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West Africa bound

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Kumba Iron Ore is the latest mining group to join the stampede to develop new projects in West Africa – a region described by one Australian mining entrepreneur as “the next Pilbara”. The Pilbara is the region in north-west Western Australia where resource heavyweights Rio Tinto and BHP Billiton [JSE:BIL] have their major iron ore operations.

Kumba Iron Ore [JSE:KIO] CEO Chris Griffith announced the development during his recent presentation of the group’s results for the six months to end-June, at which Kumba reported a 40% rise in headline earnings to R9,1bn and declared a record interim dividend of R21,7/share for a total payout of R7bn.

Griffith said the plan was to produce around 20m tons by 2020 in West Africa and that Kumba was in the “early stages” of examining opportunities. He declined to go into specifics, saying it was “early days”. But he did say Kumba would probably seek a partner for whatever project it decided to develop.

An obvious potential partner is parent Anglo American Corporation, which is developing the Minas Rio iron ore project in Brazil, or Kumba’s empowerment partner Exxaro Resources (Exxaro). Two years ago Exxaro stated its own intention of diversifying into iron ore and it’s just made a failed bid to take over Australian iron ore junior, Territory Resources.

Griffith denied the decision to move into West Africa had anything to do with logistical constraints in SA on the Sishen-Saldanha rail line. The line is currently being expanded to a total capacity of 60m ton/year but a debate has been under way between Transnet Freight Rail (TFR) and iron ore and manganese producers about expansion beyond that level since at least 2009.

In November 2009, then acting TFR CEO Chris Wells said a plan was being looked at to expand the Sishen line to a capacity of around 90m ton, of which 75m tons would be allocated to iron ore exporters and the balance to manganese ore exporters.

In April last year Griffith said a “new spirit of co-operation” had been reached with TFR in its expansion negotiations and Australian consultants Aurecon had been appointed to conduct a fresh study. Last week he noted the “joint Transnet/industry study currently was in the prefeasibility stage and a feasibility study was planned for completion in 2012”.

Broadly-speaking, it seems SA’s iron ore and manganese producers want the Sishen/Saldanha line to be expanded for their combined use, but it seems TFR – under political pressure – is leaning towards exporting manganese ore through Coega in the Eastern Cape. Griffiths commented: “Kumba will continue to expand its production in SA up to the planned target of 70m tons a year by 2019 and is working positively with Transnet to achieve that.”

When it does move into West Africa, Kumba will be in competition with the world’s three biggest iron ore producers – Rio Tinto, BHP Billiton and Vale – as well as heavyweight newcomer Xstrata, plus a string of Australian and Canadian listed juniors and four major Chinese mining groups. One of those Australian juniors is Cape Lambert Resources, whose CEO – Tony Sage – has drawn the comparison with the Pilbara region and also described West Africa as “a battleground” between the Chinese and the West’s resources majors.

Reason is, if the Chinese become established producers in West Africa, they’ll cut back on iron ore imports from Australia and Brazil.
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