KAZ Minerals: Target Price increase

Increase of 12M TP to GBp 285/share, recommendation "BUY".

Dias KabyltayevOctober 05, 2016

Since our last report on August 22, 2016, share price of Kaz Minerals increased by 33%. In our opinion, main driver could be an improvement of economic situation in China and in industrial metals market in general, which lead to heightened investors interest in mining companies. Increase in our copper price forecast by more than 8% in 2020 and significant activisation of the market itself, allow us to increase our 12M TP for KAZ Mineral’s shares to GBp 285/share, maintaining our BUY recommendation.

Industrial metals re-entered the “bull” phase. After significant downturn of industrial metals market, indicators again point to the “bullish” trend. According to the Bloomberg, LMEX index increased by almost 20% since the beginning of the year. In our opinion, support for higher prices contributed by improvement of economic situation in China - the largest consumer of industrial metals. For example, the business activity index (PMI) in July has exceeded the psychological point of 50p. for the first time since February,2015.Therefore, PMI index in China was out of the negative zone for the third consecutive month, indicating signs of economic stabilization in the largest copper consumer.

Copper price forecast has changed. HF forecast corrected in favor of increasing, against the positive market trend background of industrial metals, and according to Bloomberg consensus forecast for September. Thus, the copper price will be higher by 8.1% than our expectations. Taking into account high Company’s performance sensitivity on changes in copper prices, the target price modeling changed significantly.

Attractiveness of growth projects. In our opinion, significant growth of the Company’s share price, which almost doubled from the beginning of the first half of this year, indicates the activisation of institutional investors in connection with an increase in their risk appetite. At this point, we believe that investors are trying to identify riskier instruments, but with significant growth potential. 

Kaz Minerals could be a good example of it, given the apparent stabilization of the copper market, long-term projects and the relatively cheap cost of production. It is also worth noting that the rate of decline of Kaz Minerals shares in 2015 was significantly higher than for its peer companies, nearly 86% against 55%.

Increase in 12M TP to GBp 285/share, preserving recommendation to BUY. Increase in copper price forecast in 2020, considering achievement of Company’s performance targets in 2016-2022 and timely growth projects commissioning during 2016-2018,  allow us to increase our 12M TP to GBp 285/share or 22.9% from the current price.