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

6.1 Joint ventures accounted for using the equity method

in PLN millions, unless otherwise stated

The item “involvement in joint ventures” comprises investments in joint ventures accounted for using the equity method and loans granted to joint ventures.

The Group classifies as investments accounted for using the equity method interests in joint ventures which are joint contractual arrangements, in which the parties sharing control have the right to the net assets of a given entity. Joint control occurs when decisions on the relevant activities of joint ventures require the unanimous consent of the parties sharing control.

Investments are initially recognised at cost. The Group’s share in the profit or loss of entities accounted for using the equity method (assessed while taking into account the impact of measurements to fair value at the investment’s acquisition date) from the acquisition date is recognised in profit or loss, while its share in changes of accumulated other comprehensive income from the acquisition date is recognised in the relevant item of accumulated comprehensive income.

Unrealised gains and losses on transactions between the investor and the joint venture are eliminated in an amount proportional to the investor’s share in these profits/losses.

If there are any indications of a possibility of impairment, an investment is tested for impairment by calculating the recoverable amount in accordance with the accounting policies presented in Part 3.

Joint control

The Group classifies Sierra Gorda S.C.M. as a joint venture under IFRS 11, in which KGHM INTERNATIONAL LTD.’s share equals 55%. Classification of Sierra Gorda S.C.M. as a joint venture, despite the 55% share of the Group, was made based on analysis of the terms of the agreements between the parties and contractual stipulations which indicated joint control. Pursuant to the terms of the agreements, all relevant activities of Sierra Gorda S.C.M. require the unanimous consent of both owners. The Group and other owners have three members each in the appointed Owners Council.
The Owners Council makes strategic decisions and is responsible for overseeing their execution. Moreover, it approves the appointment of senior management. In the reporting period, there were no changes to provisions that were the basis of classifying the investment as a joint venture.

Pursuant to the Group’s judgment, loans granted to the joint venture Sierra Gorda S.C.M. do not meet the criteria of recognition as net investments in a joint venture, because the loan’s settlement is planned and probable in the foreseeable future.

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2020 2019
Sierra Gorda S.C.M. Other entities Total Sierra Gorda S.C.M. Other entities Total
As at 1 January – – – – 4 4
Acquisition of newly-issued shares 207 – 207 439 – 439
Share of losses of joint ventures accounted for using the equity method (including share of loss for the current year and unrecognised accumulated loss for prior years) (204) – (204) (434) (4) (438)
Exchange differences from the translation
of foreign operation statements with a functional currency other than PLN		 (3) – (3) (5) – (5)
As at 31 December – – – – – –

 

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from 1 January 2020
to 31 December 2020		 from 1 January 2019
to 31 December 2019
The Group’s share (55%) in net losses, of which: (125) (556)
recognised share of losses of joint ventures (125) (434)
unrecognised share of losses of joint ventures – (122)

 

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Unsettled losses from prior years

2020 2019
As at 1 January (4 988) (4 866)
The Group’s share in net losses not recognised in the share of losses of joint ventures – (122)
Settlement of the Group’s share of unsettled losses from prior years 79 –
As at 31 December (4 909) (4 988)

 

As at 31 December 2020, the KGHM Polska Miedź S.A. Group’s share in the unsettled accumulated losses of Sierra Gorda S.C.M amounted to PLN 4 909 million (as at 31 December 2019: PLN 4 988 million). The Group stopped recognising its share of losses of Sierra Gorda S.C.M. at the moment the value of this share exceeded the carrying amount of the interest in the investment in Sierra Gorda S.C.M. Recognition of the Group’s share of losses of Sierra Gorda S.C.M. caused the carrying amount of shares in Sierra Gorda S.C.M. to be equal to PLN 0. After reducing the share to zero, the Group performed an analysis as to whether there is a legal or customary obligation to pay on Sierra Gorda S.C.M.’s behalf, which would result in an obligation of the Group to recognise a liability for this reason. Moreover, the Group analysed the terms of guarantees granted to Sierra Gorda S.C.M. to secure the payments due to lease contracts entered into, payment guarantees with respect to working capital facilities which meet the definition of financial guarantees and letters of credit to secure the proper performance of a long-term contract for the supply of electricity, which does not meet the definition of a financial guarantee pursuant to IFRS 9. Details on the guarantees granted to Sierra Gorda S.C.M. are described in Note 8.6.

On the basis of conducted analyses, the Group does not identify the existence of a legal or customary obligation to pay on Sierra Gorda S.C.M.’s behalf, which is described in IAS 28.39.

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Information on entities accounted for using the equity method

Main place
of business		 % of share capital
held by the Group		 % of
voting power		 Value of the investment in
the consolidated statement
of financial position
Jointly controlled entities As at
31 December 2020		 As at
31 December 2019
Sierra Gorda S.C.M. Chile 55 50 – –
Other Poland 49 50 – –
Total – –

 

Condensed financial data of Sierra Gorda S.C.M. is presented in the table below

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As at
31 December 2020		 As at
31 December 2019
Non-current assets 15 532 15 459
Current assets, including: 2 106 1 188
Cash and cash equivalents 966 336
Non-current liabilities, including: 20 618 19 837
Borrowings and lease 543 857
Liabilities due to loans granted by jointly-controlling entities 18 985 17 965
Current liabilities, including: 3 441 3 438
Borrowings and lease 2 389 2 494
Carrying amount of net assets (incorporating the fair value measurement from date of obtaining joint control) (6 421) (6 628)
The Group’s share in net assets (55%) (3 532) (3 645)
Total unrecognised accumulated share of losses of Sierra Gorda S.C.M. 4 909 4 988
Balance of impairment loss on interest in Sierra Gorda S.C.M. (671) (671)
Exchange differences from the translation of changes of the investment in Sierra Gorda S.C.M. to the PLN presentation currency (706) (672)
Value of the investment in the consolidated statement of financial position – –

 

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from 1 January 2020
to 31 December 2020		 from 1 January 2019
to 31 December 2019
Revenues from contracts with customers 4 726 3 640
Depreciation/amortisation (1 462) ( 949)
Interest costs (1 355) (1 455)
Other incomes/(costs) (2 513) (2 533)
Loss before income tax ( 604) (1 297)
Income tax 376 284
Loss for the period ( 228) (1 013)
Exchange differences from the translation of Sierra Gorda S.C.M.’s net assets to the PLN presentation currency ( 38) 29
Total comprehensive income ( 266) ( 984)

 

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Other information on the Group’s involvement in the joint venture Sierra Gorda S.C.M.

As at
31 December 2020		 As at
31 December 2019
Group’s share in commitments (investment and operating) 3 810 2 582
Group’s share in the total amount of future lease gross payments due to lease agreements for mining equipment 542 609
[Note 8.6] Guarantees granted by the Group 1 814 2 046

 

As stated in the Common Security Agreement and share pledge agreements, as at 31 December 2020, 2 215 400 shares in Sierra Gorda S.C.M. held by the KGHM Polska Miedź S.A. Group (carrying amount of shares: PLN 0) were pledged as collateral to banks that granted an investment corporate bank loan to Sierra Gorda S.C.M. for the advancement of the Sierra Gorda project. The collateral will expire when the bank loan is fully repaid, which is expected to take place on 15 June 2021.

As at 31 December 2019, 2 215 400 shares were pledged as collateral (carrying amount: PLN 0).

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6.2 Loans granted to a joint venture (Sierra Gorda S.C.M.)

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