KAZ Minerals decided to expand production at Aktogay, with the construction of a second sulphide concentrator. The commencement of production is planned for 2H2021. The total investment in the project will equal to $1.2bn. The processing capacity of sulphide concentrator will double up to 50mn tons per year.
According to the Company, the beginning of production at the second sulphide concentrator is planned for 2H2021. The second concentrator will increase processing capacity from 25 to 50mn tons per year. The forecasted production of copper from sulphide ore will increase to 170k tons (+ 80k tons) during 2022-2027 and will equal to 130k tons (+ 60k tons) thereafter. The total investment in the project will amount to $1.2bn, of which $200mn will be invested in the following year. Sustaining capital expenditures will increase from $30-40mn to $50-60mn starting from 2022. Due to the higher processing capacity, the life of the Aktogay sulphide deposit will decrease from 50 to 28 years. Production of copper from oxide ore will remain unchanged at around 20k tons, with the remaining mine life of 8 years. Net cash cost guidance remains unchanged from the previously declared range of $1-1.2 per pound ($2 205-2 646 per ton). According to KAZ Minerals, in case the current analysts’ consensus forecast for copper prices holds true, the expansion project will generate returns in excess of the Company’s cost of capital.
The projected volume of copper production for 2017 at Aktogay is 85-95k tons, of which 60-70k tons will be produced from sulphide ore and up to 25k tons from oxide ore. In October 2017, KAZ Minerals reached the level of commercial production at the Aktogay sulphide plant.
We consider the Company’s approval of the expansionary project at Aktogay, as a strategic step that will bring a significant amount of future production closer to the present time. Given the expertise and experience in launching similar projects at Bozshakol and Aktogay, the operating risks of expansion are not significant. The current consensus forecast for copper prices is supported by supply deficit and strong demand for the base metal. However, given the time distance of the start of production and significant capital investments in the medium term, the determinant factor in the profitability of the expansion will be the maintenance of the current positive outlook for the copper market. Meanwhile, the Company will be able to finance necessary capital investments with its strong operating cash flows from Bozshakol and Aktogay. Taking into account the change in the capital expenditures plan and the adjustment of production volumes in the long-term, we put our Hold recommendation under review.