KGHM Polska Miedz SA
WSE:KGH
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KGHM Polska Miedz SA
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[Foreign Language] Good afternoon, ladies and gentlemen. Welcome to the presentation of results of the group for the first quarter 2018. It is a pleasure for me to be able to see so many of you. I hope that without further delays, we will hear from the Vice President, Head of Finance, Mr. Stefan Swiatkowski. So well, over to you, sir.
So let me begin. Well, I've shown you the agenda, and the agenda is such that, first, we're going to give you an introduction, then we're going to talk about our business results, and we'll do a summary -- a recap.
So when it comes to our introduction, and this is the slide you're seeing, the production of payable copper is lower year-on-year by 12%. And the main reason for that happening is that we are focusing our efforts on trying to use up our own resources and -- our own resources that are on stock. And the second reason, even more important, is the fact that we are preparing for the Glogów maintenance shutdown. This maintenance shutdown was delayed. By standards, we should be doing this every 4 years, but Glogów I was delayed a little bit, so we decided to continue for the fifth year. But still, right now, this maintenance effort is going on. It started on the 8th of April, and we're planning that it's going to take 3 months. In order to prepare for that shutdown, we have produced manufacture a little bit less. But cathode or electrolytic copper, but we have quite a lot of anode copper.
And we are trying to optimize our cash flow as much as possible. Maybe we could have produced more copper if we had used other resources, third-party resources that are higher in copper than what we have on stock. However, from the point of view of cash flow, it wouldn't be too rational, let's say.
So the whole -- this whole slide and all the other points are the consequences of our lower revenues. So that's macro, macroeconomic outlook. And actually, one can see what's been going on. Copper prices are rising. In U.S., silver is going down. And of course, there are currency fluctuations. And currency fluctuations are, in our case, something that has an even stronger impact than price of copper. So the only thing that I may want to point your attention to, in one of the bullet points, it says something about South America and Chile, and how we are redefining or renegotiating labor agreements.
2018 is this year where there is a renewal. All those labor contracts are up for renewal. And all mines, all businesses are actually getting ready for negotiations or, already, negotiations are underway. And the law into regulations are very, very pro trade unions, pro workforce and so on. So for example, if employers managed to negotiate some benefits for trade unions, then they have to have approval from the trade union to expand all those benefits onto the rest of employees. So these negotiations tend to be tough, and it's happening across Chile and across their jurisdiction. Then, of course, the market always knows and always senses that something is up and something might be happening.
So when it comes to our production metals, production here, domestically, there will be one more slide explaining things even more accurately when it comes to what's going on in Poland. But anyway, we're getting ready for higher levels in second half when the maintenance shutdown finishes, because it's going to take up the entire second quarter, so levels are going to go up again.
Robinson is performing better than we had assumed. Last year, late last year, we had quite a lot of discussions and a lot of deliberations whether Robinson should be given a chance or should it -- does it deserve a pushback, like to have its life longer by 3 years or maybe more. So the decision was, yes, we're going to do the pushback. We're going to invest in stripping or, well, at one point, we weren't sure. Maybe we would scale down, right? But the decision was, yes, we're going to do that. Let's push back. And it's an old creature, but alive and kicking. So the results are better than we had assumed. So actually, that decision from 2016, I know it was a tough decision back then to make because prices were up and down, they were all over the place, things were changing very rapidly at that time. But still, I mean, they're doing well.
However, Sierra Gorda has hit a rough patch in terms of its ore. Both molybdenum and copper are a little bit low, like from 0.11 to 0.05 in molybdenum. But actually, we have much higher yields of molybdenum.
With copper, we had been receiving something quite decent at that point, but we never managed to compensate the facts -- the lower copper content. But we have less -- we have -- we didn't compensate with availability or anything else. So right now, copper is going down. But we're expecting to finally hit the higher metal content ore at one point.
When it comes to unit costs, our growth in Poland are actually a reflection of what's happening with U.S. dollars. So C1 is measured in dollar, so there is no way if it’s a 16% -- well, if dollar is moving against the zloty, there is nothing we can make up -- we cannot make up for it of that much. So Robinson is working a little bit better than we thought, that's why C1 went down a little bit.
