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KAZ surprises again

The copper miner's last month has been nothing if not dramatic
August 17, 2018

Welcome aboard the KAZ Minerals (KAZ) roller coaster. A fortnight after its proposed acquisition of the Baimskaya copper project left shareholders dizzy and whiplashed, the miner threw the market another loop with a strong set of interim numbers, and – why not? – a dividend into the bargain. Metal prices may be tumbling, but the important thing is to keep investors on their toes.

IC TIP: Buy at 585p

Indeed, if KAZ’s initial surprise act failed to convince investors, then why wouldn’t a first distribution in half a decade? After all, the 28 per cent share price drop which greeted news of a $900m (£708m) long-term bet on a $5.5bn mine has made it easier to cheaply add a nominal yield to the stock.

This second shock seemed to work. Despite another dire week for copper, KAZ shares jumped 7 per cent on the publication of these figures, as investors welcomed the maintenance of production and cost guidance, and further signs that the company can deliver on its large capital programmes. In the first half, the Aktogay sulphide concentrator met its designed throughput capacity, and is on course to double its output year-on-year.

Net debt fell 16 per cent to $2.05bn, even after a long-deferred $250m payment was made to an Aktogay contractor. On a backward-looking view – or as KAZ puts it, a “12-month rolling” basis – that brings gearing down to a comforting 1.4 times gross cash profits. But seven weeks into the second half of 2018, and the London Metal Exchange copper price is down 16 per cent down on the first-half average of $6,916 per tonne. Earnings will be trending lower, and gearing will have already risen.

Naturally, that leverage will expand further once the Baimskaya deal is inked, though the $436m cash portion will not be paid until the first half of 2019. That, in turn, places greater reliance on better commodity prices before the year is out. Fortunately for KAZ, its by-product-rich output puts a lot of distance between it and the growing number of copper producers now making a loss. Group gross cash costs averaged $1.45 per pound in the first half of 2018, or just 82¢ after accounting for gold, silver and zinc sales.

On average, analysts expect full-year pre-tax profits of $885m and adjusted EPS of $1.40, rising to $886m and $1.54 in 2019.

KAZ MINERALS (KAZ)   
ORD PRICE:585pMARKET VALUE:£ 2.61bn
TOUCH:584.4-585p12-MONTH HIGH:1,103pLOW: 546p
DIVIDEND YIELD:0.8%PE RATIO:6
NET ASSET VALUE:268¢NET DEBT:171%
Half-year to 30 JunTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20170.7224041.0nil
20181.1035562.06.0
% change+52+48+51-
Ex-div:06 Sep   
Payment:03 Oct   
£1=$1.27