KGHM Polska Miedz S.A. (KGHPF) Q2 2024 Earnings Call Transcript

KGHM Polska Miedz S.A. (OTCPK:KGHPF) Q2 2024 Earnings Call Transcript August 14, 2024 6:00 AM ET

Company Participants

Andrzej Szydlo – President & CEO
Zbigniew Bryja – VP of Management Board, Development
Janusz Krystosiak – Head, IR
Piotr Krzyzewski – VP of Management Board, Finance

Conference Call Participants

Pawel Puchalski – Santander
Lukasz Rudnik – Trigon Brokerage

Operator

Good afternoon, ladies and gentlemen. Welcome at the conference where we are going to discuss our results for Q1 2024. The presentation will be delivered by the members of the Board, President of the Board, Andrzej Szydlo; the Vice President, Zbigniew Bryja, who’s responsible for Development; Piotr Krzyzewski, VP, responsible for Finance; and Piotr Stryczek, Vice President, responsible for Corporate Affairs. We have Janusz Krystosiak with us, he’s in charge of the Investors Relations.

After the conference — after the interventions from our management board, we will have Q&A session where analysts and journalists will be welcome to ask questions. And let me remind you that we have the streaming of the conference on our website and this is also the place where you may ask your questions. We have a special tab for results where we are going to have all the answers delivered, and there is an email address where you can also send your questions.

And now, over to our President of the Board, Andrzej Szydlo.

Andrzej Szydlo

Good afternoon, ladies and gentlemen. Let me just explain that Vice President Laskowski is not able to attend. He really wanted to be here because conference covering the first six months, it’s an important event, but for personal reasons, he had to stay back home. Well, just to make things a bit lighter, just at the beginning of the conference, I have to say that I see the preview of the upcoming long weekend because we have a decent turnover, no crowds. I have to admit that I have an issue reading the presentation that I have in front of me. Therefore, I’m going to use the hard copy. I’m going to give you the general highlights of our performance during the first six months of 2024. I will also touch upon production. And, Mr. Bryja will provide more details about production. And finally, financial results, our Vice President Mr. Krzyzewski will cover that. I think that it is a neat approach to the presentation to save time for questions and answers.

2024, the first six months. Well, to a large extent, we really want to compare ourselves to the past period, but we are also referring to our budget. However, today I’m really going to focus on the comparison to the previous period and I may also offer some additional comments. However, references to the budget is more of the internal business of the company.

Let me first look at the macroeconomic environment. Q2 was quite conducive because of the copper prices. However, we had fairly high volatility. Nevertheless, compared to Q1 2024 we’ve seen a clear increase in prices. In dollar terms, compared to the first half of 2023, the prices were up by 4%. However, given the depreciation of the dollar against zloty by 7%, in zloty terms, we’ve seen that negative result of 3%. That will be more visible at the next slide.

Now, silver. Silver price 12% up in dollar terms and 4% up in zloty terms. So in this case, the depreciation of dollar against zloty was offset since the price in dollar terms of silver went up by 12% compared to the first half of 2023.

And now in terms of our overall production and dry matter, no major changes. It is — ore and dry weight it’s basically the same as — and I think that quarter-to-quarter and half year to half year the situation is stable, no major variables. Production of copper in concentrate was slightly higher, below 1%, compared to the first half of previous year. And 4.7% in negative territory is the production of metallic silver. And I’ve already explained why we’ve seen this variance. In Q1, we’ve seen actually over 10% in the negative territory, but this is due to our maintenance cycle. And we need to go back to Q4 2022 when we had actually a standstill because of the maintenance of that particular department of semi-precious metals. And therefore, in Q1 2023, we were actually depleting our inventory, so we had a very high baseline to compare to 2023. And although in Q1, the difference was very substantial, I think that I have a note somewhere about production, 388 tonnes in Q1 2023 and Q1 2024 it was 322 tonnes. So it’s a major variance, 17% after Q1. Q2, when we compare ourselves to 2023, it’s 10% in production and 356 tonnes. This is where we stand at Q2. Therefore, after 6 months the overall result is minus 4.7% for production of metallic silver. Production of gold is 22.4% again negative, but this is also the result of the high baseline and the smaller processing of the imported concentrate containing that metal.

Our CapEx was PLN1.750 billion. This is where we are 15% up compared to the same period of the past year. And finally, 14% give and take is what we see within the scale of the current year. Our revenue was slightly down by 2% and we ended at PLN17.480 billion. And well, in terms of zloty this — shows the minus 3% copper price in Polish zloty. Debt to adjusted — net debt to adjusted EBITDA is 0.7. This is a very good result. We were down by 3% because prior to that we were at 1.12.

If we move to the next slide, I’ve already mentioned the revenues PLN17.480 billion for KGHM Group. We are down by 1.5% compared to the same period of 2023. Adjusted EBITDA is PLN4.2 billion. We were up by 35% compared to the first six months of 2023. And with the increased margin EBITDA from 17% to over 20% and the net result PLN1.74 billion and this is where we see a major increase, over 200% from PLN400 million last year. In terms of KGHM’s local assets, the revenue is PLN15 billion, specifically PLN15.076 billion, adjusted EBITDA is PLN2.472 billion and 8% increase compared to the first half of 2023. And the net profit is PLN1.331 billion and that means that we were up by 10%.

