Kazakhmys plummets on ?1.5bn hit

Mar 26. Interactive Investor

By Patrick Smith

Kazakhmys plummets on ?1.5bn hitCopper miner Kazakhmys has taken a $2.2 billion (?1.5 billion) hit on its stake in Eurasian Natural Resources (ENRC) after a slip in the latter’s share price and charges that exceeded expectations.

The impairment dragged Kazakhmys deep into the red as it posted a $2.2 billion pre-tax loss compared with a $1.6 billion profit a year ago.

Shares in the miner were trading down 10% on Tuesday as investors reacted with shock to the news.

The impairment charge on its 26% stake in ENRC was as a result of the shares losing more than half of their value over the last year. There had been a warning in February that such an write-down would be necessary, but it was unclear to what extent it would take a chunk out of Kazahkmys’s profits.

But the loss cannot be wholly attributed to ENRC, with the Kazakhmys’s key market, copper, going into decline over the year, and the company paying the penalty for falling prices.

Revenue fell in 2012 to $3.4 billion compared with $3.6 billion the year before and it was mining that fell heaviest – compared with its power and services division – dropping 36%.

Interactive Investor view

Kazakhmys is just the latest mining giant to be weighed down by acquisitions made during the boom years, when a healthy global economy meant demand and prices for resources were riding high. And in this case ENRC is the single biggest factor holding Kazakhmys back.

It could get worse too, as Kazakhmys has not written off all of the loss in share value, instead choosing to value the stock according to assumptions about future cash flows. If this proves to be optimistic then a further impairment will be suffered by the company.

Analyst view

Analysts at Investec commented: “We believe that KAZ’s share price has been adversely affected by its associate for some time, but [Tuesday’s] announcement highlights the ENRC stake as a significant negative for the group.

“This also had a knock-on effect of increasing the group’s effective tax rate to over 68% as there is no tax relief on the impairment in Kazakhstan.”

The results on Tuesday highlighted the commodity-price and cost-inflation pressures the group is facing and with the global economy still struggling, there is no easy fix for this.

As such, Kazakhmys was forced to increase its borrowing in order to finance planned capital expenditure for the year. Loans increased by 30%, which pushed the company from a net cash position of $19 million to a net debt position of $800 million.

The positive is that (particularly considering Tuesday’s share price fall) the stock is cheap compared with its rivals.