Note 8.1 Capital management policy

Capital management in the Group is aimed at securing funds for business development and maintaining the appropriate level of liquidity.
In accordance with market practice, the Group monitors its capital, among others on the basis of ratios presented in the table below:

* adjusted EBITDA for the period of 12 months ended on the last day of the reporting period and does not include the EBITDA of the joint venture Sierra Gorda S.C.M.

In the management of liquidity and capital, the Group also pays attention to adjusted operating profit, which is the basis for calculating the financial covenants and which is comprised of the following items:

* presented amount does not include the reversal of allowances for impairment of loans granted to joint ventures

In order to maintain financial liquidity and the creditworthiness to acquire external financing at an optimum cost, the Group aims to maintain the equity ratio at a level of not less than 0.5, and the ratio of Net Debt/EBITDA at a level of up to 2.0.

Note 8.2 Equity

Note 8.2.1 Share capital

As at 31 December 2018 and at the date of signing of these financial statements, the Parent Entity’s share capital, in accordance with the entry in the National Court Register, amounted to PLN 2 000 million and was divided into 200 000 000 shares, series A, fully paid, each  having  a face value of PLN 10. All of the shares are bearer shares. The Parent Entity has not issued preference shares. Each share grants the right to one vote at the general meeting. The Parent Entity does not have treasury shares. Subsidiaries and joint ventures do not have shares of KGHM Polska Miedź S.A.

In the years ended 31 December 2018 and 31 December 2017 there were no changes in either registered share capital or in the number of issued shares.

In 2018, Aviva Otwarty Fundusz Emerytalny Aviva BZ WBK  and Otwarty Fundusz Emerytalny PZU „Złota Jesień” exceeded the 5% threshold in the total number of votes at the General Meeting of the Parent Entity.

In 2017 there were no changes in the ownership of significant blocks of shares of KGHM Polska Miedź S.A.

As far as the Parent Entity is aware, as at 31 December 2018, the Parent Entity’s shareholder structure was as follows:

On 18 February 2019, the Parent Entity was notified that the share of Otwarty Fundusz Emerytalny PZU “Złota Jesień”’ decreased below the 5% in the total number of votes at the General Meeting of KGHM Polska Miedź S.A. The Parent Entity’s shareholder structure  as at the date of signing of these financial statements was as follows:

Note 8.2.2 Changes of other equity items

Based on the Act of 15 September 2000, the Commercial Partnerships and Companies Code, the Parent Entity is required to create reserve capital for any potential (future) or existing losses, to which no less than 8% of a given financial year’s profit is transferred until the reserve capital has been built up to no less than one-third of the registered share capital. The reserve capital created in this manner may not be employed otherwise than in covering the loss reported in the financial statements.

As at 31 December 2018 the statutory reserve capital in the Group’s entities amounts to PLN 766 million, of which PLN 660 million relates to the Parent Entity.

Information related to dividends paid may be found in Note 12.2.

Note 8.3 Liquidity management policy

The Management Board of the Parent Entity is responsible for financial liquidity management in the Group and compliance with adopted policy. The Financial Liquidity Committee is a body supporting the Management Board in this regard.

The management of financial liquidity in the Group is performed in accordance with the Financial Liquidity Management Policy in the KGHM Group. This document comprehensively describes processes of managing the financial liquidity in the Group, which are realised by Group companies, while organisation, coordination and supervision over the realisation is performed by the Parent Entity by using appropriate procedures and instruments. The basic principles resulting from this document are:

• assuring the stable and effective financing of the Group’s activities,
• continuous monitoring of the Group’s debt level,
• effective management of working capital, and
• coordination, by the Parent Entity, of processes of financial liquidity management in the Group companies.

Under the liquidity management process, the Group utilises instruments which enhance its effectiveness. One of the instruments used by the Group is cash pooling – local in PLN, USD and EUR and international - in USD. The cash pooling service is aimed at optimising the management of cash resources, limiting interest costs, the effective financing of current working capital needs and the support of short-term financial liquidity in the Group.

In the fourth quarter of 2018, the Management Board of the Parent Entity carried out a review of the Strategy of KGHM, the goal of which was to ensure uniformity with the current market environment and with the needs of the KGHM Polska Miedź S.A. Group. As a result of the assumptions adopted with respect to ensuring long-term financial stability, actions are underway aimed at developing mechanisms supporting further growth in this regard:

• basing the financial structure of the Group on diversified and long term financing sources,
• restricting the need for net working capital in the Group, and
• effective management of market and credit risk in the Group.

Note 8.3.1 Contractual maturities for financial liabilities

Financial liabilities – as at 31 December 2018

Financial liabilities – as at 31 December 2017

*Financial liabilities arising from derivatives are calculated at their intrinsic values excluding the discount effect.

Note 8.4 Borrowings

Note 8.4.1 Net debt

* Presented amounts include the preparation fee paid in the amount of PLN 15 million which decreases financial liabilities due to bank loans
(in 2017: PLN 21 million).

