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KGHM: Feedback from the analyst meeting

KGHM: Feedback from the analyst meeting

14.08.2012 11:01

KGHM’s management held a press conference and an analysts’ meeting to discuss the 2Q12 results yesterday. The key highlights were as follows:

• Guidance revision: The company is planning to update its guidance in months ahead. The new guidance would encompass standalone figures as well the whole group figures to show the potential impact of Quadra FNX acquisition. Current budget assumes revenues at PLN 19,418m and net profit at PLN 3,804m (down 66.4% y/y) in 2012. The latter figure is 16% below our forecast of PLN 4,527m for full-year 2012 (Polish operations only).

• On hedging policy: KGHM’s hedging policy, despite realization of almost 78% of the budget, is likely to maintain the revenue stabilization functions. The CFO Wlodzimierz Kicinski mentioned that the company is bracing for copper price declines in upcoming future.

• On capital expenditures: According to CEO Mr. Wirth, the size of engagement in shale gas projects will be based on an econometric model, this year the spending will be below PLN 100 m. 2012 capex on Blachownia power plant will be insignificant. The whole value of the project is estimated at PLN 3.6-4 bn, KGHM's share is at 50%, but use of project finance may reduce KGHM's costs exposure to a minority share.

• On dividend policy: CEO Wirth remains a supporter of a dividend formula based on free cash flows. But he stressed that the decision belongs to the owner.

• On mining tax: KGHM expects PLN 150-200 m in monthly cost of the metals tax at the current production level.

• On debt: It is likely that the company will enter the debt market in October but the formula (bonds or credit, PLN or EUR) was not revealed.

• Quadra results: The 2Q12 Quadra results were blurred by several one-offs: write-off of inventories at Franke mine, higher costs at Robinson
and Morrison mines.

Our view:
We expect to hear more regarding the Quadra results on the conferencecall which is set to take place tomorrow at 01:00 pm ET (10:00 am PT). The disappointment of the 2Q12 Quadra results means that the variability of Canadian operation results would be greater going forward than of the operations in Poland. The Sierra Gorda project Capex reassessment would be revealed after 4Q12 however we do not expect the project to exceed massively current budget. The project is still expected to come on line in 1Q14. We expect the company would draw around PLN 2.5-3.5bn of debt in autumn, probably around the time when the second dividend installment payment is due (PLN 2.268bn on 16.11.2012).

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