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Shares in Kazakhstan-based copper miner Kazakhmys didn't react well to poorer-than-expected earnings across the company's controlled subsidiaries, and the scrapping of a final dividend for 2008. Costs have risen sharply along with debt repayment liabilities, and the focus now is on conserving cash while cutting production in the face of weakened demand.
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A six per cent drop in average realised copper price to $6714 per tonne in 2008 more than offset marginal production growth, so revenues dropped two per cent to $5.15bn. Spiralling fuel, materials and wage costs plus rampant Kazakh inflation however shrunk group underlying earnings before interest, taxes, depreciation and amortisation (Ebitda - or cash earnings) thirty per cent, to $1.63bn.
The actual full-year figures below cash earnings - which the company will only release once fellow London-listed Kazakh miner ENRC has announced its own results and Kazakhmys can therefore include earnings due to its 26 per cent ENRC stake on an equity-accounted basis - will also have to include $400m of impairment charges across various assets. The largest such write-down, $158m, relates to the Kazakhmys Gold subsidiary acquired in mid-2007, to reflect the fact that its outlook is 'less attractive than originally anticipated'.
Significantly, with cash costs of copper production soaring from 33¢ per lb to 116¢ there is no way Kazakhmys can still be described as a low-cost producer. In the coming year copper cathode production is expected to be 300,000 tonnes compared to 343,000 tonnes in 2008, and the company is closing some of its higher cost shafts. In the coming year the cost of fuel and materials should drop and a devaluation of the local currency against the dollar will also help the reported cost base.
The real trouble, however, is that this month sees the beginning of principal repayment on the $2.1bn loan the company secured to buy a power plant last year - to be paid back in chunks of $44m per month. That will push interest and financing costs to more than $440 this year compared to just $70m in 2008 - and is well above projected operating cashflow of around $25m per month.
Near-term debt disaster should be averted by some $570m cash in the bank, $100m owed in tax repayments, an undrawn $200m credit facility and the possibility of selling on a stake in the same power plant to a state investment company for around $500m. But without this money sloshing around above the operational level, it is easy to see how much trouble Kazakhmys would be in.
The negative implications of all the above are obvious, but additionally all work on whatever growth projects the company did have is also being put on ice. So rather than being well-prepared for when copper's day comes again, as rival Antofagasta will be by continuing to invest through the downturn, Kazakhmys will have to pick up where it left off. High enough at 255p.
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