2016 – Results Highlights

Highlights

Financial performance

Key indicators4Q 20164Q 2015Change (%)20162015Change (%)
Sales revenue 6.0 5.1 17 19.1 20.0 -4.5
Adjusted EBITDA* 1.5 1.0 58 4.7 4.7 0
Profit/(loss) for the period -5.0 -6.2 -19 -4.4 -5.0 -12

* Adjusted EBITDA = profit/loss for the period pursuant to IFRS, excluding income tax (current and deferred), finance costs, other operating income and costs, the share of losses of joint ventures accounted for using the equity method, impairment losses on interest in a joint venture, depreciation/amortisation, impairment losses on property, plant and equipment included in the cost of sales, selling costs and administrative expenses.

  • Consolidated net result for 2016 of –PLN 4 449 million, mainly due to the impairment losses recognised on non-current assets of the Group in the total amount of PLN 5 674 million.
  • After excluding the impact of impairment, the net result would have been PLN 1 225 million and in comparable conditions (after excluding impairment) would have been similar to the level of the prior year.
  • Once again nearly 80% of the Group’s sales revenue was generated by the segment KGHM Polska Miedź S.A.
  • The decrease in the Group’s EBITDA by PLN 44 million was due to the lower result of KGHM Polska Miedź S.A., which was partially offset by the improved operating results of the international assets.

KGHM Polska Miedź S.A.

  • The lower adjusted EBITDA by PLN 612 million (-15%) was mainly due to the lower sales volumes  (due to the shutdown at Głogów I) and to lower copper prices, partially offset by the sale of copper concentrate and to the weakening of the PLN versus the USD which was favourable for the Company.

KGHM International

  • EBITDA in the segment KGHM International in 2016 amounted to PLN 614 million  (USD 155 million ). The increase in USD terms by 60% as compared to the corresponding period in 2015 was the result of consistent cost discipline and to lower impairment of the value of copper inventories in the Carlota mine.

Sierra Gorda (55%)

  • EBITDA for 2015 includes only the second half of 2016, as commercial production began at the end of the second quarter of 2015. In addition, in 2016 work continued on improving flotation parameters. As a result, copper recovery increased by 9% and molybdenum by 23%, which in turn increased EBITDA from a negative -PLN 101 million in 2015 to +PLN 189 million in 2016.

C1

  • C1 cost in the Group in 2016 was lower by 11%, mainly due to an increase in the value of associated metals. Under the metals prices and exchange rates of the same period of 2015, C1 cost would have been lower by 3%.
  • The drop in C1 cash cost in KGHM Polska Miedź S.A. by 12% was mainly due to the weaker PLN as compared to the USD by 5% as well as to higher silver content in own concentrate by 4.6%. Under the metals prices and USD exchange rates of 2015, C1 cost would have amounted to 1.50 USD/lb and would have been at a comparable level to the corresponding period of 2015.
  • The drop in C1 cost in KGHM INTERNATIONAL, despite the lower copper sales volume, was due to lower production costs achieved as a result of saving intiatives.
  • The substantial drop in C1 cost in Sierra Gorda as compared to 2015 is due to the incomparability of periods (C1 cost in 2015 is presented for the period from the start of commercial production from July). In the fourth quarter there was a slight drop in C1 cost as compared to the prior quarter, due to a higher copper sales volume and higher revenues from the sale of by-products, which decreases C1 cost.

Operational performance

Production 4Q 20164Q 2015Change (%)20162015Change (%)
Copper kt 183 194 -5.7 742 749 -0.9
Metallic silver t 307 367 -16.3 1 207 1 299 -7.1
Precious metals production (koz t) 57.7 58.5 -1.4 228.8 205.0 11.6

  • The lower production of copper equivalent from own concentrates, payable copper and silver in KGHM Polska Miedź S.A. was due to the shutdown prior to starting up the flash furnace, while at the same time setting aside inventories of own copper concentrates.
  • The significantly higher volume of precious metals (by 11%) as compared to 2015 is due to the higher processing of purchased concentrates rich in gold by KGHM Polska Miedź S.A.
  • Molybdenum – the significant increase in the volume of molybdenum production is mainly due to the incomparability of reportable periods (production of this metal by Sierra Gorda was commenced in April 2015).

Commodity prices and exchange rates

 4Q 20164Q 2015Change (%)20162015Change (%)
Copper price USD/t 5 277
4 892 7.9 4 863
5 494 -12
Silver price USD/oz t 17.19 14.77 16.4 17.14 15.68 9
Molybdenum price USD/lb 6.94
5.02 38.2 6.56
6.73 -3
Exchange rate USD/PLN 4.06 3.89 4.4 3.94 3.77 5

  • Lower copper and molybdenum prices in 2016 were partially offset by weakening in local currencies versus the USD.
  • Decisions by central banks, presidential elections in the USA and Brexit had a substantial impact on financial market participants. In times of uncertainty precious metals are favoured, and in 2016 these gained in value.
  • Improved expectations regarding the global economy and the fundamental situation of selected commodities led to a more favourable view of the entire commodities market by investors, particularly in the second half of the year.

