New strategy of KGHM

The starting point for KGHM’s new strategy was the achievement of goals set in 2009. Key amongst these was to develop the resource base and increase production capacity, which was achieved among others by our acquisition of the Canadian mining company Quadra FNX, completion and com-missioning of the Sierra Gorda mine, commencing mining operations in Deep Głogów, renewing our concessions in Poland and exploring new deposits. These actions, along with the modernisation of our Głogów smelter/refinery, created the potential to substantially improve the effectiveness and efficiency of our operations. The stability of our Group operations is supported by the medium and long-term financing which has been secured and consolidated at the Parent Company level. In addition, thanks to the construction of combined-cycle gas & steam turbine power plants, we have gained greater energy security. In terms of corporate social responsibility, KGHM has maintained on-going support for social, cultural and charitable activities.

“The copper market which KGHM has been active on for 60 years is exceptionally promising. Our strategic priority in the years 2015–2020 is to achieve annual production of 1 million tonnes of copper equivalent and become the seventh largest copper producer in the world. To achieve this goal we are engaged in the largest investment program involving copper mining projects in the history of KGHM as well as the largest exploration campaign in Poland’s history. This will enable us to gain access to some of the largest copper deposits in the world, and will be accompanied by enhanced mining and geological know-how at all levels of management and production. We also want to be a global leader in terms of mining innovation and within 25 years we intend to implement an intelligent mine program,” says Herbert Wirth, President of the Management Board of KGHM Polska Miedź SA.

KGHM’s new strategy is based on three pillars. The first of these is the development of our resource base by increasing resources, searching for low-cost assets, and diversifying our activities. KGHM’s objective is to replace each tonne of mined copper with three tonnes of documented copper re-sources, enabling us to secure our long term ability to operate. Exploration by KGHM will be focused on the company’s current operating regions, and in the case of new mining projects in areas which are geopolitically stable. The company will search for mining projects which are within the first half of the global cost curve, making KGHM more competitive thanks to a lower average weighted cost of producing copper.

The second pillar of the strategy is the development of our assets on time and budget. This priority encompasses development programs in the core production business in Poland and bringing resource projects into production, such as Deep Głogów, Victoria, Sierra Gorda (phase two and processing of the oxide ore) and Afton-Ajax. KGHM’s objective is to standardise management of our projects and investment portfolios by establishing a Global Skills Center for project execution. The transfer of new knowledge to production processes will be possible thanks to the creation of a Knowledge Center and an innovation management model (knowledge and intellectual rights) ensuring access to new technologies and solutions.
The third pillar of the strategy involves ensuring stable production by increasing production capacity to the extent possible thanks to the implementation of modern technological solutions, optimising production processes and organic growth. The priority will be to ensure cost effectiveness, which will be based on on-going improvements on production processes and labor organisation, optimisation of the maintenance program and underground machines management, centralisation of key production processes and the automisation of production. It will also be of key importance to enhance workplace safety by continuing to implement modern safety standards and provide effective training.

The three pillars of KGHM’s activities in the years 2015–2020 are based on four supporting strategies. The global organisation and skills development strategy assumes the achievement of an optimum model for the management and supervision of business processes within the Group. The financial strategy involves ensuring stable financing for the activities of the KGHM Group, enhancing the ability to operate in challenging economic conditions, and supporting development and increasing efficiency. The goal of our corporate social responsibility strategy is to strengthen the position of KGHM as a stable, growing and trustworthy partner, caring for the common good and the balanced management of resources. In turn the aim of the global energy strategy is to ensure energy supplies for our operations, including from renewable resources. A crucial goal is to ensure the possibility of purchasing energy for key companies of the Group in Poland and to secure global power purchases at below-market prices.

In terms of the outlook beyond 2020, KGHM’s value will be based on the development of new invest-ment projects to increase copper production and diversify the products portfolio. This includes the possibility of mining deposits of potassium salts which are used in the production of artificial fertilizers, as well as uranium in order to secure the supply of fuel for the Polish nuclear power plant. New geological resources will be documented thanks to development of the global exploration and evaluation program, whose aim is to identify promising early-stage resource projects, supported by the implementation of modern, low-cost exploration techniques, and to assess new deposits in Poland. The challenges related to keeping costs under control and to efficiently accesss new deposits will require the implementation of innovative technological solutions. Around the year 2020 we intend to implement new mining methods on an industrial scale, around 2030 the mining of deposits using a centralised management system for key mining processes, and around 2040 it will be possible to develop the world’s first mine based on neural networks.

Exploration, investment, innovation – the strategic priorities of KGHM – guarantee growth and enhanced value

•  Production of over 1 million tonnes of copper equivalent: amongst the TOP 7 global mining  companies.
•  The largest copper mining investment program in the 60-year history of KGHM – ensure stable     production.
•  The largest exploration campaign in Poland’s history – access to some of the largest copper de-posits in the world – ensuring operations by KGHM for the next several decades.
•  Enhanced mining and geological know-how at all levels of management and production.
•  Program of global leadership in mining innovation through a unique intelligent mine project over the next several decades.

Basic production and economic assumptions for the Group (reflecting the 55% share in the Sierra Gorda project) for the years 2015 – 2020:

• Production – over 1 million tonnes of copper equivalent from our own resources by the year 2020;
• Share of copper equivalent production from overseas assets – an increase from 17% to 40% in 2020;
• CAPEX – PLN 27 billion in total capital expenditures, of which around 70% will be allocated for development projects, and over half of the capital expenditures will be invested in Poland;
• EBITDA – expected increase by 2020 of 70% as compared to 2014
• C1 cost – planned decrease by 2020 of C1 cash cost of around 10 % as compared to 2014;
• Net Debt/EBITDA will be maintained at a safe level in the range of 1-2.

The Strategy was developed based on the following assumptions:

- average annual copper price in the period 2015 – 2020 of 7 600 USD/t (2015 - 6 800 USD/t);
- average annual silver and molybdenum prices in the period 2015 – 2020 respectively: 21 USD/troz (2015 – 18 USD/troz) and 12 USD/lb (2015 – 12 USD/lb)
- average assumed exchange rate of the PLN versus the USD in the period 2015 – 2020 of PLN 3 (2015 – 3.30).

Strategy of KGHM for years 2015 - 2020

Communications and CSR Department KGHM