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

Good morning, everyone, and welcome to Kumba's 2020 Annual Results Presentation. My name is Pranill Ramchander, and I'm Kumba's Executive Head of Corporate Affairs. Thank you for joining us. [Operator Instructions] Before we begin, please note the disclaimer slide. Our agenda starts as usual with Themba Mkhwanazi, our Chief Executive, providing an overview of our performance, including safety, health and environment as well as marketing and operations. He will also unpack some exciting news around our UHDMS project and Kumba's life-of-mine ambitions. Bothwell Mazarura, our CFO, will go through our numbers. Themba will then wrap up with our outlook and guidance before we go into Q&A. Now over to you, Themba.

Thank you, Pranill. Good morning, everyone, and thank you for joining us. Let me start by acknowledging our Chairman, Dr. Mandla Gantsho; members of the Kumba and SIOC boards; representatives from Anglo American; and the Kumba executive team. Timo Smit, our Executive Head of Marketing, is joining us on the line from Europe. Also, a warm welcome to Pranill who joined us last year. Before we get into the presentation, on behalf of the entire Kumba family, I would like to offer my sincerest condolences to all those who have lost loved ones during the pandemic. I know that we have all in our personal lives been either impacted or affected by the pandemic. And just to say that our thoughts and prayers are with you and your families. Sadly for us, we lost 8 of our own since the onset of the pandemic. We feel their loss and we grieve with their families and love ones. We also pay tribute to all the health care workers who continue to make sacrifices each and every day to help their fellow South Africans, and we are truly thankful for that. Today's presentation highlights firstly that we safely delivered a great set of financial results and excellent returns for our shareholders. Secondly, I am delighted to announce that our UHDMS project got the green light last Friday. It's a significant milestone for us, as it maximizes value and meaningfully extends Sishen's life of mine. And finally, we'll talk to you about some changes to simplify our margin strategy and our priorities to achieve performance. I would now like to turn to our first slide which demonstrates that Kumba continued to deliver in 2020 despite the extreme challenges and volatility. Firstly, we met our production and sales guidance. Secondly, the quality of our products, good demand and team performance delivered a record EBITDA of ZAR 45.8 billion, up 37%. Return on capital employed rose to 109%. This, combined with our capital discipline, translated into free cash flow of ZAR 20.7 billion. Our resilience and capital-efficient balance sheet enabled us to declare a final dividend of ZAR 41.30 per share. This brings our total full year dividend to ZAR 60.90 per share, an increase of 30%. These are spectacular sets of results delivered in unprecedented circumstances. The next slide covers our ongoing response to the challenges of COVID-19. The pandemic has affected us all profoundly. COVID-19 tested Kumba's resilience across multiple fronts. Critical to Kumba's ability to return to work was receiving government's exemption to reopen as an essential service provider, and we are thankful to the minister for that. Our WeCare COVID program, supported by our financial discipline and solid balance sheet, also ensured a swift and comprehensive response. Technology played a big role in quickly embedding COVID information and safety protocols. Our engage up reaches more than 90% of our workforce and our new connected worker smart watch provide safety alerts and helps with social distancing and contact tracing. We spent ZAR 296 million on the fight against COVID, including PCR testing and quarantine and isolation facilities for our workforce and communities. Of this, ZAR 93 million went to safeguarding the lives and livelihoods of our communities. Food and health care packs were supplied to families and masks to schools. Much needed PPEs and bulk sanitizers were supplied to clinics. Quarantine facilities and critical oxygen equipment were donated to local hospitals. To support livelihoods, we source as many services and products as possible from local communities. We also appreciate the strong spirit of collaboration we enjoyed with our stakeholders, including Transnet, our suppliers, peers, customers and governments. This meant that we could, in turn, support our business partner, Transnet. We were able to provide PPEs and PCR testing equipment as well as contractor support to assist in their recovery. We have kept the Kumba engine running and sustained our ecosystem, and we are confident in our abilities to continue responding to the pandemic in the future. This brings home our purpose of reimagining mining to improve people's lives. In my next slide, I will focus on our #1 value, which is safety. In 2020, Kumba marked 4 years and 7 months of fatality-free production. Of all of our achievements, this is the one we are most proud of, and we achieved our lowest rate of total recordable incidents in 5 years. This confirms that our focus on taking ownership for our own safety and that of others has paid off, demonstrating probably the best safety performance we've seen in the last 5 years. Health wise, there were no new cases of occupational diseases, highlighting the benefits of enhanced dust management equipment and technology. Through our HIV program, 88% of our workforce were tested with 77% on treatment achieving viral suppression. To have raised the bar yet again in terms of health and safety, despite rechanneling our resources demanded by COVID is truly remarkable. Turning to environmental performance, Kumba is committed to a responsible transition towards carbon neutrality. Our