6.2 Loans granted to a joint venture (Sierra Gorda S.C.M.)

Loans granted to Sierra Gorda S.C.M. were classified as credit-impaired financial assets
due to the high credit risk at the moment of initial recognition (POCI). POCI loans are measured at amortised cost using the effective interest rate, adjusted by the credit risk using the scenario analysis and available free cash of Sierra Gorda S.C.M.

The terms of repayment of loans granted to finance operations abroad, including planned repayment dates, were set in individual agreements. Pursuant to the schedule, the principal amount and interest are paid on demand, but not later than 15 December 2024. Due to the implementation of IFRS 9 as at 1 January 2018, the expected, undiscounted credit loss at the moment of initial recognition was estimated to amount to PLN 6 105 million (USD 1 754 million per the 3.4813 USD/PLN exchange rate of NBP dated 29 December 2017).

The repayments of loans by Sierra Gorda S.C.M. depend on that company’s financial standing. Due to the good financial situation, in 2021 there were first repayments in the total amount of USD 308 million (PLN 1 259 million). Further payments were made in 2022 in the total amount of USD 193 million (PLN 789 million). Due to the fact that settling the loan is planned and probable in the foreseeable future, the loan is not a net investment under IAS 21.15.

Pursuant to the requirements of IFRS 9.5.5.17, the Group performed impairment testing of the loan. To estimate the expected credit losses, scenario analysis (IFRS 9.5.5.18) was used, comprising the Group’s assumptions on the repayment of the loan granted. The scenario analysis was based on cash flows of Sierra Gorda S.C.M., estimated on the basis of current market paths of commodities price forecasts, which were subsequently discounted using the effective interest rate adjusted by the credit risk, determined at the initial recognition of the loan pursuant to IFRS 9.B5.5.45 at the level of 6.42%.

Other important assumptions used in the measurement of the loan concern the following:

• the probability of realisation of individual measurement scenarios,
• the level of production,
• the level of costs,
• the level of capital expenditures,
• the external financing of Sierra Gorda S.C.M.,
• the form and level of financing Sierra Gorda S.C.M. by owners,
• taxation at the level of Sierra Gorda S.C.M.,
• the distribution of cash.

Future realisation, or not, of assumptions will depend on many macroeconomic, operational and financial factors, as well as agreements made between JV partners (sensitivity analysis of the carrying amount of the loan is presented in Note 7.5.2.4).