Let me move to the next slide. I’m not going to make lot of comments, because I’ve already said a lot. Copper in concentrate 205,500 tonnes. Basically, all the products were delivered at the higher level. Compared to the timeline, we were up by 50%. Copper — electrolytic copper was also a notable result. And at the same time, we actually made the inventory of anodes for the planned standstill of Glogov 1. So the inventory of anodes was over 40,000 tonnes before the standstill. So that was then0020like in the shadow of electrolytic copper production. So if not for the anodes, the electrolyte copper output would be higher. But since we had to get prepared for the technological cycle of that facility, we had to actually prepare the sufficient inventory. But will be consumed over the third quarter of this year.

In terms of the production in KGHM S.A., not much to add. We have to say that in international, we have much better production. But objectively speaking, I have to say that the baseline for the first six months of 2023 was really weak. We had issues with operation production and availability of the mining equipment. In total, production of paid copper in the group for the first quarter was 358 tonnes, 2% higher than in the first half of 2023. If we break it down into KGHM Polska Miedz S.A., 293 tonnes, just 1% less. Just because you have to keep in mind the context of building, the buffer for the technology downtime. Very good results, indeed. Again, the base is 93%, up compared to the second quarter. Okay, it went 93% higher in Robinson, which is the main asset of KGHM International and a slightly worse performance, 10%, at Sierra Gorda.

If we look at the next slide, you can see here to a large extent, a repetition of information that has already been presented. But I would like to highlight that if you look at production at KGHM Polska Miedz S.A., the share of copper production from our own input or — and input from third parties is basically the same as last year at 66%, 33% and 34% from third parties’ input. In total paid copper production, KGHM International accounts less than 20% of paid copper within the group.

As regards to silver production, I have already talked about that. It continues to be 5% lower for the first half this year than the first half last year. It has already been explained, so I will not repeat this. Precious metals, 10% lower and molybdenum, unfortunately lower by 50% mainly from Sierra Gorda. Here we can say that molybdenum is difficult product. It is not a side product. However, the production of copper in this mine and at this stage of processing, we focus our attention on copper.

Now, I would like to hand over to Mr. Bryja to comment on our production results.

Zbigniew Bryja

Ladies and gentlemen, a lot of points that have already been mentioned will recur in my presentation, but let’s go through areas.

I will start with Poland. The results of KGHM Polska Miedz S.A., ore production was slightly better than assumed. But in dry output, we are within the assumed range that is 15.2 tonnes. Ag content improved and Cu content improved. That is not just the result of better work organization, better work discipline. It would be too much to attribute the merit entirely to ourselves. On the bars you can see how the output changed in individual quarters since last year. We now entered better parts of the deposit with greater content of silver and copper. As a result, we have better quality concentrate. Compared to last year, we have an improvement in terms of Cu content in concentrate. 205,500 tonnes was the result for the first half of the year and that is about 3,200 or 3,300 tonnes more.

Regarding electrolytic copper 223 tonnes, it has already been explained why we are lower 1%. And in the first half last year we simply had to accumulate a certain buffer of anodes. And then we had better output, better quality ore and in the future we will recoup this. So this temporary dip will translate into a recovery of the assumed levels of production in the future — in the following accounting periods.

Production results in Sierra Gorda, here unfortunately, we cannot boast such good results as we had in KGHM, because in KGHM we had about 100% performance of the plan. Unfortunately here the lower production of paid copper in the first quarter by as much as 11% compared to the same period 2023 was due mainly to the exploitation of ore of lower content of metal in just a fraction of what we had before. So worse quality ore, polymetallic ore with lower content of copper translates into to lower parameters in molybdenum as well. The same goes for gold. However, silver maintained good parameters. So we have a slight improvement in silver production as compared to the assumed levels.

As regards production results at KGHM International, here the situation is opposite to what we had in Sierra Gorda. Last year we experienced the breakthrough at Robinson. This mine was in a very poor geological condition, under worse meteorological conditions. And as a result, the base for calculation of the plan was underrated. Now Robinson is making up for those poor results in the past. So in spite of worse results in Sudbury and Carlota, Robinson’s result even improves the entire consolidated result for the holding. Even it improves the result of KGHM, because we have about — well, I can give you the exact number actually. In KGHM International, copper production was 14,000 tonnes higher than the assumptions. And again, molybdenum plays a role. Here molybdenum had a positive contribution and we might have had a similar result on silver. Unfortunately, Sudbury had poor results on silver and that offset this better result I talked about previously.

That was about production and now I will discuss my area of expertise. Because as the person responsible for development, I specialize in this area in the company. The first half of this year meant CapEx as PLN1.57 million. You can see the pie here. The greatest expenditures on mining, PLN1.2 billion; and metallurgy, PLN201 million; the other activity, PLN19 million, and research and development, PLN1 million; and PLN76 million, leasing. If you deduct leasing from the total, you will see the analytical breakdown, how money was allocated to individual products. So recovery. Recovery of the performance of machinery, modernization and purchases of new machinery, 33%. 38%, maintenance of our production capacity assumed and production plans.

