A likely multi-billion dollar write-down and a lower-than-expected dividend have added to the pressures on Kazakhmys' (KAZ) share price with today's trading update sending the stock down a further 6.6% to 632.5p. With near-term cost pressures compounding events, shareholders in the FTSE 100 copper producer should be braced for a rocky road ahead.

Kazakhmys has reported $1.36 billion earnings before interest, tax, depreciation and amortisation (EBITDA), meeting consensus forecasts. Net cash costs of $1.74 per pound are also within the guidance range of $1.60 to $1.90 per pound. The company says gross cash costs are set to be 8% to 12% higher this year, reflecting an industry-wide trend.

Metal output is expected to be flat this year with higher tonnages of extracted material offsetting lower grades.

While this performance suggests the business is trucking away quietly and on track, the two big negatives in today's trading update will not help to revive positive investor sentiment towards the stock.


KAZ - Comparison Line Chart (Rebased to first)


Kazakhmys owns 26% of ferrochrome producer Eurasian Natural Resources (ENRC). This investment has a $4.59 billion carrying value against a $1.55 billion market value at the end of 2012 (and $3.29 billion at the end of 2011). Therefore Kazakhmys will have to write-down this stake at its full-year results on 26 March.

Eurasian Natural Resources yesterday announced that it was finalising its own annual impairment review. The £4.4 billion cap has flagged non-cash impairment charges for its alumina business in Kazakhstan; Democratic Republic of Congo-based Boss Mining – which was part of the $951 million acquisition of Camec in 2009; Zambian copper group Chambishi which it bought for $300 million in 2010; and Northam Platinum where its 13.5% stake is worth $226 million in the market versus $296 million paid three years ago. Liberum reckons Eurasian Natural Resources' impairments will exceed $1 billion. The details will be confirmed at full-year results on 20 March.

The second negative with Kazakhmys' trading update is the 8c per share final dividend declaration. This will result in a total dividend for the year of 11c, more than half the 28c paid in 2011. In a market where miners are increasing dividends, not decreasing, this clawback in the shareholder reward will understandably disappoint investors. The reduction reflects lower profits, increased debt and higher capital investment.

In a preview of the results two days ago, Canaccord Genuity predicted that Kazakhmys would pay 15c per share dividend for the year, so today's announcement is a shock to both investors and the City.

Issue Date: 28 Feb 2013