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

Good morning, ladies and gentlemen. My name is Sinah Phochana. I'm the Head of Communication at Kumba. On behalf of Kumba's Board of Directors, welcome to Kumba's first virtual interim results presentation for the first 6 months ended June 30, 2020. Obviously, because of COVID-19, this is a very different format from our usual presentation. [Operator Instructions] I now hand you over to Kumba's Chief Executive, Themba Mkhwanazi.

Thanks, Sinah. Good morning, everyone, and welcome to our half year results presentation. Thank you for joining us today on the call and on the webcast. Over the past few months, the virtual world has become second nature to the way we work. Today is our first virtual results presentation and, unfortunately, we can't offer you lunch. But I'm delighted to present to you our results and, as always, I look forward to our conversations afterwards. I would like to acknowledge our Chairman, Dr. Mandla Gantsho; members of the Kumba and SIOC Boards; representatives from Anglo American; and the Kumba executives who have joined us online. Timo, our Executive Head of Marketing, is joining us from Singapore. As usual, I will begin the presentation and then hand over to Bothwell, who will present our financial performance. At the end, I will wrap up our outlook and guidance for the second half and take questions. Before we get into the presentation, I want to thank all the brave health workers out there, working around the clock to save precious lives, and acknowledge the dedication of our employees and contractors. Speaking for the Kumba team, our condolences to all those who have lost loved ones to the pandemic. We wish those who have tested positive and their families a speedy recovery. And we are glad to hear that our Minister of Mineral Resources and Energy, Honorable Gwede Mantashe, has been discharged from hospital after taking ill with COVID-19. Our thoughts are with everyone impacted by the disease and its effects. Now let me start by taking you through 3 key highlights of today's call. Firstly, we have taken a holistic approach to COVID-19 based on our WeCare program. We recognize that our responsibility does not stop at the mine gate but reaches a far wider group of our stakeholders. Secondly, in these unprecedented times, I am pleased to say that the business has proved to be resilient. Our operations are back to pre-COVID run rates, and we have generated solid financial returns. In a sign of confidence in our long-term future, we are pleased to announce the approval of a ZAR 7 billion investment into the Kapstevel South pit to sustain our Kolomela operations. As a final point, we could not have achieved this in isolation, and we appreciate the collaboration from all our stakeholders, including government, our suppliers such as Transnet and our peer group. As usual, please take a note of the important disclaimer. Now turning to our first slide, which highlights our priorities and how they are helping our business to respond effectively. Our comprehensive WeCare lives and livelihoods program works across 3 fronts: Firstly, prevention measures focusing on the physical and mental well-being of our employees and contractors. We continued to pay salaries throughout the lockdown, and this has alleviated a significant amount of anxiety in a time of great uncertainty. The facilities that we have in place to test our workforce enable us to proactively identify infections. By the 27th of July, our screening and testing procedures had identified 248 positive cases, of which 67 have recovered. As infection rates increase across South Africa, we also expect the number of cases to increase amongst our workforce, and we will continue to take all appropriate measures to identify those cases, support their treatment, protect our workforce and sustain our operations. Secondly, our business response included ramping up safely, moving to redirect cargoes and a cash conservation program. Importantly, our long-term strategy of margin enhancement and extending the life of our assets remains in focus. We will cover our strategy later in this presentation. Now turning to our communities and their livelihoods. In this humanitarian crisis, as I said earlier, we are committed to supporting not only our employees and contractors, but also our communities. We are all in this together. On the prevention