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Halyk Finance: Kazakhmys - Spin off could unlock value, but devil is in the details




Halyk Finance


12 Mar 2014





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Last month Kazakhmys finally provided the market with a long awaited divestiture plan, which we believe could unlock value for company shareholders. The plan envisages separation of Kazakhmys into two companies. Mature assets in the Zhezkazgan and Central region will be transferred into a separate entity, which may be further disposed to Mr.Vladimir Kim, the company’s major shareholder and former Chairman. The publicly listed company (New KAZ) will be left with seven large-scale operating mines (four East region mines, Bozymchak gold mine in Kyrgyzstan and two growth projects – Aktogay and Bozshakol). Albeit the proposed restructuring plan looks promising as would allow Kazakhmys to emerge as a more cost efficient, less labor intensive and more cash generative entity, the financial details of the split are yet to be agreed. The company CEO emphasized that no cash is expected to be received for the disposed assets, but that the restructuring terms will allow for viable existence of the new entity. We believe Kazakhmys could make initial working capital payment to the cash negative mature assets, which we estimate to be approximately $200mn. The details of the restructuring transaction will be disclosed after the release of 1H2014 results, scheduled for August. We have revised our valuation methodology and now value Kazakhmys based on two scenarios with equal probability of execution. In the first scenario, we assume that company continues operations as is and in the second scenario, we assume that Kazakhmys will implement proposed restructuring plan during 2014. Based on our 10-year DCF model at an 11.2% WACC, we estimate probability weighted fair price of Kazakhmys shares at 258GBp per share, or 9.8% below the current share price. We set our 12-month target price at 291 GBp per share and maintain a Hold recommendation on the stock. We believe potentially the split could be at risk if the workers in Zhezkazgan and Central region resist the change of ownership, the explicit and implicit government support at all stages of restructuring will be critical to the successful execution of the plan.

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