KGHM: Employee bonus higher on the back of new deal with unions

KGHM has signed an agreement with trade unions setting the framework for employee bonus payments for 2006 and future years. KGHM management has agreed to pay PLN 80mn additional bonus to employees for 2006 production results, against unions demand for PLN 100m, increasing the total bonus for the year 2006 to PLN 170m. Additionally the management has signed a bonus scheme for 2007, where bonuses will be paid as follows:
* 3% of average annual wage in case net profit is PLN 100mn
* 6% of average annual wage when net profit between PLN 100m and PLN 200mn
* 8.5% of average annual wage when net profit between PLN 200m and PLN 500mn
* 10.0% of average annual wage when net profit between PLN 500m and PLN 1bn.
* Extra 0.5% for each additional PLN 100m of net profit above PLN 1bn.

Union representatives have commented that they are very satisfied with the agreement. Our view: We view signing of the agreement as a major concession from the management. As a consequence, the rate of bonus versus the company wage pool would increase from 8.5% to 14.0% in 2006, and further to 22% in 2007, with the employment cost up by PLN 120m in 2007 versus 2006, despite some 7% forecasted decline in copper price on average in 2007. We view the potential for lowering employment cost from the new agreement as very limited, as copper prices would need to more than halve in 2007 for KGHM to pay out lower bonus, which we view unlikely. The higher cost bonus represent a 3% cut of our net earning estimate for 2007 of PLN 3.520m. Overall, we view the news negatively and expect a negative market reaction today. We reiterate our Hold rating for the stock, as we maintain our copper price scenario for 2007, expecting a 7% drop in average price for 3 months contract to USD/t 6,197.