Polish mining giant KGHM Polska Miedz S.A. (KGHM) revealed a challenging financial year in its latest earnings call, marked by a drop in revenue and a significant net loss. CEO Andrzej Szydlo emphasized the company's long-standing experience and ownership of substantial copper deposits, but acknowledged that production difficulties, particularly at KGHM International and its Sierra Gorda and Robinson mines, had impacted results. Despite these setbacks, KGHM's domestic production in Poland reached record highs for electrolytic copper and silver. The company is now focusing on optimizing costs, revising its strategy, and investing in new projects to maintain production levels and address rising costs.
Key Takeaways
- KGHM experienced a 1% decrease in revenue, totaling €3.467 billion for the year 2023.
- Adjusted EBITDA fell by 41% to €5.362 billion, and the company reported a net loss of €1.153 billion.
- Production of payable copper was down by 3% from the previous year, with international operations seeing significant declines.
- Domestic production in Poland achieved historical highs in electrolytic copper and silver.
- The company is reviewing its strategy and investing in new shafts and renewable energy projects to combat rising costs.
Company Outlook
- KGHM is revising its financial outlook and strategy, with plans to present them for approval by the end of the year.
- Investments in mining, maintenance, and development projects remain high, with 98% of the €3.474 billion budget achieved.
- The company is focused on long-term copper production at the lowest possible cost.
- KGHM is considering various options for renewable energy sources to secure cheaper and more diverse energy supplies.
Bearish Highlights
- KGHM International's production decreased by 30% due to difficulties in the Robinson mine.
- Sierra Gorda's production was in line with the budget but 13% lower than in 2022.
- The equity for Robinson mine was 29% lower due to lower metallic content and machinery availability issues.
Bullish Highlights
- Domestic production in Poland set records for the production of electrolytic copper and silver.
- The management is considering financing capital expenditure through the capital market, including bond issuance.
- KGHM aims to generate 50% of its energy from its own resources by 2030 and is exploring various energy sources, including offshore projects.
Misses
- The company experienced a net loss of €1.153 billion, influenced by noncash write-offs.
- KGHM did not buy a 45% stake in Sierra Gorda when offered by Sumitomo, missing a potential investment opportunity.
Q&A Highlights
- KGHM will inform investors about the possibility of paying dividends in the coming weeks.
- The Victoria project is in the advanced exploration phase, and investment decisions will be made in the future.
- The company plans to maintain its guidance on energy costs for 2024 despite market volatility.
- The next earnings call is scheduled for mid-May to release Q1 2024 results.
KGHM Polska Miedz S.A. faces a challenging market environment but remains committed to its long-term strategy and operational improvements. With its focus on cost optimization and strategic investments, KGHM aims to navigate the complexities of the mining industry while maintaining its position as a major player in copper production.
Full transcript - None (KGHPF) Q4 2023:
Janusz Krystosiak: I think now you can hear me very well. Maybe that was a good sign. But for the first time was not had. I would like to welcome the record on the everyone who is here with us in Warsaw and those who are following our broadcast today via our website. Our today's meeting will focus on discussion of the results that were published yesterday. These are operational and financial results of the KGHM Polska Miedz for 2023. And it is also an opportunity for all those following the transmission discussed with the management board, the prospects for the company, the current situation and the plans. I would like to introduce members of the Management Board, Andrzej Szydlo, President of the Management Board. Zbigniew Bryja, Vice President of the Management for Development; Piotr Krzyzewski, Vice President for Finance; Miroslaw Laskowski, Vice President of the Management Board for production. And Piotr Stryczek, Vice President of the Management Board for Corporate Matters. My name is Janusz Krystosiak. I have the honor of hosting today's meeting, and I already invite you to participate in the Q&A session that will follow the presentation. Now, I would like to give the floor to the CEO.
Andrzej Szydlo: Good afternoon, ladies and gentlemen. Before we proceed to the presentation and discussion, hopefully, the best possible atmosphere, the results of KGHM 2023. I would like to start with a general background about the company. KGHM, against the backdrop of other metal producers can boast a few advantages. Maybe not huge advantages, but, let's say, a few characteristics that make it unique. The first of this characteristics is people and experience the history of KGHM is over 60 years now. On the 1st of May, we will celebrate somewhat arbitrary anniversary of 33 years of operation of KGHM at the market. Another characteristic of KGHM is that it owns its own copper deposits. And third characteristic, a very important one is we are an integrated technological operator. A lot of producers of metals only have certain assets. They do not own the full value creation chain. We have modern metallurgy, and we can provide a complete end-to-end technological process. Janusz Krystosiak presented our names, but I would like to give you a somewhat broader introduction about the management board. Probably, we have some questions. We are a new management board. We have been working with a team for a month and a half now only. However, I would like to highlight that it is a great honor for me to work with set colleagues. First of all, I have never dreamt of becoming the CEO of KGHM. And more importantly, I couldn't have a ramp of a better composition of the management board. We have managers of mining industry, and it's a great honor to work with Mr. Byrja and Mr. Laskowski for years, I have worked with them as my directors. And I looked up to them as mentors. Mr. Krzyzewski has got the shortest tenure with us, but I would also like to say a few words about him. Sometimes I'm scared by the pace at which he learned the details about this company. Even if his knowledge becomes much more profound than ours, that's only the best for the company. Mr. Stryczek, Vice President for Corporate Matters, as a person with vast experience management. Additionally, I have known him for a number of years, and I can call him a friend. Talking about those advantages characteristics of KGHM that I mentioned at the beginning, I can emphasize once again the huge experience of my colleagues. And before I present the results, I would like to stress the long history of over 60 years of operations. I used to play chess, maybe not as a nominal trust player. But when we talk about life of mine, how long mine can operate? We can safely say that KGHM is somewhere halfway. So by analogy to test gain, we can say