• 6.1 Joint ventures accounted for using the equity method

6.1 Joint ventures accounted for using the equity method

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in PLN millions, unless otherwise stated

The item “involvement in joint ventures” comprises investments in joint ventures accounted for using the equity method and loans granted to joint ventures.

The Group classifies as investments accounted for using the equity method interests in joint ventures which are joint contractual arrangements, in which the parties sharing control have the right to the net assets of a given entity. Joint control occurs when decisions on the relevant activities of joint ventures require the unanimous consent of the parties sharing control.

Investments are initially recognised at cost. The Group’s share in the profit or loss of entities accounted for using the equity method (assessed while taking into account the impact of measurements to fair value at the investment’s acquisition date) from the acquisition date is recognised in profit or loss, while its share in changes of accumulated other comprehensive income from the acquisition date is recognised in the relevant item of accumulated comprehensive income.

Unrealised gains and losses on transactions between the investor and the joint venture are eliminated in an amount proportional to the investor’s share in these profits/(losses).

If there are any indications of a possibility of impairment, an investment is tested for impairment by calculating the recoverable amount in accordance with the accounting policies presented in Part 3.

Joint control

The Group classifies Sierra Gorda S.C.M. as a joint venture under IFRS 11, in which KGHM INTERNATIONAL LTD.’s share equals 55%. Classification of Sierra Gorda S.C.M. as a joint venture, despite the 55% share of the Group, was made based on analysis of the terms of the agreements between the parties and contractual stipulations which indicated joint control. Pursuant to the terms of the agreements, all relevant activities of Sierra Gorda S.C.M. require the unanimous consent of both owners. The Group and other owners have three members each in the appointed Owners Council.
The Owners Council makes strategic decisions and is responsible for overseeing their execution. Moreover, it approves the appointment of senior management. In the reporting period, there were no changes to provisions that were the basis of classifying the investment as a joint venture.

Pursuant to the Group’s judgment, loans granted to the joint venture Sierra Gorda S.C.M. do not meet the criteria of recognition as net investments in a joint venture, because the loan’s settlement is planned and probable in the foreseeable future.

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2021 2020
Sierra Gorda S.C.M. Sierra Gorda S.C.M.
As at 1 January – –
Acquisition of newly-issued shares – 207
Share of net profit/(losses) of joint ventures accounted for using the equity method 3 178 (125)
Settlement of the Group’s share of unsettled losses from prior years (accumulated comprehensive losses) (2 920) (114)
Exchange differences from the translation of statements of operations with a functional currency other than PLN (258) 32
As at 31 December – –
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from 1 January 2021
to 31 December 2021		 from 1 January 2020
to 31 December 2020
The Group’s share (55%) of net profits/(losses) of Sierra
Gorda S.C.M. for the reporting period, of which:		 3 178 (125)
recognised in the valuation of the joint venture 3 178 (125)
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Unsettled share of the Group of losses of Sierra Gorda S.C.M.

2021

 2020
As at 1 January (4 203) (4 317)
Settlement of the Group’s share of unsettled losses from prior years (accumulated comprehensive losses) 2 920 114
As at 31 December (1 283) (4 203)

As at 31 December 2021, the KGHM Polska Miedź S.A. Group’s share of the unsettled accumulated losses of Sierra Gorda S.C.M amounted to PLN 1 283 million (USD 389 million), as at 31 December 2020: PLN 4 203 million (USD 1 178 million).

The Group stopped recognising its share of losses of Sierra Gorda S.C.M. at the moment the value of this share exceeded the carrying amount of the interest in the investment in Sierra Gorda S.C.M. Recognition of the Group’s share of losses of Sierra Gorda S.C.M. caused the carrying amount of shares in Sierra Gorda S.C.M. to be equal to PLN 0. After reducing the share to zero, the Group performed an analysis as to whether there is a legal or customary obligation to pay on Sierra Gorda S.C.M.’s behalf, which would result in an obligation of the Group to recognise a liability for this reason. Moreover, the Group analysed the terms of the guarantee granted to Sierra Gorda S.C.M. to secure repayment of an instalment of the credit facility, which meets the definition of a financial guarantee pursuant to IFRS 9. Details on the guarantees granted to Sierra Gorda S.C.M. are described in Note 8.6.

On the basis of conducted analyses, the Group does not identify the existence of a legal or customary obligation to pay on Sierra Gorda S.C.M.’s behalf, which is described in IAS 28.39.

