7.5.1.3 Risk of changes in foreign exchange rates
in PLN millions, unless otherwise stated
Regarding the risk of changes in foreign exchange rates within the KGHM Polska Miedź S.A. Group, the following types of exposures were identified:
- transaction exposure related to the volatility of cash flows in the base currency;
- exposure related to the volatility of selected items of the statement of financial position in the base (functional) currency;
- the exposure to net investments in foreign operations as concerns the volatility of consolidated equity in the Group’s base currency (presentation currency).
The transaction exposure to currency risk derives from cash flow-generating contracts, whose values expressed in the base (functional) currency depend on future levels of exchange rates of the foreign currencies with respect to the base currency. Cash flows exposed to currency risk may possess the following characteristics:
- denomination in the foreign currency – cash flows are settled in foreign currencies other than the functional currency; and
- indexation in the foreign currency – cash flows may be settled in the base currency, but the price (i.e. of a metal) is set in a different foreign currency.
The key source of exposure to currency risk in the Parent Entity’s business operations are the proceeds from sales of products (with respect to metals prices, processing and producer margins).
The exposure to currency risk also derives from items in the consolidated statement of financial position denominated in foreign currencies, which under the existing accounting regulations must be translated, upon settlement or periodic valuation, including the translation of foreign operations statements, by applying the current exchange rate of the foreign currencies versus the base (functional) currency. Changes in the carrying amounts of such items between valuation dates result in the volatility of profit or loss for the period or of other comprehensive income.
Items in the consolidated statement of financial position which are exposed to currency risk include in particular:
- trade receivables and trade payables related to purchases and sales denominated in foreign currencies;
- financial receivables due to loans granted in foreign currencies;
- financial liabilities due to borrowings in foreign currencies;
- cash and cash equivalents in foreign currencies; and
- derivatives on metals market.
As for the currency market, the notional amount of settled transactions hedging revenues from metals sales amounted to approx. 28% (in 2020: 25%) of the total revenues from sales of copper and silver realised by the Parent Entity in 2021.
As part of the realisation of the strategic plan to hedge against market risk, in 2021 the Parent Entity purchased put options for a total of USD 1 050 million of planned sales revenues with maturities from February 2021 to June 2022 (including: USD 180 million for the period from January to June 2022). Moreover, collar option strategies were implemented with a total notional amount of USD 240 million and maturities from July 2022 to December 2022. Additionally, in terms of restructuration of an open position in derivatives, previously-sold put options with strike prices of USD/PLN 3.20 for the period from February to December 2021 and the notional amount of USD 495 million (USD 45 million monthly) were redeemed, and also put spread structures were entered into (put options were purchased with a strike price of USD/PLN 3.50 and simultaneously put options were sold with a strike price of USD/PLN 3.30) for the notional amount of USD 270 million, aimed at decreasing the strike price of put options sold as part of seagull option structures hedging revenues in the period from July 2022 to December 2023.
As a result, as at 31 December 2021 the Company held an open hedging position on the currency market for the notional amount of USD 1 050 million, and Cross Currency Interest Rate Swap (CIRS) transactions for the notional amount of PLN 2 billion, hedging revenues from sales in the currency as well as the variable interest of issued bonds.
The condensed table of open transactions in derivatives of the Parent Entity on the currency market as at 31 December 2021 is presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).
