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

Good morning, everyone. Welcome to Kumba's interim results for 2023. And it's really good to see you here in the room as well as on the line. Today, with me, I have Mpumi, our CEO, Mpumi Zikalala; and CFO, Bothwell Mazarura, And we're also very pleased to welcome our Board of Directors and our Exxaro management. [Operator Instructions] Before we continue, please note the disclaimer, particularly in reference to our forward-looking statements, and I'll now hand you over to Mpumi.

Thanks, Penny. Good morning, everyone. It's great to be here with you again, close just like yesterday. And thank you to all of you for joining us and also just a big thank you to those who are joining us virtually. I will begin with an overview of our performance for the first 6 months of the year, including our ESG and operational performance before handing you over to Bothwell, who will take you through our financial performance. I'll then spend some time on our refresh strategy, and share our outlook for the rest of the year before wrapping up and opening it up for questions. Now turning to our first half performance. The past 6 months has been about building safe and stable operations, while navigating ongoing logistics challenges and market volatility as we continue to deliver value to all our stakeholders. I'm pleased to say that the actions that we've taken to restore consistent production performance have been successful and this is the key driver of a relatively robust financial performance in spite of lower commodity prices. While logistics have been the key constraint to our performance, there continues to be constructive collaboration to find pathways to achieve improvements that all of us know we need in the future. As we look forward, we are committed to continued action to make this business as safe, efficient and effective as possible. In doing that, I believe that we can stay ahead of inflationary pressures that we continue to face. Now just taking a look at some of our KPIs. For us at Kumba, safety remains paramount. I was deeply saddened by the loss of our colleague, Nico [indiscernible] in February earlier this year. Nico was employed by our service or drilling service partner. We responded immediately and have further strengthened our safety controls. While we still have much to do, I'm encouraged that our total recordable injury frequency rate of 1.2 is below the 3-year average of 1.35. In the first half, production was up 6% to 18.8 million tonnes, driven by a strong recovery from Kolomela and ongoing improvement succession. Despite a lower pricing environment, we delivered a solid set of financial results. Our EBITDA of ZAR 19.8 billion, and attributable free cash flow of ZAR 7.9 billion reflects the positive impacts of operational improvements, cost discipline as well as a weaker currency. This enabled us to create enduring value of ZAR 28.5 billion for all our stakeholders, and our Board is pleased to declare an interim dividend of ZAR 9.7 billion of which our empowerment partners will receive a total dividend of ZAR 2.4 billion for the period. Now moving on to safety and our operations. As a responsible miner, taking care of the safety and health of our employees as well as our communities and the environment is critical to our sustainability. We remain focused on eliminating fatalities and improving our safety critical controls. We have increased our visible felt leadership engagements and also simplified our broader awareness programs to connect better with our teams. Following the increase in cable theft incident, Kumba is also participating in industry-wide initiatives to reduce crime across the country, including our own operations and the remainder of our value chain. Through [indiscernible] we are supportive of the joint initiative on crime and corruption as well as the partnerships and initiatives at a community level to help keep our communities safe as well. On the health front, after many years of continuous improvement, we confirmed one occupational disease case due to a musculoskeletal disorder which took place in 2022. We continue with exposure reduction programs focused on reducing overall workplace health risks. Turning to water management, as a net water positive mine with supply close to 6.8 billion liters to our local communities and reduced our freshwater usage by 3.2 billion liters. In the second half, we are increasing our dewatering capability in line with mine plan requirements. The capacity of the regional water infrastructure managed by Bloem Water is constrained and unfortunately unable to accommodate the additional water and provide it to communities. As a result, our freshwater consumption will increase in the second half of the year. We are collaborating with Bloem Water provincial and local government as well as other mining companies within the Northern Cape to improve the Vaal Gamagara water scheme infrastructure and its ability to receive the higher volumes of water. Ultimately, we want to ensure the beneficial use of this valuable resource for all our stakeholders, especially considering that the Northern Cape region is a water scarce region. Now turning on to our sustainability performance. In terms of environmental performance, I'm pleased to say that we've extended our track record of over 8 years with no environmental or no major environmental incidents. We are making progress on our decarbonization pathway. The first phase is our 68-megawatt solar PV plant at Sishen. Earlier this year, we were granted environmental authorization and major ethics began earlier this month. Given our increase in haulage dispenses and the use of Eskom power at our plants, our Scope 1 and 2 emissions are likely to increase before reducing when our solar PV is fully commissioned. This project is therefore key to our ability to reduce our carbon emissions which for the first half totaled 0.51 million tonnes of CO2 emissions. We have also launched 6 additional LNG ships which service the South Africa to Asia route, bringing the total to 8 out of the 10 that we told you about earlier this year. And clearly, we are looking forward to the last 2. These LNG ships are expect it to result in a 35% reduction in carbon emissions, and we remain absolutely excited about this work. On our social performance, Kumba's Health and Wellness strategy adopts a whole of society approach. Following extensive consultations during the first half of the year, we achieved a significant milestone by signing an MOU with the Northern Cape Department of Health. This means that we will align all our efforts with the district health system model, which represents the department's priorities and work to strengthen health care clinics and outreach teams. This agreement reflects our shared commitment to improving health outcomes and increasing access to health care services in our region of the Northern Cape. Secondly, our educational goal encompasses more than 80% of selected schools in our communities. Our aim is to have these schools within 20% of either the top-performing schools in the country or the most improved of all state schools nationally by 2030. In the first phase of this program, we have seen an average mathematics pass rate improve from 74% in 2021 to 81% in 2022. So we are seeing the results of this. The second phase launched earlier this year and it added 20 schools and 20 early childhood development centers. We are also investing in libraries to enhance educational resources and supporting matriculants through better schemes and many other training and development opportunities. Lastly, corporate governance is one of the key cornerstones of good business practice. To