KGHM Polska Miedź S.A. is the Parent Entity of a Group which is a world-class producer of copper and silver with nearly 60 years of experience in the copper ore mining and processing sector. In Poland, KGHM Polska Miedź S.A. operates one of the world’s largest copper deposits, guaranteeing continuous production in Poland for the next several decades. KGHM Polska Miedź S.A. also produces silver, gold, molybdenum, lead and rock salt, as well as being one of the leading exporters in the country and one of the largest companies in Poland.

The KGHM Polska Miedź S.A. Group holds geographically diversified mining assets located in low-risk countries. The copper, silver, molybdenum, nickel and precious metals mines of the Group are located in Poland, the USA, Chile and Canada. The key international asset – the Sierra Gorda mine, which is a joint venture between KGHM INTERNATIONAL LTD., Sumitomo Metal Mining and the Sumitomo Corporation – is located in Chile. In addition, the KGHM Polska Miedź S.A. Group has mine projects which are at the preproduction phase (Victoria, Sierra Gorda Oxide, Ajax), as well as exploration projects. 
The major assets of the KGHM Polska Miedź S.A. Group are presented in the diagram below.

Img. Location of mining assets of the KGHM Polska Miedź S.A. Group

Based on the aforementioned geological assets, mines and metallurgical plants have been established and developed. These are described below in the subsequent tables:

We believe that copper and the other minerals that we provide to our customers on every continent are, and will remain, critical for the development of all sectors in the foreseeable future. For this reason our mission is „To always have copper” with the vision „To use our resources efficiently to become a leader in sustainable development”. The principle of conducting our business in compliance with the concept of sustainable development and of being a leader in this regard is based on numerous factors. Among them it is worth pointing out the scale and multi-faceted nature of our business and the long life of the Group. This in turn generates a substantial, conscious sense of responsibility for the rational, balanced utilisation of our resources, as well as for the Group’s enormous impact on its environment, mainly in its social and natural aspects.

In KGHM Polska Miedź S.A. we act in accordance with the following principles based on specific values:

Picture. The Group’s Basic Ethical Standards

Picture. Principles of ethical behaviour in KGHM Polska Miedź S.A

The scope of the KGHM Polska Miedź S.A. Group’s business operations, the unique, on a global scale, comprehensiveness of our mining and processing operations, our pursuit of innovation and maintenance of financial stability along with our extensive in-depth experience allow us to market products that satisfy the expectations of even the most demanding buyers of our products and services.

The KGHM Polska Miedź S.A. Group’s competitive advantages are depicted on the following diagram.

A good relationship with stakeholders based on mutual understanding and trust is of crucial importance to the KGHM Polska Miedź S.A. Group as an organization exerting a significant impact on its economic, social and natural environment, of which it is fully aware and for which it is prepared to accept full responsibility. Cooperation – one of the Company's values – is the basis for its success in business and the social sphere. The Group builds relationships with stakeholders based on partnership and complete transparency, with an awareness of their importance in its long-term strategy and sustainable approach to business. The basis of this process is dialogue geared towards learning about mutual expectations and capabilities and implementing agreements.

In 2016, the process of identifying and mapping the KGHM Polska Miedź S.A. Group's stakeholders was conducted. Its first stage was to distinguish stakeholder groups. This was accomplished using a survey covering members of senior management of each member of the KGHM Polska Miedź S.A. Group representing various business areas. During the second stage of this process involving a validation workshop, these same respondents assessed the degree of stakeholders’ interest and orientation on the organization and vice versa. Their assessments made it possible to specify four Stakeholder groups. The key stakeholders, forming the KGHM Polska Miedź S.A. Group’s most influential and significant stakeholder group, are one of them.  During a strategic review performed in 2018, it was concluded that the stakeholder map and the strength of interest and influence determined during the mapping exercise in 2016 remained unchanged for the years 2019-2023. The map is presented in the diagram below.

IMG. Key Stakeholders in the KGHM Polska Miedź S.A. Group

Based on estimates of CRU International, global mined copper production in 2018 amounted to 20 917 thousand tonnes. During this same time the companies of the KGHM Group produced in total 521 thousand tonnes of mined copper, representing approx. 2.5% of global production. In terms of the ranking of the world’s major mined copper producers, the KGHM Group held eighth place in 2018, as shown below:

Source: CRU, KGHM Polska Miedź S.A.

Global refined copper production, according to data from CRU, amounted to 23 651 thousand tonnes. Production of refined copper by the companies of the KGHM Group amounted to 522 thousand tonnes, or approx. 2.2% of global production and puts the Group beyond the top ten largest producers. However, in the ranking of the largest copper-producing countries, Poland held tenth place, as shown below:

Source: CRU, KGHM Polska Miedź S.A.

