KGHM Polska Miedz SA
WSE:KGH
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KGHM Polska Miedz SA
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[Audio Gap] our Results Conference of KGHM for Third Quarter 2020 and for 9 Months of 2020. We are in a unique situation of the pandemic. That's why we have to take all the special precautionary measures to ensure security to all participants, and that is why there are few of us here. And we need to keep social distance. But in order to speak clearly, we would like everyone to keep distance.
And we'll listen to comments from Marcin Chludzinski, President of the Board; Katarzyna Kreczmanska-Gigol, Vice President for Finance; and Radoslaw Stach, Vice President for Production.
Some of the Board members are not present today. But nevertheless, we will discuss all the important aspects of the company's operations over the last 9 months of 2020 or the 3 quarters. And after that, we will try to answer some of the questions. We have received some questions already. And we encourage you to ask questions at ir@kghm.com, our e-mail address, and we will answer all the questions we receive. Some of them today, some of them later in a couple of days on our website. And that has been a standard procedure in the conferences. And there will also be a transcript of our answers provided today.
Head of Public -- our Investor Relations, Janusz Krystosiak, will be moderating the Q&A, but let us first listen to the commentary from the Management Board.
Ladies and gentlemen, well, this is a special situation because I'm in quarantine -- towards the end of my quarantine, that is why I'm addressing you this way.
So the last 9 months have been a difficult time for KGHM for clear obvious reasons, because of the pandemic, the situation that the whole world is struggling with. Good news is that the tough time of 9 months have been quite good for us, relatively good with a record high EBITDA.
Given the circumstances in Poland and abroad, 18% year-to-year, that's the increase in EBITDA, 2020 compared with -- to 2019 and a 2x higher EBITDA in our Sierra Gorda project. So these results are explanatory, and this is mainly due to our efforts of maintaining operational capabilities, continuity and resilience in Poland and abroad. And this is where the main battle has been. This is not the end, we're still -- amidst the pandemic. And to say even more, we are under even higher pressure now compared with the first half of 2020. And it would not have been possible without the good situation on the market in terms of the demand and the prices.
So if you look at prices in September, October and also November, these are close to $7,000, oscillating around that figure, because of higher demand for copper in China and also the optimism related to the vaccine. So the situation on the market in the economy can become stabilized in the long run, so -- that we can have better certainty planning economic development for the future.
We should not forget about capitalization. Our results on the market and our capitalization in September is around PLN 24 billion. And now it's around PLN 30 billion now. So these are significant demands for the Polish Stock Exchange. What has a significant impact on our -- on that amount is the optimism related to the demand for copper and economic growth going forward because of the vaccine, but there are also some other aspects, which will shape the copper market in the nearest future.
So one is a very large free trade zone, which is established in Asia, 30% of the world GDP, 1/3 of the global population, a huge market and huge area. Free trade, also having an influence on the potential for growth in our industry. And there's also green energy trends besides Europe, which we are aware of. China has recently announced plans to become climate-neutral in 2050. And the composition of President-elect Joe Biden's administration also shows that this is a direction in which the U.S. will probably be going large free trade area.
Green energy renewables, not only in Europe, but also as a global trend. These are factors influencing long-term and also the short-term optimism of the market. We can see that by the Chinese import results growing several dozen percent every month. And there are a number of projects in Europe, which will stimulate our market, and including the great green revolution in the U.K. to triple the size of wind farms -- offshore wind farms by 2030 and EUR 5 billion for the automotive industry from the German government. The automotive industry suffered from lower production and experienced a decline. So well, it also has an impact on suppliers to that industry. It's part of our sales. So a lot has been going with a lot of optimism in spite of the uncertainties and the pandemic and its threats.
We have been coping because of resilience and the consistency in our decision-making processes, making decisions quickly and having good teams. And that has been very important. And we're looking in the long run and in the short run with a lot of optimism in spite of everyday battle that we have.
So thank you for your attention. And hopefully, I can participate in person in the next conference. So let me give the floor to Radoslaw Stach and Katarzyna Kreczmanska-Gigol to show the detailed results. Thank you.
Ladies and gentlemen, good afternoon. Let me thank the President for his introduction. Now it's working.
Okay. So let me again thank the President, Mr. Chludzinski for his speech. So let me reiterate some of the things that he's mentioned for quarter 3 in KGHM, that is the coronavirus situation in Poland, in Europe and abroad.
