MKM is the Group’s downstream copper business, which produces and sells copper and copper alloy semi-finished products. Based in Germany, the business is structured in three sections: wire products, flat products (strips, plates and sheets) and tubes and bars. Kazakhmys has determined that MKM is not considered a core business as it is no longer consistent with the Group’s geographic and strategic focus. The business has therefore been classified as held for sale at the 2009 year end.
MKM
At a glance
Operations:
Location: Germany (Hettstedt)
Line of business: Copper and copper alloy semi-finished products
Main industries supplied: Automotive, construction and manufacturing
Main market: Europe
Main products: Wire, flats, tubes and bars
Financial overview:
EBITDA (excluding special items): $76 million
Financial summary
| $ million (unless otherwise stated) | 2009 | 2008 |
|---|---|---|
| GVA1 (€ million) | 123 | 161 |
| Wire section (€ million) | 29 | 38 |
| Flat section (€ million) | 60 | 80 |
| Tubes and bars (€ million) | 34 | 43 |
| EBITDA (excluding special items) | 76 | (1) |
| Capital expenditure (sustaining) | 9 | 11 |
- 1 GVA is Gross Value Added which is calculated as turnover less the input cost of copper cathode, i.e. MKM’s ‘value add’. It is not a statutory reporting measure. The GVA figures are presented in Euros, MKM’s operating currency.
GVA
Gross Value Added (GVA) represents the conversion charge that customers pay in excess of the copper cathode cost, and is considered a key performance measure for MKM as it excludes the impact of changes in the price of copper.
GVA fell by 24% in 2009, principally due to the economic weakness in Europe, MKM’s core marketplace, which accounts for almost 90% of sales volumes. Industrial output in the region was severely impacted by the economic downturn, which led to lower demand across all product lines. The lack of availability of debtor insurance which forms part of MKM’s risk management policy, forced MKM to limit sales to certain customers. These factors led to sales volumes falling by 13% from 273 kt to 237 kt, with reductions across all three sections.
To support sales activities, MKM maintained higher levels of inventory which enabled more short-term orders to be accepted. Management also made a number of changes to the structure of the sales force. MKM was forced to accept lower margins to protect its market position.
Within the wire section, wire rod sales volumes were supported by high demand in eastern Europe, however, overall volumes were lower as sales to MKM’s core markets declined. GVA from the wire section was also impacted in 2009 as a result of lower sales from the higher margin drawn wire products driven by the weakness in the automotive industry. Flat products, consisting of plates, strips and sheets, experienced a 15% decrease in GVA per tonne due to reduced demand and pricing pressure from competitors. Tubes and bars saw volumes reduce by 15% due to a slowdown in building industry activity.
Whilst the first half of the year was extremely challenging, MKM has seen a recovery in orders in the second half of 2009 as the major European economies returned to growth.
EBITDA (excluding special items)
Although GVA decreased in 2009, EBITDA was $77 million higher than in the prior year. EBITDA in 2009 includes a positive $58 million IFRS inventory adjustment due to the rising copper price over the year, compared to a negative $48 million IFRS adjustment in 2008. Excluding the impact of the IFRS inventory adjustment and presented in Euros to better reflect underlying performance, EBITDA was €15.0 million in 2009, €14.9 million lower than in the prior year.
In response to the lower demand, certain production shifts were cancelled, overtime work was substantially reduced, and temporary workers were released. Other costs which reduced in 2009 include utility costs with lower gas prices and energy consumption due to the decline in production volumes. In addition, maintenance work was carried out internally where possible.
Capital expenditure
Capital expenditure in 2009 was restricted due to the economic downturn. Projects were completed on the tubes, bars and sheets production lines to improve operational efficiency.