KGHM Polska Miedz SA
WSE:KGH
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KGHM Polska Miedz SA
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I think we can get started. Good morning, everyone. I would like to welcome you at our today's meeting dedicated to the presentation of KGHM Polska Miedz Results for the third quarter of 2018. Today's meeting will be chaired by our Vice President for financial matters, Katarzyna Kreczmanska-Gigol; Vice President for production, Radoslaw Stach; Vice President for [Technical Difficulty] [ Adam Bugajczuk ].
We would like you talk you through the presentation part of our operating results. Our operating results will be presented by President and staff, economic results by President Katarzyna Kreczmanska-Gigol and initiatives and projects will be presented by [ others and ] Adam Bugajczuk.
After our presentation, we will invite you to ask questions. Questions can also be asked online. There is also streaming -- video streaming and after the meeting, we'll be available to you and I give the floor to the President right now.
Ladies and gentleman, before we move on to the presentation of the third quarter results as well as result of the 9 months, I would like to say that after third quarter, KGHM group stays within the budget, both in production terms and financially.
Let me focus now on our project of the 9 months program of making available the deposit for metallurgy development construction of the -- building our furnace on [ agritov ] plan to our plans for remelting in the future of copper, everything [ moves on in the quarter ] for the land development of the Iron Bridge. Things that are future-oriented for KGHM related to storage of waste also the development of Southern Quarter. After a round of consultations with international experts, who evaluated our activities within the investment as very professional and very well account. [ We will now proceed ] our growth our most important foreign assets of 130,000, 140,000 processing. These are the things that I will dwell on when presenting the following slides, but this is a signal just now that we are on schedule and in line with our assumptions.
Our production results after 9 months, production of payable copper for the third quarter this year is lower by 7% than last year, which follows from the budget which was adopted for this year rather than from the refurbishment shutdown of the furnace, which is again something I will discuss later on.
This is the result of our discussions that the budget is lower and very much linked to this 3-month shutdown. We also present our results and EBITDA. Again, these numbers are lower but that is planned and linked to the structure of our budget.
The following slides concerning production of payable copper and comparison of the third quarter 2017 and 2018. Here are the same levels, slightly lower, minus 7% after 9 months. This is due to lower production at KGHM international Sierra Gorda and that is also something that stems from lower content and deposit molybdenum platinum, that is why the result is lower after 9 months, as you can see in the slide.
As regard production of other metals, that is silver, molybdenum and the accompanying metals. We present here the detailed breakdown. After 9 months, silver is lower, even though the numbers are higher quarter-to-quarter.
That stems from copper production levels because silver accompanies copper production and is contained in our ore so there is a lower quantity of silver. There is -- that translates into molybdenum. That is why the results are worse than in 2017.
Molybdenum and other elements that is related mainly to the content levels, as we indicated in the budget. And this is also the consequence of what we included in the budget. Another piece of information concerns stock of copper ore and there is the copper concentrate.
We adopted certain schedule of utilizing our stock up. Please note, quarter-to-quarter, we are 20% lower, which is in line with our assumptions. We are also very optimistic about the results expected, so at the end of the year, we should utilize more of this stock than we assumed in the budget, which is very positive. At the same growth of [ amidine ] copper also in Glogow, we have some planned shutdown that is related to the critical maintenance.
Now I'll give the floor to my colleague.
Ladies and gentlemen, as we announce economic results I would like to draw your attention above all to the fact that with regard to revenues of the capital group after 9 months compared with last year, we recorded 2% growth.
What does it result from? We saw a change in the price of our core product and this change in price was positive. However, this change was offset by an unfavorable development in exchange rate.
So leaving aside those 2 factors, we can now look at that with regard to sales volumes, these volumes were lower but again this was offset by sales of concentrate and a growth in DMC revenues in connection with the contract that is performed in the U.K. And revenues increased by 2%.
As regards per unit costs, in the entire group, the C1 unit cost was higher than in the comparable period last year. It was higher by 18%. But if we look at the structure, the principal driver of that growth in this cost within the group was C1 growth in the mother company, that is KGHM Polska Miedsz.
This growth was significant because it stood at 32% and the growth of the C1 cost was mainly driven by the strengthening of the Polish currency compared -- with reference to the U.S. dollar and an increase in cost by type and lower production on concentrates.
At the same time, during the 9-month 2018, we saw a decrease in C1 costs within KGHM International. This decrease was up 6%. Also significant decrease in C1 costs at Sierra Gorda by 30%. This downward development at Sierra Gorda was caused by higher prices of molybdenum, although in terms of volume, the molybdenum sales dropped, prices grew by so much that the revenues from the sales of molybdenum were higher.
