Kumba Iron Ore

2017

2018

2019E

2020E

2021E

Income statement

Revenue

46,379

45,725

65,955

62,146

56,829

Underlying EBITDA

19,691

20,733

36,912

30,177

26,138

Underlying EBIT

16,664

16,464

33,002

26,202

22,073

Net interest

298

320

756

953

785

Taxation

-5,481

-4,026

-8,946

-7,196

-6,057

Minority interest in profit

-3,798

-2,980

-6,451

-5,189

-4,368

Attributable profit

12,335

9,615

18,361

14,769

12,432

Headline earnings

9,728

9,677

18,361

14,769

12,432

HEPS, ZAR

30.47

30.28

57.01

45.86

38.60

Thomson Reuters consensus, ZAR

40.71

28.37

24.93

DPS declared, ZAR

30.97

30.24

57.00

45.80

38.60

Income statement ratios

EBITDA margin

42%

45%

56%

49%

46%

EBIT margin

36%

36%

50%

42%

39%

HEPS growth

12%

-1%

88%

-20%

-16%

Dividend payout ratio

80%

101%

100%

100%

100%

Input assumptions

Iron ore - (62.5%, CIF China), $/t

71

66

88

85

78

Lump premium, $/t

15

20

21

15

14

Kumba average export realisations, $/t

71

72

99

87

81

Kumba average product premium, $/t

11

20

22

18

17

Mining & beneficiation cash cost, ZAR/t

307

272

300

315

312

Freight charges - S. Africa to China, $/t

11.2

13.8

11.4

15.9

13.8

ZAR/$

13.3

13.2

14.3

14.4

14.5

Required breakeven price, $/t

39.6

34.9

32.4

41.4

39.2

Sales volumes, kt

Export iron ore

41,615

39,966

40,950

41,800

40,750

Domestic iron ore

3,277

3,291

3,000

3,000

3,750

Total sales

44,892

43,257

43,950

44,800

44,500

Attributable Cu eq volumes, kt

365

351

357

364

361

Volume growth

5.8%

-3.7%

1.8%

2.0%

-1.0%

Balance sheet

Net operating assets

30,834

33,959

31,287

32,144

32,526

Investments

838

558

558

558

558

Equity

34,769

35,260

39,600

37,138

36,043

Minority interest

10,777

10,927

12,452

11,587

11,202

Net debt

-13,874

-11,670

-20,208

-16,023

-14,161

Balance sheet ratios

Gearing*

-66.4%

-49.5%

-104.2%

-75.9%

-64.7%

Net debt to EBITDA

-0.7x

-0.6x

-0.5x

-0.5x

-0.5x

RoCE

17.0%

16.4%

32.2%

24.8%

20.3%

RoIC (after tax)

10.9%

12.7%

26.1%

18.2%

14.8%

RoE

39.4%

27.5%

49.1%

38.5%

34.0%

RoE at replacement cost

13.4%

9.9%

17.7%

13.4%

11.6%

Dec-YE

2019E

2020E

2021E

2017

2018

Cash flow statement

Operating cash flow

18,074

14,376

31,640

23,108

20,723

Growth capex

-575

-506

0

-500

-1,000

Maintenance capex

-2,499

-3,957

-4,700

-4,192

-3,870

Other

-655

-12

0

0

0

FCF

14,345

9,901

26,940

18,416

15,854

Equity shareholders' cash

12,853

7,301

22,558

13,047

11,666

Dividends and share buy backs

-5,144

-9,505

-14,020

-17,232

-13,528

Movement in net debt

7,709

-2,204

8,538

-4,184

-1,862

Cash flow ratios

Working capital days

37

59

35

37

38

Cash conversion

1.3x

0.8x

1.2x

0.9x

0.9x

FCF yield

18.0%

8.3%

17.2%

11.5%

9.8%

Equity shareholders' yield

18.5%

7.5%

17.3%

10.0%

8.9%

Capex/EBITDA

15.6%

21.5%

12.7%

15.5%

18.6%

Valuation

Calculation of target price

ZAR

DCF fair value

315

Plus: equity shareholders' cash/share

63

Less: DPS paid

-46

TP, rounded to

330

Share price on 26/3/2019

405

Expected share price return

-18.6%

Plus: expected dividend yield

13.4%

Total implied one-year return

-5.2%

Share price range, ZAR:

12-month high on 26/3/2019

405

12-month low on 30/11/2018

244

Price move since high

0.0% Price move since low

66.1%

Calculation of discount rate

WACC

14.2%

Cost of debt

10.0%

Risk-free rate

9.0%

Tax rate

28%

Equity risk premium

4.0%

After-tax cost of debt

7.2%

Beta

1.30

Debt weighting

0%

Cost of equity

14.2%

Terminal growth rate

3.0%

Valuation ratios

Dec-YE

2017

2018

2019E

2020E

2021E

P/E multiple

7.1x

10.0x

7.1x

8.8x

10.5x

Dividend yield

14.4%

10.0%

14.1%

11.3%

9.5%

EV/EBITDA

4.1x

5.8x

4.2x

5.3x

6.2x

P/B

2.0x

2.8x

3.3x

3.5x

3.6x

NAV per share, ZAR

107.9

109.5

123.0

115.3

111.9