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