Hedging against USD/PLN currency risk - open derivatives as at 31 December 2021
| Instrument/ option |
Notional | Option strike price | Average weighted premium | Effective hedge price | |||
|---|---|---|---|---|---|---|---|
| sold put option | purchased put option | sold call option | |||||
|
hedge limited to |
exchange rate hedging |
participation limited to |
|||||
| [USD mn] | [USD/PLN] | [USD/PLN] | [USD/PLN] |
[PLN per |
[USD/PLN] | ||
| 1st half | seagull | 67.5 | 3.30 | 4.00 | 4.60 | (0.01) | 3.99 |
| seagull | 90 | 3.50 | 3.90 | 4.50 | 0.04 | 3.94 | |
| purchased put option | 180 | – | 3.75 | – | (0.04) | 3.71 | |
| 2nd half | seagull | 67.5 | (3.30) | 4.00 | (4.60) | (0.01) | 3.99 |
| seagull | 90 | 3.30 | 3.90 | 4.50 | 0.03 | 3.93 | |
| collar | 240 | – | 3.85 | 4.60 | (0.04) | 3.81 | |
| TOTAL 2022 | 735 | ||||||
| 2023 | seagull | 135 | 3.30 | 4.00 | 4.60 | (0.00) | 4.00 |
| seagull | 180 | 3.30 | 3.90 | 4.50 | (0.03) | 3.93 | |
| TOTAL 2023 | 315 | ||||||
Hedging against USD/PLN currency risk – open derivatives as at 31 December 2020
| Instrument/ option |
Notional | Option strike price | Average weighted premium | Effective hedge price | |||
|---|---|---|---|---|---|---|---|
| sold put option | purchased put option | sold call option | |||||
|
hedge limited to |
exchange rate hedging |
participation limited to |
|||||
| [USD mn] | [USD/PLN] | [USD/PLN] | [USD/PLN] | [PLN per USD 1] |
[USD/PLN] | ||
| 2021 | Put spread | 540 | 3.20 | 3.70 | – | (0.09) | 3.61 |
| purchased put option | 240 | – | 3.80 | – | (0.07) | 3.73 | |
| TOTAL 2021 | 780 | ||||||
| 2022 | seagull | 135 | 3.30 | 4.00 | 4.60 | (0.01) | 3.99 |
| seagull | 180 | 3.30 | 3.90 | 4.50 | 0.04 | 3.94 | |
| TOTAL 2022 | 315 | ||||||
| 2023 | seagull | 135 | 3.30 | 4.00 | 4.60 | 0.00 | 4.00 |
| seagull | 180 | 3.30 | 3.90 | 4.50 | 0.03 | 3.93 | |
| TOTAL 2023 | 315 | ||||||
| Hedging against currency-interest rate risk connected with the issue of bonds with a variable interest rate in PLN – open derivatives as at 31 December 2021 and as at 31 December 2020 | ||||
|---|---|---|---|---|
| Instrument |
Notional |
Average interest rate | Average exchange rate | |
| [PLN mn] | [LIBOR] | [USD/PLN] | ||
| VI 2024 | CIRS | 400 | 3.23% | 3.78 |
| VI 2029 | CIRS | 1 600 | 3.94% | 3.81 |
| TOTAL | 2 000 | |||
Some of the Group’s Polish companies managed the currency risk related to their core business (among others trade) by opening transactions in derivatives, among others on the USD/PLN and EUR/PLN markets. The table of open transactions as at 31 December 2021 and 31 December 2020 is not presented, due to its immateriality for the Group.
As for managing currency risk, the Parent Entity applies natural hedging by borrowing in the currency in which it has revenues. As at 31 December 2021, following their translation to PLN, the bank loans and the investment loans which were drawn in USD amounted to PLN 2 980 million (as at 31 December 2020: PLN 4 321 million).
The currency structure of financial instruments exposed to currency risk (change in the USD/PLN, EUR/PLN, CAD/PLN and GBP/PLN exchange rates) of the KGHM Polska Miedź S.A. Group and sensitivity analysis to the risk of changes in the exchange rates are presented in the tables below. In order to determine the potential changes in the USD/PLN, EUR/PLN, CAD/PLN and GBP/PLN exchange rates for sensitivity analysis purposes, the Black-Scholes model (the geometrical Brownian motion) was used.
| Financial instruments | Value at risk as at 31 December 2021 | ||||
| total PLN million | USD million | EUR million | CAD million | GBP million | |
| Shares | 5 | – | – | 2 | – |
| Trade receivables | 515 | 80 | 30 | 4 | 8 |
| Cash and cash equivalents | 1 558 | 341 | 20 | 23 | 2 |
| Long-term loans granted to joint ventures | 7 867 | 1 938 | – | – | – |
| Short-term loans granted to joint ventures | 447 | 110 | – | – | – |
| Other financial assets | 150 | 26 | – | 12 | – |
| Derivatives * | (1 174) | 220 | – | – | – |
| Trade and similar payables | (1 132) | (167) | (87) | (16) | – |
| Borrowings | (3 121) | (736) | (18) | (15) | – |
