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Edited Transcript of KGH.WA earnings conference call or presentation 21-Aug-19 9:00am GMT

Half Year 2019 KGHM Polska Miedz SA Earnings Call

Lubin Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of KGHM Polska Miedz SA earnings conference call or presentation Wednesday, August 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Bugajczuk

KGHM Polska Miedz S.A. - Deputy CEO of Development & VP of Management Board

* Katarzyna Kreczmanska-Gigol

KGHM Polska Miedz S.A. - VP of the Management Board- Finance & CFO

* Marcin Chludzinski

KGHM Polska Miedz S.A. - President, CEO & President of the Management Board

* Radoslaw Stach

KGHM Polska Miedz S.A. - VP of the Management Board - Production

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Conference Call Participants

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* Pawel Puchalski

Santander Brokerage Poland, Research Division - Head of Equity Research Team

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Presentation

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Marcin Chludzinski, KGHM Polska Miedz S.A. - President, CEO & President of the Management Board [1]

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Welcome cordially at the presentation of the results of KGHM Polska Miedz for first half 2019. The management board of KGHM is at your disposal today. President of the Management Board, Professor Kreczmanska-Gigol, CFO; Adam Bugajczuk, Vice President for Development; and Radoslaw Stach, Vice President of Production.

We will start traditionally with a brief presentation and our comments on the results of both company and the group, then we will proceed to the Q&A session. I would like to welcome also -- I mean our online viewers. Please ask you questions during the presentation. We'll read your questions and provide answers at the end of this session. We will, of course, address all those questions during the conference afterwards.

I give the floor to the President of the management back. And since the holiday season is over, there are so many of you in the room. Pawel Gruza is not with us unfortunately because he is still enjoying his holiday, but we will try to give you a picture of how we end the first half of 2019 for 6 months of this year.

So a brief summary. As a background, in this slide, you can see all key figures showing the situation in the first half of this year. Our production is on track, that is in line with our assumptions. In some cases, we even exceeded our expectations. And we will dwell on that later on because we managed to optimize our technology lines. We managed to obtain greater production of paid copper than we had initially planned, 19% growth of revenues to PLN 11.8 million. We are talking about comparison to 2018.

We also had lower C1 cost in the entire capital group. This is an important piece of information. A significant growth in EBITDA up to PLN 2.732 billion. We're also talking about comparison to the analysis period of 2018, the first half of 2018. So that is our reference to the growth.

We also had net profit growth. And here, the dynamics was much greater than in 2018. We analyzed our strategy both in the context of financing, bond issue and some other matters, which we'll address later on.

And all that has to be presented in the context of the parameters annualized quotation of copper, 11% lower, and for copper that is 8.5% lower. For silver, that is 8.5%, nickel also 18% lower. Better production results, better business, better net profit but with macro parameters with prices 11% lower than in the analogous period of 2018. We have the annualized average prices in the first half 2019 versus 2018.

Let's move on and let's have a look at more details. Our key production indicator, that is production of paid copper throughout the entire capital group, 352 tonnes, with just 19% growth year-on-year. That shows we have significant growth.

Also you can see in the slide, a breakdown of this number into growth in our Polish part of activity within the mother company, 287,000 plus 26%. And in Sierra, we have plus 19%. The situation is slightly different on international because of geological circumstances, lower output on Robinson, but the volume was not significant in the whole group.

You can say that by increasing the availability of our technology lines, thanks to optimization and increased discipline and supervision of both foreign and Polish projects, our production results are much better, which, at the end of the day, also contributes to the final financial results where the prices, say -- I have already indicated, lower. And this also translates into financial indicators being down for the whole group, PLN 2.732 billion, that is plus 7% compared with the first half of 2018.

The same goes for revenues at plus 19%. And the net profit of the group is plus 59% year-on-year. So I think this is also good result on production, and very much in line what we assumed in our strategic assumptions developed in December of 2018. Efficiency of production, elasticity of production, cost flexibility are the best fruits in the first half of 2019. The results are seen on both financial and production levels, and obviously, macroeconomic environment.

