Copper counts KAZ – update 05

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.

Mid 2018 – acquire the Baimskaya copper project

KAZ Minerals announces that it has agreed to acquire the Baimskaya copper project in the Chukotka region of Russia for $900 million in cash and shares, comprising Initial Consideration of $675 million and Deferred Consideration of $225 million.

This appears to be a game changer since the share price dropped somewhere between 25% to 30% on the news wiping £1 bill ($1.3 bill) off the market capital which is more than the cost of the acquisition. Clearly shareholders have taken a very cautious stance to the project.

The asset is as follows:

JORC resources of 9.5 Mt of copper at an average grade of 0.43% and 16.5 Moz of gold at an average grade of 0.23 g/t

With copper prices at 6,100 USD/t this would equate to  ~ 25 bill over the lifetime of the mine.

Kaz expects the average annual production over first ten years of operations expected to be 250 kt copper and 400 koz gold, or 330 kt Copper Equivalent Production which equates to 865 mill USD per year in added revenue (at today’s price). One would then have to deduct operating and other costs from such.

It appears as though the market prefers to react retrospectively to the above positives in the case of Kaz. The market will need to see results to book a recovery in share price. One thing is for sure, there will be no dividends or special dividends because the cash that Kaz did have (452 mill in dec 2017) will have been spent on the project as opposed to returned to shareholders.

copper price (1 tonne = 2204 lb)

Mid 2018

The share price continues on an upward trend. Since the last review below Kaz has gone from £8.75 to £10.00. This rise is due to the same two factors:

[1] the ramp up in production and successful progress of the current projects.

[2] the value of copper in the open market.

With respect to [1] above: Copper production (from q1 production report produced in April) increased by 3% to 67.3 kt (Q4 2017: 65.2 kt) supported by higher output at Bozshakol and Aktogay sulphide. The entire table is printed below and the blue cells indicate where production has increased against Q1 2017. This is a modest but acceptable increase.

Group production summary unit Q1 2018 Q4 2017 Q1 2017
Copper production kt 67.3  65.2  52.1
Bozshakol kt 26.9  22.5  22.9
Aktogay kt 26.4  26.0  11.9
East Region & Bozymchak kt 14 16.7 17.3
Zinc in concentrate kt 14.2  11.8  15.5
Gold production koz 49.9  40.9  42.6
Silver production koz 852  798  795

We again look to [2] the the price of copper on the open market. Here we see copper moving to an upper bound (+ 3 st dev) from previous trading averages currently at 3.28 USD/lb (7,223.45 USD/t). The price increase means gross revenue will have increased 10% on the additional 3% production. One might expect crudely expect revenue to increase to well over $2 billion.

Furthermore, if we assume costs have remained at $1 to 1.50 per llb, then the operating margin will have increased a further 10% and profit before tax may be in excess of $750 million.

If the market assigns a 15x multiple, this takes the market capital to $11 billion (£8 billion) which would see the share price double from it’s current level taking the share price to a new all time high last seen in 2007. However being a mining company a more conservative estimate might be $7.5 bill (£5.5 bill) which is still very respectable 25% above the current value.
The obvious risks:
[1] Global economic slowdown (in particular China) would negatively impair the price of copper.
[2] Some form of trade war which may prevent sales.
[3] Reduced production from the company (for various technical or other reasons).
or tweet here: @dlefcoe.

Late 2017, approaching 2018

The market has observed a strong performance in share price through 2017 so far with the share peaking above £8.75. This comes from 2 factors:

[1] the ramp up in production and successful progress of the current projects.

[2] the value of copper in the open market.

With respect to [1] above: The half yearly report for Jun 2017 states 3 operational highlights.

·       Copper output more than doubled to 118 kt in the first half of 2017

·       Aktogay ramp up progressing well, Bozshakol expected to achieve full capacity in second half

·       By-products on track to meet or exceed 2017 guidance

Naturally these follow into the financial highlights with gross revenues increasing from $363 mill to $837 mill (2.3X) and an increase in EBITDA from $147 mill to $505 mill  (3.4X). Furthermore, the key parameters leave the future of Kaz on a relative basis to its peers looking positive, in particular net cash cost of 64 USc/lb which is among the lowest cost copper producers globally.

The gross cash costs are as follows:

    • Bozshakol = 115-135 USc/lb
    • Aktogay= 110-130 USc/lb
  • East Region and Bozymchak = 205-225 USc/lb

With copper prices at $3 per lb, there is observable margin.

The above leads the analysis onto [2]. There is a positive correlation between copper and the share price. More-so, there is observable leverage between the share price and the underlying commodity which is depicted in the chart below (and has been discussed previously) where the market observes the stock as being the more volatile parameter.

In summary, it makes sense to remove some profit as the price becomes excessive relative to the underlying (65% share v 12% underlying). Having said this, the core position should remain long with a view to adding on dips. Ultimately, as with all stocks of this nature, it lays at the mercy of global economic conditions and in particular as the market has observed, the progress of countries such as China who create the demand.

Early 2017

So what has changes since the last update ?

Very little. The price of copper remains robust, the projects as described in earlier posts are well on their way. However, the value of equity has gone up from £3 to £5 per share since the last time of writing (you can see all the previous comments below or simply search for KAZ). The change in price represents a 65% increase arguably pricing in a reasonable proportion of the (near term) expected upside, however, the company is still “good value” relative to trailing index average earnings multiples (the SP500 is just over 21x, compared to KAZ at 15x).

Comparing KAZ to its sector (well at least to gold miners @ 31x), it appears to be even better value, although certain plays like AAL and RIO are more inline at 12 to 15x too.

The has been little change to the base view in previous comments, which remains the case so far…

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.

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.

Historical Copper Prices - Copper Price History Chart

What the investor can see is [1] volatility and [2] trend


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.


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.

Historical Copper LME Warehouse Levels - Copper Levels Chart

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.

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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.

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