Review of 1H2017 financial results

Andrey KozhokaruAugust 24, 2017

Since the beginning of 2017 the price of KAZ Minerals shares has doubled, exceeding 760 GBp on August 22. Significant growth of copper prices and reevaluation of long-term forecasts by market participants contributed to the increase in capitalization of the Company. KAZ Minerals is continuing implementation of strategic plans to increase production on growth projects Bozshakol and Aktogai. Taking into account the growth rate of production relative to competitors and improvement of credit metrics in the long-term, we raise our 12M TP to 824GBp/share, recommendation “Buy”.

Superior growth rates. The company is on its way to achieve previously declared level of copper production at 225-260k tons in the current year. Taking into account decreasing production in Eastern region and Bozymchak, reaching estimated production levels at Bozshakol and Aktogai will allow the Company to reach 300k tons of copper a year in the medium term, which is twice as high as in 2016. The forecasted production growth rate of KAZ Minerals for the period 2016-2020 is approximately 17% y/y, which is one of the best rates in the industry.

Financial results correspond to the volumes. Considering the level of production and also the forecasted copper prices, Company could triple its revenue by 2020. At its core, KAZ Minerals is a low-cost producer and due to the synergistic effect from the launch on full-capacity of Bozshakol and Aktogai the Company would continue to maintain low cash cost and, as result, high profit margins.

Debt load as a decreasing risk factor. According to current forecasts, starting from 2019 the main capital expenditures of KAZ Minerals will be spent to maintain production. According to our estimates, total capital expenditures in 2017-2018 will amount to $470mln, $543mln respectively. Subsequently, annual average capital expenditures are expected at $124mln. Given the significant increase of free cash flow in medium term, the Company’s net debt is expected to decrease by 22% to $2 080mln at the end of 2019, which would provide the business with more flexibility. As of December 31 2016, the net debt of the Company was $2 669mln. Reducing the debt burden will increase the Company’s investment attractiveness, which eventually will positively affect the cost of capital.

Expectation of the copper deficit as the main growth factor. The demand growth in China, weakening US dollar, strong PMI indicators in Euro zone are supporting copper prices. Strikes at big mines in Chile and export restrictions in Indonesia earlier this year and current rumors about possible ban on copper scrap import in China also supported copper prices. One of the main factors in the growth of copper in the long-term is an absence of new large scale projects to compensate for the exhaustion of production at the old mines. A small deficit in the copper market is expected in 2018, with its subsequent increase.

We increase our target price to 824GBp, “Buy” recommendation. In the formation of expectations for the Company we based our estimates on an increase in the copper price by 3.5% y/y in the forecasted period, an increase in production in 2016-2022 by 11% y/y, an increase in free cash flows and as a result the reduction in debt burden. We raise our target price from 652GBP to 824GBP per share (+26%) with the “Buy” recommendation.  

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