Impact of COVID-19 on the functioning of The Company and The Group

The most important risk categories associated with the COVID-19 pandemic and affecting the operation of the Company and the Group include:

• possible infections with the SARS-CoV-2 virus and increased absences among core production business employees
• possible disruption in the supply chain of materials and services and logistics limitations, especially in international transport
• possible closure of some sales markets, a decline in demand and optimisation of inventories of raw materials and finished products with business partners
• possible extraordinary amendments to laws
• decreases in copper and silver prices on metals markets
• decreases in molybdenum, lead and sulphuric acid prices
• decreases in the USD/PLN rate
• shortages of third-party copper-bearing materials
• general uncertainty and volatility on financial markets and risk of recession on global markets

From the point of view of the Group, one material effect of the coronavirus pandemic was its impact on the market risk associated with the volatility of metal prices and stock market indices in 2020. At the end of 2020, the Company’s stock price rose by 91% compared to the quotations at the end of 2019 and doubled as compared to the price form the end of H1 2020; at session closing on 30 December 2020 it was PLN 183.00. In the same period, WIG and WIG20 indices fell by 1% and 8%, respectively (vs. the end of 2019) and rose by 15% and 13%, respectively (vs. the end of H1 2020). As a result of the changes in stock prices, the capitalisation of the Company increased from PLN 19.2 billion at the end of 2019 to PLN 36.6 billion at the end of 2020, which was 77% and 73% higher than the net asset value of the Company and the Group, respectively.

The situation on the metals market improved from Q2 2020, which was reflected by an increase in settlement prices of copper by 26% from 4,797 USD/t at the end of Q1 2020 to 6,038 USD/t at the end of Q2 2020 and a 28% increase in H2 2020 to 7,742 USD/t at the end of 2020.

The COVID-19 pandemic had the most significant impact on the Group’s ancillary activity involving hotel and spa services. Uzdrowiska Kłodzkie S.A. – the PGU Group, Uzdrowisko Połczyn Grupa PGU S.A., Uzdrowisko Cieplice Sp. z o.o. – the PGU Group, Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – the PGU Group, INTERFERIE S.A. and Interferie Medical SPA Sp. z o.o. The year 2020 witnessed a significant disruption in the ongoing operation of these companies related to the mandatory lockdown and limitation of activities implemented by the Health Minister’s Regulations. Accordingly, the Group had to close certain facilities temporarily. The Companies were affected by a temporary prohibition of conducting business activity twice: in the spring (from March to May/June) and in the Winter (starting in November). The activities of spa and hotel companies were also affected by the introduction of other regulations, e.g. those affecting the possibility of providing work by employees or registering some facilities owned by the spa companies on the list of facilities designated as quarantine locations.

COVID-19-related restrictions caused a decline in revenues in 2020 in spa companies by about 37% and in hotel companies by 45% as compared to the 2019 revenues and by 41% and 43%, respectively, versus the revenue plans. This performance constituted the basis for conducting impairment tests for non-current assets of those companies and recognizing impairment allowances for the assets in question. Detailed results of the tests are presented in Section 3 of the consolidated financial statements.

It is also worth noting that, as a result of the decrease in revenues and the resulting decline in the operating profit, the spa companies breached the covenant (set forth under the concluded loan agreements) to maintain the Debt Service Coverage Ratio (DSCR) at no less than 1.2. As at the end of 2020, the spa companies have obtained temporary waivers of the covenants from the lenders. Since the restrictions and the prohibition of conducting business activities were extended into 2021, there are plans to obtain the same waivers for subsequent periods as well.

We expect the companies to gradually return to their business activity, start providing services and generating pre-crisis revenues in Q2 2021. Despite the continuing state of pandemic, the spa and hotel facilities are fully prepared to provide services and welcome customers and patients under a strict sanitary regime. COVID-19 vaccination points are operating in selected spa facilities.

The spa and hotel companies from the KGHM Polska Miedź S.A. Group have joined the Polish Tourist Voucher program and submitted applications to the Polish Development Fund for financing under the Anti-Crisis Shield for large enterprises, as a result of which some of them have already received funds as part of program 1.0.

With respect to the other domestic companies comprising the KGHM Polska Miedź S.A. Group, the pandemic situation in 2020 did not materially affect the operating results generated by these entities.

The pandemic situation caused by COVID-19 did not have a material effect on the Company’s and the Group’s operations and, as at the publication date of this report, the Parent Entity’s Management Board believes that the risk of losing business continuity due to COVID-19 is low. Individual minor deviations in the continuity of the supply chain for materials and services can be observed due to logistical restrictions in international markets. The situation on the copper scrap market in H2 2020 improved significantly as compared to H1 2020 and the volume of material supply secured the Parent Entity’s production needs. Regular contact with suppliers enables quick reaction to delays, by using the supplier diversification strategy adopted by the KGHM Group and application of alternative solutions.

KGHM Polska Miedź S.A. as well as all foreign mines of the KGHM Polska Miedź S.A. Group and Sierra Gorda S.C.M. undertook several preventive measures, such as maintaining a sanitary regime, monitoring of health condition and employee testing; as a result, no production stoppages caused directly by the pandemic were recorded. Consequently, the Group’s copper production in 2020 did not deviate from one planned at the beginning of the year.

Moreover, a business continuity plan was developed for the KGHM Polska Miedź S.A. Group in the event that production is limited, halted, or it is temporarily put on standby. Also, the Parent Entity has complete documentation required by the “Geological and Mining Law” and the implementing regulations in this respect, relating in particular to the maintenance of the mine’s core operations.

In the sales area, the Parent Entity has a long-standing and stable customer base with which it maintains regular contact. At this point, most of our customers still do not feel any strong impact of the pandemic and consequently their amounts due to the Parent Entity are paid on time.

The Group is fully capable of paying its liabilities. The cash held by the Group along with the secured external financing ensure that liquidity will be maintained. At the Parent Entity level, the Group’s financing structure relies on long-term diversified financing sources. This has ensured long-term financial stability for the Company and the Group, by extending the weighted average maturity of KGHM Polska Miedź S.A.’s indebtedness.

With the COVID-19 pandemic still ongoing, the rise of the next pandemic wave in Q1 2021 and the introduction of broader nationwide security rules from 20 March 2021, there is still uncertainty about future developments of the pandemic situation in Poland and globally. COVID-19 vaccination will be important for the national and global economy. The vaccines have been developed by several companies and are gradually admitted for use in individual countries. The availability of vaccines, their effectiveness against specific virus strains and the rate of vaccination will influence, among others, the capacity of individual countries and industries to lift restrictions that have been put in place, reduce uncertainty about the future, or increase the activity of producers and consumers. These factors may affect the operations of the Company and the Group in subsequent quarters, however the Parent Entity is monitoring the global economic situation on an ongoing basis in order to assess its potential negative impact on the KGHM Polska Miedź S.A. Group, and to take pre-emptive actions to mitigate this impact.