in PLN millions, unless otherwise stated
Regarding the risk of changes in foreign exchange rates within the KGHM Polska Miedź S.A. Group, the following types of exposures were identified:
- transaction exposure related to the volatility of cash flows in the base currency;
- exposure related to the volatility of selected items of the statement of financial position in the base (functional) currency;
- the exposure to net investments in foreign operations as concerns the volatility of consolidated equity in the Group’s base currency (presentation currency).
The transaction exposure to currency risk derives from cash flow-generating contracts, whose values expressed in the base (functional) currency depend on future levels of exchange rates of the foreign currencies with respect to the base currency. Cash flows exposed to currency risk may possess the following characteristics:
- denomination in the foreign currency – cash flows are settled in foreign currencies other than the functional currency; and
- indexation in the foreign currency – cash flows may be settled in the base currency, but the price (i.e. of a metal) is set in a different foreign currency.
The key source of exposure to currency risk in the Parent Entity’s business operations are the proceeds from sales of products (with respect to metals prices, processing and producer margins).
The exposure to currency risk also derives from items in the consolidated statement of financial position denominated in foreign currencies, which under the existing accounting regulations must be translated, upon settlement or periodic valuation, including the translation of foreign operations statements, by applying the current exchange rate of the foreign currencies versus the base (functional) currency. Changes in the carrying amounts of such items between valuation dates result in the volatility of profit or loss for the period or of other comprehensive income.
Items in the consolidated statement of financial position which are exposed to currency risk include in particular:
- trade receivables and trade payables related to purchases and sales denominated in foreign currencies;
- financial receivables due to loans granted in foreign currencies;
- financial liabilities due to borrowings in foreign currencies;
- cash and cash equivalents in foreign currencies; and
- derivatives on metals market.
As for the currency market, the notional amount of settled transactions hedging revenues from metals sales amounted to approx. 25% (in 2019: 21%) of the total revenues from sales of copper and silver realised by the Parent Entity in 2020.
As part of the realisation of the strategic plan to hedge the Company against market risk, in 2020 the Parent Entity implemented Seagull option structures hedging against a change in the USD/PLN exchange rate in years 2022-2023 with a total notional amount of USD 720 million.
Additionally, in 2020 the Parent Entity managed the open hedging position by restructuring option structures on the currency market1. Sold call options were redeemed with a strike price of USDPLN 4.25 from the collar options structure, with maturities from May to December 2020 in the total notional amount of USD 300 million. In terms of restructuration, seagull options structure with a total notional amount of USD 90 million and maturities from January 2022 to December 2023 were closed and at the same time sold call options with strike prices of USDPLN 4.30 and 4.40 in the total notional amount of USD 780 million and maturities from January 2021 to December 2021 were redeemed, which were earlier entered into as part of the seagull structures. Thereby these structures were transformed in the put spread structures. Hedging transactions covered by restructuration were excluded from hedge accounting as of the date the opposite restructuring transactions were entered into.
As a result, as at 31 December 2020 the Company held an open hedging position on the currency market for USD 1 410 million, and in 2019 entered into Cross Currency Interest Rate Swap (CIRS) transactions for the notional amount of PLN 2 billion, hedging against the market risk connected with the issue of bonds in PLN with a variable interest rate2.
The condensed table of open transactions in derivatives of the Parent Entity on the currency market as at 31 December 2020 is presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).
