3.2. Impairment of assets as at 31 December 2021
in PLN millions, unless otherwise stated
As at 30 June 2021, as a result of the identification of indications of a possible change in the recoverable amount of some of the international mining assets of the KGHM INTERNATIONAL LTD. Group, the Parent Entity’s Management Board performed impairment testing of these assets. The following cash generating units (CGUs) have been selected for the purpose of evaluation of the recoverable amount of the assets of the KGHM INTERNATIONAL LTD. Group, in which indications of a possible change in the recoverable amount were identified:
- The Robinson mine,
- The Sudbury Basin, comprising the Morrison mine and the McCreedy mine,
- The pre-operational Victoria project,
- The Ajax project.
The key indications to perform impairment testing were:
- a change in market forecasts of commodities prices,
- the decision to commence the process of preparing to sell some of the assets located in the Sudbury CGU (this does not include the Victoria project in the pre-operational phase, which remains within the KGHM INTERNATIONAL LTD. Group as a strategic asset),
- a change in technical and economic parameters for the KGHM INTERNATIONAL LTD. Group’s CGU Sudbury mine assets in terms of production volumes, planned operating costs and capital expenditures during the life of a mine.
The main indications that the recoverable amount may be higher than the carrying amount, with the consequent justification for the reversal of previously recognised impairment losses, were increases in the price paths for copper, gold, palladium and silver.
The main indications that the recoverable amount may be lower than the carrying amount, with the consequent necessity for the recognition of an additional impairment loss, were as follows:
- a decrease in the price paths for nickel,
- a change in technical and economic parameters of assets of the CGU Sudbury, among others the deferment of re-commencement of production, lower expected production volume, an increase in the expected capital expenditures during the life of a mine.
In order to determine the recoverable amount of assets of individual CGUs, in the test conducted the fair value (decreased by estimated costs to sell) was calculated using the DCF method, i.e. the method of discounted cash flows, for the following CGUs: Sudbury, Victoria and the value in use for the CGU Robinson.
Price paths were adopted on the basis of long-term forecasts available from financial and analytical institutions. A detailed forecast is being prepared for the period 2022-2026, while for the period 2027-2031 a technical adjustment of prices was applied between the last year of the detailed forecast and 2032, from which a long-term metal price forecast is used as follows:
- for copper – 7 000 USD/t (3.18 USD/lb);
- for gold – 1 500 USD/oz;
- for nickel – 7.25 USD/lb.
| Assumption adopted for impairment testing as at 30 June 2021 | Victoria | Sudbury | Robinson |
| Mine life / forecast period | 14 | 14 | 7 |
| Level of copper production during mine life (kt) | 249 | 43 | 358 |
| Level of nickel production during mine life (kt) | 221 | 23 | – |
| Level of gold production during mine life (koz t) | 157 | 27 | 263 |
| Average operating margin during mine life | 62% | 27% | 43% |
| Capital expenditures to be incurred during mine life [USD million] |
1 530 | 157 | 410 |
| Applied discount rate after taxation for assets in the operational phase* | – | 7.5% | 7.5% |
| Applied discount rate after taxation for assets in the pre-operational phase | 10.5% | – | – |
| Costs to sell | 2% | ||
| Level of fair value hierarchy to which the measurement at fair value was classified | Level 3 | ||
| Sudbury | The inclusion in production of copper and precious metals mineralisation zones („700 Zone” and „PM Zone”) and exclusion of a nickel zone („Intermain Orebody”).
Deferment of re-commencement of the Levack mine up to 2027 and a decrease of the production volume. |
Results of the test performed as at 30 June 2021 are presented in the following table:
| CGU | Segment (Part 2) | Carrying amount* | Recoverable amount | Reversal of impairment loss | |||
| USD mn | PLN mn | USD mn | PLN mn | USD mn | PLN mn | ||
| Victoria | KGHM INTERNATIONAL LTD. | 280 | 1 065 | 280 | 1 065 | – | – |
| Sudbury | 43 | 164 | 43 | 164 | – | – | |
| Robinson | 369 | 1 404 | 614 | 2 335 | 10** | 38** | |
** Despite estimating the recoverable amount of CGU Robinson at the level of USD 614 million (PLN 2 335 million), which was higher than the carrying amount of this CGU’s assets by the amount of USD 245 million (PLN 932 million), the Group reversed, pursuant to IAS 36.117, impairment losses on assets of this CGU recognised in prior periods in the amount of USD 10 million (PLN 38 million), that is to the level of the carrying amount of assets, which would be determined (after deducting any accumulated depreciation/amortisation), if there was no recognition of impairment losses on these assets in prior periods.