In 2018, global mined silver production in amounted to 856 million troy ounces (estimated data by the World Silver Survey). The KGHM Polska Miedź Group during this time produced 33.9 million troy ounces of silver, representing approx. 4.0% of global production of this metal. According to the survey conducted annually by the World Silver Survey, in 2018 the KGHM Group held third place globally in terms of metallic silver production, while Poland held seventh place in the ranking of countries producing this precious metal, as shown below:

From analyses conducted by the International Monetary Fund it appears that, although in 2018 the global economy was unable to maintain the rate of growth recorded in 2017, it still provided room for optimism. We can no longer speak about synchronised growth, given the clear acceleration in the United States and the weakening of the Eurozone, as detailed in the following diagram:

Source: Bloomberg, KGHM Polska Miedź S.A.

This trend is confirmed by the newest global GDP readings, which according to estimates of the IMF amounted to 3.6% in 2018 (3.8% in 2017). As a result the global economy only slowed slightly, which to a large extent was due to weaker results in the second half of the year. This was confirmed by readings from both emerging economies as well as from developed ones. The weaker readings lead the IMF to a slight revision of its global GDP growth forecast in 2019 to 3.3% (0.2 percentage points lower than in the prior forecast). The forecasted growth in 2020 remains unchanged at 3.6%. This is shown in detail in the following diagram:

Source: IMF, KGHM Polska Miedź S.A.

The global slowdown observed in the second half of 2018 was caused by several factors. Economic growth in China was lower due to a combination of regulatory tightening related to so-called shadow banking and heightened tensions with the USA. The slowdown in the Eurozone turned out to be more pronounced than expected and involved interruptions in automobile production in Germany, a drop in investments in Italy and lower internal demand. Sentiment in the financial markets was lower, leading in the spring of 2018 to weaker financial results in emerging markets, and later in the year in developed economies as well.

Another several years of price declines in the commodities markets affected investments in many companies and frequently lead to problems with with liquidity. This trend was however interrupted at the end of 2016, and the rise in prices of many metals from that time lasted until mid-2018. Investor and analyst optimism was mainly based on strong fundamentals, the result among others of many years of under-investment, with a consequent impact on supply. On the other hand the relatively strong economic growth in key global economies, in particular the USA and China, had a positive impact on commodities consumption. Sentiment changed however at mid-year, as a result of the introduction of tariffs under the growing trade conflict between the United States and China. Apart from the shadow this cast on trade with China, the world’s largest consumer of copper, it also lead to a substantial appreciation of the USD. The value of the USD compared to a basket of currencies (the so-called dollar index) in 2018 rose by nearly 4.5%, aided likewise by a tighter monetary policy by the Fed, despite the opposition of President Trump and the growing disparity between the USA and the world’s main economic regions. These were the main factors which lead to a rapid depreciation in commodities prices from June 2018.

The tense political situation in 2018 and the strengthening of the USD had a negative impact not only on metals prices but also on most other commodities. On a yearly scale the Bloomberg Commodity Index (BCOM) fell by nearly 15% which, apart from its impact on metals prices, was the factor most responsible for the depreciation in the value of energy-related commodities (-18%) and industrial commodities (-21%). This is shown in detail in the following drawing:

Source: Bloomberg, KGHM Polska Miedź S.A.

Market conditions in 2018

In 2018 the refined copper market was in deficit, caused mainly by many years of under-investment in new mining projects, which restricted supply, as well as by a steady increase in demand in China. Although the expected scenario of multiple supply-side interruptions, based on the need to renegotiate labour contracts and the associated potential for strikes in numerous mines, failed to materialize, the increase in mine production, considering the low base of 2017, nonetheless remained relatively low (3.7% as compared to 4.7% in the period 2012-2016). Hope on the part of market participants was also supported by the potential for additional demand from the electric car sector, despite the fact that this growth will only become noticeable in the long term. However, this situation drastically reversed at mid-year, when the risk of a trade war between the United States and China began to materialize. As a result, on the day prior to the introduction by the administration of President Trump of tariffs amounting to USD 34 billion on Chinese exports to the USA, one of the largest Chinese brokers – Gelin Dahua – closed most of the positions they had opened in January 2019 and part of those from November and December 2018. This initiated a rapid collapse in the copper price, which within barely a month fell from around 1 000 USD/t. The price of copper in the second half of the year stabilised around 6 100 USD/t. Consequently, the average price of copper in the second half of 2018 was more than 11% lower than in the first half.

The average annual price of copper on the London Metal Exchange (LME) in 2018 was 6 523 USD/t, 6% above the average price in 2017 (6 166 USD/t).

