Kumba Iron Ore Limited (KIO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Yvonne Mfolo, and I'm the Executive Head of Corporate Affairs for Kumba Iron Ore. On behalf of the Kumba Board of Directors, I welcome you to this presentation of our annual results for the year ended 31st December 2019. Before we proceed with the presentation, allow me to take you through a few housekeeping rules. The cloakrooms are in the main reception through which you entered. In case of any emergency, an announcement to evacuate the premises will be made. All the doors on your right can open to lead you to the assembly point on the lawn, the paved carpark and the open area next to it. Please note that there are no safety drills scheduled for today. So any emergency announcement should be taken seriously. We will now proceed with the results presentation followed by a question-and-answer session. Please hold on to your questions until then. I will now hand over to Kumba's Chief Executive, Themba Mkhwanazi.

Thanks, Yvonne. Good morning, ladies and gentlemen, and thank you. We really appreciate everyone taking the time to be with us today, both here in the audience and also on the webcast. I would also like to acknowledge our Chairman, Dr. Mandla Gantsho; members of the Kumba and SIOC Board, who are here with us today; and also the Kumba executives who are here with us. I also acknowledge my predecessor and current Chair of Platinum, Norman as well. We've also got Timo Smit, our Executive Head of Marketing, joining us on the line from Singapore; and also a special welcome to Vijay Kumar, who will be taking up the role of Chief Operating Officer in April. Welcome, Vijay. We also have [ Andre Rieu ], our new General Manager at Sishen mine. And we also have Fazila Patel, who recently joined our team as our company secretary. Welcome, Andre and Fazila. As usual, I will start the presentation, and Bothwell will present our financial performance. And then at the end, I will wrap up with our outlook and guidance for the year and take questions. So before we get into the presentation, let me start by running through 3 key highlights for 2019. Firstly, Kumba's strategy has helped deliver exceptional returns as we continued to increase the resilience of the business. Secondly, we maintained our fatality-free record while recovering production tonnes and increasing operational efficiency. And this is a true testament to our commitment to safety. And thirdly, we experienced some maintenance issues at Sishen, but we view this as a temporary hurdle in our journey. We identified the root causes, implemented remedial actions and recovered in the second half. Kolomela's DMS upgrade was completed on time in the fourth quarter and is now running smoothly. Of course, we want to do more than recover. We want to focus on moving our business forward. We want to continue unlocking value from our world-class assets, so that we can build a more resilient business and provide greater stability for our employees, our contractors and the communities around us and in addition to delivering sustainable returns to our shareholders. Now our 2019 results were achieved, thanks to the efforts of our employees, our contractors and their focus on safe and responsible production. And as such, I would like to start today with our most important value, the safety and health of our people and our commitment to sustainability. So our people are at the heart of our business. So the safety and health of our employees and contractors is Kumba's highest priority. This, together with our focus on environmental performance, is key to our leadership and culture and contributes to the underlying strength of our business. We have remained fatality-free since May 2016, and we are immensely grateful for that. This demonstrates what can be achieved when there is a total commitment to safety. This means we have honored our sacred covenant and kept our promise that our colleagues return home safely to their loved ones each and every day. If you look at lost-time injuries, they were down by 19% to 17 cases, while our total recordable cases increased to 51, reflecting a decrease in the severity of the incidents. Our safety leadership is underpinned by our elimination of fatalities framework and critical control monitoring system. And we launched our I-Care Buddy initiative in 2019 that ensures we continue to be our brothers' and sisters' keeper. And in fact, we strongly encourage staff to stop unsafe work. And that is why in 2019, there were 402 Section 23s and 172 internal safety stoppages that took place, demonstrating that, at Kumba, safety does come first. The health and well-being of our people is just as important to us. And we have a comprehensive wellness program that includes chronic disease screening and treatment, mental health programs and other support, such as financial literacy. And we're working towards eliminating occupational hazards and disease through preventative action and the implementation of engineering controls and technology. Lastly, as a mining company, we play a key role in preserving the environment for future generations. And our land rehabilitation program promotes biodiversity and conservation, and the 2019 targets for both Sishen and Kolomela were achieved. We have also not had any major environmental incident for the past 4 years, and this is supported by our proactive approach of identifying high potential hazards and preventing incidents before they occur. So moving on to the rest of our performance highlights. So as we look at the 2019 highlights, this really fits with the themes that I talked about at the outset of the presentation. We now have a more resilient business that is equipped to respond to operating challenges. We are responsive to the market and are able to convert higher iron ore prices into very strong financial performance. Shareholders will therefore participate in this through a dividend in line with our commitments. Now let me talk in a bit more detail through the specific results. Starting on the left of the slide, export sales of 40 million tonnes are flat compared to that of 2018. Despite severe weather conditions, repairs to a stacker reclaimer and the planned refurbishment of a ship loader at Saldanha port, sales were stable in the second half. And then below that, the quality is our competitive advantage, and our average realized price increased by 35% to $97 per tonne. We will see later that our ability to realize maximum value is a clear differentiator. This, together with further cost savings and a weaker rand, translated into EBITDA growth of 62% to over ZAR 33 billion. In line with this, attributable free cash flow increased by 120% to ZAR 17.1 billion. So all this means we delivered exceptional returns, with return on capital employed of 83%, well above the 49% achieved in 2018. And as a result of this, we will be paying a final dividend of ZAR 15.99 per share, giving us a total dividend for 2019 of ZAR 46.78 per share. Next, we will review the value we created through our Tswelelopele strategy of margin enhancement and life extension. So as you can see on this slide, our strategy focuses on: firstly, enhancing our margin by $10 per tonne by 2022 to become more competitive