Turkey of the week: shine wearing off this metals miner

By Paul Hill Aug 14, 2009

Paul Hill

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Most asset classes were hit for six by the recession until governments around the world printed new money to inject capital into the banking system. The problem is a large chunk of it is being siphoned off by trading desks allowing banks to have a field day betting on the credit, commodities and currencies markets.

Copper, for example, has more than doubled to $6,000 per ton since January. This is not due solely to China stockpiling it or improving demand from Asia and the construction sector. The latest spike in prices is also being driven by speculation.

That spells trouble for shareholders: when the hot money departs the sector will suffer a cold bath. Take Kazakhmys, whose stock has rocketed over five-fold since November. It is the largest copper producer in Kazakhstan (and the eighth-biggest worldwide), with 20 open pit and underground mines and selling around 40% of its output to China.

It also produces big quantities of other metals including zinc, silver and gold, and spent $1.5bn in 2008 buying local power stations to secure its electricity supply. Kazakhmys owns a 26% stake in compatriot Eurasian Natural Resources Corporation (ENRC, worth around £2.9bn), another miner whose shares have shot up as well.

Kazakhmys (LON: KAZ), tipped as a BUY by Bank of America-Merrill Lynch

Not only is Kazakhmys tied to the unsustainable metals bubble, it is exposed to geopolitical risk. Most of its assets are in Kazakhstan, a notoriously unstable region. Further, the stock is still being supported by rumours swirling around ENRC after both boards walked away from a merger in April 2008. The Kazakh government owns stakes in both groups, so there is a chance they will try to create a national champion. Such an enlarged group would focus less on shareholder value and more on achieving political goals, which is bad for shareholders.

Kazakhmys's shares are far too expensive. They trade on a stratospheric 18 times 2009's p/e multiple, even after adjusting for net debt of $1.7bn and its portion of ENRC's earnings. Kazakhmys's interims are due out on 27 August, while ENRC's numbers are due on the 19th.  

Recommendation: SELL at £8.54

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

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