Where does value of smelter come from? Case study based on KGHM perspective 27th International Copper Conference, Milan, March 10-12, 2014

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1 Where does value of smelter come from? Case study based on KGHM perspective 27th International Copper Conference, Milan, March 10-12, 2014 Artur Więznowski Jerzy Lisak

2 Areas covered in the presentation: Concentrate grade and concentrate recovery Feed flexible smelters vs smelting technology Scrap as feedstock Costs of smelters Business model of KGHM smelter and refinery

3 * KGHM copper concentrates are worldwide unique due to their chemical composition. * Very difficult treatment. * Why not always reflected in value added? (game of surplus capacity in smelting vs mining vs demand) * European (or Western) perspective influenced by: - high labour costs - high energy prices - suboptimal logistic - environmental requirements. * No natural monopoly for smelting business, no economic rent resulting in smelter economic value added compared to mining margins in good times.

4 All charts are only very simplified method of presentation of analysed problems

5 Invisible profit concentrator recovery (to be extracted in integrated mining and smelting business)

6 Smelter recovery vs concentrate grade

7 Integrated recovery

8 Looking for optimum Lower grade concentrates are not necessarily a bad thing

9 Optimazation criteria depends on relative flexibility of smelter costs to concentrate grade vs concentrator cost to concentrate grade, with crucial role of absolute levels of those costs. At the same time the limit is the fact that we need to process sucessfully the concentrate. So, smelters have to be able to accept the low grade concentrates!

10 That s just the start of dealing with the concentrate processing and recovery

11 Then we have to add scrap to the equation * Utilisation of free heat in copper matte converting (low operating costs, substitution of copper concentrate) * Input of PM and PGM (PCB scrap, WEEE) * Increasing copper production capacity without increasing acid plant production capacity (savings of investment costs) * Adding value to industrial residues and waste

12 Scrap categories for different technologies Scrap categories Cu content (%) Way of treatment High grade Copper scrap I > 99,0 Remelting Copper scrap II 96,0-99,0 Fire refining Metallic alloys 50,0-95,0 Converting Medium grade Contaminated copper 60,0-95,0 Converting Processing scraps, sands, Low grade sludges, dusts, Reducing 5,0-50,0 residues, weee, smelting PCB scrap, etc.

13 So the final results from KGHM perspective are as follow

14 KGHM EBIDTA and value added 2012 KGHM Value Added KGHM EBITDA 86,5% 84,2% 13,5% 15,8% Smelter Other Smelter Other

15 EBIDTA dynamics (indexes) 300% 250% 248% 200% 150% 153% 115% 140% 100% 50% 0% 2010/ /2010 EBITDA KGHM Smelter EBITDA

16 Value added dynamics (indexes) 200% 180% 176% 160% 140% 120% 100% 80% 60% 40% 20% 136% 132% 128% 0% 2010/ /2010 KGHM Value Added Smelter Value Added

17 Sources of smelters profits 2012

18 Treatment charge (TC) TC is calculated per tonne of concentrate metal price included in concentrate is reduced by the value of TC Information regarding the level of TC provides specialised agencies (i.a. Brook Hunt) TC strongly varies with time, for standard concentrate (Cu concentration over 30%), TC varies from 45 to 105 USD per Mg of concentrates Refinery charge (RC) This premium reduces a price of metal contained in concentrate to cover the refining cost RC premium is calculated per mass unit of copper contained in concentrate RC varies from 200 to 350 USD/Mg of Cu

19 Geographic rent The standard contracts assume that copper concentrate will be delivered at the expense of the supplier to the harbour indicated by the buyer. Changes in the world concentrate market means that increasingly such harbour is Shanghai. Premium to cathode When selling cathodes producer gets premium to the cathode. The basic function of this premium is covering of the cost of sale.

20 Free metals recovery When selling concentrate a part of the included metals is transferred for free, this is related to their low content (i.e. Au level in KGHM concentrates), accepted conditions of market transactions (payable Cu 96% but not less than 1 percentage point deduction from the analytical content) or classification as an impurity (i.e. Pb) Premium for impurities When a certain level of contaminations in the concentrates is present, metal price is deducted as the form of fines for impurities Premium for scraps and blisters When buying scraps and blisters KGHM have certain discounts to cover the processing costs. In smelters it is also recovering unpaid Ag in scraps.

22 Free metals structure 2012 recovery Ag f rom Lead Dept recovery Pb recovery Ag from scrap recovery Ni free Cu- lost of Cu recovery Au free Ag- lost Ag

25 Conclusions 1. Smelters as part of integrated business have the potential to convert very poor materials into pure grade metals. 2. Sometimes the biggest value added is in processing the worst feed due to integrated recovery. 3. Smelters play an important role in generating KGHM profits eceeding 1 billion PLN from time to time. 4. There is potential to further improvement of these results. 5. Smelters as a diversification of activities reduces the overall risk for KGHM.

26 Thank you for your attention!

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