Kazakhmys PLC (OTC:KZMYF) Q4 2013 Results Earnings Conference Call February 27, 2014 4:00 PM ET
Simon Heale - Chairman
Oleg Novachuk - Chief Executive Officer
Andrew Southam - Chief Financial Officer
Fraser Jamieson - JP Morgan
Alain Gabriel - Morgan Stanley
Rob Clifford - Deutsche Bank
Louise Collinge - Investec
Mike Flitton - Citi
Myles Allsop - UBS
Cailey Barker - Numis
Thank you all for coming. It’s very good to see you all. Can I introduce ourselves, I am Simon Heale, Chairman of Kazakhmys. On my left I have Oleg Novachuk, our Chief Executive Officer; Andrew Southam who is our CFO and (inaudible) who is our Head of Project.
We have quite a lot to tell you about today. So without any further adieu, can I handover to Oleg?
Thank you. Good morning, everyone. Thank you very much for joining us this morning. I am very happy to say that this is the 6th year in a raw we delivered our results as we guided in the beginning of the year. We have achieved all our targets, the top guided range for the copper production at 294,000 tons. Our operational cost savings and CapEx reduction ahead of our target as well.
As we previously told you that we would like to focus our activity on the copper, we would like to become a pure copper player, one of the rarest in the world who will be the most efficient, but we will talk about that a bit later. I am sure that you have heard news today; this is one of the logic step towards execution of our strategy. But in line with our strategy we successfully disposed our non-core assets in 2013 that was the most extensive year for me I think in the whole history of our company. We luckily and successfully disposed off our long lasting MTM business you probably would remember that we try to sell it for few years, but in 2013 we successfully closed this deal without any losses.
We also disposed off our ENRC stake and you are aware about that that was a big transaction. And we are about to complete the transaction with the sale of our stake in GRES-1.
As we speak at the moment I just had a conversation with our counter-party in Samruk and we expect that the closure of that transaction will be any day soon. For the growth part one, Bozshakol and Aktogay site was schedule for the first production in 2015, as we promised you every year when we will start our presentation, we will show you, how we started the projects and where we are today and we will show you a short movie about the progress of our project and we will tell you the story about that.
Aktogay’s so far deliverability was moved to 2017 and (inaudible) that as well. Acquisition of the third major copper deposit in Kazakhstan approved by the Board and I will explain you in the further slide, what is it and why we are doing that.
So I could say that we have 18 totalities in 2013, but definitely not what we expected. We worked very hard to improve our safety performance, but unfortunately we have 18 totalities which are slightly better than last year, but still not satisfactory to us.
We have spent about $40 million in 2013 to improve our safety performance, we very closely corporate with DuPont Company which helps us to introduce the modern and effective safety policies. They organize training and this year we have trained about two-thirds of our employees and we are trying to change the safety behavior in our mines and we have achieved certain improvements in certain core risk areas, such as the reduce totalities resulting from the (inaudible) which is most dangerous and less concerned in the mining industry, but finally we have achieved this level where we can say that we now have control over that.
And embedding reassessment behavior at underground durations an additional focus has been done on the transport safety because we have some totalities over transportation. Unfortunately we have never seen these records before, but 2013 was very unlucky in this area. And we're also working at the heights and heavy machinery handling in 2014.
As you can see from this slide that our ore output was up 4%, focus was on profitable production as we said last year that we don't to create volume, we want to create profit, it doesn't matter how much we produce, it matter how much cash we can generate out of our production.
Our copper ore grade was 0.99%, we always guided that our copper grade will be in around 0.95% and many people asking questions about is that high grading? For long you can maintain the high grading? And I can tell you it's not the high grading, because we want to show the results exactly in this year, that was sourced very thorough preparation of our mining development works and we can say that, this is the part of our optimization program. We were able to get access to the better panels of our mines; underground mines specifically in Zhezkazgan and that will be more of a sustainable for next two years. That's why; this year we are 0.99% which definitely helped us to manage the cost control. Zinc and gold output were both targets and silver ahead of the guidance reflecting the substantial release of work in progress in 2012.
The next one is production outlook, the old structure engraving line with 2013, due to the suspension of our smelter in Zhezkazgan, 40% of our sales will be in the form of copper concentrate, we have successfully negotiate our conference for copper concentrate sale in China with our strategic partners.
And our byproducts production will be reduced for the single zero due to the reduction in grades, contribution to the gold output from Bozymchak will be seen this year.
Bozymchak you probably heard about that for few years, finally I can tell you that we started commissioning on Bozymchak. And we expect that the first production will be in H1 2014 and I am working with our commissioning team closely every day-to-day. I visited this mine already few times during few weeks and we’re expecting the first production very, very soon not to be conservative we’re saying that the first production will be seeing in H1.
It was very challenging project, the altitude of this mine is 2.4,000 meters, it’s very remote and as you know we have to suspend construction for our mine few times first of all due to the on rest in Kyrgyzstan, it was a political unrest changing of the power then weather conditions, but finally we successfully completed construction and we successfully commissioning in this mine and Kazakhmys now is one of the most successful companies in Kyrgyzstan.
We’re working very closely with local authorities with local communities and we are very welcome in this country and we believe that this project will be as our first successful project which has been financed by CDB. And by the way NSC, who was appointed as our contractor at Bozshakol, demonstrated tremendous performance in this mine. I’ll tell you they have started the construction on the concentrator and if I’m correct in summer months and they do concentrated from crush just in the matter of 6 or 7 month and that was very, very impressive. And the quality was very acceptable for us.
