rc 2013 winning presentation wroclaw univ

8/13/2019 Rc 2013 Winning Presentation Wroclaw Univ

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Copper-bottomedinvestment

Wroclaw Universityof Economics

Marta, Katarzyna,

Kamil, Jan, PiotrLondon, April 2013


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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion

Introduction

Market profile

Ticker(Bloomberg) KGH:PW

52-week price range (PLN) 111.4 194.5

2012 dividend yield 24.2%

Market capitalization

(USD bn)12.1

Average daily traded value

(USD mn)40.6

Free float 68%

Share in WIG 20 14.3%

P/E2012 7.5

State

Treasury

32%

23%

39%

6%

Other

Diluted

68%

State Treasury Polish institutional investors

Foreign institutional investors Individual investors

Shareholder structure

2013 HY report July 30, 2013

Strategy update Mid-2013

New projects update Mid-2013

Forthcoming Events

Main features

9th copper producer globally

1st silver producer globally

4th resource base in the world

High quality products


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Recommendation

Key drivers

Robust pipeline of new projects (58% increase in

production volume by 2017)

Increasing operational efficiency (EBITDA margin

increase from 35% in 2012 to 45% in 2017)

Stable market conditions

Sound financial position (USD 6.4bn Balance sheet

headroom)

Holding period return

End of 2013 End of 2014 End of 2015

27% 39% 56%

Upside: 18.6%

Target price: PLN 220

BUY

Recommendation

80100

120

140

160

180

200

220

240

Feb/12

Mar/12

Apr/12

May/12

Jun/12

Jul/12

Aug/12

Sep/12

Oct/12

Nov/12

Dec/12

Jan/13

Feb/13

Target price (12 M) Current price (at 15-Feb-13) Closing price

18.6%

upside

PLN 220

PLN 185.5


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Limited risk of Quadras acquisition

Quadras experience in M&A

Know-how regarding open pit mines

Strong financial position of KGHM before acquisition

Takeover price < NAV

1961

Establishment of

KGHM

1997

IPO on Warsaw Stock

Exchange

2010

Afton-Ajax first overseas

expansion project in Canada

2012

Acquisition of Quadra FNX Mining Ltd -

Friendly takeover through Plan of

Arrangement

Business description

New projects in business-friendly countries

Exhaustive due-diligence prior to acquisition

Positive updates

Strict monitoring


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Specification

High operational leverage - strong labour

unions, underground mines conditions

Revenues dependent on copper price and

USD/PLN exchange rate effective

hedging strategies

Foreign operations contribution to EBITDA

0

2

4

6

8

10

12

2012E 2013E 2014E 2015E 2016E 2017E

EBITDA (PLN bn) KGHM EBITDA (PLN bn) KGHM International


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Industry overview& competitive positioning


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0

1

23

4

5

Threat of New

Entrants

BargainingPower of

Buyers

Threat of

Substitute

Products

Competition

in the

Industry

BargainingPower of

Suppliers

Industry overview

Key copper marketcharacteristics

High entry barriers

Low product differentiation

Lack of copper perfect substitutes

Individual copper producer as price-taker


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6000

11000

16000

21000

26000

31000

2011 2012 2013E 2014E 2015E 2016E 2017E

'000tCopper surplus expected

Base Case Mine Output Highly Probable Projects

Probable Projects Possible Projects

Demand For Mine Output

0

2000

4000

6000

8000

10000

1999 2002 2005 2008 2011 2014E 2017E 2020E

USD/tCopper price decrease

2012 KGHM cash extraction cost

Industry overview

Source: World Bank Commodity Price ForecastSource: Wood Mackenzie

-15%


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0

2000

4000

6000

8000

10000

1999 2002 2005 2008 2011 2014E 2017E 2020E

USD/tCopper price decrease

2012 KGHM cash extraction cost

Industry overview

Source: World Bank Commodity Price Forecast

-15%

QE1* QE2**

Copper 108% 20%

Silver 64% 81%

*(11/2008-03/2010)

** (08/2010-06/2011)

QE positive effects on copperand silver prices


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35.2

31.6

BHP Billiton

Anglo American

KGHM

KGHM vs. Competitors

Codelco

Southern Copper

Freeport McMoRan

Xstrata

Rio Tinto

RAO Norilsk

Antofagasta

1

2

3

4

5

6

7

8

9

10

93.2

58.2

55.8

18.1

17.0

9.1

8.9

Resource baseQuadra acquisition (mn t)

after

37.5

0.0%

0.5%

1.0%

1.5%

2.0%

0

20

40

60

80

SCCO FCX KGHM ANTO FM KAZ

KGHM best quality of ore

Copper base in

2011 mn t

(LHS)