that we are in the middle of the game. We are in a very complex volatile environment, just as was the case in 2023. We also have a lot of things that may change if somebody wants to say that after 60 years, you should expect an end, I think that's a very inaccurate assessment because KGHM still faces the future of several dozen years of set exploitation of its own resources. We have a lot of companies across Europe. I will not enumerate the names in here. The use in the metallurgical production foreign input at KGHM provides 2/3 of national production using its own resources, its own concentrates or it's on output. Again, by analogy to a chess game, we as the management board view the company and assess its performance, not with the time horizon of a single year or 2 years, we take a much longer line. Realistic investment plans or investment strategies are normally developed 5 or 10 years ahead. But of course, all that is now bearing in mind the uncertain factors that always can modify the situation. Nevertheless, we are optimistic about the future. This company, which is now at the middle stage of its life time, of most mining companies has to face an increasingly difficult operational conditions. There are a lot of miners that operate open pit mines. KGHM Germans domestic assets has deep mines. And we can expect natural but mining operations regardless of macroeconomic situation will not be easier as the turn passes. We will have to go deeper and deeper, delivery lines will be longer and longer. Grade of deposits can be debatable depending on which area we are discussing. But we have to be mentally prepared for lower grade. And that actually is related to costs of air conditioning, ventilation, other technological processes. So now the Management Board sees its role as having to deal with a task of reversing the current trend of counteracting the costs that continue to grow across the mining sector. KGHM has a long-standing and unique experience in mining. And we also have to draw on this experience to find new areas for optimization, to offset any cost fluctuations in the areas where there are no natural factors that could drive those costs. We have already managed to become acquainted with the strategy that is currently in place. If we consider a strategy as a set of long-term goals, we will proceed to revise the existing strategy with particular attention to core business that is metal production. And the primary objective of our strategy which I'm convinced we will be able to flesh out soon will be set projects and such management activities. That will allow us to complete efficiency-improving projects that are adjacent to our business -- that are aligned with our business and that always linked to a positive NPV. This is an essential condition to support our core business, that is metal production. We will inform you about further details once we are ready for that. Now, only a general introduction. Ladies and gentlemen, let's proceed with the results for 2023. The details will be commented on by each of the specific members of the Board. What we can say about 2023 is that it was 1 year that's not post-pandemic, but really a year that was impacted by the war in Europe, at least from the macroeconomic point of view. But the further impact of the pandemic period is still residual. It's not entirely gone. So what was observed in the first year after the pandemic and during the pandemic was a very volatile macroeconomic landscape. The levels of PPI producer price index where unprecedented very high vis-a-vis the stable period in the preceding decade, which in fact was linked to the prices of the industry functioning. What we have right now is a trend for a slight decrease in terms of inflation, consumer inflation and industry. But we are now talking about 2023. That is why I'm mentioning this. For KGHM, the currency exchange rate was not very favorable, especially to the dollar in the fourth quarter. But throughout the year, throughout 2023, a lower exchange rate compared to 2022 that we are presenting on the slide. We're talking about the comparison between 2023 to 2022. Also, the dollar prices for copper was on average 4% lower. But when we look at the rating rates in the Polish lot, it was 9% lower than in the comparable period of 2022. The situation was slightly different for silver prices, 7% higher than 2022 in dollars, but only 2% higher than 2022. Shortly, the dry weight is 30.4 million tons extraction and it was slightly lower compared to 30.5 in 2022. This, however, did not translate into the production of concentrated copper. It's slightly higher than 2022 due to the slightly higher content of metal in concentrate. The production of metallic silver in 2023 reached a record high over 1,400, 1,403.4 tons of metallic silver in 2023, and metallic gold rose by 27.1%. Now the investment outlay in KGHM was higher compared to 2022, and the growth was up by 21%. The very small lack of performance on the level of 2% vis-a-vis the planned expenditure. Now, the drop of revenue minus PLN 380 million, and that's 1% lower than 2022 with a safe level of indebtedness that you can see on the level of 1.1 million, and that's the net indebtedness to EBITDA ratio. Okay. Perhaps the KGHM Polska Miedz, the revenue is €3.467 billion, adjusted EBITDA is €5.362 billion. We will be talking about that later. The loss in the period is minus €1.153 billion, and a consolidated view 33,400, still on EBITDA is €5.3 million, and the net is minus NOK 3.691. Just a few words, to introduce the rest production, it will be spoken about by Mr. Laskowski. The production of paid copper -- payable copper, 711, that's 3% lower vis-a-vis 2022, mainly due to the results in KGHM International and Sierra Gorda that should be treated separately, and partially in lower production in KGHM International and Sierra Gorda was compensated by the domestic production, which amounted to 592,000 tons of metallic copper, and was higher -- 1% higher than in 2022, and it was a record high production of KGHM Polska Miedz here in Poland. And I've already mentioned about the lower results of KGHM International, that's 13% lower in Sierra Gorda. And that's resulting from lower metallic content in the deposits. And in KGHM International, the main factor influencing the equity that's Robinson, and that's lower by 29%. And we will comment on that, if needed. The lower production resulted from the content of metal, but also availability of machinery in quarter 1 of 2021 -- 2023.
Janusz Krystosiak: Okay. Now, President Laskowski, please.
Miroslaw Laskowski: Thank you for the floor.
Janusz Krystosiak: Before we go further, to talk about operational results in specific segments. Let me just remind you that traditionally, you are welcome to ask questions here in the room. But throughout the duration of our meeting, it is possible to send also questions online to the dedicated mailbox, which is on our website, also er@kghm.com. And after the presentations, we will go forward to the Q&A session. Now I give the floor to Mr. Laskowski, who is responsible for production in the Board, and we will go over the production results in Poland and worldwide.
