UPDATE: KGHM's Canada Investment Positive But Has Some Risks

An agreement between Polish copper miner KGHM Polska Miedz (KGH.WA) and Canada's Abacus Mining & Exploration Corp. (AME.V) to jointly explore a copper and gold field project in western Canada is a positive move but not without potential risks, analysts said Wednesday.

The deal, signed Tuesday, will see KGHM pay $37 million for 51% of the joint venture. Abacus will contribute its rights to the Afton Ajax field, located in the Canadian province of British Columbia, into the business.

KGHM has the option to buy a further 29% in the joint venture for up to $35 million. If it exercises that option, it will be required to organize financing of $535 million for the joint venture's investment in the field, proportionally to its holdings in the venture.

"The field's parameters are really fantastic, especially in terms of unit production costs," Michal Marczak, equity analyst with BRE Bank brokerage, said in a research note. He said he expects KGHM's investment to be paid back after only four years.

But he said the decision to sell such an attractive field at a relatively low price raised questions.

"The answer (as to why Abacus is selling) probably lies in risk factors which still remain unknown," he added.

According to estimates, the Afton Ajax field is expected to produce 50,000 metric tons of copper and 100,000 troy ounces of gold a year. The field is expected to produce for 23 years starting in 2013, KGHM said.

Pawel Puchalski, equity analyst with BZ WBK brokerage, said the deal is supportive to KGHM's valuation, but that numerous risks exist. These include possible delays in project startup, escalating costs of investment and lower output.

The project will help KGHM in its strategic long-term goal of producing 700,000 tons of copper annually, the company's chief executive Herbert Wirth said Wednesday. In 2009, KGHM produced 501,000 tons of copper.

Under that strategy, KGHM plans to spend PLN13.7 billion on investment by 2014. Of this, PLN5.7 billion is to be spend on capital investment.

Copper production costs at Afton Ajax are estimated at $2,000/ton, Wirth said, significantly lower than KGHM's average costs of $3,580/ton in 2009.

The company operates three mines in Poland--Lubin, Rudna and Polkowice-Sierszowice. It also has an Ore Enrichment Plants division, which prepares concentrate for smelters and refineries in Legnica and Glogow; a Tailings Management division, responsible for the storage and management of tailings, and a Cedynia copper wire rod plant in Orsk.

At 1013 GMT KGHM shares traded down 1.4% at 103.50 zlotys ($33.50) at the Warsaw Stock Exchange, against a 0.5% slide in the blue-chip WIG20 index.

-By Malgorzata Halaba, Dow Jones Newswires; [phone]; [e-mail]