KGHM Polska Miedź has completed its previously announced review of the technical and economic assumptions applied to the international mining assets of the Group. As a result the parameters for these assets, as regards mine lives, metals production volumes, assumed operating costs and the level of capital expenditures during a given mine’s life, were substantially modified. The change in parameters and the updated macroeconomic assumptions neccesitated that an impairment loss be recognised in the value of these assets. Given the fact that this accounting write-off is a of non-cash nature, it does not affect the KGHM Group’s liquidity nor the stability of its financial position.
On 14 February 2017, the Company completed the major work related to testing for the impairment of the international mining assets of the KGHM Group. The total amount of impairment losses due to impairment testing carried out in the consolidated financial statements after including the tax effect amounts to USD 1 241,8 million (PLN 5 190 million). With respect to the separate financial statements of KGHM Polska Miedź S.A., the tests carried out indicated justification to recognise an impairment loss in the amount of PLN 5 869,8 million.
„Last year the Company announced that it would review the production assumptions for its international assets. This was a months-long process of testing and analysing individual projects based on updated metals prices assumptions. With respect to Sierra Gorda, this process was of particular importance, as the project commenced commercial production in mid-2015 and only the collection of more precise data during the initial phase of the mine’s operation enabled the entire operating model to be reviewed,” said Radosław Domagalski-Łabędzki, President of the Management Board of KGHM Polska Miedź S.A.
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 long-term forecasted metal price of 6 614 USD/t (3.00 USD/lb) was used. For comparative purposes, a long-term copper price of 7 075 USD/t (3.21 USD/lb) was set for the purpose of conducting testing for impairment as at 31 December 2015.
Sierra Gorda
Sierra Gorda concentrated on consolidating and improving its operations in order to optimise its financial and production parameters.
In terms of impairment testing, the following were reviewed: the amount of reserves, technical and production parameters, development and investment plans for individual parts of the mining and processing process and – as a result - the specified life of the Sierra Gorda mine, given the updated pricing paths.
The technical and economic model for Sierra Gorda assumes the following: a 24-year mine life, with total copper production of 4 352 thousand tonnes and an expected operating margin of 36%. Current production assumptions exclude the second phase of the mine’s development as well as mining and metals production from the Pampa Lina deposit. For the purposes of the testing conducted as at 31 December 2016, the valuation of this deposit, which could in future potentially prolong the life of the Sierra Gorda mine, was based on an analysis of the value of comparable market transactions.
„The decrease in the amount of reserves and the forecasted life-of-mine production volumes which are based on them is due to the application of lower pricing paths. This is why, given today’s market conditions, we have excluded commencement of phase II. Nonetheless it should be pointed out that, given a long-term increase in the price of copper, the mining of resources which are not currently taken into account may become economically viable,” says Michał Jezioro, Vice President for Development.
With respect to the consolidated financial statements for 2016, the tests carried out indicated justification to recognise an impairment loss in the amount of USD 1 036,3 mn (PLN 4 331 mn) due to an impairment of the carrying amount of the loan granted to Sierra Gorda SCM.
„In accordance with the owners’ assumptions, repayment of the interest-bearing loan is the basic mechanism for recouping the value of Sierra Gorda, and thanks to the regular accrual of interest on the loan, the amount due to be paid to KGHM is steadily rising. The impairment of a portion of the amount of the loan to Sierra Gorda does not however mean it will be written off – KGHM retains the right to recover its receivables in future, if the mine significantly improves its financial and production results,” says Stefan Świątkowski, Vice President for Finance and CFO.
The impairment losses recognised on the assets of the Sierra Gorda mine do not impact the cash flow of the KGHM Group and do not threaten the operations of the Sierra Gorda mine.
„Mine assets are characterised by mine lives spanning decades, while commodities prices exhibit substantial short-term volatility and long-term cyclicality. During its life a mine may experience several commodities cycles which include very low prices as well as exceptionally high prices, leading to substantial variations over time in the carrying amount of these assets,” underscores Michał Jezioro, Vice President for Development.
Other mine assets
With respect to the consolidated financial statements of KGHM Polska Miedź S.A. for the financial year ended 31 December 2016, the tests carried out indicated justification to recognise the following impairment losses on other international assets, after including the tax effect:
- an impairment loss in the amount of USD 61,3 milion (PLN 256,3 milion) due to an impairment of the carrying amount of the assets of the Sudbury Basin mines,
- an impairment loss in the amount of USD 45,1 mln mn (PLN 188,7 milion) due to an impairment of the carrying amount of the assets of the Robinson mine,
- an impairment loss in the amount of USD 99,1 milion (PLN 414,4 milion) due to an impairment of the carrying amount of the assets of KGHM Ajax.
„KGHM is not the sole company to take such actions, as is clearly shown by the mining sector. The carrying amount of commodities-related assets is impacted not only by the current market prices of these commodities, but above all by the substantial volatility to be seen in price forecasts over years and even decades. As one of the world’s largest copper producers we believe in the long-term outlook for this market, which also makes us optimistic about the value of our international assets,” points out Radosław Domagalski - Łabędzki, President of the Management Board of KGHM Polska Miedź S.A.
In the case of KGHM’s assets in Poland, upon which the KGHM Group’s production potential is founded, there were no indications justifying the conduct of testing for impairment.
The impairment amounts presented by the Company are estimates and are subject to change. The final results of the testing will be presented in the separate and consolidated financial statements for 2016, the publication of which is planned for 16 March 2017.