KGHM Polska Miedz SA
WSE:KGH
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KGHM Polska Miedz SA
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[Foreign Language] Marcin Chludzinski.
[Foreign Language]
[Foreign Language] Adam Bugajczuk [Foreign Language]
[Foreign Language]
[Foreign Language] Pawel Gruza [Foreign Language]
[Foreign Language]
[Foreign Language] Katarzyna Kreczmanska-Gigol [Foreign Language]
[Foreign Language]
[Foreign Language] Radoslaw Stach [Foreign Language]
[Foreign Language]
[Foreign Language] Marcin Chludzinski.
[Foreign Language] We are working underground. We use thermal vision for temperature checks, and we have them in all 25 entrances to our company. We also disinfect rooms and infrastructure used by people, both in our mining operations and smelting operations. And we do a lot of other things as well.
So this is a collective effort. We are trying to act. We are trying to take some preemptive efforts, and we all have to stay responsible. We have to follow the rules. And I would like to appreciate the contribution of trade unions. Here, we follow the principles of social partnership. As a result, in these times that are far from normal, we try to act normal. What does that mean? The first slide shows what it means.
Here, you see the key financial and production parameters, our macroeconomic environment compared to the first quarter of 2019. Copper prices went down by 9.3%. Silver prices went up by 8.5%. The dollar is stronger over zloty by 3.4%. And these figures show the effect of the coronavirus on the economy. It's common knowledge that prices of metals, such as copper, plummeted in the first quarter. This -- well, we had volatile prices before at the end of 2019, especially in the context of trade wars, but these prices keep falling.
The good news is that production is doing well. So quarter-on-quarter, we have 1% growth of production. So we not only maintained but also improved our production of copper. Silver production grew by 3% and C1 cost was reduced by 7.4%. So we maintained our production and sales through our hard work. We managed to keep our costs under control. And here is the results. Our net results went up by 25%, our EBITDA went down by 22% and our revenues went down by 3%. These reductions reflect the macroeconomic situation.
And this collective success is owed to the hard work of everyone, the crew, the management. We all have an ambition to keep working safely. And this safe work translates into these results, maintained sales, maintained production and cost under control. This is a major challenge. When we look at the environment -- industrial environment and mining operations all over the world, this is not the case everywhere. Many places shut down, many places are temporarily off. So the figures you can see are a major success. Quite openly, this involves constant decision-making, and these decisions are harsh, are tough, parameters, new variables. We need to respond on the go. We act in close cooperation with the Management Board, with managers of our sites. Our staff situation is changing day-by-day.
In 2018, we accept -- we adopted a new strategy. And that strategy defined the need for being more resilient and this is what we are doing right now. Last year, we had trade wars between the U.S. and China. And resilience and flexibility was much in demand back then and it is much in demand right now. When you look at the economy of our company or the economy as such, then the first thing that comes to your mind is the COVID situation. This dictates the pace of all economies. And this is a volatile situation.
So today, we can say that the first quarter was good because by acting collectively, by following the regime, we delivered good results. But there are so many variables related to the virus that things may change overnight. And there are many examples of that all over the world. So we have to stay vigilant. We have to stay resilient and adapt to the changing reality.
This slide shows the effect of the changes of copper prices in the last year and in the first 2 months of this year. We can see clear drops in terms of prices. In the beginning of the year, the prices went down because of shrinking demand. We handled this by diverting our surplus production to those places where the demand was greater. Right now, the situation is quite different. In March and in the end of February, companies started to build some stocks because the supply chains were affected and stocks became more important.
Ground forecasts all over the world, according to IMF, it seems that 2020 will be a year of declining trends in all the countries where we are present with our projects and in China. The scale of these reductions may vary. And this will depend heavily on the COVID situation. If economy starts up faster, supply-demand and production will pick up faster as well. The good news is that Poland is the country that is the least affected by COVID in Europe. But still, we must prepare for some negative trends that will be observed globally. We need to bear that in mind when we think about further development.
