3.1. Impairment of assets as at 31 December 2022
in PLN millions, unless otherwise stated
Pursuant to IAS 36, as at 31 December 2022 the Group assessed the occurrence of indications of impairment of its assets. Key non-current assets of the Group were subjected to the analysis. As a result of the performed evaluation, no indications of impairment of these assets were identified. Because of the Parent Entity’s market capitalisation remaining below the level of its net assets for a significant part of 2022, this area was subjected to a further analysis.
In 2022, a general deterioration in sentiment was seen in stock markets due to the substantial uncertainty as to the development of the global macroeconomic situation in reaction to the start of the armed conflict in Ukraine and the tangible consequences of the COVID-19 (coronavirus) pandemic. As a result, stock market indices, amongst others, suffered greatly. In 2022, the share price of KGHM Polska Miedź S.A. fell by 9% compared to the share price at the end of 2021, and as at 31 December 2022 it amounted to PLN 126.75. During the same period the WIG and WIG 20 indices fell respectively by 17% and 21%. As a result, the Parent Entity’s market capitalisation fell from PLN 27 880 million to PLN 25 350 million, which means that as at 31 December 2022 it remained 15% below the level of the Company’s net assets.
As at 15 March 2023, the Parent Entity’s share price amounted to PLN 113.30 and as a result, the market capitalisation amounted to PLN 22 660 million and was 24% lower than the level of the Parent Entity’s net assets.
Due to the fact that, during a significant part of the reporting period, the Company’s market capitalisation remained below the carrying amount of its net assets, in accordance with IAS 36 Impairment of assets, the Management Board of KGHM Polska Miedź S.A. conducted an analysis to determine whether any area of KGHM Polska Miedź S.A.’s activities could be impaired.
The analysis of the assets located in Poland indicated that not all of the factors which affect the market capitalisation of KGHM Polska Miedź S.A. are factors which are related to the conducted economic activities.
The drop in share prices affected companies in the majority of sectors, in different economies, and reflected investor uncertainty as to the future. In particular, the armed conflict in Ukraine caused withdrawal of foreign investors from areas bordering the war zone, which can be seen not only in the situation on the Warsaw stock exchange, but also on exchanges in the region, such as in Czechia, Slovakia and Hungary, and also had a significant impact on the weakening of the PLN versus the USD.
From the point of view of the Company’s operations, the key factor influencing the level of market capitalisation is the copper price. In December 2021, the average price of copper amounted to 9 550 USD/t, and following the initial continuation of the upward trend in the first months of 2022 it recorded a significant decline. The minimum was recorded in July 2022, when the average copper price was at the level of 7 530 USD/t. But over time, as reassuring information as to the demand for this metal kept coming, prices returned to the trend observed at the start of the year and in December 2022 the average price for copper amounted to 8 367 USD/t. The share prices of companies involved in the mining and processing of copper are strongly correlated with the price of this metal.
It should be pointed out that in the case of the Polish assets, of significance are PLN-expressed metals prices, which are also affected by the USD/PLN exchange rate. Fluctuations in the price of copper related to the turbulence on the financial markets, whose origins may often be found not only in macroeconomics but also in broadly understood geopolitics, are usually to a large extent offset by changes in the USD/PLN exchange rate, which additionally remains under the influence of the armed conflict in Ukraine.
Despite the continued uncertainty in the economic environment, KGHM Polska Miedź S.A. maintains full operational capacity and consistently advances planned production and sales targets. The financial results achieved by the Company significantly exceed the budget targets, which is also a result of conducted optimisation initiatives and cost discipline applied in response to macroeconomic conditions.
As a result of the assessment, it was judged that there was no relation between the fall in the share price of KGHM Polska Miedź S.A. both in terms of the activities of KGHM Polska Miedź S.A. in Poland as well as abroad. The Company realises production and sales targets in Poland as well as abroad. Consequently, there were no indications identified suggesting the risk of impairment of the Polish and international production assets, therefore there were no tests for impairment conducted for these assets as at 31 December 2022.
Due to the uncertainty and the significant volatility of basic economic parameters, including metals prices and currency exchange rates, and dynamic development of the global pandemic situation, and its impact on the economic situation, the Company is continuously monitoring the global situation.
As at 30 June 2022, new risks were identified to the realisation of forecasted financial results of the Group companies providing spa services (CGU): Uzdrowiska Kłodzkie S.A. – Grupa PGU, Uzdrowisko Połczyn Grupa PGU S.A., Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU, Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU. Apart from the increase in prices of electricity, energy carriers, food and other cost items due to inflation pressure, there is also a risk of inability to effectively transfer these increases into prices for end customers and/or an impact of these costs on provided services.
For the purpose of estimating the recoverable amount, in the conducted test the value in use of the cash generating units, comprised of property, plant and equipment and intangible assets of all of the aforementioned companies, was measured using the DCF method, i.e. the method of discounted cash flows.
