UPDATE 2-Kazakhmys EPS up, sees challenges in 2008

(Adds conference call, shares, analyst comment)

By Eric Onstad

LONDON, March 6 (Reuters) - Kazakhmys Plc (KAZ.L), the world's 10th biggest copper producer, posted a 0.7 percent rise annual earnings per share on Thursday, lower than market forecasts after flooding and processing problems cut output.

It said 2008 might be another tough year, but output should at least equal that of last year.

"There will undoubtedly be challenges in 2008, though we anticipate that copper cathode production should be at least the level of 2007," a statement said.

Chief Executive Oleg Novachuk said the forecast might have some upside, but he was being cautious after problems in 2007.

"We are absolutely aware that probably we are overly conservative, but we have learned lessons that we cannot know everything that will happen over the year," he told a results conference call.

In January, the firm released production data showing full-year copper output fell 6.3 percent to 381,200 tonnes, down from 407,000 tonnes in 2006.

Flooding at its South Mine in Zhezkazgan in September combined with slower pick-up in output from new concentrators curbed 2007 copper output.

SHARES UP AS COPPER RISES

The firm, whose main operations are in Kazakhstan, said EPS based on underlying profit rose to $3.02 in 2007 from $3.00 the previous year, coming short of a forecast of $3.07 in a Reuters Estimates poll of 10 analysts.

The shares, which have gained a quarter so far this year, gained 1.6 percent to 17.60 pounds by 0850 GMT as copper prices came within a whisker of matching a record high. This compared to a 0.4 percent increase in the UK mining index .FTNMX1770.

Analyst Charles Kernot at Seymour Pierce said the results were largely in line with expectations, but he reiterated a "sell" rating on the stock.

"The company's future options for growth are focused on... longer term projects and so we see better near-term growth potential in Antofagasta (ANTO.L). Fears about the copper market are, however, our overriding short-term concern."

Kazakhmys said earnings before interest, tax, depreciation and amortisation (EBITDA) increased 1.2 percent to $2.34 billion while underlying profit rose 0.5 percent to $1.41 billion.

The firm proposed a final dividend of 27.4 cents per share, which combined with the interim dividend represents a total dividend of 41 cents per share, up 7 percent.