in the short to medium term. And our strategy is delivering. Since we embarked on our journey in 2018, we have maximized cash generation, and we've raised the EBITDA margin to 52% from 45% last year. Market conditions have been favorable, but we also did a lot of work to achieve this. Our Fe quality of 64.2% and the lump-to-fine ratio of 67% is highly competitive, allowing us to capitalize on the strong iron ore market. Our operating equipment efficiency rose 3 percentage points from 65% in 2018 to 68% of benchmark. Against increasing cost pressures, we also delivered savings of ZAR 920 million, bringing total savings to ZAR 1.9 billion, well ahead of the 2018 and 2019 cumulative targets. So this means we have achieved around 70% of our ZAR 2.6 billion target in just 2 years. Secondly, we remain steadfast in our ambition to extend the life of our assets to 2040 by focusing on optimization and efficiency; beneficiation and technology; and lastly, exploration. Overall, our life of mine reduced at both sites, from 14 to 13 years, primarily due to annual production. So let me give the highlights, and I will provide more detail under our Strategy section with regards to the life of mine. So firstly, on the efficiency front, we have reduced the life of mine stripping ratio at Kolomela from 4.1 to 3.8 through a forecast pit optimization exercise. Secondly, on the Sishen UHDMS project, we reviewed the value proposition of the project, taking into consideration logistical constraints that have intensified as a result of the lower domestic offtake. This is in part due to the winding down of AMSA Saldanha steel operations. The UHDMS project will no longer only focus on purchasing additional tonnes from lower grade material. We have identified that optimal value will be achieved through life of mine extension and leveraging the ability of technology to increase our overall product quality even further by treating both the low- and high-grade feed, and this further enhances our key differentiator of being a niche product producer. The feasibility study is being updated to consider the new life of mine focus and to incorporate some additional value-add items identified during the study. And in addition, a detailed review of the capital estimate is underway to ensure it is appropriate, considering the change in strategy. So given all this, the study will now be completed in the second half of 2020, whilst first production remaining in the first half of 2023. Thirdly, at Kolomela and Ploegfontein, we have progressed well with our exploration programs, and I am pleased to announce that we have gained access to 2 new prospective targets situated between Sishen and Kolomela. And this is an exciting development that proves the success of our exploration program, which is very much ATS in the making. Finally, on the Zandrivierspoort Project, a 1,419 million tonne (sic) [ 419 million tonne ] magnetite deposit in the Limpopo province, this has been removed from our mineral resource portfolio. And this is due to the expiry of the prospecting rights in March 2020, and it also aligns to our strategic focus on exploration and project efforts in the Northern Cape region. Our work on margin enhancement and life extensions positions us well for the long term. And of course, none of this would be possible without the partnerships we have with our valued stakeholders, which I believe are fundamental to our long-term success. So moving on to our stakeholders. Our stakeholders are fundamentally important to our long-term success. And in the face of a struggling economy, Kumba plays an important role in creating value for South Africa through the national fiscus, local communities and suppliers as well as our employees and their families. In the last year, we created almost ZAR 20 billion of value in dividends for shareholders, employees and our empowerment partners. Altogether, we contributed over ZAR 10 billion in taxes and royalties to the national fiscus, and we have paid ZAR 5 billion of salaries to our employees. We spent close to ZAR 14 billion with BEE suppliers, of which ZAR 2.4 billion was with our host community businesses and another ZAR 171 million on local social investment projects. Our efforts to manage our business sustainably have been recognized by a number of global ratings organizations, as you can see on the site. And this really confirms that we are moving in the right direction. Next, I would like to spend some time on the market and also on our operations. So Kumba manages the markets and the operational performance as 1 seamless value chain focused on maximizing the realized value of our product portfolio. In 2019, prices were supported by demand and supply factors. The iron ore price averaged $93 per tonne, up 34% and the highest level since 2015 in dollar terms. In rand terms, it's the highest level ever recorded. On the demand side, Chinese stimulus drove a 5% increase in pig iron production and a 7% increase in crude steel production, much more than anybody had expected. For 6 out of 12 months last year, the monthly crude steel production run-rate was comfortably above the 1 billion tonne mark, a new record. And on the supply side, a lot has already been said about Brazil's Brumadinho dam collapse and the Tropical Cyclone Veronica in Australia. As a result, shipments from the big 4 miners fell 80 million tonnes short of their initial 2019 guidance. Over the past weeks this year, iron ore has remained around $80 per tonne, clearly impacted by the coronavirus outbreak. As of today, the virus has infected tens of thousands of people, the majority in China, and the situation is still evolving rapidly. The precise impact on the economy remains to be seen. Now let's look at quality premia. So Kumba follows a premium product strategy. So lump and quality premia are obviously important. On the left, we show the lump premium, and 2019 recorded the highest-ever average lump premium of $0.27 per dmtu, which is approximately $17 per tonne of lump ore. And because 2/3 of our portfolio consists of lump, it means that we achieved a premium of $12 per tonne. Similar to the iron ore price, one of the key drivers of the strong lump premium has been lower supply from the Australian majors, Rio Tinto and BHP. But most importantly, the lump premium benefits from centering cuts as China focuses on clean air, and we have previously spoken about the structural changes underpinning the lump premium. Now these factors continue to play out. In 2020, is also the last year of China's 13th Five-Year Plan, and it has not yet reached the clean air targets that we envisage. So we should, therefore, expect an even stronger focus on reducing pollution, which bodes well for the demand for lump. On the right-hand side of the slide, we show the high-grade premia. And this premium is underpinned by structural industry changes such as consolidation, capacity elimination and bigger blast furnace. But cyclical factors also play a role, in particular, steel mill profitability, which influences the buying behavior. So when margins are high, mills focus on productivity. But when margins are low, they focus on costs. And this was the case for most of 2019. We continue, however, to believe that the high-grade