7.5.1.3 Risk of changes in foreign exchange rates
in PLN millions, unless otherwise stated
Regarding the risk of changes in foreign exchange rates within the KGHM Polska Miedź S.A. Group, the following types of exposures were identified:
- transaction exposure related to the volatility of cash flows in the base currency;
- exposure related to the volatility of selected items of the statement of financial position in the base (functional) currency;
- the exposure to net investments in foreign operations as concerns the volatility of consolidated equity in the Group’s base currency (presentation currency).
The transaction exposure to currency risk derives from cash flow-generating contracts, whose values expressed in the base (functional) currency depend on future levels of exchange rates of the foreign currencies with respect to the base currency. Cash flows exposed to currency risk may possess the following characteristics:
- denomination in the foreign currency – cash flows are settled in foreign currencies other than the functional currency; and
- indexation in the foreign currency – cash flows may be settled in the base currency, but the price (i.e. of a metal) is set in a different foreign currency.
The key source of exposure to currency risk in the Parent Entity’s business operations are the proceeds from sales of products (with respect to metals prices, processing and producer margins).
The exposure to currency risk also derives from items in the consolidated statement of financial position denominated in foreign currencies, which under the existing accounting regulations must be translated, upon settlement or periodic valuation, including the translation of foreign operations statements, by applying the current exchange rate of the foreign currencies versus the base (functional) currency. Changes in the carrying amounts of such items between valuation dates result in the volatility of profit or loss for the period or of other comprehensive income.
Items in the consolidated statement of financial position which are exposed to currency risk include in particular:
- trade receivables and trade payables related to purchases and sales denominated in foreign currencies;
- financial receivables due to loans granted in foreign currencies;
- financial liabilities due to borrowings in foreign currencies;
- cash and cash equivalents in foreign currencies; and
- derivatives on metals market.
As for the currency market, the notional amount of settled transactions hedging revenues from metals sales amounted to approx. 20% (in 2021: 28%) of the total revenues from sales of copper and silver realised by the Parent Entity in 2022.
As part of the realisation of the strategic plan to hedge against market risk, in 2022 the Parent Entity purchased the following: put options on the currency market for USD 205 million of planned sales revenues with maturities from April 2022 to December 2022, collar option structures on the currency market for USD 400 million of planned sales revenues with maturities from August 2022 to December 2022, and collar structures for USD 2 640 million with maturities from January 2023 to December 2024.
In addition, as part of on-going management of the currency risk, short-term forward sale transactions were entered into for the planned current cash flows, aimed at hedging against risk connected with USD/PLN rate fluctuations. Forward transactions were settled in the third quarter of 2022.
As a result, as at 31 December 2022 the Parent Entity held an open position on the currency market for the notional amount of USD 2 955 million (USD 1 050 million as at 31 December 2021), and Cross Currency Interest Rate Swap (CIRS) transactions for the notional amount of PLN 2 billion, hedging revenues from sales in the currency as well as the variable interest of issued bonds.
The condensed table of open transactions in derivatives of the Parent Entity on the currency market as at 31 December 2022 is presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).
