Rally on copper price in the middle of 2016 and production growth up to 73% yoy became the main factors of impressive growth of KAZ Minerals shares value. Considering the maintenance of a reasonable optimism about copper prices and an increase of free cash flow since 2018, as a consequence, credit risk reduction, we are able to raise our 12M TP to GBp 652/share.
Strong financial results. Following the positive operating results, KAZ Minerals showed expected strong financial results. The growth of total revenues by 43% yoy with a simultaneous decrease of the cost by 4% yoy influenced positively on EBITDA, which has grown by 137% in 2016. Due to the launch of new projects and an impact of macroeconomic environment-, total cash costs amounted to $1.56/pound, decreasing by 32% yoy. The Company’s net income became positive for the first time in two years and totaled to $177 mln.
Forecasts for 2017. The total volume of copper, planned for production in 2017, by the Company’s estimates, will amount to 225-260kt, which is on average higher by 59% yoy. Total cash costs due to the increase of inflationary pressure and a transition of tenge to de-facto floating rate, by the Company’s forecasts, will increase by 16% and will reach the target of $1.66/pound. Total CAPEX are planned at $535 mln in 2017. CAPEX for expansion will be reduced from $1.4 bn invested in the past two years, to $300 mln in 2018. CAPEX for expansion after 2018 are not planned. As a result, we expect a significant increase of free cash flow, which in consequence, by our opinion, might be used for repayment of debt burden of the Company, currently estimated at $3.7 bn.
Impressive production ramp up. At the time of separation of KAZ Minerals in 2014, the Company’s management did not have a practical experience of capital-intensive and technically complex copper projects implementation. Due to this, year ago, we laid high project risks in our estimates. However, despite the background, progress at both mines exceeded our expectations. Thus, with the increase of production at Bozshakol and Aktogay during 2017-2018 years, total production of KAZ Minerals at the specified period will almost double and reach 270-300kt of copper per year.
Copper - fundamentals remain positive. The situation on the copper market has improved significantly in 2016. The positive effect of Chinese demand increase, the potential reduction of the tax burden in the US and an increase of investments in infrastructure projects, by the forecasts, will additionally support the current prices of industrial metals, including copper. Moreover, due to reduction of existing mines production and the lack of new approved development projects, demand for copper might exceed supply by the end of 2018.
Increase of 12M TP to 652 GBp, "Buy" recommendation. Based on the presence of reasonable optimism about the projected copper prices, promising targets for production and cost in 2017-2022, we increase our 12M TP to GBp 652/share. This price implies a potential growth of price per share for 25.3% from the current price.