Share of the week: KAZ Minerals bounces off record low

After Goldman Sachs hung a 'sell' sign above KAZ Minerals a month ago, the miner lost nearly half its value and has significantly underperformed the market. But there is potential both for growth and debt restructuring, here, and the broker now believes the de-rating marks the Kazakhstan-focused copper miner as a value play. As KAZ shares surged 16%, directors also took the chance to fill their boots.

Chairman Simon Heale topped up the family stake by over 77,000 shares this week at 81.8-84.5p. Finance director Andrew Southam bought over 99,000 shares and newly appointed non-executive director John MacKenzie bought 5,000.

Don't get too excited, though. Goldman is still bearish on the outlook for copper, so makes no changes to forecasts for KAZ. Before the rally, KAZ shares traded on a 2018 EV/EBITDA multiple of 7 times, a justified premium to the mid-cycle multiple for copper miners under Goldman's coverage.

The shares have jumped from 76.3p to 94p this week, but the analyst has a 110p target price, in-line with the downward trend shown on the chart below.

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"In our view the valuation now fairly reflects the concerns that predicated our [October] sell rating: 1) perfect execution on delivery of growth, and 2) restructuring of the debt repayment schedule; we are yet to see delivery but think they are now reflected in the price," says Goldman analyst Yulia Chekunaeva.

"We also believe KAZ’s announcement that it will reschedule US$300 million of contractual payments to 2018 is a move in the right direction; it will result in less pressure on [free cash flow] (2016-17E) and paves the way for further restructuring."

Bozshakol, Aktogay, Koksay

KAZ's main growth driver is the Bozshakol project. It's the largest single mine development in the former Soviet Union and will more-than-double KAZ's production, with a life of over 40 years.

If successful, the company could secure additional pre-export finance debt facilities based on off-take agreements. This, along with the fact that development banks in China have pumped in most of the cash, may lead to debt restructuring, says Goldman.

KAZ also wants to get its second copper project, Aktogay, into production and develop Koksay from the scoping stage. Luckily, the group is focused on open pit mining in Kazakhstan, so drilling costs are lower.

With 58 thousand tonnes (kt) of copper drilled from the ground in the first nine months of the year, KAZ is banking on a serious ramp-up in the last quarter to hit its 80-85kt full-year guidance.

With zinc production at 73kt, the firm should meet the upper limits of it 90-95kt forecast, while silver output should beat guidance of 2,250-2,500 thousand ounces (koz) by around 10%. Although Goldman expects full-year revenue will climb 16% to $784 million, KAZ is likely to lose $73 million.

Still, KAZ's underperformance has triggered an upgrade to 'hold' from Goldman and removal from its Pan-Europe Sell List. Of course, key risks still remain in a very exposed and volatile sector: any negative commodity price movements, foreign exchange headwinds and issues getting its growth projects up and running in time and on budget could demolish the prospective investment case here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.