Morning Mumble: Kumba Iron Ore: What's $200M between friends (AMSA), India's restrictive practices? VED, Rhino Resources, Chapter 11 (NYSE: ANR) & The Market Vectors Coal ETF (NYSE:KOL) Whoops! + Fresnillo! & SXX Good News!

Good Morning,

We knew Kumba Iron Ore (JSE: KIO) had difficulties. It appears ArcelorMittal South Africa (AMSA) have won the spat with Kumba over the 20% Sishen, see: EMC: Kumba + Sishen. Just not how it was expected, but they've won conversely/perversely. They did something very shrewd, they are now simply not paying a premium for Kumba's ore any more. What’s $200M of revenue between friends?

The market should be appalled with itself for reacting so slowly to the pricing assumptions of AMSA. Kumba has relied upon a sales agreement with AMSA for near 12 years, whereby 6.5MT was contracted via a supply agreement. Last year’s contract was worth just over $500M to Kumba. Unfortunately, the supply agreement does not appear to be mutually beneficial anymore, and perhaps never will be again. AMSA can simply import iron ore at near 60% less than the price ($80/t EMC assumptions) that they had been paying to Kumba. 

This contractual issue/supply agreement has a number of impacts. Not only does the profit on the supply contact equate to almost all the entire planned CAPEX for Kumba, but more so, this revenue supports the operations at Kumba's Northern Cape operations. With the contract value, assuming Kumba roll-over, being worth near $300M compared to the previous $500+M. essentially at a loss when factoring in an all in cost basis for Kumba.

One suspects the contract negotiations were at an advanced stage when a leak appeared in how AMSA was strong arming Kumba (tut tut that’s just naughty!). As mentioned previously, it's a price setters market (remember this). The Chinese wielded that axe near two years ago.

Kumba have some very difficult choices to make including cuts and/or pricing in respect of AMSA. It’s likely to be far worse for Kumba than it is for AMSA and Anglo America (AAL) (majority shareholder in Kumba). AAL may have the opportunity to fill the void, so perhaps are offering AMSA some attractive terms. AMSA’s location near Saldanha Bay could not be better for them. One analysts suggest AMSA may be tempted by Minas Rio supply.

Additionally, AMSA’s strong arm approach is likely to be punishing, as they are under significant pressure by a global oversupply of steel. If there are no Government protectionary measures put in place soon, not only in South African but India, steel producers will (not could) be forced out of business by cheap Chinese imports. Expect news on import quotas or import levies in due course. Evidenced by the aluminium prices producers in India are already suffering from because of a slump in prices and surge in cheap imports. (BALCO/Vedanta)

With a market capitalisation of $2.6B  ($1:ZAR12.64). Would you be long? There's more woes to come as Kumba’s LOM's are reducing as a result of a change in operational focus. CAPEX under significant pressure, even if they “maintain the AMSA business for another year.” Unless the global price recovers, Kumba, may not be a casualty but certainly a shadow of its former self. The impact for Exxaro may just be more significant…chequebooks please.

With interest, is the Chairman's Statement from the AGM at Vedanta (VED), where there's an emphasis on "Make in India” leading to a bounce today. There's significant pressure on India relating to their import duties that could be described as restrictive. 

India is changing, examples being the relaxation of cabotage rules (Carriage of cargo between two points within a country by a vessel or vehicle registered in another country), but is likely to put pressure on the national operators and producers in the longer-term.

The Indian Government is being pressed externally to review all levies including, agricultural and consumer goods. Complaints are already lodged with the WTO, examples being the application of the Avian Influenza restrictions. (WTO: Indian Avian Influenza). Worthy of a read to grasp the economic outlook of India is the most recent WTO Trade Policy Review: India (2 and 4 June 2015).

Some very good news for Sirius Minerals (SXX) today, with the publication of their corn and soybean crop study . The size of both these markets is material. Potash producers, sit up and take note. With no reason to hold this stock currently, one has to factor in the viability of the polyhalite being a tempting factor. Good news to assist the management in their fundraising.

Can Glencore's woes get any worse? We'll let those more inclined to see what the impairment should be on their thermal coal operations. However, their miners may actually assist the price with planned strikes etc... South African mine union threatens legal action against Glencore’s job cut plans. Remember, Anglo impaired their Australian Coal and Minas Rio assets in July by near $3.5B. Glencore blame ESKOM for the woes, perhaps they should shut some production? FT Glencore South Africa (Optimum Coal Unit). Has GLEN not been so exposed to thermal coal, then they would have fared better? 

One hopes EDF Trading Resources gets there $125M from the sale of their share in the Pennsylvania Land Resources Holding JV with Alpha Natural Resources (NYSE: ANR). ANR has natural gas assets that may pay some of the bills, but they can finalise those valuation with a chapter 11 wrapper. Over to Rhino Resources (RNO) to take a kicking as well...This doesn’t bode well for the The Market Vectors Coal ETF (NYSE:KOL) that's performed like a proverbial dog. 

Limited time to cover Fresnillo (FRES) interim results but worthy of further work, especially around the costs on an all in basis increasing. Sensibly, FRES have reduced the exploration budget for this year in light of more challenging precious metals market conditions. It would be wise not to ignore the benefits of the hedging programme either that benefits the bottom line. CAPEX for the full year 2015 has been tapered back but still expected to be in the region of $570m (vs. previous expectation of c. $700m). Whether they can achieve the 570m target is another matter. 

Atb Fraser