Completion of Bozshakol, significant decrease in total cash costs for 1H2016, and preservation of analysts optimism towards copper prices allow us to increase our 12M TP on KAZ Minerals Plc. to GBp 222/share. In this regard, with operating results above our expectations, we upgrade our recommendation from "SELL" to "BUY", still noting still high credit risks of the Company.
Positive 1H2016 results. Due to the development of new projects (Bozshakol and Aktogay), the copper production in cathode equivalent increased by 43% y/y to 52.6 thousand tons. Despite the drop in gross revenues by 11% y/y due to the capitalization of pre-commercial revenue of new projects totaling $61 million, the Company managed to increase its EBITDA by 31% y/y. This result was achieved mainly due to the decrease in total cash costs by 34% y/y.
Projects stay on schedule. Exploitation of Bozshakol began in 4Q2015, ore mining and processing mill was launched this February. According to the Company, commercial production was launched on schedule, it is expected to achieve full operating capacity in 2017.
On Aktogay project: a construction of SX/EW facility is near to be completed; sulphide ores – still in construction phase, exploitation is expected in 2H2017, in 2018 – commercial production is plannedto start. Need to note that, according to the Company’s report, the budget of the project was slightly reduced from $ 2 330 million to $ 2 230 million.
We positively assess the management’s ability to conform with the commissioning schedule of important growth projects.
Credit risks remain. We expect that the size of the Company's net debt may increase from $2.5 billion up to $2.9 billion by YE2016. The major part of the debt includes a credit line issued by the China Development Bank in purpose to finance Bozshakol and Aktogay projects, maturing in 2025-2029.
According to our forecasts, by the end of 2019 the net debt of the Company will increase to $3.5 billion. (Increase of net debt/market capitalization ratio from 3,81x at the end of 2016 to 4.5x at the end of 2019). Consequently, the credit risks, as before, have been evaluated as high.
Increase of 12M TP to GBp 222/share, recommendation upgraded to "BUY". Having published strong 1H2016 results, the Company exceeded the market’s expectations. Taking into accountant the expansion of production and significant reduction in total cash costs and based on timely commissioning of future projects, we cancel our recommendation "Sell" and recommend to "Buy" Kaz Minerals Plc. shares.