These are company-making days for KGHM (WSE: KGH). With its acquisition of Quadra FNX, the Polish company has gone from being a domestic copper producer concentrating on one deposit to a global presence with operations on three continents.
The acquisition is part of a larger, five part plan announced towards the end of 2009 that called, among other things, for the production of copper to reach 700, 000 tonnes annually by 2018. The plan prioritized diversification along both geographical and commodity lines.
As Business Development General Manager Krzysztof Kubacki says “We need to grow our resource base and have a limited ability to do that from domestic sources.”
Up until recently, the company has concentrated on domestic deposits of Polish copper, which unlike the porphyry deposits found in the Americas are deep underground, and thus require a great deal of infrastructure to mine. With exploitation of domestic resources rendered so expensive, the Poland-based company was prompted to look further afield.
“To be competitive on the market among copper producers globally we need to reduce our costs of copper production and to do that we can either have some technological breakthroughs in Poland and we can find new ways to produce copper so we can actually do it cheaper and such a process is neither easy nor fast,” says Kubacki. “Or we can acquire new deposits or new mines which can produce copper at a lower price. We want to focus on both areas.”
KGHM’s first foray into international territory came in 2010 when KGHM acquired a stake in the copper/gold project at the Afton Ajax deposit, located in British Columbia in Canada, via a jv with Abacus.
At the time KGHM’s president Herbert Wirth called it “the first step in implementing our corporate strategy.”
The first goal KGHM had regarding Quadra was not for the whole company, but in the first instance for a stake in the Sierra Gorda project in Chile. Despite their proposal being outbid by the Sumitomo group, the KGHM team were sufficiently interested to look at acquiring the whole company as it represented a good strategic fit.
Quadra FNX appealed to the KGHM team as, Kubacki says, they were searching for three specific things.
“A project that could produce a lot of copper, and a lot of copper for us meant 100, 000 tonne a year” says Kubacki. It should produce that copper for at least 15 years and should produce that copper at low cost, meaning about $1 per pound of copper or about $200 per tonne.”
A mid-tier miner, Quadra FNX had operations in Canada, the United States and Chile and three potential mining projects at various stages of development: Sierra Gorda in Chile, Victoria in Canada and Malmbjerg in Greenland.
And with KGHM’s plan calling not only for a huge increase in production numbers, but also a cap on production costs, a concentration on the shallower deposits to be found in Chile became all the more necessary.
“The simple fact with regards to copper deposits in general is that 75 to 80 per cent of today’s product comes from large porphyry deposits and most of those deposits are located in North and South America, well over 50 per cent is located on those two continents. The reality is that if you want to be a big copper producer with a low-cost base you probably need to be in Chile, because that’s the number one place where those porphyry are being found. Chile is the number one copper producer in the world” says Kubacki.
Late 2011 saw the signing of an agreement to acquire all the outstanding shares in Quadra FNX, which closed in March 2012. The sale was funded in part by the timely sale of the KGHM’s highly valued telecom assets.
The company that was Quadra FNX is now called KGHM International, and with this acquisition KGHM has taken great strides towards achieving the vision laid out in the corporate strategy implemented in 2009.
Indeed, the acquisition adds 100, 000 tonnes of copper production a year from the current mines that Quadra FNX was operating, and the anticipated production from two large development stage projects, Sierra Gorda in Chile and Victoria in Canada will swell the numbers further.
“When you look at KGHM International right now it’s only 100, 000 tonnes of copper a year, it’s not small but it’s a lot less than what KGHM is producing from domestic sources -- but Sierra Gorda itself is a huge project which will produce over 250, 000 tonnes of copper a year and over 50 per cent of that will be attributable to KGHM International. On top of that we will have Victoria, we will have the Ajax project, that almost brings up to that level of 700, 000 tonnes a year,” says Herbert Wirth, KGHM’s CEO.
“So in total we have almost closed the gap between the current production that KGHM has right now and the 700, 000 tonnes annual production that we want to reach by 2018.”
And the next challenge on KGHM’s mind? The integration, which is likely to be challenging, as the company goes from its old model of three mining positions in a 50km radius to multiple mines spread over Canada, the US and South America.
“It’s a very versatile adjustment, very interesting and exciting.”