Kazakhmys’s copper output has been on a declining trend since it listed in London in 2005 and, in terms of its core business, Investec sees this trend continuing. Investec says “gross cash cost guidance for FY13E is significantly higher than the current copper price. The group’s two major growth projects should, in the long term, bring production up and average costs down, but in our view this development has come at the wrong time in the cycle.

“In our opinion, Kazakhmys is one of the most consistent mining companies in London, in terms of meeting its production and cost guidance. However, in the last couple of years, this has been nothing to be proud of. Copper production is now around 25% lower than 2005, when the group listed. Kazakhmys has faced cost pressures like all miners, however, average grades are falling for the group, which has historically mined above its reserve grade, and this is adding pressure to unit costs. FY13E gross cash cost guidance is higher than the spot copper price.

“In order to restore cash generation, we believe Kazakhmys has no choice but to make big changes to its core mining business. In a recent analyst meeting, Kazakhmys alluded to this. Another part of the solution is for Kazakhmys to build two new large copper mines, Bozshakol and Aktogay. Ore from these operations should result in increased production and lower costs in the longer term. However, this comes at a high cost (circa $3.9 billion capex) and, in light of recent commodity prices, we believe is at the wrong time in the cycle, potentially leaving the group’s balance sheet looking weak.”