Of course, we have to bear in mind that the average annual price in the first half of the year was lower by 11%. You are familiar with our industry. The LME is the reference price for current transaction. LME price is shaped to a significant extent by the macroeconomic environment by the developments worldwide, and the first half of the year was worse than the first half 2018.

Also in the context of macroeconomic and geopolitical environment, we have no stability of certain themes linked to the tension between China and the U.S. In terms of trade war, there are conditions related to prices. And actually, there's nothing new. When we developed our strategy in December 2018, we said very clearly both to ourself and to you that turbulence in the market is something that is constant, like it's something that we are experiencing and we will experience. There are turnovers day-by-day, some things change overnight. This is also very much linked to the American political cycle. That is something that must be discussed openly, and it is no surprise to us.

With this volatility, we are able to show you improving financial and production results year-by-year, and that is the outcome of the fact that we took this volatility, this variability into account when we developed our plan and strategy.

In this line, you can see the quotations in the U.S. at the start of the trade war. Once this gained more publicity, you can see the result immediately. And it is very much embedded in the political context. When the external circumstances are favorable, that is when there are no one-off extraordinary events. And when geological conditions are favorable, we have a lot of factors under control.

We can decide on what can be invested in, what can be exploited, but we have absolutely no control over what development emerge from the current situation between the U.S. and China, and all that, despite the fact that we are the eighth largest copper producer worldwide, consistent implementation of the strategy.

As I have said, both deposit management, more effective extraction, stronger optimization of our technological means and of smelting installations, I'm talking about Glogów, but also completed roaster installations. We're also investing in new facilities like WTR, which is nonmining production, but the things that can be found on a circular economy, these are the first. Also energy projects within the field of green energy we will show them during the meeting, the Economic Forum in Vinnytsia, also the program of deposit availability.

I can tell you about is that we opened 12 kilometers of new corridors. Annually, that will be 30 kilometers. And GG-1 shaft is being deepened. For the time being, it will also sold because of geological conditions, and molybdenum also progressing with the shaft work. The production is growing year-by-year, and productivity on this mine is improving. So a lot of things are happening and a lot more will happen. The results of which will be seen in the financial and the production results.

And now I would like to give the floor to Rados who will address details linked to production.

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Radoslaw Stach, KGHM Polska Miedz S.A. - VP of the Management Board - Production [2]

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Ladies and gentlemen, going on to production results of the capital group. As it's been mentioned, we're on the level of 19% above, in comparison to the first semester of 2018, and that is, of course, a very good work here in Berlin but also in Sierra Gorda, and these results, of course, translates jointly into the KGHM result, slightly lower production in KGHM International. I will talk about this in further slides. Silver and molybdenum are also slightly lower, but I will talk about this when I talk about Sierra Gorda, detailed results concerning the domestic production here in Poland.

As you can see, very good copper output of electrolytic and metallic copper. Here, vis-a-vis the first semester of 2018, we are largely above the level of very good work, slightly lower of copper output but comparable. And we mentioned that when we were talking about the first quarter, the plant in Rudna where 30% of the plant was excluded, but very good decisions were made and our mine has worked, made it possible for us to actually almost catch up with the level of last semester.

Now the stock inventory that we are disclosing here, we try to minimize stock, as you can see, in the second quarter of 2019 is a lot lower than in the fourth quarter of 2018. So this is all happening. Our declarations are being put in practice as the strategy that we adopted, outlined. And the anode stock here, as you can see, are related to building up stock for stoppages of the plant. This is planned now for September, so we're not planning any other incidents.

For Sierra Gorda, production of almost 19% better to -- compared to the first semester of 2019. The improvement is ongoing, and we can see a significantly better result for processing. It is part of our strategy to make sure that from here to

2020, we have 130,000. And I think that we're on the right track. We are demonstrating it every quarter, and here semester-to-semester.

Silver production has also increased, and auxiliary metals slightly -- slight decrease of molybdenum. This is an accompanying metal. For Sierra Gorda, the content that we're achieving in the sections 3 and 4 is a lower grade, what we're saying, and hence, the molybdenum output is slightly lower.

Now for KGHM International. You can -- you could see in the first slide lower output flow production and it will be lower as you will have heard because we've spoken about it before.

