Risk management
Comprehensive Risk Management System in the KGHM Group
The KGHM Polska Miedź S.A. Group defines risk as uncertainty, being an integral part of the activities conducted and having the potential to result in both opportunities and threats to achievement of the business goals. The current and future, actual and potential impact of risk on the KGHM Polska Miedź S.A. Group’s activities is assessed. Based on this assessment, management practices are reviewed and adjusted in terms of responses to individual risk factors.
Under the Corporate Risk Management Policy and Procedure and the Rules of the Corporate Risk and Compliance Committee updated in 2018, the process of corporate risk management in the Group is consistently performed. In the companies of the Group, documents regulating the management of corporate risk are consistent with those of the Parent Entity. KGHM Polska Miedź S.A. oversees the process of managing corporate risk in the Group. Each year, the process of managing corporate risk is subjected to an efficiency audit (compliant with the guidelines of Best Practice for WSE Listed Companies 2016).
Risk factors in various areas of the Group’s operations are continuously identified, assessed and analysed in terms of their possible limitation. Key risk factors in the Group undergo in-depth analysis in order to develop a Risk Response Plan and Corrective Actions. Other risk factors undergo constant monitoring by the Department of Corporate Risk Management and Compliance, and in terms of financial risk by the division of the Executive Director for Treasury Operations - Corporate Treasurer.
This comprehensive approach to analysing risk factors also comprises the identification of risk factors related to achieving the strategic goals. In 2018, risks were reviewed related to achievement of the strategic goals contained in the Main Strategy and in the Executory and Support Strategies.
Following is the organisational structure of risk management in the Parent Entity as updated in 2018. The breakdown of rights and responsibilities applies best practice principles for Corporate Governance and the generally recognised model of three lines of defense.
Organisational structure of risk management in KGHM Polska Miedź S.A
 Supervisory Board (Audit Committee) |
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Performs annual assessment of the effectiveness of the risk management process and monitors the level of key risk factors and ways to address them. |
 Management Board |
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Has ultimate responsibility for the risk management system and supervision of its individual elements. |
1st line of defense | 2nd line of defense | 3rd line of defense | |||
|---|---|---|---|---|---|
Management Managers are responsible for identifying, assessing and analysing risk factors and for the implementation, within their daily duties, of responses to risk. The task of the management staff is ongoing supervision of the application of appropriate responses to risk within the tasks realised, to ensure the expected level of risk is not exceeded. | Risk Committees They support effective risk management and ongoing supervision of key risks. | Audit The Internal Audit Plan is based on assessing risk and subordinated business goals, assessed is the current level of individual risk factors and the degree of efficiency with which they are managed. | |||
Corporate Risk and Compliance Committee | Market Risk Committee | Credit Risk Committee | Financial Liquidity Committee | ||
Manages corporate risk and continuously monitors key risk factors | Manages risk of changes in metals prices (e.g.: copper and silver) as well as exchange and interest rates | Manages risk of failure of debtors to meet their obligations | Manages risk of loss of liquidity, understood as the ability to pay financial liabilities on time and to obtain financing for operations | ||
Corporate Risk Management Policy | Market Risk Management Policy | Credit Risk Management Policy | Liquidity Management Policy | Internal Audit Rules | |
Department of Corporate Risk Management and Compliance | Executive Director for Treasury Operations - Corporate Treasurer | Executive Director for Audit and Control | |||
Reports to the Management Board | Reports to the Vice President of the Management Board (Finance) | Reports to the President of the Management Board | |||
Risk management
Key risk factors in the Group and their mitigation
For the purposes of risk identification, the KGHM Group uses a tool called a Risks Model. Its structure is based on risk sources and is divided into the following 5 categories: technological, value chain, market, external and internal. At the level of the identified and defined subcategories, there are several dozens of subcategories corresponding to individual areas of operations or management.
Risk factors in the KGHM Group
A tool used in identifying risk in the KGHM Polska Miedź S.A. Group is the Risk Model. Its structure is based on a given risk’s source and is divided into the following 5 categories: Technological, Values chain, Market, External and Internal. Several dozen sub-categories have been identified and defined covering particular areas of the operations or management.
Following are the key risks in the KGHM Polska Miedź S.A. Group, including identification of specific risks for the Parent Entity and the KGHM INTERNATIONAL LTD. Group.
