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

  • Our Strategy
  • Comprehensive risk management system in the KGHM Group

Comprehensive risk management system in the KGHM Group

GRI[ ]

The KGHM Polska Miedź S.A. Group defines risk as the effect of uncertainty inherent in its operations that may give rise to both opportunities and threats to the attainment of business objectives.

  • 102-11

’You can’t manage what is not measurable’. This is one of the basic principles of management which aids in the constant improvement of advanced risk management methods developed over the years in the KGHM Group. We are building an organisation aware of the risks and striving to constantly improve and systematically grow and protect the value for our shareholders. We focus on threats and opportunities in the short and long run, taking into account the functional and project-based structure of the KGHM Group. We apply solutions adapted to our uniqueness, supporting systematic identification, assessment and analysis of risk, whose results allow us to design our response to the risks, keeping them at the expected level.

Monika Wolniewicz
Director of the Corporate Risk and Compliance Management Department

We assess the current and future, actual and potential impact of risk on the KGHM Polska Miedź S.A. Group’s activities. Based on the assessment, management practices are verified and adapted in response to risks.

The process of corporate risk management in the KGHM Polska Miedź S.A. Group is consistently performed on the basis of the Corporate Risk Management Policy and Procedure and the applicable Rules of the Corporate Risk and Compliance Committee. KGHM Polska Miedź S.A. oversees the corporate risk management process in the KGHM Polska Miedź S.A. Group; while the documents regulating the corporate risk management process in the Group companies are consistent with those of the Parent Entity.

The Corporate Risk Management Policy in the KGHM Polska Miedź S.A. Group is available on the KGHM website at www.kghm.com in the Investor Relations tab.

The corporate risk management system is subject to an annual effectiveness assessment as required in the “Best Practice for WSE Listed Companies 2016”.

Risks occurring in various areas of the KGHM Polska Miedź S.A. Group’s operations are continuously identified, assessed and analysed in terms of their possible mitigation. Each key risk factor in the KGHM Polska Miedź S.A. Group undergoes in-depth analysis in order to develop a Risk Response Plan and Corrective Actions. Other risk factors undergo monitoring by the Corporate Risk and Compliance Management Department, and in terms of financial risk by the division of the Executive Director for Treasury Operations – Corporate Treasurer.

In order to standardize the approach to the systematic identification, assessment and analysis of compliance risk, defined as compliance with the requirements arising from the applicable legal (external and internal) regulations or voluntarily assumed legal obligations and standards (including ethical standards), the Management Board of KGHM Polska Miedź S.A. adopted the Compliance Management Policy in the KGHM Polska Miedź S.A. Group and the Compliance Management Procedure and Methodology in KGHM Polska Miedź S.A. in 2020. The compliance management process, which is linked to the corporate risk management process in the KGHM Polska Miedź S.A. Group, is an important business tool for preventing events which could result in sanctions.

The corporate risk management process adopted in the KGHM Group is inspired by the solutions adopted in the ISO 31000:2018 standards, by best risk management practices and the unique characteristics of the KGHM Group, and it is composed of the following stages:

Risk management process in the KGHM Polska Miedź S.A. Group

kghm_19 kghm_19

Definition of Context

The first step in the process consists of three actions: identification of the external context, the internal context and the risk management context.

The external context is the environment, in which the KGHM Polska Miedź S.A. Group is pursuing its Strategy. Identification of the context requires an update of the understanding of the social, political, legal, regulatory, financial, economic and technological aspects of the environment that affect the business activity.

Identification of the internal context requires an analysis of (strategic/business) goals, planned and implemented changes in the organisational structure, new areas of the business activity, projects, etc.

The final action within this step is to define the risk management context, which comprises setting or updating goals, scope, responsibility as well as procedures and methodologies applied in the risk management process.

Identification and Assessment

At this stage of the process, the risks that could affect the achievement of goals at the level of the KGHM Polska Miedź S.A. Group are identified and assessed. The main task at this stage is to prepare a complete list of threats, which might facilitate, hamper, accelerate or delay the attainment of goals. Each identified risk is systematised by categories and subcategories in the form of a Risk Model, which serves the KGHM Polska Miedź S.A. Group as a standardised risk taxonomy.

When identified, each corporate risk is subjected to assessment using the Risk Assessment Matrix, which provides scaled assessment ranges for the dimensions of impact, vulnerability and probability. Risk may bring diverse effects and therefore, in order to ensure as a broad identification of the potential impact as possible and to restrict the subjectivism of the assessment, the following impact assessment dimensions have been defined:

  • Finance – impact of the effects of a given risk in the financial dimension through the application of value ranges.
  • Strategy – assessment the risk impact on the attainability of strategic goals.
  • Reputation and Stakeholders – risk impact on the Company’s reputation, brand trust, investor relationships, stakeholder relationships, including effectiveness of the activities related to building responsible business and sustainable development.
  • Health and Safety – direct impact on people’s health & safety and life.
  • Natural Environment – risk materialisation impact on climate and natural environment as well as ecosystem activity.
  • Laws and Regulations – assessment of the compliance of occurrences with the applicable laws, the necessity to participate in proceedings before public administration authorities responsible for supervision and regulation and potential sanctions resulting from such proceedings.
  • Business Continuity – assessment of the impact of risk on business interruptions causing severe/irreversible consequences and loss of access to information that is critical for the business.

The risk identification and assessment results are presented graphically, i.e. in the form of Risk Maps. They outline the risk profile and support the key risk selection process.

Analysis and Response

The aim of this stage is to expand the knowledge and gain an understanding of the specific nature of the key risks selected at the previous stage. Cause and effect analyses and an in-depth description of risk management methods are supposed to enable the decision to continue or change the present method.

A directional decision is called a Risk Response. A change of the method requires specification of Corrective Actions, that is organisational, process, systemic and other changes aimed to mitigate the key risk.

Applicable Key Risk Indicators (KRIs), that is sets of business process parameters or environment parameters reflecting changes of a given risk profile, are also defined at this stage.

Monitoring and Communication

The aim of the monitoring and communication process is to ensure that the applied Risk Response Plan is efficient (ad-hoc and periodic reports), new risks have been identified (Risk Register update), changes in the internal and external environments and their impact on the business activity have been found, and appropriate measures have been taken in response to incidents (Incident Information update).

An efficient, well planned and properly executed risk monitoring enables flexible and quick reactions to the changes occurring in the external and internal environments (e.g. risk escalation, changes in the measures related to risk response, or risk assessment parameters, etc.).

The execution of the stage provides the assurance that risk management in the KGHM Polska Miedź S.A. Group meets the expectations of the KGHM Polska Miedź S.A. Management Board, the Audit Committee of the KGHM Polska Miedź S.A. Supervisory Board and other stakeholders by delivering reliable information about risk, ensuring continuous improvement and aligning the quality and efficiency of the Risk Response to the requirements of the external and internal contexts.

The allocation of powers and responsibilities conforms to the best Corporate Governance practices and the universally recognised Three Lines of Defence model, as shown on the following graph:

The best Corporate Governance practices and the universally recognised Three Lines of Defence model were adopted in the allocation of powers and responsibilities. This is presented in the figure below:

Risk management organisational structure of KGHM Polska Miedź S.A.

