EUR 20.00 For Business Accounts Only

KGHM – 3Q19E results preview

We remain negative towards the equities of KGHM (Sell + Underweight, 12M EFV of PLN 65.0 per share). We believe that this is clearly not the best time for equity investments in a commodity cyclical like KGHM. Most of the negative arguments which we presented in our previous research reports against the equities of KGHM still remain valid. Firstly, we continue to be disappointed with the Company’s operating cash flows (previously we have numerously pointed out the Company’s very poor EBITDA-to-cash conversion ratios). Secondly, we remain worried about the Company’s ever increasing net debt level, which – the way we see it – is likely to easily reach PLN 8 billion at the end of the year (especially if we include the negative FX translation effects expected in 2H19 tied to strong US$). Thirdly, we are still not impressed by the relatively high level of the Company’s operating costs (rising level of costs of external services, salaries and raw materials (including energy)). But most importantly, we remain bearish towards copper prices which have been rather weak in the past few weeks. It looks like the commodity has fallen victim to apparent signs of progressing economic slowdown and the uncertainties tied to the prolonging tariff war between the USA and China. Ultimately, we introduce more pessimistic macro assumptions which in tandem with expected higher operating costs, lowers our financial forecasts for the Company (both our ST and LT forecast are downgraded).