Kazakhmys raises full-year cost guidance

Surging cash costs at Kazakhmys came in ahead analysts' forecasts in the first half, leading the miner to raise its guidance range for the full year.

Net cash costs, a concern for analysts going into the results, jumped year-on-year from 93 cents a pound (c/lb) to 171c/lb in the six months to June 30th. Credit Suisse had estimated on Wednesday that cash costs would increase to 164c/lb.

"Costs are a significant headwind for the mining industry and Kazakhmys has seen inflation in both input costs and labour. Kazakhstan has a relatively small skilled labour force and as the economy is dominated by the petroleum sector, it is vulnerable to labour inflation. As ore volumes increase, particularly from those mines with no adjacent processing facilities, transportation costs are also under pressure," said Chief Executive Oleg Novachuk.

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Overall, Kazakhmys Mining's cash operating costs increased by 20% over the year to $966m.

In the second half, higher sales volumes should help reduce unit costs, the group said. However, lower by-product pricing combined with the higher disability provision, mean that the net cash cost for the full year will now be in the range of 160-190c/lb, above the previous target of 150-180c/lb.

Meanwhile, revenue declined by 17% to $1,516m on the back of lower sales volumes (as already mentioned last month) and prices. The average realised sales price of copper fell from $9,454 per tonne to $8,253 per tonne year-on-year.

Copper production in the first half was held back by severe weather and equipment availability at the start of the year, though it did recover in these second quarter. Ore output rose 6% but output of copper in concentrate from own material fell by 4%. The group has maintained its copper product target range for 2012 of 285-295kt.

Segmental earnings before interest, tax, depreciation and amortisation (EBITDA) excluding special items sank from $1,065m to just $621m in the first six months, reflecting reduced revenues and rising costs. When including the firm's 26% stake in fellow miner ENRC, group EBITDA came in at $949m, well below the comparator of $1,608m last year.

On an underlying basis, profits fell from $866m to $307m.

"Our growth projects are at an exciting stage of development and we will continue to focus on their efficient execution. Cost management at our existing operations will clearly be a major issue in order to protect profit margins and enhance cash generation. The second half of the year should benefit from an increase in output and sales and the outlook for copper demand remains sound," Novachuk said.