3. Impairment of assets
Note 3.1. Impairment testing of the KGHM INTERNATIONAL LTD. Group’s assets
As at 31 December 2018, as a result of the identification of indications of possible change in the recoverable amounts of international assets of the KGHM INTERNATIONAL LTD. Group, such as: the Sudbury Basin, the Franke mine, involvement in joint venture Sierra Gorda, the Management Board of the Parent Entity tested these assets for impairment, identifying each of them as separate cash generating units (CGUs).
The key indication to perform impairment testing of assets was the significant change in technical and economic parameters of mining assets, such as mine lives, production volume, reserves and resources, assumed operating costs and the level of capital expenditures during a mine’s life. To determine the recoverable amount of assets during the testing, the following were measured at fair value (less costs to sell) using the DCF method, i.e. the method of discounted cash flows: CGU Sudbury and involvement in Sierra Gorda and at the value in use of CGU Franke. The fair value was classified to level 3 of the fair value hierarchy.
BASIC MACROECONOMIC ASSUMPTIONS ADOPTED IN THE IMPAIRMENT TESTING | |
|---|---|
| Assumption | Level adopted for testing |
| Copper price | The price path for copper was set based on internal macroeconomic assumptions developed with the use of long-term forecasts available from financial and analytical institutions. A detailed forecast is being prepared for the period 2019-2023, while for the period 2024-2028 a technical adjustment of prices was applied between the last year of the detailed forecast, and 2029, from which a long-term metal price forecast of 6 614 USD/t (3.00 USD/lb) is being used. The long-term forecasted copper price has not changed as compared to the long-term price adopted for conducting testing as at 31 December 2017. |
OTHER KEY ASSUMPTIONS USED FOR FAIR VALUE ESTIMATION OF ASSETS OF CGUs | ||||
|---|---|---|---|---|
| Assumption | Sierra Gorda | Sadbury | Franke | |
| Mine life / forecast period | 25 | 18 | 2 | |
| Level of copper production during mine life [kt] | 4 372 | 276 | 37 | |
| Average operating margin during mine life | 35% | 57% | 7% | |
| Capital expenditures to be incurred during mine life [USD million] | 2 219 | 1 630 | 4 | |
| Applied discount rate after taxation for assets in the operational phase | 8% | 8% | 11% | |
| Applied discount rate after taxation for assets in the pre-operational phase | 11% | |||
| Costs to sell | 2% | |||
KEY FACTORS RESPONSIBLE FOR MODIFICATION OF TECHNICAL AND ECONOMIC ASSUMPTIONS | |
|---|---|
| Sierra Gorda | Postponement to subsequent years of capital expenditures from 2017-2018 related to the debottlenecking program and from the oxide ore processing project. In the previous test, expenditures on the aforementioned projects were included in the period not covered by current assumptions. The update of the multi-year mine plan resulted in the prolongation of the mine’s life by 3 years. |
| Sudbury | On-going optimisation of the multi-year plan of KGHM’s operating activities in the Sudbury Basin. Among others, as a result of the activities undertaken, the extraction of ore from the Morrison deposit is planned to be halted in the first quarter of 2019 along with a recommencement of production by the McCreedy West mine. The update of the multi-year plans resulted in an increase in capital expenditures, a change in the production volumes of individual metals and an extension of the production period by one year. The assumptions adopted for the Victoria project have not changed significantly as compared to the testing conducted as at 31 December 2017. |
| Franke | Identification of additional deposits of oxide ore and an update of the mining plans, which allows for a prolongation of the mine’s life by an additional production year. |
The test carried out indicated justification to reverse a part of the allowance for impairment, recognised in prior years, on loans granted to the joint venture Sierra Gorda S.C.M.
| CGU | Segment (Part 2) | Carrying amount | Recoverable amount | Reversal of allowance for impairment | |||
|---|---|---|---|---|---|---|---|
| mln USD | mln PLN | mln USD | mln PLN | mln USD | mln PLN | ||
| Sierra Gorda S.C.M. | Sierra Gorda S.C.M. | 1 188 | 4 466 | 1 383 | 5 199 | 195 | 733 |
Reversal of an allowance for impairment was recognised in in “other operating income” of the consolidated statement of profit or loss.
Results of tests performed as at 31 December 2018 for CGU Sudbury and CGU Franke confirmed that their fair value is equal to their carrying amounts.
Note 3.2 Water rights – intangible assets not yet available for use
In the Group, water rights in Chile are annually subjected to impairment testing by comparing their carrying amount to the recoverable amount, which is set as fair value less costs to sell. The fair value of water rights is classified under level 2 of the fair value hierarchy, in which fair value measurements are based on significant observable input data, other than market prices.
For the year ended on 31 December 2018, the Group assessed the financial indicators and came to the conclusion that there is no need to recognise an impairment loss, as the estimated amount of water available for extraction did not change compared to the amount estimated as at 31 December 2017.