Polish Copper Mining Giant in Governmental Chains

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Economic slowdowns are always challenging for the state authorities. Expenditure cuts and search for new sources of income often lead to imperfect policy changes. In 2012, KGHM – one of the biggest state-owned enterprises in Poland – became a victim of a government’s hunt. As a result, the company was forced to pay a new silver and copper extraction tax.

The occurrence of this tax is not surprising – in almost every country in the world a mineral extraction taxation exists. Poland is no exception. Every company extracting natural resources in Poland has been paying the government a levy for many years. However, it is difficult to find a reasonable explanation for implementing the new tax that was imposed exclusively on the copper and silver mining giant KGHM and so it seems to be only a new way for the government to guarantee constant stream of income to the budget.

In the end of 2011, public finance in Poland was kept under surveillance of the European Commission, which in 2009 implemented a procedure of excessive deficit and recommended deficit reduction to 3% of GDP by the end of 2012. The Commission’s prediction from 2011 assumed that Poland would not manage to reach the required deficit level. The government started to look for additional sources of money. Eventually, it turned out that a wide range of the governmental actions (including a special tax on copper extraction) diminished the deficit in 2012 budgetary plans and lowered the EU’s concerns about the Polish public finance. But what consequences faced the investors and the company itself?

It turned out very quickly that taxing KGHM strongly influences its performance on the stock market. Since November 18, 2012, when Prime Minister Donald Tusk announced the tax, the value of the company’s shares plummeted. Just during the trading session on that day KGHM shares lost almost 14% of their value. A month later, after announcing the 2012 budget plans, the shares fell to PLN 105 (approximately EUR 24), which was a 40% loss in just a month. This sudden deterioration in KGHM’s stock market performance was the price for introducing the new tax. The burden of this cost was heavily felt by the minority shareholders, but also by the state itself (31.79% of shares), which, nevertheless, benefited financially from the new tax on copper and silver extraction.

Later new problems with the tax appeared. Unfortunately, the formula of the tax was not synchronized with the copper and silver price fluctuations on global markets. Therefore, the company is forced to pay high taxes, even when resource prices are low. This lack of flexibility and dwindling copper prices influenced both company’s financial performance and consequently the profit of its shareholders. KGHM has always been associated with very high dividends paid every year and was extremely attractive for long-term investors. However, since 2012, the dividends are falling due to market conditions and the new tax. This, in turn, harms not only the minority shareholders but also the state that owns the KGHM shares. The state compensates itself for this loss with the money from the tax on copper and silver. It is very beneficial for the state budget because a dividend depends on market fluctuations and is shared with other shareholders, whereas the income from the tax is fixed and almost unaffected by the company’s performance.

In October 2015, a glimpse of hope for KGHM and the investors appeared. The newly elected government promised to abolish the tax. Unfortunately, this promise has not been fulfilled so far as the government needs revenues to cover the increasing public expenditures in 2016 and later on. This event also influenced KGHM. The Polish mining giant, already affected by low copper prices, reached its six-years minimum in December 2015, when the price per share fell to PLN 60 (approximately EUR 14).

This example of a special tax on copper and silver shows the shortsightedness and egoism of governments and politicians. They decided to use income of a very prosperous state-owned company in order to close the budget gap, ignoring interests of the company itself and of the minority investors. The government found itself in a very comfortable situation by securing an income which is constant, high, and almost independent from the market conditions. The Polish authorities “triumphed” thanks to the tax burden on both the company and its shareholders. That is, however, a route to nowhere.

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Maciej Orczyk