December 20, 2001
Posted to the web December 21, 2001
A key thrust of Kumba Resources’ first two years of existence will be the reduction of its debt pile which currently translates into a debt to equity ratio of 78 percent. However, the company is keen to emphasise that this financial ratio is misleading because it assumes shareholder equity of about R3.3 billion. It should be noted that the carry over of assets from parent company, Iscor, was completed at a book value.
A truer gauge of Kumba’s indebtedness is to assume a market value on its assets of R8 billion. This, therefore, reduces the debt to equity ratio to about 30 percent. Viewed from this point, Kumba is hopeful it can reduce debt to equity ratio to about 25 percent: “We’d be quite comfortable at this level,” says Kumba’s general manager for corporate finance, Fred Clarke. Kumba still has some non-core assets to sell including its stake in the information technology company, AST, which is estimated to be worth between R400 million to R420 million.
CAPITAL STRUCTURE OF KUMBA – PROFORMA AS OF JULY 1, 2001
Clarke says Kumba is highly cash generative. Earnings can cover annual debt repayments four times over not including the input of Kumba’s investment in Ticor. “We feel this is a more informative financial ratio to look at,” he says.
Kumba’s debt was inherited from Iscor, the company from which Kumba was unbundled in November.
Iscor over-capitalised its Saldanha Steel development such that a project that should have cost R5 billion cost upwards of R8 billion. This was partly due to poor cash flow from Iscor’s steel products and all time interest rate highs in South Africa at the time of peak funding for Saldanha Steel.
Clarke says the division of debt between Kumba and Iscor in terms of the unbundling was based on the ability of each company to repay that debt.
Kumba’s projects are not cash dependent for the first two years which will enable the company to channel forecast cash flow of R1 billion a year. The R2.2 billion mineral sands project, which is the first major venture that Kumba must finance, has been secured in non-recourse debt. In additon to this there is estimated capital expenditure likely to be no more than R800 million a year.
Thereafter, the company may press the button on the Sishen South iron ore expansion which could cost about R1.6 billion to complete. A feasibility is under way to establish a truer picture of the capital outlay. It may be possible, for instance, to outsource a mining contractor to develop the project. The exploitation of possible synergies with iron ore operator, Assmang, could also reduce annual operating and development costs.
Kumba is also investigating a A$1.3 billion development of the Hope Downs iron ore project. But this could take years to come to fruition and should not be viewed as having a short-term impact on the balance sheet.
In any event, Clarke says there is no particular need for Kumba to seek loan finance in the short-term. This is despite a decline in the cost of capital partly informed by a reduction in interest rates worldwide. The shrinkage in the mining finance industry as a result of asset consolidation is also causing a shortage in clients for banks making the financial services sector more competitive. Kumba will finance future deals on equity participation or develop other assets through joint ventures. Therefore, the burden on Kumba’s balance sheet is likely to be minimised.
Group Revenue: Cash Generative.
Kumba has three times dividend cover but Clarke says the company’s dividend policy will be goverened by affordability. It’s likely the first Kumba dividend will be paid from June 2003 with earnings from the current financial year (2002) being channelled into repaying debt
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