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CFA Institute Research Challenge

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Local Challenge CFA Society of Poland
Wroclaw University of Economics




Wroclaw University of Economics Student Research



Important disclosures appear at the back of this report

This report is published for educational purposes only by
students competing in The CFA Institute Research Challenge.
[Mining Industry, Basic Materials Sector]
KGHM Polska Mied SA
Date: 15/02/2013
Ticker: KGH:PW (Bloomberg)

Exchange:
Recommendation: BUY
Target Price: PLN 220 (USD 70.5)

Current Price: PLN 185.5
USD/PLN: 3.12











Highlights

KGHM - o!!er-"otto#ed in$est#ent

%e issue a "uy reco##endation &ith a target !rice o' P() **+ ,-S. /+012. It implies 27% holding
period return (including dividend). KGHM is one of the biggest and most liuid blue!chips on "#$ (average
dail% volume as percent of shares outstanding& '.()%)* effectivel% e+panding into international
mar,ets. -urrent position ma% be described b% the .
th
place in mined copper production and the /
st
place
in silver production globall%. 0he -ompan% is a t%pical dividend!pa%ing firm* 1ith historical median dividend
%ield in %ears 2''2!2'/2 amounting to /'.73%

Main !rice gro&th dri$ers3 (/)4obust pipeline of international pro5ects resulting in (2% gro1th
of production volume b% 2'/76 (2) High discount to peers ((2% 1ith respect to 78$2'/2$* )2% 1ith respect
to $98$:I0;<2'/2$) e+pected to fall substantiall%. 0he main reasons for discount decrease are geographical and
mineral base diversification* as 1ell as significantl% higher gro1th opportunities comparing to past6
()) Increasing operational efficienc% b% Group average -/
/
cost reduction b% 2'% till 2'/2.

Sound 'inancial !osition3 lo& le$erage, cash su''iciency and high #argins0 "e estimate KGHM
to still e+hibit health% financial standing* despite high forecast outla%s for pro5ects and high dividend pa%out&
(/) ;8< eual to (.=(% in 2'/2$ and //.)2% in 2'/7$6 (2) ->?8-<7$@6 in 2'/2$ to be /=/%* in 2'/7$
to be )2)% ())6 $:I0;< margin amounting to )(% in 2'/2$ and =(% in 2'/7$.

Main risks issues are& adverse fluctuations in copper and silver mar,ets* as 1ell as in A#;87BC
e+change rate. Macro conditions* industr% demand and suppl% assumptions also have significant influence.
Moreover* failures of ne1 pro5ects and #tate 0reasur% influence ma% pose additional ris,.

KGHM daily stock !rices ,P()2


/
0he costs of mining* milling and concentrating* onsite administration and general e+penses* propert% and production
ro%alties not related to revenues or profits* metal concentrate treatment charges* and freight and mar,eting costs less the net
value of the b%!product credits.

80
100
120
140
160
180
200
220
240
Closing price
Target Price
Current Price
PLN 220
PLN 185.5
18.62% upside
hange in 'orecast le$el o' -S.4P()
rate in years *+56-*+5/
hange in 'orecast le$el o' co!!er !rice in years *+56-*+5/
!/'% !(% '% (% /'%
!/'% 2/2 22/ 22. 2)3 2=)
!(% 222 2)' 2). 2=3 2()
'% 2)/ 2=' 2=2 2(3 23)
(% 2=' 2=. 2(7 23( 272
/'% 2=. 2(7 23( 27) 22'


Holding Period 7eturn
$nd of
2'/)
$nd of
2'/=
$nd of
2'/(
*/8 698 118
Source3 0eam estimates



Market !ro'ile
(2!1ee, price
range (7BC)
5550: ; 59:01
<verage dail%
volume
5 +19 6<=
<s % of shares
outstanding
+0168
#harpe ratio
(2'/2)
60//
2'/2 dividend
%ield
*:0*8
#hares
outstanding
*++ +++ +++
Mar,et
-apitaliDation
(7BC bn)
6/0 /<
Institutional
Holdings
<*8
:9 per share
(7BC)
5+90/
4?$ 2'/2$ **8
;ebt to capital
2'/2$
10:68
78:9
50<=
78$ /01
Source3 0eam estimates* :loomberg



9aluation .> Multi!liers
$stimated
price
2=2 /.2
"eights ('% ('%
0arget
price
**+
Source3 0eam estimates

Source3 stoo.pl* 0eam estimates

Source3 0eam estimates* based on ;-> price
>A Institute 7esearch hallenge /( >eb 2'/)
2

Business .escri!tion

KGHM 7ols,a MiedE #.<. is a 7olish mining compan%* 1hich specialiDes in copper e+traction and smeltering.
$stablished in /.(/* located in Bubin* Bo1er #ilesia* KGHM 7ols,a MiedE #.<. is one of the biggest pla%ers
on global copper producers mar,et. <fter acuisition of -anadian Fuadra >C@ (no1 KGHM International)
the -ompan% is a holder of ? :th largest co!!er reser$e "ase in the &orld. 0he -ompan% is 9th "iggest
co!!er #ine !roducer globall% and ?5 sil$er !roducer. "e identif% the biggest strength of the -ompan% to be
the @uality o' its !roducts (Gfour ninesH I .....% of copper in their products)* great "ase o' kno&-ho&*
sustaina"le 'inancial standing and o&n resource "ase(as 1ell as smelters I bac,1ard integration
of production process). 0he -ompan% is currentl% engaged in intensive e+ploration pro5ects 1hich assure
prospects for further strengthening of KGHMHs international position (please see appendi+ /' regarding global
mines portfolio). In 2'// the -ompan% 1as hiring over /2, 1or,ers* 1hereas /2, 1here miners. <s a holding*
KGHM comprises (' subsidiaries. Ho1ever* the core business (dedicated to 27% of the Group revenues and
/')% of CI in %ear 2'//) 1as run through one compan%* KGHM 7ols,a MiedE #.<. until the acuisition of Fuadra
>C@.

Sales o' co!!er constitutes 73% of total sales of the -ompan%. 0he product is used mainl% in electric
and electronic goods industr% as 1ell as construction industr%. <dditionall% it ma% be used in transport*
household appliance and industrial euipment. KGHM offers copper products in forms of cathodes* 1ire rods
and billets* 1hile 1ire rods and cathodes being most important. :usiness model is based on long!term* often
optional contracts(optionalit% depends on the amount of tonnage) for copper deliver%* as 1ell as the sales
through BM$. -urrentl% binding contracts for copper sale 1ere signed 1ith the follo1ing customers& 7r%smian
Metals Bimited (siDe of the contract 7BC 2.)2 I 2.23 bn)* MKM Mansfelder Kupfer Messing GmbH (7BC /.( bn)*
n,t cables Gmbh -ologne (7BC = I=.= bn) and -hina Minmetals -orporation (7BC 3.) I/2.3 bn). >or more
information please see the appendi+ /(.

Product 'oreign reci!ients0 In %ear 2'// the domestic sales of copper and copper products amounted to 2/%
of total copper sales 1hile 7.% of sales 1here e+ported. Main foreign destinations for copper products 1here
German%* -hina* Ital% and the -Dech 4epublic. #ales of silver covered 2'% of total revenues in F) 2'/2. $+port
sales (including $uropean Anion sales) accounted for .7*)% of total silver sales. 0he biggest foreign customers
for silver 1here Great :ritain* the A#< and :elgium. 0he acuisition of Fuadra >C@ and associated 1ith this
event future pro5ects (chec, appendi+ /2 1ith future pro5ects) are going to increase b% a significant amount the
production of nic,el and precious metals as 1ell as add mol%bdenum to the overall produced metals portfolio.

urrent strategy of the -ompan% can be described 1ith the follo1ing ( pillars&
J I#!ro$ing !roducti$ityImain goal to halt the increasing unit cost of production in 7olish mines. 7ossible
solutions are investment in ne1 technologies (mechanical mining or ore)* modernisation of e+isting
infrastructure (replacement of mining machiner%* modernisation of smelter process in GKogL1 I currentl%
in progress)* optimaliDation in the areas of purchases* I0 and mine development activities.
J .e$elo!ing the resource "ase I strategic goal of reaching the production level of ca. 7'' , tonnes of copper
b% 2'/2. -onsidered solutions are& development of deep deposit mining s%stem* investment in foreign mining
assets and e+ploration of ne1 local deposits.
J .i$ersi'ying sources o' re$enues and gaining inde!endence 'ro# energy !rices I strategic goal& in long
term ca. )'% of revenues from energ% production. 0he -ompan% ta,es into consideration further investments
in gas fired po1er plants and rene1able energ% sources. -urrentl% the -ompan% alread% holds sta,es in energ%
companies* e.g. in 0auron 7ols,a $nergia #.<. and $nerget%,a #p. D o.o.* for more information please refer
to appendi+ /=.
J 7egional su!!ort I the goal of the -ompan% in the area of regional support is to remain the ,e% emplo%er in
region* 1ith possible ne1 5obs creation as 1ell as protecting the local natural environment and health of local
communit% (supporting sport activities* arts and science).
J .e$elo!ing organiAational kno&-ho& and ca!a"ilities I this pillar of strateg% is going to be realiDed via
implementation of management mechanism through goals* staff development programs as 1ell as increase of
Group structure transparenc%.

;uring 2'/2 there 1as no ma5or change in terms of shareholders structure of KGHM. 0he onl% shareholder
holding (% or more of the -ompan%Hs euit% is the 7olish #tate 0reasur%* 1hich holds )/.7.% of the share
capital. #uch state of things implies certain ris,% polic% connected to man% aspects of the -ompan%Hs activit%.
KGHM is under political pressure set b% the government. 0his ma% influence dividend polic%* particular strategic
plans(such as investment decisions or future acuisitions). 0he rest of shareholders are highl% diluted* ho1ever
some tendencies among them can be follo1ed. )..)% of the -ompan% stoc,s are held b% different foreign
institutional investors* 1hile 22.(% is held b% the domestic ones. 3.=% of KGHM stoc,s is held b% individuals.

KGHM #anage#ent co#!rises only !ro'essionals0 -urrentl%* management of KGHM consists of ( persons
(the ma+imum number is 7 members). 0he -$? is Herbert "irth* 7h; in #cience* received the degree doctor
habilitatus in mining and geological engineering. He has served as the chairman of management board since
2''. and previousl% dealt 1ith geological pro5ects and management of companies connected 1ith mines.
Ander his leadership* KGHM for the first time in histor% effectivel% e+panded internationall% on a large scale.
?ther = members of management have 1ide e+perience in either copper e+traction and mine management&
"o5ciech KMdDia and ;orota "Koch* or are e+perts in planning and finance pro5ections& "KodDimierD KiciNs,i
and <dam #a1ic,i. <s indicated in the ris, section* there are strong labour unions in KGHM. Ho1ever* so
far management has been able to ,eep good relations 1ith those unions.


>igure /& #hareholders structure


Source3 -ompan% data

>igure 2& 4evenue brea,do1n I shares
of e+tracted metals in 2'/2F)

Source3 -ompan% data

>igure )& 7olish deposit

Source3 -ompan% data


>igure =& $+port vs. domestic copper
sales

Source3 -ompan% data



)2%
2)%
).%
3%
32%
#tate 0reasur%
7olish institutional investors
>oreign institutional investors
Individual investors
77%
2'%
)%
-u
<g
other
7(% 7.%
2(% 2/%
2'/' 2'//
$+port ;omestic
>A Institute 7esearch hallenge /( >eb 2'/)

3

Industry B$er$ie& and o#!etiti$e Positioning

High "arriers to entry and !er'ectly-co#!etiti$e !rices
-opper industr% is characterised b% significant entr% barriers& limited resource base* e+istence of mining
concessions and high capital intensit%(please refer to 7orterHs ( forces anal%sis in appendi+ )(). KGHM is
a beneficiar% of the onl% copper deposit in 7oland 1hich is also the biggest one in $urope* but further increase
of mined copper output is possible onl% through e+ploration of ne1 deposits* in countries 1here global mining
is concentrated. High capital intensit% is related to energ% costs (in $urope 2(!)=% of product cost)*
transportation and 1ater suppl% needs* specialised emplo%ees and mining euipment* as 1ell as maintenance of
environmental protection s%stems. <ccording to ;avenport
2
research* fi+ed capital investment cost for
a comple+ producing refined copper is ca. O2(''8t (from '.7(% -u ore). 0he fact that individual copper
producers are price!ta,ers 1ith the onl% product distinction based on product ualit% (KGHM produces copper
cathode 1ith .....% copper content) and the high dependence of industr%Hs profitabilit% on the copper mar,et
price lead us to the anal%sis of the forces 1hich govern this price.

o!!er #arket outlook deter#ined "y glo"al econo#y
-opper (as presented in >igure () is a material used in pro!c%clical industries such as electronics* construction
and transportation. 0he mar,et driven b% demand from above mentioned sectors presented )% -<G4 for
the last 2' %ears. <ccording to our research* the correlation coefficient bet1een refined copper usage change
and 1orld G;7 gro1th rate is (2% 1ith beta of /.23. Higher sensitivit% of copper consumption over global G;7
gro1th can be observed in >igure 3.

.e$elo!ing countries3 dri$ing 'orce in co!!er consu#!tion
In /..' copper usage in developed economies ("estern $urope and Corth <merica) constituted ('% of global
consumption. <ccording to 2'/2 I-#G estimates* this share decreased to 2(% and the mar,et has been
monopoliDed to -hina demand ().%) (please see appendi+ /2). $uropean sovereign debt crisis and tightening
fiscal policies 1ere not in favour of $A construction industr% (,e% copper consumption driver) 1hich has been
declining since 2''2 (please refer to appendi+ 2/). Pet* the potential for further <sian copper consumption
gro1th still e+ists. In 2'// (.22 ,g of copper per capita 1as consumed in -hina* contrar% to /3.)2 ,g per capita
consumed in German% (please refer to appendi+ 2'). Ap to 2'2' it is predicted that -hina and India 1ill solel%
represent ('% of global copper usage* driven b% /'./% and (.2% respectivel% long!term manufacturing gro1th.

o!!er su!!ly to 'ollo& increased consu#!tion
<fter three %ears of deficit in refined copper production (from )(2,t in 2'/' to 2)7,t in 2'/2$) the ne1 mining
pro5ects are e+pected to s1itch mar,et into copper production surplus ()3',t in 2'/)$). 0he ma5or ones aimed
to start production bet1een 2'/)$ and 2'/7$ 1ill increase global copper annual production in 2'/7$ b%
).3mnt (22% of 2'/2 forecast mined copper production). Ce1 mine openings are necessar% to meet e+pected
demand. -urrent mine base 1ill result in (./2mn t deficit in 2'2'. ?n the other hand realiDation of all proposed
mine pro5ects 1ill produce 2mn t copper surplus (please refer to appendi+ /.).

High co!!er !rices3 i#!ulse 'or riskier !roCects
In 2'/2 the global mined copper production 1as determined in ))% b% the output from -hile. 0he 2
nd
biggest
producers 1ere -hina and 7eru (both 2% of global output)* follo1ed b% A#< (7%). Pet* the high copper prices
made profitable to invest in more capital!intensive pro5ects (characteriDed b% lac, of infrastructure or countr%Hs
unstable political situation). In 2'2' an increased proportion of suppl% 1ill come from <frica (;emocratic
4epublic of -ongo* Qambia) and <sia (Mongolia* <fghanistan) but it is forecast to be dependent on smaller and
deeper mines 1ith lo1er copper grade ('..% copper in process feed in /.2' as compared to '.7% in 2'/2).
(7lease see appendi+ /.)