The list below uses the following abbreviations: for the KGHM Polska Miedź S.A. Group – the KGHM Group, for the KGHM INTERNATIONAL LTD. Group – the KGHM INTERNATIONAL Group.
| Risk factor | Risk - description | Mitigation |
|---|
| Technology | ||
|---|---|---|
| Technology | (Parent Entity) Technological risk related to the mining of deep underground copper ore deposits, under conditions associated with natural hazards. | R&D work and test runs of alternate mining methods to currently-used copper ore mining technology. |
| (Parent Entity) Risk of failure to adhere to the efficient working time parameter and of failure to fully utilise the capacity of metallurgical installations to process own concentrate (Głogów Copper Smelter and Refinery). | Construction of a concentrate roasting installation at the Głogów smelter and refinery, maintain the appropriate separation of concentrate to optimise the pyrometallurgical process and advance R&D. | |
| Value chain | ||
|---|---|---|
| Planning | (KGHM Group) Risk related to using inappropriate economic parameters related to production, investments, macroeconomics and finance, for forecasts of company results. | Forecasts related to specific areas of the operations are prepared by appropriate specialised units. |
| (KGHM INTERNATIONAL Group) Risk related to the accuracy of estimating decommissioning costs of certain mines. | ||
| Resources and reserves | (KGHM Group) Risk related to insufficient knowledge of the parameters and characteristics of a deposit, both for exploration projects (estimated input data for orebody evaluation models), as well as for ongoing mining operations. | Additional expenditures on exploratory work to enhance the precision of estimating resources and the level of knowledge of geological-mining conditions, optimisation of the drilling network, geological research, knowledge gained through access drifts, consultations with external experts. |
| Waste management | (Parent Entity) Risk of the inability to store mine tailings. | Operation, construction and development of the tailings storage facility pursuant to the operating instructions. Cooperation with a Team of International Experts (TIE) and the General Designer, introduction of Observation Methods during development recommended by the TIE, based on the evaluation of geotechnical parameters obtained from the results of monitoring performed, which allow conclusions to be made regarding the behaviour of the constructed/operated facility. |
| Availability of materials and utilities | (Grupa KGHM) Risk related to the lack of availability of utilities (electricity, gas, water). | Ensure back-up systems for key utilities and on-going evaluation of the security of power systems. Conduct a variety of investments aimed at strengthening energy security. Agreement with the company Polskie Górnictwo Naftowe i Gazownictwo S.A. for the sale of natural gas, increasing the security of natural gas supply. |
| Production and infrastructure | (KGHM Group) Risk related to infrastructure emergencies resulting in a shut-down of production lines, both as a result of natural hazards as well as internal factors related to the applied technology (as well as the pyrometallurgical process). | Preventative management of key elements of infrastructure which impact the smooth flow of operations. On-going analysis of geotechnical risk and reviews of planned recoveries. Appointment of special-purpose and expert teams on preventing emergencies in metallurgical infrastructure. |
| (KGHM INTERNATIONAL Group) Geotechnical risk in open-pit mines (wall stability) and in underground mines. | ||
| Efficiency and costs | (KGHM Group) Risk related to the cost effectiveness of the production process, mining projects and the processing of copper-bearing materials, including the risk of significant increases in the prices of materials, services and utilities and of restoration costs. | Monitoring trends on the copper-bearing materials market and maintaining costs at the planned levels. Creating multi-year plans and budgets to achieve profitability under the given market conditions. |
| Market | ||
|---|---|---|
| Market Risk | (KGHM Group) Risk related to volatility in commodity prices (copper, silver and other metals), exchange rates and interest rates. | This risk is actively managed (in the Parent Entity, in accordance with the Market Risk Management Policy currently in force). A basic technique for managing market risk in the company are hedging strategies utilising derivative instruments. Natural hedging is also applied. |
| Credit Risk | (KGHM Group) Risk related to the failure by commercial customers or financial institutions to regulate receivables. | This risk is actively managed (in the Parent Entity, in accordance with the Credit Risk Management Policy currently in force). Exposure to credit risk is limited by evaluating and monitoring the financial condition of customers, setting credit limits and applying creditor security and factoring. |
| Liquidity Risk | (KGHM Group) Risk related to the loss of liquidity, understood as the ability to pay liabilities on time and to obtain financing for operations. | This risk is actively managed (in the Parent Entity, in accordance with the updated Financial Liquidity Management Policy in the KGHM Group). |
| Equity investments and divestments | (KGHM Group) The risk of not receiving the expected return or expected effects on an equity investment. Risk of loss of company value, the failure to achieve assumed synergies, the loss of alternative profits, a fall in the price of shares of listed companies. | Detailed analysis of the effectiveness and justification of equity investment plans; pre-investment analysis of projects and on-going monitoring of the value of assets owned. |
| External | ||
|---|---|---|
| Administrative proceedings | (KGHM Group) The risk of restricting or suspending operations as a result of administrative and/or legal proceedings: administrative decisions not received, withdrawn or which undergo unfavourable changes. | The process of obtaining administrative decisions is conducted with an appropriate level of prudence and care. Deadlines are met. Being proactive (initiating procedures at an early stage and executing decisions with a margin of safety in terms of time). Legal counsel is employed when the company is engaged in administrative proceedings. Appeals procedures are followed. The opinions of external experts are sought. |
