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Risk management in the KGHM Polska Miedź Group

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The KGHM Polska Miedź S.A. Group defines risk as uncertainty, being an integral part of the activities conducted and having the potential to result in both opportunities and threats to achievement of the business goals. The current and future, actual and potential impact of risk on the KGHM Polska Miedź S.A. Group’s activities is assessed. Based on this assessment, management practices are reviewed and adjusted in terms of responses to risk.

Under the Corporate Risk Management Policy and Procedure and the Rules of the Corporate Risk and Compliance Committee, the process of corporate risk management in the KGHM Polska Miedź S.A. Group is consistently performed.

KGHM Polska Miedź S.A. oversees the process of managing corporate risk in the KGHM Polska Miedź S.A. Group, while in the companies of the KGHM Polska Miedź S.A. Group, documents regulating the management of corporate risk are consistent with those of the Parent Entity.

Risk categories

The Corporate Risk Management Policy of the KGHM Polska Miedź S.A. Group is available on KGHM’s website, in the Investor Relations section Risk Management | KGHM Corporate Website.

Each year, the process of managing corporate risk is subjected to an efficiency audit compliant with the guidelines of “Best Practice for GPW Listed Companies 2021”, which came into force on 1 July 2021 (previously in compliance with the guidelines „Best Practice for GPW Listed Companies 2016”).

Risk factors in various areas of the KGHM Polska Miedź S.A. Group’s operations are continuously identified, assessed and analysed in terms of their possible limitation. Key risk factors in the KGHM Polska Miedź S.A. Group undergo in-depth analysis in order to develop a Risk Response Plan and Corrective Actions. Other risk factors undergo monitoring by the Corporate Risk and Compliance Management Department, and in terms of financial risk by the division of the Executive Director for Financial Management.

In order to unify the approach to the systematic identification, evaluation and analysis of the risk of a loss of compliance, defined as adherence to the requirements arising from existing laws (external and internal) or from voluntarily-assumed legal obligations and standards (including ethical standards), since 2020 a Compliance Management Policy for the KGHM Polska Miedź S.A. Group together with a Procedure and Methodology for managing compliance in KGHM Polska Miedź S.A. as adopted by the Management Board of KGHM Polska Miedź S.A. has been in force. The process of managing compliance, which is connected with the process of managing corporate risk within the in KGHM Polska Miedź S.A. Group, is an important business tool for the prevention of events which could lead to the imposition of penalties.

In 2021, the process began of implementing a comprehensive system to manage operational continuity, which also enables a detailed breakdown of the scope of actions undertaken as regards managing corporate risk in terms of the risk of a catastrophic impact and the small probability of their occurrence. This is expressed in the Operational continuity management policy of KGHM Polska Miedź S.A. along with the Procedure and Methodology of managing compliance in KGHM Polska Miedź S.A., adopted by the Management Board of KGHM Polska Miedź S.A. The prepared documentation of the comprehensive operational continuity management system sets forth the principles and requirements to build the robustness of KGHM as regards catastrophic events by sorting out and unifying the existing approach to management of the risk of loss of operational continuity of the core production business and preparing for unforeseen events.

The corporate risk management process adopted in the KGHM Group is inspired by the solutions adopted by the ISO 31000 standard, best practice in risk management and the specific nature of the KGHM Group, and is comprised of the following stages:

Corporate risk management process in The KGHM Polska Miedź S.A. Group

The first step in the process is comprised of three actions: defining the external context, defining the internal context and the risk management context.

The external context is the environment in which the KGHM Polska Miedź S.A. Group advances its Strategy. Here the definition needs to update the understanding of the social, political, legal, regulatory, financial, economic and technological aspects of the environment which affect its activities.

During this step also assessed, based on the results of scenario analysis, the most important factors for transitioning to a low-emission economy and the paths of climate change and weather models, which are processed in subsequent steps of the process. During the process of defining the internal context, goals are analysed (strategic/business), changes in the organisational structure are planned and performed, new areas of activities, projects, etc.

The last part of this step is to define the risk management context, which comprises the setting or updating of goals, the scope, responsibilities and procedures and methods applied in the risk management process.

In this step of the process we identify and evaluate risks which could impact the achievement of goals at the level of the KGHM Polska Miedź S.A. Group. The main task in this step is to prepare a complete list of threats which could facilitate, impede, accelerate or delay the achievement of goals. Each identified risk is assigned to a category and a sub-category in the form of a Risk Model, which provides the KGHM Polska Miedź S.A. Group with a consistent risk taxonomy.

Following its identification, each corporate risk is evaluated using a Risk Evaluation Matrix, containing a scaled breakdown of assessments by impact, utility and probability. A risk may have various effects, and therefore in order to ensure the broadest recognition of potential impact and the limitation of subjective evaluation, the following Impact evaluation measures have been defined:

  • Finance – impact of the effects of a given risk in its financial aspect by applying value ranges.
  • Strategy – evaluation of the risk’s impact on the ability to achieve strategic goals.
  • Reputation and Stakeholders – impact of the risk on the Company’s reputation, trust in the brand, investor relations, relations with stakeholders, also including on the effectiveness of actions related to building a responsible business and sustainable development.
  • Health and Safety – direct impact on health and safety and human life.
  • Natural environment – impact of the materialisation of risk on natural environment, the functioning of the ecosystem and the time needed to restore the disturbed balance.
  • Regulations and Laws – evaluation of the compliance of events with existing laws, the need to participate in proceedings before bodies of public administration of a supervisory and regulatory nature as well as potential penalties as a result of such proceedings.
  • Operational continuity –evaluation of the impact of risk on interruptions to activities resulting in significant/irreversible effects and loss of access to information important from the point of view of conducted activities. The results of the identification and evaluation of risk is presented in a graphic form, i.e. Risk Maps. These provide a profile of the given risk and support the process of identifying the key risk.

The goal of this step is to deepen knowledge and to understand the specific nature of the types of key risks identified in the previous step. Cause and effect analyses and a more substantive description of the means of dealing with risk are aimed at facilitating decision making on whether to maintain or eventually change current actions.

A directional decision is called a Response to risk. A change in the way an action is taken requires the determination of Corrective Actions, meaning organisational, process, systemic and other changes which are aimed at reducing the level of the key risk.

During this step KRIs – Key Risk Indicators – are also defined, being a set of business process parameters or environmental parameters which reflect changes to a given risk profile.

The goal is to ensure that the adopted Risk Response Plan is effective (ad hoc and periodic reports), new risks are identified (updating of the Risk Registry), changes in the internal and external environments and their impact on activities are uncovered, and appropriate actions are taken in response to incidents (updating of information on Incidents).

Effective, well-planned and appropriately performed monitoring of risk enables flexible and prompt reaction to impending changes in the external and internal environments (e.g. risk escalation, changes in actions related to risk response, or risk evaluation parameters, etc.).

Achievement of this step provides the assurance that risk management in the KGHM Polska Miedź S.A. Group fulfils the expectations of the Management Board of KGHM Polska Miedź S.A., the Audit Committee of the Supervisory Board of KGHM Polska Miedź S.A. and other stakeholders by supplying reliable information about risk, continuous improvement and adaptation of the quality and effectiveness of Risk Response to the demands of the external and internal context.

Organisational structure of risk management in KGHM Polska Miedź S.A.

Corporate risk – key risk factors and their mitigation

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A comprehensive approach to risk management is consistent with a strategy of growth as well as with continuous striving to achieve operational excellence and the principles of a sustainable and responsible business. It was designed in such a way as to support the KGHM Polska Miedź S.A. Group in building a resistant corporate structure. A tool used in identifying risk in the KGHM Polska Miedź S.A. Group is the Risk Model. In 2021, actions were taken to adapt the risk taxonomy to include issues related to climate change in accordance with TCFD (Task Force on Climate-Related Financial Disclosures) Recommendations. The Risk Model, whose structure is based on sources of threats, is divided into 6 categories: Technological, Value chain, Market, External, Internal and Climate (definitions presented in the illustration below). Several dozen sub-categories have been identified and defined for each of these categories, covering particular areas of the operations or management. The KGHM Polska Miedź S.A. Group applies due diligence when undertaking actions aimed at minimising exposure to risk by lowering vulnerability to individual risk factors and reducing the probability of the materialisation of events which such factors could induce. The identification and evaluation of threats is however always associated with uncertainty as to the effectiveness of the preventative measures applied and planned, especially as regards those areas which are beyond the direct control of the KGHM Polska Miedź S.A. Group.