carbon emissions have reduced by 16% from 2016 baseline. We are well ahead of target as we work towards a 30% reduction by 2030. This work includes investigating the use of solar power generation. And together with Anglo American, we are looking at the possibility of hydrogen production to power our whole truck fleets. Water provision is part of our essential services, and we supplied 19 megaliters to our host communities in 2020. We've raised and revised our water strategy, prioritizing freshwater usage reduction. We've seen a 17% reduction from a 2015 baseline, moving us closer to our 2030 target of 50%. On the next slide, I will touch briefly on some of the key areas where we are creating enduring value. As a trusted corporate leader, contributing to society is equally important to us. In 2020, we created ZAR 60 billion of enduring value. On a broader economic level, over ZAR 13 billion in taxes and royalties went towards sustaining South Africa and its people. Another ZAR 6 billion of capital was invested which demonstrates our commitment to the future of our country. Procurement spend, including host community suppliers, topped ZAR 13 billion. We also contributed ZAR 264 million in direct social investments, including the spend on COVID. Our shareholders and empowerment partners benefited from ZAR 26 billion in shareholder returns, up from ZAR 19.8 billion last year. Turning to our UHDMS project, this will significantly shift the dial in our Tswelelopele journey and clearly demonstrates our commitment to investing in South Africa. And questionably, the UHDMS project is a game changer for us and will help us transition to future smart mining. You will recall when we started the project that we were targeting increasing production by 2 million tonnes through treating low-grade material. Since then, we have refined our understanding of the logistical constraints and seen a lot of developments in the premium product markets. UHDMS is a differentiator for us as it gives us flexibility. We can add value in both a volume or a quality scenario because the technology enables us to increase the density in the plant beyond the current limit of 3.6. The value proposition of the UHDMS project is essentially threefold. Firstly, by beneficiating our existing high-grade run-of-mine feed, we will be able to increase the product grade and earn an additional $1 per tonne premium. Secondly, the life of mine stripping ratio at Sishen reduces to 3.1. And thirdly, the lowering of the curve grade means that we will be able to treat C-grade material, earning between 110 million and 130 million tonnes of reserves. We will be stockpiling this lower-grade material and only treating it much later in the life of mine. Production in the last 3 to 4 years will be approximately 15 million tonnes per annum. Additional technologies, such as bulk ore sorting, will enable us to upgrade this material and achieve higher yields, and thus, additional volumes. The CapEx spend on the UHDMS project is expected to be ZAR 3.6 billion, and first production is still planned for the second half of 2023. The opportunities that UHDMS technology brings for our business and our investors are truly exceptional. It firmly positions Kumba as a niche producer, provides value uplift and extend Sishen's life of mine by 3 to 4 years. We will update you on our progress as we go forward. And for those interested, a video on the UHDMS technology is available on our website. Moving on to our life-of-mine ambition in the following slides. While UHDMS -- while the UHDMS approval is a big step forward, optimization and exploration remain fundamental to our life-of-mine ambitions. At the outset of our Tswelelopele journey in 2018, we were aiming to increase our ore reserves by 200 million tonnes by 2022. And I am thrilled to say that we have realized this ambition 2 years ahead of plan. Our reserves, excluding UHDMS, increased by 206 million tonnes between 2018 and 2020, and this represents a 30% increase. At Kolomela, we are still working towards a 2040 life of mine through the development of Heuningkranz and Ploegfontein orebodies. However, these are longer-term projects that we are working on for the next few years. In 2020, we approved the Kapstevel South project and completed a pit optimization project which reduced Kolomela's overall strip ratio to 3.6. The Kapstevel South project is well on track, and by the end of December, we have mined over 2 million tonnes of waste. The pit is included in the current life of mine and contributes significantly to sustaining Kolomela's production of around 13 million tonnes for the remaining life of mine. At Sishen, we implemented Phase 1 of our pit optimization project in 2018 that gave us an increase of 112 million tonnes of ore reserves. In 2020, we updated the pit for the last -- for the latest macroeconomic parameters and implemented Phase 2 of the projects. This increased our reserves by a further 81 million tonnes, taking the life of mine from 2032 to 2035. As mentioned, the UHDMS project will add between 110 million and 130 million tonnes of reserves. Altogether, our optimization drive and the UHDMS project will extend the life of our Sishen operation to 2039. Besides the obvious economic benefits, this creates enduring value for all of our stakeholders, especially employees and host communities, 54% of whom are either directly or indirectly dependent on the mine for their livelihoods. The extended life of mine makes our longer-term sustainability initiatives in terms of solar power and hydrogen fuel much more viable. And now to our marketing and operational review. Our integrated marketing and operational strategy is designed to ensure that we optimize our value chain and maximize our product value. 