Sta"le co!!er secondary #arket and #inor su"stitution risk
-opper is one of the most often rec%cled material* as it doesnHt lose its chemical or ph%sical properties in
the rec%cling process. 0he rec%cling input rate (copper scrap use in total copper usage) 1as on av. )(% in last
ten %ears. 0he rate 1as stable* var%ing from )2.=%(2''.) to )7%(2''3). 0here is no perfect substitute for
copper although it is sometimes replaced b% aluminium* plastic* steel and optical fibre. 0he highest product
mar,et loss in 2'// 1as present in telecom cable mar,et I /=%. 0he copper mar,et is a beneficiar% of ne1
technologies as it is a component of solar panels* 1ind farms and modern means of transport.

7ossible future copper surplus is a ma5or reason of long!term copper price decrease. Pet* such a decrease
is limited due to high level of A# monetar% base. 0he short-ter# distortion risks 1hich ma% influence copper
price are ne1 round of A# Fuantitive $asing* -hinese copper destoc,ing ris, and introduction of ph%sicall%
bac,ed copper $0> (please see appendi+ 2) R 2=). -opper mar,et is also influenced b% active futures mar,et.

Prices a''ected "y acti$e 'utures #arket
0he total volume of open contracts in 2'// on BM$* -?M$@ and #H>$ amounted to /.2(bnt of copper 1hich
is 32+ refined copper usage in 2'//. BM$ mar,et share (measured b% open copper futures contracts) decreased
from 22% in 2''( to 7/% in 2'// in favour of -?M$@ and #H>$ (/2% and /7% mar,et share respectivel%).
#ince Covember 2'/2 the mar,et is in contango* contrar% to the beginning of 2'/2.

Sil$er ; !recious "y-!roduct
Cearl% one fifth of KGHM revenues come from sale of silver. 0he global production of this metal is 1ell spread.
:ased on our estimates the HHI ratio for the biggest 2' silver producers ((2% of mar,et) in 2'// 1as /(2
indicating highl% competitive mar,etplace. >or copper industr% HHI ratio amounted to ))( (3=% of mar,et) !

2
".G. ;avenport* M. King* M. #chlesinger* <.K. :is1as* $+tractive Metallurg% of copper* 7ergamon =
th
$dition* p. )27
>igure (& -opper usage in c%clical industries


Source3 KGHM -#4 report



>igure 3& -opper consumption sensitive to
global economic outloo,



Source3 I-#G* "orld :an, data


>igure 7& Global refined copper deficit8
surplus



Source3 I-#G data


>igure 2& F$ positive effects on copper and
silver prices (appendi+ 2))

DE5F DE*FF
o!!er /'2% 2'%
Sil$er 3=% 2/%
S(//82''2!')82'/')
SS ('282'/'!'382'//)

Source3 0eam estimates




-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006 2008 2010
World !P gro"t# rate
$e%ined copper usage c#ange
'
2'''
='''
3'''
2'''
/''''
/=
/(
/3
/7
/2
/.
2'
2/
U
S
$
/
t
m
n

t
re%ined production &L'()
re%ined copper usage &L'()
Copper spot price &$'()
>A Institute 7esearch hallenge /( >eb 2'/)

4

still indicating high competition. 0he suppl% of silver in 2'// 1as in 7)% provided b% mine production
(although it is often mined as a b%!product) and in 2(% from scrap. ;emand for silver onl% in ((% comes from
industrial applications. ?ther usage include 5e1eller%* coins* photograph% and silver1are. More diversified
sources of demand act in favour of silver 1hose prices did not decline as significantl% as copper prices in the end
of 2''2.

KGHM has "een one o' the glo"al leaders in the copper industr% for a long time* but it 1as not sooner than
in March 2'/2 (acuisition of Fuadra >C@ 1as formall% approved b% the board at that time) 1hen the o#!any
started o!erating &orld&ide0 Having the largest copper deposit in $urope 1as enough to conduct successful
business locall%* in the environment of a decade!long gro1th in commodit% prices. 0his* ho1ever* spurred
diversified conglomerates to intensif% e+plorations and enlarge the scale of operations 1hat has ended up 1ith
impressive pipeline of pro5ects ().3mnt of incremental suppl% until 2'/7$) (see appendi+ 2(). KGHM 5oined
global e+pansion late and it ma,es difficult for the -ompan% to significantl% outperform its competitors
in coming %ears. :ased on our research* ho1ever* it 1ill remain among GBP 5+ #ined co!!er !roducers
in *+5/E.

Strong !osition in the !eer grou!
"e perceive KGHM as a single-!roduct #anu'acturer (refined copper* 1ith silver as a ma5or b%!product)*
#oderately-high $olu#e !roducer (=23.7,t in 2'//)* &ell esta"lished and !ro!erly #anaged holding 1ith
great a#"itions 'or the 'uture (7'',t of copper in 2'/2). 0his is 1h% 1e place the -ompan% in line 1ith such
giants as >reeport McMo4an-opperRGold(>-@)* #outhern -opper -orporation (#--?)*<ntofagasta 7B- (<C0?)*
>irst Fuantum Minerals (>M) and KaDa,hm%s (K<Q) (see appendi+ 27 for comparables selection criteria). KGHM
is the middle point in such combination and it is rather impossible it 1ill overta,e the first t1o companies or be
overta,en b% the latters in terms of ore reserves* copper base or revenues in coming %ears.
It constitutes /2% of the peer group mined copper production and should sta% on this level until 2'/7$
(see appendi+ 23). <ll companies* 1ith the e+ception of <C0? and K<Q* conduct operations on a global scale
(see appendi+ 22) 1hat creates opportunities for further e+pansion 1hen ne1 deposits are discovered.

7eco$era"le #etal in reser$es u! to *60=#nt ,H*=82 until *+5/
KGHM ran, ?6 in ter#s o' #etal reco$era"le 'ro# o&n reser$es (/2.3mnt* 2'//) and ?5 in ter#s o' ore
grade (/.(2%) as compared 1ith the peer group. :ecause the -ompan% has not had an access to open pit mines
until 2'/2* it suffered relativel% high cost of e+traction (/2= A#c8lb or 2722 A#;8t in 2'/2$). In the future*
-/ -ash -ost is e+pected to decrease ca. 2'8 than,s to the engagement in pro5ects in -hile (#ierra Gorda) and
-anada (<fton <5a+* 9ictoria). 0hose pro5ects alone should increase #etal "ase "y :056#nt (T22%)
in coming (!%ears period* 1hile other operating mines acuired 1ith Fuadra (4obinson* Morrison and >ran,e)
add another 505#nt (T3% this %ear and total increase of 22% bet1een 2'//!2'/7$) (see appendi+ // and /2).

Mined co!!er !roduction Cu#!ed to 1**kt ,H*:82 in *+5*
:ased on -ompan% fillings 1e estimated that mined copper production rose b% /'2,t in 2'/2 than,s
to operations conducted b% KGHM International (increase of 2=%)* 1hat 1ould give the -ompan% 6
rd
!lace
a#ong selected co#!etitors and =
th
!osition glo"ally 1ith 60*8 #arket share. 7roduction in 2'/)$ should
decrease slightl% ((.(%) due to the planned furnace refurbishment at GlogL1 smelter and rebound significantl%
in %ears 2'/=$ and 2'/($ 1hen #ierra Gorda starts production. Having on mind the balance of costs (higher
production from lo1!cost open pit mines against increasing costs of e+ploitation underground deposits
in 7oland) 1e do not e+pect ma5or changes in KGHMHs margins* although improvement is desirable 1hen
production from foreign assets gains momentum. -urrentl%* ho1ever* our estimate of 618 EBIG.A #argin
for >P2'/2 is belo1 =)% peer group average* although the -ompan% loo,s better in terms of )et Inco#e
#argin reaching *68 vs /.% peer group average.

ProCects in !i!eline to deli$er 511kt until *+5/
<s of the end of >P2'/2 KGHM has full% financed and permitted pro5ect in -hile ,Sierra Gorda2* 1ith first
!roduction scheduled 'or *+5:. It 1ill be the 2
th
biggest open!pit mine in that countr% (-hile alone
contributes ))% to global suppl%)* located in close neighbourhood to the biggest copper mines in the 1orld
(see appendi+ 2.). #ierra Gorda 1ill suppl% 2)',t of copper annuall% (('% is attributable to KGHM) and reach
its full production capacit% in 2'/($* together 1ith the biggest pro5ects 1orld1ide (see appendi+ 2(). A'ton-
ACaI pro5ect in -anada is after :an,able >easibilit% #tud% and is on the 1a% to start !roduction in *+51E*
suppl%ing additional :+kt(cooperation 1ith <bacus Mining R $+ploration -orp.). "e e+pect that KGHM 1ill be
able to mine ca. <<*kt o' co!!er in *+5/E. It gives the -ompan% <8 AG7 of production 1ith o$erall
increase o' *<8 as compared 1ith 2'/2$ and constitute almost 1/8 gro&th as compared 1ith 2'//*
1hen the -ompan% did not operate globall%. In our vie1* such performance gives KGHM stable :
th
!osition
a#ong its !eers and 9
th
a#ong to! industry leaders in *+5/E "hat is more* there is still place for gro1th*
as the -ompan% strateg% assumes /++kt ,H<0182 o' co!!er from o1n resources to "e reached until *+5=0

Jery li@uid and &ell !er'or#ing stocks
KGHM is one of the leading companies listed at "arsa1 #toc, $+change and contributes ca. 5:8 (as of Uan
2'/)) to "IG2' I 7olish :lue -hip inde+. It has a"o$e a$erage li@uidity as measured b% turnover (consistentl%
among 0?7() and is <!0!0 #ore $olatile than the mar,et as measured b% standard deviation (/2%). 0his ris,*
ho1ever* is compensated b% high stock returns* 1hich out!er'or# #arket since A!ril *++9 (bottom
of recession) on a monthl% basis (1e are referring to all data translated into A#;). KGHM shares outperform
peer group as 1ell* 1ith a$erage daily turno$er o' -S. :+#n and a$erage daily $olu#e o' 505 #n shares*
1hich constitute a"out +0168 o' A$erage nu#"er o' Shares Butstanding ,ASB2. ?nl% >reeport provides
more liuidit% to its investors 1hile the other companies sta% far behind KGHM. 1K *58AG7 o' stock !rice
is outstanding if compared 1ith M#-I "orld (!=%) or peers median ((%)* giving KGHM total increase o' 51/8
since Uan 2''2 (not including dividends).
Figure 9: Mined copper production in 2017E
(kt)


Source: Companies reports, Team estimates


>igure /'& 7eers basic statistics for 2'/2$


-/ (A#
c 8 lb)
$:I0;<
margin
(%)
CI
margin
(%)
KGHM /2= )) 2'
>-@ /(' ). 2.
#--? 3( (= )=
<C0? /'2 (3 /.
>M /(' =2 .
K<Q /=) )) //
Source3 -ompanies reports


>igure //& -u base (BH#* mn t) and grade
(4H#)

Source3 -ompanies reports


>igure /2& KGHM and the peer group
attributable mined copper production
in 2'/7$ (,t)

Source3 -ompanies reports* 0eam
estimates


>igure /)& 0urnover and trading volume of
KGHM relative to the 7eer Group in 2'/2


Gurno$er
,#n L-S2
Jolu#e
,#n2
ASB
,82
>M 3(( /7*. /*2.
SB 3= 2*/ '*2(
KGHM =/ /*/ '*()
A)GB )( /*. '*/.
>M )( /*7 '*)7
KAN )' 2*) '*=)
Source3 0eam estimates

0
500
1000
1500
2000
-
?
;
$
B
-
?
>
-
@
@
0
<
#
-
-
?
4
I
?
:
H
7
<
<
B
>
M
K
G
H
M
K
<
Q
2011-201* +n#ance,ent
2011 Production
'*'%
'*(%
/*'%
/*(%
2*'%
'
/'
2'
)'
='
('
3'
7'
#
-
-
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>
-
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K
G
H
M
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C
0
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>
M
K
<
Q
'
(''
/'''
/(''
2'''
>A Institute 7esearch hallenge /( >eb 2'/)

5

In$est#ent Su##ary

Good entry !oint
"e issue a :AP recommendation for KGHM 7ols,a MiedE #.<. 1ith a target price 7BC 22' and /2.32% upside
from current price level. KGHM has strong position on domestic mar,et and in the last %ear acuired man%
international pro5ects* that are e+pected to add (2% gro1th in -u production during ne+t ( %ears. Investors
reacted enthusiasticall% to international e+pansion* as KGHMHs capitaliDation rose from March 2'/2 (date
of acuisition of Fuadra >C@) till >ebruar% 2'/) b% over T3'% to 7BC )2bn (A#; /2 bn). "e e+pect
the gro1th of stoc, to be continued* as KGHM is still undervalued comparing to its peers& (2% discount 1ith
respect to 78$ and )2% discount 1ith respect to $98$:I0;< in 2'/2$. 7ro5ected stead% gro1th and
advantageous perspectives for lo1ering -/ cost level (according to management statement appro+imate
decrease b% 2'% in long term) should enable further strengthening of the -ompan%Hs position on the global
copper mar,et.

Jaluation #ethods
"e derived our target price b% combining ;-> valuation and multiple pricing 1ith eual 1eights. In our
opinion there is no reason for different treatment of an% of those t1o methods. 0he peer group 1as chosen
in a rigorous manner and 1e believe that comparison to selected companies is full% 5ustified.

)e& !roCects add $alue and reduce risk
7ipeline of ne1 pro5ects assures increase of production volume and provides cooperation potential (details
regarding s%nerg% effects are in appendi+ /)). Ce1 pro5ects do not onl% increase the volume of copper
e+tracted* but also allo1 KGHM to diversif% in terms of geographical e+traction and mineral base. Mines
in other parts of the 1orld are e+pected to diminish compan%Hs ris,* because pro5ects are located in more
stable and business friendl%!environments (measured 1ith ;oing :usiness Inde+
)
). "e believe that large
discount of KGHM in comparison to its peers 1ill be substantiall% reduced than,s to higher gro1th
perspectives and significant ris, reduction. >rom valuation point of vie1* the ris, again 1ill be reduced due to
falling values of beta.

"e identif% the -u prices and A#;87BC e+change rate to be main drivers for the volatilit% of earnings. In our
report 1e based them on the "orld :an, -ommodit% 7rice >orecast and anal%stsH consensus from $MI#
database. >orecast levels of those t1o catal%sts are e+pected to assure revenue -<G4 ca. 2% and CI -<G4 of
)% in %ears 2'/2$!2'/7$. 0he second factor significantl% affecting the structure of revenues is the increasing
share of metals other than copper and silver from )% in 2'/2$to /7% in 2'/7$. 0his ma% protect KGHM
in case of disadvantageous mar,et conditions in copper mar,et.

Strong 'inancial !osition and high di$idends
KGHM is currentl% the least indebted mining compan% among its peers. "e pro5ect it 1ill get more debt in the
forecast period* as outla%s for ne1 pro5ect 1ill reuire on average 7BC ).)bn %earl%. Ho1ever* the target ;8<
ratio in 2'/7$ is forecast at ca. //% (comparing to ca. '% in 2'//)* 1ith still possibilities to emplo% more
debt. KGHM 1ill maintain its strong financial position and high overall cash generation abilit% (for details
please refer to >inancial <nal%sis section). 0his 1ill enable the -ompan% to pa% high dividends (estimated
median dividends per share to be paid in period 2'/)$!2'/7$ 1ill amount to 7BC /3../ comparing to 2'/2
7BC 22.)= per share and 2'// 7BC /=..' per share). In %ears 2''2!2'/2 median value of dividends per share
1as 7BC //.32 1ith median /'.73% dividend %ield. ;espite high pro5ected outla%s for acuired pro5ects and
pa%outs of dividends* KGHM 1ill still be able to remain active on the possible mining MR< ground (due to
high ->?s and debt incurrence possibilities).

