KGHM Sees Sierra Gorda Copper Project Cost Rising 34%

KGHM Polska Miedz SA, the copper producer with the largest European mine output, said the cost of developing its Sierra Gorda project in Chile will be 34 percent higher than planned.

KGHM, which holds 55 percent in Sierra Gorda, forecast the capital expenditure to start the mine will be $3.9 billion, compared with an earlier estimate of $2.9 billion, the Lubin, Poland-based company said in a regulatory statement today. Sumitomo Metal Mining Co., Japan’s second-largest copper producer, owns the rest of the project.

KGHM became the majority holder in the mine, which is set to start production in the second quarter of 2014, after buying Canada’s Quadra FNX Mining Ltd. last year. The $3 billion acquisition, which was the biggest foreign takeover by a Polish company, is part of KGHM’s plan to raise annual copper output to 700,000 tons from 427,000 tons produced in Poland in 2012. Sierra Gorda’s goal is to produce 220,000 tons of copper a year.

“The size of the cost increase at Sierra Gorda is not that surprising although it’s at the higher end of market expectations,” Leszek Iwaszko, an analyst at Societe Generale SA, said by phone from Warsaw today.

KGHM shares slumped 5 percent to 171.7 zloty at 3 p.m. in Warsaw, the lowest intraday level since Nov. 19.

Higher Costs

The higher cost at Sierra Gorda comes from higher labor, materials and energy costs as well as the strengthening Chilean peso, state-controlled KGHM said in an e-mailed statement. The spending may eventually be at about $3.7 billion mainly due to planned leasing of mining equipment, according to the statement.

Quadra, now called KGHM International Ltd., forecast its copper output will drop to 93,700 tons in 2013 from 110,496 tons last year, KGHM said in a regulatory statement.

“The production forecast at the unit is disappointing,” Iwaszko said. “Investors will focus on KGHM International and Sierra Gorda today and the news coming isn’t positive.”

The company said in a separate statement its 2012 net income fell 80 percent to 753 million zloty ($237 million) in the fourth quarter from a year earlier, beating its own forecast of 674 million zloty. Profit fell after KGHM booked a profit from the sale of a mobile-phone operator in 2011 and started paying a copper tax.

The company will probably announce an eight-year strategy in the second quarter, Deputy Chief Executive Officer Dorota Wloch told reporters in Warsaw today. It may also take on debt, depending on the strategy and dividend plans, Chief Financial Officer Wlodzimierz Kicinski said.

KGHM, which paid a record dividend of 28.34 zloty a share in 2012, declined to comment on this year’s payout. A dividend of 20 zloty a share would be “too high,” CEO Wirth said in an interview with TVN CNBC today.

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