demonstrate how integral sustainability is to our business, our Board established the Safety, Health and Sustainable Development Committee, focusing on driving ESG, which represents 20% of their executive scorecards. Another area of focus is inclusivity and diversity. It is well demonstrated that a more inclusive and divers workforce ensures greater overall business performance. I'm pleased to report an increase from the 24% in 2022 to the current 31% in our female representation at senior management levels. We are making progress in driving this key space ensuring thriving communities includes facilitating value creation for all our stakeholders, which brings me to the next slide. I will touch on a few highlights which you see on the slide. Starting firstly with our contribution to government of ZAR 3.3 billion in income taxes and royalties. For our shareholders, including the Community Development Trust and our employees through Semela, our employee share option scheme, we returned ZAR 9.7 billion in valuable dividends. A highlight is also that we concluded our 3-year wage agreement. This better supports operational stability and business sustainability more holistically, and equally important, we spent ZAR 7.9 billion with BEE suppliers, and of this, our local host communities in the Northern Cape benefited from ZAR 2.8 billion of procurement spend thereby making a significant contribution to the economic transformation of the Northern Cape region, where 81% of our employees and contractors are from. They come from our local Northern Cape communities. Now I'll move on to the next slide, where I'll take you through our operational performance. Starting with our mining performance. We have seen a pleasing performance in the first half and we have built up healthy feedstock buffers at both mines. This was underpinned by the optimization of our mine plans and the focus on HME improvement, which will continue going forward. As a result of improved feedstock and operational stability, total production has increased by 6%. Next, along the value chain. We saw ore railed to the port decrease by 3%, and I will discuss the challenging logistics performance later. Given this, 92% of our finished feedstock or finished stockpiles is unfortunately sitting at the mines and only 8% of our stockpiles or material or final product stockpiles are sitting at the Saldanha port, and this is clearly not ideal. This affects our ability to load on to ships efficiently and negatively impacts our sales. You'll have seen that we have revised our sales guidance down by 1 million tonnes for the full year, to between 36 million to 38 million tonnes. Having a stable value chain and healthy stock buffers is absolutely critical to our ability to deliver to plan and create value for all our stakeholders. Now turning on more specifically to Sishen and Kolomela's performance. This year, our focus has been on stabilizing and improving capability at both our operations. Kolomela's mining performance has recovered well following the implementation of the rain readiness plans and a focus on rebuilding key mining buffers, which is what we told you we were going to focus earlier on in the year. We are stabilizing the operation through effective planning routines, which help the system in terms of managing variability. This, in addition to improving HME reliability has resulted in a more stable operation and has seen production increase by 22%. Sishen's performance continues to be stable, and we are starting to see capability step up, especially in the mining fleet, which is absolutely great. Our holistic HME improvement plan has fundamental pillars focusing on addressing both the reliability and the utilization of our fleet. We have made good traction on both fronts and have seen a progressive improvement in each quarter. In particular, we have seen this in the utilization of the fleet with focus areas being around whole cycle optimization, shift change efficiencies and also refueling optimization that we've seen across the Board. We are also seeing the benefit of improved ore stock availability and quality. This provides more flexibility and ensures that we can produce volumes more efficiently. This has seen Kumba's product quality improving to 63.3% relative to the 63.1% that we had from a quality perspective in the first quarter. We'll continue to focus on stability and driving cost efficiencies in the second half of the year. However, while all of this is key to value delivery, we clearly need rail to improve quite significantly. Now turning to logistics and the work that's being done to offset the real challenges that we have seen so far. In the first quarter, we saw a successful collaboration with Transnet on the temping maintenance as well as the Locust spraying program which yielded results. However, the second quarter was impacted by train derailments and numerous other breakdowns. While these are due to maintenance required, we also saw an emerging trend of cable theft. This is new to the iron ore line and a serious concern to both ourselves, other users of the line, as well as Transnet. Our security teams are working with Transnet and the rest of the all-users forum, on additional security to combat cable theft and secure our line. The interventions have led to the recovery of certain stolen copper cable and arrest of a number of suspects. The establishment of the National Logistics Crisis Committee is therefore encouraging. It brings together government, Transnet and business, and this follows from the good work that we saw from a Netcomm perspective on the energy front. In the near term, the NLCC is working on the critical operational challenges of the logistics system, as well as security solutions to combat the growing cable theft that we are seeing. In the medium to longer term, structural solutions are absolutely required and these will rely on government's real reform policies. We do believe that our logistics challenges can be solved through greater collaboration and for us, more fundamentally, significantly more public and private sector partnerships. Importantly, we are committed to working with government, Transnet and other industry peers to ensure the success and the sustainability of the logistics network. This is absolutely critical. It forms part of our value chain, so this is something that clearly we focus on significantly more as a business. Now moving on to the iron ore market. After a strong start to the year following China's economic reopening, the pace of recovery slowed down amid the property sector downturn. However, strong exports this year have more than offset the reduction in domestic demand as China steel production rose by 1.2% in the first 6 months of the year. Amid higher steel production and with supply chain stocks at near 5-year lows, the iron ore market remains tight. Supply from traditional basins has also remained stable with little expansion since 2018. Given these combined factors, the market has been supported at current levels. Lump premium have been under pressure this year due to thin steel mill margins, but recent [indiscernible] should fuel a recovery in the short term. Over the medium to long term, an increase in the proportion of direct-charge products and blast furnaces and rising steel industry consolidation in China will support mill margins leading to higher lump and FE premium. Our focus on premium products, therefore, continues to benefit us and also benefits the carbon emission reduction properties of our high-quality iron ore products promises to make Kumba's product an important feedstock in a decarbonized future. I will now hand over to Bothwell who will take you through our numbers.

