Integrated Report
2022
GRI

Risks and opportunities

GRI
Table of contents
GRI
  • 3-3
  • 2-12
  • 2-13
  • 2-16
  • 201-2

Risk Management System

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 risk.

Under the Corporate Risk Management Policy and Procedure and the Rules of the Corporate Risk and Compliance Committee, the process of corporate risk management in the KGHM Polska Miedź S.A. Group is consistently performed. KGHM Polska Miedź S.A. oversees the process of managing corporate risk in the KGHM Polska Miedź S.A. Group, while in the companies of the KGHM Polska Miedź S.A. Group, documents regulating the management of corporate risk are consistent with those of the Parent Entity.

The introduction of the aforementioned Policy and Procedure and approval of their updating is made at the level of the Management Board of KGHM Polska Miedź S.A. following recommendations by the Corporate Risk and Compliance Committee. The reporting of key types of corporate risk in the KGHM Polska Miedź S.A. Group is performed cyclically to the Management Board of KGHM Polska Miedź S.A. and to the Audit Committee of the Supervisory Board of KGHM Polska Miedź S.A.

In 2022, the process continued of implementing a comprehensive business continuity management system, which also enables a detailed breakdown of the scope of actions undertaken as regards managing corporate risk in terms of the risk of a catastrophic impact and the small probability of their occurrence. This is expressed in the Operational continuity management policy of KGHM Polska Miedź S.A. along with the Compliance Management Procedure and Methodology in KGHM Polska Miedź S.A.

The corporate risk management process adopted in the KGHM Polska Miedź S.A. Group is inspired by the solutions adopted by the ISO 31000 standard, best practice in risk management and the specific nature of the Group, and is comprised of the following steps:

Enterprise risk management process in the KGHM Polska Miedź S.A. Group

The first step in the process is comprised of three actions: defining the external context, the internal context and the risk management context.

The external context is the environment in which the KGHM Polska Miedź S.A. Group advances its Strategy. Here the definition needs to update the understanding of the social, political, legal, regulatory, financial, economic and technological aspects of the environment which affect its activities. During this step also assessed, based on the results of scenario analysis, are the most important factors for transitioning to a low-emission economy and the paths of climate change and weather models, which are processed in subsequent steps of the process.

During the process of defining the internal context, goals are analysed (strategic/business), changes in the organisational structure are planned and performed, new areas of activities, projects, etc.

The last part of this step is to define the risk management context, which comprises the setting or updating of goals, the scope, responsibilities and procedures and methods applied in the risk management process.

In this step of the process risks which could impact the achievement of goals at the level of the KGHM Polska Miedź S.A. Group are identified and evaluated. The main task in this step is to prepare a complete list of threats which could facilitate, impede, accelerate or delay the achievement of goals. Each identified risk is assigned to a category and a sub-category in the form of a Risk Model, which provides the KGHM Polska Miedź S.A. Group with a consistent risk taxonomy.

Following its identification, each corporate risk is evaluated using a Risk Assessment Matrix, containing a scaled breakdown of assessments by impact, vulnerability and probability. A risk may have various effects, and therefore in order to ensure the broadest recognition of potential impact and the limitation of subjective evaluation, the following Impact evaluation measures have been defined:

  • finance – impact of the effects of a given risk in its financial aspect by applying value ranges.
  • strategy – evaluation of the risk’s impact on the ability to achieve strategic goals.
  • reputation and stakeholders – impact of the risk on the Company’s reputation, trust in the brand, investor relations, relations with stakeholders, also including on the effectiveness of actions related to building a responsible business and sustainable development;
  • health and safety – direct impact on health and safety and human life.
  • natural environment – impact of the materialisation of risk on the natural environment, the functioning of the ecosystem and the time required to restore the disturbed balance.
  • regulations and laws – evaluation of the compliance of events with existing laws, with the need to participate in proceedings before bodies of public administration of a supervisory and regulatory nature as well as potential sanctions as a result of such proceedings.
  • operational continuity – evaluation of the impact of risk on interruptions to activities resulting in significant/irreversible effects and loss of access to information important from the point of view of conducted activities.

The results of the identification and evaluation of risk are presented in a graphic form, i.e. Risk Maps. These provide a profile of the given risk and support the process of identifying the key risk.

The goal of this step is to deepen knowledge and to understand the specific nature of the types of key risks identified in the previous step. Cause and effect analyses and a more substantive description of the means of dealing with risk are aimed at facilitating decision making on whether to maintain or eventually change current actions.

