Investment Highlights
 

1. Kaz Minerals reported strong production performance in the financial year 2019, with an increase in the sales of copper by 7 per cent and gold by 33 per cent versus the FY2018 data.

2. Delivered strong revenue growth with decent operational performance for the current period.

3. The company maintained an aggressive position on the cost curve of industry and was able to maintain a net cash cost of 77 USc/lb to lead the industry.

4. The group signed new debt facilities with Caterpillar Financial Services Corporation and Development Bank of Kazakhstan for USD 100 million and USD 600 million, respectively.

5. The group has shown the ability to make extended investment decisions and construct & operate large copper projects, which can generate higher cash flows at lower costs.

6. The group’s majority of Capex in the financial year 2019 was associated with overhaul and purchase mining equipment and construction to strengthen the storage capacity.

7. The investment company made in Baimskaya and Aktogay will fetch them with higher returns. It will provide them with a pipeline of growth opportunities and will be recognised as producing asset base with low cost in the future period.

8. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

KAZ Minerals PLC (LON: KAZ)

Kaz Minerals PLC is a copper company, which is focused in open pit mining in the Commonwealth of Independent States (CIS) region. The group has successfully delivered several greenfield mining projects. The group primarily develops and operates large scale and low-cost copper mines.  It is listed on FTSE 250 index of the London Stock Exchange and in Kazakhstan also. In 2019, the group has supplied 24 mt of copper to the global markets with a total value of USD 140 million.


(Source: Annual Report)

The group is predominantly operating through the following business segments, which is differentiated in terms of end products or the nature of their operations:
 

1. Aktogay
 

(a) It is in the east of Kazakhstan and operates the plants of oxide, sulphide concentrator and open pit.

(b) The segment is expected to double its capacity of sulphide ore processing, by the end of 2021.
 

2. Bozshakol: It is in the Pavlodar region of Kazakhstan and operates the plants of clay, sulphide concentrator and open pit.

3. East Region and Bozymchak: Mainly represents the activity related to mining and processing of copper and other metals of Vostoktsvetmet LLC and KAZ Minerals Bozymchak LLC.

4. Mining Projects: Represents companies which are engaged in the assessment and development of greenfield metal deposits.
 

Key Statistics


Strategic Priorities with Milestones Achieved

Delivery of major growth projects
 

1. KAZ Minerals is currently investing USD 1.2 billion at Aktogay, as a part of the expansion project, which should double its sulphide processing capacity by 2021.

2. The progress has progressed well and remained in budget.
 

Optimizing the existing assets

1. EBITDA has increased from USD 1,310 million in 2018 to USD 1,355 million in 2019.

2. EPS on Underlying Profit has increased to USD 1.21 in 2019 as against USD 1.18 in 2018.
 

Seeking out natural resource opportunity
 

1. Copper production: Grew by 6% to 311.4 kt in 2019 from 294.7 kt in 2018.
 

Socially Responsible Operator
 

1. The number of fatalities went to 2 in 2019 from 4 in 2018. However, the goal is to make it zero.

2. Total Recordable Injury Frequency Rate was 1.38 in 2019 as against 1.74 in 2018. The average TRIFR for ICMM members, recorded in 2018 was 3.41.
 

Recent Developments - Enhanced Liquidity to fund the Project Expansions

28^th January 2020: The group has amended the pre-export finance (PXF) loan facility and increased its commitment to USD 1 billion. The additional USD 700 million of PXF facility has extended the maturity profile by 3.5 years to December 2024.

15^th November 2019: The group has signed a new credit facility of USD 100 million with Caterpillar Financial Services.


(Source: Company Presentation)

Top Shareholders

 

Financial Highlights – Strong Operational Performance in FY2019 (ended 31^st December 2019)


(Source: Annual Report, Company Website)
 
For the financial year ending 31^st December 2019, driven by higher production for the period, the revenue increased by 5 per cent to USD 2,266 million as against USD 2,162 million in FY2018. The EBITDA increased to USD 1,355 million in the financial year 2019 from USD 1,310 million in the financial year 2018, reflecting an EBITDA margin of 60 per cent for the period.

Driven by the decline in the operating expenses for the period, the group reported an operating profit of USD 923 million in FY2019 versus an operating profit of USD 851 million in the financial year 2018, reflecting an increase of 8 per cent for the period. Driven by cost efficiencies in the eastern region and improved share from Aktogay, the group managed to reduce its gross cash cost to 140 USc/lb in FY2019 versus 144 USc/lb in FY2018, while achieving an industry-leading  77 USc/lb of net cash cost for the period.

The group’s PBT (profit before tax) stood at USD 726 million in FY2019 versus a PBT (profit before tax) of USD 642 million in FY2018, driven by strong growth of revenue and EBITDA. The Profit for the year stood at USD 571 million in the financial year 2019 versus a Profit for the year of USD 510 million in FY2018. The basic earnings per share stood at 1.21 cents in FY2019 versus basic earnings per share of 1.18 cents in FY2018. Due to increase in the expansionary capex and cash used in the acquisition of Baimskaya, the group’s net debt increased to USD 2,759 million in FY2019 versus USD 1,986 million in FY2018, while the gross liquid funds declined to USD 541 million as on 31^st December 2019. The total dividend for the period stood at 12 US cents for the period.

