in PLN millions, unless otherwise stated
The greatest impact on the operations and results of the KGHM Polska Miedź S.A. Group is from the Parent Entity and, to a lesser extent, the KGHM INTERNATIONAL LTD. Group.
The most significant negative risk factors related to the COVID-19 pandemic and impacting the Company’s and the Group’s activities are:
Evaluation of the key categories of risk which are impacted by the coronavirus pandemic underwent detailed analysis by the on-going monitoring of selected information in the areas of production, sales, supply chains, personnel management and finance, in order to support the process of reviewing the current financial and operating situation of the KGHM Polska Miedź S.A. Group. As a result, only some of the aforementioned risk factors had a negative impact on the Group’s operations, and at that only in the first half of the year, as there was a significant improvement in subsequent months with the result being that in the end there were no substantial deviations from the achievement of the budget targets for 2020 in any of the operating segments of the KGHM Polska Miedź S.A. Group, with the exception of companies operating in the spa and hotel sector.
From the Group’s point of view, an important impact of the coronavirus pandemic was its effect on market risk related to volatility in metals and share prices in 2020. The Company’s share price at the end of 2020 was 91% higher compared to the price at the end of 2019 and 101% higher compared to the price at the end of the first half of 2020, and at the close of trading on 30 December 2020 amounted to PLN 183.00. During these same periods the WIG and WIG20 indices fell respectively by 1% and 8% (compared to the end of 2019) and rose by 15% and 13% (compared to the end of the first half of 2020). As a result of these changes in the share price, the Company’s capitalisation increased from PLN 19.20 billion at the end of 2019 to PLN 36.60 billion at the end of 2020, meaning a level 77% higher than the net value of assets.
Starting from the second quarter of 2020 there was an improvement in the metals market, reflected in an increase in the price of copper by 26%, from 4 797 USD/t at the end of the first quarter of 2020 to 6 038 USD/t at the end of the second quarter of 2020, along with an increase by 28% in the second half of 2020 to 7 742 USD/t at the end of 2020.
The greatest impact of the COVID-19 pandemic was on the Group’s secondary activities involving the hotel and spa services of the companies Uzdrowiska Kłodzkie S.A. – Grupa PGU, Uzdrowisko Połczyn Grupa PGU S.A., Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU, Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU, INTERFERIE S.A. and Interferie Medical SPA Sp. z o.o. In 2020 there occurred substantial interruptions to the daily operations of these companies, caused by the forced lockdown and the restrictions imposed on their activities by Decrees of the Minister of Health. As a result, decisions were made to temporarily close certain facilities. These companies were required to temporarily close twice: in the spring (March – May / June) and in the winter (from November). The activities of these spa and hotel companies were also affected by the introduction of other regulations, such as those affecting the ability of employees to work, or adding selected facilities of the spa companies to the list of facilities designated to serve as quarantine facilities.
Restrictions related to COVID-19 caused lower revenues in 2020 in spa companies of approx. 37%, and in hotel companies of 45%, compared to revenues for 2019, and in comparison to planned revenues respectively at the level of 41% and 43%. This represented indications for the performance of impairment testing on the non-current assets of these companies and the recognition of impairment losses on these assets. The detailed results of the tests are presented in Part 3 of these consolidated financial statements.
Moreover, it should be noted that the recorded decrease in revenues, and therefore the decrease in operating profit, resulted in a breaching by the spa companies of the commitment (arising from signed bank loan agreements) to maintain a DSCR ratio (Debt Service Coverage Ratio) at the level of not less than 1.2 as at the end of 2020. The spa companies obtained statements from the creditors that, because of the situation, they will temporarily not impose the sanctions stipulated in the bank loan agreements. Due to the extension of the restrictions and the ban on conducting operations for 2021, it is planned that these declarations will also be extended for subsequent periods.
In the second quarter of 2021 it is expected that there will be a gradual return to the conduct of activities, the providing of services and the generation of revenues as was the case prior to the crisis. Despite the ongoing state of pandemic, the spa and hotel facilities are fully prepared to provide services and welcome customers and spa guests under a comprehensive sanitary regime. Additionally, COVID-19 vaccination points have been set up on the grounds of selected spa facilities.
