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UPDATE 2-Miner Kazakhmys hit by worries over rising costs
February 28, 2013 / 12:50 PM / 5 years ago

UPDATE 2-Miner Kazakhmys hit by worries over rising costs

* Names Simon Heale as chairman, Andrew Southam as CFO

* Gross costs forecast 8-12 percent higher in 2013

* 2012 core profit excluding ENRC down 30 percent

* Shares down more than 5 percent

By Clara Ferreira-Marques

LONDON, Feb 28 (Reuters) - The prospect of sharply higher costs and spending at copper miner Kazakhmys battered its shares on Thursday, after the company reported a drop in annual profit and warned it would take a hit on its stake in Kazakh rival ENRC.

The stubbornly high cost of labour, transport and materials has been a bane for the mining industry, with Kazakhstan a flash point where miners compete with the oil industry for a small pool of qualified workers.

London-listed Kazakhmys has also had to process more ore to compensate for lower grades from ageing mines.

Kazakhmys’s 2012 net cash costs were at the top end of a targeted range. Gross cash costs, which exclude the benefit of metals produced as by-products, rose almost 29 percent.

The miner, which has frozen hiring, forecast a further gross cost rise of 8 to 12 percent in 2013 and said by-product output, which helps keep costs down, would be lower - leading some analysts to forecast that net costs could rise by more than a quarter.

“The cost outlook is worse than expected and should lead to earnings downgrades for this year,” analyst Nik Stanojevic at stockbroker Brewin Dolphin in London said.

“The real issue is capital expenditure, which is going up to (as much as) $2.3 billion, almost doubling. With higher costs and flat production and $2 billion of capex, you are talking about a very large negative free cash flow for 2013 and new production is not coming on until 2015.”

Cost pressures are expected to ease after Kazakhmys increases the proportion of copper mined from cheaper, open pit mines, and brings in new operations like the $1.9 billion Bozshakol, on track to start producing in 2015.

Shares were down 5.8 percent at 1130 GMT, underperforming a an 0.8 percent drop in the broader mining sector.


Kazakhmys said core profit, or earnings before interest, tax, depreciation and amortisation (EBITDA) - excluding its stake in ENRC - came in at $1.36 billion, down 30 percent.

But the miner also warned it would write down the value of its holding in ENRC, making Kazakhmys the latest miner to take a hit from acquisitions attempted or completed during the boom years. ENRC itself said yesterday it would be forced to write down the value of assets in Kazakhstan and Africa.

The value of the 26 percent ENRC stake dropped to $1.55 billion at the end of 2012 from $3.29 billion at the end of 2011. Shares have recovered since the start of this year, but Kazakhmys - the single largest investor in ENRC - said it would write down the value of the holding to close to the market value, implying an impairment of at least $1.5 billion.

That is likely to revive questions over the future of Kazakhmys’ ENRC holding - a major stake in a rival at which it does not have a board seat.

“We are open to all possible options,” Kazakhmys Chief Executive Oleg Novachuk said. “As soon as we see an opportunity, we will use it, but currently it is difficult to see what will be the next step.”

Kazakhmys’ decision on the future of its ENRC stake could be critical for its Kazakh rival, which is seeking to increase its freefloat to comply with London regulations.

Kazakhmys also announced changes at the top, including a new chairman, former London Metal Exchange boss Simon Heale, to replace the outgoing Vladimir Kim, the company’s biggest shareholder with just under 30 percent according to Reuters data.

Chief Financial Officer Matthew Hird will step down in May, and will be replaced by his deputy, Andrew Southam.

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