When it comes to Sierra Gorda, C1 is going down a little bit, but those quarterly changes are not very indicative because there might be just one shipment of molybdenum that goes or shift from Q1 to Q2, and then the whole results -- the whole set of results looks a little bit different because we're measuring some of the things when it comes to sales. Like for example, our production, is stable. But whether a certain shipment will fall into quarter 1 or quarter 2, it depends on so many different factors, like, sometimes, weather. Sierra Gorda is better to follow in longer time frames, rather than from quarter to quarter.
Okay. Let's get into financials. Sales revenue of the group, you could see that in previous slides, it went down a little bit due to lower sales volumes. A little -- it was compensated partially through changes in stock prices. However, still, volumes pulled it down a little bit more than share prices could pull it up. So when it comes to operating results, again, revenue changes and then it leads into EBITDA. So of course, all these things that we haven't sold cannot be our costs. So actually, EBITDA was mostly affected by lower sales, namely lower revenues.
Financial results. Again, it's a consequence of what I talked about before, so changes in revenues, changes in EBITDA, so the whole result changes. The rest was rather favorable. A lower CIT, some favorable FX changes, but of course, it didn't make up for a lost revenue or smaller revenue. So this is about our changes in half-finished product. So actually, Op working capital also changed. But generally, the thing is that we had enough cash flow to invest, plus some more.
And when I'm looking at these 2 middle bar, so namely acquisition of property, plant and intangible assets, and other net cash generated by operating activities, I mean, all what was left after we invested was eaten up by facts -- by stock, and therefore, we had to go into debt. So this tells you about inventories, and it's correlated with what I said about revenue before or what I said about cash flow before.
So on top, you have copper in concentrate inventory, and the second part is anode copper in plants. So you can see that, quarter by quarter, what happens at plants. So for example, there are some plants where it's very stable and changes in inventories are not going to affect us so much. But the Glogów, for example, it has a lot of -- high inventory levels, so all the fluctuations will affect us. We have more concentrates because we were switching input. So for 3 months, we were -- yes, Glogów I was not working so new -- the new furnace was not working.
And then inventories were not falling because this furnace was sort of going through a learning curve. So if it did, if it had gotten worst quality concentrate, well, we hadn't known that furnace that much at this time. It had been new, so we were using better concentrates for it. When the situation -- well, then, of course, something else that we plan to launch wasn't launched. And then in late '17, we had a VAT, a recovery VAT shutdown or it was a breakdown, then we manage to reduce inventories. And then on the lower part, in the lower part, you see anode copper inventory. And then you can see buildup of anode copper during the shutdown, and then it falls down. Like before Q3, we built up inventory and same happened in the first quarter of '18 because we were getting ready for the ongoing shutdown -- maintenance shutdown. And then this quarter, we're expecting that it's all going to be consumed because the furnace is not working, so we're not producing as much. And in the second quarter, we're not expecting inventories to fall all that much, not yet. The furnace is shut down. And then, in the last slide, I will show you how things will change in inventories.
Now the debt position. I actually covered that slide. The debt is impacted by the exchange rate differences around the change of the U.S. dollar against the Polish zloty.
So now, let me move on to the summary. But before I summarize, let me add one more thing.
Last night, there was an accident at Sierra Gorda, and that triggered some anxiety. It was the second fatal accident in the history of Sierra Gorda. It was the employee of Finning, our contractor. This is the company that operates Komatsu equipment. During the refurbishment of one of the large equipment piece, bulldozer, hydraulic equipment was under refurbishment, and the employee was taking out a cylinder. There was some tension. The cylinder simply flew out of the machine with a -- pushed by the large force and hit the employee in his face. The employee died shortly after. It was not a explosion. It was not a conveyor breakdown. It was not a slide down. It was an incident. We don't have knowledge at this point whether there was some mistake or whether procedures were not complied with or it was just misfortunate occurrence. The standard procedure into [indiscernible], but after the accident, the mining operation comes still for 24 hours. We were given the permit to reopen after 20 hours. So at night, the accident happened. And then at 9 PM the other day, we were able to reopen, with the exception of that section of the mine where the investigation is going on. Obviously, the relevant services around the site, and we also investigate the case. So this is a very sad thing that happened, but this is not something that had a more -- a broader impact across the whole mine, it was just very unfortunate accident -- incident really.
