TBY talks to Oleg Novachuk, CEO of Kazakhmys, on copper production, development projects, and commodity prices.
TBY How would you assess Kazakhmys’ contribution to the realization of Kazakhstan’s full mining potential?
OLEG NOVACHUK We are currently developing two of the largest projects in Kazakhstan: Aktogay and Bozshakol. Each of these requires around $2 billion of capital investment and will increase Kazakhstan’s copper output by over 50%. We will also spend some $70 million on exploration in 2011. This is probably the biggest program of its kind in the country.
Kazakhmys decided not to issue new shares on the Hong Kong Stock Exchange despite the board’s approval of the secondary listing. What factors have led the Group not to commit to a second listing just yet?
We have completed our listing on the Hong Kong Stock Exchange. At some point we would like to issue a modest amount of shares in Hong Kong, in order to assist liquidity. We believe there is good demand in Hong Kong, but these shares can only be issued at a price and valuation that makes sense to existing shareholders. We think the outlook for copper is positive, which is the main driver of our share price, and there should be an opportunity in the next 18 months.
What is the status of the Bozshakol and Aktogay projects? What level of impact are you expecting on Kazakhmys’ operations and profitability once production starts as scheduled in three to four years?
Each of these projects represents around 100 kilotons of copper a year, compared to our current production of 300 kilotons, so it is a substantial uplift. The profitability obviously depends on metal prices at the time, but we believe they are both economically attractive projects. Bozshakol is just completing its feasibility study and should move into development at the end of 2011, with first production in 2015. Aktogay is around 12 months behind Bozshakol and should move into feasibility during 2011. Most importantly, we have $2.7 billion of funding from the China Development Bank (CDB), which will fund Bozshakol and our mid-sized projects, and we recently signed an MoU with the CDB for $1.5 billion that if completed will be used towards Aktogay.
Kazakhmys has precious metal mines outside Kazakhstan. Provided the profitability of the Group and increasing commodities prices, what are your plans on expanding your operations to other geographies outside the CIS?
We have stated that we will look at opportunities to diversify principally in Central Asia. This will be achieved through exploration and by acquiring known assets. The Central Asian region is where we can operate most comfortably, as we understand it well. It is also a vast and mineral-rich area. We will look elsewhere, but we have to be sure that we can understand and manage the risks.
Diversification of the economy and accelerated industrialization are important agenda items for the government. How do you see processing prospects of Kazakhstan in extractive industries? What business opportunities are there for local and foreign investors?
This is an interesting question for Kazakhmys—we are already far more involved in processing than our international peer group. We are fully integrated, so that all of the ore we mine is processed through to finished metal and around 25% is then taken further to copper rod. This is highly unusual for a major copper company. We have also worked with the government to establish the “Made in Kazakhstan” program, which aims to encourage local companies to come forward and supply materials and parts.
Kazakhstan itself has a number of key advantages for future development. The land is naturally rich in resources, with a wide range of commercially attractive deposits, and strong and reliable transport links. The country has a strong track record in attracting FDI, which has amounted to more than $120 billion since independence in 1991.
What is the role of Kazakhmys in the satisfaction of the country’s increasing need for reliable, sustainable, and environmentally friendly energy?
Kazakhstan is currently in reasonable balance for power supply and demand, but with fast growing GDP and quite old power facilities it is critical that the country continues to invest, otherwise there will be a major shortfall in the coming years. We have four power plants—three are used mainly for our copper production, but the fourth plant is Ekibastuz GRES-1—the largest plant in Kazakhstan. Ekibastuz GRES-1 is currently undergoing a $1 billion refurbishment that will see its capacity increase by 60% in the next four years. Delivering this investment program will be critical to ensuring that the supply of power is not a restraint on economic growth
Kazakhstan’s mining sector experienced a relative contraction due to decreasing commodities prices, which was reversed in 2011. How does Kazakhmys look to take advantage of this positive trend and improving climate?
In terms of demand, there was very little contraction in copper, and so our production did not change. Prices went down and we had to manage costs carefully, but in copper it was about margins rather than volumes. Prices have recovered, but it continues to be a matter of managing margins. As a copper mining company we cannot control end prices—we focus on managing our output and our efficiency.
What is your business outlook for the rest of 2011? What changes in the business climate are you expecting?
We tend to look long term—some of the assets we are developing will last 40 years, so the next six months is fairly small. In the long term, we think that the outlook for copper remains excellent; demand should remain firm and supply is always constrained. This is the decade for copper.
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