| Natural hazards | (KGHM Group) The risk of employees’ loss of life or health. Disruptions or restrictions in production as a result of seismic events and associated roof collapses, or destressings of the rock mass and the occurrence of uncontrolled rock bursts. | A wide variety of technological and organisational solutions and other active and passive methods are applied to prevent roof collapses enabling restriction of the effects of dynamic events (roof collapses or rock mass destressings) in the mines. Preparation of reserve fields in the orebody which could handle reduced production. |
| (Parent Entity) Risk related to gas hazards (mainly hydrogen sulphide). | The risk of gas hazards occurring is being assessed and principles are being developed for working under the risk of such hazards. Individual employee safety measures are applied as well as equipment and means for reducing concentrations of hydrogen sulphides and neutralising oppressive odours. | |
| (Parent Entity) Risk related to underground climate risk, which increases in tandem with increasing mine depth. | The construction of additional ventilation shafts, the use of centralised, workplace and individual air cooling systems as well as reduced working time. | |
| (Parent Entity) Risk related to the occurrence of underground water-related threats. | The introduction of a variety of technological solutions (e.g. water level signalling devices and alarms, draining of the rock mass) and organisational solutions (training, work conducted in accordance with documentation), aimed at minimising the negative impact of the occurrence of such a risk. | |
| Natural environment and climate change | (KGHM Group) The extraction and processing of copper ore at all stages of production has an unavoidable impact on various parts of the natural environment. Risk related to pricing and the placing of limits on CO2 emissions. | Compliance with rigorous environmental standards imposed by law is possible thanks to the systematic modernisation of environmental protection installations, both those built in the past as well as new investments in this regard. (In the Parent Entity a CO2 Emissions Management System has been implemented as well as environmental management standard ISO 14001). |
| (KGHM Group) Risk related to evaluating air quality in Lower Silesia (exceeding the average annual target level of arsenic in suspended dusts PM10). | Carrying out the list of actions arising from Air Protection Programs. Conduct of R&D work and of the Program to adapt the technological installations of KGHM BAT Conclusions for the non-ferrous metals industry together with limitation of arsenic emissions. | |
| Law and regulations | (KGHM Group) The risk of changes in the regulatory environment in areas such as geological-mining law, environmental protection, energy, corporate law, insurance and security. | Monitoring of legal changes in individual jurisdictions and active participation in legislative processes. Taking pre-emptive actions to adapt to organisational, infrastructural and technological changes. An energy management system was implemented in the Parent Entity and a certificate of compliance with ISO 50001 standard was received. |
| Taxation | (Parent Entity) The risk of there being no change in the royalty formula (the minerals extraction tax) and the risk of taxation arising from other regulations. | |
| (KGHM INTERNATIONAL Group) Taxation risks arising from operating in numerous jurisdictions. | ||
| Internal | ||
|---|---|---|
| Occupational health and safety | (KGHM Group) The risk of serious accidents or industrial illnesses caused by improper workplace organisation, the failure to follow procedures or the use of improper safety devices. The risk of temporary production stoppages caused by serious accidents. | In the Parent Entity, occupational health and safety standards are in force (18001/OHSAS); regular training in occupational health and safety standards, programs to identify potentially accident-causing events. |
| Stakeholders | (KGHM Group) The risk of negative ad campaigns and the risk of lack of acceptance by the public, local governments or other stakeholders for the conduct of development and exploration work. | Execution of the CSR Strategy, close cooperation with government bodies; meetings and negotiations with stakeholders, informational campaigns, conferences, publications. |
| Human resources | (KGHM Group) The risk of not being able to acquire and keep human resources, for example in order to support development projects. | Programs aimed for example at raising the effectiveness of the processes of recruitment, finding successors and maintaining key positions. Employee mobility program. |
| Security, IT and data protection | (KGHM Group) Risk that the confidentiality, integrity or availability of informational assets which have been collected, stored or processed on physical and/or IT resources may be compromised. | Strict adherence to and application of the principles, among others, of the Information Security Policy and Facility Protection Plans. Adaptation of the KGHM Group to the requirements of the general decree on the protection of personal data (GDPR). Systematic assessment of the risk of compromise of the confidentiality, integrity or availability of informational assets. |
| Ethics and organisational culture | (KGHM Group) Risk of failure to adhere to established principles and standards with respect to counteracting corruption within the procurement process and the risk of incurring losses due to actions harmful to KGHM. | Strict adherence to and application of the principles arising from the Code of Ethics of the KGHM Polska Miedź S.A. Group, the Anti-corruption Policy and the Procedures for Counteracting Threats of Corruption in the KGHM Polska Miedź S.A. Group. In the companies of the KGHM Group, Corporate Representatives for Ethics and Anti-corruption were appointed and a Procedure for Disclosing Improprieties and Protecting Whistleblowers was implemented in the KGHM Group. |
| Project management | (KGHM Group) The risk of exceeding project/program budgets and schedules, exceeding defined scopes and failing to meet defined quality parameters as a result of the improper management of portfolios and projects. | Project Management in accordance with Methodology as well as on-going monitoring and updating of schedules. On-going evaluation of the economic effectiveness of existing and anticipated development projects. |
| (KGHM INTERNATIONAL Group) Risk related to the operational management and development of key mining projects, including issues related to costs incurred, permitting and infrastructural requirements. | ||
Risk management
Market, credit and liquidity risk
The goal of market, credit and liquidity risk management in the KGHM Polska Miedź S.A. Group is to restrict the undesired impact of financial factors on cash flow and results in the short and medium terms and to enhance the Group’s value over the long term.