front, we know that knowledge is just as important in prevention as essential services and testing. We've, therefore, reached out to educate and inform about 300,000 people on how to prevent infection. Unemployment amongst our host communities is high, which makes them highly vulnerable. To assist, we have provided access to water, health care, medical services and food parcels, in partnership with the Department of Health and local municipalities. Our UGM wellness clinic in Kathu has been equipped and made available to the community for testing, and we are supporting the Postmasburg Hospital to receive COVID-19 cases. Diagnostic laboratories with PCR testing machines that can each process over 500 tests a day were set up at our UGM clinic, our Kolomela mine and at Saldanha ports. As we have this capability, we are also assisting other mining houses with testing. On the treatment front, we focused on treatment and care. Critical medical equipment such as ventilators and oxygen as well as more than 400 additional beds for ICU, quarantine and isolation facilities were provided at Kathu, Postmasburg and Tsantsabane. Mental health and well-being are equally important, and we are working with organizations such as FAMSA, Lovelife and Careways. We are also pursuing our living with dignity interventions to address gender-based violence. And the success of our WeCare community response program is that it is based on the collaborative partnerships we have with government, local municipalities, business forums, unions and community leaders. Following prevention and response, as our communities recover, it is important that their livelihoods are also secure. And to this end, we continue supporting small businesses through our online Zimele program. We are offering payment holidays and assisting SMMEs by providing information and support to access a wide range of business support mechanisms. We have partnered with local suppliers to source some of the items we need for the communities like relief packages and face masks. This has helped us to secure the ecosystem in which we operate. Now turning to our results. As you know, safety is our top priority, and I am happy to say that 2020 marks 4 years of fatality-free operations. Our elimination of fatalities framework and critical control monitoring system continue to underpin our safety leadership. To guard against complacency, particularly at a time when it is easy to be distracted, we implemented the safety rhythm and routines initiative. This highlights critical safety KPIs to drive behavioral and cultural change. The health and wellbeing of our people are equally important. Our ongoing work to reduce exposure to hazards has resulted in no new occupational disease cases. We are also focusing on chronic and lifestyle disease management. As a mining company, we play a key role in preserving the environment for future generations. Pleasingly, we have not had any major environmental incidents for over 4 years. Water conservation is a focus for us, and we supply it as an essential service to our surrounding communities. We recently launched our water management strategy. And by 2030, we intend to be reusing 75% of our mine water. Now moving on to our business performance. As I said at the outset, the business has responded quickly to mitigate risks from the COVID-19 pandemic and proved remarkably resilient. This is demonstrated in our achievement of an EBITDA of ZAR 17.4 billion and also our free cash flow of over ZAR 7 billion, which Bothwell will discuss in more detail. All of this has contributed to a ROCE of 84% and allowed us to pay an interim dividend of ZAR 19.60 per share. The dividend reflects our balance sheet strength while maintaining a buffer against further downside risks and volatility. Consistent with my earlier sentiments, though, this is also a time when we need to continue to support all of our stakeholders. The broader social and economic benefits of being a sustainable business become really clear in a crisis like this. We've been able to continue contributing to South Africa and delivering sustainable shareholder value. We're in a position to provide much-needed support to our BEE suppliers and local host community suppliers. This brings home our purpose of reimagining mining to improve people's lives. Finally, our contribution to our wider community and progress in other areas of sustainability