The output and ramp up the full capacity of Bozymchak project will be expected in 2015. The outline what is to remind you the capacity of the concentrator is 1 million tons per annum. The expected life of mine currently 17 years but we continue drilling and we continue exploration of the mine and we hope that we may have some upside there as well.
The production of copper is about 7,000 tons of copper a year and the production of the gold will reach 35,000 ounces in concentrate per annum. Net cash cost will be from $100 to $127 per pound.
Koksay, what is Koksay and I expect that you may have some questions like why these guys buying Koksay if they didn’t finish Bozshakol and Aktogay, why all the companies in the world trying to avoid buying Greenfields and you do that. And I’ll tell you in Kazakhstan at the time of our listing 2005, there were three major less creative mines.
The best one and number one was Koksay. The second one was Bozshakol and the third one in terms of quality was Aktogay.
Unfortunately we were able to acquire these mines in reverse order, because Aktogay became available first, we bought Aktogay, secondly we have found opportunity to buy Bozshakol and that's why by the way we started feasibility study for Aktogay before we acquired Bozshakol.
After acquisition of Bozshakol, after the solo analysis we decided the Bozshakol economically is better than Aktogay because of the byproducts and because of the different technology, which we suppose to require there. And then we switch to Bozshakol and started to prioritize Bozshakol for us.
Now we found opportunity to secure the Koksay deposit. This is a large scale open it, it has very good characteristic better than even Bozshakol and the advantage of Koksay is that the copper grade there 0.84%, it was 3.4 million tons of copper in ore at the moment we sum upside which should be confirmed during the confirmatory drilling which will take about couple of yes and we expect that the copper output will be about 90,000 tons of copper a year with the life of mine over 20 years but this is very preliminary data which definitely will be defined later when we will complete our feasibility study.
We have no intention to spend significant capital on this project until have completed our Bozshakol production and when we will see the major cash flow from our major project first. And definitely we will consider the partnership with other companies and currently even before we acquired that project we have already seen some interest to be partners with other big players. But we will consider that in a later stage when we will be closer to completion of feasibility study.
And now I would like to pass the words to Andy and he will run you through financials. Thank you.
Over the past few years Kazakhmys has experienced rapid inflation in its gross cash cost 23% in 2011, 34% in 2012. I am pleased to report that effective cost management particularly in the second half of ‘13 supported by strong sales volumes has led to gross cash costs of $3.28 per pound in line with that for 2012 and considerably below the guidance we set at the start of the year.
Free cash flow was a negative $171 million although this includes $153 million of interest payments and an outflow of $35 million at MKM. Excluding interest at MKM the operations were therefore marginally cash positive in the year.
Cash management has been the key focus. Inefficient to the cost initiatives we’ve also successfully managed capital expenditure such that we have a lower sustaining CapEx figure $166 million below 2012 were a reduction of 25%. Net debt finished the year only $64 million higher continued investments in the major growth projects was offset by the reset of $875 million from the sale of ENRC and as Oleg has said the proceeds of $1.25 billion from the sale of GRES-1 are expected in the near future.
One EBITDA was affected by lower pricing for copper, gold and silver and I will talk through the key variance distribution later. EBITDA for the captive power stations rose by $29 million as that sealing tariff and (inaudible) sales increased, coverage degree to sale of Ekibastuz GRES-1 in early December which is when we see equity accounting growth. The $153 million of EBITDA that will represent 11 months in 2013 compared to a full year in 2012.
GRES 1’s EBITDA was also impacted by weaker domestic demand. The negative contribution from MKM for the period until the disposal at the end of May was due to the decline of the copper price which is reflected in the value of its inventories compared to a positive $48 million EBITDA contribution for the full year 2012.
Group EBITDA includes Kazakhmys’ share of ENRC which we equity accounted for the first half compared to a full year of equity accounting in 2012.
This slide assigns more detail the movement in mining to EBITDA from 2012, 2013. The (inaudible) copper price averaged $7,328 per ton 8% low than the prior year. The price bearing from the slide also includes the impact from the side of copper concentrates which commenced in the third quarter following the suspension of the Zhezkazgan smelter. Revenues from concentrate are recognized half of the deduction of proceeds charges. Production volumes as similar to those in the prior year however, tight management of finished goods led to a sustained reduction in inventories. Sales of copper products exceeded production by 16 kilotons and with 30 kilotons higher than the prior year.
Prices of precious metals fell sharply with LBMA gold averaging 15% lower and silver 24% lower. And in addition, when comparing ’12 with ‘13, the prior year included the sale of gold inventory which was built up in 2011.
Turning to costs, we increased our output by 4%, which coupled with inflationary pressures, lead to higher raw materials or transportation at costs. Salaries increased by 7% in the year, as the full year impacted of pay awards we gave in April May 2012 came through partially offset by the labor efficiencies measures we took in the second half of the year.
When comparing the results for 2013 against ‘12, it is important to note that we had a $38 million provision reversal in the prior year, half of which went through other cost of sales and half of which came within G&A.
In addition to the provision reversal, SG&A was also impacted by higher distribution costs reflecting the 30 kilotons additional sales volumes increasing visibility payments and higher levels and charges.