A directional decision is called a Response to risk. A change in the way an action is taken requires the determination of Corrective Actions, meaning organisational, process, systemic and other changes which are aimed at reducing the level of the key risk.

During this step KRIs – Key Risk Indicators – are also defined, being a set of business process parameters or environmental parameters which reflect changes to a given risk profile.

The goal of this step is to ensure that the adopted Risk Response Plan is effective (ad hoc and periodic reports), new risks are identified (updating of the Risk Registry), changes in the internal and external environments and their impact on activities are identified, and appropriate actions are taken in response to incidents (updating of information on Incidents).

Effective, well-planned and appropriately performed monitoring of risk enables flexible and prompt reaction to changes occurring in the external and internal environments (e.g. risk escalation, changes in actions related to risk response, or risk evaluation parameters, etc.).

Achievement of this step provides the assurance that risk management in the KGHM Polska Miedź S.A. Group fulfils the expectations of the Management Board of KGHM Polska Miedź S.A., the Audit Committee of the Supervisory Board of KGHM Polska Miedź S.A. and other stakeholders by supplying reliable information about risk, continuous improvement and adaptation of the quality and effectiveness of Risk Response to the demands of the external and internal context.

Organizational structure of risk management in KGHM Polska Miedź S.A.

Corporate risk

A comprehensive approach to risk management is consistent across the KGHM Polska Miedź S.A. Group and it was designed in such a way as to support the building of a resistant corporate structure. KGHM Polska Miedź S.A. also took steps to include issues related to climate change in the risk taxonomy in accordance with the Recommendations of TCFD (Task Force on Climate-Related Financial Disclosures). As a result of the above work, KGHM distinguishes a category of climate risk, the importance of which is equivalent to the other risk categories for the Company. A tool used in identifying risk in the KGHM Polska Miedź S.A. Group is the Risk Model. The Risk Model, whose structure is based on the sources of risk, is divided into the following 6 categories: Technological, Value Chain, Market, External, Internal and Climate. Several dozen sub-categories have been identified and defined for each of these categories, covering particular areas of the operations or management.

Corporate Risk Management Policy

The Corporate Risk Management Policy in the KGHM Polska Miedź S.A. Group is a document describing the approach, defining the basic principles and establishing the corporate risk management process in the KGHM Polska Miedź S.A. Group.

The holistic approach to risk management is consistent with the growth strategy, continuous aspiration for operational excellence and with the principles of sustainable and responsible business. It has been designed to support the Company in building a resilient corporate structure.

Risk management goals:
  • Ensuring the development and protection of shareholder value by establishing a consistent approach to identifying, evaluating and analyzing risks, and implementing responses to key risks,
  • Protecting the life and health of employees, natural environment, and brand reputation,
  • Supporting the achievement of business goals by implementing early warning tools for opportunities and threats,
  • Providing strong support for decision-making at all levels of the organisation,
  • Building an organisation that is aware of the risks it takes and strives for continuous improvement.
Technology 

This category is associated with changes in competitiveness resulting from the application of industrial technology, IT, innovation management, protecting and/or managing intellectual property as well as the impact of investment projects involving productivity and technology quality, or changes in the quality and efficiency of IT infrastructure affecting business units, support functions and infrastructure.

 (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.
Value chain

This category is associated with changes in the operational efficiency of logistics and warehousing in the production process and in providing services, in managing sales, in managing waste and restoration as well as being correlated with the process of managing the supply chain, the availability of utilities and materials in the production process, changes in the evaluation and management of mineral deposit resources, or the advancement of research and exploration projects.

 

 

 

 

 

 (KGHM Group)

Risk related to an ineffective process of monitoring and providing early warning to management staff on deviations from the budget and financial plans as well as with respect to adopting inappropriate economic parameters related to production, investments, macroeconomics and finance, for forecasts of company results.
(KGHM INTERNATIONAL Group) 

Risk related to the precision of estimated costs of decommissioning certain mines.
(KGHM INTERNATIONAL Group)

Risk related to the exhaustion of deposits and/or the insufficient recognition of their parameters and characteristics, both in exploration projects (estimation of input data for deposit evaluation models) as well as in current operations.
(Parent Entity)

Risk of the inability to store mine tailings or restrictions thereof.
(KGHM Group)

Risk related to the lack of availability of required energy sources.
(KGHM Group)

Risk related to infrastructure breakdowns which disrupt the core production operations, related to natural hazards as well as internal factors related to the applied technology.
(KGHM Group)