Pay copper production in our Capital Group went up by 1%, 174,000 tonnes in the first quarter. That's been -- this has been a major challenge and a lot of hard work, but this is very important. And good news for all stakeholders and for all investors, we are working hard to maintain this. Every day is a day of hard work and every day matters.
This is the net result of the group. This is our EBITDA, that PLN 1.129 billion. That's the first quarter of 2020. You can also see the net results, that's PLN 690 million, which is a lot. That's a very good net result. If you look -- if you take a historical perspective, this is one of the best quarterly results in our history. So this is very good news.
As I said, all these efforts, all these things are part of our consistent strategy. If we had not prepared for such volatility, we wouldn't be handling it as well as we are. We are trying to adapt every single day. We are trying to introduce new solutions into our structures. And we are often asked by our international colleagues about what we do and how we do it. We gladly share our experience. We are hopeful that we think about the future. But every single day, we know that we may be taken by surprise by the reality because there are some things that are beyond our control. I'm talking about the pandemics. And even if many people do what they should and act responsibly, then you never know what's going to happen.
Here, we will move on to production results. And I give the floor to Mr. Stach.
Ladies and gentlemen, let's move on to production right now. And let's emphasize that the first quarter was a very tough quarter in terms of production. However, everything that we have done, as Mr. President has just explained, helps us to deliver good results, especially in March.
Now let's take a look at the production as such. We have 174,000 tonnes of pay copper in KGHM, that's 1% more than in the first quarter of 2019. We produced more silver and other accompanying metals. We are a little bit low on moly, but we will discuss that in detail when we move to Sierra Gorda.
As far as the Polish production is concerned, we have concentrates, copper. Here, production was similar to the first quarter of 2019. The same goes for electrolytic copper and silver. So we maintained the levels from the first quarter of last year. The ore was somewhat lower. But this is our policy adopted in 2018. We wanted to reduce the number of additional material extracted because we concentrate on the pure metal.
Our stocks. Stocks -- our reserves, looking back to 2018, in 2018, we had a lot of cash that was frozen. Now we are loosening that. We are defreezing the cash that is bound in our stocks, so we are approaching the optimum level. As regards the reserves, the stocks of anode copper, here, the reserves are going up because Glogów I smelting plant will go into downtime, and we need to have some stocks to be able to continue with the production of cathodes. Quite importantly, our operations in the Legnica smelting plant allowed us to deliver very good results in 2019 as planned. And also the first quarter of this year has quite successful.
Now let's move on to discussing Sierra Gorda and KGHM International.
Thank you, Radek. To begin with, let me note that our international assets are often located in places that struggle with pandemics. So there, the major challenge was to maintain stable production in those plants. So we have undertaken a number of efforts that allowed us to achieve to deliver the results that we did.
We have simple solutions, such as questionnaires for people who declare whether they may or may not have contact with infected people. We follow the principles of personal hygiene. And the synergy of all those actions, both in Sierra Gorda and in other mines of KGHM International, have been quite successful. They have been appreciated both by supervisory authorities in those jurisdictions and by our crew, and we are very happy about that.
In addition, there are some other challenges that we have to face in these, include regulatory challenges. Every state, every country has a different set of safety rules related to working in the times of the pandemics. But despite that, we successfully continue our production. Of course, we were also affected by difficulties with delivering other -- our materials, but we successfully built up our stocks.
Now let's move on to the details. Sierra Gorda is self-explanatory. We have processed more ore -- 8% more ore than in the first quarter last year. We also have better-quality ore, higher copper content. Unfortunately, moly production is low because of significantly lower moly content in the ore.
Now KGHM International. There are several factors which influence that value of minus 13%. So first of all, let me note that in the previous quarter, in the first quarter of 2019, Morrison was still in operation, which added to the volume, which is roughly 9% out of the 13%. We're showing here. So the Morrison mine, which moved from current maintenance to suspension after quarter 1 last year. And additionally, well, I would like to also tell you that we have the Franke situation and the geological conditions were worse. I'm talking about the copper content and also about the carbonate, which are making the production more difficult than -- and so much better results in quarter 1.
