in PLN millions, unless otherwise stated
The Parent Entity is exposed to the risk of changes in the prices of the metals it sells: copper, silver, gold and lead. Furthermore, the KGHM INTERNATIONAL LTD. Group is exposed to the risk of changes in the prices of copper, gold, nickel, molybdenum, platinum and palladium.
In the Parent Entity and the KGHM INTERNATIONAL LTD. Group, the price formulas used in physical delivery contracts are mainly based on average monthly quotations from the London Metal Exchange for copper and other common metals and from the London Bullion Market for precious metals. Within the commercial policy, the Parent Entity and KGHM INTERNATIONAL LTD. set the price base for physical delivery contracts as the average price of the appropriate future month.
The permanent and direct link between sales proceeds and metals prices, without similar relationships
on the expenditures side, results in a strategic exposure. In turn, operating exposure is a result of possible mismatches in the pricing of physical contracts with respect to the Group’s benchmark profile, in particular in terms of the reference prices and the quotation periods.
On the metals market, the Group has a so-called long position, which means it has higher sales than purchases. The analysis of the Group’s strategic exposure to market risk should be performed by deducting from the volume of metals sold the amount of metal in purchased materials.
The Group’s strategic exposure to the risk of changes in the price of copper and silver in the years 2019-2020 is presented in the table below:
The notional amount of copper price hedging strategies settled in 2020 represented approx. 34% (in 2019: 22%) of the total sales of this metal realised by the Parent Entity (it represented approx. 47% of net sales1 in 2020 and 30% in 2019), while the notional amount of silver price hedging strategies settled in 2020 represented approx. 8% of the total sales of this metal realised by the Parent Entity (in 2019 revenues from silver sales were not hedged by derivatives).
As part of the realisation of the strategic plan to hedge the Parent Entity against market risk, in 2020 hedging strategies were implemented on the copper and silver markets.
On the copper market, seagull hedging strategies were implemented and put options were purchased hedging future sales revenues for years 2021-2023 for a total notional amount of 402 thousand tonnes. On the other hand, seagull structures were implemented on the silver market, hedging sales revenues for years 2021-2023 for a total notional amount of 24.6 million ounces. Additionally, in 2020 the Parent Entity managed the open hedging position by restructuring option structures on the copper market2. Part of the seagull options structure hedging revenues from sales in the period from March to December 2020 with a total notional amount of 20 thousand tonnes was closed. Hedging transactions covered by restructuration were excluded from hedge accounting as of the date the opposite restructuring transactions were entered into. In addition, sold put options were redeemed with a strike price of 4 000 USD/t in the total notional amount of 84 thousand tonnes, entered into in previous periods in terms of seagull strategies hedging revenues from copper sales in 2021.
In 2020 QP adjustment swap transactions were entered into on the copper and gold markets with maturities of up to June 2021, as part of the management of a net trading position3.
As a result, as at 31 December 2020 the Parent Entity held open derivatives positions for 406.4 thousand tonnes of copper (of which: 402 thousand tonnes came from strategic management of market risk, while 4.4 thousand tonnes came from the management of a net trading position) and 24.6 million troy ounces of silver.
The condensed tables of open derivatives transactions held by the Parent Entity on the copper and silver markets as at 31 December 2020, entered into as part of the strategic management of market risk, are presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).