Copper-bottomed investment

London, April 2013

Wroclaw University of Economics

Marta, Katarzyna, Kamil, Jan, Piotr

Introduction
Main features
9th copper producer globally 1st silver producer globally 4th resource base in the world High quality products Market profile
Ticker(Bloomberg) 52-week price range (PLN) 2012 dividend yield Market capitalization (USD bn) Average daily traded value (USD mn) Free float Share in WIG 20 P/E2012 Company Overview Industry & Competitors KGH:PW 111.4 194.5 24.2% 12.1 40.6 68% 14.3% 7.5 Financial Analysis Valuation Risk Analysis Conclusion
State Treasury Foreign institutional investors Polish institutional investors Individual investors

Shareholder structure
23% State Treasury 32% Other Diluted 68% 39% 6%

Forthcoming Events
2013 HY report Strategy update New projects update July 30, 2013 Mid-2013 Mid-2013

Recommendation
Recommendation Key drivers
Robust pipeline of new projects (58% increase in production volume by 2017) Increasing operational efficiency (EBITDA margin increase from 35% in 2012 to 45% in 2017)
240 220 200 180 160 140 120 100 80 Jun/12 Mar/12 Aug/12 Oct/12 Nov/12 Feb/12 Sep/12 Jan/13 Jul/12 May/12 Dec/12 Feb/13 Apr/12

Target price: PLN 220 Upside: 18.6%

BUY
PLN 220 PLN 185.5 18.6% upside

Stable market conditions Sound financial position (USD 6.4bn Balance sheet headroom)

Holding period return

End of 2013 End of 2014 End of 2015

27%

39%

56%

Target price (12 M)

Current price (at 15-Feb-13)

Closing price

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Business description
1961 Establishment of KGHM 2010 Afton-Ajax first overseas expansion project in Canada

1997 IPO on Warsaw Stock Exchange

2012 Acquisition of Quadra FNX Mining Ltd Friendly takeover through Plan of Arrangement

Limited risk of Quadras acquisition

Quadras experience in M&A Know-how regarding open pit mines Strong financial position of KGHM before acquisition Takeover price < NAV New projects in business-friendly countries Exhaustive due-diligence prior to acquisition Positive updates Strict monitoring

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Business description

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Business description
Specification
High operational leverage - strong labour unions, underground mines conditions Revenues dependent on copper price and USD/PLN exchange rate effective hedging strategies

Foreign operations contribution to EBITDA

12 10 8 6 4 2 0 2012E 2013E 2014E 2015E 2016E 2017E

EBITDA (PLN bn) KGHM

EBITDA (PLN bn) KGHM International

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Industry overview & competitive positioning

Industry overview
Bargaining Power of Suppliers Competition in the Industry

Threat of New Entrants

5 4 3 2 1 0

Key copper market characteristics High entry barriers Low product differentiation

Bargaining Power of Buyers Threat of Substitute Products

Lack of copper perfect substitutes Individual copper producer as price-taker

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Industry overview
'000t 31000

Copper surplus expected

USD/t 10000

Copper price decrease -15%

26000

8000

21000

6000

16000

4000

2012 KGHM cash extraction cost

11000 2000

6000 2011

2012

2013E

2014E

2015E

2016E

2017E

0 1999 2002 2005 2008 2011 2014E 2017E 2020E

Base Case Mine Output Probable Projects Demand For Mine Output

Highly Probable Projects Possible Projects

Source: Wood Mackenzie Source: World Bank Commodity Price Forecast

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Industry overview
USD/t 10000

Copper price decrease -15%

QE positive effects on copper and silver prices

QE1* Copper Silver
*(11/2008-03/2010) ** (08/2010-06/2011)

8000

QE2**
6000

108% 64%

20% 81%
4000

2012 KGHM cash extraction cost

2000

0 1999 2002 2005 2008 2011 2014E 2017E 2020E

Source: World Bank Commodity Price Forecast

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

KGHM vs. Competitors

Resource base after Quadra acquisition (mn t) 1 2 3 4 5 6 7 8 9 10 Codelco Southern Copper Freeport McMoRan KGHM BHP Billiton Anglo American Xstrata Rio Tinto RAO Norilsk Antofagasta 93.2 58.2 55.8 37.5 35.2 31.6 18.1 17.0 9.1 8.9

80 60 40 20 0 SCCO FCX

KGHM best quality of ore

2.0% 1.5% 1.0% 0.5% 0.0%

Copper base in 2011 mn t (LHS) Ore grade in 2011 (RHS)