At the half year, we announced, we'd identified a range of incremental measures across our operations to reduce operating costs. And we estimated savings of $40 million over the second half or $80 million annualized going forward. These included optimizing materials used in production, improving ore transportation, closing concentrator, renegotiating suppliers. And our labor efficiency whilst we have limited flexibility there, headcount has reduced across 2013 and we have managed employee costs by transferring certain cash treated workers all time terms.
In total these measures expected to deliver around 40 million we have actually 60. And we believe these are is sustainable across 2014 which will generate a $120 million on an annualized basis or 5% of our cash operating cost base as part of the drive to improve cash flows of the mine division the level of capital expenditures being significantly curtailed. We reviewed the portfolio of medium sized projects and many being suspended reducing capital spends for this year and in future years.
The sustaining CapEx in the mining division was $603 million in 2012 in ‘13 we reduced division sustaining CapEx by $181 million or almost 30%. Operating cash costs in the second half of ‘13 were lower than those in the first half and also lower than those in the second half of ‘12.
(Inaudible) reflected in the cash operating cost or CapEx cash flows have benefited from improved working capital management. Sales volumes were achieved by sustaining low volumes of finished goods throughout the year and other areas of inventory such as consumables use in production have also been reduced releasing working capital.
The large development opportunities in the Zhezkazgan region which would improve its economics, but these would require considerable investments and given the Group’s current financing structure and focus on delivering the large scale open pit mine projects, we do not believe that this investment is likely to occur as part of the listed Kazakhmys Group. Therefore our assessment of the likelihood of Kazakhmys PLC achieving those structural changes require to improve the Zhezkazgan region with a number of low grade mature mines, significant infrastructure has led to Kazakhmys recognizing impairment of $575 million for the region.
So gross cash process calculated by taking the cash operating cost base divided by the sales volumes. And it also includes a processing charge on the copper concentrated sales which commence in the second half of the year. So the reported full year 2012 cash cost was $3.33 however this included large charge of gold inventories pulled forward in the prior year. So excluding this the cash cost in ‘12 was $3.21 and it’s against that figure, which we gave the guidance of ’13. ‘13 the cost drivers were a 4% higher or extraction domestic inflation as well as the full year impact of salaries. These were offset by optimization measure and also the impacts of the higher sales volumes.
So in 2013 gross cash cost of $3.28 per pound is only 2% higher than the underlying cash cost for ‘12, which compares favorably to the guidance we gave at the start of 2013 of 8% to 12% increase or $3.47 to $3.60 per pounds and the guidance we gave at half year were 5% to 8% were $3.37 to $3.47 per pounds.
For 2013 gross cash cost reached 328 cents per pound was the outlook for 2014. The fee valuation of the tenge which moved from 155 to 185 a dollar is being beneficial for business, but in certain make any guidance for 2014 much a straight forward. Our total cash operating base was $2.25 billion. We estimate that approximately 60% of our mining cash operating costs of tenge denominated, which from February would be approximately 18% low in U.S. dollar terms.
The benefit devaluation has brought will be partially offset by higher inflation flowing through, and you will be aware of our announcements this about to 10% higher salaries and we’re already facing pressure from supplies to review that pricing.
In 2014 we have a new 5% pension contributions which has been introduced in Kazakhstan effective from the 1st if January which is applicable to number of categories of workers.
A big change to operations in ‘13 came from suspension of the Zhezkazgan smelter. We sold 31.5 kilotons of copper in concentrate, approximately 10% of total sales in ‘13; in 2014, we are guiding approximately 40% of our cathode copper output will be sold as concentrate. In the fourth quarter of the year we’ve experienced the sharp rise in Chinese TCRCs which is negatively impacted the terms on which we secured our TCRCs processing charges for 2014.
The TCRCs are deducted from revenues in the accounts, however we add back processing charge on to our cash cost figure to show cash cost in copper cathode equivalent. The 2014 cash cost includes $0.15 for processing charges.
At the bottom of the slide are the sales volumes, as cash cost in ‘13 benefited from sustained reduction in finished goods, in ‘14 I would expect production to equal sales volumes which will on a unit cost basis put upward pressure.
The guidance for ‘14 is therefore gross cash cost of between 315 cents and 330 cents per pound. But you also have some revenues in tenge. For example, our captive power division and also some of the revenues within the mining division other products. We believe that the devaluation may reduce the captive power division’s EBITDA by approximately $10 million or so with an estimated similar impact on mining other revenues.
This slide reconciles EBITDA from continuing operations to the movement in net debt. Working capital was positive as we sold our finished goods and also reduced consumables and there was an increase in debtors in the period because largely offset by higher payables. Corporate income tax and mineral extraction tax together represented $325 million, approximately $40 million above the current tax year end, with the current tax changes, which will reduce that $40 million will reduce payments in 2014. Sustaining CapEx of $487 million is $166 for the prior year and it does include $83 million on authorization projects such as upgrades concentrators, some of which will continue over into 2014.
All sustaining CapEx continuing operations were marginally cash positive in ‘13. The expansion in CapEx of $757 million was largely Bozshakol and Aktogay. We also paid at the start of 2013 a dividend and in respect of 2012 of $42 million and in November we received the net sales proceeds from the sale of ENRC of $875 million, so net debt was largely unchanged for the year.
At end of ‘13, we had cash of $2.3 billion. The $1.25 billion proceeds from the sale Ekibastuz GRES-1 are expected shortly and we take Kazakhmys to a pro forma cash position of $3.6 billion and also to a pro forma net fund’s positions. Of the $3.1 billion debt, $0.5 billion is then turned to pre-export finance facility and the balance is from the two China Development Bank facilities which are reserved for the development projects.
