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Halyk Finance: Kazakhmys - Leverage rises to fund development, while margins continue to shrink




Halyk Finance


07 Mar 2013





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Last week Kazakhmys reported preliminary financial results for FY2012, which were overall weak, but in line with the market estimates. The company’s segmental EBITDA declined by 30% YoY, while net debt grew to $707mn, as expected. A major disappointment came from the guidance on by-products for 2013 which was lower (YoY and than expected) and which implies lower earnings for the Mining division. Other negatives were the news of impairment of Bozymchak by $162mn. We do not consider the announced impairment of the stake in ENRC to affect the stock price since it was expected and largely discounted by the market. We have revised our model to incorporate the decline in by-product credits, reduced value of the ENRC stake, and assumed higher working capital assumptions. As a result, we have lowered our 12-month target price from 740 GBp to 505 GBp and downgraded the stock to a ‘Sell’. We estimate that over the next two years the company will continue to have negative free cash flows due to massive capex, while the margins at the Mining division will shrink further. During this period it will be critical that Kazakhmys tightly controls unit costs and limits cost overruns and delays at Aktogay and Bozshakol. In the short-term, the successful sale of Ekibastuz GRES-1 could serve as a positive stock price catalyst.

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