A sharp devaluation of Kazakhstan's currency has triggered a 24% rally in one of the country's big copper miners, Kazakhmys (KAZ) to 219.6p. Up to three quarters of its cost base are in the local currency, so there's good news for its profit margins.
Remember that this stock is heavily shorted, so lots of people will be forced to close out their positions amid margin calls today – hence the big share price reaction.
Yet the last time the Tenge was devalued, inflation went through the roof, wiping out all the initial cost benefits to miners.
'Overnight, Kazakhstan's central bank devalued the domestic currency, the Tenge, from KZT155.63 at close yesterday, to KZT185/US$ ±KZT3, a decline of 19%,' says Westhouse Securities. 'We understand that the unofficial rate is currently KZT195/US$. The country last devalued the Tenge in February 2009, by 21%, and had been trying to support the currency at KZT145-155/US$.'
The broker reckons a 19% decline in the Tenge for 10.5 months of this year should lower cash costs by 12.5%. Liberum Capital says the last major Tenge devaluation, held in 2009, saw inflation running close to 50% a year later, 'totally eroding any initial benefits'. The central bank is presently maintaining its inflation guidance at 6% to 8%.
When the Ukraine devalued the Hryvnia in 2008, iron ore producer Ferrexpo (FXPO) saw costs in US dollar terms fall by 20%, but then inflated at around 20% for the next two years.
Other Kazakhstan-based miners include Central Asia Metals (CAML:AIM) which nudges ahead 3.4% to 184.5p. You can read our latest view on that stock here. We looked at Kazakhmys' problems last week in Shares. Today's news clearly warrants us to reconsider this negative view.
The analyst community have different opinions on how much of Kazakhmys' costs are linked to the Tenge. Westhouse reckons 75%, Liberum is at 60% and Investec reckons half. Even at the lower end of this range, the potential boost to earnings would still be good.
Investec comments: 'This is undoubtedly a piece of much needed positive news for Kazakhmys. If we assume that 50% of the group’s costs are Tenge denominated, this currency devaluation could point to a c.10% reduction in costs. However, the company would still be a high cost copper producer. It is also worth noting that when other countries have undertaken currency devaluations, this has led to high inflation for the forthcoming years. We would not expect any near term cost savings for Kazakhmys to be for the long term.'