If you are too young to figure out the Disney reference here, you need to do some Googling. “The Lion King” was around long before people paid ridiculous prices for shares in electric car manufacturers that are barely profitable.

Dinosaur industry

Unlike Tesla and other new-age companies, Kumba Iron Ore is an absolute dinosaur of a company. When Pumba was still a young warthog, mining was the rock upon which the South African economy was built. World-famous companies like Anglo American called South Africa home.

Fashions change and so do company valuations, with mining suffering from an incredible slump in valuations after the 2008 / 2009 Global Financial Crisis. It took forever for mining stocks to claw back share price drops, sending the reputations of several asset managers down the mineshaft.

The South African mining industry suffered an irreparable blow to its global image with the shootings at Marikana in 2012 amid a climate of labour unrest that lasted several years. Only once the mining unions had nearly run the industry into the ground did things start to subside.

The relative contribution of mining to South Africa’s economy has also changed significantly. In 2007, Mining’s GDP contribution was approximately half that of the contribution from Finance and Business Services. 10 years later, this had dropped to just a third, as the shape of the South African economy shifted away from mining.

Not extinct yet

The first half of 2020 has been all about the world’s tech giants and their meteoric rise in values. In the past week though, concerns over US – China relations put a firm end to the USD’s rally and are making investors nervous.

Like a child running back to his or her mommy, investors run back to gold when things get scary. Other natural resources often benefit too. The dinosaurs are suddenly in fashion again.

Kumba is investing in times of crisis

Kumba’s share price is up 30% this year. Note: not since March, since January. That’s quite a performance. If you bought at the bottom in March, you’ve more than doubled your money.

Anglo American bought a controlling stake in Kumba in the only bull years this country has experienced in this millennium. Shortly thereafter, Kumba listed on the JSE in 2006 with Anglo as controlling shareholder.

Kumba was worth just R36bn at the time. The company is now worth over R175bn.

It’s refreshing to read about companies investing in South Africa in these difficult times. Kumba has approved a R7bn investment in its iron ore mine at Kolomela in the Northern Cape. They believe the project will deliver an internal rate of return of 25% p.a. which is good news for shareholders.

This is a life-extension for an existing mine rather than a new project. It ensures that 6,000 jobs remain intact, absolutely critical in the current climate.

The first ore from the extension is only expected in 2024. That gives some insight into the long-term thinking that is a feature of this industry, which is why it is critical that South Africa works towards a political and regulatory climate that encourages investment.

Although Kumba’s overall revenue has taken a recent dip, mainly due to supply chain challenges with Transnet under Covid conditions, the company has still declared a dividend and has a powerful balance sheet.

The dinosaurs are fighting back.

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