So now a summary. During the previous presentation, we were explaining what are our main commitments, and here we actually check the progress, improved the level of efficiency at the Flash Furnace at Glogów I. We were able to improve the efficiency by 3 percentage points, which is not a dramatic improvement. But again, we need to actually also improve the roasting capacity, so the roasting installation. That is part of the production process. And this improvement is planned by the end of the year. Probably, we can squeeze out more of that furnace, but we want to work more on our own copper concentrate. Therefore, we build the copper concentrate in such a way that we can maximize our furnace and then utilize the copper concentrate inventories.
We intend to sell over 20,000 tonnes of copper in concentrate. The process has already started, but it is spread over time. This is like 20,000 tonnes of copper concentrate, so you need to contract that and then you need to ship that. So the decisions were already made, because in a short run, we have -- we ran excessive inventory of concentrate. But this is not like a strategic move. In the long run, we have more smelting than mining capacity. Therefore, well, obviously the question is where to store that copper and concentrate and how much the cost of storage are. And we decided that 20,000 tonnes is an adequate level of sales for copper in condensate for 2018.
And Sierra Gorda, we want to increase the daily ore processing to 130,000 tonnes in 2019. The project is underway. We've already placed some contracts. And some measures are not only deliberated, but they have already been in execution. Obviously, another major job for Sierra Gorda is maintenance. This is another important point. And actually, the head of our maintenance operation went to Sierra Gorda to optimize maintenance processes to increase efficiency of the processing capacities.
Now expansion and development of mine infrastructure. We have some inventory of concentrate. Therefore, we decided to focus on preparatory work in the new areas. Usually, the preparatory work would produce quite a lot of ore. Now this preparatory work will probably have a lesser share in ore production because we need to go through the stone layers to get to actual deposits, and this is what we do.
Another thing is the Zelazny Most tailings storage facility. This is another key thing. We've been wrestling with that for a long time. And we need to start -- we need to -- we are actually getting close to having it in full swing because we have a contract signed for the first stage of this project. It's a large contract. We are not going to overrun our CapEx, perhaps it would be even more successful story than the overrun. This is that we know for sure. We were able to complete tree cutting and tree felling to the extent needed. We had to finish before birds start to nest. It turned out that we had a lot of strong wins coming through Poland, and all that tree falling companies were busy removing the fallen trees. But eventually, we were able to get a sufficient number of contractors to make it on time. There were some difficult moments, but we managed to do whatever had to be done. So what was in the scheduled has been taken care of, and we are on track with costs.
And finally, construction of the reverberatory melting refining furnace to produce enough copper. Well, this project is slightly behind schedule, but on budget. We should be able to deliver it this year. It looks like that this RMR furnace is going to have some budget overruns. The only thing that was sort of out of line was foundation. We had to eventually come up with a stronger, more robust foundation than initially designed, but it didn't impact the [indiscernible] in big way.
[Indiscernible] no, that's not all because we still have questions-and-answer session. So thank you for this part of the presentation, and now we are open for your questions.
Investor [indiscernible]. I wanted to ask you about Glogów II refurbishment project. So I think that it's going to impact quarter 3 as well. And now a lot of questions about how you're reducing your inventory. We know what's the status as -- during Q1, but what is your projection end of year? And how you're going to decline your inventory?
And now production infrastructure, mining infrastructure and specifically
preparatory work that is underway. And so when the mining operation will get back on track after the completion of the preparatory work. So as far as Glogów II refurbishment process is concerned, it goes according to the schedule. Such a project is planned to a great detail, day in, day out. There is no delay. Therefore, I think that the impact on Q3 will not be very substantial because the ramp-up time is approximately 2 weeks, so we are not going to feel the impact that much in Q3. In terms of the inventory, well, we are not really disclosing this data. Well, during the annual conference, we said that, until 2019, we are going to reduce our inventory. But this year, we are going to sell copper in concentrate. And you can tell that now, in Q1, we used more concentrate ourselves. And in 29, we are going to have a new roaster that will be completed by the Q4. We will be actually going down with inventory because of the more production that we are going to have. And if you are speaking about getting back on track with our mining production volumes, well, we believe that it's going to happen next year, but don't expect anything extraordinary here because we are now working on more difficult sites, more difficult deposits. Now we are going to dig Glogów and of that offsets this difficult site because the ore content is higher there. But we have a fewer and fewer deposits of ore, and therefore, we need to open up new deposits and still get access to them. We have to actually get through the layers of stone to get there, to either increase the production or to sustain the level that we have. So it will happen probably once we get to renew deposits, it will help us to improve production numbers, but not dramatically.
