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Today’s post takes a look at the most compelling reasons why a stock – the second one today – has been added to The Value Investor Report.
Caution is still front and centre when it comes to investing in this climtae of record highs for the indexes.
But when ‘demonstrable bargains’ can be had and your time horizon is long, then there’s no need to ‘wait it out’.
The first time I heard about Kazakhmys (LSE: KAZ) being a potential investment was when it was kicked out of the FTSE 100.
The forced selling that ensues whenever a stock is ‘downgraded’ from an index can drive the share price to bargain levels.
We may have already seen the point of maximum pessimism when Kaz’s share price hit 170p in February 2014.
I’m not in the business of picking bottoms; if you get into that sort of caper you just end up with smelly fingers.
Picking bottoms, an unfortunate turn of phrase
Here’s what’s happening with Kaz:
In the first quarter of 2013, Kaz announced a new chairman and chief financial officer on the back of disappointing results.
The stock price was at 619p at the time and fell to it’s all time lows of 180p in less than 12 months.
The new management team are proceeding with a cost cutting plan as part of a wider restructuring plan designed to strengthen the balance sheet and protect margins from being eroded due to lower output and commodity prices.
As alluded to in their 2013 results, the management team were ‘met with lower copper prices and rising costs‘ which meant that ‘more structural change‘ is required.
Kazakhmys Mining Financial Summary – 27 February 2014
$ million (unless otherwise stated) 2013 2012 -------------------------------------------------------- ----- ----- Sales revenues: 3,058 3,362 Copper cathodes 1,973 2,088 Copper rods 85 187 Copper concentrate 210 - Zinc concentrate 143 154 Silver (1) 311 414 Gold (by-product) 146 300 Gold (primary) 6 22 Other 184 197 Average realised price of copper (2) ($/t) 7,252 8,067 EBITDA (excluding special items) 705 1,160 Net cash costs excluding purchased concentrate (USc/lb) 222 174 Gross cash costs excluding purchased concentrate (USc/lb) 328 333 Capital expenditure (3) 1,317 1,233 Sustaining 432 624 Expansionary 885 609 -------------------------------------------------------- ----- -----
There are two main ideas behind management’s restructuring plan:
- dispose of non-core assets and develop ‘major growth projects’; three assets were sold in 2013 netting $2,179 million in cash, two of which (a 26% stake in ENRC and a 50% stake in Kazakstans largest power station Ekibastuz GRES-1) served little more than to distract Kazakmhys from it’s core business and deal adequately with the bear market in commodity prices.
- focus on mining and copper production from large-scale open pit mines; even though MKM, a downstream copper business based in Germany was a profitable business, Kazakmhys sold it because ‘it did not fit with our focus on mining in Central Asia’
These three disposals allow management to focus solely on our core copper business, increase the efficiency of our existing assets and deliver our growth projects.
In response to the pressure on margins and the future spend on the Group’s major growth projects, we commenced an optimisation programme and asset review, including a re-assessment of the Group’s integrated model. The objective was to achieve sustainablepositive cash flow from our existing operations focusing on profitable production rather than volume targets
The latest venture in regard to these cost saving initiatives is a proposed separation of mature assets that will not contribute to cash flow into a separate corporate entity to be sold to Vladimir Kim, the ex chairman but as yet nothing has been agreed and negotiations are at the early stages.
Management are hinging the success of future earnings on two of their current projects (emphasis mine):
‘The delivery of our two current major growth projects at Bozshakol and Aktogay is central to the Group’s transformation and we have implemented some significant changes at the projects during the year… The Board believes that the long-term success of Kazakhmys is dependent on improving the cash generation of the underlying business and delivering the major growth projects
Reviewing the Kazakhmys Mining Production Summary it becomes very clear exactly how they make their money:
The Division’s key products are copper cathode, rod and concentrate, which contributed 74% of total revenue in 2013. Sales of zinc in concentrate, silver and gold products are also an important part of the Mining Division’s business model.
This is significant because production and grade levels from copper increased through 2013:
kt (unless otherwise stated) 2013 2012 ----------------------------------------------- ------ ------ Ore output (1) 39,191 37,507 Copper grade (%) 0.99 0.95 Copper in concentrate from own production 314.6 303.7 Copper cathode equivalent from own concentrate 294.0 292.2 Cathode (2) 262.5 292.2 Concentrate (3) 31.5 - Copper rod production 12.1 23.9 =============================================== ====== ======
The Bottom Line
The fact is that KAZ is a former large cap stock going through a period of prolonged unpopularity and is selling at a discount to it’s potential as a copper producer.
It has a smart management team who know what the problem is and have already started to take action.
Copper prices will always have an influence on the price of KAZ but with a large enough margin of safety in place and a 2 – 4 year time horizon for this investment now is a good time to take a position.
Long today at 282p with a target price of 400p
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Image: Yahoo Finance