Fiona Bond, Interactive Investor, August 12, 2011
Think of Kazakhstan and thoughts might immediately turn to Borat. But you would be mistaken for thinking Sacha Baron Cohen’s character is the biggest export the country has to offer.
For this country, nestled deep between Russia and China, boasts a wealth of natural minerals which it is absolutely intent on exploiting.
Arguably most famous for its Caspian oil fields, this is set to change with an influx of miners flocking in search of gold, copper and other raw materials.
FTSE 100 heavyweight Rio Tinto (RIO) recently set its sights on the country, signing an agreement with Kazakh state company Tau-Ken Samruk on joint mining in the Central Asian country.
After signing the deal Kazakhstan’s vice minister for industry, Albert Rau, described Rio’s arrival in the country as “very positive”, particularly given that exploration investment has been cut over the past few years.
And just last month, the government said it was considering building a third gold refinery this year or next as it aims to significantly boost its gold output. Last year, President Nursultan Nazarbayev announced plans to boost its production to more than 70 tonnes by 2015 in order to join the world’s largest producers of the precious metal.
The country, Central Asia’s largest economy, holds some 4% of world gold reserves and ranks seventh in the world in terms of reserves. Last year, it produced 13.3 tonnes of refined gold, up 29.5% on 2009 numbers.
Kazakhstan benefits from not only its large expanse of underexploited land, but its proximity to China which could afford it an abundance of opportunities, analysts note.
Crucially, the Central Asian country has a good infrastructure system allowing it to transport its products to market. Mineral exports account for almost 75% of total exports, with the country dispatching more than its domestic consumption, according to analysts at Xcap Securities.
In 2010, it recorded a GDP figure of 4% up from 2% in 2009 thanks to the strong recovery in commodity prices, in particular gold and copper.
In the same year it also adopted the revised Law on Subsurface Use to create a favourable environment to lure exploration investment. The most notable change was the abolition of the royalties, replaced by Minerals Extraction Taxation imposed according to the different mineral mined. Furthermore, the government reduced corporate income tax from 30% to 20%, with another reduction to 17.5% expected in 2013 and 15% from 2014 onwards, according to data from Xcap Securities.
Little wonder then that UK-listed miners are casting their attentions to this land.
Central Asia Metals
Central Asia Metals (CAML) is one of the newest additions to AIM, having joined last September with a $60 million (?36.9 million) raising.
Its main focus is the large low-grade copper “waste” dump deposit, Kounrad, in south-central Kazakhstan.
The project, located 620 kilometres to the north of Almaty, was operational from 1936 to 2005 and accumulated “waste” dumps from the decades of open-pit mining operations.
At the moment the company is focused on constructing the first SX-EW plant as it eyes up first production by the end of 2011, with a view to ramping up to full rate by mid-2012.
“When we listed we had a project that would cost $47 million to get into production and we are on budget. Often companies are inclined to go back to the market cap in the hand which is a flaw of the AIM market but we have avoided that,” chief executive Nick Clarke told Interactive Investor.
The company, which boasts no debt, believes it will be cash flow positive in 2012.
But despite this, the company’s shares have underperformed the copper price since its IPO and are lower than their debut price in September. However, as the project approaches first production, analysts believe there is the opportunity for shares to rerate.
“We are very confident of achieving our goals and remain on track to achieve first production by the end of this year,” Clarke said.
The company, which also has assets in Mongolia, has an option to expand the project by an extra 10,000 ounces per annum. It is currently undertaking some work to decide whether to go ahead.
“Our current long term copper price assumptions would allow the group to fund internally the construction of a second plant with commercial production commencing in 2015,” said mining analysts at Mirabaud Securities.
And if it doesn’t? The company said it will seek to find other opportunities in Kazakhstan.
“Constructing this second plant would double copper production to circa 20,000 tonnes per year and shorten the mine life to 2029. Our valuation is therefore twofold. First, based on the processing of the dumps between the fourth quarter 2011 and 2044 at 10,000 Cu per year, we value CAML shares at 136p rising to 216p. Second, assuming production increases to 20,000 tonnes Cu per year from constructing a second plant between 2015 and 2029, we value CAML at 217p per share,” said Charles Gibson, analyst at Edison Investment Research.
Gold mining and exploration group Hambledon Mining (HMB) has homed in on East Kazakhstan with the Sekisovskoye gold mine.
“Kazakhstan remains a good place to do business and the re-election of president Nursultan Nazarbayez in March has helped to ensure continued stability,” the company said.
Its main focus for the time being is on improving production at the mine, in a bid to build a solid and consistent production profile.
Analysts note that the mine has reported improved production since March 2010, producing 22,678 ounces of gold last year.
And in the three months from 1 April to 30 June, the company processed a record 219, 675 tonnes of material and churned out a total of 5,320 ounces of gold and 10, 786 ounces of silver.
“Management has shown that it is able to improve production performance, which has historically been hampered by harsh winters and poor recoveries,” said analyst Duncan Hughes at Ambrian.
