Key Investment Highlights

Kaz Minerals PLC (LON: KAZ) is a high growth and low-cost producer of Copper. The Company is focused on open-pit Copper mining, which is operating on a large scale in Kazakhstan. It is expecting further growth through the expansion of the Aktogay division as sulphide processing is projected to double by 2021.

Financially, the Group has delivered 40.2 per cent growth in revenue and 53.6 per cent growth in EBITDA, over the past three years (FY16 to FY19). The Group has consistently grown the production of Copper, Gold, Silver and Zinc over the past five years, which has reduced per-unit cost of production; hence, it is reflecting the growth potential to be competitive with an increase in the profitability.

Operationally, the Group has a low-cost position compared to its peers in Copper industry. As per Wood Mackenzie (as at 31^st December 2019, the Company’s net cash cost stood at 77 USc/lb (US cents per pound), while the first quartile of the industry was at 98 USc/lb. Moreover, the Growth in Copper and gold production has the potential to offset the impact of lower Copper prices.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day and 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Kaz Minerals PLC (LON: KAZ) – Well Positioned for Generating Progressive Returns with Industry-Leading Low Cost Producer and Continuous Production Growth Trajectory

Kaz Minerals PLC is a FTSE 250 listed 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. In 2019, the Group had supplied 24 million tonnes of Copper to the global markets with a total value of USD 140 million. Its Copper production witnessed a compounding annual growth rate of 40 per cent to 311 kt (kilo tonnes) in 2019 from 85 kt in 2015. The Company was admitted to the LSE (London Stock Exchange) on 12^th October 2005.

On 30^th July 2020, the Group is expected to release its production report for the second quarter of 2020.

The remarkable progress of non-financial key performing indicators can be seen in the picture below:

 
(Source: Annual Report, Company Website)
 
 
Key Fundamental Statistics



Segments at a Glance

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: It is in the east of Kazakhstan and operates the plants of oxide, sulphide concentrator and open pit. By the end of 2021, this division is planning to double its capacity of sulphide ore processing.

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.
 

(Source: Annual Report, Company Website)

Further, the Group also splits its revenue by product. The breakup of 2019 revenue by product is given in the picture below:


(Source: Presentation, Company Website)

Milestones in KPIs Against the Strategic Priorities
 

1. Delivery of major growth projects: 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. The progress has progressed well and remained in budget.

2. Seeking out natural resource opportunity: Copper production grew by 6 per cent to 311.4 kt in 2019 from 294.7 kt in 2018.

3. Socially Responsible Operator: The number of fatalities went to 2 in 2019 from 4 in 2018. However, the goal is to make it zero. 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
 

1. 30^th April 2020: The Group reported Copper production of 74.9 kt (kilo tonnes) in the first-quarter of 2020, while the gold production stood at 55.4 koz (thousand ounces).

2. 28^th January 2020: The Group had 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.
 

Top Shareholders Statistics

 

Guidance for Capital Expenditure in FY2020 and Aktogay Project Update

On 30^th April 2020, KAZ Minerals released an update on guidance for 2020 capital expenditure and an update on Expansion of Aktogay Project. After considering the impact of covid-19 restrictions and progress of construction activities, the project remained on track for completion in FY2021 and will commence production activities in late 2021. Steps have been taken by Kazakhstan Government and international Governments to contain the spread of virus as it has negatively impacted supply chain and reduced availability of vendor and local contractors. The Groups expects its capital expenditure to be in between USD 300 million to USD 350 million in FY2020, which was lower than the guidance of USD 400 million.

Improved Production in the First quarter of the Financial Year 2020

On 30^th April 2020, KAZ Minerals released an update on the production for the first quarter of the financial year 2020 ending 31^st March 2020. The copper production increased by 7 per cent to 74.9 kt versus 70.0 kt in Q1 FY2019 and remained in line with the guidance for FY2020 which was in between 280 kt to 300 kt. Driven by higher ore throughput from Bozshakol, the Company delivered strong gold production of 55.4 koz in Q1 FY2020 versus 55.3 koz in the Q4 FY2019. The net debt as on 31^st March 2020 stood at USD 2,796 million versus USD 2,759 million as on 31^st December 2019 with a cash balance of USD 1,055 million and undrawn facilities of USD 306 million for the period.

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 85 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 in FY2019 versus basic earnings per share of $1.18 in FY2018. Due to an 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 cents for the period.

Financial Ratios – Strong Profitability Margins versus the Industry Median

 

The reported Gross margin, EBITDA margin, Operating Margin, Pretax Margin and Net Margin for the financial year 2019 stood at 50 per cent, 52 per cent, 40.7 per cent, 32 per cent and 25.2 per cent. Reported profitability metrics were higher against the industry median. 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 lower than the industry median of 1.75, 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 lower versus last year data.

Share Price Performance Analysis


Daily Chart as on 3^rd June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 3, 2020, at the time of writing (before the market close, at 10:01 AM GMT+1), Kaz Minerals Plc shares were trading at GBX 491.80, up by 1.24 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 629.20/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 Glencore Plc (NTM Price/Earnings was 20.01), Highland Gold Mining Ltd (NTM Price/Earnings was 9.24), Central Asia Metals Plc (NTM Price/Earnings was 8.10), EVRAZ Plc (NTM Price/Earnings was 8.12) and Atalaya Mining Plc (NTM Price/Earnings was 6.13). The Average of Price/Earnings (NTM) of the company’s peers was 10.30x (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 BHP Group Plc (NTM Price/Cash Flow was 7.85), Central Asia Metals Plc (NTM Price/Cash Flow was 4.77), Highland Gold Mining Ltd (NTM Price/Cash Flow was 6.46), Ferrexpo Plc (NTM Price/Cash Flow was 3.61) and EVRAZ Plc (NTM Price/Cash Flow was 4.43). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.42x (approx.)

Valuation Metrics


(Source: London Stock Exchange)
 
As on 30^th April 2020, the Price to Earnings multiple of the Kaz Minerals Plc was around 4.4x, which was lower as compared to the industry. It reflects, shares are undervalued against its peers. 

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


(Source: Refinitiv, Thomson Reuters)

In the last five years, Kaz Minerals Plc share price has delivered 94.27 per cent return as compared to negative 3.04 per cent return of FTSE-Mid 250 index, which shows that the stock has outperformed the index during the last year.

Industry Outlook
 
As per the Acumen Research and Consulting, the market size for Copper industry worth will be around 222 billion by 2026. 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 per cent by 2040.
 

(Source: Annual Report)

Growth Prospects and Risk Assessment

The Company has many value-accretive projects in the pipeline with low risk and higher production. It is well-positioned to take benefits from growth trends across the energy and industrial markets. The company using its cost synergies had optimized its operational structure to achieve sustainable growth in the future. It 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 regulations or legislation in local markets.

Business Outlook Scenario

The Company has shown an increase in financial performance in the financial year 2019. Both the top-line and the bottom-line performance have 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 production in the Q1 FY2020 remained strong despite the impact of covid-19 and Expansion of Aktogay Project remained on track.

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 Group 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.

To meet the rising 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 per cent). The Company had 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 Company expects 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 assists 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.

Moreover, the Group has an industry leading cash position. As per the data collected by the Wood Mackenzie, first quartile net cash cut off was 98 USc/lb (US cents per pound), as at 31^st December 2019, while the net cash cost of KAZ Minerals was 77 USc/lb.


(Source: Presentation, Company Website)

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 growth prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing market price of GBX 485.80 (as on 2^nd June 2020), with lower-double digit upside potential based on 10.30x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 5.42x NTM Price/Cash flow(approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 3^rd June 2020).

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