Another Miner Hit by the Commodity Curse

LONDON -- Kazakhmys (LSE: KAZ.L  ) , the biggest copper producer in Kazakhstan, has seen profits more than halved (down 67%) in the first six months of its year.

The company has been hurt by dropping copper prices, which are down more than 20% in the past year. It's also been hit by rising costs and the reduced and delayed demand from China.

Net income shrank to $121 million, or $0.23 per share, which is down from $374 million ($0.70 a share) a year earlier. Sales fell 17% to $1.5 billion.

Kazakhmys' EBITDA, or earnings before interest, tax, depreciation and amortization -- a measure of overall operating profitability -- dropped over 40% from the prior year. It's announced an interim dividend of $0.03 per share.

Despite that rough start, Kazakhmys' leaders say they expect higher sales in the second half and are maintaining their full-year guidance.

"Following disruptions caused by adverse weather conditions at the beginning of the year, we raised output toward the end of the first half, allowing us to maintain our copper production target range for 2012," said Oleg Novachuk, chief executive. "Uncertainty prevails in the global markets, but we are encouraged by the continuing demand from our customers."

Kazakhmys is not the only commodity producer having troubles. Anglo-Australian mining giant BHP Billiton (LSE: BLT.L  ) was also hurt by plummeting metal and coal prices, as reported recently. BHP's rival, Rio Tinto (LSE: RIO.L  ) , is also watching costs, as it recently announced a more measured approach to expansion and new projects. Both BHP and Rio Tinto are looking to dispose of mines and businesses that aren't considered low-cost enough or material enough to the overall business.

Commodity producers are subject to the boom and bust of commodity prices and, by definition, they have no pricing power. The only way to distinguish yourself is to be a low-cost provider. Hence looking at production (growth or lack thereof), cost of production, and balance sheet strength (can they fund expansion and ride out a period of low metal prices?) is how we should be evaluating commodity producers.

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Jill Ralph does not own shares of any company mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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