It's very important we have to keep it at the back of our head when discussing and interpreting the results. Another aspect is the macroeconomic situation in China, the U.S., the elections, as Mr. Chludzinski has mentioned, the development -- the directions for development for business, industries in the various countries, we would like to use these opportunities. And also, a good team with our employees, everyone from the shop floor level up to the top management and the involvement of our teams and this -- these -- all these are the reasons why we have recorded such results. They've been very good.
So in this macroeconomic situation -- sober situation has been very good, almost 22% higher year-to-year, which has a very positive impact on our results. And another thing is -- in production results is that C1 costs dropped by 6%. It's important. I will discuss the production in detail in a moment. But in terms of the finances, EBITDA is at a high level. It's at a good level.
Now talking about the results in KGHM Group compared with 2019. It's similar, but lower, mainly because of the assets in KGHM Polska Miedz and KGHM International. So the other aspects related to silver production, well, there is a significant influence of published production there. And I'll also discuss the production of moly and TPMs.
So now the Polish production compared with 2019 -- quarter 3 2019, so the output is somewhat lower. Our policy that we have pursued for 2 -- more than 2 years, we would like to mine less, but with better parameters. So we have succeeded. And so with that percentage in the ore, it's better but it has not translated into the production of copper and concentrate or not as high as in 2019.
Thinking about the electrolytic copper and our smelters, the results are also good, but there was a major overhaul at local [ finance ] smelter plant. It was planned for 3 months, but it's taken 2.5 months now. But with technological progress and a good schedule, we have reduced duration. This will have an influence on the results in quarter 4.
And so well, silver production is important here. Last year, the silver production results were one of the best in our history. We'd like to continue on that trend, but there are also aspects of the silver content in ore and also in third-party concentrate. So that's lower. The percentage is lower. We'd like to be close to last year's result and achieve the project we planned for this year.
Now the stock in smelters, concentrate and anodes and the downtimes when the smelter is down. So concentration divisions are still working. And in quarter 3, you see it's higher compared to quarter 2. It's normal, but it's included in our budgets so that we would like to achieve only the parameter we need to have the necessary stock, not higher than the stock, which is necessary for the operations of our smelters.
Anode copper stock built up in quarter 1 and quarter 2, it's been used and reduced to minimum in quarter 3 to have the minimum necessary stock for any years. So that may happen.
So to sum up the whole production results in Poland, so well, we have the situation of the pandemic. But nevertheless, the results have been good with strong efforts and involvement of all our employees. And it has translated to the positive results.
Sierra Gorda results in quarter 3 have been very good compared with 2019. As we emphasized at our previous conferences, we expect good results from Sierra Gorda, and they have -- it has been delivered. So well, across the board really, year-to-year, we have improved the performance, and we're driving to achieve 130,000 average throughput. And the only thing here is moly, which is lower than compared to 2019. But when we have open pit mines, there are some areas, which are richer in copper, then we have lower moly content. This is why it's difficult to compare 2020 and 2019 in that respect. So to sum up, quarter 3 in Sierra Gorda has been very good.
Now KGHM International. Well, we also have to emphasize, well, the situation in which we work. So one of the shafts at Morrison was closed. So it's making the comparison difficult between 2020 and 2019. So the production dropped. It's related, to some extent, to the Sudbury Area Basin mine and also Morrison. So the parameters now in the ore are lower. So in order to access good layers, good deposits, we have to go through those areas where the concentration -- the percentage of the ore is lower. Now percentage of copper is lower and other metals. That's all natural. But we have achieved the results, which are within the range of our budget for 2020.
And so we have to emphasize the difficult situation here. So in spite of that, we have achieved good results in Sierra Gorda especially, where we were not so much affected by coronavirus situations, [Foreign Language] for all -- to all managers. And similarly in Northern America, good results, really.
Now the financial results. Let me give the floor to Katarzyna.
Good afternoon, everyone. After Radek's introduction, let me move on to presenting our results in purely financial terms. As regards, our revenues from contracts with clients, they were lower this year than in the first 9 months last year. The reduction was 2%, but the largest negative contribution is observed in other revenues from client contracts. And here, the largest contribution was made by KGHM International because the company provided -- or DMC provided fewer mining services.
Other factors that contributed to the PLN 539 million. These include, first of all, lower revenues in national companies, which is directly attributable to the COVID because some of our companies are indeed more exposed to the COVID risk. And that's why the domestic company sector was affected.