Thank you, Mpumi, and good morning to everyone. Mpumi has provided an overview of the market and our operational performance over the past 6 months. Our financial results reflect this operating environment. Volatile markets and constrained rail logistics again impacted our top line. Iron ore markets, however, continue to reward quality. We continue to focus on cost discipline to remain competitive and to generate cash flows that allow us to maintain a strong flexible balance sheet. We are also disciplined in the way we allocate capital, ensuring that there's an appropriate balance between the liquidity on our balance sheet, investing to sustain our business and delivering excess returns to our shareholders. Now let's take a closer look at our financial performance for the first half. As MPumi alluded to, iron ore prices continued to be supported at current levels, although below the level we saw last year. As a result, our average realized FOB price declined to $106 per tonne. Operational gains, a continued focus on costs and the weakening rand have allowed us to contain C1 unit costs at $39 per tonne. I'll unpack costs later in the presentation. Our EBITDA margin continues to be strong at 52%. Our all-in breakeven price, which includes all costs, sustaining business capital, net of quality premiums was $65 per tonne for the period. Our headline earnings for the 6 months were ZAR 30.04 per share. On the back of the solid operational and financial performance and the flexibility that our balance sheet provides us the Board has declared an interim dividend of ZAR 22.60 per share. Now let me turn to the benefits that we get from our premium products. The quality of our ore body is a primary differentiator for us. It positions us well in the market with a focus on decarbonization and green steel plays an increasingly important role. 46% of our total sales went to markets outside of China. This is aligned to our medium- to long-term target between 45% and 55% for this market. This allows us to continue maximizing the premiums we earn from a diverse customer base. Earlier, the lump premium has come under pressure during the period. This, combined with mills in China utilizing more low quality, low-cost material to support their margins impacted our lump and FE premium. For the first half of the year, the iron ore FOB Index price averaged $102 per wet metric tonne on the back of [indiscernible] global steel demand. We achieved a combined lump and FE premium of $8 per tonne. The marketing premium of $1 per tonne that we earned during the period were more than offset by negative timing effects of $5 a tonne, resulting in a combined negative impact of $4 per tonne. In a declining price environment, we see a negative timing impact because we price on average 2 months after shipping to our customers. The opposite is true when prices rise, which results in this difference reversing over time. Despite the negative timing effect, we realized an FOB price of $106 per tonne, which is still ahead of our peers. On the next slide, I'll take a closer look at our EBITDA performance. The improvement in our C1 unit costs limited the impact of lower sales volumes on our profitability. The biggest impact on our EBITDA came from a lower average FOB price, which was partially offset by the weaker rand-dollar exchange rate. All in all, despite challenging logistics and a lower iron ore price environment, which impacted our top line, we achieved an EBITDA of just under ZAR 20 billion at a solid margin of 52%. Next, I'll take a closer look at our costs. Cost inflation across both our sites averaged between 6% and 7% for the first half. Now when I presented the 2022 full year results, I did express concern over Kolomela's unit costs, which had been impacted by the operational challenges that we experienced last year. I'm glad to say that the operational improvements that Mpumi spoke about, coupled with a renewed focus on efficiency and cost optimization have had a positive effect on Kolomela's unit cost position. The impact of cost inflation, higher maintenance costs as well as mining costs driven by increased waste movement continued to put pressure on costs. However, these cost pressures were more than offset by better dilution of costs through higher plant production and the savings that we achieved through efficiency and optimization measures, as a result, Kolomela's unit costs improved by 9% to average ZAR 447 per tonne for the half. Sishen's unit costs, on the other hand, increased by 13% as guided. This was driven by cost inflation of 7%, higher maintenance costs as well as increasing waste volumes, partially offset by the savings that we achieved. Sishen's plant production was restricted by rail availability resulting in a slightly negative impact on our unit costs. Looking ahead, in the second half of the year, Kolomela's production is expected to moderate in line with rail availability. This will reduce the cost dilutive effect that we saw in the first half. As a result, we are maintaining Kolomela's unit cost guidance at between $510 and $540 per tonne. Sishen's unit cost guidance is also unchanged between ZAR 540 and ZAR 570 per tonne. We expect production to remain stable in the second half, subject to logistics performance. Our C1 unit cost decreased to $39 per tonne, and this includes the benefit of a weaker rand-dollar exchange rate. Given this, we have reduced our full year guidance to $43 per tonne. The right-hand side of the slide that's in front of you zooms into our cost optimization program. This delivered savings of ZAR 900 million for the first half. This reflects the good work our teams are doing on the ground, especially around operational efficiency and continued optimization of our mine plan. We are already within reach of our full year savings target of ZAR 1 billion. Optimizing our cost to remain competitive, especially given our logistics reality remains a key imperative for our business. It is key to unlocking the full potential of our business, which is an integral pillar of our refreshed strategy, which Mpumi will talk to later. We continue to see significant cost optimization potential. And this comes from the following areas: further optimizing our mine plan to focus on value over volume, extracting further efficiencies and key value chain activities, optimizing the way we source our goods and services, how we manage outsourced services and how efficient we are in the consumption of our consumables. We will outline the value we seek to extract from these areas as we look ahead into the new year, and we will have further engagements later this year where we will delve deeper into this. Now if I turn to our capital expenditure. Our CapEx program reflects our continued commitment to strong capital discipline as we continue to invest in our business. Capital expenditure for the half year increased from ZAR 3.6 billion to ZAR 4.4 billion. This largely relates to expansion CapEx of ZAR 1.6 billion on our major projects. These include the ZAR 1 billion we spent for infrastructure construction, equipment and waste movement at our Kapstevel South project. This project is now 74% complete. We spent a further ZAR 381 million on our UHDMS project as we progress the detailed engineering design work. As we've said before, we'll provide an update on this later in the year. SIB spend was to support operational stability as well as environmental sustainability. Lastly, deferred stripping CapEx was lower, mainly driven by average strip ratios that were lower than life of mine averages at some sections of both mines. Given the uncertainty faced because of the logistics challenge and as we continue to optimize our capital spend, we have rephased capital at Kapstevel South and optimized our HME spend. This has resulted in a revision in our full year guidance down to between ZAR 9 billion and ZAR 10 billion. I will now take a closer look at our capital allocation. We continue to deliver sustainable returns supported by a balanced and disciplined capital allocation. Our dividend policy remains unchanged. Base dividends are targeted between 50% and 75% of our headline earnings. For the period under review, we generated cash of ZAR 13 billion after paying for sustaining capital. We then paid a final 2022 base dividend of ZAR 6.3 billion before allocating capital to our discretionary options. These included expansion capital of ZAR 1.6 billion and additional shareholder returns of ZAR 600 million. We ended the period with ZAR 13.8 billion in the bank. In addition to these cash resources, our liquidity position is bolstered by committed debt facilities and these total ZAR 16 billion. On the back of our strong closing liquidity position and after considering the capital requirements that we need through the cycle, we will be paying an interim dividend of ZAR 9.7 billion. This includes ZAR 2.4 billion paid to our minority shareholders. This equates to an interim dividend of ZAR 22.60 per share to Kumba shareholders, and it is at the top end of our range of 50% to 75%. So the payout is 75%. This gives us a dividend yield just for the 6 months of 5%, and you can annualize that for the rest of the year. We are committed to consistent delivery of shareholder value through the cycle. Over the past 4.5 years, our attributable free cash flow totaled ZAR 87 billion, and we distributed just under ZAR 90 billion in dividends to shareholders. This includes dividend paid to our staff and communities and reflects an average dividend payout ratio of 87%. As I look forward, we will remain focused on enhancing our margin to maintain our competitive position. We will maintain capital discipline and we'll continue to focus on delivering sustainable returns to all our stakeholders. Thank you. I will hand back to Mpumi.

