HSBC downgrades Kaz Minerals as it was 'too bullish' on copper production

Shares in Kaz Minerals were under pressure on Monday as HSBC downgraded the copper miner to ‘reduce’ from ‘hold’ and cut its target price to 400p from 440p as it had been "too bullish" on Kaz’s production guidance for 2017.

HSBC downgraded Kaz Minerals discounting a copper price of about $3 per pound of copper and a strong set of results for 2016.

The bank said that it was “too optimistic” and has cut its production forecasts by 10% with even bigger changes for the by-products.

HSBC had assumed copper production at 276 kilotonnes for the 2017 financial year, but Kaz’s guidance was between 225-260 kilotonnes and so its updated forecast is at the top of this range at 254 kilotonnes.

“There is little change in gross unit cash costs but net unit costs are higher due to lower by-product credits. Furthermore, 2017 capital expenditure is about $200m higher due mainly to the under-expenditure in 2016.”

But HSBC said that the Kaz is still on track to produce about 300 kilotonnes per year of copper at $1 per pound in cash costs from 2018.

It expects 2018 will be KAZ's first full year at about 300 kilotonnes of copper and associated by-products at a time when the price of copper is set to rise and that the timing appears good and decent returns should be earned.

Capital expenditure is also higher for 2017, mainly due to a some $150m carry-over from 2016 and so, due to KAZ’s excessive leverage, HSBC said that the impact on the target price is material.

From the second half of 2018, net debt should decline at an annual rate of $500-600m per year, and so it will be sometime before the company will consider any dividend policy.

HSBC added that it does “not envisage that Kaz will be under any real financial pressure in the future, despite the fact that some of the debt ratio metrics appear challenging”.

Shares in Kaz Minerals were down 3.84% to 526.50p at 1003 GMT.