Miroslaw Laskowski: I can say that you've partially done the job, Andrzej, in terms of my presentation because all the basic information concerning our main locations, 3 main locations, that is Polska Miedz, Sierra Gorda, and International have been covered, but let me go to some detailed slides that will show us the volume of the production in those 3 locations. Now before I talk about it, perhaps a few words of comment for the output in 2023 vis-a-vis the budget allocated in the Polish assets. The outcome was over the budget. Sierra Gorda was just on point and KGHM International. Well, mainly due to problems in Robinson line, there were some significant deviations and the shortage. Now, let me go back to the presentation of the results in specific locations in Poland. The result was very satisfactory, very good. And we should emphasize the fact that the production of electrolytic copper and silver is a historical high unprecedented throughout the 60-year history of Polish copper production. Now, for Sierra Gorda, I've already mentioned that it went according to the budget, according to the plan, but below the level from 2022, and the difference is 13%. But he outcome of that is having the ore from places where there is a slower content of copper. Molybdenum production, definitely above the levels of 2022 with the same result, the higher content of molybdenum in the output in the recovery. Here, you can see the slide illustrating the situation at Sierra Gorda, and now KGHM International. Here, we recorded an on 30% decrease in year-on-year production. Robinson mine faced problems related to the machinery, mainly with the transportation equipment, with the resulting the problems with obtaining output in the transitional deposit with lower content of copper. There is also the type of soil, which contributes to this situation. Fourth quarter 2023 and the first quarter 2024 show that we have already overcome those difficulties in Robinson, and the plans for the future will be implemented as planned. The result, minus 20% year-on-year is also the result of a large base of 2022. In our assets in KGHM International, we had Franke mine, hence, the production in 2022 was calculated on a larger base. And then what we have in 2023 that is in a nutshell about production in our three locations. Thank you very much. And now I would like to give the floor to the Vice President for Development, Bryja.
Zbigniew Bryja: Ladies and gentlemen, performance of our investment plans regarding to investments in fixed assets in 2023 was at a very high level, 98% of performance of the assumed €3.474 billion. The actual performance was just a little lower -- and that is the figure which includes costs of leasing and research and development activities. On those pie charts on the left-hand side, you can see which areas were most investment intensive. As our CEO has already noted in his introduction, we are now halfway through our mine life and exploitation of our mines, our deposit for the mining industry, it is a very important period because the benefits reaped in the first half of our lifetime are no longer fully available, and we need to refocus our interest and to operate the assets, which have already depreciated. More than 3/4 of the plan, €2.6 billion out of more than €3 billion represents mining, the rest, metrology research and development. That is on the left-hand side pie chart. And on the right-hand side, you can see specific areas to which the costs were allocated. 45% accounts for recovery, that is recovery of our production assets and a non-deteriorated condition. Then 32% CapEx in maintenance, maintenance of the production levels that were approved in the production plan. Then we have development projects, where we talk about underground exploration infrastructure for new operating areas, but also exploration on the ground and documentation of our deposits, which accounts for 25%. Other expenditures are projects related to the adjustment of new requirements following from our legal regulations. These are not significant amounts accounting for only 2% out of the total. In the next slide, you can see the specific investments. The program of making the deposit available represents the largest item here, €626 million recognized in this item. We have major expenditures related to 4 shafts, which are now at various stages of availability. GG-1 is the shaft, which was opened in 2010. And it is now being deepened. Last year, it was deepened further to the lowest point. We finished a central unit for air conditioning. That's a very modern engineering solution. In fact, stand-of-the-art technology. And then we have shaft number 2.We are now finishing research drilling works, that's about 60 kilometers away from -- 6 kilometers away from Gaworzyce mine, that work is being carried out right now. And the zoning plan is being adjusted accordingly. Then we have Retkow, I cannot show you a map right now, but this is a chart which is on the outskirts of Gaworzyce. This is a shaft, which is excellent in terms of air conditioning, travel distance for deliveries. This will secure our production for Retkow, which is deposit to be operated in the future, and even Colabor. The last chart here I mentioned here is Gaworzyce. Now documents, planning documents within the municipality of being drafted right now. So it is an early stage of development. As you can see, we are carrying out intensive work at various stages. On some of those shafts, we still have efforts to be continued for the upcoming 2 years. But it will give us some breathing space. And in the following slide, you will see the improvement of output and Gaworzyce with a major relief for the teams working there. And there are some more shafts for which we are waiting impatiently and looking forward to having the operational. Once machinery is moved from shaft #1 to shaft #2, then we improve the equipment and relocate the machinery. We want to continue this program this way. And the amount involved is very significant, about 40 kilometers of corridor available for exploitation. We had shafts, but we also have connecting connections. Then we have a major item related to infrastructure for utilities. We need to have air conditioning. We need to have conveyors, transports delivery points, all the supporting infrastructure. That's €589 million last year. Replacement of machines, €445 million. Last year, we got 255 mechanical vehicles of various types, more than 30 than last year. We adopted a policy with the company, that envisages in renewal of our entire machinery, more or less every 5 years. We do not plan to have general renovations. It's not very profitable for machinery. It's much better to buy new machinery that is replaced regularly every 5 years. Auxiliary equipment has longer working time. We also have a major program of water drainage from the mines. The decline of our deposit is not favorable because that is Northwest, which means that water tends to be accumulated, and we need to cope with this. That is why we are extending a major pump chamber in SW4 that is Sieroszowice shaft, which accounts for €394 million last year. Another item, exploration that is drilling and search for deposits within our licensed areas. But also, we are working on ports deposit that's magnesium and potassium, and put now a feasibility study is being prepared. We are in excellent contacts with municipality authorities. The local port counts very much on our presence there because that open up the possibilities for expanding the port infrastructure. If the feasibility study shows that the construction of mine is profitable. We will proceed with this investment. If not, we will find a partner of our joint venture, or we can even sell the deposit if we find out that it is not really profitable or it is not promising in terms of our core business development. We also have some minor items, which are recurring every year. So, we have regular refurbishment of elements of infrastructure, new purchases of equipment that needs to be replaced. And obviously, adjustment projects, BRL 86 million, that is not a significant amount, but this includes CO2 emission rights per to €52 billion. And the last slide here, I have mentioned Retkow, it's a pity that we cannot show you an indicator very well presentable on a slide, but it is Retkow deposit shows it is an oblong structure with this blue container that large deposit, the operations of which started in more than 10 years ago. Now, we had 7 teams working there. Initially, the work was conducted in a very hard weather conditions. The beginnings in 2010 were very hard. But then the air conditioning improved, which improved the working conditions. So also, for the production of copper and silver. But in summary, it looks better every year, and there is no new department there, but just climate has improved, and the output has improved, therefore. We're looking forward to further improvement. So, the construction of a new shaft, the Retkow that I've already mentioned, will allow us to further explore the Retkow deposits. And that's a section that's very interesting for us because it's before the order River, and we're looking for any other deposits that could be used there with the existing infrastructure. I'm looking forward to your questions. That's all for me. Thank you.