Thank you, Bothwell. We announced earlier this year that we were embarking on the next phase of value delivery. Our Tswelelopele strategy has successfully created value over the last 5 years, and we are currently refreshing our strategy. Our refreshed strategy seeks to address 4 interconnected trends. The decarbonization of the steel industry, technology, the future of work and society's changing expectations of big business. By responding to these trends, we are also aware of the new business opportunities. As we take actions so that we can thrive in this changing environment, we are primarily focused on unlocking the full potential of our core, which relies on leadership and culture. These in turn drive operational excellence and also cost competitiveness. Concurrent to this, we are positioning ourselves for a sustainable future. I spoke earlier of the progress we are making on our own decarbonization journey. Key to this is the role that we play in the steel industry's decarbonization journey. At the same time, operating in the challenging socioeconomic circumstances of the Northern Cape, it becomes an increasing imperative for us to proactively initiate programs that are directly aligned to the UN SDGs. By recognizing the unique socioeconomic challenges faced in the region, we acknowledge the agency to foster sustainable development in areas such as poverty eradication, access to higher quality education, health care improvement and infrastructure development. Through a focused commitment to the SDGs, we can thrive for a positive change, empower local communities and contribute to the long-term well-being and prosperity of the Northern Cape region. Our continued dedication to these goals will pave the way for inclusive growth, sustainable solutions and a brighter future for our region, which we call home. As we'll see on the next slide, the prospects of the steel industry offer significant opportunities for further value delivery. The fundamentals for iron ore, which is a key ingredient in the steelmaking process remains strong. On the left, you can see that as GDP per capita grows, steel per capita also grow. Compared to developed countries such as the U.S., Japan and Singapore, China is still quite far behind. This means that there is plenty of room for steel to grow in China given the size of its population. The steel industry will increasingly pivot towards carbon light steelmaking resulting in an exponential growth in DRI production around the world. These plants will create further demand for high-quality iron ore products. Lastly, we have an important role to play in the future of steel. Our approach is as follows: to provide high-quality products in line with our customers' requirements. We are also participating in the green steel transition and collaborating with our customers to develop decarbonization technologies as well as new green business. Currently, 30% of our customers based on sales volumes are covered by partnership agreements. All in all, there is significant upside to iron ore demand in the medium to long term from a GDP population and green steel demand perspective. This drives home the fact that our focus on product quality and the future growth opportunities in the green steel market allows us to maximize premium value. Now turning to our guidance and Bothwell has covered certain elements of this. As reported on the 20th of July, we have maintained our production guidance. The improved stability of our operations is encouraging, and this has been evident at Sishen for some time. Kolomela is also improving, although overall, our production guidance is clearly subject to rail performance. To reflect the rail constraints experienced so far this year, we have revised our 2023 guidance on waste to between 195 million to 225 million tonnes and sales to between 36 million and 38 million tonnes, as I mentioned earlier. We have maintained our production and unit cost guidance at both mines and reduced our C1 cost guidance to $43 per tonne to reflect the weaker rand exchange rate. Given the uncertainty faced as a result of the logistics challenges, we have deferred some of our capital expenditure and lowered our full year guidance by ZAR 2 billion to between ZAR 9 billion to ZAR 10 billion, and Bothwell spoke a little bit about this earlier as well. As we navigated at the logistics challenges amid a volatile iron ore market, which adjusted -- sorry, we adjusted our plans and focused on operational execution and business sustainability. Before we go to Q&A, let me conclude with our value proposition. I would like to bring the presentation to the close with a slide that most of you are now familiar with, which is the summary of our investment case at Kumba. Kumba's value case is underpinned by high-quality assets that produce premium quality products with a very well-proven track record for delivering attractive returns and doing so on a sustainable basis, and this is in all senses of this word. This gives us a really firm foundation for the future. However, I think it's also important to say that the key lesson from the last few years is that we are living through a period of extraordinary volatility, uncertainty and multiple challenges. I believe that in times like this, we have to run faster and do more to stay ahead. Therefore, to pick up on one of the 3 key things that I mentioned at the onset of the presentation, we need to take decisive action to get ahead of the challenges that we face and continue to meet the needs of all our stakeholders. Our performance over the last 6 months has shown good progress in stabilizing operations while we have also pushed for efficiency and kept capital discipline, but we will need to push harder. My top priorities, therefore, include continuing to ensure that our operations are safe, stable and cost efficient to improve our margin or our position on the margin curve. Secondly, to work with Transnet and government to effectively address the logistics capacity constraint challenges and develop a sustainable solution. And as I said earlier, I fully support the establishment of the NLCC because it will help with this. Thirdly, it's to progress our decarbonization program, which is absolutely key. Ultimately, this is all underpinned by our refresh strategy, and we will take you through this in more detail at our Investor Day in September. And I have to say that we are looking forward to hosting you at Sishen. Of course, in order to achieve all of this, we rely on a team effort, and I wish to thank all of our Kumba employees and contractors for their dedication and hard work, our Board for their leadership and counsel, as well as all our valued partners and stakeholders for their continued support. I remain excited about what it is that we can achieve together. But certainly, as I said earlier, it's not easy. So we have to keep pushing harder. On that note, I will now hand over back to Mpumi, who will manage our question-and-answer session. Thanks, Penny.

