Seeking Alpha
Contrarian, long/short equity, deep value
Profile| Send Message|
( followers)

Summary

  • Sierra Gorda, a project of the major importance to the company, has just started its operations.
  • Other company’s projects are on schedule.
  • KGHM’s results, recorded in the first half of the year, confirm the company is financially sound.

On August 4, KGHM (OTC:OTC:KGHPF) announced commencing its operations at the Sierra Gorda project. This is a milestone project for the company and the main reason KGHM acquired the Canadian company Quadra in 2012. To remind my readers - this project, shared with Sumitomo (55% KGHM and 45% Sumitomo), is an open pit mine located in the Atacama Desert, Chile. According to the company, Sierra Gorda should be one of the world's largest mines of copper, molybdenum and gold.

The target annual production is expected to be:

  1. copper - 220 thousand tons
  2. molybdenum - 25 million pounds
  3. gold - 64 thousand ounces

To give you some perspective - in 2013 KGHM produced 530 tons of copper in concentrate, so Sierra Gorda will increase the overall KGHM attributable production from 530 tons to 651 tons (23%).

In my last article on KGHM, I mentioned a legal dispute over the Sierra Gorda transportation issues. Fortunately, the company solved all these problems to its advantage so now it is possible, without any additional expenses, to transport and storage the copper extracted from the project site directly to the nearest Chilean port, Antofagasta.

During the pre-stripping phase of the project (these works had to be done to access the sulfide ore, which is the basic ore to process) substantial resources of oxide ore were stored for heap leaching - presently the company performs tests trying to assess the profitability of extracting minerals from that ore. If the tests confirm the profitability of extraction, the additional copper production would have had a positive impact on the project's economics.

Deep Glogow

On April 17, KGHM started initial production from the new "Deep Glogow" mining area. This mine is an extension of the currently operating mines, Polkowice - Sieroszowice and Rudna (Deep Glogow is located directly under these mines). In 2014 KGHM plans to extract 14.5 thousand tons of electrolytic copper from Deep Glogow, but in the later phases of the project the yearly production is estimated to stand at 200 - 220 thousand tons of copper, which makes this project comparable to Sierra Gorda. But remember - in a few years Deep Glogow will substitute the above mentioned mines so it should not be regarded as a new-capacity mine per se. Completion of construction is planned for the fourth quarter of 2015.

Victoria Mine

The project is located in the province of Ontario, Canada. Victoria is supposed to be an underground mine producing 15 thousand tons of copper and 16 thousand tons of nickel a year. Mining should start in 2018 - 2019. In the second quarter 2014, KGHM completed preparations for the construction of the mine infrastructure. Presently the company plans to start sinking a main mine shaft.

Afton - Ajax

The Afton - Ajax project is 100% owned by KGHM Ajax Mining Inc., a joint venture company owned 80% by KGHM and 20% by Abacus Mining & Exploration Corp. The project is located near the city of Kamloops, British Columbia, Canada.

This open pit mine will be producing 40 thousand tons of copper and 79 thousand ounces of gold a year (attributable to KGHM) throughout 23 years of a mine life. On May 29, KGHM Ajax Mining Inc. published a new mine plan which reduces the mine's environmental impact and makes it far more probable to obtain all necessary permits to start mine construction (expected to commence in mid-2016). The production of the first copper concentrate should start at the end of 2018.

Half - year results

The table below illustrates the half-year results:

in millions of PLN

And below you will find production results for Polish and foreign (KGHM International) operations:

As one may spot, the mines located in Poland recorded more or less the same production results as in the previous year. The biggest difference is the increased silver production this year but this was due to the maintenance works performed at the precious metals plant last year (last year silver production was decreased but this year it is back to usual levels).

There were some production problems in foreign operations, mainly at the Robinson mine, Nevada, USA. This mine produced only 41.7 million pounds of copper in the first half of 2014 while in the previous year it was 67.3 million pounds. Gold production was lower as well, 12.1 thousand ounces and 30.4 thousand ounces respectively. This was mainly due to ongoing production switch from a lower grade deposit (Kimbley - this deposit will complete its operations in the third quarter 2014) to the higher grade one (Ruth East).

Despite quite good production results the financial results were worse than those recorded in 2013. There were two main reasons of that:

  1. in the first half of 2014 the prices of copper and silver were lower than in 2013, 9% and 30% respectively
  2. the sales volume was also lower, 8% and 4% respectively (at the current prices environment the company preferred to increase its inventories than to sell metals on the market)

Summary

KGHM recorded worse financial results in the first half of 2014, but the main reasons for that were lower copper and silver prices - the factors the company does not control. Lower sales, despite generally unchanged production, should be considered as a plus for the company; in my opinion it is smarter to wait for better copper and silver prices than to sell the company's products into a weak market.

The most important second quarter's event was the commencement of the operations at the Sierra Gorda project. This project is a milestone in the company's history. After reaching its full production stage it will increase the KGHM's output by 23%. Apart from that, this project is expected to be a facility with one of the lowest production costs in the whole copper industry (C1 cost at $1.13 per pound of copper), which increases KGHM's attractiveness as an investment. This year's KGHM share prices action confirms that (see the chart below).

(click to enlarge)

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Source: KGHM Starts Operations At The Sierra Gorda Project