| Other financial liabilities | (177) | (41) | (3) | – | – |
| Financial instruments | Value at risk as at 31 December 2020 | ||||
|---|---|---|---|---|---|
| total PLN million | USD million | EUR million | CAD million | GBP million | |
| Shares | 5 | – | – | 2 | – |
| Trade receivables | 615 | 115 | 35 | 6 | 1 |
| Cash and cash equivalents | 1 999 | 455 | 28 | 23 | 18 |
| Loans granted to joint ventures | 6 069 | 1 615 | – | – | – |
| Other financial assets | 322 | 74 | 1 | 13 | – |
| Derivatives* | (695) | (184) | (1) | – | – |
| Trade and similar payables | (1 283) | (127) | (171) | (7) | 1 |
| Borrowings | (4 518) | (1 171) | (15) | (17) | – |
| Other financial liabilities | (53) | (12) | (2) | – | – |
An analysis of the Group’s sensitivity to the currency risk in 2021
|
Financial assets and liabilities as at 31 December 2021 |
Value at risk |
Carrying amount 31 December 2021 |
Change in the USD/PLN exchange rate | Change in the EUR/PLN exchange rate |
Change in the CAD/PLN exchange rate |
Change in the GBP/PLN exchange rate | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 4.57 (+13%) | 3.66 (-10%) | 5.01 (+9%) | 4.37 (-5%) | 3.55 (+11%) | 2.90 (-9%) | 6.15 (+12%) | 4.98 (-9%) | |||||
| profit or loss | other comprehensive income | profit or loss | other comprehensive income | profit or loss | profit or loss | profit or loss | profit or loss | profit or loss | profit or loss | |||
| Shares | 5 | 615 | – | – | – | – | – | – | 1 | – | – | – |
| Trade receivables | 515 | 1 026 | 41 | – | (32) | – | 12 | (7) | 1 | (1) | 5 | (4) |
| Cash and cash equivalents | 1 558 | 1 904 | 175 | – | (138) | – | 8 | (4) | 8 | (7) | 1 | (1) |
| Long-term loans granted to joint ventures | 7 867 | 7 867 | 997 | – | (782) | – | – | – | – | – | – | – |
| Short-term loans granted to joint ventures | 447 | 447 | 57 | – | (44) | – | – | – | – | – | – | – |
| Other financial assets | 150 | 671 | 14 | – | (11) | – | – | – | 4 | (3) | – | – |
| Derivatives | (1 174) | (1 174) | 10 | (646) | 2 | 527 | (7) | 4 | – | – | – | – |
| Trade and similar payables | (1 132) | (3 201) | (86) | – | 67 | – | (36) | 20 | (6) | 5 | – | – |
| Borrowings | (3 121) | (5 949) | (379) | – | 297 | – | (7) | 4 | (6) | 4 | – | – |
| Other financial liabilities | (177) | (479) | (21) | – | 16 | – | (1) | 1 | – | – | – | – |
| Impact on profit or loss | 808 | – | (625) | – | (31) | 18 | 2 | (2) | 6 | (5) | ||
| Impact on other comprehensive income | (646) | 527 | – | – | – | – | – | – | ||||
An analysis of the Group’s sensitivity to the currency risk in 2020
|
Financial assets and liabilities as at 31 December 2020 |
Value at risk |
Carrying amount 31 December |
Change in the USD/PLN exchange rate | Change in the EUR/PLN exchange rate |
Change in the CAD/PLN exchange rate |
Change in the GBP/PLN exchange rate |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 4.20 (+12%) | 3.33 (-11%) | 4.96 (+8%) | 4.31 (-7%) | 3.32 (+12%) | 2.61 (-12%) | 5.80 (+13%) | 4.58 (-7%) | |||||
| profit or loss | other comprehensive income | profit or loss | other comprehensive income | profit or loss | profit or loss | profit or loss | profit or loss | profit or loss | profit or loss | |||
| Shares | 5 | 618 | – | – | – | – | – | – | 1 | (1) | – | – |
| Trade receivables | 615 | 834 | 41 | – | (40) | – | 10 | (9) | 2 | (2) | 1 | (1) |
| Cash and cash equivalents | 1 999 | 2 522 | 163 | – | (157) | – | 8 | (7) | 7 | (6) | 10 | (8) |
| Loans granted to joint ventures | 6 069 | 6 069 | 580 | – | (557) | – | – | – | – | – | – | – |
| Other financial assets | 322 | 809 | 27 | – | (26) | – | – | – | 4 | (4) | – | – |
| Derivatives | (695) | (695) | 114 | (733) | 147 | 816 | (8) | 6 | – | – | – | – |
| Trade and similar payables | (1 283) | (3 593) | (46) | – | 44 | – | (48) | 43 | (2) | 2 | 1 | – |
| Borrowings | (4 518) | (7 335) | (421) | – | 404 | – | (4) | 4 | (5) | 5 | – | – |
| Other financial liabilities | (53) | (345) | (4) | – | 4 | – | – | – | – | – | – | – |
| Impact on profit or loss | 454 | – | (181) | – | (42) | 37 | 7 | (6) | 12 | (9) | ||
| Impact on other comprehensive income | – | (733) | – | 816 | – | – | – | – | – | – | ||