So this is more for 2019, right?
No, no. For 2018, we will be drilling through the stone layers. And 2019, we should get access to that deposit.
And Sierra Gorda, one more question. Now when can you get to the deposit that will have higher copper content?
Well, the peak is projected for 21, 22 molybdenum. Well, molybdenum is actually going down. I think that there will be one moment, 0.5 month -- 0.5 year or 1 year at some point where we will get to the higher content of ore. But now we need to go through the certain -- around a certain wall, but we're sliding down. So once we go around that wall, we should be able to get to this higher-grade ore. But basically, molybdenum will be declining over time. With copper, things will vary. But with molybdenum, eventually, we will be going down.
Okay. But you mentioned the labor negotiations, so what percentage cost is taken up by your -- by the wages? And what is the expected pay rise in percentage?
I don't remember how much wages take up from the sales cost. We would have to analyze it. This is less than in KGHM. But another thing is, but there are many contractors there. So if you want to really get to the labor costs, then you have the look at third-party services.
But just give and take, ballpark?
No, I cannot tell you, but there will be some impact. Every impact happens every 3 years because this is the practice that they have. Every 3 years, they sign the signing bonus with the employees. So this is a kind of bonus for staying on board for 3 years, okay? You've been with us for 3 years, now if you stay for another 3 years, you get a bonus. Well, the pay raise, I cannot tell you because we are during the negotiation process.
But it will be 5 or 20? Give us a range.
I don't remember. Let me say that I've been following all the news about the negotiations, because as far as I remember, we speak about several million tonnes of copper that are under negotiation in [ here ] and globally. So there's this under negotiation table where the trade unions, none of the mines has ever told anyone anything about the process when it was still going on. So we will keep this best practice. There are really hearing what you say. They are tracking us. So we cannot really say anything.
[ Pawel Puchalski ]-- [ Oland Company ]. The first question is about the news from 2 days ago. Can you confirm that you're not going to be part of the nuclear power plant project if you're not going to provide financing? And another question is about the costs for Q2 and the second half of the year. And the third question is breakdown of production between Poland and international operations.
Well, referring to the news from 2 days ago, well, it is hard for me to confirm the statement made by the minister. That would be definitely not correct. But we appreciate it, and we are happy that the ministry understands, but we have our own projects that we need to cover with funding. And therefore, large nuclear plant is not something that would be in synergy with our operation. So we are happy that the minister recognizes the situation that KGHM has. Now in terms of costs, I think that this is the question about the budget. Well, as far as a short-term guidance is concerned, for a quarter or 2 quarters, well, we've never given such data beforehand and we are not going to change our policies right here and now. And in terms of the annual goals, we are heading towards the direction that we outlined last March during the conference for 2017. Q1 is in line with our projections. So our annual goals will be pretty much in line with everything that we presented back in March. We are at the very final stage of agreeing the final goals between the Management Board and Supervisory Board. And we believe that, very soon, the final goals will be approved. And when we are able to report it to the market, showing our budget assumptions for the entire year, therefore, that would be the official confirmation of the outline that we gave you back in March.
Okay. We have 2 questions. Perhaps we will take another one.
[indiscernible] [ Bank. ] I have another question about the dividend policy. Any news? Are you going to pay dividends? Any expectations how much we can expect?
Well, I have nothing to say on that because the Management Board has not approved any recommendations. The Supervisory Board has not deliberated that yet, so these decisions are ahead of us.
Well, it appears that 32 minutes were sufficient to explain the whole thing. Well, thank you very much for being with us and hope to see you back again in August when we will discuss our performance for the first 6 months of 2018. Thank you.