FTSE Contrarian: 2013 Offers No Growth for Kazakhmys

LONDON -- Kazakhmys  (LSE: KAZ  ) , the Kazakhstan-based copper miner which joined my list of FTSE losers thanks to a 16% drop in share price in 2012, announced its full-year production was in line with expectations but had a rather dull outlook of flat production in 2013.

The market appeared to shrug its shoulders at this, but perhaps that was because the shares sold off a bit the day before when Antofagasta  (LSE: ANTO  ) -- Kazakhmys' larger, Chile-focused competitor -- disappointed investors with the announcement that it wasn't expecting to see any production growth in 2013. More importantly, Antofagasta said it expected to see its net cash costs (how much it costs to produce a pound of copper ignoring any corporate costs) rise from $1.03 per pound to $1.40.

Pinch your coppers
In copper mining, like any commodity production, the miner has no pricing power because what they make is substitutable by anyone else that happens to have a copper mine -- and a lot of others do. The secret to success, then, is to pull the copper out of the ground for less than the next guy. That way you can provide yourself a profit at lower market prices than your competitors.

Kazakhmys reported cash costs of $1.71 per pound at mid-year, so it is clear that Antofagasta's operations will be more profitable than Kazakhmys at any price level, but with copper prices around $3.70 per pound, both are making a nice profit. Importantly, though, for investors choosing between the two companies, the gap appears to be shrinking.

More, please
Of course, investors would like to see their investments grow and neither Kazakhmys nor Antofagasta is offering that in the next year -- unless copper prices rise dramatically.

On this front, Kazakhmys looks to be slightly ahead because it has two large projects that are moving forward. The company plans to spend nearly 2.5 billion pounds trying to bring two new mines online by 2015. The production from these mines is expected to help boost its production by 60% over the next six years.

Meanwhile, Antofagasta recently suspended a development project as it weighs the costs against the benefits in a world of uncertain economic growth and copper demand. A second potential mine in Pakistan suffered a blow when the agreement governing Antofagasta's claim was ruled null and void by the Pakistani Supreme Court.

Squaring up
Just doing what it did last year isn't likely to help Kazakhmys's shares recover. After last year's struggles, the company is trading at 4.6 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) -- a discount to Antofagasta's 5.2 multiple.

Investors need to be cautious, however, as this year's weak copper prices dented profits. A further fall in copper prices would hurt Kazakhmys more because of its higher cost base, but it does appear that if prices remain stable, then it offers patient investors better growth prospects. However, 2015 is a long way off and a lot can happen between now and then.

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