At year-end in 2018, there's a closure of Morrison of -- and it's difficult to match that level of production elsewhere. But to respond to that, we are increasing output at Robinson. This is happening, but semester-by-semester, the production does come out slightly lower.

Now when you look at silver and molybdenum, it's a lot higher then unless there's a very positive contributor to our financials.

Thank you. Now the financials will be presented by Kreczmanska-Gigol, the CFO. Over to you.

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Katarzyna Kreczmanska-Gigol, KGHM Polska Miedz S.A. - VP of the Management Board- Finance & CFO [3]

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Good morning, ladies and gentlemen. Now the revenues. As you have heard, contracts with clients generate higher revenues compared to the same period of the previous year, and the increase here is of 19%.

Ladies and gentlemen, when we look at the value of revenue, it is higher mainly due to the change in the sales of volume and of the basic products, and that is the best news for us.

Now regarding our basic products and changes of prices quoted compared to last year. The changes have negatively impacted our revenues, but the volume of sales exceeded last year's volume so much that even the decreased ratings didn't actually impact our results so negatively as to offset the bigger sales volume.

On top of that, we have seen change in the currency exchange rate, dollar versus zloty, and that also has had a positive impact. And the remaining factors had some contribution share as well.

Please note that the main factor that we always look at, which is independent from us, that is the copper price rate, despite it being a negative contributor, the remaining factors have been positive for our activity and notably the sales volume, which is definitely something that we have impact on.

Now in terms of the unit cost, please note that for the whole group, the C1 is lower by 3% for the whole group. Now when we look into details for the mother company, KGHM Polska Miedz S.A., the decrease in the C1 cost was the biggest one because we noted a decrease of 5%.

There has been an increase of C1 cost for Sierra Gorda, and this is mainly the outcome of write-off for the sales of accompanying metals. There is a lot less molybdenum than there was before, and hence, ultimately, the C1 cost is higher in Sierra Gorda than it used to be last year.

I also wanted to draw your attention to the specific nature of the C1 cost. We talked about the cash unit cost of the production of concentrated copper, so we adjust the C1 by the noncash cost and share. Hence, we've got depreciation. But the more we produce accompanying -- the more accompanying (inaudible) metals we produce, the lower the C1 is.

Now EBITDA. So operational results, please note that it is 7% higher for the whole group vis-a-vis last year. And the factor that's got the big -- that's had the biggest positive impact is the lower EBITDA for KGHM Polska Miedz S.A., although we've also had higher EBITDA in Sierra Gorda. In the remaining companies and KGHM International, EBITDA was lower.

Now for KGHM Polska Miedz S.A. The higher EBITDA is mainly attributable to higher revenue and the increase is of 23%. So this is the main factor that has had the biggest role to play while determining our results.

Now the net result of the group. The difference here between this year and the first semester of last year, as Mr. Chludzinski has already said, is a lot bigger than for EBITDA. Our net result is 59% higher than in 2018. And please also note that the decisive factor for this increased result is the level of revenue. Revenue is higher than last year and the difference is PLN 1.805 billion.

Now of course higher revenue are related to increased production but this also triggers higher costs because the change in costs has impacted negatively the net revenue. But the main contributing factors to that was the increased use of foreign input and the increased cost of energy, which is independent from us, also foreign services, outsourcing, transport and transportation predominantly. But the main factor that triggered cost increase was the increased production and sales, which is a natural phenomenon whenever the sales increases.

Now ladies and gentlemen, now if I were to speak about the remaining factors, then please look at the results of our involvement in joint ventures, lower capital like Sierra Gorda, lower than last year, which is very positive -- which is a very positive phenomenon, which confirms that our activities previously engaged in our foreign assets have become fruition.

Now for financial flows. What I wanted to say is that the level towards the end of the first semester this year was higher than at the beginning of the year, which means that we have worked more funds.

As you can see, the biggest -- the highest bar in green share is the result of our bonds issuance. We have received PLN 2 billion from that, but also profit before tax has accounted for PLN 1.452 billion, and the remaining flows from operations account for PLN 307 million.

Now indebtedness of the capital group. This is what you are always looking out for and asking about. Please notice that the main indicator, net debt versus EBITDA, is being maintained all the time at the level that we want to keep, and that is below 2.

