Kaz Minerals Plc: Sustainable business model and industry leading low-cost producer

Kaz Minerals Plc (LON: KAZ) is a FTSE-250 listed copper Company, which is focused in open pit mining in the Commonwealth of Independent States (CIS) region. The Company is identified as the largest copper producer in Kazakhstan. KAZ is focused on copper mining and the development of new copper mining projects in Russia and Kazakhstan. The Company has successfully delivered several greenfield mining projects. Kaz Minerals primarily develops and operates low-cost copper mines. Copper production witnessed a compounding annual growth rate of ~40% to 311 kt (kilo tonnes) in 2019 from 85 kt in 2015. The Company will release Q3 production update on 29 October 2020.

(Source: Company Website)

Growth Prospects and Risk Assessment

KAZ is high growth copper miner, with amongst the lowest production costs globally. It is focused on a large scale, open-pit copper mining in Kazakhstan. 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. It is anticipating 80 ktpa of additional copper production from Aktogay expansion project in the near-term. The Aktogay expansion project is on track to start from late FY21. Also, the feasibility study of Baimskaya copper project is expected to be completed by the end of FY20. In H1 FY20, it has maintained a low-cost position with a net cash cost of 68 USc/lb, which is amongst the lowest in the industry.

(Source: Kalkine Research, Refinitiv)

However, there are certain risk and uncertainties to business growth. Mining is a hazardous business, and hence, any accident or negative incident could cause production disruption, reputational damage, and financial loss. The Company operates in multiple geographies, and its profits can be impacted negatively due to the foreign exchange rate fluctuations. Moreover, there are significant operational risks associated with Covid-19 related restrictions, geological and weather conditions.

Industry Outlook Dynamics

In 2019, the global copper supply and demand gap, which has been in deficit since 2015, worsened to 446kt. Moreover, demand growth is anticipated to be slow in 2020, due to the coronavirus outbreak. As per the Acumen Research and Consulting, the market size for copper industry will be around USD 222 billion by 2026. In the long-term, the demand for copper is likely to grow, primarily driven by urbanisation (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 by 43 per cent by 2040.

(Source: Kalkine Research, Presentation)

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

On 7 August 2020: KAZ Minerals provided an update on the provision of infrastructure to begin operations at Baimskaya copper project. The Company is in active discussions with the Russian government and will provide an update later.

A Glimpse of Business Segment

(Source: Interim Report, Company Website)

Key Performance Indicators (Financial & Non- Financial)

(Source: Annual Report, Company Website)

Financial & Operational Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company did not experience any material disruption to output or sales from Covid-19 pandemic. Led by 11% lower average LME (London Metal Exchange) copper price, the revenues decreased by 6% year-on-year to US$991 million.
• Meanwhile, it has shown an increase in copper sales volumes of 2% year-on-year and 16% higher gold revenues. Copper and gold sales were lower than production volumes due to the timing of shipments.
• Due to the lower copper price, the profitability for the period declined, while the Company showed strong cash generation, with USD 310 million of net cash flows from operating activities.
• Net cash cost stood at 68 USc per lb (H1 FY19: 80 USc per lb), supported by strong gold by-product credits, surged copper sales volumes and weaker tenge exchange rate in the period.
• The Company witnessed an increase in the production of copper and gold by 4% and 25%, respectively in the first half of the financial year 2020. The Company believes covid-19 related risks to exist in H2 FY2020, while all metals are on track to achieve production guidance for FY2020.
• The Company has a strong liquidity position with gross liquid funds of USD 1,101 million funds as on 30 June 2020, and the net debt has also increased for the period by USD 38 million.
• Kaz Minerals maintained an interim dividend of 4 cents for the period.
• The Company’s Aktogay expansion project remained on track for start-up in late FY2021, with an unchanged project budget of USD 1.2 billion.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Kaz Minerals Plc has delivered a decent return for the shareholders’ as return on equity of 9.4% was higher as compared to the industry median of 2.5%. On the liquidity front, Kaz Minerals Plc’s current ratio was higher than the industry median of 1.86x, reflecting sufficient liquidity to meet short-term obligations. On leverage front, the debt-equity ratio was 1.88x, which was higher as compared to the industry median of 0.54x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

(Source: Kalkine Research, Refinitiv)

On 23 September 2020 (before the market close, at 8:25 AM GMT+1), Kaz Minerals Plc shares were trading at GBX 558.80, up by 0.58% against the previous day closing price. Stock 52-week High was GBX 600.00 and Low of GBX 256.20, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 100-day (GBX 515.30) and 200-day (GBX 490.90) simple moving average prices, which reflects an uptrend in the stock.

14-day RSI is currently supporting an upside move (around 41 level), which means the stock price could increase in the short term.

(Source: Kalkine Research, Refinitiv)

In the last one year, Kaz Minerals Plc share price has delivered ~29.18% return as compared to ~ negative 15.37 % return of FTSE-250 index, which shows that the stock has outperformed the index during the last year.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

(Source: Kalkine Research, Refinitiv)

Business Outlook Scenario

KAZ has responded swiftly and comprehensively to the challenges presented by Covid-19 mayhem. Therefore, the production guidance for FY20 remained intact after the robust H1 FY20 performance. It has maintained a low-cost position with a net cash cost of 68 USc/lb, which is amongst the lowest in the industry.

The long-term outlook for copper remains positive; however, Covid-19 delays could exacerbate the supply deficit in the short-term. In the near-term, the outlook for copper will depend on the pace of economic recovery, the persistence of supply disruption, the extent of government spending on new copper-intensive infrastructure projects, and central bank stimulus measures. In future, the likelihood of strong operational performance is also underpinned by the progress made in the pipeline at Aktogay and Baimskaya projects.

(Source: Company Presentation)

Moreover, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption. Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment.

Considering the improved production, strong liquidity position and support from the valuation as done using the above method, we have given a “Buy” recommendation on Kaz Minerals Plc at the current price of GBX 558.50 (as on 23 September 2020, before the market close at 8:25 AM GMT+1), with high single-digit upside potential based on 8.14x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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