As a result of the conducted test, there was a reversal of an impairment loss on the assets of the CGU Robinson in the amount of PLN 38 million, which decreased the item “Cost of sales”.
The results of tests performed as at 30 June 2021 for the CGU Victoria and the CGU Sudbury confirmed that their recoverable amounts are equal to their carrying amounts.
| Sensitivity analysis of the recoverable amount of CGU Victoria (USD mn) | Wartość odzyskiwalna |
|---|---|
| Discount rate 11% | 247 |
| Discount rate 10.5% (test) | 280 |
| Discount rate 10% | 329 |
| Sensitivity analysis of the recoverable amount of CGU Victoria (USD mn) | Recoverable amount |
| Copper price -0.10 $/lb | 275 |
| Copper price (test) | 280 |
| Copper price +0.10 $/lb | 299 |
| Sensitivity analysis of the recoverable amount of CGU Victoria (USD mn) |
Recoverable amount |
| Nickel price -0.10 $/lb | 238 |
| Nickel price (test) | 280 |
| Nickel price +0.10 $/lb | 336 |
| Sensitivity analysis of the recoverable amount of CGU Robinson (USD mn) |
Recoverable amount |
| Discount rate 8% | 604 |
| Discount rate 7.5% (test) | 614 |
| Discount rate 7% | 625 |
| Sensitivity analysis of the recoverable amount of CGU Robinson (USD mn) |
Recoverable amount |
| Copper price -0.10 $/lb | 564 |
| Copper price (test) | 614 |
| Copper price +0.10 $/lb | 665 |
The sensitivity analysis of the recoverable amount of the CGU Sudbury, due to the low carrying amount of assets, was not presented.
In the second half of 2021, as a result of the identification of indications of a possible change in the recoverable amount of the CGU Sudbury’s mining assets of the KGHM INTERNATIONAL LTD. Group, the Parent Entity’s Management Board performed impairment testing of these assets. The key indications to perform impairment testing and indicating that that the recoverable amount of assets may be lower than their carrying amount, and therefore it may be necessary to recognise an additional impairment loss, were the decision to abandon mining operations on the additional deposit and the decrease in efficiency of these assets. Production was halted in two of the mines in the CGU Sudbury, that is Morrison and Podolsky, and they are maintained without conducting mining operations. Moreover, results of another mine of this CGU – McCreedy – were below expectations in 2021, mainly due to a significant decrease in metal content in mined ore.
In order to determine the recoverable amount of the CGU Sudbury’s assets, in the test conducted the fair value (decreased by estimated costs to sell) was calculated using the DCF method, i.e. the method of discounted cash flows.
The basic macroeconomic assumptions adopted for impairment testing as at 31 December 2021, that is metal prices, did not significantly change as compared to those adopted for impairment testing as at 30 June 2021.
| Assumption adopted for impairment testing as at 31 December 2021 | Sudbury |
|---|---|
| Mine life / forecast period | 5 |
| Level of copper production during mine life (kt) | 14.8 |
| Level of nickel production during mine life (kt) | 3.7 |
| Level of gold production during mine life (koz t) | 14.1 |
| Average operating margin during mine life | 7% |
| Capital expenditures to be incurred during mine life [USD million] |
14.28 |
| Applied discount rate after taxation | 7.5% |
| Costs to sell | 2% |
| Level of fair value hierarchy to which the fair value measurement was classified | Poziom 3 |
| Sudbury | A decrease in production volume of McCreedy and Morrison/Levack, a decrease in the life of McCreedy mine to 2026. |
Results of the test performed as at 31 December 2021 are presented in the following table:
| CGU |
Segment
(Part 2) |
Carrying amount* | Recoverable amount | Impairment loss | |||
| USD mn | PLN mn | USD mn | PLN mn | USD mn | PLN mn | ||
| Sudbury | KGHM INTERNATIONAL LTD. | 41 | 166 | 0 | 0 | 41 | 166 |
As a result of the conducted test, an impairment loss was recognised on the assets of CGU Sudbury in the following items: “Cost of sales” in the amount of PLN 162 million and “Other operating costs” in the amount of PLN 4 million.