premium should average about 20% in the long term. Today, it's at 17%, up from the average of 12% that we saw in 2019. Demand for premium products is also supported by the flight to quality, as we have mentioned in the past before. But there's another important structural transition that is happening in China. As you can see from this slide, inland mills are relocating to the coast, away from the cities. Small blast furnaces are replaced with much bigger furnaces that require better quality raw materials. And this makes China more dependent on seaborne ore and gives us a competitive advantage. As China's reliance on seaborne ore increases, the growth of the big 4 miners has slowed down considerably. And in the years ahead, we expect them to focus on replacing existing capacity and maintaining product qualities rather than adding on new capacity. But it's not just the quality of our products that gives us a competitive advantage. As you can see on this slide, it's also our size, allowing us to select customers that truly value our products. In 2019, we have further diversified our customer base away from China. Europe, Japan and South Korea, our traditional markets, now make up to 42% of our overall portfolio. And as we have grown the share of the sales into these markets, so has our premium grown over and above the Platts 62 index. And this premium is, of course, driven by many factors, which Bothwell will show in more detail. But one factor that definitely helps is our diversified customer portfolio. You will also be familiar with this slide. And here, we are showing that Vale's average Fe content was slightly better than ours in 2019 as a result of the production challenges that we will talk about a little later. The comparison on the right-hand side speaks for itself. The gap between Kumba and Rio, BHP and Vale has basically remained the same. FMG has clearly benefited from the market's focus on cost, which has driven cyclical demand and, therefore, prices of low-grade products. As you can see, quality pays as Kumba continues to lead. Turning on to the next slide, I'd like to touch on operations. So operationally, 2019 was a difficult year for Kumba, with breakdowns at Sishen disrupting mining activity and plant production. And this affected product quality, cost and the delivery of our productivity improvements. Sishen's operations were impacted by unscheduled maintenance on the 4,100 shovels. And at the processing plant, we have had a breakdown of the primary crusher and the conveyor systems. And as a result, waste mines and production volumes were broadly flat for 2019. While there have been improvements, it is not to the extent we would have liked to have seen them, but we are of the view that the issues at a temporary speed bump in our improvement trajectory. We are still on track to achieve our strategic targets by 2022. And to improve the reliability and performance of our key equipment and plant, we revised our asset management, planning and practices. We also brought forward some maintenance and stay-in-business capital projects. And you will see the effect of this impact in our costs and capital expenditure in the slides that Bothwell will take us through. Although completion of the planned SIB projects is only expected at the end of 2020, to date, we have already seen progress, particularly when you look at the second half of 2019's performance. Both waste and production increased. Waste ended the year above guidance, while we saw good recovery in production finishing well within the full year guidance. Pleasingly, waste mined is up 19% to 98 million tonnes, and production is up by 12% to 15.4 million tonnes in the second half. And despite our challenges, I am also pleased to report that lost-time injuries, still reduced by 14%. Sishen's products remain competitive at 64.3% Fe and lump-to-fine ratio at 71.4%. Now let's look at Kolomela in the next slide. Kolomela delivered a solid performance. Waste volumes of 63 million tonnes are up around 13% on 2018. Total production is 5% lower than 2018 due to the temporary closure of the DMS plant for a scheduled infrastructure and technology upgrade. The plant came back into operation in the fourth quarter of 2019, and we saw a good step-up in the performance from the DSO plant. This contributed to production in the second half increasing by 10% to 6.9 million tonnes, and the improvement was also supported by safe production, with lost-time injuries reducing by 40%. We've maintained quality of 64.1% Fe and lump-to-fine ratio at over 58%. So let's also look at Sishen's and Kolomela's achievements on the operational efficiencies in the next slide. Our P101 initiatives are aimed at driving operational efficiencies beyond the 100% of benchmark. And as a reminder, the benchmark is based on the performance of our 4100 shovels and 960 haul trucks at Sishen and also the 996 shovels and the 730 haul trucks at Kolomela. At Sishen, owner fleet productivity increased by 5% to 68% of benchmark despite 2 of the 3 4100 shovels undergoing maintenance in the first half, which also impacted our primary truck fleet performance. On a positive note, our drive to improve our truck payload is yielding benefits, with a 960 fleet operating at 103% of rated payload. We are also encouraged by the performance of our other roof shovel fleets, the 2800s, which saw a fantastic improvement to 73% of benchmark from 55% in 2018. And this gives us confidence that our efficiency improvement projects are focusing on the areas that will give us the most value because, ultimately, it is about delivery. At Kolomela, we achieved 2% increase in our overall fleet performance, which was primarily impacted by the poor performance of our 996 shovels. Our truck productivity increased to 84% of benchmark, mostly due to improving our direct operating hours from 14.5 hours to 16 hours per day, following the implementation of a more streamlined shift system. The 730 haul truck fleet saw an average payload increase to 97%, still some way off Sishen, but a definite step in the right direction. I'd now like to move on to the logistics and sales slide. I'm really pleased to say that, since increasing the level of our engagement with the Transnet team, we have continued to see a marked improvement in the performance of the rail, with far less downtime than we experienced in 2018. We have also seen a steady increase in the stability and the reliability, and this has resulted in iron ore rail to the port increasing by over 3%. As mentioned, we had some port constraints in the second half of the year, but thanks to the great collaboration and teamwork with the Transnet team, we have had minimal impact on our shipments, with our shipments totaling 40 million tonnes shipped to our export markets. Domestic offtake of 2.2 million tonnes was lower, but this was largely due to the winding down of AMSA Saldanha steel operations. And this resulted in our total sales of 42.2 million tonnes. Total finished stocks held at the mine and the port for the year increased to 6.4 million tonnes. And of this, 2.2 million tonnes are at the port already, ensuring that we are well set up for the first quarter of this year. I will now hand over to Bothwell to take you through our financials.

