KGHM says phase two of Sierra Gorda copper mine in Chile will never happen

Polish miner KGHM (WSE:KGH), Europe's second-largest copper producer, has decided to ditch a planned second phase of expansion of its Sierra Gorda mine in Chile on the back of high production costs an falling metal prices.

The state-controlled company grabbed the copper and molybdenum project in 2012, after buying Canadian rival Quadra FNX in what was the largest-ever foreign acquisition by a Polish company.

The Polish company, Europe's second-largest copper producer, said that given current macro conditions, the plan "had lost sense."

At the time of the deal, LME three-month copper prices were nearing $10,000 per tonne. Currently, LME copper is around $5,500 per tonne.

Announcing the decision, KGHM — which chose to delay the intended expansion last year — said that given current macro conditions, the plan “had lost sense,” Diario Financiero reports (in Spanish).

Chief executive Radoslaw Domagalski-Labedzki also noted that the company had no intentions of revisiting the idea in the future.

The news didn’t surprised investors, as asset impairment charges related to Sierra Gorda had already been hurting KGHM, pushing its financial results into the red in both 2015 and 2016.

Adding to KGHM’s troubles, the Polish government ordered early last year an audit into its foreign assets in direct reaction to the financial situation at the Chilean mine.

Sierra Gorda, a joint venture 55% owned by KGHM and 45% by Japan's Sumitomo Metal Mining Co Ltd, began production in July 2014 with an expected output of 220,000 tonnes of copper a year once the now aborted expansion was completed.

Last year, it produced around 98,000 tonnes of copper, according to figures published by Chile’s government.