KGHM to Revise Strategy Amid Weaker Outlook for Copper Price

  • Polish copper producer posts 2015 loss of 5.01 billion zloty
  • Miner is scaling back its forecasts for metal prices for 2016

KGHM Polska Miedz SA will review its investments and shave costs in its 2020 strategy as Poland’s sole copper producer sees metal prices and output decreasing amid a global economic downturn. The company may still pay a dividend.

State-controlled KGHM expects copper trading at $5,000 a ton in 2016, 9 percent below the average price seen last year and 26 percent lower than the company’s forecast from a year ago. Its production of electrolytic copper will shrink 9 percent to 525,400 tons due to a planned four-month shutdown of its Glogow smelter, it said in a statement. The miner assumes its total 2016 investments will fall 3.8 percent from a year earlier.

Along with its global competitors, KGHM suffered last year from a 25 percent slump in copper prices, the biggest annual drop since 2008, reflecting a waning demand from its top consumer China. That blow made KGHM the third-worst performer on Warsaw’s WIG20 Index last year, shaving 42 percent off its value. The stock rose 0.6 percent to 76.18 zloty as of 2:05 p.m. in Warsaw, boosting this year’s gain to 20 percent, outperforming the benchmark stock gauge as copper prices rebounded.

“We will continue to carry out key investments, while their timing and budgets will be adjusted to market conditions and the company’s financial situation,” Chief Financial Officer Stefan Swiatkowski said in a website statement, adding that KGHM position is stable and that it will focus on cost cuts.

‘No revolution’

KGHM also reported on Thursday a record annual loss of 5.01 billion zloty ($1.32 billion), mainly due to asset write-offs, including the biggest one of $787 million at its flagship Sierra Gorda Chilean mine, which were announced earlier this month. The company doesn’t expect any more write-offs this year, the CFO said at a press conference in Warsaw.

Even after incurring a record loss, KGHM may still pay a dividend this year, Chief Executive Officer Krzysztof Skora said at the same conference, adding that the final decision on the payout proposal will be taken in May. The strategy update, which the company wants to present by mid-year, won’t be “revolutionary,” he said at a meeting with analysts later on Friday.

To weather a commodity rout, the company has been in talks with Poland’s Finance Ministry to modify the algorithm used to calculate the metal extraction tax, Skora, appointed the CEO last month, said. He added that KGHM, which paid about 1.4 billion zloty in copper tax last year, is “aware” that a suspension of the levy, as pledged by the Prime Minister Beata Szydlo during last year’s election campaign, would result in changes to the government budget.

Chilean headache

The completion of the Sierra Gorda’s start-up is being delayed and is now slated for this year. The mine’s copper output stood at 84,000 tons last year, falling short of an original plan, while its loss before interest, taxes, depreciation and amortization, or Ebitda, adjusted for write-offs amounted to $26 million.

“The Sierra Gorda performance surprised us negatively and plain speaking looks awful,” Tomasz Kucinski, an analyst at Pekao Investment Banking SA in Warsaw, wrote in a note. “Poor molybdenum volumes together with tough macro translates into a loss on the Ebitda level.”

Kucinski, who has a sell recommendation for the stock, said that “even following some recently observed rebound in prices, it will not be an easy year for KGHM.”

The producer expects that at current copper and molybdenum prices as well as after implementing the cost cutting, Sierra Gorda can avoid an Ebitda loss this year, a head of the controlling department Renata Wiernik-Gizicka said at the press conference. KGHM sees copper output at the Chilean unit at 110,000 tons to 120,000 tons this year.

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