Janusz Krystosiak: We have 2 segments of our operations to cover. Mr. Stryczek, Executive Vice President for Corporate Affairs, and he will talk about the execution of the strategy and cooperation.
Piotr Stryczek: The capital group that I have the honor to oversee includes 34 domestic entities, 6 out of which are in the core business, that is our PeBeKa, Mercus and Energetica, and Nitroerg, that accounts for almost 13,000 employees in the Capital Group. Currently, we have been reviewing the strategy of specific entities, and it is our ambition to make sure that the core entities that I've listed just now, can colloquially speaking, be tailor-made for our technological flow. It is our ambition to be able to present until the end of this year to the Board, the strategy for specific entities for approval. That's within our capital group. And on the completion of this process, we would like to be able to present this strategy to you. We have also started the review of staff, management and supervisory staff in the companies from the Capital Group. We would really want the supervisory staff and management staff to be professionalized. In the recent years, we have observed, I belief in some areas, some lack of professionalism. There is an ongoing recruitment procedure in some of the entities. The process is transparent. Yesterday, a new Management Board was appointed in Energetica and Metraco. And I'm hoping that until the end of May, we will have completed the process of upgrading the professional profile of these management boards. Thank you.
Janusz Krystosiak: Many thanks. Also, following the presentation of our operations, let me ask Mr. Krzyzewski, Vice President, CFO of the group, to summarize the financials of the group financial indicators for 2023.
Piotr Krzyzewski: Good afternoon. Last but not least, as it's usually said, let's have a look at the 3 key parameters that have been with us throughout 2023. Revenue of the group, we can see a decrease by 1 percentage point year-by-year. But if we look at the segments, then in KGHM, we have a 2% growth. In KGHM International, the drop is 24 percentage points of revenue, and that results from what our colleagues were talking about, Robinson and the problems that ended in quarter 3. We will be able to look also through the lens of C1 and KGHM International, and we will be able to see what happened in quarter 4, because we seem to be going back to the normal level of extraction, and we are normalizing the costs. The net result in red, €3.7 billion in the group, mainly due to the noncash event, which is a write-off, and I will tell you the details. And the third component, the EBITDA is 5.3%. That's a decrease of 41% year-by-year. There are 2 factors. The revenue factor on the one hand, that acted negatively, but on the other hand, the cost factor that has impacted the EBITDA result, and I will talk to you about the details very soon. Now if we look about the bridge and the transition between 2022 and 2023 in terms of revenue, one of the keys that have impacted the revenue was volume. And that has a positive impact. But when we look inside this indicator, for KGHM S.A., we noted an increase in revenue on the level of PLN 1.1 billion, but there was a negative impact by the KGHM International revenue, and that's PLN 450 million decrease. This is not a very big impact in terms of net outcome, but a slight change in the price of copper, that's dropped by 4 percentage points. But on the other hand, the silver rating gold, 7% gold and molybdenum 32. And the biggest impact was felt by the exchange rate. In 2022, it was PLN 4.46 to the dollar. That's the average throughout the year. In 2023, the average was 4.2%, and that has caused an impact of €1.8 billion in terms of revenue. This was partially compensated by the revenue obtained from the security transactions, but you need to have it at the back of your mind that this revenue is only disclosing the -- we are only disclosing the revenue part of these transactions here. Now when we look at the cost, expenses have grown by 13% year-by-year now, nominally speaking, it's PLN 4.2 billion. And you need to note that the write-offs PLN 3.1 billion as the biggest. So impairments are the biggest component. And some of them are dependent on listings and exchange rate, then the -- we see that the increase of expenses is on the level of 9% year-by-year. The biggest categories that should be noted are services, internal services and labor costs, these have grown significantly. Now, looking at unit cost, Q1. C1 unit cost, they grew from 2.20 to 2.87% within the group. That's an increase of 30%. If we look at the cost dynamic, the biggest dynamic is felt in KGHM International, my colleagues have said a large proportion of this increase was caused by what's happened in Robinson. When we look at C1 for quarter 4, it's already normalized, and it is at the level of 2.22. So this is normalized R&D. But when we look at C1 and KGHM, the increase is on the level of 25%. But when we want to go and analyze it further and find out where the main source of that increase was, 7 percentage point out of that was accounted by the change in exchange rates. So, we're looking at the increase of 18% here. Now, if we also look at the fact that temporarily in 2022, we saw a lower tax rate for some materials. That was a one-off and that was all available in 2023, and that accounted for 6%. So the increase of C1 after excluding these 3 components would have been 12%. And the inflation for 2023 was 11.4% from the Central Statistic Office, where the energy factor, in fact, grew by 20 percentage points. So Sierra Gorda grew by 12% year-by-year. If we look now at the financial results, the key element, which determined this red figure on profit line write-offs of nonfinancial nature. Then non-performance of EBITDA in KGHM S.A. THB 1.9 billion and 1.2 in KGHM International, and positive contribution of other segments amounting to less than €100 million. Here, you can see also other amounts that are worth mentioning in this context, for example, PLN 700 million is the reversal of the element which we experienced in 2022. That was a write-off on loans on Sierra Gorda. Another element which drove those costs or exchange rates. Then we also had a change on income tax on 2 dimensions in the current tax and deferred tax. On other items, we have diagnosed one-offs that appeared in 2022. And these are transactions that were discussed earlier, that was a disposal of Interference Franke 179 million and recognition of the result on this transaction, which was shown in the results for 2022, as well as oxide disposal more than PLN 100 million. And I think another topic that we rise to a number of questions and received a lot of publicity in the media. We are a listed company that operates on a number of markets. And we're also a company that operates based on international accounting standards. IFSR 36 specifies the conditions for testing. And the IS-36 premise, which forced the auditor to recommend the additional testing was the drop in value. We were already at the time of closing our financial statements, and we had to carry out those tests. So it is not something new. The company previously collaborated closely with the auditor in carrying out the notes, and the auditor acting with all due diligence for the company to do all the necessary testing. And you can see the outcomes of the testing process. The key element here results from C1. If you look at the recent years, C1 has grown very dynamically, which led to cost increase around exploitation reaching new deposits. And all this was reflected in testing results. In the note to our financial statements, there is an explanation saying that our model is very sensitive to exchange rate dollar to PLN exchange rates, and possibly in the future, there will also be other periods for which we will have to do similar testing. And maybe the trend will be reversed. But those external factors can affect the whole situation. Now, I'll also show you how our assets and structure were affected by stand-alone and consolidated results, depending on what asset base we take into consideration, you see different numbers. And obviously, this affects deferred tax, both at stand-alone and consolidated levels. And the last element, cash flows. At the end of year, we recognized over €500 million higher balance of cash at the end of 2022. A positive element involve changes in operating flows, BRL 3.7 billion EBITDA, €3.7 million is also released, working capital, BRL 1.6 billion is income tax. In total, that is in plus MYR 6 billion. And on the other hand, we have the investment part, 3 billion KGHM International, 1 billion and other segments, EUR600 million or €700 million. As a result, we had cash balance at PLN 1.739.