Thank you, Themba. Good morning, everyone. I'm delighted once again to present an exceptional financial outcome for Kumba. This can be broken down into 3 distinct elements: firstly, favorable market conditions, which have supported a higher commodity price; secondly, operational challenges, as described by Themba, which have put pressure on our costs and capital spend; and finally, a continued focus on our margin enhancement program, which, on the one hand, allowed us to maintain the quality of our product to take advantage of a favorable market, while on the other, saw us continue to realize significant cost savings which have gone a long way in offsetting the cost headwinds arising from the operational challenges. In this financial section, I'd like to not only give you a bit more color in terms of our performance in 2019, but also insight into what we are doing as a business to address the cost challenges and how we think about guidance going forward. Let's start with the financial highlights for the year. My 3 broad focus areas remain targeted at enhancing shareholder returns. Riding on the back of a strong iron ore market, our high-quality products and a diversity customer -- and a diversified customer base allowed us to realize a 35% higher average price. This contributed substantially to our EBITDA margin of 52%. Our cost savings program successfully delivered ZAR 920 million in savings, bringing our total savings to ZAR 1.9 billion for 2018 and 2019. This has brought us closer to our overall target of ZAR 2.6 billion, which we had only expected to achieve by the end of 2022. I'm pleased with the progress made to date, but we are seeing increasing cost pressure, and this is reflected in our breakeven price, which has gone up to $45 per tonne. I'll break this down later. Our headline earnings per share of ZAR 50.88 is up 70%. Pleasingly, attributable free cash flow increased by 120%, and this has allowed us to declare a total dividend of ZAR 46.78 per share. I'll unpack this dividend later. Turning to the next slide, let's look at our average realized price. We saw earlier in the Marketing section that Kumba achieved a realized FOB price of $97 per tonne. This is a premium of $18 over the Platts 62 FOB price. A key contributor to the price premium was the strong lump premium. Roughly 2/3 of our sales consists of lump, resulting in a price uplift of $12 per tonne. We realized an additional $3 per tonne due to our Fe content of 64.2%, which exceeds the index's 62%. Our marketing efforts resulted in an additional $2, largely on the back of utilizing the 65 index to price our premium products. As alluded to in our interim results presentation, the $6 timing difference that we enjoyed in a rising iron ore market at the half year has largely reversed as prices moderated in the second half of the year. Next up, let's understand the drivers of our revenue. Total revenue increased by 41% to ZAR 64.3 billion. The 35% increase in the average realized iron ore price to $97 per tonne was a significant driver of this revenue growth. While sales volumes were down 2% due to the lower domestic offtake, this was more than compensated for by the market premium and the higher realized prices. Revenue was also lifted by the rand weakening 9% against the U.S. dollar and a ZAR 938 million increase in shipping revenue. Now let's take a closer look at costs. I'll spend a bit of time on costs, as I believe it's important for us to understand the underlying drivers. In particular, I want to take you through the maintenance and WIP utilization costs on this slide and the following slide. I'm going to start with Sishen. Someone doesn't want to hear about costs. I want to start with Sishen. Unit costs increased by 19% to ZAR 345 per tonne for the year. We continued to see cost pressure from mining inflation above CPI. The operational challenges that Themba spoke about earlier led to higher maintenance costs of ZAR 36 per tonne and WIP utilization cost of ZAR 50 per tonne. I'll talk to this on the next slide. As we mine through areas with a higher strip ratio than the life of mine strip ratio, we capitalized more stripping costs, resulting in a positive impact on unit costs. Finally, our savings allowed us to partially offset the cost pressures from escalation and increased maintenance costs. At Kolomela, unit cash cost increased by 9% to ZAR 270 per tonne. Like Sishen, Kolomela was also impacted by cost inflation and escalation. We also moved more waste in line with the mining plan, which increased mining costs, but this was largely capitalized as we also mined through high strip ratio areas. Kolomela was not impacted by maintenance cost increases and WIP utilization to the same extent as Sishen. However, lower production due to the DMS shut negatively impacted unit costs. Similar to Sishen, an increase in savings provided partial relief for higher costs. Further details on our 2019 unit cash cost can be found in Annexes 6 and 7. Now let's take a closer look at maintenance and WIP utilization costs. Maintenance costs increased by ZAR 1.3 billion in 2019. While we had anticipated an increase in maintenance costs as we demand more from our equipment in our journey towards P101, we experienced increased incidents of unscheduled maintenance. Of this amount, we've built around ZAR 608 million into our maintenance cost base going forward as we recognize the need to keep on top of our maintenance protocols to minimize operational disruptions. The remaining amount of ZAR 655 million for unscheduled maintenance at Sishen is not expected to recur in 2020. Taking all of this into consideration, we're anticipating maintenance costs of around ZAR 3 billion in 2020. As we saw in the previous slide, WIP utilization costs increased by over ZAR 50 per tonne as we drew down from our high-grade stockpiles due to lower ex-pit ore volumes. This was especially pronounced in the first half of the year when the impact of WIP utilization peaked at about ZAR 80 per tonne at Sishen before partially reversing by ZAR 30 per tonne in the second half as production proved. For the year ahead, we do not expect this utilization to increase as we have planned for mined ex pit or to exceed our planned feedstock requirements. This will allow us to replenish our stockpiles. With all of these headwinds, I'm glad to highlight that our cost savings program has continued to deliver savings, which have lessened the impact on unit costs. Our initiatives delivered well ahead of target for the second year in a row. This time, we saved ZAR 220 million more than our 2019 target of ZAR 700 million. Over 40% of the savings came from