3. Impairment of assets
Note 3.1 Impairment testing of shares in the subsidiary Future 1 Sp. z o.o. and loans granted to the KGHM INTERNATIONAL LTD. Group
In the current period, as a result of the identification of indications of possible change in the recoverable amounts, the Company performed impairment testing of the Company’s equity involvement (shares in Future 1) and of loans granted to Future 1 and the KGHM INTERNATIONAL LTD. Group. The key indication to perform an impairment test was a significant change to the technical and economic parameters of mining assets of the KGHM INTERNATIONAL LTD. Group concerning mine lives, production volumes, reserves and resources, assumed operating costs and the level of capital expenditures during a mine’s life. In order to assess impairment, the fair value of the investment in KGHM INTERNATIONAL LTD. was estimated based on the sum of the fair values of individual CGUs (Cash Generating Units) within KGHM INTERNATIONAL LTD., decreased by liabilities and increased by other assets.
The value of shares in Future 1 is recognised at cost and as at 31 December 2018 amounted to PLN 1 037 million, while the carrying amount of loans granted to the KGHM INTERNATIONAL LTD. Group, together with interest, amounted to PLN 2 078 million, and those granted to the subsidiary Future 1 amounted to PLN 3 927 million.
The following CGUs have been selected for the purpose of assessment of the recoverable amount of the assets of the KGHM INTERNATIONAL LTD. Group:
- the Robinson mine,
- the Sudbury Basin, comprising the operating Morrison mine, the McCreedy mine which is in the process of closure and the pre-operational Victoria project,
- the Franke mine,
- the Carlota mine
- involvement in the joint venture Sierra Gorda, and
- the Ajax project.
To determine the recoverable amount of assets in individual CGUs during the testing, their fair value was calculated
(less costs to sell), using the DCF method, i.e. the method of discounted cash flows for the CGUs Sudbury and involvement in the joint venture Sierra Gorda and at the value in use for the CGU Franke. As for the recoverable amount of CGUs Robinson, Carlota and KGHM Ajax, due to a lack of indications of changes in the recoverable amount, they were set at their carrying amounts.
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 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 | Sudbury | 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. |
Results of the test performed as at 31 December 2018 are presented in the following table:
| Test elements | PLN million | |
|---|---|---|
| Discounted future cash flows of KGHM INTERNATIONAL LTD. (Enterprise value) | (USD 2 053 million *3.7597) | 7 720 |
| Estimated costs to sell | 30 | |
| Recoverable amount of investment in KGHM INTERNATIONAL LTD. (Enterprise value) | 7 690 | |
| Carrying amount of loans granted to the KGHM INTERNATIONAL LTD. Group, together with interest | 6 005 | |
| Carrying amount of shares in Future 1 | 1 037 | |
| Reversal of impairment loss on shares in Future 1 | 402 | |
| Reversal of allowances for impairment of receivables due to loans granted to the KGHM INTERNATIONAL LTD Group | 246 | |