8.6 Liabilities due to guarantees granted

in PLN millions, unless otherwise stated

Guarantees and letters of credit are an essential financial liquidity management tool of the Group.

The Group issued guarantees which meet the definition of contingent liabilities pursuant to IAS 37 and recognises them in contingent liabilities and guarantees, which meet the definition of financial guarantees under IFRS 9, and which are measured and recognised as financial instruments pursuant to this standard.

The financial guarantee agreement is an agreement obliging its Issuer to make certain payments compensating the holder of the guarantee for the loss they will incur due to a debtor’s failure to pay on the due date, pursuant to the initial or amended terms of a debt instrument.

The liability due to the financial guarantee granted as at the end of the reporting period is recognised at the higher of two amounts: the initial value of the issued guarantee less the amount recognised in profit or loss on guarantees, or the amount of expected credit losses – set pursuant to the principles of the general model, described in accounting policies in Note 7.5.2.

For the calculation of expected credit losses (ECL), the Group adopts estimates for the rating, PD (probability of default) and LGD (loss given default) parameters. Calculation of the expected credit losses takes place in the horizon remaining to the end of the guarantee, while the rating of a guarantee’s beneficiary is adopted as the rating of the entity used for the purposes of calculating the PD parameter.

As at 31 December 2020, the Group held liabilities due to guarantees and letters of credit granted in the total amount of PLN 2 213 million (as at 31 December 2019, PLN 2 470 million) and due to promissory note liabilities in the amount of PLN 171 million (as at 31 December 2019, PLN 144 million).

The most significant items are liabilities of the Parent Entity aimed at securing the following obligations:

Sierra Gorda S.C.M. – securing the performance of concluded agreements in the amount of PLN 1 814 million:

• financial guarantees in the amount PLN 1 158 million*:
  • PLN 18 million (USD 5 million) as corporate guarantees set as security on the payment of concluded lease agreements (as at 31 December 2019 in the amount of PLN 60 million, or USD 16 million), for the guarantee’s validity period of up to 5 years. The carrying amount of the recognised liability due to a financial guarantee granted amounts to PLN 0.4 million,
  • PLN 1 140 million (USD 303 million) as corporate guarantees securing repayment of short-term working capital facilities (as at 31 December 2019 in the amount of PLN 803 million, or USD 211 million), the guarantee’s validity period of up to 2 years. The carrying amount of the recognised liability due to a financial guarantee granted amounts to PLN 21.2 million,
• other liabilities due to guarantees granted and letters of credit in the amount of PLN 656 million:
• a letter of credit of PLN 517 million (USD 138 million) granted as security for the proper performance of a long-term contract for the off-take of electricity (as at 31 December 2019 in the amount of PLN 522 million, or USD 138 million),
• PLN 104 million (USD 28 million) as a corporate guarantee securing repayment of a specified part of payment to guarantees set by Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, securing repayment of a corporate loan drawn by the joint venture Sierra Gorda S.C.M. (as at 31 December 2019 in the amount of PLN 627 million, or USD 165 million),
• PLN 35 million (USD 9 million) as a corporate guarantee securing claims arising from the obligation to restore post-mining terrain, following the conclusion of mining operations (as at 31 December 2019 in the amount of PLN 34 million, or USD 9 million),

other entities, including the Parent Entity:

•  PLN 188 million (USD 50 million)  securing the proper execution by DMC Mining Services (UK) Ltd. and DMC Mining Services Ltd. of a contract for shaft sinking under a project advanced in the United Kingdom (as at 31 December 2019 in the amount of PLN 190 million, or USD 50 million)
• PLN 175 million to secure the proper execution by the Parent Entity of future environmental obligations related to the obligation to restore terrain, following the conclusion of operations of the Żelazny Most tailings storage facility (as at 31 December 2019 in the amount of PLN 179 million),
• PLN 21 million (PLN 3 million, USD 3 million and CAD 2 million) securing the obligations related to proper execution of agreements concluded (as at 31 December 2019 in the amount of PLN 23 million, or PLN 5 million, USD 3 million and CAD 2 million).

* The Company determined that, with respect to the financial guarantees granted to Sierra Gorda S.C.M., it is necessary to recognise these guarantees pursuant to par. 4.2.1. point c of IFRS 9.

Based on the knowledge held, at the end of the reporting period the Group assessed the probability of payments resulting from contingent liabilities related to:

• Sierra Gorda S.C.M. as moderately low,
• other entities of the Group as low.