Good co!!er #arket !ros!ects
Fuadra >C@ acuisition 1as for KGHM li,e shift to higher gear* the copper mar,et also e+pands to ne1
mar,ets (:4I-# countries) to maintain demand and ,eep prices stable. <lthough -hinaHs G;7 gro1th rate
is forecast to be no longer double!digit* the planned countr%Hs e+pansion of urbaniDation on be%ond
the seaside areas combined 1ith development of emerging economies should be a buffer for future copper
prices. 0he forecast long!term price* although ca. /(% lo1er than the BM$ 2'/2 average* is still 2.=+ higher
than the lo1est price in last ( %ears and over (+ higher than in last 2' %ears. Ho1ever* high copper price
is a stimulus for ne1 mining pro5ects 1hich in effect ma% lead to copper surplus.
Possi"le in$est#ent risks
:esides the influence of mar,et ris,(-u prices and A#;87BC e+change rate) investors should be a1are of
other possible adverse influences& high share of fi+ed costs in the production process* strong labour unions
forcing higher 1ages (the second highest part of operating costs)* possible dela%s of starting e+traction from
ne1 pro5ects* influence of #tate 0reasur% to enter less profitable business ventures. "e identif% main ris,s
in Investment 4is, section.

3
The ease of Doing Business Index is an index created by the World Bank.
>igure /=& $:I0;< margin in estimated
period

Source3 0eam estimates


>igure /(& 78$ and $98$:I0;< in 2'/2$
for KGHM and its peers

Source3 0eam estimates* :loomberg

>igure /3& 4elation of -<7$@ to ->?
(bn 7BC)


Source3 -ompan%Hs reports* 0eam
estimates

>igure /7& 7RB in 2'/2$ (7BC mn)

Source3 -ompan% data
)(%
)3%
)2%
=)%
==%
=(%
)'%
='%
('%
2
'
/
2
2
'
/
)
2
'
/
=
2
'
/
(
2
'
/
3
2
'
/
7
'
(
/'
/(
2'
78$ $98$:I0;<
7eers KGHM
'
(
/'
2
'
/
'
2
'
/
/
2
'
/
2
$
2
'
/
)
$
2
'
/
=
$
2
'
/
(
$
2
'
/
3
$
2
'
/
7
$
->? -<7$@
' /'''' 2''''
4evenue
-?G#
Gross profit
#GR<
?ther
$:I0
>inancial
$:0
0a+es
CI
>A Institute 7esearch hallenge /( >eb 2'/)

6





Jaluation
"e have considered t1o standard approaches to value KGHM I ;iscounted -ash >lo1 (;->) model and
comparable compan% multiple pricing.

.> Jaluation
"e used ;iscounted -ash >lo1 Model& >ree -ash >lo1 to the >irm (>->>) ! this method is suitable for KGHM
because the -ompan% is going to change its capital structure from no debt to target capital structure during
forecast period. <ccording to our detailed ;-> anal%sis 1e e+pect the target price of 7BC 2=2. 0he ;-> model is
sensitive mostl% to the follo1ing factors&

Sales 3 0he forecast of gro1th in sales is based on increasing ore e+ploration in KGHM InternationalHs mines.
7olish mines capacit% shall be constant due to the underground mines specificit%. #ale of copper is the most
important component of total sales* ho1ever its share declines from appro+imatel% 77% in 2'/2$ to 7'% in
2'/7$. 0his fall is due to different t%pe of ore structure in ne1 mines* 1here the ore contains higher amount
of other metals (production forecasts are presented in details in appendi+ 7./* 2 and .)

7esidual gro&th rate is "ased on3(/) condition in the global econom% (rising G;7 gro1th rate Iappendi+
22)* (2) development of KGHM internationall% in ne1* prospective pro5ects* ())future revenues from realiDation
of energ% pro5ects(according to current -ompan% strateg%* )'% of revenues in the future 1ill be earned from
such pro5ects)* (=) high e+pected return on euit% in %ears 2'/)$!2'/7$ (median value of 2'.(%). 0a,ing into
account the aforementioned factors 1e established the residual gro1th rate of >->> at /%. "e believe it to be
a conservative estimate belo1 long!term gro1th of G;7 and belo1 median of anal%stsH estimates of residual
gro1ths for copper mine companies. "e deem terminal gro1th rate to be onl% /%* since KGHM at the moment
has less robust pipeline of pro5ects as compared to its peers and copper prices are e+pected to decline.

.i$idend !olicy3 It is assumed that KGHM 1ill still pa% high dividends (in period 2''2!2'/2 the median
dividend %ield 1as /'.73% and median pa%out ratio 1as ('%). High pa%out rate 1ill be sustained due to
substantial impact of #tate 0reasur%* 1hich has al1a%s insisted on pa%ing high dividends. 0he pa%out polic% is
described in appendi+ 7.(.

a!eI3 ;ue to ne1 gro1th pro5ects in #ierra Gorda* <fton!<5a+ and 9ictoria* future capital e+penditures 1ill
be significant. 0he% are all based on -ompan%Hs reports and >easibilit% #tudies. 0hose e+penditures* according to
our calculations* 1ill be on average 7BC ).=bn %earl%.

0
50
100
150
200
-ul-08 -an-0. -ul-0. -an-10 -ul-10 -an-11 -ul-11 -an-12 -ul-12 -an-1/
Cegative ad5ustment
of earnings forecast
#ale of 7ol,omtel #.<.
shares
$+!dividend da%
:eggining of Fuadra >M@
acuisition process
;eclaration of
0auron 7$ #.<.
share acuisition
Introduction of
M$0
7ositive
earnings
forecast
ad5ustment
:ancurptc% of Behman
:rothers
0
10
>igure 5=3 KGHMOs share !rice and ne&s 'lo& since Puly *++=
Source3 stoo.pl* -ompan% data



















>igure /.& ;ividend paid
(7BC8share) historical and
estimated


Source3 -ompan% data* 0eam
estimates

'
/'
2'
)'
2
'
'
.
2
'
/
'
2
'
/
/
2
'
/
2
2
'
/
)
2
'
/
=
2
'
/
(
2
'
/
3
2
'
/
7
Volume (mn)
>A Institute 7esearch hallenge /( >eb 2'/)

7

%A3 0he cost of euit% 1as calculated using -<7M model. "e utiliDed /'!%ear government bond ris,!free
rate of ).==%* the ad5usted beta* 1hich is changing from /..= in 2'/2 (KGHM price in A#; regressed against
M#-I "orld Inde+) to /.). in residual value calculation (reflecting substantial drop in ris, b% diversification
of both mineral base and geographical location* additionall% reduced b% starting pro5ects in more business!
friendl% environments). 0he sum of mar,et and countr% ris, premium is eual to 3.(% (based on
<. ;amodaranHs estimation
=
). 0he after!ta+ cost of debt 1as calculated using value of 3.2% for KGHM and
marginal ta+ rate. -ost of debt 1as estimated using -ompan% data from financial statements* in 1hich KGHM
states its possible cost of loans as "I:?4 T /!= p.points. >or more details about components of "<-- and its
assumptions please refer to appedi+7.=.

Peer grou! !ricing3 the discount case

Having previousl% chosen appropriate peer group* 1e conducted multipliers pricing using benchmar, 78$ and
$98$:I0;< ratios* both based on t1o!%ear for1ard medians. 0here 1as a long!term discount observed on
KGHMHs mar,et price relative to its peer group in the past. 0here 1ere number of factors supporting this
discount in previous %ears* such as&

higher ris, of KGHM* measured 1ith s%stematic ris, that 1as higher than peerHs median (/..( vs. /.32
as measured b% beta based on M#-I "orld Inde+)*
no organic gro1th* focus on local business onl%* 1ithout e+panding capacit%*
influence of ma5or shareholder being the #tate 0reasur%*
lo1er multipliers on average for the "#$ than for e+changes 1here peers are listed (countr% ris,).

<lthough the historical discounts amounted to (2% for 78$ and ('% for $98$:I0;<* 1e consider that
the business environment of the -ompan% has changed significantl% at the beginning of 2'/2 1hen KGHM
started operating globall%. -urrentl%* it has t1o operating mines in the A# and one in -hile as 1ell as it is
involved in ne1 pro5ects in -hile and -anada. <ll countries mentioned are more business friendl% than 7oland
(as measured b% the ;oing :usiness Inde+)* have 1ell developed infrastructure and possess copper reserves
much bigger than KGHM does in 7oland. Hence* diversification should reduce the ris, in long!term perspective
1ith pro5ects in pipeline adding (2% production gro1th to be realiDed during the ne+t ( %ears.

Ho1ever* it is rather unli,el% that the #tate 0reasur% 1ill diminish its o1nership sta,e in the -ompan%
or multipliers for 1ill increase sharpl% to close the gap ()7% 1ith respect to 78$) bet1een e+changes in Bondon*
Ce1 Por, and 0oronto. 0here are /( other companies from 7 different sectors listed on "#$ 1here the #tate
0reasur% e+cises considerable po1er* 1hich are currentl% traded at appro+. 2'% discount to relevant peers
(teamHs research based on /'' comparable companies found on aforementioned mar,ets). Cone of them*
ho1ever* have such gro1th opportunities or face undergoing operational changes as KGHM does. >urthermore*
there are alread% t1o blue!chips listed on "#$ controlled b% the #tate 0reasur% and either operating
internationall% (7KC ?rlen) or managed b% globall%!recognised parent (7K? :78Ani-redit) 1hich do not trade
at a discount at all. Hence* 1e consider it to be possible for KGHM to sueeDe its valuation gap in relation to
peers in the future.

Cevertheless* there are at least t1o %ears ahead until the -ompan% utiliDes profits from its international
e+pansion. 0his is 1h% 1e assigned 2(% and 2'% discount (euall% for both multipliers* in accordance to their
similar historical discount medians) in 2'/)$ and 2'/=$ respectivel%* even though KGHM has alread% been
outperforming 7KC and 7K? regularl% in terms of profitabilit% since 2''7(not to mention the remaining
/) companies controlled b% the #tate 0reasur%). 0he discount should fall to median discount of companies 1ith
#tate 0reasur% o1nership* because of relativel% high sta,e of this bod% in the shareholder structure and its big
impact on business carried out in KGHM. <dditionall%* e+ecution of all planned pro5ects in t1o %ears time 1ill
not ma,e KGHM as diversified as its peers. 0herefore* 1e deem it as reasonable to e+pect the discount of 2'%
to still e+ist in 2'/=$. If KGHM develops ne1 pro5ects and #tate 0reasur% sells its sta,e in the -ompan%* there
1ill be a 5ustified reason for discount to disappear.

"e treat both 78$ and $98$:I0;< euall% in our valuation* as there is no evidence of predominance of one over
the other as 1ell as 1e assigned eual 1eights for %ears ta,en under consideration. 0he price 1e obtained
in such combination is eual to 7BC/.2./ per share* 1hat results in 7BC 22' 1hen combined 1ith ;-> using
('!(' 1eighting procedure (please see appendi+ 3)

7isks to target !rice
;-> model relies mostl% on terminal value* 1hich in turn is dependent on terminal gro1th rate* copper price
and A#;87BC rate in the long term. AtiliDed terminal gro1th rate 1as chosen in a relativel% conservative
manner* but failure of ne1 mines and inabilit% to find ne1 attractive pro5ects ma% adversel% affect this factor.
Bong!term copper prices and e+change rates are also ver% important and practicall% infeasible to be calculated
1ith reasonable precision in long term* therefore 1e deem them as imposing ris, to our model. "e performed
Monte -arlo simulation in order to chec, to 1hat e+tent our target price ma% be influenced b% changes in those
variables and 1e obtained a mean price of P() *66051* 1hich is close to our valuation model (see appendi+ )/).
Multiple model is mainl% dependent on KGHMHs gro1th opportunities* ris,s and profitabilit%.





4
Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University, best known as the author of
several widely used academic and practitioner texts on Valuation
>igure 2'& -omponents of "<--

7isk 'ree rate ).==%
Beta /..=!/.).
Market risk !re#iu# (%
ountry risk !re#iu# /.(%
ost o' de"t 3.2%
Source: Team estimates, market data



>igure 2/& 7eer groupHs betas regressed
against M#-I "orld Inde+
Source: Team estimates



>igure 22& ;oing :usiness Inde+ 2'/)
7ank ountry
) Anited #tates
/7 -anada
)7 -hile
(( 7oland
Source: World Bank



>igure 2)& >or1ard multipliers


Source: Team estimates, Bloomberg



>igure 2=& Monte -arlo I price
distribution

Source: Team estimates












0
1
2
K<Q KGH >M >-@ <C0?#--?
'
/'
2'
2'/2$ 2'/)$ 2'/=$
7eers median 78$
KGHM 78$
7eers median $98$:I0;<
KGHM $98$:I0;<
>A Institute 7esearch hallenge /( >eb 2'/)

8

>inancial Analysis

Sustaina"le earnings
>or KGHM* %ear 2'// 1as a record in terms of both revenues and net income. 0he realised earnings -<G4 in
%ears 2''7!2'// 1as ca. 2=% (2'// CI& 7BC // ))=.(2mn* /=2% PoP). Impressive results 1ere mainl% driven
b% favourable level of copper and silver prices* as 1ell as A#;87BC e+change rate as 1ell as nonrecurring items*
namel% sale of 7ol,omtel #.<. and ;ialog #.<.(the% 1ere telecom companies treated as portfolio investments).
Ho1ever* 1e forecast deterioration of the results 1ith follo1ing drivers& introduction of Mineral $+traction 0a+
(for more details about M$0 please refer to appendi+ /3) and lo1er levels of copper and silver prices. "e e+pect
stead% gro1th of earnings in the mid!term (forecast CI ca. )% -<G4 in 2'/2$!2'/7$)* based on assumed
forecast levels of metal prices and budgeted production as 1ell as launch of ne1 mining pro5ects (#ierra Gorda
in F) 2'/=$* <fton <5a+ in 2'/($6 2'/($ CI gro1th %ear PoP is e+pected to be ca. )2% due to increased
production volume). "e forecast CI in 2'/2$ to be significantl% lo1er than the one from %ear 2'//(ca. !(3%
PoP). 0he main reason for such state of matter is the fact that 2'/2 is the first %ear 1ith introduced M$0 1hich
significantl% deteriorates the net result. In %ears 2'/)$ and 2'/=$ 1e e+pect further decrease of CI* ho1ever
not as substantial as in 2'/2$ (CI 2'/)$& !7./3%* 2'/=$& !/..3%). Main drivers of slight decreases in 2'/)$ and
2'/=$ are identified as lo1er -u prices and unfavourable A#;87BC e+change rate. Ho1ever 1e maintain the
vie1 that forecast level of earnings 1ill enable the continuation of attractive dividend polic%* practiced b% KGHM
so far.

Mid and long-ter# sound le$el o' #argins
<lthough in the long term the -ompan% is going to reduce its average cost of copper production (lo1 e+pected
costs of production in #ierra Gorda I due to utilisation of lo1!cost open pit technolog%)* in short!term 1e e+pect
main margins to deteriorate slightl%* ho1ever remain at sound level comparing to historical performance
of KGHM as 1ell as its peers. In mid!term 1e forecast margins to recover* as in %ears 2'/($ and 2'/3$ the effect
of lo1er -u production cost in ne1 mining pro5ects 1ill be in effect. <fter impressive %ear 2'//* $:I0;< margin
1as 7/.=%* 1e e+pect $:I0;< margin to be ca. )(% in 2'/2$ and to gro1 sustainabl% through all %ears
of forecast to the level of appro+imatel% ca. =(% in 2'/7$.

