Economic results of KGHM Polska Miedź S.A.

The main goals set by the Management Board in terms of production and occupational health and safety for 2021 were:

• optimal utilisation of the resource base and of the production capacity of the Company, and
• optimisation of copper content in ore and concentrate.

The goals set required advancement of the following actions:

In 2021 extraction of ore (dry weight) amounted to 30.0 million tonnes and was higher by 0.3 million tonnes than in 2020.

Average copper content in extracted ore amounted to 1.48% and was lower than the level achieved in 2020. In the case of silver in ore, content was substantially higher and amounted to 50.72 g/t.

As a result the amount of copper in extracted ore was higher than in 2020 by 0.6 thousand tonnes of copper and amounted to 442.6 thousand tonnes. The volume of silver in ore increased by 99 tonnes and amounted to 1,522 tonnes.

In 2021, 29.9 million tonnes of ore (dry weight) were processed (or 251 thousand tonnes more compared to 2020). The higher amount of ore extracted by the Mining Divisions, of a lower copper content, directly affected the obtained lower amount of copper in concentrate, which amounted to 391.3 thousand tonnes.

The production of concentrate (dry weight) increased slightly as compared to 2021.

The amount of silver in concentrate was higher than in 2020 by 7%.

The production of electrolytic copper as compared to 2020 increased by 17.2 thousand tonnes, or by 3.1%.

The higher production of electrolytic copper was the result of an increase in the supply of purchased metalbearing materials. By supplementing own concentrate with purchased metal-bearing materials in the form of scrap, copper blister and imported concentrate, existing technological capacity was effectively used.

The production of other metallurgical products (silver, wire rod and OFE rod) derives from the level of electrolytic copper production and depends on the type of raw material used, and above all on market demand.

In comparison to 2020, the production of metallic gold decreased by 481 kg, or 16.0%, while metallic silver production was higher by 9.3 tonnes, closing the year at 1,332 t.

The main goals set by the Management Board in terms of production and occupational health and safety for 2022 are a continuation of actions taken in 2021, i.e.:

• optimal utilisation of the resource base and of the production capacity of the Company, and
• optimisation of copper content in ore and concentrate.

Key tasks in 2022:

W 2021 In 2021, the level of sales of copper products by the Company did not differ significantly from that achieved in 2020 and amounted to 561.5 thousand tonnes, versus 561.0 thousand tonnes in the prior year. In 2021, sales of copper cathodes amounted to 279.3 thousand tonnes, meaning a 7% decrease compared to 2020. Sales of copper wire rod and OFE rod increased however by 8%, amounting to 278 thousand tonnes in 2021. The change in the structure of sales of copper products results from the year-long high demand of higher-margin products compared to processed copper cathodes.

Sales of metallic silver in 2021 amounted to 1,249 t, meaning a 9% decrease compared to 2020, alongside a slight increase in production. Silver inventory at the end of 2021 was designated to meet the sales schedule in 2022. Sales of gold in 2021 amounted to 78 thousand troy ounces, which means a decrease compared to data for the previous year (-22%).

Total revenues from sales by KGHM Polska Miedź S.A. in 2021 amounted to PLN 24,618 million, representing an increase by 27% versus 2020, when revenues reached PLN 19,326 million.

Revenues from sales of copper products in 2021 increased by 34% and amounted to PLN 19,079 million (compared to revenues in 2020 of PLN 14,258 million).

Revenues from metallic silver sales in 2021 also increased (+16%) to PLN 3,990 million compared to PLN 3,453 million in 2020. Revenues from sales of metallic gold in 2021 decreased to PLN 548 million, versus PLN 690 million in 2020 (21%).

The increase in revenues from contracts with customers compared to the previous year by PLN 5,292 million was mainly due to higher prices of copper, silver and gold (+PLN 7,807 million), with lower revenues connected with:

• a change in the adjustment of revenues due to hedging transactions (-PLN 1,974 million)

• lower volumes of sales of silver and gold, respectively by 9% and 22% with higher sales of copper by 0.1% ( PLN 443 million), and

• a less favourable USD/PLN exchange rate (-PLN 173 million)

In 2021, KGHM Polska Miedź S.A. earned most of its revenues from domestic sales, which amounted to 24% of total revenues. The remaining major customers of KGHM came from Germany (15%), China (12%), Italy (8%), Czechia (7%), and the United Kingdom (5%).

The following chart shows the geographic structure of revenues in 2021. Sales revenue includes the result from the settlement of hedging instruments.

The Company’s cost of sales, selling costs and administrative expenses (cost of products, merchandise and materials sold plus selling costs and administrative expenses) in 2021 amounted to PLN 20,514 million and was 27% higher as compared to the corresponding period of 2020. The Company’s cost of sales, selling costs and administrative expenses was substantially affected by the utilisation of inventories, which led to a higher
sales volume.

Total expenses by nature in 2021 as compared to 2020 were higher by 42% mainly due to higher consumption of purchased metal-bearing materials by PLN 3,158 million (a higher amount by 45 thousand tonnes and a higher price by 40%) as well as a higher minerals extraction tax charge (+PLN 1,923 million).

