STRUCTURAL AND OWNERSHIP CHANGES

IN POLISH BASE METALS INDUSTRY

Wieslaw Blaschke - Joanna Kulczycka

Polish Academy of Sciences - Mineral and Energy Economy Research Institute

INTRODUCTION
The fundamental changes leading to the establishment of a market economy in
Poland were introduced in 1989. After a short breakdown at the beginning of
1990’s, Polish economy started to recover. In the last five years, it achieved one
of the best results in Europe in terms of the primary macroeconomic indicators
(Table 1), e.g. the GDP grew at an average rate over 4% yearly, and the
average annual inflation rate (CPI) has been diminishing. Between 1990 and
2000, there also was a steady increase in the role of the private sector, whose
share in total industrial sales reached 74% last year, i.e. 6,438 state-owned
enterprises were transformed into private companies, of which in mining and
quarrying sector there were 635 entities of which only 42 were state-owned
enterprises, 75 were stock companies, 508 were joint-stock companies, and 8
were co-operatives. In addition, Poland has attracted over 43 billion USD of
foreign capital; approximately 90% of this total direct foreign investment in
Poland comes from OECD countries, primarily Germany and the US. The share
of the mining and quarrying industry in direct foreign investment has reached no
more than ca. 70 million USD.

Poland’s metals industry has already been privatized or is in the midst of the
privatization process. The Polish Law on the Commercialization and
Privatization of State Enterprises (dated July 12, 1990) permits two paths and
possibilities for the privatization of state enterprises:

§ privatization through equity issuance (so–called indirect privatization)

establishing the framework for the creation and functioning of the capital

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 market, e.g. for KGHM indirect privatization was chosen, and on September
12, 1991, the state-owned company was transformed into a joint stock
company solely owned by the State Treasury, KGHM Polska Miedz SA, or
§ direct privatization through liquidation of state enterprises, ether through
their sale, their merger into another entity, or leasing.

Table1. Basic macroeconomic indicators in Poland, 1996 - 2000

Year 1996 1997 1998 1999 2000e
Real GDP growth (%) 6.1 6.8 4.8 4.1 4.2
GDP per capita in USD 3,474 3,470 3,750 4,200 4,500
Population (in millions) 38.639 38.660 38.667 38.654 38.644
Inflation rate XII/XII (CPI) 18.5 13.2 8.6 9.8 8.5
Exports (million USD) 24,439.8 25,751.3 28,228.9 27,407.4 28,796.2I-XI
Imports (million USD) 37,136.7 42,307.5 47,053.6 45,911.2 44,682.8I-XI
USD/PLN exchange rate 2.6965 3.2808 3.4940 3.9675 4.3464
Unemployment rate (%) 13.2 10.3 10.4 13.1 15.0
Number of registered 238,923 261,503 295,777 332,758 381,371
business entities
Number of mines and 482 517 572 615 635
quarries
Source: GUS

THE ROLE OF METAL SECTOR FOR POLISH ECONOMY

Poland is one of a few European countries where the mining industry play an
important role, both in the country's GDP and in exports revenues. The basic
metals sector contributed about 5% of the sold production of the industry, but
the export of metals and metal articles contributed about 15% of export
revenues, of which base and precious metals – 3.5%, i.e. ca. 960 million USD in
1999. Metalliferous mining and processing are important, with copper and its
various by-products (silver, gold, platinum and palladium, lead, cobalt), lead,
and zinc being the main commodity produced. Aluminium based on imported
alumina and scrap is also produced.

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ECONOMIC, STRUCTURAL AND OWNERSHIP CHANGES IN POLISH
METAL INDUSTRY
The economic, and organizational changes started along with transformation of
the economy after 1989, and the necessity for the producers to finance their
own operation and compete on the international markets. An evaluation of the
competitive position on the international market rendered it necessary to apply
and conduct full cumulative accounting for production costs (e.g. cash cost) in
compliance with the methodology observed in countries with a market economy.
The knowledge of production cost and proper accounting is important, as there
is no state subsidies for metals production. Polish producers must compete with
both domestic and foreign manufacturers, as the domestic market is not
protected by an import tax, which was abolished as of January 1, 1997, and the
custom tariff rates have been reduced. Moreover, the profitability of metals
producers depends also on world prices, e.g. in actual practice metals
producers sell the metals on the domestic market at the LME price basis
converted to Polish zlotys at the Polish National Bank exchange rate.

