Business summary

Higher revenues from sales by PLN 1 643 million (+9%) were achieved in 2020 compared to 2019 mainly due to:

• Higher metals prices (copper +3%, silver +27%)
• a more favourable USD/PLN exchange rate (+2%)

Higher EBITDA, higher net profit

• EBITDA higher by 23% vs the corresponding period of 2019
• Higher net profit by PLN 515 mn(+41%) than in 2019 mainly due to higher operating profit

* Consolidated data unless otherwise indicated, i.e. in the case of LTIFR – only KGHM Polska Miedź S.A.
** Sum of segments; adjusted EBITDA = EBITDA (profit/(loss) on sales + depreciation/amortisation) adjusted by impairment losses on non-current assets

The average price of copper in 2020 in PLN and USD was at levels similar to 2019, but with extremely large volatility in metals prices

• While the average price of copper in 2020 amounted to 6 181 USD/t, or 3% higher compared to the prior year, the highs and lows set by the copper price differ by up to 70% (a low of 4 617 USD/t vs a high of 7 964 USD/t)
• The average price of copper in 2020 expressed in PLN amounted to 23 975 PLN/t, which due to a slight weakening of the PLN was 4% higher than in 2019
• The high volatility in prices in 2020 was caused by the COVID-19 pandemic and its impact on the global economy, along with the response of central banks and governments which introduced further fiscal packages and liquidity for the financial markets

In 2020 copper prices reached their lowest levels in 4 yearsand their highest since 2012, increasing by nearly double

• Closure of economies in Q1 and Q2 2020 caused the copper price to collapse and led to a jump in metal inventories
• Opening of the Chinese economy and its quick return to balance, and in particular record purchases by the agency responsible for materials inventories in China led to higher prices for the red metal
• In Q4 2020 the victory of Joe Biden and the Democrats in the USA, together with announced fiscal packages and a weaker USD supported copper prices

Speculative net position at historic records confirms exceptional investor interest in copper

• Initially, copper’s recovery was connected with the rise of imports into China, which fizzled out in the 4 quarter
• The above-average interest by investors, demonstrated by historically-high long positions, was the main factor supporting increases in subsequent months
• The over-heated copper market is drawing speculative capital on other metals markets as well, e.g. in Shanghai

Silver and gold fell in Q4 2020 but remain above the yearly average

• Silver prices, which a year ago, at the start of the COVID-19 pandemic, failed to rise as quickly as gold, made up for lost time, with stability coming in Q4 2020 below the historic (gold), or multi-year (silver) peaks, but still at historically-high levels
• The gold/silver ratio, after reaching record levels in March and April, returned to the 40-year average
•  The drop in precious metals prices, after reaching record levels, was due to the development and approval of the COVID-19 vaccine and the start of vaccination programs. This resulted in a better outlook for the global economy. This impact was more strongly felt by gold than silver due to the industrial nature of the latter metal.

• KGHM Polska Miedź
  lower quality and thickness of deposit and restricted copper scrap supply in H1 2020
• Sierra Gorda 
  higher ore throughput and recovery, higher copper content in ore
• KGHM INTERNATIONAL
  lower production by Franke mainly due to ore quality, and by the Sudbury Basin, where ore with higher TPM content was extracted; in 1Q 2019 extraction from the Morrison mine was suspended

* On a 55% basis

Adjusted Group EBITDA for 2020 the highest in the last 7 years

The increase compared to 2019 (+PLN 1 394 million; +27%) was from the following segments:

• KGHM Polska Miedź +PLN 839 mn (+23%) – higher sales volume and higher copper prices
• Sierra Gorda¹⁾ +PLN 686 mn – more than twice as high due to improvements in mine operating parameters (processed ore volume and recovery), the implementation of optimisation and savings programs, better quality ore mined, higher copper prices

Higher Group revenues

• Impact of higher copper sales by KGHM Polska Miedź and Sierra Gorda with higher copper and silver prices

Higher Group net profit

• Improved EBITDA supported achievement of a higher profit for the year by PLN 376 mn (+26%) than in 2019

* On a 55% basis
** Sum of segments; adjusted EBITDA = EBITDA (profit/ loss on sales + depreciation/amortisation) adjusted by impairment losses/reversals of impairment losses on non-current assets

¹⁾ Sum of costs of extraction, floatation and metallurgical processing per cathode, together with support functions and cathode selling costs, adjusted by the value of inventories of half-finished products and work in progress, less the value of anode slimes and divided by the volume of electrolytic  copper production from own concentrates
²⁾ Capital expenditures – excluding costs of borrowing, leasing per IFRS 16 unrelated with an investment project and development work – uncompleted; Other expenditures – acquisition of shares and investment certificates of subsidiaries and associates and loans granted
³⁾ Reflects an adjustment of assumptions pursuant to regulatory filing 9/2020 dated 12 May 2020
⁴⁾ Adjusted EBITDA for 12 months, to the end of the reporting period, excluding EBITDA of the joint venture Sierra Gorda S.C.M.
⁵⁾ Level of net debt/EBITDA ≤ 2 related to the Financial Liquidity Policy adopted by the Company and is not part of the budget assumptions of KGHM for 2020

Main factors affecting net debt in 2020

Increases in debt

• Cash expenditures on property, plant and equipment (PLN 3 458 mn)
• The minerals extraction tax (PLN 1 625 mn)
• Equity increase in Sierra Gorda (PLN 216 mn)
• Borrowing costs recognised in cash flow (PLN 177 mn)

Decreases in debt

• Positive cash flow from operating activities, excluding the change in working capital and the minerals extraction tax (PLN 5 526 mn)
• Change in trade and other payables, incl. trade liabilities transferred to the factor (higher by PLN 1 287 mn)
• Change in inventories (lower by PLN 295 mn)
• Positive exchange differences (a decrease in PLN denominated debt by PLN 194 mn)
• Change in trade and other receivables (lower by PLN 173 mn)