It was the most ambitious overseas acquisition by a Polish company — and it has not gone according to plan.
In 2012, the state-controlled copper group KGHM bought Canadian rival Quadra FNX in a $2.9bn deal that was meant to create Poland’s first truly global company.
However, a slowdown in China and a brutal turn in the commodities cycle hit the cash-flows from KGHM’s new assets, triggering a slump in its share price. Seven years on, the Sierra Gorda mine in Chile that came with the deal is still lossmaking, and KGHM’s market capitalisation is around half the 28bn zloty it was in 2012. Last month, Poland’s audit office concluded the deal was “not in KGHM’s interest”.
Yet Marcin Chludzinski, who became chief executive last year, remains optimistic. Copper production at the mine rose 19 per cent year-on-year in the six months to June, and the 40-year-old restructuring expert expects more improvements next year.
“As CEO . . . I have to build the value of the firm from what is available . . . If we did not see value in this project, we certainly wouldn’t be doing this. We do see hope in it, but it is considerably harder than it would have been . . . due to those historical problems and mistakes,” he said.
“At the moment, we are not considering selling [Sierra Gorda]. Of course, the project has a long life cycle. Currently we are consulting on optimisation. In terms of production . . . we are at around 109,000t average daily ore throughput. Our goal for this year is to reach stable daily ore throughput of around 120,000t and 130,000t thereafter, potentially even 140,000t.”
KGHM is however reviewing its other overseas businesses, which include mines in Canada and the US, and some analysts argue they should be sold. “From a cash flow perspective they wash their face, but they’re not making the company any money. If they can sell them . . . to a responsible partner, I think that would be sensible,” said Edward Sterck, an mining analyst at BMO. “The one asset they should keep is the Victoria project in Ontario . . . geologically it’s very attractive.”
Mr Chludzinski said the group might freeze production at some smaller overseas projects. But he said the review would not be complete until the end of the year, and that decisions would depend on the macroeconomic context.
That context has been clouded recently by the trade war between the US and China, while Polish businesses are also closely watching developments in their western neighbour, Germany, where the economy shrank in the second quarter.
However, Mr Chludzinski said trade war tensions had not yet hit KGHM’s sales volumes and that the company — the world’s second-largest producer of silver, and eighth largest of copper — was not overexposed to particular sectors, such as the German car industry.
“We have several sectors that buy from us, and the behaviour of the buyers does not show any signs of a big potential impact as far as we are concerned,” he said. “We look at the consensus price [for copper] on Bloomberg, which is around $6,000 per tonne. If this is the consensus, it doesn’t seem to us like there will be a recession.”
Nonetheless, Mr Chludzinski said successful metals groups had to be able to function in times of high and low prices, and that KGHM was trying to keep a lid on costs, which — as at other Polish companies — are under pressure from rising wage demands and energy prices. “I always repeat, we are not in a market where we can control prices. We can control our costs, and our level of production,” he said.
Energy prices in Poland, which gets most of its electricity from coal, have jumped over the past year owing to the rising price of carbon permits and coal. As a result, ArcelorMittal temporarily halted production at its Krakow plant in May.
Mr Chludzinski said that KGHM, Poland’s biggest electricity consumer, was protected from market fluctuations until 2020 by long-term contracts. But to protect itself in future, the company is aiming to derive at least 50 per cent of its electricity from renewable and its own sources by 2030.
Earlier this week, KGHM and Polish energy group PGE said they would team up on a photovoltaic project that will provide 200MW of electricity. “We have taken big steps this year,” said Mr Chludzinski. “We have a big range of new projects.”