9.4 Provision for decommissioning costs of mines and other facilities

The provision for future decommissioning costs of mines and other technological facilities is recognised based on the estimated expected costs of decommissioning of such facilities and of restoring the sites to their original condition  following the end of operations, which are made on the basis of ore extraction forecasts (for mining facilities), and technical-economic studies prepared either by specialist firms or by the Parent Entity.

In the case of surface mines, certain actions and costs may influence the scope of restoration work, such as costs of hauling barren rock, incurred during mine life and due to its operations, are recognised as operating costs being an integral part of the production process and are therefore excluded from costs that are a basis of calculating the provision for mine decommissioning.

Revaluation of this provision is made in two stages:

1. estimation of the costs of decommissioning mines to the current value in connection with the change in prices using the price change indices of construction-assembly production published by the Central Statistical Office.
2. discounting of the decommissioning costs to the current value using effective discount rates calculated based on the nominal interest rates and the inflation rate (quotient of the nominal rate and the inflation rate), whereby:
   • the nominal interest rate in the Parent Entity is based on the yield on treasury bonds at the end of the reporting period, with maturities nearest to the planned financial outflow and if there are no treasury bonds with maturities close to the planned financial outflows – the nominal interest rate is determined by the professional judgment of the Parent Entity’s Management on the basis of the consistency of the adopted assumptions. In the KGHM INTERNATIONAL LTD. Group – it is the rate of return on investments in ten- and twenty-year treasury bills of the US Federal Reserve and the rate of return on investments in five–year treasury bonds issued by the governments of Canada and Chile.
   • the inflation rate is based on the forecast of future inflation used in the calculation of future employee benefits liabilities.

A change in the discount rate or in the estimated decommissioning cost adjusts the value of the relevant item of a fixed asset, unless it exceeds the carrying amount of the item of a fixed asset (any surplus above this amount is recognised in other operating income).

The increase in the provision due to the time lapse is recognised in finance costs.

The provision for decommissioning costs of mines and other technological facilities includes the balance of the Mine Closure Fund and Tailings Storage Facility Restoration Fund, which the Parent Entity creates under separate regulations, i.e. the Act of 9 June 2011 Geological and Mining Law and the Act of 14 December 2012 on waste, respectively. The role of the Funds is to secure cash for the future realisation by the Parent Entity of its obligations related to the closure, decommissioning and restoration of mines and tailings storage facilities, by collecting them in the manner provided for by the laws.

In the case of the Mine Closure Fund, the Parent Entity has separated a bank cash account to which it transfers cash equivalent to 3% of the depreciation charges on fixed assets of mines, determined in accordance with the provisions of the Income Tax Act. Details on the credit risk related to the cash accumulated on the separate account of Mine Closure Fund are presented in Note 7.5.2.4.

In the case of Tailings Storage Facility Restoration Fund, in July 2022 the Parent Entity changed the form of securing the funds of this Fund, replacing a separate bank account with financial guarantees issued by the bank on demand of the Parent Entity, of which the Parent Entity is also a beneficiary. As at 31 December 2022, the amount of guarantees was PLN 98 million, and their value is updated on an annual basis. The Parent Entity strives to fully secure funds for the restoration of individual tailings storage facilities in the year, for which the liquidation and restoration schedule provides for the closure of a given tailings storage facility, by systematic increasing the value of these guarantees.

In 2022, the Parent Entity revised its approach to the discount rates used to estimate environmental provisions. At the end of the reporting period, with a bond yield of +/- 6.845% and inflation of +/- 13.1% (at the end of the comparable period, respectively +/-3.6% and +/-7.6%), the Parent Entity received and applied for the years 2022-2023 a negative real discount rate of -5.53% instead of a rate of ”0”. For the subsequent two measurement periods, that is for 2024 and 2025, the Parent Entity adopted inflation rates at the level of the NBP’s forecast, that is 5.9% and 3.5%, respectively, and for subsequent periods, following the NBP’s forecast – at the level of 2.5%, in line with the long-term inflation target. Moreover, for the first 10 years of measurement of the provision (that is to 2032), a risk-free rate of 6.845% (measurement of 10-year treasury bonds) was adopted, due to the fact that it is the only publicly available information on the risk-free rate for the subsequent 10 years, and pursuant to the adopted judgment, this rate was not modified. The Parent Entity will adjust the risk-free rate to the level of this rate announced at every subsequent end of the reporting period in order to measure the provision at those days.

In turn, taking into account the high volatility of the risk-free rate that was in the last period, based on quotations of 10-year treasury bonds, the Parent Entity applied a professional judgment to determine this rate for the estimation of provisions falling after a period of 10 years from the end of the annual reporting period based on the historical observation of the ratio of the risk-free rate to the assumed inflation target. As a result of the judgement, the Parent Entity adopted the risk-free rate of 3.5% for the estimation of provision for 10 years from the end of the annual reporting period, which translated into a real discount rate of 0.98%.

In the current period, for the purpose of the measurement of the provision for mine decommissioning and other technological facilities located in the United States of America and Canada, a real discount rate at the level of 1.19% to 1.67% was adopted depending on the mine. In the comparable period a real discount rate of “0” was adopted due to the inflation remaining at the level of the nominal discount rate.

With regard to the costs of some activities carried out during the exploratory work of surface mines, which at the same time serve to restore (recultivate) such pits, the Group made a judgment and recognised that these costs are mostly current production costs, because these activities primarily determine the current mine production and revenue generation, and their restoration is a secondary effect. Therefore, the costs of such activities are not included in the measurement of the restoration provision.