The management of these risks includes both the processes of risk identification and measurement as well as its restriction to acceptable levels. The process of risk management is supported by an appropriate policy, organisational structure and procedures. In the Parent Entity these issues are covered in the following documents:
The „Market Risk Management Policy in the KGHM Polska Miedź S.A. Group” covers selected mining companies in the Group (KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD., FNX Mining Company Inc., Robinson Nevada Mining Company, KGHM AJAX MINING Inc. and Sociedad Contractual Minera Franke), with representatives of the Parent Entity and KGHM INTERNATIONAL LTD. serving as members of the Market Risk Committee.
Financial liquidity management is carried out in accordance with the „Financial Liquidity Management Policy in the KGHM Group” which in a comprehensive manner regulates financial liquidity management in the Group carried out by individual Group companies, while its organisation and coordination as well as the supervision thereof is performed in the Parent Entity.
Credit risk management in the Parent Entity is carried out in accordance with the Management Board-approved Credit Risk Management Policy. The Parent Entity serves as an advisor to the Group’s companies with respect to managing credit risk. The „Credit Risk Management Policy in the KGHM Polska Miedź S.A. Group” applies to selected Group companies, the goal of which is to introduce a comprehensive, joint approach and the most important elements of the credit risk management process.
Risk management
Market risk management
Market risk is understood as the possible negative impact on the Group’s results arising from changes in the market prices of commodities, exchange rates and interest rates, as well as from changes in the value of debt securities and share prices of listed companies.
In terms of market risk management (in particular the risk of changes in metals prices and exchange rates) of greatest significance and impact on the results of the Group are the scale and nature of the activities of the Parent Entity and the mining companies of KGHM INTERNATIONAL LTD.
The Parent Entity actively manages market risk, undertaking actions and decisions in this regard within the context of the global exposure throughout the KGHM Polska Miedź S.A. Group.
The Management Board is responsible for market risk management in the Parent Entity and for adherence to policy in this regard. The main body involved in performing market risk management is the Market Risk Committee, which makes recommendations to the Management Board in this area.
Commodity risk, currency risk
In 2018, the Group was mainly exposed to the risk of the changes in the prices of metals it sells: copper and silver. Of major significance for the Parent Entity was the risk of changes in currency rates, in particular the USD/PLN exchange rate. The Group’s companies are additionally exposed to the risk of volatility in the prices of lead, gold, molybdenum, platinum and palladium. Market risk related to changes in metals prices arises from the formula for setting prices in physical metals sales contracts, which are usually based on the average monthly market prices for the relevant future month.
In accordance with the Market Risk Management Policy, in 2018 the Parent Entity continuously identified and measured market risk related to changes in metals prices, exchange rates and interest rates (analysis of the impact of market risk factors on the Parent Entity’s activities – profit or loss, statement of financial position, statement of cash flows), and also analysed the metals and currencies markets. These analyses, along with assessment of the internal situation of the Parent Entity and Group, represented the basis for taking decisions on the application of hedging strategies on the metals, currency and interest rates markets.
With respect to managing risk in 2018, the Parent Entity implemented copper price hedging transactions with a total notional amount of 126 thousand tonnes and a hedging horizon falling from July 2018 to December 2020 (including: 114 thousand tonnes hedging revenues from copper sales in the years 2019-2020). The Parent Entity did not implement derivatives transactions on the silver market. As a result, the Parent Entity held open derivatives positions on the copper market for 168 thousand tonnes of copper in the years 2019-2020.
Moreover, in 2018 the Parent Entity commenced the management of a net trading position in order to react to changes in contractual agreements with customers and to the appearance of non-standard pricing conditions in metals sales and in purchases of copper-bearing materials. In the fourth quarter of 2018 so-called QP adjustment swap transactions were entered into on the copper and gold markets with maturity falling in June 2019.
