China continues to invest, especially domestically,” highlights new Kumba Iron Ore CEO Chris Griffith.
“They are taking more than 50% of seaborne iron-ore. Even if there is a global downturn, we see that Chinese demand for steel, and, therefore, for iron-ore, will continue and increase. There have been slight increases in China’s own production of iron-ore, but their grades are decreasing and so, on a rich-ore basis, their production is actually decreasing.”
Nor is Griffith alone in his confidence. Only last week, Roberto Castello Branco, investor relations director for Companhia Vale do Rio Doce, the world’s number one iron-ore- miner (and number three mining group, in terms of market capitalisation), speaking at the Euronext stock exchange, in Paris, said, “When you go to places like China, the Middle East, India and Vietnam, you perceive that we don’t have a bubble; the demand is real,” adding that “it is not a cyclical process, it is a structural change” in the commodities markets.
The global demand for iron-ore, and the concommitant desire to secure access to orebodies, is illustrated by the current competition to buy Nacional Minérios SA (Namisa), one of two iron-ore mining subsidiaries of Brazilian steelmaker Companhia Siderúrgica Nacional (CSN). Namisa expects to produce 7,5-million tons of iron-ore this year, and CSN is seeking to sell part or all of it in order to be able to reduce its debt burden. The steelmaker has brought in US investment bank Goldman Sachs to assist with the sale.
Press reports in Brazil state that Goldman Sachs valued Namisa at $10-billion, higher than estimates by various analysts, which ranged between $7-billion and $8-billion. Even so, international interest was immediate and strong.
Companies reportedly bidding include world number one steelmaker ArcelorMittal, Russia’s Severstal, an unidentified Japanese consortium, three Indian steelmakers – Essar Steel, JSW, and Tata Steel – and two Chinese consortiums, one of which includes both Baosteel and Shougang Group, with the other centred on private-sector steelmaker Shagang Group, despite the fact that it is still not clear how much of Namisa CSN will sell, or even if any sale will take place at all. Clearly, iron-ore is not only a hot commodity, but everyone involved sees it staying that way, and for some time. “We believe, as Kumba, that this is a really tight market,” affirms Griffith. “Demand for iron-ore exceeds supply. We’re certainly feeling bullish about the long-term future of iron-ore. For the next three to five years, supply is not going to be able to keep up with demand.”
Kumba, which is about two-thirds-owned by world number five (by market capitalisation) mining group Anglo American, and was listed on the JSE, in 2006, is currently the world’s fourth-biggest player in the seaborne iron-ore market. “We’re a significant player,” says Kumba GM: commercial Timo Smit. “But the top three are much bigger than us.” (Kumba is not Anglo American’s only iron-ore subsidiary; the London-listed group also owns 63% of recently established Brazilian iron-ore group IronX.)
The South African company is determined to grow with the rising demand for its product.
"Clearly, everyone in the market is looking to expand as much as they can. And so are we. We’re not focused on being number four or number five – that doesn’t drive us,” explains Griffith. “What drives us is to expand our production.” Currently, Kumba’s forecast annual production is 37-million tons a year to 38-million tons a year, of which nine-million tons a year are for the domestic market and 29-million tons a year are for export.
Of these exports, 37% go to China, another 37% to Europe, and 26% to the rest of Asia. “We have plans to increase our export capacity to 44- million tons a year in 2013, which would take our total production to 53-million tons a year. We have the potential to increase this to 70-million tons a year by 2015. Our project pipeline has the capacity to do this. The capability of doing it will be influenced by issues of infrastructure – power, water, and transport – and the situation of the market.” (Unlike rivals in Australia and Brazil, Kumba does not have its own railways and ports.
This expansion will be entirely organic. “We are not seeking acquisitions,” states Griffith. “Our board wants us to focus on the projects we are already working on. We have a wonderful project pipeline and our strategy is to focus on our pipeline.”
An important competitive advantage for Kumba is its ability to supply niche products.
These niche products are a coarse sinter product, from 5 mm to 8 mm in size, a direct reduction iron-ore product (which acts as an alternative, or supplement, to iron-ore pellets) with a size between 8 mm and 20 mm, and a direct reduction shaft product, ranging between 13 mm and 27 mm. “About 25% of our products are niche products,” reports Smit. “We get a premium on these products and we’re trying to increase the proportion of these niche products in our output. We have a niche market strategy,” confirms Griffith.
Currently, the company operates two mines, both in South Africa – Sishen, in the Northern Cape province, and Thabazimbi, in Limpopo province. In the six months ending June 30, 2008, Sishen produced 15,8-million tons, and Thabazimbi 1,3- million tons, of iron-ore products.