2020 was a phenomenal year for iron ore prices. China's fiscal and monetary stimulus fueled a 6% growth in steel production, while iron ore supply from the big 4 miners remained flat. 2021 has started on a positive note as China's steel production is showing no signs of slowing down and markets outside of China continue to recover. Turning to the lump premium. Lump premium fell to a record low, but has since recovered sharply. High coking coal prices of well above $200 per tonne and sintering cuts during China's winter season provided strong support. Longer-term structural change in China towards carbon neutrality underpins the flight to quality. We've seen ongoing consolidation of blast furnaces China. Since 2015, the share of direct charge ore has gone up 5 percentage points. And we believe that this trend is likely to follow those in developed markets as China moves towards its air pollution targets. Turning to our diversification strategy. Still production within Europe and other regions outside China saw a V-shaped recovery in the second half. Consequently, these markets increased to a record 47% of total sales in the fourth quarter. Our diversified client strategy and marketing agility enabled us to divert cargoes quickly in line with market demand. As a result, we earned $1 premium above the lump and Fe premium, significantly more than in 2015. Our high-quality product also helps ensure that we continued to outperform our peers. As you will see in the next slides, quality always pays. Both our Fe quality and lump defined sales ratio were ahead of the big 4 miners. Even with the market dislocation last year, we continued to lead. Our FOB realized price was 18% above the plus 62 FOB price and over 15% ahead of our peer group. Moving on to our operations. Mining and production reflects the health of our value chain, which, as you'd expect, was impacted by COVID. This was compounded by above-average rainfall and some equipment reliability issues, resulting in less waste volumes mined. Further knock-on effects to production volumes came from the 11% decrease in iron ore rails to ports and lower domestic sales as a result of the closure of the Saldanha Steel plant. However, as Transnet recovered from COVID, we also began building momentum. Even with the disruption of the annual maintenance in quarter 4, production was up by 7% in half 2. Importantly, we have implemented a high rainfall readiness plan because extreme weather will no longer be the exception. This plan, together with our defect elimination and work management programs, targeting equipment reliability contributed to a 16% increase in waste mined during half 2. Pleasingly, our iron ore quality and lump ratios were not affected and remain highly competitive, supporting our product premium. Having betted down these interventions, we are focusing on improving our operational efficiencies, and that is the subject of my next slide. Driving operational efficiencies as part of our Tswelelopele program is high on our list of priorities. However, 2020 was a tough year, with our shovel and truck fleet efficiencies reducing by 4 to 5 percentage points. We also recognize that OE improvements have slowed down with the last 10% to 20% typically more challenging to realize. It's clear that to close the efficiency gap and achieve our margin ambitions, we have to target our efforts where they can't most. For us, it's getting our trucks to P101 benchmark efficiency as we operate in the order of 140 trucks and only 8 waste moving shovels. The sweet spots for our shovel efficiency is around 80%. That said, this still requires a significant improvement from our current levels. Some key initiatives that we are driving hard in order to meet our targets by 2022 besides the programs already mentioned include real time waste condition monitoring and precision maintenance, technology such as guided spotting to improve truck and shovel turnaround times, and additionally, we are increasing truck speeds and reducing shovel loading, which are resulting in improved payloads and shovel fuel factors. Our operating model is now 85% implemented across core mining, processing and engineering. And for 2021, our focus is on operational planning and short-term interval control to improve the stability and predictability of our operations. Leadership culture and technology innovation will further enhance safety and productivity. Turning to my next slide. We delivered a solid export sales performance. Overall, sales volumes were largely impacted by domestic sales falling 84% compared to 2019. The highlights has been the solid performance in export sale, thanks to collaborative contribution from Transnet. In these challenging times, it was heartening to see the strong teamwork between industry and Transnet. By working closely together, we could respond more quickly to issues and optimize the use of the rail and port infrastructure. To offset the impacts of COVID-19 on logistics, we've maximized direct loading and increased loading through the multipurpose terminal. Integrated planning between our mines and ports to maintain flexibility across the value chain was also key. As a result, we were able to export 1.8 million tonnes more than was railed to ports. And consequently, export sales were only down 1.8% for the year. Going forward, we are optimizing our blending strategies by simplifying our product portfolio while maintaining our high product quality. This will further increase direct loading through throughput and efficiencies. Secondly, at the bulk terminal, we are moving to larger capesize vessels of 130,000 to 200,000 tonnes, and this will enable us to increase our average load per ship. These are just some of the changes we are making to ensure that we can increase export sales to mitigate lower domestic sales. On that note, I will now hand over to Bothwell who will take you through our financial performance and also update you on our margin strategy.

