Forecast for gold production is increased, copper – confirmed. The company's emphasis on long-term growth projects is paying off, which is confirmed by the positive results of operations in the reporting period. The company's production results for 9M2019 once again demonstrated an increase in the physical volume of production in the main categories in comparison with the same period last year. During 9M2019 the company produced 230.5k tons of copper, which exceeds the relative amount of the same period last year by 6.3%. A decrease in copper in concentrate production to 129.1k tons (-6.92% y/y) was offset by an increment in cathode copper production to 101.4k tons (+29.8% y/y), achieved by increasing the processing of material from Aktogay under the tolling scheme to the mark 32.3k tons versus 3.4k tons a year earlier. A significant contribution to the growth of gold production over the considered period was made by Bozshakol, with 26.6 million tons of ore mined (+14.6% y/y) and 110.2 thousand ounces of gold (+10% y/y) produced resulting in a total production of 146.2 thousand ounces (+8.3% y/y) over 9M2019.
The total debt as of September 30, 2019 amounted to $3.2 bln, which is 6.3% higher than the same indicator at the end of 2018. The amount of cash and cash equivalents at the reporting date amounted to $0.6 bln, while as of December 31, 2018 it totaled $1.2 bln. The diminution of this indicator is associated with an increase in capital expenditures for the expansion of Aktogay ($600 mln for 2019) and the acquisition of Baimskaya project (the amount of remuneration paid was $436 mln).
Reallocation of capital expenditure for expansion of Aktogay and Baimskaya for 2019. The company decided to increase the amount of capex by an additional $100 mln up from the previously announced $500 mln for 2019. It should be noted, that the total project budget remains within $1.2 bln, uniformly reducing the corresponding load in the next 2 years. Total capex for the development of Baimskaya in 2019 expected at around $150 mln up from the previously planned $70 mln. The Board of Directors of the company approved $80 mln of capex for 2H2019, which will be utilized for the camp’s primary construction works. The detalization of the capital expenditure schedule for the Baimskaya project allows us to project the cash flows of the respective periods more precisely. According to the statement, the peak of capex for this project will take place in 2022 and 2023 amounting to $1.5 bln in each year, $1 bln in 2024, $500 mln in 2025, $300 mln in 2026. The total capex budget for Baimskaya of $5.5 bln remained unchanged in our forecast.
Over the next ten years, the value of the company will be determined by the success of Aktogay 2 and Baimskaya projects. Copper production at Aktogay 2 is planned to begin in 2021. We expect an increase in Aktogay copper production by 24% to 172k tons per year starting from 2022. Planned expansion of Aktogay’s facilities, as well as reaching the planned output capacity of the company’s enterprises, according to the production report, is the guarantor of stable operating dynamics of the company (over 300 thousand tons of copper per year), which, in our estimation, will contribute to the generation of significant operating cash flow by 2026 (presumably $770 mln). At the same time, the relative temporal proximity effect of Aktogay 2 reduces production risks.
In the longer perspective, we expect the implementation of Baimskaya project with the production launched in 2026 would allow the company to increase total copper production by 7% CAGR from the moment of launch, up to the level of 560k tons in 2029 and therefore significantly increase generated cash flows.
Main risks. In our opinion, main risks are associated with the commissioning of new projects, as well as a decrease in forecasted metals price for the main categories of products sold in response to worsening expectations regarding demand for metals due to a slowdown in global economic growth. In the long term, for Kaz Minerals there is a significant risk in the effective implementation of the expensive Baimskaya project, which depends on the support of the government of Russian Federation, including the development of energy and transport infrastructures. However, after the launch of this project, Kaz Minerals will be able to increase its copper production significantly by adding a large-scale long-term asset to the Company's portfolio.