So to sum up now. Well, we have a flexible approach to our foreign assets, acting fully responsibly, optimizing CapEx and OpEx at those facilities. And we are ready to make difficult but well-thought-over decisions. Thank you.
Ladies and gentlemen, the financial results are related to the production results naturally. If you have a look at revenues now, so revenues from contract with customers this quarter were 3% down compared with quarter 1, 2019. But besides production results, there are also other factors influencing our revenues, and these include prices.
So most importantly, our results, financial figures were affected by prices. So prices of our main products, foreign exchanges, these were the most important factors influencing the drop in our revenues compared with the year before. It was partly offset by the exchange rate of the dollar. But we also have to say that with this negative effect of copper prices and also, to some extent, the offsetting by silver prices to some extent, was only partly offset or covered by this favorable dollar exchange rate.
Now talking about the unit cost. As President Chludzinski has rightly mentioned, C1 is lower than in quarter 1 last year. The main reason here was the dollar exchange rate, which is higher compared with last year. But the decrease in C1 was recorded in the parent company, KGHM Polska Miedz S.A. and also in Sierra Gorda. But it increased, on the other hand, in KGHM International. And this increase of the cost resulted mainly from the revaluation of stock because of the lower copper price. So when we look at the costs of KGHM International, if we want to take into account the increase in costs related to write-downs on stock, the other costs were actually lower compared with quarter 1, 2019.
Now looking at the operational result. The adjusted EBITDA in the group was 22% lower year-on-year. So most importantly, we recorded a drop in the revenues. And that was the main reason behind that. Revenues decreased because of low copper prices, although we have the dollar exchange rate somewhat higher. Now talking about the parent company, we recorded higher depreciation costs. And that's because of the investment projects we have. These projects were commissioned, and this is why our depreciation is higher this year.
Now looking at the other segments here, if you have a look at the EBITDA of [ KGHMI ], so same as with C1, in the case of [ KGHMI ], we have revaluation of stock, which plays an important role here. But we also recorded a drop in revenues because of the service operations of the DMC company.
Now the profit or the net result is 25% better in quarter 1, 2020 compared with 2019 because of the favorable dollar exchange rate. And we can see that in the growth of the net result by more than PLN 400 million in the whole group. The copper price was lower, as I've mentioned. The favorable factors were the lower corporate tax. And with that lower tax, our costs were lower. And also the purchase charge or purchase copper-bearing material cost was lower. And looking at the other costs, we recorded an increase. That's because of our social contracts and agreements with employees because these were the labor expenses, which played an important role here.
Now the cash flows. Please note that cash level is definitely higher at the end of March this year when we compare it with March 2019. But I also have to say that it was related mainly to our precautionary approach. So we were really conservative. And seeing the volatility on the market and the unstable situation, we decided to draw some of the syndicated loan as a cash reserve to be used. Now what we have seen is stabilities. And it's not as volatile as it used to be initially when the pandemic started on the market. And that is why this cash level will probably be lower in the future periods. We also have to see that the pretax profit influenced our results or the cash in a positive way. There were also working capital management activities, which we undertook. We released some of that cash, which was frozen in our working current assets.
What is also important from the financial point of view is our debt level. The situation on the market is difficult. Copper prices are low. But please see that the net debt-to-EBITDA ratio increased year-over-year, it's 1.7, that's the figure for 2020 compared with 1.5 last year. But it was influenced mainly by the dollar exchange rate. So the exchange rate of the dollar increased our revenues, which is positive, but it also affects the valuation of our debt. So if you have a look at our net debt of the group in dollars, well, we will actually see that this debt dropped significantly compared with 2019. However, when we denominate this in zlotys, after such conversion, we will have an impression that our net debt increased. But as I've told you, this is the effect of the dollar exchange rate.
Thank you.
Now ladies and gentlemen, talking about investment program, we are very satisfied with the pace of our projects and the progress as well. So the scope has been very good, indeed. Our company, companies from the group and general contractors have really coped very well with the situation of the pandemic. And we were able to deliver our projects without serious obstacles. So we've managed to consume PLN 400 million of CapEx in quarter 1 and most importantly, achieve the progress as expected in our projects.