is acknowledged through our MSCI ESG ratings and our inclusion in the FTSE4Good Index, amongst others. Moving on to our marketing and operations. Our marketing, sales and operations form the core of our value chain. The Platts 62 index averaged $91 per tonne in the first half of 2020. Contrary to expectations, the overall impact of COVID-19 in China was relatively modest. Mills continue to produce, and China successfully reopened the economy in the first quarter. Steel output rose 2.2%, and run rates in June reached a record high of about 1.1 billion tonnes annualized. Outside of China, it has been a very different story. About 25% of steel production capacity was shut. Prices were supported by supply constraints in both Brazil and Australia. Brazilian exports fell by 10% in the first half. These constraints benefited quality premia with a Platts 62 to 65 differential averaging $15 per tonne. For the rest of the year, prices are expected to average about $90 per tonne, and the Platts 62 to 65 differential to average around $11 per tonne. Turning to the lump premium. The lump premium averaged $0.23 per dry metric ton units or $15 per tonne, but it's seeing some pressure due to 3 factors: firstly, increased lump supply from Australia; secondly, as steel production outside China fell sharply, pellet cargoes were redirected to China and are at record highs; and thirdly, restricted activities have improved air quality in China. And centering cuts, which would have benefited lump, did not come through. We believe we will see the lump premium recovering from current levels to above $0.15 per dry metric ton units in quarter 4. But these are short term effects. Longer term, structural factors underpin the flight to quality. We have previously spoken about the elimination of small blast furnaces in China. Blast furnaces in China are getting bigger, and that's good for lump. We have also highlighted that longer term, the share of lump will increase as blast furnaces evolve towards those in developed markets. And as we can see, China needs to continue implementing environmental controls to reach its air pollution targets. Turning to our diversification strategy. Our strategy benefited us in the first half of 2020. As steel production came down in the rest of the world, we diverted cargoes to China. Consequently, the share of traditional markets came down to about 30%. Generally, it would have been about 45%. It's a temporary effect. And as steel production normalizes, we should see the share of traditional markets return to pre-COVID-19 levels. As we had to redirect cargoes, demand for standard products went up but premium products came down. This impacted our ability to -- and marketing premium. We are of the view that this is a short-term effect, and we should start to achieve a premium in future. Generally, we earn $2 to $3 above the lump in Fe premium. Long term, the structural factors driven by tighter emission standards continue to underpin a flight to quality, and quality will continue to pay. Our qualities came in at 64.4% Fe for the first half of this year, but we have the flexibility to respond to changes in market demand. We responded by adjusting qualities down with the Fe dropping from quarter 1 to quarter 2. As the situation normalizes, it will be reversed. Even with this adjustment, our product quality compares favorably with our peers, and our products are truly second to none. Our lump-to-fine sales ratio dropped to 65% as bad weather delayed a couple of vessels from June to July. This is a once-off, and we expect it to normalize in the second half. As you can see, our realized price continue to lead our peer group. Moving on to our operations. Overall, our performance reflects our reduced workforce levels in quarter 2 and the subsequent ramp up to pre-COVID levels in June. An important point is that production, and not only sales, is closely managed in line with Transnet's logistical capacity, which is currently at 80%. And I'll cover this in more detail later. It's a great achievement that run rates at both our mines have now recovered to pre-COVID levels. Vijay and our GMs at the mines, André and Masala have done a sterling job. One of our biggest challenges in ramping up to production at both sites has been how we incorporate health screening of everyone, roughly 8,000 people who enter our operations daily. Initially, we were losing about 4 