset the lower production. The payout ratio over at Kumba has been around 80 percent of earnings, a very, very welcome investment for Anglo American, good timing on their part. But, if record dividend payments are a thing of the past (but still excellent, make no mistake), the cost cutting exercises that the current CEO (Mark Cutifani) has embarked upon should bear fruits later. Hopefully. But not fun for now.


To have a look at the other divisions, Manganese experienced modestly lower production on a YTD basis, thermal and metallurgical coal experienced a pleasing uptick YTD and then copper was perhaps the most pleasing out of all the divisions. In fact it was a record for quarterly production, and overall YTD is up 13 percent. Phew. Platinum production was flat, diamonds, that was up 11 percent year to date. The current quarter (diamond production) saw a modest decrease, but higher production is definitely encouraging. I am guessing that this was not the most encouraging report, there were definitely spots to be pleased with, but for Anglo the Kumba "miss" was pretty unnerving, because it has been such a great dividend payer. A 40 Rand payment on the 69.7 percent stake that Anglo have in Kumba Iron Ore is around 8.98 billion Rand. A 30 Rand dividend payment is 6.73 billion Rand. Every Rand is nearly 224.5 million Rand less or more, depending on which way the needle moves! So now you understand how important this asset is to Anglo American!!