* 2011 EBITDA excluding ENRC $1.96 bln vs $1.93 bln in 2010
* Average realised copper price up 16 percent
* Production costs rise 18 percent, labour costs hurt
* Dividend up 27 pct, more share buybacks unlikely
* Cost worries hit shares, down more than 4 pct (Updates shares, adds detail)
By Clara Ferreira-Marques
LONDON, March 1 (Reuters) - Copper miner Kazakhmys posted a flat core profit for 2011 as an 18 percent rise in production costs, including soaring wages for skilled workers in Kazakhstan, offset stronger metal prices, and warned of more cost pressures ahead.
The FTSE 100 miner, like others across the sector, has been badly hit by the rising price of everything from tyres to diesel and wages. The miner said the steep cost increases were fuelled in part by a labour squeeze in Kazakhstan, where oil and mining firms compete for a limited pool of qualified workers.
It said gross cash costs would increase 20-25 percent in 2012 in part as volumes increase to compensate for lower grades, with net cash costs of $1.50 to $1.80 per pound, well above analyst expectations and compared with $1.14 in 2011.
The news battered Kazakhmys shares, which pared early gains and closed down 4.2 percent, underperforming a virtually flat mining sector, as analysts pointed to the likely impact on 2012 earnings.
“The official inflation rate in Kazakhstan is running at 7 percent, but in the resource industry, it’s likely to be running closer to 20 percent,” Kazakhmys’ Chief Financial Officer Matthew Hird told analysts.
The miner, which largely met market expectations on its 2011 numbers, dangled a higher-than-expected 27 percent dividend rise, but said it was unlikely to complete a $250 million buyback announced last year, disappointing some.
The company has bought back $83 million of shares to date.
“We are mindful of the freefloat and comments made by shareholders that they would like to maintain a certain level of freefloat,” Hird said, when asked if he would consider a fresh buyback. “So we won’t rule it out, but going forward it is more likely that if we had surplus capital we would be returning it through an increased dividend.”
Kazakhmys, whose shares have rallied by about 17 percent this year and outperformed the sector as copper prices recover, said dividend increases were likely to ease as it ramps up spending on its growth projects.
Capital expenditure for 2012 is expected to be $1.5 billion, more than double than in 2011, largely due to development of its $1.8 billion Bozshakol project and mostly financed by Chinese loans. It will also almost double its spending on exploration.
“Clearly they beat market expectations (on the dividend), and that says something reasonably positive. However it doesn’t fully compensate for the potential the share buyback will not be completed,” analyst Charles Cooper, at Oriel in London, said.
Part-owned by the Kazakh government and by Chairman Vladimir Kim, Kazakhmys said earnings before interest, tax, depreciation and amortisation (EBITDA) came in at $1.96 billion, against $1.93 billion in 2010, broadly in line with market expectations.
That excludes special items and the contribution from its 26 percent stake in rival miner ENRC.
Kazakhmys said it welcomed corporate governance changes at ENRC, where it is the largest shareholder, after that miner completed a governance review and replaced its chairman. Kazakhmys continues to consider options for its holding.
“We always monitor a variety of possibilities, and will choose the one that will maximise value for shareholders,” Chief Executive Oleg Novachuk told reporters. “I don’t think a sale is the only option. We don’t rule it out, but we are considering a few options.”
He later told analysts the company was “closer than last year” to deciding what to do with the stake.
The miner, which released production numbers in January, confirmed it expects 2012 output at a similar level to 2011, though grades will decline at a similar rate. It does not anticipate further significant declines after this year.
Sales volume dipped but the higher realised copper price, up 16 percent, lifted revenue 10 percent to $3.6 billion, as Chinese customers compensated for European weakness.
Kazakhmys said sales contracts for 2012 had been completed on broadly similar pricing terms to 2011, but some 80 percent of its material would be sold to China, as opposed to the usually more even split with Europe.
Sales of gold, which Kazakhmys produces alongside copper, have been hit by restrictions imposed by the Kazakh central bank which said last September it would buy all the gold the country’s mines can produce until 2014-15, to boost the central Asian state’s reserves.
Kazakhmys said it had stockpiled 69,000 ounces of gold bars by the year end, with an approximate value of $122 million at current prices, but expects to sell that in the first quarter. (Editing by David Hulmes and Erica Billingham)