First 9 months of 2016 – Results Highlights

Highlights

Financial performance

Key indicators9M 20169M 2015Change (%)20152014Change (%)
Sales revenue 13.1 14.9 -13 20.0 20.49 -2
Adjusted EBITDA* 3.2 3.7 -16 4.7 4.9 -4
Profit/(loss) for the period 0.6 1.2 -49 -5.0 2.45 -304

* 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.

  • In the first 9 months of 2016, consolidated profit for the period amounted to PLN 629 million and was 49% lower than in the corresponding period in 2015.
  • The decrease in the Group’s EBITDA by PLN 558 million was mainly due to the fall in the price of copper.

KGHM Polska Miedź S.A.

  • The lower EBITDA by PLN 858 million (-26%) was mainly due to the deterioration in metals prices and to the lower sales volume (due to the planned shutdown at the Głogów smelter/refinery) which was partially offset by the weaker PLN versus the USD and lower costs.
  • Profit for the period of KGHM Polska Miedź S.A. decreased by 23% due to the lower result on sales achieved by the Company.

KGHM International

  • EBITDA in the segment KGHM International in the first 9 months of 2016 amounted to PLN 393 million (USD 100 million). The increase in USD terms by 32% compared to the corresponding period in 2015 was the result of consistent cost discipline.
  • The lower net loss of KGHM International (excluding the results of Sierra Gorda) is the result of improved EBITDA (lower costs due to savings initiatives) and lower depreciation by USD 81 million, mainly due to the impairment losses recognised in the fourth quarter of 2015.

Sierra Gorda (55%)

  • Apart from macroeconomic factors, EBITDA achieved by Sierra Gorda was also significantly impacted by the processing of relatively low quality ore from a transition zone, which impacted the level of technological parameters and as a result the level of metals production and sales, including in particular molybdenum.
  • Apart from operating factors, the net loss was mainly due to the costs of interest on the owner loans granted by the partners to finance construction of the mine in the years 2012-2014. Interest on these loans, charged to the financial result for the first 9 months of 2016, amounted to USD 225 million (on a 100% basis).
  • In the first half of 2015, Sierra Gorda functioned under the project stage, and therefore the financial results began to be recognised from the moment when production at a commercial level was attained, i.e. from July 2015.

C1

  • C1 cost in the Group in the first 9 months of 2016 was lower by 13%, 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 4%.
  • The drop in C1 cash cost in KGHM Polska Miedź S.A. by 14% was mainly due to the weaker PLN as compared to the USD by 5% as well as to higher silver and gold prices.
    Under the metals prices and USD exchange rates of the first 9 months of 2015, C1 cost would have amounted to 1.5 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.
  • In the third quarter of 2016 Sierra Gorda recorded an increase in C1 cost compared to the prior quarter despite 20% higher copper and precious metals sales (Au and Ag). This was due to the lower valuation of by-products, which in turn was due to a decrease in molybdenum sales volume from 8.7 million pounds in the second quarter to 3.6 million pounds in the third quarter of 2016.

Operational performance

Production 9M 20169M 2015Change (%)20152014Change (%)
Copper kt 559 554 +1 718 670 +7
Metallic silver t 900 927 -3 1 285 1 258 +2
Precious metals production (koz t) 171.2 140 +22 205.2 152.7 +34

  • The higher production of copper equivalent from own concentrates in the Group was due to higher production of gold and molybdenum.
  • Production of payable copper and silver was lower due to preparations for the start-up of the flash furnace by KGHM Polska Miedź S.A., and the related build up of half-finished products inventories.
  • The substantially higher volume of precious metals (by 22%) as compared to 2015 was due to the higher processing of concentrates rich in gold by KGHM Polska Miedź S.A. and to higher production by the Sudbury Basin.
  • 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

 9M 20169M 2015Change (%)20152014Change (%)
Copper price USD/t 4 725 5 699 -17 5 494
6 862 -20
Silver price USD/oz t 17.12 15.99 +7 15.68 19.08 -18
Molybdenum price USD/lb 6.43
7.31 -12 14 837
25 548 -42
Exchange rate USD/PLN 3.91 3.73 +5 3.77 3.15 +20

  • Over the last 9 months the Polish zloty has undergone substantial volatility. The zloty has mainly been impacted by the volatility in expectations respecting interest rates in the USA and the value of the USD.
  • The rate of change in interest rate hikes, the struggle for the presidency in the USA and Brexit remain at the center of attention for financial markets. During times of uncertainty precious metals appreciate, and they recorded solid gains in the first 9 months of 2016.
  • The low USD-denominated copper prices are partially offset by the weakening of local currencies versus the USD in developing countries.

