3. Impairment of assets
Note 3.1. Impairment testing of the KGHM INTERNATIONAL LTD. Group’s assets
The business of the KGHM INTERNATIONAL LTD. Group’s companies is the mining production of metals (including copper, gold, nickel and platinum) in mines operating in the USA, Canada and Chile, the largest of which are the Sierra Gorda, Robinson, Morrison, Franke and Carlota mines as well as mining projects at the pre-operational stage, of which the most significant are Victoria and Ajax in Canada.
In the current period, due to the identification of indications of the impairment of assets, the Group tested the international mining assets for impairment. A key indication to perform impairment testing was the significant change in parameters of mining assets of the KGHM INTERNATIONAL LTD. Group, such as mine lives, copper production volumes, assumed operating costs and the level of capital expenditures during a mine’s life.
The following CGUs have been selected for the purpose of assessment of recoverable amount of the assets of the KGHM INTERNATIONAL LTD. Group:
- Robinson mine,
- Sudbury Basin, comprising the operating Morrison mine, the McCreedy mine which is in the process of closure and the pre-operational Victoria project,
- Franke mine,
- Carlota mine,
- Involvement in the joint venture Sierra Gorda, and
- the Ajax project.
To determine the recoverable amount of assets in individual CGUs during the testing, their fair value was calculated (less costs to sell), using the DCF method, i.e. the method of discounted cash flows of CGUs: Sudbury, KGHM AJAX, involvement in Sierra Gorda and the value in use of CGUs Robinson, Carlota and Franke.
The fair value was classified to level 3 of the fair value hierarchy.
BASIC MACROECONOMIC ASSUMPTIONS ADOPTED IN THE IMPAIRMENT TESTING | |
|---|---|
| Assumption | Level adopted for testing |
| Copper price | The copper price curve was adopted based on internal macroeconomic assumptions which were prepared based on available multi-year forecasts of financial and analytical institutions. A detailed forecast was prepared for the period 2018 – 2022, while the forecast for subsequent years was estimated, based on a long-term copper price, at the level of 6 614 USD/t. |
OTHER KEY ASSUMPTIONS USED FOR RECOVERABLE AMOUNT ESTIMATION OF ASSETS OF CGUs | ||||||
|---|---|---|---|---|---|---|
| Assumption | Robinson | Sudbury | Franke | Carlota | KGHM AJAX | |
| Mine life / forecast period | 7 years | 18 years | 2 years | 4 years | 19 years | |
| Level of copper production during mine life [kt] | 371 | 282 | 40 | 15 | 1 005 | |
| Average operating margin during mine life | 39% | 57% | 28% | 24,2% | 40% | |
| Capital expenditures to be incurred during mine life [USD million] | 557 | 1 619 | 14 | 7 | 1 629 | |
| Applied discount rate after taxation for assets in the operational phase | 9% | 8% | 11% | 10% | - | |
| Applied discount rate after taxation for assets in the pre-operational phase | - | 11% | - | - | 9,5% | |
| Costs to sell | 2% | |||||
The results of tests conducted as at 31 December 2017 for the CGUs Franke and Carlota confirmed that the value in use of these assets is equal to their carrying amount.
Results of the test performed as at 31 December 2017 are presented in the following table:
| CGUs | Segment (Part 2) | Carrying amount | Recoverable amount | Impairment loss | |||
|---|---|---|---|---|---|---|---|
| USD mn | PLN mn | USD mn | PLN mn | USD mn | PLN mn | ||
| Robinson* | KGHM INTERNATIONAL LTD. | 180,6 | 628,7 | 278,6 | 969,9 | (98) | (341,2) |
| Sudbury | 323,4 | 1 125,9 | 202,1 | 703,6 | 121,3 | 422,3 | |
| KGHM AJAX MINING INC. | 88,3 | 307,4 | 24,3 | 84,6 | 64,0 | 222,8 | |
| Razem | | 87,3 | 303,9 | ||||
*Increase in the recoverable amount caused mainly by extending the mine’s life
Recognitions/(reversals) of impairment loss were recognised in the following items of the consolidated statement of profit or loss:
| Cost of sales | (257) |
| Other operating costs | 770 |
| Other operating income | (41) |
| Income tax on recognised impairment losses | (168) |
| Total impairment losses, net | 304 |
Note 3.2 Water rights – intangible assets not yet available for use
In the Group, water rights in Chile are annually subjected to impairment testing by comparing their carrying amount to the recoverable amount, which is set as fair value less costs to sell. The fair value of water rights is classified under level 2 of the fair value hierarchy, in which fair value measurements are based on significant observable input data, other than market prices.
For the year ended on 31 December 2017, the Group assessed the financial indicators and came to the conclusion that there is no need to recognise an impairment loss, as the estimated amount of water available for extraction did not change compared to the amount estimated as at 31 December 2016.
Note 3.3 Impairment testing of intangible assets with an indefinite useful life
In 2016, the Group recognised an impairment loss in the amount of PLN 148 million on water rights as limitations arose concerning the amount of water which could be obtained from water sources held in Chile.
Note 3.4 Other impairment losses on assets
Other impairment losses on assets concern:
- available-for-sale financial assets – PLN 57 million (Note 7.3),
- fixed assets under construction and other intangible assets not yet available for use – PLN 18 million,
- other property, plant and equipment and intangible assets – PLN 27 million,
- write-down of inventories – PLN 83 million.
- allowance for impairment of receivables – PLN 10 million.
Information on where impairment losses were recognised in the consolidated statement of profit or loss may be found in note 4.4.