7.5.1.2 Commodity risk
in PLN millions, unless otherwise stated
The Parent Entity is exposed to the risk of changes in the prices of the metals it sells: copper, silver, gold and lead. Furthermore, the KGHM INTERNATIONAL LTD. Group is exposed to the risk of changes in the prices of copper, gold, nickel, molybdenum, platinum and palladium.
In the Parent Entity and the KGHM INTERNATIONAL LTD. Group, the price formulas used in physical delivery contracts are mainly based on average monthly quotations from the London Metal Exchange for copper and other common metals and from the London Bullion Market for precious metals. Within the commercial policy, the Parent Entity and KGHM INTERNATIONAL LTD. set the price base for physical delivery contracts as the average price of the appropriate future month.
The permanent and direct link between sales proceeds and metals prices, without similar relationships on the expenditures side, results in a strategic exposure. In turn, operating exposure is a result of possible mismatches in the pricing of physical contracts with respect to the Group’s benchmark profile, in particular in terms of the reference prices and the quotation periods.
On the metals market, the Group has a so-called long position, which means it has higher sales than purchases. The analysis of the Group’s strategic exposure to market risk should be performed by deducting from the volume of metals sold the amount of metal in purchased materials.
The Group’s strategic exposure to the risk of changes in the price of copper and silver in the years 2020-2021 is presented in the table below:
| from 1 January 2021 to 31 December 2021 |
from 1 January 2020 to 31 December 2020 |
|||||
|---|---|---|---|---|---|---|
| Net |
Sales |
Purchase | Net | Sales | Purchase | |
| Copper [t] | 432 910 | 628 011 | 195 101 | 468 623 | 634 042 | 165 419 |
| Silver [t] | 1 222 | 1 251 | 29 | 1 352 | 1 376 | 24 |
The notional amount of copper price hedging strategies settled in 2021 represented approx. 44% (in 2020: 34%) of the total sales of this metal realised by the Parent Entity (it represented approx. 67% of net sales[1] in 2021 and 47% in 2020). The notional amount of silver price hedging strategies settled in 2021 represented approx. 25% of the total sales of this metal realised by the Parent Entity (in 2020: 8%).
As part of the realisation of the strategic plan to hedge the Company against market risk, in 2021 seagull hedging strategies were implemented on the copper market for the period from January 2022 to December 2023 for a total notional amount of 87 thousand tonnes. Moreover, a hedging position on the copper market was restructured. Call options were purchased for the period from March to December 2021 for a total notional amount of 155 thousand tonnes, and therefore the participation in potential further prices rises of collar and seagull option structures for 2021 owned was opened. As a part of restructuration the strike price for structures hedging revenues from sales of copper in the period from October to December 2021 for a total notional amount of 25.5 thousand tonnes was also increased. Moreover, a position on the forward silver market for the period from July 2021 to December 2022 was restructured. A part of previously-sold put options (11.7 million ounces) and call options (5.1 million ounces) entered into under seagull hedging strategies were redeemed, and also the strike price for sold call options for 2022 (6.6 million ounces) was increased.
In 2021 QP adjustment swap transactions were entered into on the copper and gold markets with maturities of up to June 2022, as part of the management of a net trading position.
As a result, as at 31 December 2021 the Parent Entity held open derivatives positions for 248.3 thousand tonnes of copper (of which: 243 thousand tonnes came from strategic management of market risk, while 5.3 thousand tonnes came from the management of a net trading position) and 14.4 million troy ounces of silver.
The condensed tables of open derivatives transactions held by the Parent Entity on the copper and silver markets as at 31 December 2021, entered into as part of the strategic management of market risk, are presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).
