3.1 Impairment of assets as at 31 December 2021

in PLN millions, unless otherwise stated

Results of the test performed as at 30 June 2021 are presented in the following table:

As a result of the conducted test, there was a reversal of an impairment loss on the assets of the CGU Robinson in the amount of PLN 38 million, which decreased the item “Cost of sales”.

The results of tests performed as at 30 June 2021 for the CGU Victoria and the CGU Sudbury confirmed that their recoverable amounts are equal to their carrying amounts.

The sensitivity analysis of the recoverable amount of the CGU Sudbury, due to the low carrying amount of assets, was not presented.

In the second half of 2021, as a result of the identification of indications of a possible change in the recoverable amount of the CGU Sudbury’s mining assets of the KGHM INTERNATIONAL LTD. Group, the Parent Entity’s Management Board performed impairment testing of these assets. The key indications to perform impairment testing and indicating that that the recoverable amount of assets may be lower than their carrying amount, and therefore it may be necessary to recognise an additional impairment loss, were the decision to abandon mining operations on the additional deposit and the decrease in efficiency of these assets. Production was halted in two of the mines in the CGU Sudbury, that is Morrison and Podolsky, and they are maintained without conducting mining operations. Moreover, results of another mine of this CGU – McCreedy – were below expectations in 2021, mainly due to a significant decrease in metal content in mined ore.

In order to determine the recoverable amount of the CGU Sudbury’s assets, in the test conducted the fair value (decreased by estimated costs to sell) was calculated using the DCF method, i.e. the method of discounted cash flows.

The basic macroeconomic assumptions adopted for impairment testing as at 31 December 2021, that is metal prices, did not significantly change as compared to those adopted for impairment testing as at 30 June 2021.

As a result of the conducted test, an impairment loss was recognised on the assets of CGU Sudbury in the following items: “Cost of sales” in the amount of PLN 162 million and “Other operating costs” in the amount of PLN 4 million.

The sensitivity analysis of the recoverable amount of CGU Sudbury was not presented due to the low carrying amount of assets.

Due to the fact that as at 30 June 2021 the Carlota and Franke mines (assets of the KGHM INTERNATIONAL LTD. Group) were reclassified to assets held for sale, their recognition and measurement at the moment of reclassification and as at 31 December 2021 were performed pursuant to IFRS 5 (Note 9.8).

The recoverable amount of tested property, plant and equipment was determined using an analysis of discounted forecasted cash flows. The adopted forecast period is 10 years. Extension of the forecast period is justified mainly, among others, by the significant and long-term impact of expected changes in the regulatory environment and in order to fully reflect the impact of planned capital expenditures,

The adopted level of capital expenditures during the forecast period mainly concerns the realisation of a task – Modernisation of a heat supply system for the Legnica city and modernisation of heating networks.

For the forecast of costs for the years 2022 – 2031, the change in the heat generation technology in Legnica from 2024 and reduction of transmission losses  will have a significant impact, and in particular:

• a decrease in costs of raw materials and production processes of a coal-based economy and the associated current maintenance, operations, overhauls and shut-downs;
• a decrease in the amount of CO₂emissions by approx. 50%;
• reorganisation of employment due the switch to a natural gas-based technology;
• reduction of heat losses in owned transmission infrastructure, related to the on-going modernisation of transmission infrastructure.

The aforementioned forecast takes into account significant changes in prices of CO₂ emission rights and energy which took place in the last period.

As the result of the aforementioned assumptions and with due prudence, the estimated EBIT will increase in the period 2022 – 2032 from the yearly level of –PLN 5 million to PLN 8 million.

The EBIT in 2032 in the amount of PLN 8 million is a basis to calculate free cash flows necessary to determine the residual value, which is estimated to be PLN 115 million.

As a result of the impairment testing of property, plant and equipment and intangible assets, the recoverable amount of assets was determined to be at the level of PLN 56 million, which was lower than the carrying amount  of the tested assets, which was the basis for recognising an impairment loss in the amount of PLN 50 million in the item “Cost of sales”.

The measurement of non-current assets and intangible assets of the company indicated a significant sensitivity to the adopted discount rates and the measurement of the residual value, which was determined based on EBIT from 2032. The following table presents the impact of changes to these parameters on the measurement of the assets.

