6. Involvement in joint ventures

in PLN millions, unless otherwise stated

Accounting policies
The item involvement in joint ventures comprises investments in joint ventures accounted for using the equity method and loans granted to a joint venture. The Group classifies as investments accounted for using the equity method the interest in joint ventures which are joint contractual arrangements, in which the parties sharing control have the right to the net assets of a given entity. Joint control occurs when decisions on relevant activities of joint ventures require unanimous consent of the parties sharing control. Investments are initially recognised at cost. The Group’s share in profit or loss of entities accounted for using the equity method (assessed while taking into account the impact of measurements to fair value at the investment’s acquisition date) from the acquisition date is recognised in profit or loss, and its share in changes of accumulated other comprehensive income from the acquisition date – in the relevant item of accumulated comprehensive income. Unrealised gains and losses on transactions between the investor and the joint venture are eliminated in the amount proportional to the investor’s share in these profits/losses. If there are any indications of impairment, an investment is tested for impairment by calculating the recoverable amount in accordance with the policy presented in Part 3. Loans granted to a joint venture do not meet the criteria of recognition as net investments in a joint venture. Loans are initially recognised at fair value and measured at the reporting date at amortised cost, including impairment losses.

Accounting policies

The item involvement in joint ventures comprises investments in joint ventures accounted for using the equity method and loans granted to a joint venture.
The Group classifies as investments accounted for using the equity method the interest in joint ventures which are joint contractual arrangements, in which the parties sharing control have the right to the net assets of a given entity. Joint control occurs when decisions on relevant activities of joint ventures require unanimous consent of the parties sharing control.

Investments are initially recognised at cost. The Group’s share in profit or loss of entities accounted for using the equity method (assessed while taking into account the impact of measurements to fair value at the investment’s acquisition date) from the acquisition date is recognised in profit or loss, and its share in changes of accumulated other comprehensive income from the acquisition date – in the relevant item of accumulated comprehensive income.
Unrealised gains and losses on transactions between the investor and the joint venture are eliminated in the amount proportional to the investor’s share in these profits/losses.
If there are any indications of impairment, an investment is tested for impairment by calculating the recoverable amount in accordance with the policy presented in Part 3.

Loans granted to a joint venture do not meet the criteria of recognition as net investments in a joint venture. Loans are initially recognised at fair value and measured at the reporting date at amortised cost, including impairment losses.

Significant estimates and assumptions
Joint control

The Group classifies the agreement “JV Sierra Gorda” as a joint venture under IFRS 11, in which KGHM INTERNATIONAL LTD’s share equals 55%, and which was entered into in order to mine copper and molybdenum in the Sierra Gorda area (Chile).
Classification of Sierra Gorda S.C.M. as a joint venture, despite the 55% share of the Group, was made based on analysis of the terms of the agreements between the parties and contractual stipulations which indicated joint control. Pursuant to the terms of the agreements, all relevant activities of Sierra Gorda S.C.M. require the unanimous consent of both owners. The Group and other owners have three members each in the appointed Owners Council. The Owners Council makes strategic decisions and is responsible for overseeing their execution. Moreover, it approves the appointment of senior management. In the reporting period, there were no changes to provisions that were the basis of classifying the investment as a joint venture.

Note 6.1 Joint ventures accounted for using the equity method

	2017			2016
	Sierra Gorda S.C.M.	Other entities	Total	Sierra Gorda S.C.M.	Other entities	Total
At the beginning of the financial year	-	27	27	534	28	562
Acquisition of shares	461	-	461	671	-	671
Share of losses of joint ventures accounted for using the equity method	( 474)		( 474)	(1 199)	(1)	(1 200)
Liquidation of a joint venture	-	(19)	(19)	-	-	-
Exchange differences from the translation of a foreign operation	13	-	13	(6)	-	(6)
At the end of the financial year	-	8	8	-	27	27

	2017	2016
The Group’s share (55%) in loss for the period, of which:	( 525)	(6 015)
recognised share of joint ventures’ losses	( 474)	(1 199)
not recognised share of joint ventures’ losses	( 51)	(4 816)

Information on entities accounted for using the equity method

Note	Jointly controlled entities	Main place of business	% of share capital held by the Group	% of voting power	Value of the investment in the consolidated statement of financial position
Note	Jointly controlled entities	Main place of business	% of share capital held by the Group	% of voting power	2017	2016
	Sierra Gorda S.C.M.	Chile	55	50	-	-
	Other	Poland			8	27
6.1	Total				8	27

Condensed financial data of Sierra Gorda S.C.M. is presented in the table below.