Because of the long value chain of the KGHM Polska Miedź S.A. Group, the geographical footprint of the Group’s activities and the resulting considerable complexity and multi-faceted nature, the detailed description of risks and their management, in the context of the Group’s social, labour, environmental, human rights, corruption prevention policies, is presented in this section, rather than in the sections devoted to the individual topics in the areas listed above. We have decided that the combined comprehensive presentation of this matter will offer the readers of this Report a better chance to fully understand it.

Risk categories in the risk model of KGHM Polska Miedź S.A. and their definitions

Following is a description of the key risk factors in the KGHM Polska Miedź S.A. Group in 2021, broken down into individual categories along with means for their mitigation, including identification of specific risks for the Parent Entity and the KGHM INTERNATIONAL LTD. Group. Key risks are future uncertain events having the greatest impact on the achievement of the business goals of the KGHM Polska Miedź S.A. Group, reflecting an evaluation of vulnerabilities, i.e. the ability of the organisation to limit the possibility of the occurrence of risk and the impact of its materialisation.

The tables below uses the following abbreviations: for the KGHM Polska Miedź S.A. Group – KGHM Group, for the KGHM INTERNATIONAL LTD. Group – KGHM INTERNATIONAL Group, for KGHM Polska Miedź S.A. – the Parent Entity.

Risk and description of risk factors Mitigation
(Parent Entity)

Risk of failure to adhere to the efficient working time parameter and of failure to fully utilise the capacity of metallurgical installations to process own concentrate.

Sources of risk include potential breakdowns of key elements of the core production line and failure to adapt technology to production requirements, which could affect the availability of metallurgical infrastructure. An important risk factor is the need to maintain the production of concentrates in an amount and quality required to optimise the utilisation of the metallurgical facilities. Exposure to risk is also associated with the need to ensure required utilities to maintain the expected level of infrastructure availability.

 Optimum utilisation of infrastructure, maintaining an appropriate selection of concentrates, R&D initiatives and advancement of programs and projects to adapt metallurgical structure and technology to ensure higher processing capacity for own concentrates, imported copper-bearing materials and purchased scrap. Actions are continuously undertaken aimed at guaranteeing the technical efficiency of production continuity and servicing systems. A maintenance policy is applied, breakdown procedures have been developed and suppliers are continuously monitored within the scope set forth in instructions and agreements. Actions undertaken are aimed at maintaining the availability of metallurgical equipment at the expected level and improving the productivity parameters of metallurgical infrastructure, as well as limiting the negative impact of this risk on operations.

Risk and description of risk factors Mitigation

(KGHM Group)

Risk related to an ineffective process of monitoring and providing early warning to management staff on deviations from the budget and financial plans as well as with respect to adopting inappropriate economic parameters related to production, investments, macroeconomics and finance, for forecasts of company results.

An ineffective process of monitoring and providing early warning to management staff on deviations from the budget and financial plans may impede or delay the appropriate early identification of deviations in respect of forecast results, at the same time shortening the time for taking appropriate corrective actions. Sources of risk are related to the possibility of ineffective mechanisms to control these processes. In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 Forecasts related to specific areas of the operations prepared by appropriate specialised units and ensuring the uniformity of operating plans with strategic plans. Cyclical reporting of execution on forecasts in all critical areas. Regular contacts with and systematic streamlining of the communication process together with setting criteria enabling the identification of symptoms of potential deviations from the expected results of the KGHM Group. Evaluation of key risk factors, on which the coronavirus pandemic has an impact, were subjected to specific analysis by the on-going monitoring of selected information in terms of production, sales, supply chains, management of personnel and finances, aimed at supporting management processes in conditions of heightened uncertainty caused by the pandemic.
(KGHM INTERNATIONAL Group)

Risk related to the precision of estimated costs of decommissioning certain mines.

With respect to risk factors related to the precision of estimated costs of decommissioning certain mines, there are questions related to the need to meet obligatory environmental conditions connected with realistic concepts for such liquidation.

 Estimated costs of restoration and mine decommissioning based on expert reports and providing guarantees of future environmental obligations related to the closure and restoration of mining areas in accordance with existing laws and regulations.
(KGHM INTERNATIONAL Group)

Risk related to the insufficient recognition of deposit parameters and characteristics, both in exploration projects (estimation of preliminary data for deposit evaluation models) as well as in current operations.

The risk of changes in the evaluation and management of ore resources involves, among others, geological factors related to the reliable estimation of resources or mining conditions. Risk factors related to the limited reliability and completeness of data, based on which new resource projects are evaluated, may lead to the taking of less than optimal decisions on advancing or suspending projects.

 Input data for models are collected in accordance with geological documentation possessed, which is prepared pursuant to laws in force as well as reviewed and consulted internally with experienced staff. The results of current work undergo particular analysis and preliminary project assumptions are updated. Expenditures incurred on exploration and evaluation enable the estimation of mineral resources and investigation of geological-mining conditions aimed at planning further mining activities.
(Parent Entity)

Risk of the inability to store mine tailings.

The Parent Entity is exposed to the risk of a lack of sufficient tailings storage capacity at the “Żelazny Most” Tailings Storage Facility. Risk factors involve the management and control of the facility, maintaining the technological regime and meeting environmental requirements. Other source of risk are external factors with respect to administrative bodies and the requirement to obtain the necessary administrative decisions for the functioning of the facility. Exposure to risk is also related with potential unplanned shutdowns resulting from infrastructure breakdowns, which could impact the continuity of the Core Production Business.

 Operating in accordance with the operating instructions.

Cooperation with a team of international experts (TIE) and a General Designer.

Applying observational methods based on assessing the geotechnical parameters obtained on the basis of evaluations of the results of monitoring, enabling conclusions to be drawn about the functioning of the expanded facility.

Systematic supervision and control over the entire “Żelazny Most” Tailings Storage Facility, including cyclical detailed analysis of all risk factors affecting the facility’s stability.
(KGHM Group)

Risk related to the lack of availability of required energy sources.

The KGHM Group is exposed to the risk of lack of availability of power sources for its operations. Potential disruptions in the supply of key power sources is mainly related to risk on the part of external suppliers and breakdowns of their distribution infrastructure. Risk is also related to the suspension of delivery of power supplies as a result of long-lasting droughts, leading to periodically lower water levels in rivers, which could cause restrictions in the operations of power plants belonging to KGHM’s suppliers. Amongst internal factors, the most important involve questions of maintaining operations, utilisation and investments and modernisation work.

 Ensuring back-up systems for the supply of critical utilities and on-going assessment of the security of the power network. Conducting a variety of investments aimed at strengthening energy security. A framework agreement with the company Polskie Górnictwo Naftowe i Gazownictwo S.A. for the sale of natural gas to increase the security of natural gas supply. Systematic limitation of energy consumption under the implemented ISO 50001 compliant Energy Management System and Energy Savings Program. Planned increase in the efficiency and flexibility of the KGHM Group in terms of its Polish and international assets, among others by partially satisfying the needs for electricity from its own sources as well as from renewable energy sources („RES”) in accordance with the Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040.
(KGHM Group)

Risk related to infrastructure breakdowns which disrupt the core production operations, related to natural hazards as well as internal factors related to the applied technology.

The KGHM Group is exposed to risk related to the technological potential and efficiency of its infrastructure to meet the needs of the production process. By utilising infrastructure required to maintain its operations, KGHM is exposed to the risk of industrial breakdowns resulting in unplanned shutdowns. Such breakdowns could result both f rom natural hazards, i.e. catastrophic natural events and force majeure, as well as internal factors dependent on the KGHM Group (ongoing operations, maintaining production, key suppliers, servicing).

 Preventive management of key infrastructure elements affecting production continuity. Appointment of task forces and expert teams with respect to counteracting breakdowns of metallurgical infrastructure. On-going analysis of geotechnical risk and the verification of planned recoveries. In terms of ICT (information-communication technology) separating groups of projects related to reducing technological debt. Gradual replacement of older technology with newer solutions, reflecting the corporate architecture standard.

In 2021, the process began of implementing a comprehensive system to manage operational continuity compliant with the ISO 22301 standard, which establishes procedural frameworks at the level of the entire organisation aimed at applying a joint approach to building solutions ensuring operational continuity and enabling its return.
(KGHM Group)

Risk related to the cost efficiency of the production process, mining projects, processing of copperbearing materials, reflecting the risk of a substantial rise in prices of materials, services, electricity, gas and water and restoration costs.