Thank you, Mpumi. if you could now please start with questions in the room. I see that there is a few of you here. I think there's probably a lot more on the line, but I would like to thank you for coming through. And we you could start with -- I'm not sure if you have any questions. Brian?

Thanks very much. It's Brian Morgan, RMB Morgan Stanley. I'd just be interested to hear, we've obviously had announcements out of China in the last -- from polypropylene in the last couple of days, be interested to hear from [indiscernible] your views and what do you expect in the next sort of 6 to 12 months?

Thanks very much. Thanks for the question. Brian, I'm quite positive. We've seen iron ore prices hold up very nicely and about $115 neighborhood where we are today. That's despite the fact that the economic recovery initially after COVID reopening, it was quite strong, then it disappointed, despite the fact that the property market in China is not particularly strong. New starts are probably down about 30% year-on-year. So that's not good for the overall market. But despite all of that, we've seen the iron ore price hold up. Why is that? I think it's because steel demand in China has been okay, but then that's been supplemented by steel exports. Now imagine what might happen against that background if we do indeed see strong stimulus being announced about polypropylene. I think it's going to provide very, very nice support for iron ore prices. So some people tend to think that the bottom is going to fall out of the iron ore market. If the stimulus does not happen, I have a different view. I think if the stimulus happens as expected, it is going to provide nice support to the iron ore price. So our view on the second half is actually quite positive. I would certainly expect that we're going to see iron ore prices above $100 per tonne well into 2024. So overall, good. Quickly on the lump premium because I'm sure you're going to have a question on there, too. There, perhaps not quite so positive. It's been under a little bit of pressure. Why is that? Well, despite everything I'm saying about the iron ore market, the steel mills are not making very, very strong margins. And against that background, typically, there's not a tendency to be using high-value products and lump is one of those. So thus put a bit of pressure on the lump premium. And secondly, what we've been seeing is that the lump fine ratio from BHP and also Rio has been going up, because of the new mine, South Flank and Gamagara for Rio. So it's a bit more lump in the market when the demand is not as strong as it used to be. And that might be a shorter-term effect. I mean, we are now seeing Tangshan restrictions that we spoke about, that could provide a bit of a boost for the lump premium. Longer term, we are very bullish on lump given that we see that continuing trend to be using more direct charge material. But perhaps in the second half of the year, we're not quite going to see that just yet. So a little bit more pressure on the land premium for the second half, I would expect.

And as follow-up, there's quite a lot of pellet feed and pellet capacity coming into the market. Do you expect that to earn prices in the medium term?

Yes, maybe in the medium term, but then again, that trend that Mpumi also highlighted of more direct charge ore being used in China year after year, that trend should continue. I mean, we've seen the percentage of direct charge will pretty much go up by 1 percentage point every single year. And still, China is far off from where Japan, Korea and Europe are at the moment. So that trend should continue quite a while longer. So yes, maybe a little bit of pressure, but overall, that trend is positive.

Good morning, Nkateko Mathonsi from Investec Bank. My first question is on transmit. And Mpumi, if you can comment on the progress of the engineering study that was meant to give you a bit of a baseline in terms of the maintenance on the rail line? And then also if you can comment on the security issues because for the longest of time, the iron ore line was kind of protected and what has catalyzed the change, as why security issues are concerned? My second question is for Bothwell. If you can give us a bit of color on the noncritical CapEx that was -- that has been different?

Thanks, Nkateko. I hope you can see us, I'm not sure if we should stand up, okay. So just on the Transnet piece itself, I think I said more holistically that clearly Transnet is still challenged more broadly. And that's the reason why we have to continue working with them. On the independent technical assessment, the physical work has not yet started, but we have aligned with Transnet. We've closed off on the tender process. We went out on tender, got tenders back and the adjudication for that took place between Transnet and our teams. And the criticality of that is that we didn't want Transnet to see this as something that sits outside of their space. We wanted it to be done within the Transnet space. And for me, even though it's taken long, what's been encouraging is that the adjudication team was made up of our teams from an iron ore user side, and Transnet leadership in charge of our line as well. So the managing executives of the various parts of the line, including both rail and the port. So in NS, the work is going to start now. But the ongoing work around us looking at the various challenges on the technical side have clearly continued. On the security front, you are absolutely correct. So even though others have seen this emerging trend, and it's not just linked to Transnet, but it's linked to the broader country as a whole, we have never seen these incidents taking place on our line. And I guess the remoteness of our 869-kilometer line has always been helpful. We started to see these incidents, and they were all concentrated within, so call it a 50-kilometer radius. And what immediately happened, and this was done within a short space of time, is that our security teams worked with Transnet to strengthen the security of that space. And it wasn't just around people working on the ground, but it was through the usage of drones similar to what we see on other channels and helicopter. And clearly, what that yielded is that we started to see some arrests taking place. But we are mindful of the fact that even though the short-term intervention has taken place, there is a broader piece of work that we are working on in the more medium term, and that's around partnering with SEPs, particularly the public order policing space of the Northern Cape and also the partnerships with [DPIC] and then more broadly, looking at the third work stream that [indiscernible] is working on with government, which is now on the broader crime and corruption space because the key thing is that when people get arrested they have to stay in jail, they shouldn't be able to come out with a minor fine. So there is also another space that we are working on more broadly within the joint initiative or from a task force perspective with Transnet. So what do we think happened? We think that the remoteness of our line was actually quite helpful for a very long time, but we've certainly had spillovers which essentially are things that have been taking place in other areas. But as a norm, we are working with Transnet to combat that.