Risk related to the cost efficiency of the production process, mining projects, processing of copper-bearing materials, reflecting the risk of a substantial rise in prices of materials, services, electricity, gas and water and restoration costs.
(KGHM Group) 

The risk of interruptions to the continuity of sales and services (including due to the COVID-19 pandemic and/or the war in Ukraine)
Market 

This category is associated with changes in the value of assets, the level of liabilities or profit and loss resulting in a change in the sensitivity to exchange rates, currencies, liquidity, inflation rates, customer insolvency, commodities prices, energy and property rights. This category also involves changes in the impact of demand and supply on the products of the KGHM Polska Miedź S.A. Group, the selection of appropriate tools to advance the marketing strategy, changes in expected rates of return on equity investments or the efficiency of transferring risk to the insurer.

 

 (KGHM Group)

Market risk related to volatility in metals prices and risk of changes in exchange rates and interest rates.
(KGHM Group)

Credit risk related to trade receivables.
(KGHM Group)

Liquidity risk.
External risk 

This category is associated with the conditions involved in conducting activities resulting from changes in economic conditions, changes in laws and regulations (compliance), political decisions, changes in the natural environment or climate (transitional risk) as well as catastrophic natural events and force majeure. This category also comprises changes in market share or margins due to changes in the competitive environment or substitutes, the risk of the result of decisions in the courts or arbitration proceedings, the risk of unfavourable administrative decisions, changes in obligations, the designation of tax liabilities or their payment deadlines.

 (KGHM Group)

Risk of restrictions to production due to seismic tremors and associated roof collapses or destressings of the rock mass, and the occurrence of uncontrolled rock bursts.
(Parent Entity)

Risk of restrictions to production or to the advancement of development work due to geodynamic gas-related events and the occurrence of naturally-occurring gases.
(Parent Entity)

Risk of production restrictions due to unfavourable climatic conditions in the mines.
(Parent Entity)

Risk of loss of mine functionality due to underground water hazards.
(KGHM Group)

Risk of exceeding the permissible emissions limits set forth in permits.
(Parent Entity)

Risk of restrictions to the ability to sell sulphuric acid (due to loss of market/customers and/or a drop in demand as well as due to the war in Ukraine).
(KGHM Group)

Risk related to interruptions in the supply of strategic materials and components affecting the continuity of production by the Core Business (including due to the COVID-19 pandemic and/or the war in Ukraine)
(KGHM Group)

Risk of failure to adhere to established principles and standards of behaviour with respect to counteracting corruption, business ethics and with respect to the procurement processes as well as the risk of incurring losses from actions which are harmful to KGHM.
(KGHM Group)

Risk of loss of compliance with requirements (general laws in force, internal corporate regulations and voluntarily-adopted legal obligations and standards).
Internal risk 

This category is associated with changes in an entity’s activities affected by changes in its structure, organisation, procedures, processes or business model, as well as the risk of changes in corporate image, its products or services, the effectiveness of principles of proceedings related with ethics and anticorruption, a company’s interests, or efforts to ensure against loss of trust, and the integrity, availability and authenticity of informational assets.

 (KGHM Group)

The risk of serious accidents or industrial illnesses caused by improper work organisation, the failure to follow procedures or the use of improper protective measures.
(KGHM Group)

The risk of lack of acceptance by the public, local governments or other stakeholders for the conduct of development and exploration work.
(KGHM Group)

The risk of not being able to secure appropriate staff to advance the Group’s business goals (including the lack of sufficient human resources to maintain the continuity of the Core Business operations due to the COVID-19 pandemic)
(KGHM Group)

Risk that the confidentiality, integrity or availability of informational assets which have been collected, stored or processed on IT resources may be compromised, as well as cybernetic threats.

The risk of exceeding project/program budgets and schedules, deviating from defined scopes and failing to meet defined quality parameters as a result of the improper management of portfolios and projects. Risk related to the operational management and development of strategic projects, reflecting the question of incurred costs, permits and infrastructural requirements.
Climate 

This category is associated with climate-related risk (climate risk) and its impact on the KGHM Polska Miedź S.A. Group’s business activities, comprising physical risk (violent and chronic) and temporary risk (regulatory, reputational, market and technological). 

 (KGHM Group)

Climate risk related to the negative impact of climate change on the activities of the KGHM Group.
(KGHM Group)

Climate risk related to the transition to a low-emissions economy and resistance to climate change.

A detailed description of the various categories of risk and ways to mitigate them can be found in the Management Report on the Activity of the Company and the Group for 2022.