Ore grade in

2011 (RHS)

0%

20%

40%

60%

EBITDA margin 2012E NI margin 2012E

In line profitability

KGHM

peers' median

Source: Company data

0%

20%

40%

60%

80%

2008 2009 2010 2011

Persistently higher ROE

KGHM

ROE

peers'

median

ROE


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Financial Analysis


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Company OverviewIndustry &

CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion

International expansion improves financial position

CapEx will translate into production

Source:

Team estimates,

Company data

CapEx vs. production

Cash extraction cost vs. EBITDA

0

500

10001500

2000

2500

3000

25%

30%

35%

40%

45%

50%

2012E 2013E 2014E 2015E 2016E 2017E 2018E

Cash extraction cost in $/t (RHS) EBITDA margin (LHS)

KGHM will significantly increase

its pipelineFalling cash extraction cost will

improve EBITDA margin

300,000

400,000

500,000

600,000

700,000

2013E 2014E 2015E 2016E 2017E

VictoriaAfton-Ajax

Sierra Gorda

Carlota

Franke

Robinson

McCreedy West

Domestic

production

Morrison

Detailed copper production in t

0

100

200

300

400

500

600

700

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2013E 2014E 2015E 2016E 2017E

CapEx in PLN bn (LHS) Production in kt (RHS)

Domestic

USD/PLN rate = 3.30

Sierra Gorda


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High debt capacity for possible further expansion

CFO breakdown 2013E

CFOs will cover expenditures and high dividends

The least indebted mining company among its peers

Net debt/EBITDA at low levels

Possible easy access to debt in case of new big

projects/acquisitions

8.03

4.09

3.09

0.850

1

2

3

4

5

6

78

9

CFO CapEx Dividends Surplus

PLN bn

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2012E 2013E 2014E 2015E 2016E 2017E

Net debt/EBITDA

PLN 20 bnBalance

sheetheadroom

0

10

20

30

40

50

60

70

0%

20%

40%

60%

80%

100%

2012E 2013E 2014E 2015E 2016E 2017E

Debtratio(LHS)

Interest

coverage

ratio (RHS)

Debt ratio and interest coverage

Net debt/EBITDA and balance sheet headroom

USD/PLN rate = 3.30


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Attractive dividend policy, unique in copper sector

Dividends per share and payout ratios of KGHM

0

5

10

15

20

25

15% 25% 35% 45% 55% 65% 75%

D

PS

Payout ratio

Median 2007-2012

2015

2017

Estimated median dividend per share in period

2013E-2017E at level of PLN 16.91Estimated median payout ratio in period

2013E-2017E at level of 62%

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010 2011 2012

Dividend yields in period 2008-2012

Median=11%

PEERS


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Valuation


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P/E EV/EBITDA

PLN 247.5

50% 50% 50% 50%

50% 50%Weights for multipliers

Weights for years

20142013 2014 2013Forward years

13.6 10.9 6.0 5.1Multipliers values

Multipliers

Multipliers pricing

At least 75% of revenues derived from copper sales

Total revenues of at least USD 5bn

Copper sold produced primarily from own resources

Peer group selection criteria


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Multipliers pricing

0.0

0.5

1.0

1.5

2.0

2.5

KAZ

KGH

FM

FCX

ANTO

SCCO

Peer group beta higher KGHMs systematic risk

0

100

200

300

400

500

2007 2008 2009 2010 2011

Mined copper production (kt)- no organic growth in the past

5

10

15

LSE TSX NYSE WSE

P/E on selected exchanges

-50%Historicaldiscount

Impact of the State Treasury

?


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Multipliers pricing

5

10

15

LSE TSX NYSE WSE

P/E on selected exchanges


0

200

400

600

800

2012 2013 2014 2015 2016 2017

KGHM KGHM Int.

Growth in production (kt)

Poland

CanadaUSA

Chile

Diversification

Impact of the State Treasury

?