The KGHM Group is exposed to the risk of external and internal factors, such as metals prices, exchange rates, costs of supply of purchased metal-bearing materials, the level of TC/RCs and selling premiums and costs of services and utilities (including especially energy). This risk is also related to the estimation of costs of provisions for the restoration of mining terrain based on existing law for the territories in which the KGHM Group operates. In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 On-going control of processing costs, monitoring the market situation, optimising costs, including supplies of purchased metal-bearing materials, hedging transactions and management of the net position. Hedging to secure the Company against changes in the USD/PLN exchange rate and metals prices (mainly copper and silver). Creating multi-year plans and budgets enabling the achievement of profitability under conditions prevailing on the market. Evaluation of key risk factors, on which the coronavirus pandemic has an impact, were subjected to specific analysis by the on-going monitoring of selected information in terms of production, sales, supply chains, management of personnel and finances, aimed at supporting management processes in conditions of heightened uncertainty caused by the pandemic.
(KGHM Group)

The risk of interruptions to the continuity of sales and services (including due to the COVID-19 pandemic).

The KGHM Group, due to its well-developed sales and services structure, is exposed to the risk of interruptions to the continuity of these processes, mainly due to external factors. Sources of risk are changes in demand for certain product groups and on individual geographic markets, production restrictions, transport and logistical interruptions (especially in terms of international transport), force majeure (extreme weather phenomena) and operational restrictions due to laws introduced at the domestic and international level. This risk has a substantial potential to decrease the revenues generated by the KGHM Group, and consequently lower operating profits. In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 On-going monitoring of the situation prevalent amongst customers, enabling a rapid response to customer needs (such as regular teleconferences, the availability and mobilisation of employees, the utilisation of various channels to exchange information and react to interruptions), analysis of the situation’s impact on customers and logistics in individual customer countries as well as transit routes, rapid changes in the structure of sales (changes of sales in individual assortments, amongst customers from individual sectors and on individual geographic markets enabling reaction to potential changes in demand in individual consumer sectors). Diversification made to customer portfolios, providing the possibility to neutralise smaller orders from some customers by selling more to others, participation in the spot market (enabling immediate product allocation given actual customer demand) apart from the main strategy based on carrying out long-term and annual contracts on the basis of long-term business relationships.

In 2021, the COVID-19 pandemic had the greatest impact on the Group’s secondary activities comprised of hotel and spa services. A variety of safety procedures were implemented aimed at spa patients, hotel guests employees of companies from the risk of contracting the SARS-CoV-2 virus. The spa and hotel companies of KGHM Polska Miedź S.A. received financing from the Polish Development Fund under the Anti-Crisis Shield 1.0 for large companies and the Anti-Crisis Shield 2.0 for SMEs. By maintaining a strict sanitary regime and regulatory restrictions as regards permitted occupancy rates in hotels, the companies were able to return to full realisation of their commercial and health-related services. In the long term, the progressive vaccination campaign will undoubtedly be the main factor regulating the situation in the hotel and spa industry.

Risk and description of risk factors Mitigation
(KGHM Group)

Market risk related to volatility in metals prices and risk of changes in exchange rates and interest rates.

Market risk is understood as the possibility of a negative impact on the results of the KGHM Group resulting from changes in the market prices of goods, exchange rates and interest rates, as well as changes in the value of debt securities and in the share prices of listed companies. In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 This risk is actively managed by the Parent Entity, in accordance with the Market Risk Management Policy. A basic technique for managing market risk in the Company are hedging strategies utilising derivatives natural hedging is also applied.

Information on the impact of COVID-19 on the functioning of the Company and Group is described in Chapter 12.2. of the Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021.

Further information on market risk is presented in section 12.3. Market, credit and liquidity risk of the Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021.
(KGHM Group)

Credit risk related to trade receivables.

The KGHM Group sells some of its products with deferred payment terms, as a result of which there may arise the risk of late payments from customers for delivered products.

In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 This risk is actively managed by the Parent Entity, in accordance with the Credit Risk Management Policy. Exposure to credit risk is limited by evaluating and monitoring the financial condition of customers, setting credit limits and applying creditor security. The companies of the KGHM Group have been working for many years with a large number of customers, which affects the geographic diversification of trade receivables.

Information on the impact of COVID-19 on the functioning of the Company and Group is described in Chapter 12.2. of the Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021.

Further information on credit risk is presented in section 12.3. Market, credit and liquidity risk of the Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021.
(KGHM Group)

Liquidity risk.

The risk of loss of liquidity is understood as the ability to pay liabilities on time and to obtain financing for operations.

In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 This risk is actively managed in the Parent Entity in accordance with the updated Financial Liquidity Management Policy.

Information on the impact of COVID-19 on the functioning of the Company and Group is described in Chapter 12.2. of the Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021.

Further information on liquidity risk is presented in section 12.3. Market, credit and liquidity risk of the Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021.

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Risk and description of risk factors Mitigation
(KGHM Group)

Risk of seismic tremors and associated roof collapses or destressings of the rock mass, and the occurrence of uncontrolled rock bursts.

The KGHM Group is exposed to the risk of natural hazards and force majeure and related insufficient geological knowledge of the rockmass. Key risk factors which affect the materialisation of such risk also involve the results of periodic analyses of the mining situation and the state of hazard and applied measurement methods. Natural hazards associated with the underground mining of copper ore deposits, in particular hazards related to mining tremors and their potential effects in the form of roof and wall collapses. These factors affect safety, as their occurrence can lead to serious or even fatal injuries as well as damage to underground machinery, equipment and infrastructure, along with production downtimes.

 Actions aimed at preventing rock bursts and roof collapses, such as systematic seismological observations, on-going assessment of the rock mass and the marking off of areas of particular threat of roof collapse. Use of active methods of preventing rock bursts and roof collapses based on provoking dynamic events through mass blasting of mining faces and through blasting to release stress in the orebody or its roof. Preparation of reserve fields in the orebody which could handle limited production.
(Parent Entity)

Risk of restrictions to production or to the advancement of development work due to geodynamic gas-related events and the occurrence of naturally-occurring gases.

KGHM is exposed to the specific risk of natural hazards and force majeure (gas-related geodynamic hazards and the occurrence of naturally-occurring hazardous gases) leading to restrictions in realising production plans and the advance of preparatory work. These factors affect safety, as their occurrence can lead to serious or even fatal injuries as well as damage to underground machinery, equipment and infrastructure, along with production downtimes.

 The risk of gas hazards occurring is being assessed and principles are being developed for working under the risk of such hazards. Individual employee safety measures are applied as well as equipment and means for reducing concentrations of hydrogen sulphides and neutralising oppressive odours. Reserve fields in the orebody are being prepared to take over the limited production.
(Parent Entity)

Risk of production restrictions due to unfavourable climatic conditions in the mines.

KGHM is exposed to a specific risk related to climatic conditions restricting activities or increasing costs, related to geological conditions, the temperature of the air sent into the mines and the conditions prevalent in the underground mines.

 The use of solutions to counteract underground climate risk using neutral means (e.g. the use of short airways and directing air f rom the lowest temperature rockmass, high-speed air) and through the use of central, workplace and personal air conditioning. The on-going monitoring of microclimate parameters and the introduction of remote control and visualisation systems and monitoring (industrial cameras) in working areas subject to particularly unfavourable climatic parameters. Decreasing external and internal losses and relative air moisture, as well as increasing air movement intensity. The use of shortened working time.
(Parent Entity)

Risk of loss of mine functionality due to underground water hazards.

KGHM is exposed to the risk of natural hazards and force majeure in the form of underground water hazards resulting f rom breakdowns of the main dewatering equipment, human error (actions contrary to the project or technology) or mistaken geological conclusions.

 Research into hydrogeological conditions and water hazards, measuring water inflow to the mines, conducting mining operations pursuant with technology for the safe conduct of mining operations in underground mines. Systematic control of mining areas threatened by water inflow, control of water flow pathways and dams according to a set schedule. The preparation and updating of the Rescue Plan in case of water inflow. Development of regional pumps and the piping system, construction of water dams aimed at restricting water inflow, drilling exploratory holes to stabilise uncontrolled water inflow. To minimise the risk of uncontrolled underground water inflow, a project is continued called „Construction of a main dewatering complex in the region of the SW-4 shaft”, aimed at increasing the dewatering capabilities of the mines.
(KGHM Group)

Risk of exceeding the permissible emissions limits set forth in permits.

