Chris Griffith, Chief Executive Officer of Kumba Iron Ore

Chris Griffith clarifies the deal with ArcelorMittal and gives an outlook for the second half of the year.

BARRY SERGEANT: I'm in conversation with Chris Griffith, Chief Executive Officer of Kumba Iron Ore. Chris, your interim results are out today and there's hardly any line which doesn't stand out, they're pretty much, I think not to be too enthusiastic, they're fantastic results. Looking at the top line, your revenue was up 49%, that's year on year. What were the main factors behind that, apart from the increase in the dollar iron ore price?

CHRIS GRIFFITH: That is true, it has been the dollar iron ore price that has really come to the party. In addition to that, we've managed to increase our sales, so we've increased production. So, we've managed to increase sales and because of the increased sales and higher price, we've managed to keep the costs under control and really, those were the big ticket items that have resulted in a also new headline earnings record. So we're now R3 billion higher than any earnings for a half-year that we've achieved to date.

BARRY SERGEANT: Yes Chris, you're well aware that Kumba Iron Ore by market value, market capitalisation, is one of the Top 25 mining companies in the world and I think these kind of figures underline why the company is sitting in that kind of place in the global rankings at this point in time. Just to go back on your Sishen Mine production, last year just short of 40 million tons but there was a very big increase first to second half of the year from about 18 million tons to 21.4 million tons in the second half. First half of this year, you've managed just a little bit lower at 21.1 million tones from Sishen. What is a big increase attributable to? Is that...it's a new jig plant, apart from Kumba responding overall to the big increase in global demand?

CHRIS GRIFFITH: That is correct, it is the continued ramp-up of our jig plant. A few years ago, a decision was made to tackle lower grade ore and beneficiate that ore with Sishen. That jig plant has now been ramping-up over the last few years and each quarter we hit new records. Last year in the two half years we hit 4.4 and 6 million tons. This half-year we've got 6.4 million tons, I think it's just a continued increase in production from the mine, a real good focus on both the DMS and jig plants. As a result of that we've seen continued increase in production.

BARRY SERGEANT: Kolomela, which used to be known as Sishen South, that is your new mine. That is going to be going into production around about the first half of 2012. What so far is the updated budget on Kolomela? How much are you spending there to bring it into production?

CHRIS GRIFFITH: The updated budget is the budget that we've always had in place and I think we're very pleased that we haven't moved that number at all. The R8.5 billion is the number that we said would cost us to build that mine, that number is still on the table and in our forecast today we mentioned that we're still on track, on budget and on schedule to deliver this production of 9 million tons in the first half of 2012, full production 2013.

BARRY SERGEANT: Full production is going to be how many tons a year?

CHRIS GRIFFITH: 9 million tones a year.

BARRY SERGEANT: Chris to go back to the first half of this year, unit cost reduced, at Sishen Mine to R102.71, that's compared to the first half of last year. That's also a notable achievement and would have been one of the factors leading into the strong increase in operating profits. That R102.71, I'm assuming that is Rand per ton?

CHRIS GRIFFITH: That is Rand per ton.

BARRY SERGEANT: How many dollars is that, roughly per ton?

CHRIS GRIFFITH: $13.66

BARRY SERGEANT: $13.66, the reason I ask that, apart from the fact that it's a fantastically, let's say, low price. I mean, a couple of months ago, the global iron ore price was running above $180/ton. Okay it's come back a lot, it's now below $120 for the meantime but when you producing round about $13/ton iron ore, it gives some indication of this amazing franchise that you've got at Sishen. What is that a combination of? Is it the grade? Is it just the kind of luck that you are sitting on a deposit of that kind of quality? Is it the ease of mining? What are the factors that go into, what's got to be one of the lowest costs of production in the world in iron ore?

CHRIS GRIFFITH: Sishen Mine is in the first quarter of cost production and it comes from a number of factors. It comes from the initial mine, the higher-grade ore, it requires fairly limited up-gradings. So it does go through a DMS plant, dense media separation plant. It's really the scale of the mine, so this is a huge mine, a mine

14 kilometers long, a few kilometers wide, so it's a big mine. All of the operations are concentrated and you are able to get the benefit of scale. So, scale plays a part, the fact that the ore quality is good, we do have a high lump ratio which means because you get a high price lump, we've got a 60 % / 40% find split, means that for every ton that we mine, we get a higher price for at least 60% of material. These are the factors that really contribute, fairly good grades, good quality material, high lump find ratio and a lot of scale. I think those are the things that contribute to make Sishen Mine one of the lowest cost producers in the world.

BARRY SERGEANT: Is Kolomela going to be sitting pretty much within those kind of parameters?