Just on the CapEx question, and thanks for that. And I know when we defer capital, a lot of people start questioning whether we are doing what we need to do to sustain the operations. So I just need to be very clear. Our focus in terms of where we invest is still focused on making sure that we've got reliable equipment, making sure that we protect the integrity of our plant and infrastructure, and then making sure that we protect our safety and environmental imperative. So we do not compromise on that. And clearly, our key expansion projects are also quite critical to us. So we do not compromise on that. The reduction in CapEx guidance that you've seen for the full year is largely driven by how we are phasing the capital. So the first part is at Kapstevel South. Again, given the logistics performance that we are seeing at Kolomela, it's not necessary for us to expose the ore at the rate that we had originally planned. So what we've done is we've slowed down the stripping CapEx there. And we've been able to rephase that and that has given us a significant saving in this year. We are still on track to get to first ore in the first half of next year. So it doesn't compromise the project. On the other hand, again, driven by our logistics reality, we are also able to rephase our HME spend in terms of the replacement cycle. So that is also informed some of the deferrals that we have done. And then there are a few other SIB projects, which we term noncritical that we've been able to defer as well.

Thank you very much Bothwell and Mpumi. Are there any other questions in the room?

It's Tim Clark from SBG Securities. Just in terms of the sort of refreshed strategy, I suppose the thing that surprised me was less focused than I expected on extending lives and sort of creating a much longer horizon for production from Kumba. And perhaps that's just work that's going on in the background. So I wonder if you could just give us a little bit more color without going into specifics on projects, it's just where the work is going to extend some of the 17 and 12 year lives and even that 17 is dependent on UHDMS and the investment decision around that. So even that 17 looks like it's got a little bit of variability in it?

I may not have spoken about it, but that certainly remains an area of focus for us. So if you look at the refreshed strategy and maybe let me zoom into the criticality of the first pillar as we look at the life extension opportunities that you are referring to. The fundamental element around the first pillar is that clearly, we are currently running at just north of 80% of our contractual capacity from a Transnet perspective. So when we talk about unlocking the full potential of the ore, it's around us doing that within that low performance area because clearly, an improvement from a Transnet perspective can only then get us to deliver more value from a business perspective. So we believe that we have to focus on the second pillar. But it doesn't mean to say that we compromise on the life extension elements that you are talking about. So what we've previously spoken about around the full potential that we see from an Northern Cape perspective, the other resources that we believe lie around Kolomela, especially the Kolomela area, the Heuningkranz, the Ploegfonteins, et cetera, those are still there, and we will continue essentially exploring that in the remainder of the Northern Cape. But we are mindful of the fact that we need to unlock the full potential of our ore taking into consideration what we are seeing from a logistics front perspective. So it's not that we are not focusing on it, but we do fundamentally believe that we've got to continue focusing on ensuring that we drive for the improved competitiveness of our business even with the challenges that we essentially sit with right now. The other work continues. We may not have covered it, but it certainly continues there.

I guess from a market point of view, we always live with the fear that the economics of some of these things have deteriorated and although we know the names of them and we know about them or where they are that those economic concerns are becoming more pervasive?

Yes. No, I think it's a good comment. So -- and Glen is sitting in front of me, but I'm not going to ask him to comment. So the fundamental belief is that the aspect of understanding what is in place from a resource perspective is clearly something that we need to get right. The critical question becomes more around the ability to mine the resource in an economic manner. And that work will always continue in terms of us essentially evaluating the optionality that we have in the business. So we may not have mentioned the names, but please believe me, it's something that we certainly think about.

Any other questions in the room? Otherwise, we'll then go.

[indiscernible] Capital. Just following on Tim's question. Your 17-year life, is that dependent on the iron ore price? For example, if you have $120, $150 a tonne, would that 17 years be extended with your other projects that you have? Or is it irrelevant what the price is? You have 17 years life, and that is it?

Yes. So I'll answer that question by just taking a step back. So the first thing is to establish what's on the ground from a resource perspective. And then work continues and the exploration work from a greenfield perspective essentially continues albeit taking into context where we find ourselves as a business. The next thing is then about the aspect on saying how best could be mind that in an economic manner and there, we clearly consider how we run our business, the fundamental cost drivers that we have in the business and also the opportunities that we have from a technology perspective because if you think about it, the fundamentals around the UHDMS and the life extension opportunity that it brings are fundamentally premised on technology and the ability to mine even, call it, the low-grade stockpiles that we couldn't mine before. And then clearly, as we then look at the fundamental economics, we also can see the pricing environment as well. But we take a broader piece of, I guess, we consider far much broader aspects as we look at life and look at what it is that we can actually bring forward into our business plans. But behind all of that, that typically be other opportunities that we'll continue working on that can extend life. And that work continues, as always in the business planning cycle. And we call that a fundamental space that we call our RDP or the resource development plan opportunities where we now look at other things that can be considered. You Ploegfonteins, your Heuningkranzs around the greenfield space, but also other technologies that can be conceived like concentrators. And as we do that work, that work clearly, if it proves to be economic would come back and bolster the life-of-mine aspect. So that work continues in the background on an ongoing basis.

