KGHM: Announcing earnings guidance for 2007
KHGM announced its unconsolidated earnings guidance for 2007, based on a set of macroeconomic assumptions. The key points:
Copper price: KGHM forecasts the average copper price at USD/t 5,700 (spot) for 2007, which is 10.1% below our forecast at USD/t 6,338, but very close (+1.6%) to the current market price at USD/t 5,611 (spot)
PLN/USD exchange rate: KGHM forecasts the average PLN/USD exchange rate at 2.95 for 2007, which is 1.3% below our forecast at 2.99, and below current market quote at 3.00
Production volumes: KGHM forecasts the copper production volume at 538,000t, (out of which 73,000 from imported concentrate), which is 2.2% lower versus our estimate of 550,000t, (out of which 40,000 from imported concentrate), due to lowgrading of copper ore in the mining output
Production costs: KGHM forecasts the copper unit production cost at PLN/t 9,450 for 2007, which is 12.9% below our forecast at PLN/t 10,845, as lower estimate for copper price results in lower forecast on variable production costs (scrap metals, etc.)
Capex: KGHM forecasts its capital expenditures (PP&L, excluding Polkomtel) at PLN 1,142m for 2007, which is 11.4% above our forecast at PLN 1,000m, driven by speeding up in new pit construction and higher outlays on equipment replacement
Dividend: The company modified its dividend policy introducing a table with progressive dividend payout ratio linked to earnings. In line with that, KGHM would pay out 49% dividend from 2007 earnings from official guidance, and 51% dividend payout from our earnings forecast, which is in line with our earlier expectation.
Revenues: KGHM forecasts the total sales revenues at PLN 10.6bn for 2007, which is 10.9% below our forecast at PLN 11.9bn, mainly on the back of lower average copper price estimate and lower production volume
Net Earnings: KGHM forecasts the net earnings at PLN 2.98bn for 2007, which is 14.0% below our forecast at PLN 3.46bn, mainly on the back of lower average copper price estimate and lower production volume
Long term outlook: KGHM forecasts a soft landing scenario for copper price, expecting that the present period of high prices would end only by 2010-11. KGHM anticipates 2008 average copper price at USD 5,200, 2009 at USD/t 4,000, and reaching the long term average of USD 3,200 only by 2011
Polkomtel: KGHM plans to increase its stake in Polkomtel from 19.61% to 26.39%, purchasing more shares from TDC than pro – rata basis would suggest, perhaps buying shares from PKN Orlen, as well
Our view: Compared with KGHM, we are more optimistic with regard to 2007 outlook for copper price, anticipating a less dramatic decline in the metal’s price. We believe that copper markets are not balanced yet due to delays in increasing mining output, while the demand remains robust, supported by growth in European economies. The recent growth in copper inventories stem mainly from increase in secondary copper production (from scraps), which does not seem sustainable over longer term, without acceleration in the mining output. We keep our earnings estimate for KGHM unchanged. We reiterate our Buy rating for the stock.