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Information on entities accounted for using the equity method

Main place of business % of share capital held by the Group % of voting power Value of the investment in the consolidated statement
of financial position
Jointly controlled entities As at
31 December 2021		 As at
31 December 2020
Sierra Gorda S.C.M. Chile 55 50 – –
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Condensed financial data of Sierra Gorda S.C.M. is presented in the table below

As at
31 December 2021		 As at
31 December 2020
Non-current assets 19 848 15 532
Current assets, including: 2 393 2 106
Cash and cash equivalents 776 966
Non-current liabilities, including: 21 768 20 618
Borrowings and lease 1 713 543
Liabilities due to loans granted by jointly-controlling entities 19 531 18 985
Current liabilities, including: 1 585 3 441
Borrowings and lease 106 2 389
Carrying amount of net assets (incorporating the fair value measurement from date of obtaining joint control) (1 112) (6 421)
The Group’s share in net assets (55%) (612) (3 532)
Total unrecognised accumulated share of losses of Sierra Gorda S.C.M. (accumulated comprehensive losses) 1 283 4 203
Balance of impairment loss on interest in Sierra Gorda S.C.M. (671) (671)
Value of the investment in the consolidated statement of financial position – –
from 1 January 2021
to 31 December 2021		 from 1 January 2020
to 31 December 2020
Revenues from contracts with customers 8 335 4 726
Depreciation/amortisation (1 413) (1 462)
Reversal of an impairment loss on property, plant and equipment* 4 799 –
Interest costs (1 349) (1 355)
Other incomes/(costs) (2 670) (2 513)
Profit/(loss) before income tax 7 702 (604)
Income tax (1 924) 376
Profit/(loss) for the period 5 778 (228)
Exchange differences from the translation of Sierra Gorda S.C.M.’s net assets to the PLN presentation currency (469) 59
Total comprehensive income 5 309 (169)
* As at 31 December 2021, due to the occurrence of indications that the recoverable amount of assets may be higher than their carrying amount, pursuant to IAS 36 Sierra Gorda S.C.M. performed impairment testing of assets. The key indications to perform testing were changes to forecasts of market pricing paths of commodities and change in technical and economic parameters of assets of the Cash Generating Unit (CGU) Sierra Gorda – Sierra Gorda is a single CGU. To determine the recoverable amount of assets during the testing, the fair value (decreased by costs to sell) was calculated using the DCF method, i.e. the method of discounted cash flows.

Price paths were adopted on the basis of long-term forecasts available from financial and analytical institutions. A detailed forecast is being prepared for the period 2022-2026, while for the period 2027-2031 a technical adjustment of prices was applied between the last year of the detailed forecast and 2032, from which a long-term metal price forecast is used:

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Period 2022 2023 2024 2025 2026 LT
Copper price [USD/t] 8 500 8 000 7 500 7 500 7 500 7 000
Gold price [USD/oz] 1 700 1 700 1 700 1 600 1 550 1 500
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Other key assumptions used for estimation of cash flows

Mine life / forecast period 23
Level of copper production during mine life[kt] 3 779
Level of molybdenum production during mine life[mn lbs] 227
Level of gold production during mine life (koz t) 1 035
Average operating margin during mine life 42.75%
Applied discount rate after taxation 7.50%
Capital expenditures to be incurred during mine life[USD million] 1 617

As a result of the testing, the recoverable amount of property, plant and equipment and intangible assets of the CGU Sierra Gorda was determined to be at the level of USD 3 670 million (PLN 14 900 million), which was higher than the carrying amount of the tested assets, which was the basis for recognising a reversal of an impairment loss in the amount of USD 1 181.9 million (PLN 4 799 million). The reversal of an impairment loss was recognised in the statement of profit or loss of Sierra Gorda S.C.M. in the item “Cost of sales”.

The change in the recoverable amount of assets of Sierra Gorda S.C.M., resulting from a significant volatility of forecasted cash flows of Sierra Gorda S.C.M. to copper prices would not result in a reversal of impairment losses on shares of Sierra Gorda S.C.M. accounted for using the equity method, however it would have an impact on the measurement of fair value of loans granted to Sierra Gorda S.C.M. Such an analysis was presented in note 7.5.2.4.

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Other information on the Group’s involvement in the joint venture Sierra Gorda S.C.M.

As at
31 December 2021		 As at
31 December 2020
Group’s share in commitments (investment and operating) 5 865 3 810
Group’s share in the total amount of future lease gross payments due to lease agreements for mining equipment 495 542
Note 8.6 Guarantees granted by the Group 670 1 814
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5.3 Tax assets and liabilities
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6.2 Loans granted to a joint venture (Sierra Gorda S.C.M.)

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