Ownership transformation, and modification in the structure of metal producers

were the main changes in the last ten years. As a result the number of units
dealing with metal production increased about 10 times in ten years; there were
43 state units in 1987, while by the end of 1997 there were 327 units, of which
32 were state enterprises, 2 communal, 13 co-operatives, 1 „foreign small
craftsman”, and 279 commercial law companies, including 73 with foreign
capital. The best indication of success in restructuring and privatization among
metals producers in Poland, is the fact that the stocks of KGHM Polska Miedz
SA, Kety SA, Hutmen SA are now listed on the Warsaw Stock Exchange; that
Trzebionka Mining Plant’s stock has been incorporated into the National
Investment Funds; that shares in Skawina Metallurgical Plant Joint Stock
Company were bought by Konin Aluminium Smelter, whose „owner” is the
trading company Impexmetal SA.

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Copper and its by-products
Copper remains Poland's most significant non-ferrous metal resource. Copper
deposits occur in Lower Silesia in southwest Poland 70 km NW of Wroclaw.
Copper mineralization, connected with Zechstein Kupferschiefer and with
underlying sandstones and overlying dolomites, was discovered by
J. Wyzykowski in 1957 (the Lubin-Sieroszowice deposit). As of December 31,
1999 the total ore reserves are 2,542.02 million tons, with a copper content of
44.14 million tons. The developed mining area in the Copper Basin is comprised
of five deposits of 1,623.0 million tons of ore, containing 30.98 million tons of
copper and 80,760 tons of silver currently under exploitation. The exclusive
producer of copper from these deposits is KGHM Polska Miedz SA, which
produced about 400,000-480,000 tons of copper in 1990s, about 1,000 tons of
silver, and about 500 kg of gold (Table 2).

Table 2. Structure and volume of KGHM Polska Miedz SA production

Year 1996 1997 1998 1999 2000
Ore mined (103 tons) 25,988.0 24,743.0 26,087.0 27,001.0 27,097.0
Copper grade (% Cu) 1.82 1.87 1.90 1.90 1.89
Concentrates production 1,652.8 1,660.9 1,729.3 1,789.0 1,753.8
(103 t)
Refined production(103 t) 424.7 440.6 446.8 470.5 486.0
Silver (tons Ag) 933 1,003 1,094 1,099 1,118
Gold (kg Au) 530 358 328 520 367
Source: KGHM Polska Miedz SA

The company's operations include three underground mines (Lubin, Polkowice-

Sieroszowice, Rudna), one Ore Enrichment Plant Division, three smelters
(Legnica, Glogów I and II), and the Cedynia Copper Rolling Mill, which has
expanded its capacity to around 185,000 t/y of copper wire rods. KGHM's output
of electrolytic copper depends mainly on the tonnage of ore extracted at these
tree mining centres. The 7.6 Mt/y capacity Lubin mine is expected to continue in
operation until 2030, with a planned production rate of 6.45 Mt/y. Polkowice-

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Sieroszowice has a capacity of 10.2 million tons yearly, and is expected to
continue operation until 2040, and the Rudna mine, which life-span for
production about 12.0 million tons is 25 years.

KGHM Polska Miedz SA was established in 1961 as a state-owned enterprise,

but as a result of the changes in the Polish economic system the company was
transformed in 1991 into a joint stock company solely owned by the State
Treasury, and in 1997, 200 million shares of common stock with a nominal
value of 10 PLN each were admitted to public trading, of which:

§ ca. 30 million were offered domestically for both small investors (16 million)
and large investors (14 million);
§ ca. 30 million (15% of total shares) were given free to 42,000 authorized
employees (these shares could not be publicly traded for two years);
§ ca. 35 million were purchased in the foreign tranche, for which 17 million
Global Depository Receipts (GDR's) were issued;
§ ca. 105 million remained in the possession of Polish State Treasury.

