Kumba Iron Ore CFO Bothwell Mazarura believes the iron market will recover, as it has many times before, despite being faced with various geological, social and political challenges.
In 2021 and 2022, the mining industry boasted record revenues, largely driven by the uncertainty created in the supply of these resources from countries like Russia during the war in Ukraine.
One of the challenges the mining industry is currently battling is limited production due to Transnet’s operational challenges. “Production growth is a major cost lever. Since 2019, ore railed to port has reduced by over 14 percent from 42Mt to 35.9Mt. Finished stock levels are almost double historical levels, with most of the stock at our mines, impacting our ability to produce due to limited space,” said Kumba Iron Ore CFO Bothwell Mazarura at this year’s Joburg Indaba on 5 October.
Cost inflation also increased to double digits in 2021 and 2022 due to the Covid-19 pandemic and global supply chain challenges. Bothwell explains that this year, cost inflation improved to between six and seven percent due to lower rates of fuel price increases and other consumables. “Geological or mining inflation adds to the cost base. Our mines are deeper and Sishen is one of the largest open pit mines in the world, spanning 14km. This results in longer haulage distances and higher lifts.”
He added that increasing weather or climate related impacts, like locusts and significantly higher rainfall in 2021 and 2022, has been keeping him up at night too. “We’ve implemented a locust spraying programme in collaboration with the Department of Agriculture, which has proven successful, and improved our dewatering and stormwater infrastructure.
“We were able to provide over 6.8ML of water to local communities and we would like to increase the supply because our mines are net water positive. However, we are limited by the local municipal bulk water infrastructure which is unable to facilitate this.”
Ensuring recovery, and sustainability
Bothwell said that volatile market conditions, combined with a tough macro-operating environment, underscore the imperative of a strong and flexible balance sheet. “Our flexible capital structure enables us to balance the need for dividends and capital for growth.”
For example, during Covid-19, Kumba maintained a cash buffer to protect against high market volatility. “We were able to reopen with 50 percent of our workforce a week after South Africa went into lockdown, and ramped up to 100 percent in just over a month,” he explained.
As iron markets improved, Kumba also reduced its cash buffer and introduced debt funding for its growth projects. “With market volatility again increasing last year due to China’s extended Covid-19 lockdown and geopolitical tensions, we returned to funding our projects through cash generated,” Bothwell said.
He added that the mine has four pillars to maximise value and balance the needs of its stakeholders:
- Remove/reduce structural cost challenges and extract additional margin through the entire value chain
- Maintain strict cost stewardship across the business
- Generating free cash flow after sustaining capex (HME and plant stability, infrastructure upgrades, technology and environmental sustainability)
- Disciplined capital allocation
“Our dividend payout policy of 50 to 75 percent of HEPs provides flexibility and gives shareholders the line of sight as to what they can expect by way of sustainable returns through the economic cycle,” Bothwell explained.
After prioritising stakeholders, the remaining capital goes towards the company’s discretionary options, covering growth projects, value accretive investment opportunities, and additional shareholder returns from excess capital.
“Applying these four pillars ensures that we can grow our assets and position our business for growth in the future, while providing sustainable shareholder returns,” he added.
Enabling the future
Bothwell explained that steel is a critical enabler of economic growth and the fundamentals for iron ore which is a key ingredient in the steel-making process remain strong. “We have seen that as GDP per capita grows, steel per capita also grows.
“Steel is not only central to how we live today, but it is also pivotal for the future. It is a crucial ingredient that enables energy transition across all renewable power infrastructure and electric vehicles.”
In addition, he explains that Kumba’s greater share of lump and high-quality iron positions the company well for the global decarbonisation, which is gaining pace as regulations take effect from 2025 onwards, starting with the EU region.
“We are also participating in the green steel transition and collaborating with our customers will develop decarbonisation technologies as well as new green businesses,” he says.
Developing growth pathways
Bothwell said that Kumba’s “Refreshed” strategy includes developing growth pathways in the future. “Our balance sheet management includes running stress test scenarios to determine the level of cash on the balance sheet required as a buffer against various exchange rate and iron ore price movements and macro risk conditions.”
He added that the mine’s growth opportunities in the short to medium-term lie in maximising its margin, improving efficiency and life of mine extension. This includes developing additional declared resources, and utilising new technologies.
“The Ultra High Dense Media Separation project is currently under review,” Bothwell said. “We remain confident that this technology is a game-changer.”
He explained that the project will be key to beneficiating Kumba’s low-grade C materials to above 60 percent, lowering mining costs, improving product quality and extending the life of mine at Sishen.
“Thirdly, we have spent over R650 million rand drilling over 200,000 metres to explore further in the Northern Cape.”
Bothwell remains optimistic for the mining industry, concluding that:
“At each economic downturn, irrespective of the trigger being a demand or supply disruption – like the global financial crisis in 2008, or the commodity crisis in 2015, or the Covid-19 pandemic and recent geo-political issues – the iron ore market has recovered.”