This indicator towards the end of the first semester this year was 1.8. But what we should notice here is that if it hasn't been for the amendments in accountancy regulations, this would have been 1.6%, which would have matched last year's level.

Amendments in accounting regulations have led to a situation where our records have had to be amended, but the level of indebtedness itself, as a matter of fact, remains as it was last year.

Another thing that I'd like to note here is the comparison of our level of indebtedness towards the end of June to the status as of the end of March. Debt -- net debt after the first semester was lower than after the first quarter.

And now ladies and gentlemen, perhaps a few words should be said about the issuance that took place recently. This was an important event. We issued PLN 2 billion, and these are seniority bonds. And the maximum issuance could be PLN 4 billion in this program, but this is a multiannual program. So this year, we issued PLN 2 billion. And the best news for us is that this ties well with our strategy and confirms the consistent implementation of our strategy because we actually did plan ahead the change in the financing structure. And the bond issuance was for PLN 4 million 5-year bonds and PLN 1.6 billion 10-year bond, which actually allowed us to extend the maturity date of our liabilities. And it increased our financial security where that translates into a better preparedness to any market changes that we might be facing.

One more thing that is worth noting here is that unlike as the case in foreign sources of financing from banks, bonds are unsecured debt.

Ladies and gentlemen, if we have a look now at the structure of entities that acquired our bonds, I would like to draw your attention to the bank, among the entities, that became our creditors. There is the European Bank of Reconstruction Development. A large portion of debt was taken out by banks, insurers, that is to say, stable financial institutions.

Since July this year, we've been paying lower corporate tax relevant regulations of the Act of 12 April 2019 have already come into force, on the 1st of July this -- act that's [government] signed by the President. And as a result, already now are we able to say that this tax will be 15% lower than what we paid in previous year?

Thank you very much, and I would like to give the floor now to my colleague, Adam Bugajczuk, will tell you about investments and development.

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Adam Bugajczuk, KGHM Polska Miedz S.A. - Deputy CEO of Development & VP of Management Board [4]

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Ladies and gentlemen, with regard to the implementation of our key investment projects, they are on track. In the slide, you can see an enumeration of our key development project, deposit availability program as had been mentioned by the CEO, and that is both corridor availability part of this effort and deepening of the shaft linked to the overground air conditioning station. All these works are on schedule. In the future, that will bring tangible results, and we are progressing towards this outcome smoothly.

And as regards the concentrate growth in installation on 22nd of June in the global smelter, the installation was handed over for use, which concluded another stage in the development of this installation.

As regards [WTR] furnace on 21st of June, and the furnace was put into operation, and it is operating in line with the assumed parameters.

As regards of the development for the waste removal. The tank on waste segregation station works are proceeding smoothly and both on schedule and within the budget plan. And a lot of those key projects, mainly the activities, are better aimed at bringing into alignment our activity with that regulation.

All these efforts will bring to a situation whereby next year, we will be compliant with all the requirements. Here, you can see a comparison of capital expenditures compared year-on-year. We recorded a 35% increase in capital expenditures. That was due to the fact that we postponed the schedule, both financial and the subject matter content of those activities. But as I mentioned at the beginning, all those works are proceeding without any delays.

The next slide shows a time line of the investments linked to the WTR furnace in Legnica smelter. That was the largest investment made in this plant. The largest (inaudible) was put into operation, and the investment was not simple, it is, in fact, the only furnace of this kind in Poland.

In the following slide, you can see photos from Glogów smelter roaster. It seems that we have covered the entire presentation.

In general, [friends and] family, I would like to say that after the first semester, we see that our assumptions adopted in December 2018 are bringing results. The strategy which assumed our response to the volatility of the global situation, crisis, global table and macroeconomic conditions, all of these things notwithstanding, we are optimistic about the future. That's the repeating long-term perspective for copper. The good perspective, unshakable one. What we have, what are we doing is a good path forward. And it will continue to -- continue along this path. With increasing efficiency, we will benefit from the opportunities. Even in face in variability -- volatility, we are, of course, supported by the hedge in silver. That is the fact that our geological deposits contain silver, which is an accompanying metal and usually in such conditions that have better pricing parameter a little bit than gold, and the standing of the dollar, supports us in broader context for macroeconomic conditions.