In order to monitor the risk of impairment of the operating assets in subsequent reporting periods, it was determined that the recoverable amount would be equal to the carrying amount of assets if the discount rate fell by 0.91% or if EBIT increased by 43.2%.

The recoverable amount of tested property, plant and equipment was determined using an analysis of discounted forecasted cash flows. The adopted forecast period is 10 years. Extension of the forecast period is justified mainly by the significant and long-term impact of expected changes in the regulatory environment. Moreover, in the detailed forecast period it is necessary to present the impact of incurred capital expenditures, the increase in their amounts in the first forecast period (for the years 2022/2023) and the lack of necessity to incur them in similar amounts in subsequent years.

The approved Budget of the company for the years 2022 – 2026, adjusted due to significant changes in prices of CO₂ emissions rights and energy which took place recently , is the basis for the preparation of forecasts of revenues and costs.

The adopted level of capital expenditures in the forecast period concerns mainly modernisation and replacement tasks.

As the result of the aforementioned assumptions and with due prudence, the estimated EBIT will increase in the period 2022 – 2024 from the level of -PLN 3 million to PLN 17 million, while from 2025 to 2032 EBIT will be at the yearly level of PLN 16 million.

As a result of the impairment testing of the property, plant and equipment and intangible assets, the recoverable amount of tested assets was determined to be at the level of PLN 307 million, which was lower than the carrying amount of the tested assets, which was the basis for recognising an impairment loss in the amount of PLN 79 million in the item “Cost of sales”.

The measurement of tested non-current assets indicated a significant sensitivity to the adopted levels of discount rates and a moderate sensitivity to a change in EBIT which is a basis used to determine the residual value. The following table presents the impact of changes of these parameters on the measurement of assets.

Wartość odzyskiwalna poddanych testowi rzeczowych aktywów trwałych została ustalona w oparciu o analizę zdyskontowanych prognozowanych przepływów pieniężnych. Jako okres prognozy przyjęto 10 lat. Wydłużenie okresu prognozy znajduje uzasadnienie przede wszystkim ze względu na istotny i długoterminowy wpływ szacowanych zmian w otoczeniu regulacyjnym. Dodatkowo, w okresie szczegółowej prognozy konieczne jest ukazanie wpływu dotychczas poniesionych nakładów inwestycyjnych, ich zwiększonych wartości w pierwszym okresie prognozy (lata 2022/2023) oraz braku konieczności ponoszenia ich w podobnej wysokości w kolejnych latach.

Podstawę opracowania prognoz przychodów i kosztów stanowi zatwierdzony budżet spółki na lata 2022 – 2026 skorygowany w związku z istotnymi zmianami cen uprawnień do emisji CO2 oraz mediów energetycznych jakie nastąpiły w ostatnim okresie.

Przyjęty  poziom  nakładów  inwestycyjnych  w  okresie  prognozy  dotyczy  głównie  zadań  modernizacyjnych i odtworzeniowych.

W konsekwencji powyższych założeń i przy zachowaniu ostrożności szacowany poziom EBIT wzrośnie w okresie 2022- 2024 z poziomu -3 mln PLN do 17 mln PLN, natomiast od 2025 r. do 2032 r. EBIT będzie kształtował się na poziomie 16 mln PLN rocznie.

W wyniku przeprowadzonego testu na utratę wartości rzeczowych aktywów trwałych oraz wartości niematerialnych ustalono wartość odzyskiwalną testowanych aktywów na poziomie 307 mln PLN, która była niższa od wartości bilansowej testowanych aktywów, co  dało  podstawy  do  dokonania  odpisu  z  tytułu  utraty  wartości  w  kwocie 79 mln PLN, który ujęto w pozycji „Koszty sprzedanych produktów i towarów”.

Wycena testowanych aktywów trwałych wykazuje znaczną wrażliwość na przyjęte poziomy stopy dyskonta oraz umiarkowaną wrażliwość na zmianę EBIT będącej podstawą ustalenia wartości rezydualnej. W poniższej tabeli przedstawiono wpływ zmian tych parametrów na wycenę aktywów.

In order to monitor the risk of impairment of operating assets in subsequent reporting periods, it was determined that the recoverable amount would be equal to the carrying amount of the assets if the discount rate to fell by 0.71 percentage point or EBIT increased by 26.3%.