The KGHM Group is exposed to the risk of impacting individual components of the natural environment resulting f rom the extraction of copper ore and its subsequent processing at all stages of production, which could result in exceeding permissible emissions limits.

 Advancement of actions under Air Protection Programs and R&D. Advancement of the Program to adapt the technological installations of KGHM to the requirements of BAT conclusions for the non-ferrous metals industry along with restriction of particulates emissions.
(Parent Entity)

Risk of restrictions to the ability to sell sulphuric acid (due to loss of market/customers and/or a drop in demand as well as due to the COVID-19 pandemic).

Risk related to macro- and microeconomic factors involving political actions which result in privileges for a specific group of producers or the introduction of additional fees/legal restrictions. Risk related to unfavourable prices (volatility to the disadvantage of KGHM), high requirements in terms of market parameters for selling sulphuric acid and lower demand for the product on international markets, including as a result of the deterioration in the financial condition of a key customer. In 2021, one of the factors affecting exposure to risk was the situation on the fertilizers market related to the COVID-19 pandemic.

 Increase the number of internal storage facilities at the metallurgical plants as well as of warehouses in Szczecin. Search for new sales markets. Long term contracts. Incur costs of additional storage. Payments to customers and incur transport costs. Search for alternative ways to manage the acid and utilise it in the Concentrators. In 2021, actions were continuously taken related to the situation on the fertilizers market as a result of the COVID-19 pandemic involving volatility in levels of customer demand.
(KGHM Group)

Risk related to interruptions in the supply of strategic materials and components affecting the continuity of production by the Core Business (including due to the COVID-19 pandemic).

The KGHM Group is exposed to the risk of interruptions in the management of the supply chain resulting mainly f rom external factors, resulting in an increase in supply chain sensitivity. These factors include unpredictable volatility in supply and demand, changes in supplier bases, technological changes, changes in inventory buffers and in timeframes for realising orders, dependency on suppliers, as well as logistical interruptions, force majeure and volatility in exchange rates and metals prices. In 2021, an important factor impacting exposure to risk was the general uncertainty on financial markets related to subsequent waves of the pandemic as well as the dynamics of economic activity and the rate of economic recovery from the recession caused by the COVID-19 pandemic.

 Continuous contact is maintained with suppliers, which enables prompt reaction to delays by utilising the strategy of diversification of suppliers and directions of deliveries applied by the KGHM Group and by applying alternative solutions, for example by using substitutes, changes in production/assembly schedules. Moreover, a plan has been developed for the KGHM Group to maintain operational continuity in case of restrictions, production suspensions or the temporary switch to a stand-by operating mode. Suppliers and inventory levels are continuously monitored. As a result of the COVID-19 pandemic actions are being systematically taken to eliminate sporadic instances of delays by suppliers due to lack of availability of components, logistical restrictions or delays by producers of materials and equipment or parts thereof.
(KGHM Group)

Risk of failure to adhere to established principles and standards of behaviour with respect to counteracting corruption, business ethics and with respect to the procurement processes as well as the risk of incurring losses from actions which are harmful to KGHM.

The KGHM Group is exposed to the risk of actions which are harmful to KGHM taken by external entities participating in the processes of procurement, sales and investment. Threats are in the form of potential losses by the KGHM Group resulting from the intentional actions of external entities, i.e. collusion over minimum pricing, the insufficient technical and economic potential of contractors, falsification of documentation, fictional contractors, conflicts of interest. Other important risk factors include threats as regards all types of improprieties related to breaching anticorruption and ethical standards (such as corruption, conflicts of interest, abuse, discrimination, illegality, nepotism) as well as breaches of human rights (such as child labour, forced work, modern slavery, women’s rights).

 Implementation of the Code of Ethics of the KGHM Polska Miedź S.A. Group as the main tool in the corporate culture of the KGHM Group, and other appropriate policies and procedures ensuring the efficiency of implemented principles and values. Meeting global corporate governance standards and increased stakeholder expectations, including above all those of customers and financial institutions. Application under the Responsible Supply Chain Policy of guarantees of the selection of responsible suppliers, especially in the case of acquiring so-called conflict minerals and ensuring that the goods and services acquired by the KGHM Group will not be used to finance terrorism, and that they will be manufactured or provided while respecting human rights, labour standards, environmental protection and counteracting corruption. Proactive monitoring and analysis of procurement processes in terms of identifying abuse and threats of corruption within the organisation and the supply chain, as well as undertaking actions with respect to ethics and counteracting corruption along with the implementation of corrective actions. Internal control with respect to the identification and uncovering of fraud, abuse and corruption in KGHM Group entities and the prevention of such based on the Internal Control Procedure in order to eliminate risk at the level of prevention. The management of compliance under a comprehensive compliance management system.

As a result of the implementation of the ISO 37001 standard, in 2021 a new Anticorruption Policy was adopted in the KGHM Polska Miedź S.A. Group. Regulations were updated and new ones were developed as regards counteracting corruption, compliant with required standards, aimed at ensuring compliance with the existing Anticorruption Policy and which are currently being implemented in all of the KGHM Group’s entities.

In 2021, work commenced on the development of a „Human Rights Policy in KGHM Polska Miedź S.A.”, whose aim is to supplement and consolidate aspects of human rights in accordance with the model of sustainable development and which are included in other policies and guidelines of the Company, such as the Code of Ethics, Code of Conduct, OHS Policy, Climate Policy and the Responsible Supply Chain Policy.
(KGHM Group)

Risk of loss of compliance with requirements (general laws in force, internal corporate regulations and voluntarily-adopted legal obligations and standards)

The KGHM Group operates in unstable regulatory environments in many jurisdictions. A consequence of the need for technological and organisational adaptation to a variable legal environment (including environmental and tax requirements) may be higher costs of activities or their limitation. Risk of interruptions to operations or the need to reorganise work as a result of new laws may have a significant impact on the KGHM Group’s activities (including the risk of switching to a low-emissions economy, a circular economy).

 

 

 Active cooperation with the academic environment, which issues opinions on changes to legal acts, and the on-going providing of positions and opinions with respect to numerous areas subject to legislative change (including as part of the membership of numerous organisations at the national and EU level). Cooperation with renowned law firms and the creation of specialised organisational units which monitor the regulatory environment. Taking preventive actions aimed at adapting to organisational, infrastructural and technological changes. In order to have a consistent approach to ensuring compliance, defined as adherence to requirements arising from the applicable legal regulations (external and internal) or voluntarilyadopted legal obligations and standards (including ethical standards), a Compliance Management Policy for the KGHM Polska Miedź S.A. Group together with a Procedure and Methodology for managing compliance in KGHM Polska Miedź S.A. are in force. Possession of a coherent compliance system in the KGHM Polska Miedź S.A Group is a constituent of effective corporate governance management through, inter alia, more efficient response and readiness to regulatory changes, protecting reputation and building an ethical culture in the organisation, as well as increasing awareness and a sense of responsibility for compliance among employees.

[103-1], [103-2], [103-3]

Risk and description of risk factors Mitigation
(KGHM Group)

The risk of serious accidents or industrial illnesses caused by improper workplace organisation, the failure to follow procedures or the use of improper protective measures.

The risk of serious accidents or industrial illnesses caused by improper workplace organisation, the failure to follow procedures or the use of improper protective measures.

The failure to adhere to occupational health and safety rules and procedures, as well as the employment of persons lacking an appropriate psychophysical predisposition, could be a source of potential accidents. Exposure to unfavourable natural conditions together with associated natural hazards requires, apart from the high requirements in terms of essential professional preparation, that employees possess appropriate qualifications in terms of health, physical ability and psychological fitness. Risk is also associated with the possibility of temporary production stoppages caused by serious accidents, which could potentially affect the operations of the KGHM Group financially, legally and image-wise. The KGHM Group is also exposed to the risk of professional illnesses as a result of the impact of the workplace environment on people. Enhanced exposure to risk is also associated with external factors in the form of subcontractors and their safety culture.