In 2018, the Parent Entity implemented transactions hedging against a change in the USD/PLN exchange rate for the total notional amount of USD 1 710 million with maturity from April 2018 to December 2020 (including transactions hedging USD 1 080 million in revenues for the period from January 2019 to December 2020). As at 31 December 2018 the Parent Entity held an open hedging position in derivatives for USD 1 260 million of planned revenues from sales of metals.
As for managing currency risk which may arise from bank and other loans, the Parent Entity applies natural hedging by borrowing in currencies in which it has revenues. The balance of liabilities of the Parent Entity due to bank loans and a loan as at 31 December 2018 was comprised of USD-denominated liabilities, which following their translation into PLN amounted to PLN 7 655 million.
As at 31 December 2018, KGHM INTERNATIONAL LTD. did not hold open derivative positions on the metals and currency markets.
Some of the Group’s Polish companies managed the currency risk related to their core businesses by opening derivative transactions on the EUR/PLN and USD/PLN markets.
Interest rate risk
Interest rate risk is the possibility of the negative impact of changes in interest rates on the Group’s position and results. In 2018, the Group was exposed to such risk due to loans granted, free cash invested on deposits and borrowings.
As at 31 December 2018, the following positions were exposed to interest rate risk by impacting the amount of interest costs and income:
- cash and cash equivalents: PLN 1 315 million, including the deposits of special purpose funds: the Mine Closure Fund and the Tailings Storage Facility Restoration Fund,
- liabilities due to bank and other loans drawn: PLN 5 112 million.
As at 31 December 2018, the following positions were exposed to interest rate risk due to changes in the fair value of instruments with fixed interest rates:
- receivables due to loans granted by the Group: PLN 15 million,
- liabilities due to bank and other loans drawn with fixed interest rates: PLN 2 810 million.
Financial liabilities denominated in USD and EUR, based on LIBOR or EURIBOR, expose the Group to the risk of higher interest rates which would result in higher interest costs. As a result, taking into consideration the global exposure of the Group to interest rate risk, in 2018 the Parent Entity drew a loan based on a fixed interest rate and exercised its right to draw loans from the European Investment Bank based on a fixed interest rate. Moreover, the Parent Entity remains hedged against an interest rate increase (LIBOR USD) through the aid of a call option (CAP) with an interest rate of 2.50% in the years 2019-2020.
Price risk related to the change in share prices of listed companies
Price risk related to the shares of listed companies held by the Group is understood as the change in their fair value due to changes in their quoted share prices.
As at 31 December 2018, the carrying amount of shares of companies which were listed on the Warsaw Stock Exchange and on the TSX Venture Exchange amounted to PLN 427 million.
Result on derivatives and hedging transactions
The total impact of derivatives and hedging instruments (transactions on the copper, silver, currency and interest rate markets as well as embedded derivatives and a loan in USD designated as a hedge against a change in the exchange rate) on the Group’s profit or loss for 2018 amounted to PLN 47 million, of which:
- PLN 125 million was recognised in sales revenue,
- PLN 89 million decreased the result on other operating activities,
- PLN 11 million increased the result on financing activities.
Moreover, in 2018 other comprehensive income increased by PLN 349 million (impact of hedging instruments).
As at 31 December 2018, the fair value of open positions in derivatives of the Group (on the metals, currency, interest rate and embedded derivatives markets) amounted to PLN 416 million.
The Parent Entity decided to implement standard IFRS 9 (including hedge accounting principles) as at 1 January 2018 without adjusting comparable data, which means that the data related to 2017 which are presented in the financial statements for 2018 are not comparable.
Risk management
Credit risk management
Credit risk is defined as the risk that counterparties will not be able to meet their contractual liabilities.
The Management Board is responsible for credit risk management in the Parent Entity and for compliance with policy in this regard. The main body involved in actions in this area is the Credit Risk Committee.
In 2018, the KGHM Polska Miedź S.A. Group was exposed to this risk, mainly in four areas:
Credit risk related to trade receivables
The Group’s companies have been cooperating for many years with a large number of customers, which affects the geographical diversification of trade receivables.
The Parent Entity limits its exposure to credit risk related to trade receivables by evaluating and monitoring the financial standing of its customers, setting credit limits, using debtor security and factoring. An inseparable element of the credit risk management process realised by the Parent Entity is the on-going monitoring of receivables and the internal reporting system. Buyer’s credit is only provided to proven, long-term customers, while sales of products to new customers are mostly based on prepayments or commercial financing instruments which transfer all of the credit risk to financial institutions. In 2018, the Parent Entity secured its receivables by promissory notes, registered pledges, bank guarantees, corporate guarantees, mortgages and documentary collection. Moreover, the majority of customers who hold buyer's credit on contracts have ownership rights confirmed by a date certain.
