Kaz Minerals Plunges After Agreeing to Buy $5.5-Billion-Outlay Russia Copper Project

Shares of Kaz Minerals (KAZ.L), a company focused on large-scale, low-cost copper mining, slumped early Thursday, after the company said it was buying the Baimskaya copper project in the Chukotka region of Russia for $900 million, taking on a project with a gigantic capital budget outlay of $5.5 billion.

The miner, whose board approved in December 2017 a $1.2 billion project to double its sulphide ore processing capacity, said in a statement that it will initially pay $675 million for a 75% interest in the project, of which $436 million will be in cash and the rest in 22.3 million new shares, or 5% of the firm’s current issued share capital.

Kaz, which reported a pre-tax profit of $580 million in 2017 versus $220 million a year earlier, said the vendor will not contribute to the development capital expenditure for Baimskaya, which it noted was one of the world’s “most significant undeveloped copper assets”.

The development expense will be incurred over 2018-26, a period that is seen to make the deal “manageable”. Noting its “highly cash generative” asset base – a positive cash flow of $752 million in 2017 versus a negative cash flow of $98 million in the previous year – the company said that it has the option of “adjusting the phasing of capital expenditure, if necessary”.

The miner, which suspended its dividends in 2013 to pay for growth, said that the average annual output from the project over the first 10 years of operations is expected to be 250 kilo tons of copper and 400 kilo ounces of gold.

The mine has a life expectancy of about 25 years, Kaz, which lowered its net debt-to-gross EBITDA ratio to 1.7 times in 2017 from 5.4 times in 2016, added in the statement.

“The acquisition of Baimskaya marks the next stage of the transformation of Kaz Minerals,” Chairman Oleg Novachuk said in the statement. “The development of this new project in Russia will enable the group to continue its industry-leading growth, delivering both value and volume as the copper market is forecast to enter a period of a significant supply deficit.”

Shares of Kaz slumped more than 15%, the third-worst performing in the FTSE All-Share Index, at the time of writing in London.