KGHM

ANTO

FM

KAZ

60% 40% 20% 0%

In line profitability
KGHM peers' median

EBITDA margin 2012E

80% 60% 40% 20% 0% 2008

NI margin 2012E

Persistently higher ROE

KGHM ROE peers' median ROE

Source: Company data

2009

2010

2011

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Financial Analysis

International expansion improves financial position

CapEx vs. production
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2013E 2014E 2015E 2016E 2017E CapEx in PLN bn (LHS) Production in kt (RHS) 700 600 500 400 300 200 100 0 300,000 2013E 2014E 600,000 700,000
Victoria Afton-Ajax

Detailed copper production in t

Sierra Gorda
500,000 400,000

Sierra Gorda Carlota McCreedy West Morrison Franke Robinson Domestic production

Domestic
2015E 2016E 2017E

Cash extraction cost vs. EBITDA

CapEx will translate into production KGHM will significantly increase its pipeline Falling cash extraction cost will improve EBITDA margin
USD/PLN rate = 3.30 Company Overview Industry & Competitors

50% 45% 40% 35% 30% 25% 2012E 2013E 2014E 2015E 2016E 2017E 2018E

3000 2500 2000 1500 1000 500 0

Source: Team estimates, Company data

Cash extraction cost in $/t (RHS)

EBITDA margin (LHS)

Financial Analysis

Valuation

Risk Analysis

Conclusion

High debt capacity for possible further expansion

PLN bn 9 8 7 6 5 4 3 2 1 0

CFO breakdown 2013E

100% 80% 4.09 8.03 3.09 0.85 CFO CapEx Dividends Surplus 60% 40% 20% 0%

Debt ratio and interest coverage

70 60 50 40 30 20 10 0 2012E 2013E 2014E 2015E 2016E 2017E Debt ratio(LHS) Interest coverage ratio (RHS)

CFOs will cover expenditures and high dividends The least indebted mining company among its peers Net debt/EBITDA at low levels Possible easy access to debt in case of new big projects/acquisitions

Net debt/EBITDA and balance sheet headroom

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 2012E 2013E 2014E 2015E 2016E 2017E Net debt/EBITDA

PLN 20 bn
Balance sheet headroom

USD/PLN rate = 3.30 Company Overview Industry & Competitors Financial Analysis

Valuation

Risk Analysis

Conclusion

Attractive dividend policy, unique in copper sector

Dividend yields in period 2008-2012
30% 25% 20% 15% 10% 5% 0% 2008 2009 2010 2011 2012

Median=11%

Estimated median dividend per share in period 2013E-2017E at level of PLN 16.91 Estimated median payout ratio in period 2013E-2017E at level of 62%

Dividends per share and payout ratios of KGHM

25 20 15 10 5 0 15% 25% 35% 45% 55% 65% 75%

PEERS
Median 2007-2012 2015 2017

DPS

Payout ratio

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Valuation

Multipliers pricing
Peer group selection criteria At least 75% of revenues derived from copper sales Total revenues of at least USD 5bn Copper sold produced primarily from own resources

Multipliers Forward years Multipliers values Weights for years Weights for multipliers 2013 13.6 50%

P/E 2014 10.9 50% 50% PLN 247.5

EV/EBITDA 2013 6.0 50% 50% 2014 5.1 50%

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Multipliers pricing
Peer group beta higher KGHMs systematic risk 2.5 2.0 1.5 1.0 0.5 0.0 FM ANTO KAZ FCX SCCO KGH Mined copper production (kt) - no organic growth in the past
500 400 300 200 100 0 2007 2008 2009 2010 2011

-50%
Historical discount

P/E on selected exchanges 15 10 5 LSE

Company Overview

Impact of the State Treasury

TSX

NYSE

WSE
Financial Analysis

?
Valuation Risk Analysis Conclusion

Industry & Competitors

Multipliers pricing
Diversification Growth in production (kt)
800 600

USA

Canada

-50%
Historical discount

Chile

Poland

400 200 0 2012 2013 2014 2015 2016 2017 KGHM KGHM Int.