Then we had R&D, including exploration. So matters related to obtaining new areas, new deposits, building shafts and so on. And 1% accounts for adjustment products. So here we are mainly talking about adjustment to changing legal regulations, EU, laws and so on. But that is a relatively small amount, PNL1.369 million. And then we have external funding and leasing (76) (ph). Altogether we have PLN1,570 million. And that is performance at a level similar to what we had last year on CapEx. In Capex, you do not have a proportionate spending to the timelapse. Last year, we had PLN3,950 million. That’s our target for this year.

Now if you look at the key investments, out of the total of PLN1,494 million, we have deposit availability program. Here on the side, you can read the main areas on which we allocated money. PLN345 million, building of three shaft GG-1, that is equipment of the shaft that has already been drilled and handed over for use in June last year. Now we are building the fixed rigid scaffolding that will not be line-based, but rigid scaffolding increase in the capacity of air conditioning at the central unit and works related to various installations like compressed air supply and so on. This is the type of work that needs to be performed at the final stages of shaft completion. Then we have fixed structures. Previously we had those temporary steel ones, and now we are finalizing this investment. As for GG-2 shaft, we are now in the process of analyzing geological drill results that is necessary in order to design the casing of the shaft. That is a very significant part of the entire investment, very much dependent on geological conditions. As for the remaining shafts, we are now conducting planning, works, buying areas, and next year, we would like to start geological studies for Gaworzyce shaft. And if funds are available because CapEx is not enough to carry out all the investment activities you would like to. So if money is available, we will start building this last shaft as soon as possible.

The next activity is providing utilities to mining areas. These are not spectacular projects. They do not have nice names like Odra shaft or something else that would be sonorous and glamorous. Now we are extending pipelines, we are building electricity supply installations, dispatching centers, air conditioning and so on. PLN267 million is the amount we are going to spend on it.

The next area is the replacement of our machinery. We are a company that operates about 1,500 vehicles, machinery under — operating underground. Every year, we replace about 250 machines. We are going to spend the same amount roughly as we did in the previous year. So this year we have a slight delay in this project, and that was due to the standard — new standard that came into effect for combustion engines. And therefore the vendors will supply the machinery till the end of the year with a small delay. So we will complete the plan but with a slight delay in the schedule.

The next plan is water removal from mines. This subject keeps resurfacing. Since 2019, there has been a greater inflow to Sieroszowice mine. Now this phenomenon is under control. Nevertheless, significant CapEx is required both for building the chamber for pumps and for works performed over ground in order to stop water coming to the mine. So for some time, we will see the recurrence of this expenditure. Then international financial reporting standards and adjustments related to this, that concerns various units, mines, and metallurgy centers. We invest in machinery components, renovation, that is not basically a replacement. That’s more taking care of maintaining the machinery in working order. And this is more recovery than development actually. The replacement of the mines and array facilities. And again, we are not speaking about building the new conveyor belts, but actually extending the existing ones. In case of ZWRS it’s about filtration station and mills and crashers. And in terms of mills, we have the tanks for sulfuric acid and modernization of electro refinement in Glogow II, but also in Legnica smelter. So this is rather modernization upgrade services, not new facility, but rather replacement or recovery of the existing ones.

The next thing is exploration. We have seven licenses and on top of it we have seven licenses for production and seven for exploration and seven non-CU licenses. So we are either doing surveying or drilling or designing across all these areas. But this is — this part of CapEx that is absolutely necessary and actually, it could be higher than it currently is. So just imagine that one geological drill that goes down to 1,400 meters, it’s over PLN10 million. So three drills or three geological openings, it would be over PLN40 million. But since we are moving more towards Northwest, we have to continue exploration.

In addition to that, we have not completed the Puck’s project where the feasibility study is prepared. We need to answer a number of questions before we actually make a decision about going into the operation of that deposit. We have to be sure, but it would be a reasonable investment. Now we don’t have any doubts regarding the invest — the financial side. However, we need to answer some questions regarding geological surveillance.

Now, development of the Zelazny Most Tailings Storage Facility, we reached a fairly high level today, 195 meters, about like the crown of the — crown height. We got the permit to go to 205 meters. All three municipalities, Gaworzyce, Rudna and Polkowice are interested in this project. Now they have land development plans under development, and anyone can offer comments and raise their objections if any. But hopefully, the procedure will be completed, and by June 2025, we should be getting the permit.

Now shafts, the shafts need maintenance. We have to maintain them, and therefore, the SW-4 is like the shaft that is currently being maintained, and this is sort of the cross-line between OpEx and the CapExs. It goes through some layer of salts, we need to keep working on that and — because we have to keep the installation operational. So we have to actually remove the salt that is coming into the shaft. And here is ZWR and Glogow copper smelter. This is a minor thing. And more about health and safety. I’m not sure, perhaps we should say something about Gaworzyce. This is a tiny thing. I think that we are getting too much into details. Okay. But these are tiny things regarding overall upgrade and modernization efforts. And other projects is PLN64 million, so overall PLN1.494 billion. As I said, we cannot really get hooked on certain things because some of these efforts are multi-annual and there are multi-annual contracts. And on other tasks we have just — the competition procedure for selecting contractors. But we believe that our CapEx is safe and we should be the same level as last year. And in 2023 the CapEx was at 98% of the budgeted CapEx. So fairly good result.