The strengthening of the USD in the second half of 2018 led to a fall in the silver price below 14 USD/oz t in September 2018, or the lowest level since January 2016. In subsequent months, despite the numerous threats to the stability of the global economy, assets generally considered as safe were not particularly in demand by investors. Only in the final weeks of the year did the downturn on the US stock market and the growing expectations of a slowdown in the policy of monetary easing by the Fed led to growth on the precious metals market, which continued into the first weeks of 2019. The price of silver ended 2018 at the level of 15.47 USD/oz t.

The average price of silver according to the London Bullion Market Association (LBMA) fell in 2018 by 8% and averaged 15.71 USD/oz t as compared to 17.05 USD/oz t in 2017.

The average annual price of nickel on the LME in 2018 amounted to 13 122 USD/t and was 26% higher than the average price recorded in 2017 (10 411 USD/t), and at the end of the year amounted to 10 595 USD/t. The level of 15 000 USD/t, the highest since 2015, was reached in June, on a wave of fears that American sanctions would seriously impact Russian metal producers, and at the same time severely limiting supply. However, in the second half of 2018, following many of the other base metals, the price of nickel began to fall, mainly due to fears about the condition of the Chinese economy under the impact of American tariffs. The price of nickel nonetheless remains supported by solid market fundamentals and by potential growth in demand for the metal from the dynamically developing electric vehicles battery sector. On the other hand, a more dynamic increase in prices was slowed by the still-high global inventories of this metal.

In the first half of 2018, following many of the other base metals, the price of molybdenum was also pushed up, with significant increases in this period. After a temporary price collapse in the June-July timeframe, the price again rose above 12 USD/lb and remained at this level until the end of the year. The price of molybdenum was supported by the fundamental market situation and by falling production in the Chuquicamata mine (related to the transformation of this mine from open-pit to underground), which was partially offset by higher production in other mines in Latin America. The steel industry, which is crucial for molybdenum, despite weaker results in Europe, continues to generate substantial demand for this metal in the United States and China. The average monthly price of molybdenum during the year ranged between 10.85 USD/lb (January 2018) and 12.86 USD/lb (March 2018).

As a result, the average price of this metal in 2018 amounted to 12.14 USD/lb and was more than 48% higher than the average price in 2017 (8.22 USD/lb).

The USD in 2018 strengthened substantially as compared to other world currencies – the value of the USD as compared to the currency basket (the so-called dollar index) increased by more than 4%. This appreciation of the USD was driven by the continued tightening of monetary policy by the Fed and the continued positive readings from the US economy. The USD/PLN exchange rate, after reaching its lowest level since 2014 (around 3.35 USD/PLN) at the turn of January and February 2018, saw a dynamic increase in the second quarter of the year, and at the end of 2018 reached the level of 3.76 USD/PLN. The average USD/PLN exchange rate (per the NBP) in 2018 amounted to 3.6117 USD/PLN and was lower by 4% than the rate in 2017 (3.7782 USD/PLN).

The following table presents the most important macroeconomic data for the Company’s operations:

Macroeconomic factors significant for the operations of the KGHM Polska Miedź S.A. Group – average prices

The primary products of the KGHM Polska Miedź S.A. Group, i.e. copper concentrates, cathodes, copper wire rod and silver in the form of bars and grains are traded on the highly-competitive global market as well as in reference to the commodity markets. Individual markets for the products offered by KGHM have varied rules and customs concerning trading and standard prices. Their incomparability is also due to the characteristics of individual products, which impacts their usage and the diversification of market participants.

Copper concentrates require processing into refined copper, which leads to incurring processing costs and the incomplete recovery of metals in individual production stages. Therefore, the transaction price should have a set of discounts as compared to quoted prices for refined copper. The benchmark of these discounts (for TC/RC) is determined during negotiations with the main producers of concentrates (Freeport McMoRan, Antofagasta) and their customers (mainly Chinese and Japanese smelters and refineries).

Companies of the KGHM Group participate in the copper concentrate markets mainly by selling concentrate from Sierra Gorda in Chile and from Robinson in the USA. Occasionally, KGHM Polska Miedź S.A. also sells copper concentrate produced by the Lubin, Rudna and Polkowice-Sieroszowice mines. At the same time the Company purchases copper concentrates from the market with characteristics suitable for more efficient utilisation of the production capabilities of the smelters and refineries in Poland.

It is a standard practice on the Grade “A” copper cathodes market to add a producer’s premium to the prices set by global exchanges. Its level allows the producer to cover the cost of transport and insurance to the agreed delivery destination, and it also includes the premium for quality (of a given cathodes brand) and supply-demand situation on a given market.

