Overview
Kaz Minerals Plc (KAZ) is a high growth copper company which is 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.



Top Shareholders

 
Production Update for Q3 and 9M FY 2019

For the third quarter from July to September 2019, the company’s copper production increased to 82.9 kt as against 77.6 kt in Q2 FY2019. For nine months ending 30^th September 2019, copper production increased to 230.5 kt as against 216.8 kt for 9M FY2018. The company’s gold production stood at 58.5 koz in Q3 FY2019 versus 44.3 koz in Q2 FY2019. For nine months ending 30^th September 2019, gold production increased to 146.2 koz as against 135 koz for 9M FY2018. The increased production level was driven by a solid performance from Bozshakol and Aktogay.The company is on track with the full-year guidance of c.300 kt. The company expects its gold production will exceed the set guidance range of 170-185 kozby around 5 per cent. The company’s silver production stood at 944 koz in Q3 FY2019 versus 926 koz in Q2 FY2019.

At Aktogay, the copper production was at 37.3 kt in Q3 FY2019 and 37.4 Kt in Q2 FY2019.The company expects its copper production at Aktogay to be on the higher side of the set guidance range of 130-140 kt.

Bozshakol registered a copper production of 32.1 kt in the Q3 FY2019 versus 23.3 Kt in Q2 FY2019, an increase of 38 per cent for the period. The gold production surged by 47 per cent to 43 koz in Q3 FY2019versus 30 koz in Q2 FY2019. As planned, both plants operated without any major scheduled maintenance which resulted in an increase in average gold and copper grades. Ore processed at Bozshakol surged by 30 per cent to 8,378 kt in Q3 FY2019 versus 6,438 kt in Q2 FY2019. The production of gold remained on the higher side of the set guidance of 130-140 koz. The production of copper remained on track with the guidance of 105-115 kt.

The copper production at East Region and Bozymchak was 13.5 kt for Q3 FY2019 and 16.9 kt in Q2 FY2019. The decline in production was driven by lower grades and lower processing volumes for the period. The production of copper remained on track with the guidance of 55 kt. The gold production at East Region and Bozymchak were 14 koz in Q3 FY2019and 14 koz in Q2 FY2019. The company expects full-year guidance to exceed the set target of 40-45 koz.

Segments

The company divided its operations into 4 reportable segments being Bozshakol, Aktogay, East Region and Bozymchak, and Mining Projects. In the first half of the financial year 2019, the revenue and the EBITDA from Aktogay have increased whereas, the revenue and EBITDA from Bozshakol, East Region and Bozymchak have been declined. The operating profit from Aktogay had increased whereas, operating profit from Bozshakol and East Region and Bozymchak have declined for the first half of the financial year 2019. The segment assets in the first half of the financial year 2019 increased for East Region and Bozymchak, Aktogay and Mining Projects businesses whereas, the segment assets for Bozshakol business had declined for the period.

Financial Highlights – H1 Financial Year 2019 (30th June 2019, $, million)


(Source: Interim Report, Company Website)
 
For the first half of the financial year 2019, the company’s revenue decreased by $46 million to $1,052 million versus $1,098 million in H1 FY18. The decrease in revenue was driven by a higher copper volume from Aktogay and gold volumes from Bozshakol which were offset by the effect of lower copper, gold, silver and zinc prices and lower zinc volumes from the East Region operations. The group’s recorded EBITDA reduced by 10 per cent to $620 million in H1 FY19 against $690 million in the H1 FY18. The operating profit stood at $410 million in the first half of the financial year 2019 versus an operating profit of $464 million in the first half of the financial year 2018. The company’s PBT (Profit before tax) was at $289 million in the first half of the financial year 2019 as against a PBT (Profit before tax) of $355 million in the first half of the financial year 2018. The company’s profit reduced to $227 million for H1 FY2019 from $276 million in the half-year of 2018. The basic ordinary EPS was recorded at $0.48 in H1 FY2019 versus $0.62 in H1 FY2018. The diluted ordinary EPS was recorded at $0.47 in H1 FY2019 versus $0.62 in H1 FY2018. The reported Free Cash Flow decreased to $182 million in H1 FY2019 from $308 million in H1 FY2018. The company’s net debt increased to $2,560 million at 30 June 2019 versus $2,052 million in H1 FY2018. The Board declared an interim dividend per share of 4.0 US cents.
 
Key Performance Indicators


 
EBITDA

EBITDA measures the company’s ability to generate cash as well as providing a useful measure of operating performance. The EBITDA for FY2018 surged to $1,310 million from $1,038 million in FY2017. The increase in the EBITDA was driven by higher sales volumes from Aktogay and Bozshakol and the higher average price of copper.
 

