Copper miner Kazakhmys to split in two to boost performance

* Shares (Frankfurt: DI6.F - news) jump 10 pct after announcement

* Production costs post-demerger to fall to 120-140 cents/lb -company

* Working capital payment lower than expected

* Demerged mines could get more support from government (Adds comments from company and analyst, adds details)

By Silvia Antonioli

LONDON, July 23 (Reuters) - Copper producer Kazakhmys will transfer some of its less-profitable assets to a private company owned by two of its shareholders as the company is broken up in an attempt to improve its performance.

The Kazakh mining company has been grappling with rising production costs, falling copper grades and weaker prices in the last few years and proposed in February to split the company in two.

It said on Wednesday it had entered into a definitive agreement to transfer its older mines and processing facilities in the Zhezkazgan and central regions to Cuprum Holding - a new vehicle owned by Kazakhmys (LSE: KAZ.L - news) ' largest shareholder and former chairman Vladimir Kim and by the company's chief operating officer Eduard Ogay.

London-listed Kazakhmys would be renamed KAZ Minerals after the demerger. It has agreed to pay Cuprum about $240 million so the private firm can operate the assets it will receive. That figure was below analysts' expectations of $300-400 million.

"Given the lower liquidity concerns and the more certain outlook, the investibility of the stock is significantly improved," Liberum analysts said in a note.

Kazakhmys shares jumped almost 10 percent after the announcement and were up 7.5 percent by 1041 GMT.

"With the spin-off you create one group of assets that will run probably better within a private entity, where you don't have the pressure of returning cash to shareholders," said Kazakhmys head of investor relations John Smelt.

"A private firm can be run slightly differently, perhaps getting more government support and do projects that create employment but don't necessarily make much money."

TWO BETTER THAN ONE

In June the Kazakh government agreed to reduce tax rates on Kazakhmys' older assets that are being spun off, in a move seen as a sign of support for the company's restructuring plan.

A spin-off of the more capital and labour-intensive assets represents a more acceptable option for the government than the shutdown of some operations and consequent job cuts, analysts have said.

Following the demerger Kazakhmys plans to focus on its assets in the east region of the country and the Bozymchak mine in Kyrgyzstan, and on its Aktogay and Koksay growth projects, to become an initially smaller but more cost-efficient producer.

Thanks to such growth projects, it plans to increase its output 32 percent by 2018, compared with last year, to reach production of about 350,000 tonnes of copper equivalent, mostly from open-pit mines.

After the demerger, Kazakhmys' production costs would fall to about 120-140 cents per pound of copper equivalent from 220 cents for the group last year, it said.

The transaction is conditional on shareholders' approval and regulatory consent. Kazakhmys expects the split to be concluded by the end of the year.

Kim has indicated he intends to keep his stake in Kazakhmys once the demerger is completed. Ogay - who has a stake of less than 1 percent in the company - did not specify whether he would keep his holding, but Kazakhmys said he would be leaving his executive role to take a management job at Cuprum. (Editing by Erica Billingham and Pravin Char)