So this slide has been shown for the past year at our conferences, because this is where we show the increased efficiency of our output in Deep Glogow — Deep Industrial Glogow. I think that you know where it is. Unfortunately, I cannot really show it on this screen, but we are speaking north towards Sieroszowice and Rudna. Currently there is one shaft, GG-1, over 1,300 meters deep, 1,350 meters deep. The deepest shaft that we have. And we’ve been interested in this area since 2004.

In 2014, we deployed our first production facility. Currently there are seven of them, six in Sieroszowice and one in Rudna. So why am I saying that we keep showing the slide for the past year? And let me say upfront that I will be referring to that area during the upcoming presentations, but we will not have a separate slide for that. Because I want to draw your attention to our production efficiency. Copper and — in ore, and silver in ore. So if you compare Q1 and Q2, it’s — the difference is 2% or 3%. But if you look at the 6 months of the past year and the six months of this year, it’s 18% difference or 16% difference. How come? Well, because of the ventilation works that were performed last week and therefore all the facilities were working full steam. Therefore, it is just a routine business to keep the current capacity and production level. So in a half a year, you will not be interested in this slide because you will see the same thing all over. So instead of the slide, we will be showing something else that would be more exciting for the forward-looking aspects of our business. But for the analysts, this is an interesting slide because it really shows how important it is to build the shaft and to ventilate, to actually let in air. Because air, although it is so light, it really contributes to each tonne — additional tonne produced.

That will be all from me. Thank you.

Unidentified Company Representative

Ladies and gentlemen. Before we actually move on to the financial performance, let me mention a few words about our production, namely Sierra Gorda and Robinson.

So for Robinson we had some — we had an opportunity to travel to Nevada and spend some time there. We were able to make a review. Currently, we are at pit West 5. And as you know, the production has been moving as scheduled. Now we need to optimize the processes, we have to improve the logistics, we have to optimize maintenance. So this is something that we are going to focus on over the next quarters. And obviously, we need additional prep work for Liberty and Veteran. These are additional sites where we are going to start production of ore. And a lot of activity has been going on there.

For instance, TCF has been fully taken over. TCF Nevada has been moved in-house. We decided to let go the third party contractors. That will obviously take some time, but over time it will have — provide a positive boost to our financial performance on that mine. Sierra Gorda, well, this is quite a challenge and we’ve been doing the same thing in Sierra Gorda as we’ve done in Robinson. So we are sending our teams from Poland and they work with the local teams to improve operation and efficiency of production. On top of it, the whole model of units and filtering and drilling so that we can actually have long term believable model. And also drills in the further sites so that we can actually extend LOM on this mine. So this is the main activity that will be taking up our time over the next quarters.

But now let me look at the financial performance key indicators. EBITDA PLN4.208 billion and again we were up by 35% compared to H1 2023. And now — but if we actually build a bridge between H1 2023 and H1 2024, PLN1.1 billion is really KI, so International. This is approximately PLN1 billion. And PLN2 million were contributed by KGHM S.A. But Sierra Gorda had the negative contribution.

Now let’s look at Q2. That was our first quarter in business as — a Management Board. So EBITDA in Q2 2023 compared to Q2 2024, the EBITDA was growing by two-folds across all the segments. So KGHM, it was PLN1.6 billion yearly and KI was over PLN400 million on the upside, and Sierra Gorda for PLN470 million. Other companies have also contributed positively to our EBITDA. The net profit we were up from PLN401 million to PLN1.074 billion. We more than doubled that. And the main impact was the result on our operating activity. Well the income tax was higher, so it was a negative impact. But nevertheless at the end of the day the consolidated net profit was delivered at such a high level.

Now let’s take a look at the revenues. As the President of the Board mentioned, the difference between H1 2023 and 2024 was just 2%, and if we look at the bridge on the revenue, then two main drivers that really gave us this picture is, on one hand a change in the overall market of metals. And copper was up by 4% and silver by 12% and gold by — was also on the upside. But just was not in such a good shape. But all these things were contributing positively to our revenue, over PLN700 million. And when we look at the dollar zloty exchange rate, obviously this is where we got the hit. Our revenue was down as a result of the dollar depreciation. However, that was in a sense offset by our hedging transactions. And we can stop for a minute here. PLN57 million, the amount that you see is the bridge between the two periods. But actual results on the hedging was over PLN284 million. Now you need to remember that this is the amount that also has some costs. But on the other hand there is also accounting issue. So some — but I’m speaking about technicalities of transactions and actually recognizing it according to our accounting policy. But hedging during the H1 2024, if we put it all together means that we were almost at 0. So we may say that actually hedging worked and we were able to eliminate the negative impact from our baseline business. Now when we look at our results from the revenue point of view across segments, KGHM is PLN15 billion. KI, so International, it’s PLN1.3 billion. And other segments contribute — it’s over PLN1 billion.

