Copper producer Kazakhmys is 'feeling the pinch', according to Credit Suisse, which left its 'underperform' rating for the stock on Friday, cutting its price target from 800p to 600p.

Shares were down a steep 5.7% at 584p in afternoon trade, one day after the release of a pre-close trading update for 2012.

"KAZ continued the poor reporting season for copper equities with higher-than-expected costs and a second consecutive year of substantial unit cost increases for 2013," Credit Suisse said.

The broker explained that as Kazakhmys is a high-cost producer, it has minimal margin insulation from sharp cost increases which puts further pressure on cash flows.

"We are not convinced that planned efficiency programmes will materially offset upward cost pressures over the medium term and some high cost production may need to close as a result."

The miner is currently developing two greenfield copper projects that could take copper volumes to 500,000 tonnes per annum between 2017-2020 (from 290,000 tonnes per annum between 2012-2014) and help lower the cost structure of the business.

However, Credit Suisse thinks that due to the high upfront capital expenditure, "project returns are marginal and we struggle to see any value in the existing high cost copper asset base".

With cash flows remaining deeply negative in the coming years, the financial risk will increase, the broker said. Net debt is expected to rise to $4.0bn by the end of 2014 - "assuming no progress on non-core asset sales" - so the net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) ratio is likely to pass the company's target of 2.5.

Copper producer Kazakhmys is 'feeling the pinch', according to Credit Suisse, which left its 'underperform' rating for the stock on Friday, cutting its price target from 800p to 600p.

Shares were down a steep 5.7% at 584p in afternoon trade, one day after the release of a pre-close trading update for 2012.

"KAZ continued the poor reporting season for copper equities with higher-than-expected costs and a second consecutive year of substantial unit cost increases for 2013," Credit Suisse said.

The broker explained that as Kazakhmys is a high-cost producer, it has minimal margin insulation from sharp cost increases which puts further pressure on cash flows.

"We are not convinced that planned efficiency programmes will materially offset upward cost pressures over the medium term and some high cost production may need to close as a result."

The miner is currently developing two greenfield copper projects that could take copper volumes to 500,000 tonnes per annum between 2017-2020 (from 290,000 tonnes per annum between 2012-2014) and help lower the cost structure of the business.

However, Credit Suisse thinks that due to the high upfront capital expenditure, "project returns are marginal and we struggle to see any value in the existing high cost copper asset base".

With cash flows remaining deeply negative in the coming years, the financial risk will increase, the broker said. Net debt is expected to rise to $4.0bn by the end of 2014 - "assuming no progress on non-core asset sales" - so the net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) ratio is likely to pass the company's target of 2.5.

BC

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