Thank you, Themba, and good morning, everyone. I'm pleased to present a strong set of financial results for Kumba. These have been shaped by 4 elements. Firstly, the disruption to our operations due to the COVID pandemic. This impacted production and sales volumes, as Themba has already outlined. Secondly, strong iron ore prices, coupled with the benefits of currency gains driven by a weaker rand. Thirdly, our Tswelelopele margin enhancement strategy, which focuses on quality, productivity and costs. And finally, our capital discipline and balance sheet strength. Looking at the financial highlights for the period. Despite the challenges, we continued to deliver sustainable shareholder returns, underpinned by our margin enhancement work and financial discipline. A higher average realized FOB price of $115 per tonne, combined with a weaker rand, provided an EBITDA margin uplift of 5 percentage points to 57%. Cost optimization, combined with cash conservation measures and reduced activity due to COVID, delivered cost savings of ZAR 1.3 billion. This translated into a lower C1 unit cash cost of $31 per tonne. I'll go into more detail on costs later. Our breakeven price was contained at $45 per tonne as lower production and cost escalation were offset by currency weakness and lower freight rates. Headline earnings per share increased by 40% to ZAR 71.07. Attributable free cash flow of ZAR 20.7 billion allowed us to declare a total dividend of ZAR 60.90 per share. We'll also take a closer look at this later. Turning to our EBITDA performance. Our EBITDA of ZAR 45.8 billion reflects strong revenue growth of 25%. This was on the back of higher average realized FOB prices and a weaker currency as we saw in the previous slide. This was partly offset by lower sales volumes and higher operating expenses. We also saw cost pressure from lower production volumes. Our cost savings of ZAR 1.3 billion provided much needed support. Let's move on to our unit costs. Sishen's unit costs increased by 5% to ZAR 362 per share (sic) [ per tonne ]. The impact of lower production volumes was partially offset by lower mining volumes, the replenishment of work-in-progress stockpiles and cost savings. At Kolomela, unit costs for the period increased by 12% to ZAR 304 per tonne. The increase relates to higher mining costs on the back of longer hauling distances, increased spend on maintenance to improve equipment reliability as well as lower production volumes. The benefit of lower deferred stripping costs and tight cost management helped us to counter some of the unit cost increases. Cost savings of ZAR 1.3 billion are made up of cost optimization initiatives of ZAR 687 million, while reduced operating activities and cash conservation initiatives in response to COVID-19 contributed ZAR 613 million. On the right, we show the breakdown of our total savings. Aside from COVID-related savings, over 20% came from lower overhead costs, driven by fixed cost reductions. Mining contributed 19% of the savings through diesel, drilling and blast efficiency improvements, together with reduced labor costs. The balance of our savings come from the plants and supply chain. The plants saw a reduction in the double handling of plant feed ore as well as energy optimization. Supply chain benefited from contract optimization. Our cost savings drive is fundamentally important to our margin strategy and our ability to remain competitive. We'll have a further look at this later. Moving on to our breakeven price, we saw earlier that the breakeven price was contained at $45 per tonne, with both controllable and noncontrollable costs remaining neutral. The breakeven price reflects the unit cost to produce and deliver our products to market and considers the premium realized. Controllable costs benefited from a higher price premium of $4 per tonne, fully offsetting an increase in SIB spend and C1 costs. Noncontrollable costs reflect currency gains from a weaker rand and lower freight rates. These mitigated the negative effects of a lower lump premium, higher royalties and mining cost inflation. Since implementing our Tswelelopele strategy in 2018, we've seen a consistent margin uplift. On the left, the benefits from our enhanced product portfolio and cost savings program supported by operational efficiencies are clear. Strong iron ore prices provided a tailwind. However, our high-quality product is a competitive advantage, which attracts an Fe and marketing premium. As seen earlier, our cost savings program has provided an offset against inflation. Looking at the graph in the middle, over the 3-year period, we have seen our C1 unit cost contained at or below $33 per tonne, allowing the benefit from rising average realized prices to flow straight through to our margin. These have been the key drivers of our EBITDA per tonne, which has grown from $36 to $70 per tonne. As part of our response to the COVID environment, we're progressing our margin strategy to better position the business for the longer term. Alongside this process, we have refreshed our 3 key initiatives and targets. On the right, these are as follows: firstly, we are streamlining our product portfolio. This will ensure greater efficiency along our value chain. Our product portfolio will be better aligned to logistical capacity, while retaining our quality focus and providing the value in use required by our customers. Related to this, we have simplified our target. Our focus going forward is to achieve a $2 per tonne product premium over and above a lump and Fe premium. Secondly, operational efficiency supports our cost savings initiative. As Themba has already outlined, we are targeting P101 benchmark efficiency on our truck fleet, and this is where we realize the most value. Thirdly, we have delivered cumulative cost savings of ZAR 3.2 billion since 2018. This includes ZAR 613 million of COVID-related savings. This has exceeded our original target of ZAR 2.6 billion and was achieved 2 years ahead of schedule. However, we are continuing on our cost savings journey, and we've set a new target of ZAR 1 billion in each of the years 2021 and 2022. Our objective is to contain our C1 unit cost below $34 per tonne. Besides driving further operational efficiencies through our P101 initiative, we believe that we can sustainably offset some of our cost inflation by the following measures. Firstly, continuing to reduce the fixed overhead cost base; secondly, optimizing our mine plans; and thirdly, improving contractor management and our supply chain processes. The next phase of our strategy will help to simplify our business and ensure that we are even more agile, improving our ability to compete more effectively. Next, we look at our capital expenditure, which sustains our business and supports our strategy. Kumba's approach of disciplined capital allocation has served us well. It allowed us to remain flexible in terms of our capital expenditure while maintaining asset integrity. We were able to enhance our strong liquidity position further by deferring ZAR 1 billion of noncritical capital expenditure. This meant that we could continue to support our business with stay-in-business, or SIB CapEx, while continuing to invest for the future and progress our key projects. For the 2020 financial year, CapEx increased marginally to ZAR 5.7 billion. Key items of CapEx spend were in the following areas: SIB CapEx of ZAR 2.6 billion, mainly comprising capital spares, replacement of HME and plant equipment as well as other infrastructure spend. Expansion capital of ZAR 591 million went towards Dingleton, the UHDMS feasibility study and the Kapstevel South project as well as our P101 efficiency initiatives. And CapEx of ZAR 2.5 billion was spent on deferred stripping. In 2021, we expect CapEx to increase to between ZAR 10.8 billion and ZAR 11.3 billion. The increase is largely due to expansion CapEx as we invest in our business for the long term. Looking at some of the main components. Let's start with SIB CapEx. This is expected to increase between ZAR 3.8 billion and ZAR 4 billion. This consists of plant and infrastructure spend to support equipment, reliability, safety and environmental sustainability. Expansion CapEx of between ZAR 4.8 billion and ZAR 4.9 billion relates mostly to the cost of developing the Kapstevel South pit at Kolomela and, to a lesser extent, the UHDMS project. We are also investing further in our P101 efficiency program, which will support our cost-saving initiatives. Over the medium term, we expect SIB capital to peak this year and normalize in 2023 to approximately ZAR 3 billion per annum. Expansion capital will be largely due to the Kapstevel South and UHDMS projects. Total spend on Kapstevel, including prestripping, is anticipated to be around ZAR 7 billion. As Themba highlighted, the total spend on the UHDMS project is expected at about ZAR 3.6 billion. Both projects offer attractive margins and returns. Now let's move on to the balance sheet. Our balance sheet resilience is supported by the quality of earnings reflected in our return on capital employed of 109%. Consistent with our capital allocation framework, which is key in this uncertain environment, our base dividend continues to target 50% to 75% of headline earnings and remaining capital is allocated to discretionary options. These include expansion projects such as our Kapstevel South and UHDMS project, value-accretive investment opportunities and the potential for additional returns to shareholders. For the year, we generated ZAR 25.5 billion of attributable cash flow after sustaining capital. We then paid a final 2019 dividend and 2020 interim base dividend totaling 4.4 -- ZAR 14.4 billion as well as applying discretionary capital of ZAR 1.2 billion. This left us with ZAR 22.2 billion at the end of the period. Taking into account balance sheet flexibility and further discretionary capital options, a final dividend of ZAR 41.30 per share was approved by our Board. Together with our interim dividend of ZAR 19.60 per share, our total dividend for the year increased by 30% to ZAR 60.90 per share. This represents a payout ratio of 86% of headline earnings and gives us a dividend yield of 9.8%. In conclusion, we've delivered a strong set of financial results for the year in an extremely challenging environment. This, together with the strength of our balance sheet, supports the investment in our business and expansion projects and allows us to reward our shareholders. Since 2018, we have paid ZAR 48 billion in base dividends and ZAR 10.5 billion in top-up dividends, while retaining the necessary funds to sustain and expand our operations. We are focused on what is within our control, that is safety and health, maximizing the value of our products and managing costs to continue delivering shareholder returns sustainably. Thank you. I'll now hand you back to Themba.