And costs now. If we return to our first conference that was for the whole 2023. We told you then that we were knowledgeable about mining and heavy industry. So these would be the first areas we would address. And we also said that a particular important area for us would be energy. That is essential in terms of costs. So we are showing you now the effects of those efforts year-on-year first half of 2023 to first half of 2024. We have 6% decrease in costs. Energy is the principal parameter we want to focus on, more than PLN600 million was the impact. And it has to be considered from two perspectives, energy and gas. We have introduced a lot of changes — organizational changes above all where the risk of energy price changes was carried over to the team that is responsible also for other types of risks. We enhanced our toolbox. We introduced a series of new initiatives. Our CEO is in charge of the committee responsible for energy efficiency. And the main energy-related topics which translate into our production security and other aspects of our operations are handled there. So you can see the effect of those efforts.

Just to show you how we manage this topic, because — so we are getting a lot of questions how we handle this, or how we split cost between energy and costs. I’ll maybe give you some examples. Our steam and gas units are our key production sources. We also have generation sources that are responsible for generating energy. And that is then used for creating ice water or air conditioning. And what we did in the context of weather conditions, we introduced this predicting the future changes. So we reduced the cost of our gas. We reduced the cost of energy buying, and we are major beneficiary, because when there is a lot of sunshine, we have negative or zero costs and then we operate as many units as possible to generate savings.

And as regards capacity consumption at sources, we have pumping stations in mining, that is a major issue. From PLNperspective, cubic meter of water obtained at different times of the day has a completely different price. So we are investigating the costs from this perspective. And we try to dynamically steer our infrastructure to make sure that we use as much energy as possible when the price is the lowest and have lower consumption when the price is higher. So those low hanging fruits have already been picked up and are being picked up.

And now when we come to the higher hanging ones, we will have to make greater efforts. We now will break a long-lasting trend this year because if you look at our costs from past years, we have recorded growth. And this year, we would like to change this rule to make sure that the costs stop increasing. That’s a very ambitious task, multidimension one. And for sure, in order to maintain the trend in the long term, keeping costs under control, we will have to incur a lot of CapEx. And this translated into C1 results. In the group, it was down by 7% to $2.65. And at the same time, PLN became stronger to dollar by 7%. And if we take everything into consideration, the difference is at minus 11%, and in total, the difference would be much greater. So the dollar effect comes from the calculation of C1 to US dollar.

If you look at KI, we have a major difference, which results from this asset coming back to the production path and C1 going down as a result. Then we had an increase in cost of fuels, as a result, costs grew and consequently C1 increased as well.

One of the key factors, obviously money, the first half 2024, actually if we look at the time between June and January, the increase in the cash was at PLN700 million. But I would like to start from the end, because PLN700 million — out of this PLN700 million, PLN400 million is investment activity. These were loans and debt instruments. There were a lot of questions after our bond issue, at the end of June to the amount of PLN1 billion and repayment of PLN400 million of bonds that were then mature.

I would like to extend my thanks to our bondholders. That was the cheapest post-COVID non-rated bond issue under the program that we announced for PLN4 billion. For sure, we will hold future issuances. But to give you an idea of our strategy, we have cooperation on several levels. One is Polish and international financial institutions. This cooperation keeps developing and will develop. The second leg is external funding without security, without rating, this type of cooperation will also develop. And now we are also extending the tenure. As you know, mining and heavy industry is characterized by heavy CapEx with long return periods. So we want the structure of this funding aligned with what we envisage in our strategy. If we look at CapEx, PLN2.5 billion negative cash flows on this. Just bear in mind that we are still ahead of the second half of year, which is going to be investment heavier with greater expenditures. Operating and investment flows have already been financed, and on balance, we recorded a growth on all areas, an increase in cash at the end of June this year.

That would be it. Thank you.

Question-and-Answer Session

A – Unidentified Company Representative

Thank you very much members of the management board for the presentation of financial and operating results for the first half of 2024. Now we move to the Q&A session. Questions asked online are handled by Mr. Krystosiak and if there are any rooms — if questions in the room, please raise your hand and you’ll get a microphone. I can see that we already have the first question in the room. Pawel Puchalski, Santander.

Pawel Puchalski

I have a few questions. The first is about OpEx and more specifically employee-related costs. They grow by 1%, 2% in the second quarter and in the first half of the year — year-on-year. And if I remember, you were planning a 9% annual increase plus some one-off changes. Could you tell me please whether we should expect in the second half of this year a strong increase in the scale of increase here. I’m talking about costs that are recognized in your PLN.