The sensitivity analysis of the recoverable amount of CGU Sudbury was not presented due to the low carrying amount of assets.
Due to the fact that as at 30 June 2021 the Carlota and Franke mines (assets of the KGHM INTERNATIONAL LTD. Group) were reclassified to assets held for sale, their recognition and measurement at the moment of reclassification and as at 31 December 2021 were performed pursuant to IFRS 5 (Note 9.8).
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 2021, 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 2020. The carrying amount of water rights amounted to PLN 67 million as at 31 December 2021 (as at 31 December 2020: PLN 65 million).
In the current period, due to indications of the possibility of changes in the recoverable amount of the property, plant and equipment and intangible assets of the company WPEC S.A., the company performed impairment testing of these assets. The main indications to perform impairment testing in the current reporting period were losses on principal activities, a significant increase in prices of CO2 emissions rights and a risk of prolongation of the investment process related to the gas source in Legnica. As at 31 December 2021, the carrying amount of the property, plant and equipment and intangible assets of WPEC S.A., decreased by the carrying amount of subsidies and land located in the town of Lubin and the carrying amount of CO2 emission rights, amounted to PLN 106 million. For the purpose of estimating the recoverable amount, in the conducted test the fair value decreased by estimated costs to sell was measured, using the DCF method, i.e. the method of discounted cash flows.
| Assumption | Level adopted in testing |
| Detailed forecast period | 2022-2031 |
| Operating margin range during the detailed forecast period | -3.24% – +3.25% |
| Capital expenditures during the detailed forecast period | 202 mln PLN |
| Discount rate | 3.86% (real rate after taxation) |
| Growth rate following the forecast period | 0% |
The recoverable amount of tested property, plant and equipment was determined using an analysis of discounted forecasted cash flows. The adopted forecast period is 10 years. Extension of the forecast period is justified mainly, among others, by the significant and long-term impact of expected changes in the regulatory environment and in order to fully reflect the impact of planned capital expenditures,
The adopted level of capital expenditures during the forecast period mainly concerns the realisation of a task – Modernisation of a heat supply system for the Legnica city and modernisation of heating networks.
For the forecast of costs for the years 2022 – 2031, the change in the heat generation technology in Legnica from 2024 and reduction of transmission losses will have a significant impact, and in particular:
- a decrease in costs of raw materials and production processes of a coal-based economy and the associated current maintenance, operations, overhauls and shut-downs;
- a decrease in the amount of CO2 emissions by approx. 50%;
- reorganisation of employment due the switch to a natural gas-based technology;
- reduction of heat losses in owned transmission infrastructure, related to the on-going modernisation of transmission infrastructure.
The aforementioned forecast takes into account significant changes in prices of CO2 emission rights and energy which took place in the last period.
As the result of the aforementioned assumptions and with due prudence, the estimated EBIT will increase in the period 2022 – 2032 from the yearly level of –PLN 5 million to PLN 8 million.
The EBIT in 2032 in the amount of PLN 8 million is a basis to calculate free cash flows necessary to determine the residual value, which is estimated to be PLN 115 million.
As a result of the impairment testing of property, plant and equipment and intangible assets, the recoverable amount of assets was determined to be at the level of PLN 56 million, which was lower than the carrying amount of the tested assets, which was the basis for recognising an impairment loss in the amount of PLN 50 million in the item “Cost of sales”.