To reduce the risk of insolvency by its customers, the Parent Entity has a receivables insurance contract, which covers receivables from entities with buyer’s credit which have not provided strong collateral or have provided collateral which does not cover the total amount of the receivables. Taking into account the collateral held and the credit limits received from the insurance company, as at 31 December 2018 the Parent Entity had secured 75% of its trade receivables (as at 31 December 2017: 95%).
The concentration of credit risk in the Group is related to the terms of payment granted to key clients. Consequently, as at 31 December 2018 the balance of receivables from 7 of the Group’s largest clients, in terms of trade receivables at the end of the reporting period, represented 28% of the trade receivables balance (as at 31 December 2017: 63%). Despite the concentration of this type of risk, it is considered that due to the availability of historical data and the many years of experience cooperating with clients, as well as above all due to the security used, the level of credit risk is low.
Credit risk related to cash and cash equivalents and bank deposits
The Group allocates periodically free cash in accordance with the requirements to maintain financial liquidity and limit risk and in order to protect capital and maximise interest income.
Credit risk related to deposit transactions is continuously monitored by the on-going review of the credit ratings of those financial institutions with which the Group cooperates, and by limitation of the level of concentration in individual institutions.
Credit risk related to derivatives transactions
All of the entities with which the Group enters into derivative transactions (with the exception of embedded derivatives) operate in the financial sector. These are mainly financial institutions, with a medium-high rating. According to fair value as at 31 December 2018, the maximum share of a single entity with respect to credit risk arising from open derivative transactions entered into by the Group and from unsettled derivatives amounted to 22%. Due to diversification of risk in terms both of the nature of individual entities and of their geographical location, as well as taking into consideration the fair value of assets and liabilities arising from derivative transactions, the Group is not materially exposed to credit risk as a result of derivative transactions entered into.
Credit risk related to loans granted
As at 31 December 2018, the balance of loans granted by the Group amounted to PLN 5 222 million. The most important of these are long-term loans in the total amount of PLN 5 199 million, or USD 1 383 million, granted by the KGHM INTERNATIONAL LTD. Group for the financing of a mining joint venture in Chile.
Credit risk related to the loans granted to the joint venture Sierra Gorda S.C.M. is dependent on the risk related to mine project advancement.
Risk management
Financial liquidity risk and management of capital
The management of capital in the Group aims at securing finds for development and at securing relevant liquidity.
Financial liquidity management
Management of the Group’s liquidity is conducted in accordance with the Financial Liquidity Management Policy in the KGHM Group. This document describes the process of financial liquidity management in the Group, which is realised by the Group’s companies, while its organisation and coordination as well as the supervision thereof is performed in the Parent Entity.
The basic principles resulting from this document are:
- the need to ensure stable and effective financing for the Group’s operations,
- constant monitoring of the Group’s level of debt, and
- effective management of working capital.
Borrowing by the Group is based on three pillars:
- an unsecured, revolving syndicated credit facility, obtained by the Parent Entity and which is for the amount of USD 2 500 million with a maturity of 9 July 2021,
- two investment loans granted to the Parent Entity by the European Investment Bank in the amount of
PLN 2 000 million and PLN 900 million with a financing period of 12 years from the dates the instalments are drawn, and - bilateral bank loans in the amount of up to PLN 3 700 million, to support the management of current liquidity in companies and the financing of working capital as well as to finance the continued advancement of investments.
Detailed information regarding available sources of financing and their utilisation in 2018 may be found in Section 6.6 of this report.
The aforementioned sources of financing fully cover the Group’s liquidity needs. During 2018, the Group made use of borrowing which was available from all of the above categories, while liabilities of the Group due to bank and other loans drawn as at 31 December 2018 amounted to PLN 7 922 million.
Management of capital
In order to maintain the ability to operate, taking into consideration the execution of planned investments, the Group manages capital so as to be able to generate returns for shareholders and provide benefits for other stakeholders.
The Group aims to maintain the equity ratio, in the long-term, at a level of not less than 0.5, and the ratio of Net Debt/EBITDA at a level of up to 2.0.