Risks associated with the COVID-19 pandemic and the war in Ukraine

  • increased absenteeism amongst employees of the core production line as a result of subsequent waves of the SARS CoV-2 virus;
  • further increases in the prices of fuels and energy carriers;
  • interruptions in the supply chain and materials availability (e.g. steel), fuels and energy on international markets;
  • interruptions and logistical restrictions in international transport;
  • restrictions in certain sales markets, a drop in demand and optimisation of inventories of raw materials and finished products amongst customers;
  • a potential global economic slowdown or recession;
  • potential exceptional legal changes;
  • volatility in copper and silver prices on the metals markets;
  • volatility in molybdenum prices;
  • volatility in the USD/PLN exchange rate;
  • volatility in electrolytic copper production costs, including in particular due to the minerals extraction tax, changes in the value of purchased copper-bearing materials consumed and volatility in prices of energy carriers and electricity;
  • higher prices of materials and services due to observed high inflation;
  • the effects of the implemented hedging policy, and
  • the general uncertainty on financial markets and the impact of the economic crisis connected with the COVID-19 pandemic and the ongoing conflict in Ukraine.

From the point of view of the Company, the impact of the COVID-19 pandemic and/or the war in Ukraine is their impact on market risk connected with volatility in metals prices and stock exchange indices during the reported period. The Company’s share price at the end of 2022 rose by 45% compared to prices at the end of the third quarter of 2022 and fell by 9% compared to the end of 2021, and at the close of trading on 30 December 2022 amounted by PLN 126.75. During these same periods the WIG index rose by 14% and fell by 17%, while the WIG20 index rose by 30% and fell by 21%. As a result of these changes in share prices, the Company’s capitalisation decreased from PLN 27.88 billion at the end of 2021 to PLN 25.35 billion at the end of 2022.

After a stable first half of 2022, when the average copper price amounted to 9,761 USD/t, the situation on the metals markets demonstrated a falling trend. The average copper price in the third quarter of 2022 fell by 18.6% compared to the average copper price in the second quarter of 2022. Since November 2022 there has been a rising trend on metals markets and in the fourth quarter of 2022 the average copper price rose by 3.3% compared to the average copper price in the third quarter. The average price of copper in 2022 amounted to 8,797 USD/t, an amount expected in the budget.

+ 45
%
an increase in the Company's share price compared to the quotations at the end of the third quarter
8,797
USD/t
average copper price in 2022

Uncertainty as to the potential continuation of rises in prices of fuels and energy carriers may continue to be the main factor generating further increases in the costs of core activities.

Individual deviations can be observed in the availability of raw and other materials, although at the present time the KGHM Polska Miedź S.A. Group is still not experiencing a significant negative impact from such variability on its operations. Taking into consideration the continuity of supplies of energy carriers (natural gas, coal, coke) the KGHM Polska Miedź S.A. Group at the present time is not experiencing a significant negative impact from the suspension of deliveries of Russian natural gas, coal and coke, and is fully capable of maintaining the continuity of the Core Production Business and all production processes.

The increased number of infections by the omicron variant of the SARS-CoV-2 virus recorded at the start of 2022, and in subsequent months the war in Ukraine, led to a temporary drop in the number of reservations and visits by customers to the spa entities. Nevertheless, the situation, starting from the turn of April and May 2022, began to systematically improve and stabilise. Starting from 16 May 2022 the state of epidemic was rescinded, and was replaced by the introduction of a state of epidemiological threat, which remains in force until rescinded. In the fourth quarter of 2022 there was no direct negative impact of COVID-19 recorded on the functioning of the market where the companies conducts their business. At the same time the companies do not anticipate in their financial targets for 2023 and for subsequent years further restrictions in the conduct of their activities or the temporary suspension of activities in their curative facilities.

Spa companies, which are engaged in curative activities and are financed from public funds, take advantage of protections resulting from the act on specific solutions serving to protect the recipients of gaseous fuels due to the situation on the natural gas market. The protection foreseen by the act will function to the end of 2023. The financial obligations of the spa companies towards lenders and lessors in the fourth quarter of 2022 were paid on time, while the improvement in results, despite higher than expected costs of electricity, natural gas and debt servicing, had a positive impact on meeting the terms of the investment loan agreement with the bank Pekao S.A.

As a result of receiving funds from 2.0 Shield for Large Enterprises from the Polish Development Fund (Polski Fundusz Rozwoju S.A.) for periods subject to the closure of activities, in August 2022 the spa companies Uzdrowisko Połczyn Grupa PGU S.A. and Uzdrowiska Kłodzkie S.A. Grupa PGU settled the support received and obtained remission of the loans. Other companies which received subsidies under the PFR’s Financial Shield program for the SME sector, are awaiting a decision by the PFR regarding the settlement of the support.

