Concise Evaluation of the Situation of the Company

Monday, 07 May, 2007

The Management Board of KGHM Polska Miedź S.A., in accordance with corporate governance principle 18 of the document "Best practices in public companies 2005" hereby provides the text of the Concise evaluation of the situation in KGHM “Polska Miedź” S.A. as carried out by the Supervisory Board of the Company.

Concise evaluation of the situation in KGHM Polska Miedź S.A. in the period from 1 January 2006 to 31 December 2006 presented to the General Shareholders Meeting

(approved by the Supervisory Board of KGHM Polska Miedź S.A. on 24 April 2007)

1. Macroeconomic conditions in 2006.

In 2006 there was a significant increase in copper prices on global markets. The average price of electrolytic copper on the London Metal Exchange in 2006 increased to 6 731 USD/t and was 83% higher than in 2005, when it reached 3 684 USD/t.

Global silver prices in 2006 reached the level of 11.55 USD/troz. The average annual price of silver on the London Bullion Market was 58% higher than in 2005, when it amounted to 7.31 USD/troz.

The average USD exchange rate in 2006 amounted to 3.10 PLN/USD and was 4% lower than in 2005 (3.23 PLN/USD).

2. Basic results and important events.

Management Board

During the period from 1 January 2006 to 10 February 2006 the Management Board of KGHM Polska Miedź S.A. functioned in the following form:

  • Marek Szczerbiak - President of the Management Board,
  • Jarosław Andrzej Szczepek - I Vice President of the Management Board, Vice President of the Management Board for Finance-Economics, - Wiktor Błądek - Vice President of the Management Board for Mining (suspended from the performance of Management Board duties for a period of not longer than 3 months),
  • Andrzej Krug - Vice President of the Management Board for Employee Affairs (suspended from the performance of Management Board duties for a period of not longer than 3 months), - Robert Nowak - Vice President of the Management Board for Trade, Marketing and Hedging,
  • Sławomir Pakulski - Vice President of the Management Board for Smelting.

On 10 February 2006 the Supervisory Board recalled Marek Szczerbiak as President of the Management Board and delegated member of the Supervisory Board Krzysztof Skóra to temporarily perform the duties of President of the Management Board for a period not longer than three months.

 On 24 February 2006 the Supervisory Board of KGHM Polska Miedź S.A. appointed Krzysztof Skóra as President of the Management Board and recalled the following persons from the Management Board: Jarosław Andrzej Szczepek, Robert Nowak, Sławomir Pakulski and Andrzej Krug. The following persons were appointed to the Management Board as their replacements: Maksymilian Bylicki, Ireneusz Reszczyński, Mirosław Biliński and Marek Fusiński. In addition, effective from 8 March 2006, the suspension of Wiktor Błądek from his duties as a member of the Management Board was lifted.

Following these decisions, the Management Board was composed as follows:

  • Krzysztof Skóra - President of the Management Board,
  • Maksymilian Bylicki - I Vice President of the Management Board for Employee Affairs,
  • Mirosław Biliński - Vice President of the Management Board for Smelting,
  • Wiktor Błądek - Vice President of the Management Board for Mining (duties assumed from 8 March 2006),
  • Marek Fusiński - Vice President of the Management Board for Finance-Economics,
  • Ireneusz Reszczyński - Vice President of the Management Board for Trade, Marketing and Hedging.

As a result of the expiration of the Vth-term Management Board of KGHM Polska Miedź S.A., at 14 June 2006 the Supervisory Board appointed Krzysztof Skóra as President of the VIth-term Management Board and the following persons to the VIth-term Management Board: Maksymilian Bylicki, Ireneusz Reszczyński, Marek Fusiński and Stanisław Kot.

 The Management Board since 14 June 2006 has been composed as follows:

  • Krzysztof Skóra - President of the Management Board, - Maksymilian Bylicki - I Vice President of the Management Board for Development,
  • Marek Fusiński - Vice President of the Management Board for Finance,
  • Stanisław Kot - Vice President of the Management Board for Smelting, (temporarily executing the rights and duties attributable to the Vice President of the Management Board for Mining),
  • Ireneusz Reszczyński - Vice President of the Management Board for Trade.

Production:

Due to a decrease in copper content in ore from 1.89% in 2005 to 1.79% in 2006 there was a decrease in the production of copper in concentrate, despite an increase in the amount of copper ore extracted from 30 434 thousand tonnes to 31 279 thousand tonnes.

In 2006 497 217 tonnes of copper in concentrate were produced, meaning a decrease versus the prior year (511 536 t) by 3%. Alongside an increase in the consumption of purchased copper-bearing materials, a relatively high level of electrolytic copper production was maintained. Copper production amounted to 556 624 t (560 255 t in 2005).

Financial results

In 2006 556 902 t of copper and copper products were sold, i.e. 1% more than in 2005. Silver sales in comparison to 2005 decreased by 1%, to 1 239 tonnes.

The increase in copper and silver prices, alongside a similar volume of sales, led to an increase in revenues from the sale of these products in 2006, respectively by: 42% (PLN 2 862 374 thousand) and 41% (PLN 368 420 thousand).

Altogether revenues from sales amounted to PLN 11 264 794 thousand, i.e. 42% more than in the prior year. The figure for revenues from sales in 2006 reflects the negative result from the settlement of commodity hedging instruments in the amount of PLN (2 453 727) thousand (in 2005 PLN (425 289) thousand) and profit from the realisation of currency hedging instruments in the amount of +PLN 83 167 thousand (in 2005 +PLN 169 760 thousand). The figure for revenues from sales was also adjusted by exchange rate gains related to the hedging of foreign currency credit which were settled in the result, and were recognised under revenues from cathode exports in the amount of +PLN 39 531 thousand (in 2005 +PLN 26 867 thousand).

Profit before extraordinary items and taxation in 2006 amounted to PLN 4 053 351 thousand, and was higher by 54% in relation to the prior year. Earnings per share amounted to PLN 16.98. The return on assets (ROA) increased from 20.9% to 27.1%, and the return on equity from 36.8% to 42.8%.

Costs

The total unit electrolytic copper production cost increased from 7 723 PLN /t in 2005 to 10 323 PLN /t in 2006.

The increase in the unit copper production cost versus 2005 by 34%, i.e. by 2 600 PLN/tonne of Cu, was mainly due to an increase in the value of scrap, imported concentrate and other copper-bearing materials consumed in production. The increase in the value of consumed copper-bearing materials was due to higher purchase prices and to an increase in external charges consumed, from 44 thousand t of Cu to 102 thousand t of Cu.

The cost of copper production from internal charges amounted to 7 971 PLN /t (an increase by 550 PLN /t, i.e. by 7%). The increase in this cost was mainly due to an increase in the following costs: labor, depreciation, materials and energy, and in external services.

3. Selected issues requiring attention.

Particular attention should be drawn to the acceptance by the Management Board of KGHM Polska Miedź S.A. of a strategy for the years 2007-2016, including advanced work on key investments for the Company related to the Głogów Głęboki deposit, to the introduction of flash furnace technology, to investments in energy and to investments related to hydrotransport.

The Management Board of KGHM Polska Miedź S.A. in 2006 carried out changes to the strategy applied for hedging instruments. Despite the changes in the strategy of the Company in this regard, taking into consideration the extent of the problem, particular attention should be paid to the question of the policy of carrying out and applying in practice hedging transactions.

 

 

(Translation from the original Polish version. In the event of differences resulting from the translation, reference should be made to the official Polish version.)