2. Operating segments
Operating segments
Based on an analysis of the Company’s organisational structure, its system of internal reporting and the applied management model, it was determined that the Company’s activity constitutes a single operating and reporting segment, which may be defined as “Production of copper, precious metals and other metallurgical products”.
The core business of the Company is the production of copper and silver. Production is a fully integrated process, in which the end-product of one stage is the half-finished product used in the next stage. Copper ore extracted in the mines is transported to concentrators where the enrichment process is carried out. As a result of this process, copper concentrate is produced, which is then supplied to the metallurgical plants where it is smelted and fire refined into copper anodes, which is then subjected to electrolytic refining into copper cathodes. From these cathodes wire rod and round billets are produced. Anode slimes, which arise from the process of copper electrorefining, is a raw material used to produce precious metals. Lead-bearing dust which is generated from the smelting processes is used to produce lead. Nickel sulphate and copper sulphate are recovered from the processing of used electrolyte. Gases generated from the smelting furnaces are used to produce sulphuric acid. Economic use is also made of smelter slags, which are sold as road-building materials.
Settlements between organisational units are carried out based on measurement of production at cost, and as a result the internal organisational units (i.e. mines, concentrators, metallurgical plants) in the production cycle do not generate profit on sales.
The financial data prepared for management accounting purposes is based on the same accounting policies which are used to prepare the financial statements. The Management Board of the Company, which is responsible for allocating resources and for the financial results of the Company, regularly reviews internal financial reports for purposes of making major operational decisions.
The organisational structure of KGHM Polska Miedź S.A. has 11 Divisions, including: mines, concentrators, metallurgical plants and the Head Office. The Head Office carries out sales of the Company’s basic products, i.e. electrolytic copper cathodes, round billets, wire rod and silver, and support functions, particularly including the management of financial assets, centralised finance and accounting services, marketing, legal and other services.
The Management Board of the Company assesses a segment’s performance based on Adjusted EBITDA and the profit or loss for the period. The manner of calculating Adjusted EBITDA and EBITDA is presented in the table “Reconciliation of Adjusted EBITDA”.
Production of main products
| from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 | |
|---|---|---|
| Electrolytic copper (kt), of which: | 501.8 | 522.0 |
| - electrolytic copper from own concentrates (kt) | 385.3 | 358.9 |
| Silver (t) | 1 188.8 | 1 218.1 |
| C1 unit cash cost of production of payable copper in own concentrate (USD/lb)* | 1.85 | 1.52 |
*C1 cost reflects ore mining and processing costs, transport costs, the minerals extraction tax, administrative expenses during the mining phase and smelter treatment and refining charges (TC/RC) less by-product value.
Segment financial results
| from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 | |
|---|---|---|
| Revenues from contracts with customers | 15 757 | 16 024 |
| Cost of sales, selling costs and administrative expenses* | (13 460) | (12 899) |
| Depreciation/amortisation recognised in profit or loss | (1 119) | ( 1 035) |
| EBITDA | 3 416 | 4 160 |
| Adjusted EBITDA | 3 416 | 4 160 |
| Profit/(loss) for the period | 2 025 | 1 323 |
| including: | ||
| reversal/(recognition) of impairment losses on non-current assets | 623 | ( 940) |
*Cost of products, merchandise and materials sold plus selling costs and administrative expenses.
Reconciliation of “EBITDA” and “Adjusted EBITDA” (which are not defined in IFRSs) with “Profit/(loss) for the period” (which is defined in IFRSs) and “Profit on sales” is presented in the following tables:
Reconciliation of Adjusted EBITDA
| from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 | |
|---|---|---|
| Profit for the period | 2 025 | 1 323 |
| [-] Current and deferred income tax | (647) | (831) |
| [-] Depreciation/amortisation recognised in profit or loss | (1 119) | (1 035) |
| [-] Finance income/(costs) | (774) | 1 033 |
| [-] Other operating income and (costs) | 1 149 | (2 004) |
| [=] EBITDA | 3 416 | 4 160 |
| [=] Adjusted EBITDA | 3 416 | 4 160 |
| from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 | |
|---|---|---|
| Profit on sales | 2 297 | 3 125 |
| [-] Depreciation/amortisation recognised in profit or loss | (1 119) | (1 035) |
| [=] EBITDA | 3 416 | 4 160 |
| [=] Adjusted EBITDA | 3 416 | 4 160 |
* Adjusted EBITDA is EBITDA adjusted by (recognition)/reversal of impairment losses on non-current assets recognised in cost of sales, selling costs and administrative expenses.