 A detailed division of obligations between management and supervisory staff on the one hand and entities providing services to the Company on the other, to ensure safe working conditions and the proper coordination of work. Systematic discussion of workplace safety with the participation of representatives of sub-contractors and mining oversight authorities. Engaging employees and sub-contractors in campaigns carried out in the KGHM Group aimed at improving OHS standards. Advancement of development initiatives based on the idea of sustainable development and safety and enhancing the Group’s image as being socially responsible under the adopted Strategy. Actions consistent with the cycle of self-improvement in order to continuously seek and prepare for implementation the catalogue of initiatives aimed at further improvement of OHS and advancement of the long-term goal of the Company, „Zero accidents due to human and technical errors”. Optimisation of health care for employees, especially following workplace accidents and the systematic search for new organisational and technical initiatives enabling achievement of a high level of safety for employees in the divisions of KGHM Polska Miedź S.A. Threats are identified and professional risk is evaluated on a cyclical basis as well as in accordance with the needs of the moment, including those related to the SARS-CoV-2 virus pandemic.
(KGHM Group)

The risk of lack of acceptance by the public, local governments or other stakeholders for the conduct of development and exploration work.

The KGHM Group is exposed to the risk of exposure to external factors involving the environment in which it operates and consequently, exposure to changes in the image of the organisation and its products or services. Risk of ineffective management of relations with stakeholders, which affects the willingness of the environment and the taking of actions towards the Group. In extreme cases, the materialisation of this risk may lead to the blocking of development plans. Risk related to the heightened expectations and awareness by stakeholders of questions related to sustainable development and corporate social responsibility, which could lead to higher operating and investment costs, and in extreme cases to their limitation. Variable consumer requirements, which is also connected with paying attention to the manner of production, and not only to the quality and price of the final good.

 Advancement of CSR Strategy and close cooperation with government bodies. Meetings and negotiations with stakeholders, informational campaigns, conferences, publications. Cooperation with academic and sector bodies and authorities in order to meet the highest communication-public relations standards. Caring about and paying due diligence to the identification of expectations and demands by the external environment. Establishing commercial and business relationships with entities who declare an attitude of caring about environmental protection and compliance with existing laws in this regard.
(KGHM Group)

The risk of not being able to secure appropriate staff to advance the Group’s business goals (including the lack of sufficient human resources to maintain the continuity of the Core Business operations due to the COVID-19 pandemic).

The risk of not being able to acquire and keep human resources, among others to support on-going operations and development projects. The KGHM Group is exposed to risk related to the availability of qualified staff in the market as well as on-going identification of staffing needs in terms of required qualifications and supplying them while reflecting staffing fluctuations. Of significance is access to qualified employees in the future in the context of an ageing society and a market deficit of certain professions.

In 2021, an important factor affecting exposure to risk was the COVID-19 pandemic and the impact of its subsequent waves on the availability in particular of key employees necessary to maintain the continuity of the Core Business.

  

Advancing a variety of HR projects, identification of potential successors for key positions (including in terms of mobility) and preparations for advancement. On-going comparison of remuneration packages (including in relation to working conditions) to offers on the market. Cooperation with schools and universities to promote the company as an employer and to ensure qualified employees. Implementation of programs to develop employee skills and to secure funds for this purpose. Development of recruiting tools and the identification of key skills to advance the business goals of the KGHM Group.

Existing solutions in the KGHM Group undergo ongoing analysis and evaluation in terms of ensuring employee safety and the implementation of additional solutions aimed at limiting the risk of spreading the SARS-CoV-2 virus amongst the staff. Continually updating developed operating procedures in case of the need to limit or cease production, concepts are prepared for new working systems enabling contact between working shifts as well as lists of employees/specialists and their substitutes, who are vital to ensuring the operational continuity of the Core Business. Maintaining procedures on what to do in the case of detection of SARS-CoV-2 amongst the employees in line with the guidelines of appropriate governmental institutions.
(KGHM Group)

Risk that the confidentiality, integrity or availability of informational assets which have been collected, stored or processed on IT resources may be compromised, as well as cybernetic threats.

The KGHM Group, due to its well-developed IT structure, is exposed to the risk of a breach in the confidentiality, authenticity, integrity or availability of informational assets which have been collected, stored or processed on IT resources. The sources of this risk are both forces of nature (e.g. fires, construction catastrophes, downpours) as well as hazards arising from human activities (intentional or not). The KGHM Group is exposed to the risk of an unauthorised loss, change or destruction of critical data and information as well as loss of the possibility of the operational control of equipment and systems as a result of cybernetic attacks on the infrastructure of the KGHM Group. Such incidents could generate the risk of production shutdowns, leading to production and financial losses and claims due to the loss/disclosure of personal data. This risk has a large impact on the reputation of the KGHM Group.

 Strict adherence to and application of principles arising among others from the IT Security Policy and from Facility Protection Plans. The systematic evaluation of risk of loss of the confidentiality, integrity, authenticity or availability of informational assets which have been collected, stored or processed on IT resources. Ongoing monitoring of the usefulness of existing infrastructure as well as the analysis of and planning for the implementation of teleinformational solutions to increase security, in accordance with global trends and best practice in this regard. Implementation of security systems and adequate organisational solutions at various levels of the company’s infrastructure, aimed at staying ahead of any decrease in the utility of systems at risk and minimising the potential losses of the KGHM Group.

In 2021, work commenced which was related among others to implementing automated information flow monitoring using a modern DLP (Data Loss Prevention) system and by building a dedicated Security Operation Centre (SOC). The main task of the new unit will be a 24h first line of support to deal with cybersecurity incidents.
(KGHM Group)

The risk of exceeding project/program budgets and schedules, deviating from defined scopes and failing to meet defined quality parameters as a result of the improper management of portfolios and projects. Risk related to the operational management and development of key mining projects, reflecting the question of incurred costs, permits and infrastructural requirements.

The KGHM Group is exposed to risk related to the advancement of projects and programs as a result of their improper management. The risk of changes in budgets, schedule, scope and deviations from the expected quality of project products and/or programs is related to a variety of factors of an internal nature involving both the methodological approach and the projected structure of management and supervision. Improperly selected tools and techniques, lack of established criteria and principles for evaluating projects, or inconsistency in their application or adherence to them may restrict or prevent the achievement of the KGHM Group’s strategic goals. In terms of external factors, there remains the question of meeting legal and formal requirements which could generate deviations from the assumed schedule, and in extreme instances may halt the advancement of a project/program.

 Improve standards in the management of portfolios and projects and implement a projects management system aimed at supporting the organisation in the planning and management of portfolios and projects. Standardisation of planning and preparation processes and in the advancement of investment projects, comprising such aspects as scheduling, preparing costs projections, technical designing, project review, investment handover documentation, risk analysis of projects/programs. Management of projects in accordance with international standards and conducting on-going monitoring of progress. On-going evaluation of the economic feasibility of existing and anticipated development projects.

Risk and description of risk factors Mitigation
(KGHM Group)

Climate risk related to the negative impact of climate change on the activities of the KGHM Group.

The KGHM Group is exposed to the risk of climate change due to the negative impact of factors arising from specified events, in particular related to violent and chronic weather phenomena resulting from changes in the climate, such as storms, floods, fires or heat waves, as well as permanent changes in weather patterns, which could interrupt the values chain or the continuity of operations of the KGHM Group. This risk is related to changes in the conditions under which activities are conducted as a result of climate change and adaptation to these changes.

 The development and publication of the Climate Policy of KGHM Polska Miedź S.A. as a directional document, whose chief goal is to present the climate-related ambitions of the Company and to set forth the scope of process and organisational changes needed to achieve them. The primary goal of the Climate Policy of KGHM is for the Parent Entity to achieve climate neutrality by 2050 with respect to Scope 1 emissions – direct emissions primarily related to the production activities and Scope 2 emissions – indirect emissions associated with the use of electricity and heat acquired from the market, with their maximum possible reduction. The intermediate target is to reduce total Scope 1 and Scope 2 emissions by 30% by 2030, compared to the emission levels of 2020. The reduction targets for the entire KGHM Group will be published no later than in the first half of 2023.
(KGHM Group)

Climate risk related to the transition to a lowemissions economy and resistance to climate change.

The KGHM Group is exposed to risk arising from the need of the economy to adapt to gradual climate change, in particular by utilising low-emissions solutions. The temporary risk category comprises questions related to legal requirements, perceptions of customers and other stakeholders to climate questions, technological progress towards a lowcarbon economy and changes in demand and supply for certain products and services, whose production is associated with negative climate impact.

This risk is related to changes in the conditions under which activities are conducted as a result of climate change and adaptation to these changes.

 Details on how the goals will be attained, as well as total capital expenditures on the realisation of activities aimed at reducing the emission of greenhouse gases, will be provided in the form of the Decarbonisation Program of the KGHM Group.

Inclusion in the Strategy of the KGHM Group of global trends related to climate changes which are driving environmental challenges as well as planned changes in the introduction of mechanisms reflecting climate context in the processes of updating, implementing and monitoring the Strategy.