That will be with regard the whole summary. And I give the floor over to my colleagues. After this overview, we would like to invite you to ask questions. I already have a question that was asked a while ago. But let's start with questions from the room, and please present yourself first.

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Questions and Answers

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [1]

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Pawel Puchalski, Santander. I have a few questions. In the first slide, you presented information about strong growth in net profit. Would the intention of the management board will be to pay out dividend from this year's profit?

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Katarzyna Kreczmanska-Gigol, KGHM Polska Miedz S.A. - VP of the Management Board- Finance & CFO [2]

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I can answer -- well, let's ask -- let's see all those questions, then it will be easier for us to answer them one by one.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [3]

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So the first question was about the dividend. The second issue is about Poland. Please dwell a little bit on that cost of staff of employees and cost of electrical energy, it's relatively low levels. Will these levels continue in the following quarters this year? Or do you expect an increase here in the second half of the year that is in a lot of company. And as regards KGHM International and Sierra Gorda, we heard about EBITDA growth. And I would like to ask about EBITDA decrease because in both KGHM International and Sierra Gorda, there was quite a significant increase in operating costs. And now will the level of operating cost in international and in Sierra Gorda continue into the future? Or is it at a level from which further growth will start or was again one-off event? And the last point, you communicated this positive news about high CapEx, PLN 1.6 billion, and I would like to find out whether this good news is likely to continue in the following quarter? Or should your CapEx of PLN 1.6 billion be multiplied by 2, to achieve the number for the whole year? Or are there any extraordinary events here? I know that there was one -- an increase of the equity in Sierra Gorda, but maybe there are some other further events.

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Unidentified Company Representative, [4]

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Okay. Let's address the questions one by one. For the dividend, our dividend policy remains unchanged. As we communicated previously, we make everything dependent on how we close the -- bearing in mind the interest of our shareholders. That is what we can say as of now. With regard to employee cost, I will hand over to [Kazsha].

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Katarzyna Kreczmanska-Gigol, KGHM Polska Miedz S.A. - VP of the Management Board- Finance & CFO [5]

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As for the employee costs, we have strictly defined rules of increasing salaries. In our collective bargaining agreement, there are clear provisions on that. So please note that as 5.6% growth in employment costs, this is below the market cost levels, but if labor costs in the economy in general and industry grow, then in our company, that will have to grow in proportion as well. But it will grow more slowly than the average in the industry. As for the energy costs, we reduced our energy costs in the first half of the year by those offsets that are already confirmed. There are still some regulations that are not effective yet as they are being processed at the moment. So as of now, there might be some increases here rather than decreases. And with respect to employee costs, we do not see any reasons for increasing our assumptions. So that is very much linked to macroeconomic factors. We take into account the provision of our collective bargaining agreement, which, I guess, the reference point, the average industry results. And Sierra Gorda will be commented by Rados.

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Radoslaw Stach, KGHM Polska Miedz S.A. - VP of the Management Board - Production [6]

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You mentioned operating cost in Sierra Gorda and KGHM International, we do not record any negative developments. The only factor might be [easy] price which, of course, influences the cost of molybdenum. To a lesser extent, that is the margin that we gained last year that was 0.05. And that is a significant decrease, but it is an accompanying metal that affects costs. Also somewhat lower sales as a result of no negative developments have been observed there. Just the opposite, we need to stress that today's processing on Sierra Gorda is very high after the first half of the year. And the next month should also show a very good picture. Our strategy was 130,000 share on processing. And looking at the way things are, it's going to happen. We want 30% more vis-à-vis 2017 and '18 to be achieved next year. And I think we've got to factor that into influence and make this possible. Now regarding CapEx. As was said by Mr. Adam Bugajczuk during his presentation, the increase was largely caused also by the shift from the contracts of last year and some contractual matters, so it needs to be looked into and taken into consideration. Those are shifts that accounts for partially for this growth.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [7]

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I'd also like to hear about the scale of the shift then.