Thanks, Bothwell. This brings home the value of a resilient balance sheet in times of uncertainty. With this solid foundation, and our strong financial performance, we are fortifying our business and are well positioned to unlock value for the longer term. Now turning to our first strategy slide. When I arrived at Kumba 4 years ago, we embarked on the Tswelelopele strategy to unlock the full potential of the business by focusing on 4 key areas. These are: Safety, operational excellence, maximizing the potential of our resource base and ensuring capital discipline. Some of the headlines here show, we've already had a significant amount of success primarily through the implementation of the operating model. This has led to sustainably improve performance in safety, productivity and cost. We have created the flexibility, both to invest in the business for the future gains and to deliver one of the highest yields of all South African companies. However, now isn't the time to sit on our laurels. Although it's good that we continue to consolidate our efficiency gains, there's still significantly more that we can achieve in terms of performance levels and consistency. On the next slide, you'll see how we are positioned for the future and the next phase of our Tswelelopele strategy. Having navigated the pandemic over the past year, we have benefited of 2020 hindsight. Please excuse the pun, we have reviewed our business and sharpened our focus on the areas in which we see real potential for further gains and aim to protect the enhanced margin that we have built in recent years. Bothwell has already mentioned that we are now targeting a product premium of $2 per tonne. Beyond that, we want to continue to focus on both operating efficiency with P101 initiatives and tight cost management in order to keep our C1 unit cost at or below $34 per tonne. We spoke about our life-of-mine area. Now on to our guidance for the year. At our investor update in December, we provided our production and C1 unit cost guidance for 2021, and we've maintained our outlook. Globally, although the COVID vaccine offers a path towards economic recovery, there have been subsequent waves of infection. We, therefore, continue to be cautious of adverse impacts to the global markets and our operating environment. The rail line in Saldanha port will be shut for approximately 10 days for annual maintenance in addition. Phase III of the port mid-life refurbishment program is planned for quarter 4 as per last year. Therefore, our sales outlook for 2021 is to sell between 40 million and 41 million tonnes, which is in line with our guidance for production. Bothwell has already discussed our CapEx guidance. Looking at the underlying details, Sishen is expected to produce around 28 million tonnes of product and Kolomela, 13 million tonnes. Sishen is expected to mine between 150 million and 170 million tonnes of waste. Kolomela's waste guidance of 55 million to 65 million tonnes includes pre-stripping waste at our Kapstevel South pit. Based on projected inflation, cost escalation and an increase in waste, the unit cash cost position is anticipated to increase to between ZAR 395 and ZAR 400 per tonne. At Kolomela, we expect unit cash costs to remain similar to 2020 at between ZAR 300 to ZAR 310 per tonne. We are cautiously optimistic that 2021 will improve as the vaccine program touches more lives and the tide begins to turn against the pandemic. We continue to sharpen our focus and adapt our business in response to the environment and the needs of our customers. Before we go to Q&A, let me remind you of our value proposition. Our focus on these 4 areas makes us more competitive in the longer term. Consistent with our values and way of doing business, safety and sustainability will continue to be our primary focus. The recognition we've received ranging from ESG excellence to business performance is testament to the progress that we are making. These inspire us to continue to do better as we move forward. Secondly, margin performance is a key value driver. We see upside potential from product premium over time, with high-quality products likely to be increasingly important to our customer base. In the near term, we'll push hard to deliver our P101 program and continue to meet our cost ambitions. Thirdly, we'll continue to unlock the full potential of our resource base. Today's announcement on UHDMS is a big step forward in this regard. And finally, there will be an ongoing focus on capital discipline. We intend to keep a strong balance sheet while investing in the business and providing shareholders with highly attractive returns. We are fortifying our business. And still have significant value to unlock. Kumba has built a foundation that is stronger than ever and a proven strategy to deliver long-term value. And I'm excited about the future. Our initiatives ensure that we are well positioned to continue creating enduring value to the benefits of all of our stakeholders. Thank you. I will now hand back to Pranill, who will manage our question-and-answer session.

