Note 2.1 Operating segments

The operating segments identified in the KGHM Polska Miedź S.A. Group reflect the structure of the Group, the manner in which the Group and its individual entities are managed and the regular reporting to the Parent Entity’s Management Board.

Based on the aggregation of operating segments and taking into account the criteria stipulated in IFRS 8, the following reporting segments are currently identified within the KGHM Polska Miedź S.A. Group:

The following companies were not included in any of the aforementioned segments:

• Future 1 Sp. z o.o., which as a result of merging with the companies Fermat 1 S. á r. l., Fermat 2 S. á r. l. and Fermat 3 S. á r. l. – took over their functions within the holding structure founded to acquire KGHM INTERNATIONAL LTD.
• Future 2 Sp. z o.o., Future 3 Sp. z o.o., Future 4 Sp. z o.o., Future 5 Sp. z o.o., Future 6 Sp. z o.o. and Future 7 Sp. z o.o., which operate in the structure related to the establishment of a Tax Group.

These companies do not conduct operating activities, which could impact the results achieved by individual segments, and as a result their inclusion could distort the data presented in this part of the consolidated financial statements due to significant settlements with other Group companies.

Each of the segments KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD. and Sierra Gorda S.C.M.  have their own Management Board, which reports the results of their business activities directly to the President of the Management Board of the Parent Entity.

The segment KGHM Polska Miedź S.A. is composed only of the Parent Entity, and the segment Sierra Gorda S.C.M. is composed only of the joint venture Sierra Gorda. Other companies of the KGHM Polska Miedź S.A. Group are presented below by segment: KGHM INTERNATIONAL LTD. and Other segments.

Location of mining assets of the KGHM Polska Miedź S.A. Group

*TPM – precious metals

The  Parent Entity and the KGHM INTERNATIONAL LTD. Group (a subgroup) have a fundamental impact on the assets and the generation of revenues in the KGHM Polska Miedź S.A. Group. The activities of KGHM Polska Miedź S.A. are concentrated on the mining industry in Poland, while those of the KGHM INTERNATIONAL LTD. Group are concentrated on the mining industry in the countries of North and South America. The profile of activities of the majority of the remaining subsidiaries of the KGHM Polska Miedź S.A. Group differs from the main profile of the Parent Entity’s activities.

The Parent Entity’s Management Board monitors the operating results of individual segments in order to make decisions on allocating the Group’s resources and assess the financial results achieved.

Financial data prepared for management reporting purposes is based on the same accounting policies as those applied when preparing the consolidated financial statements of the Group, while the financial data of individual reporting segments constitutes the amounts presented in appropriate financial statements prior to consolidation adjustments at the level of the KGHM Polska Miedź S.A. Group, i.e.:

• The segment KGHM Polska Miedź S.A. - comprises data from the separate financial statements of the Parent Entity prepared in accordance with IFRSs. In the separate financial statements, investments in subsidiaries (including investment in KGHM INTERNATIONAL LTD.) are measured at cost.
• The segment KGHM INTERNATIONAL LTD. –  comprises consolidated data of the KGHM INTERNATIONAL LTD. Group prepared in accordance with IFRSs and including fair value adjustments from the settlement of the acquisition of this Group by KGHM Polska Miedź S.A. in 2012. The  involvement in Sierra Gorda S.C.M. is accounted for using the equity method,
• The segment Sierra Gorda S.C.M –  comprises the 55% share of  assets, liabilities, revenues and costs of this venture presented in the separate financial statements of Sierra Gorda S.C.M. prepared in accordance with IFRSs after fair value adjustments of assets and liabilities of this venture, determined when accounting for the acquisition of the KGHM INTERNATIONAL LTD. Group in 2012.
• Other segments – comprises aggregated data of individual subsidiaries after excluding transactions and balances between them.

The Management Board of the Parent Entity assesses a segment’s performance based on adjusted EBITDA and the profit or loss for the period.
The Group defines adjusted EBITDA as profit/loss for the period pursuant to IFRS, excluding income tax (current and deferred), finance income/(costs), other operating income and costs, the share of losses of joint ventures accounted for using the equity method, impairment losses on interest in a joint venture, depreciation/amortisation and impairment losses on property, plant and equipment included in the cost of sales, selling costs and administrative expenses. Since adjusted EBITDA is not a measure defined by IFRS, it is not a standardised measure and therefore its method of calculation may vary between entities, and consequently the presentation and calculation of adjusted EBITDA applied by the Group may not be comparable to that applied by other market entities.

Unallocated assets and liabilities concern companies which have not been allocated to any segment. Assets which have not been allocated to the segments comprise cash and trade receivables. Liabilities which have not been allocated to the segments comprise trade liabilities and current corporate tax liabilities.

Note 2.2 Financial results of reporting segments

* 55% of the Group’s share in Sierra Gorda S.C.M.’s financial and production data.
** unit cash cost of payable copper production, reflecting ore mining and processing costs, transport costs, the minerals extraction tax, administrative expenses during the mining phase and smelter treatment and refining charges (TC/RC) less by-product value.
*** Adjusted EBITDA to sales revenue. For the purposes of calculating the Group’s EBITDA margin (26%), the consolidated sales revenue were increased by sales revenues of the segment Sierra Gorda S.C.M.
[5 753 / (20 358 + 1 993) * 100]
**** Adjustments arise from consolidation eliminations and financial data of companies unallocated to any segment.