Summary

SELECTED FINANCIAL DATA (mn PLN)20153Q'154Q'151Q'162Q'163Q'16% Change
(3Q'16 to 3Q'15)
Sales revenue 20,008
4,800 5,148 3,912 4,544 4,685 -2
Profit/(loss) for the period (5,009)
34 (6,237) 163 135 331 +874
Adjusted EBITDA* 4,710
1,051 961 987 1,075 1,089 +4
Net cash generated from operating activities 4,163
964 770 584 747 949 -2
Total capital expenditures** - 1,006 - - - - -
Total cash expenditures*** 3,939
974 - 935 851 697 -28

* 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.
** Per former segment structure and methodology
*** Based on the new segment structure and methodology and on a change in the presentation formula, from accrual basis to cash basis

C1 Cost (USD/lb)20153Q’154Q’151Q’162Q’163Q'16% Change
(3Q'16 to 3Q'15)
KGHM Polska Miedź S.A. Group, including: 1.59 1.64 1.49 1.39 1.40 1.36 -17
 - KGHM Polska Miedź S.A. 1.47 1.49 1.40 1.33 1.32 1.18 -21
 - KGHM INTERNATIONAL LTD Group 1.87 1.74 1.72 1.48 1.59 1.73 -1
- Sierra Gorda S.C.M. 2.58 2.60 2.56 1.73 1.77 2.19 -16

SALES OF BASIC GROUP PRODUCTS20153Q’154Q’151Q’162Q’163Q'16% Change
(3Q'16 to 3Q'15)
KGHM Polska Miedź S.A.
Cathodes and cathode parts (kt) 294.4 67.8 93.1 50.7 58.5 56.7 -16
Copper wire rod and OFE rod (kt) 264.8 66.7 59.5 65.6 73.7 66.4 0.0
Other copper products (kt) 12.2 3.3 3.4 3.3 3.4 7.0 +1
Total copper and copper products (kt) 571.4 137.8 156.0 119.6 135.6 130.1 -0.1
Metallic silver (t) 1,245 307 376 216.4 328.1 301.2 0.0
Metallic gold (kg) 2,660 687 974 857 751 1,032 +0.5
Refined lead (kt) 30.4 6.3 7.8 7.4 8.2 6.3 0.0
KGHM INTERNATIONAL LTD. Group
Copper* (kt) 98.9 30.9 24.0 22.6 22.0 21.1 -0.3
Nickel (kt) 2.2 0.5 0.6 0.5 0.6 0.5 0.0
Precious metals** (koz t) 97 30.3 26.3 23.0 24.7 21.7 -1.0

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

Group results 9M 2016

CEO/CFO comments

The KGHM Group achieved improved profitability in terms of both operating and net profit in the 3rd quarter of 2016 (versus the comparable period of 2015). Profitability increased despite a slight decrease in sales revenue, mainly thanks to lowering operating costs.

„The increase in profitability despite the tough macroeconomic conditions reinforces the need to maintain strict cost discipline. Our key strategic development projects in Poland are being continued in accordance with our assumptions: ramp-up of the new flash furnace at the Głogów 1 smelter/refinery is proceeding smoothly, which also applies to the Deep Głogów ore access program. At the same time we are approaching the final stage of KGHM’s strategy revision, which will allow us to make business decisions regarding the international assets based on conclusions derived from their audit, forecasted macroeconomic conditions and the projected financial performance of the KGHM Group,” explained Radosław Domagalski‑Łabędzki, CEO of KGHM Polska Miedź S.A.
Stefan Świątkowski, Vice-President and CFO of KGHM Polska Miedź S.A. commented: „The third quarter was the most profitable quarter for the KGHM Group this year, driven by consistency in cost discipline – operating costs decreased by 7% compared to the same period last year – and sales revenues increasing quarter by quarter in 2016.”.