Integrated Report of KGHM Polska Miedź S.A.
and the KGHM Polska Miedź S.A. Group
for 2020

7.2 Derivatives

in PLN millions, unless otherwise stated

Derivatives are classified as financial assets/liabilities held for sale, unless they have not been designated as hedging instruments.

Purchases or sales of derivatives are recognised at the transaction date.

Derivatives not designated as hedges, defined as trade derivatives, are initially recognised at fair value and at the end of the reporting period are measured at fair value, with recognition of the gains/losses on measurement in profit or loss.

In the KGHM Polska Miedź S.A. Group, the Parent Entity applies hedge accounting for cash flows. Hedge accounting aims at reducing volatility in the Parent Entity’s net result, arising from periodic changes in the measurement of transactions hedging individual types of market risk to which the Parent Entity is exposed. Hedging instruments may be derivatives as well as bank and other loans in foreign currencies.

The designated hedges relate to the future sales transactions forecasted as assumed in the Sales Plan for a given year. These plans are prepared based on the production capacities for a given period. The Parent Entity estimates that the probability that transactions included in the production plan will occur is very high, as from the historical point
of view sales were always realised at the levels assumed in Sales Plans. Future cash flows arising from interest on bonds issued in PLN also represent a hedged position.

The Parent Entity may use natural currency risk hedging through the use of hedge accounting for bank and other loans denominated in USD, and designates them as positions hedging foreign currency risk, which relates to future revenues of the Parent Entity from sales of copper, silver and other metals, denominated in USD.

Gains and losses arising from changes in the fair value of the cash flow hedging instrument are recognised in other comprehensive income, to the extent by which the change in fair value represents an effective hedge of the associated hedged item. The portion which is ineffective is recognised in profit or loss as other operating income or costs. Gains
or losses arising from the cash flow hedging instrument are recognised in profit or loss as a reclassification adjustment, in the same period or periods in which the hedged item affects profit or loss.

Derivatives are no longer accounted for as hedging instruments when they expire, are sold, terminated or settled, or when the goal of risk management for a given relation has changed.

The Parent Entity may designate a new hedging relationship for a given derivative, change the intended use of the derivative, or designate it to hedge another type of risk. In such a case, for cash flow hedges, gains or losses which arose in the periods in which the hedge was effective are retained in accumulated other comprehensive income until the hedged item affects profit or loss.

If the hedge of a forecasted transaction ceases to function because it is probable that the forecasted transaction will not occur, then the net gain or loss recognised in other comprehensive income is immediately transferred to profit or loss as a reclassification adjustment.

If a hybrid contract has a basic instrument which is not a financial asset, the derivative is separated from a basic instrument and is measured pursuant to rules for derivatives only if (i) the economic characteristic and risk of the embedded instrument are not strictly related to the character of the host contract and its risks, (ii) a separate instrument, whose characteristics reflect the traits of the embedded derivative, would fulfil the conditions of the derivatives, and (iii) the combined instrument is not classified to financial assets measured at fair value, whose results of revaluation are recognised in other income or other operating costs in the reporting period. If an embedded derivative is separated, the host instrument is measured pursuant to appropriate accounting principles. The Parent Entity separates embedded derivatives in commodities transactions with settlement periods in the future, after the date of recognising a purchase invoice in the books up to the date of final settlement of the transaction.

If a hybrid contract has a basic instrument, which is a financial asset, the criteria for classification of financial assets are applied to the whole contract.