the mining area and around 20% from fixed overhead costs. Both of these areas have continued to deliver substantial savings since this part of our program. Combined savings from our projects and the plant contributed a further 27%. These cost-savings efforts across our business are commendable, particularly in the face of the challenges experienced at the mine and, indeed, at the plant. Since implementing our savings program in 2018, we have saved ZAR 1.9 billion, substantially more than the cumulative target of ZAR 1.5 billion. This puts us in a strong position to achieve our savings target of ZAR 2.6 billion well ahead of 2022. With this in mind and knowing that we need to step up our rate of saving if we are to offset mining inflation, we are looking to increase the savings target. We are aiming to deliver a further ZAR 960 million of savings in 2020 through initiatives focused on our fixed cost base and further optimization of outside services. This will compensate for the increase in maintenance costs and other cost escalations. All this has informed our 2020 guidance on unit costs, which will see increases limited to around 6% at the midpoint of our guidance across the business. Moving on to our breakeven price. Now we use this measure to measure the unit of cost to produce and deliver our products to market while taking into account the premiums we realized for our product when compared to the Platts 62 index price. Starting with our controllables, which are on the left. As we saw in the previous slides, unit costs have increased. This, combined with higher stay-in business CapEx, added $5 to our break-even price. Our marketing efforts delivered a price premium of $1. The noncontrollables more or less offset each other, resulting in a break-even price of $45 per tonne for the year. Clearly, we need to do more to reduce costs and increase our premia. This remains the key focus of our margin enhancement program to ensure we continue to be competitive and sustainable. In the next slide, we see what all this means to the bottom line, our profits. Kumba generated an EBITDA of ZAR 33.4 billion, a 62% increase from 2018. Consequently, the EBITDA margin improved to 52%, up from 45%. Cost savings of ZAR 920 million and market premia of ZAR 646 million went a long way towards mitigating higher maintenance and WIP utilization costs as well as the 2% decrease in sales volumes. This was further supported by an 83% increase in market factors, including the 35% price increase and a 9% weaker currency. Lastly, a net trade loss was incurred on shipping operations from long-term fixed chartering contracts, and royalties increased in line with the stronger sales prices. Let me move on to capital expenditure. Disciplined capital allocation remains important to us. We continued to manage the business prudently. The increase in CapEx for the year to ZAR 5.6 billion is driven by a few factors. Stay-in business capital of ZAR 2.4 billion went towards capital spares, plant and other infrastructure spend as well as our primary equipment fleet. CapEx of ZAR 2.6 billion went to deferred stripping. As mentioned earlier, we mined through areas with a higher strip ratio than the life-of-mine strip ratio, therefore, we capitalized more stripping costs. Expansion capital of ZAR 600 million was spent on the Dingleton project, the UHDMS feasibility study and the P101 efficiency program. For 2020, we expect a capital spend of between ZAR 6.6 billion and ZAR 7.1 billion. The increase is driven by SIB CapEx as we continue with the renewal of our primary fleet. The level of SIB capital is expected to normalize from 2021 onwards to around ZAR 3 billion per annum. Deferred stripping CapEx is anticipated to decrease to between ZAR 1.8 billion and ZAR 2 billion, in line with the lower stripping ratio at both Sishen and Kolomela. Expansion CapEx will increase due to CapEx for projects supporting our P101 drive. Over the medium term, the total spend for Kapstevel South mine at Kolomela, including the pre-stripping, is estimated at ZAR 5 billion. The bulk of this spend will commence in 2021 up to 2023. The UHDMS project is still expected to cost around ZAR 3 billion. The cost of these projects, the UHDMS and Kapstevel South, will not be significant in 2020 and they will just include the feasibility study costs and preliminary project implementation costs. We provide further details on capital expenditure in Annex 8 of the appendices. Moving on, we consider the balance sheet. Our capital allocation framework remains unchanged. It is underpinned by a business that is set up to generate strong cash flows after sustaining capital from which we commit a base dividend of 50% to 75% while retaining balance sheet flexibility to fund our discretionary capital options. These discretionary options include expansion projects like the UHDMS, other value-accretive investment opportunities and potential of additional returns to shareholders over and above the base dividend. In 2019, we generated ZAR 21 billion of attributable cash flow after sustaining capital, but before discretionary capital. We then paid last year's final dividend and the 2019 interim dividend totaling ZAR 16.6 billion. And then we applied discretionary capital to the additional dividend payment at the half year as well as the spend on expansion projects, as I spoke about. This left us with ZAR 12.3 billion of cash at the end of the period. We then considered the balance sheet flexibility we wish to retain and further discretionary capital options, and we arrived at our dividend decision. The 2019 dividend of ZAR 46.78 per share represents 92% of our full year headline earnings as it includes the base dividend of 75% and the top-up element, a dividend yield result of 11.6%. We announced our capital allocation framework in 2018. And over the past 2 years, we have allocated ZAR 42.6 billion of capital, we have returned ZAR 32.5 billion to our shareholders and we have invested ZAR 10.1 billion in building a resilient and sustainable business. In conclusion, we produced an excellent set of financial results for 2019. While higher market prices have provided a strong tailwind, we also worked hard to ensure that we're well positioned in the market and that we deliver the right product to the right customer. We focused on what is in our control to achieve optimal value and continue to deliver shareholder returns. The importance of our 3 levers, margin enhancement, financial discipline and sustainable returns, has not changed. This will continue to be our focus in 2020 with a particular emphasis on cost reduction. Thank you. I'll hand back to Themba.

