KGHM Polska Miedz SA
WSE:KGH
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KGHM Polska Miedz SA
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Good morning, ladies and gentlemen. I think we can start. I would like to give a cordial welcome to all of you at this meeting. So this is the discussion of the result of KGHM Polska Miedz for the first quarter 2019. The results will be presented and commented by the entire management board. CEO, Marcin Chludzinski; Professor Katarzyna Kreczmanska-Gigol, Vice President of the Management Board for financial matters; Adam Bugajczuk, Vice President of Management Board for Development; Pawel Gruza, Vice President of Management Board for Foreign Assets; and Radoslaw Stach, Vice President of the Management Board for production. My name is Janusz Krystosiak. I am responsible for Investor Relations at KGHM.
I give the floor to the president.
Good morning, ladies and gentlemen. We have some good news for you. And I will leave my colleagues to share this information with you. We were to open a Poles house in Brussels, this is a representation of polish companies that are trying to defend their interest in their regulatory field. But it turned out that the trade unions that are on strike in Brussels prevented us from landing there. So I can say that we and KGHM are not on strike, just the opposite. As you can see in the first quarter and in the results of the first quarter.
Ladies and gentlemen, from the perspective of macroeconomic environment it was not an easy quarter, especially if we compared that with last year. Because the fact that copper on average in the first quarter 2019 was [ $6,215 ] and the similar period 2018 was $6,960 per tonne, so it was much better commercial conditions back then.
And even -- despite the worse commercial conditions this year, more turbulent environment, we managed to achieve good parameters. First of all production of paid copper 173,000 tonnes, that's a 21% lower (sic) [ higher ] quarter-to-quarter compared to last year.
In terms of production that was the best quarter since the beginning of 2018. This was linked to a growth in the production of paid copper in Poland and the mining company, Polska Miedz, we had 28% quarter-to-quarter growth. And was also -- was linked to the growth of production in Sierra Gorda, and on this period, quarter-to-quarter, marked the growth of 23%. A smaller grade and that was the cause of the decrease. But [ on book ] 173,000 tonnes, 21% more than the comparable period last year.
And in terms of parameters, this is also the best quarterly result in KGHM in last 3 years. This also affects our financial results, production is greater, price is much lower than in 2018 on average. EBITDA in turn was higher to 24%, PLN 1,454 million throughout the group. This was also determined by growing revenues both in individual assets and in the entire group. 29% growth in revenue, and net result of 113 million higher than the first period last year.
The fact that we have such results with less stable macroeconomic environment, where we know that the macroeconomic environment contributes very much to the price. This is the parameter which is beyond our control. But the result is mainly due to better production parameters and there's in fact a few of them, but altogether, contributed to greater output.
First of all, more analytical and more selective approach to domestic production. It's not truly that our output was considerably greater, but we are trying to have a greater content of copper in the output we have. Another important factor was great efficiency, greater performance in the smeltering assets. So we are talking mainly about Glogóws, the traditional 2 furnaces but also installation for roasting the concentrates. So that is the installation that we've launched [ January 1, 2015 ]. This year it is working in a more stable manner, and it has a major impact on our production results. It is something that we can see on our EBITDA and copper production.
[ We also fear on bringing ] that for a major impact on the growth of production in the entire Capital Group. So these are 3 major factors.
The fact that this is happening is -- above all the results of our strategic assumption from December 2018, we are implementing this strategy. I keep repeating that in particular the flexibility, ecology all those things that are important. But the first 2 points mentioned on the slide are important for all the profit that the company has to cope when the macroeconomic environment is better. And when more favorable conditions prevail, we have -- we're able to completely say that if the price remained similar with the first quarter last year, we would have almost PLN 400 million more in revenues. But this is something beyond that. We have to call also when lower prices prevail in the market and that can be achieved by greater flexibility and better efficiency. This is our approach and this is what we are doing this quarter. We also have significant admissions for the next quarter and that remaining part of the year.
This is work and commitment of the entire company and all employees, and we have to deliver the result in the context of deteriorating maximum parameters.
So that is in regards to the introduction and the other colleagues on the management board will talk you through their areas of responsibilities.
Now I would like to invite Stach and Pawel Gruza to comment on foreign assets and finance.
