Overview
Kaz Minerals PLC (KAZ) is a high growth copper company engaged in the mining and processing of copper. The company is focussed on developing new copper mining projects in Russia and Kazakhstan. KAZ Minerals Plc is the largest copper producer and operates low-cost open-pit mining in Kazakhstan with large scale production. The group is one of Kazakhstan's highest profile and fastest growing companies and is a dual-listed company traded on both the London and Kazakhstan Stock Exchanges. The group’s four operating segments are Bozshakol, Aktogay, East Region and Bozymchak, and Mining Projects. Aktogay is an open pit with a remaining life of 27 years. The company is having an employee base of 14,000 people, mainly in Kazakhstan.

The current Chair is Oleg Novachuk and was appointed on January 1^st, 2018 as Chair. Andrew Southam holds the responsibilities of the Chief Executive Officer.

Key Statistics



Top Shareholders

 

Production Update Q1 FY 2019

For the first quarter ending 31st March 2019, the company’s copper production increased by 4 per cent to 70.0 kt as against 67.3 kt in Q1 FY2018. The copper production in Q4 FY2018 was at 77.9 kt. The company is on track with the full year guidance of c.300 kt. The company expects higher copper production for the remaining 3 quarters because of Bozshakol grade profile and increase in processing of clay concentrators in Bozshakol and Nikolayevsky.The sulphide concentrators at Aktogay and Bozshakol achieved design ore throughput over the quarter.

At Aktogay, the copper production was at 36.7 kt in Q1 FY2019 and 36.0 Kt in Q4 FY2018.

Bozshakol registered a copper production of 23.8 kt in the Q1 FY2019 and 26.6 Kt in Q4 FY2018. The company’s sulphide output was at 6,315 kt in Q1 FY2019. The higher sulphide throughput was offset by low-grade areas mining and clay plant downtime. The gold production at Bozshakol was 30.0 koz in Q1 FY2019 and 34.1 koz in Q4 FY2018. The production of gold remained on track with the guidance of 130-140 koz.

The copper production at East Region and Bozymchak was 9.5 kt for Q1 FY2019 and 15.3 kt in Q4 FY2018. Zinc production was at 6.2 kt in Q1 FY2019 and 11.4 kt in Q4 FY2018. The production declined due to low volume processing and stockpiling of ore at Nikolayevsky. The gold production at East Region and Bozymchak were 12.5 koz in Q1 FY2019and 14 koz in Q4 FY2018.

Segments

The company divided its operations into 4 reportable segments being Bozshakol, Aktogay, East Region and Bozymchak, and Mining Projects. In the financial year 2018, the revenue and the EBITDA from Bozshakol, Aktogay had increased whereas, the revenue and EBITDA from East Region and Bozymchak had been declined. The operating profit from Aktogay had increased whereas, operating profit from Bozshakol and East Region and Bozymchak had declined for the financial year 2018. The segment assets in the financial year 2018 increased for East Region and Bozymchak business whereas, the segment assets for Bozshakol, Aktogay had declined for the period.
 
Financial Highlights - Financial Year 2018 ($, million)


(Source: Annual Report, Company Website)
 
In the financial year ending 31^st December 2018, the company’s revenue increased by 12 per cent to $2,162 million versus $1,663 million in 2017. The increase in revenue was driven by a surge in production volumes and higher prices of copper in the international market.

The group recorded EBITDA of $1,310 million in FY2018 against $1,038 million in the FY2017, driven by higher sales volumes from the sulphide plant in Aktogay. Impacted by the higher cost per unit at East Region and Bozymchak with the inclusion of $9 million VAT impairment, the Gross EBITDA margin declined from 64 per cent in FY2017to 61 per cent in FY2018. 

The company’soperating profit increased by 19 per cent to $851 million in FY2018 as against $715 million in the FY2017. The PBT (profit before taxation) was at $642 million in FY2018 versus$580 million in the FY2017.
The company’s Underlying profit rose to $530 million for the period from $476 million in the Financial year 2017. The company’s Basic and Diluted earnings per share stood at $1.14 in the FY2018 against $1 in the FY2017. The underlying EPS (based on underlying profit) was recorded at $1.18 for the financial year 2018.