The spa and hotel companies of KGHM Polska Miedź S.A. have also joined the Polski Bon Turystyczny (Polish Tourist Voucher) program and have submitted applications to the Polski Fundusz Rozwoju (Polish Development Fund, PDF) for financing under the Anti–Crisis Shield, and as the result of which:
The financing received from the aforementioned programs amounted to PLN 19 million in 2020.
With regard to other domestic companies of the KGHM Polska Miedź S.A. Group, the pandemic situation in 2020 did not have a significant impact on the operating results generated by these entities.
The pandemic situation caused by COVID-19 did not have a significant impact on the Company’s and the Group’s operations, and at the date of publication of this report the Management Board of the Parent Entity estimates the risk of loss of going concern caused by COVID-19 as low. Individual, immaterial interruptions to the continuity of the supply chain for materials and services have been observed, caused by logistical restrictions in international markets. The situation on the market for copper scrap in the second half of 2020 compared to the first half of 2020 was significantly better, and consequently the volume of deliveries satisfied the production needs of the Parent Entity. Regular contact with suppliers enables prompt reaction to delays by utilisation of the strategy of supplier diversification applied in the Group as well as the use of alternative solutions.
In KGHM Polska Miedź S.A. and as well as in all international mines of the KGHM Polska Miedź S.A. Group and Sierra Gorda S.C.M., thanks to the implementation of a variety of preventative measures, such as enforcing a sanitary regime and monitoring and testing the health of employees, there were no production stoppages, which would have been directly attributable to the pandemic. As a result, the Group’s copper production in 2020 was in line with the target set at the start of the year.
Moreover, for the KGHM Polska Miedź S.A. Group, a plan was prepared to maintain operational continuity in the case of production restrictions or stoppages, or a temporary shift to maintenance of operations. The Parent Entity also has complete documentation as required by the „Act on geology and mining” as well as executive decrees in this regard, respecting in particular maintaining mining operations.
In terms of sales the Parent Entity has a long term, stable base of customers with whom it is in constant contact. Most customers at the moment remain free of any highly negative impact of the pandemic on their operations, thanks to which sales liabilities towards the Parent Entity are regulated on time.
The Group is fully capable of meeting its financial obligations. The financial resources held by the Group and available borrowings guarantee the Group’s continued financial liquidity. Financing structure of the Group on the level of the Parent Entity based on the long-term and diversified sources of financing provided the Parent Entity and the Group with long-term financial stability through extending the weighted average maturity of KGHM Polska Miedź S.A.’s debt.
Due to the centralisation of the process of obtaining external financing for the needs of the entire Group, in order
to transfer liquidity within the Group, a debt instrument in the form of owners loans is used to support the investment process, and the Group uses local and international cash pooling to service its daily operations.
At present the Parent Entity is not aware of any significant risk of a breach in the financial covenants contained in loan agreements related to the COVID-19 pandemic.
The Group continues to advance its investment projects on time and is not aware of any increase in risk related to their continuation as a result of the coronavirus pandemic.
During the reported period there were likewise no interruptions in the continuity of the Group’s operations caused by infections of this virus amongst the employees. There continues to be a lack of any substantial heightened level of absenteeism amongst employees of the Parent Entity’s core business or domestic and international production assets related to the pandemic. Solutions aimed at ensuring employee safety are constantly being assessed along with ongoing evaluation of already-implemented solutions in the Group, while additional solutions are continuously being implemented to reduce the risk of spread of the virus amongst employees.
Due to the ongoing COVID-19 pandemic and its next wave in the first quarter of 2021, there still remains uncertainty as to the further development of the pandemic situation both domestically and abroad. An important factor for the domestic and global economies will be the program of vaccinations against COVID-19 using vaccines developed by several companies, and which are gradually being distributed for use in various countries. The availability of these vaccines, their effectiveness in relation to individual viral strains and the rate of vaccinations will have an impact among others on the possibility of lifting the restrictions imposed in various countries and sectors, reducing uncertainty as regards future periods and increasing activity amongst producers as well as consumers. Although the aforementioned factors may have an impact on the functioning of the Company and the Group in subsequent quarters, the Parent Entity continues to constantly monitor the global economic situation, in order to assess its potential negative impact on the KGHM Polska Miedź S.A. Group and to take actions to mitigate this impact.