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Unidentified Company Representative, [8]

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I think we can ask Lukasz Stelmach after the conference to approach you on a one-to-one basis and communicate this to you. These are individual investments and contracts, so we won't ask our experts to disclose the details in as much as it can be disclosed due to company secret limitations.

I'm not sure if I understood you well, sir, but you seem to have said that we are -- that you are aware of additional extraordinary CapEx outlays in Sierra, but we are not aware of these. So I'm not sure what we're talking about here because this year, we're trying to transfer less money to Sierra, which I think triggers the positive outcome of the transfers unlimited, and we are not foreseeing any additional CapEx expenditures in Sierra. Quite the opposite, we are convinced that we will not even be putting employees over the planned outlays in the context of current financing.

Indeed, I spoke about $30 million of co-financing for the repayment of a loan, but this is not anything extraordinary because this is part of the plan. And like I said, it is a plan that we are even assuming will not be fully put into place, at least in terms of meeting the amounts that were put in the plan, also due to the increased production and to the fact that we're achieving the production parameters that are improving our EBITDA.

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Pawel Puchalski, Santander Brokerage Poland, Research Division - Head of Equity Research Team [9]

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And my last question here. The slide that I find is missing from the presentation concerns your overall annual budget. I must admit I do not exactly recall the copper production level that was assumed for the concentrate. We are talking annual for this year, right?

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Unidentified Company Representative, [10]

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Yes, in the mother company, other than less elsewhere because that's not relevant. It's 397,000. And I understand that the first semester results indicate, yes, that we are on track to meet the budget. And we are, of course, trying to go beyond that and exceed the budget as we did in 2018.

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Unidentified Analyst, [11]

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(inaudible) Regarding energy prices, I understand that you were -- used the statutory compensation, not high consumption industry regulation. So what are the projects regarding energy prices and the way they translate into your operational costs in the following semester and in 2020?

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Unidentified Company Representative, [12]

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Well, like we said at previous conferences this year, as regard to energy prices, we have a large volume of long-term sales, and this is not a negative situation and does not have any negative impact. Also next year, some of the volume is also in long-term contracts, and we are happy to see that, at least to a certain extent, we will be able to use some external stimuli. But also due to the trends on the market while this is one of the reasons why we assume that in our strategy that 50% of our energy independence will be based on renewable resources and own resources, that will allow us to gain more energy independence in terms of supply continuity and cost-effectiveness. And to give you more details here. You asked about the source -- the statutory source that we used. We have not yet decided. We are still -- options are still open. In terms of us declaring whether we are going to use this statutory support for the energy bill amendment or compensation system. We have secured some assets for that. And to that end, but we have still some time before we have to decide ultimately on the terms applied. And having thoroughly analyzed the conditions applicable in our situation, we remained in the selection to opt for one of the forms of support. But we have made these assets evident in our financials.

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Unidentified Analyst, [13]

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My question is about the mother company costs, the cost per unit in the second quarter was 18,606, and that's 10% and plus quarter-on-quarter. Now starting from the 1st of July, the tax will be lower and perhaps your electricity bill will be lower as you mentioned, so the pace of cost increase quarter-by-quarter in Q3 and Q4 will be comparable. It will be about 10% given that the facts will be lower and the energy costs will be lower. Is that correct?

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Unidentified Company Representative, [14]

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Let us consult as to whether we can break down cost in this much detail. It's not that simple. And as a rule, we do not break down our cost to such a big degree of detail. We would not like to disclose data that we have not so far disclosed. But as we indicated in our previous stocks concerning the trends in relevant quarters and concerning the potential factors that will positively impact our cost levels, it is difficult at this point to indicate whether the next quarters to come, and the current quarters will experience increased support from the support systems due to regulatory changes.

It's very difficult to actually assume anything for certain. We can talk about cost dynamics related to production development and natural cost inflation, but we will be looking closely at the regulatory developments that may help us offset the cost dynamic and sort of flatten it slightly. We are also putting in place quite a few initiatives that translate into specific cost benefits such as using the branch logistics to our benefit. After the pilot program in the first quarter, we have generated savings at the level of 2% in external purchases. That's a pilot program, but we are hoping to get much more in terms of savings due to the use of different logistics systems, digitization, centralization of our logistics, but also implementing a sourcing system based on an IT solution that will allow us to be paperless and fully electronic throughout the company. That's already bringing up results. But in terms of logistics and sourcing and purchasing, we're expecting here a decrease of cost.

