Kazakh metal producers at high tide: Kazakhmys

Sell what you can, even at unattractive prices, and keep output volumes and output costs as low as you can. This has been by and large Kazakhmys’ policy, apart from its gesture to its home country’s community of not paying out dividends over the first half of this year, in order to remain in business. Like other companies, Kazakhmys, quoted on the London Stock Exchange and controlled by metal tycoon Vladimir Kim, has felt the hot breath from the government in its neck, warning that ruthless labour strategies would not be tolerated.

by Charles van der Leeuw, KZW senior contributor

Last winter, Kazakhstan’s leading miners suggested to the government to bail out part of their businesses after banks’ examples if the economic crisis would continue to exercise pressure on sales prices and thereby on sales earnings. Today, it looks like such meaures will not be needed. Though it must have hurt employees, rather draconic-looking measures have saved the day for Kazakhmys, Kazakhstan’s major and also one of the world’s largest producers of copper as well as by-products zinc, gold and silver through the first half of the current year. In his note to the board and the shareholders included in the financial review of the first six months, Kazakh tycoon Vladimir Kim, of Korean origin, gives an outline of what has been done.

“The suspension of four mines, at the end of 2008, should have resulted in a decline in ore output of around 3 million tonne with consequential reductions in metal production,” the text reads. “However, a series of actions taken by management has allowed us to offset the impact of the suspensions and maximise production. Output was raised at several producing mines, such that ore output declined by just 1.5 million tonne to 16 million tonne. The processing of previously stockpiled ore and higher recovery rates, at the concentrators and smelters, meant that the production of copper in concentrate from own material actually increased by 4.5 per cent to 178,000 tonne and the production of copper cathode equivalent rose by 8 per cent to 170,000 tonne. Action was also taken to reduce inventories of finished product, in order to release working capital, as a result of which sales of copper cathode equivalent were 200,000 tonne during the period.”

In all, Kazakhmys has kept its expenditure-productivity ratio stable in the best manner it could over the first half of the year. Not only its output of copper cathode picked up by 8 per cent from the second half of the previous year – “assisted by the use of stockpiled ore and productivity improvements” in the company’s half-year report’s words. Output of zinc, silver and gold also rose by 15, 10 and 8 per cent respectively in the first six months from the same period of the previous year. Reactions from investors, even as Kazakhmys has proposed to freeze dividend payment for the first six months (and probably as well over the second half), have been moderately upbeat. After Kazakhmys’ report came out, its shares on the LSE rose by 2.1 per cent of 19.5 pence to close the day 937 pence, Bloomberg reported. This puts the company’s market capital value in the order of 5 billion Sterling.

On the downside of the story, sales income so far this year could not keep pace with increased sales volumes from inventories, and dropped by 42 per cent on-year to 1.648 billion US dollar. It could have been a lot worse, the company’s board argues in its report, if production costs would not have been reduced from a previous 116 US dollar cents per pound of processed copper to 76 through the first six months. In this way, Kazakhmys was able to cash in on recovering prices in the best way it could. Prices realised by the company within the first half of the year stood at just over 4,000 dollar per tonne, rising from $2,902 a tonne at the beginning to $6,305 at the end of the period.

Kazakhmys does not seem to have been the only copper miner to have eaten into its warehouse stock. In the first half of the current year, overall copper stocks around the world, monitored by the London Metal Exchange, dwindled by almost a quarter (see table) from the end of the previous year – only to come close again to 300,000 tonne at the end of the last full trading week of August. In the same period of time, both spot and three-month contract prices more than doubled, ending the period at $6,500 per tonne for three-month paper.

However, zinc, Kazakhmys’ other base metal, saw its warehouse stocks soar from just over a quarter million tonne at the end of 2008 to close to 0.435 million tonne at the end of August this year. Prices over the period picked up by around 60 per cent through the period calculated from end-2008. As for gold and silver, two other byproducts from Kazakhmys’ copper mines, their prices within the same time-span gained in the order of 10 and 40 per cent respectively.

Caution should be urged for, though, since the difference between contract prices have been extremely narrow of late, with at the end of the first half of the year copper’s three-month paper diving under the spot price. It can only mean that traders, most probably by and large consisting of producers’ proxies after the oil industry’s example, have been hedging heavily into the current year, with the aim of keeping the upward trend in spot prices stable at the cost of paper trade profit. It does not mean, in any case, that faith in the market has fully returned.