| Instrument/option |
Notional [USD mn] |
Average weighted option strike price |
Average weighted premium [PLN per USD 1] |
Effective hedge price [USD/PLN] |
|||
| sold put option | purchased put option | sold call option | |||||
| hedge limited to [USD/PLN] |
exchange rate hedging [USD/PLN] |
participation limited to [USD/PLN] |
|||||
| 2023 | seagull | 135.00 | 3.30 | 4.00 | 4.60 | (0.00) | 4.00 |
| seagull | 180.00 | 3.30 | 3.90 | 4.50 | 0.03 | 3.93 | |
| collar | 666.00 | – | 4.48 | 5.48 | (0.03) | 4.45 | |
| collar | 660.00 | – | 4.69 | 6.09 | (0.05) | 4.64 | |
| TOTAL 2023 | 1 635.00 | ||||||
| 2024 | collar | 660.00 | – | 4.48 | 5.48 | (0.00) | 4.48 |
| collar | 660.00 | – | 4.69 | 6.09 | (0.01) | 4.68 | |
| TOTAL 2024 | 1 320.00 | ||||||
| Instrument/option |
Notional [USD mn] |
Option strike price |
Average weighted premium [PLN per USD 1] |
Effective hedge price [USD/PLN] |
|||
| sold put option | purchased put option | sold call option | |||||
| hedge limited to [USD/PLN] |
exchange rate hedging [USD/PLN] |
participation limited to [USD/PLN] |
|||||
| 1st half | seagull | 67.5 | 3.30 | 4.00 | 4.60 | (0.01) | 3.99 |
| seagull | 90 | 3.50 | 3.90 | 4.50 | 0.04 | 3.94 | |
| purchased put option | 180 | – | 3,75 | – | (0.04) | 3.71 | |
| 2nd half | seagull | 67.5 | 330 | 4,00 | 4.60 | (0.01) | 3.99 |
| seagull | 90 | 3.30 | 3,90 | 4.50 | 0.03 | 3,93 | |
| collar | 240 | – | 3.85 | 4.60 | (0.04) | 3.81 | |
| TOTAL 2022 | 735 | ||||||
| 2023 | seagull | 135 | 3.30 | 4.00 | 4,60 | (0.00) | 4.00 |
| seagull | 180 | 3.30 | 3.90 | 4,50 | (0.03) | 3.93 | |
| TOTAL 2023 | 315 | ||||||
| Instrument |
NotionaL [PLN mn] |
Average interest rate [fixed interest rate for USD] |
Average exchange rate [USD/PLN] |
|
| VI 2024 | CIRS | 400 | 3.23% | 3.78 |
| VI 2029 | CIRS | 1 600 | 3.94% | 3.81 |
| TOTAL | 2 000 | |||
Some of the Group’s Polish companies managed the currency risk related to their core business (among others trade) by opening transactions in derivatives, among others on the USD/PLN and EUR/PLN markets. The table of open transactions as at 31 December 2022 and 31 December 2021 is not presented, due to its immateriality for the Group.
As for managing currency risk, the Parent Entity applies natural hedging by borrowing in the currency in which it has revenues. As at 31 December 2022, following their translation to PLN, the bank loans and the investment loans which were drawn in USD amounted to PLN 3 435 million (as at 31 December 2021: PLN 2 980 million).
The currency structure of financial instruments exposed to currency risk (change in the USD/PLN, EUR/PLN, CAD/PLN and GBP/PLN exchange rates) of the KGHM Polska Miedź S.A. Group and sensitivity analysis to the risk of changes
in the exchange rates are presented in the tables below. In order to determine the potential changes in the USD/PLN, EUR/PLN, CAD/PLN and GBP/PLN exchange rates for sensitivity analysis purposes, the Black-Scholes model (the geometrical Brownian motion) was used.
| Financial instruments | Value at risk as at 31 December 2022 | |||
| total PLN million | USD million | EUR million | CAD million | |
| Shares | 4 | – | – | 1 |
| Trade receivables | 776 | 140 | 30 | 5 |
| Cash and cash equivalents | 868 | 163 | 20 | 17 |
| Long-term loans granted to joint ventures | 9 603 | 2 182 | – | – |
| Other financial assets | 234 | 44 | – | 12 |
| Derivatives* | 357 | 36 | – | – |
| Trade and similar payables | (1 063) | (153) | (75) | (11) |
| Borrowings | (3 578) | (793) | (10) | (13) |
| Other financial liabilities | (49) | (9) | (2) | – |
| Financial instruments | Value at risk as at 31 December 2021 | ||||