Unidentified Company Representative

Employee costs result from our collective bargaining agreement which remains unchanged, but the provisions of this agreement oblige the parties to make sure that the coefficient of remuneration increase is agreed. This agreement has been achieved. It is at a very decent level for employees, 9.2%. Additionally, we have agreed a certain motivational system of changing the place of various jobs within the employment grid, and this year, we expect to have this level of increase. It’s difficult to make quarter-to-quarter comparisons because those arrangements are made at different points in time. There are various levels of annual bonus that is linked to the performance. So it is more appropriate to make comments regarding the whole year rather than parts of the year or make comparisons between parts of the year. I understand what you are asking about from the perspective of profit and loss accounts. If you look into this item, you will also find that there — the write-off of actuarial provision that was 89% for employee benefits that had a positive impact reducing this item. But on our side, all elements have been reflected in the number. So I do not expect any surprises here.

Pawel Puchalski

I have two more questions then. One regarding this presentation, because at some point, when you were discussing Deep Glogow, you said that in the second quarter and in the first half of the year you could see strong growths, but those branches have been operational since the first quarter this year. And you said in the upcoming quarters, there would be no point discussing this because the picture will become stable. Does it mean that the company has achieved in the second quarter its target level of output in Glogow, and then you will have no increase in output from this field? And the second question is about CapEx. Because on the one hand, you are saying you have to invest a lot in more shafts, and of course, that’s understandable. On the other hand, I also hear that savings and OpEx are possible, yet you have to invest more. The third thing is that Madam Minister said that you needed 1.2 up to 1.5 extra CapEx on desalinization facilities. Should that lead to the conclusion that next year’s CapEx is going to be significantly higher than this year’s?

Unidentified Company Representative

As regards Deep Glogow, my intention was the following: getting air to those installations meant that people can work there. Those installations can work there throughout the week. And the capacity and working branches should not change significantly. They have achieved the optimum level of performance in terms of human work and machinery operation. If there is a new branch of operation of Deep Glogow, we will have an increase. But let’s not count branches of Deep Glogow as a separate mine or separate area of activity. We have six branches and this production is attributed to Rudna. One is to Sieroszowice.

Pawel Puchalski

So I have one extra question. When is KGHM planning opening of another branch in GG?

Unidentified Company Representative

Opening of another operation branch depends on preparatory works. Operating branches require all framing, installation of air conditioning, power supply, water and all other utilities. Hence, at the current stage of installation, there is no possibility to set up another branch there. So, CapEx, now?

Unidentified Company Representative

Well, I’m not going to give you a straightforward answer to your question, apologies for that. But in more general. PLN3.5 billion, this is the CapEx that we need to spend to be able to keep the status quo in place and to keep our output at the certain — at the same level under the current conditions that are more difficult than they used to be five years ago. However, that CapEx will not sustain the long-term growth of the company. If we keep the same CapEx in place, we are not going to be satisfied with long — and we are not going to have the long-term operations of KGHM. Long-term, meaning, 30 years plus. Some projects are long term and you have to plan them early on so that later on you’re not chasing the time that is flying by. And the same is true about the access to the new production area and preparing them for reasonable working conditions. So we are certainly going to generate cash and improve our efficiency in operations. But at the same time, we are fully aware that capital expenditure will be on the increase if we want to keep the company growing and be in business in a long-term horizon. That means that we need to start certain capital expenditures early on to be able to sustain stable production and safe operations. And that would include the placement of our tailings and waste products. So we are working currently on the strategy for the KGHM with the main assumption that the key technologies — technology lines are priorities. And it is our ambition to support it with efficiency projects that will reduce the costs, such as electricity or energy. But first things first. So first we have to invest in our main technology line, so that we are able to produce copper until the last bit, and the same for gold and silver. So our CapEx will be growing over time.

Unidentified Company Representative

Thank you. I can see Lukasz.

Lukasz Rudnik

It’s Lukasz Rudnik with Brokerage House. So let me ask more probing questions about CapEx. PLN4 billion and PLN1.5 billion after six months. PLN2.5 billion for the next six months. So what accounts for this additional billion in CapEx? And what about your salt operations? Are you going to make any final decision anytime soon? And when are you in the position to actually share the information about the accumulated surplus CapEx over five years, because the regular CapEx is PLN3.5 billion. But until 2029 or 2030, the surplus of the CapEx will be how many billions, PLN10 billion, PLN20 billion, just to be able to sustain the production and keeping the costs in control?

Unidentified Company Representative

So let me start. I’m not sure if I’m able to cover it all. Perhaps my colleagues will support me. I don’t think that we should assess likelihood of CapEx over time, because CapEx is not proportionate to time during the year. But we don’t see any risk of not delivering CapEx in 2024. So that answers your first question. At this point, I don’t really feel comfortable to share numbers pertaining to the future. I already said that our capital expenditure will be growing, and in addition to the replacement and maintenance CapEx, we are actually building a strategy and we are putting in place the hierarchy of projects. But at this point, I do not really want to get into details and speak about the exact numbers, whether it’s going to be PLN5 billion or PLN10 billion of additional CapEx over the next five years. It may vary depending on the phase of our ongoing capital expenditure projects, but certain works have to be undertaken right now. In terms of the salt production, well, this is the investment project that is very likely to happen. And this is more about sort of adjusting our position here. It’s not about, like, having the business of salt production, but it is more about building a margin of safety because of the problem of the underground waters in the mines that we experienced during the past few years. So there are some activities that have been pursued over the past few months not to — to prevent the excessive salination of the Odra river. So the salt facility will be coming, but we just want to make sure that the installation is of the right scale, not too big, not too small, and it should also stick to the proper parameters in terms of entry and salination. Well, just to offer more comments to that, to say bluntly, we are modeling various scenarios. This is part of our strategy preparation work. So all these things will be addressed. The salt facility is not a standalone business. This is a puzzle of the broader water management picture. So we will certainly share that with you showing the numbers, showing the timeline for the CapEx. So please bear with us for a while because as we said, we are developing the strategy in-house and we want to finish it by the end of the year. So we are doing a lot of modeling right now and the financial model once completed will be shared and presented.

