Poland’s KGHM seeks new acquisitions

With mining stocks falling, it is little wonder that talk of mergers and acquisitions has picked up. Unfortunately for most junior mining companies, much of the talk has remained just that – talk.

But while some pundits speculate that senior producers won’t start making acquisitions until their equity valuations rise, one senior producer from across the pond has already proclaimed its intention to take advantage of the low share prices.

Lubin, Poland-based KGHM Polska Miedz (KGHM-WAR) – the world’s ninth-largest producer of copper and the third-largest producer of silver – is planning on shaking up the copper-mining business with US$3 billion earmarked for M&A over the next two years.

Such a large sum is supported by the US$3 billion in profits it expects this year. It made US$1.4 billion last year, which makes it Poland’s most profitable company, and its most globally ambitious.

Most of the profit is generated from its copper and silver mines in the Legnica-Glogow copper belt in Poland. Eighty-three percent of revenue comes from copper production and 13% from silver.

And while KGHM still has exploration programs in Poland – including its rigorous Wartowice project near the past-producing Konrad mine – its growing  presence outside of Poland’s borders marks a change in strategy.

Krzysztof Olszewski, who is handling investor relations on behalf of KGHM, says the move into foreign markets comes as mining depths at some Polish operations reach 1,200 metres, and as the company prepares for the dwindling of its resources over the next 40 years.

Rather than accept such a decline, KGHM is looking bolster its growth profile to 700,000 tonnes of copper production annually from the current 500,000 tonnes.

To do that it will acquire projects that are situated in politically stable countries. It has an exploration drill program for copper in the German province of Saxony and a deal to develop a copper-gold project in B.C.

The company arrived in B.C. by way of a joint venture in May with Abacus Mining & Exploration (AME-V). The deal saw KGHM take a 51% stake in the Afton-Ajax copper-gold project near Kamloops for a $37-million capital commitment.

A feasibility study on the project is due before 2012, with production anticipated in 2014.

A preliminary economic assessment on the project carried out by Abacus and released in 2009 envisioned a mine that would produce 106 million lbs. copper per year and 99,400 oz. gold over a 23-year mine life.

The deposit has measured and indicated resources of 442 million tonnes grading 0.3% copper and 0.19 gram gold per tonne, for 2.9 billion lbs. copper and 2.6 million oz. gold.

As for North American investors who want to play KGHM’s aggressive growth strategy, the company is only listed on the Warsaw exchange, but Olszewski says that will soon change.

KGHM is in the midst of taking a controlling position in a Western mining firm that trades on one of North America’s largest exchanges. While he wouldn’t offer details, he said that the deal should be completed in the coming weeks.

The Warsaw listing hasn’t prevented large investors from holding the company – 14% of its shares are held by North American financial institutions. But the largest shareholder in the company remains the Polish government, with a 32% stake.