9.4 Provision for decommissioning costs of mines and other facilities

in PLN millions, unless otherwise stated

The provision for future decommissioning costs of mines and other technological facilities is recognised based on the estimated expected costs of decommissioning of such facilities and of restoring the sites to their original condition following the end of operations, which are made on the basis of ore extraction forecasts (for mining facilities), and technical-economic studies prepared either by specialist firms or by the Parent Entity.

In the case of surface mines, certain actions and costs may influence the scope of restoration work, such as costs of hauling barren rock, incurred during mine life and due to its operations, are recognised as operating costs being an integral part of the production process and are therefore excluded from costs that are a basis of calculating the provisions for mine decommissioning.

A change in the discount rate or in the estimated decommissioning cost adjusts the value of the relevant item of a fixed asset, unless it exceeds the carrying amount of the item of a fixed asset, and any surplus above this amount is recognised in other operating income.

The increase in the provision due to the time lapse is recognised in finance costs.

These provisions represent the estimated future decommissioning costs of mines and other technological facilities discounted to present value. Revaluation of this provision at the end of the reporting period is affected by the following indicators:

1. in the Parent Entity:
   1. the index of changes in prices in the construction-assembly sector published by the Central Statistical Office (GUS),
   2. the forecasted discount rate calculated based on the yield on treasury bonds with maturities nearest to the planned financial outflow.
2. in the KGHM INTERNATIONAL LTD. Group:
3. the rate of return on investments in US 10 and 20 year treasury notes of the Federal Reserve of the United States of America, and
4. the rate of return on investments in 5-year government bonds issued by the governments of Canada and Chile.

The yield on treasury bonds and the inflation rate are set separately for future periods, i.e. for the first, second and third years, and jointly for periods from the fourth year.

At the end of the reporting period, applying the current approach, with the historically low level of profitability of 10 year bonds and an increase in inflation, the Group received a negative effective discount rate. Due to the unusual and previously unknown situation, the Group applied a cautious approach and adopted for the measurement of provisions a discount rate of “0” as at 31 December 2020. Due to the non-standard nature of current market conditions, the Group is monitoring the situation and analysing the possible verification of its current approach to determining the effective discount rate.

In the KGHM Polska Miedź S.A Group, in order to estimate provisions for the decommissioning costs of mines and other technological facilities located in individual countries, the following discount rates were applied:

With regard to the costs of some activities carried out during the exploratory work of surface mines, which at the same time serve to restore pits, the Group made a judgment and recognised that these costs are mostly current production costs, because these activities primarily determine the current mine production and revenue generation, and their restoration is a secondary effect. Therefore, the costs of such activities are not included in the measurement of the restoration provision.