UPDATE 2-Miner Kazakhmys scraps dividend as rising costs bite

Thu Aug 22, 2013 7:52am EDT

Related Topics

* Kazakhmys takes $823 million hit from ENRC sale

* Scraps dividend

* Gross cash costs increase 5 pct, lowers guidance

* Net cash cost of copper rises almost 56 percent

* Says resumes talks on Ekibastuz sale

By Clara Ferreira-Marques

LONDON, Aug 22 (Reuters) - Copper miner Kazakhmys said first-half core profit dropped by more than a third and scrapped its dividend on Thursday, as higher production failed to offset the impact of falling prices and a relentless rise in costs.

The Kazakh group - burning cash while it builds the two mines that will transform its production profile from 2015 - sank to a net loss of $962 million from last year's profit, weighed down by impairments that included an $823 million hit from the sale of its stake in peer ENRC.

While the $875 million it cashed in from selling the 26 percent stake in its Kazakh rival will help Kazakhmys to cut debt that soared to $1.3 billion at end-June, the transaction confirmed how far the value of its asset had dropped.

"The ENRC impairment looks unflattering but should have been expected," said analyst Louise Collinge at Investec. "The lack of interim dividend is the right decision by the company for cash conservation, but may disappoint the market."

Kazakhmys had long intended to get rid of its stake in ENRC, which was left over from a failed takeover attempt. The sale will leave it more exposed to the vagaries of the price of copper as well as by-products gold and silver, since ENRC's profits come mostly from ferroalloys and iron ore.

"We had ambitions to work with ENRC, but the strategies of our companies became different," Kazakhmys Chief Executive Oleg Novachuk told reporters. "Our target now is to generate cash for shareholders, optimise cash cost and deliver our projects. Life without ENRC will also be bright."

Kazakhmys's closely watched core profit, however, missed forecasts, even after gross costs - a measure which excludes the impact of by-products like gold and silver - rose a modest 5 percent, prompting the group to lower full-year inflation guidance to 5-8 percent from an increase of up to 12 percent.

However net cost soared thanks to a smaller contribution from gold and silver as those prices dropped, meaning the cash cost of producing a pound of copper including the contribution of those metals rose to $2.32 from $1.49.

Kazakhmys, the world's No. 10 copper miner, reported core profit, or earnings before interest, tax, depreciation and amortisation (EBITDA), at $438 million for the six months, at the lower end of estimates cited by analysts.

Including ENRC, EBITDA fell year-on-year to $714 million.

CASH BURN

Kazakhmys is reviewing its assets in order to cut costs and begin generating cash. It had negative free cash flow of $135 million in the period, one of the reasons that prompted it to scrap its interim payout.

The miner said in February it was in talks to sell its stake in Kazakhstan's largest power station after the state made it an offer. It confirmed on Thursday that talks over that potential sale had resumed after the ENRC vote went through, but gave no further details.

Kazakhmys is investing heavily in two new mines, Bozshakol and Aktogay, that will begin producing in 2015. They will enable its transformation from a producer with one of the worst safety rates among larger firms, owing to its risky underground mines, to a copper miner with some 80 percent of production from less labour intensive open-pit mines.

Kazakhmys gave little detail of its cost review on Thursday but said it would cut back on mid-sized projects, suspending four as well as halting work on a copper ore concentrator.

Kazakhmys had said output copper cathode rose 7 percent over the six months to 144,000 tonnes. It said on Thursday that production for the year will be at the higher end of its forecast range of 285,000 to 295,000 tonnes.

Shares in Kazakhmys ticked 0.9 percent higher at 1030 GMT, underperforming a 1.8 percent rise in the broader sector, reflecting what analysts said was a mixed picture.

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