hours per day, but through applying good industrial engineering principles and mobile medical surveillance technology, we have got this down to 45 minutes with an ultimate target of 20 minutes. On to Sishen. Overall, waste stripping decreased by 17% and production by 10% for the 6 months; however, our underlying monthly performance reflects the progress made during quarter 2 when we returned to pre-COVID levels. Production ramped up from 1.6 million tonnes in April to 2.6 million tonnes in June. And our metrics on the right reflects the safety performance referred to earlier, while our Fe and lump ratio remain competitive. Kolomela is also back to full run rates, ensuring flexibility to protect our value chain. Kolomela's performance follows a similar trend in waste and production to Sishen. Total waste decreased by 15% and production by 12% in the first half of 2020. Again, the underlying monthly performance paints a different picture. You can see that we have recovered well and are running close to or slightly ahead of pre-COVID levels of production. The safety and the quality metrics indicates we've maintained our safety performance and our competitive quality. Moving on to our operational efficiency. We are still targeting a 100% of benchmark performance on our waste fleet as part of our margin enhancement strategy. When comparing our half 1 2019 to our half 1 2020 performance, you can see the impacts of reliability issues on our fleets in quarter 1 and the COVID impact in quarter 2. We are, however, resolute in sticking to our improvement plans, and you can see we are showing good progress on quarter 1 performance with positive trends from April to June. In quarter 1 this year, we're in the process of doing major maintenance interventions on our 4100 shovels at Sishen. These have all now been completed, and we are seeing the benefits in improved availability and reliability. At Kolomela, in quarter 1, we experienced reliability issues on our truck fleet primarily due to a lack of spare parts. We are working closely with our OEMs to work through this backlog. We continue to drive our operational efficiency programs and have seen good improvements in truck speeds and payloads as well as improved utilization of our shovels as a result of improvements in our drill and blast practices. You can clearly see how we have ramped up over the last 3 months with Sishen increasing from 64% to 71% efficiency and Kolomela improving from 60% to 65%. Now turning to logistics. Both our production and sales are managed in line with Transnet's logistical capacity. Our primary focus has, therefore, been to maintain flexibility across our value chain. At the moment, Transnet is operating at run rates of around 80% because they have a higher proportion of vulnerable employees who are not at work. This has impacted rail performance, which was down by around 18%. As part of our value chain strategy, we've built up to 6.2 million tonnes of finished stock. Of this, 2.4 million is at Saldanha. The benefit of this approach is that we have the flexibility to draw down on our finished stocks as needed. And looking at total sales, this decreased by 13% driven by domestic sales falling to less than 1/3 of last year's volumes and we've seen no further offtake in quarter 2. Export sales decreasing by 8%. Besides port constraints, shipping rates were impacted by severe coastal weather conditions. On the next slide, I will take you through some of the work we are doing with Transnet and our peers to manage the challenges. As I mentioned, collaboration is essential if we are to successfully manage through the pandemic. To support Transnet, as they reopened and ramped up operations, we supplied PPEs and established a fully equipped laboratory with PCR testing kits. Our focus is now on helping them to increase their workforce capacity and improve productivity to levels above 80%. Some of our joint initiatives include schedule management and training staff while managing our stock levels and loading at the ports. These initiatives are making a difference. Despite a shortfall of around 20% in workforce capacity, export sales have only decreased by 8%. And this demonstrates what can be achieved when we all work together. And I will now hand over to Bothwell to take you through our financials. And due to our COVID protocols for social distancing, we are presenting from 2 different rooms.