So this slide shows you the most important projects in our group. Let me focus on the 2 most important ones. One is the program of gaining access to ore which is our flagship project, which we are going to continue all the time as we will use this to mine ore and also build shafts in the future in existing underground mines. So it's going well to plan. At GG-1, it's even faster. So the progress is better than planned. We're very happy to see that because of all the stoppages and slowdowns in the past. Now talking about the Zelazny Most Tailings Storage Facility, the southern quarter work is ongoing to plan and schedule, so both the southern quarter and also the Tailings Segregation and Thickening Station. So the whole project is in a very good position.
And my last slide shows you the Deep [ industrial ] Glogów deposit. So now we're exploring, learning more and more about the deposit. And we will be moving from 1,000 to 1,200 meters, so 50 kilometers of access headings or tunnels every year, ventilation work, related projects. So in spite of the drop in the output by about 9%, we have an increase of head grade of copper content ore, which is really significant showing us that we are more effective there. So we're looking towards the future. And knowing the share of that deposit in our overall production, we're very happy to see this.
Thank you.
Now to sum up this part, the results for quarter 1. I can tell you that the macroeconomic situation has not been favorable. It was unfavorable in 2019 and is also the same case in 2020. So in 2020, this is directly related to the pandemic, the coronavirus crisis. So the pandemic has deteriorated the former negative macroeconomic trends, the copper price. On the other hand, the dollar exchange rate is good for us, which -- but we're not hoping to be lucky. No, we would rather act in a very responsible way, working hard to maintain production, trade, setting into our cost discipline while maintaining safety and health at work.
So we can ask about the long run, what is going to happen in 3, 4, 5 months? Well, if we will not have problems because of the health situation and the pandemic, we continue and produce. But the situation is volatile, it's changing, we can't really say that everything will be the same. So many of these factors are beyond our control and we have a strategic approach. The strategy, 4E, flexibility, efficiency, industry and environment, helps us to adjust to the changing situation. So we started a review of strategic initiatives. Maybe some of these aspects are not most important. But we're also analyzing our budget objectives, the assumptions, and we will be trying to look at what the future brings us and respond in a flexible way. This is what our development model is based upon. And times are demanding, and we have to be flexible and face the challenges it brings.
Thank you.
Now ladies and gentlemen, so these have been brief comments of the Board on the results of KGHM Polska Miedz S.A. And now we will have a Q&A session. These are the questions we received sent to ir@kghm.com, our e-mail address. And I encourage you to ask questions also after the video conference. Janusz Krystosiak will be the moderator of the Q&A session, the Director of Investor Relations. All the questions and answers will also be available online for you.
And the first question came from Pawel Puchalski from Santander Brokerage House. Are you going to reduce the guidance for moly production in Sierra Gorda, copper in KGHMI and silver in Poland because these 3 items after the first quarter are below the budget?
No, we are not going to. We believe that the budget for moly in Sierra Gorda is up to date. It's still valid. As regards KGHMI, we are still analyzing the situation, and we haven't taken any decisions yet. Thank you.
And production in Poland, production of silver, we are sticking to the plan as regards to metallic silver after smelting. And silver extracted in our minds is below the plan. But we are still analyzing this situation, and we are not going to change the budget for silver as of today.
The next question from UBS. Despite COVID-19 and the price pressure, CapEx in Poland looks to follow the plan -- seems to be following the plan. And you are maintaining -- you're sticking to the budget figure of PLN 2.25 billion. If the prices keep falling, will you move your CapEx to a later date? If yes, then at what price level will you consider postponing your CapEx? And Sierra Gorda, you're selling copper below -- copper sales is below the plan, but moly is above the plan. So could you comment on your stock situation and your further plans for 2020?
I'm sorry. But I translated this question live from English to Polish, so maybe it hasn't been fully clear.