Great. Thank you. Okay. We'll then now go to the line, if you could have a look at any questions on Chorus Call.

We currently have a question from Shilan Modi from HSBC.

Congrats on a decent set of results in a difficult period. Maybe a question on the more controversial side. If Transnet's rail performance does not improve, at what stage would you look at restructuring Kumba?

Yes, thanks. Thanks, Shilan. I don't think it's a controversial question. It's something that we ask ourselves as well. So I think fundamentally, the first thing that I need to see is that in everything that we do, we always rebalance back from a mine plan perspective to something that looks at the full value chain, including Transnet. So if you look at what we are doing right now around the reduction in the Kolomela waste, it's driven by that. That's part of the ongoing cycle of work that we look at, particularly around how we structured ourselves as a business because it doesn't make sense, for example, to strip significantly more waste and end up with stripped reserves that don't make sense from a business perspective. So that is something that we consider on an ongoing perspective, Shilan, and the work that we continuously do, not just around the cost reduction opportunities and Bothwell showed you the cost improvements that we've been able to see right now, which is the [indiscernible] 900-odd million against the target that we started with of ZAR 1 billion. And clearly, we'll outperform that for the remainder of the year because we do understand that we still are running with the Transnet challenges. So that's something that we consider on an ongoing basis because we ultimately align our business to the fundamentals of rail. Clearly, if things continue getting less from a transit perspective and as we do our ongoing work around the mine plan, and this is fundamentally premised on balancing the value chain and ensuring that we remain competitive, that's something that will continue to be put under pressure, but that's ongoing work that we essentially look at. So we do, I guess, ongoing restructuring. Sometimes you don't see it, but it's the fundamental basis of what essentially yields the cost improvements that you see.

I think I was being a bit more specific, like a large scale restructuring changing the design capacity of the mines. If you shrink the mine, you obviously get a life of mine extension, stuff like that, that's kind of what I was trying to get at. But just another question. Given the high levels of stockpiles that you have at the mines, are you able to tweak what you sell just based on the pricing you receive in the market? And where I'm going with this is if lump premier come down quite substantially like they have, are you able to hold back on lump and then just put more fines into the market? Or is that too difficult to do?

Timo is going to comment. I think as Timo gets the mic, what I will comment on is the fact that clearly, sitting with the low levels of stock at the port is a challenge. But what I'm pleased with is the fact that from an operations perspective, our teams have mastered the ability to blend at the mines, to make sure that we can continue doing more direct ship loading. If it went for that, clearly we would be in a far much more worth of space, but ultimately, we seek to deliver to customers. Timo on the flexibility element?

Yes. Can we tweak? Yes, we can, and we do. I mean, if you just look at the qualities that we've delivered so far this year, they've actually been up in Q2 versus Q1 because of that continued focus on quality, how do you get the best value through the railway line, given the constraints that we face there. So yes, we do that and frankly, expect us to further focus on quality. 63.3%, so far, average this year, should be improving in the second half of the year with Kolomela focusing on a better quality again. So that's the first comment. And second comment, can you tweak and flex between lump and fines? To an extent you can, but it is limited because the mines produced in the 67:33 ratio. So you can't be stockpiling too much lump while prioritizing fines. At some point, you're going to run out of bed space. Would you want to do that longer term? Probably not because the lump premium may be under a little bit of pressure, but you're still earning a very nice lump premium, right? It's nothing at all. So before you would give up on that, quite a lot would need to happen. So a little bit of flex is always possible. But what we do on an ongoing basis is optimize the way we plan between Kolomela and Sishen to load what is needed on the next vessel that's arriving in Saldanha. And as Mpumi said, we've actually become quite good at that, not relying on blending in the port, but being able to actually flex the ratio of trends from the two mines to make sure that we have exactly what's needed on the next vessel.

Thanks, Timo. If there no more questions on Chorus Call, then we'll turn to the webcast questions. The first question is from [indiscernible]. The first question is about the stocks. How much stocks do you have at port? Which I can answer 7.9 million tonnes. It's on our presentation. Sorry, not a port, but it's -- sorry, I wish it was the other way around. Yes, 8% at ports of 7.9 million tonnes. So you can work that out 600,000 tonnes. A total of 7.9 million tonnes. Second question from [indiscernible] is what exactly is being reviewed on the UHDMS project? And the clear question is how much further can you push cost optimization given that you're almost at your full year 2023 targets?

So what are we reviewing on the UHDMS? So the UHDMS or the ultra-high dense medium separation project clearly is fantastic from a technology perspective, but what we saw is that when we started executing, we clearly saw more complexity from an execution perspective. So fundamentally, this is essentially deconstructing existing sections of the plant, firstly, which brings in, I guess, complexity because we call it a red field's project. So you remove what's there, and then you build within the same space and everything has got to align as you build and you do it in modules. So when we started with a piece of work, we realized that our engineering design was not as advanced as it needed to be at. So we suspended the construction and first and foremost, just detailed from an engineering perspective. And that is the right thing to do because if you don't have that right, you run the risk from a safety of people perspective as you do the work. And then secondly, you run the risk of significantly increasing both the duration time line and certain costs. So we paused to detail the engineering design and the bulk of that has been done. And then clearly, what we are doing right now is looking at the implications of that. But fundamentally, the technology is still sound. It's being tested not just at a lab-scale level, it's been tested in operations, albeit at a smaller scale. And we are looking at coming back, as we said before the end of the year with an indication of what essentially that will then fundamentally look like, covering all the various aspects of looking at the capital project. And then from a cost optimization perspective, the answer is yes. And I guess it links up to the question that Shilan asked before. So as we look at ourselves from a competitiveness perspective, we are considering the constrained logistics environment. And considering the fact that we can't continue running the business at current costs, and I think maybe Shilan that's what you are trying to essentially refer to. So yes, we believe that there's more that we can do in the space. And that's a space that we'll continue doing. Our mines continue reminding us that when we set them a target at the beginning of the year, they would already have built some of the improvements into the business plan, but we do certainly believe that there's more that can be done. And clearly, we'll continue doing this work because structurally to Shilan's point, we can't forget about the environment that we find ourselves in. And that's why I ended off the presentation by saying we've got to push harder, and that's exactly what we will essentially keep doing.

