KGHM buy of Sierra Gorda mistake but no plans to sell yet – CEO

KGHM’s purchase of the Sierra Gorda mine in Chile was a mistake but the Polish miner has no plans to sell the asset, its CEO told Metal Bulletin in an interview ahead of LME Week here in London.

KGHM holds 55% of Sierra Gorda – it acquired the copper and molybdenum mine in 2012 when it bought Canadian rival Quadra FNX in what was the largest ever foreign acquisition by a Polish company.

At the time of the purchase, LME three-month copper prices were nearing $10,000 per tonne. Today, LME copper is around $4,700 per tonne

“In my opinion, the purchase of Quadra FNX at a time when commodity prices were so high was a mistake,” Krzysztof Skora, KGHM’s CEO said.

Earlier this year, the Polish government, which holds around a third of KGHM, ordered an audit into its foreign assets in direct reaction to the financial situation at the Sierra Gorda mine.

Adding to KGHM’s troubles, Poland’s Internal Security Agency (ABW) is investigating the miner over the company’s losses and its purchase of Quadra FNX.

The ABW alleges that, from December 2010 until March 2012, KGHM management may have inflicted a large loss on the company, a crime that is punishable in Poland by up to 10 years in prison.

Despite the pressures, KGHM does not want to embark on a fire sale. 

“For now we don’t have any plans to sell [Sierra Gorda]. Getting rid of assets when commodity prices are low would be another unfavourable decision as prices are currently stabilizing and, in the future, should go up again,” Skora added.

Despite weak copper prices, cutting output will not be a part of the company’s strategy, he said.

Still, reaching the production target of one million copper-equivalent tonnes by 2020 set by former CEO Herbert Wirth last year before Skora replaced him in a board reshuffle will be hard to achieve, Skora added.

“KGHM is changing for the better with the new management although not as fast as I would have wished,” Skora said.

“We are trying to keep costs in check, we ensure everything works per the schedule and we focus on projects that are crucial for the company. We have our feet firmly on the ground we don’t want to ‘fly to space’ to extract raw materials like our predecessors did,” he added.

KGHM sees copper output at Sierra Gorda at 110,000-120,000 tonnes this year.

While a weakening zloty is softening the blow for the company, there is no doubt that macroeconomic conditions are worse than was assumed a few years ago, resulting in a need to verify the company’s previous strategies and adapt them to more demanding market conditions, Skora said.

As for copper demand, the picture is less clear, he said.

“Economic and political uncertainties including US presidential elections, central banks’ monetary policies, Brexit and conflicts in the Middle East will continue to weigh on investors’ and consumers’ sentiment,” Skora said. “This doesn’t help when you need to estimate supply and demand trends for metals in the coming quarters.”

Attention remains on China, the world’s biggest consumer of copper and a key market for KGHM – it recently signed an agreement with China Minmetals for the sale of copper cathodes from 2017 until 2021. The agreement will be a stabilising factor for the miner’s revenues, Skora said.

“Although the Chinese economy still faces a lot of uncertainties, we expect stabilisation on the global macroeconomic front,” Skora said.

Europe accounts for 80% of KGHM’s copper sales, with the remaining 20% of production exported to Asia.

“Restructuring programmes currently being carried out in mining companies, less access to financing and a significantly smaller number of new mining projects will cause difficulties in satisfying demand for the red metal,” Skora told Metal Bulletin.

To keep costs low when revenues are falling, KGHM will not give an annual party during LME Week.

(Editing by Mark Shaw)