KGHM – Earnings Potential Undercut By Negative Economic Forces
As copper inventories in exchange-monitored warehouses continue to climb (stocks have doubled since mid-January) amid curtailed business activity in Europe and the US (between them, the two regions account for about 20% of global copper consumption), prices in global markets are expected to stay low at least through the end of June. The 2020 estimated median unit cash cost of copper production is currently about $3,860/t, but the cost to open pit mines, the dominant source of the metal, might be closer to $3,500 after falling 10% from last year, owing to lower costs of crude oil. KGHM is not a beneficiary of this, with its production costs determined largely by prices of electric power - at the current rates the Company is a third quartile producer on cash costs. Another factor affecting KGHM's earnings prospects is a downward correction in silver markets, underpinned by a slowing manufacturing activity (the manufacturing sector accounts for 40% of total silver consumption). After cutting our 2020 price projection for copper from an average $6,000 to $5,000/t, and after revising the expected silver price downward from $18 to $15/oz, we currently expect KGHM to post EBITDA contraction as high as 40% in 2020. With this in mind, we lower our target price from PLN 76.92 to PLN 46.83 per share, and we downgrade KGH from hold to reduce.
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.
Clients get access to a comprehensive selection of research products including daily market insights, monthly roundups, macroeconomic views, industry- and company- specific analyses, investing strategies, earnings comments, etc.
We give our institutional clients numerous opportunities to connect with industry professionals, top executives, and leading analysts:
- Get direct access to senior management teams at listed companies (over 30 meetings in 2018),
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- Stay informed through an array of enlightening discussion panels, workshops, and briefing sessions with regulatory officials.
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