The resources sector has enjoyed a more positive year in 2016. Certainly, it’s still not fully recovered, but the green shoots of recovery in commodity prices have begun to emerge. Today’s results from KAZ Minerals (LSE: KAZ) provide further evidence of this and also provide clues as to whether it’s a better buy than resources peers Gulf Keystone Petroleum (LSE: GKP) and Genel Energy (LSE: GENL).
KAZ Minerals was able to increase its copper cathode equivalent production by 43% in the first half of the current year. This contributed to a rise in EBITDA (earnings before interest, tax, depreciation and amortisation), with it increasing from $88m in the first half of last year to $115m 12 months later.
Its copper guidance for the full year has narrowed to 135-145 kt, while KAZ Minerals’ gold production forecast is 95-115 koz. Its Bozshakol asset is ramping up production and is on track to achieve commercial production in the second half of the current year. Its operating costs are also falling, with gross cash costs declining by 34% in the East Region.
This fall in costs plus increased production is expected to cause KAZ Minerals’ pre-tax profit to increase from £20m in the current year to almost £100m next year. This rapid rise in its profitability could cause investor sentiment to improve and with it trading on a low valuation, there’s significant upside potential. For example, it has a price-to-earnings growth (PEG) ratio of only 0.1 and this indicates that its shares could soar even more than their 10% gain of today.
Greater volatility
In fact, the outlook for KAZ Minerals is superior to that of Genel Energy and Gulf Keystone Petroleum. The former is expected to move from loss to profit in 2017 and while this has the potential to boost investor sentiment, the market seems to have already priced this in. Genel trades on a forward price-to-earnings (P/E) ratio of 34, which indicates that there’s limited upward rerating potential.
That’s especially the case since Genel has a higher risk profile than KAZ Minerals due to the geopolitical challenges continuing in Northern Iraq. Although Genel’s operations haven’t been severely affected by it, the increased risk means that a wider margin of safety may be required to make it more appealing than KAZ Minerals.
Similarly, Gulf Keystone has an uncertain future, with the company forecast to remain lossmaking in the current financial year and in the next one. Although losses are expected to narrow from £154m in the current year to £17m next year, when compared to KAZ Minerals’ strong earnings growth outlook, Gulf Keystone lacks appeal. Like Genel, Gulf Keystone suffers from above average risk due to its geographical exposure, while the uncertainty surrounding its financial position and potential takeover mean that KAZ Minerals has a superior risk/reward ratio.
So, while KAZ Minerals is still a relatively high risk stock and is highly dependent on the price of copper and gold, it has lower risk and higher return potential than Genel or Gulf Keystone.
