KAZ Minerals shares have high volatility that implies tendency to be overbought/oversold. We tie the most recent rally in KAZ Minerals shares to copper prices reaching 3 year high on 5 of September. Currently we keep all projected financial indicators unchanged. Our 12M TP was slightly adjusted to reflect changes in USD/GBP exchange rate. In the absence of revision of copper price forecast and projected production volumes, we consider our 12M TP as correct representation of the fair value of the Company. We change our recommendation from Buy to Hold with 12M TP of 807GBp per share.
Copper market: price is ahead of fundamentals. KAZ Minerals shares have pronounced correlation with copper prices. From 1 of June to 7 of September base metal price grew by 20%. Particular rally of copper may be related to strong manufacturing PMIs in Eurozone, China and USA. Depreciation of the USD in which copper is quoted relative to G10 currencies also played a part in price rise. Additional support of the rally may be derived from the ‘clean air’ policy in China, which is directed to reduction of emissions of harmful substances by imposition of restrictions on industrial production that deviates from standards. The period of low copper prices, which continued from the middle of 2015 to the end of 2016 forced many producers to reconsider long-term investment plans and suspend some projects with high cash costs. In light of the current copper rally, some producers have started to review the possibility of launching the projects, which previously have negative NPVs. However, any significant increase in production coming from new projects would require time. We expect that copper prices can consolidate around current levels in medium-term perspective, but we do not see any fundamental reasons for copper prices to hold at current levels in the short-term. We consider speculative interest as one of the reasons of the current rally. Reviewing spot prices and futures prices, we see that the market currently in contango. Current price of the future delivery (futures) is higher than the spot price. In other words, market participants do not rush to buy the copper at spot for subsequent storage and use in the future, but rather buy futures. Such behavior corresponds to the absence of expectations of the price increase in the short-term.
Change of the recommendation to Hold and adjustment of target price to 807GBp per share. Our expectations for the main operating indicators of the Company have not changed. We currently regard copper as overbought, which is the reason of increase in share prices of the whole sector. Because our computation of financial indicators is in USD, change in USD/GBP exchange rate renders some influence on our target price. In our latest calculation, we used 1.28 USD/GBP exchange rate. In current calculations, we use 1.31 USD/GBP. Consequently, our 12M TP decreased from 824 to 807GBp per share, recommendation changed from Buy to Hold.