Supervisory Board (Audit Committee)
Performs annual assessment of the effectiveness of the risk management process and monitors the level of risk factors and ways to address them.
Management Board
Has ultimate responsibility for the risk management system and for supervision over its individual elements
1st line of defence 2nd line of defence 3rd line of defence
Management Risk Committees Audit
Managers are responsible for identifying, assessing and analysing risk factors and for the implementation, within their daily duties, of responses to risk.

The task of the management staff is ongoing supervision of the application of appropriate responses to risk within the tasks realised, to ensure the expected level of risk is not exceeded.


 Support the effectiveness of the risk management process. The Internal Audit Plan is based on assessing risk and subordinated business goals, assessed is the current level of risk factors and the degree of efficiency with which they are managed.
Corporate Risk and Compliance Committee Market Risk Committee Credit Risk Committee Financial Liquidity Committee
Manages corporate risk and continuously monitors the key risk Management of the metal price risk
(incl. copper and silver), exchange rates and interest rates 		Manages counterparty default risk Manages risk of loss of liquidity, understood as the ability to pay financial liabilities on time and to obtain financing for operations
Corporate Risk Management Policy

Compliance Management Policy   

 Market Risk Management Policy Credit risk management policy Financial Liquidity Management Policy Internal Audit Rules
Corporate Risk and Compliance Management Department

Executive Director for Treasury Operations – Corporate Treasurer

 Executive Director for Audit and Control
Reporting to the Management Board

Reporting to
 Vice President of the Management Board (Finance)

 Reporting to the President & CEO

Corporate risk: key risks and mitigation

  • 102-15

The holistic approach to risk management is consistent with the growth strategy, continuous aspiration for operational excellence and with the principles of sustainable and responsible business. It has been designed to support the KGHM Polska Miedź S.A. Group in building a resilient corporate structure. The Risk Model is a tool used to identify risk in the KGHM Polska Miedź S.A. Group. Its structure is based on the sources of risk and is divided into the following 5 categories: technological, value chain, market, internal and external, which are described in detail in the chart below.

In reference to Article 49a of the Accounting Act, it must be stated that, because of the long value chain of the KGHM Polska Miedź S.A. Group, the geographical footprint of the Group’s activities and the resulting considerable complexity and multi-faceted nature, the detailed description of risks and their management, in the context of the Group’s social, labour, environmental, human rights, corruption prevention policies, is presented in this section, rather than in the sections devoted to the individual topics in the areas listed above. We have decided that the combined comprehensive presentation of this matter will offer the readers of this Report a better chance to fully understand it.

Several dozen sub-categories have been identified and defined at the level of each Risk Model category, covering particular areas of operations or management. The KGHM Polska Miedź S.A. Group acts with due diligence when taking measures for minimizing risk exposure by reducing vulnerability to the individual risk factors and probability of materialisation of the events which might be triggered by such factors. However, threat identification and assessment is always accompanied by the uncertainty about the effectiveness of the applied and intended preventive measures, in particular in an area outside the direct control of the KGHM Polska Miedź S.A. Group.

Technology

This category covers changes in competitiveness resulting from the application of industrial technologies, IT, innovation management, protection and/or management of intellectual property and impact of investment projects related to technology efficiency and quality and change in the IT infrastructure quality and efficiency influencing business units, support functions and infrastructure.

Value chain

This category covers changes in the operational efficiency of logistics and warehousing, in production and services, sales management, waste management and reclamation and correlated with the supply chain management process, availability of utilities and materials in the production process, change of exploration and management of ore resources, or execution of research and prospecting projects.

Market

This category covers changes in the value of assets, level of liabilities or financial result leading to a change in the sensitivity to the volatility of interest rates, currencies, liquidity, inflation rate, insolvency of counterparties, prices of goods, energy and proprietary interests. The category refers also to changes in demand for and supply of the KGHM Polska Miedź S.A. Group’s products, selection of appropriate tools for implementing a marketing strategy, a change in achieving the expected rate of return on equity investments or efficiency of risk transfer to insurers.

External

This category covers the conditions of pursuing a business activity arising from a change of economic conditions, amendments to laws and regulations (compliance), political decisions, environmental or climate change (transition risk) as well as natural disasters and force majeure (physical risk). The category encompasses also changes in market shares or margin as a result of changes in the competitive environment or substitutes, the risk of the consequences of decisions in court or arbitration proceedings, the risk of unfavourable administrative decisions, change in burdens, setting of tax liabilities or payment deadlines.

Internal

This category covers with changes in a business activity under the influence of changes in its structure, organisation, procedures, processes or business model, and the risk of change of the company’s image, its products or services, effectiveness of the rules of conduct related to ethics and anticorruption, the company’s interest, and safeguards against loss of confidentiality, integrity, availability and authenticity of information assets.

Following is the description of key risks inherent in the activity of the KGHM Polska Miedź S.A. Group in 2020, broken down into individual categories along with means for their mitigation, including identification of the specific risk for the Parent Entity and the KGHM INTERNATIONAL LTD. Group. The key risk is future uncertain events exerting the greatest impact on the attainment of the business goals of the KGHM Polska Miedź S.A. Group taking into account the assessment of vulnerability, i.e. the organisation’s ability to reduce the probability that a risk materializes and mitigate its effects.

The table below uses the following abbreviations: for the KGHM Polska Miedź S.A. Group – the KGHM Group, for the KGHM INTERNATIONAL LTD. Group – the KGHM INTERNATIONAL LTD. Group, for KGHM Polska Miedź S.A. – the Parent Entity.

Risk, description of risk factors and mitigation

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Risk and description of risk factors Mitigation
Category – Technology
(Parent Entity)

Risk of failure to adhere to the efficient working time parameter and of failure to fully utilise the capacity of metallurgical equipment to process own concentrate.

Sources of risk include potential breakdowns of key elements of the core production line and failure to adapt technology to production requirements, which could affect the availability of metallurgical infrastructure. An important risk factor is the need to maintain the production of concentrates in an amount and quality required to optimise the utilisation of the metallurgical facilities. Exposure to risk is also associated with the need to ensure required utilities to maintain the expected level of infrastructure availability.

 Optimum utilisation of infrastructure, maintaining an appropriate mix of concentrates, R&D initiatives and advancement of programs and projects to adapt metallurgical structure and technology to ensure higher processing capacity for own concentrates, imported copper-bearing materials and purchased scrap. Action is taken on an ongoing basis to ensure technical working order of maintenance and service systems. An overhaul policy and emergency procedures are in place and suppliers are monitored on an ongoing basis within the scope described in instructions and contracts. Actions undertaken are aimed at maintaining the availability of metallurgical equipment at the expected level and improving the productivity parameters of metallurgical infrastructure, as well as limiting the negative impact of this risk on KGHM’s operations.
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Category – Value Chain 
(KGHM Group)  

Risk related to an ineffective process of monitoring and providing early warning to management staff on deviations from the budget and financial plans as well as with respect to adopting inappropriate economic parameters related to production, investments, macroeconomics and finance, for forecasts of company results.

An ineffective process of monitoring and providing early warning to management staff on deviations from the budget and financial plans may impede or delay the appropriate early identification of deviations in respect of forecast results, at the same time shortening the time for taking appropriate corrective actions. Sources of risk are linked to potential ineffectiveness of the mechanisms controlling these processes. In 2020, a significant factor affecting the exposure to the risk was the general uncertainty in financial markets and the risk of recession in global markets in connection with the COVID-19 pandemic.

