KGHM financial results after three quarters of 2014

Mines of KGHM in Poland in the first three quarters of 2014 produced 320,000 tonnes of copper in concentrate, which was a similar level to the parallel period last year, when production amounted to 325,000 tonnes. Ore extraction reached 23.5 million tonnes, of which nearly one-tenth (209,000 tonnes) came from the “Deep Głogów” area, where production started in April 2014. At the same time the production of electrolytic copper increased by ca. 3 percent and silver by ca. 8 percent, which was the result of increased processing both from own and external concentrate. Production throughout the group, which also includes mines in the USA, Canada and Chile, stood at 603,000 tonnes of copper equivalent during the first nine months of 2014.

The financial results in the first three quarters were affected by a decline in copper and silver prices, as well as an adverse change in the USD/PLN exchange rate. Copper prices fell 6 percent and silver – as much as 20 percent in year-on-year terms. USD/PLN exchange rate fell during this period by 3 percent, but the signs of slowdown in the Polish economy, due to the situation in the Eurozone and restrictions in the trade with Russia, as well as relatively better prospects for the US economy translated into the strengthening of the US dollar against the Polish zloty in the third quarter.

-In the light of challenging macroeconomic conditions we have taken measures that have brought visible benefits to the company and its shareholders. In the segment of metallurgy both electrolytic copper and silver production is higher than in the previous year, and by the end of the year it is possible to slightly exceed the projected volumes. This in turn has a direct impact on sales levels and allows us to limit the effects of lower metal prices on global markets. As a consequence, our plans regarding 2014 financial results remain valid,-said Herbert Wirth, President and CEO of KGHM.

The impact of unfavourable macroeconomic environment was also partially offset by cost discipline. Costs by type for the three quarters of 2014 amounted to PLN 9,814 million and were 6 percent lower in year-on-year comparison, primarily due to lower cost of heat and electricity, as well as planned reduction in the scope of preparatory works. The increase was in labour costs and taxes, including the tax for the use of mines and the mining fee. The formula of calculating the mineral extraction tax, which is excluded from the deductible, has not changed. As a result, the effective rate of corporate income tax paid by KGHM is higher by more than half than the nominal tax rate and is nearly 28 percent.

-In the first three quarters of 2014 we were able to reduce costs by PLN 87 million, not taking into account the mineral extraction tax and external copper-bearing materials. Our analysis shows the unit costs of copper production would have been 4 percent lower than last year if we had last year’s market conditions. Simultaneously the increase in production translated into 7-percent lower pre-precious metals unit costs of production from our own concentrate. Although it was possible also thanks to a lower mineral extraction tax, the impact of this tax on KGHM’s business – especially in the area of investment – remains negative. This is particularly important due to the fact that more than one-third of investment in KGHM are development investments,”  - said Jarosław Romanowski, Executive Vice President & CFO of KGHM.

In the third quarter of 2014 the copper production was launched in KGHM’s Sierra Gorda mine in Chile. On October 25, the first ship carrying ca. 6 tonnes of copper concentrate from Sierra Gorda mine left the port of Antofagasta. Currently, the works are undergoing on the second stage of investment, especially focused on the infrastructure development related to the processing plant. Progress has also been observed in mining projects located in Canada, Victoria and Afton-Ajax. In Poland, works continued on the construction of the ventilation shaft GG-1 and on the production of electricity and heat from a highly efficient cogeneration gas-fired CHP units in Polkowice and Głogów. The opening of the two blocs took place on 3 November 2014.