Janusz Krystosiak: Thank you very much for this presentation part of our meeting. Now we move on to the Q&A session. You are welcome to ask questions. If you are in the room, and I will also read out some questions that have been sent online. Please introduce yourself before you ask your question.
Q - Pawel Puchalski: Pawel Puchalski, Santander (BME:SAN) Brokerage House. First of all, I would like to ask you about your CapEx. In your presentation, you have dedicated a lot of attention to you telling us about the need to invest in new shaft. There was this nice map showing new deposits. We know very well that after 60 years, mines lose their ability to maintain production at previous levels. So my question is, wouldn't it be simpler to say that within the next 10 years as we have to build such number of shafts in order to maintain the unchanged level of output, and we need to spend such and such amount to achieve this. So that was the general question. And as regards to details, you stayed within the budget in your parent company. And then you show €100 million as the annual CapEx. But in the Management Board report, I can read that the parent company accounted for over €3 billion. International accounted for €1 billion, and other accounted for €600 million, and there was also an acquisition. So in total, CapEx adds up to almost €5 billion rather than €4.1 billion. And I'm asking you about this because I want to know how to approach the guidance for this year. Is that likely to be 4? Is there likely to be 5? So one general question, one specific question.
Andrzej Szydlo: Let me start very generally. By answering your first question about new shafts. And in a way, change in our model of operating them. It has always been in the focus of the management goals of this company. And always, companies like ours ask themselves how to exploit their deposits. Obviously, we have defined a certain baseline. We have our mining infrastructure. And it's not a question of location of the shaft because you probably manage production shaft, location of mining is also the location of processing and waste storage. Of course, we have to think about investing in mining shafts and all enrichment plants, which will be located as close to as short as possible. But if I ask Mr. Bryja for additional information, he can give you a lot of details. Mr. Laskowski and Mr. Bryja are two excellent miners, so they can provide you with the clinical details. But in general terms, we always have to ask ourselves what comes next. Definitely, we need to implement such projects, which are aligned with our strategy, and would allow us to at least offset, possibly reverse the trend of costs that are naturally growing. That is something we are discussing right now, and we have a lot of meetings. And that is something we are working very intently on. Not necessarily building a KGHM 2.0 or whatever label you wish to give to it. But our focus is on such operation of the deposit to obtain copper long-term and at the lowest possible cost. Mr. Laskowski.
Miroslaw Laskowski: When we talk about developing operations in Poland at KGHM Polska Miedz S.A., as of today, we rely on operational production shaft and all enrichment plants. And as regards licensing, we need to build 3 more shafts to carry out our operations in the areas for which we have licensed as of today. My colleague has already presented my arguments. I'm well known for being a man of more words than my colleague. When we talk about mining centers, they have been in the same location for years, at a level of about 1,100 all shafts that we build in the North and Northwest are ventilation shaft. Even if there is some transport of copper, but mainly we focus here on the shaft that was primary functioning as ventilation. By 2055, we want to complete those 3 shafts. They will provide a ventilated in the areas. DT1 that I mentioned earlier is the 31st shaft of KGHM, we still need to build 3. Apart from the areas that were shown on the map, we need to deal with such a natural order in the form of the others. Sieroszowice is another deposit. If the court grants us license to operate this deposit, we will be able to operate this area, which is across the other river. So, if we need extra technology and more operational activities that we will have to build an extra line there. For the time being, before we cross this natural river border, we improve our infrastructure related to automation, process steering, machinery. And we are doing this in order to be ready for the time when we decide to build the mine across the other river. For the time being, the zoning plan envisages this process starting not earlier than in 2055. In reality, it might be much later. We are really talking about 30, 40 years of operations in this area. If we could perhaps display the map again, it seemed to the nonprofessionals is one of the key things was the distance for the transportation of copper on the copper rock, but also the miner to the place of exploration. So when I look at this map, it seems that the distance from the current -- let me just respond to that. The G1 shaft, which is currently being built. It will be the material one, infrastructure one and the same for AUTO1, just to decrease the distance between the miner and the place of work. But now in regards to the transportation of the output of the ore, it will be transported to the existing shaft in its conveyor. So we will just be minimizing one of the sections, and then it will be the conveyor where we can extend that distance. We are very much limited by the time of commute, we say, or the transportation of the teams to the exploration point. One shaft is OR2.5 billion. Now when I was planning R11,over 25 ago, this was ZAR 600 million. Now, this is 2.2. These are the amounts, but we need to add on top of that, the location transport to the enrichment plant, also is not to be neglected. So that's a significant cost item. Yes, financial analyst. Now, from the point of view of the finances, was also said about the updating of the strategy. What is this? The two models. One is the 5-year model, and the other one is LOM, Love of Mining. And these are the models where we are trying to review different scenario, throwing in different CapExes and focusing on what Andrzej was talking about. This CapEx that triggers the operational leverage. This can break the curve and allow us to generate additional results and to increase the margin, both where the granulation is very big. But when we talk about the new deposits, we also tested on the LOM model. We will share the outcomes of this work with you. As it's completed, it will be then supported with figures, but with also some the base of our resources and our review of it.