Ladies and gentlemen, before I discuss production results. Just a brief comment about security that is one of our priorities and strategy on 2019, 2023.
After the first quarter, you can see where we are. We are at a very good level in terms of the Polish indicators. This -- there was 1 event on the Rudna mine, but if we compare the February and March over the same months last year, the results are very good, and I think we will continue to work on safety. Next, we go to production results, in comparison from last year, it shows comparable levels. Lower production of copper concentrate caused by the event in the Rudna. However, this did not translate into production of electrolytic copper. As you can see in the slide, since the beginning of 2018, third quarter, we have worked continuously on improving the availability of our technological lines. This is something we are doing and that is why we are achieving these results also and the context of production of metallics silver. I would also like to add that the mine is working at 100% of its capacity. There are no deviations from the plan in the following months and quarters.
As concerning stock of copper concentrate, we had a plan to reduce this -- the stock of the inventories and it is something that is happening -- that is also possible, thanks to greater capacity and the availability of our equipment. As regards to this, we felt we [ need ] that in case of some planned downtime, we show such inventories at 14%, which is in line with our budget assumptions.
Thank you, Rados.
The Sierra Gorda result exceeded its planned production and this is due to the different management approach and the different [ oversight ]. We are able to consume the fruit of the growing production, and the changes that had been implemented over the past few months.
What is the next step in the financial position and performance of Sierra Gorda? Production is up 23% on a quarter-to-quarter basis. This is an excellent result. We are way past the BATAs. So not only we are higher than during the same quarter last year, but we are also beyond the BATAs. We want to make sure that we continue this performance throughout the year. And we are quite optimistic about the delivery. Reduced production of molybdenum is the due to the characteristic features of the molybdenum deposit that was anticipated and this is due to the geological conditions. We are also working on optimization of CapEx. We are very happy that we're able to increase the production without increasing certain items of the CapEx. Therefore, we were able to optimize cost.
Now moving to KGHM International, our current operations that we have in Americas. Here, we do have the decline in production due to the Robinson mine. And again, this is due to the geological conditions. But let me say that this decline was anticipated and budgeted for. And in the end, we are constrained by geological conditions.
We hope that our projections until the end of the year will come true. And as a result, throughout the year we should not suffer any visible decline in the production at international. Thank you.
Now let's move to the financial results and Katarzyna Kreczmanska will cover the section.
Production performance translated into group financial performance. The revenue of the capital group in Q1 2019 compared to Q1 2018, our revenue was up by over PLN 1.2 billion. The main driver is coming from the volume, growing sales volumes. PLN 1 million -- PLN 1.049 billion, that was the contribution of the growing sales volume. So this is the [growth] of the growing volumes. However, there were some factors that with the reduction of our positions and undertake the prices in the markets that we were able to offset the negative business coming from the price. And with the better exchange rate of zloty to dollars. So overall PNL 1.222 billion was the -- that's how much our revenue in this quarter were higher than the same quarter last year.
On cost -- unit cost across the Capital Group, C1 unit cost was lower than Q1 2018. In the current quarter, it was PNL 1.74 and please note that the reduction of C1 was attributed to the [ mining ] companies, so KGHM Polska Miedz and Sierra Gorda likewise. There was a slight increase in C1 at KGHM International.
Now EBITDA. EBITDA was up by 24% compared to Q1 2018. And as you may notice from this chart, the EBITDA was higher at the KGHM Polska Miedz and the International and Sierra Gorda, so across the board.
The net profit was up by 26%. And mind you that the main reason why we were able to raise a net profit was the change in the revenue, we've had higher revenue in Q1 2019 compared to Q1 2018. And interest rate differences were also conducive to that and despite the fact that the costs were higher than in Q1 2018 -- and despite the change in the -- [ drop in ] inventory of products because this year, we were using inventory that was built out throughout 2018 because of the repair and refurbishment process that was scheduled for 2018.
And again, we also had an impact of the income tax. The income tax was higher since the gross capital was higher than last year. So overall, the net profit was higher and were up by 26%.
Now cash flow. At the end of Q1, cash flow was lower than at the end of the last year. And why so?
Well, first of all, we had a change in the working capital. We have high inventory levels. We continue to build up inventory due to the scheduled upcoming repairs and on the smelters. In addition to that, we have fairly high investment expenditure. But mind you, the capital expenditure were allocated to investment [ in certain ] that were made in Q1, but some of them pertain to the projects and investment that were completed last year.