Thank you. Thank you, Themba. Ladies and gentlemen, I will now open the conference call line for questions, and then we will move to the questions already send through on the webcast.

The first question comes from Shilan Modi of UBS.

Congrats on the good set of results. Thanks for the large dividend as well. A couple of questions from my side. Maybe a bit of a blight on the result was the CapEx number stepping up materially year-on-year. How should we think about CapEx for the next 5 years? Should we think about this staying at around the ZAR 10 billion -- ZAR 10 billion to ZAR 11 billion level? Or does this kind of tail off after F '21? After that, maybe talk to your lump ratio. It seems quite high. It's at 69% currently. Should we also be thinking about that staying at these current levels, what's driving that? And what -- how does the UHDMS change this over time? And then maybe just talk to the cost pressures in Sishen versus Kolomela. Kolomela cost guidance is kind of flat year-on-year, and Sishen is escalating. It's not the first time that we've seen this kind of a scenario. Maybe just talk to the different cost pressures between the 2 mines.

Thanks, Shilan. I will cover the lump ratio question, and then I'll hand over to Bothwell to take us through the CapEx and cost pressure question. So in terms of the lump to fine sales ratio, there's an element there around timing, because you will note that the base lump to fine ratio through production was around about the 67%. In addition to that, we also had more of the lumpier material, which would ordinarily go to the Saldanha steel plant. So that as well went into export sales now that the Saldanha steel plant is shut. So that's why we saw that uplift. We would be saying that, that should normalize and in particularly because of the impacts of timing. In terms of UHDMS, I mean, UHDMS now allows us to go above the 3.6 density that we currently have which then allows us to actually increase the percentage of premium material because we are now able to drive harder the high-quality ore body that we have. So we effectively are looking at increasing our current premium percentage of 18% to above 50% by 2024. Bothwell?

