KAZ Minerals is a high growth copper company focused on large scale, low cost open pit mining in Kazakhstan. The Group is listed in London, Kazakhstan and Hong Kong.
KAZ share price
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end of 2016
Bozshakol and Aktogay are the two major green-field projects and are at the core of the company’s long term growth plans. Bozshakol commenced production in February 2016 and Aktogay will be completed in 2017.
At the end of Sep 2016, KAZ Minerals PLC announced the completion of construction and the commencement of commissioning works at the Bozshakol clay plant. The clay plant has an annual processing capacity of five million tonnes and is expected to commence production of saleable copper concentrate in 2016. Completion of the plant brings the total ore processing capacity at Bozshakol to 30 million tonnes per annum, including the main 25 million tonne sulphide concentrator which began operations at the start of the year.
The price of copper
KAZ has been a pure copper play for a number of years. Extracting & selling the materiel on the open market.
The common form that copper is quotes is US$ per Llb, although metric tonnes is also used for example in futures contracts. Both are equivalent and acceptable.
The long term chart for copper is displayed below.
What the investor can see is [1] volatility and [2] trend
Volatility
In percentage terms the metal experiences >50% peak-to-trough vol. The timescale for a whole movement swing (for a sharp move), ranges from 6 months to a few years. The most recent shock event was around 2009 with the price falling to ~35% of the 2008 price and then recovering and exceeding the 2008 level reaching a peak value of 4.5 us$/llb in 2010.
Trend
The investor can argue an long term upward trend over the past 25 years. However, this has been clearly been a game of two-halves with the first 15 years range-bound between 0.5 & 1.5 us$/llb. The last spike move is attributed to the “credit crunch” post the well documented failure of Lehman brothers (with values as per the above). However, since a more than full recovery, the market has experienced a continual decline over the past 5 years which economists have largely put down to the China slowdown.
The china slowdown
In simple terms, the economic growth of one of the worlds major consumers has declined resulting in a supply demand imbalance and a build up of inventory in warehouse levels. This has been in a number of products used for construction with copper, a key material, included. Warehouse levels have spiked as a result and although lower than any of the previous spikes, the elated inventory still creates a downward pressure on the price and will continue to do so until such is normalized.
Predicting the future for copper
This is the million dollar question and will clearly depend on management of the “latest” key driver – China. The economic slowdown has been ongoing for a number of years and whilst this may continue, the market, even if it responds slowly, has and continues to react. Firstly, price action as significantly normalized (currently at 50% of recent peak levels) albeit elevated to the 25 year historic average. Secondly, there are signs that warehouse levels are beginning to get managed accordingly. Thirdly, reduced production which has been forced onto market participants with sustained economic loss / reduced margins for those who do not react (the same is happening to oil) as those entities ultimately face closure.
However, there are plenty of stochastic random variables that can easily change the dynamic and therefore pricing in both directions. Obvious examples may be an increased slowdown of China (negative for price) or the emergence of a new economy (Brazil, India). Less obvious examples may be the trends & changes in material technology and the way and need for copper (for example its conducting properties or use in copper piping).
For further discussion and information the reader is welcome to contact here.
A leveraged play
The value of KAZ Minerals PLC is directly related to the value of its primary raw material (copper) & the quantities it produces (and ultimately sells).
However, the relationship is non-linear. The chart clearly shows a leveraged play and on inspection of recent data one observes a >300% more in the share price for a given 25% move in the commodity that is extracted and sold. To a reasonable extent this will be partly expected because of completions and expected completions of some large projects, which will increase volumes and drive efficiencies over and above the copper price moves alone.
Additional demand for 2017
With Brexit & Trump being the main themes, the market focuses on policy.
The US policy is expected to be one of construction. This will be extremely supportive for builders and ultimately miners and in particular a base commodity which is used in huge sections of the industry. To what extent will the US demand offset the previous China slowdown and also to what extent has the China slowdown already abated (with prices normalizing accordingly) as mentioned previously.