KGHM Slumps as Dividend at Risk on $494 Million Impairment

  • Polish miner writes down assets amid plunge in copper prices
  • Analysts say dividend may be lower than earlier expected

KGHM Polska Miedz SA fell the most in three weeks on Tuesday after Poland’s sole copper miner wrote down the value of its flagship international investment in Chile and other foreign projects as copper prices tumbled to a six-year low.

The total impairment cost stood at $494 million, including the Chile’s Sierra Gorda charge of $266 million, the company said in a regulatory statement after the market closed on Monday. In addition, KGHM estimates that its share in Sierra Gorda’s 2015 net loss will be about $510 million. Taking into account deteriorating economic conditions, KGHM will start a review of its strategy. The impairment itself is non-cash and it won’t affect the state-controlled company’s liquidity, debt covenants or its dividend policy, the company said.

“We believe that 2015 dividend will be paid out of post-impairment net profit,” Pawel Puchalski, an analyst at Bank Zachodni WBK SA, said in a note today. “If we are correct, 2015 dividend would fall 45 percent from the year earlier and implied dividend yield would come disappointingly low.”

KGHM’s dividend has declined in recent years. Earnings are set to fall further, putting more pressure on payouts.

The shares plummeted as much as 4.6 percent, and traded 3.9 percent lower at 59.55 zloty, the steepest drop since Jan. 20, as of 2:21 p.m. in Warsaw. That values the Lubin-based miner at 11.9 billion zloty ($3 billion). Societe Generale SA cut KGHM’s share-price estimate by 17 percent to 65 zloty on Tuesday after the asset writedown.

“The company is in a stable financial situation,” Chief Executive Officer Krzysztof Skora said in a statement. “Our answer to falling prices is continued activities on the costs side and a flexible approach to investment plans.”

KGHM announced the purchase of Canada’s Quadra FNX, the owner of Sierra Gorda, in late 2011, just as copper started to decline from an all-time high and cash at the company was at record levels. With about $3 billion spent, it’s still the biggest foreign acquisition by a Polish company. In the meantime, copper prices declined and spending to start operations at the mine exceeded plans by 45 percent and KGHM faced a new tax in Poland. Last week, the company’s management was changed by the three-month-old government.

KGHM’s price-to-book value has dropped along with copper prices, reaching a record low last month.

Net Loss?

The writedowns will cut KGHM’s stand-alone net income, from which the company pays dividends, by about 1 billion zloty, according to the company’s statement. Its net amounted to 1.68 billion zloty in the first nine months of 2015. KGHM is set to publish its final 2015 earnings on March 17.

“The impairments were mostly priced in by the market, however, they are so big that it means the first consolidated net loss for KGHM in many years,” said Andrzej Knigawka, an analyst at ING Securities SA in Warsaw. “Lower stand-alone profit means a lower dividend.”

KGHM’s impairment follows that of Sumitomo Corp., which holds the remaining 45 percent stake in Sierra Gorda. The Japanese company posted a charge of 68.9 billion yen ($599 million) on the copper mine in Chile on Friday.

“Copper market trends will be the main driver of KGHM shares, with the announcement of maintaining dividend at a time when most peers are cutting theirs is meant to sugar-coat the impairment news,” said Michal Potyra, an analyst at UBS Group AG in Warsaw.

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