 Forecasts related to specific areas of the operations prepared by appropriate specialised units and ensuring the uniformity of operating plans with strategic plans. Monthly reporting of execution on forecasts in all critical areas. Regular contacts with and systematic streamlining of the communication process together with setting criteria enabling the identification of symptoms of potential deviations from the expected results of the KGHM Group. The assessment of key risks affected by the coronavirus pandemic was subjected to particular analysis, through ongoing monitoring of selected information in the production, sales, supply chain, personnel management and finance areas, in order to support the management processes in the conditions of increased uncertainty caused by the pandemic.
(KGHM INTERNATIONAL Group)

Risk related to the precision of estimated costs of decommissioning certain mines.

With respect to risk factors related to the precision of estimated costs of decommissioning certain mines, there are questions related to the need to meet obligatory environmental conditions connected with realistic concepts for such liquidation.

 Estimated costs of restoration and mine decommissioning based on expert reports and providing guarantees of future environmental obligations related to the closure and restoration of mining areas in accordance with existing laws and regulations.
(KGHM INTERNATIONAL Group)

Risk of insufficient understanding of the parameters and characteristics of deposits, both in exploration projects (estimation of inputs to deposit valuation models) and in ongoing production.

The risk of changes in the evaluation and management of ore resources involves, among others, geological factors related to the reliable estimation of resources or mining conditions. Risk factors related to the limited reliability and completeness of data, based on which new resource projects are evaluated, may lead to the taking of less than optimal decisions on advancing or suspending a particular project.

 Preliminary modelling data are collected in accordance with geological documentation held and prepared based on existing law as well as reviewed and consulted internally with experienced staff. Detailed analyses are performed on the results of on-going work, with a project’s initial assumptions being updated. Incurring expenditures on prospecting and evaluation enables the assessment of ore resources and research into geological-mining conditions, aimed at planning subsequent mining activities.
(Parent Entity)

Risk of the inability to store mine tailings.

The KGHM Group is exposed to the risk of a lack of sufficient tailings storage capacity due to delays in the expansion of the Żelazny Most Tailings Storage Facility. The risks are associated with the management and control of the project and may affect its budget, schedule and the intended outcome and may lead to a failure to adhere to the technological regime for designing and execution. Another source of risk are external factors attributable to administrative bodies, as implementation of such a project requires the Group to obtain the necessary administrative decisions. Some risk exposure is also linked to the possible unscheduled shutdowns resulting from infrastructure breakdowns, which may impact the continuity of KGHM’s operations.

 Operating, building and expanding the Tailings Storage Facility in accordance with the operating instructions. Cooperation with a team of international experts (TIE) and a General Designer during the investment process. Application of an observational method based on the assessment of geotechnical parameters obtained from monitoring results, which offers the possibility of making conclusions on the behaviour of the facility being built or operated. Systematic supervision and control over the entire investment process of the expansion of the Żelazny Most Tailings Storage Facility.
(KGHM Group)

Risk of unavailability of the necessary power sources.

The KGHM Group is exposed to the risk of unavailability of power sources necessary for its operations. Potential disruptions in the supply of key power sources is related mainly to risks affecting external suppliers and breakdowns of their transmission infrastructure. This risk also entails the possibility of power supply being suspended as a result of seasonal, prolonged droughts. Global climate changes may result in, among other things, lower rainfall, resulting in temporary reduction of water levels in rivers, which in turn may restrict the operations of power plants supplying KGHM if cooling water is not available or if the permitted temperature of water released back into rivers is exceeded. Amongst internal factors, the most important involve questions of maintaining operations, utilisation and investments and modernisation work.

 Ensuring that emergency supply systems are in place for key utilities and conduct ongoing evaluation of security of grid power supply. Conducting a number of investment projects to strengthen energy security. A framework agreement with the company Polskie Górnictwo Naftowe i Gazownictwo S.A. for the sale of natural gas to increase the security of natural gas supply. Systematic limitation of energy consumption under the implemented, PN-EN ISO50001:2018-compliant Energy Management System and Energy Savings Program (POE). Planned increase in the efficiency and flexibility of the KGHM Group in terms of its Polish and international assets, among others by partially satisfying the needs for electricity from its own sources as well as from renewable energy sources (“RES”) by the end of 2030.
(KGHM Group)

Risk related to infrastructure breakdowns which disrupt the core production operations, related to natural hazards as well as internal factors related to the applied technology.

The KGHM Group is exposed to risk related to the technological potential and efficiency of its infrastructure to meet the needs of the production process. By utilising infrastructure required to maintain its operations, KGHM is exposed to the risk of industrial breakdowns resulting in unplanned shutdowns. Such breakdowns could result both from natural hazards, i.e. catastrophic natural events and force majeure (also as a result of climate changes causing more frequent occurrence of extreme weather) as well as internal factors dependent on the KGHM Group (on-going operations, maintaining production, key suppliers, servicing).

 Preventive management of key infrastructure elements affecting production continuity. Appointment of a task and expert teams in the area of counteracting infrastructure breakdowns. On-going analysis of geotechnical risk and the verification of planned recoveries In terms of ICT (information-communication technology) separating groups of projects related to reducing technological debt. Gradual replacement of older technology with newer solutions, reflecting the corporate architecture standard.
(KGHM Group)

Risk related to the cost efficiency of the production process, mining projects, processing of copper-bearing materials, reflecting the risk of a substantial rise in prices of materials, services, electricity, gas and water and restoration costs.

The KGHM Group is exposed to the risk of external and internal factors, such as metals prices, exchange rates, costs of supply of purchased metal-bearing materials, TC/RCs, selling premiums and costs of services and of electricity, gas and water. This risk is also related to the estimation of costs of provisions for the restoration of mining terrain based on existing law for the territories in which the KGHM Group operates.

In 2020, a significant factor affecting the exposure to the risk was the general uncertainty in financial markets and the risk of recession in global markets in connection with the COVID-19 pandemic.

 

 On-going control of processing costs, monitoring the market situation, optimising costs, including supplies of purchased metal-bearing materials, hedging transactions and management of the net position. Hedging, securing the Company against changes in the USD/PLN exchange rate and metals prices (mainly copper). Creating multi-year plans and budgets enabling the achievement of profitability under conditions prevailing on the market. The assessment of key risks affected by the coronavirus pandemic was subjected to particular analysis, through ongoing monitoring of selected information in the production, sales, supply chain, personnel management and finance areas, in order to support the management processes in the conditions of increased uncertainty caused by the pandemic.
 

(KGHM Group)   

Risk of disruptions of the continuity of sales and service processes (also due to the COVID-19 pandemic)

Due to its extensive sales and service structure, the KGHM Group is at risk of disruptions of the continuity of these processes caused primarily by external factors. The sources of the risk is changes in the demand for individual product ranges and in individual geographic markets, production limitations, disruptions in transport and logistics (in particular in international transport), force majeure (extreme weather events) and limitation of the business activity as a result of the introduced legal regulations at the national and international levels. The risk substantially contributes to decreased revenues of the KGHM Group and, what follows, lower operating profits.

In 2020, a significant factor influencing exposition to risk was the general uncertainty in financial markets, the risk of recession in global markets and legal restrictions connected with the COVID-19 pandemic.

