In recent years, KAZ Minerals (KAZ) has beaten the doubters. The near simultaneous construction and ramp-up of its Aktogay and Bozshakol projects was repeatedly questioned by investors and analysts, who saw too much risk for an overburdened balance sheet. The copper miner’s response was to deliver. Timed to a rally in prices, KAZ’s share price jumped 10-fold in 30 months.
This week the group upped the ante with the dramatic decision to acquire the Baimskaya project in the Chukotka region of Russia for $900m (£690m) in cash and shares. The purchase, from a consortium of sellers including Chelsea FC-owner Roman Abramovich, will comprise an upfront payment of $436m cash and $239m in new stock priced at 816p a share.
The remainder has been deferred until the project has been delivered and production begins in 2026, by which time Baimskaya is projected to have sucked in $5.5bn of capital.
This combination of heady costs, lengthy development, deal structure, asset location, and sharp strategic shift sent investors into a blind panic. As chairman Oleg Novachuk was presenting the acquisition to a room of analysts, KAZ's shares were heading for a 28 per cent intra-day drop, although the shares had recovered 5 per cent at the time of writing.
One could forgive the market's nerves. Or was it confusion? Just a week before, KAZ had told the market that shareholder returns and de-leveraging comprised two of its three priorities for capital allocation. Investors can probably scotch the prospect of a dividend this year, and the upfront cash payment means the balance sheet once again looks stretched.
But KAZ insists that the deal will not push gearing too far, and that it can be counted on to obtain debt financing for the project – most likely from Chinese or Kazakh lenders.
Although he acknowledged the share price reaction was "ugly", the chairman and former chief executive encouraged shareholders to consider (and buy into) the long-term growth of the company.
The scale of Baimskaya is not in doubt. With expected copper equivalent production of 330kt per year, the mine will be roughly double the size of the Aktogay and Bozshakol operations combined, boasts a low strip ratio and has high enough grades to slot into the first quarter of the global net cash cost curve. Although capital intensity is lighter than the build-out of Aktogay and Bozshakol, costs per tonne of copper equivalent production will average $16,700 in the first decade of output.
Mr Novachuk said KAZ has looked at 92 large-scale copper projects, and decided that the company's competitive advantage made Baimskaya a strong fit. He also rebutted concerns around conditions in Chukotka, stating that climate was not dissimilar to the miner’s existing projects in Kazakhstan, and that “you can easily operate” in Baimskaya's cold weather.
One sticking point here is infrastructure, which is being built by a Russian government keen to invest in the Far East, and willing to provide the tax breaks to make the project work. KAZ also believes the deal's deferred consideration structure means the sellers have a financial interest in getting the mine built.
