On October 26, KAZ Minerals presented its operating results for 3Q2017

Andrey KozhokaruOctober 26, 2017

The Company increased copper production in the reporting period and updated its production guidance for 2017.

Copper production in the 3Q2017 increased by 14% q/q to 75.3k tons, zinc production decreased by 20% q/q to 13.5k tons, gold production decreased by 11% q/q to 44.8k ounces, silver production remained almost unchanged, equaled 952k ounces in 3Q2017 against 961k ounces in 2Q2017. When considering the results for 9M2017, copper production increased by 96% y/y to 193.3k tons, zinc production decreased by 18.5% y/y to 45.8k tons, gold production increased by 61% y/y to 137.8k ounces, the production of silver for 9M2017 grew by 18% y/y to 2,708k ounces. In the context of total revenue of KAZ Minerals at $ 837mn for 1H2017, copper sales accounted for $632m (75.5%), gold sales equaled to $106m (12.7%), silver revenue amounted to $35m (4.2%), zinc accounted for $59m (7%) and $5m (0.6%) referred to other revenue.

In 3Q2010 the increase in copper production was due to the increase in the processing of sulfide ore at Aktogai to 23.2k tons (15.4k tons in 2Q2017), and a seasonal increase in production of Aktogay oxide ore to 8k tons (5.7k tons in 2Q2017). KAZ Minerals increased the copper production in the Eastern region and Bozymchak by 1.6k tons q/q to 17.3k tons with the processing of ore reserves accumulated in 2Q2017. The copper production at Bozshakol decreased by 2.3k tons q/q to 26.8k tons in 3Q2017, mainly due to the expected decrease in the grade from 0.56% to 0.51%. The company raised the overall copper production forecast for 2017 up to 250-270k tons from 235-260k tons.

The reduction of zinc production in 3Q2017 in the Eastern region was due to a lower grade, and the reduction in production for 9m2017 reflects the closure of the Yubileyno-Snegirikhinsky mine and the maintenance works at the Orlovsky mine. In addition, at the Artemievskoye mine, the ore extraction did not reach the area with a high content of zinc, which was planned for 2H2017. The combination of these factors provided the decrease in zinc production forecast for 2017 to 60-65k tons from 70-75k tons.

In 3Q2010, the gold grade at Bozshakol decreased to 0.25 g/t from excessively high levels in 1H2017, which corresponded to the decrease in production. However, despite the expectation of a lower grade in 4Q2017, the Company forecasts that gold production at Bozshakol in 2017 will be 10k ounces higher than in the previously announced forecast. KAZ Minerals raised its forecast of gold production to 160-180k ounces from 150-170k ounces.

The production of silver in the Eastern region and Bozymchak in 3Q2017 increased by 5% q/q due to higher processing volumes and recovery levels against the decrease in grades. Taking into account the production results for 9m2017 KAZ Minerals raised the forecast of silver production in the Eastern region and Bozymchak by 350k ounces to 2 600-2 850k ounces. The overall forecast for silver was raised to 3 450-3 700k ounces from 3 100-3 350k ounces.

The Company's net debt decreased to $2 220m as of September 30, 2017, from $2 442m as of June 30, 2017. As of the reporting date, the Company has $1 684m of available liquidity, of which $1 352m were in cash and equivalents and $332m were available from undrawn facilities.

Our opinion:

KAZ Minerals demonstrates the strong growth of operating results due to active production expansion on its growth projects, Bozshakol and Aktogay. As a result, we expect increased growth rates of the Company’s operating and financial performance until 2019. Despite the reduction in zinc production, if the current pricing environment in the base metals market could be sustained, we expect that the dynamics of growth of the financial metrics will significantly outpace the Company's operating results for 2017. We highlight the continued reduction in the debt burden from the generation of operating cash flows as an important positive factor in the Company's valuation.

In the favorable macroeconomic environment, main factors in the valuation of KAZ Minerals are the stability of prices for its products and successful implementation of its operational plans for the increase in production. From our point of view, considering the effective fulfillment of operating forecasts provided by KAZ Minerals, a significant part of the future increase in production is already priced in Company’s shares. At the same time, the current rally observed in the industrial metals market may prove to be unsustainable in the medium term. In our opinion, current prices of copper ($ 7,000 per ton) and zinc ($ 3,200 per ton) are not reflected in KAZ Minerals stocks due to insufficient market confidence regarding maintenance of such prices on the forecasted horizon. Without fundamental changes in the medium-term forecasts for the metals markets, we maintain our Hold recommendation and the 12M TP of 807GBp per share unchanged.