The first CDB facility of $2.7 billion has been fully drawn. And 408 of it was the medium size projects which we believe are unlikely to proceed in the near term. And we have decided to repay that cost of facility early in January this year. The balance is payable over 12 years. The second CDB facility is for Aktogay, which totaled $1.5 billion of which approximately $60 million was drawn at year-end with $1.4 billion still available for drawing. The [Aktogay] facility is also long dated, amortizing over approximately 12 years.
The disposal of non-core businesses in the year has significantly strengthened our balance sheet prior to commencement of Bozshakol.
On the financial outlook, as I said earlier, we’re guiding for ‘14, a gross cash cost of 315 cents to 330 cents per pound reflecting a reduced a cash operating base. On capital expenditure, sustaining CapEx in the mining division is expected to be between 350 and 450 which include the completion of certain upgrade for projects carried forward from ‘13 and the captive power division will spend $60 million to $80 million on maintenance and also replacing turbines.
The expansion in CapEx guidance is for $1.3 billion to $1.3 billion mainly in Bozshakol and Aktogay. On Bozshakol we have a number of payments planned for Q4 and also for early 2015 which depending on the timing of those payments could fall in the period and that’s led to the $200 million range set out on the slide.
In 2013, the disposal of non-core businesses significantly strengthened our balance sheet. In 2014, we’re very much focused on restructuring operations ahead of the launch of the first major growth project in 2015.
With that, I’d like to turn up for video on Bozshakol. [Audio/Video Presentation]
Unidentified Company Representative
Good morning. As promised, we continue to show you progress on our projects. Some is quite satisfactory other is acceptable but not as much as (inaudible). As you saw from the pictures, winter is on full force in Kazakhstan. I was last on site 2.5 weeks ago, sites within Bozshakol, everybody was working, it was minus 41 degree centigrade.
So, this question keeps coming up, I even continue working in winter yes, we have done that for two, spring is almost upon us, another month. And we will do that next winter as well.
The progress in 2013, we essentially finished all our external concretes, you saw some internal concrete inside the building for small foundations et cetera being pulled, but the main equipment foundations are done.
The three mills I am correcting, we said two in the video, there are two ball mills and one sag mill. So the three mills are all on site and the drives are on site and the contractor is scheduled to start installing that in this first half. And second contractor that we've indicated before that we were looking at, has been appointed. As previously stated in this [NFC] out of China, they are mobilizing, they have a presence on site already and they are building up trends every week.
Total expenditures still forecast to be 2.2 billion as we stated last year, end of last year. Our net cash cost update in 2014 and we have updated those is in the range of $0.60 to $0.80 so we’ll still be in a pretty good shape on cash operating cost.
In 2014 we are going to finish all the interior steel and concrete, but more important we will finish all the non-process buildings and permanent camp. We’ll complete the 220 kV line which should be finished in the first half of this year. And based on the infrastructure I have just mentioned being complete, we’ll complete assembly of the haul trucks intervals for preproduction mining to commence.
We will start the installation and that’s going to be the trust of real construction trust this year on the mechanical and electrical equipment including the key pieces of equipment like the mills and rights issue. And of course as the main equipment goes in the bulk materials, the piping and electrical cable et cetera will go in along with. We are still forecasting first production in second half of 2015 as we have indicated earlier in 2015.
Aktogay. On Aktogay with all the major equipment has been ordered, some of it’s arriving onsite. As we indicated earlier, Aktogay in terms of the design the technology processing facilities, the concentrator et cetera is almost an exact duplicate of Bozshakol which has allowed us to leverage on the ensuring design on the timeline based on the late start of our Aktogay, when I say late, I meant that it started after Bozshakol.
The construction camp for 1,700 man construction force from the previous contractor that has commenced it was for onsite commenced. However we have made the decision based on our experience of Bozshakol to replace the principal contractor. And as we stated in the video, we come up with the slightly different contracting philosophy. The first packages should be awarded early in March and as spring, they will be for the completion of earthworks onsite and as weather eases up into spring, we can recommence that work. The capital expenditure to go with this revise strategy and the replacement of the contractor is still under review.
The plan in 2014 for Aktogay is to complete the 110 kV power line which will be providing main operational power to site, complete the site earthquakes, start pouring the critical foundations and commence the erection of the main concentrated building. I think you had a good view of that in the Bozshakol clips, it’s a pretty massive building, takes a lot of steel and that’s critical that we commence this year. And of course in order to allow us to produce copper in 2015, we work on the leach pad construction for the heap leach which will give us oxide copper.
The milestones is completing -- completion of the mining infrastructure this year, getting the heap leach pad ready. In 2015, we want first oxide copper with getting the heap leach pad and followed by the SX/EW plant will allow us to do that. And in 2017, have first copper from the sulphide concentrator.
I hope that you are pleased to hear good news so far. And now we have the major one for you. I would like to start our explanation on power decision from our strategy slide which we have shown you already few times. Where Kazakhmys would like to be in next few year? What our execution steps to achieve the goal, which we've set up for ourselves?
Kazakhmys would like to be a major, very cost efficient copper player in the world. What steps we decided to take is first of all optimize our existing assets, deliver our major growth and expand in Kazakhstan and create value in Central Asia.