Kazakhmys has shown readiness to admit its market operations all too frankly. “At the start of the year we hedged 8,500 tonne of production for each month in 2009, around one third of our anticipated production,” the half-year report reads. This was done to protect some of our higher cost operations, in the event of prolonged weakness in the copper price. These transactions offset the negative impact of copper prices falling below $3,000 per tonne at the cost of sacrificing the upside when the price rose above $4,000 per tonne.”

For this full year, Kazakhmys has set its copper production target at 300,000 tonne of copper cathode equivalent, which given Kazakhstan’s overall output (see table) should account for around 80 per cent of national production. In years to come, output is set to remain stable as two new mining projects, Aktogay and Boschekul, now at their exploration and assessment stage, will provide more than enough replacement to offset existing mines’ depletion. However, the company’s board warns that caution remains on top of the list. “So far, we have met the challenges of 2009, but the global exonomy remains fragile and we will continue to focus on cash generation and margin protection,” Mr. Kim’s note concludes. “We continue to believe that the long-term supply/demand fundamentals for copper are positive and as our major projects move forward, we will be well place to take advantage of this outlook.”

Not everybody takes such assessments for granted, though. Thus, the London-based private think tank VM Group in a report dated August 3 pointed out that market contractions are far from over – and this includes China where the government has kept the market cycle afloat by massive stock purchases – thereby buying time rather than pushing economic growth ahead against the odds. The fact that Kazakhstan’s overall production of non-ferrous metals has not recovered into the second half of the year indicates that a longer-lasting lull in market activity, reflected by the production side, is still on the agenda.

“We are not of the view that the near doubling of the copper price since its December low at $2,820 per tonne is due to any pick-up in the real global demand,” VM Group’s report reads. “Rather we see it as having more to do with the huge spate of restocking in China, and expectations that, somewhere along the line, real physical tightness will again emerge in the copper market, due to worries about its medium-term supply-side fundamentals. This has provided a platform for prices to spike higher, in anticipation of better times ahead. […] Such astonishing dynamics should suggest that the global recession is well and truly behind us, since copper traditionally is extremely sensitive to changes in global industrial output. But this is not the case. Chinese restocking has been so great that it has claimed a huge volume of available copper, and in doing so has provided a platform for traders to seek profit from the positive arbitrage trade between the higher Shanghai price over the LME price, which in April was more than $1,000 per tonne.”

This could well prompt companies like Kazakhmys to revise their outlooks into the second half of 2009 and for upcoming years. In July, with the company’s half-year report still in preparation, the International Copper Study Group cut its forecast for growth in copper mining capacity from here to 2013 down from a previous 5.1 million tonne to 3.9 million tonne. “The financial fallout and resultant deep recession has forced the postponement of mine expansions and new projects, and this will inevitably mean a tightening of the copper market ahead, especially in the context of continued demand growth from emerging nations and the eventual recovery in western demand,” VM Group comments in its report. “A serious market deficit is on the cards late next year and into 2011, with the growing possibility of a copper price that will most probably trump previous records, in nominal and perhaps even in real terms.”

(copper, zinc in tonne, gold, silver in kilogramme; changes on-year)

period/change June’09 July’09 January-July’09
copper 42,943/+24.1% 21,083/-50.9% 205,990/-4.8%
zinc 27,590/-8.2% 26,860/-12.8% 195,128/-9.0%
gold 1,174/+50.9% 649/+27.0% 5,975/+26.9%
silver 73,211/+41.1% 39,134/-9.9% 387,660/+5.8%

source: Reuters

(in million US dollar)

period H1’08 H1’09
revenue 2,838 1,648
earnings before EBITDA, tax 1,050 717
earnings before tax 886 645
net profit 610 269

source: company data


date 31/12’08 30/06’09 28/08’09
PRICES (USD cent)      
copper spot/t LME 290200 510800 649050
copper 3-m/t LME 293500 510200 650000
zinc spot/t LME 112050 155500 188000
zinc 3-m/t LME 115500 157800 188100
gold spot/oz LBM 86370 93755 94775
silver spot/oz LBM 1079 1394 1454
STOCK (tonne)      
copper LME 339775 265950 298925
zinc LME 253500 353575 434600

LME = London Metal Exchange
LBM = London Bullion Market
source: FT/Reuters