Summary

SELECTED FINANCIAL DATA (mn PLN)20154Q'151Q'162Q'163Q'164Q'16% Change
(4Q'16 to 4Q'15)
Sales revenue 20,008
5,148 3,912 4,544 4,685 6,015 17
Profit/(loss) for the period (5,009)
(6,237) 163 135 331 (5,078) -19
Adjusted EBITDA* 4,710
961 987 1,075 1,089 1,515 58
Net cash generated from operating activities 4,163
770 584 747 949 1,932 151
Total cash expenditures 3,939
1,218 935 851 697 768 -37

* Adjusted EBITDA = profit/loss for the period pursuant to IFRS, excluding income tax (current and deferred), finance costs, other operating income and costs, the share of losses of joint ventures accounted for using the equity method, impairment losses on interest in a joint venture, depreciation/amortisation, impairment losses on property, plant and equipment included in the cost of sales, selling costs and administrative expenses.

C1 Cost (USD/lb)20154Q’151Q’162Q’163Q’164Q'16% Change
(4Q'16 to 4Q'15)
KGHM Polska Miedź S.A. Group, including: 1.59 1.49 1.39 1.40 1.36 1.49 0
 - KGHM Polska Miedź S.A. 1.47 1.40 1.33 1.32 1.18 1.34 -4
 - KGHM INTERNATIONAL LTD Group 1.87 1.72 1.48 1.59 1.73 1.72 0
 - Sierra Gorda S.C.M. 2.58 2.56 1.73 1.77 2.19 2.11 -18

SALES OF BASIC GROUP PRODUCTS20154Q’151Q’162Q’163Q’164Q'16% Change
(4Q'16 to 4Q'15)
KGHM Polska Miedź S.A.
Cathodes and cathode parts (kt) 294.4 93.1 50.7 58.5 56.7 80.5 -13.5
Copper wire rod and OFE rod (kt) 264.8 59.5 65.6 73.7 69.8 55.9 -6.1
Other copper products (kt) 12.2 3.4 3.3 3.4 3.5 2.8 -17.6
Total copper and copper products (kt) 571.4 156.0 119.6 135.6 130.1 139.2 -10.8
Metallic silver (t) 1,245.0 376.0 216.4 328.1 301.2 343.0 -8.8
Metallic gold (kg) 2,660.0 974.0 857.0 751.0 1,032.0 859.0 -11.8
Refined lead (kt) 30.4 7.8 7.4 8.2 6.3 7.8 0.0
KGHM INTERNATIONAL LTD. Group
Copper* (kt) 98.9 24.0 22.6 22.0 21.1 24.6 2.5
Nickel (kt) 2.2 0.6 0.5 0.6 0.5 0.5 -16.7
Precious metals** (koz t) 97 26.3 23.0 24.7 21.7 25.0 -4.9

* copper in the form of copper cathodes, payable copper in concentrate, payable copper in ore
** gold, platinum, palladium

Group results 2016

CEO/CFO comments

The KGHM Polska Miedź S.A. Group in 2016 limited the year’s decrease in sales revenue to 4%, and in adjusted EBITDA to 1% thanks to consistent cost discipline, maintaining stable production and the uptick in market sentiment at year’s end.

„The KGHM Group once again successfully dealt with another challenging year on the international commodities market. Despite the fall in the average annual USD price of copper by more than 11%, our revenues were lower by only 4%, as a result of increased sales of other metals, and thanks to rigorous cost discipline adjusted EBITDA was virtually stable. The clear improvement in market sentiment towards the commodity sector, which appeared at the end of last year, has given us cause for increased, albeit cautious, optimism to plan for the further development of the KGHM Group, both domestically and in terms of the existing international assets,” said Radosław Domagalski-Łabędzki, President of the Management Board of KGHM Polska Miedź S.A.

The net result of the KGHM Group in 2016 was decreased by impairment losses recognised on the Group’s assets in the amount of PLN 5.7 billion. For the same reason, the annual consolidated net result amounted to -PLN 4 449 million, versus -PLN 5 009 million in the prior year. After excluding the impairment losses on the non-current assets of the Group, a net profit in the amount of PLN 1 225 million would have been recorded for the year, including PLN 548 million in the fourth quarter.

Net debt at the end of the fourth quarter amounted to PLN 7 262 million and was 10.8% higher than at the end of 2015, while the ratio of  net debt to adjusted EBITDA[1] amounted to 1.6. The increase in Group debt in 2016 was mainly due to the minerals extraction tax (in the amount of PLN 1 338 million), expenditures on financing the international development assets and payment of the dividend.

„Reversal of the bear trend in copper in November of last year had a clear positive impact on the revenues of the KGHM Group in the fourth quarter, which together with the actions taken to optimise costs led to an improvement in adjusted EBITDA by more than half, and excluding the impact of non-cash accounting of the impairment losses on assets, we would have earned a net profit comparable to the result for the first three quarters,” commented Stefan Świątkowski, Vice President of the Management Board (Finance)



[1] Adjusted EBITDA reflecting the 55% share of EBITDA of Sierra Gorda, the results of which are accounted for using the equity method.

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