Pawel Puchalski: Did you spend €4.1 billion or JPY 5 billion last year.
Miroslaw Laskowski: Like I showed on the slide, the CapEx was JPY 3 billion for KGHM say, €1 billion in International. We won't see it to this extent of details, 680, this is added. Those are our companies. And what Piotr has mentioned, we are revising our strategy but also revising the strategy of our company. So we will come back to you with a response as to what CapEx we are, and what its impact will be, because that CapEx should have influenced a better cost structure is mandate structure where the services are prepared for us. So this should also impact our long-term model.
Pawel Puchalski: Sorry, forgive me a follow-up question. I understand that in KGHM, you've got 3-point-something billion. And in the company, you've got about €600 million, which will impact the improvement of KGHM S.A. So perhaps you should be showing the CapEx of €600 million in the mother company, because if it translates directly to the outcome of another company, perhaps that's where it should be disclosed?
Miroslaw Laskowski: We are currently having the financial statements approved in specific entities. We will definitely come back to you. But we should not, at this point, be discussing these issues before the corporate management body approve the statements. We will come back to this. But when we have like an investment in an X company of ours, the CapEx could be used by us, but they also work commercially on the market. So from that point of view, I think this presentation is correct. We are not trying to avoid it. We are disclosing this information. We can talk about it, and we're showing you that the CapEx includes the 3 segments that are being presented here.
Pawel Puchalski: Another question then, if this is how you are disclosing this, it's good to be showing a small CapEx in the mother company. So let me add a different question. If there's EUR600 million CapEx in the company's outside KGHM S.A., but it generates 300 off so or more EBITDA than the new Management Board decided to immediately sell from this package, which is creating a €300 million loss in terms of cash for last year. I do not understand entirely where this diagnosis comes from. You would have had to analyze every individual CapEx separately. I understand that they should have a positive NPV. And I think that your claim is too simplistic. I'm looking at the EBITDA in other and CapEx and other. The EBITDA is €300 million. The CapEx is about €600 million. Yes, but you will have to take a different question. Over what time was this CapEx spend? And what kind of investment projects they were? I can imagine various scenarios here, but we can possibly discuss this topic, without going into detail of specific projects, this outlook seems too simplistic.
Miroslaw Laskowski: Also, if you allow me, we're looking at the consolidated data, and we're making comments on the CapEx of individual companies in this segment of the other. So I think this would take a longer analytical discussion. One more thing. We cannot look at CapEx throughout the period of 1 year. This is what you are doing.
Robert Maj: Thank you. Mr. Robert Maj. I have a question about dividend. This is something that is interesting for the market. What's going to be your dividend despite the net loss? And what are the prices of copper that you apply in your calculations of positive NPV per project you mentioned that the need to be in the black, the need to be positive. So what's the Victoria Sierra Gorda 2 project. So the extension of the mine in Chile stroke oxide with your assumption of copper prices, are they highly positive then? And will they be continued? I believe that, well, I don't know if we can disclose this to such a level. This is a slightly different approach that's being used for tests and different for budgeting. Mr. Krzyzewski.
Piotr Krzyzewski: Dividend. The policy of the company remains unchanged, and we maintain the level that is included in our dividend policy. The write-off was a noncash write-off. Ladies and gentlemen, we are at this point, currently analyzing the present financial outline the CapEx and the OpEx, and we will come back to you with the information about whether or not there is space for a dividend to be paid. I believe that in the weeks to come, we can inform you about this. Now for NPV, as was said just now, this is a backend model. To a large extent, we are also basing on the analysis and the average market values. We look at the analysis that are provided by either investment lines or just our outlook. And that's something that we do. And you can see in explanatory note. We have provided some details describing the test and the values that were assumed in it. For the Victoria project, do you see that it is in the advanced exploration phase. The CapEx is quite significant for that. And in the weeks to come, we will be taking the decision as to the investments in this project and how we see the future of this asset.
Unidentified Company Representative: A short comment about Victoria. We are not slowing down the performance of the project of building exploration shaft there. But we need to commence talks with our partners, maybe resume talks, started fresh discussions about an offtake agreement regarding Victoria mine. It's premature to discuss any details yet. As regards the ore from Sierra Gorda, as XIW project, as far as I know from the Victoria, we cannot make any to far-reaching plans, but there are 2 projects going on there. One is the construction of a fourth line with a 3-year time frame. And the other project related to the development of infrastructure, special installation. The outlays in the KGHM International have been significant. So we first need to secure the possibility of efficient funding, and we need to analyze those projects in terms of the hierarchy of the best rate of return. So, nothing escapes our attention here.
Janusz Krystosiak: In a moment, we will move on to the questions that were asked online. I have a question to the CEO, who started with a general comment, which is great news to us as investors and namely that you will take care of, of course. You will also revise your strategy. So could you give a bit more color to this general statement, how you are going to take care of this budget?
