Iron-Ore Crash Sends Kumba From Anglo's Darling to Rejectby
Anglo plans to divest 69.7% stake in Kumba before end-2017
Current value of Anglo holdings seen $780 million, Citi says
Less than four years ago, Anglo American Ltd. increased its controlling stake in Kumba Iron Ore Ltd. by 4.5 percent for almost $1 billion. Now, its entire stake is valued at less than that.
Kumba became the latest casualty of iron-ore’s price slump as Anglo seeks to dispose of its 69.7 percent interest in Africa’s largest producer of the steelmaking ingredient, an investment that accounted for half the London-based company’s profits three years ago. While the price of iron ore dropped by more than three-quarters since its peak in 2011 as the largest producers including Rio Tinto Plc and BHP Billiton Ltd. fueled a glut, Kumba had to cut its workforce by a third and axe a dividend that Anglo depended on since the Pretoria-based company’s listing in 2006.
“It was a big contributor to Anglo,” Norman Mackechnie, a fund manager at Momentum Asset Management (Pty) Ltd., who helps to oversee more than $20 billion of investments that include Anglo and Kumba stock, said by phone Tuesday. “Unfortunately people’s minds were clouded and didn’t pay attention enough to the oversupply that was coming through -- we’ve seen this movie before.”
In 2002, Anglo bought a 20.1 percent stake for the equivalent of $220 million in Kumba Resources Ltd., a company that controlled the Sishen mine, the world’s third-largest iron-ore operation at the time. It took control of the company in 2003 in a series of deals that raised Anglo’s holding to 66.6 percent. The producer relisted Sishen in a new company three years later while merging Kumba’s coal and zinc assets to create Exxaro Resources Ltd. in a venture with Eyesizwe Coal Ltd.
“We realized Anglo’s major objective was to get to the iron ore because that was a commodity that was humming at the time,” Con Fauconnier, the chief executive officer of Kumba Resources until November 2006, said by phone on Tuesday. “Sishen is a fantastic asset. The ore is very sought after because it is some of the hardest in the world,” which means it makes stronger steel.
After the listing in November 2006, Kumba’s market value surged more than fivefold to about 180 billion rand ($11 billion) in February 2013 as growth in China, the biggest consumer, fueled demand. It has paid $5.6 billion in dividends to Anglo and accounted for 49 percent of the parent’s underlying earnings in the first half of 2013, analysts at Citigroup Inc. wrote in a note to clients on Tuesday.
In 2012, Anglo again increased its holding in Kumba to the current size, paying $948 million for a 4.5 percent stake. In the same year, it opened the Kolomela pit, a $1 billion investment that Anglo flagged as one of its key projects at the time.
These investments reflected Anglo’s view “on the quality of the business and its highly attractive performance and growth profile,” former CEO Cynthia Carroll said in July 2012.
After iron-ore prices reversed as a result of a global oversupply and China’s reduced demand for the commodity, Kumba saw its fortunes change. Profits last year fell more than two-thirds from 2012 while it dropped its dividend for the first time in 2015. The company is busy cutting more than 3,900 jobs, or about a third of its workforce, in an effort to remain profitable.
Anglo will either spin off or sell its stake in Kumba and hopes to complete a deal before the end of 2017, the parent’s chief financial officer, Rene Medori, said on a call with reporters on Tuesday. At the current share price of about 57 rand, Anglo could raise $780 million if it sells it stake, the Citi analysts said.
“Who wants to buy a higher-cost producer unless you get it very cheaply,” Momentum’s Mackechnie said. “Whoever buys those assets needs to take a view on what iron ore will do over the longer term. No one can answer that question, it will all be guesswork.”
Kumba shares rose 11 percent to 64.50 rand, the highest since Oct. 28, as of 2:48 p.m. in Johannesburg, giving the company a market value of $1.31 billion.
Anglo’s divestment could be beneficial for Kumba’s minority shareholders because it will make the stock easier to trade because it’s more readily available, Citi’s analysts said.
“Historically it has not been unusual for the big diversified miners to sell assets near the bottom of the cycle,” they said. “In the event of a spin-out, Kumba’s shares would be materially more liquid over time.”