.uPont analysis ; dri$ers o' !ro'ita"ility
In the anal%Ded historical period* KGHM e+hibited high return on euit%(2'/' 4?$ )3.7(%* 2'// 4?$ 3'.)%).
7reviousl%* the main drivers of such high level of profitabilit% 1here mainl% net income margin* euit% multiplier
as 1ell as total assets turnover. ?ur anal%sis indicate impaired 4?$ forecasts (2'/2$ 4?$ 22.2/%* 2'/)$ 4?$
2'.(/%) mainl% due to lo1er net income margin and lo1er euit% multiplier* ho1ever 1e evaluated e+pected
levels of 4?$ to be still attractive comparing to historical performance of the -ompan% (#ee >igure no 2.).
"e forecast 4?$ in 2'/7$ to be /../2%. ;u7ont anal%sis suggests the most important driver for sustaining
future level of return on euit% to be financial leverage* calculated as ratio of asset divided b% euit%. Hence* 1e
conclude forecast increase of the -ompan%Hs leverage to have positive influence on profitabilit%. #econd driver
appears to be asset turnover* 1hich indicates the better utilisation of -ompan%Hs resources(increase in sales due
to larger asset base 1ill be bigger than the gro1th of the asset base itself).>or e+tended ;u7ont anal%sis see
appendi+ /7

7o"ust cash generating a"ilities
In the anal%Ded historical period (2''2!2'//) KGHM presented positive ->? and negative ->I due to high level
of -<7$@. "e predict this trend 1ill hold in the forecast period. In %ears 2''2 I 2'// KGHM presented negative
->> 1hich 1as due to high level of dividends. <dditionall% KGHM 1as able to generate internall% all the
necessar% cash for covering investments (e+cept %ear 2'/21hen the -ompan% incurred debt in form of cash
loan for covering the dividend pa%out). Moreover* KGHM constantl% managed to present positive cash
conversion c%cle. In our opinion this trend 1ill continue to be present in the future.

0he -ompan% liuidit% ratios remained at high levels (-urrent ratio 2'/'& 2.(7 2'//& =.(=). "e e+pect future
level of liuidit% ratios to be sufficient in pro5ected period (-urrent ratio 2'/2$& 2.)= 2'/7$& 2./') >or more
financial ratios please see appendi+ = .

In the period of forecast* 1e predict the ratio of ->?8-<7$@ to be significantl% higher than /''% (2'/2$& /=/%
2'/7$& )2)%)* ho1ever possible e+ternal sources of financing are ta,en into account as necessar% for
sustaining robust dividend polic%. "e predict that overall cash sufficienc%* measured 1ith ratio of
->?8(;ividend paid T ;ebt 4epa%ment T >i+ed <sset Investment)* 1ill maintain at the level of / (enough cash
for covering all reuired pro5ects for gro1th development).

$arnings ualit% indicator (computed as ->?8(CI T ;R< TVC"-) has been above / in previous %ears (%ear 2'//
is an outlier due to nonrecurring events included in CI* namel% sell of 7ol,omtel and ;ialog #.<.). "e e+pect
relation of ->?8(CI T ;R< TVC"-) above / to be continued in the forecast period.

Structure o' 'inancing0 High !otential 'or de"t 'inancing
In previous %ears the -ompan% 1as financing its resources entirel% 1ith euit% (insignificant revolving loans
1ere incurred). 4ecentl% management stated possibilit% of incurring debt (management considers several
options& long term ban, loan* domestic bonds issuance* euro bonds issuance). In our opinion the incurrence
of debt 1ould favourabl% influence the overall KGHMHs cost of capital and profitabilit% ratios* especiall% ta,ing
into account sound financial position as 1ell as cash generation abilit%. "e forecast increased debt financing*
debt to euit% ratio is estimated to rise from ca. 7.22% in 2'/2$ to ca. /(..2% in 2'/7$.


>igure 2(& #table margins (7BC bn)


Source3 0eam estimates* -ompan% ;ata


>igure 23& ;u7ont <nal%sis for 2'/2$ R
2'/3$ (<ppendi+ /7)


Source: Team estimates.


>igure 27& Higher 4?$ as compared to peers


Source3 0eam $stimates* -ompan% ;ata


>igure 22& -ash flo1 pattern


Source3 0eam $stimates* -ompan% ;ata



'%
/'%
2'%
)'%
='%
('%
3'%
7'%
2'%
'
(
/'
/(
2'
2(
)'
2
'
'
2
2
'
'
.
2
'
/
'
2
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=
$
2
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$
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3
$
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7
$
4evernues
$:I0 Margin
$:I0;< Margin
Cet 7rofit Margin
'%
/'%
2'%
)'%
='%
('%
3'%
7'%
2''2 2''. 2'/' 2'//
KGHM 4?$
M$;I<C 7$$4# 4?$
!/(
!(
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/(
2
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2
2
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2
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7
$
->? ->I ->>
>A Institute 7esearch hallenge /( >eb 2'/)

9

or!orate Go$ernance and Social 7es!onsi"ility

KGHMOs cor!orate go$ernance and cor!orate social res!onsi"ility ,S72 are o$erall highly rated

KGHM sho1s great efforts in improving its relations 1ith shareholders* clients and emplo%ees. It can be
sho1n b% -ompan%Hs high ualit% of annual reports* creation of audit* remuneration and strateg% committees
and introduction of -ompan%Hs o1n code of ethics. 0o ob5ectivel% estimate the KGHM resources* the -ompan%
commissioned Micon International Bimited to prepare an independent research on resource base* 1hich 1as
issued in 2'/). "e deem such actions create additional upside potential for KGHM* as compared to companies
that lac, special focus on corporate governance and -#4.

or!orate go$ernance0 "e estimated the ualit% of corporate governance b% appl%ing 7rinciples
of -orporate Governance developed b% ?rganiDation for $conomic -ooperation and ;evelopment (?$-;).
KGHMHs final score 1as 2.= out of ma+imum /' points. "e value this score as relativel% high. >or detailed
calculation methodolog% please refer to KGHMHs corporate governance and corporate social responsibilit%
in appendi+ )2.

or!orate social res!onsi"ility0 High ualit% is sho1n b% publication of -#4 report for %ears 2'/'!2'// and
inclusion of KGHM in 4$#7$-0 Inde+ since its establishment in 2''.. KGHM has historicall% been striving to
improve its ecological side* b% effectivel% introducing ne1 eco!investments and pro!environmental solutions
(in %ears 2'/' and 2'// KGHM spent over 7BC )''mn on eco!pro5ects). More information on 4$#7$-0 Inde+*
its importance and environmental issues of KGHM is sho1n in appendi+ )2.

onditional dri$ers o' additional u!side

7educed engage#ent in shareholders structure o' Polish State o' Greasury0 "e e+pect this is one of the
most important potential events that might release additional upside potential. <s suggested in multiple
valuation part* 1e forecast the certain amount of discount against peers to hold in the future. 7ossible less
control of #tate 0reasur% over the -ompan% ma% influence favourabl% the general operations of the -ompan%.

)e& ac@uisitions in the area o' core o!erations0 <s the official strateg% of the -ompan% suggest* 1e ma%
e+pect the management to consider ne1 investments in the copper mar,et* both through mining companies
acuisition or acuisition of copper deposits. "ith purchase of Fuadra >C@ (currentl% KGHM International)
the -ompan% entered the group of global pla%ers on the copper mar,et. 7otential strengthening or even
increasing its international position ma% translate into positive stoc, price changes.

Success'ul in$est#ent in the area o' energy !roduction0 <s indicated b% the management* the -ompan%
currentl% introduces the strateg% of diversification of revenue sources. 0he main area that KGHM is going to
develop is its side pro5ects is energ% production. 0he strategic goal to be reached is to gain certain level
of independence in terms of energ% suppl% for polish mining facilities as 1ell as gain on the e+ternal sale
of energ%.

In$est#ent risks

7robabilities of the follo1ing ris,s and possible impact on the -ompan% price are presented in appendi+ )).

MA7KEG 7ISK3 Metal !rice assu#!tions - 'luctuations o' co!!er and sil$er !rices
4evenues depend on the factor that cannot be full% controlled b% the -ompan%& copper mar,et price. < /'%
change in the long!term copper price 1ould change our valuation b% /3% due to high operating leverage and
terminal value sensitivit%. ;ue to the fact that 2' % of revenue comes from sale of silver* its price fluctuations
can also have impact on our target price. Cevertheless* the influence is estimated to be not as significant
as in case of copper. :ased on our research* changes in KGHMHs share prices are correlated in (/% 1ith changes
in copper prices* 1hat is less than the average for the other companies in the sector (please see appendi+ )').

MA7KEG 7ISK3 -S. currency assu#!tions - 'luctuations o' eIchange rates
<bout 7.% of the GroupWs income and costs are related to foreign currenc% transactions. Moreover* even
domestic transactions are influenced b% e+change rate fluctuations* because copper price for all bu%ers is based
on BM$ price. >or this reason* the A#;87BC rate changes have significant impact on the siDe of income from
sales. #trengthening of the domestic currenc% has a negative impact on the profitabilit% of e+port and domestic
sales.

MA7KEG 7ISK3 Poland enters the Euro Aone
If 7oland entered the $uro Done during our forecast (!%ear period (1hich is possible but not much probable)
the e+change rate ris, 1ould significantl% decrease* because A#;87BC is a more volatile currenc% than
A#;8$A4. 0his situation could have positive impact on revenues volatilit%.

EB)BMI 7ISK3 Glo"al #acro ; dro! in G.P gro&th rate
0he demand for copper depends mostl% on the economic climate. 0his is caused b% strong correlation of house
building industr% and the G;7 gro1th rate. <s the significant amount of copper (=/%) is used in construction
and household appliances* a decline in G;7 gro1th rate ma% lead to a decrease in the long term mar,et price
of -u and as a conseuence decrease revenues.

>igure 2.& 4evenues brea,do1n !
domestic sales and e+port 2'//



Source3 -ompan% ;ata

2/%
7.%
7oland other
>A Institute 7esearch hallenge /( >eb 2'/)

10

EB)BMI 7ISK3 .e#and assu#!tions ; in'luence o' hina
0he largest share of the global demand for copper in the amount of ).% is created b% high needs of -hina
(details presented in appendi+ /2). Ho1ever* there is a possibilit% that the future increase in -hina demand
is inaccuratel% estimated (possible changes in both directions).

EB)BMI 7ISK3 o#!etition - o$ersu!!ly
0here are numerous ne1 e+pansion pro5ects in the pipeline* 1hich are going to be realiDed especiall% in
2'/((refer to& appendi+ 2(). ;ue to this fact* 1e are e+pecting an increase in copper suppl% in the mid!term.
0hat situation ma% lead to decrease of copper price.

BPE7AGIB)A( 7ISKS3 Assu#!tions a"out the @uality o' ore
?n the basis of professional geological researches* it is assumed that the ore in 7oland contains /.(.% copper.
Ho1ever* this assumption ma% be estimated 1ith error. It is possible that after reaching deeper la%ers* the ore
ualit% ma% be lo1er. In this case* the e+traction process ma% become unprofitable because of smaller amount of
copper in ore and higher e+traction cost. <nother constraint is the problem about difficult conditions such as
high temperature in lo1er la%ers* 1hich ma% ma,e the ore impossible to e+plore.

BPE7AGIB)A( 7ISKS3 Increase in energy, la"our and eI!loration costs
Increase in those costs can adversel% affect future margins obtained b% KGHM. Ho1ever* the changes in
e+ploration and energ% costs can be easil% predicted b% the management. In 2'/2* the labour cost is estimated
to increase b% 2%* although according to KGHMHs annual report it is supposed to increase onl% b% (.)%. :ecause
2.% of all emplo%ees are members of labour unions (data as of ;ecember 2'//)* the% have a strong negotiating
position that allo1s to force the management to rise compensation through industrial actions. Babour costs
ma,e up 22% of KGHM costs* therefore material and une+pected changes in compensation level can influence
the -ompan%Hs profitabilit%. "hat is more* that actions might decrease the e+traction itself and* in conseuence*
have a negative effect on the -ompan%Hs financial results.

BPE7AGIB)A( 7ISKS3 -!dates in the gro&th !roCects ,A'ton-ACaI, Sierra Gorda, Jictoria2
0here is ris, connected 1ith ne1 information regarding& progress* obstacles causing dela%s in ne1 e+ploration
pro5ects* higher amount of capital e+penses to be incurred* uncertain amount of copper content in the ore.
"e carried out sensitivit% anal%sis* 1hich too, into account ris, of other production volume than forecast in the
model and different $:I0;< margin than e+pected (1hich is influenced b% the start of ne1 mines* ore
diversification* etc.). >or results please refer to appendi+ )=.

PB(IGIA( 7ISK& hanges in en$iron#ental !olicy
4ecent changes in the $A environmental la1 have introduced ne1 stricter rules. 0heir implementation result in
incurring additional costs and the necessar% investments. KGHM 1ill also be covered b% the s%stem of
allo1ances to trade -?2 emission rights in the future (possible e+penses connected 1ith technolog% ad5ustments
and emission rights).

PB(IGIA( 7ISK3 In'luence o' the State Greasury
0he #tate 0reasur%* 1hich holds )/.7.% of the share capital* can have substantial impact on man% aspects of the
-ompan%Hs activities. ;ue to this shareholder* KGHM is under governmentHs pressure. 0his ma% influence
dividend polic% and particular strategic plans(possible acuisitions and investments). Ho1ever* strong position
of main shareholder is a prevention from hostile ta,eovers* ma,ing them impossible. <dditionall%* in case of
strong financial disturbances KGHM ma% be supported b% cash in5ection from the government. Pet* there is still
a possibilit% that it ma% sell its sta,e of KGHMHs stoc,s.

PB(IGIA( 7ISK3 eItension o' the #ining concessions in Poland
In 2'/) -ompan%Hs mining concessions 1ill e+pire. #ince KGHM is the o1ner of the 1hole mining infrastructure
it is almost certain that concessions from the 7olish government 1ill be granted. Ho1ever* there is a ris, that
due to the current good condition of KGHM higher fees could be imposed.


















