UPDATE: KGHM's Canada Investment Positive But Has Some Risks
05 May 2010 - 9:08PM
Dow Jones News
An agreement between Polish copper miner KGHM Polska Miedz
(KGH.WA) and Canada's Abacus Mining & Exploration Corp. (AME.V)
to jointly explore a copper and gold field project in western
Canada is a positive move but not without potential risks, analysts
said Wednesday.
The deal, signed Tuesday, will see KGHM pay $37 million for 51%
of the joint venture. Abacus will contribute its rights to the
Afton Ajax field, located in the Canadian province of British
Columbia, into the business.
KGHM has the option to buy a further 29% in the joint venture
for up to $35 million. If it exercises that option, it will be
required to organize financing of $535 million for the joint
venture's investment in the field, proportionally to its holdings
in the venture.
"The field's parameters are really fantastic, especially in
terms of unit production costs," Michal Marczak, equity analyst
with BRE Bank brokerage, said in a research note. He said he
expects KGHM's investment to be paid back after only four
years.
But he said the decision to sell such an attractive field at a
relatively low price raised questions.
"The answer (as to why Abacus is selling) probably lies in risk
factors which still remain unknown," he added.
According to estimates, the Afton Ajax field is expected to
produce 50,000 metric tons of copper and 100,000 troy ounces of
gold a year. The field is expected to produce for 23 years starting
in 2013, KGHM said.
Pawel Puchalski, equity analyst with BZ WBK brokerage, said the
deal is supportive to KGHM's valuation, but that numerous risks
exist. These include possible delays in project startup, escalating
costs of investment and lower output.
The project will help KGHM in its strategic long-term goal of
producing 700,000 tons of copper annually, the company's chief
executive Herbert Wirth said Wednesday. In 2009, KGHM produced
501,000 tons of copper.
Under that strategy, KGHM plans to spend PLN13.7 billion on
investment by 2014. Of this, PLN5.7 billion is to be spend on
capital investment.
Copper production costs at Afton Ajax are estimated at
$2,000/ton, Wirth said, significantly lower than KGHM's average
costs of $3,580/ton in 2009.
The company operates three mines in Poland--Lubin, Rudna and
Polkowice-Sierszowice. It also has an Ore Enrichment Plants
division, which prepares concentrate for smelters and refineries in
Legnica and Glogow; a Tailings Management division, responsible for
the storage and management of tailings, and a Cedynia copper wire
rod plant in Orsk.
At 1013 GMT KGHM shares traded down 1.4% at 103.50 zlotys
($33.50) at the Warsaw Stock Exchange, against a 0.5% slide in the
blue-chip WIG20 index.
-By Malgorzata Halaba, Dow Jones Newswires; +4822 447-2432;
malgorzata.halaba@dowjones.com
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