As regards operating results of our group, EBITDA was 11% lower than EBITDA after 9 months 2017. The principal reason for that was an increase in operating costs, where we recorded an increase in the cost of coal operations as well as a higher tax on minerals as compared with last year.
This impact was to some extent offset by higher revenues and a change in the EBITDA for Sierra Gorda, which was higher than last year. And these are the key factors. The bottom line is that EBITDA is lower by 11%. As for the net result, it is lower than after 9 months 2017, lower by 41%. The core factors behind this development include lower EBITDA due to operating costs, provisions that were established, the result of the exposure of the group to joint ventures and consolidation adjustment for Sierra Gorda EBITDA.
The other factors included depreciation and other consolidation adjustment. We also had other factors which had a positive impact, exchange rate differences and change in the corporate income tax, which is lower.
So the final result is lower by 41%. As regards cash flow, the status of cash flows at the end of the third quarter was -- the level was higher by more than PLN 200 million. This was caused double by positive cash flows in operations, but on top of that, we had some investments, which caused negative cash flows on investment activities by over PLN 2 billion.
So finally, this caused an increase, in fact, the increase in debt was driven by the fact that the difference between the investment CapEx and operating revenue had responded to that. 1.6 was net debt to EBITDA ratio at the end of the third quarter, so we are in line with the budget and also with our targets because our targets was that this particular ratio should be below 2.0. So 1.6 is adequate.
Now cost of borrowing. Given the fact that our debt was higher than during the same period last year, our financing costs were higher. And net debt of the capital group was up by $135 million as compared to 2017, which the -- which is PLN 862 million.
So to summarize, we may say that in terms of liquidity position, debt is good. Our debt ratios are in line with whatever was planned in the budget. Thank you.
Now let me move on to our macroeconomic environment. And I would like to comment on the compare prices of copper, silver and molybdenum. While these prices are important to us because they have direct impact on our the financial performance. Higher price of copper compared to last year but exchange rate as dollar to zloty was a little bit to the downside.
And molybdenum has been going up. We are watching the global markets, and we are tracking the global inventory. We can tell from the chart that the global inventory is actually going down and, therefore, we are optimistic about the prices of copper in the future and the prices of copper cathodes in China make us optimistic about the future prices.
And in summary, I would like to highlight main production items for international, for Sierra Gorda and for KGHM Poland. As you can tell, we are everywhere around 75% so this is what we are expecting after 3 quarters. We have lesser production of all the associated metals, and we have reduced production of copper and maintenance but this is due to the lower content of copper and other elements in the ore.
Therefore, the results that we are showing are not as good as we anticipated, however, the August and September, showed better production at Sierra Gorda, which brings us back to the budget. So despite temporary shortcomings, we are very positive about delivering the budget for international and Sierra Gorda.
Now main activities that are planned for 2018, and here, I would like to highlight the launch of the concentrate roasting installation. This is the last stage of our investment in the Glogow Smelter. We've already run 2 tests on the existing installation. The technology test disclosed certain errors that had to be mitigated.
We are looking forward to the third round of tests, and we are looking forward to launching the concentrate roasting installation because it will help us build a better performance at Glogow.
In terms of international operations, we are debottlenecking Sierra Gorda mine. We are very much focused on delivering that. We are on plan and on the budget. We want to deliver 140,000 in production next year. Next year, we want to have 130,000. And again, the outlook is very positive. And the next slide will be commented by Mr. Adam Bugajczuk.
Well, as our CEO said at the beginning of the presentation, all the key investment projects are going as planned. Everything is contracted and there is no risk that delivery may not happen. This is mostly about the industrial Glogow ore deposit and the Zelazny Most expansion, and we also have work going on, on our RMR furnace. So all the key projects are progressing as scheduled.
And there is of the strategy, as we communicated earlier, we are doing the review of the existing strategy and by the end of the year, we will provide you with the update on the revised strategy.
The next slide presents the liquidity of the group also broken down into cost per unit. Currently, the cost level is as planned and the investment budget is delivered as planned.
Now net profit to EBITDA is also at a very safe level -- net debt to adjusted EBITDA.
Now let me comment on key domestic projects. For mining operations, Deep Glogów is the key project. This is our deep deposit. On the left-hand side, you'll see the gray bars, which show the trench compared to Q3 2017, we were up, which means that the progress is underway, and we are producing from that deeper deposit.
So it is happening. As we promised, we are delivering and this is a positive thing. Now in addition to that, we continue to build the GG-1 shaft and we also work on the Surface-based Central Air Conditioning System. We are also working on the extension of GG-2 shaft. This is the future of our company.
We are looking forward to 2034 and 2036, so long-term planning positive news for the developments for KGHM in the future.
