Liberum and Redburn highlight value at KAZ Minerals

Kaz Minerals shares have lost more than half their value since June's peak, leading broker Liberum to upgrade its rating on the shares to 'hold' from 'sell' and Redburn to reiterate its view that the shares are a "value opportunity".

Investors have overwhelmingly turned their noses up at Kaz's $900m acquisition of the Baimskaya copper project in Russia, which will require an elevated level of capital expenditure before production can begin in 2026.

This new endeavour has "clearly come at a time when the market does not see the value in large scale greenfield projects in Russia", Liberum analyst Ben Davis said, but noted that management are undeterred and strongly believe in the value of the project and their ability to deliver on it.

"On our assumptions, the impact to NPV is fairly minimal, but we can understand why the market is repricing the company risk given that the investment proposition has changed so materially. Current investors do not want to be on this new journey, but others will eventually, assuming that the company take the appropriate steps to derisk."

Davis and his colleagues said a large equity stake at the project level and a phasing of the project could help significantly, but a feasibility study is not due to complete until the second half of 2019. With the share price now at Liberum's 460p price target, the Liberum analysts upgraded their rating and "see upside risk on a reverse on the overly negative sentiment in copper" in the short-term.

Analyst Simon Toyne at Redburn highlighted a "rare" value opportunity in the shares.

In market cap terms, KAZ has shed $2.1bn, which equates to the $0.9bn purchase price of Baimskaya, plus $1.2bn negative NPV on a project that Toyne sees a "high quality in terms of cost, capital intensity and life". The decline in the shares, he suggested, translated to an investor assumption that capex spend on Baimskaya will overrun by 20%, that 50% of the project will be expropriated by the Russian government post construction, and that copper prices would run at 270 cents per lb in the long term.

"Our opinion is that, while we entirely understand investor angst qualitatively, and the fact there are clearly more sellers than buyers currently as potential new ‘value’ investors take time to study the situation and existing investors who are now opposed to this type of proposition exit, it is ultimately very pessimistic to believe this set of assumptions is a sensible central case.

"Value opportunities on this scale are rare in the mining sector, as are the subset of investors willing, ideologically, to engage in such a situation, but for those who are – buy."