These stocks are listed on the Warsaw Stock Exchange, where the asking price
on July 10, 1997, was 23.50 PLN per share (the lowest price, 10.2 PLN, was
noted on January 13, 1998, the highest 35.2 PLN on February 25, 2000).
Currently, over 50% of KGHM’s shares are now in private hands, with major
shareholders including Bankers Trust, Emerging Markets Growth Fund Inc., and
others.

KGHM Polska Miedz SA continuously carries out activities aimed at improving

its position on both domestic and international markets. First to improve the
management system the company in 1995 was segmented into two groups:

1. The copper concern - comprised of 10 divisions and connected with mining

and smelting activities. Each of these division has separate internal
accounting. (The sale of copper and copper products accounted for about

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 77-85% of the total revenue from the KGHM sale. Silver and gold are the
other important by-products. Sliver share in KGHM's sales amounted to 10-
19%, whereas gold to ca. 0.3%).

2. The capital holding group: comprised of two regional investment funds:

§ The Lower Silesian Investment Fund (DSI SA) to manage new activities, e.g.
the local telephone industry,
§ KGHM Metale - representing a natural extension of the activity of processing
copper and other by–products.

Then, to increase the profitability of production and its financial result (Table 3),
the Company reduced the total cost of copper production to the level of 1,472
USD/t in 1999 (which amounted to 1,952 USD/t in 1996, 1,590 USD/t in 1998,
and 1,433 USD/t in the first half of 1999), through increasing the volume of
production, diminishing the employment from 19,414 at the end of 1998 to
18,841 by the year 1999 in the core concern (there were 39,714 employees on
the payroll in 1991), and continuing the active policy of the hedging of copper
and silver prices, which already had a positive impact on the effective price
achieved in the sale of products in last years.

Table 3. KGHM Polska Miedz SA capital market ratios

Ratio 1996 1997 1998 1999 2000e
Return on assets (%) 3.39 10.10 3.59 (3.47) 10.73
Net return on sales (%) 4.49 12.63 4.90 (4.13) 12.40
Net profit/shares outstanding - - 0.89 (0.85) 3.09
Price per share/earning per share - - 14.0 (30.60) n.a.
Price per share/book value per - - 0.61 1.50 n.a.
share
Source: KGHM Polska Miedz SA

KGHM Polska Miedz SA also significantly reduced the negative influence of the
copper industry on the natural environment. They reflect all aspects of

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environmental protection, and in particular the problem of post-flotation waste
management; for example, research is being conducted on the possibility of
utilizing post-flotation wastes in underground mining technology to backfill
exploited areas and fill abandoned works.

Zinc and lead

Poland is a traditional producer and exporter of zinc, and in the early years of
the 20th century the Zn-Pb industry in the Silesia-Cracow region was one of the
largest in the world. The total zinc and lead ore reserves are 189.58 million
tons, containing 7.45 million tons of zinc and 3.43 million tons of lead (as of
December 31, 1999). The developed mining in the Chrzanów and Olkusz
regions consists of three Mississippi Valley-type lead-zinc deposits of the total
reserves amount to 49.2 million tons of ore, containing 864,000 tons of lead and
2,066,000 tons of zinc. In that region there are two underground zinc-lead
mines that belong to two different Polish companies, but the reserves of zinc
and lead in these mines are near exhaustion (2006-2008).

The Trzebionka mine, where about 2.3 million tons of ore (3.4% Zn and 1.5%
Pb) is extracted yearly, and the processing plant (with capacity of 1.9 Mt/y)
located close to the Trzebionka mine belong to ZG Trzebionka SA - a joint stock
company since 1992. With the creation of National Investment Funds in 1995,
the company entered into the portfolio of Hetman SA. In 1999, ZG Trzebionka
SA and five other companies in the Hetman portfolio created the Śląsk
Consortium and took steps to create a holding company. ZG Trzebionka SA
sells concentrates with grades over 60% zinc and 70% lead, with slight
admixtures (the maximum content of MgO is 0.2%; CaO - 0.8%), both to
domestic smelters and foreign clients (Table 4).