Kumba has delivered a solid financial performance despite the challenging operating conditions. Our results for the period are driven by 4 main elements: Firstly, the disruption to our operations due to the COVID lockdown restrictions and the subsequent ramp up to normal run rates. This impacted production and sales volumes, as Themba has already outlined. Secondly, favorable market conditions, which have supported a high commodity price, coupled with the benefits of currency gains driven by a weaker end. Thirdly, our continued drive to enhance our margins, focusing on quality, productivity and costs. And finally, our cash preservation priority is to protect our balance sheet through the cycle. Looking at the financial highlights for the period. As before, my 3 broad focus areas are targeted at enhancing shareholder returns. From a price perspective, our marketing team performed well to realize $93 per tonne during the first half under challenging marketing conditions where flexibility was key. I think it's also important to note here that last year's realized price of $108 per tonne was on the back of an increasing iron ore price and strong premia following significant supply disruptions in Brazil. This favorable price made a big contribution to our EBITDA margin of 55%. Our cost optimization initiatives, combined with our COVID cash conservation measures, successfully delivered a total of ZAR 700 million in savings. I'll go into more detail on costs later. We've made good progress to date, but we also see an increase -- we also saw an increase in cost pressures from lower production volumes. Combined with lower-priced premia, we saw a breakeven price increase to $42 per tonne. Our headline earnings per share of ZAR 26.19 was down 17% driven by lower sales and price premia. The weaker rand did provide some partial relief, though. Attributable free cash flow of ZAR 7.1 billion has allowed us to declare a total dividend of ZAR 19.60 per share. We'll take a closer look at this later. Turning to the next slide. Let's look at our EBITDA performance. Our EBITDA of over ZAR 17 billion reflects a 14% decrease on the back of lower sales volumes and the lower realized average FOB price as we saw in the previous slide. This was partly offset by lower operating expenses, reflecting good cost discipline and restricted operating activities in Q2. Currency gains from a weaker exchange rate provided support, while the average Platts FOB price remained broadly flat at $81 per tonne. Moving on to unit costs. I'll start with Sishen. Sishen's unit costs decreased by 6% to ZAR 325 per tonne. Lower mining volumes, a replenishment of work-in-progress stockpiles and cost savings more than offset the impact of lower production volumes and mining cost inflation. However, Sishen's unit cost will increase in the second half of the year as mining volumes return to normal, while production volumes will continue to be managed in line with rail capacity. While further cost savings are anticipated in the second half, the full year unit cost for Sishen is now expected to be between ZAR 385 and ZAR 395 per tonne. This represents an increase of around 7% from our original guidance. At Kolomela, unit costs for the period increased by 13% to ZAR 306 per tonne, driven by cost inflation and lower production volumes. Lower mining volumes and cost savings provided only partial relief. Kolomela's unit costs being a smaller operation are a lot more sensitive to production volumes. As these recover in the second half of the year, unit costs are expected to moderate to between ZAR 280 and ZAR 290 per tonne, in line with our original guidance. I'll move on to our breakeven price. We use the breakeven price to measure the unit cost to produce and deliver our products to market. It also takes into account the premium we realized for our product compared with a Platts 62 index price. In the first half of the year, we saw the breakeven price increase by $10 to $42 per tonne driven by a lower price premium achieved. As mentioned in the marketing section, market conditions precluded us from achieving the same $3 per tonne marketing premium that we saw last year. In addition, timing effects were not in our favor this time. Last year's price premium included a $6 per tonne timing benefit, which we stated at that time would not recur. To add to this, there was a negative $2 timing impact this year because of falling freight rates. Together, these make up the total of $11 per tonne negative impact seen on this slide. C1 costs provided a benefit of $1 per tonne, while SIB CapEx was flat following the CapEx deferral as part of our COVID cash conservation measures. Noncontrollable costs were neutral. Currency gains of $8 per tonne and lower freight rates were offset by lower lump premium and an increase in royalties. We're continuing on our cost-saving journey, and it remains a focus of our margin enhancement program to ensure we continue to be competitive and sustainable. In the next slide, we'll take a look at how our strategy has protected our margin. Since we've implemented our margin enhancement strategy, we've continued to see a margin uplift. From the 2017 base, EBITDA per tonne increased by 70% to $56 per tonne. Our total unit costs have been well contained, and this has allowed the benefit from average -- from rising average realized prices to flow straight