Information on the results of the conducted tests for impairment

Monday, 08 February, 2016
8/2016

Following regulatory filing no. 26/2015 dated 30 December 2015, the Management Board of KGHM Polska Miedź S.A. („Company”) announces that primary work related to testing for impairment of the carrying amount of assets in accordance with IAS 36 has been completed.

Due to the fact that the main factor responsible for KGHM Polska Miedź S.A.’s market capitalisation as at the end of financial year 2015 remaining significantly below the carrying amount of net assets was the macroeconomic environment, in particular the relatively low level of commodities prices, testing for impairment was carried out in respect of the domestic and international production assets of the KGHM Polska Miedź S.A. Group, whose recoverable amount depends on the prices of metals.

For purposes of the tests conducted, the recoverable amount was set based on an analysis of the discounted cash flow generated by individual assets, which took into account among others current forecasts of pricing paths for particular commodities, long term forecasts of production volumes, current information on grades in minerals deposits, reviewed investment expenditures and actions that are being carried out aimed at improving productivity.

The impairment tests carried out on the domestic production assets indicated that there was no need for impairment losses in the carrying amount of these assets. A favourable factor reducing the impact of the relatively low commodities prices on the value of the Polish assets is the significant weakening of the Polish zloty (PLN) versus the American dollar (USD).

With respect to the separate financial statements of KGHM Polska Miedź S.A. for the financial year ended 31 December 2015, the tests carried out indicated justification to recognise an impairment loss in the amount of PLN 1 052 million due to an impairment of the carrying amount of the interest in a holding company which indirectly owns 100% of KGHM International Ltd.

With respect to the consolidated financial statements of KGHM Polska Miedź S.A. for the financial year ended 31 December 2015, the tests carried out indicated justification to recognise the following impairment losses after including the tax effect (amounts in USD together with their equivalents in PLN at the average exchange rate of the National Bank of Poland as at 31 December 2015):

  1. An impairment loss in the amount of USD 266 million (PLN 1 038 million) due to an impairment of the carrying amount of the investment in Sierra Gorda SCM;
  2. An impairment loss in the amount of USD 85 million (PLN 331 million) due to an impairment of the carrying amount  of assets of Sudbury Basin mines;
  3. An impairment loss in the amount of USD 84 million (PLN 328 million) due to an impairment of the carrying amount of assets of the Robinson mine; and
  4. An impairment loss in the amount of USD 59 million (PLN 230 million) due to an impairment of the carrying amount of assets of the Franke mine.

The total amount of the aforementioned impairment losses due to impairment testing carried out in the consolidated financial statements after including the tax effect amounts to USD 494 million (PLN 1 927 million).

Apart from the above impairment losses, an item substantially impacting the consolidated net financial result for 2015 will be the 55% share of the losses of Sierra Gorda SCM as an investment accounted for using the equity method. This share, attributable to KGHM Polska Miedź S.A., is estimated at USD 510 million (PLN 1 989 million), of which USD 357 million (PLN 1 393 million) is due to the impairment loss recognised by Sierra Gorda SCM on the carrying amount of its assets after including the tax effect.

Assuming that the macroeconomic environment would have been similar to that at the end of 2014, the results of the impairment tests on the international production assets of KGHM Polska Miedź S.A. would not have indicated the need for impairment losses.

The impairment losses recognised are a non-cash item and have no impact on the liquidity of KGHM Polska Miedź S.A., nor do they impact the fulfilment of the financial covenant (net debt/EBITDA) contained in the credit agreements.

The impairment losses recognised will have no impact on the dividend policy. In accordance with a prior declaration, in making its recommendation of a dividend for 2015 the Management Board will base its decision on the Company’s actual and anticipated financial situation, with particular attention to the need to maintain debt at a safe level, with a target net debt/EBITDA ratio below 2.0.   

Due to the deterioration of macroeconomic conditions, the Management Board has decided to commence the process of reviewing the assumptions contained in the strategy for the years 2015 – 2020. In particular, the investment projects of the Group are being reviewed and prioritised in order to substantially reduce capital needs in the short and medium terms. The Company is implementing advanced cost efficiency programs for its mining operations, based among others on optimising technological processes, employment and renegotiating contracts for the supply of materials and services.

The amounts presented above are estimates and are subject to change. The final results of the testing will be presented in the separate and consolidated financial statements for 2015, the publication of which is planned for 17 March 2016.  

Legal basis: art. 56 section 1 point 1 of the Act dated 29 July 2005 on public offerings and conditions governing the introduction of financial instruments to organised trading, and on public companies (unified text: Journal of Laws 2013.1382).