Following excessive earnings marginsExpectation of the copper

Following the divestment of the high cost assets in October 2014, KAZ has transformed into a copper development company focused on two large scale copper mines, Bozshakol and Aktogay. Both are similar in size (~100 ktpa) and design, and are guided to take group production up to ~300 kt by 2018Monetary results correspond to the volumes. thinking about thestage of manufacturing and additionally the forecasted copper costs, organisationmay want to triple its sales through 2020. At its core, KAZ Minerals is a low costmanufacturer and because of the synergistic effect from the release oncomplete-ability of Bozshakol and Aktogay the organisation would maintainto keep low coins cost and, as result, excessive earnings marginsExpectation of the copper deficit as the main increase aspect.The demand increase in China, weakening US dollar, strong PMIsigns in Euro quarter are assisting copper expenses moves at hugemines in Chile and export restrictions in Indonesia in advance this 12 monthsand contemporary rumors about viable ban on copper scrap import inChina additionally supported copper expenses. one of the foremost elements in theincrease of copper inside the lengthy-time period is a scarcity of recent massive scaletasks to catch up on the exhaustion of manufacturing on the oldmines. A small deficit within the copper market is expected in 2018, withits subsequent increasePerfomance outlook – Thanks to the growth in copper prices and a significant increase volume of production Kaz Minerals demonstrated strong results for 1H2017. The total revenue reached $ 837 million, which 2.3 times more than in the same period in 2016. Index EBITDA reached $ 429mn, which is 3.7 times more than EBITDA in 1H2016. The Company’s operating profit increased 4.3-fold, having made $ 291 mln. Total cash cost decreased by 17% from 173 cents per pound ($ 3,813 per tonne) to 144 cents per pound ($ 3,174 per tonne) in 1H2017. Free cash flow Companies in 1H2017. was $ 155mln after the payment interest on liabilities. Net debt decreased from $ 2,669 million as of December 31, 2016 up to $ 2 442 mln as of June 30, 2017. As of June 30 2017. The liquid position of the Company was $ 1 563 million, from of which $ 1,223 million are represented by cash and $ 340 million are available in the form of borrowings. The decrease in net debt was due to the increased operating income, lower capital costs, and refund of VAT on projects in Bozshakol and Aktogay in the amount of $ 176 mln. The company has updated the forecast for the cost of 2017g. So on Aktogay the projected cost price was decreased by an average of 11%, to 110-130 cents per pound ($ 2,424-2 865 per ton) compared to the forecast at the beginning of the year, at Bozshakol cost is expected at the level of 115-135 cents per pound ($ 2,535-2,975 per tonne), which is 7.5% less than before of the declared range, in the Eastern region and Bozymchak on level of 205-225 cents per pound ($ 4 518-4 959 per tonne), which is 10.5% less than the previous forecast. Projects Bozshakol and Aktogay inherently have a low cost of production and due to increase in their share in total production, the Company reduces the cost of its products. Capital expenses of the Company for 1H2017. amounted to $ 108 million, of which $ 23 million for maintenance and $ 85 million for expansion of projects. KAZ Minerals raised the lower limit of the range forecasted copper production for 2017. from 225-260 thousand tons up to 235-260 thousand tons. Achievement of full production capacity in Bozshakol is expected in 2H2017. Also in 2P2017 expected to achieve commercial production of sulphide concentrate on Aktogay. Company also raised the lower limit of the production range Gold from 135-170 thousand ounces to 150-170 thousand ounces due to more high level of content at Bozshakol and projected range for silver from 2 750-3 000 thousand ounces to 3 100-3 350 thousand ounces.The Company’s management notes the possibility of considering dividend payments in 2018.The best growth rates. The company is on track to achieve previously declared level of copper production at 225-260 thousand tons per this year. Taking into account the decline in production in the East region and Bozymchak, achievement of the calculated level of production at the Bozshakol and Aktogay GOKs will allow the Company to approach indicator of 300 thousand tons of copper per year in the medium term, which two times above the level of 2016y. The projected growth in Kaz production Minerals for the period 2016-2020. will be about 17% y / y, which is one of the best indicators in the industry.Financial results correspond to volumes. Given the levels production, as well as a forecast for copper prices, the Company may triple revenues by 2020. In its essence Kaz Minerals is a manufacturer with a low cost and due to the synergistic effect of starting full capacity of Bozshakol and Aktogay GOKs, the Company can continue to maintain a low cash cost and, as consequence, high margin. Debt load as a decreasing risk factor. On the current projected since 2019. main capital investments of KAZ Minerals will mainly have to maintain production. According to our given the total capital expenditure in 2017-2018. will amount to $ 470mln, $ 543 million, respectively. Further average annual costs are expected at the level of $ 124 million. Given the significant increase in free cash flow in the medium term, it is expected to reduce net debt of the Company by 22% to $ 2,080mn at the end of 2019, that will give the business more flexibility. As of December 31, 2016. The Company’s net debt was $ 2,669mn. Reduction of debt The burden will increase the Company’s attractiveness, which in the end is positive will affect the cost of capital. Waiting for a deficit as the main growth factor. Growth in demand in China, weakening US dollar, strong PMI indicators in the euro area support prices for copper. Strikes at large mines in Chile and the restriction of exports to Indonesia at the beginning of this year and current rumors about a possible ban on imports of copper scrap in China also supported the price of metal. One of the main factors in the growth of prices for copper in the long term is the absence of new large projects to compensate for the depletion of production on older deposits. ¬†¬†Opinion:KAZ Minerals demonstrates the strong growth of operating results due to active production expansion on its growth projects, Bozshakol and Aktogay. As a result, we expect increased growth rates of the Company’s operating and financial performance until 2019. Despite the reduction in zinc production, if the current pricing environment in the base metals market could be sustained, we expect that the dynamics of growth of the financial metrics will significantly outpace the Company’s operating results for 2017. We highlight the continued reduction in the debt burden from the generation of operating cash flows as an important positive factor in the Company’s valuation.In the favorable macroeconomic environment, main factors in the valuation of KAZ Minerals are the stability of prices for its products and successful implementation of its operational plans for the increase in production. From our point of view, considering the effective fulfillment of operating forecasts provided by KAZ Minerals, a significant part of the future increase in production is already priced in Company’s shares. At the same time, the current rally observed in the industrial metals market may prove to be unsustainable in the medium term. In our opinion, current prices of copper ($ 7,000 per ton) and zinc ($ 3,200 per ton) are not reflected in KAZ Minerals stocks due to insufficient market confidence regarding maintenance of such prices on the forecasted horizon. Without fundamental changes in the medium-term forecasts for the metals markets, we maintain our Buy recommendation