Thanks. Thanks, Themba. Hi, Shilan. I'm not sure I'd call our CapEx a blight. I think it's quite -- it's a bit -- it's quite positive that we are investing in some expansion projects going forward. And that's what is driving the significant increase in our total CapEx build. So if you just look at 2020, we've spent just below ZAR 6 billion. Next year, we're going to spend about ZAR 11 billion in CapEx. ZAR 5 billion of this is entirely on our expansion projects. The Kapstevel South project at Kolomela is going to spend a significant chunk of this. And the UHDMS, which Themba alluded to, will break ground in the second half of this year. So we will see some spend on that as well. And we'll continue to spend on our P101 initiatives as well. So that's a big driver in terms of CapEx. These 2 projects will go on over the next 3 years until about 2023, so expect elevated levels of expansion capital over those years. From an SIB perspective, as I said in the presentation, we saw -- we deferred about ZAR 1 billion of expenditure from 2020, largely as a result of COVID. So there's an element of catch-up in our SIB as far as that deferral is concerned. But there's also big investment in terms of ensuring the reliability, both on the mining side and on the plant side. So we will see quite a bit of spend on HME and critical spares on the mining side but also plant infrastructure as well. We anticipate that the SIB spend will stabilize in 2023 at about ZAR 3 billion. So there will be a slight normalization there. Yes, the deferred stripping capital stays fairly, fairly flat over the period. So I hope that answers your CapEx question. In terms of...

Is Heuningkranz and Ploegfontein beyond the 3 years? I mean, it's not in the numbers that you're talking about.

No, it's currently not in the numbers. Those are currently under study, and they're slightly longer-term in terms of the CapEx coming into the plan. But we will update you as those studies progress. Yes. From a cost perspective, I think you would have seen -- I mean, we've always said Kolomela is quite sensitive to production being a smaller mine. So in 2020, we saw reduced production, largely as a result of COVID. And that resulted in its unit cost increasing quite substantially by about 12%, well ahead of the increase we saw at Sishen. Next year, we get back to more normalized production levels for Kolomela. So you see that, that cost position normalizing. So you don't see the significant increase that we saw this year. Sishen, on the other hand, we saw the disruption, from a production perspective, was in the plant, but there was quite also a significant disruption in terms of the waste that we moved. So we moved a lot less waste than we had anticipated, and that benefited unit cost. And that's what kept the unit cost increase at about 5%. Next year, we will be catching up on that waste movement, so we will see an increase from that perspective. And that is over and above the other normal increases we will see from inflationary pressures. And that's why you've got that disparity in terms of the anticipated increase for 2021.

The next question comes from Thabang Thlaku of SBG Securities.

Well done on the results guide. Just a few questions from my side as well, first one being what is the -- in terms of the additional life of mine extension, so firstly, the presentation is saying the life of mine in [indiscernible] and the results [indiscernible]. So maybe Themba could clarify that right. And what proportion of the additional life is due to take to comprise the price line and what proportionate is due to the Phase 2 of the optimization. My third question is how does one can think about the life of mine extension in terms of the 15- or 19-year depending on which one is correct, from the 2039 life of mine legal top line due to the new UHDMS, does that comes through when we see the first production in the second half of 2023. And then my last question is around the [indiscernible]. So given the peak in CapEx levels over the next 2 to 3 years, how do we think about ZAR 5 billion buffer that you guys have always kept on the balance sheet? And could this potentially mean that we think dividend decline in that payout ratio coming below 75%?

Thanks, Thabang. I mean -- so let's, first of all, touch on the life of mine and, through the process, provide some clarity. So if we go back to 2018, we increased the life of mine by 2 years. And that was largely due to the work that we did around slope optimization and obviously incorporating the benefits that we got from the modular plants. So that resulted in a 2-year life of mine. Now when we talk about the increase last year, in 2020, this work that we did, which obviously resulted in that 3-year life of mine increase, and part of that was the continued slope optimization work where we've added about -- it's contributed about a year to that 3-year life of mine increase. Then we've also revised the longer-term iron ore price increases, and we've built that in terms of our life of mine. And again, that's probably contributed about 1.5 years. And then in addition to that, there's about 0.5 years because of the closure of the Saldanha store plant because of obviously less production. So there's a base 3-year increase because of those activities. Then the UHDMS, which we have announced today, potentially takes the life of mine up by a further 3 to 4 years. And that's largely because of UHDMS. So when we talk about life of mine extension at Sishen, we're essentially saying it's a 6- to 7-year increase made up of the 3 years because of the revised life of mine plus the additional 4 to 3 years from UHDMS of which we see that life of mine because of the treatment of the waste stockpiles that we treat -- or the secret material, I should rather say, that we treat at -- from 2035 to 2039. Your question in relation to, okay, how do we think about life of mine beyond the 2039, let me hand over to Glen Mc Gavigan, our Head of Technical, who is also on the call, just to provide more color around what are some of the other activities that we're actually focused on in terms of life of mine.