Risk management
Key risks to the competitive advantage
Key risks to the competitive advantage of of the KGHM Polska Miedź S.A. Group in 2018:
| Competitive advantage | Key related risk |
|---|---|
| Unique competencies and skills | Risk related to human resources, comprising the acquisition and retention of appropriate human resources to build competitive advantage. |
| Global reach of operations | Risk related to laws and regulations, as well as taxes related to the complexity, volatility and number of jurisdictions in which the KGHM Group operates. Risk related to the lack of support of Stakeholders for the global development and operational work being performed. |
| Integrated process from mining to sales | Risk related to technology (in the sector, IT systems), the recognition and assessment of mining resources and reserves. Risk related among others to operational efficiency in the management of wastes, ensuring required power, water etc. and infrastructure, i.e. the potential for breakdowns which could impact production (including risks related to natural hazards as well as internal factors). Risk related to organisational health and safety. |
| Innovation | Risk related to the selection of appropriately innovative technology, risk related to laws and regulations (including patent procedures) and financial risk. Risk related to ensuring appropriate cost efficiency and appropriate human resources to advance tasks related to innovation. |
| Financial stability | Risk related to volatility in the prices of goods, exchange rates and interest rates (market risk). Borrowing risk and risk related to achieving the expected rate of return or the expected effect of equity investments. |
Further information on the management and mitigation of risk in the Group may be found under the specific indicated categories of the Risk Management chapter, including in the section Risk in the Parent Entity and in the KGHM INTERNATIONAL LTD. Group)
Risk management
The system of security and loss prevention
In 2018, KGHM Polska Miedź S.A. started the implementation of a global Security and Loss Prevention System in the KGHM Polska Miedź S.A. Group.
The system is designed to protect the employer’s interest by preventing acts that expose the company to material loss and reputational harm, as well as by the optimization of expenses and investments, which generates savings for the KGHM Polska Miedź S.A. Group. The key elements of the system include:
- defined procedures and control mechanisms,
- standardization of procedures and processes in the aforementioned area across the KGHM Group,
- effective prevention of malpractice that can lead to losses for the KGHM Group,
- effective detection of committed malpractices, inspection and control activities and implementation of corrective mechanisms,
- counteracting corruption,
- growing the ethical awareness of employees.
Established in January 2018 in the KGHM Polska Miedź S.A. Head Office, the Security and Prevention of Loss Division is responsible for the implementation, functioning and oversight of the system. Currently, the Division is made up of two Departments:
- the Security Department, comprising, among others, the Unit of Ethics and Anti-corruption Procedures and the Unit of Security and Loss Prevention,
- the Department of Supply Chain Security.
In 2018, KGHM’s Divisions and Subsidiaries appointed Representatives for Ethics and Anti-corruption, whose work is monitored, supervised and coordinated by the Ethics and Anti-corruption Representative of the KGHM Group (as per the applicable procedure, the function is discharged by the Director of the KGHM Security Department).
Since 2017, regular anti-corruption training has been organized for the employees of all KGHM entities. In 2018, specialized training was carried out, addressed to the management and the representatives. All the materials and instructions are readily available to all Employees on the internal corporate portal.
The actions undertaken by the KGHM Polska Miedź S.A. Group with respect to managing risk also include determining risks and how to deal with them under the Group’s CSR-related activities.
Risk management
Safty-related risks
The KGHM Group has defined the following significant safety risks and mitigation factors:
| Risk factor | Risk description | Mitigation |
|---|---|---|
| Natural hazards | (KGHM Group) Risk of loss of employees’ life or health, disturbances or limitations in production as a result of seismic shocks and accompanying bursts or rock mass decompressions and occurrence of uncontrolled falls. | Introduction of a series of technological and organizational solutions as well as other methods of active and passive burst prevention to mitigate the effects of dynamic phenomena (bursts or rock mass decompressions) in operating branches. Preparation of reserve fields to take over production on a limited basis. |
| (Parent Company) Risk related to gas hazards (methane and hydrogen sulfide). | The existence of gas hazard is identified and rules have been developed for conducting work in conditions of this risk. Individual protection of employees is used as well as equipment and measures to reduce hydrogen sulfide concentration and neutralize nuisance smells. | |
| (Parent Company) Risk related to climate hazard increasing with the depth of operation. | Building successive ventilation shafts, use of central, work place and personal ventilation, and shorter work time. | |
| Occupational safety | (KGHM Group) Risk of serious accidents at work or occupational diseases due to incorrect organization of work, non-compliance with procedures or use of inappropriate means of protection. Risk of temporary stoppage of a production line caused by a heavy accident. | (In the Parent Company OHS management standards 18001/OHSAS have been implemented); there are systematic training courses on OHS, programs of identification of potential accidents. |
| Technology | (Parent Company) Technology risk related to exploitation of copper ore deposits at great depths, in conditions of associated natural hazards. | Performance of research and scientific works, and trials of operations alternative to the currently used technologies of excavating copper ore deposits, as well as ventilation, air conditioning and transport, prevention of rockbursts. Comprehensive on-line monitoring of people and mining machines. |
| (Parent Company) Risk associated with gas hazards (methane and hydrogen sulfide). | Performance of controls of occurrence of gas hazards and development of rules of conducting works in the case of occurrence of such risk. Individual employee safety measures and equipment, and measures of hydrogen sulfide concentration reduction and odor neutralization. | |
| (Parent Company) Risk associated with climatic threat, increasing with the depth of exploitation. | Building successive ventilation shafts, use of central, work place and personal ventilation, and shorter work time. Increased automation and mechanization, based on the Industry 4.0 principles. |
Risk validation is conducted quarterly on a five-degree scale using an expert assessment method and it influences the Management Board’s decisions.
