Economic performance of the Sierra Gorda S.C.M. segment

The Sierra Gorda S.C.M. segment is a joint venture owned by KGHM INTERNATIONAL LTD. (55%) and the Australian-based South32 mining group (45%).

The production and financial figures disclosed below are presented based on the full ownership interest in the joint venture (100%) and pro rata to the interest in Sierra Gorda S.C.M. (55%), in accordance with the presentation methodology adopted in note 2 of the consolidated Financial Statements.

In 2022, Sierra Gorda S.C.M.’s copper and molybdenum output was lower than in 2021 as a direct result of operations conducted in zones containing lower quantities of these metals.

2021 was an exceptional year in terms of the copper content in the mined ore, which was significantly greater than the levels obtained in all other years since the inception of commercial production in 2015. The mining of resources with a lower Cu content was the primary reason for the decline in payable copper output in 2022 (-13%) despite the maintenance a comparable volume of ore processed to that of 2021.

In terms of molybdenum output, the decrease from the level obtained in 2021 was 64%, which also resulted from the mining plan’s selection of zones characterised by a significantly lower content of this metal and a deterioration in molybdenum yield at the processing phase.

Sales revenues in 2022 totalled USD 1,617 million (for a 100% interest), or PLN 3,974 million considering KGHM Polska Miedź S.A.’s 55% ownership interest.

Revenue decreased by 25% compared to the volume generated in 2021. Such a significant decrease was a direct consequence of the mining of ore with a lower copper and molybdenum content, which translated into a drop in sales by 11% (Cu) and 47% (Mo). The change in sales volume accounts for approximately half of the USD 534 million decrease in revenue. Other reasons for the decrease in revenue include, for the most part, selling price factors and refining charges, which went up due to the market situation in 2022.

The decrease in segment revenue (in PLN) was not as significant as for revenue presented in the Sierra Gorda S.C.M. report (in USD) due to the exchange rates applied to convert the values presented in the report (USD 1 = PLN 3.88 in 2021 v. USD 1 = PLN 4.47 in 2022).

The detailed impact of specific factors on the change in revenue is presented in the subsection on Sierra Gorda S.C.M.’s financial performance.

Sierra Gorda S.C.M.’s cost of sales, selling costs and administrative expenses totalled USD 1,107 million, of which USD 964 million represents costs of products sold and USD 143 million represents combined selling, general and administrative expenses. Pro rata to the ownership interest (55%), the Sierra Gorda segment costs stood at USD 2,721 million.

These factors were the main reason for the USD 77 million (+8%) increase in cost of sales, selling costs and administrative expenses compared to 2021 and the 0.72 USD/lb (+92%) increase in the C1 unit cost of copper production. In the case of C1, an additional burden was the decrease in molybdenum sales, which directly translated into lower accompanying element deductions. Also relevant was the lower level of copper sales, translating into an unfavourable distribution of fixed costs per unit of copper sales.

In 2022, adjusted EBITDA was USD 891 million, of which PLN 2,190 million was attributable to the KGHM Group on a pro-rata basis (55%).

A summary of key factors affecting revenue and costs, and therefore EBITDA, is presented in the following description of the main factors affecting the USD 1,338 million decrease in Sierra Gorda S.C.M.’s net result.

* Cost of sales, selling costs and administrative expenses excluding impairment losses/reversal of impairment losses on property, plant and equipment