The Olkusz-Pomorzany mine, where about 2.5 million tons of ore (4.2% Zn and
1.4% Pb) is extracted yearly (Table 4), and the processing plant (with
processing capacity of 2.55 million tons yearly), and Boleslaw Zinc Smelter are
in the structure of the ZGH Boleslaw Mining & Smelting Plants, which is still a

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state enterprise. However, the company has been continuously modernized
(e.g. zinc smelter capacity has been increased up to 72,000 tons) and
restructured to exclude non-producing divisions from its structure, and introduce
pre-privatization procedures (e.g. the Zinc Oxide Plant at the Boleslaw smelter
in 1998 was transformed into an independent company Boleslaw Recycling
Ltd., specialized in treatment and neutralizing of slimes after zinc electrolysis,
zinc-containing metallurgical wastes, steel dusts, etc. The current processing
capacity of 60,000 tons of wastes is projected to increase up to 115,000 tons
yearly, providing considerable investment expenditures).

Table 4. Structure and volume of ZG Trzebionka SA and ZGH Boleslaw

production
Year 1996 1997 1998 1999 2000
ZG Trzebionka SA
Ore mined ('000 tons) 2,221.3 2,233.5 2,284.5 2,285.3 2,268.7
Concentrates 63.6 64.3 60.8 59.8 59.8
production (103 tons)
Zinc grade (% Zn) 58.5 59.9 61.4 61.5 61.11
Lead grade (% Pb) 74.6 70.4 69.7 70.5 75.06
ZGH Boleslaw
Ore mined (103tons) 2,384.5 2,506.0 2,565.6 2,580.2 2,485.8
Concentrates 88.8 87.8 88.8 90.9 87.4
production (103 tons)
Zinc grade (% Zn) 52.6 52.6 53.9 54.6 54.3
Lead grade (% Pb) 58.7 47.4 50.1 50.6 52.8
Zinc production (103 68.8 69.9 70.2 70.6 70.9
tons)
Source: data from producers

Despite changing zinc and lead prices on international and domestic markets,
both ZG Trzebionka SA and ZGH Boleslaw are capable of generating profits; for
example, the highest recorded net profits in the last five years - 18,772,200 PLN
for ZG Trzebionka SA, and 17,708,000 PLN for ZGH Boleslaw - were achieved
in 1997 (Table 5).

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Table 5. ZGH Boleslaw and Trzebionka SA financial result
Ratio 1996 1997 1998 1999 2000e
Trzebionka SA
Net return on sales (%) 1.8 9.8 -6.7 1.8 1.5
Net profit (103 PLN) 2,467 18,772 -10,642 3,262 2,928
ZGH Boleslaw
Net return on sales (%) 1.0 4.7 1.3 3.3 7.2
Net profit (103 PLN) 2,602 17,708 4,128 13,438 30,000
Source: data from producers

Based on domestic and imported concentrates, zinc metals in various grades

and refined lead are produced at four smelters located in the Silesia region.
Two of them Miasteczko Śląskie Zinc Smelter (where 76,723 tons of zinc and
34,552 tons of lead were produced in 2000), and Boleslaw Smelting Plant
(where about 70,900 tons of zinc was produced) are still state companies,
whereas Silesia Metallurgical Plant SA, and Szopienice Non-Ferrous Metals
Smelter SA are joint stock companies.

Aluminum
Some 93-95% of Polish production of aluminum is based on imported alumina,
and the rest comes from a few small producers of secondary aluminum. The
solely producer of primary aluminum in Poland is Konin Aluminum Smelter SA,
which was transformed into a joint stock company on December 1991, 31. In
December 1995 about 80% of the stock was bought by Impexmetal SA.
Nowadays, Impexmetal SA holds 88.2%, State Treasury 4.7% and employees –
7%. The production of aluminum dropped significantly in 1991-1992, due to
obsolete technology and high energy price, but after the modernization of
electrolysis with dry anode mass, and introduction of a new method for feeding
aluminum oxide to the tubs in 1993-1995, and further modernization (dry
technology) at Konin Smelter S.A. the volume of production has been increased
from 52,080 tons in 1997 to 70,000 tons in 2000.