Thank you. Thanks, Bothwell. Before I continue, I'd also like to recognize our newly appointed Board member, Michelle Jenkins, welcome. And also our Anglo American colleagues in the audience. So our focus remains as strong as ever: to maximize free cash flow, maintain capital with discipline and increase returns. And there are significant opportunities ahead for us to further transform our business and create sustainable value for our shareholders. So we operate in an uncertain world with market volatility and concerns around the coronavirus weakening confidence and affecting commodity markets, and this makes us cautious about the short-term outlook. But looking forward, we remain positive about the outlook for the industry and in the long run. Our unique, high-quality lump products and marketing capabilities positions us well for the future. So as you've seen, our strategy of margin enhancement is about improving operational performance across our value chain and achieving optimal value from our high-quality products safely and efficiently. And our strategy aims to deliver value through the cycle by, firstly, increasing premium product sales to 40% of total export sales by 2022. The operational challenges experienced in 2019 resulted in premium product sales of 19%. But we have set up for improved sales performance in 2020. Next, we want to continue increasing our P101 operating equipment efficiency to benchmark and beyond. And as we improve the reliability of our key equipment, we expect better performance. As mentioned in our slides covering Sishen and operational efficiency, we are fast-tracking our maintenance program. Thirdly, we are all -- we're well on our way to achieving a cumulative target of about ZAR 2.6 billion of savings by the end of 2022 through our cost-saving program. As Bothwell has mentioned earlier, we have identified a number of initiatives to optimize costs across the business. And in the next 12 months, we aim to increase product quality and sales while improving operational efficiency. We will also continue to partner with our suppliers to ensure that we optimize our spend. Let me take you through some of the projects that we are undertaking to unlock the value of our assets. So in 2020, we plan to achieve key milestones with a number of our projects. Our strategy to extend the life of our assets to 2040 is built on 3 key pillars, namely, optimization and efficiency, beneficiation and technology, and lastly, exploration. So let me share our progress so far. So firstly, on the efficiency front. At Sishen in 2018, you will recall that we saw a significant benefit from the work we are doing through optimization and efficiencies. We continued with this work as part of our annual life-of-mine planning cycle, and in 2019, we focused this time on Kolomela. And through smart design, we have removed 54 million tonnes of waste at the expense of only 3 million tonnes of ore from the life of mine. And this has seen a significant reduction in the life-of-mine stripping ratio from 4.1 to 3.8. We are investigating several other optimization projects, and we will update you when we have more information. Secondly, the Sishen UHDMS project remains a strong focused area for us in terms of extending our life of mine and increasing our product grades. This is a key value driver considering the constrained logistics environment in which we operate in. And despite the change in strategy from volume to quality, the project's business case remains robust. Capital guidance is still expected to be around ZAR 3 billion, and we will provide more information in the second half when we've completed the feasibility study. Thirdly, through our resource development planning process -- program, which guides our long-term portfolio, Ploegfontein and Heuningkranz are being positioned to extend Kolomela's life post 2032. And we will be progressing these projects through their various study phases over the next 5 to 7 years. And in line with our 2040 life-of-mine ambition, exploration represents an important pillar within our project pipeline. And following the discovery of Heuningkranz and with our extensive regional logical knowledge built up over the past 8 years of exploration, we have revaluated the potential of the area between Sishen and Kolomela and identified several new prospective targets. First drilling is scheduled to commence in the first quarter of this year. Now moving on to the guidance slide for 2020. So 2020 has started on a similar note to that of 2019: with supply disruptions among the big iron ore producers. Vale's shipments have been running at 30% lower year-on-year, and Australia has been facing unusually wet weather that has already seen 3 tropical cyclones on the Pilbara coast. And despite tight supply, the coronavirus outbreak has clearly affected demand and iron ore prices have come under pressure. We expect volatility to continue over the next few months while China's stimulus measures will offer support for commodity demand. Thus far, our sales have not been affected. At this point, we do not expect to have to slow down production even if steel production in China continues to be impacted well into the second quarter. We have taken a proactive approach in putting a strategy in place that will allow us to preempt potential impact on our business as far as possible and we are already actioning some of these actions identified. The strategy includes stock management and proactive discussions with customers, both in and outside of China. And in the event that the crisis impacts sales or production, we will update the market. Our production guidance for 2020 is between 41.5 million and 42.5 million tonnes. Sales will be supplemented by finished stocks, which, as you've seen in the slides, are at healthy levels. Sishen is expected to produce around 29 million tonnes of product and mine between 170 million and 180 million tonnes of waste. Kolomela's production guidance is around 13 million tonnes of waste (sic) [ product ] and waste at 55 million to 60 million tonnes. Our total sales guidance is between 42 million and 43 million tonnes, and this takes into account the lower offtake from AMSA of 1 million tonnes. The CapEx outlook is between ZAR 6.6 billion and ZAR 7.1 billion as Bothwell has already mentioned earlier. And based on projected inflation, cost escalation and further maintenance costs, the unit cash cost for Sishen is anticipated to increase to between ZAR 355 and ZAR 370 per tonne. At Kolomela, we expect unit cash cost of between ZAR 280 to ZAR 290 per tonne with the DMS plant in operation. Before closing, let me remind you of our value proposition. Kumba's value proposition is clear. The quality of our assets, strong balance sheet and talented people will continue creating value and ensuring that we deliver sustainable returns. We are making progress operationally. And yes, 2020 will bring along its challenges. Cost inflation will continue, and we have already seen increased price volatility in the commodity markets. However, we are confident that our strategy of pursuing value will keep delivering results for years to come. Over the past 2 years, since implementing our margin enhancement strategy, we have delivered a cumulative EBITDA of ZAR 54 billion, attributable free cash flow of ZAR 25 billion. Our ROCE has increased from 49% to 83%. And we have returned ZAR 32.5 billion in dividends to our shareholders and our empowerment partners, demonstrating our commitment to value creation. And whilst we still have a lot more to do, we are focused on delivering our safe production targets to continue capitalizing on this opportunity. We will focus on improving operational equipment reliability and productivity. And building on our strong financial performance in 2019 underpinned by a resilient balance sheet provides a solid foundation for achieving our 2020 guidance. Before closing, I would like to thank our Kumba employees and our contractors for their hard work and commitment, my colleagues on the Executive Committee for their invaluable inputs and team efforts, the Board of Directors for its leadership and guidance and our stakeholders for your continued support. Thank you. I will now hand over to Yvonne to facilitate our question-and-answer session.

