Bad investments to hit mining group's bottom line at year's end

Copper and telecommunications group KGHM Polska Miedź, which announced first-quarter profits of zł. 2.94 million ($725,000) last week, is set to end the year with losses of zł. 100 million ($25 million), analysts and company officials said. They blame the growing burden of KGHM's loss-making subsidiary Telefonia Dialog (TD), the strong złoty and low copper prices. Although the 2002 first-quarter profits of KGHM's core mining business grew to zł. 60 million ($15 million) from zł. 45 million ($11.2 million) the previous year, the group's consolidated profits plummeted by 91.8%, despite only a minor slip in sales revenue from zł. 1.3 billion ($326 million) to zł. 1.25 billion ($314 million) quarter-on-quarter. "Our consolidated result was much poorer than that of the parent company because it fully consolidates TD, which brought losses of zł. 47 million ($11.7 million) in the first quarter," said Wojciech Marciniak, head of investor relations at KGHM. "This figure, combined with the losses of some of our smaller subsidiaries, swallowed up virtually all of the parent company's profits."

KGHM became the owner of TD after purchasing a 50% stake in the fixed-line telephony provider for zł. 340 million ($85 million) last year and has since underwritten zł. 1.1 billion ($275 million) of the company's debt. TD's losses, largely caused by the decline of demand for fixed-line telephony in Poland, will erode the profits of KGHM's other subsidiaries at the consolidated level, including mobile phone operator Polkomtel. "The group's subsidiaries, principally Telefonia Dialog, will bring around zł. 50 million ($12.5 million) in losses each quarter and I don't believe that the KGHM parent company will be able to generate profits in the remaining quarters of the year," said Paweł Puchalski, analyst at Austria-based Raiffeisen Bank. "I forecast that the company will find itself quite substantially in the red next quarter and I anticipate year-end consolidated losses of zł.100 million ($25 million). Marciniak said that KGHM managers also have resigned themselves to consolidated losses of zł. 100 million ($25 million) in 2002, to include zł. 52 million ($13 million) in profits by the parent company and losses of zł. 144 million ($36 million) by TD "assuming that we meet our forecast for the parent company and TD doesn't exceed its forecast losses," Marciniak said.

"Despite an optimistic performance compared to the fourth quarter, this first quarter result is still poor and subsequent quarters are most likely to be worse," said Michał Mierzwa, analyst at Austria-based Erste Bank. "The management expect things to get worse too, as they have forecast the company's year-end profits at zł. 52 million, close to the level achieved in the first quarter." He added that the złoty and copper prices have stabilized at levels that are too low to guarantee KGHM's profitability for the rest of the year. "The growth of copper prices experienced in the first quarter has not continued and prices have stabilized between $1,500-1,600 per ton," Mierzwa said. "In my opinion the chance of a significant increase to levels that would make KGHM profitable is unlikely this year." KGHM's efforts to find an investor to help develop TD have thus far proved fruitless, although "work is continuing," Marciniak said. "We are still searching and conducting talks." According to Puchalski there is now only one way to deal with the burden of TD. "They should write it off," he said.