KGHM: posts solid result for 4Q05
KGHM delivered net earnings of PLN 660m for 4Q05, up 667% y/y and down 5% q/q, coming in slightly below the consensus forecast of PLN 677m, but above our estimate of PLN 554m. EBIT came in at PLN 862m, up 480% y/y and 20% higher q/q, beating the consensus expectation of PLN 737m and our forecast of PLN 549m. KGHM exceeded its official full-year 2005 profit forecast of PLN 2,078m, reporting a profit of PLN 2,369m. What accounts for the positive earnings surprise was an increase in copper sales volumes, following changes in schedules of deliveries and a slight increase in production volumes. The other factor behind the earnings surprise is related to higher realised prices of copper and silver, due to reduced scale of hedging activities on metals in 4Q05 versus last year.
• Total sales revenues came in at PLN 2,421m up 50% y/y, driven by an increase of copper prices on the London Metal Exchange (LME) by 39% y/y and an increase by 11% y/y for silver prices on the London Bullion Market (LBM). Copper and copper products accounted for 87% of total revenues, while silver for 9%. Copper sales volumes increased by 5% y/y, due to a slight increase in production volumes, by 3% on our estimate, and changes in schedules of deliveries. Silver sales volumes decreased by 17% y/y, as the result of replacing KGHM own mines production with imported concentrate. The revenue growth has been impacted only in a minor way by the strengthening of the PLN versus US$ by 0.6% y/y to 3.29 US$/PLN. We forecast KGHM sales revenues growth to slow down to 3% y/y in 2006, on the expectation of only a 7% rise in copper prices compared with the 2005 average to USD/t 3,933 (spot), as we anticipate price contraction from record-high levels towards 2H06.
• Hedging activities contributed marginally to the widening difference between copper market prices (up 39%) and KGHM realised copper prices (up 43% on our estimate), due to the reduced scale of hedging. The company remains hedged for approximately 33% of copper sales planned in 2006 and approximately 16% in 2007. This is significantly lower compared with the past, e.g. approximately 45% in 2004. A similar situation exists regarding silver sales, where KGHM hedged approximately 34% of 2006 sales and approximately 8% of those of 2007. With regard to currency hedging, it amounts to 18% of forecasted sales revenues for 2006 and 9% of those of 2007. Overall, we expect hedging to remain a drag for KGHM results in 2006, as market prices are higher than KGHM’s realisation price, although on a much smaller scale, compared with 2005.
Unit production costs rose again in 4Q05, unsurprisingly, as the result of higher costs of labour, energy and costs of preparatory works in mines. In PLN-terms, we saw the total unit copper production costs increasing by 19% y/y to PLN 8 257 PLN/t. Denominated in USD, the total unit cost of copper production amounted to PLN 2 515 USD/t, up 18%. For 2006 we anticipate further increase in KGHM unit production cost by 11% compared with 2005 average.
Provisioning decreased reported profits in 4Q05, due to creation of additional reserves for future expenses and liabilities, as well as resulting from asset value write-offs. Among the main items, KGHM created provisions for future costs of mine closures (PLN 22m) and for future employee benefit claims (PLN 14m). The company has written down fixed assets to the amount of PLN 158.8m and revalued downwards its investments in subsidiaries (Telefonia Dialog mainly) to the amount of PLN 159.2m. We believe that provisioning would not materially impact 2006 results.
Overall, we view KGHM earnings in 4Q05 as solid and would expect positive market impact today. However, we do not intend to change our full-year forecasts for KGHM, following the results, and reiterate our sell rating for the stock with fair value estimate of PLN 69.1 per share.
Following quarterly results publication, KGHM will hold an analyst videoconference with senior management at its Warsaw office, at 13.00 CET on Thursday, February 16th, 2006.