Now the net debt. Our net debt was going up but this is strictly an accounting operation. Because the main driver for this increase in the net debt was the implementation of IFRS 16. And therefore, we had to change our accounting approach and the PNL 516 million was the impact of that implementation.
In addition to that, since our cash flow was lower, that also impacted the situation of the net debt. But in terms of the actual change in the net borrowings, the debt was up by only by PNL 1 million. In addition, we have exchange rate differences, so it is not that we incurred PNL 173 million new debt. This is to the extent differences that contribute to the increased debt as compared to the debt at the beginning of the whole period -- beginning of the year. You must be certainly interested in the overall net debt of the capital group. This ratio is at the good level because of the end of Q1, we were at 1.8 so we are below the threshold that we set for ourselves. And then mind you, the threshold is set at [ default ]. Thank you.
Well, thank you. And now we would speak about investment initiatives and the new developments.
Ladies and gentlemen, speaking of the development projects in Poland, basically the situation has not changed since our last meeting. We talked about the key investments such as, RMR furnace that is going to be completed very soon. Now we are also working on the Deep Glogow's deposit. We continue to work on the roasting facility, and we also works on the tailings at Zelazny Most. And finally, we are also trying to be in line with that BAT, B-A-T. So there, our project is the same but we wanted to highlight the fact that these projects truly important to us. And my previous -- as I've said that we are stabilizing the operation of our roasting facility. We continue to improve its efficiency, and these ratios and figures show that we are improving efficiency of our operations at the smelter.
Now next slide shows how important our Deep Glogow's projects has become. We have shown you the current situation and the present for the future as far as Deep Glogows.
So once this is fully completed, we should be able to have that smooth transition, and we would not face the same decline in production as if we had to accept. If we did not work on this project. This is obviously a tedious work, we had to get licenses, we have to go through the exploration project. But once this is completed, we'll have a stable production over the next years. Thank you.
And I think we have 2 more slides about the international projects.
Well, as I mentioned earlier, we will continue to improve the production at Sierra Gorda. We're also doing projects on this mine. So as a result, we are able to have higher production, and this is higher than the BATAs and also the internal numbers are better than in the same quarter of the past year. We evaluate that the projects that hasn't completed so far, the investment is very positive. And therefore, we are reconsidering our CapEx today, our production level is reaching the levels that we had in our plans and this is highly satisfactory. Therefore, we wish to run the revision of our CapEx, and we believe that at the end of this process, we should be able to show some financial savings by the end of this year.
Obviously, we are also looking at the other operations and other assets, in particular, the Robinson mine. The Robinson has a number of options that might be considered for further development.
At this point in time, we think about continuing production by 2025. This is under consideration as you can see that in the [indiscernible] decision and would be finalized soon.
Now to summarize, we are facing difficult time in terms of the macro environment and overall challenges. But we are quite happy with performance and -- financial performance and production. And looking forward, we are committed to deliver the BATAs, and this is not the only ambitions that we have because we'd like to make sure that we over -- [ exceeded ] the BATAs, and we are able to deliver more production than anticipated.
So we shall see what can be expected from that external environment and macroenvironment. We know that the U.S. China relations are very volatile and that actually impacts aluminum price but we are flexible, so we are prepared for the upside and we are prepared for the downside, so this happens. And I believe that with this approach we can have different mind when we think about the future of our company.
[Operator Instructions] And now I open the floor for questions. We will be happy to answer them.
Pawel Puchalski, Santander. [indiscernible] This slide is displayed. It is very interesting. I keep bearing in mind your mining production at once [ 420,000 ] and now I'm are talking about mother company, [ 401,000 ], if I remember correctly. And this graph, very interestingly hangs somewhere between [ 400,000 and 500,000]. Now I would like to ask you for an explanation whether it's just a question of presentation or should I reduce this? How come [ 450,000 ] in this slide. It shows a similar value on the 500,000. And I remember last year, we were talking about mining assets and that is projection of production [ 401,000. ]Can you comment on those numbers?