Segment assets and liabilities
| As at 31 December 2018 | As at 31 December 2018 | |
|---|---|---|
| Assets | 34 250 | 30 947 |
| Liabilities | 15 205 | 13 691 |
Accounting policies |
|---|
| In accordance with IFRS 15, as at 1 January 2018 the Company recognises revenue from contracts with customers when the Company satisfies a performance obligation by transferring a promised good or providing a service to a customer, which is when the customer obtains control of that asset, i.e. the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, as well as the ability to prevent other entities from directing the use of, and obtaining the benefits from, the asset. The Company recognises as a performance obligation every contractual promise to transfer to a customer a good or provide a service that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. For each performance obligation, the Company determines (based on contractual terms), whether the obligation will be performed over time or at a specified moment.` Revenues from the sale of products, merchandise and materials are recognised in profit or loss once at a point in time when the performance obligation is satisfied (in particular in accordance with the applied INCOTERMS principles). Revenues from the sale of services are recognised in profit or loss over time if one of the following criteria is met:
Revenues arising from ordinary operating activities of the Company, i.e. revenues from sales of products, merchandise and materials are recognised in the statement of profit or loss as revenues from contracts with customers. Revenues from contracts with customers are recognised in the amount of the transaction price (including any discounts granted and rebates). The transaction price also reflects the effects of the time value of money if a contract with a customer contains a significant financing element, which is determined based on the contractual payment terms, regardless of whether the promise of financing is explicitly stated in the contract. In determining whether a financing component is significant for a given agreement, all of the facts and circumstances are taken into consideration, including the eventual difference between the promised consideration and the cash selling price of the promised goods and services, as well as the total impact of the following two factors: (i) the estimated period from the moment an entity transfers the promised goods or services to a customer to the moment the customer pays for these goods or services, and (ii) prevailing interest rates on a given market. In the case of a sales transaction for which the price is set after the date of recognition of a given sale, the revenue is adjusted at the end of each reporting period by any change in the fair value of the relevant trade receivables. Sales revenue is adjusted for the gain or loss on the settlement of cash flow hedging derivatives, in accordance with the general principle that the portion of gain or loss on a derivative hedging instrument that is determined to be an effective hedge is recognised in the same position of profit or loss in which the gain or loss on the hedged item is recognised at the moment when the hedged item affects profit or loss. |
Sales revenue – breakdown by products
| | from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 |
|---|---|---|
| Copper | 11 942 | 12 127 |
| Copper in concentrate* | 400 | 86 |
| Silver | 2 101 | 2 447 |
| Silver in concentrate** | 141 | ( 6) |
| Gold | 381 | 556 |
| Services | 88 | 142 |
| Other | 704 | 672 |
| TOTAL | 15 757 | 16 024 |
* Value of payable copper less processing premium (TC), copper refining premium (RcCu) and other deductions impacting the value of concentrate, apart from the silver refining premium.
** value of payable silver less the silver refining premium (RcAg). The negative amounts in 2017 were a result of final settlement of copper concentrate sales realised in 2016.
Sales revenue – geographical breakdown reflecting the location of end clients
| from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 | |
|---|---|---|
| Europe | ||
| Poland | 4 131 | 4 134 |
| Germany | 1 968 | 2 147 |
| The United Kingdom | 1 870 | 1 776 |
| Czechia | 1 325 | 1 358 |
| France | 699 | 990 |
| Hungary | 667 | 652 |
| Spain | 552 | 4 |
| Italy | 551 | 411 |
| Switzerland | 532 | 765 |
| Austria | 235 | 255 |
| Romania | 112 | 101 |
| Slovakia | 104 | 86 |
| Slovenia | 70 | 68 |
| Denmark | 57 | 68 |
| Sweden | 41 | 50 |
| Bulgaria | 14 | 16 |
| Belgium | - | 6 |
| Other countries (dispersed sale) | 110 | 92 |
| North America | ||
| The United States of America | 177 | 443 |
| Other countries (dispersed sale) | 1 | 1 |
| South America | 4 | - |
| Asia | ||
| China | 2 001 | 2 159 |
| Turkey | 323 | 268 |
| India | - | 156 |
| Singapore | 158 | 3 |
| South Korea | 30 | - |
| Other countries (dispersed sale) | 13 | 14 |
| Africa | 12 | 1 |
| TOTAL | 15 757 | 16 024 |
Main customers
In the period from 1 January 2018 to 31 December 2018 and in the period from 1 January 2017 to 31 December 2017, there was a single customer from whom revenues exceeded 10% (12.6% in both of these periods) of the sales revenue of the Company.
Non – current assets – geographical breakdown
The property, plant and equipment of KGHM Polska Miedź S.A. are located in Poland.
Cash expenditures on property, plant and equipment and intangible assets
| from 1 January 2018 to 31 December 2018 | from 1 January 2017 to 31 December 2017 | |
|---|---|---|
| Cash expenditures on mining and metallurgical assets | 1 884 | 1 970 |
| Cash expenditures on other property, plant and equipment and intangible assets | 23 | 21 |