An implemented and improved effective system of risk management, which also comprises management of climate risk, including the categorisation, identification, assessment and manner of dealing with this risk, along with plans for its mitigation. An implemented and improved effective system of compliance management, which also comprises management of the risk of loss of compliance with climaterelated requirements.

Start of implementation of a climate reporting system based on the Recommendations of the Task Force on Climate- Related Financial Disclosures from 2017. Development of changes involving key business and management processes – in particular those related to or having an impact on restrictions by the Parent Entity in greenhouse gas emissions by among others changes in corporate governance and changes as regards indicators, whose goal is to introduce the process of measuring emissions for the KGHM Group in a manner fully compliant with GHG Protocol and implementation of the first indicators responsible for monitoring improvements in the business robustness model to climate change. More detailed information on climate risks is presented later in this document.

Information on the impact of the war in Ukraine on the Company’s and Group’s operations

As at the date of approval of the Annual Consolidated Financial Statements of the KGHM Polska Miedź S.A. Group for publication, the geopolitical situation associated with the direct aggression of Russia in Ukraine and the implemented system of sanctions does not have a substantial impact on the operations of KGHM Polska Miedź S.A., while the risk of interruptions to the Company’s operational continuity in this regard continues to be considered as low.

KGHM Polska Miedź S.A. does not engage in direct transactions with entities from Russia, Belarus or Ukraine; such contracts are held by certain intermediaries, mainly traders of wire rod, which could indirectly impact the level of purchases made by such clients.

The possible increase in the near-term in prices of fuels and energy carriers could be a primary factor generating higher cost of sales, selling costs and administrative expenses. The availability of resources and materials is currently at a stable level. It cannot however be ruled out that a continuation of this armed conflict over an extended period of time as well as the system of economic sanctions could have a negative impact on suppliers and lead to interruptions in the continuity of materials and services supply chains in the Company KGHM Polska Miedź S.A., caused among others by logistical restrictions and availability of materials on international markets, e.g. of steel, fuels and energy.

The level of cathode inventories in exchange warehouses is currently very low, while the sanctions imposed on Russia and on Russian entities may limit the availability of Russian cathodes (produced among others by Norilsk Nickel) on European markets. The potential for changes in supply and high copper prices on metals markets resulting from the aforementioned situation may lead to higher revenues of KGHM Polska Miedź S.A., but at the same time to higher prices for purchased metal-bearing materials used in production. A similar dependency may occur in the case of a weakening of the PLN versus other currencies (USD and EUR), where the possibility exists for higher revenues, and simultaneously for higher prices for imported materials and resources, for a higher copper tax, or the aforementioned costs of purchased metalbearing materials. It is impossible to estimate the impact of the aforementioned, potential events on potential profit or loss; the situation is currently continuously monitored, with the simultaneous use of possible mitigating actions.

In terms of the availability of capital and the level of debt, KGHM holds no bank loans drawn from institutions threatened with sanctions.

The financial markets reacted rapidly to the outbreak of the conflict in Ukraine. In the first phase of the war the price of copper in London and currencies rose in reaction to the crisis, and in less than a month from the outbreak of the conflict the copper price reached a maximum of 10 730 USD/t (7 March 2022). Another key factor for the copper market is the strongest Covid-19 pandemic wave in China since March 2020. The reduction in economic activity and the restrictions on the movement of people in the largest Chinese cities are having a negative impact on industrial production, and consequently on demand for the metal. The war in Ukraine, the economic sanctions imposed, the pandemic in China and the ongoing cycle of tightening of monetary policy globally are increasingly making the market more anxious about the rate of global economic growth. This negative sentiment has led to falls in stock prices, as well as to an adjustment of prices on the metals market. The price of copper on 11 May 2022 amounted to 9 367 USD/t.

The war in Ukraine led to a weakening in the PLN versus other currencies (USD and EUR), and there was an obvious strengthening of the USD to most other currencies. The value of the USD expressed in PLN reached a maximum on 7 March 2022 and amounted to 4.5722 PLN, following which it withdrew to 4.4190 PLN on 11 May 2022. The EUR behaved similarly, and reached a maximum of PLN 4.9647 on 7 March 2022, following which it fell to 4.67 PLN on 11 May 2022.

During this time the Monetary Policy Council raised interest rates several times, with the latest change occurring on 6 May 2022 and as a result interest rates are currently at their highest level since 2008.

In 2021, the process began in the Company of implementing a comprehensive system to manage operational continuity, which also enables a detailed breakdown of the scope of actions undertaken as regards managing corporate risk in terms of the risk of a catastrophic impact and the small probability of their occurrence.

Information on the impact of COVID-19 on the Company’s and Group’s operations

The greatest impact on the operations and results of the KGHM Polska Miedź S.A. Group is from the Parent Entity and, to a lesser extent, the KGHM INTERNATIONAL LTD. Group.

The most significant risk factors related to the COVID-19 pandemic and impacting the Company’s and the Group’s activities are:

  • increased absenteeism amongst employees of the core business as a result of subsequent waves of the SARS-CoV-2 virus,
  • potential interruptions in the materials and services supply chain as well as logistical restrictions, especially as regards international transport,
  • possible restrictions in certain sales markets, a drop in demand and optimisation of inventories of raw materials and finished products amongst customers,
  • potential exceptional legal changes,
  • volatility in copper and silver prices on the metals markets,
  • volatility in molybdenum prices,
  • volatility in the USD/PLN exchange rate,
  • volatility in electrolytic copper production costs, including in particular due to the minerals extraction tax, changes in the value of purchased copper-bearing materials consumed and volatility in prices of energy carriers and electricity,
  • the effects of the implemented hedging policy, and
  • the general uncertainty on financial markets and the impact of the economic crisis connected with the COVID-19 pandemic.

Evaluation of the key categories of risk which are impacted by the coronavirus pandemic underwent detailed analysis by the on-going monitoring of selected information in the areas of production, sales, supply chains, personnel management and finance, in order to support the process of reviewing the current financial and operating situation of the KGHM Polska Miedź S.A. Group. As a result, none of the aforementioned factors had a substantial negative impact on the Group’s operations and consequently, there were no extensive deviations from achievement of the budget targets for 2021 in any of the operating segments of the KGHM Polska Miedź S.A. Group, with the exception of companies operating in the spa and hotel sector.

In 2021 the COVID-19 pandemic did not have a significant impact on the world’s metals markets. On 31 December 2021 the price of copper was 9,692 USD/t, or an increase by 25% compared to the price at the end of 2020. The price of silver on 31 December 2021 amounted to 23.10 USD/oz t, or a decrease by 13% compared to the price at the end of 2020. Molybdenum prices ended the year 2021 at the level of 18.61 USD/lb compared to 9.33 USD/lb at the end of 2020, or an increase by 99%.

In 2021 the greatest impact of the COVID-19 pandemic was on the Group’s secondary activities involving the hotel and spa services of the companies Uzdrowiska Kłodzkie S.A. – Grupa PGU, Uzdrowisko Połczyn Grupa PGU S.A., Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU, Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU, INTERFERIE S.A. and Interferie Medical SPA Sp. z o.o. The spa and hotel companies obtained exemptions from financing institutions from the obligation to calculate the DSCR ratio for the entire year 2021. Financial liabilities to creditors and lessors are paid on an ongoing basis.

The spa and hotel companies of KGHM Polska Miedź S.A. received financing from the Polski Fundusz Rozwoju (Polish Development Fund or PDF) under the Anti–Crisis Shield 1.0 for large enterprises and under the Anti–Crisis Shield 2.0 for the SME sector. Companies which received financing from the shield for the SME sector submitted applications in the fourth quarter of 2021 requesting the write-off of some of the assistance (in the total amount of PLN 9.2 million). The Company is currently awaiting decisions regarding the settlement of the subsidies received. In addition, at the end of September, companies that joined the Anti-Crisis Shield 1.0 program for large enterprises submitted applications to join the Financial Shield under the 2.0 program for large enterprises. At present, dedicated PDF teams are carrying out a financial and legal analysis. The total requested amount of liquidity loans amounted to PLN 18.7 million.

By maintaining a strict sanitary regime and regulatory restrictions as regards permitted occupancy rates in hotels, the companies were able to return to full realisation of their commercial and health-related services. In the long term, the progressive vaccination campaign will undoubtedly be the main factor regulating the situation in the hotel and spa industry.

