Kazakhmys, the short position and Odey Asset Management – what do you they know or “think” they know?

We have been asked to comment on the Odey short position in Kazakhmys and the FT article yesterday in which the paper stated that they are in fact short almost 1/3 of the free float.

Real short data is notoriously difficult to pin down as positions can be held across funds and also short stances taken via various instruments like options. However, what is clear is that ‘Ol Crispin fancies that all is not swell at KAZ. Is he right? Only time will tell, but from what we can see and what has been argued out on the blog here in recent months, the stock currently trades at an Enterprise Value of just over £600m. This is a shade over 1 times what the mining division made in 2012. That is exceptionally cheap in anybody’s book and to be short here requires balls of steel or info that the rest of us are missing.

Now, to be sure, Odey is no fool and to sit on a short position of that magnitude when the stock is hovering near its 6 year lows and is trading at a fraction of book (tangible) is a gutsy call. That there have been a chorus of “anal”ysts out sticking the knife in in recent months appears, at face value, to add weight to his case, although it has to be said that he started shorting over 300p. What we should point out however is that almost all these “anal”ysts were positive on the stock when the price was nearly 4 times its current one (note to readers – collectively “anal”ysts are ALWAYS wrong as we proved here on page (26) – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v14_generic).

With copper rising in price in recent weeks what with talk of a supply shortage and deliverability problems (as highlighted here – http://www.spreadbetmagazine.com/blog/a-new-year-special-is-dr-copper-back.html), the balance sheet of KAZ now comprising net cash upon receipt of the Ekibastuz proceeds and some recent directors purchasing, it does seem compelling on the Buy side. However, we accept that the mining sector and in particular this, ENRC & Avocet Mining were banana skins for us in 2013 and so it pays to look at the negative side and question ourselves where we could be wrong.

We have possession of a number of the negative “anal”yst notes and it seems that the heart of the bear story, aside from an “Eastern Europe” corporate governance discount following the shenanigans a lot of management bods have been upto out there, is the increasing debt profile of KAZ as the group builds out its Bozshakol copper mines. Out of 22 analysts covering the stock, just one has a Buy rating with 11 advocating a sell and 11 hold. If ever there was a contrarian recipe then this is a text book case.

One nameless analyst sees peak net debt rising to $2.6bn in 2016 and if you look at the EBITDA through to 2015 the stock does indeed look expensive (see below) if these figs are produced by the co. However, once the mines are complete, and given the materially lower production profile of them, the EV:EBITDA figs for 2016/17 look very, very different. What they are also not crediting the company with is that the book value will likely rise. Remember the company is not simply pouring the debt down a black hole (!) – they are using it to invest in their copper mine complex. A liability is being matched by an asset. With a book value already in excess of 700p per share even after the write downs with the ENRC steal (sorry sale), some semblance of reality has to be applied here.

To us, it seems that the uncertainty over the copper price with a rising debt profile is the “meat” that Odey is getting into and the poor sentiment adding a tailwind to the bear case. Per our last sentence in the para above though, at some stage the discount to book value becomes so compelling to other industry participants that corporate activity becomes a very real possibility. It is precisely this point that has us scratching our heads at what Odey believes will be the catalyst to send the stock even lower as the blunt facts from our perspective do not advocate being short here…

With copper actually showing signs of rising over the next few years and KAZ’s new lower cost mines coming on stream at potentially the sweet spot of the cycle the flip of the coin could in fact just turn up heads and not tails for bears of this stock. Additionally, Mr Odey seems to have forgotten the fundamental rule of trading cyclical shares, that being you buy when the PE is HIGH and sell when it is low.

KAZ remains one of our picks for 2014.

CLEAR DISCLOSURE – THE WRITER AND TITAN FUNDS ARE LONG KAZAKHMYS