Thank you, Mpumi. Next question is from Bruce Williamson from Integral Asset Management. He's asking, probably would be more for Timo in terms of the markets again. His question is around what seems to be a weaker-than-expected sales to the rest of Asia? He wanted to know what insights can you provide in terms of the important countries that we sell to and the outlook for the second half of the year? And do we expect EU to at least not worsen from where it currently has performed? .

Lots of good questions. So you will have see our sales mix a little bit different from what we've seen over the past couple of years. The ratio between China and ex China, 46% outside of China, 54% through China, where before we've seen sales outside of China exceed 50%. I do expect ex China to pick up a little bit because that mix was dictated by demand but also by supply. We spoke about the fact that earlier in the year, Kolomela produced a slightly lower quality product. That's a product that was not in demand outside of China. So we sent that to China, and that skewed our ratio a little bit more towards China than otherwise would have been the case. That product is no longer part of our portfolio. So we should see that normalize. So it's going to be driven much more by demand going forward, not so much by supply. So I would expect us to move back towards the 50-50 ratio China versus ex China.

Thanks, Timo. And then just one last question from Bruce. It is essentially in terms of the cost of a full train of fines. This is a cost of a full train of lumpy or if there's a difference in the cost?

No. We move volumes and there's a cost per tonne associated with, I guess, the tonne irrespective of what that tonne is made up of.

I'll just check one more time to see if there are other questions on Chorus Call since. There is Ian Rossouw mentioned here, but not sure if he is on the line still.

We do have a question from Ian Rossouw.

I just wanted to follow up on the inventory situation. Bothwell. you sort of previously talked about building inventory ahead of the tie-in activities for the UHDMS. Could you maybe just sort of mention what are those levels? Obviously, I suspect the ZAR 1 billion sort of inventory figures have gone up because of cost inflation. But if you take away cost inflation, what sort of sensible inventory levels, which you think about from a product and work-in-progress perspective maybe over the next few years just in relation to UHDMS and sort of what should normal levels be after that?

Yes. No. Thanks, Ian. So if you look at what we -- what our plans were at the beginning of the year and when we gave guidance, we did -- there was a difference between our sales guidance and our production guidance. And we did expect to see a slight drawdown in terms of our inventory levels. That hasn't happened clearly because of the challenges we've had on the rail. So you've seen the inventory levels have stayed flat if you look at where we were at the beginning of the year. We have again moderated our sales guidance for the rest of the year. So that position is unlikely to change. You are right, Ian, in that as we lead up to the UHDMS project and that tie-in, we do need to have elevated levels of stock, and that will allow us to continue selling product while the plant is on -- is being tied in from a UHDMS perspective. So that is still in -- and as we come back and talk about the timing of the UHDMS, that will become clear in terms of what stock levels we need to carry on holding. If I think about beyond UHDMS and what are the optimal levels of stock, we've always spoken about that, it should at least have about 1.5 million tonnes out of the port and the mines should have about between 3 million and 4 million tonnes is about the levels that we want. So you're looking at about 4.5 million, 5 million tonnes is around about the optimal levels that we would like to run with.

Those levels of finished stock, presumably. So what about work-in-progress symmetries? I mean, that's obviously gone up quite a bit over the last couple of years? How should we think about that?

Yes. So the way we think about -- can you hear me now, Ian?

Yes, that's better.

Yes, so our WIP stockpiles are about the buffers that we need in the value chain. So for example, last year, when we had the operational issues at Kolomela, we talked about having depleted those buffer stockpiles just ahead of the plant, and we needed to rebuild those. And that's what we've been doing through the first half of this year. And as Timo alluded to, as we were building up those buffer stockpiles, that's why we also had the quality issues, we had to sell some lower quality product as we built up those buffer stockpiles. We have now done that at Kolomela, and we shouldn't have to sell low spec product going forward. So that contributed to some of the buildup in terms of WIP stockpiles that you have seen. The other thing that is contributing to that as well is that, again, as we look up to the UHDMS project, we are now recognizing, what we call, C-grade stockpiles which are slightly lower grade stockpiles, which we previously allocated to waste with the UHDMS project. That means we can now process those and we are now ascribing a value to those, and that also contributes to the increase in the WIP stockpiles that you are seeing. But again, all those stockpiles will be turned into product and will be turned into value. And that's something we constantly look at.

And then just obviously, there's an element of noncurrent and current within that. I see the current inventories went up quite meaningfully. Is that the implication that you still expect to treat if a lot of that is C grade within that increase? Do you still expect to treat that within one year? Is that the typical time lines for the classification?

Yes, exactly. So what we classify as current will be treated within the next 12 months. And what's noncurrent is beyond that. Now typically, you will see because the UHDMS is not yet up and running, a lot of that C-grade stockpiles is in the noncurrent area. And it just happens because it's C-grade, it's of a lower value than the higher grade which sits in the current, and that's why you've got more from a value perspective that sits in the current.

Okay. All right. That's great.

Thanks, Bothwell, thanks, Ian. As there are no more questions, I'll now conclude. Thank you very much for joining us today. For us, it's always great to see you, and we look forward to joining you with a little bit of catch-up afterwards. We certainly have some refreshments. And with that, I'd like to just say thanks, go well, and we enjoy your continued interest in Kumba. Thanks.