March 6, 2012 / 1:17 PM / in 6 years

UPDATE 1-KGHM eyes more deals as mining tax crimps profit

* Reiterates goal of 700,000 tonnes of cooper output by 2018

* Finalised Quadra buy, plans to float stake in 2014-2016

By Agnieszka Barteczko and Adrian Krajewski

WARSAW, March 6 (Reuters) - Poland’s KGHM, Europe’s No.2 copper producer, expects flat operating profit this year, held back by a new mining tax, and is looking for more deals following its C$3 billion ($3 billion) purchase of Canadian rival Quadra FNX.

The state-controlled miner made a record net profit of 11.2 billion zlotys ($3.6 billion) in 2011, thanks to high copper prices and telecom asset spin offs, while operating profit excluding one-off items jumped 20 percent to 7.5 billion.

“Taking into account no disinvestments this year, we may expect operating profit to be comparable to last year’s at current copper prices and costs,” KGHM chief executive Herbert Wirth told reporters on Tuesday.

This year’s results will be weighed down by a new Polish mining tax on copper and silver, with KGHM bearing the brunt of the levy’s expected state budget income of 1.8 billion zlotys this year.

But they will be boosted by the inclusion of Quadra, renamed KGHM International, after KGHM finalised the agreed takeover and delisted the Canada-based company on Monday.

With plans to boost its copper output by 66 percent to 700,000 tonnes a year by 2018, KGHM took control of Quadra’s Sierra Gorda copper project in Chile, one of the world’s largest copper projects, along with other assets spread across Canada, Chile and the United States.

“Thanks to Quadra we are raising our annual output by 100,000 tonnes or by 25 percent,” Wirth said. “To attain the 700,000 mark we will need at least one more takeover.”

“Two companies (takeover targets) are knocking on our door, we are in talks with them, but it’s not an overnight thing and we are now focusing on organic growth of the joint group.”


KGHM, with a market value of 9.4 billion zlotys, has leapt into the global top 10 of copper producers, but the group’s own annual output - estimated at 526,000 tonnes together with Quadra - is still less than a third of the world’s No.1 player, Codelco .

The group places itself at No.4 in the world in terms of documented copper deposits, arguing this means its shares are undervalued trading at a 79-percent discount to global peers in terms of their price-to-earnings ratio.

“There is big potential for shareholders,” Wirth said. “Quadra is also a company with potential for improvement that we know how to attain.”

KGHM is financing the Quadra deal with its own resources, which will use up over 80 percent of its record 2011 profit. With a dividend payout of around 18 zlotys per share, or 3.6 billion zlotys, Wirth does not rule out taking up a loan.

Banking sources said KGHM has joined a flood of syndicated loan borrowers in the region, looking for early refinancing and extra capital amid fears liquidity will dry up due to Europe’s protracted debt crisis.

Bankers said KGHM was in early-stage talks with potential lenders to gauge pricing expectations, seeking more than $1 billion of loan financing.

“We got responses from banks, we know what we’re sitting on and if there’s a need, we’ll tap these resources,” Wirth said without going into detail.

The miner plans to float a stake in Quadra in Toronto between 2014 and 2016, while retaining a minimum holding of 51 percent, the CEO added.

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