KAZ Minerals 2017 financial results

Andrey KozhokaruFebruary 23, 2018

As expected, the Company announced strong financial results for 2017. A significant increase in the production (+80% y/y) combined with an increase in copper prices (+27% y/y) ensured an increase of gross revenue by 2 times to 1 938mn USD, gross EBITDA to 1 235mn USD (2.5 times y/y), operating profit to 715mn USD (3.3 times y/y) and net profit to 447mn USD (2.5 times y/y).

The Company's net debt decreased to 2 056mn USD (2 669mn USD as of December 31, 2016). The free cash flow for 2017 amounted to 452mn USD against the cash outflow of 60mn USD for 2016. The actual expansionary CAPEX for the reported period amounted to 196mn USD against 300mn USD projected by the Company. About a half of the unspent CAPEX for 2017 will be invested in 2018.

According to 2018 forecast, the Company intends to produce 270-300k tons of copper, 95-105k tons of which are planned to be produced at Bozshakol, 110-130k tons at Aktogay and 65k tons at East region and Bozymchak.

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Gross cash cost of copper production for 2017 amounted to 3 042USD/ton against 3 438USD/ton in 2016. For 2018, the Company forecasts an increase in the gross cash cost due to lower grades, maintenance schedule and an increase in inflation.

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Our opinion:

With an increase in revenues of 969mn USD in 2017, 723mn USD of the increase was provided by higher production volumes and about 246mn USD was provided by the rise in commodities prices. Despite the rally in prices of base metals, observed in late 2017 and early 2018, the current market consensus forecast for copper for 2018 assumes a price increase of 8% y/y. For now, we expect an increase in copper production in 2018 by 7.6% y/y. Nevertheless, the Company's financial results exceeded our expectations for 2017, the projected gross cash costs at Bozshakol and at East Region and Bozymchak for 2018, also somewhat exceeds our expectations.

Due to the lower capital expenditures (385mn USD –forecast, 264mn USD –actual) and the receipt of VAT refunds (243mn USD), the Company's net debt was below our expectations of 2 387mn USD. Meanwhile, the 2018 will be the most capital intensive year on the projected horizon. According to KAZ Minerals plans, the total capital expenditures will be around 745mn USD. Consequently, we do not expect a significant reduction in the Company’s debt in the short term. An adjustment of our mid-term forecasts in accordance with the Company's latest guidance does not entail a significant change for our 12M TP of 865GBp/share. We keep our Hold recommendation unchanged.