As you can see the graph shows the value of [ 450,000 ], that is our strategic assumption for 2019, 2023, that is why we assume this line is the starting point. What you are mentioning is we're already after adjustments because we show here the output from the mines. We understand that if we are talking about production that can be sold after processing, we -- this slide and Slide #26 should show numbers lower by about 50,000. Is my understanding correct? This slide shows output from the mine, production from the mine, that is why we have [ 450,000 ]
Okay. Another question about energy cost. This [ detail ] show the energy cost in the first quarter at lower -- higher cost of energy? Or did you assume a flat price?
As regards to energy price, this is a theme that is very interesting to everyone. But I can say as I mentioned earlier that this year is better secured for us in terms of volume and long-term contract. So we are managing well in terms of energy prices because we operate under long-term contract. Therefore we don't have an [ inferior ] cost resulting from market environment.
So I understand you have signed a contract with energy supplier for price of energy for 2019, which is close to flat rate, yes, we can define it like this. Makes us feel a little bit more comfortable about prices electrical energy. And regardless of legal changes, this price is going to remain stable throughout 2019 versus 2018. I do not know what legal changes that you're referring to but in the current legal state we can talk about flattening of the price in the context of historical price from last year. So 2020, do you have an agreement in power supply as well?
For 2020, we to some extent have volume secured for long-term contract. But in what part, I cannot say that.
But is that smaller part, bigger part?
That is our internal business information. We are coping with this price in a way we deliver this term contract for this year. We also have some contract of 2020 with regard to a large part of purchases, a large part exceeding 50%.
You know that I can say only as much as I have said.
Robert Maj, IPOPEMA. I would like to ask you about the silver production, after the first quarter you had 321 tonnes. Now the plan for the whole year is more than 1,300. Do you uphold your forecast or has anything changed?
By all means as regards to the production of metallic silver, we want to deliver as seen in the budget that is our plan, that we are able to process another part of the deposit. Our target is to deliver the budget numbers. With regards CapEx and the budget after the first quarter that was less than [ 900,000 ] is the budget target somewhere above PNL 3 billion uphold -- upheld?
As for CapEx for this year, we have PNL 2.5 billion. And as we mentioned in previous meetings, we would like to keep this CapEx stable level that will guarantee our key investment for the upcoming years. So we can say that both in terms of CapEx, a large part of which is this RMR, everything is within the budget. As for programs of making the deposits available, that also was in the budget within the few weeks of delivering the CapEx targets.
And the question about the reevaluation of the loan value, it was PNL 94 million after the [ first ] quarter, will such readjustments will also return the following quarters?
That is the consequence of IFRS #9 and the valuation of loans at fair value, such events can occur.
And Slide 29, where you -- current situation at Deep Glogow. If you look at the parameters of this copper, it seems the content is about 1.5% of copper in the deposit. So what can you comment on the content of copper in the old mines? Is that above the plans, in line with the plans, or you had the greater expectations?
We assume that analysis of copper and the deposit is at our targeted level of [ 1.4, 1.5 ] and that is what we expect. Our old mines are at 1.47, 1.55. So that is the target. Anyway, we do not expect any major changes here.
And if we look at the first quarter, the analysis by mines shows better results in terms of content, better than what was originally included in our production plan. And it's is thanks to better technology and better approach, better planning. So the increase of production in Glogow will be in 2023, 2024 in Deep Glogow. It will be included in production on an ongoing basis, so we are getting deeper and deeper to 1,200 meters from the current 1,000 or 1,100. That is what we wanted to show you in the graph. And that goes by [ Polska Miedz ] -- that is Rudna and [ Polska Miedz ], 2 mines that service Deep Glogow.
And one more question that I would made. Would there be any problems with the implementation of Deep Glogow and [ collection of the ] deposit of because gas might penetrate somewhere into those deposits? Would that cause any problems with those plants?
Every place underground entails a variety of problems. We are overcoming them on an ongoing basis that is why we pursue a series of projects. Once situation develops, we will react as needed. We are taking preventative actions, for example, cooling the air and ensuring ventilation to the site presence of gas underground. But as of today, all geologic parameters are fulfilled and identified in the risk of this kind.
Andrzej Plachta, Alior Towarzystwo Funduszy. I need to ask about the cost of compensation package because when you're negotiating wages for the trade unions. And there were at some point there was information provided once the excavation tax will be reduced, you will come back to that negotiating table. And excavation tax law has already been permitted by the Parliament and the presidential signature.