 

 

 Ongoing monitoring of customers’ situation, which enables a dynamic response to customer needs (such as regular conference calls, employee availability and mobilisation, use of various information exchange channels and reaction to the occurring disruptions), analysis of the situation affecting customers’ activity and logistics in individual countries of consumers and transit routes, dynamic formation of the sales structure (changes in sales in individual product ranges, among customers from individual sectors and in individual geographic markets enabling a response to demand changes, if any, in individual sectors of consumption). Customer portfolio diversification resulting in the possibility to neutralize the reduced number of orders from some consumers through additional sales to others, the presence in the spot market (it enables immediate product allocation as part of the current demand among counterparties) apart from the main strategy, which relies on long-term and annual contracts based on a long-term business relationship.

In 2020, the COVID-19 pandemic had the most significant impact on the Group’s ancillary activity involving hotel and spa services. During the periodic closure of facilities, a range of safety procedures were introduced to the KGHM Polska Miedź S.A. Group’s spas and hotels to protect patients, hotel guests and employees of the companies against COVID-19 infections. KGHM Polska Miedź S.A.’s spa and hotel companies have joined the Polish Tourist Voucher program and submitted applications to the Polish Development Fund for financing under the Anti-Crisis Shield, as a result of which some of them have already received funds. Since it was not possible to counteract the risks, the temporary lockdown and stopping of the core activities of the spa and hotel companies has contributed to a drop of their revenues. Despite the continuing state of epidemic, the spa and hotel facilities are fully prepared to provide services and welcome customers and patients under a strict sanitary regime.
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CATEGORY – MARKET 
(KGHM Group) 

Market risk related to volatility in metal prices, exchange rates and interest rates.

Market risk is understood as the possibility of a negative impact on the results of the KGHM Group resulting from changes in the market prices of goods, exchange rates and interest rates, as well as changes in the value of debt securities and in the share prices of listed companies.

In 2020, a significant factor affecting the exposure to the risk was the general uncertainty in financial markets and the risk of recession in global markets in connection with the COVID-19 pandemic.

 This risk is actively managed by the Parent Entity, in accordance with the Market Risk Management Policy. A basic technique for managing market risk in the Company are hedging strategies utilising derivative instruments. Natural hedging is also applied.

From the point of view of the KGHM Group, one material effect of the coronavirus epidemic in 2020 was its impact on the market risk related to the variation of metal prices and stock market indices. Information on the impact of Covid-19 on the activity of the Company and the Group is described in detail in Section 6.6 of the Management Board’s Report on activities.

More on the market risk in section 12.3 Market, credit and liquidity risk of the Management Board’s Report on activities of KGHM Polska Miedź S.A.
(KGHM Group)

Credit risk related to trade receivables.

The KGHM Group sells some of its products with deferred payment terms, as a result of which there is a risk that the buyers might not pay the price for the products on time.

In 2020, a significant factor affecting the exposure to the risk was the general uncertainty in financial markets and the risk of recession in global markets in connection with the COVID-19 pandemic.

 This risk is actively managed by the Parent Entity, in accordance with the Credit Risk Management Policy. Exposure to credit risk is limited by evaluating and monitoring the financial condition of customers, setting credit limits and applying creditor security. The companies of the KGHM Group have for many years cooperated with a large number of customers, leading to the geographic diversification of trade receivables.

From the point of view of the KGHM Group, one material effect of the coronavirus epidemic in 2020 was its impact on the risk related to the timely payment of amounts due by buyers. Information on the impact of Covid-19 on the activity of the Company and the Group is described in detail in Section 6.6 of the Management Board’s Report on activities.

More on the credit risk in section 12.3 Market, credit and liquidity risk of the Management Board’s Report on activities of KGHM Polska Miedź S.A.
(KGHM Group)

Liquidity risk.

Manages risk of loss of liquidity, understood as the ability to pay financial liabilities on time and to obtain financing for operations

In 2020, a significant factor affecting the exposure to the risk was the general uncertainty in financial markets and the risk of recession in global markets in connection with the COVID-19 pandemic.

 This risk is actively managed in the Parent Entity in accordance with the updated Financial Liquidity Management Policy.

From the point of view of the Group, one material effect of the coronavirus epidemic in 2020 was its impact on the risk of liquidity loss linked to the variation of metal prices and stock market indices. Information on the impact of COVID-19 on the activity of the Company and the Group is described in detail in Section 6.6 of the Management Board’s Report on activities.

More on the liquidity risk in section 12.3 Market, credit and liquidity risk of the Management Board’s Report on activities of KGHM Polska Miedź S.A.
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Category – External risks
(KGHM Group)

Risk of reduced production due to seismic tremors and associated roof collapses or destressings of the rock mass, and the occurrence of uncontrolled rock bursts.

The KGHM Group is exposed to the risk of natural hazards and force majeure and related insufficient geological knowledge of the rockmass. Key risk factors which affect the materialisation of such risk also involves the results of periodic analyses of the mining situation and the state of hazard and applied measurement methods. Natural hazards associated with the underground mining of copper ore deposits, in particular hazards related to mining tremors and their potential effects in the form of rock bursts and roof collapses. These factors affect safety, as their occurrence can lead to serious or even fatal injuries as well as damage to underground machinery, equipment and infrastructure, along with production downtimes resulting in reduced production.

 Actions aimed at preventing rock bursts and roof collapses, such as systematic seismological observations, on-going assessment of the rock mass and the marking off of areas of particular threat of roof collapse. Use of active methods of preventing rock bursts and roof collapses based on provoking dynamic events through mass blasting of mining faces and through blasting to release stress in the orebody or its roof. Preparation of reserve fields in the orebody which could handle limited production.
(Parent Entity)

Risk of reduced production or slower progress of preparatory work as a result of gas-related geodynamic hazards and naturally occurring gases.

KGHM is exposed to the specific risk of natural hazards and force majeure (gas-related geodynamic hazards and the occurrence of naturally-occurring hazardous gases) leading to restrictions in realising production plans and the advance of preparatory work. These factors affect safety, as their occurrence can lead to serious or even fatal injuries as well as damage to underground machinery, equipment and infrastructure, along with production downtimes resulting in reduced production.

 The risk of gas hazards occurring is being assessed and principles are being developed for working under the risk of such hazards. Individual employee safety measures are applied as well as equipment and means for reducing concentrations of hydrogen sulphides and neutralising oppressive odours. Preparation of reserve fields in the orebody which could handle limited production
(Parent Entity)

Risk of reduced production due to unfavourable climate conditions in mines.

KGHM is exposed to a specific risk related to the underground climate, limiting activities or increasing costs, involving geological conditions, the temperature of the air sent into the mines and underground mining conditions.

 The use of solutions to counteract underground climate risk using neutral means (e.g. the use of short airways and directing air from the lowest temperature rockmass, high-speed air) and through the use of central, workplace and personal air conditioning. Ongoing monitoring of the microclimate parameters and introduction of remote control and visualisation and surveillance systems (CCTV cameras) in workplaces with particularly adverse climate parameters. Reduction of external and internal losses and relative humidity and increase in airing intensity. The use of shortened working time
(Parent Entity)

Risk of losing functionality of mining areas as a result of underground water hazards

KGHM is exposed to the risk of natural hazards and force majeure in the form of underground water hazards resulting from breakdowns of the main drainage equipment, human error (actions contrary to the project or technology) or mistaken geological conclusions.