Gea# disclosure3
"e assign a :AP rating 1hen a securit% is e+pected to deliver returns of /(% or greater over the ne+t t1elve
months. < #$BB rating is given 1hen the securit% is e+pected to deliver negative returns over the ne+t t1elve
months* 1hile a H?B; rating implies flat returns over the ne+t t1elve months.
>igure )'& 2'/2 F) e+penses b% nature


Source3 -ompan% data






=.%
22%
/)%
/'%
3%
Materials and energ%
$mplo%ee benefit e+penses
0a+es and charges
$+ternal services
;R<
>A Institute 7esearch hallenge /( >eb 2'/)

11

A!!endiI 53State#ent o' 'inancial !osition

BA(A)E SHEEG ,P() Q+++ +++2 *++9 *+5+ *+55 *+5*E *+56E *+5:E *+51E *+5<E *+5/E
I0 >iIed Assets 9 1+9 5* 5*1 55 <9/ *5 :9+ *1 **+ *= :91 65 1+6 66 1:* 6: 1*6
/. Intangible assets 73 27 /(/ /(' /(' /(' /(' /(' /('
2. 77$ ( .)2 3 ((/ 7 272 7 2/2 2 2=' . 3== /' )/7 /' 23. /' =32
). 77$ 7ro5ects ' ' ' 2 2=( . .). /2 =77 /= 2)7 /3 )7) /7 2''
=. Bong!term investments ) 2/2 ( '=/ = '/( = 2() ( 23( ( 2') ( 73) ( 7/3 ( 37'
(. Bong!term receivables //' 27 2= /'3 /'. /'( /2' //3 //7
3. Bong!term deferred charges and accruals /37 )3' /32 )/3 )/3 )/3 )/3 )/3 )/3
II0 urrent Assets : ::: / /+: 5/ 11< / 6=: / *+/ < /1= = +11 = 61= 5+ +/*
/. Inventories / 2.' 2 '// 2 )(3 ) =(2 2 .7) 2 2). ) ).' ) )'' ) )22
2. #hort!term receivables / )/( 2 ).= / (') 2 372 2 2(3 2 /(( 2 =3( 2 ='' 2 =/3
). -ash R -ash euivalents .7( 2 (.3 /2 2)3 .'2 / 32( / =/2 / 2=7 2 )'( ) .2/
=. #hort!term investments 23= 7') 232 )() )() )() )() )() )()
ASSEGS 56 916 59 =*9 *9 *16 *= =/: 6* :*= 61 *16 69 11= :5 =99 :: 191

StockholdersR E@uity 5+ :+: 5: :1< *6 56< *5 =+9 *6 61= *1 +<1 *= *11 *9 ==< 65 /<6
I0 (ia"ilities 6 1:9 1 6/6 < 55= / +<1 9 +/+ 5+ 5=/ 55 6+6 5* +56 5* =6*
(ong-ter# lia"ilities 5 /+: * 6=+ * *1+ 6 95* 1 +5= < 5*9 < /1/ / 6== = +65
/. Bong!term pa%ables /7 /= /2 =7 =2 =( (' =. =.
2. Bong!term loans /2 2 ' / (7' 2 (7' ) (7' = '7' = (7' ( '7'
). Bong!term liabilities due to emplo%ee benefits / '.2 / /22 / 2/3 / )/= / =/. / ()2 / 3(( / 727 / .)'
=. ?ther long!term liabilities (77 / 22. / '22 .22 .22 .22 .22 .22 .22
Short-ter# lia"ilities 5 =:1 * 996 6 =<= 6 516 : +1* : +1= : 1:/ : <*1 : =+5
/. #hort!term pa%ables / )73 / 722 / 222 2 /22 2 2(= 2 72( ) '/) 2 .)= 2 .()
2. #hort!term loans 3 ) ' ( ( ( ( ( (
). #hort!term liabilities due to emplo%ee benefits .) .) /'7 /'7 //3 /2( /)( /=3 /(2
=. ?ther short!term liabilities )3. / /3. / .)) 2(2 / '77 / 2') / ).) / (=/ / 32(
ED-IGK H (IABI(IGIES 56 916 59 =*9 *9 *16 *= =/: 6* :*= 61 *16 69 11= :5 =99 :: 191

Source3 0eam estimates

>A Institute 7esearch hallenge /( >eb 2'/)

12

A!!endiI *3 Inco#e state#ent

I)BME SGAGEME)G ,P() Q+++ +++2 * ++9 * +5+ * +55 *+5*E *+56E *+5:E *+51E *+5<E *+5/E
7e$enues 55 +<5 51 9:1 *+ +9/ *5 *9+ *5 =96 *+ 9+< *6 9*+ *6 *=/ *6 :::
-?G# 7 /27 2 3/7 . 272 /) ==2 /= 2)2 /) =') /= )72 /) .7) /= '''
Gross profit ) .)) 7 )22 /' 22' 7 2=2 7 33/ 7 (') . (=2 . )/( . ==)
Gross profit margin 36% 46% 51% 37% 35% 36% 40% 40% 40%
#GR< 7)3 37/ 2(3 .27 .() ./' / '=/ / '/= / '2/
7rofit from sales ) /.7 3 3(7 . )3= 3 ./( 3 7'2 3 (.) 2 ('3 2 )'/ 2 =22
?ther operating income 27/ 7// ( '.) / ./3 / .7' / 222 2 /() 2 '.3 2 //'
?ther operating e+penses .3. / 7)' 73. 2 /2. 2 /2. 2 './ 2 ).2 2 )2. 2 )==
?perating profit ($:I0) ) '.2 ( 3)2 /) 322 3 7'2 3 =2. 3 )2= 2 237 2 '32 2 /22
$:I0;< ) 3=3 3 2(= /= )3' 7 ==' 7 237 7 .23 /' /)/ /' /37 /' =()
EBITDA margin 33% 39% 71% 35% 36% 38% 42% 44% 45%
D&A (=2 3/( 372 7)7 / )72 / 3'2 / 23= 2 /'' 2 23(
%ap!" 47% 51% 46% 25% 34% 41% 48% 66% 99%
>inancial income ' ' ' ' ' ' ' ' '
>inancial e+penses )2 )) )= /32 2=7 )'7 )=( )7= ='(
$:0 (loss) ) '37 ( 3'3 /) 3(= 3 ()= 3 2=2 3 '77 7 .22 7 3.= 7 72)
0<@ (23 / ')7 2 )/. / (== / 3'. / ()( / .)7 / 27. / 2.'
a#t$a% ta" rat! 17% 18% 17% 24% 26% 25% 24% 24% 24%
7rofit (loss) of minorit% shareholders ' ' ' ' ' ' ' ' '
)et !ro'it ,loss2 * 1:+ : 1<9 55 661 : 99+ : <66 : 1:* 1 9=1 1 =51 1 =96
margin 23% 29% 56% 23% 21% 22% 25% 25% 25%
Earnings &!r '(ar! &)* /) 2) (7 2( 2) 2) )' 2. 2.
Di+i,!n, p!r s(ar! //*7 )*' /=*. 22*) /(*( /=*2 /=*' 2'*. 2'*/
&a-o$t ratio 80% 24% 65% 50% 62% 61% 61% 70% 69%

Source3 0eam estimates
>A Institute 7esearch hallenge /( >eb 2'/)

13

A!!endiI 63 State#ent o' cash 'lo&s

SGAGEME)G B> ASH >(B%
,P() Q+++ +++2
* ++9 * +5+ * +55 *+5*E *+56E *+5:E *+51E *+5<E *+5/E
Cet profit (loss) 2 (=' = (3. // ))( = ..' = 3)) = (=2 ( .2( ( 2/( ( 2.)
;R< (=2 3/( 372 7)7 / )72 / 3'2 / 23= 2 /'' 2 23(
-hange in Cet "or,ing -apital !322 !2(2 / (3( !/ ./7 / (7) /'7 !(7= 7( !/.
?ther 22 =2/ != 2'= )2/ =33 (/3 (2= 3'7 3='
>B * :=/ 1 6:/ = /<= : 59* = +:9 < /</ / =19 = 19/ = //9
-<7$@ !/ /32 !/ 2/7 !/ =3' !2 .2) != '.= !) .=) !) 2.7 !) /22 !2 2./
Interest received 3 ( /2 ' ' ' ' ' '
;ividends received =(( /=7 277 (7 (7 (7 (7 (7 (7
?ther investments !2=3 !2 '3' = 73' !7 =/( !/ ''' !/ ''' !/ ''' !/ ''' !/ '''
>I -9:/ -6 5*1 6 19+ -5+ 6:5 -1 +6< -: ==< -: =:+ -: 56+ -6 *66
Interest paid ' ' ' !/22 !/.. !23/ !2.2 !)2) !)(=
#hare issues ' ' ' ' ' ' ' ' '
7roceedings from borro1ings ' ' ' ( / ''' / ''' ('' ('' (''
;ebt paid != !) ' ' ' ' ' ' '
;ividends paid !2 ))3 !3'' !2 .2' !( 332 !) '.' !2 2)) !2 7.2 != /2( != '/(
?ther != !) !/) ' ' ' ' ' '
>> -* 6:: -<+< -* 996 -1 /=1 -* *9+ -* +9: -* 1=: -: ++9 -6 =/+
Gains due to e+change rate differences
in valuation of cash and cash euivalents
-5< 1 =/< + + + + + +
-hange in cash !2/. / 32' /' 2=/ !// .)= 72= !2/= =)( =(2 / 373
:eginning balance of cash / 7.= .7( 2 (.3 /2 2)3 .'2 / 32( / =/2 / 2=7 2 )'(
$nding balance of cash .7( 2 (.3 /2 2)3 .'2 / 32( / =/2 / 2=7 2 )'( ) .2/

Source3 0eam estimates





























>A Institute 7esearch hallenge /( >eb 2'/)

14

A!!endiI :3 Key >inancial 7atios

Key >inancial 7atios *++9 *+5+ *+55 *+5*E *+56E *+5:E *+51E *+5<E *+5/E
(i@uidity 7atios

-urrent 4atio 2.=/ 2.(7 =.(= 2.)= /.72 /.37 /.77 /.2/ 2./'
Fuic, 4atio /.)2 /..' )..) /.2( /.'( '..7 /.') /.'. /.=/
-ash 4atio '.() '.27 ).)2 '.2. '.=' '.)( '.=/ '.(' '.2)
E''iciency 7atios

0otal <sset 0urnover '.7. '..= '.22 '.7) '.7/ '.32 '.3= '.(7 '.(=
>i+ed <sset 0urnover /.2/ /.=7 /.3. /.22 '..= '.72 '.2' '.72 '.3.
C"- 0urnover ).32 =.)3 2./2 2.)2 (..) 7./= 7.7/ 3.=) (.2/
<-- 4eceivable 0urnover 2.72 2.3' /'.)/ /'./2 2.27 ..=2 /'.)( ..(7 ..7=
;a%s ?f #ales
?utstanding
=/.23 =2.=( )(.). )(.2= =/./) )2.(/ )(.2( )2./) )7.=.
Inventor% 0urnover 3.3) 2./7 ..2' 7.)) 3.2/ 7./. 7.32 3..3 7.'2
;a%s ?f Inventor% ?n
Hand
((.'3 ==.33 )..33 =..7. ().(3 ('.7) =7.(2 (2.=) (/.(3
7a%ables 0urnover (.)/ (.3) (.7( 3.== =.() =.'2 =.(7 =.'2 =./.
Cumber of da%s of
pa%ables
32.7( 3=.2) 3).=2 (3.32 2'.(= .'.7= 7.../ 2..== 27./(
-ash -onversion -%cle 22./7 22.22 //.(7 22..= /=./( !/.(' 2.27 /./2 /..'
Pro'ita"ility 7atios

Gross 7rofit Margin )3% =3% (/% )7% )(% )3% ='% ='% ='%
$:I0 Margin 22% )(% 32% )/% )'% )/% )(% )(% )(%
$:I0;< Margin ))% ).% 7/% )(% )3% )2% =2% ==% =(%
Cet 7rofit Margin 2)% 2.% (3% 2)% 2/% 22% 2(% 2(% 2(%
4?< /2% 27% =3% /7% /(% /)% /3% /=% /=%
4?$ 2=% )7% 3'% 22% 2/% /.% 22% 2'% /.%

Sol$ency 7atios

;ebt 4atio './)% '.'3% '.''% (.=(% 7..=% /'./=% /'.)'% /'..2% //.)2%
;ebt to $uit% 4atio './7% '.'2% '.''% 7.22% //.'2% /=.23% /=.=2% /(.)/% /(..2%
>inancial Beverage /.)) /.)3 /.)/ /.2. /.)3 /.=' /.=' /.=' /.='
Interest -overage 4atio /= =37 22 22= / )'( =(( 3/.'' )..== )'.(= )=.3= )/.=) 2..=.
ash >lo& 7atios

Internal financing of
-<7$@ (->?8-<7$@)
2/=% =).% 3'/% /=/% /.7% /72% 2'2% 27'% )2)%
?verall 4atio of cash
sufficienc%
(

'.7/ 2..= /..2 '.=2 /./2 /.'' /./7 /./7 /.).
->?8(CIT;R<TVC"-) /.'/ /.'. '.3( /./' /.'3 /.'2 /.'2 /.'2 /.'2
-ash sales performance '.22 '.)= '.== '.2' '.)7 '.)2 '.)) '.)7 '.)7

Source3 0eam estimates






(
->?8(;ividend pa%ments T ;ebt 4epa%ments T >i+ed <ssets Investments)
>A Institute 7esearch hallenge /( >eb 2'/)

15

A!!endiI 13 .> analysis
*+5*E *+56E *+5:E *+51E *+5<E *+5/E 7esidual
4>4 ).=% ).=% ).=% ).=% ).=% ).=% ).=%
$47 (.'% (.'% (.'% (.'% (.'% (.'% (.'%
-47 /.(% /.(% /.(% /.(% /.(% /.(% /.(%
:eta /..= /.2. /.7. /.(' /.=7 /.=) /.).
ost o' e@uity 5<0+8 510/8 51058 560*8 560+8 5*0/8 5*018
-ost of debt 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2%
Marginal ta+ rate 2'.2% 2'.2% 2'.2% 2/.2% 2/.2% 2/.2% 2/.2%
A'ter-taI cost o' de"t :098 :098 :098 :098 :098 :098 :098
"eight of euit% .)% .'% 22% 27% 27% 23% 23%
"eight of debt 7% /'% /2% /)% /)% /=% /=%
%A 51068 5:0/8 560=8 5*058 55098 550<8 55018




(7BC mn) *+5*E *+56E *+5:E *+51E *+5<E *+5/E 7esidual
CI = ..' = 3)) = (=2 ( .2( ( 2/( ( 2.) ( 2.)
Interest e+penses (/!marginal ta+ rate) .. /32 2/2 2)7 232 227 227
;R< 7)7 / )72 / 3'2 / 23= 2 /'' 2 23( 2 23(
-hange in C"- !/ ./7 / (7) /'7 !(7= 7( !/. !/.
-<7$@ 2 .2) = '.= ) .=) ) 2.7 ) /22 2 2./ 2 2./
>->> 377 ) ='/ 2 23. ) )3( = 2/= ( 22( ( 22(



ter#inal gro&th rate 58
7erpetuit% "<-- //.(%
7BC mn

4esidual value (3 (=(
79 of residual value )( =(=
79 of >->> /( './
Enter!rise $alue 1+ 1:1
Cet debt .=.
Jalue o' e@uity :9 19<
Cumber of shares (mn) 2''
7rice at the end of 2'/) *:=0+
7rice at /st March 2'/) **60=


Source3 0eam estimates




>A Institute 7esearch hallenge /( >eb 2'/)

16

A!!endiI <3 Multi!liers !ricing
P4E *++/ *++= *++9 *+5+ *+55 *+5*E *+56E *+5:E
>-@ /).3 ).) /).) /).' 7.3 //./ 7.3 7.23
#--? /).. /'.' )'.2 23.3 /'.. /(.2 /=.. /).22
<C0? /'./ ).3 2).7 2).3 /(.' /(.7 /=.= /).=2
>M //.) 2.2 /).= /23.) /3.7 /2.' /).3 /'..)
K<Q ..' 2.' /=.. ..7 (.( /'.' ..2 ../
Median 78$ for each %ear
//.) ).) /=.. /2.) /'.. /(.7
KGHM P4E
10: *0+ 905 /01 *0+ /01
Historical ;iscount
!(2% !)2% !).% !(.% !22% !(2%
ME.IA) o' historical discount3 ,*++/-*+5*2 -1*8


EJ4 EBIG.A *++/ *++= *++9 *+5+ *+55 *+5*E *+56E *+5:E
>-@ 3.= ).= (.( (.. ).3 (.2 ).( ).=/
#--? 2./ (.7 /(.2 /=.) 3.2 ..= 2.. 2.)/
<C0? =.3 2.( ..2 2.3 (.= (.2 (.7 (./
>M 3.3 /.. (.) 7.3 7.( 2.7 3.( =.2
K<Q (.3 /.2 2/.) ... (.) 3.3 3.' 3.'(
Median $98$:I0;< for each %ear
3.= 2.( ..2 2.3 (.= 3.3
KGHM EJ4EBIG.A
60: 50+ 10* :06 +09 :01
Historical ;iscount
!=7% !(2% !==% !('% !2)% !)2%
ME.IA) o' historical discount ,*++/-*+5*E2 -1+8




*+56E *+5:E

*+56E *+5:E
78$ peers median /).3 /'..

$98$:I0;< peers 3.' (./
A!!lied discount -*18 -*+8

A!!lied discount -*18 -*+8
0arget 78$ /'.2( 2.2

0arget $98$:I0;< =.(3 =.//
$7# 2) 2)

$:I0;< 7 237 7 .)3


-ash / 32( / =/2


#0 Investments )() )()


;ebt 2 (7( ) (7(


9alue of $uit% (7BC bn) )(.) )/
Price 'ro# P4E *6/06 5990= Price 'ro# EJ4EBIG.A 5/<0: 51:09
"eights for %ears
('% ('%

('% ('%
"eights for multipliers ('%
('%


Price 'ro# relati$e $aluation 59*05

"eight of relative valuation ('%
Price 'ro# .> *:=0+
"eight of ;-> ('%
Price !er share ,end o' *+562 **+0+ H5=0<8 -PSI.E PBGE)GIA(
7rice per share (/ Mar 2'/)) 2'2.'

