KGHM: An unfortunate set of circumstances...
We re-initiate coverage of KGHM with a SELL rating and FV of PLN 79.30 (15% downside) stemming from the negative outlook for 1H-3Q18 results at KGHM Poland, which is suffering from an accumulation of ongoing unfavourable circumstances regarding smelting operations. First, we expect a drop in 1Q18 refined copper volumes manufactured by the Polish division of 20Kt yoy (-15%), mainly on the back of the anodes inventory built up for the HMG II 85-days maintenance shutdown that started on 8th April. Therefore, we forecast 2018 full-year copper production volumes to be around 366Kt and 148Kt from own and purchased metal-bearing material respectively compared to 380Kt and 150-160Kt guided by management in the 4Q17 results presentation. While 20Kt of refined copper production lost due to the 4Q17 recovery boiler outage will raise 2018 available capacity compared to 2017, the 2Q18 planned overhaul of HMGII will take away around 40Kt of smelting volumes, in our view. We also expect negative price effects on realized results. As of 1Q18 the average silver price denominated in PLN is down yoy by 20%. The copper PLN price has remained flat yoy. However, we are concerned about its short-term performance. On our numbers, KGH trades at low 18E/19E EV/EBITDA multiples of 4.6x/4.1x, at ca. 20% and 28% discounts to copper int’l peers which we think is currently warranted due to operational risks.KGHM Polska Miedz is engaged in the mining of copper and non-ferrous metals ore; the excavation of gravel and sand; the production of copper, precious and non-ferrous metals; the production of salt; the casting of light and non-ferrous metals; the forging, pressing, stamping and roll forming of metal- powder metallurgy; waste management; wholesale based on direct payments or contracts; warehousing and storage of merchandise; holding management activities; geological and exploratory activities; general construction activities with respect to mining and production facilities; scheduled and non-scheduled air transport; telecommunication and IT services; and other activities.
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