South African iron-ore miner Kumba Iron Ore (KIO) is in strategic discussions with Transnet, the state-owned rail-transport enterprise Transnet on the possible creation of a public private partnership (PPP).
KIO CEO Chris Griffith told Mining Weekly Online that "for the first time, the PPP door seems to be slightly open to us".
Until recently, the prospect of a PPP was not an option available to the company, but towards the end of 2008, KIO started having strategic rail discussions with Transnet, Griffith discloses.
"We don't know what a potential PPP could look like and neither do Transnet. So they are saying why don't we start talking to each other about what the potential of that could look like. It's quite positive and we are looking to progressing that in this year", Griffith says.
The question of a possible rail PPP arose after KIO CFO Vincent Uren's disclosure during Monday's presentation of excellent KIO results that the company was "looking with some excitement at a ports and shipping strategy".
Uren reports that selling and distribution costs increased 52% year-on-year in 2008 owing to the increase in the rail and port tariffs and a higher load factor, as Transnet ramped up additional volumes from KIO's jig plant.
Uren says that, when the contract for the 9-million tons a year from the proposed Sishen South expansion project was signed, KIO and Transnet simultaneously amended certain clauses in the existing contract and settled all outstanding claims, including the additional capital required to fund the full scope of the iron-ore export channel to 47-million tons.
KIO agreed to make a cash payment of R200-million, which is included in the 2008 costs.
In addition, Transnet has also agreed to make available up to 12-million tons of additional cumulative capacity in the period from 2009 to 2011.
As part of the settlement, KIO has agreed to an additional take-or-pay supertariff of R50/t in 2008 terms on the first 10-million tons of the12-million tons additional capacity.
"This is very positive for us and creates an opportunity to increase export sales," says Uren.
KIO, which has competed in the seaborne iron-ore market since the opening of the Sishen–Saldanha export channel in the mid-1970s, is currently the world's fourth-largest supplier of iron-ore.
The deepwater Saldanha Bay export port that KIO uses services markets in both the Atlantic and Pacific basins and KIO has also invested in the deepwater port of Qindao in China over a number of years.
Griffith reports that KIO made R327-million of profit on shipping this year and that the company's proposed new shipping strategy is designed to increase value along the value chain, says Griffith.
"There are a number of areas in the value chain that we are looking to participate in. The board has had a first pass at our port and shipping strategy to see how much more value we can create.
"By participating more in the amount of cost, insurance and freight (CIF) sales that we have, we believe that we can participate more in the shipping upside, although shipping itself has a number of potential downsides that have to be managed very carefully," Griffith says.
KIO, he says, is looking to leverage off its relationship with the Qindao port authority.
Uren says that the 135% increase in KIO's shipping operations is due to a 12% increase in the average freight rates to $36,67/t in 2008 and a 2,1-million ton increase in CIF volumes.
The company, he says, took a decision to waive its shipping fee for a few customers on some voyages in the fourth quarter of 2008 and for six voyages in order to move more iron-ore into China, as European and Japanese markets collapsed.
The effect of this on its financial statements was to recognise a loss of R305-million for these voyages.
But overall, the strategy was "very beneficial", Uren says, as the company managed a R327-million 2008 shipping profit.
KIO operations generated R14,5-billion in cash flow in 2008 and Griffith is looking to an improved performance in 2009.
Bucking the cutback trend, KIO is planning a 10% increase in production in 2009, "market permitting", with China taking more than its contractual volumes.
Source: Mining Weekly Online
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