Risk management
Risks related to employees and respecting human rights
The global nature of the KGHM Group is also associated with risks involving its human resources. The Company wants to acquire and retain the best workers, who are invaluable, among others, in advancing its development projects.
Major risks and their mitigation have been defined for the KGHM Group with regard to employees and respect for human rights:
| Risk factor | Risk description | Mitigation |
|---|---|---|
| Human capital | (KGHM Group) Risk of recruitment and retention of human resources required among others to implement development projects. | Performing programs to increase the efficiency of recruitment, succession and retention processes for key positions. Employee mobility program. Education support programs. |
Risk validation is conducted quarterly on a five-degree scale using an expert assessment method and it influences the Management Board’s decisions.
Risk management
Risks related to the responsible supply chain
The Group identified the following significant risks and their mitigations in the responsible supply chain area:
| Risk factor | Risk description | Mitigation |
|---|---|---|
| Logistics and supply chain | (KGHM Group) Risk of limited access to transportation infrastructure, impacting the regularity of supplies of commodities and materials necessary for production and acceptance of finished products. | Management of liquidity of supplies and the minimum levels of inventories of commodities and materials necessary for production. Development of own logistical base. |
Risk validation is conducted quarterly on a five-degree scale using an expert assessment method and it influences the Management Board’s decisions.
Risk management
Risks related to Social Dialogue
The Group has defined the significant risks and their mitigation in the area of social dialogue:
| Risk factor | Risk description | Mitigation |
|---|---|---|
| Stakeholders | (KGHM Group) Risk of a negative image campaign conducted in the media, and risk of the development and exploration works not being accepted by the local communities, local authorities and other stakeholders. | Implementation of the CSR Strategy, close cooperation with public administration authorities, meetings and negotiations with stakeholders, information campaigns, conferences, publications. Close cooperation and relations with the local communities. |
Risk validation is conducted quarterly on a five-degree scale using an expert assessment method and it influences the Management Board’s decisions.
Risk management
Environmental impact risk borne by KGHM Group
The Group has identified material risks and their mitigating factors in the area of natural environment.
| Risk factor | Risk description | Mitigation |
|---|---|---|
| Natural environment and climate changes | (KGHM Group) The extraction of copper and its subsequent processing at all production levels is inextricably associated with affecting particular components of the natural environment. The risk associated with prices and the granted limit for CO2 emissions. | Compliance with strict environmental standards following from laws is possible due to the systematic modernization of installations for protecting the environment, both those constructed in the past and the new investments in this area. (In the Parent Company, a CO2 Emissions Management System and the ISO 14001 environmental management standards have been implemented). |
| (Parent Company) Risk associated with assessment of air quality in the Voivodship of Lower Silesia (exceeding the annual average target level for arsenic in PM10 particulate matter). | Performance of the duties resulting from Air Protection Programs. | |
| Waste management | (Parent Company) Risk of impossibility of storing flotation tailings | Operation, construction and expansion of the storage facility in accordance with the operating manual. Cooperation with a Team of International Experts (TIE) and the General Designer, introduction of the Observation Method in the period of expansion recommended by ZEM based on the evaluation of geotechnical parameters obtained through evaluation of monitoring results that offer the ability to request to keep the facility being built/operated. Introduce the LCA model and circular economy. |
| Availability of materials and utilities | (KGHM Group) Risk associated with the unavailability of the necessary utilities (electricity, natural gas, water). | Ensure that emergency supply systems are in place for key utilities and conduct ongoing evaluation of security of grid power supply. Conduct several investment projects to strengthen energy security |
| Production and infrastructure | (KGHM INTERNATIONAL Group). | Geotechnical risk in open pit mines (stability of slopes) and in underground mines. Risk of failure to achieve the assumed leach extraction performance parameters. |
| Law and regulations, taxes | (KGHM Group) Risk of changes in legal regulations in the area of e.g.: geological and mining law, environmental and energy regulations. | Monitor legal developments at the level of individual jurisdictions and take an active part in legislative processes. Take preemptive measures to adapt to changes in respect to organization, infrastructure and technology. Implement the energy management system in KGHM Polska Miedź S.A. based on the ISO 50001 standard. |
The risk is validated on a quarterly basis on a five-degree scale using an expert method and influences the Management Board’s decisions.