Free Cash Flow (FCF)

The company’s FCF (Free Cash Flow) surged by $133 million to $585 million in FY2018 from $452 million in FY2017. The increase in FCF reflects inclusion of Bozshakol clay and Aktogay sulphide operations for the full-year, which were commercialised in the FY2017.


Adjusted EPS (Earnings Per Share)

Adjusted EPS is used to identify the profits available for distribution to shareholders or for business retention. The Kaz Minerals Adjusted EPS surged from $1.07 per share in the financial year 2017 to $1.18 per share in the financial year 2018.

Financial Ratios
  

The reported gross margin in H1 FY2019 declined by 2.2 per cent to 49.30 per cent against 51.5 per cent reported last year for the same period. The reported EBITDA margin of 50.8 per cent for the H1 FY2019 stood higher than the industry median of 33.70 per cent. The reported operating margin in H1 FY2019 declined by 3.3 per cent to 39 per cent from 42.3 per cent reported last year for the same period. The reported Pretax margin of 27.5 per cent for the H1 FY2019 stood higher than the industry median of 11.2 per cent. Net margin reported was 21.6 per cent for the first half of the financial year 2019, reflecting a decrease of 3.5 per cent when comparedwith last year data for the same period. Return on equity for the first half of the Financial year 2019 stood at 16.1 per cent, which was higher than the industry median of 5.1 per cent. On the liquidity front, Kaz Minerals Plc’s current ratio was lower than the industry median of 1.67, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Kaz MineralsPlc’s was 1.86x, which was higher as compared to the industry median of 0.54x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Price Performance
 

Daily Chart as at November-06-19, before the market close (Source: Thomson Reuters)

On November 06, 2019, at the time of writing (before the market close, at 10:27 AM GMT), Kaz Minerals Plc shares were trading at GBX 510.60, down by 0.85 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 745.45/GBX 375.30. At the time of writing, the share was trading 31.50 per cent lower than the 52w High and 36.05 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,593,871.80; 30 days – 1,447,518.43 and 90 days – 1,533,935.34. The average traded volume for 5 days was up by 10.11 per cent as compared to 30 days average traded volume. The company’s stock beta was 2.47, reflecting significantly higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.43 billion, with a dividend yield of 1.62 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)
 


To compare Kaz Minerals Plc withits peers, Price/Cash Flow multiple has been used. The peers are BHP Group Plc(NTM Price/Cash Flow was 7.16), AngloGold Ashanti Ltd(NTM Price/Cash Flow was 5.42), Hochschild Mining Plc(NTM Price/Cash Flow was 4.93), Petropavlovsk Plc(NTM Price/Cash Flow was 4.87) and EVRAZ Plc(NTM Price/Cash Flow was 3.90). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.26x (approx.)

Method 2: Price to Earnings Approach (NTM)
 
 


To compare Kaz Minerals Plc withits peers, Price/Earnings multiple has been used. The peers are Ferrexpo Plc(NTM Price/Earnings was 3.83), Sibanye Gold Ltd(NTM Price/Earnings was 3.74), United Company RUSAL Plc(NTM Price/Earnings was 3.59), Petropavlovsk Plc(NTM Price/Earnings was 2.00) and Gem Diamonds Ltd(NTM Price/Earnings was 1.20). The Average of Price/Earnings (NTM) of the company’s peers was 2.87x (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 has achieved higher growth rates in the industry. The ongoing trade war between the US and China has impacted the company’s performance.

Conclusion

For the next decade, the demand for copper is anticipated to stay robust, as the urbanisation are supplemented by new demand from investment in clean energy generation and traditional drivers of economic development and the enhanced adoption of electric vehicles.

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 decent cash flows, helping the company to increase its copper production in the long term. With the expansion of new operations at Aktogay, the company has achieved a higher growth rate in the industry. The ongoing trade war between the US and China has impacted the company’s performance.
In FY19, the company’s copper guidance was maintained at 300 kt. The company stated that they are more vigilant, driven by continuing trade pressures and China slowdown concerns, but the long-term prospects remain healthy. The company's strategy of investing in large scale copper projects is supported by strong long-term fundamentals of the copper market.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from $846 million in FY14 to $2,162million in FY18. Compounded annual growth rate (CAGR) stood at 26.44 per cent.

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 current price of GBX 510.00 (as on 6^th November 2019, before the market close at 9:30 AM GMT) with lower double-digit upside potential based on 5.26x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 2.87x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.77643 GBP.

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