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Unidentified Analyst, [15]

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Please give more details here.

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Unidentified Company Representative, [16]

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Yes. Throughout the whole technological production system here, we're looking for solutions that will help us generate lower costs, but still the system of mainstreaming production in the mines and a number of actions that are outlined in our cost items. And towards the end -- the year-end, we will try to demonstrate that what we have put in our strategy is being put into practice.

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Unidentified Analyst, [17]

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A few questions from me here, if I may. The prices of electricity, have you already contracted prices for 2020 or is it still something that's ahead of you? Question regarding Sierra Gorda. There was quite an important increase in stripping outlays. And now will this be on the level of 130,000 tonnes or perhaps more next year because there is quite a significant increase of CapEx there. And now the reversal of the pricing of a loan. As far as I can recall, about PLN 100 million was mentioned for Sierra Gorda. So should it be expected at year-end that there will be a large reversal of the write-offs that were done in 2016 for foreign assets or is it too early to say?

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Unidentified Company Representative, [18]

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I am nodding my head here or shaking my head. That doesn't mean I'm saying no or yes, but we will be reporting the details further on. President will tell you about his thoughts.

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Marcin Chludzinski, KGHM Polska Miedz S.A. - President, CEO & President of the Management Board [19]

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Very quickly, to your third point, it is too early to talk about write-off. Now Section 5 talks about removing the stripping. This is not planned in the budget. There aren't any additional unforeseen costs. This has been planned in the budget, and it is happening according to the plan. Here is my comment. Now regarding energy prices, we -- a part is already contracted for 2020, but some of that is purchased at the exchange, so we have this under control, shall we say.

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Unidentified Analyst, [20]

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And another question regarding budget and CapEx. To Slide 16, CapEx in Poland. The budget might be exceeded throughout the year. Now my question is to what extent have we been paying off CapEx from last year? And to what extent will the budget be exceeded quite simply?

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Unidentified Company Representative, [21]

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But the budget will not be exceeded, we will meet the plan that we put forward. We're increasing our effectiveness. Last year, you said that 80% was low. So it's our ambition to raise that. And we will be using the budget that's planned for this year. But no -- and there will be no increases in terms of CapEx in the budget. Now the details will be communicated to you after the conference regarding the year-by-year shift.

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Unidentified Company Representative, [22]

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We have one question that keeps recurring from our online viewers. There was a report published about purchases considering those outlays and those investments as inaccurate. I should have not comment on the report from the Supreme Chamber of Audit. That is the state institution well prepared to assess the situation, so I don't quite understand the intention, underlying question. I understand that the former President [Veert] presented his argument related to the decision-making process. He is in the position where he's forced to do that. We just look at what the container control and we listen to what the Audit Chambers is saying. We learned our lessons. We are not engaged in opinion writing, we are involved in real management towards an investment crisis. And now we are in the first year, we are able to show real growth in production, a real reduction of transfers from the mother company into Sierra Gorda. We disclosed production growth without the major capital expenditures which were planned based on technology optimization. We increased the Polish part of engineering effort and all those activities that bring results. And there was this Polish comedy where one of the characters said, "Maybe they're own life, but we are right, whatever they say." We have to focus on our business. We are not in a position to judge after that.

Are there any further questions from the room?

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Unidentified Participant, [23]

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[Peema Zeblinky], a business owner. I heard a question KGHM and [GG-1]. At what stage in talks with this company you are because, GG-1 offered the buyback of our shares?

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Unidentified Company Representative, [24]

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At some point, they closed off negotiations. We were willing to share -- to sell our shares, but then they closed the process. So that's what I can say.

Are there further questions? There are no further questions. That is it. If more questions come to us online, we will answer on our website. Now we would like to invite you to lunch and we are also available for you if you have any questions. All managers from the management board are also ready to answer your questions. Investor relationship team is present here, so we can answer all your questions as direct communication. They will also be posting on our website. So thank you.