| total PLN million | USD million | EUR million | CAD million | GBP million | |
| Shares | 5 | – | – | 2 | – |
| Trade receivables | 515 | 80 | 30 | 4 | 8 |
| Cash and cash equivalents | 1 558 | 341 | 20 | 23 | 2 |
| Long-term loans granted to joint ventures | 7 867 | 1 938 | – | – | – |
| Short-term loans granted to joint ventures | 447 | 110 | – | – | – |
| Other financial assets | 150 | 26 | – | 12 | – |
| Derivatives* | (1 174) | 220 | – | – | – |
| Trade and similar payables | (1 132) | (167) | (87) | (16) | – |
| Borrowings | (3 121) | (736) | (18) | (15) | – |
| Other financial liabilities | (177) | (41) | (3) | – | – |
| Financial assets and liabilities as at 31 December 2022 | Value at risk | Carrying amount 31 December 2022 |
Change in the USD/PLN exchange rate | Change in the EUR/PLN exchange rate | Change in the CAD/PLN exchange rate | |||||
| 5,03 (+14%) | 3,91 (-11%) | 5,18 (+10%) | 4,48 (-5%) | 3,68 (+13%) | 2,88 (-11%) | |||||
| profit or loss | other comprehensive income | profit or loss | other comprehensive income | profit or loss | profit or loss | profit or loss | profit or loss | |||
| Shares | 4 | 521 | – | – | – | – | – | – | – | – |
| Trade receivables | 776 | 1 178 | 88 | – | (68) | – | 15 | (6) | 2 | (2) |
| Cash and cash equivalents | 868 | 1 200 | 102 | – | (79) | – | 10 | (4) | 7 | (6) |
| Long-term loans granted to joint ventures | 9 603 | 9 603 | 1 372 | – | (1 065) | – | – | – | – | – |
| Other financial assets | 234 | 890 | 28 | – | (21) | – | – | – | 5 | (4) |
| Derivatives | 357 | 357 | (3) | (1 197) | (6) | 1 193 | (2) | 1 | – | – |
| Trade and similar payables | (1 063) | (3 280) | (96) | – | 75 | – | (37) | 16 | (5) | 4 |
| Borrowings | (3 578) | (6 443) | (499) | – | 387 | – | (5) | 2 | (5) | 5 |
| Other financial liabilities | (49) | (211) | (6) | – | 4 | – | (1) | – | – | – |
| Impact on profit or loss | – | (773) | – | (20) | 9 | 4 | ||||
| Impact on other comprehensive income | (1 197) | 1 193 | – | – | – | |||||
| Financial assets and liabilities as at 31 December 2021 | Value at risk | Carrying amount 31 December 2021 |
Change in the USD/PLN exchange rate | Change in the EUR/PLN exchange rate | Change in the CAD/PLN exchange rate | Change in the GBP/PLN exchange rate | ||||||
| 4,57 (+13%) | 3,66 (-10%) | 5,01 (+9%) | 4,37 (-5%) | 3,55 (+11%) | 2,90 (-9%) | 6,15 (+12%) | 4,98 (-9%) | |||||
| profit or loss | other comprehensive income | profit or loss | other comprehensive income | profit or loss | profit or loss | profit or loss | profit or loss | profit or loss | profit or loss | |||
| Shares | 5 | 615 | – | – | – | – | – | – | 1 | – | – | – |
| Trade receivables | 515 | 1 026 | 41 | – | (32) | – | 12 | (7) | 1 | (1) | 5 | (4) |
| Cash and cash equivalents | 1 558 | 1 904 | 175 | – | (138) | – | 8 | (4) | 8 | (7) | 1 | (1) |
| Long-term loans granted to joint ventures | 7 867 | 7 867 | 997 | – | (782) | – | – | – | – | – | – | – |
| Short-term loans granted to joint ventures | 447 | 447 | 57 | – | (44) | – | – | – | – | – | – | – |
| Other financial assets | 150 | 671 | 14 | – | (11) | – | – | – | 4 | (3) | – | – |
| Derivatives | (1 174) | (1 174) | 10 | (646) | 2 | 527 | (7) | 4 | – | – | – | – |
| Trade and similar payables | (1 132) | (3 201) | (86) | – | 67 | – | (36) | 20 | (6) | 5 | – | – |
| Borrowings | (3 121) | (5 949) | (379) | – | 297 | – | (7) | 4 | (6) | 4 | – | – |
| Other financial liabilities | (177) | (479) | (21) | – | 16 | – | (1) | 1 | – | – | – | – |
| Impact on profit or loss | 808 | – | (625) | – | (31) | 18 | 2 | (2) | 6 | (5) | ||
| Impact on other comprehensive income | (646) | 527 | – | – | – | – | – | – | ||||