Lukasz Rudnik

Well. Thank you. And another question is about Victoria project. Quarter-to-quarter, the CapEx — investment expenditure was down, and given the nickel prices that we have today, is it likely that you will make the final decision about this project or is it postponed or can we have an acceleration of CapEx? So basically, I would like to hear some comments about the Victoria project.

Unidentified Company Representative

Well, as you said, we are ahead of the major decision regarding the Victoria project and this is called Advanced Exploration in Phase 1. And I think that over the next few weeks, we are going to make the decision. So we will be back with the proper information where we will address various scenarios for this project, including financial scenarios.

Lukasz Rudnik

Okay, another question. Copper, I mean, was added to the list of the strategic commodities in the EU. Does it mean that you may have some grants or lending mechanism with the low interest rate? So anyhow pass — any benefits that would be coming up as a result of the fact that copper was added to the list of strategic commodities?

Unidentified Company Representative

Let me be a bit provocative while answering his question. It is not quite known what kind of benefits may be derived from the fact that copper was added to that list of critical metals. I think that we may look forward to some benefits, some positive effects of that decision. But perhaps there will be a different approach or somewhat modified approach to the fact that, well, any serious deposits of copper in Europe are located in Poland. Perhaps there will be some positive changes. Together with the shareholders, we will be certainly thinking about it and the Ministry of Finance will certainly be invited to the table. How to really sustain long-term business of KGHM in the context of the current met tax? I would rather look at it as, like, the better overall atmosphere around KGHM and copper at large. I would not really be looking at grants or other mechanisms of support.

Lukasz Rudnik

Okay. And the final question is about EBITDA. In the other Polish companies, it was PLN182 million. It was way better compared to other — previous quarters. So is it because of some one-offs, one-off events? Or overall it was higher than the market consensus, so which companies contributed most and did you have any one-off events?

Unidentified Company Representative

Well, this is a complex thing. As we promised, we are currently replacing some human resources in our supervisory functions and management functions. So that has to do with your question. You know that we really want to have very professional human resources bringing a lot of experience. On top of it, we launched a broad-based cost optimization process that certainly had a positive boost. And on top of it, prices of energy, namely electricity and natural gas. Mr. Krzyzewski has covered that. And also we are optimizing our employment and the cost of our manpower. So in terms of positive events, it was mostly at Metraco and also ZANAM and NITROERG, these three companies.

Janusz Krystosiak

Thank you. So perhaps right now, we should also give a chance to questions that we get in our mailbox. Jakub Szkopek, Erste, not with us today. He sent two questions. One is about the Victoria project, but that has been covered. So we are not going to repeat that. And CapEx and development for Victoria project. And the second question is, will the update of the modernization plan for the Glogow Smelter and the precious metal division? Has anything changed in terms of plant standstills?

Unidentified Company Representative

Well, the plant standstill at the precious metal division are not going to change really. But a cycle of maintenance works is not annual. Therefore we can see standstills at different times of the year. In terms of technology, we are not really thinking about any changes.

Janusz Krystosiak

Daniel Major, UBS. Would you be able to share some update about the (4 Line) (ph) at Sierra Gorda?

Unidentified Company Representative

Right now, this is the function that is — that rotates. But we are owners, council President at this point at Sierra Gorda. So this project is underway. Pre-feasibility study is prepared. Together with our partner, we are going to make the decision about this investment and other investment likewise, such as Oxide. So we will certainly get back to you once we have more information to share. But the main business for us is to make this asset operational again, so that our budget, our plan, and the unit model is actually delivered.

Janusz Krystosiak

And one more question from Daniel. The new management board has been in place for four months or six months. Are you able to give us some guidance about the strategic review of KGHM operations, especially in the context of potential sale of international assets? Or options that you have with the financing of renewable energy sources that you may deploy in the future.

Unidentified Company Representative

So international assets certainly call for some restructuring. KGHM produces slightly under 20% of copper in these sites. But within the near future, we do not really see the room for any major acquisitions or other investments. Perhaps Sadbury assets that are too small for KGHM or do not show positive cash flow. So it’s rather really sorting out our asset situation and possibly cutting off those that are not needed, with focusing on the key assets like Robinson and Victoria project has already been mentioned. We need to make final decision. It’s not just to continue with the additional CapEx over time. And we need to work with our partners and we will have to optimize Sierra Gorda operations and that will hopefully generate positive cash flow, whether for Oxide project or Line 4 project. But we don’t really want to actually finance this project with owners’ lending. I think that I sufficiently covered that question.

