KGHM – Copper Outlook Deteriorates On Trade War Concerns
Rising tensions between the US and China after the threat of new tariffs sent out by President Trump, coupled with theories that China wants to hold off a deal until after the 2020 US presidential elections, have raised concerns about further deterioration in economic prints in the near future. Chinese copper imports fell to their lowest level since March 2018 in June at 930,000 tonnes, down 21% year over year. At the same time, local vehicle registrations in July logged their 12th month in a row of falls, showing an 8% drop from July 2018. This on top of a 10% slump in new lending in July to 1,664 billion yuan. Analysts have been cutting their forecasts for 2019-2020 average copper prices since mid-2018. When it comes to KGHM, the downward pressure is exacerbated by expectations of worsened earnings results for Q2 2019, indicating a continuing downward slide in August in line with a general sell-off in mining stocks, underpinned by a likely downward correction in the prices of iron ore. Global stocks set to be affected by the downturn in metals prices include ANG JS, BHP AU, and RIO LN. The discount at which KGH is usually traded relative to its global peers has narrowed from an average of 20-25% to about 9% in recent weeks, an unsustainable level given the Polish miner's higher C1 production costs, lesser free-cash-flow-generating capability, and below-average dividend yields. After lowering our 2019-2021 copper price outlook to levels consistent with the median forecasts of analysts, and after downgrading expectations as to the USD/PLN exchange rate and the prices of lead, we are forced to cut our 2020-2021 EBITDA estimates for KGHM by approximately 10%. Consequently, we downgrade KGH from hold to buy, with the 9-month price cut from PLN 98.35 to PLN 80.38 per share.
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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