Hedging derivatives – open items as at the end of the reporting period

As at 31 December 2020 As at 31 December 2019
Type of derivative Financial assets Financial liabilities Net total Financial assets Financial liabilities Net total
Non-current Current Non-current Current Non-current Current Non-current Current
Hedging instruments (CFH) 749 199 (801) (604) (457) 123 289 (118) (38) 256
Derivatives – Metals (price of copper, silver, gold)
Options – collar (copper) 1 1 (35) (355) (388) 14 99 (8) (30) 75
Options – seagull (copper) 235 14 (432) (242) (425) 14 140 (1) 153
Options – purchased put option (copper) 17 17
Options – purchased put option (silver) 311 91 (107) (7) 288 1 5 6
Derivatives – Currency (USDPLN exchange rate)
Options – collar 36 38 (10) (7) 57
Options – seagull 202 (29) 173 58 (26) 32
Options – put spread 44 44
Options – purchased put option 32 32 7 7
Derivatives – Currency-interest rate
Cross Currency Interest Rate Swap CIRS (198) (198) (74) (74)
Trade instruments total 8 11 (201) (75) (257) 1 4 (65) (53) (113)
Derivatives – Metals (price of copper, silver, gold)
Options – sold put option (copper) (41) (1) (42) (1) (3) (4)
Options –purchased put option (copper)
QP adjustment swap transactions (copper) (7) (7) (8) (8)
Options – sold put option (silver) (54) (3) (57)
QP adjustment swap transactions (gold) 1 (1) 2 (2)
Derivatives – Currency
Options – sold put option (USDPLN) (81) (1) (82) (12) (12)
Options – purchased put option (USDPLN) 4 4
Options – purchased call option (USDPLN) 4 10 14
Collar and forward/swap EUR (1) (2) (3) 1 2 3
Embedded derivatives (price of copper, silver, gold)
Acid and water supply contracts (24) (33) (57) (52) (31) (83)
Purchase contracts for metal-bearing materials (27) (27) (9) (9)
Instruments initially designated as hedging instruments excluded from hedge accounting 32 (4) (9) 19
Derivatives – Currency (USDPLN exchange rate)
Options – collar (2) (2)
Options – seagull 32 (4) (7) 21
TOTAL OPEN DERIVATIVES 789 210 (1 006) (688) (695) 124 293 (183) (91) 143

 

The table below presents detailed data on derivative transactions designated as hedging, held by the Parent Entity as at 31 December 2020.

Open hedging derivatives Notional Average weighted price /exchange rate/interest rate Maturity – settlement period

Period of profit/loss impact

Type of derivative copper [t] [USD/t] from to from to
silver
[mn ounces]
[USD/oz t]
currency [USD mn] [USD/PLN]
CIRS
[PLN mn]
[USD/PLN, LIBOR]
Copper – seagulls* 258 000 6 426-7 716 Jan ‘21 – Dec ‘22 Feb ‘21 – Jan ‘23
Copper – collars 84 000 5 200-6 660 Jan ‘21 – Dec ‘21 Feb ‘21 – Jan ‘22
Copper – purchased put option 60 000 6 971 Jan ‘21 – June ‘21 Feb ‘21 – Jul ‘21
Silver – seagulls 24,6 26,20-42,20 Jan ‘21 – Dec ‘23 Feb ‘21 – Jan ‘24
Currency – seagulls* 630 3,94-4,54 Jan ‘22 – Dec ‘23 Feb ‘22 – Jan ‘24
Currency – put spread* 540 3,7 Jan ‘21 – Dec ‘21 Jan ‘21 – Dec ‘21
Currency – purchased put option 240 3,8 Jan ‘21 – Dec ‘21 Jan ‘21 – Dec ‘21
Currency – interest rate – CIRS 400 3,78 i 3,23% – June ‘24 – June ‘24
Currency – interest rate– CIRS 1 600 3,81 i 3,94% – June ‘29 June ‘29 – Jul ‘29
* Collar structures, i.e. purchased put options and sold call options were designated as hedging under seagull options structures (CFH – Cash Flow Hedging), while only purchased put options were designated as hedging under put spread structures.

The impact of derivatives and hedging transactions on the items of the statement of profit or loss and on the statement of comprehensive income is presented below.

Statement of profit or loss from 1 January 2020
to 31 December 2020
from 1 January 2019
to 31 December 2019
Revenues from contracts with customers 323 245
Other operating and finance income / (costs): (244) (102)
on realisation of derivatives (313) (150)
on measurement of derivatives 87 49
interest on borrowings (18) (1)
Impact of derivatives and hedging instruments
on profit or loss for the period (excluding the tax effect)
79 143
Statement of other comprehensive income
Measurement of hedging transactions (effective portion) (1 026) ( 303)
Reclassification to revenues from contracts with customers due to realisation of a hedged item (323) (245)
Reclassification to finance costs due to realisation of a hedged item 18 1
Reclassification to other operating costs due to realisation of a hedged item (settlement of the hedging cost) 281 158
Impact of hedging transactions (excluding the tax effect) (1 050) (389)
TOTAL COMPREHENSIVE INCOME (971) (246)

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