BMO launches coverage of Kazatomprom

BMO Capital Markets has initiated coverage of Kazakhstan-based uranium producer Kazatomprom (LON: KAP), with an outperform rating and a target price of $17 per share.

The company recently listed about 15% of its stock on Kazakhstan’s new Astana Stock Exchange (AIX) and U.S. dollar-denominated global depository receipts (GDRs) on the London Stock Exchange.

Kazakhstan’s sovereign wealth fund, Samruk-Kazyaha, holds the remaining 85% interest in the company.

“Kazatomprom offers investors exposure to the largest and one of the lowest-cost producers of uranium globally, with attributable production of about 31 million pounds at an average all-in sustaining cost of US$16 per lb. in 2018,” BMO’s London-based analyst Alexander Pearce comments, noting that the company manages production rates for all joint-venture partners within Kazakhstan and currently makes up about 23% of the world’s primary uranium supply.

“The company has gone through a sea change in strategy in recent years and is now following a profit-over-volume strategy that is expected to deliver substantial cash flow and potential for further dividend growth,” he said.

Pearce also notes that Kazatomprom’s dividend strategy “is to pay out up to 75% of free cash flow to shareholders,” and estimated dividend yields of 6-16% between 2019 and 2021 at the current share price.

The company has interests in 13 operating in-situ recovery (ISR) mines in Kazakhstan.

“The company has in the past been heavily regulated by the Kazakh state; however, we see evidence of greater operational flexibility, demonstrated by recent production discipline, making Kazatomprom well positioned to capitalize on any potential future recovery in the uranium market,” Pearce notes. “Further, Kazakhstan has attracted a credit-grade investment rating and has made a commitment to reduce government holdings in businesses to OECD norms (less than 15%), which should result in more of Kazatomprom’s stock coming to the market over time.”

In 2017, Kazatomprom decided to restrict supply from Kazakhstan to 57 million pounds. It also opened a trading division in Switzerland for greater flexibility in marketing. BMO forecasts uranium prices to appreciate from the current US$29 per lb. U3O8 to US$55 per lb. by 2023.

Pearce believes Kazatomprom’s earnings before interest, tax, depreciation and amortization (EBITDA) will continue to grow due to a recovery in the uranium price and organic production growth.

He forecasts EBITDA will grow from US$394 million in 2017 to US$466 million in 2018. By 2020, he says, EBITDA should grow to US$854 million and surpass US$1.4 billion by 2022.


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