The companies of the KGHM Group participate on the cathodes market mainly by selling cathodes from the Group’s Polish assets. The Głogów Copper Smelter and Refinery produces cathodes of the HMG-S and HMG-B brands, while the Legnica Copper Smelter and Refinery produces cathodes of the HML brand. Moreover, the KGHM Group offers cathodes produced through the leaching and electrowinning process (SX/EW) in the Franke mine in Chile and in the Carlota mine in the United States. Production of refined copper in the companies of the KGHM Group amounted to 525.2 thousand tonnes, which represents approx. 2.2% of global production.

Wire rod’s price structure, apart from the copper quotations on the London Metals Exchange, also includes a producer’s fee (added to cathodes) and the refining charges due to the costs of processing cathodes into wire rod. KGHM produces wire rod in the Cedynia Wire Rod Plant in Orsk.

Usually, participants in the silver market make use of London Bullion Market Association quotations when setting the price for silver in physical transactions, after adjusting for current market conditions.

KGHM sells silver in the form of bars and grains (produced at the Głogów Copper Smelter and Refinery) and is one of the largest producers of metallic silver. Yearly, the Company produces approx. 1.2 thousand tonnes of this valuable metal. Silver in the form of bars is registered under the brand KGHM HG and has a registered certificate on the New York Mercantile Exchange (NYMEX) as well as Good Delivery certificates issued by the London Bullion Market Association. Silver is supplied in the form of grains to the photographic, jewellery and metals industries, which produce alloys containing silver. Silver in the form of bars (ingots) is mainly purchased by financial institutions.

According to analysts’ consensus, economic growth will begin to slow after 2019, along with continuing slowdown in the Eurozone, along with a deterioration of readings from the USA and China which nonetheless have recently surprised frequently to the upside. A potential slowdown, especially in China, which is the world’s largest consumer of copper, could detrimentally impact demand for most of the industrial metals in the short term.

In terms of copper supply, an increasingly important question is that of the drop in copper grade in ore (0.45% globally in 2018) and the increasing amounts of impurities. Additional producers are being forced to make substantial investments in in order to maintain production levels. Some large open-pit mines, such as Grasberg and Chuquicamata, are being transformed into underground mines, which also plays a part in rising production costs. The market will have to deal with restrictions resulting from the underinvestment in copper mining projects in recent years, during which most of the commodities reached multi-year minimums. There has however been seen recently a reversal of the policy of many companies and an increase in investments.

In 2018 and at the start of 2019 it was difficult to notice a direct correlation between the price of copper and the market deficit, affected by the high level of inventories. If however this deficit continues, there should be a reaction by the copper price.

Many countries, including China, have begun to place increasing attention on the question of environmental protection. In many Chinese provinces, industrial production during the winter months is officially restricted in order to fight smog. Further regulations and requirements are being introduced, although not all metallurgical plants meet the requirements introduced back in 2013. China is currently advancing a program called „National Sword”, which was approved by President Xi Jinping and national customs offices aimed at restricting the inflow of imported wastes. The Chinese plan to replace the decrease in imported scrap caused by the new regulations by a rapid rise in domestic production. This could have a serious impact on international scrap flows and could lead to higher demand for copper concentrate.

These events reflect the trend towards green technology and renewable energy sources. The rapidly growing electric car sector could potentially result in a significant rise in demand for copper (the amount of copper in electric vehicles is up to four times as much as in conventional combustion engines) as well as for many other metals. The batteries produced using NMC and NCA nickel-containing technology, which are used in EV production, have outstanding electro-chemical properties. Demand for nickel from this sector by 2025, as estimated by the leading financial institutions, will exceed 200 thousand tonnes, or approx. 10% of total demand recorded in recent years. The diversification of energy portfolios and increases in the use of renewable energy sources which many countries have been promoting has lead to a substantial increase in demand for wind farms, which has had a positive impact on copper consumption. On the other hand the use of photovoltaics potentially supports demand for silver. The Silver Institute expects this trend to continue in the coming years, accompanied by a decrease in the amount of silver used in solar cells.

Among the threats facing this relatively favourable macroeconomic picture are further escalation in the trade conflict between the USA and China and its expansion to other regions of the globe, leading to a drop in international trade. Another risk to continued growth is the potential tightening in monetary policy and a decrease in the US Fed balance along with similar actions by other central banks around the world. This is shown in detail below:

Forecasted copper market balance (kt)

The assets, capital and corporate governance system presented above, in reference to the macro- and microenvironments, enable the KGHM Polska Miedź S.A. Group to determine the means to build its value, and to further advance this process.