Borrowings by currency (translated into PLN) and by type of interest rate

* Presented amounts include the preparation fee paid in the amount of PLN 15 million which decreases financial liabilities due to bank loans
(in 2017: PLN 21 million)

In 2018, liabilities due to borrowing increased, mainly as a result of a higher USD/PLN exchange rate. In the current part, under bilateral agreements signed with banks, the Group has a constant and ongoing access to credit and overdraft facilities with maturities of up to 2 years. Due to the fact that they are successively extended for subsequent periods, the Group considers the liquidity risk connected to the received short-term bank loans as low.

Note 8.4.2 Net debt changes

Currency risk and interest rate risk are related to borrowings. A description of exposures to financial risks may be found in Note 7.5.

Note 8.4.3 Detailed information concerning the main sources of borrowings

As at 31 December 2018, the Group had open credit lines and loans with a total balance of available financing in the amount of PLN 16 023 million, out of which PLN 7 937 million had been drawn.

The structure of financing sources is presented below.

* Presented amounts include the preparation fee paid in the amount of PLN 15 million which decreases financial liabilities due to bank loans
(in 2017: PLN 21 million).

These sources fully cover the current, medium and long-term liquidity needs of the Group.

The syndicated credit in the amount of USD 2 500 million, the investment loans in the amount of PLN 2 900 million and bilateral bank loans granted to the Parent Entity in the amount of PLN 3 454 million, are unsecured. Repayment of other liabilities of the Group due to bilateral bank loans and other loans in the amount of PLN 270 million are secured amongst others by proxy rights to bank accounts, statements on submitting to an enforcement regime, contractual mortgages, registered pledges or the assignment of receivables.

Note 8.5 Cash and cash equivalents

Note 8.6 Contingent liabilities due to guarantees granted

Guarantees and letters of credit are an essential financial liquidity management tool of the Group, thanks to which the Group’s companies and the joint venture Sierra Gorda S.C.M. do not have to use cash in order to secure their obligations towards other entities.

Information on contingent liabilities may be found in Note 12.5.

As at 31 December 2018, the Group held contingent liabilities due to guarantees and letters of credit granted in the total amount of PLN 2 878 million and due to promissory note liabilities in the amount of PLN 178 million.

The most significant items are contingent liabilities of the Parent Entity aimed at securing the following obligations:

Sierra Gorda S.C.M. – securing the performance of concluded agreements in the amount of PLN 1 815 million:

• a letter of credit of PLN 517 million (USD 138 million) granted as security for the proper performance of a long-term contract for the off-take of electricity (as at 31 December 2017 in the amount of PLN 479 million
  (or USD 138 million)),
• PLN 125 million (USD 33 million) as corporate guarantees set as security on the payment of concluded lease agreements (as at 31 December 2017 in the amount of PLN 174 million (or USD 50 million)*),
• PLN 496 million (USD 132 million) as corporate guarantees securing repayment of short-term working capital facilities (as at 31 December 2017 in the amount of PLN 460 million (or USD 132 million)*),
• PLN 677 million (USD 180 million) as a corporate guarantee securing repayment of a specified part of payment to guarantees set by Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, securing repayment of a corporate credit drawn by the joint venture Sierra Gorda S.C.M. (as at 31 December 2017 in the amount of
• PLN 627 million (or USD 180 million)).

Other entities, including the Parent Entity:

• PLN 401 million (USD 93 million, CAD 18 million and PLN 3 million) securing the restoration costs of the Robinson mine, the Podolsky mine and the Victoria project and obligations related to proper execution of concluded agreements (as at 31 December 2017 in the amount of PLN 380 million, or USD 93 million,
  CAD 20 million and PLN 1 million),
• securing the proper execution of future environmental obligations of the Parent Entity related to the obligation to restore terrain, following the conclusion of operations of the Żelazny Most tailings storage facility –
  PLN 160 million in the form of a bank guarantee (as at 31 December 2017 in the amount of PLN 160 million) and PLN 160 million in the form of an own promissory note (as at 31 December 2017 in the amount of PLN 160 million),
• PLN 188 million (USD 50 million) securing the proper execution by DMC Mining Services (UK) Ltd. and DMC Mining Services Ltd. of the contract for shaft sinking under the project conducted in the United Kingdom (guarantees granted in the first half of 2018).

Based on knowledge held, at the end of the reporting period the Group assessed the probability of payments resulting from contingent liabilities related to:

• Sierra Gorda S.C.M. – as moderately low,
• other entities of the Group - as low.

* As part of the analysis of the impact of IFRS 9 on the financial statements with respect to the financial guarantees granted to Sierra Gorda S.C.M., in the Group’s opinion it is necessary to recognise the aforementioned guarantees in the accounting books as per paragraph 4.2.1 point c of IFRS 9.