through to our margin. We have consistently delivered on our cost savings initiatives, and this period was no different. We achieved a further ZAR 700 million of savings. Cost optimization delivered ZAR 345 million, while reduced operating activities and cash conservation initiatives in response to COVID-19 contributed ZAR 355 million. On the right, we show the breakdown of our total savings. Aside from COVID-related savings, over 26% came from lower overhead costs driven by fixed cost reductions and optimized rehabilitation expenditure. Mining contributed 13% of the savings through drilling and exploration optimization, together with the reduced labor costs. The balance of our savings are from the plants and supply chain. The plant saw a reduction in double handling of plant feed ore as well as energy optimization. Supply chain benefited from contract optimization. In 2018, we set a cumulative cost-saving target of ZAR 2.6 billion to be delivered by 2022. If we take into account the ZAR 700 million of savings in the first half, we've already achieved this target well ahead of the delivery date. In the second half of this year, our aim is to save a further ZAR 400 million, resulting in a total cost saving of ZAR 1.1 billion for this year. This will come from continued fixed cost savings and contract optimization. In addition to this, we are seeing operating efficiencies improve as our mining volumes recover, which has a positive impact on our costs. In February, we announced that we're reviewing our longer-term cost savings target, and we'll provide an update at the half year. In light of the circumstances brought on by the pandemic, we continue to monitor developments and are reviewing the potential risks as well as opportunities under various macro scenarios. Once there's more certainty, we'll provide an update on our longer-term cost-saving target. Next, we look at our capital expenditure. Disciplined capital allocation is an important element of how we run our business. For the first half of this year, CapEx increased to ZAR 2.8 billion driven by a few factors. Stay-in business capital of ZAR 1.2 billion went mainly towards capital spares for fleet and plant as well as other infrastructure spend. CapEx of ZAR 1.2 billion went towards deferred stripping. Expansion capital of ZAR 400 million was spent on Dingleton, the UHDMS and Kapstevel South feasibility studies and the P101 efficiency initiatives for our mining fleet. Taking into account the ZAR 1 billion of CapEx deferral that Themba spoke of earlier, our CapEx guidance for the full year 2020 is between ZAR 5.6 billion and ZAR 6.1 billion. Over the medium term, we expect SIB capital to peak in 2022 before normalizing from about 2024, settling at approximately ZAR 3 billion per annum. As Themba mentioned earlier, the Kapstevel South project at Kolomela has been approved. Total spend for Kapstevel South, including pre-stripping, is expected to be around ZAR 7 billion. The project will have an internal rate of return of about 25% and will allow Kolomela to maintain an estimated EBITDA margin of over 35% in the long term. Total spend on the UHDMS project is now estimated at between ZAR 3 billion to ZAR 4 billion, but we'll be able to confirm this figure once the feasibility study is complete. We will also be ramping up our P101 efficiency program over 2020 and 2021. I'll now move on to the balance sheet. Our capital allocation framework remains unchanged. It is premised on a business that generates strong cash flows after sustaining capital. This is then allocated, firstly, to a base dividend targeting 50% to 75% of headline earnings. Balance sheet flexibility remains key, especially in this uncertain environment, and our position on liquidity remains unchanged. Remaining capital is then allocated to discretionary options. These include expansion projects, other value-accretive opportunities and the potential of additional returns to shareholders over and above the base dividend. In the first half of this year, we generated ZAR 10.5 billion of attributable cash flow. This was after sustaining capital, but before discretionary CapEx. We paid a final 2019 base dividend of ZAR 6.1 billion in February and applied discretionary capital of ZAR 1 billion. This left us with ZAR 15.7 billion at the end of the period. After that, we considered the balance sheet flexibility we want to retain and further discretionary capital options and arrived at our dividend decision. The 2020 interim dividend of ZAR 19.60 per share represents 79% -- 75% of our headline earnings. In conclusion, we delivered a solid set of financial results for the first half in an extremely challenging environment. Our 3 levers of margin enhancement, financial discipline and sustainable returns continue to be our focus for the remainder of the year. While market prices have provided a strong tailwind, we also moved quickly to secure our position in the market. Our cash preservation measures provide further support to the balance sheet. We're focused on what is within our control to achieve optimal value and to continue delivering shareholder returns sustainably. Since 2017 when we resumed dividend payments, we have paid ZAR 47 billion in base dividends and ZAR 6.8 billion in top-up dividends while retaining the necessary funds to sustain and expand our operations. Thank you. I'll hand back to Themba.