	2017	2016
Non-current assets	13 524	15 348
Current assets, including:	1 228	1 352
Cash and cash equivalents	358	382
Non-current liabilities, including:	17 928	21 011
Liabilities due to bank loans	1 915	2 967
Liabilities due to loans granted by jointly-controlling entities	14 244	15 795
Current liabilities, including:	2 509	2 408
Liabilities due to bank loans	533	374

Fair value of net assets	(5 685)	(6 719)
The Group’s share in net assets (55%)	(3 126)	(3 695)
Cumulatively unrecognised share of losses of Sierra Gorda S.C.M.	4 867	4 816
Balance of impairment loss on interest in Sierra Gorda S.C.M.	(671)	( 671)
Adjustment by the value of unrealised gains	( 110)	( 110)
Exchange differences from the translation of changes of investment in Sierra Gorda S.C.M. using exchange rates from prior periods	(960)	( 340)
Value of the investment in the consolidated statement of financial position	-	-

Sales revenue	3 623	2 534
Depreciation/amortisation	( 845)	(1 533)
Impairment loss on property, plant and equipment	-	(12 233)
Interest costs	(1 419)	(1 464)
Other incomes/(costs)	(2 579)	(2 347)
Loss before income tax	(1 220)	(15 043)
Income tax	265	4 107
Loss for the period	( 955)	(10 936)
Total comprehensive income	( 955)	(10 936)

Note		Other information on the Group’s involvement in the joint venture Sierra Gorda S.C.M.
Note		2017	2016
	Group’s share in commitments (investment and operating)	2 248	2 579
	Group’s share in the total amount of future minimal payments due to leasing agreements for mining equipment	777	1 044
12.5	Guarantees granted by the Group	1 740	1 289

Note 6.2 Loans granted to joint ventures (Sierra Gorda S.C.M.)

Accounting policies	Significant estimates and assumptions
Assets included, in accordance with IAS 39, in the category “loans and receivables” are initially recognised at fair value and measured at the reporting date at amortised cost using the effective interest rate, reflecting impairment.	The terms of repayment of loans granted to finance operations abroad, including planned repayment dates, were set in individual agreements. Pursuant to the schedule, the principal amount and interest are paid on demand, but not later than 15 December 2024. The start of repayment of loans by Sierra Gorda S.C.M. will depend on the company’s financial standing. It is assumed in the long-term plans of Sierra Gorda S.C.M. that the loans will be repaid with interest. Due to the fact that settling the loan is planned and probable in the foreseeable future, the loan is not a net investment under IAS 21.15

Accounting policies

Significant estimates and assumptions

Assets included, in accordance with IAS 39, in the category “loans and receivables” are initially recognised at fair value and measured at the reporting date at amortised cost using the effective interest rate, reflecting impairment.

The terms of repayment of loans granted to finance operations abroad, including planned repayment dates, were set in individual agreements. Pursuant to the schedule, the principal amount and interest are paid on demand, but not later than 15 December 2024. The start of repayment of loans by Sierra Gorda S.C.M. will depend on the company’s financial standing. It is assumed in the long-term plans of Sierra Gorda S.C.M. that the loans will be repaid with interest. Due to the fact that settling the loan is planned and probable in the foreseeable future, the loan is not a net investment under IAS 21.15

Note		2017	2016
	At the beginning of the financial year	4 313	7 504
	Accrued interest	319	633
4.4	Allowance for impairment of loans granted	-	(4 394)
	Exchange differences from the translation of a foreign operation	( 743)	570
	At the end of the financial year	3 889	4 313

Credit risk related to the loans granted depends on the risk related to realisation of the mining joint venture in Chile (Sierra Gorda S.C.M.). Due to the identified indications, in 2016 the Group performed impairment testing of mining assets and as at 31 December 2016 recognised an allowance for impairment of loans granted in the amount of PLN 4 394 million.

Loans granted to Sierra Gorda S.C.M. are in the functional currency of the KGHM INTERNATIONAL LTD. Group and therefore they are not associated with the currency risk.

These loans’ interest rates are fixed and therefore they are exposed to changes in fair value due to interest rates volatility. As the loans are measured at amortised cost, changes in their fair values are not recognised in the consolidated financial statements of the Group.