But it won’t stop there.
The company is eyeing up an ambitious target of over 100,000 ounces by 2016 – no mean feat, although Ambrian believes the company has shown considerable strength in improving its output.
“Hambledon continues to deliver improved and consistent quarterly production. Management’s ‘hands-on’ approach is clearly having a positive impact and we expect market sentiment to reflect greater confidence in the company’s production performance going forward.”
A renewed boost of confidence would certainly help the company, which has seen its shares slide 40% over the past year.
To that end, Hambledon is concentrating on progressing the underground development whilst the open pit provides cash flow.
Last month, it unveiled a promising set of drill results, including a 150% increase in the average thickness of the gold mineralisation.
To date, 29 drill holes have been completed and chief executive Tim Daffern called the latest batch of 12 holes “encouraging” and in some cases, better than expectations.
“On the basis that Hambledon successfully executes its plans to commission an underground mining phase and ramp up production by transferring operations from surface to underground from end 2011, we value the company at 11.64p per share,” said analysts at Edison Investment Research.
AIM-listed Frontier Mining (FML) has big ambitions as far as Kazakhstan goes. The company, which was established in 1998, is working towards becoming the number one independent mining company in the country.
To that end, the company has concentrated on its flagship Benkala and Koskuduk projects, after recently selling its Maminskoye gold deposit in Russia for a cool $37.45 million.
It plans to plough the proceeds into launching the Benkala SX-EW project in a bid to become a “solid Kazakh-focused copper producer”.
“I believe that uncertainty about Frontier’s capacity to complete Benkala has weighed on our share price and that this monetisation of value will encourage investors to focus on the significant value that Frontier offers to investors,” said chief executive Erlan Sagadiev.
Indeed, the company’s share price has slipped 42% over the past 12 months.
But despite this, the company said it has been making firm progress across its operations and at the end of June hailed 2010 and the period post year-end as “transformational.”
The year saw the company raise $5.8 million in equity from a share placement and take on board $17 million of debt. It invested just over $19 million directly into the Benkala and Koskuduk projects.
It has also continued to make progress at the copper-molybdenum-gold porphyry Benkala deposit, with construction for the total project some 65% complete at the start of June and first production expected later in the year.
“Frontier’s key challenge will be to successfully bring Benkala into production by end 2011 and complete construction of the project by end 2013; execution of this could likely reverse the current share weakness,” said analysts at Edison Investment Research.
Meanwhile, at the Naimanjal Licence Area, located in north eastern Kazakhstan, Frontier is generating early cash flow from a low cost heap leach operation at the Koskuduk gold mine. While output in 2010 disappointed due to delays in permitting the power line to the site, operations restarted in May after the winter closure and the company has said it is confident it can reach an improved production forecast of 6,000 ounces this year.
But of course it wouldn’t be right to cover Kazakhstan without reference to its Caspian oil fields.
Welcome to Max Petroleum (MXP); an AIM-listed oil and gas explorer with exploration and production rights to the Blocks A&E licence area which includes two onshore blocks extending over 12 kilometres in the highly prolific Pre-Caspian Basin in Western Kazakhstan.
The company is focusing on two core portfolios of potential oil and gas deposits; shallow post-salt and deep pre-salt prospects.
It’s a move that’s paid off with shares up over 55% during the past 12 months.
The group kick-started the year with an $85 million fund raising, which it pledged to use for the post-salt drilling programme and a two-well pre-salt drilling programme.
Since the company renewed its post-salt exploration programme in January 2010, it has made five field discoveries. Its most recent, the KZIE-1 exploration well, discovered 17 metres of net oil pay in two Jurassic sandstone reservoirs earlier this month, and Max plans to test another three post-salt prospects this quarter.
“We are well positioned to execute on our exploration programme regardless of macro market conditions and look forward to continue generating significant value for our shareholders in the very near-term,” said executive co-chairman Robert Holland.
The company is also on the cusp of drilling its first pre-salt well at the Emba B prospect, targeting 467 million barrels of oil equivalent unrisked mean resources (135 mmboe risked).
Miramgul Maralova, analyst at Halyk Finance, said: “We view Max’s progress in the exploration and production development programs very positively. We expect a major stock price movement upon publication of drilling results of Max’s first pre-salt well in the first quarter of 2012.”
And in a further boost to investors, the company announced last month that it expects production in the current quarter to increase to 3,500 barrels of oil per day.
Brendan Long, analyst at Merchant Securities, said: “These are not incremental or marginal changes, these changes are of material significance to Max Petroleum. Investors who like this company should be pleased to bid aggressively into this news.”
In July, the company said the Kazakh government had approved an extension of the trial production project for the Zhana Makat field until 15 December 2011, while it seeks final regulatory approval to covert Zhana Makat to full field development which will allow it to produce for up to 25 years and sell 80% of its crude on the export market.
“With a potential upside greater than 160%, Max remains our favourite small cap idea,” said Barclays Capital.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.