KAZ Minerals production results for 1H2017

Andrey KozhokaruJuly 27, 2017

KAZ Minerals increased copper production in 1H2017 by 110% to 118kt.

In 1H2017 KAZ Minerals extracted 34.4mln tons of ore (+56% YoY), volume of processed ore increased 3.8 times to 18.2mln tons. Average copper grade processed in 1H2017 was 0.76%. Gold production in 1H2017 doubled YoY reaching 93koz. Production of silver increased by 13% for the same period reaching 1.76mln oz. Main source of gold and silver production gains was increase in output at Bozshakol. In 1H2017 Group produced 32.3kt of zinc in concentrate (-18% YoY). Main reasons of decrease in output of zinc concentrate are the closure of Yubileyno-Snegirikhinsky mine in the end of 2016 and change of working schedule at Orlovsky mine in 2H2016.

As expected, in 1H2017 main sources of production gain were company’s growth projects. Volume of production at Bozshakol in 1H2017 reached 52kt of copper, more than 5 times increase relative to 1H2016. Such increase corresponds to improvement of processing capacity on the site. Volume of extracted ore equaled 19.4mln tons (+76% YoY). Volume of processed ore increased more than five times, reaching 11.7mln tons. Company plans to reach 100% of commercial capacity at Bozshakol in 2H2017. At Aktogay in 1H2017 production equaled 33kt of copper that was six times more than in 1H2016. 22kt relates to sulphide copper, production of which started in February 2017. Extraction of ore at Aktogay in 1H2017 increased by 50% YoY to 13mln tons. Copper production in East Region and Bozymchak decreased by 19% YoY to 33kt in 1H2017. Such decrease appeared from closure of Yubileyno-Snegirikhinsky mine in December 2016 and change of working schedule at Orlovsky mine because of maintenance work.

KAZ Minerals confirmed latest forecast for 225-260kt of copper production in 2017. At Bozshakol copper production is expected at 95-110kt, at Aktogay at 65-85kt. Considering latest results, Group expects gold production to be closer to upper level of projected range of 85-110koz in 2017. Moreover, gold and silver production in East Region and Bozymchak are expected to be closer to upper levels of projected ranges of 50-60koz for gold and 2 250-2 500koz for silver.

Our opinion:

KAZ Minerals production results in 1H2017 were somewhat higher than our expectations. In 1h2017, gold production was 7% higher than our forecast, silver production at Bozshakol appeared four times higher than our initial estimates, and copper production at Aktogay surpassed our estimate by 20%. We think that company will reach its 2017 production targets and may even slightly exceed them, because of high pace of production growth at Bozshakol and Aktogay. In case of favorable macroeconomic environment and stable prices of industrial metals, we expect strong financial results in 2017. In forecasting free cash flows of the company we use average copper price of $5 500 per ton in 2017. According to latest data, average spot price of copper was around $5 750 per ton in 1H2017. From 3 January to 26 of July, price of KAZ Minerals shares increased by 90% to 703GBp per share, what is higher than our current 12M target price. We put our target price on revision.