With regard to the other domestic companies of the KGHM Polska Miedź S.A. Group, the epidemic situation in 2021 did not have a significant impact on the operating results generated by these entities.

The epidemic situation caused by COVID-19 did not have a significant impact on the Company’s and the Group’s operations, and at the date of publication of this report the Management Board of the Parent Entity estimates the risk of loss of going concern caused by COVID-19 as low. Individual, immaterial interruptions to the continuity of the supply chain for materials and services have been observed, caused by logistical restrictions in international markets. Regular contact with suppliers enables prompt reaction to delays by utilisation of the strategy of supplier diversification applied in the Group as well as the use of alternative solutions.

In KGHM Polska Miedź S.A., as well as in all international mines of the KGHM Polska Miedź S.A. Group as well as Sierra Gorda S.C.M., thanks to the implementation of a variety of preventative measures, such as enforcing a sanitary regime and monitoring and testing the health of employees, there were no production stoppages which would have been directly attributable to the pandemic. As a result, the Group’s copper production in 2021 was in line with the targets set at the start of the year.

In terms of sales, the majority of customers continue not to feel any strong negative impact from the epidemic on their activities, thanks to which their trade payables towards the Parent Entity are being paid on time, while the execution of deliveries to customers continues without interruption.

The Group is fully capable of meeting its financial obligations. The financial resources held by the Group and available borrowings guarantee its continued financial liquidity. The financing structure of the Group at the level of the Parent Entity, based on the long-term and diversified sources of financing, provided the Company and the Group with long-term financial stability through extending the average weighted maturity of the debt of KGHM Polska Miedź S.A.

Due to the centralisation of the process of obtaining external financing for the needs of the entire Group, in order to transfer liquidity within the Group, a debt instrument in the form of owners loans is used to support the investment process, and the Group uses local and international cash pooling to service its daily operations.

At present the Parent Entity is not aware of any significant risk of a breach in the financial covenants contained in external financing agreements related to the COVID-19 pandemic.

The Group continues to advance its investment projects in accordance with established schedules and is not aware of any increase in risk related to their continuation as a result of the coronavirus pandemic.

During the reported period there were likewise no interruptions in the continuity of the Group’s operations caused by infections of this virus amongst the employees. There continues to be a lack of any substantial heightened level of absenteeism amongst employees of the Parent Entity’s core business or domestic and international production assets related to the epidemic. Taking into consideration the risk of a subsequent wave of the COVID-19 pandemic, there still remains uncertainty regarding the directions of development of the economic and social situation in Europe and globally. An important factor for the domestic and global economies will be the percentage of people fully vaccinated against COVID-19, which would enable among others the further easing of restrictions in individual countries and sectors, a reduction in uncertainty as to future periods, or improving the pace of economic recovery from the recession caused by the COVID-19 pandemic. The Parent Entity constantly monitors the global economic situation, in order to assess its potential negative impact on the KGHM Polska Miedź S.A. Group and to take preventive actions to mitigate this impact.

Political risk in Chile

Due to the on-going work on the new Constitution in Chile, there is visible increased exposure to political risk which could in future have an impact on operations there. The Parent Entity is engaged in on-going monitoring of the political situation in Chile and its associated impact on the mining industry in order to make an up-to-date assessment of the potential ramifications for the KGHM Polska Miedź S.A. Group. Depending on the direction of the changes and the decisions undertaken by Chile’s authorities and society, various scenarios are being analysed which will necessitate the taking of appropriate adaptive actions.

 

 

 

 

 

Market, credit and liquidity risk

The goal of market, credit and liquidity risk management in the KGHM Polska Miedź S.A. Group is to restrict the undesired impact of financial factors on cash flow and results in the short and medium terms and to enhance the Group’s value over the long term. The management of risk includes both the elements of risk identification and measurement as well as its restriction to acceptable levels. The process of risk management is supported by an appropriate policy, organisational structure and procedures. In the Parent Entity these issues are covered in the following documents:

  • Market Risk Management Policy and the Rules of the Market Risk Committee,
  • Credit Risk Management Policy and the Rules of the Credit Risk Committee, and
  • Financial Liquidity Management Policy and the Rules of the Financial Liquidity Committee.

The „Market Risk Management Policy in the KGHM Polska Miedź S.A. Group” covers selected mining companies in the Group (KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD., FNX Mining Company Inc., Robinson Nevada Mining Company, KGHM AJAX MINING Inc. and Sociedad Contractual Minera Franke). Financial liquidity management is carried out in accordance with the „Financial Liquidity Management Policy in the KGHM Group” which regulates financial liquidity management in the Group and is carried out by individual Group companies, while its organisation and coordination as well as the supervision thereof is performed in the Parent Entity.

Credit risk management in the Parent Entity is carried out in accordance with the Management Board-approved Credit Risk Management Policy. The Parent Entity serves as an advisor to the Group’s companies with respect to managing credit risk. The „Credit Risk Management Policy in the KGHM Polska Miedź S.A. Group” applies to selected Group companies, the goal of which is to introduce a comprehensive, joint approach and the most important elements of the credit risk management process.

Market risk management

Market risk is understood as the possible negative impact on the Group’s results arising from changes in the market prices of commodities, exchange rates and interest rates, as well as from changes in the value of debt securities and share prices of listed companies.

In terms of market risk management (in particular the risk of changes in metals prices and exchange rates) of greatest significance and impact on the results of the Group are the scale and nature of the activities of the Parent Entity and the mining companies of KGHM INTERNATIONAL LTD.

The Parent Entity actively manages market risk, undertaking actions and decisions in this regard within the context of the global exposure throughout the KGHM Polska Miedź S.A. Group.

The Management Board is responsible for market risk management in the Parent Entity and for adherence to policy in this regard. The main body involved in performing market risk management is the Market Risk Committee, which makes recommendations to the Management Board in this area.

In 2021, the Group was mainly exposed to the risk of the changes in the prices of metals it sells: copper and silver. Of major significance for the Parent Entity was the risk of changes in currency rates, in particular the USD/PLN exchange rate. The Group’s companies are additionally exposed to the risk of volatility in the prices of other metals. Market risk related to changes in metals prices arises from the formula for setting prices in physical metals sales contracts, which are usually based on the average monthly market prices for the relevant future month.

In accordance with the Market Risk Management Policy, in 2021 the Parent Entity continuously identified and measured market risk related to changes in metals prices, exchange rates and interest rates (analysis of the impact of market risk factors on the Parent Entity’s activities – profit or loss, statement of financial position, statement of cash flows), and also analysed the metals, currencies and interest rates markets.

These analyses, along with assessment of the internal situation of the Parent Entity and Group, represented the basis for taking decisions on the application of hedging strategies on the metals, currency and interest rates markets. In terms of the realisation of the strategic plan of hedging against the risk of changes in the USDPLN exchange rate, in 2021 the Parent Entity purchased put options for the total amount of USD 1,050 million to cover planned revenues from sales with maturities from February 2021 to June 2022, and also entered into collar options strategies in the notional amount of USD 240 million with maturities from July 2022 to December 2022. Moreover, in 2021 the Parent Entity managed an open hedged position on the currency market by restructuring options structures.

In 2021, the Parent Entity implemented seagull hedging strategies on the copper market for the period from January 2022 to December 2023 for the total notional amount of 87 thousand tonnes. In terms of restructuring a hedging position on the copper market, call options were purchased for the period from March to December 2021 for the total notional amount of 155 thousand tonnes, opening at the same time participation in potential further price rises for the collar and seagull options structures held for 2021. In the second half of 2021 the strike price of structures hedging revenues from the sale of copper was also raised for the period from October to December 2021 for the total notional amount of 25.5 thousand tonnes. Also restructured was a position on the forward silver market for the period from July 2021 to December 2022. Detailed disclosures on the actions taken in 2021 with respect to market risk management is presented in notes 7.5.1.2 and 7.5.1.3 of the financial statements.

As at 31 December 2021, the Parent Entity also held open CIRS (Cross Currency Interest Rate Swap) transactions for the notional amount of PLN 2 billion, hedging against market risk related to the issue of bonds in PLN with a variable interest rate. Debt due to bonds denominated in PLN generate currency risk due to the fact that most of the Parent Entity’s sales revenue is denominated in USD.

In terms of managing currency risk, the Parent Entity applies natural hedging by borrowing in currencies in which it has revenues. The value of bank and investment loans as at 31 December 2021 drawn in USD, following their translation into PLN, amounted to PLN 2,980 million (as at 31 December 2020: PLN 4,321 million).

