Since falling by more than 50% in the Covid-19 sell-off, the KAZ Minerals (LSE: KAZ) share price has rallied. The shares are now sitting just 14% below their 2020 high. Even so, they’re still over 70% down on where they were in 2011. As is often the case with miners, KAZ’s performance has been one of boom and bust.
The FTSE 250 group is primarily focused on producing copper, but also produces smaller amounts of gold, silver and zinc. KAZ benefits from operating mines that are among the most cost-efficient in the world, and operates out of Kazakhstan, Russia and Kyrgyzstan.
Since a company restructure in 2014, KAZ’s performance has been impressive. Over that time, annual copper production has increased from 85kt to 311kt. Revenues have increased from $665m in 2015, to $2.26bn last year. Meanwhile, net profits have averaged over $400m for each of the last four years, with record profits of $571m in 2019.
This performance is largely the result of a focus on high-growth, low-cost mines. And KAZ is committed to further optimising and expanding production at its existing mines, as well as acquiring new assets. In fact, the miner paid $900m for undeveloped assets in Russia as recently as last year. By 2022, it plans to have increased copper production by 25% from today’s level. Then by 2027, it hopes to be producing 500kt of copper a year.
The KAZ share price follows the copper price
Like all miners, the KAZ share price is sensitive to movements in commodity prices. Ultimately, profits will be determined by the copper price. But I think KAZ is in a good position. Its low-cost mines give it a net profit margin of 26%. This leaves plenty of scope to absorb lower prices and remain profitable. While a positive movement in pricing will have a disproportionately larger positive impact.
The copper price is intrinsically linked to economic growth. Such growth drives increased demand for copper, which is an important component in everything from electricity generation and transmission, to transportation and communications. In the long term, there’s logic in the rationale for copper price appreciation. Management predicts a shortfall in global copper supply in the coming decade, while electric vehicles and renewable power generation are expected to create a significant increase in demand.
Operations largely unaffected by Covid-19
The group’s operations have been largely unaffected by Covid-19, with management leaving production targets for the full year unchanged. Sales of gold made up 14% of revenues last year. A 14% increase in the gold price – since the onset of the pandemic – will go some way to offsetting the 10% plus fall in the copper price.
The current KAZ share price gives a P/E (price to earnings) ratio of around 5, based on last year’s earnings. I think that puts the shares in the ‘cheap’ category and severely underestimates the company’s financial performance. If the group manages to increase production as planned, and if the copper price stays stable, then I would expect the KAZ share price to kick on.
However, as a long-suffering shareholder, I must also warn of the risks. The company does have a high debt load. But more worrying is the collapse of the share price and subsequent restructuring in 2014. This still leaves an unpleasant after taste and hints at corporate governance issues. To reduce risk, make sure to diversify.