 Research into hydrogeological conditions and water hazards, measuring water inflow to the mines, conducting mining operations pursuant with technology for the safe conduct of mining operations in underground mines. Systematic control of mining areas threatened by water inflow, control of water flow pathways and dams according to a set schedule. Review and updating of the Rescue Plan in case of water inflow. Development of regional pumps and the piping system, construction of water dams aimed at restricting water inflow, drilling exploratory holes to stabilise uncontrolled water inflow. In order to minimize the risk of uncontrolled inflow of water underground, the Group implements the project entitled “Construction of the main drainage system in the area of the SW-4 shaft”, which ultimately should increase the capacity of draining the mine.
(KGHM Group)

Risk of failure to uphold air quality standards (including with respect to arsenic).

The KGHM Group is exposed to the risk of negative impact on various components of the natural environment resulting from the mining of copper ore, followed by its processing at all stages of the production process, which could lead to the breaching of permissible emissions limits.

 Undertaking actions under the Air Protection Programs and R&D work. Execution of the Program to adapt the technological installations of KGHM to the requirements of BAT Conclusions for the non-ferrous metals industry and to restrict emissions of arsenic (BATAs)
(Parent Entity)

Risk of restrictions to the ability to sell sulphuric acid (due to loss of market/customers and/or a drop in demand, also due to the COVID-19 pandemic).

Risk related to macro- and microeconomic factors involving political actions which result in privileges for a specific group of producers or the introduction of additional fees/legal restrictions. Risk related to unfavourable prices (volatility to the disadvantage of KGHM), high requirements in terms of market parameters for selling sulphuric acid and lower demand for the product on international markets, including as a result of the deterioration in the financial condition of a key customer.

In 2020, a significant factor affecting the exposure to risk was the situation on the fertilizer market in connection with the COVID-19 pandemic.

 Increase the number of internal storage facilities at the metallurgical plants as well as of warehouses in the port in Szczecin. Search for new sales markets. Long term contracts. Payments to customers and incur transport costs. Search for alternative ways to manage the acid and utilise it in the Concentrators. In 2020, ongoing actions were taken to address the fertilizer market situation as a result of the COVID-19 pandemic, i.e., slowed shipments and high inventory levels of raw materials and fertilizers by contractors.
(KGHM Group) 

Risks associated with disruptions in the supply of strategic materials and components affecting the continuity of the Core Production Business (also as a result of the COVID-19 pandemic)

The KGHM Group is exposed to the risk of disruptions in the management of the supply chain resulting mainly from external factors causing an increase in the sensitivity of the supply chain. These factors include, but are not limited to, unpredictable variations in supply and demand (including those that may result from customer expectations for products, whose production process does not contribute to climate change), changes in supplier bases, technological changes, changing buffers in inventory and lead times, dependence on suppliers, as well as logistical disruptions, force majeure (supply chain disruptions and logistical disruptions in deliveries as a result of more frequent extreme weather events on land and sea as a result of climate change) and fluctuations in currency exchange rates and metal prices.

In 2020, a significant factor affecting the exposure to the risk was the general uncertainty in financial markets and the risk of recession in global markets in connection with the COVID-19 pandemic.

 Constant contact with suppliers is maintained to enable a quick reaction to delays through the supplier and supply direction diversification strategy employed in the KGHM Group and application of alternative solutions, e.g. substitutes, changes in production/assembly schedules. Moreover, a business continuity plan has been developed for the KGHM Group in the event that production is limited, halted, or it is temporarily put on standby. An ongoing monitoring of suppliers and inventories is performed. In connection with the COVID-19 pandemic, regular measures are taken to eliminate the rare instances of delays on the side of suppliers due to unavailability of components, logistics limitations or delays at the side of the manufacturers of materials and machinery or parts.
(KGHM Group) 

Risk of failure to adhere to established principles and standards of conduct with respect to counteracting corruption, business ethics and with respect to the procurement process as well as the risk of incurring losses from actions which are harmful to KGHM.

The KGHM Group is exposed to the risk of actions which are harmful to KGHM taken by external entities participating in the processes of procurement, sales and investment. Threats are in the form of potential losses by the KGHM Group resulting from the intentional actions of external entities, e.g. collusion over minimum pricing, the insufficient technical and economic potential of contractors, falsification of documentation, fictional contractors, conflicts of interest. Other important risk factors include threats as regards all types of improprieties related to breaching anti-corruption and ethical standards by employees of the KGHM Group (such as corruption, conflicts of interest, abuse, discrimination, illegality, nepotism).

 Implementation of the Code of Ethics of the KGHM Polska Miedź S.A. Group as the main tool in the corporate culture of the KGHM Group, and other appropriate policies and procedures ensuring the efficiency of implemented principles and values. Meeting global corporate governance standards and increased stakeholder expectations, including above all those of customers and financial institutions. Application under the Responsible Supply Chain Policy of guarantees of the selection of responsible suppliers, especially in the case of acquiring so-called conflict minerals and ensuring that the goods and services acquired by the KGHM Group will not be used to finance terrorism, and that they will be manufactured or provided while respecting human rights, labour standards, environmental protection and counteracting corruption. Proactive monitoring and analysis of procurement processes in terms of identifying abuse and threats of corruption within the organisation and the supply chain, as well as undertaking actions with respect to ethics and counteracting corruption along with the implementation of corrective actions. Internal control with respect to the identification and uncovering of fraud, abuse and corruption in KGHM Group entities and the prevention of such based on the Internal Control Procedure in order to eliminate risk at the level of prevention. Compliance management as part of a comprehensive compliance management system.
(KGHM Group)

Risk of non-compliance with the requirements (general law, internal corporate regulations and voluntarily adopted legal obligations and standards)

The KGHM Group operates in unstable regulatory environments in many jurisdictions. A consequence of the need for technological and organisational adaptation to a volatile legal environment (including environmental requirements) may be higher operating costs or restriction of such activities. The risk of interruptions to operations or the need to reorganize work due to new legislation may have a substantial impact on the operations of the KGHM Group (such as the risk of transitioning to the low-carbon economy, circular economy).

 Active cooperation with the academic environment, which issues opinions on changes to legal acts, and the on-going providing of positions and opinions with respect to numerous areas subject to legislative change (including as part of membership of national and international organisations). Cooperation with renowned law firms and the creation of specialised organisational units which monitor the regulatory environment. Taking preventive actions aimed at adapting to organisational, infrastructural and technological changes. In order to standardize the approach to ensuring compliance defined as observance of the requirements arising from the applicable legal (external and internal) regulations or voluntarily assumed legal obligations and standards (including ethical standards), the Management Board of KGHM Polska Miedź S.A. adopted the Compliance Management Policy in the KGHM Polska Miedź S.A. Group and the Compliance Management Procedure and Methodology in KGHM Polska Miedź S.A. in 2020. A consistent compliance system in the KGHM Polska Miedź S.A. Group is an element of effective management as part of corporate governance through e.g. a more efficient response and readiness for regulatory changes, care for reputation and ethical culture building in the organisation as well as awareness raising and enhancement of the sense of responsibility for compliance among employees.
(KGHM Group)

Risk of climate change related to the negative impact of climate change on the KGHM Group’s activity.

The KGHM Group is exposed to climate risk related to the adverse impact on the enterprise. The risk exposure is associated with factors arising from certain events, in particular ones related to extreme weather events, such as storms, floods, fires or heat waves, which may disrupt the value chain, continuity of the Core Production Business. The risk is associated with the changes in the conditions of running business activity due to environmental or climate changes.