But as we said, we are closing the final stage of the furnace at Glogow, Flash Furnace at Glogów, and we are also starting our roaster and as the CEO said, we are very positive and optimistic about having the successful launch of these operations.
Now we also have a range of different projects that are underway to bring us to compliance with the BAT directive, and we included emissions of arsenic in this scope. And we have a number of projects that will help make sure that our emissions are not as harmful to the environment as they could be.
And finally, let's have a look at the key international projects. First of all, Sierra Gorda mine and the production of mine -- of copper for the last 9 months, 69,000 tonnes, molybdenum 19.5 million pounds and the most important thing is to continue the debottlenecking program where we want to remove the bottlenecks that are affiliated with the processing operations.
This project is underway and again, it makes us very optimistic when we look into the future. Sierra Gorda oxide is the next project and this oxide processing project is at Sierra Gorda. Now Victoria and Ajax are currently under review. We are revising certain underlying assumptions that we made for those projects. The macroenvironment situation is evolving, therefore, when we are presenting results on the next occasions, it will be a good opportunity to keep you updated on the plans regarding these projects, but please bear with us because we need to complete our review.
Thank you very much for your attention, and thank you.
Well, thank you, and the floor is open for questions.
Pawel Puchalski, Santander. On Slide 24, you're showing how much capital expenditure you had this year. Would you please comment why we have such a poor delivery and why is this level so low? Did you give up on some projects? Or are you able to halve your costs on the projects that are going on?
I'm not -- can you show yourself, please. Oh yes, here. Well, to answer your question, let me say right away that no development projects have been put on hold. You're asking about certain costs. Well, those costs are lower than anticipated because some schedules were shifted or there were some financial discussions. We thought it would be 100 million and then we were being able to get the same product or service for 50 million, well the product is delivered but the product is not fully delivered. But all these projects that we mentioned, that and others, are multi-billion projects. Therefore, whenever the schedule is shifted, it may impact the delivery of the CapEx, but we are very optimistic about the ongoing delivery and in our annual report, we'll be able to provide you with the full report on the delivery. But the most important thing is that we are not stepping down from anything. So this is mostly about shifting in time. So we simply do not see CapEx in Q1, but it will be coming up in Q4 and later on. Yes, but it may be very well the case, but we are not going to deliver 100% of the CapEx. It's not that we are going to show the full burden for Q4. As I said, this is partially due to our financial negotiations and shifts.
Okay, KGHM International, OpEx was going up strongly in Q3 and that was not driven by reduction in inventory because your production was equal to your sales. So my question is whether Q3 is really representative for next quarters to come?
Well, we would have to review the whole budget, and we would have to scrutinize all the underlying assumptions. As a matter of fact, the first half of the year was more optimistic in terms of production. The second half of the year was more pessimistic. I don't want to explain why it happened like that given the budget structure. But in terms of our production, July, August, September were very positive and Q4 is still underway, but I might say that we expect to deliver the budget for the year at Q4. And any partial nondelivery can be due to the content of metal that we have in the current ore.
Okay, the third question is about Sierra Gorda. You said that you are very optimistic about delivering the annual budget, given the Sierra Gorda volumes and that would be a major accomplishment because Sierra Gorda has been lagging behind after 3 quarters. Therefore, I would like to have an explanation, how come that you can make such a leapfrog, either in technology or ROIs, just within the 3 months.
Well, I'm sure that you have come across the opinion that we keep saying we are working on improvements. We are fine-tuning things here and there. We are trying to get in line with the characteristics of the deposits that we are working on. The zones are being shifted a bit. And it is true that from July, we have been managing that deposit in such a way we were able to start the actual delivery as promised. Therefore, I'm very optimistic. I would never say that we are going to overdeliver, but I think that it's very likely that we will deliver. Why? Well, because we have been doing a good job on Sierra Gorda and also like things that we've done in the past, we see the increment and all the financial investments and all the CapEx that went to Sierra Gorda has to start working and it is paying off. So next year, 130,000 and 140,000 in 2020, in my opinion, is likely to be delivered.
Pawel Wieprzowski, Wood & Company. I have a question about CapEx. What can we expect? What portion of those projects will be shifted to the next year? Out of those projects, which are delayed, can you give us any guidance about your CapEx plans for next year? The second question is about Sierra Gorda, what are you planning for the upcoming 2 years? And with regard to debottlenecking, how -- what is going to be the split of copper and molybdenum?
I would start answering with -- stating that 140,000 tonnes is our target. Our principal objective for -- to achieve by 2020. We assumed 130 level for processing and a lot of things have already started. Further development will depend on macroeconomic environment but any financial shifts can be discussed at the end of the year when we know more exactly where we are and what financial setting is like.
Jakub Szkopek, mBank. I have first question regarding the assumed level of concentrates and inventories for the end of the year.
