KAZ Minerals sinks as analysts fret about Baimskaya risks

In Credit Suisse's view, KAZ's appeal had been its low-cost operations that drove its strong free cash flow and its balance sheet, all of which have been "turned on its head" as a result of the FTSE 250 group's $900m acquisition of the Baimskaya copper mine from a group of investors including Chelsea FC owner Roman Abramovich.

The Swiss investment bank said that investing in Baimskaya will mean KAZ's capex will remain "very elevated" for the next eight years, meaning free cash flow would shift to negative over the period, driving net debt up every year.

"All this would be somewhat easier to grasp if we were confident on significant long-term value in the project but with it completely undeveloped, requiring lots of upfront capex and in a region that comes with higher ESG/political difficulties, this is not the case," said Credit Suisse.

Credit Suisse said that Baimskaya is projected to cost KAZ roughly $5.5bn in capex with production not due to begin in 2026 when it is expected to produce an average of 400,000 ounces of gold for the first ten years of its total 25-year lifespan.

In addition to the downgrade from 'outperform' to 'neutral', Credit Suisse also slashed its target price on KAZ Minerals from 1,050p to 630p.

The broker, which previously used net present value to drive its target price on KAZ, now thinks the method is "the wrong way to look at it".

"Given financial risk and poor earnings momentum in the coming years, we think the stock will trade at a big discount to this NPV until the market becomes a lot more comfortable with the new project," the analysts noted.

Similarly, UBS cut its price target to 660p from 940p as while KAZ has helped address some investor concerns about the project, analysts felt it is "unlikely to change the market's negative perception of the project".

The company is also "unlikely" to provide more detailed operational/cost estimates to support the projects valuation until the feasibility study is complete in the second half of 2019, which is also the time management have suggested would be best to bring in a partner.

While KAZ announced a dividend for the first time since 2013, this "small positive" is also "unlikely" to be followed in coming periods by a sufficiently attractive dividend yield "to materially impact the investment case".

UBS said Baimskaya "could be transformational for KAZ" but it is long dated and execution risks and country risks "are elevated", meaning even after the share price correction analysts stay at a 'neutral' rating.