Two steps you have seen, so the major projects are on track at the moment. They expand and create value which is particularly deliver of our major projects and acquisition of Koksay. And I would like to see Kazakhmys in next few years, the company which will produce between 350,000 to 400,000 tons of copper in concentrate. To be a very low cost producer, may be in the most competitive, but one of the leaders in the world, very solid and very good track records of the safety and very efficient in operations. And this company should be focused only 5 to 7 mines.
If you compare where is Kazakhmys today? Its 16 mines, most of them are underground, a lot of employees, currently we have 56,000 employees in company, very sensitive so they made me change, very difficult to manage safety because of the nature of the production and of course declining grades and maturing assets.
And our strategy to optimize existing assets has been considered for one-time and decision which we have taken about reorganization which we announced today, it's not something which came to us suddenly and unexpectedly, this is the logical step, how we will execute our strategy?
Just to remind you, and I think I’ve been asked many times by all of you show us the breakdown of the cost specifically [Fraser] he was very interested in that. He said show me the breakdown of all your mines all your concentrators, I want to run the model and I want to see which assets are not profitable and why you continue to run them. I think previously it wasn’t easy to do and today is the right day to do that.
We can tell you what is Kazakhmys today, what is part of Kazakhmys which is suitable for the listed company which can meet the requirements of our shareholders only high return and which operation is better to keep in the private company and operate them privately to the benefit of the employees to the benefit of the country, but these assets may not be necessarily good to be in the listed company. That’s why we decided to reorganize the company in a way to create two separate independent companies one of which will be listed company and another one will operate privately.
We decided that the listed company will take the eastern region operations, which consist of, here you can see on the slide the eastern operations currently consist of 5 mines, underground mines, but with very high grade, it’s 2.4%, 4 concentrators, estimated metal and concentrate per year is expected about 85,000 ounce of copper and concentrate 50,000 ounce of gold and 4.6 million ounce of silver and 120,000 tons of zinc a year, it’s not 12%.
The employees’ number in eastern operations now is 12,000 people. And currently we have in Kazakhmys 56,000 people. Net cash cost at the eastern operations now is 1.30 to 1.50 of pounds and sustaining CapEx is 80 million to 100 million a year. And you remember that the sustaining CapEx for the whole group was about $650 million. The guidance which we have given for 2014 will be about $350 million to $450 million, which is still high. But here for this estimate duration, it’s just a fraction of that, but this business is extremely cash generative. And regardless of the thought that the production output will be significantly lower than we currently have, the economic effect is enormously bigger than we currently have. So it will be very cash positive business.
Apart from that in addition to these assets, we would like to include our growth projects Bozshakol, Aktogay which are scheduled to become to be an Aktogay oxide and Bozshakol will be started 2015 and we recently, which will be required Koksay.
And it’s very important to know that the necessity of this split is to deliver the value to our shareholders and to take the assets which cannot be operated in a listed company as smooth as possible. And that's why Mr. Kim was very instrumental in that. As a main shareholder, he suggested to take care of the difficult assets, legacy assets and make sure that these assets will be viable even after this split. Mr. Kim will remain as a main shareholder in listed company and in the company which will become a private company.
We will have a minimal shared services and joint ventures. We will cooperate listed company’s private and the listed company will cooperate on smelting and sales because the assets I just explained you what will remain in a private company to review Zhezkazgan area, Balkhash area, central division, two smelters and the captive power. Definitely we will continue cooperation for example for smelting. Eastern Group will produce only the concentrate which will be supplied for the toning to the smelters of the private company and we will signing a toning agreement with them on long term basis definitely would be very competitive conditions because don’t forget I know old numbers and the cost and the recovery grade. So it will be very well negotiated.
And we will have no share at management. I just wanted to know but I will not be a shareholder in the private company to reward any conflict of interest and I will serve only for the benefits of the shareholders of the listed company.
And also it’s important to know that Mr. Kim will be we will remain committed to existing holding listed in Kazakhmys. I expect some questions and I already have some questions, why Mr. Kim is doing that, what is wrong here, why he decided to take assets which are not necessarily economically good, what’s the reason for that. The main reason is that Mr. Kim will remain a shareholder in the listed company. He believes in the great success of this company. He believes in copper and to make this company successful is inevitably necessary to take out the assets which should exist outside of the listed company.
For the timing transaction is in very preliminary stage we discuss this transaction with the board explain the reasons. We have run feasibility study for few months ready to identify all the risk of transition, mitigation steps in order to reduce this risk or to mitigate to eliminate this risk at all. And the handover procedures because these separations are very highly integrated now, and of course it will be a big job to split the companies in the right way and make sure that they will continue work smoothly regardless the (inaudible) revenues action.
We will report the transaction and the transaction in H1 2014 results in August. We aim to complete this transaction by the year end and completion subject to approval of the independent shareholders, where Mr. Kim will have no right to grow. So this isn’t about whether this transaction is good or not will be taken by our independent shareholders.
On this slide, I just wanted to show you where Kazakhmys will be after this transformation. This is really transformation decision for Kazakhmys and please remember during our presentations last two year, I always told you that, we would like to transform Kazakhmys into the new company and this is a transformational step to make sure that it will happen. The cash cost of Kazakhmys of new Kazakhmys I called will be very competitive, you can see about the east group, east region cost is 130 to 150 Aktogay is better from 110 to 130 and Bozshakol even better from $0.60 to $0.80 very competitive compared to all existing very affective operations.
