Dear Ladies and Gentlemen,
2014 was for KGHM a period of both great challenges and groundbreaking successes. They proved that KGHM is an excellent choice for investors seeking assets with a stable return and with the potential for growth in the medium and long term. This year showed that, especially in difficult macroeconomic conditions, it is worth investing in a stable organization with strong values, one that cares about society and the natural environment, as well as in experienced staff who through new projects continuously build the company’s value for shareholders.
KGHM confirmed its assets, such as a diversified portfolio of projects and a stable resource base, coupled with a consistent policy to improve cost-effectiveness. These advantages are visible in the production and financial results of KGHM for 2014. Total production of payable copper in the Group amounted to 663 thousand tonnes. This level is similar to that of 2013. At the same time, a significant increase was recorded in the production of silver and precious metals (8 per cent and 15 per cent, respectively). Consequently, despite a significant drop in commodity prices on international markets, the KGHM Group managed to close 2014 with a net profit of PLN 2.45 billion.
In terms of mining projects management, 2014 was a breakthrough year in the history of KGHM. First of all, at a record pace for mining projects – within a mere ten years from the first drillhole – we started production at the Sierra Gorda mine in Chile. The launch of copper production below the level of 1200 meters in the Deep Głogów deposit also represented an important event.
This development requires securing energy supplies for the main production line. In 2014 KGHM achieved this by launching CCGT units in Głogów and Polkowice. Together these units produce about one-fifth of the electricity necessary for KGHM. At the same time, the inclusion of these units in the KGHM energy supply system strengthens the Company’s independence from the fluctuating energy price market. Another important step in the same direction was the signing of an agreement by PGE EJ 1 shareholders, a company responsible for the construction of the first Polish nuclear power plant.
The implementation of this project will benefit from our experience in public consultations which we successfully conducted in 2014 in connection with the expansion of the Żelazny Most tailings storage facility. The signing of the agreement with the residents of surrounding communities brings KGHM closer to the completion of this investment, which is essential for the stable operation of KGHM.
In addition to the aforementioned Sierra Gorda mine and the Deep Głogów area, other strategic investments in progress during 2014 were the Ajax and Victoria projects in Canada. Both of these projects reached important milestones in 2014. The Ajax project received a new plan for the mining plant, which will help optimize the investment and facilitate the process of obtaining environmental permits. The new mine plan meets the expectations of the local communities, whose voice has received KGHM’s full attention since the very launch of exploration, and at the same time is fully economically justified. In 2014, significant progress was also made on the Victoria project. The preliminary technical design is currently being developed, which comprises the detailed schedule, budget and a model of the future mine. PeBeKa from the KGHM Group is one of the design team members, whose inclusion will further increase the value of the project for shareholders. Both the Ajax and Victoria projects, the basis for KGHM’s future growth in value, will be continued with equal intensity in 2015, as well. The year 2015 should also witness the full production capacities of the first phase and exploration of additional potential around the Sierra Gorda mine. We will also strive to disclose to KGHM’s shareholders, as early as 2015, all Letter from the Chairman of the Supervisory Board Chapter I. Introduction 11 we know about the future expansion options for the Sierra Gorda mine. Depending on the solution chosen, the mine’s production capacity will increase around the start of 2019 to 220 thousand tonnes of copper per year. In parallel, in 2015 we will analyse the opportunities for copper production from oxide ore, deposited in the rock layers removed when the actual sulphide ore deposits were being uncovered. It is worth noting that the projects we invest in feature a low production cost. In the long term this will provide sustained improvement of our competitive position.
Investments are one of the pillars of KGHM’s strategy for the years 2015-2020. The foundation of our investment activities is timely project completion without budget overruns. The strategy provides for implementation of the largest investment program in the history of KGHM, worth PLN 27 billion, over the next six years. Of these funds, 65 per cent will be allocated to development investments and 35 per cent will be spent on maintenance and replacement projects. More than half of these funds will be invested in Poland. These will include the continuation of the Pyrometallurgy Modernisation Program with a total budget of PLN 2.1 billion. The launch of a new flash furnace at the Głogów smelter/refinery is expected in late 2016.
Investments in the core process line will be matched by continual development of the resource base. We want to ensure replacement of extracted resources, so that one tonne of extracted ore corresponds to three tonnes in proven reserves. Through extensive research and development work we have managed to document copper ore deposits of 4.1 million tonnes in the Gaworzyce - Radwanice region.
The third pillar of the strategy - production and sales - is expected to stabilise production and revenue performance. All activities will be based on efficiency and innovations, which distinguish KGHM today and will do so in the future. Our employees’ knowledge and commitment are our most valuable resources. In our daily work, we follow the values shared by all employees in the KGHM Group. Zero harm, teamwork, results orientation, accountability and courage form the catalogue of our core values. The determination and high competence of employees are the key element of our potential, which helps us reach the deposits of raw materials that are so valuable to our civilization.
While submitting the Integrated Report, on behalf of the Supervisory Board, I would like to thank the Management Board of KGHM, our employees, and all those who contributed to the effective implementation of the Company’s business objectives. I believe we can meet the challenges presented by the new strategy for 2015-2020 with an outlook to 2040. We will achieve our set objectives while respecting the interests of society as well as ethical and environmental aspects.
Chairman of the Supervisory Board