Union takes KGHM to task
By : Jeffrey Sparshott
KGHM Polska Miedz's management and union last week failed to resolve a dispute over wages, employment guarantees and investment decisions, with the company rejecting several of the union's claims as "unacceptable."
The company's labor relations, macroeconomic vagaries, political uncertainty and other bad news has kept its stock trading at 1999 levels, nearly 50% below a high-water mark struck in February 2000, analysts said.
Along with the union spat, the mining and telecom concern has been deeply affected by weak global copper prices, a strong zloty, which makes Polish exports less competitive, and generally poor sentiment toward telecommunications firms, where the company has a large stake. On the political front, the government's strong hand in the company's direction overruling the management's recommendation on a dividend payout and helping defeat a proposal to increase share capital by 75% two weeks ago is frustrating some investors. The Treasury Ministry announced that plans to float 10% of the company's stock this year will be detailed by September but the treasury minister's political strength, pending elections and a weak share price, call the proposal into question. Elections are also expected to influence the future makeup of the company's management board.
On top of structural concerns, KGHM's former chief financial officer recently admitted involvement in illegal foreign exchange transactions.
Despite the problems, analysts note a significant upside for the company especially if an overvalued zloty weakens and copper prices pick up.
"There are potential triggers on the horizon," said Zbigniew Lapinski, an equity analyst with Deutsche Bank, noting that a currency devaluation is expected, though the timing is uncertain, and copper prices could rise when economic activity in the West picks up. "It is hopeful to recover in the second half of the year. It remains a 'buy' recommendation."
At slightly above zl. 16 per share, KGHM's stock is trading at a little better than half of its February 2000 peak. It is one of the most liquid and heavily traded stocks on the Warsaw Stock Exchange (WSE); the company is also listed in London.
The current dispute between KGHM management and the Trade Union of Employees of the Copper Industry (ZZPPM) focuses on union demands for an 8% wage increase effective July 1, initiation of an employee pension fund, continuing enforcement of a 1996 agreement to provide at least a three-year guarantee of employment and election of employee representatives to KGHM's supervisory board, and a stop to outside investments or "donations."
While analysts said disputes between KGHM and ZZPPM are common and generally resolved with a compromise, they note that wages are still very high by Polish standards and the relationship is a main cause for investor disdain toward KGHM's stock.
"One of the most important factors influencing the price is the shareholder structure, which allows unions to influence company management," said Rafal Jankowski, an analyst with CDM Pekao Securities. "It's a bad way of managing the company. The best information that would influence a price hike would be a decision to privatize 20% of the company, not 10%."
That would limit union and treasury influence, he said. The treasury has five seats on the management board, the union three and international investors one. The treasury holds about 44% of KGHM's stock, overseas investors hold more than 19%, treasury-owned Powszechna Kasa Oszczednosci Bank Polski (PKO BP) holds about 5% and other shareholders roughly 31%, according to KGHM.
Stephen Marks, an investor relations analyst with KGHM, said the company and government are still examining the feasibility of selling 10% of the company's stock on equity markets.
"At this point, the process is going forward," he said. "It's still possible this year. It depends on the price it would be sold for."
Institutions and individual investors could take a stake in the company at a premium over the current price, he said.
The Lubin-based company posted zl. 4.98 billion ($1.22 billion) in revenue in 2000, an increase of 21% from 1999, the company said. First-quarter results were weaker. The immediate outlook is bleak Lapinski projected a second-quarter loss.
