South African transport parastal Transnet and mining group Kumba Resources on Monday announced that they had signed a new iron ore contract and had agreed on the expansion of Transnet’s rail and port infrastructure to allow Kumba to expand its iron ore output by 10-million tonnes by 2009.
On the news of the planned expansion in output, Kumba’s stock on the JSE Securities Exchange South Africa touched a fresh all-time high of R73,35, eclipsing its previous all-time high of R70,50 established last Friday. However, by 13.30pm on the JSE, Kumba’s stock was quoted at R70,25, down 0,2% or 15 cents from its previous close.
Kumba and Transnet on Monday signed a new contract that will remove the volatility of the rand/US dollar exchange rate and the level of iron ore prices from Transnet’s income statement. The contract has a 23-year duration and can be reviewed every five years.
“The new contract eliminates exchange rates and iron ore prices and successfully releases Transnet from an embedded derivative liability of R4,3-billion,” said Transnet Chief Executive Officer Maria Ramos.
Transnet operates the 861km Orex rail line between Sishen in the North Cape, where Kumba’s Sishen iron ore mine is situated, and Saldanha. Transnet, through South African Port Operations, operates the facilities at the Saldanha port.
Kumba Resources CEO Con Fauconnier said that the functioning of the Orex line was world class and could match the operation capability of the 890km line from the iron ore mining area of Carajas in Brazil to the nearest available port.
Transnet also agreed to increase the amount of iron ore it transports from the Northern Cape to Saldanha by 12-million tonnes per annum to 41 million tonnes per annum by 2009.
In its 2004 year, Kumba moved 22,1-million tonnes per annum of iron ore to Saldanha and exported 20,9-million tonnes.
In 2005, the group is looking to move 23,5-millions tonnes of iron ore to Saldanha and then increase its tonnage moved by between 1,5-million tonnes and two million tonnes in 2006, said Kumba Operations Executive Mike Kilbride.
From 2007 to 2009, Kumba expects to see significant increases in iron ore moved to Saldanha as the new infrastructure will be in place, he added.
As a result of the expansion, Kumba is aiming to up its production moved down the Orex line to 35-million tonnes per annum, of which 33,2-million tonnes per annum will be exported.
The expansion of Kumba’s iron ore production comes at an opportune time for the group as global iron ore prices have increased by unprecedented levels.
Brazil’s Companhia Vale do Rio Doce or CVRD, the world’s largest iron ore producer, and London-listed mining group Rio Tinto have both concluded iron ore contract price increases of 71,5% for the coming 2005 iron ore year, which starts on April 1, 2005.
Fauconnier said it was difficult to predict how long the current boom in global demand for iron ore from the world steel industry would continue.
However, he said that with the Chinese economy expected to grow 8% in
2005 after 9,5% in 2004, steel output from China would increase and this would have a commensurate increase in iron ore demand.
Kumba is the world’s fourth largest iron ore exporter. If the current demand for iron ore continues, Fauconnier said Kumba would then expect a further increase in iron ore contract prices in 2006.
“The commodity cycle has changed and there seems to have been an upward shift in global demand,” Ramos said. The expansion was a very bankable one, she added.
The expansion was part of Transnet’s objective of reducing costs and becoming more efficient while remaining profitable and increasing infrastructure and upgrading rolling stock, Ramos said.
Ramos announced that Transnet would be spending R4,5-billion over the next five years on its iron ore capacity expansion, with R3,9-billion going to investment in more rail infrastructure, locomotives and rolling stocks and R600-million on port infrastructure, especially new stacker reclaimers.
Transnet will increase the size of the trains on the Sishen-Saldanha line to 342 wagons per train and will buy 69 new electric locomotives.
Transnet is likely to use its own cash in its 2005 and 2006 financial years and would look at other options after those two years, Ramos said.
As a result of the expansion, South Africa will export about 39,2-million tonnes of iron ore per annum by 2009 from the existing level of about 27,2-million tonnes per annum.
There was good market acceptance of Kumba’s planned new fine and lump ore product that would be mined from its Sishen Expansion Project, Fauconnier said.
The Sishen Expansion Project would result in a decline in the Sishen mine’s stripping ratio from 2,9 to 1,9, which would mean that less ore would need to be mined for Kumba to get a ton of iron ore, Fauconnier said.
Kumba expects to spend R2,96-billion rand on its Sishen Extension Project with R600-million to be spent in the current 2005 financial year, R1,7-billion in 2006 and R600-million in 2007, with the remaining amount to be spent in 2008.
The group expects to fund the expansion from internally generated cash flows.
The new iron ore production that Kumba will generate will mainly be sold to its customers in China and Europe. Kumba currently sells iron ore to steel customers in Europe, Japan, China and Eastern Europe.
Kumba expects that the Sishen Expansion Project will add R200-million per annum to the Northern Cape province’s gross domestic product and will bring in $250-million in foreign exchange earnings per annum.
The project will see 1 800 in direct construction jobs and about 900 direct and indirect jobs will be created once the expansion is over.
The Sishen Expansion Project will increase the Sishen mine’s production from the current 28-million tonnes per annum to 38-million tonnes per annum by 2009.
Construction will start in mid 2005, with production ramp-up to commence by mid- 2007. – I-Net Bridge