Unidentified Company Representative: I don't know which color you have in mind. I hope it's going to be a somewhat warmer color. As for cost discipline will be a high priority. In a moment, you are probably going to ask about costs of remuneration because that's a significant component of cost. But we tend to see that in terms of completion of projects that are efficient enough to make sure that the costs related to energy, for example, the more significant item can be completed to obtain cheaper energy and to ensure security of our technological lines. Additionally, there is a lot to be done in renewable energies. I wouldn't like to discuss individual segments yet. But we know that KGHM cannot rely on its own sources of a single type. We need to diversify. Not only for security reasons, but also for reasons of the characteristics of those various energy sources, photovoltaics, wind, semi-conventional energies or CCTV. All nuclear energy. We are considering this, but this is not a direction in which the market would be ready to respond to the requirement of KGHM. And in terms of our plans for 2024 because that's probably a great interest to you. I can say that the positive effect that the CEO has mentioned, will probably be already visible in the first quarter. On energy numbers, we manage efficiently the cost of energy. So we keep this under control. We are also implementing some activities related to the use of the existing infrastructure. For example, we reduced the level of work of our units, and we buy energy at weekends when the costs are favorable. We are beneficiaries of those changes, which will be reflected in the results we will show for the first quarter. We're also looking for savings on consumption of materials, depending on the item, there are diverse projects and then subsequent quarters, you should see the results of those activities.
Janusz Krystosiak: And last question very quickly. Slide 61 shows that you have at least as of the January this year, you have hedging on dollars. You didn't have any hedging on silver or copper?
Unidentified Company Representative: Yes, exactly. Hedging on exchange rate, dollar PLN is about 15%. Then we need to add that we follow all the principles of hedging accounting here and the entire benefits utilized here on metals.
Janusz Krystosiak: As I announced now some questions that were asked online. We have already talked about energy sources. So I have 3 questions here that can be merged into one about energy. Given the changes in the composition and the Management Board, can we expect any change in the attitude to the funding and ownership structure of the projects related to renewable energy sources. In particular, SMR, Bank of America (NYSE:BAC) wants to know whether the management board is similarly involved in nuclear plants -- nuclear energy plants as the previous management board or would you consider changing your attitude from constructor, from a builder to a stone kind of client. And the general question is about your intentions regarding energy projects, various things concerning energy projects. I don't know whether I understand precisely another questions.
Unidentified Company Representative: KGHM has been interested in all energy projects that can generate positive results for our core business. That's the foundation, and that's the precondition. There are no energy products that are being implemented for their own sake. Coal business means metal output and production. Energy KGHM should be auxiliary to coal business, at least as long as we have this long-term prospect of deposit operation, SMRs, MMRs, small nuclear energy for purpose of diversification and offsetting of power is a very attractive option. But you have to bear in mind the process of obtaining permits on the process of building smaller micro reactors is a process that's going to take a number of years. There has been relatively little time to review of the technologies available, but there has been enough time to answer the question. We should stand in line rush to get those technologies. The answer is no. There was a bit of rivalry among state-owned companies, which of them will sooner get nuclear reactors. But the problem is that no such thing is readily available in the market, and probably it will be available soon. We tend to be very sober at KGHM when considering such matters. It's reasonable to have energy generation sources located as close to our technological facilities as possible. We want to have those energy generation sources at the shortest possible distance from our places of consumption of this energy. Then there is also the issue of cogeneration or technological heat, which needs to be produced with the use of fuels. We are very open-minded in thinking about various energy sources. We do not back out of considering building small reactors, but we seem to be ahead of the market right now. I cannot envisage an entity appearing in the market that would be able to come up with a proposal of building small nuclear reactors within the next 5 years. If such an entity exists, we can start immediately. But it seems that the activity so far, they shouldn't be assessed negatively, but we need to look around. We are very much interested, yet our primary interest is to have interesting and efficient in terms of cost for our coal business. So with regard to funding of energy, we have 4 points. One is the profile of consumption. And we know that we have our own generation sources. We have our own consumption profile. The second point that we need to consider is the mix we would like to acquire from the market. And that is portable energy has a profile, which is different from that in wind energy. And we have 2 categories here, our own projects and our own land and M&A. And then the last, I think we have already started talks with the financial sector because entire funding structure would have to be built for such projects with a determined rate of return, with a determined lifetime to make sure that everything is appropriately balanced, so that we do not compete with the CapEx among other projects. All these projects have to follow certain rules, but they have to have allocated sources of funding as well, and the hierarchy of priorities in terms of efficiency. Thank you very much. Now the plans on the optimization of metallurgy. In 2016, we completed a big modernization project in the Gaworzyce 1 metallurgy plant. I think this project was slightly forgotten because it's launched overnight as a matter of fact, which never happened. And actually, after this change of technology, this plan seems to be almost complete Gaworzyce, and it doesn't seem that there are any more modernization projects needed for metallurgy infrastructure. Legnica plant gradually and in a controlled way is becoming the plant that has taken over a significant proportion of the derivative copper processing. And there was also a program for the construction of revitalization there. Now, for the next decade, we've got still some to do for refinement for Gaworzyce and for Legnica plant, but I would probably, to be concise, tell you that we do not foresee any significant overblown needs in terms of CapEx for metallurgy. Obviously, Gaworzyce, from the point of view of experience has about 40 years of experience, and Gaworzyce 1, the similar technology but to a logic extent, in almost 10 years, 8 years' experience right now without any major issues. So here, we seem to be very advanced, and we don't need to expect a revolution. Now responding to this topic, I don't see I can put any more shade into what has just been said.
Janusz Krystosiak: Another question from UBS, a request to -- sorry, we already covered that. After the significant decrease in KGHM International last year, what is the outlook for 2024? So we have specific volumes already disclosed for the first quarter of 2024. Now what is the outlook?
Unidentified Company Representative: We've got a precautionary policy in place. Production volumes in Poland and all our locations for 2024 for the first quarter are according to the budget of above.
Janusz Krystosiak: Thank you. Perhaps questions from the room. Let me ask you about the review of strategy. Now, for the existing review strategy, do you see any remaining risks for write-downs or any aspects that have perhaps brought about some positive ones, so the reversal of the write-down for impairment?
Unidentified Company Representative: Okay. Well, again, precautionary policy, we cannot respond. This would be too theoretical. It's too early to say. But for CapEx, did you ask back?
Janusz Krystosiak: I wanted to ask a lot the CapEx as well. Now, for the sources of financing CapEx this year, and the implementation of the assumptions for a few years to come, are you considering the capital market any bonds, green bonds? Are you looking at that as an option?