Hedging against copper price risk – open derivatives as at 31 December 2021
|
Instrument/ Option |
Notional [tonnes] |
Option strike price |
Average weighted premium |
Effective hedge price |
||||
| sold put option | purchased put option | sold call option | purchased call option |
|||||
| hedge limited to | copper price hedging | participation limited to | participation opened | |||||
| [USD/t] | [USD/t] | [USD/t] | [USD/t] | [USD/t] | [USD/t] | |||
| seagull | 30 000 | 4 600 | 6 300 | 7 500 | – | (160) | 6 140 | |
| 1st half | seagull | 24 000 | 5 200 | 6 900 | 8 300 | – | (196) | 6 704 |
| seagull | 6 000 | 6 700 | 9 200 | 11 400 | – | (210) | 8 990 | |
| seagull | 4 500 | 6 700 | 9 400 | 11 600 | – | (250) | 9 150 | |
| seagull | 30 000 | 4 600 | 6 300 | 7 500 | – | (160) | 6 140 | |
| 2nd half | seagull | 24 000 | 5 200 | 6 900 | 8 300 | – | (196) | 6 704 |
| seagull | 15 000 | 6 000 | 9 000 | 11 400 | – | (248) | 8 752 | |
| seagull | 6 000 | 6 700 | 9 200 | 11 400 | – | (210) | 8 990 | |
| mewseagulla | 4 500 | 6 700 | 9 400 | 11 600 | – | (250) | 9 150 | |
| TOTAL 2022 | 144 000 | |||||||
| seagull | 24 000 | 5 200 | 6 900 | 8 300 | – | (196) | 6 704 | |
| 1st half | seagull | 15 000 | 6 000 | 9 000 | 11 400 | – | (248) | 8 752 |
| seagull | 6 000 | 6 700 | 9 200 | 11 400 | – | (210) | 8 990 | |
| seagull | 4 500 | 6 700 | 9 400 | 11 600 | – | (250 | 9 150 | |
| seagull | 24 000 | 5 200 | 6 900 | 8 300 | – | (196) | 6 704 | |
| 2nd half | seagull | 15 000 | 6 000 | 9 000 | 11 400 | – | (248) | 8 752 |
| seagull | 6 000 | 6 700 | 9 200 | 11 400 | – | (210) | 8 990 | |
| seagull | 4 500 | 6 700 | 9 400 | 11 600 | – | (250) | 9 150 | |
| TOTAL 2023 | 99 000 | |||||||
Hedging against silver price risk – open derivatives as at 31 December 2021
| Instrument/ Option |
Notional [mn ounces] |
Option strike price | Average weighted premium | Effective hedge price | |||
| sold put option | purchased put option | sold call option | |||||
|
hedge limited to |
silver price hedging |
participation limited to |
|||||
| [USD/ounce] | [USD/ounce] | [USD/ounce] | [USD/ounce] | [USD/ounce] | |||
| 2022 | seagull | 3.60 | 16.00 | 26.00 | 42.00 | (0.88) | 25.12 |
| collar | 2.40 | – | 27.00 | 55.00* | (2.08) | 24.92 | |
| collar | 4.20 | – | 26.00 | 55.00 | (1.89) | 24.11 | |
| TOTAL 2022 | 10.20 | ||||||
| 2023 | seagull | 4.20 | 16.00 | 26.00 | 42.00 | (1.19) | 24.81 |
| TOTAL 2023 | 4.20 | ||||||
The condensed tables of open derivatives transactions held by the Parent Entity on the copper and silver markets as at 31 December 2020, entered into as part of the strategic management of market risk, are presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).
Hedging against copper price risk – open derivatives as at 31 December 2020
|
Instrument/option |
Notional [tonnes] |
Option strike price | Average weighted premium | Effective hedge price | ||||
|---|---|---|---|---|---|---|---|---|
| Sold put option | Purchased put option | Sold call option | Purchased call option | |||||
|
hedge limited to |
copper price hedging |
participation limited to |
participation opened | |||||
| [USD/t] | [USD/t] | [USD/t] | [USD/t] | [USD/t] | [USD/t] | |||
| Collar | 42 000 | – | 5 200 | 6 600 | – | (204) | 4 996 | |
| Seagull | 21 000 | 4 200 | 5 700 | 7 000 | – | (130) | 5 570 | |
| 1st half | Seagull | 30 000 | 4 600 | 6 300 | 7 500 | – | (193) | 6 107 |
| Purchased put option | 42 750 | – | 7 000 | – | – | (247) | 6 753 | |
| Purchased put option | 17 250 | – | 6 900 | – | – | (235) | 6 665 | |
| Collar | 42 000 | – | 5 200 | 6 600 | – | (204) | 4 996 | |
| 2nd half | Seagull | 21 000 | 4 200 | 5 700 | 7 000 | – | (130) | 5 570 |
| Seagull | 30 000 | 4 600 | 6 300 | 7 500 | – | (193) | 6 107 | |
| TOTAL 2021 | 246 000 | |||||||
| 2022 | Seagull | 60 000 | 4 600 | 6 300 | 7 500 | – | (160) | 6 140 |
| Seagull | 48 000 | 5 200 | 6 900 | 8 300 | – | (196) | 6 704 | |
| TOTAL 2022 | 108 000 | |||||||
| 2023 | Mewa | 48 000 | 5 200 | 6 900 | 8 300 | – | (196) | 6 704 |
| TOTAL 2023 | 48 000 | |||||||
Hedging against silver price risk – open derivatives as at 31 December 2020
| Instrument/option | Notional [tonnes] |
Option strike price | Average weighted premium | Effective hedge price | |||
| sold put option | purchased put option | sold call option | |||||
|
hedge limited to |
silver price hedging |
participation limited to |
|||||
| [USD/ounce] | [USD/ounce] | [USD/ounce] | [USD/ounce] | [USD/ounce] | |||
| 2021 | Seagull | 2.40 | 16.00 | 27.00 | 43.00 | (1.42) | 25.58 |
| Seagull | 7.80 | 16.00 | 26.00 | 42.00 | (1.04) | 24.96 | |
| TOTAL 2021 | 10.20 | ||||||
| 2022 | Seagull | 2.40 | 16.00 | 27.00 | 43.00 | (1.42) | 25.58 |
| Seagull | 7.80 | 16.00 | 26.00 | 42.00 | (1.04) | 24.96 | |
| TOTAL 2022 | 10.20 | ||||||
| 2023 | Seagull | 4.20 | 16.00 | 26.00 | 42.00 | (1.19) | 24.81 |
| TOTAL 2023 | 4.20 | ||||||
In 2021 and in 2020, neither KGHM INTERNATIONAL LTD. nor any of the mining companies implemented any forward transactions on the commodity market.
