EUR 150.00 For Business Accounts Only

KGHM: One step forward, one step back

We upgrade KGHM from SELL to NEUTRAL with a FV of PLN 82.04 (was PLN 79.30) on the back of the metallurgical production rebound and possible 15% cut in the metal tax which may fuel 2019 results in spite of considerable electricity and gas prices increases. We also note that the current macro situation may weigh on copper prices as the outlook for economic activity in China still looks poor mainly on lower PMI readings and the ongoing trade spat with the USA. On the other side, however, we see some pressure on global TC/RC rates which may herald copper concentrate tightness and in effect push metal prices higher since 2019 capacity additions will be rather modest according to the ICSG. Last but not least, although we note that KGHM’s capital expenditures planned for 2018 will most likely drag on into 2019 and 2020, thanks to concentrate inventories processing, we expect rather strong FCF in the next two years. All in all we have a mixed view on KGHM: Although we forecast an EBITDA uplift on a forecast higher copper price and metallurgical production, this is overshadowed by substantial CAPEX outlays. Looking at copper fundamentals we see light at the end of the tunnel as supply additions in 2019 are poised to be modest which in turn may be affected by the ongoing China-US trade row.