Source& 0eam estimates* :loomberg
>A Institute 7esearch hallenge /( >eb 2'/)

17

A!!endiI /3 .> assu#!tions
50 Jolu#e o' !roduction
22% of -u is from scrap (based on historical averages and -ompan% data). <mount of ore e+tracted in 7oland is increasing* but the copper
and silver content in the ore is decreasing. 0hus the final result 1ill be the same amount of copper and silver for sale (based on -ompan%
data).



*0 u, Ag !rice
2'/2$ 2'/)$ 2'/=$ 2'/($ 2'/3$ 2'/7$ B0
Cu price USD/t 7 962 7 800 7 400 7 000 6 900 6 800 6 900
Ag price USD/troz 31.14 31 29.5 28 27.68 26.5 25
PLN/USD 3.30 3.23 3.14 3.10 3.06 3.05 3.05
Source& 0eam estimates based on "orld :an, -ommodit% 7rice >orecast (Uanuar% /(. 2'/))* e+change rate from $MI# database (based on a anal%stsH
consensus)


60 ost o' goods sold
-ost of goods sold are pro5ected as share of revenues. >or %ears 2'/2$!2'/=$ 1e utiliDed historical stable level. Ho1ever* after e+traction
starts in #ierra Gorda in 2'/($* -?G# are forecast to decrease. 0his situation is 5ustified b% changing -/ cost (cash cost connected 1ith
e+traction). Ce1 mines include not onl% underground t%pe* but also cheaper to e+plore open pit mines). <ccording to -ompan% data*
KGHM Group -/ cost shall decline b% 2'% till 2'/2.


:0 %eighted ost o' a!ital

7isk 'ree rate /'!%ear 7olish government bond ().==%)
Beta >alling from /..= in 2'/2 (KGHM changes in price in A#; regressed against changes in M#-I "orld
Inde+) to /.). in residual value calculation (the average value of metal mining sector based on
<. ;amodaran data)
Market risk !re#iu# (%
based on <. ;amodaranH s calculation
ountry risk !re#iu# /.(%
ost o' de"t 9alue stated at 3.2%. 0his factor 1as estimated using -ompan% data from financial statements. KGHM
states its possible cost of loans as "I:?4 T /!= p.points. -urrentl%* as -ompan% has no debt 1e
calculated the cost of debt on possible loans as the middle value of the range. 0he upper value of
the range if appro+. eual to median cost of debt for peers* but 1e believe that such a high value is not
5ustified since KGHM 1ill onl% start to get indebted and value of debt 1ill not be significantl% high.
Marginal taI rate 0a+ rate 1eighted b% the amount of $:0 from the particular countr% (-anada* -hile* 7oland). In -hile and
-anada in districts 1here KGHM operates or plans to operate the ta+ rate is eual to 2(%. In 7oland
the rate differs* because in order to calculate ta+* M$0 needs to be added to $:0. :efore the introduction
of M$0* median effective ta+ rate in %ears 2''7!2'// 1as appro+imatel% /7%.
a!ital structure .uring years *+5*E-*+5/E3 actual capital structure* 1hich approaches target 1eights. KGHM is going
to incur debt in order to finance ne1 pro5ects and possibl% to enable even higher than anticipated
dividends (possible scenario if 7olish government has problems 1ith budget deficit).
In residual $alue3 target capital structure* based on median average structure of peers. KGHM 1ill
graduall% incur ne1 debt in 2'/)$!2'/7$* approaching peer debt structure.
Source3 0eam estimations


10 .i$idend !olicy

)et !ro'it ,#n P()2 scale o' di$idend !ayout MI) MAM
u! to /++ no dividend

/++ - 5 /++ 2'' T ('% of amount over 7'' 2'' 7''
5 /++ - 6 /++ 7'' T 3'% of amount over / 7'' 7'' / .''
o$er 6 /++ / .'' T /''% of amount over ) 7'' / .'' unlimited
Source3 -ompan% data

>A Institute 7esearch hallenge /( >eb 2'/)

18

<0 )e& ac@uisitions or Coint $enture in$est#ents assu#ed in years *+51E-*+5/E in order to !ro$ide /++kt
u in the long run ,KGHM strategy2
<nnual -u production (KGHM TKGHM International) 1ithout ne1 acuisitions

Source3 -ompan% data* 0eam estimates


/0 Bther
0<@ "eighted b% production from particular countr% (rate in 7oland& /.%* rate in -hile and
-anada& 2(%)
Inflation
2.(% anchored b% the Cational :an, of 7oland
;epreciation R <mortiDation
Bine depreciation based on historical rate in KGHM and KGHM International
Source3 -ompan% data





)''
=''
(''
3''
7''
2
'
/
)
2
'
/
=
2
'
/
(
2
'
/
3
2
'
/
7
2
'
/
2
2
'
/
.
2
'
2
'
2
'
2
/
2
'
2
2
2
'
2
)
2
'
2
=
2
'
2
(
2
'
2
3
2
'
2
7
2
'
2
2
2
'
2
.
2
'
)
'
2
'
)
/
2
'
)
2
2
'
)
)
kt
>A Institute 7esearch hallenge /( >eb 2'/)

19

A!!endiI =3 EItraction $olu#e
0here 1ill be furnace repairment in the GKogL1 smelter in 2'/). "e forecast this 1ill cause (.(% drop in the production.

Source3 -ompan% data* 0eam estimates

A!!endiI 93 Esti#ated re$enues structure changes
-hanging structure of revenues due to the different t%pe of ore in -anadian and -hilean open pits mines (higher amount of other metals).
<dditionall%* silver price is going to decrease in the nearest %ears according to the "orld :an,Hs forecast.

Source3 -ompan% data* 0eam estimates










=2' =/2 =2' =2' =2' =2' =2'
/'2
.=
//'
2)7 2)7 2=2
22'
2'/2 2'/) 2'/= 2'/( 2'/3 2'/7 B0
$+traction KGHM (7oland) X,tY $+traction KGHM International X,tY
**% *6% *5%
*/% *2%
*1% *0%
20%
1.%
1*%
14%
14%
1/%
12%
/%
5%
8%
1/% 14%
16%
18%
0%
20%
40%
60%
80%
100%
2012 201/ 2014 2015 2016 201* LT
Cu 0g ot#er ,etals
>A Institute 7esearch hallenge /( >eb 2'/)

20

A!!endiI 5+3 KGHM S KGHM International glo"al #ines !ort'olio

Source3 -ompan% data

A!!endiI 553 B!erating #ines

KGHM KGHM International
Lubin
Polkowice-
Sieroszowice
Rudna Robinson Franke Morrison
McCreedy
West
Carlota Podolsky
LoM (years)

47 32 24 48 22 8 4 1 0
Location

Poland Poland Poland USA Chile Canada Canada USA Canada
Mine type

under-
ground
underground
under-
ground
open-pit open-pit
under-
ground
under-
ground
open-pit
under-
ground
Mineral
reserves
ore (mn t) 324 369 246 110 35 0.91 0.23 41 0.46
Cu (%) 1 1.87 1.6 0.5 0.76 8.28 0.24 0.47 3.34
Ag (g/t) 43 46 45 - - - - - -
Au (g/t) - - - 0.18 - 0.81 - - 0.69
Ni (%) - - - - - 1.61 1.89 - 0.29
PGM (g/t) - - - - - 6.09 - - 2.74

2011 Cu production
(000' t)

70 195 162 43 15 18 2 11 11

Source3 -ompan% data





>A Institute 7esearch hallenge /( >eb 2'/)

21

A!!endiI 5*3 Green'ield !roCects


KGHM KGHM International
A'ton-ACaI Sierra Gorda Jictoria
Start o' !roduction 2'/($ 2'/=$
2'/3$82'/7$ (full production b%
2'2'$)
(i'e o' Mine ,(oM2 2) %ears 2' %ears /3 %ears
(ocation -anada -hile -anada
Mine ty!e open!pit open!pit underground
Point Jenture
!artner
<bacus Mining R $+ploration -orp #umitomo !
Stake in !roCect
2'% KGHM
2'% <bacus
((% KGHM International
=(% #umitomo
/''% KGHM International
Mineral reser$es
Z (/2 mn t ore
'.)/% cuprum
'./. g8t gold
Z /.27=.2 mn t ore
'.).% cuprum
'.'2=% mol%bdenum
Z/=.( mn tS
2.(% cuprum
2.(% nic,el
7.3g8t 07M (total precious
metals)
A$erage year
!roduction
(' ''' t cuprum
/'' ''' oD gold
2)' ''' t cuprum
// ''' t mol%bdenum
2 t gold
/( ''' t cuprum
/3 ''' t nic,el
5 cash cost /.22O8lbs
'.(3O8lbs (%ears /!() and /./(O8lbs
(B?M)
n8a
Initial APEM 7.( mn A#;
2 277 mn A#; ([2'/=$)
2/2 mn A#; (e+pansion capital
2'/($!2'/7$)
2'= mn A#;
Sustaining APEM
,o$er (oM2
3'= mn A#; / ')2 mn A#; n8a
Status
after :an,able >easibilit% #tud%
(/282'//)
after :an,able >easibilit% #tud%
('(82'//)
after 7reliminar% $conomic
<nal%sis ('382'//)
S Mineral reserves 1ill be estimated at feasibilit% stud%6 amounts refer to mineral resources

Source3 -ompan% data


A!!endiI 563 KGHM and KGHM International coo!eration !otential

#%nergies bet1een KGHM and KGHM International 1ill appear mostl% due to best practice sharing and scale effect&










Source3 0eam estimates

Asage of Fuadra >C@Hs e+perience in open!pit mining* ore
processing6
Increase in the resource base* direct access to ,e% global
resources (#ierra Gorda)6
7resence not onl% in $urope but also in both <mericas6
#trengthening the KGHMHs position as a global* multinational
compan%6
<verage production cost reduction (forecast drop b% 2'% in
2'/2 for 1hole Group average cash cost)6
Geographic* product and currenc% diversification I lo1er
operational ris,.
AtiliDation of centraliDed* read%!to!use solutions for
managing copper e+traction and sale
Asage of KGHMHs labor e+perience and ,no1ledge to
develop ne1 pro5ects* instead of hiring outside e+perts

KGHM KGHMI
>A Institute 7esearch hallenge /( >eb 2'/)
22

KGHM B$0I< #<
2(*=(%
0echnolog% par,* propert% sales

M-Q #< /''%
Medical services
QagKMbie Bublin #<
/''%
Management of football club
0A"!-A74AM
.)*2'%

Mutual personal
propert% insurance
services
KGHM I >iDan/''%
Health!related investments
KGHM 0>I #</''%
-reation Rmng of investment
funds* investment consulting
KGHM II >iDan/''%

Investments focused on
rene1able energ% pro5ects
KGHM III >iDan/''%

Investments in modern
technolog% sector



















A!!endiI 5:3 BrganiAation structure
-ore business
related

-#4
related

Insurance
services

Investment
funds

7H7 Mercus
sp. D o.o. /''%
Import and e+port of
goods
:I74?M$0 #<
33%
Heav% industr%
investments preparations
KGHM $coren
/''%
4ecover% of other metals
from KGHM 1aste
7?B!MI$;\ 04<C#
/''%
KGHM passenger and
cargo transport
KGHM -A74AM
sp. D o.o. -:4 ! /''%
4R; of mining pro5ects
7e:eKa #<
/''%
-onstruction R
engineering services
CI04?$4G #<
2(%
;etonation s%stems for
mining
IC?9< sp. D o.o.
/''%
4adiocommunicationR
seismic services
;>M Q<C<M
B$GM$0 /''%
7roduction of mining
machiner% R euipment
-:U sp. D o.o.
/''%
Microbiological anal%sis
Source3 -ompan% data

KGHM Metraco #<
/''%
7urchase of copper scrap
for smelters* 1holesale
KGHM Kupfer <G
2'%
Mining deposits
e+ploration ! "eiss1asser
0<A4?C 7ols,a
$nergia /'*).%
#ale of electricit% and heat
production

$le,tro1nia
:lacho1nia Co1a
sp. D o.o. ! ('%


-onstruction of po1er
generation sources in
po1er plant :lacho1nia

KGHM <5a+ Mining
IC-. ! 2'%
Mining deposits
e+ploration ! <fton!<5a+
$nerget%,a
#p. D o.o. /''%
7o1er suppl% R 1aste
flo1s management

KGHM (#H<CGH<I)
-?77$4 04<;ICG
-?. B0; ! /''%


"holesale sales*
consulting services
KGHM International
B0;. ! /''%
?perates mines in
-anada* A#< and -hile
>A Institute 7esearch hallenge /( >eb 2'/)

23

A!!endiI 513 (ong-ter# contracts



Source& -ompan% data


.ate o'
contract
ontractor Ger# o' the
contract
Su"Cect Jalue
650+50*+56 7r%smian Metals Bimited 2'/)!2'/= copper rod sale 2.)2 ! 2.23 bn 7BCS
*=0+50*+56 MKM Mansfelder Kupfer und Messing GmbH 2'/) copper cathode sale /.( bn 7BC
*50+50*+56 H#:- :an, A#< C.<.* Bondon :ranch 2'/) silver sale /.7 bn 7BC
510+<0*+55 n,t cables GmbH -ologne 2'/2!2'/) copper rod sale = ! =.= bn 7BCS
*+05*0*+55 -hina Minmetals -orporation 2'/2!2'/3 copper cathode sale 3.) ! /2.3 bn 7BCS
6+0+/0*+5+ 7GCiG #.<. 2'/2!2')) suppl% of natural gas = bn 7BC
*90+10*++9 #<B?:? M$0<I# #.<. 2'/2!2'/3
copper concentrate
purchase
'.3). ! '. .3. bn A#;S
Sdepending on the use of uantitative options

Source3 -ompan% data

A!!endiI 5<3 Mineral EItraction GaI ,MEG2
?n the 2nd of March 2'/2* 7olish government introduced ne1 ta+ on companies that e+tract copper and silver in 7oland I mineral
e+traction ta+. It came into legal effect in mid!<pril 2'/2. >rom that time KGHM has been obliged to pa% monthl% pa%ments of M$0* based
on current e+traction and mar,et prices of copper and silver. Mineral e+traction ta+ is included in costs of goods sold (-?G#)* therefore
immediatel% affecting gross profit. <dditionall%* M$0 is not ta+ deductible* resulting in different calculation of corporate income ta+es than
in previous %ears. $ffective ta+ rate rose in 2'/2$ comparing to 2'// from /7% to 2).3)%. 9alue of M$0 for each month consists of ta+ on
copper and ta+ on silver. 0a+ on copper is calculated as uantit% of e+tracted copper in concentrate (or ore) multiplied b% copper price rate.
0a+ on silver is calculated as uantit% of e+tracted silver in concentrate (or ore) multiplied b% silver price rate. >ormulas for copper and
silver price rates are sho1n in the tables belo1.
MEG 'or#ula 'or co!!er !rice rate !er tonne0
o!!er !rice ,P()2 TU 51 +++ V51 +++
o!!er !rice rate
0he higher of& 0he lo1er of&
'.''( + copper priceS 7BC /3 '''
'.== + (copper price I 7BC /2 ''') '.')) + copper price T ('.''/ + copper price)
2*(

Scopper price is based on the monthl% average of dail% official settlement prices of copper on Bondon Metal $+change and monthl% average
e+change rate published b% 7olish central ban, (C:7). <dditionall%* all formulas (e+pect for constant value of 7BC /3 ''') are ad5usted
up1ard in ever% calendar %ear b% the rate of inflation. Ho1ever* if inflation turns out to be negative* no do1n1ard ad5ustment in possible.