Thank you, Bothwell. Our focus now more than ever is to continue improving our margin through cost discipline, productivity improvements and maximizing prices, and that allows us to generate free cash flow to keep investing in our business and to sustain the returns. Turning to the first of our strategic imperatives. As Bothwell showed us, our margin enhancement strategy is working for us. We've become more resilient as a result. As you will recall, we are firstly targeting 40% of premium product sales. Our marketing team have done well to achieve 22% in the current environment. They have been agile and moved quickly to redirect cargoes as we saw various countries going into lockdown. Secondly, we want to achieve 100% of benchmark operational efficiency on our waste fleets. Our efficiency was impacted by the restrictions and reduced by 4 percentage points to 63%. But we're starting to see good recovery, and we achieved 69% overall in June. Thirdly, we have our cost-saving initiatives. We are aiming to deliver a further ZAR 400 million in the second half of 2020, resulting in a total savings target of ZAR 1.1 billion for this year. Moving on to our life of mine extension ambitions, which is equally important to our sustainability. We have also made good progress with our Sishen-UHDMS feasibility study, which is now 89% complete. Approval is anticipated in the latter part of 2020, while we maintain our guidance for the first production in the first half of 2023. We have completed the Kapstevel South feasibility study, and the Board has given us the green light to proceed. As highlighted earlier, the total capital cost of the project will be approximately ZAR 7 billion, including pre-stripping. This project includes the development of the new pit and associated infrastructure at Kolomela. Kapstevel South will produce a high-quality direct shipping ore. While the pit is included in the current life of mine, it contributes significantly to sustaining Kolomela's production of around 13 million tonnes for the remaining life of mine. Pit establishment and waste stripping will commence this year with first ore expected in 2024. As a result of the lockdown, we had to suspend our exploration activities at Ploegfontein and Heuningkranz, but these have now resumed. Both have long implementation time horizons and won't be affected by the delay. Our rights are secure, and these are included in the Kolomela mining rights. Lastly, we announced that we had gained access to 2 new prospective targets earlier in the year, and I am pleased to say that we have commenced drilling activities on both of these sites post the lifting of the lockdown restrictions. As part of our ambition to reimagine mining to improve people's lives, we are embracing technology and transformation in our exploration program. With our drilling partner, Rosond, we are in the process of rolling out a fleet of next-generation exploration rigs in the Northern Cape. This incorporates completely automated rod handling and are operated by remote control from secure, air-conditioned cabins. This has delivered safety, productivity and transformation benefits. And we are proud to announce that we have deployed our first all-female exploration drilling crew at Sishen. And we believe this is a first in South Africa, if not the broader world. We'll be looking for more of these opportunities to help us achieve our goal of being truly sustainable right from the start of the value chain. Now on to our guidance for the year. In April, we revised our guidance and have maintained our outlook. However, several months into the pandemic, infection rates are increasing in South Africa. Globally, we're still seeing waves of outbreaks. There is a great deal of uncertainty and a lack of visibility. We are operating in a fluid environment, and it is impossible to fully predict how this pandemic will unfold and affect our operations over the next few months. There is no doubt that there is significant potential for downside risk. We are, therefore, cautious about the next few months as we move towards the peak of the pandemic. Against this context, total production for the full year is expected to be between 37 million and 39 million tonnes. To achieve this, we will need to step up performance in the second half. The implications for our export markets are also still unfolding. We are encouraged by China's recovery and the gradual reopening of the European economies. However, logistical constraints are a concern and represent the biggest risk for our sales guidance of between 38 million and 40 million tonnes. In the second half, the Saldanha port will also be shut for approximately 6 weeks for the annual planned refurbishment. Bothwell has already discussed our unit costs and CapEx guidance. In the next 6 months, we have our work cut out for us. We will continue to sharpen our business response and manage through this crisis. And before we go to Q&A, let me remind you of our value proposition. We have a compelling investment value proposition. The world is clearly going through a period of great uncertainty, characterized by high market volatility. But as you have heard today, we see continued long-term demand for premium quality iron ore. Kumba's exceptional value is found in our assets, our capabilities and sustainable returns. Our assets are a key differentiator in a competitive market and supports our margin. We have strong community and stakeholder relationships and are deeply committed to making a difference to all those who rely on us for their livelihoods. Our balance sheet is strong. We have consistently demonstrated our capital discipline and ability to deliver sustainable returns to our shareholders. But most important of all, we have the right people. Navigating through a storm, with little visibility, is a challenge that we are all facing. As we have seen time and time again, what makes a difference to the outcome is the people we have at our site. And on that note, I want to say thank you to the incredible people that I have the honor and privilege to work with at Kumba. Thank you. I will now hand back to Sinah, who will manage our questions-and-answer session.