P/E on selected exchanges 15 10 5 LSE

Company Overview

Impact of the State Treasury

TSX

NYSE

WSE
Financial Analysis

?
Valuation Risk Analysis Conclusion

Industry & Competitors

Multipliers pricing
International competitors

-50%
Impact of the State Treasury

Historical discount Oil Banks

Chemicals Energy coal

-20% Discount

Industrial metals Electricity

Insurance

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Multipliers pricing

-50%
Historical discount

Multipliers Forward years Applied discount Multipliers values Adjusted multipliers Weights for years Weights for multipliers Final price 2013 -25% 13.6 10.25 50%

P/E 2014 -20% 10.9 8.8 50% 50% PLN 192.1 247.5

EV/EBITDA 2013 -25% 6.0 4.6 50% 50% 2014 -20% 5.1 4.1 50%

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

DCF assumptions
Decrease in the main revenue drivers: copper and silver prices according to World Bank forecasts
2012E Cu price USD/t Ag price USD/troz USD/PLN 2013E 2014E 2015E 2016E 2017E

Introduction of Mineral Extraction Tax (MET) in 2012 increases COGS and effective tax rate
25% 20% 15% 10% 5% 0% 2011 2012E MET (RHS) COGS (RHS) effective tax rate (LHS) 2012 residual value

MET effects

mn PLN

16000 12000 8000 4000 0

7 962 31.14 3.30

7 800 31 3.23

7 400 29.5 3.14

7 000 28 3.10

6 900 27.68 3.06

6 800 26.5 3.05

Source: World Bank Commodity Price Forecast, exchange rate EMIS database (based on a analysts consensus)

KGHM net income margin

30% 25% 20% 15% 10% 5% 0% median 2007-2011 median 2012-2017E

Changing WACC
Risk free rate Beta Market risk premium Country risk premium Cost of debt WACC

3.44% 1.9 5% 1.5% 6.2% 15.3% Risk Analysis

3.44% 1.4 5% 1.5% 6.2% 11.5% Conclusion

PEERS

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Target price
DCF analysis

50%

PLN 248

PLN 220
PLN 192
Multiples analysis

50%

Year-end target price Upside : 18.6% Holding period return: 27%

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Risk Analysis

Main risks
high

Market Operational

Economic Political

Influence of the State Treasury Changes in environmental policy

Fluctuations of Cu and Ag prices FX risk

PROBABILITY

Cost inflation Delay in the growth projects Drop in GDP growth rate Lack of extension of the mining concessions
severe

moderate

Strikes

Deterioration in the quality of ore

low

Poland entering the Euro Zone

insignificant Industry & Competitors Financial Analysis moderate IMPACT

Company Overview

Valuation

Risk Analysis

Conclusion

Main risks
State Treasury - influence on strategic decisions
acquisitions
limiting new acquisitions due to savings for high dividends
Influence of the State Treasury
Fluctuations of Cu and Ag prices FX risk

investments
shale gas, energy sector, atomic power plant risky and highly capital consuming
Cost inflation

high dividend payout

putting pressure on high dividends (as they can be a way to decrease fiscal deficit)

Shareholders structure

Dividend statistics
average dividend payout ratio 2009-2017E average dividend per share 2009-2017E 60%

PLN bn
350

Polish Fiscal Deficit based on 2013 Budget Act

32% 68%

State Tresury minority investors

PLN 16

300

PLN 35bn deficit

250 revenues expenditures

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Main risks
Reducing the impact of possible increase in energy, labour and extraction costs
investments in energy sector (joint venture with Tauron) maintaining good relations with labour unions development of new cost-efficient technologies decreasing the average Group extraction cash cost (C1) after acquisition of Quadra 2012 Q3 expenses by nature
16% 13% 22% 49%
Materials and energy Employee benefit expenses Taxes and charges

Influence of the State Treasury

Fluctuations of Cu and Ag prices FX risk

Costs inflation

Employees in labour unions

$/t

C1 extraction cash cost

3000

11%

-20%

members of labour unions other

2000 1000 0 2012 2018

89%

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Monte Carlo simulation

The main revenue drivers
Copper & silver prices USD/PLN exchange rate
Costs inflation Influence of the State Treasury Fluctuations of Cu and Ag prices FX risk

Probability

Current price PLN 185

Monte Carlo summarizing statistics

Mean 10th percentile 90th percentile Upside potential 233.15 PLN 146.41 PLN 319.81 75%

Company Overview

Industry & Competitors

Financial Analysis

Valuation

Risk Analysis

Conclusion

Conclusion

Conclusion
Increasing operational efficiency Stable copper price supported by macro factors Sound financial position

Robust pipeline of new projects

BUY
Upside potential 18.6%
Financial Analysis

12 M Target price PLN 220

Industry & Competitors

3Y HPR 56%

Company Overview

Valuation

Risk Analysis

Conclusion

Thank you for your attention!