Yes, as regards the domestic CapEx, we are not going to reduce it as for now. And as Marcin mentioned, we are flexible. We are responding to any changes that may happen, we are fully prepared to do that. Sierra Gorda, as regards copper, we have some temporary downtime in the port in Antofagasta, which disturbs our shipments of the concentrate. But these are temporary situations. Yes, they are reported in our report, but they are of minor importance from the whole year's perspective. And the same goes for moly.
It's Pawel Puchalski. In KGHM, the deep deposit in Glogów delivered 14% of the parent company output in the first quarter of 2020, which is down by 3%, whereas the overall production went up by 3%. How come? How do you have a greater production in the parent company? And when will that a deposit run out?
Let me start from the end. Well, we don't know when the deposit will run out. It's anybody's guess. And you have to differentiate between extraction and smelting. Glogów Deep has more silver, as Adam already showed, when we increased the operation territory. But our smelting and mining results may be different, but we are also still sticking to budget as of now.
Mr. Jacek Saja from Radio Plus. In your production results, you have clear improvement by 33% compared to the first quarter of last year in terms of gold production. What's the underlying reason? And is it a sustainable trend?
The production of gold and silver depends on how much material we have in our concentrate. As of today, we happen to have more silver and gold in those areas that we are working in right now. So if we continue to have more gold, then we will have more gold. But still, copper is our flagship product, whereas silver and gold are just byproducts.
The next question or, in fact, these are three questions. The first one has been answered, but let me read it anyway. It's from Monika Borkowska from interia.pl. What are your expectations regarding copper prices in the quarters to come? What is the demand from your customers in April? And what is the demand from China?
Thank you for that question. As regards prices until the end of the year, I will refrain from answering this question. Talking about the demand, well, the situation is quite complicated because we have different levels of demand for different products. On the one hand, the demand for cathode copper or rolled copper, we have stable demand level. Apart from local problems with deliveries to Italy, we don't have any other problems. Whenever such a problem arises, we can quickly find buyers, perhaps in other continents. So there are no major threats on the sales side. We've been observing a significant impact of the economic downturn on our sales of lead, especially from the automotive industry, whereas there is a greater demand for copper concentrate. So the landscape is quite varied and depends heavily on which product we are talking about. Overall, we do not see any major threats to our expected sales levels.
And again, one more question to Mr. Gruza, a question from the Polish Press Agency. Your current optimization of OpEx and CapEx, is it only related to KGHM International or also to Sierra Gorda?
Yes, this optimization involves all our international assets.
Mr. Tomasz Józwiak, Radio Elka. President Bugajczuk (sic) [ Chludzinski ] mentioned more intensive works in GG-1. Does that mean that this investment will be launched earlier than planned? And how did you handle the problem of water in that investment?
Well, it's still a lot of time, nearly 2 years, for deepening the shafts. And we have learned that we must have a lot of respect for nature. Today, the dredging works, the deepening works are moving faster than expected. But it doesn't mean that this rate will be maintained. Today, we wanted to report that more successful progress. However, in 2018, we did have a problem with water. As of today, the situation has improved. We have handled the water situation in the GG-1 shaft. So as of today, we do not expect any other problems related to water in that deposit.
The next question, what was the impact of COVID-19 on your costs? Which cost items were mostly affected?
As in connection with the COVID situation, KGHM did some projects requested by the government. And these included ventilators, face masks overalls, medical goggles. But the costs that we incurred will be refunded. So the effect of these purchases on our cost level will be neutralized. However, in connection with the COVID situation, we had to implement some safety measures. And these safety costs and the cost of reorganizing our operations, they are just a fraction of our overall cost. And that's why we do not communicate those costs.
Thank you. And just checking the mailbox. We still received a few more questions. We have questions from e-mail addresses, from mobile phones. But actually, it seems that we have answered all the questions that have been sent so far. If more questions are sent later on, we will respond. And both the questions and responses will be available on our website.
So this is the time to close our video conference and video transmission, where we discussed the results for the first quarter of 2020 in KGHM Capital Group. Thank you very much. Let me thank the Board and the viewers, and see you in 3 months. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]