LONDON -- I would advise potential bargain hunters to resist plunging into copper miner Kazakhmys (KAZ). The shares have collapsed almost a third from January's eight-month peak of around 826p to current levels around 558p. But I think that the company remains on shaky ground as a combination of escalating production costs and falling output looks likely to keep earnings hemmed in over the medium term.

Production woes continue to bash company
Kazakhmys announced in last month's trading update that revenues slid 5.9% during 2012 to $3.4 billion, which -- allied to advancing production costs and a host of impairment charges -- drove operating profits 70% lower to $368 million.The miner's net cash costs exploded to 174 (U.S.) cents per pound last year, up 53% from 2011. This jump was caused by deteriorating ore grades and increased labor and transportation costs. Meanwhile, Kazakhmys produced 292,000 tons of copper cathode from its own sources in 2012, a 2.3% fall, and the company expects this figure to come in between 285,000 and 295,000 for 2013. A 10% drop in average copper prices during the course of last year also weighed heavily on the balance sheet.

Kazakhmys plans to aggressively increase copper cathode production in coming years, and has penciled in an output target of 500,000 tons by 2018. But any potential problems in achieving this target, coupled with further weakness in the copper price, could continue to whack the bottom line and send the shares spiraling lower again.

Earnings pressure expected to endure
City analysts expect 2012 earnings per share to have collapsed 60% in 2012 to 68 pence, with a further 6% slip predicted this year to 64.2 pence.Preliminary results for last year are due on Tuesday, March 26, after Eurasian Natural Resources Corporation -- in which Kazakhmys holds a 26% stake -- releases its 2012 results. Kazakhmys also offers investors little in the way of dividend income, and the company announced during February's trading statement that the 2012 full-year dividend would be slashed to 11 cents from 28 cents in 2011 due to earnings pressure.

Kazakhmys trades on P/E ratios of 8.2 and 8.7 for 2012 and 2013, respectively, which are some way below the mining sector average of 16.9. But I believe that, until Kazakhmys shows tangible signs of curing its production woes, investors should look elsewhere for mining plays with a lower risk profile.

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