Thank you, Themba. [Operator Instructions] Judith, are there any questions on the conference call?

[Operator Instructions] The first question comes from Brian Morgan of RMB Morgan Stanley.

Two questions from my side. Can you just chat us through the increase in the Kapstevel CapEx? Is there a change in scope there? Or is this just a better-refined number?

Brian, as you will appreciate, as you move from pre-feasibility to feasibility, you get to sharpen the numbers, sharpen the understanding as well in terms of the elements of the project, so that's effectively the impact of that.

So no change in scope.

No.

Cool. Second question, you spoke about the lack of spare parts. Could you elaborate a little bit more, tell us exactly where you're seeing supply chain issues and what the outlook is there?

Yes. So first and foremost, this was pre-COVID, so it was not as a consequence of COVID. Generally, through the supply chain and how we've managed the supply chain and the engagements with our suppliers, from a COVID perspective, we've seen very little impact from a supply chain perspective. This issue has emanated largely towards the end of quarter 4 last year and the first 2 months of this year. But by and large, all the issues pertaining to that have been resolved.

The next question comes from Shilan Modi of UBS.

Shilan, we can't hear you.

Shilan, you can ask your question. Unfortunately, we're not getting any response from his line. We go now to the next question, which comes from Myles Allsop of UBS.

I didn't catch the name, sorry.

It's Myles Allsop of UBS. I just wanted to kind of think about the life of mine extension, so Sishen and Kolomela currently have 13 years. With the UHDMS plant, how much potential can we extend that? Does that get you over 20 years? And just to be clear as well, does that impact the quality of the product or the unit cost? Or should it be -- are you still thinking it will be a similar sort of business in sort of 14, 15 years' time in terms of the product you're selling, the cost you're selling it? That's the first question.

Yes. So Myles, essentially, it's the same product. Our ambition is to increase the life of mine from the current 13- to the 20-year life, and that's a combination of various activities. First and foremost, as we improve our productivity efficiencies, we are able to do some interesting and smart things around pit geometries, and we are able to step in the slope angles. So that gives us the opportunity as well to move more of the resource into reserve, and we've seen that at Sishen and both Kolomela. Secondly, it's clearly the UHDMS project. And again, we've said before that because of the constraint on the rail, it's now a life extension project. And it probably -- in terms of that contribution from the 13 to the 20, it adds about 3 to 4 years in terms of life extension. And again, it's largely because instead of putting the material into a waste stockpile, we're now converting it into a high-value product. And then the remainder of the life extension activities is really around our exploration activities. Again, part of this process is clearly the Ploegfontein and Heuningkranz resource that I talked about. But over and above that as well, it's the opportunity of the 2 tenements that I talked about, which we have now just initiated the drilling activities. So the combination of that gives us the opportunity to increase our life of mine from the current 13 to 20. But by and large, the product in terms of Fes remains the same; and also in terms of size, fraction, lump-to-fine ratio.

Okay. That's helpful. And how should we think about your cash breakeven kind of looking over the next sort of 12 months? I mean, obviously, you've said your view in terms of lump premium, if we stick with the rand where it is today, how do you think that will evolve? Are you going to see it start coming down again? Or are you concerned it's going to creep up?

Okay. Bothwell, do you want to take that?

Yes. Thanks, Themba, and thanks for the question, Myles. I think as you have seen, there has been pressure on our breakeven price in the first 6 months of the year, and we're up to $42 per tonne. But that's still down from where we ended the year on, where we ended 2019 on. As we said, I mean, the biggest mover there has been the price premium, which we got last year this time, which we haven't got, for the reasons that I spoke about, in the actual presentation. As we now go into the second half of the year as we said, we've ramped up to normal run rates. So we should continue to see cost -- the cost initiatives from our operating efficiencies starting to come through in the form of savings. And we've said we're targeting another ZAR 400 million. So that we see as containing our breakeven price to current levels. So we don't expect a significant movement through the rest of the year. But like I said in the presentation, what we are doing in the long term is really revising our cost savings targets. As I said, we had targeted ZAR 2.6 billion by 2022. We've already reached that target. But clearly, the cost pressures are not abating in terms of inflation and in terms of what we term geological inflation, so we do need to redouble our cost-saving efforts. And we are reassessing that, and we'll come back at the end of the year with a revised target around that.

The next question comes from Johann Pretorius of Renaissance Capital.

And my first question is just on the Kapstevel project. I was just wondering whether you could give us a bit of guidance on the -- perhaps the iron ore price assumption and exchange rates that you use to calculate that margin of 35% and the internal rate of return of 25%?

Okay. Johann, we don't normally give our view on the long-term price and the FX, and today is no exception. All I can say is that it is not wildly different from all the focus out there in terms of a long-term view and that's a moderating price from current levels, obviously. So that's what we have taken into account.

Can you give us your expected returns on the UHDMS project, the ZAR 3 billion to ZAR 4 billion UHDMS project?

Johann, we're not in a position to do that yet. We always typically wait until we've completed the feasibility study to start giving those metrics just like we've done for Kapstevel.

Okay. I mean, you've given us a lot of color [indiscernible] forecast, your growth CapEx over the next couple of years. But can you perhaps just give us even a little bit more guidance in terms of your total CapEx guidance for the year beyond 2020, perhaps for 2021 and '22 at least?