UPDATE 2-Copper miner Kazakhmys surprises with radical spin-off plan

Thu Feb 27, 2014 8:47am EST

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* Considers acquisition of Koksay copper project

* Looks for partners in growth projects

* Spin-off plan expected to complete in 2015

By Silvia Antonioli

LONDON, Feb 27 (Reuters) - Copper miner Kazakhmys plans to sell off less-profitable mines to its biggest shareholder Vladimir Kim to focus on lower-cost, open-pit mines and growth projects, sending its shares up by more than 30 percent on Thursday.

This will put some of the company's mines into a separate private company owned by Kim, a Kazakh billionaire who has about 33 percent of Kazakhmys, with potential support from the Kazakh government.

The shake-up provides more evidence of how big mining companies are struggling to cope with weak metal prices and rising costs. Rio Tinto, Anglo American and BHP Billiton are all trying to cut production costs and shed less-profitable assets.

London-listed Kazakhmys, which reported a 40 percent drop in full-year core profit, has been trying to move the bulk of its production to cheaper open pit mines.

Under the spin-off plan, the group would become a smaller but lower-cost producer, with output of about 80,000 tonnes, until new projects come on stream. Last year, Kazakhmys produced 294,000 tonnes of copper cathode equivalent.

The group's mature mines, mainly in the Zhezkazgan and central regions of the country, will be put into the separate company.

"It's about creating two entities, both of which are viable: one contains assets that are really suited to a public company listed status and the other that has a better chance in a private company," Chairman Simon Heale said.

Shareholders will vote on the plan in the second half of 2014 and the spin-off should be completed in 2015.

"Kazakhmys has announced a restructuring plan significantly bigger in scope than we and the market expected," Credit Suisse analysts said in a note. "If successfully executed in 2014 this could be a major positive for the group, transforming the operating and cost structure."

Analysts also hoped the restructuring would help the company improve its free cash flow, which was a negative $171 million in 2013 compared with an inflow of $85 million in 2012.

Shares in Kazakhmys hit a five month-high on Thursday. They had lost about two thirds of their value in 2013, underperforming a 16 percent fall in the mining sector , according to Thomson Reuters data.

NEWER MINES

Shedding its weakest assets will allow Kazakhmys to focus on its Bozshakol and Aktogay open-pit copper projects, for which it is considering finding partners.

Both are on track to start production in 2015 but the company said a change in contractors at Aktogay would likely raise the project's cost by $300 million to $2.25 billion.

The company's board has also approved the potential $260 million acquisition of a third copper project, Koksay, which fits with the strategy of producing more from newer mines.

Asked why Kim would take on Kazakhmys's older mines, Chief Executive Oleg Novachuk said Kim's intent was to improve the growth prospects of Kazakhmys in which he will maintain a 33 percent share.

"He will be very instrumental to make sure that this reorganisation will go smoothly in Kazakhstan," Novachuk said.

The company reported group core profit, or earnings before interest, tax, depreciation and amortisation (EBITDA), of $1.1 billion for 2013, down 40 percent from a year earlier.

Segmental EBITDA, which excludes income from a stake Kazakhmys owned in peer ENRC, was at $873 billion for 2013, 36 percent down from a year earlier but above company-provided analyst consensus of $772 million.

Kazakhmys produced 294,000 tonnes of copper cathode equivalent in 2013 and expects copper output for 2014 of about 285,000-295,000 tonnes.

After the spin-off and once Bozshakol and Aktogay reach full production, the miner's output is expected to rise to about 300,000 tonnes.

Kazakhmys is targeting 2014 cash cost between $3.15 to $3.30 per pound, little changed from its 2013 level of $3.28, as rising inflation is expected to partially offset the benefit of the Kazakh central bank's decision to devalue its currency by about 20 percent earlier this month.

"We are already seeing pressure from suppliers to raise prices so we'll give back some of the (currency) gain through higher inflation in costs in 2014," head of investor relations John Smelt said.

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