KGHM: 1Q11 results better than consensus

1Q11 net profit higher than market consensus, in line with our forecast:

Net profit came in at PLN 1,958.4m for 1Q11, up 170% y/y and up 48% q/q. The outcome came 7% above consensus expectation of PLN 1,835.0 m, (source: PAP) and fully in line with our own forecast of PLN 1953.9m. The main discrepancy between the result and market consensus was the positive result on hedging activities which drove the other operating result into a small PLN 41.6m profit vs a massive PLN 642m loss in 4Q10 and a loss of PLN 303m in 1Q10. The other reason for such a result was lower cost base of the company in the period with unitary production cost from own deposits averaging PLN$/t 9,401 which means 1% above our expectations of PLN/t 9,325. In 1Q11 the revenues were positively affected by hedging activities which upped the revenues by PLN 21.4m. On annual basis, the firm’s earnings in the period also have been boosted by 32.4% y/y growth in the price of copper in 1Q11: this translated almost fully into equivalent growth in PLN terms after the flat performance of the Polish currency versus the US dollar in the period. The net income result for 1Q11 amounts to 23.5% of the management’s guidance of PLN 8.35bn for full-year 2011. (The latter figure includes a gain on the disposal of a telecom asset.)

Overall, we would expect positive market reaction.

Revenues in line with expectations: Revenues came in at PLN 4,773.5m for 1Q11, up 46% y/y, in line with market expectations and 1.2% below our own forecast. Copper production volumes came in at 140,000 tonnes up 9% y/y, and 1% below our estimate. Volume sold at 133,000 was 1% above our projections. Silver production level was 4% above our expectations, and silver volume sold was 5% below our forecast of 277.5t. In 1Q11 the revenues were positively affected by hedging activities which upped the revenues by PLN 21.4m.

EBIT above market expectations: The EBIT came in at PLN 2,421.6m, up by 167%y/y and up 49% q/q, 7% above market consensus and in line with our own forecast. The main drivers lower-than-expected costs of
production from own deposits, swing in inventories which lowered the cost base and higher-than-expected result on the hedging activities due to favorable PLN vs USD exchange rate in the period. Other operating activity came in at positive PLN 41.6m for 1Q11 vs our expectations of PLN 25m. This outcome was due to the booking of the gains on the upward adjustment of the time value of purchased options (PLN 28.9) and
execution of options (PLN 3.1m). In our opinion, the EBIT result came in at higher than market consensus mainly on the back of the higher-thanexpected result on hedging activity.

Unit production below estimates: Total (41,27 EUR, 0,79%) unit production cost from own ore came in at 9,401 PLN/t, down 2% y/y and down 11% q/q. This was only 1% above our projections of 9,325 PLN/t.