KAZ Minerals: Operating results for 2017

Andrey KozhokaruJanuary 26, 2018

In 2017 KAZ Minerals increased production of copper (+80% y/y), gold (+40% y/y) and silver (+6.8% y/y) and reduced production of zinc (-23.6% y/y).

In 2017 the Company produced 258.5k tons of copper (+80% y/y), 178.7k ounces of gold (+40% y/y), 3 506k ounces of silver (+6.8% y/y) and 57.6k tons of zinc (-23.6% y/y). The increase in the copper production was provided by growth projects – Bozshakol (+53.3k tons) and Aktogay (+72.1k tons). The substantial growth of gold production occurred at Bozshakol as a result of doubled processing volumes. Zinc production was lower than Company’s guidance (60-65k tons for 2017) due to the lower grades than was initially planned.

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Copper production equaled to 101.3k tons at Bozshakol, which turned out to be 3% lower than we expected for 2017. Despite the decline of gold grades down to 0.28 g/t (0.33 g/t in 2016), due to the increase of processed ore volumes up to 24 558k tons (11 068k tons in 2016), the production of gold at Bozshakol amounted to 119k ounces, which is 5% higher than we expected. According to 2017 results, 65.1k tons of copper was produced from sulphide ore and 25.1k tons of copper from oxide ore at Aktogay, which generally corresponds to our expectations for 2017. Due to the decline of the average grade in the East Region and Bozymchak down to 1.89% (previously 1.96%), because of lower grades at Orlovsky and Nikolayevsky mines, copper production has decreased to 67k tons (-13.4% y/y). A low content of zinc in the ore and inability to reach higher grades areas at Artemyevsky mine contributed to the shrinkage of production to 57.6k tons (-24% y/y), which is 10% lower than our forecast.

On 22 of February, together with the financial results, the Company will provide production guidance for 2018.

Our opinion:

The negative point in the Company’s published results, was the forecast of Bozshakol’s copper grade of 0.44% for 2018 (0.50% in 4Q2017), along with the annual production forecast of 100k tons of copper, which significantly differs from our expectations. This correction appeared due to the change of mining sequence, which force the Company to initially process the ore with a lower than expected grade.

The average copper price in 2017 equaled to 6 170 USD/ton corresponding to the increase of 27% y/y. The average copper price in January 2018 amounted to 7 078 USD/ton. Observed prices for the main product of the Company (76% of total revenues for 1H2017) and the growth pace of copper production (+80% for 2017) are expected to boost financial results for the period. Our recommendation is currently under review.