The reported Free Cash Flow increased by 29 per cent to $585 million in FY2018 from $452 million in FY2017. The company’s net debt reduced to $1,986 million at 31 December 2018 versus $2,056 million in FY2017.
Financial Ratios
 
  
 
The reported gross margin in FY2018 declined by 4.5 per cent to 49.7 per cent against 54.2 per cent reported last year for the same period. The reported EBITDA margin of 52.3 per cent for the FY2018 stood higher than the industry median of 16.5 per cent. The reported operating margin in FY2018 declined by 3.6 per cent to 39.4 per cent from 43 per cent reported last year for the same period.Net margin reported was 23.6 per cent for the financial year 2018, reflecting a decrease of 3.3 per cent when comparedwith last year data. Return on equity for the current financial year stood at 49.9 per cent, which was significantly higher than the industry median of 9 per cent. On the liquidity front, Kaz Minerals Plc’s current ratio was higher than the industry median of 1.87, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Kaz Plc’s was 3.29x, which was higher as compared to the industry median of 0.38x, reflecting that the company is more leveraged as compared to its peers.  

Share Price Performance

Daily Chart as at July-03-19, before the market close (Source: Thomson Reuters)

On July 03, 2019, at the time of writing (before the market close, at 12:37 PM GMT), Kaz Minerals Plc shares were trading at GBX 592.40, up by 0.34 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 859.62/GBX 421.50. At the time of writing, the share was trading 31.08 per cent lower than the 52w High and 40.55 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,377,588.60; 30 days – 1,387,900.40 and 90 days – 1,690,262.88. The average traded volume for 5 days was down by 0.74 per cent as compared to 30 days average traded volume. The company’s stock beta was 2.32, reflecting significantly higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.91 billion, with a dividend yield of 1.56 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)
 
To compare Kaz Minerals Plc with its peers, Price/Cash Flow multiple has been used. The peers are SSAB AB (NTM Price/Cash Flow was 4.43), Glencore Plc (NTM Price/Cash Flow was 4.42), Ferrexpo Plc (NTM Price/Cash Flow was 4.22), Acerinox Sa (NTM Price/Cash Flow was 6.83) and South32 Ltd (NTM Price/Cash Flow was 6.22). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.2x (approx.)

Method 2: Price to Earnings Approach (NTM)

To compare Kaz Minerals Plc with its peers, Price/Earnings multiple has been used. The peers are Anglo American Plc (NTM Price/Earnings was 9.43), Gem Diamonds Ltd (NTM Price/Earnings was 7.80), EVRAZ Plc (NTM Price/Earnings was 7.56), AK Alrosa PAO (NTM Price/Earnings was 7.63) and Ferrexpo Plc (NTM Price/Earnings was 4.43). The Average of Price/Earnings (NTM) of the company’s peers was 7.4x (approx.)

Growth and Risk Assessments

The company has many value-accretive projects in the pipeline with low risk and higher production. The company’s asset base is capable of generating strong cash flows, helping the company to increase its copper production in both the short and long term. With the expansion of new operations at Aktogay and Bozshakol, the company had achieved higher growth rates in the industry. The ongoing trade war between the US and China had impacted the company’s performance.

Conclusion 

The company had shown decent financial performance with both Top-line and Bottom-line performance increased for the year. The company's strategy of investing in large scale copper projects is supported by strong medium-term fundamentals of the copper market.

The company is expecting to double the copper production through value-accretive projects in the pipeline with low risk and enabling the company to maintain its position in the first quartile of the global cost curve as the company is focused on running its processing plants at their design capacity. 

Structural factors, such as low strip ratios, automation and the use of modern, large scale mining and processing equipment, energy efficiency, are expected to continue to benefit the group. Investment in the Peschanka deposit at Baimskaya will be supported by additional cash flow generation from the Aktogay expansion project, which is a low-risk brownfield project.

The market prices of commodities are out of the company's control and are dependent on world supply and demand and investor sentiment. China being the biggest market for copper, the trade war between the US and China has negatively impacted the Chinese economy and its future outlook.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 590.40 (as on 2nd July 2019) with high single-digit upside potential based on 5.20x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 7.40x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*The Buy recommendation is valid for the current price as covered in the report (as on 3rd July 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.79551 GBP.

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