| Tue 8 Mar 2005, 14:48 | | Kumba lands Transnet deal |
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Kumba lands Transnet deal
March 8, 2005
By James Macharia
Johannesburg - Iron ore giant Kumba Resources has signed a transport contract that will enable it to boost output at its Sishen mines by an annual 10 million tons within four years.
The deal would allow Kumba to expand Sishen output to 38 million tons by 2009 at a cost of R2.96 billion, the group said yesterday.
Shares in Kumba, which have gained more than 60 percent this year, raced up 4.19 percent to a fresh record high of R73.35 after the deal was announced yesterday. The share price closed up 66c at R71.06, while the other mineral extractors sector was down 2.14 percent.
Kumba, the world`s fifth-largest iron ore producer, said it would launch construction for the expansion of its Sishen mines in mid-2005, and the production ramp-up would start by mid-2007.
The transport contract with state-owned logistics group Transnet provides for a new pricing mechanism that will be a rand-based tariff, and caters for Kumba`s growth plans to increase iron ore exports through Saldanha from 23.5 million tons yearly to 35 million tons by 2009.
The deal was effective from January 1 2005 and would run for 23 years, with tariff reviews every five years.
`This is very positive for Kumba, and the share price has been rising to price in this anticipated good news,` said Neels van Schaik, a fund manager at PSG Fund Management.
`The key questions are whether iron ore prices will hold in the long term to justify the expansion, and if Transnet can keep its part of the deal on track to avoid transport bottlenecks.`
Kumba`s share price has pumped upwards since the world`s top iron ore producer, Brazil`s CVRD, and second-placed Rio Tinto won deals with European and Asian steel makers, which agreed to pay 71.5 percent more for iron ore from April 1.
Kumba sold 40 percent of its exports last year to China, whose biggest steel maker, Baosteel, also agreed to a 71.5 percent hike in prices with Rio Tinto.
The 2004 iron ore price increase was 18.6 percent.
Kumba transports about 22.5 million tons of iron ore annually through the Sishen-Saldanha line.
`This contract ensures that Kumba`s iron ore business maintains its profitable performance,` said Con Fauconnier, Kumba`s chief executive.
`It supports future growth plans and a sustainable business environment for both parties.`
The contract would effectively remove the negative effect of the embedded derivative in Transnet`s accounting records as the pricing mechanism in the previous contract was linked to the US dollar iron ore price, Kumba said.
Transnet will invest R4.4 billion over the next five years to expand rail and port infrastructure.
Its rail operator, Spoornet, has been criticised for inefficient service and high charges, but Transnet has said it would put together a restructuring plan for Spoornet to spend R14 billion in capital projects over five years.