We also had a negative contribution from changes in the volume of our basic products. But here, we had a positive phenomenon, namely a more favorable dollar to zloty exchange rate and positive developments in gold and silver prices.
As regards copper price, after the first 9 months, we had a negative trend. But right now, in November, these prices are picking up, which means that both October and November have seen copper prices that were, in fact, larger than expected.
As Radek mentioned, our C1 cost across the capital group, it fell by 6% compared to the first 9 months of 2019. And quite importantly, in the mother company, KGHM Polska Miedz and in Sierra Gorda, C1 fell considerably. There's only 1 segment, KGHM International, C1 went up, but both me and Radek have already presented the results, namely lower revenues from DMC sales.
Quite importantly, at C1 reduction, even if we exclude the tax, the mining tax, that the C1 would still be lower. So it's not only the effect of tax reduction.
Now let's move on to our EBITDA, which is something that is particularly pleasing because EBITDA reflects our core business. So after the first 9 months of this year, EBITDA went up by 7%. And the largest contribution comes from Sierra Gorda, as Radek already mentioned. But also in KGHM Polska Miedz, EBITDA is larger. Only in KGHMI and in other companies, EBITDA is not performing as good as elsewhere. Again, this is the negative contribution and negative impact of the COVID crisis.
In the mother company, please pay special attention to one important thing. The growing EBITDA is attributable not only to factors beyond our control, such as silver and gold prices or foreign exchange rates. To a large extent, the EBITDA growth is due to our cost discipline and the measures we launched last year. So this is an effect of our hard work for the last couple of quarters.
Our net result is lower by 30% compared to the same period of 2019, but let's not forget that the negative change has been caused by the fact that this year, we relied on our reserves and provisions to a larger extent than last year, which eventually reduces our demand for sources of financing and makes our operations more efficient.
As regards costs by type, this is the most important positive change in our net results because we managed to successfully reduce these costs.
Other important factors in our net results include nonmonetary operations. So the cash call that we observed in Sierra Gorda required some fair value valuation. So this is not -- well, this is merely a bookkeeping operation, and we had some value impairment provisions for some of our domestic assets related to the pandemic. So again, this is not a financial spending per se, it's just an accounting operation of foreign exchange rates. And we had a positive ratio of cash to net debt. So we are quite pleased with our performance under the coronavirus situation. We successfully managed to reduce our debt.
So over to Radek. Thank you very much.
Let me move on to our investment projects. We would like to show you our CapEx for the first 9 months of 2020. When you look carefully, you will notice that the missing amounts are only attributable to the fact that this is a quarterly report. We are on the right track. We are making good progress. We also use a lot of subcontractors all over Poland and from beyond. All our subcontractors have been performing well.
A number of important development programs. So the program of discovering new deposits that will ensure sustainable production in the future, then development of Zelazny Most project. All of those projects are going on. We are also adapting our technologies to BAT requirements. Everything is on the right track and going as planned.
Now we want tell you about our power supply development program. Our strategy assumes that by 2030, we will be using our own generation sources, including renewables. We have been asked about the progress. Yes, a lot of things are going on. We are only starting right now, obviously, but we are on the right track.
We have selected our contractor for our PV site in Glogów and Obora. You can see some preliminary drawings. We are doing this in cooperation with ZANAM, which is one of our subsidiaries. So this is part of our strategy to secure our own energy supplies.
So that's it. As regards to third quarter, that's it for me. So thank you. Thank you, Mr. President.
So after these presentations, we will have a quick Q&A session. As I said, all the questions that will not be answered today will be answered later on, on our website. As you already know, we'll do our best to answer your questions in a matter of a few days.
Good afternoon. We have question #1. Mr. Rafal Wiatr from Citi.
Please, could you comment on such a major improvement of cost performance in KGHMI and in Sierra Gorda? Is it a lasting trend?
Mr. President mentioned that, last year, we launched some programs to cut costs. We have dedicated departments doing just that. And hence, cost improvement in Sierra Gorda. And then we have a better production situation. And Pawel Gruza, Mr. President, is doing a lot to keep our costs under control. So these are projects we launched last year. And right now, we are reaping the benefits.
Thank you. Next question, Mr. Jakub Szkopek from mBank.
Is the lower copper and silver content in the third quarter something that should be extrapolated to the following quarters? And if -- will any of the Polish mines become unprofitable?
