London 21/03/2016 - The Polish government's decision to carry out an audit into KGHM's foreign assets was a direct reaction to the financial situation of its Sierra Gorda mine project in Chile, the State Treasury told FastMarkets.
"The audit into company's foreign assets follows the significant impairment losses in Sierra Gorda reported by KGHM earlier this year," a spokesman for the Treasury said.
It is still too early to determine the timetable of the process, the Treasury spokesman added - KGHM is currently selecting an auditor.
"After the audit is complete, it will be possible to assess the validity of its foreign investment, as well as any projects planned by the company for the future," he added.
The Polish government holds around a third of copper and silver producer KGHM, which is struggling with copper prices that are mired at their lowest since 2008 financial crisis - LME copper recently traded at $5,065 per tonne but hit six-year lows late last year below $4,500.
Earlier this year, KGHM said its total impairment costs for 2015 stood at 5.063 billion zlotys on its foreign assets, including the Sierra Gorda mine. Sumitomo, meanwhile, recorded a 14-billion-yen loss against Sierra Gorda in the nine months to December 31.
The Treasury "has doubts about the foreign investments carried out by KGHM", whether the miner's "investment in Chile was justified or not" and whether "any mistakes have been made along the way", it has said.
KGHM, which owns 55 percent stake of Sierra Gorda, acquired the copper and molybdenum mine in 2012 when it bought Canadian rival Quadra FNX - the largest ever foreign acquisition by a Polish company. Japan's Sumitomo holds the other 45 percent of the project.
Adding to KGHM's worries is Chile's environmental regulator, SMA, pursuing legal redress against the Sierra Gorda mine. Earlier this month, SMA said the mine committed "seven serious and two mild environmental breaches" and could be fined and have its licence revoked.
The final decision whether to sell the company's stake in Sierra Gorda would belong to KGHM, the State Treasury spokesman said.
"For now, KGHM and Sumitomo both decided to continue their cooperation over the mine" despite falling copper and molybdenum prices, he said.
The Treasury "pays special attention to the importance of Polish enterprises in the international arena and sees it as part of Poland's economic development", it added.
KGHM sees copper output at Sierra Gorda at 110,000-120,000 tonnes this year.
(Editing by Mark Shaw)