No one rings a bell on the day that a given market hits the bottom. That is the reason for owning assets that everyone hates: because you want to be hanging around on the day that everyone stops hating them quite so much, and it is impossible to predict when that day is going to be.
This sums up the argument Lex made last week about copper miners. Everything, from the strengthening dollar to the weakening global economy to short sellers, is lined up against them. So maybe a contrarian bet is in order; if so, pick a low-cost producer so you don’t have to worry about solvency at the same time as you worry about the stock price. In that note, we characterized KAZ Minerals of Kazakhstan as a high cost producer. The company begs to differ, and they sent us the following counter-argument:
KAZ Minerals was renamed following a restructuring completed in October 2014 which has repositioned the company on the global cost curve. The disposal of mature, lower grade assets has re-focused the business on its most profitable and cash flow positive mines in the East Region of Kazakhstan. We are also in the process of constructing two low cost, large scale, open pit mines at Bozshakol and Aktogay.
These new mechanized open pit operations will contribute 80% of our estimated 300 kt of copper production in 2018 with 1,500 employees at each location, compared to 10,000 in our East Region operations and 53,000 prior to the restructuring. Both projects have access to power, water and transport links and will produce valuable by-products such as gold and/or molybdenum. Bozshakol is expected to have a net cash cost of 80-100 USc/lb (c.$1,800 – $2,200 per tonne) and Aktogay 110-130 USc/lb (c.$2,400 – $2,900 per tonne). The projects are funded by long term debt facilities and production at Bozshakol is scheduled to commence in H2 2015. This will further improve our cost position and complete our transformation into one of the lowest cost, highest growth, pure-play copper miners.
Alon Olsha of Macquarie Securities, observed yesterday:
“The market seems to regard KAZ in much the same way it has for the past several years – as the highest cost and most leveraged play on copper in Europe. However, this belies the radical transformation the group has undertaken over the past six months. KAZ is no longer the high cost, Soviet-era miner of old but rather a 2nd quartile, and soon to be 1st quartile copper miner with a fully funded suite of top quality growth projects.”
This chart from Credit Suisse (22 August 2014) illustrates the improvement in our relative 2014 cost position brought about by the restructuring:
It’s a compelling argument; we would only note that 2018 is a few years off, and that the figures we cited in our piece were total costs (which include capital spending), not cash operating costs.
We are eager to hear any thoughts readers have on the red metal.
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