KGHM held the analyst conference in the company Warsaw office yesterday, commenting on 1Q06 results and new guidance for 2006. The main points:
Capex cuts: new management at KGHM has put under review several investment projects prepared by its predecessors, including new copper mill furnace (est. cost PLN 1bn) and gas based power plant (it is cheaper to buy electricity at regulated prices, than generate it from natural gas purchased at market prices). In effect cash pile available for distribution among investors, PLN 1.7bn at 31/03/06, would get even bigger.
Higher mining output: KGHM would dig for copper ores with lower ore content, as high refined metal prices make it more economical to use own ores compared with imported concentrate, whose price grows parallel to refined metal price. As the result, KGHM aims at slowing down growth in the total unit production cost.
Risks to profit guidance: The management aims at earnings of PLN 3.5bn in 2006, assuming average PLN/USD exchange rate of 3.25, (currently at 3.00) and total cap on labor cost increases, which seems a weak assumption, taking into account renewed union demands.
Chance for higher dividend: Despite increasing the dividend payout ratio to 48% for 2005, (record date 23/06/06, payment date 11/07/06), the company would accumulate close to PLN 2bn cash position towards the 2H06. Even after deducting PLN 0.8bn for acquiring additional shares in Polkomtel from TDC, it leaves room for extra dividend payment.
Following the analyst conference we will revise our earnings forecasting model on KGHM and will publish a Flash Note with new fair value estimate on the company soon.