The compounded average grade growth is also impressive. And I ask our guys to this chapter, they didn’t. This is more aggressive because we will start from the company now, which will produce 90,000 tons of copper today in few years time. Bozshakol and Aktogay and of course our third project will come stream, Kazakhmys will become producer of 350 to 400,000 tons where Kazakhmys was 14 years ago, when I joined Kazakhmys the records of production in Kazakhmys was 420,000 tons of copper and that time Kazakhmys wasn't so effective as we expect it to be in few years time from now.
And in the last slide, I would like to say where is Kazakhmys in few years? It's exactly what we aimed. Kazakhmys will be focused on production from 7 mines, 85% even more than 85% because here we didn't include Koksay, because it is the early stage, but when Koksay will come on stream, it will be even more than 85% of copper output will come from open pit operations. And this company will produce over 350,000 tons of copper, which will lead us to improve safety environment, definitely it will be, I don't want to forgot, but it will be one of the best companies in the world in terms of safety, because of the different nature of operations.
High labor productivity, I wanted to mention you that labor sensitivity for Aktogay and Bozshakol was very, very low. Bozshakol will mine 25 tons of ore per year, with the 1,500 people employed, ore Kazakhmys today mine 40 million tons with 56,000 employees. Of course if you change the salary slight, you will immediately feel that. If you change the salary significantly on Bozshakol, you don't feel it, because it's laid down sensitive with the tremendous production volume and with very productive low cost operation. That's why it will be very high labor productivity, low cost copper as you've already seen in the and of course that will deliver value to our shareholders. But we will update you in due course. And currently we've finished our presentation and happy to take the questions. Thank you
Fraser Jamieson - JP Morgan
Thanks. It is Fraser Jamieson, here from JP Morgan. And thank you for providing some cash flow statement. I think looking at the numbers it looks like one of the keys to the value proposition around the separation will be ongoing support this required by the spun-off assets and the proportion of that support that needs come from Kazakhmys. Could you perhaps well it looks like it could be sort of $250 to $300 million free cash flow negative just purely splitting out the businesses. Could you maybe give a bit of context around the sources of support that that spun-off business could enjoy and some context around your expectation for the level of support that Kazakhmys and new Kazakhmys might have to provide?
Sure. Let me just start the first part of the answer and then Andy will continue. First of all, we should understand that after the reorganization both companies should be viable and should be adequately financed. But definitely we will make sure that after this reorganization the new Kazakhmys will remain viable and it will benefit from this reorganization. And for numbers it’s early to say how much exactly but Andy can just briefly tell you what of that.
Okay. I am going to answer, why not answering. So at this stage it’s just too early to quantify what support might be provided to the assets. One thing I mean we are very mindful it has to be viable for both sides and that includes taking into account the legacy assets cash flow requirements and also the financial position of the listed entity that will be taken into account. I think that there will be a rope for the government in some form not the ownership in some form supporting the spun off assets.
And I think I would add, that we’ll taken into account the recent change in the currency volume and as Andy said government will anticipate to support the maturing assets but not in form of the with shareholding.
Fraser Jamieson - JP Morgan
Okay. Thank you.
(Inaudible) maybe a follow-up and then a question from Ian as well. So in terms of the vision of how this is going to come about is at the time of separation, do you think that some cash changes hands or does he just get given the title deep for these mines and wish good luck? And then the second question just from Ian as we, we did have a bit of a capital cost overrun on Bozshakol, if we look at Aktogay does the devaluation of the tenge make things a little bit easier in terms of Aktogay?
The answer first for cash in hands. Cash will no change hands, most of the cash will be held by new public company. But as I said, we will make sure that both companies are viable, so we don’t intend to split the cash somehow and just decide to take what the, it will be viable transfer of net working capital and Ian you can.
Unidentified Company Representative
The devaluation of the tenge may have a minor impact on Aktogay as a result of our having more national contractors, but it’s a little bit early to speculate, my stake will go through and how much will be come up by inflation.
So if we look at the pressures that led to the capital cost overrun on Bozshakol are you seeing those same pressures in Aktogay or was that more projects specific to Bozshakol?
Unidentified Company Representative
No, I think we've given previous guidance that we expect the cost of Aktogay to follow along the lines of increases from Bozshakol.
And would you like to ask something about, just on -- I think the external debt will remain with the listed company. And it is important that both sides are viable like I said which means that there may be a contribution towards working capital of the assets that are leaving the Group.
Okay. So it does sound like some cash would go with this one-off asset? Okay, thank you.
Alain Gabriel - Morgan Stanley
Hi, this is Alain Gabriel from Morgan Stanley. The question is for (inaudible) on the unit cost for the Bozshakol and Aktogay, does the new guidance include the devaluation of the tenge and are you able to give us also guidance on the gross cash cost for both projects? Thanks.
Maybe I will take that question. So Bozshakol, we have updated the cash cost; it doesn’t include the effect of the devaluation. We haven’t had sufficient time to work that through. However, I would say that it would not -- it’s a long term cash cost figure we could figure out the first 10 years life. So we would expect that the effect of inflation would erode some of the benefit of that of the devaluation over that time period. And like I said, I think we have still a relatively small proportion of the Bozshakol operating costs are denominated in tenge.
