KAZ Minerals: Oversold – Baimskaya is a free hit (stays BUY)
On 2 August, KAZ announced the USD 900m acquisition of Baimskaya. The stock dropped 28% on that day and is down 46% in total since (USD 2.2bn of market cap) vs. c.11% on average for its peers (if it moved with its peers, KAZ would have lost c.USD 540m of market cap, implying a USD 1.6-1.7bn de-rating, due mainly to Baimskaya). We dislike the acquisition. It is a challenging project in an unfamiliar region (Russia), with large capex relative to the size of the company. USD 900m seems a steep price to pay, considering the recent fall in the copper price. However, we believe KAZ has been oversold. While Baimskaya comes with significant risk, we believe this is already in the price, leaving Baimskaya as a free option effectively (even on our bear case for Baimskaya and our existing price deck, we would find 9% upside). Baimskaya, alone, has the potential to double KAZ’s 2017 copper production, with costs expected to be in the bottom quartile of the cost curve and KAZ has an excellent track record in project development. KAZ now trades at 4.1/4.7x 2018/19E EV/EBITDA, despite the legacy assets offering 27% copper production growth by 2022E, funded from cash flow. That is too cheap, in our view, for assets in the bottom quartile of the cost curve, especially when there is the additional optionality of Baimskaya, which could transform KAZ into a 500koz+ pa producer. We reiterate our BUY recommendation, with a lower price target (PT) of GBp 679/share (-32% due to reduced commodity price assumptions and the negative impact of Baimskaya).
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