The recoverable amount of CGUs, estimated as described above, was confirmed by the fair value of a transaction price of tested assets, which were sold between entities of the Group as part of the reorganisation project realised by the Group (details on changes in the organisational structure of the Group may be found in Note 12.11 Composition of the Group).
| Assumption | Uzdrowiska Kłodzkie S.A. – Grupa PGU | Uzdrowisko Połczyn Grupa PGU S.A | Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU | Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU |
| Detailed forecast period* | 2nd half of 2022 – 1st half of 2028 | 2nd half of 2022 – 1st half of 2028 | 2nd half of 2022 – 1st half of 2028 | 2nd half of 2022 – 1st half of 2028 |
| Average EBITDA margin during the detailed forecast period | 12% | 13% | 12% | 13% |
| EBITDA margin during the residual period | 15% | 14% | 14% | 16% |
| Capital expenditures during the detailed forecast period | PLN 58 million | PLN 12 million | PLN 12 million | PLN 9 million |
| Average notional discount rate during the detailed forecast period** | 11.4% | 11.3% | 11.4% | 11.5% |
| Discount rate during the residual period** | 11.4% | 11.7% | 11.5% | 11.8% |
| Notional growth rate following the detailed forecast period | 2.0% | 2.0% | 2.0% | 2.0% |
** Data is presented after taxation, despite the measurement model of value in use. The application of data before taxation does not have a significant impact on the recoverable amount.
The results of the conducted tests are presented in the following table:
| OWSP | Carrying amount | Recoverable amount | Impairment loss |
| Uzdrowiska Kłodzkie S.A. – Grupa PGU | 114 | 102 | 12 |
| Uzdrowisko Połczyn Grupa PGU S.A. | 81 | 55 | 26 |
| Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU | 34 | 28 | 6 |
| Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU | 38 | 36 | 2 |
As a result of the tests conducted, an impairment loss on non-current assets was recognised in the total amount of PLN 46 million – by comparing the carrying amount with the recoverable amount.
The impairment loss was recognised in the items: “Cost of sales” in the amount of PLN 45 million and in “Other operating costs” in the amount of PLN 1 million.
The recoverable amount of individual CGUs indicated a significant sensitivity to changes in the adopted discount rate, the average EBITDA margin, and the growth rate following the forecast period. Moreover, it should be noted that sensitivity to the change in the level of revenues is reflected in sensitivity to the changes in the EBITDA margin.
| Recoverable amount | |||
| Average EBITDA margin during the forecast period | decrease by 2 pp. | per test | increase by 2 pp. |
| Uzdrowiska Kłodzkie S.A. – Grupa PGU | 60 | 102 | 144 |
| Uzdrowisko Połczyn Grupa PGU S.A | 43 | 55 | 69 |
| Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU | 20 | 28 | 35 |
| Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU | 27 | 36 | 45 |
| Average discount rate during the forecast period | decrease by 1 pp. | per test | increase by 1 pp. |
| Uzdrowiska Kłodzkie S.A. – Grupa PGU | 119 | 102 | 88 |
| Uzdrowisko Połczyn Grupa PGU S.A | 63 | 55 | 50 |
| Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU | 32 | 28 | 24 |
| Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU | 41 | 36 | 32 |
| Growth rate following the forecast period | decrease by 1 pp. | per test | increase by 1 pp. |
| Uzdrowiska Kłodzkie S.A. – Grupa PGU | 92 | 102 | 113 |
| Uzdrowisko Połczyn Grupa PGU S.A | 52 | 55 | 60 |
| Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU | 25 | 28 | 30 |
| Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU | 33 | 36 | 39 |
In order to monitor the risk of further impairment of operating assets in subsequent reporting periods as well as to monitor the possibility of reversing the impairment loss, it was determined that the recoverable amount would be equal to the carrying amount of individual companies if the notional discount rate were as presented below:
| Uzdrowiska Kłodzkie S.A. – Grupa PGU | 10.54% |
| Uzdrowisko Połczyn Grupa PGU S.A | 8.50% |
| Uzdrowisko Cieplice Sp. z o.o. – Grupa PGU | 10.00% |
| Uzdrowisko Świeradów – Czerniawa Sp. z o.o. – Grupa PGU | 10.75% |
In the Group, water rights in Chile are annually subjected to impairment testing by comparing their carrying amount to the recoverable amount, which is set as fair value decreased by costs to sell. The fair value of water rights is classified under level 2 of the fair value hierarchy, in which fair value measurements are based on significant observable input data, other than market prices.
For the year ended on 31 December 2022, the Group assessed the factors impacting the recoverable amount of the asset and concluded that there are no grounds for recognising an impairment loss, as the water price and the estimated amount of water available for extraction did not change compared to the level of these factors adopted for measurement as at 31 December 2021. The carrying amount of water rights amounted to PLN 73 million as at 31 December 2022 (as at 31 December 2021: PLN 67 million).
Other impairment losses on assets
Other impairment losses on assets concern:
- fixed assets and intangible assets, PLN 38 million (including PLN 36 million on the segment KGHM INTERNATIONAL LTD.),
- fixed assets under construction and other intangible assets not yet available for use, PLN 63 million (including PLN 55 million on the segment KGHM INTERNATIONAL LTD., projects under IFRS 6, which were fully impaired since the drilling was concluded without confirmation of economic feasibility of explored deposits),
- write-down of inventories, PLN 74 million,
- allowances for impairment of receivables, PLN 9 million.
Information on the item in which impairment losses are recognised in the consolidated statement of profit or loss is presented in Note 4.4.