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Aluminum and aluminum alloy scrap are used directly to produce aluminum
ingots in Kęty SA, and Skawina metallurgical plants. The latter was formerly a
primary aluminum smelter, which was closed on 31 December 1981 for
ecological reasons. Now, the plant produces about 24,000 tons of aluminum
rods and 15,000 tons of alloys being a joint stock company since 1 April 1996
(the main shareholder is the Konin Smelter, the other - Impexmetal). The
current recovery of aluminum from scrap to the aluminum and aluminum ingots
production is estimated on minimum 60,000 tons, and should be intensified in
the near future, especially as many small private companies are involved in this
sector.

CONCLUSIONS
The basic metals mining covers copper and its by- and co-products, whose
production volume is to be slightly increased, and lead-zinc, whose production
will be diminishing.

The transformation of Polish economy, has contributed to the significant

ownership changes and the way of management. Most of non-ferrous metals
producers are now joint stock companies or stock companies, which shares are
owned mostly by Polish shareholders, the State Treasury, banks or trading
companies. These changes influenced improvement of the production volume
of base metals, their quality, protection of environment, and better utilization of
secondary sources. However, as compared to the international tendencies, the
cost of production of base metals in Poland are still relatively high, and the
utilization of secondary sources is still very low. Some positive results of the
current pro-ecological mineral policy in Poland have been already clearly visible
in the case of non-ferrous metals smelters, where the emission of dusts and
gases was significantly reduced, e.g. after a SOLINOX installation at the
Legnica smelter in 1994, and an installation to the desulfurise gases from the
heating plant at the Glogów smelter in 1997 were put on line.

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The transition to a market economy in Poland has also created the opportunity
for foreign companies to prospect and extract raw minerals deposits.
Unfortunately, there are no many companies which are interested in
prospecting new non-ferrous or precious metal deposits in Poland. By the end
of 2000, only two foreign companies were granted concessions for gold
prospecting:

§ Benjamin Resources granted for gold and other non-ferrous metals in March
2000, and valid till March 2003,
§ Gleniff Ltd. in the North-Sudetic Basin, granted for gold: the first in October
1996, and valid till October 2002, and the second granted in April 1999, and
valid till April 2002.

If the current increasing tendency of world production of non-ferrous metals

continues, Poland’s role as their primary producer will be reduced. The only
possibility which would allow Poland to maintain its current position in the
production of basic metals is to rationalize Polish imports and to improve the
utilization of secondary sources, e.g. there has been observed an increase of
silver production from silver scraps when some private companies started its
operations, i.e.:

§ AgTech in Katowice, a private company which began operations in 1995,

produced about 10-15 tons of silver in 1998-1999;
§ Argentchem in Troszczyn, a private company which began operations in
1989, produces over 1-2 tons per year of silver;
§ Innovator Ltd. in Gliwice, which started operation in 1997 produces, about 1-
2 tons per year of silver.

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REFERENCES
1. Burkowicz A., Galos K., Kamyk J., Kulczycka J., Lewicka E., Smakowski T.,
Szlugaj J. (2000) - Minerals Yearbook of Poland 1994-1998. Polish Academy
of Sciences, Mineral and Energy Economy Research Institute, Department of
Mineral Policy, Cracow.
2. Kulczycka J. (1998) - Using the World Price in Management: the Example of
the Polish Copper Industry. IGSMiE PAN, Kraków.
3. Lewicka E. (1999) – Przyszlosc branzy cynkowo-olowiowej w Polsce (The
future of the zinc and lead branch in Poland). Materiały IX Miedzynarodowej
Konferencji “Aktualia i Perspektywy Gospodarki Surowcami Mineralnymi”
Rytro 1999, IGSMiE PAN, Kraków.
4. KGHM Polska Miedz S.A. Annual Report 1998.
5. KGHM Polska Miedz S.A. Annual Report 1999.
6. ZG Trzebionka Annual Report 1997.

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