In 2021, none of the Group’s mining subsidiaries implemented forward transactions on the metals and currency markets and did not hold open positions as at 31 December 2021. Risk related to changes in metals prices did however exist in the case of embedded derivative instruments in contracts for the purchase of metal-bearing materials.

Some of the Group’s Polish companies managed the currency risk related to their core businesses by opening derivative transactions on the EUR/PLN and USD/PLN markets.

Interest rate risk is the possibility of the negative impact of changes in interest rates on the Group’s position and results. In 2021, the Group was exposed to such risk due to loans granted, free cash invested on deposits, the reverse factoring program and borrowings.

As at 31 December 2021, the following positions were exposed to interest rate risk by impacting the amount of interest income and costs:

  •  cash and cash equivalents: PLN 2,333 million, including the deposits of special purpose funds: the Mine Closure Fund and the Tailings Storage Facility Restoration Fund,
  • borrowings: PLN 2,153 million
  • trade and similar payables: PLN 55 million.

As at 31 December 2021, the following positions were exposed to interest rate risk due to changes in the fair value of instruments with fixed interest rates:

  • receivables due to loans granted by the Group: PLN 22 million,
  • borrowings: PLN 3,796 million.

As at 31 December 2021, the Parent Entity held open CIRS (Cross Currency Interest Rate Swap) transactions for the notional amount of PLN 2 billion, hedging against market risk related to the issue of bonds in PLN with a variable interest rate.

Price risk related to the shares of listed companies held by the Group is understood as the change in their fair value due to changes in their quoted share prices.

As at 31 December 2021, the carrying amount of shares of companies which were listed on the Warsaw Stock Exchange and on the TSX Venture Exchange amounted to PLN 516 million.

The total impact of derivatives and hedging instruments (transactions on the copper, silver, currency and interest rate markets as well as embedded derivatives and USD-denominated loans designated as a hedge against a change in the exchange rate) on the Group’s profit or loss for 2021 amounted to -PLN 2,080 million, of which:

  • PLN 1,651 million decreased revenues from contracts with customers,
  • PLN 385 million decreased the result on other operating activities, and
  • PLN 44 million decreased the result on financing activities (including: -PLN 34 million as an adjustment of interest on borrowings).

Moreover, in 2021 other comprehensive income decreased by PLN 367 million (impact of hedging instruments).

As at 31 December 2021, the fair value of open positions in derivatives of the Group (on the metals, currency and interest rate markets and in embedded derivatives) amounted to -PLN 1,174 million.

Credit risk management

Credit risk is defined as the risk that counterparties will not be able to meet their contractual liabilities.

The Management Board is responsible for credit risk management in the Parent Entity and for compliance with policy in this regard. The main body involved in actions in this area is the Credit Risk Committee.

In 2021, the KGHM Polska Miedź S.A. Group was exposed to this risk, mainly in four areas:

The Group’s companies have been cooperating for many years with a large number of customers, which affects the geographical diversification of trade receivables.

The Parent Entity limits its exposure to credit risk related to trade receivables by evaluating and monitoring the financial standing of its customers, setting credit limits, using debtor security and non-recourse factoring. An inseparable element of the credit risk management process realised by the Parent Entity is the on-going monitoring of balance and ageing of receivables and the internal reporting system.

Buyer’s credit is only provided to proven, long-term customers. In the case of new customers, an effort is made to ensure that sales are based on prepayments or trade financing instruments which wholly transfer the credit risk to financial institutions.

In 2021, the Parent Entity secured its receivables by promissory notes, registered pledges, bank guarantees, corporate guarantees, mortgages and documentary collection. Moreover, the majority of customers who hold buyer’s credit on contracts have ownership rights confirmed by a date certain.

To reduce the risk of insolvency by its customers, the Parent Entity has a receivables insurance contract, which covers receivables from entities with buyer’s credit which have not provided strong collateral or have provided collateral which does not cover the total amount of the receivables. Taking into account the collateral held and the credit limits received from the insurance company, as at 31 December 2021 the Parent Entity had secured 84% of its trade receivables (as at 31 December 2020: 75%).

The concentration of credit risk in the Group is related to the terms of payment granted to key clients. Consequently, as at 31 December 2021 the balance of receivables from 7 of the Group’s largest customers, in terms of trade receivables at the end of the reporting period, represented 49% of the trade receivables balance (as at 31 December 2020: 42%). Despite the concentration of this type of risk, it is considered that due to the availability of historical data and the many years of experience cooperating with clients, as well as above all due to the security used, the level of credit risk is low.

The Group allocates periodically free cash in accordance with the requirements to maintain financial liquidity and limit risk and in order to protect capital and maximise interest income.

Credit risk related to deposit transactions is continuously monitored by the on-going review of the credit ratings of those financial institutions with which the Group cooperates, and by limitation of the level of concentration in individual institutions. As at 31 December 2021, the maximum share of a single entity in terms of credit risk arising from financial institutions in which the Group has deposited funds amounted to 41% (as at 31 December 2020: 25%).

All of the entities with which the Group enters into derivative transactions (with the exception of embedded derivatives) operate in the financial sector. These are mainly financial institutions, with a medium-high rating. According to fair value as at 31 December 2021, the maximum share of a single entity with respect to credit risk arising from open derivative transactions entered into by the Group and from unsettled derivatives amounted to 26% (as at 31 December 2020: 32%). Due to diversification of risk in terms both of the nature of individual entities and of their geographical location, as well as taking into consideration the fair value of assets and liabilities arising from derivative transactions, the Group is not materially exposed to credit risk as a result of derivative transactions entered into.

As at 31 December 2021, the balance of loans granted by the Parent Entity amounted to PLN 8,366 million. The most important of these are long-term loans in the total amount of PLN 5,220 million granted to the company Future1 and to the KGHM INTERNATIONAL LTD. Group. Detailed information on the loans granted by KGHM Polska Miedź S.A. is presented in the Financial Statements, Note 6.2

As at 31 December 2021, the balance of loans granted by the Group amounted to PLN 8,336 million. The most important of these are short-term and long-term loans in the total amount of PLN 8,314 million, or USD 2,047 million, granted by the KGHM INTERNATIONAL LTD. Group for the financing of a mining joint venture in Chile.

Credit risk related to the loans granted to the joint venture Sierra Gorda S.C.M. is dependent on the risk related to mine project advancement and is assessed by the Management Board of the Parent Entity as moderate.

Management of financial liquidity risk and of capital

The management of capital in the Group aims at securing funds for development and at securing relevant liquidity.

Management of the Group’s liquidity is conducted in accordance with the Financial Liquidity Management Policy in the KGHM Group. This document describes the process of financial liquidity management in the Group, which is realised by the Group’s companies, while its organisation and coordination as well as the supervision thereof is performed in the Parent Entity.

The basic principles resulting from this document are:

  • the need to ensure stable and effective financing for the Group’s operations,
  • constant monitoring of the Group’s level of debt, and
  • effective management of working capital. Borrowing by the Group is based on the following pillars:
  • an unsecured, revolving syndicated credit facility, obtained by the Parent Entity in the amount of USD 1,500 million with a 5-year tenor with the option of extending for another 2 years (5+1+1). In 2021, the Parent Entity obtained the consent of the syndicate’s members to extend the tenor by another year, or to 20 December 2026. The available financing limit during the period of extension will be USD 1,438 million,
  • two investment loans granted to the Parent Entity by the European Investment Bank in the amount of PLN 2,000 million and PLN 1,340 million with financing periods of up to 12 years from the date the instalments are drawn,
  • bilateral bank loans to the amount of PLN 2,877 million, supporting the management of liquidity of companies and the financing of working capital as well as the financing of investments,
  • the bond issue program of the Parent Entity on the Polish market, based on an issue agreement dated 27 May 2019. On 27 June 2019 the first issue was made in the nominal amount of PLN 2,000 million, under which 5-year bonds were issued in the amount of PLN 400 million and 10-year bonds in the amount of PLN 1,600 million.

Detailed information regarding available sources of financing and their utilisation in 2021 may be found in Section 6.6 of the Management Board’s Report on the Activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021. The aforementioned sources of financing fully cover the liquidity needs of the Parent Entity and the Group. During 2021, the Group made use of borrowing which was available from all of the above categories, while liabilities of the Group due to bank and other loans drawn and to bonds issued as at 31 December 2021 amounted to PLN 5,304 million.

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