Unidentified Company Representative: Briefly, we will not rule that out.
Janusz Krystosiak: And last question, do you see any risk of stagnation here in Poland, like it was last year or abroad for the company's assets.
Unidentified Company Representative: This question is mostly about metallurgy. This year, there seems to be a maintenance toll that's planned for Głogów plant. And after many years, we have reached such a period, but where the period between main closedowns for maintenance are about 6 years. When we look at the calendar on the 16th of October 2016, we launched Głogów plant. So 2020 was the first break and 2024 would be the second one in Głogów. I stalled here for a while because in Głogów II, which was launched in '78, 1978, I think these are 2 periods between maintenance, but we only reached that after 20 years. And now we're looking at 4, and that's the first period of 4 years between maintenance breaks. So, that just tells you, to the extent to which we were able to draw on the experience from the previous plant. I don't see that we can foresee any other events we wouldn't want to see any happening any case. So a planned maintenance break was something that we accounted for, but it's according to the plan. Do the plant scheduling.
Janusz Krystosiak: To be fair towards all the people that have asked questions. I tried to put these questions to groups, UBS asked about dividend and guidance for 2024. We've covered the dividend. We have published the budget. So I think there is nothing new that we can add here. The budget for 2024. Again, let me later call our colleague from UBS Santander, again. Just to summarize, I understand that the Board is sustaining the plan to produce 50% energy from own resources. And the second thing, as far as I can hear, the resources should be located close to the plan. I understand that it is not feasible to take part in an offshore project. And another thing, concerning Sierra Gorda, in quarter 4, there was a significant increase in cost and expenditure. And I would like to know whether this is a one-off situation, or should the level of expenditure in quarter 4 be continued in the subsequent quarters of this year and the next years.
Unidentified Company Representative: Okay, let's start with the 50% coverage in the strategy of energy. Indeed, in its strategy until 2030, KGHM has included a provision whereby we generate up to 50% of our energy from own resources. Now, let me remind you that we are consuming over 3 terawatt hours a year. And that is not to say by any means that it is an unrealistic volume. We're looking into trying to update our strategy. And of course, it would be very good if it could be 20 -- 50% until 2030. But when I spoke about small reactors or micro reactors, nuclear micro-reactors, then most likely, it will be a problematic thing to only -- to use that. And if we base on just PV or offshore, well, that's not completely out of question as long as it brings out a positive outcome to Mr. Laskowski in his production capacity if it brings enough energy. But I never ruled out offshore. Of course, it would be preferable to locate the sources close to where the energy is consumed also due to cogeneration, which is an important factor. That is not to say -- well, that is a preferred location, right, but not the only one, and KGHM is not intending to close off within our own locations for generation. Now for quarter 4, Piotr.
Piotr Krzyzewski: Yes. The observed increase OpEx in Sierra Gorda in quarter 4, it was temporary. I don't think we should be observing such a great growth dynamics in terms of OpEx there in subsequent quarters, we should be able to keep a stable level from now on. But it needs to be said that in Chile, there is a significant inflation rate, and it has had an impact on our asset.
Janusz Krystosiak: I've seen another question, microphone base. I will perhaps respond myself to one, not one that hasn't been asked, but one that I see on the Internet. What is the planned net revenue in terms of percentage in first quarter 2024. We cannot respond. We are not revealing forecasts. We will be closing quarter 1 very soon. From the point of view of financials and operations, we only know volumes right now. So no forecast at this point. And the same author is asking about dividends. So again, it's a recurring topic. It's already been covered. What is the Board thinking about the transaction of taking over Anglo-American by B2B? What impact will it have on the copper market and in particular, what can happen to the copper assets throughout the world?
Unidentified Company Representative: Well, the Board of costs coming in would not like to issue its position on the takeovers between the 2 very important players in the market, whether or not it will have an impact on the copper market. I don't think so. Perhaps we should reverse the question, why should it have an impact. We can try to read something into it as a positive sign for copper prices. Looking through the lens of the purchaser, perhaps maybe I'm going too far, because then I would be saying things about an entity that I'm not managing and I shouldn't be doing that.
Janusz Krystosiak: Thank you very much. Are there any other questions from the room? I have already reviewed to the questions asked online and they have been answered. Mr. Puchalski.
Pawel Puchalski: To continue on the topic of M&A. If you received today the offer that KGHM had a year, 1.5 years ago to buy about a 40% stake in Sierra Gorda. Would you take advantage of this offer or not? And one last point. I have heard what the Management Board said about the cost of energy. We know about the level of silver prices. So the question is, does the management board intend to revise downward its guidance on such costs for 2024?
Unidentified Company Representative: The first question is very difficult because we are talking about something that took place. So Sumitomo sold 45% shares in 2021, I think. And we have to say that each decision of this nature involves a number of various aspects that should be considered. Let me speculate in a safe way, though, when Sumitomo was selling, it's 45% should KGHM have bought that stake. KGHM didn't buy the stake of 45% stake in Sierra Gorda. But just as well, you could ask whether KGHM should have sold its 55% than what copper price was back then. Should you sell when the price is high? I cannot really answer your question. I do not know. And regarding the second question, please consider this parameter of energy, which has been quite stable historically, has become very volatile lately. Any revision change of the budget and guidance based on a volatile indicator would not be advisable, especially when we have -- on the other side of revenues, we have volatile exchange rates, dollar to PLN, and then prices of metals. Costs are definitely the element which will pay a lot of attention to find an operational leverage.
Janusz Krystosiak: Thank you. There are no further questions from the room, and we have some time limitation. So, I would like to thank you very much for this meeting and invite you to the next one in mid-May when we are going to publish KGHM results for the first quarter 2024. We are at your disposal. If you have any questions, we are available. Our Investor Relationship department, and our communication team are available at the telephone numbers shown on our website. You can also use the dedicated e-mail addresses to ask your questions. Thank you once again for participation in today's conference, and see you at our next event.
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