Thursday August 28, 2014





Can KGHM afford Ajax mine?

KGHM Polska Miedz S.A. third-quarter results were released Nov. 12. Consolidated earnings for the three months ending Sept. 31 were 228,954,000 Polish Zloty (PLN), down 61 per cent from the 3,195,452,000 PLN earned during the same period the previous year. (Note — 3.269 PLN equals $1 CDN). Results were negatively affected by lower copper prices, higher operating costs and a new Polish mining tax.

The main reason for KGHM’s disappointing earnings is the performance of their Canadian subsidiary KGHM International Ltd. (formerly known as Quadra FNX), which it purchased in March 2012 for close to $3 billion.

The Canadian subsidiary, which owns 80 per cent of Ajax, disappointed by only earning $27 million year-to-date. A poor return on a $3-billion investment.

The cash position at KGHM, which is 32 per cent owned by the Polish government, is under major strain due to a newly implemented dividend policy. The company was required to pay 3,400,000,000 PLN in dividends in August and was due to pay 2,268,000,000 PLN again Nov. 16.

This will put extreme pressure on the company’s liquidity because the cash position on September 30 was only 3,594,317,000 PLN.

KGHM International Ltd. is currently looking at extensive capital expenditures. Its share of Ajax Mine will run approximately $640 million. It is also in the process of developing the Victoria Mine near Sudbury, Ontario, which has an estimated cost of $750,000,000.

Its largest project is the Sierra Gorda in Chile, which has an estimated capital expenditure of $3.1 billion. KGHM International Ltd. owns 55 per cent of the project. Sierra Gorda should start operation by the first quarter of 2014.

All of their projects are subject to cost overruns, which have been running 10 to 30 per cent on new mining projects around the globe.

The Sierra Gorda project is currently undergoing a capital expenditure review, which will be released during the fourth quarter of 2012.

KGHM CEO Herbert Wirth has stated that he expects to list KGHM International Ltd. on the Toronto Stock Exchange in 2014 to raise funds to complete the current projects. KGHM plans to retain 51 controlling interest in its Canadian subsidiary.

Consensus is that KGHM may have overpaid for Quadra based on the performance of the mining sector and it may have difficulty in raising sufficient funds to bankroll its ambitious expansion on the already resource-heavy TSE.

JOHN SCHLEIERMACHER

Kamloops





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