Yes, it is true but the law was adopted by the Parliament and the Senate likewise. Now we are waiting for the signature of the President, and the tax will be reduced by 15%. However, only just second half of the year will show that impact of the reduced tax. And now our negotiations were complete in January or February. It was collective bargaining and the increased wages were actually part of the collective bargaining agreement.
Reduced mineral excavation task will potentially contribute our profit once we have a higher profit we will have more bonus for the workforce. But this is a standard mechanism, which is part of our collective bargaining agreement. So the bonus is dependent and tied to profit and there are no extraordinary measures. So there are no additional renegotiations plans. The negotiations have been closed. We keep talking to the trade union people on an ongoing basis but this is not on the agenda right now.
One more question from me. Any time or very soon the energy policy for Poland by 2040 will be announced by the government. Now since you're the largest consumer of electricity in Poland, are you going to be active in the financial commitment in building either offshore units or nuclear power?
Well, in terms of electricity generation and electricity overall, we already made clear that we want have higher renewables in our energy mix. And we want to build our own capacity that will be under our control. So we are not discussing any external generation project. We have no other commitments with the exception of historical commitment, which is [ 10% ] and this is our share in EG1 companies. So this is legacy asset. It -- potentially, it could be in active asset and liquid asset. What will be the decision about this company? It will depend on the shareholders, but we have to be looking for the future in the shorter term. We cannot not wait for the nuclear power to take off.
Jakub Szkopek, mBanku. Swell, congratulations on excellent performance. I have 2 questions about International and Sierra Gorda, the KGHM international. When you were speaking about the worrisome, about the strategy, you said that we are going to have [ limited ] operation or shut it down. So we would read in the media that over 80 -- 83 or 86 miners were terminated. So are we going to expect some provisions due to their shutdown of this operations?
No. Actually, we have more people that were terminated. Because this line is shifting towards the current maintenance and this exercise was successful so we are not planning any accounting measures. I must say that strategically we are waiting for nickel prices to bounce back. Once it happens, our historical operations will get the second wind and -- but we're still waiting for that.
According to the analyst, nickel prices should bounce back within a few years because these operations in addition to copper carry fairly large amount of nickel.
[indiscernible] you completed the weight negotiations, and it was a successful thing. But I think that [ KGHM ] tradition expects the employer to pay out annual balance after signing such an agreement. So can you disclose any details? Where you have paid it out? Or where are you charged that? Or were -- are you going to charge it to the second quarter results?
Well, it will be charged for the second quarter. Some organizations signed a collective bargaining agreement earlier, therefore, the total payment will be allocated to several reporting periods. However, the key trading organization threatening strike and financial office. They signed an agreement with us. And technically, speaking it will become recognizable in Q2.
I understand you that don't want to disclose the detail of the balance that you had to pay out.
No. These things have never been disclosed and they are never in public domains. But I made you assure that it doesn't affect our business, and it is not -- it is in line with the standards accepted in such operations.
I have another question about fixed cost at KGHM. I think that the costs were exceptionally low in Q1. Therefore, it makes me think whether this is a new trend. It will take [ 160-plus ]in '19 -- in 2018, it was above [ 200 ] and in Q4 you were at 230 or 240.
Well yes, that was an accurate statement that the costs are going down. Because we are speaking about a fixed cost, right, and then to some extent, this is driven by the scale of the production. Obviously, when we have increased production, the distribution of costs is different. And once we are delivering higher production numbers, we are better placed into our cost position.
Okay. So one more question about the nuclear power plant company. You have your shares in this company? You're trying to sell to PGE and it fell through?
Well, we kept the America updated on that. We continue the dialogue, PGE communicated with the -- finished the discussions. Well, I guess that this is not the question that should be asked.
Well, if I made 2 follow. It is true that production was up, but I never heard the production could reduce fixed cost. Obviously, you can reduce fixed cost as compared to the production. But nevertheless, in terms of value fixed cost should be fixed. Where obviously, I was referring to the relation to the fixed cost because what I had in mind is C1 that was really going down substantially, so not really about the fixed cost. So I would rather say here that we couldn't see major increase or dynamics to the fixed cost.
Well, I understand that low cost is the new tradition at KGHM. Do you believe that it will be stable? And how come that you are able to achieve that?