Source& -ompan% data

PLN 2.38 - 2.86bn
PLN 1.5bn
PLN 1.7bn
PLN 4 - 4.4bn
PLN 6.3 - 12.6 bn
PLN 4bn
USD 0.63 - 0.6bn
0 1 2 / 4 5 6 * 8 . 10 11 12 1/ 14 15 16 1* 18 1. 20 21 22 2/ 24 25
Pr1s,ian 2etals Li,ited
232 2ans%elder 3up%er und 2essing ,4'
'(5C 5an6 7(0 N.0.8 London 5ranc#
n6t ca4les ,4' Cologne
C#ina 2in,etals Corporation
PNi (.0.
(0L959 2+T0:( (.0.
2011 201/ 2015 201* 201. 2021 202/ 2025 202* 202. 20/1 20// 20/5
>A Institute 7esearch hallenge /( >eb 2'/)

24

MEG 'or#ula 'or sil$er !rice rate !er kilogra#0
Sil$er !rice ,P()2 [] / 2'' ^/ 2''
sil$er !rice rate
0he higher of& 0he lo1er of&
'.''( + silver priceS './2( + silver price + ('.''/ + silver price)
=
'.7( + (silver price I 7BC / ''') 7BC 2 /''

Ssilver price is based on the monthl% average of dail% official settlement prices of silver established b% Bondon :ullion Mar,et <ssociation
and monthl% average e+change rate published b% 7olish central ban, (C:7). It is assumed that / ,ilogram is euivalent to )2./( troD.
<dditionall%* all formulas (e+pect for constant value of 7BC 2 /'') are ad5usted up1ard in ever% calendar %ear b% the rate of inflation.
Ho1ever* if inflation turns out to be negative* no do1n1ard ad5ustment in possible.

Source& -ompan% data


A!!endiI 5/3 .uPont analysis













Source3 -ompan% data* 0eam estimates




Cet income8#ales
2).'% 22.7% (3.=%
2).=% 2/.2% 2/.7%
2(.'% 2(.'% 2(./%

#ales8<ssets
7..)% 2'.=% 32.7%
7).7% 3..(% (..)%
3'.(% ((.3% (2.3%

Begend
2''. 2'/' 2'//
2'/2$ 2'/)$ 2'/=$
2'/($ 2'/3$ 2'/7$

4?$
2=.2% )3.2% 3'.)%
22.2% 2'.(% /2.2%
22.=% 2'.'% /../%
4?<
/2.)% 27.'% =3.2%
/7.2% /(./% /).=%
/3.'% /=.)% /).3%
<sset8$uit%
/)=./% /)7.2% /23.=%
/)2.=% /)2.2% /='.3%
/='.'% /='.2% /='.=%

Cet income (7BC bn)
2.(= =.(7 //.))
=... =.3) =.(=
(... (.22 (.2.
$:I0(7BC bn)
)./' (.3= /).3.
3.7' 3.=. 3.)2
2.27 2.'7 2./.

$:08$:I0
...'% ...=% ...2%
.7.(% .3.2% .(.2%
.(.2% .(.=% .(.'%
Cet income8$:0
22.2% 2/.(% 2).'%
73.=% 7=.2% /=.7%
7(.(% 7(.3% 7(.7%

>A Institute 7esearch hallenge /( >eb 2'/)

25

A!!endiI 5=3 o!!er consu#!tion; the change in 'a$our o' Asia

o!!er usage "y region


hinese co!!er consu#!tion dri$en "y !ositi$e industrial gro&th rate 7e'ined co!!er consu#!tion annual gro&th rate


Source3 -?-HIB-? Source& #tandard :an,* -I< "orld >actboo,* 4euters

A!!endiI 593 High co!!er !rices ; i#!ulse 'or ne& #ining !roCects, ne& localisations


Source& "ood Mac,enDie Source& -opper ;evelopment <ssociation* 4io 0into

2.%
2/%
3%
23%
/)%
)%
2%
599+
22%
/3%
2/%
22%
3%
(%
2%
*++:
Western +urope Nort# 0,erica
C#ina 0sia e;. C#ina
+astern +urope Latin 0,erica
$est o% World
/=%
//%
).%
/3%
(%
=%
//%
*+5*E
0%
5%
10%
15%
20%
25%
/0%
/5%
0
2 000
4 000
6 000
8 000
10 000
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
/
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
*
2
0
0
8
2
0
0
.
2
0
1
0
2
0
1
1
-hina refined copper consumption W'''t (BH#)
BM$ copper price O8t (BH#)
-hina industrial production gro1th rate %o% (4H#)
!=%
!/%
2%
(%
2%
//%
/=%
India hina BraAil Euro!e Pa!an -SA %orld
2''/!2'// 2'/2!2'2(
12500
1*500
22500
2*500
/2500
/*500
2011 2012 201/+ 2014+ 2015+ 2016+ 201*+ 2018+ 201.+ 2020+ 2025+
!000t
Possi4le pro<ects Pro4a4le Pro<ects
'ig#l1 Pro4a4le pro<ects 5ase Case 2ine 9utput
!e,and =or 2ine 9utput
5 120 "t
#e$%&%t
8 000 "t
'u()lu'
0%
10%
20%
/0%
40%
50%
60%
*0%
80%
.0%
100%
2000 2010 2020+
9t#er Nort# 0,erica C#ile 2ongolia Peru C#ina 0%rica
Source& :roo, Hunt*
I-#G

>A Institute 7esearch hallenge /( >eb 2'/)

26

A!!endiI *+3 Potential 'or co!!er consu#!tion gro&th in hina and India

52 7e'ined co!!er consu#!tion !er ca!ita ,*+++, *++=, *+5*2


Source3 I-#G* IM>* -I< "orld >actboo,

*2 (e$el o' in$est#ents


Source& IM>



Source& IM>
*(+,%l 2012
-u''%+ 2012
./%n+ 2012
0e(m+n1 2012
Un%te# St+te' 2012
2n#%+ 2012
0
5 000
10 000
15 000
20 000
25 000
/0 000
/5 000
40 000
45 000
50 000
55 000
080 280 480 680 880 1080 1280 1480 1680 1880
N
o
m
%
n
+
l

0
D
P

)
&

(
U
S
D
)
-e$%ne# &o))e( &on'um)t%on )& ("3)
*(+,%l
-u''%+
2n#%+
./%n+
US4
0e(m+n1
10
15
20
25
/0
/5
40
45
50
2000 2002 2004 2006 2008 2010 2012+ 2014+ 2016+
5
6ot+l %n7e'tment +' 5 o$ 0DP
0 500 1 000 1 500 2 000 2 500 / 000 / 500 4 000
5ra>il
$ussia
:ndia
C#ina
er,an1
7nited (tates
4n 7(!
Nom%n+l 7+lue o$ %n7e'tment'
2000
2012+
>A Institute 7esearch hallenge /( >eb 2'/)

27

62 -r"anisation

Arbanisation level both in -hina and India remains belo1 the 1orld average ((/%) as contrar% to those countriesH G;7 gro1th rate. ;ue to
high urban sector contribution to G;7 (3'%)* further urbanisation became a ,e% point in current countriesH >ive!Pear 7lans. -hina set a
target of building )3mn apartments b% 2'/($ (2'% countr%Hs housing mar,et) and in #eptember 2'/2 approved (( investment pro5ects
1orth O/(7.7bn 1hich ma% become a buffer for future global copper demand. :et1een 2'''!2'/2 India has sho1n the highest increase of
nominal value of investments among :4I- countries. -ountr% is e+pected to increase urban area from )'% to ('% before 2'=( starting from
infrastructure pro5ects included in $leventh >ive!Pear 7lan.





HI)A I).IA


7-SSIA) >E.E7AGIB) B7ANI(




Source3 Anited Cations data





35855
61855
368805
648655
708805
848265
78135
08145
0
20
40
60
80
100
2000 2005 2010 2015+ 2020+ 2025+ 20/0+ 20/5+ 2040+ 2045+ 2050+
5 Pe(&ent+3e o$ Po)ul+t%on -e'%#%n3 %n U(b+n 4(e+'
0%rica 0sia +urope Nort#ern 0,erica
0
20
40
60
80
100
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
+
2
0
2
0
+
2
0
2
5
+
2
0
/
0
+
2
0
/
5
+
2
0
4
0
+
2
0
4
5
+
2
0
5
0
+
%
0
20
40
60
80
100
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
+
2
0
2
0
+
2
0
2
5
+
2
0
/
0
+
2
0
/
5
+
2
0
4
0
+
2
0
4
5
+
2
0
5
0
+
%
0
20
40
60
80
100
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
+
2
0
2
0
+
2
0
2
5
+
2
0
/
0
+
2
0
/
5
+
2
0
4
0
+
2
0
4
5
+
2
0
5
0
+
%
0
20
40
60
80
100
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
+
2
0
2
0
+
2
0
2
5
+
2
0
/
0
+
2
0
/
5
+
2
0
4
0
+
2
0
4
5
+
2
0
5
0
+
%
>A Institute 7esearch hallenge /( >eb 2'/)

28

A!!endiI *53 Euro!ean construction sector crisis


-onstruction production inde+ (% change compared to corresponding period of the previous %ear)&


Source3 $urostat

<ccording to last reported data (?ctober 2'/2) the improvement is not observed&









Spercentage change m8m!/2














Source3 $urostat










-40 -/0 -20 -10 0 10 20
9u(o)e+n Un%on
0e(m+n1
2(el+n#
0(ee&e
S)+%n
:(+n&e
2t+l1
Un%te# ;%n3#om
5
2011 2010 200. 2008 200* 2006
>A Institute 7esearch hallenge /( >eb 2'/)

29

A!!endiI **3 G.P and industrial !roduction gro&th rate

!P gro"t#
rate
2010 2011 20129 20139 20149 20159 20169 20179
7nited (tates 2./.1 1.808 2.1* 2.116 2../* /./5* /.41 /./2.
C#ina 10.44* ..2/* *.828 8.2/1 8.514 8.544 8.5/5 8.5
$ussia 4./ 4./ /.6.8 /.82/ /.88 /.. /.84 /.8
5ra>il *.5/4 2.*// 1.4*4 /..52 4.1.* 4.20/ 4.10. 4.1/8
:ndia 10.0.2 6.8/6 4.86 5..*1 6./8. 6.*44 6.885 6..46
Poland /.8*1 4./15 2./5 2.05 2.*16 /.108 /.428 /.56/
+7 2.055 1.5.4 -0.20* 0.4.2 1.5/4 1..14 2.021 2.055
World 5.137 3.833 3.278 3.620 4.146 4.418 4.510 4.560

Source3 IM>



Source3 "ood Mac,enDie
























2''2 2''. 2'/' 2'// 2'/2 2'/)$ 2'/=$ ^2'/($
India 7*7 '*) .*7 =*7 /*) =*3 3*/ 3*/
-hina /2*. // /(*7 /)*. .*. /'*7 /'*7 .*2
German% ' !/(*( /'*/ 2 !'*2 ' /*7 /*/
Anited #tates !)*( !//*= (*= =*/ )*3 /*7 2*= 2*'
Global '*= !7*2 .*( =*7 2*2 )*( =*3 =*3
-20
-15
-10
-5
0
5
10
15
20
5
Industrial !roduction ,8 change o$er !re$ious year2
>A Institute 7esearch hallenge /( >eb 2'/)

30

A!!endiI *63 Su!!orti$e @uantiti$e easing ,DE2
:elo1 chart presents A# mone% base and copper price at BM$. Antil 2''( 1e can observe a stable mone% base and copper price fluctuating
bet1een /)'' and O)2''8t. <lthough price increase bet1een 2''( and 2''2 can be e+plained b% tight copper inventor% (less than / 1ee, of
global consumption in official stoc,s)* the current price is a result of enlarged mone% base as the inventor% is not at ris,. "eHve made a
similar anal%sis for silver prices.


F$ program 1as beneficial for both copper and silver prices. 0he ne+t round of F$ 1as announced /=
th
#eptember 2'/2 but no increases in
mone% base are observable %et.






0
500
1 000
1 500
2 000
2 500
/ 000
0
2 000
4 000
6 000
8 000
10 000
12 000
04-01-2006 04-01-200* 04-01-2008 04-01-200. 04-01-2010 04-01-2011 04-01-2012 04-01-201/
$

b
n
$
/
t
7( 2one1 5ase &$'() Copper price &L'()
0
500
1 000
1 500
2 000
2 500
/ 000
0
1 000
2 000
/ 000
4 000
5 000
04-01-2006 04-01-200* 04-01-2008 04-01-200. 04-01-2010 04-01-2011 04-01-2012 04-01-201/
$

b
n
.
+
'
/

.
e
n
t
'
/
6
(
o
1

o
u
n
&
e
7( 2one1 5ase &$'() (il?er price &L'()
Source3 4euters* 0eam estimates


0
500
1 000
1 500
2 000
2 500
/ 000
0
2 000
4 000
6 000
8 000
10 000
12 000
0*-0*-1../ 0*-0*-1..6 0*-0*-1... 0*-0*-2002 0*-0*-2005 0*-0*-2008 0*-0*-2011
$
b
n
$
/
t
7( 2one1 5ase &$'() Copper price &L'()
<91
1 725 $bn

<92
600 $bn

<
9
3
<91
1 725 $bn

<92
600 $bn

<
9
3
=1085
1 725 $bn
=205
1 725
=645
1 725 $bn
=815
1 725
>A Institute 7esearch hallenge /( >eb 2'/)

31

A!!endiI *:3 B''icial stocks o' co!!er

0he level of inventor% in official 1arehouses at the beginning of Uanuar% 2'/) e+ceeded the 2'/2 highs and amounted to 3'',t. 0he non!
official stoc,s of copper in -hina (not associated 1ith #H>$) alread% reached 37(,t in #eptember 2'/2. <s the forecast dail% copper
consumption in 2'/2 amounted to (3,t* such total inventor% 1ould be sufficient for 2) da%s. Pet* the inventor% stoc,piled in -hina is not
onl% accounted for industrial use. In 2'// and 2'/2 the copper has been used 1idel% as a collateral (2'% of -hinese copper imports).
Boosening credit polic% and lo1ering the copper e+port ta+ to /7 percent (effective since Uul% 2'/2)ma% lead to destoc,ing of -hinese
inventor%.



In 1ee,s of consumption&


Source& 4euters* I-#G


An additional distortion to co!!er in$entory #ay "e introduction o' !hysically "acked co!!er EG>0
U7Morgan obtain the #$- approval for launching ph%sical!copper $0>. <lthough such instruments are alread% listed on B#$ ($0># 7h%sical
-opper from $0> #ecurities and db 7h%sical -opper $0- from ;eutsche :an,)* their copper holdings represent minor part of mar,et ($0>#
7h%sical -opper held 2,t of copper in ;ecember 2'/2). 0he $0> to be listed on CP#$!<rca can hold ma+ 3/.2,t copper cathode. 0hose
amount combined 1ith still 1aiting for #$- approval (postponed to 228'282'/)) :lac,4oc, ma+ holdings of /2/.2,t constitutes 2'% of
current BM$ copper stoc,. 7h%sicall% bac,ed copper $0> are on 1a% also in <sia I alread% approved Mirae <sset Global Investment $0>.