Commencement of work to prepare a climate policy which will be a systemic solution for implementing the Communication of the European Commission being Guidelines on non-financial reporting: Supplement on reporting climate-related information (2019/C 209/01), including an Annex on the Task Force on Climate-related Financial Disclosures (TCFD), in the part applicable to the Metals and Mining sector. It will also include medium-term (2030) and long-term (2050) quantitative goals aimed at minimizing activities in regions exposed to a long-term or severe physical risk. Driving systemic solutions that take a forward-looking approach to environmental sustainability in line with the Regulations of the European Parliament and of the Council (EU) on establishing a framework to facilitate sustainable investment and on sustainability-related disclosures in the financial services sector (2020/852, 2019/2088)

The KGHM Group Strategy takes into account the global trends that define the environmental challenges. Efficient risk management system encompassing also climate risk management allowing for risk categorisation, identification, assessment and management as well as plans for its mitigation.
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Category – Internal risks
(KGHM Group)

The risk of serious accidents or industrial illnesses caused by improper workplace organisation, the failure to follow procedures or the use of improper protective measures.

The failure to adhere to occupational health and safety rules and procedures, as well as the employment of persons lacking an appropriate psychophysical predisposition, could be a source of potential accidents. Exposure to unfavourable natural conditions together with associated natural hazards requires, apart from essential professional preparation, that employees possess appropriate qualifications in terms of health, physical ability and psychological fitness. Risk is also associated with the possibility of temporary production stoppages caused by serious accidents, which could potentially affect the operations of the KGHM Group financially, legally and image-wise. The KGHM Group is also exposed to the risk of industrial illnesses as a consequence of the effect of the working environment on people. Enhanced exposure to risk is also related to external factors in terms of sub-contractors and their safety culture.

 A detailed division of obligations between management and supervisory staff on the one hand and entities providing services to the Company on the other, to ensure safe working conditions and the proper coordination of work. Systematic discussion of workplace safety with the participation of representatives of sub-contractors and mining oversight authorities. Engaging employees and sub-contractors in campaigns carried out in the KGHM Group aimed at improving OHS standards. Advancement of development initiatives based on the idea of sustainable development and safety and enhancing the Group’s image as being socially responsible under the current Strategy. Actions performed in the self-improvement cycle in order to continuously seek and prepare for implementation the catalogue of initiatives aimed at further improvement of OHS, to advance the long-term goal of the Company, “Zero accidents due to human and technical errors”. Optimisation of health care for employees, in particular following workplace accidents and systematic searching for new organisational and technical initiatives to enable the achievement of a higher level of safety of employees in the Divisions of KGHM Polska Miedź S.A.  The Group regularly identifies threats and evaluates professional risk, including the risks linked to the SARS-CoV-2 virus pandemic.
(KGHM Group)

Risk of lack of acceptance by the public, local governments or other stakeholders for the conduct of development and exploration work.

The KGHM Group is exposed to the risk of exposure to external factors involving the environment in which it operates and consequently, exposure to changes in the image of the organisation and its products or services. Risk of ineffective management of relations with stakeholders, which affects the willingness of the environment and the taking of actions towards the KGHM Group. In extreme cases, the materialisation of this risk may lead to the blocking of development plans. Risk associated with raised expectations and awareness of stakeholders as regards climate and environmental issues, which could lead to increased operating and investment costs and, in extreme cases, to limitation of the business activity. The changing consumer requirements involve also a focus on the production method rather than merely the quality and price of the final good.

 Advancement of CSR Strategy and close cooperation with government bodies. Meetings and negotiations with stakeholders, informational campaigns, conferences, publications.  Cooperation with academic and trade institutions and authorities in order to meet the highest standards of communication and PR management. Care and due diligence in identification of expectations and requirements of the external stakeholders concerning the climate and environmental issues. Establishment of trade and business relationships with entities that declare care about environmental protection and comply with the regulations applicable in this regard.
(KGHM Group)

Risk of not being able to secure appropriate staff to achieve the Group’s business goals (including lack of sufficient HR resources to maintain continuity of operations of the Core Production business because of the COVID-19 pandemic)

The risk of not being able to acquire and keep human resources, among others to support on-going operations and development projects. The KGHM Group is exposed to risk related to the availability of qualified staff in the market as well as on-going identification of staffing needs in terms of required qualifications and supplying them while reflecting staffing fluctuations. Of significance is access to qualified employees in the future in the context of an ageing society and a market deficit of certain professions.

In 2020, the COVID-19 pandemic and its effect on the availability of, in particular, the key employees needed to maintain the continuity of operations of the Core Production Business.

 Advancing a variety of HR projects, identification of potential successors for key positions (including in terms of mobility) and preparations for advancement. On-going comparison of remuneration packages (including in relation to working conditions) to offers on the market. Cooperation with schools and universities to promote the company as an employer and to ensure qualified employees. Implementation of programs to develop employee skills and to secure funds for this purpose. Development of recruiting tools and the identification of key skills to advance the company’s business goals.

In 2020, after the first reports about the coronavirus, the solutions already in place in the KGHM Group were analysed and assessed in terms of ensuring employee safety and additional solutions were introduced to mitigate the risk of virus transmission among the staff. The analysis covered, among others, maintenance of the continuity of processes associated with the Core Production Business. Additionally, the procedure in case of the necessity to limit or discontinue the production was developed, assumptions for new work systems enabling contact between individual shifts were made, employees/specialists required for ensuring the continuity of the processes were identified and their potential replacements were designated. Limitations on direct contact and rules of keeping distance between employees were introduced and procedures of conduct in case of detecting SARS CoV-2 infections among employees were implemented in accordance with the guidelines of the competent government institutions. The solutions already implemented in the KGHM Group are regularly analysed and assessed in terms of ensuring employee safety and additional solutions are continually introduced to mitigate the risk of virus transmission among the staff.
(KGHM Group)   

Risk that the confidentiality, integrity, availability or authenticity of informational assets which have been collected, stored or processed on IT resources may be compromised, as well as cybernetic threats.

The KGHM Group, due to its well-developed IT structure, is exposed to the risk of a breach in the confidentiality, integrity, authenticity or availability of informational assets which have been collected, stored or processed on IT resources. The sources of this risk are both forces of nature (e.g. fires, construction catastrophes, downpours) as well as hazards arising from human activities (intentional or not). The KGHM Group is exposed to the risk of an unauthorised loss, change or destruction of critical data and information as well as loss of the possibility of the operational control of equipment and systems as a result of cybernetic attacks on the infrastructure of the KGHM Group. Such incidents could generate the risk of production shutdowns, leading to production and financial losses and claims due to the loss/disclosure of personal data. This risk has a large impact on the loss of reputation of the KGHM Group.

 Strict adherence to and application of principles arising among others from the IT Security Policy and from Facility Protection Plans. The systematic evaluation of risk loss of the confidentiality, integrity, authenticity or availability of informational assets which have been collected, stored or processed on IT resources. On-going monitoring of the usefulness of existing infrastructure as well as the analysis of and planning for the implementation of ICT solutions to increase security, in accordance with global trends and best practice in this regard. Implementation of security systems and adequate organisational solutions at various levels of the company’s infrastructure, aimed at staying ahead of any decrease in the utility of systems at risk and minimising the potential losses of the KGHM Group.
(KGHM Group)

The risk of exceeding project/program budgets and schedules, deviating from defined scopes and failing to meet defined quality parameters as a result of the improper management of portfolios and projects. Risk related to the operational management and development of key mining projects, reflecting the question of incurred costs, permits and infrastructural requirements.