In terms of the guidance on Bozshakol, we initially released numbers in half way through 2012, they were based on work done at the end of 2011. We have updated that to 2014 terms. So that has seen increase in our guidance on the gross cash cost from 120 cents to 140 cents per pound to 140 cents to 160 cents per pound. We have also updated the net cash cost figures using a slightly higher gold price, which has seen the range move from 50 cents to 70 cents to 60 cents to 80 cents per pound. On Aktogay, we haven’t completed our review with that project. The guidance we gave, that was based on 2012 figures and therefore remains at a stage 120 cents to 140 cents per pound on a gross cash cost basis and 110 cents to 130 cents on a net cash cost basis.
Rob Clifford - Deutsche Bank
Hi. It’s Rob Clifford, Deutsche Bank, a couple of questions, I guess I would state in order. On Koksay, could you tell us who you are buying that from and just remind us what you paid for Aktogay and Bozshakol previously?
I think that, it will be incorrect to compare the same as Aktogay and Bozshakol because Aktogay was acquired by our company in 1999 and we didn’t pay anything for Aktogay at that time or we paid hundreds of thousands (inaudible) because Aktogay wasn’t considered as a project. If you go back 15 years ago, the mine was couple grade 0.35% wasn’t consider as a mine, because the grades of all our mines were quite below -- quite higher than 2%, so we didn’t consider this as a mine at that time, as well as the government.
Bozshakol was acquired also for the low price because nobody believe at that time that Bozshakol could be done and financing of this scale could be available and that’s why the price for Bozshakol and Aktogay are very, very different. Koksay has changed hands few times, and recently we acquired that from Kazak International Group which is mixture of Kazak and western investor. They held these assets for few years, of course they drilled and they increased the resources of this asset. And the agreement is to pay $260 million with stages, at the first stage we will pay $195 million; the second stage by the end of the year or may be beginning of the 2015, we will pay $30 million and the rest will be paid subject to confirmation of the resources. So, we will need some time to drill, to make the confirmatory drilling and then check, if the resources are the same, we will pay them the rest. If the resources will be changed in negative way, so we are going to refuse the payment of the last stage. But we’re pretty sure that resources are quite accurate, because they’ve been mostly done in the solid time.
Rob Clifford - Deutsche Bank
Okay, thanks. And then just a follow up some other question about valuations when you split the business. You’ve recently done a pretty significant write-down which suggests you’ve actually done the work internally on the value. Given that (inaudible) pretty significant split in company, can you make that valuation and data in the public, so not just the cost of these regions, but also the details around the assets that you’re effectively selling?
So in this sector, the investors will be asked to vote upon, it will provide information on the assets that are being disposed off together with a fairness opinion from an independent investment bank. And the transaction will also be considered to commence independent committee of the Board.
Rob Clifford - Deutsche Bank
Fantastic. And just a very final question. In the Chairman’s statement, it talks about being concerned around corporate governance issues ENRC which kind of covers all sorts of things, what specifically were you concerned about at ENRC?
Where you start, I think ENRC’s problems have been quite broadly rehearsed. And I think there were issues about the nature of the Board, the way they interacted, the way some people came off, their reactions to that. Some of their acquisitions I think were acquisitions that we might not have made. So I think the general concern about the way ENRC operated across the board I think which is very different than the way we operate.
Rob Clifford - Deutsche Bank
Louise Collinge - Investec
Hi. Louise Collinge from Investec. And just a quick question on your admin, if I assume the two businesses separate, what do think your admin cost could be reduced by?
I think that all numbers will be known in next few weeks when we will run in all those, because currently we have all very preliminary numbers, but definitely administrative cost will be fraction of the current one. So, it will be significantly low, but I am not ready to tell you the number not to mislead you today.
Mike Flitton - Citi
Thanks. It’s Mike Flitton from Citi. A couple of questions, firstly, has any thought been given to the concepts of the claw back within this deal, so obviously your disposing off assets which arguably are at the bottom of copper cycle or approaching in the next year or so and obviously therefore potentially giving up some leverage to the upside. Is there any thought given to basically an option to call that back?
I think this is very early stage to discuss that and definitely we will consider that when we will discuss it in a more details with the Board and with our advisors but now it’s very too early to say.
Mike Flitton - Citi
And just a second one the new project, obviously it’s meant to be as you said better asset, but can you guys a bit color, I mean can we assume the IRR is better than Bozshakol essentially?
Let me just maybe -- it’s up to you now to think about that because I will be ready to answer that IRR and all these numbers when we will run at least prefeasibility study but not now. But I’ll tell you the copper grade of Aktogay and Bozshakol was 0.35, the copper grade of Koksay is 0.48. It is more byproducts in Koksay; we have gold, we have silver which we don’t have in Bozshakol and Aktogay and we have malignant with the higher grade. And if you compare Koksay and Bozshakol, Koksay has a clay plant which is for cost and attractiveness is less attractive than oxide. Koksay has oxide ore as Aktogay. So Koksay is combination of all advantages which we have in Aktogay and Buzshakol.
So we expect that it’s a better project but numbers are not ready to be published there.
Mike Flitton - Citi
Hi, this is (inaudible) West Coast Securities, two questions if I may. First of all on the restructuring, can you give a bit of color on the discussions you had with the government and the degree of support they have given to the transaction? And then secondly in terms of Bozymchak that doesn’t appear to be a core asset, what is the future of that in the group, because obviously you are a moment including in the retained assets?