Thank you, Themba. Ladies and gentlemen, we now present the opportunity for questions. Kindly wait for a roving microphone, identify yourself and state your question. We will first take questions from the audience in Johannesburg before going to the conference call line, and finally, the live webcast. Just a reminder, we also have Timo on the line, and he will be taking questions as well around marketing.

It's Patrick Mann from Bank of America. I just wanted to ask around the operating efficiency program. So you're currently running at 68%, targeting 100% within kind of 2 to 3 years. It's a big jump and should have a massive impact on your financials if you deliver it. Can you maybe talk about why you're confident of getting that and what sort of programs you're running? And how confident you are of getting to 100% within this time frame?

Okay. Should we take another one before answering or...

Yes. We can take another one.

It's Shilan Modi from UBS. Related to -- semi-related to Patrick's question. In 2019, your product premiums increased. You had quite a substantial cost saving, but it didn't seem like all of this fell through to the bottom line. So maybe talk through some of the issues you had during the year. And maybe explain to us how we should be thinking about product premiums and cost savings going forward and how it should influence profitability. And then second question, if I may. In your guidance, you're guiding to higher costs, higher CapEx and lower volumes. How does that tie into your margin enhancement program? Does that change anything? And again, how should we be thinking about this for the next couple of years?

Okay. All right. I think we'll --

Let's respond, and then we'll take some more. Yes.