The measurement of non-current assets and intangible assets of the company indicated a significant sensitivity to the adopted discount rates and the measurement of the residual value, which was determined based on EBIT from 2032. The following table presents the impact of changes to these parameters on the measurement of the assets.
| Recoverable amount for a given discount rate | |||
| lower by 1 pp | per test | higher by 1 pp | |
| Discount rate 3.86 % (test) | 113 | 56 | 23 |
| Recoverable amount for a given EBIT in a residual period | |||
| lower by 5 % | per test | higher by 5 % | |
| EBIT in the residual period PLN 8 million (test) | 50 | 56 | 62 |
In order to monitor the risk of impairment of the operating assets in subsequent reporting periods, it was determined that the recoverable amount would be equal to the carrying amount of assets if the discount rate fell by 0.91% or if EBIT increased by 43.2%.
In the current period, due to indications of the possibility of changes in the recoverable amount of property, plant and equipment and intangible assets of the company “Energetyka” sp. z o.o., the Company performed impairment testing of these assets. The key indication to perform impairment testing in the current reporting period were the following: worse than expected economic results and a significant increase in prices of CO2 emissions rights. As at 31 December 2021, the carrying amount of tested non-current assets of “Energetyka” sp. z o.o. amounted to PLN 386 million. For the purpose of estimating the recoverable amount, in the conducted test the value in use of the CGU was measured using the DCF method, i.e. the method of discounted cash flows.
| Assumption | Level adopted in testing |
| Detailed forecast period | 2022-2031 |
| Operating margin range during the detailed forecast period | 0.43% – +2.07% |
| Capital expenditures during the detailed forecast period | PLN 313 million |
| Discount rate* | 3.80% (real rate after taxation) |
| Growth rate following the forecast period | 0% |
The recoverable amount of tested property, plant and equipment was determined using an analysis of discounted forecasted cash flows. The adopted forecast period is 10 years. Extension of the forecast period is justified mainly by the significant and long-term impact of expected changes in the regulatory environment. Moreover, in the detailed forecast period it is necessary to present the impact of incurred capital expenditures, the increase in their amounts in the first forecast period (for the years 2022/2023) and the lack of necessity to incur them in similar amounts in subsequent years.
The approved Budget of the company for the years 2022 – 2026, adjusted due to significant changes in prices of CO2 emissions rights and energy which took place recently , is the basis for the preparation of forecasts of revenues and costs.
The adopted level of capital expenditures in the forecast period concerns mainly modernisation and replacement tasks.
As the result of the aforementioned assumptions and with due prudence, the estimated EBIT will increase in the period 2022 – 2024 from the level of -PLN 3 million to PLN 17 million, while from 2025 to 2032 EBIT will be at the yearly level of PLN 16 million.
As a result of the impairment testing of the property, plant and equipment and intangible assets, the recoverable amount of tested assets was determined to be at the level of PLN 307 million, which was lower than the carrying amount of the tested assets, which was the basis for recognising an impairment loss in the amount of PLN 79 million in the item “Cost of sales”.
The measurement of tested non-current assets indicated a significant sensitivity to the adopted levels of discount rates and a moderate sensitivity to a change in EBIT which is a basis used to determine the residual value. The following table presents the impact of changes of these parameters on the measurement of assets.
| Recoverable amount for a given discount rate | |||
| lower by 1 pp | per test | higher by 1 pp | |
| Discount rate 3.80 % (test) | 431 | 307 | 234 |
| Recoverable amount for a given EBIT in a residual period | |||
| lower by 5 % | per test | higher by 5 % | |
| EBIT in the residual period of PLN 16 million PLN ( test) | 292 | 307 | 322 |
In order to monitor the risk of impairment of operating assets in subsequent reporting periods, it was determined that the recoverable amount would be equal to the carrying amount of the assets if the discount rate fell by 0.71 percentage point or EBIT increased by 26.3%.
Other impairment losses on assets
Other impairment losses on assets concern:
- fixed assets and intangible assets, PLN 49 million,
- fixed assets under construction and other intangible assets not yet available for use, PLN 34 million,
- write-down of inventories, PLN 47 million,
- allowances for impairment of receivables, PLN 13 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.