Expenses by nature, excluding purchased metal-bearing materials and the minerals extraction tax, amounted to PLN 11,221 million and were higher as compared to the corresponding period of the previous year by PLN 1,434 million, mainly due to an increase in the following:

• consumption of materials and energy (+PLN 758 million) – mainly due to higher prices for natural gas, electricity, coke and technological materials,
• labour costs (+PLN 414 million) – due to an increase in remuneration and a higher provision for the annual bonus,
• external services (+PLN 168 million) – mainly due to an increase in transportation services, repairs and maintenance and mine development work,
• depreciation /amortisation (+PLN 71 million) – an increase due to investments advanced in prior periods.

The structure of expenses by nature in 2021 is presented below. As compared to the prior year, they were at a very similar level.

The Company’s operating costs are decisively impacted by the costs of electrolytic copper production (prior to decrease by the value of by-products), whose share is around 96%.

Cost of producing copper in concentrate – C1 (unit cash cost of producing payable copper in concentrate, reflecting costs of ore extraction and processing, transport costs, the minerals extraction tax, administrative costs during the mining stage, and smelter treatment and refining charges (TC/RC), less the value of by-products) amounted to respectively: in 2020: 1.62 USD/lb and 2021: 2.26 USD/lb. The increase in this cost by 40% was mainly due to a higher minerals extraction tax charge. C1 cost excluding this tax rose by 2.6% and was due to a strengthening in the PLN as compared to the USD and lower production of copper from own concentrate.

The pre-precious metals credit unit cost of copper production from own concentrate (unit cost prior to decrease by the value of anode slimes containing among others silver and gold) was higher than that recorded in 2020 by 6,988 PLN/t (27%), alongside lower production from own concentrate by 32 thousand tonnes of copper (7.7%). The increase in the unit cost was mainly due to the higher minerals extraction tax charge (+4,662 PLN/t), higher prices of energy, fuels and technological materials and higher costs of labour.

The total unit cost of copper production from own concentrate was higher compared to 2020 by 4,383 PLN/t (25%) with a higher valuation of anode slimes due to higher silver prices.

The Company recorded a profit for 2021 in the amount of PLN 5,169 million, or by PLN 3,390 million (2.9-times) higher than the profit for the prior year

Net cash generated from operating activities in 2021 amounted to +PLN 1,963 million and mainly comprised profit before income tax in the amount of PLN 6,716 million, adjusted by the exclusion of income and costs in the amount of -PLN 1,216 million (including depreciation/amortisation recognised in the financial result, +PLN 1,363 million, the reversal of impairment losses on non-current assets, PLN 1,762 million and fair value gains/(losses) on financial assets measured at fair value through profit or loss, -PLN 1,029 million), less income tax paid in the amount of PLN 707 million and a decrease in working capital by PLN 2,830 million.

The change in working capital was mainly due to the following: a decrease in inventories (-PLN 1,824 million) and a decrease in trade payables transferred to factoring by PLN 1,154 million. Net cash used in investing activities in 2021 amounted to -PLN 607 million and mainly comprised expenditures on property, plant and equipment and intangible assets in the amount of PLN 2,407 million and the balance of proceeds and expenditures due to loans granted, +PLN 1,655 million.

Net cash used in financing activities during the same period amounted to -PLN 2,091 million and mainly comprised the balance of proceeds and expenditures due to borrowings drawn in the amount of -PLN 1,684 million and ividends paid to shareholders in the amount of PLN 300 million.

After reflecting exchange differences on cash and cash equivalents, in 2021 cash and cash equivalents decreased by PLN 803 million and amounted to PLN 1,332 million.

As at 31 December 2021, total assets amounted to PLN 43,458 million, or an increase as compared to the end of 2020 by PLN 4,116 million, or by 10%, mainly due to increases in the following items:

• property, plant and equipment and intangible assets by PLN 991 million, resulting from advancement of investments – cash expenditures on property, plant and equipment and intangible assets in 2021 amounted to PLN 2,407 million,
• investments in subsidiaries by PLN 843 million,
• long-term financial instruments by PLN 472 million, including loans granted (+PLN 601 million),
• inventories by PLN 1,881 million,
• trade receivables by PLN 249 million,
• receivables due to cash pooling by PLN 370 million,

alongside a decrease in the value of cash and cash equivalents by PLN 803 million.

The carrying amounts of equity and liabilities as at 31 December 2021 are presented below.

There was an increase in equity and liabilities, mainly due to increases in the following items:

• equity by PLN 5,114 million, mainly with respect to the profit for 2021 in the amount of PLN 5,169 million,
• deferred tax liabilities (+PLN 209 million),
• derivatives (+PLN 387 million),
•  tax liabilities (+PLN 922 million),
• accruals (+PLN 195 million)

alongside a decrease in:

• borrowings, lease and debt securities (-PLN 1,269 million),
• employee benefits liabilities (-PLN 596 million),
• provisions for decommissioning costs of mines and other technological facilities (-PLN 374 million),
• trade and similar payables (-PLN 721 million).