Financial Ratios – Strong Profitability Margins versus the Industry Median

 
(Source: Thomson Reuters)

The reported EBITDA margin of 52 per cent for the FY2019 stood higher than the industry median of 17.00 per cent. The reported Pretax margin of 32.00 per cent for the FY2019 stood higher than Pretax margin of 29.7 per cent in FY2018. Net margin reported was 25.2 per cent for the financial year 2019 and stood significantly higher than the industry median of 3.5 per cent. Return on equity for the Financial year 2019 stood at 36.1 per cent, which was higher than the industry median of 6.7 per cent. On the liquidity front, Kaz Minerals Plc’s current ratio was slightly lower than the industry median of 1.65, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Kaz Minerals Plc’s was 1.56x, which was higher as compared to the industry median of 0.39x.

Share Price Performance


Daily Chart as on 15th April 2020, before the market close (Source: Thomson Reuters)

On April 15, 2020, at the time of writing (before the market close, at 10:04 AM GMT), Kaz Minerals Plc shares were trading at GBX 383.40, down by 6.72 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 743.00/GBX 256.20.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Kaz Minerals Plc with its peers, Price/Earnings multiple has been used. The peers are BHP Group Plc (NTM Price/Earnings was 9.82), Anglo American Plc (NTM Price/Earnings was 8.39), Central Asia Metals Plc (NTM Price/Earnings was 7.03), EVRAZ Plc (NTM Price/Earnings was 5.04) and Ferrexpo Plc (NTM Price/Earnings was 4.97). The Average of Price/Earnings (NTM) of the company’s peers was 7.05x (approx.)
 
Method 2: Price/Cash Flow (NTM) Approach 
 


To compare Kaz Minerals Plc with its peers, Price/Cash Flow multiple has been used. The peers are South32 Ltd (NTM Price/Cash Flow was 5.00), Central Asia Metals Plc (NTM Price/Cash Flow was 4.07), Hochschild Mining Plc (NTM Price/Cash Flow was 4.04), Anglo American Plc (NTM Price/Cash Flow was 3.71) and Glencore Plc (NTM Price/Cash Flow was 2.90). The Average of Price/Cash Flow (NTM) of the company’s peers was 3.95x (approx.)
 
Valuation Metrics


(Source: London Stock Exchange)
 
As on 31st March 2020, the Price to Earnings multiple of the Kaz Minerals Plc was around 3.7x, which was lower as compared to the industry. It reflects, shares are undervalued against its peers. 


(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Kaz Minerals Plc Vs FTSE Mid 250 Index (5 Years)


(Source: Thomson Reuters)

In the last five years, Kaz Minerals Plc share price has delivered 78.85 per cent returns as compared to negative 9.95 per cent returns of FTSE-Mid 250 index, which shows that the stock has outperformed the index during the last year.

Total Return - 5 Years Period

(Source: Thomson Reuters)

Kaz Minerals Plc generated a total return of 83.29 per cent in the last five years versus the total return of FTSE All share of 1.14 per cent for five years period.

Risk Assessment

The company operates inmultiple geographies, and its profits can be impacted negatively due to foreign exchange rate fluctuations. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets. Currently, Covid-19 outbreak crisis has impacted business performance globally.

Future Growth Trajectory in the High Growth Industry

The demand for copper is consistently growing, primarily driven by urbanization (includes demand for power generation and transmission), economic development (includes development related to infrastructure, transport and construction), and the newly rising demand for electric vehicles and renewable energy. Subsequently, the Global copper consumption is likely to surge 43% by 2040.


(Source: Annual Report)

To meet this soaring demand, KAZ Minerals has been persistently investing in several mining projects in the CIS region since its formation in 2014. The Group’s copper production increased to 311 kt in 2019 from merely 85 kt in 2015 (reflecting a CAGR of 40%). The group has mined 95 Mt of ore and total of 24 Mt of copper was supplied to the industry in 2019.


(Source: Annual Report)

Going forward, the group is expecting a drop in copper prices in the short run, impacted by the contagion of Covid-19 and measures taken to pacify the virus. However, the group expect the demand to surge in the medium to long-run outlook, since the plummeting supply would require to be replenished by output from new projects. On other hand, the group’s projects in Aktogay and Baimskaya are reflecting growth, which should further assist in ramping up the output. Furthermore, the group holds the position of lowest unit cost globally in terms of a pure player in copper, which shall yield lucrative productivity and profitability.

Business Outlook Summary
The company has shown an increase in financial performance in the financial year 2019. Both the top-line and the bottom-line performance has improved, with improved profitability margins for the period. The group has a strong pipeline of opportunity from its producing assets and is making an investment in those assets to fetch higher returns in the long-term.

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 company's strategy of investing in large scale copper projects is supported by strong long-term fundamentals of the copper market.

The company maintained an aggressive position on the cost curve of industry and was able to maintain a net cash cost of 77 USc/lb to lead the industry. The group remained confident about its management team and business model to face the uncertainty created due to Covid-19 outbreak.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from USD 766 million in FY16 to USD 2,266 million in FY19. Compounded annual growth rate (CAGR) stood at 43.55 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 377.70 (as on 15^th April 2020, before the market close at 10:07 AM GMT), with lower-double digit upside potential based on 7.05x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 3.95x NTM Price/Cash flow(approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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