I understand that this is a question about our Polish assets because, internationally, we have some concerns in Robinson and Franke, where we have some carbides and less copper in the ore. But in Poland, I wouldn't say that this is a lasting trend and copper content will fall considerably. As I said, we have programs in place. We want to constantly improve our copper production. After the first 9 months, we are doing better than assumed. So I wouldn't say that copper price -- copper content in the ore will be constantly falling.
Thank you very much. [indiscernible]
Is current copper production in Sierra Gorda already at the optimum level? Or is there some room for improvement?
Our strategy until 2023 assumes 130,000 as a daily output. We are on the right track. We still don't know what the average output will be at the end of the year. But as we expected, our production, our output has been growing since 2020, and we want to keep it improved. We want to improve it even further.
Another question from the same source. So let me read the question even though actually we have answered parts of it.
So will you confirm that first cash flows from Sierra Gorda to KGHM will come next year or perhaps this year, maybe?
As regards 2020, we don't expect any incoming cash flows from Sierra Gorda, but we know that there will be no outgoing cash flow. So we will not spend additional capital.
Had it not been for the coronavirus and temporary reduction in copper prices in the beginning of the year, then perhaps we wouldn't have sent any money to Sierra Gorda this year. But the COVID and falling copper prices forced us to have the small cash goal this year.
We expect that, in the next couple of years, Sierra Gorda will become self-sustaining in terms of financing its operations, and the next step will be to gradually repay the debt to unrelated companies in the following stage. Sierra Gorda will repay its debt to the owner.
Let me just mention that in the first quarter, for the first time, we had a positive contribution from Sierra Gorda to our consolidated results. That's why we are optimistic about the future.
One more question from Mr. [indiscernible].
When we look at the current growing copper prices, are we expecting any wage increases in Poland and Sierra Gorda, 5% or more?
Wage increases in KGHM, well, we have a system of rules in place agreed on with the trade unions. And wage increases are not tied to copper prices, they are tied to average remuneration in Poland.
In Sierra Gorda, as you remember, last year, we negotiated with the trade unions, and we signed an agreement, so we don't expect any changes here. There will be no surprising moves, I would say.
Thank you very much Patrick [indiscernible], National Investment Partners. What is the CapEx that we can expect in 2021?
As a rule in KGHM, our CapEx is PLN 2 billion to PLN 2.5 billion. That's feasible. We've been doing that for a couple of years, and that's the direction we want to follow.
Skimming through the list of questions, some of them have been answered. Like a question about the expected capital injection to Sierra Gorda this year and in the years to come. We have some more incoming questions. Let me find one.
A question from [indiscernible]. Are you worried about the expected bankruptcy rate, which is supposed to be a double-digit number? Are you secure against default from bankrupting companies?
Well, we've been preparing for that for months or years. And we assumed that in a poor economic cycle, the credit risk will be greater as regards measures we have already contributed sometime -- completed sometime ago. These measures have proven effective as regards our outdated receivables. That's just a fraction of total receivables because our credit risk management processes are top-notch.
We are monitoring the condition of our clients. So we cooperate with insurance companies and business intelligence companies. We keep track of the situation and performance of our clients.
A question from UBS. A question about the number of people infected with COVID. What is the operating risk in your Polish operations? Is it likely that operations will be closed if the infection rate remains high?
I understand this is a question about the third quarter. I wouldn't like to give you any confusing information. I don't have the number on hand. We can answer later on.
And do we think of shutting down our operations?
Well, anything can happen. However, we are prepared for anything. As for today, continuity is not at risk, even with the number of people in quarantine or people who do have virus. We are up and running. But still, we're talking about our results at the end of September.
Let me add that we have a naturally diversified operation because we're not just one mine. We have more locations. So yes, it may happen that production will be disrupted in one of our mines, but at the same time, the others will keep running. But so far, we have avoided this, which is quite important. And we have more than 1 smelting operation, we have a few of them. So we are naturally diversified. As a result, it's highly unlikely, not to say impossible, for the entire mining operations and smelting operations to be shut down at the same time.
I can't see any questions on topics, which we have not covered. So we will be answering your questions as we receive them. So we keep receiving more questions, but because of the safety of -- by the Board members and everyone, we don't want to take too much time. And we will be available, and our Investor Relations department will be available. We will be answering all questions, including those submitted to us after the conference. And in a couple of days, we will find all the answers on our website. Let me thank you very much for your participation. Thank you. Thank you, and goodbye.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]