First of all, the conversation with the government, we can’t consult it with the government before we take that decision to discuss with our Board, what’s their view on that. And definitely in the interest of the country and in the interest of the government, it’s very important to preserve the jobs in the assets which may not be highly generative. And government welcomed our decision because we should understand that we have taken out all the gas from the old Kazakhmys, which will allow the old Kazakhmys Company to attract new financing for development of these assets. They may not be as profitable as expected by the public company, but it will be enough to run these assets to preserve the jobs, which is in the interest of the government. And definitely they will consider some support measures to make sure that this asset will be run for many, many years, they may not be necessarily highly generative, but they will preserve jobs for people there.
As to Bozymchak, Bozymchak was inherited together with the acquisition of the gold company with the assets in Kazakhstan. And of course probably -- wasn’t in the scope of our strategy to expand, but we said we want to expand in the Central Asia where we have strength and competitive advantages.
Bozymchak is very is highly profitable mine. The interview of that project regardless of delays we face is still very attractive. And that will generate very healthy margin. And this duration is very tiny and we will be happy to do that because the payback period is very short. And we have explored some upside in the ore body there, so we continued drilling on the size of our ore body and we think that it will be upside when we will know that we will announce about it. But currently we don’t consider to do anything, first we need to start production to payback our expenses, to generate healthy margin and then we will explore other opportunities.
Myles Allsop - UBS
Myles Allsop, UBS. Just a few quick questions, first of all around the projects, obviously they haven’t been so completely smooth, we have seen this for instance on. What do you see is the kind of key risk now over the next for couple of years? And the second question is while you talked about bringing in the partner, is that the new project or would that be for Bozshakol and Aktogay? And then the third question is around to the balance sheet and obviously there is a lot of CapEx over the next two, three years. I guess it’s the question for Andrew and for Simon in a way, I mean obviously you got financing means that you probably don’t need to do a rights issue, but then for an external perspective, if you are getting up to four, five, six times net debt to EBITDA, you might feel uncomfortable as a Board and do you think that that is potentially transaction will go along side the split?
I was asked recently by someone, what keeps you up at night? And that’s essentially the same question you asked. The risk going forward our standard contraction risk getting a contractor who can do the job making sure he has got a confident labor force and he is working efficiently.
The prime reason for changing or bringing in the new contractor on Bozymchak and changing the contractor on Aktogay is to address those risks where we can get somebody we have high degree of confidence given the performance of the previous contractor which we are not happy with. So it’s now getting NSC organized on Bozymchak making sure that they continued to do the work efficiently.
The back of the job on Bozymchak essentially is broken by doing the civil. And we’ve got everything, essentially everything under cover now and we just have to, like as I said earlier install the equipment. It needs a lot of skilled labor force, which is opposed to concrete and steel. And that the Chinese are bringing with them.
And let me explain our strategy on partnership. We don't rule out that in order to make sure that our capital is adequately provided to develop our company, we may consider partnership with anyone who is interested and we currently have some of the interested to co-operate with us. Definitely, there is a lot of interest for Koksay and we are not ruling out to consider the partnership in Aktogay. But this is in early stage and we will decide, it depends on the copper price, it depends on the progress of our projects.
At certain point, we will think whether we partners or not. But if we see that, we will require more capital that we can afford definitely, we will consider that. But I think the timing may address the issues with the capital raising in terms of the…
If I can press that and I think from a Board's perspective what we've done over the last year with MKM, ENRC and the GRES-1 transaction is that we focused the company, we bring significant amounts of money which certainly go a long way to addressing on these on delivering these projects.
Our two priorities at the moment, number one working on the separation into the two parts and secondly the delivery first of all Bozshakol, then Aktogay. And that is our priorities. There has been no discussion of rights issues, none would server this time. And my view is that once you get Bozshakol up and running, as you know the change in cash dynamics is quite significant. Secondly, where we do ever feel it’s appropriate we think we have three assets, whether it's Bozshakol, Aktogay and Koksay and I'm not in any way implying any favoritism or thoughts at any of them, it’s a partnership where there is interest. So I think on the rights issue that is not on the agenda.
Debt levels to EBITDA will spike and as we take on more debt in a period which if you look at New Kazakhmys will have a reduced EBITDA in 2015, however that is temporary. The cash flows from Bozshakol are very attractive, this is the first quarter assets, it has higher grade over the first few years, so we do see a pretty quick ramp up in terms of (inaudible) like for example we increasing our output. So those first two years you won’t see significant cash flows coming through it. So it is a temporary spike ahead of and the delivery of what is it making new asset for us.
Cailey Barker - Numis
Thank you. Sorry cuts in the middle, but okay, Cailey Barker from Numis. Just a question on news flow, perhaps just to give you a steer when you heard prices on the costs and CapEx in that development you hope to update us on the restructuring next?
On the restructuring we will be ready to update you in the second half, but we will be giving results of our second half result announcement but on Aktogay.
We run about that same timeframe.
Cailey Barker - Numis
Thank you. Is there anyone on the line?
Any last questions or shall we call it a day?
One at the front.
Good morning. It’s (inaudible). With regard to the central assets, can you comment at all on whether any of them will be for sale individually in their own capacity to parties either directly from the current Kazakhmys entity or whether there is an intention potential to having as a holding pin point to better work to potential disposed entity parties from the private vehicle?
Yes, I think currently we are not in any agenda to consider for sales, so we’re talking only about the organization at the moment.
Do you remember that it is to create two halves of businesses. So it’s not there and that's where the group has come - from.
Right, thank you very much. Thank you for your time.
Is there anyone for?
No sir. Thank you.
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