Rc 2013 Winning Presentation Wroclaw Univ
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Transcript of 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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
Business description
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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
Business description
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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
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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Company Overview Industry &Competitors FinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
Multipliers pricing
5
10
15
LSE TSX NYSE WSE
P/E on selected exchanges
-50%Historicaldiscount
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
Multipliers pricing
-50%HistoricaldiscountImpact of the State Treasury
-20%Discount
Chemicals
Energy coal
Industrial metalsElectricity
Insurance
Banks
Oil
International competitors
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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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
-50%Historicaldiscount
-25% -20% -25% -20%Applied discount
10.25 8.8 4.6 4.1Adjusted multipliers
PLN 192.1
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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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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Company OverviewIndustry &
CompetitorsFinancialAnalysis Valuation Risk Analysis Conclusion
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!