Kaz Minerals (LSE: KAZ) continued its recovery from recent share price weakness in Thursday business, a positive reception to latest production numbers sending the copper colossus to its most expensive in almost five weeks.
I fail to share the market’s revived enthusiasm however, and expect Kaz Minerals to resume its downtrend sooner rather than later.
Production boost
The Kazakh digger advised that copper output rose 16% during the first quarter, to 52,100 tonnes, a result that prompted Kaz Minerals to confirm its full-year goal of between 225,000 and 260,000 tonnes.
The mining play lauded the impact of production ramp-ups at its new assets, like its Aktogay facility, where the new sulphide concentrator produced 7,000 tonnes of material in the quarter after starting up in mid-February. Aktogay, like Bozshakol, is expected to propel Kaz to the next level on the copper stage.
Fundamental fears
There is no doubting the vast potential of its ambitious expansion strategy, a scheme which the City expects to propel earnings higher following last year’s move back to growth.
Current projections suggest expansions of 77% and 42% are on the cards for 2017 and 2018 respectively. Such forecasts also make Kaz decent value for money, on paper at least. A forward P/E ratio of 8.9 times falls well below the British big-cap average of 15 times, while a sub-1 PEG reading of 0.1 underlines the digger’s relative cheapness.
But of course, a strong copper price is crucial for Kaz to realise the fruits of its expansion plans and meet these estimates, something that is by no means a given.
On the demand side, metal inventories in China remain a whisker off recent multi-year highs, casting doubt over the scale of real demand in the commodities-hungry country.
And looking at supply, the end of strike action at BHP Billiton’s gargantuan Escondida mine in Chile, allied with the lifting of an export ban at Freeport McMoRan’s Grasberg asset in Indonesia, will prompt massive amounts of material hitting the market once again. And a raft of project expansions slated over the next decade across the globe could keep red metal values well hemmed in the coming years.
I reckon profits growth at Kaz Minerals is in danger of falling well short of expectations.
Silver surfer
I am far more optimistic over the prospective earnings picture over at Hochschild Mining (LSE: HOC) however, as I expect growing economic and political turbulence to support precious metals prices.
Like Kaz Minerals, Hochschild is ramping up group output to deliver robust long-term earnings growth. The company produced 8.6m silver equivalent ounces during January-March, the company advised today, up 16% year-on-year. The digger has consequently affirmed its full-year output target of 37m silver equivalent ounces.
While earnings are expected to flatline in 2017, Hochschild’s bottom line is expected to blast 78% higher next year. So although the business trades on an elevated forward P/E ratio of 30.1 times, I reckon the prospect of huge rewards as production booms, supported by a positive outlook for silver values, merits a high rating.