KGHM delivered net earnings of PLN 825m for 3Q06, up 19% y/y but down 27% q/q, coming below the consensus forecast of PLN 883m, as well as below our estimate of PLN 916m. Operating profits of PLN 1,257m for 3Q06, up 75% y/y and 4% q/q, came in above the consensus forecast of PLN 1,131m and above our estimate of PLN 1,094m. Revenues came in at PLN 3,339m, up 64% y/y, above the market consensus of PLN 2,865m, and our estimate of PLN 2,956m.
• Total sales revenues came in at PLN 3,339m, up 64% y/y, driven by an increase of copper prices on the London Metal Exchange (LME) by 117% y/y and a slightly lower increase for silver prices on the London Bullion Market (LBM). The revenue growth has been impacted negatively by the strengthening of the PLN versus the US$ by 5.0% y/y to 3.13 US$/PLN. Since the company has not revealed copper volume sales, we cannot explain the difference between the actual sales figure and the 3Q06 forecasts.
• Unit production costs rose strongly in 3Q06, as the result of lower copper ore content in KGHM own mining output (c. 1.85% vs. 3.2% long-term average), higher use of imported concentrate and higher costs of labour. In PLN-terms, we saw total unit copper production costs increasing by 51% y/y to 11,589 PLN/t for 3Q06. Denominated in USD, the total unit cost of copper production amounted to 3,703 USD/t, up 60% y/y.
• Management earnings forecast for 2006 has been left unchanged at PLN 3.4bn for the net profit and at PLN 10.2bn for the sales revenues, due to faster than budgeted growth in production costs at the company , offsetting the positive effect of higher than expected copper and silver prices.
Following the publication of weaker than expected earnings, we would expect a negative market reaction today. We will make downward revisions to our valuation model to account for higher production costs, considering that after 9M06 the unit production cost has reached PLN/t 9,853, exceeding our 2006 forecast of PLN/t 9,354.
KGHM will host an analyst meeting in its Warsaw office on November 9th, Thursday, at 12.00 CET. We expect the company to give by then more details about its 3Q06 volumes of production, hedging results, capex, etc.