Financial results of reporting segments for the comparable period

* 55% of the Group’s share in Sierra Gorda S.C.M.’s financial and production data.
** unit cash cost of payable copper production, reflecting ore mining and processing costs, transport costs, the minerals extraction tax, administrative expenses during the mining phase and smelter treatment and refining charges (TC/RC) less by-product value.
*** Adjusted EBITDA to sales revenue. For the purposes of calculating the Group’s EBITDA margin (23%), the consolidated sales revenue were increased by sales revenues of the segment Sierra Gorda S.C.M.

[4 666 / (19 156 + 1 394) * 100]

**** Adjustments arise from consolidation eliminations and financial data of companies unallocated to any segment.

* 55% udziału Grupy Kapitałowej w danych finansowych Sierra Gorda S.C.M.

*55% share of the Group in the financial data of Sierra Gorda S.C.M.

Note 2.3 External sales revenue of the Group – breakdown by products

* 55% of the Group’s share in revenues of Sierra Gorda S.C.M.
** Smelter treatment and refining charges

Note 2.4  External sales revenue of the Group – geographical breakdown reflecting the location of end clients

Note 2.5 Main customers

In the period from 1 January 2017 to 31 December 2017 and in the comparable period the revenues from no single contractor exceeded 10% of the sales revenue of the Group.

Note 2.6 Non-current assets – geographical breakdown

The following were also recognised in non-current assets: joint ventures accounted for using the equity method, derivatives, other instruments measured at fair value, other financial and non-financial assets and deferred tax assets.

Note 2.7 Information on segments' results

The segment KGHM Polska Miedź S.A.

In 2016, the adjusted EBITDA of the segment KGHM Polska Miedź S.A. amounted to PLN 3 551 million, which represents a decrease of 15% as compared to the level recorded in the previous year (EBITDA in the amount of PLN 4 163 million).

The decrease in the operating result is mainly the result of lower copper prices, which were partially offset by a USD/PLN exchange rate more favourable for the Parent Entity. The temporary limitation of production related to bringing the flash furnace on-line, which replaced the shaft furnace at the Głogów I Copper Smelter and Refinery, was also of significance as it contributed to the decrease in sales volume, and therefore sales revenue of copper and silver. This decrease was, to a certain degree, offset by selling copper concentrate (132 thousand tonnes of dry weight). Moreover, in 2016 the adjustments due to settlement of hedging transactions which increased revenues was lower, by PLN 479 million, than the amount recorded in the comparable prior year period. As a result of the aforementioned factors, revenues from sales were lower by PLN 827 million as compared to 2015.
Cost of sales, selling costs and administrative expenses did not change significantly and amounted to PLN 12 517 million.

In 2016, the Parent Entity’s financial result was mainly impacted by impairment losses on non-current assets in the amount of PLN 6 197 million, including PLN 4 856 million on investments in subsidiaries, and PLN 1 130 million on loans granted. As a result, this segment’s loss for the period amounted to PLN 4 085 million, which is a decrease in the financial result as compared to 2015 by PLN 1 297 million.
The production and financial results of KGHM Polska Miedź S.A. are described in more detail in section 7 of the Management Board’s report on the activities of KGHM Polska Miedź S.A  and KGHM Polska Miedź S.A. Group in 2016.

The segment KGHM INTERNATIONAL LTD.

In 2016, the adjusted EBITDA of the segment KGHM INTERNATIONAL LTD. amounted to PLN 614 million, which represents an increase by PLN 245 million as compared to the previous year.
The increase in the segment’s operating results was impacted by a decrease in costs of sales, selling costs and administrative expenses, i.e. as a result of undertaken saving initiatives.
In 2016, the segment’s loss for the period in the amount of PLN 6 828 million was mainly impacted by recognising impairment losses on non-current assets and share of losses of Sierra Gorda S.C.M. accounted for using the equity method in the total net amount of PLN 6 734 million.
The production and financial results of the KGHM INTERNATIONAL LTD. Group are described in more detail in section 8 of the Management Board’s report on the activities of KGHM Polska Miedź S.A  and KGHM Polska Miedź S.A. Group in 2016.

The segment Sierra Gorda S.C.M.

The adjusted EBITDA of the segment Sierra Gorda (55% share) amounted to PLN 189 million, which represents a significant increase as compared to the negative EBITDA recorded in 2015 in the amount of PLN 101 million. It should be noted however, that the results for 2015 concern the second half of that year, i.e. since commercial production started. Moreover, in 2016 the company continued activities aimed at improving the stability of the technological parameters of ore processing and concentrate production, most of all of molybdenum, the recovery of which is below our expectations.

The segment recorded a loss for the period in the amount of PLN 6 015 million, which represents a 55% share of losses of Sierra Gorda S.C.M.
The main factor responsible for the negative net result is the impairment loss on non-current assets. Proportionally to the share in the company, the impairment loss amounted to PLN 6 728 million before taxation and PLN 4 874 million net of tax. The next significant factor was accrued interest on the owner loan granted to finance the mine’s construction.
The production and financial results of Sierra Gorda S.C.M. are described in more detail in section 9 of the Management Board’s report on the activities of KGHM Polska Miedź S.A  and KGHM Polska Miedź S.A. Group in 2016.