7.5.1.2 Commodity risk

in PLN millions, unless otherwise stated

The Parent Entity is exposed to the risk of changes in the prices of the metals it sells: copper, silver, gold and lead. Furthermore, the KGHM INTERNATIONAL LTD. Group is exposed to the risk of changes in the prices of copper, gold, nickel, molybdenum, platinum and palladium.

In the Parent Entity and the KGHM INTERNATIONAL LTD. Group, the price formulas used in physical delivery contracts are mainly based on average monthly quotations from the London Metal Exchange for copper and other common metals and from the London Bullion Market for precious metals. Within the commercial policy, the Parent Entity and KGHM INTERNATIONAL LTD. set the price base for physical delivery contracts as the average price of the appropriate future month.

The permanent and direct link between sales proceeds and metals prices, without similar relationships on the expenditures side, results in a strategic exposure. In turn, operating exposure is a result of possible mismatches in the pricing of physical contracts with respect to the Group’s benchmark profile, in particular in terms of the reference prices and the quotation periods.

On the metals market, the Group has a so-called long position, which means it has higher sales than purchases. The analysis of the Group’s strategic exposure to market risk should be performed by deducting from the volume of metals sold the amount of metal in purchased materials.

The Group’s strategic exposure to the risk of changes in the price of copper and silver in the years 2021-2022 is presented in the table below:

The notional amount of copper price hedging strategies settled in 2022 represented approx. 25% (44% in 2021) of the total sales of this metal realised by the Parent Entity (it represented approx. 42% of net sales in 2022 and 67% in 2021).

The notional amount of silver price hedging strategies settled in 2022 represented approx. 24% of the total sales of this metal realised by the Parent Entity (25% in 2021).

As part of the realisation of the strategic plan to hedge the Parent Entity against market risk, in 2022 strategies hedging the planned revenues from copper sales were implemented. Seagull hedging strategies were entered into for the period from January 2023 to December 2023 for a total tonnage of 90 thousand tonnes. Moreover, an open hedging position on the copper market was restructured for the same period with a total tonnage of 12 thousand tonnes by raising the sold options’ strike price from a seagull structure entered into in 2020. In 2022, the Parent Entity did not implement any hedging strategies on the silver market.

In 2022 QP adjustment swap transactions were entered into on the copper and gold markets with maturities of up to June 2023, as part of the management of a net trading position.

As a result, as at 31 December 2022 the Parent Entity held open derivatives positions for 193.5 thousand tonnes of copper (of which: 189 thousand tonnes came from strategic management of market risk, while 4.3 thousand tonnes came from the management of a net trading position) and 4.2 million troy ounces of silver.

The condensed tables of open derivatives transactions held by the Parent Entity on the copper and silver markets as 31 December 2022, entered into as part of the strategic management of market risk, are presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).

^{* Copper sales less copper in purchased metal-bearing materials.
** Applied in order to react to changes in contractual arrangements with customers, non-standard pricing terms as regards metals sales and the purchase of copper-bearing materials.}

The condensed tables of open derivatives transactions held by the Parent Entity on the copper and silver markets as 31 December 2021, entered into as part of the strategic management of market risk, are presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).

In 2022 and in 2021, neither KGHM INTERNATIONAL LTD. nor any of the mining companies implemented any forward transactions on the commodity market.

As at 31 December 2022, the risk of changes in metals prices was also related to derivatives embedded in the purchase contracts for metal-bearing materials entered into by the Parent Entity.

In order to determine the potential changes in metals prices for purposes of sensitivity analysis of commodity risk factors (copper, silver, gold), the mean reverting Schwarz model (the geometrical Ornstein-Uhlenbeck process) was used.