The KGHM Group is exposed to risk related to the advancement of projects and programs as a result of their improper management. The risk of changes in budgets, schedule, scope and deviations from the expected quality of project products and/or programs is related to a variety of factors of an internal nature involving both the methodical approach and the projected structure of management and supervision. Improperly selected tools and techniques, lack of established criteria and principles for evaluating projects, or inconsistency in their application or adherence to them may restrict or prevent the achievement of the KGHM Group’s strategic goals. In terms of external factors, there remains the question of meeting legal and formal requirements which could generate deviations from the assumed schedule, and in extreme instances may halt the advancement of a project/program.

 Improve standards in the management of portfolios and projects and implement a projects management system aimed at supporting the organisation in the planning and management of portfolios and projects. Standardisation of planning and preparation processes and in the advancement of investment projects, comprising such aspects as scheduling, preparing costs projections, technical designing, project review, investment handover documentation, risk analysis of projects/programs. Management of projects in accordance with international standards and conducting on-going monitoring of progress. On-going evaluation of the economic feasibility of existing and anticipated development projects.

Market, credit and liquidity risks

The goal of market, credit and liquidity risk management in the KGHM Polska Miedź S.A. Group is to restrict the undesired impact of financial factors on cash flow and results in the short and medium terms and to enhance the Group’s value over the long term. Risk management includes both the elements of risk identification and measurement as well as its restriction to an acceptable level. The process of risk management is supported by an appropriate policy, organisational structure and procedures. In the Parent Entity these issues are covered in the following documents:

  • Market Risk Management Policy and the Rules of the Market Risk Committee
  • Credit Risk Management Policy and the Rules of the Credit Risk Committee
  • Financial Liquidity Management Policy and the Rules of the Financial Liquidity Committee

The “Market Risk Management Policy in the KGHM Polska Miedź S.A. Group” covers selected mining companies in the Group (KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD., FNX Mining Company Inc., Robinson Nevada Mining Company, KGHM AJAX MINING Inc. and Sociedad Contractual Minera Franke).

Financial liquidity management is carried out in accordance with the “Financial Liquidity Management Policy in the KGHM Group” which in a comprehensive manner regulates financial liquidity management in the Group carried out by individual Group companies, while its organisation and coordination as well as the supervision thereof is performed in the Parent Entity.

Credit risk management in the Parent Entity is carried out in accordance with the Management Board-approved Credit Risk Management Policy. The Parent Entity serves as an advisor to the Group’s companies with respect to managing credit risk. The “Credit Risk Management Policy in the KGHM Polska Miedź S.A. Group” applies to selected Group companies and its goal is to introduce a comprehensive, joint approach and the most important elements of the credit risk management process.

Market risk management

Market risk is understood as the possible negative impact on the Group’s results arising from changes in the market prices of commodities, exchange rates and interest rates, as well as from changes in the value of debt securities and share prices of listed companies.

In terms of market risk management (in particular the risk of changes in metals prices and exchange rates) of greatest significance and impact on the results of the Group are the scale and nature of the activities of the Parent Entity and the mining companies of KGHM INTERNATIONAL LTD.

The Parent Entity actively manages market risk, undertaking actions and decisions in this regard within the context of the global exposure throughout the KGHM Polska Miedź S.A. Group.

The Management Board is responsible for market risk management in the Parent Entity and for adherence to policy in this regard. The main body involved in performing market risk management is the Market Risk Committee, which makes recommendations to the Management Board in this area.

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Commodity risk, currency risk

In 2020, the Group was mainly exposed to the risk of the changes in the prices of metals it sells: copper and silver. Of major significance for the Parent Entity was the risk of changes in currency rates, in particular the USD/PLN exchange rate. The Group’s companies are additionally exposed to the risk of volatility in the prices of other metals. Market risk related to changes in metals prices arises from the formula for setting prices in physical metals sales contracts, which are usually based on the average monthly market prices for the relevant future month.

In accordance with the Market Risk Management Policy, in 2020 the Parent Entity continuously identified and measured market risk related to changes in metals prices, exchange rates and interest rates (analysis of the impact of market risk factors on the Parent Entity’s activities – profit or loss, statement of financial position, statement of cash flows), and also analysed the metals, currency and interest rates markets. These analyses, along with assessment of the internal situation of the Parent Entity and Group, represented the basis for taking decisions on the application of hedging strategies on the metals, currency and interest rates markets.

As part of implementation of the strategic plan hedging the Parent Entity against market risk in 2020, hedging strategies in the copper and silver markets were implemented. In the copper market, seagull hedging strategies were implemented and put options were purchased to hedge future sales revenues for 2021-2023 for the total nominal volume of 402 thousand tonnes. The main aim of the implemented strategies in the copper market was to secure the Company’s revenues in 2021 against the negative pricing scenario, as a result of the economic crisis caused by the pandemic. In the silver market, seagull option structures were implemented to hedge sales revenues for 2021-2023 for the nominal volume of 24.6 million ounces. In addition, in 2020, the Parent Entity managed its opened hedging position, restructuring option structures in the copper market.

As part of strategic management of currency risk, in 2020 the Parent Entity implemented option structures to hedge against the USD/PLN exchange rate fluctuations in 2022-2023 for the total nominal value of USD 720 million. Seagull option structures were purchased. In addition, in 2020, the Parent Entity managed its opened hedging position, restructuring option structures in the currency market.

As at 31 December 2020, the Parent Entity had also open CIRS (Cross Currency Interest Rate Swap) transactions for the notional amount of PLN 2 billion, hedging against market risk related to the issue of bonds in PLN with a variable interest rate. Debt due to bonds denominated in PLN generate currency risk due to the fact that most of the Parent Entity’s sales revenue is denominated in USD.

In terms of managing currency risk, the Parent Entity applies natural hedging by borrowing in currencies in which it has revenues. The value of bank and investment loans as at 31 December 2020 drawn in USD, following their translation into PLN, amounted to PLN 4,321 million (as at 31 December 2019: PLN 4,980 million).

In 2020 none of the Group’s mining subsidiaries implemented forward transactions in the metal and currency markets or had any open positions as at 31 December 2020. The commodity risk pertained to derivative instruments embedded in long-term sulphuric acid and water supply contracts and derivative instruments embedded in purchased material purchase contracts.

Some of the Group’s Polish companies managed the currency risk related to their core businesses by opening derivative transactions on the EUR/PLN and USD/PLN markets.
Interest rate risk

Interest rate risk is the possibility of the negative impact of changes in interest rates on the Group’s position and results. In 2020, the Group was exposed to such risk due to loans granted, free cash invested on deposits, the reverse factoring program and borrowings.

As at 31 December 2020, the following positions were exposed to interest rate risk by impacting the amount of interest income and costs:

  • PLN 2,924 million, including the deposits of special purpose funds: the Mine Closure Fund and the Tailings Storage Facility Restoration Fund,
  • borrowings: PLN 3,431 million,
  • trade and similar payables: PLN 1,264 million.

As at 31 December 2020, the following positions were exposed to interest rate risk due to changes in the fair value of instruments with fixed interest rates:

  • receivables due to loans granted by the Group: PLN 18 million,
  • borrowings: PLN 3,904 million.

As at 31 December 2020, the Parent Entity had open CIRS (Cross Currency Interest Rate Swap) transactions for the notional amount of PLN 2 billion, hedging against market risk related to the issue of bonds in PLN with a variable interest rate.
Price risk related to the change in share prices of listed companies Price risk related to the shares of listed companies held by the Group is understood as the change in their fair value due to changes in their quoted share prices.

