KGHM – Will proposals to use monetary easing work?

Speculators bet on further drops in copper prices, as evidenced by the almost record-high number of short positions. Last week the figure rose to 138 thousand, which is way ahead of the level reported during economic slumps in the past. For comparison, in 2009 the number of short positions slightly exceeded 40 thousand a couple of times, while in 2015-2016 it stood below 45 thousand. In our opinion, the Jackson Hole symposium, where central bankers will gather on 22-24 August, may positively affect investor sentiments toward industrial and precious metals in the short term. Central bankers are likely to hint at using unconventional monetary tools in response to signs of an economic slowdown. In the short term, this may encourage speculators to close short positions, which will spark a rebound in copper prices. Following a large price reduction, we upgrade our recommendation for KGHM from reduce to hold and revise the target price down to PLN 77.51 (from PLN 80.38) based on peer valuation.is expected to harvest 6% less of sunflower seeds in the 2019/2020 season than in the season before. indicating tightened access to seeds for domestic sunflower oil producers. with the ratio of seed supply to crushing capacity expected to drop to 71% from 76% last year. Consequently. on a 2% lower crush volume, we believe Kernel is facing contraction in the FY2019/2020 EBITDA of the Vegetable Oil segment to $99 million from $107 million posted in FY2018/2019. Furthermore, Kernel's Farming business in the season ahead  is also facing downward margin pressure stemming from a 5% lower total crop (due mainly to a lower corn harvest), combined with a 9% rise in costs. As a result, we anticipate a drop in segmental EBITDA from $162m to $97m (ex-IFRS16 effects), underpinned by a lower volume of crops protected by price hedging (16% of total vs. 62% this time last year) despite a recent retreat in grain prices in the wake of mounting trade tensions between the US and China. With 2019/2020 CAPEX budgeted at $300m, after an 11% drop in EBITDA, Kernel is set for zero free cash flow this reporting year, and it faces an increase in the net debt/EBITDA ratio to 2.7x. After adjusting our outlook for weaker expected crush margins, lower hedging gains, and higher CAPEX, we downgrade KER from buy to reduce with the price target cut from PLN 58.63 to PLN 42.70 per share.