Okay. So in response to Patrick's question, we're still very confident that we can achieve the P101 ambition, which is effectively beyond benchmark. I mean, if we look at 2019, the challenges were largely related to equipment reliability and availability. And as you've seen, despite the fact that, for example, 2 of the 3 4100 shovels were out, we were still able to deliver that 3 percentage point uptick in performance. Our focus largely focuses on improving the direct operating hours in terms of the key waste-moving fleets. It also focuses on also improving the tempos and also the payloads. And when we look at our plans and in terms of the programs that we have in place, we have actually, on certain occasions, demonstrated the running at the benchmark levels. Clearly, the opportunity is to sustainably achieve at that level. So that's why we remain confident because this is a program that is obviously driven throughout the organization. We also have the support as well within the organization and within the broader Anglo American organization through the technology and solutions area. Now clearly, I mean, when you look at our ambitions achieving the margin enhancement, and this really starts to talk to Lilesha's (sic) [ Shilan's ] question, is really important. And I think our challenge is further emphasized by the fact that we are rail constrained, so we can't use volume to dilute our fixed costs and that restriction is largely as a consequence of, obviously, the rail constraints. We are of the view that whilst we have guided what we have guided, we are still very much on track. In terms of ensuring that as we improve efficiencies and productivities, we will be able to park here, which should, in turn, translate to the improvements in terms of the cost base. And again, this is a program that is very much over the next 3 years or so. I don't know, Bothwell, whether you want to add on to that?

Let me start by -- I mean, you talked about how this year's challenges impacted the bottom line. I think, at first, if I just look on the cost side and as I said earlier, 2 key things that happened this year. Because of the operational challenges, we had to -- we saw an increase in unscheduled maintenance and that has come through our cost at Sishen. It's impacted our cost by ZAR 36 per tonne. And then also, we had to draw down on our stockpiles, which are normally buffer stockpiles that you keep in the system to make sure that your whole value chain is healthy and is able to withstand any shocks. Clearly, we experienced the issues and we had to draw down on those stockpiles. That cost is usually on your balance sheet, it flowed down to our income statement, and hence, it had the impact on costs. So while we did have the savings of the ZAR 920 million, they were not enough to offset these cost pressures and that's how we saw the increase in unit cost especially at Sishen. Clearly, going forward, I think as Themba alluded to, our efficiency drive and then what we are doing across the cost base in terms of ratcheting up our level of savings to ZAR 960 million, those are some of the things that we see countering against those cost pressures going forward. On the revenue side, we did see the product premium flow through into our bottom line. We showed the slide of our realized price where you saw that we've got a marketing premium of $2 per tonne because of the marketing excellence from our team. And we were also able to realize the lump premium and the Fe premium because we managed to maintain our qualities through the year despite the challenges we got in the operations. So I think going forward, and Themba also touched on this, it's really about the margin enhancement is giving us results. We are seeing these headwinds that come and erode some of those gains. So it's really an imperative for us to step up that margin enhancement program to be able to offset the headwinds that we get, and hence, the step-up in costs, the step-up in efficiencies and also we're demanding Timo and his team to continue to get us the price realization that they've been getting for us in the market.

I noted Thabang and Johann, and then we'll go to the conference call line and the website -- the webcast.

This is Thabang Thlaku from SBG Securities. The UHDMS project has been extended until the second half of this year, and I see that you're planning to increase the proportion of your quality sales from about 19% to 40% over the next 3 years. May I ask if the UHDMS project plays a significant role in that sort of like increasing your quality sales? And just like a little bit of color as to why it's been extended again, and if we can actually expect the feasibility study to be completed at the end of this year. My second question is around AMSA. The company is in dire straits. And when we speak to management, they are looking at potentially sourcing iron ore from other producers who may be significantly cheaper than Kumba. Has management thought about a world where AMSA is not buying any iron ore? And what flexibility does Kumba have in terms of those 2 million tonnes that could potentially be lost from AMSA? And then my last question. I think you guys are doing phenomenal on the cost savings and you're ahead of your schedule in terms of the ZAR 2.6 billion, but it's still less than 10% of your total operating expenses. Is there room to increase that target further given that your unit cash cost seems to be growing at double-digit growth?

I think I probably should respond to the...

It's like 3 questions. So Johann, we'll come back to you.

Yes. So as I had said earlier, I mean, the UHDMS, the focus has changed given the rail constraint, and of course, the reduction in domestic takeoff. So we now see this as more as a life extension project and that's why we've extended the feasibility study. We are still on target, obviously, to complete in the second half of this year. As far as its contribution to the premium and create product uplift to 40%, clearly, the UHDMS falls outside of that because we're looking at the UHDMS first production in the first half of 2023. When you look at the 19% that we achieved this year in terms of that 40% ambition, a large component of that was the fact that we probably had about 1 million tonnes less of premium product material that we put through the Sishen plant because of the challenges that we had. And then coupled with that was also the fact that at Kolomela, we didn't have the DMS plant for a large proportion of the period. But again, I mean, I think, ongoing improvements in terms of our plant, the use of technology through advanced process control and value-based ore control, we are still confident that we can achieve that aspiration. And of course, the UHDMS coming online in 2023 will actually assist us even more, more so, given the focus that we've got. On the AMSA question, you will have seen in 2020 that we are guiding 1 million tonnes of offtake from AMSA. The opportunity for us is obviously to offset whatever sales we cannot materialize locally through exports. Clearly, the port then becomes a key focal area, and it is. And through the relationships and the engagements that we have with Transnet, we are currently engaged in discussions and seeing how can we look at improving further productivities within the port to be able to offset whatever we are not able to sell locally. Based on AMSA's press releases, we are clearly still of the view that the 1 million tonnes will be taken up locally. I think that was your question, Thabang. Yes.

You still have on cost...

Savings.