As at 31 December 2020, the carrying amount of shares of companies which were listed on the Warsaw Stock Exchange and on the TSX Venture Exchange amounted to PLN 523 million.
Result on derivatives and hedging transactions The total impact of derivatives and hedging instruments (transactions on the copper, silver, currency and interest rate markets as well as embedded derivatives and USD-denominated loans designated as a hedge against a change in the exchange rate) on the Group’s profit or loss for 2020 amounted to PLN 79 million, of which:
  • PLN 323 million adjusted revenues from contracts with customers,
  • PLN 219 million decreased the result on other operating activities,
  • PLN 25 million decreased the result on financing activities.

Moreover, in 2020 other comprehensive income decreased by PLN 1,050 million (impact of hedging instruments).

As at 31 December 2020, the fair value of open positions in derivatives of the Group (on the metals, currency and interest rate markets and in embedded derivatives) amounted to PLN -695 million.

Credit risk management

Credit risk is defined as the risk that counterparties will not be able to meet their contractual liabilities.

The Management Board is responsible for credit risk management in the Parent Entity and for compliance with policy in this regard. The main body involved in actions in this area is the Credit Risk Committee.

In 2020, the KGHM Polska Miedź S.A. Group was exposed to this risk, mainly in four areas:

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Credit risk related to trade receivables

The Group’s companies have been cooperating for many years with a large number of customers, which affects the geographical diversification of trade receivables.

The Parent Entity limits its exposure to credit risk related to trade receivables by evaluating and monitoring the financial standing of its customers, setting credit limits, using debtor security and non-recourse factoring. An inseparable element of the credit risk management process realised by the Parent Entity is the on-going monitoring of receivables and the internal reporting system.

Buyer’s credit is only provided to proven, long-term customers. In the case of new customers, an effort is made to ensure that sales are based on prepayments or trade financing instruments which wholly transfer the credit risk to financial institutions.

In 2020, the Parent Entity secured its receivables by promissory notes, registered pledges, bank guarantees, corporate guarantees, mortgages and documentary collection. Moreover, the majority of customers who hold buyer’s credit on contracts have ownership rights confirmed by a date certain.

To reduce the risk of insolvency by its customers, the Parent Entity has a receivables insurance contract, which covers receivables from entities with buyer’s credit which have not provided strong collateral or have provided collateral which does not cover the total amount of the receivables. Taking into account the collateral held and the credit limits received from the insurance company, as at 31 December 2020 the Parent Entity had secured 75% of its trade receivables (as at 31 December 2019: 64%).

The concentration of credit risk in the Group is related to the terms of payment granted to key clients. Consequently, as at 31 December 2020 the balance of receivables from 7 of the Group’s largest clients, in terms of trade receivables at the end of the reporting period, represented 42% of the trade receivables balance (as at 31 December 2019: 29%). Despite the concentration of this type of risk, it is considered that due to the availability of historical data and the many years of experience cooperating with clients, as well as above all due to the security used, the level of credit risk is low.
Credit risk related to cash and cash equivalents and bank deposits The Group allocates periodically free cash in accordance with the requirements to maintain financial liquidity and limit risk and in order to protect capital and maximise interest income.

Credit risk related to deposit transactions is continuously monitored by the on-going review of the credit ratings of those financial institutions with which the Group cooperates, and by limitation of the level of concentration in individual institutions. As at 31 December 2020, the maximum share of a single entity in terms of credit risk arising from financial institutions in which the Group has deposited funds amounted to 25% (as at 31 December 2019: 19%)
Credit risk related to derivatives transactions All of the entities with which the Group enters into derivative transactions (with the exception of embedded derivatives) operate in the financial sector. These are mainly financial institutions, with a medium-high rating. According to fair value as at 31 December 2020, the maximum share of a single entity with respect to credit risk arising from open derivative transactions entered into by the Group and receivables and liabilities from settled derivatives amounted to 36% (31 December 2019: 15%). Due to diversification of risk in terms both of the nature of individual entities and of their geographical location, as well as taking into consideration the fair value of assets and liabilities arising from derivative transactions, the Group is not materially exposed to credit risk as a result of derivative transactions entered into.
Credit risk related to loans granted

As at 31 December 2020, the balance of loans granted by the Parent Entity amounted to PLN 7,648 million. The most important of these are long-term loans in the total amount of PLN 5,112 million granted to the company Future 1 and to the KGHM INTERNATIONAL LTD. Group. Detailed information on the loans granted by KGHM Polska Miedź S.A. is presented in the Financial Statements (Note 6.2).

As at 31 December 2020, the balance of loans granted by the Group amounted to PLN 6,087 million. The most important of these are long-term loans in the total amount of PLN 6,069 million, or USD 1,615 million, granted by the KGHM INTERNATIONAL LTD. Group for the financing of a mining joint venture in Chile.

Credit risk related to the loans granted to the joint venture Sierra Gorda S.C.M. is dependent on the risk related to mine project advancement and is determined by the Management Board of the Parent Entity as moderate.

Management of financial liquidity risk and of capital

The management of capital in the Group aims at securing funds for development and at securing relevant liquidity.

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Financial liquidity management Management of the Group’s liquidity is conducted in accordance with the Financial Liquidity Management Policy in the KGHM Group. This document describes the process of financial liquidity management in the Group, which is realised by the Group’s companies, while its organisation and coordination as well as the supervision thereof is performed in the Parent Entity.

The main principles resulting from this document are:

  • the need to ensure stable and effective financing for the Group’s operations,
  • constant monitoring of the Group’s level of debt, and
  • effective management of working capital.

Borrowing by the Group is based on the following pillars:

  • an unsecured, revolving syndicated credit facility, obtained by the Parent Entity in the amount of USD 1,500 million with a 5-year tenor with the option of extending for another 2 years (5+1+1). In 2020 the Parent Entity obtained the consent of the syndicate participants to extend the term of the agreement by 1 year, i.e. till 19 December 2025. The limit of available financing during the extension period will amount to USD 1,438 million,
  • two investment loans granted to the Parent Entity by the European Investment Bank in the amount of PLN 2,000 million and PLN 900 million with financing periods of 12 years from the date the instalments are drawn,
  • bilateral bank loans to the amount of PLN 2,379 million, supporting both the management of liquidity of companies, for the financing of working capital as well as of investments,
  • the bond issue program of the Parent Entity on the Polish market, based on an issue agreement dated 27 May 2019. The first issue of bonds with a nominal value of PLN 2,000 million took place on 27 June 2019, under which 5-year bonds were issued in the amount of PLN 400 million and 10-year bonds in the amount of PLN 1,600 million.

Detailed information regarding available sources of financing and their utilisation in 2020 may be found in Section 6.6 of this Report.

The aforementioned sources of financing fully cover the liquidity needs of the Group. During 2020, the Group made use of borrowing which was available from all of the above categories, while liabilities of the Group due to bank and other loans drawn and to bonds issued as at 31 December 2020 amounted to PLN 6,679 million.
Management of capital

In order to maintain the ability to operate, taking into consideration the execution of planned investments, the Group manages capital so as to be able to generate returns for shareholders and provide benefits for other stakeholders.

The Group aims to maintain the equity ratio, in the long-term, at a level of not less than 0.5, and the ratio of Net Debt/EBITDA at a level of up to 2.0.
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