The market doesn’t like today’s half-year results report from FTSE 250 mining company Kaz Minerals (LSE: KAZ) and the share price is down around 11% as I write.
I reckon the damage to the share price has occurred because of the outlook statement. The company said in the report that “a more negative outlook for global demand” has driven copper prices lower. I can’t argue with that because a quick glance at the copper price chart reveals that the base metal has been trending down in price for around 20 months.
A clear focus on copper
The price of copper is a big deal for Kaz Minerals. The firm has a clear focus on producing the commodity from its open-pit mining operations in Kazakhstan, Russia and Kyrgyzstan. In the first six months of the year, almost 68% of the revenue generated came from copper, so a large part of the financial outcome for each reporting period depends on what the price of copper has been doing.
The company also made 13% of its revenue from gold production and the price of the shiny stuff has been tearing upwards for around a year. But the contribution from gold has not been enough to offset the deteriorating economics of copper, or of zinc, which earned the firm 12% of its revenue. The price of Zinc seems to be moving down in lock-step with copper.
Despite a 3% increase in copper sales volumes in the period and a 6% increase in copper production, Kaz Minerals could not overcome the off-setting effect of the 11% fall in the London Metal Exchange (LME) copper price that occurred. The outcome was that overall revenue declined by 4% compared to the equivalent period the year before, operating profit dropped by almost 12%, and diluted earnings per share plunged by just over 24%.
Dividend down
The directors declared an interim dividend of 4 US cents, which is just over 33% below the half-time dividend last year. The company’s dividend policy specifies that the directors will consider the cash generation and financing requirements of the business before recommending a suitable dividend. I think that’s an important point to consider if you are attracted to Kaz Minerals because of its dividend yield or low-looking valuation.
The dividend policy “maintains flexibility,” which is “appropriate” given the underlying cyclicality of a commodity business and the firm’s growth ambitions, it says in the report. But with a weakening copper price coinciding with the firm undergoing a period of “significant” capital investment, I wonder if the immediate prospects for the dividend are weak.
The persistent fall in the price of copper makes me worry about the health of the macroeconomy. But even if we manage to avoid a full-blown world recession, it is easy to imagine the price of copper falling much further. If that happens, Kaz Minerals’ share price, profits, cash flow and dividends will surely follow despite the firm’s push for growth in production. I wouldn’t dare buy the stock right now, no matter how cheap it looks based on past trading figures.