KGHM's Congo plans raise doubts

By Timothy Sifert

KGHM Polska Miedź's tentative plans to invest another $10 million (zł. 39 million) into copper mining operations in the Republic of Congo has left equity analysts wary of the mining concern's prospects in - and reasons for - returning to an operation that has already lost the company millions of euros.

Yet, as the direct investment would only amount to $10 million (zł. 39 million), regardless of its success or failure, it would hardly affect the company's financial situation. KGHM has interests in a number of other subsidiaries including debt-ridden fixed-line telecom Telefonia Dialog, which KGHM has had plans to dish off to investors. And, analysts said, should KGHM be able to make good on its investment in the civil war-torn Congo, it could be looked upon as a positive last-ditch move to recoup some investments previously dismissed as sunken costs.

"I think the decision is a good one," said Paweł Puchalski, an analyst at Raiffeisen Bank. "It won't kill them if they make good use of the money, but we can't expect the investment to get everything back."

But Puchalski mitigated his optimism by quickly pointing out that KGHM's other problems, such as the increasingly high cost of exacting copper from deep local mines and labor force disagreements, dwarf whatever benefit might be won by the renovation of the Congolese operations, and may dissuade investors.

"So there are still a lot of reasons to sell KGHM (stock)," Puchalski said.

The board of directors at the world's sixth largest copper producer and second largest silver producer recently presented a plan whereby the company would construct a new ore-processing installation to monetize the copper mined from the Congo's Kimpe deposits, as well as seek new opportunities in the region. Analysts declined to offer definitive critiques of the project, saying that they were unsure of the details of just how the Lublin-based company would go about jump-starting the operations.

"I was rather surprised because the new management (under CEO Stanisław Speczik) was rather skeptical about the investment," said Michał Mierzwa, an analyst at Erste Bank Securities. "Mr. Speczik said he'd rather close the investment."

In 1997, KGHM's former management, under CEO Stanisław Siewierski, decided to invest in the Congo. However, by 2000, incoming executives deemed the roughly E30.3 million (zł. 135 million) sunk in the region would have to be written off. As it turned out, the facilities KGHM invested in were in poor condition and the available deposits there were less than expected, a company official told the Business Journal.

Andrzej Kowalczyk, investor relations officer and head of subsidiary supervision at KGHM, explained that the company plans to invest in a hydro-metallurgical plant as an economical way of converting some of the roughly 600,000 tons of ore in Africa into cash.

"Part of the project is to save some of the money which was lost previously," he said.

He explained further that, despite other problems, a key reason the original Congo plan did not bear fruit was because the price of cobalt in 1996-1997, when the deal started, was four times as high as it is today.

"There is a team looking into our investment in (the) Kimpe (mines)," he said. KGHM has offered the team a year-end deadline to conclude whether it's sensible to delve back into the Congo.

However, Raiffeisen's Puchalski believes the investment will go through.

"I cannot imagine it being rejected," he said. "They want to monetize the assets."

Besides recovering previous losses, the company plans to yield other gains from the region. The investment, if it comes to fruition, should yield a profit in five years, company representatives said.