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Multipliers pricing

-50%HistoricaldiscountImpact of the State Treasury

-20%Discount

Chemicals

Energy coal

Industrial metalsElectricity

Insurance

Banks

Oil

International competitors


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50%50% 50% 50%

50% 50%

PLN 247.5

Weights for multipliers

Weights for years

Final price

13.6 10.9 6.0 5.1Multipliers values

2014

P/E EV/EBITDA

2013 2014 2013Forward years

Multipliers

Multipliers pricing


-25% -20% -25% -20%Applied discount

10.25 8.8 4.6 4.1Adjusted multipliers

PLN 192.1


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0%

5%

10%

15%

20%

25%

30%

median 2007-2011 median 2012-2017E

KGHM net income margin

DCF assumptions

Decrease in the main revenue drivers: copper and silver

prices according to World Bank forecasts

2012E 2013E 2014E 2015E 2016E 2017E

Cu price USD/t 7 962 7 800 7 400 7 000 6 900 6 800

Ag price USD/troz 31.14 31 29.5 28 27.68 26.5

USD/PLN 3.30 3.23 3.14 3.10 3.06 3.05

Source:

World Bank Commodity Price Forecast, exchange rate EMIS database (based on a analysts consensus)

2012 residual value

Risk free rate 3.44% 3.44%

Beta 1.9 1.4

Market risk premium 5% 5%

Country risk premium 1.5% 1.5%

Cost of debt 6.2% 6.2%

WACC 15.3% 11.5%

Changing WACC

Introduction of Mineral Extraction Tax (MET)

in 2012 increases COGS and effective tax rate

0

4000

8000

12000

16000

0%

5%

10%

15%

20%

25%

2011 2012E

mn PLNMET effects

MET (RHS)

COGS (RHS)

effective tax rate (LHS)

PEERS


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PLN248

PLN192

PLN220

DCF analysis

50%

Multiples analysis

50%

Target price

Year-end target priceUpside : 18.6%

Holding period return: 27%


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Risk Analysis


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Main risksMarket Economic

Operational Political

PROBABILITY

low

modera

te

high

insignificant moderate severe

IMPACT

Influence of theState Treasury

Fluctuations of

Cu and Agprices

FX risk

Changes in

environmental

policy

Cost inflation

Strikes

Deterioration in

the quality of

ore

Delay in the

growth projects

Drop in GDP

growth rate

Poland entering

the Euro Zone

Lack of

extension of the

mining

concessions


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Main risks

State Treasury - influence on strategic decisions

acquisitionslimiting new acquisitions due to savings for high dividends

investments

shale gas, energy sector, atomic power plant risky and highly capital consuming

high dividend payout

putting pressure on high dividends (as they can be a way to decrease fiscal deficit)

32%

68%

State

Tresury

minority

investors

average dividend payout

ratio

2009-2017E 60%average dividend per

share 2009-2017E PLN 16

250

300

350

revenues expenditures

PLN 35bn

deficit

PLN bn

Shareholders structure Polish Fiscal Deficit based on2013 Budget Act

Dividend statistics

Influence of

the State

Treasury

Fluctuations of

Cu and Ag

prices

FX risk

Cost inflation


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Main risks

Influence of

the State

Treasury

Fluctuations of

Cu and Ag

prices

FX risk

Costs inflation

0

1000

2000

3000

2012 2018

$/t

-20%

49%

22%

13%

16%Materials and

energy

Employee

benefit

expensesTaxes and

charges

investments in energy sector (joint venture with Tauron)

maintaining good relations with labour unions

development of new cost-efficient technologies

decreasing the average Group extraction cash cost (C1) after acquisition of

Quadra

89%

11%members of

labour unions

other

2012 Q3 expenses by nature Employees in labour unions C1 extraction cash cost

Reducing the impact of possible increase in energy, labourand extraction costs


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Monte Carlo simulation

The main revenue drivers

Copper & silver prices USD/PLN exchange rate

Mean 233.1510thpercentile PLN 146.4190thpercentile PLN 319.81Upside

potential 75%

Monte Carlo summarizing

statistics

Influence of the

State Treasury

Fluctuations of

Cu and Ag

prices

FX risk

Costs inflation

Probability

Current price

PLN 185


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Conclusion


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Conclusion

12 M Target price Upside potential 3Y HPR

PLN 220 18.6% 56%

Robust

pipeline of newprojects

Increasing

operational

efficiency

Stable copper

price supported

by macro factors

Sound

financial

position

BUY


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Thank you for your attention!

rc 2013 winning presentation wroclaw univ

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