As at 31 December 2021, the risk of changes in metals prices was also related to derivatives embedded in the purchase contracts for metal-bearing materials entered into by the Parent Entity.
An analysis of the Group’s sensitivity to the risk of changes in copper, silver and gold prices in the years 2020-2021
|
Value at risk |
Carrying amount |
Change in COPPER price [USD/t] |
Change in SILVER price [USD/ ounce] |
Change in GOLD price [USD/ ounce] |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 11 614 (+19%) | 7 495 (-23%) | 30,52 (+31%) | 16,55 (-29%) | 2 122 (+17%) | 1 523 (-16%) | |||||||
|
Financial assets and liabilities as at 31 December 2021 |
Profit or loss | Other comprehensive income | Profit or loss | Other comprehensive income | Profit or loss | Other comprehensive income | Profit or loss | Other comprehensive income | Profit or loss | Profit or loss | ||
| Derivatives (copper) | (1 096) | (1 096) | (74) | (1 770) | 173 | 1 701 | – | – | – | – | – | – |
| Derivatives (silver) | 224 | 224 | – | – | – | – | 9 | (192) | (39) | 334 | ||
| Derivatives (gold) | – | – | – | – | – | – | – | – | – | – | (20) | 20 |
| Embedded derivatives (copper, silver, gold) | (21) | (21) | (129) | – | 165 | – | (1) | – | 1 | – | (11) | 11 |
| Impact on profit or loss | (203) | – | 338 | 8 | – | (38) | – | (31) | 31 | |||
| Impact on other comprehensive income | – | (1 770) | – | 1 701 | – | (192) | – | 334 | – | – | ||
| Value at risk | Carrying amount 31 December 2020 |
Change in COPPER price [USD/t] |
Change in SILVER price [USD/ ounce] |
Change in GOLD price [USD/ ounce] | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Financial assets and liabilities as at 31 December 2020 |
9 204 (+19%) | 6 033 (-22%) | 34,37 (+30%) | 18,44 (-30%) | 2 216 (+17%) | 1 576 (-17%) | ||||||
| Profit or loss | Other comprehensive income | Profit or loss | Other comprehensive income | Profit or loss | Other comprehensive income | Profit or loss | Other comprehensive income | Profit or loss | Profit or loss | |||
| Derivatives (copper) | (844) | (844) | (25) | (985) | (172) | 2 040 | – | – | – | – | – | – |
| Derivatives (silver) | 231 | 231 | – | – | – | – | 39 | (456) | (106) | 475 | – | – |
| Derivatives (gold) | – | – | – | – | – | – | – | – | – | – | (3) | 3 |
| Embedded derivatives (copper, silver, gold) | (84) | (84) | (75) | – | 76 | – | (2) | – | 2 | – | (18) | 18 |
| Impact on profit or loss | (100) | – | (96) | – | 37 | – | (104) | – | (21) | 21 | ||
| Impact on other comprehensive income | – | (985) | – | 2 040 | – | (456) | – | 475 | – | – | ||
In order to determine the potential changes in metals prices for purposes of sensitivity analysis of commodity risk factors (copper, silver, gold), the mean reverting Schwarz model (the geometrical Ornstein-Uhlenbeck process) was used.