9th Feb 2016 13:48
LONDON (Alliance News) - Anglo American PLC shares dropped on Tuesday after the company provided a further glimpse into its full year results to be released next week after revealing earnings from the Kumba iron ore hub in South Africa have plummeted during 2015.
Anglo American shares were down 8.9% to 342.75 pence per share on Tuesday afternoon.
Anglo American holds its stake in the Kumba iron ore hub through a 69.7% stake in the company that holds the operation, Kumba Iron Ore Ltd. The Kumba iron ore hub is made up of three producing mines - Shishen, Thabazimbi and Kolomela - all in South Africa.
Iron ore miners have had a difficult year in 2015, as prices remain under pressure. Anglo American demonstrated the severity of the price falls on Tuesday, by stating Kumba Iron Ore's headline earnings dropped to USD304.0 million in 2015 from USD1.01 billion in 2014.
Revenue at Kumba dropped 24% in 2015 to ZAR36.10 billion from ZAR47.60 billion, which was the result of lower prices and lower production. Anglo American had already revealed that production from Kumba was down 7% year-on-year in 2015 to 44.9 million tonnes, mainly because the Shishen mine is being transitioned to a lower-cost pit configuration.
Kumba's production fell at even steeper rate in the fourth quarter after operations at Thabazimbi stopped, leading to an overall 12% year-on-year fall in production, which looks set to continue to reduce in the future.
Anglo American has other iron ore operations in Brazil that are separate to Kumba Iron Ore. The Brazilian operations experienced large rises in production in 2015, offsetting those falls reported by Kumba Iron Ore.
Anglo American has previously said the work being carried at out the Shishen mine will lead to lower production in the future, as it sacrifices production growth for cost reduction to try and adjust to the current environment.
The restructuring of Shishen will "impact" 2,633 employees at Kumba and a further 1,300 contractors, and Kumba Iron Ore is continuing to hold "extensive consultations" with those members of staff.
Also, the Thabazimbi mine is set to formally close in the second quarter of 2016 and mining operations stopped in late 2015.
That fall in production in 2015 was accompanied by steep falls in prices, with Kumba Iron Ore averaging a price of only USD54 per wet metric tonne in 2015 compared to USD91 per tonne a year earlier.
"Rapidly changing market and economic fundamentals have resulted in the iron ore price falling faster and deeper than expected. The period ahead is likely to result in formidable changes for the industry with the market now pricing in a more muted trend for the iron ore price," said Kumba Iron Ore.
"As such the group does not expect a significant recovery in the iron ore price over the medium term. These circumstances have reinforced the need to make tough decisions for the business and to take necessary action to safeguard the viability of the operations," it added.
Importantly, Kumba's breakeven price was only USD49 per tonne in 2015 - providing a slim margin. However, it said that breakeven cost was only USD41 per tonne at the end of the year, suggesting that margin has improved and will continue to improve in the future. That is also ahead of Kumba's internal target to have a breakeven price of USD45 per tonne, it said.
Kumba plans to reduce controllable costs per tonne by a further USD10 in 2016, largely from on-mine cash cost reductions through the implementation of the new mine plan for Sishen and ongoing cost initiatives including "headcount rationalisation" and salary freezes for senior and middle management.
The overall breakeven price at Kumba is expected to drop to less than USD40 per tonne in 2016 - but Kumba warned that volatility in freight and foreign exchange rates could affect this.
Kumba has provided production guidance for 2016, stating total production from the Shishen and Kolomela should come to around 39.0 million tonnes. To put that into context, Shishen produced 31.4 million tonnes in 2015 and Kolomela produced 12.1 million tonnes to total 43.5 million tonnes in 2015.
Overall, Kumba Iron Ore will only contribute USD238.0 million to Anglo American's full year underlying earnings in 2015, which excludes certain items and is used to measure the underlying performance of the business, compared to USD693.0 million in 2014.
The scale of the drop in earnings from Kumba follows Anglo American's announcement Monday that its platinum arm based in South Africa, Anglo American Platinum Ltd, would contribute more to its group underlying earnings in 2015 than it did in 2014 despite reporting a substantial drop in headline earnings during the year.
Anglo American said Anglo American Platinum will contribute around USD168.0 million to its underlying earnings in 2015, compared to only USD25.0 million in 2014.
That is despite Anglo American Platinum reporting a large drop in headline earnings to ZAR107.0 million in 2015 from ZAR786.0 million in 2014, representing an 86% year-on-year drop as the platinum arm swung to an operating loss from a profit despite reporting a rise in revenue.
Gross revenue rose to ZAR59.82 billion from ZAR55.62 billion, with net sales revenue increasing to ZAR59.81 billion from ZAR55.61 billion.
That pushed its gross profit up to ZAR5.27 billion from ZAR2.64 billion, but a ZAR10.24 billion impairment against property and equipment pushed the firm to a ZAR6.05 billion operating loss from a ZAR843.0 million profit last year.
Other impairments against investments in third-parties, non-current financial assets and against businesses that are currently up for sale, totalled around ZAR7.68 billion, also dragged earnings down.
Anglo American Platinum stressed that all of its operations remain cash positive, stating earnings were "significantly impacted by one-off impairments and restructuring costs".
Refined platinum production in 2015 rose considerably to 2.5 million ounces from 1.9 million ounces, and was one of the only of Anglo American's commodities to experience production growth in 2015. However, platinum group metal prices were also down 21% year-on-year.
Anglo American already has said its platinum arm was the only segment of the business to experience a material lift in production in 2015 - with production of the majority of its other commodities experiencing steep falls.
Anglo American, like its peers, has been adjusting the business to suit the downturn in the market and ensure it keeps competitive. In December, it outlined "radical" restructuring plans aimed at downsizing the business which included suspending its dividend, slashing expenditure, downsizing its assets by more than half and a large amount of job cuts.
Anglo American plans to focus on its best assets, consolidating its units to three from six. The new divisions will focus on its diamond unit De Beers, an Industrial Metals unit which will include platinum and base metals and Bulk Commodities, which will host iron ore and coal.
Anglo American Platinum reiterated Monday that all decisions on major capital projects remain suspended until at least 2017, as it focuses on retaining positive cashflow from its existing operations and maintaining its balance sheet.
It is a similar story at Kumba, with the company Tuesday stating it reduced controllable costs by around ZAR4.00 billion in 2015 and lowered its net debt by 42% to ZAR4.60 billion - which was possible because of the dividend suspension, it said.
Kumba Iron Ore spent 20% less in capital expenditure in 2015 than in 2014, totalling ZAR6.80 billion, and said an extra ZAR900,000 was saved on top of the ZAR4.00 billion saving in controllable costs through overhead reduction and job cuts.
"During the year the group took significant steps to protect its balance sheet by preserving capital and reducing costs. A key area of focus was moving from a volume to a value based strategy by reconfiguring the mines to reduce the amount of waste mined and to save costs in all operational areas," said Kumba Iron Ore.
Anglo American will report group results for 2015 on Tuesday, February 16.
By Joshua Warner; [email protected]; @JoshAlliance
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