CHRIS GRIFFITH: Kolomela doesn't have quite the same grade. Kolomela has the same physical characteristics that's also hard, also has a high lump find ratio. Doesn't have the same grade but because the Kolomela ore body is slightly different, means that we can actually mine a direct shipping ore, a DSO ore, very similar to what the Australians mine.

BARRY SERGEANT: Right.

CHRIS GRIFFITH: Because of that, it doesn't get to quite the same grade. So instead of a 66% lump quality, we'll be delivering a 64% lump quality but it doesn't require up grading, it doesn't require beneficiation. So it will mean that really you can mine it and then just crush and screen it, without putting it through another plant. That means that the plant costs are much lower and much simpler to get the ore from the mine into the wagons on the way down to the coast.

BARRY SERGEANT: Right. Chris, just on a point of clarification, one of the better known stories of the year so far is, let's say, dispute between Kumba Iron Ore and ArcelorMittal South Africa. There was early this morning, an interim pricing announcement that came out of the companies, which is going to extend up to the end of July next year. So, there is for the meantime, certainty on that. The supplier price that has been agreed from Kumba to Saldanah, that is the ArcelorMittal plant down there, is $50/ton and inland, that's going to be to what was known as the Vaal Triangle area, that's going to be around about $70/ton. Compared to your cost of production of around about $13, what does that $50 refer to? Does that include the cost of freight, the rail? Is it the net or the gross price?

CHRIS GRIFFITH: The cost of $50/ton is a price free on rail. So the rail cost down to Saldanha, we then add those on and charge those back to ArcelorMittal. The price of $70/ton to the inland plant, ArcelorMittal are responsible for the rail tariff inland, so it's just a straight free on rail number for us and they arrange the freight.

BARRY SERGEANT: Okay. So the $50 and $70 that have been quoted there are similar to the kind of, if we quote the spot global price, that's a similar type of quote, it's comparable.

CHRIS GRIFFITH: Spot price normally includes freight and so if you want to get a comparative number, you'd have to get a free onboard number. So to get from a spot number to free onboard, you'd take off the freight.

BARRY SERGEANT: Okay.

CHRIS GRIFFITH: So currently if the spot price is, let's say $120/ton, you would increase that $120, to the...because it's normally not the same quality, so you'll increase that price for quality and then remove the freight cost off that.

BARRY SERGEANT: Okay. Chris, to go to a tricky subject - forecasting.  That's traditionally a mug's game but everybody wants to have a stab at it. You have made the point very strongly that global crude steel production at the moment is above

pre-2008 crisis levels. Now, the first half of this year, in fact, up to now, a little more than half the year, we've seen the global spot iron ore price develop from about $100/ton to, as mentioned earlier, above $180. It's come back to just below $120/ton. Where would you anticipate that going for, let's say, short term and the more medium term?

CHRIS GRIFFITH: Barry, what we did today when we gave an outlook for the second half, what we said is that we anticipate that there will be a moderate and short term slow down in the markets. So, particularly in China, we are seeing that there's government intervention to slow down the economy. Particularly so in the housing market, so we're seeing government intervention on the fiscal policy. It is slowing steel production, they are taking out some of the small steel producers. China has taken the tax rebates off the export sales of steel. So what they are doing is they are actually forcing the steel industry in China to slow down and we have seen some of that and because we've seen that plus the European markets, we are seeing a cooling  off of the European markets, we've seen an end to re-stocking of raw materials in Europe. Because of that we anticipate a shorter term, moderate slow down in the production of steel and therefore the import of raw materials, which affects iron ore. So, I think what we are likely to see is a price that softens a little more. It has softened quite a lot and we're starting to see a stabalising of the price. I think it will get a little weaker in the second half and I think it will pick up towards the end of the year but I'm cautioning the market not to expect the same kind of performance in the second half. I think that we won't get quite as much sales, we've really had a bumper sales quarter, we've been able to drawn down on our stocks at the port. I don't think that we're going to see the same level of sales, unless Transnet really have a fantastic year because we have got extra stock at the mine. So if they have a great railing, then we've got enough stock to send it down to the coast. Then at the same time, I'm not expecting the price for the second half to be as good as the second quarter. Remember, the first quarter price still belonged to the iron ore benchmark of the previous year, which is at a lower price.

BARRY SERGEANT: Yes.

CHRIS GRIFFITH: I think that we won't see the same kind of prices. Although this quarterly pricing mechanism would indicate to an increasing price going forward. Certainly for the coming quarter and because of that the quarterly pricing mechanisms are not yet entrenched and because the spot price has come down, I don't think we're going to see quite the same price going forward.

BARRY SERGEANT: All right good, well probably the one comment there is from an investor's point of view. Given the kind of costing which you have at Sishen, you're still going to be earning fantastic margins going forward and it's a very comforting thing to know at these times when it comes to stocks and shares. Chris Griffith, Chief Executive of Kumba Iron Ore thanks so much and we'll speak to you after the next half.

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