Commencement of production at Bozshakol, decline of the Company gross cash cost by 10.5% to USC230/lb in 2015 and higher spot price for copper allows us to increase our 12M TP to GBp140/share. However given the high credit and operating risks of the Company coupled with the conservative consensus forecast for copper (market will continue to experience excess supply in 2016-2019), we maintain our Sell recommendation
2015 financial results. Relatively weak copper prices lowered the Company`s revenue in 2015, while Tenge depreciation helped the Company to reduce the gross cash cost. The Company reported a net loss of $12 mn in 2015 largely due to the FX losses.
Weak production results in 1Q2016. Ore mined in 1Q2016 increased by 32% qoq, and copper production in cathode equivalent went down by 5.3% qoq to 21.5 kt.
Bozhakol – ramp up to commercial level in 2H2016. Commissioning ofBozshakol was in 4Q2015, and copper concentrator was launched in February. Management is expecting to ramp up production to commercial level in 2H2016 and to full ramp up in 2017 by reaching the peak production in 2018. However launch of molybdenum flotation circuits is postponed due to the additional capital expenditures needed, in our view.
Aktogay – commercial production in 2018. Oxide ores -construction of SX/EW facility is nearing completion, sulphide ores – still in construction phase, commissioning is expected in 2H2017, and ramp up to commercial level in 2018. However required annual payment of $480 mn on borrowed funds and capital spending of $980 mn for Aktogay in light of low copper prices might deteriorate the Company`s liquidity position, and therefore cause a delay in timely commissioning of Aktogay.
Company`s credit risks are increasing. Net debt at the end of 1Q2016 increased by 7.6% qoq to $2.4 bn. We expect net debt to increase to $3.1 bn by the end of 2016 (gross debt/market capitalization ratio to increase from 3.8x to 4.1x) which may negatively affect share price.
We increase our 12M TP to GBp140/share, maintaining “Sell” recommendation. Given the conservative long term consensus for copper prices, high credit risk of the Company and relatively high EV/EBITDA ratio vs the comparable companies, we maintain our “Sell” recommendation.