Unfortunately, the mic was switched off and we are not able to hear the speaker. The microphone is on the way. What I understand that you were asking about overheads. I was referring to the previous question. Overheads were up by 3.2 and the main drivers were very different compensation packages. Everything else is line with the last year level because we keep high cost discipline. When you look at the consulting services or entertainment and -- sorry, hospitality, well, this is under control. And on top of it, we have the actually provision that impacts this cost. And as it happened in Q1 it was not high. Actually, we are in line with last year level therefore, it did not drive the cost up. And believe that in the next quarter, the level of overheads will be the same provided that actually provision doesn't change. Well, I believe that if you look at the cost on block, the overall cost policy is certainly in bounds. We are revising our procurement. We are implementing IT systems. We will have a new inventory system. We will have better insight into inventory at all structures of the group, and actually we see the first outcomes of this process. I believe that in the second half of the year it will become more visible.
My question is -- we will take a few questions of the Internet. Well, first 2 question for Sierra Gorda. The first question comes from Andrzej Jones. Why Sierra Gorda costs went down quarter-to-quarter despite the reduced volume of molybdenum?
The reduced volume of molybdenum is due to the anterograde. Obviously, we are working on controlling the Sierra Gorda cost, and we have the plan to optimize operating expenses. And earlier I was saying that we are optimizing our CapEx for 2019. And looking forward, if you sum up all this things you see the results. On the other hand, we have increased revenue due to the increase copper production and that provides quite favorable C1.
Another question about profitability. Dan Shaw of Morgan Stanley asked, when can we expect Sierra Gorda show operating profit and no financing impairment will be needed to get that going.
At this point in time, financing provided by partners by Sierra Gorda is necessitated by the project finance that -- which is a legacy debt. And on top of the Sierra Gorda is actually self sustaining or even able to show positive performance and positive results. So I believe that this answers the question. So historical debt, which is quite sizable and has to be paid down by the end of this year and next year and here partners have to contribute financial buffer to be able to bring the historical liabilities to the close but everything depends on the price copper. It's -- we have the strong tailwinds. And mind you, the price today is around [ $6,000 ] per tonne. So if we keep the prices in the right direction and the Sierra Gorda may become self sustaining much faster than we expect. Now another question is about your intended issuance of bonds. Any more details.
As we have communicated, we are currently in discussions about possible issuance of bonds. That would be another step in the delivery of our financing strategy. The one that we announced in December last year. We are restructuring our debt. We want to make our debt structure safer and better diversified. And hence, it is our intention to refinance our old -- part of old debt and hence the intention to issue new bonds because bonds will be the same for funding. So far we have not been using that. Any more questions from the audience.
Yes. One more question.
That is budget 2019 projects and predicts cost at [ PNL 20,000 ] per tonnes, this is Polish operation. I think last year it was [ 17,600 ]and Q1 was below [ 17,000 ] so my question is whether we should expect any increase in cost so we reached this projected [ 20,000 ] per tonne that you have in the budget or perhaps you will have revised the budget.
What I understand that you haven't -- when you speak about the revision of the budget, you mean that the costs can be higher or lower than the budget. Well if we are under the budget with the cost than we will celebrate. It's -- we don't need to revise, we would be happy to deliver that. As I said, we are really committed to deliver the lowest cost possible. And as I said, we have a number of migration measures in place. We shall see what the second quarter will produce in terms of costs.
And in last question last year in Q2 you had a different of 239 million from subsidiaries for, if I'm not wrong here. Would you expect the same dividend payout in Q2 2019?
Well, we have to look it up in the budget. While we don't expect the same scale of the dividend payout. While there might be some in flow, however, at the much lower scale. Well, but please understand the mechanism. This is a very good question really. It's helps us explore the logic. At our company that are responsible to some sections of our technology, while this dividend is going to be something that we have to pay this company for this type service, so we are trying to optimize that price for service instead of expecting the dividend payout.
As you have no further questions. I will thank you for participating in this meeting. All questions if not managed answer today and I keep receiving more and more online, will be answered on our website. So that you feel that you have been fully informed and after this meeting we will be available to you via our website and also our team of Investor Relations. We invite you also to the next meeting where will present the results of the second quarter, thank you once again.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]