It is clearly part of our expansion strategy to focus first on the Northern Cape,” avers Griffith. “The Northern Cape is where we do most of our mining, and where we have the best ability to deliver on projects. However, we do have other projects in South Africa, at Thabazimbi, and at Zandrivierspoort, also in Limpopo. Outside South Africa, we have a project in Guinea, in West Africa."
The most advanced of these projects is the Sishen Expansion Project (SEP), with the first phase, designated SEP1, in production ramp-up. SEP uses jigging technology, rather than dense-media separation (DMS), to process the iron-ore, because jigging can handle lower grades of ore than DMS. Although delayed by the late commissioning of the crushing and sample plants, SEP1 achieved production of 1,3-million tons in the first six months of this year and, with the commissioning of the seventh and eighth jig modules scheduled during this quarter, the company expects that SEP1 will have a total production of five-million tons for this year.
At full production, SEP1 will add 13-million tons a year to Kumba’s output. The next phase, SEP1B, is currently under feasibility study and will add a further 0,4-million tons a year in 2009, while, beyond this, SEP2 is now in prefeasibility and will contribute 10-million tons a year by 2012.
“We have already secured expansion of the logistics line for SEP,” assures Griffith. “We’ll imminently announce the successful end of negotiations to expand the Sishen–Saldanha railway line.” Sishen’s products are railed to the Port of Saldanha, in the Western Cape province, for export. The Sishen–Saldanha railway is operated by Transnet Freight Rail, while Saldanha harbour, including the iron-ore export terminal, is operated by Transnet Port Terminals.
Next in line is the slightly misleadingly named Sishen South Project – Sishen South will be a completely new mine, and will be located 80 km south of the existing Sishen mine.
This R5,9-billion (in real 2008 terms) project is now in the final stages of its approval process, and, when in full production, will add another nine-million tons a year to Kumba’s output. Production at Sishen South is expected to start in 2012, with full production in 2013. Transnet will have to construct a 36-km branch line to link Sishen South to the main Sishen–Saldanha line, and they have committed to doing so. Despite its distance from Sishen, Sishen South will be able to share services with the older mine.
Apart from SEP2, there are two projects under prefeasibility study – Zandrivierspoort, and Project Phoenix. Zandrivierspoort is a quite substantial, but low-grade, magnetitie resource. The project is a 50:50 joint venture with ArcelorMittal South Africa. If it gets the go-ahead, Zandrivierspoort will enter production in 2013, and reach one-million tons a year. Project Phoenix is located at Thabazimbi and could, if realised, contribute 3,4-million tons a year to Kumba’s production. “The market is the key to unlocking Phoenix,” explains Smit. “We are doing studies on it. It will not be a decision we make in the short term. We have six years to decide. This gives us the time to do thorough studies.”
We are also looking at lower-grade deposits in the Northern Cape,” adds Griffith. For example, the Sishen C-grade project could add 10-million tons a year in production capacity. Further out, the Sishen South MGO could provide an extra 3-million tons a year.
Kumba also has projects under study to diversify its products. “We are investigating fines projects – value-adding pellets projects,” cites Griffith. “Pellets would be for both the export and domestic markets. And we are considering further value addition, beyond pelletisation.” The initial concept is for a pelletisation plant at Sishen with a production capacity of 1,5-million tons a year.
Abroad, there is the project in Guinea. “This is an early-stage greenfield exploration project,” elucidates Griffith. “It is too early to release any details.”
Abroad, Kumba is in dispute with ArcelorMittal over an iron-ore deposit in Senegal. This dispute is now in arbitration. “This arbitration process is confidential and it is not speedy – but I cannot say that you can write off Senegal as far as Kumba is concerned,” he comments. “In Guinea, we have 51% ownership of the company which has the exploration title. We are in a strong position. We have learnt lessons in Senegal.”
Meanwhile, back in South Africa, the power restrictions imposed by State-owned electricity utility Eskom have had an impact on Kumba. Although only 24 000 t of iron-ore production was lost in the first six months of this year owing to the power situation, Sishen mine has had to cease using electrical power (delivered by means of pantographs) for its giant ore-carrying trucks – now they run mainly on diesel. The result is that Sishen’s diesel consumption has increased 10% year-on-year. “Diesel fuel is more expensive than electricity, but it is cheaper than losing production,” he comments.
The company has committed itself to reducing electricity consumption at its DMS plants to 90% of the 2007 level, and has deferred waste prestripping at the Thabazimbi mine. Kumba is optimistic that it can meet its electricity saving targets without losing any more production. On the bright side, neither SEP nor Sishen South will be subject to any power restrictions during their ramp-up phases.
