KGHM - Dark clouds gathering over metal prices...
With slower manufacturing growth, reflected in a contraction in the Caixin PMI to 49.6 in September, China's copper imports have been on a decline (-16% in June, -21% in July), and with a high year-ago comparable base for the next three months, considering China’s +50% share in global use, if the downturn persists this is going to hurt sentiment in copper markets. The more bearish outlook is underpinned by the latest prediction of a small copper surplus in 2022 made by Chile’s Cochilco.
Contrary to our expectations, the series of tense pay negotiations that have taken place this year in the Chilean copper sector in the end did not cause major disruptions in mine operations, and, what is more, the impact of the Delta variant of Covid-19 on the industry is not as bad as thought.
As supply pressures build, in the U.S. there is increasing expectation for an imminent asset taper, and the implications of this for global metal prices prompt us to lower our 2022 average price expectations from $10,000 to $8,500/t for copper and from $24 to $20/oz for silver.
From the point of view of KGHM, 2022 will also be a year of rising costs – according to our estimates, next year's annual energy bill might be poised to surge by PLN 335m, accompanied by a PLN 270m increase in costs of labor. With a likely decline in next year’s profit, we believe KGHM might opt to cut the 2022 dividend payout in half, from the 10 zloty per share paid in 2021 to 5zl.
After updating our models, we lower our target price for KGHM from PLN 245.39 to PLN 158.27 and we downgrade the stock two notches to hold.
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.
Set up in 1986, mBank (originally BRE – Export Development Bank) is Poland’s 4th largest universal banking group in terms of total assets and 5th by net loans and deposits at the end of June 2019. mBank has one of the oldest brokerages in Poland – we have been providing brokerage services since 1991 - and the biggest, serving about 300 ths clients.
We provide all brokerage services available in the Polish capital market (i.e. Warsaw Stock Exchange, non-public markets and forex) in a way that meets the expectations of all groups of investors, both individual and institutional. Participating in the dynamic growth of the Polish capital market since its inception, we have acquired competences and experience needed to provide the highest quality of service and we have won the trust and satisfaction of our Clients.
Over the past decade, mBank's Equity Research Team has been consistently ranked among the top research teams in Parkiet's annual institutional investor surveys (Parkiet is Poland's leading daily business newspaper). mBank analysts provide coverage on an extensive list of companies, mainly in Poland but also elsewhere in the CEE region: Austria, Czechia, Portugal, Ukraine and Hungary.
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