Growth of production indicators at low production cost. In 2018 KAZ Minerals produced 294.7 kt of copper (+14% y/y), which corresponds to the upper limit of the planned annual range of 270-300 kt. The company also increased gross income by 30% y/y, reaching revenues of 2 162 mn USD. The growth of production was due to the high results of Aktogay and the increase in copper prices. The expansion project of the 2nd sulphide factory at Aktogay will contribute to the increase in production, which will exceed 350 kt of copper during the forecast horizon of 2022-2025 due to the construction of an additional concentration plant. Meanwhile, according to 2018 results, the Company succeeded to maintain a low net cash cost of copper production in the first quartile of the global cost curve in the amount of ~ 1 874 USD/ton due to an increase in production and a weaker tenge.
Baimskaya is a large-scale project with high growth potential. The launch of the large-scale Baimskaya project will allow the Company to produce about 500 kt of copper in the period from 2027-2036, which will completely compensate the decline in production indicators of the existing deposits in the long term. However, the successful implementation of the project depends directly on the support of the Russian government, in particular in the timely construction of transport and energy infrastructures and providing access from the field to the port in order to transport the Company's products.
Long-term prospects for copper. As of November 30, 2018 world copper production increased by 2.4% y/y, mainly due to an increase in copper production at the largest mining companies in Chile, Indonesia and the Congo, which was offset by a decrease in metal production in the United States and Canada. In the long run, copper prices will be supported by favorable fundamental factors. According to analysts' consensus forecasts, a lack of investment in field development projects and the natural depletion of mines will lead to a prolonged supply shortage in the remote horizon. In addition, the development of renewable energy sources and the electric vehicle sector will stimulate the growth of copper demand, which will create prerequisites for price increases.
Recommendation Buy with 12M TP 760 GBp/share. According to our calculations, EBITDA margin will be 52% in 2019 and 54% in 2020. Given the positive consensus forecast on prices for industrial metals, we expect a potential increase in the Company's value of 22.4%.
