Copper bottomed
Yet investors perceive KGHM stock, which closed at zł. 12.25 last Thursday, as overpriced and the company beset by boardroom confusion. Mounting debt from investment in fixed-line operator Telefonia Dialog, indifferent productivity and the state's control of a 44.28% stake play a large part in souring sentiment.
"I released a report earlier this year with a sell recommendation, and it's still valid," said Paweł Puchalski, an analyst at Raiffeisen Bank.
KGHM's main problem, according to market watchers, is Telefonia Dialog, a wholly owned subsidiary, which has lain 18 months on the auction block with little more than rumours of transactions. In November 2000, KGHM snapped up - for €41.5 million (zł. 163.9 million) - the remaining 50% of Dialog from Polish Power Grid (PSE) and Tel-Energo, a telecom firm controlled by PSE. Today, the Wrocław-based Dialog is the third largest national fixed-line operator, but carries a debt load on KGHM's books of €278 million (zł. 1.1 billion). The debt was raised in short-term securities, which KGHM must constantly roll over into new securities and pay fees, analysts said. What's more, KGHM is slated to invest a further E50.6 million (zł. 200 million) in the next few months - unless it finds a buyer for assets considered in the market as overpriced.
"We would like an exit from Telefonia Dialog, either to a strategic investor or putting it up for sale," said Wojciech Marciniak, director of investor relations at KGHM. Marciniak deflected a string of rumours that KGHM has successfully played matchmaker for its fixed-line subsidiary. The company's deputy president Andrzej Szczepek announced that management was considering a merger between Dialog and Netia, which requires sophisticated debt restructuring. But Marciniak noted that any accurate information on Dialog is never that accessible, and the operator must arrange its own stretched finances to appear attractive for a merger. "We're probably just going to write it off," he said.
Market observers consider KGHM is asking too high a price for assets that have undoubtedly fallen out of favour. KGHM management has said at times that it was close to signing deals with anonymous financial investors for undisclosed prices.
"There are interested parties but they want to sell it at twice its market value," said Rafał Jankowski at CDM Pekao Securities. Jankowski said that the management is looking to sell Dialog at book value, approximately €468 million (zł. 1.85 billion), which breaks down into €278 million (zł. 1.1 billion) in debt and roughly €164.6 million (zł. 650 million) in equity. "I would say it would be very successful if it sells it for half."
Dialog results fail to shine, in no small part due to restricted opportunities for fixed-line carriers to expand. This exacerbates the parent company's bargaining dilemma. Dialog reported a net loss in 2001 of €91.8 million (zł. 362.6 million) on revenues of €57 million (zł. 225 million). For 2002, it forecasts a €36.2 million (zł. 143.9 million) in net losses on €96 million (zł. 379.5 million) in revenues.
KGHM plans to dig deeper into its core business of copper and silver mining, which generates almost 96% of its revenues. The company holds 3% of the world copper market with important export markets in Europe and China. But the company is crippled by the trade unions and restrictive working practices and the state, as a shareholder, resists labour-related productivity improvements. The company needs to reduce its 18,500-strong workforce by 15%, according to CDM Pekao's Jankowski. But company president Stanisław Speczik, appointed in 2001 after the Democratic Left Alliance (SLD) won the election, said that he would not take the necessary steps to enforce labour efficiencies because such action might upset SLD's relationship with unions.
"The workforce has been decreasing," said KGHM's Marciniak. "In about two years there should be 1,500 to 2,000 people less."
KGHM argues outsiders may not be close enough to the action to see the miners at work. "Analysts think that we have an over-excessive head count," Marciniak said. "I think that it's not true; you hardly see any idle workers in the mines."
The company are driving reforms, such as moving from a three- to a four-shift day to boost production and decrease costs. They would at least consider trimming some of the costs by outsourcing some administration.
As the company has to dig deeper to procure resources, analysts worry that cost per ton of metal production will increase significantly. New, more expensive technologies are needed, which would cut into the bottom line. So investors first cheered KGHM's decision to enter the southern Congo about five years ago.
It was KGHM's former management headed by CEO Stanisław Siewierski who in 1997 decided to invest abroad, but by 2000 incoming executives concluded that the €30.3 million (zł. 120 million) sunk in the Congo would have to be written off, Marciniak said.
"It turned out the facilities were in very bad shape, and the deposits were less than we thought," he said, but declined to comment on KGHM's original impetus for African exploration. "We somehow got involved in the Congo."
Questions were raised by the company's relationship with Colmet International in the adventure, according to Michał Mierzwa, an analyst at Erste Bank Securities.
Virgin Islands-based Colmet was KGHM's middleman and has been accused of supplying misleading information about the profitability of the ore deposits in Africa and ease of access to the resources.
"Colmet got a lot of money for doing things KGHM could have done cheaper," Mierzwa said. KGHM's Marciniak agreed that there were at least some elements of Colmet's connection to the Congo that appeared to be dubious, in respect of their contacts in the Congo.
At present, he said KGHM management is divided over whether the venture was mistaken. The chief supporter of sustaining the project is chief architect Siewierski, the former CEO, a vice president at KGHM, Marciniak said. Siewierski left the company in 1999 and returned last December after SLD returned to power. Along with other executives, he denies that the investments were misguided and insists that the company will reap benefits. In fact, CEO Speczik said KGHM planned to go ahead with further investment of €5-6 million in the Congo to tap new copper deposits.
KGHM's actions came under scrutiny when the incoming government ordered a report on all state-owned assets.
"The report was supposed to prove how incompetent were the boards put in place by the AWS government," he said. "There were a number of reports of incompetence and wasting money at KGHM, but the opposition in Parliament voiced outrage that it was not true. So the Parliamentary Commission asked NIK to review the company," Marciniak said.
But company president Speczik refused to let NIK inspectors enter the company's premises, which prompted NIK to file a case with the district court in Lublin for hindering the audit. After reaching an agreement in October, NIK was allowed full access to offices and files, according to Marciniak.
Małgorzata Pomianowska, NIK's spokeswoman, said the deadline for the lawsuit had expired and that NIK inspectors have thus far found no evidence justifying action.