The epidemic situation caused by COVID-19 did not have a significant impact on the operations of the Company and the other companies of the Group. As at the date of publication of this report the Management Board of the Parent Entity estimates the risk of loss of going concern caused by COVID-19 as low.

The geopolitical situation related to the direct aggression of Russia against Ukraine and the implemented system of sanctions at the present time is not restricting the operations of KGHM Polska Miedź S.A. or other Group companies, while the risk of interruptions to the continuity of the activities of the Company and the KGHM Polska Miedź S.A. Group in this regard continue to be estimated as low.

Despite the high level of inflation observed in the global economy, leading to a tightening of monetary policy, demand for the Company’s key products did not substantially deteriorate in the fourth quarter of 2022r. Metals prices experienced a rising trend, being the result among others of depreciation of the USD. Additionally, the easing by Chinese authorities of the „zero COVID” policy raised hope of increased metals consumption by China in 2023, which also had a positive impact on the rise in metals prices at the end of 2022.

In 2023 the main sources of risk for economic development remain the high level of inflation and Russian aggression against Ukraine, which consequently may bring an economic slowdown in sectors which are critical for metals consumption (such as construction). Today it is not possible to estimate the impact of these factors on possible profit, and the situation is under constant monitoring while at the same time taking possible mitigating actions.

With respect to the availability of capital and the level of debt, KGHM does not hold bank loans drawn from institutions threatened with sanctions.

From the point of view of exchange differences (the revaluation of balance sheet items), a weakening of the PLN may mean foreign exchange gains (unrealised) due to the fact that the amount of the loans granted by KGHM in USD is higher than the amount of borrowings in USD.

In terms of the other companies of the KGHM Polska Miedź S.A. Group, the situation in Ukraine in 2022 did not have a substantial impact on the operating results generated by these entities.

Political risk in Chile

Due to the ongoing work on the new Constitution in Chile, there is visible increased exposure to political risk which could in future have an impact on operations there. In September 2022 the citizens of Chile voted in a decisive majority against the new draft constitution. The rejected draft constitution assumed among others that more pressure would be placed on the question of protecting the natural environment, indigenous peoples and their habitats, increasing the country’s regionalisation (tax autonomy, political autonomy for individual regions etc.), as well as the anticipated possible nationalisation of the mining industry. Despite this, work on the new constitution has continued. At the same time work is underway in Chile to introduce a new tax royalty for the mining sector. The projected changes from October 2022, which are lighter than those initially proposed, involve both an ad valorem tax on sales, as well as a tax calculated based on operating margin. As regards the aforementioned changes, the company Sierra Gorda SCM is however temporarily protected under a DL600 investment agreement. The Parent Entity continually monitors the political situation in Chile and the related impact on the mining industry, to maintain an update assessment of its potential impact on the KGHM Polska Miedź S.A. Group. Depending on the direction of changes and the decisions taken by the Chilean social authorities, various scenarios are being analysed which will require the taking of appropriate adaptive actions. Taking into consideration the complicated legislative process in Chile, as well as the variable support for the proposed solutions, it may turn out that the draft constitution will not be accepted by Chilean lawmakers within a specific timeframe or form.

Market, credit and liquidity risks

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 risk includes both the elements 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:
  • Market Risk Management Policy and the Rules of the Market Risk Committee,
  • Credit Risk Management Policy and the Rules of the Credit Risk Committee, and
  • Financial Liquidity Management Policy and the Rules of the Financial Liquidity Committee.

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.).

Financial liquidity management is carried out in accordance with the „Financial Liquidity Management Policy in the KGHM Group” which regulates financial liquidity management in the Group and is 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 and its goal is to introduce a comprehensive, joint approach and the most important elements of the credit risk management process.

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.

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.

The management of capital in the Group aims at securing funds for development and at securing relevant liquidity.

Risk categories
  • Commodity risk, currency risk
  • Interest rate risk
  • Price risk related to the change in share prices of listed companies
  • Result on derivatives and hedging transactions
  • Related to trade receivables
  • Related to cash and cash equivalents and bank deposits
  • Related to transactions in derivatives
  • Related to loans granted
  • Financial liquidity management

A detailed description of the various categories of risk can be found in the Management Report on the Activity of the Company and the Group for 2022.

Previous page
Remuneration of Members of the Parent Entity’s Bodies
Next page
Management of sustainable development and ESG risks
Search results