Thanks, Themba. Thanks for the question, Thabang. So just in terms of life beyond 2039, obviously, at Sishen, we've got a base case now with UHDMS included, which like Themba says, takes us at 2039. But I think if you think about -- we've essentially retooled Sishen, putting new technology in, and there's always optimization opportunities in there. So just to Themba's point, so we're going to be stockpiling all of the C grade coming out of the pit from now until 2035, and they're treating that at the back end of the life. And then treating our existing ROM coming out from 2024 to 2035 upgrading the premium. So that's the 2 phases of the project: First phase, up until 2035, is real premium products; and then 2035 to 2039 is treating that stockpiled C-grade material. And the reason for that is in a rail-constrained environment, Fe units down the rail adds the most value. And just in terms of post 2039, there are other opportunities in UHDMS, which we've already identified. We all know we've got historical stockpiles at Sishen, which we're going to look to treat again towards the end of life. And there are other opportunities to lower the cut-off grade even further from the 40% we have now down to 38%. So we'll progress that work over the next couple of years. But like I said, once we've got UHDMS in, it brings a lot of more flexibility and opportunities for life ex beyond 2039.

Okay. Bothwell, can you...

As just to -- sorry, Themba, just before you move on, just to clarify, right, so you explained that the next 3 years due to pit optimization and cost adjustments, then an additional 4 years due to the UHDMS. So that's 7 years from now, when 2020, that takes to 2027. So the end between 2027 and 2035, which is another 8 years, should we expect production levels to stay at current level, so around something like 41 million tonne, and is it also because the UHDMS come through.

Thabang, remember, we're starting from around 13 years of life of mine at Sishen, right? We then add the 3 years because of slope optimization and taking into account the longer-term prices. So that takes us to 2035. Then from 2035, we have UHDMS, the treatment of the C-grade stockpiles, as Glen has said, which then take us to 2039. Now again, we have indicated that between 2035 and 2039, we're likely, at this stage, projecting production levels to be around the 15 million tonnes of the current level. However, because of bulk ore sorting technologies and also further improvements that we can make on UHDMS, we believe that we will be able to increase the yields, which will then result in higher volumes which should close the gap of the between the 15 million tonnes and the plus/minus 30 million tonnes at Sishen which we are currently delivering.

Okay. That's clear.

Okay. Bothwell?

Yes. Thabang, dividend policy is unchanged. So just as a reminder, still targeting a base dividend of 50% to 75% of earnings. And then thereafter, we look at discretionary capital options, one of which is giving additional top-up dividends to our shareholders. So we still think around keeping a net cash position on our balance sheet. However, given the cash generation that we have seen and continue to see over the next couple of years because of our price outlook in terms of our market outlook, we're quite comfortable that we will be able to generate cash to deal with our capital investment over the next 3 years, which includes these expansion projects. If you recall, last year, we also renewed our debt facilities. So we've got ZAR 8 billion of extra liquidity that's available to us and is accessible because of the type of covenants that we negotiated with our banking group last year. So on that basis, we have slightly reduced that cash buffer to about ZAR 2.5 billion going forward. But it's a situation we will continue to monitor. So will it result in reduced dividends going forward? No, not necessarily. We will still target the base dividend of up to 75%. And if we generate excess cash, we will still look to our discretionary options, which includes the top-up dividend.

Operator, can we just pause for a moment and take some of the questions that have been submitted on webcast? Penny?

Thanks, Pranill. We have a few questions. We have a question from Prince Mopai. Prince Mopai has asked a question with regards to the outstanding net cash position of ZAR 22.7 billion. Are we likely to see other forms of shareholder returns, such as share buybacks above the current cash dividends? And he also says congratulations on the good results.

Thanks, Prince, and thank you for those kind words on the results. Yes, we did have ZAR 22.2 billion at the end of December. But ZAR 17.8 billion of that is what we have just declared now as a dividend. So it leaves us with about ZAR 4.4 billion in terms of pro forma net cash. Our preferred method of distribution at this time is through dividends. So we are not thinking of any other distribution methods at this point in time.

And then we have another question from Nkateko. She's asked can you please give us a bit of color on CapEx profile up to 2023?

I think we covered that when we dealt with Shilan's question. So no need to repeat that.

Okay. And then we have a question from Catherine Cunningham at JPMorgan. This one is for Glen. Sishen life of mine strip ratio will reduce to 3.7x with UHDMS. Can you help us understand the profile of the strip ratio from 2021 up to 2030.