0
2000
4000
6000
8000
10000
12000
0
200
400
600
800
1 000
1 200
1 400
200/-01-14 2005-01-14 200*-01-14 200.-01-14 2011-01-14 201/-01-14
U
S
D
/
t
!
0
0
0

t
L2+ C92+@ ('=+ L2+ copper price &$'()
0
2 000
4 000
6 000
8 000
10 000
12 000
080
085
180
185
280
285
/80
/85
480
485
580
200/-01-14 2005-01-14 200*-01-14 200.-01-14 2011-01-14 201/-01-14
U
S
D
/
t
:n?entor1 in "ee6s o% consu,ption &L'() L2+ copper price &$'()
>A Institute 7esearch hallenge /( >eb 2'/)

32

A!!endiI *13 Industry !roCects !i!eline


Source3 -ompanies reports* 0eam estimates





A!!endiI *<3 hanges in #ined co!!er !roduction "et&een *+55-*+5/E ,kt2



Source3 -ompanies reports* 0eam estimates






'
/'''
2'''
)'''
='''
('''
3'''
2'// 2'/2 2'/) 2'/= 2'/( 2'/3 2'/7
KGHM
K<Q
>M
<C0?
#--?
>-@
;0>? - 't+ble 12875 &om)onent o$ t/e Pee( 0(ou)
>A Institute 7esearch hallenge /( >eb 2'/)

33

A!!endiI */3 Peer grou! selection criteria

/) Most of copper products sold should be produced from o1n resources
2) <t least 7(% revenues from copper sales in 2'/2$


Source& -ompanies reports* 0eam estimates



)) <t least O(bn of total sales in 2'/2$S

=) (P 4?# at least 2'% and (P 4?$ at least /'%
S >M and K<Q are about to fulfil criterion until 2'/7

Source3 -ompanies reports Source3 -ompanies reports* 0eam estimates



'%
2'%
='%
3'%
2'%
/''%
/2'%
KGH >-@ #--? <C0? >M K<Q
-?77$4 Mol% Qinc Gold #ilver ?ther
'
(
/'
/(
2'
KGH >-@ #--? <C0? >M K<Q
'%
/'%
2'%
)'%
='%
KGH >-@ #--? <C0? >M K<Q
4?# 4?$
4?# -ut!off 4?$ -ut!off
>A Institute 7esearch hallenge /( >eb 2'/)

34

A!!endiI *=3 Position o' KGHM and its !eers on the glo"al co!!er #arket




Source3 -ompanies reports
>A Institute 7esearch hallenge /( >eb 2'/)
35

A!!endiI *93 International o!erations in hile


Source3 -ompanies reports

A!!endiI 6+3 7egression analysis
.escri!tion o' analysis and assu#!tions
"e conducted a simple regression anal%sis for chec,ing the correlation of changes in KGHM stoc, prices 1ith changes of -u prices. 0he
anal%sis 1as e+panded on the industr% competitors. 0he dependent variable 1as defined as dail% change in stoc, prices of each compan%*
1hile the independent variable 1as the dail% change of -u prices. :oth variables 1here derived from prices denominated in A#;. <nal%Ded
period 1as the same for ever% regression(2''7!2'/2). 0o complement the anal%sis 1e conducted t!test for correlation coefficient* and
1ith (% level of significance 1e ma% conclude that all the correlation coefficients are statisticall% different from '.
onclusions
0he main goal of this anal%sis 1as to chec, ho1 strong is the correlation of KGHMHs stoc, performance and copper price changes. 0he
correlation coefficient (_) for KGHM stoc, price changes in anal%Ded period* occurred to be '.(/. 0his indicated significant* positive
relationship. <dditionall% 1e 1anted to chec, 1hether KGHM differs significantl%* in the manner of this relationship* from the industr%
competitors. 0he conclusion is that there are no significant differences. <ll anal%Ded companies present positive correlation of their price
changes 1ith -u price changes. 0he mean correlation coefficient 1as '.(3 and median 1as '.3. 0his indicates that KGHMHs price changes
are correlated 1ith copper price changes slightl% belo1 the mean and median of the industr% competitors.






















o#!any )a#e Gicker 7
*
W G-Stat 'or W
KGHM KGH +0*< +015 **06/
>ree!ort >-@ '.2. '.(= 2=.22
Southern o!!er #--? '.2. '.(= 2=.'.
Anto'agsta P( <C0? '.== '.33 )).)(
>irst Duantu# >M '.23 '.(/ 22.).
KaAakh#ys K<Q '.=' '.3) )'..2
7io Ginto 4I? '.)3 '.3' 22.(2
BHP Billiton :B0 '.=' '.3) )/./=
Mstrata @0< '.)2 '.32 2...=
Anglo A#erican P( <<B '.). '.3) )'.=/
Jedenta resources 9$; '.)3 '.3' 22.22
Geck 7esources (i#ited 0-K.< '.22 '.=7 2'./7
MM )orlisk )ickel GMKC './) '.)3 /=.(2
Source3
0eam
estimates
>A Institute 7esearch hallenge /( >eb 2'/)

36

A!!endiI 653 Monte arlo si#ulation

<s an addition to our sensitivit% anal%sis 1e performed Monte -arlo #imulation in order to chec,* ho1 overall changes in prices of copper
and silver (t1o main revenue drivers) ma% influence our target price. "e included changes in A#;87BC rates as 1ell* since the commodit%
prices are denominated in A#;* 1hat constitutes additional variable having an impact on the compan% profitabilit%.
:ase assumptions are summariDed in the table belo1 1ith the methodolog% described in detail thereafter.

>actor ;ata range

7arameters
S
;istribution #> $+planation
7(-u)
I 2''/!
@II 2'/2
(C])//=)

]'
s]'*2727
$K]/*/=)2
#tudentHs t
1ith (df
2.'/(
Gives annual rates of returns in range of T8! ((*7(%
1ith ..% probabilit%.
4eturns in historical data sample never crossed that
level from belo1
A#;87BC

]'
`] '*/=27
$K]/*=2(=
Gives annual rates of returns in range of T8! 22*(=%
1ith ..% probabilit%.
4eturns in historical data sample never crossed that
level from belo1
7(<g)

]'
`] '*)/3)
$K]/*)/=2
Gives annual rates of returns in range of T8! 3(*27%
1ith ..% probabilit%.
4eturns in historical data sample never crossed that
level from belo1

0ime period selected for variables computation starts 1ith Uan 2''/* the first full %ear since 7oland introduced the floating
currenc% e+change rate regime and ends 1ith the end of most recent calendar %ear.
0here 1ere outliers observed in data samples (especiall% in cases of >@!rates and silver prices)* so 1e decided to put cap and
floor on our observations eual to ..
th
and /
st
percentile value of dail% price movements accordingl%. 0his resulted 1ith
e+clusion of 3= observations from each sample.

in all ) ad5usted samples 1ere not statisticall% significant based on t!test 1ith a]/%* and had lepto,urtic shapes. 0hus*
1e applied #tudentHs t!distribution 1ith ( degrees of freedom for further anal%sis.
<nnualiDed standard deviations of returns calculated on data samples ad5usted for outliers 1ere too high to produce meaningful
results (returns^'%)* hence 1e decided to reduce them proportionall% b% 2.'/(. 0he scaling factor (#>) 1e used corresponds to
/'% significance level derived from the #tudentHs t!distribution described on (df.
<ccording to our estimates* the mean of KGHMHs share price is cantered around 7BC2))./(* 1hat supports our bu% recommendation.

Monte arlo result


Monte arlo su##ariAing statistics
Mean 2))./(
(o&er range 7BC 23.7(
-!!er range 7BC =)3./3
5+
th
!ercentile 7BC /=3.=/
9+
th
!ercentile 7BC )/..2/
-!side !otential 7(%


Source3 0eam estimates
>A Institute 7esearch hallenge /( >eb 2'/)

37

10%
20%
20% 10%
20%
20%
A!!endiI 6*0 or!orate go$ernance and cor!orate social res!onsi"ility
or!orate go$ernance #ethodology0 >or measuring overall condition of corporate governance in relation to KGHM 1e incorporated
7rinciples of -orporate Governance developed b% ?rganiDation for $conomic -ooperation and ;evelopment (?$-;). 0he factors ta,en into
account are sho1n belo1. ?n the graph belo1 there is sho1 the 1eight for each criterion of ?$-;.















Source& 0eam estimates Source& 0eam estimates
$ach criterion is 5udged in scale /!/'. KGHMHs final score 1as 2.=. "e rec,on that this number is relativel% high and 5udge KGHMHs
corporate governance as of high value. Ho1ever* there are still possibilities to improve this score. Most important elements that hinder
ideal corporate governance in KGHM&
/. #tate 0reasur% ma% convene $+traordinar% General Meeting if it considers convening as 1arranted. Co other shareholder is
granted such lavish right. 0his privilege is not dependent on the number of shares held b% #tate 0reasur%.
2. :oard of ;irectors is elected for ) %ears. 0he best practice dictates that elections ta,e place ever% %ear* so that members of :oard
ma,e more careful decisions.
). :oard of ;irectors includes at least 2 emplo%ees of KGHM in all circumstances. It 1orsens the independence* competence and
effective shareholder participation in election of board members.
=. 0here are impediments to live participation in General Meetings* b% KGHMHs failing to provide access to General Meeting on!line
transmissions.

7ESPEG I).EM0 0his inde+ 1as created b% "arsa1 #toc, $+change ("#$) in 2''.. ?nl% =.3% of all companies listed on "#$ are part of
4$-7$-0 Inde+ and its performance since mid!>ebruar% 2'/2 till mid!March 2'/) outperformed "IG2' (7olish inde+ of the 2' biggest
and most liuid companies) b% over /2.7 percentage points. 4$#7$-0 Inde+ contains companies that are run b% management in
responsible and sustainable 1a%* are characteriDed b% high reporting ualit% and investor relations. <dditionall%* companies need to deal
in ethical manner in such areas as strateg% of organiDation* environmental issues* emplo%ee relations and the mar,et of products in 1hich
the% operate.

En$iron#ental issues

KGHM plans to invest in the future in more rene1able energ% sources. -onstant enhancements and introductions of ecological activities
have resulted in decreasing environmental fees and lo1er pollution&

E#issions ,Mg2
59=+ 599+ *+++ *+5+ *+55 *+5*
o!!er
2 .32 2'= 2) /'.3 //.) ..7
(ead
) //. /2= /= =.. ).3 =./
Sul!hur dioIide
/(= 2=( =2 7/. 3 2'2 = (/2 = 2)2 = 22'

Source3 -ompan% data

?ne of the biggest challenges for KGHM is to manage safel% 1aste management. -urrentl%* appro+imatel% .=% of mineral material 1aste
arises in the flotation process. 7art of this material is transported to belaDn% Most (1aste tailings pond and supporting industrial buildings
and tree!covered land)* 1hich siDe is ) ='' hectares (the largest such ob5ect in $urope). 0o diminish possible negative conseuences for
environment* special protection techniues have been implemented* 1hich 1ere in line 1ith specific legal and ecological reuirements.
belaDn% Most is dedicated not onl% for storage of 1aste material* but it also discharges properl% treated 1ater to the nearb% ?dra river
(having regard the balance of the salt concentration in river). In the areas of copper smelters and belaDn% Most automatic immission
measurement s%stems run continuousl%.
KGHM is constantl% loo,ing for economical usage of metallurgical 1aste& shaft slag is used in road construction* granulated slag from the
electric furnace GKogL1 II smelter is used in the sandblasting* desulphurisation 1aste is used in metallurgical process* 1hereas lead!
bearing dust and slime (1hich is collected in the dedusters of all three copper mines) is processed into crude lead at GKogL1 I.

0he main investment goals related to environmental protection include&
J altering pirometallurgical technolog% at the GKogL1 smelter*
J constant moderniDation of all sulphuric acid plants*
J developing the belaDn% Most tailings pond and on!going actions aimed at reducing its influence on the environment*
J creation of alternative uses for flotation tailings*
J managing 1aste* e.g. the product of desulphuriDation of incinerated gas from the po1er plant of the GKogL1 smelter and smelter slag*
J maintenance of the previous protective Dones.
BE. riteria
KGHMOs score
'or each
criterion
KGMOs score a'ter
a!!lying &eights
<ppl%ing foundations for an effective
corporate governance frame1or,
/' /
#hareholdersH rights 2 /.3
$uitable treatment of shareholders 2 /.3
4ole of sta,eholders /' /
;isclosure and transparenc% 2 /.3
0he responsibilities of board 2 /.3
Su#3 =0:
>A Institute 7esearch hallenge /( >eb 2'/)

38

A!!endiI 663 7isk #atriI ; #aCor threats


Mar,et ris,
$conomic
ris,
?perational
ris,
7olitical ris,



Influence of the
#tate 0reasur%


>luctuations of
e+change rate
(A#;87BC)
>luctuations of
-u and <g prices


Increase in
energ%* labour
and e+ploration
costs
;ela% in the
gro1th pro5ects
;rop in G;7
gro1th rate


-hanges in
environmental
polic%
?verestimated
-hinaHs demand
for copper
;eterioration in
the ualit% of
ore


7oland entering
the $uro Qone

Bac, of
e+tension of the
mining
concessions in
7oland




Source3 0eam estimates


A!!endiI 6:3 Sensiti$ity analysis "ased on .> !rice

h
a
n
g
e

i
n

'
o
r
e
c
a
s
t

E
B
I
G
.
A

#
a
r
g
i
n

i
n

y
e
a
r
s

*
+
5
6
-
*
+
5
/

hange in 'orecast !roduction gro&th in years *+56-*+5/
-5+8 -18 +8 18 5+8
!/'% /2. /.2 2'7 2/7 223
!(% 2'2 2/2 222 2)2 2=2
'% 227 2)7 2=2 2(. 23.
(% 2=3 2(7 232 22' 2./
/'% 23( 277 22. )'' )/2









Source3 0eam estimates
%
A


,
r
e
s
i
d
u
a
l
2

(ong-ter# gro&th rate

!/% '% /% 2% )%
/'.(% 2)' 2=3 237 2.2 )2=
//.'% 22) 2)2 2(7 22' )'2
//.(% 2/7 2)/ 2=2 23. 2.=
/2.'% 2// 22= 2=' 2(. 222
/2.(% 2'3 2/2 2)) 2(' 27/
7
4
?
:
<
:
I
B
I
0
P


l
o
1








m
o
d
e
r
a
t
e



h
i
g
h

insignificant moderate severe

IM7<-0

>A Institute 7esearch hallenge /( >eb 2'/)

39

0
1
2
/
4
5
6/(e+t o$ Ne@ 9nt(+nt'
*+(3+%n%n3 Po@e( o$
*u1e('
6/(e+t o$ Sub't%tute
P(o#u&t'
.om)et%t%on %n t/e
2n#u't(1
*+(3+%n%n3 Po@e( o$
Su))l%e('
A!!endiI 613 PorterOs 'i$e 'orces analysis

















































Source3 0eam estimates


Ghreat o' )e& Entrants
/) high barriers to enter the mar,et
2) e+istence of economies of scale
)) mining concession needed
=) meeting high standards of environmental protection

Bargaining Po&er o' Su!!liers
/) limited number of mining machiner% and euipment producers* detonation and seismic
s%stems
2) high po1er suppl% needs
)) specialised labour force reuired
=) strong position of labour unions

Bargaining Po&er o' Buyers
/) high concentration of copper bu%ers
2) ver% lo1 bu%ersH threat of bac,1ard integration
)) long term suppl% contracts involved
=) high importance of product to the bu%ers
() lo1 product differentiation

o#!etition in the Industry
/) ))( HHI ratio for 3(% of copper miners indicating high competition
2) relativel% large competitors
)) economies of scale
=) lo1 product differentiation
() capacit% augmented in large increments due to gro1ing demand
3) high e+it barriers

Ghreat o' Su"stitute Products
/) no perfect substitute (copper has superior characteristics)
2) higher prices of copper as compared to substitutes* for e+ample aluminium
)) copper usage in modern technologies

Final rating: 2.8
Ghe scale o' the interaction3
+ Co interaction * Bo1 : High
5 Insignificant 6 <verage 1 9er% high

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40




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Institute Research Challenge with regard to this companys stock.




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