Janusz Krystosiak

Okay, so let’s move on. Bank of America, Paul (indiscernible). A question about the international segment. KGHM International in the second quarter recorded a growth in profitability. How lasting is this effect? How lasting can it be in the future? How we should look at the rest of the year in this international segment?

Unidentified Company Representative

Ladies and gentlemen, if we look at Robinson in the context of the tasks that are ahead of this mine and preparation for the following areas, we are prepared for a long-term process and for building regularity in performance. That is our motto of the management board. We don’t want to have above the target short-term results as a result of higher grade. We try to optimize recovery, we try to optimize maintenance in a very efficiently operating mine. That all translates into quite measurable millions in extra results. These are the operations we are focusing our attention on right now. Thank you.

Unidentified Company Representative

Let me add that stability is of primary importance. That is, storing the ore that later allows us to have the optimum mix for processing. We cannot consume the spread that we have on the bread immediately, because then we are left with just bread alone. In the future, we don’t want to have anything like that. We want to have stable production also by keeping in check the input that we use on a current basis.

Janusz Krystosiak

I have one more question right now also to Mr. Krzyzewski, that is from Lukasz Prokopiuk, BOS. How can the company explain the significant growth in the stock of copper in the markets LME, COMEX or Shanghai? And what is your evaluation of prospects for copper at the end of this year?

Piotr Krzyzewski

Well, that might be tricky, because the forecasts are difficult. I actually quite like this question. KGHM is a large producer of copper, but if we were one that is responsible for 60% of supply, we could command the situation in Shanghai or LME. We are among the major producers of copper, but in the total supply, we only have a few percent. So we don’t want to comment on stock. Obviously, the lower stock on commodities exchange, the more likely changes in prices. Maybe that shows a slowdown in demand. We are worried about this to some extent, but we will not comment on this. We do nothing feel responsible for the stock.

Unidentified Company Representative

Yes, ladies and gentlemen, this latest quarter was very dynamic in terms of changes. The volatility of prices in copper market was significant. But let’s keep in mind who we are and who we want to be. We are long term asset and we have a clearly set path forward. Objectively, we expect the demand for copper to grow and supply is a certain emanation of the fact that copper is a strategic element. Rio Tinto Serbia will be an important development here, that will be a certain checkpoint for us. But from the perspective of our assets, we take a long-term perspective and we know that copper is the asset that is going to be a raw asset and the demand for it will grow. The projects that we are talking about are many billion projects requiring long-term planning and very intense expertise and know-how. So supply is likely to be limited.

Janusz Krystosiak

The last question on the topic concerning hedging policy, prices of metals and energy and foreign currencies. Mr. President, could you comment on our hedging?

Andrzej Szydlo

Yes, obviously. As you can see in the note to our financial statement, we had a transaction for almost 30,000 tonnes of copper. The hedging period is from July of this year till December 2025. And on silver, we have 3 million troy ounces and that is from July 2024 till December 2025. So, from this perspective, we are actively engaged in hedging policy. Also, as the management board, we are actively analyzing the transactions. There will be some transactions which we will want to announce to the market in the upcoming periods. We don’t want to surprise ourselves or the public with the transactions. So we are making our careful preparations. But you surely understand our long-term approach to our assets from this point of view that will be reflected in our hedging structure. And if you look at the energy price, I will not comment on this. We are secure. We are hedged here. The result of the second quarter confirms this to some result. We also have mandates that have been issued for the upcoming transactions. We are probably the largest industry player in the commodities market. So we don’t want to send any signals that can boost volatility in the market, that is anyway volatile in the energy intensive times. So you know what is going on in the market. But we will definitely monitor energy and CO2 and gas markets.

Janusz Krystosiak

Legnica, there was a question from Radio Plus. When are you planning to complete modernization of refinement in Legnica Smelter? What expenditures do you plan for this and will waste disposal have some impact on Legnica Smelter?

Unidentified Company Representative

Frankly, I do not remember the details. But one thing needs to be done about this investment is project. We need to have a close look at the CapEx that is planned right now. Because this CapEx seems very, very hard to maintain. So we are looking into it. And I have discussed this with people who are responsible for the project in the company. For sure, we don’t want to exceed the assumed CapEx. In terms of the completion date, the analysis of the project and the decisions we are going to make in the near future may have some impact on the completion date. I’m vague, but I have to admit that this project that is important for Legnica was not a top priority among what we have done recently. There were some urgent issues to address. But we will address this question within a month or two. We should have completed the analysis of this project.

Janusz Krystosiak

Thank you very much. Are there any further questions from the room? If there are no questions, over to our Director.

Andrzej Szydlo

If there are no further questions in the room, I would like to thank you so much for the questions that you have already asked. You can still ask questions to our — sending them to our email address, and the answers will be published on our website. Thank you very much for the participation in this conference. Thank you, gentlemen, for the presentation of the results. See you at the next event. Thank you