Let's talk of concentrate -- copper and concentrate. Okay. The inventory of concentrate results from the failure of furnace and copper plant at Glogów. We have a schedule that indicates our processing capacity and we are proceeding in accordance with the schedule. This is a [ political ] development. We have plan of how to envelop it because [ that as well ]. The money is frozen and this inventory on Glogów is up from planned downtime, which was calculated in accordance with what we need in order to ensure smooth production without slowdowns or stoppages. And this inventory level will serve us to achieve the parameters that we assumed for next year.
Be more specific about my question. Is it possible to go down to a technical level of about 15,000 tonnes of this inventory concentrate and also for 10,000?
Technical inventory for let me -- 10,000 -- 60,000, so 50,000 doesn't fit to other numbers. I know we're up. According to my knowledge, this is a level we're going to achieve by 2020. And for ML3, adjusting our plans to the timing of the refurbishment, we are continually in touch with our sales division. And at the end of the year, we'll be able to give you more accurate indication. But we are now in line with our plans.
And the last question regarding Sierra Gorda because I feel that there is somewhat more optimistic news from you regarding the future of this mine. So at the end of the year, you are going to calculate the value of this company and possibly reverse the impairment write-off that you had recently.
Well, as of now, we are waiting for the closure of the year. We are waiting for December, and we will inform you of our decision at the end of the year.
Once again -- I am sorry for not asking this question first of all. What do you expect this MET to be like for next year? Do you expect this tax to be reduced? Or it will it simply be reallocated between the state budget and local budget?
As of now, we have an announcement from the Ministry of Finance that 5% can be down to local governments. And this is what we have until the Ministry of Finance makes official announcements concerning this mineral extraction tax indication. So before we have more accurate guidance, we won't be able to give you any more specific information on this subject.
Jakub Szkopek, Dom Maklerski. I would like to ask you about the expectations concerning energy, CO2 and salaries for next year. KGHM is the largest recipient of energy in Poland as of now. Everybody knows that. We 151 -- implementing 151 program, which is aimed at replacing our existing equipment with more energy-efficient ones.
At present, we are holding talks with the Ministry of Energy and until those increases are specified, it is very hard for us to give you anything more concrete.
When can we expect some more concrete information?
I think at the end of the year.
Are there any other questions?
Robert [ Mikoka ]. I would like to ask about the level of production of copper on the Polish asset next year. Could you try to quantify that from your own input?
Well, the plan for next year is higher than this year's, both in the production of copper in mines and in Legnica, Glogow, we want to reach 92%, 94%. So the plan is higher than -- for this year, and we will show you details at the end of the year. But the general information is this is higher.
And the second question regarding the cost level at Sierra Gorda, it changed significantly quarter-to-quarter. There was also a change in molybdenum and apart from byproducts being lower, the cost base grew organically in the third quarter. What was the reason for that?
The costs generated in Sierra Gorda like in Poland is the production level. If the production goes down, and that was the case for molybdenum. If the production is not really on track, the same goes for copper and that entails changes in costs. We are working in fact all the time in order to see a positive impact on the costs next year.
If there are no other questions, I would like to look at the questions asked online. And here, there are some points that have already been brought up here, questions about the forecasts, expected increases in prices, in particular, for energy. We have already addressed that. We have also talked about this mineral extraction tax and the other questions have already been answered. Maybe I will read one more: Costs for C1 -- C1 costs in Poland quarter-to-quarter went down but only during the time of normalization of production. What were the main drivers of cost increase?
I would like to reiterate the principal C1 cost driver for copper production in KGHM, in general, is production. Production is lower than last year and C1 was lower and why do you have this cost has to be higher. If we keep production as intended, it's over in terms of machinery, quantity, no changes introduced but production changes because there was this planned downtime in Glogów. Hence, there is the cost surplus, I wouldn't really look for any extra factors, which could significantly contribute to that. Maybe my colleague would like to add something.
I would like to mention changes in the exchange rates. This is something I briefly referred to when discussing C1 costs. Unfavorable change in exchange rate also pushes up the C1 costs.
We have already mentioned this, but maybe as a reminder, to respond to the question asked by UBS about our expected timeline for a strategic overhaul or strategic review. As regards our strategy, after the presentation of our results after 2 quarters we said that we would work on it and that is our strategy. Now we are working on the strategy. We would like to revise it based on the existing macroeconomic environment, make it more realistic in the context of this macroeconomic environment. And by the end of the year, in December, we will present you this updated strategy.
If there are no new questions online, maybe there are some more in the audience. No? In that case, thank you very much. We are available for any questions after this meeting and also we will be in touch with those who contact our Investor Relationship office. Thank you very much for today's meeting and pleased to invite you to the next one.