KAZ Minerals: Review of 2017 operating results

"Hold" recommendation with 12M TP of 865GBp/share

Andrey KozhokaruFebruary 09, 2018

KAZ Minerals has fulfilled its annual forecast for 2017, increasing copper production by 80% y/y. Meanwhile, the phase of exponential growth of production, which began with the launch of Bozshakol and Aktogay, is coming to an end. With a conservative approach and adjusting the copper production forecast for Bozshakol, we expect the average annual growth of KAZ Minerals production to be slightly below 5% y/y in the period of 2018-2021. After the construction of the 2nd sulphide factory at Aktogay, we expect that the total volume of copper produced by KAZ Minerals will exceed 370kt per year in 2022. Despite the necessary investments in the project at 1.2bn USD, the Net debt/EBITDA ratio, according to our estimates, will not exceed 2x on the forecasted horizon, and the Company will continue to reduce the debt burden, but at a slower pace. The price of copper will continue to remain the main driver of KAZ Minerals shares. Given the risk associated with a possible correction in the price of copper to the current consensus forecast for 2018 (6 620USD per ton), we maintain Hold recommendation on KAZ Minerals with a 12M TP of 865GBp.

Operating results and forecasts. In2017 Bozshakol produced 101kt of copper, which is on the lower boundary of the Company's forecast of 100-110kt. The Company provided weak forecasts on the grades (0.44%) and copper production (100kt) at Bozshakol for 2018. The presented forecast was the result of a forced change in production sequence, which assumes processing of a lower grade ore. Our previous forecast for copper production in 2018 at Bozshakol was at the level of 115kt (current forecast 101kt), which corresponds to a decrease by 5% from the previously anticipated total annual production of KAZ Minerals. An important factor will be the need to adjust production forecasts for Bozshakol after 2018. We maintain our current forecast for 2018 at 104kt of copper production at Aktogay unchanged, taking into account expectations for the achievement of 100% design capacity in 2018 from 68% in 4Q2017.

Price of copper as the main source of risk and support. The observed bull rally in the base metals market has a fundamental support from the sustainable demand, expressed by strong macroeconomic indicators of leading economies and a supply shortage, mainly provided by a reduction in capital investments during low prices and depletion of operating mines. Moreover, the potential instability of supply in the copper market comes from possible strikes in Chile and Peru in 2018. According to the expectations of market participants, 2018 will be one of the most saturated years for negotiations between labor unions and management of mining companies on the renewal of labor contracts. Meanwhile, the current positive expectations provide the risk of a sharp decline in prices in the event of a change in a market sentiment, which may occur with a slowdown in economic activity or with an unexpected increase in supply in the copper market. According to market data, as of January 30, 2017, the number of net long speculative positions for copper exceeded the average for the last 3 years by more than two times.

12M TP 865GBp per share, Hold recommendation. We include into our production forecasts for 2018-2019 some risks associated with Aktogay’s achievement of 100% design throughput and with a decrease in grades at Bozshakol. Meanwhile, considering the average price of KAZ Minerals for the last 12 months at 508GBp/share, we believe that our 12M TP correctly reflects the growth in the Company's production and given consensus expectations for metals market.

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