A slowing global economy never spells good news for companies digging minerals out of the ground, as evidenced by the 10% plunge in the KAZ Minerals (KAZ) share price today.
Shares in the Kazakhstan-focused copper miner are trading down at around 445p this morning after it cut its dividend and reported lower half year profit, warning investors over the short term outlook for copper.
A 3% rise in copper sales in the six months to 30 June was offset by an 11% drop in the metal’s price, leading KAZ to report a slight drop in revenue to $1.05bn, and a fall in EBITDA to $620m, compared to $690m for the same period a year ago.
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The firm also declared an interim dividend of four cents per share, down from six cents last year, which broker Shore Capital has calculated to be equivalent to an ‘uninspiring’ 1.3% yield.
INVESTING HEAVILY FOR GROWTH
KAZ has invested heavily in growth projects as it looks to take advantage of the long term structural increase in demand for copper.
Its major uses of cash included $436m to acquire the highly promising but operationally challenging Baimskaya mega project, an underdeveloped copper deposit in the remote Chukotka autonomous region in far north-eastern Russia. Facing Alaska, Chukotka has the most severe natural conditions in Russia.
The Baimskaya acquisition caused a big selloff in KAZ shares, with analysts unconvinced over the logic of the deal given the operational issues the company is likely to face as well as the large amount of money that will inevitably be needed to get the thing up and running.
KAZ also invested $332m in other growth projects, mainly expanding its Aktogay mine. As a result, its cash balance fell to $739m in the first half of this year, compared to $1.22bn in the second half of last year, while net debt increased to $2.56bn, up from $2.1bn.
Having cash in the bank is a big thing for miners so they can survive the inevitable downturn when commodity prices go down and still be around on the upturn to capitalise when prices go up.
SHORT TERM PAIN FOR LONG TERM GAIN
Demand for copper is expected to rise significantly in the long term mainly due to electrification, i.e. demand for electronics, electric vehicles and the upgrading of grid infrastructure as countries around the world continue to develop.
The company said the short term copper market outlook is more cautious ‘due to continuing trade pressures and China slowdown concerns’, but insisted the long term outlook ‘remains robust’.
Many market commentators agree the fundamentals underpinning long term copper demand are indeed ‘robust’.
But because copper is currently seen as a bellweather for global economy, due to the fact it is used in practically everything, not a lot of benefit is expected to be felt in the next couple of years as the commodity’s price fluctuates in line with global economic concerns and investor sentiment.
