Note 8.1 Capital management policy

Capital management in the Group is aimed at securing funds for business development and maintaining the appropriate level of liquidity.
In accordance with market practice, the Group monitors its capital, among others on the basis of ratios presented in the table below:

* adjusted EBITDA for the period of 12 months ended on the last day of the reporting period and does not include the EBITDA of the joint venture Sierra Gorda S.C.M.
In the management of liquidity and capital, the Group pays also attention to adjusted operating profit for the period of 12 months ended on the last day of the reporting period, which is the basis for calculating the financial covenants and which is comprised of the following items:

* presented amount does not include impairment loss on interest in joint ventures and loans granted to joint ventures

In order to maintain financial liquidity and the creditworthiness to acquire external financing at an optimum cost, the Group aims to maintain the equity ratio at a level of not less than 0.5, and the ratio of Net Debt/EBITDA at a level of up to 2.0.

Note 8.2 Equity

Note 8.2.1 Share capital

As at 31 December 2017 and at the date of authorisation of these financial statements, the Parent Entity’s share capital, in accordance with the entry in the National Court Register, amounted to PLN 2 000 million and was divided into 200 000 000 shares, series A, fully paid, each  having a face value of PLN 10. All of the shares are bearer shares. The Parent Entity has not issued preference shares. Each share grants the right to one vote at the general meeting. The Parent Entity does not have treasury shares. Subsidiaries and joint ventures do not have shares of KGHM Polska Miedź S.A.

As at 31 December 2017 and as at 31 December 2016, there were no changes in either registered share capital or in the number of outstanding shares issued.

In 2017 there were no changes in the ownership of significant blocks of shares of KGHM Polska Miedź S.A. In 2016, Nationale-Nederlanden Otwarty Fundusz Emerytalny (managed by Nationale-Nederlanden Powszechne Towarzystwo Emerytalne S.A.) exceeded 5% threshold in the total number of votes at the General Meeting of the Parent Entity.

As far as the Parent Entity is aware, as at 31 December 2017 and as at the date of authorisation of these financial statements, the Parent Entity’s shareholder structure was as follows:

Note 8.2.2 Changes of other equity items 

Based on the Act of 15 September 2000, the Commercial Partnerships and Companies Code, the Parent Entity is required to create reserve capital for any potential (future) or existing losses, to which no less than 8% of a given financial year’s profit is transferred until the reserve capital has been built up to no less than one-third of the registered share capital. The reserve capital created in this manner may not be employed otherwise than in covering the loss reported in the financial statements.

As at 31 December 2017 the statutory reserve capital in the Group’s entities amounts to PLN 793 million, of which PLN 660 million relates to the Parent Entity.

Information related to dividends paid may be found in Note 12.2.

Note 8.3 Liquidity management policy

The Management Board of the Parent Entity is responsible for financial liquidity management in the Group and compliance with adopted policy. The Financial Liquidity Committee is a unit supporting the Management Board in this regard.

The management of financial liquidity in the Parent Entity is performed in accordance with the Financial Liquidity Management Policy approved by the Management Board. In KGHM INTERNATIONAL LTD. liquidity management principles are described in the Investment Policy. These documents describe the process of managing the Group's financial liquidity, indicating the best practice procedures and instruments. The basic principles resulting from this documents are:

• assuring the stable and effective financing of the Group’s activities,
• investment of financial surpluses in safe instruments,
• compliance with limits for individual financial investment categories,
• compliance with limits for the concentration of funds in financial institutions, and
• effective management of working capital.

Under the process of liquidity management, the Group utilises instruments which enhance its effectiveness. One of the primary instruments used by the Group is the Cash Pool service, managed both locally in PLN, USD and EUR and internationally in USD. The Cash Pool service is aimed at optimising the management of cash resources, enabling control of interest costs, the effective financing of current working capital needs and the support of short-term financial liquidity in the Group.

Note 8.3.1 Contractual maturities for financial liabilities

Financial liabilities – as at 31 December 2017

Financial liabilities – as at 31 December 2016

 *Financial liabilities arising from derivatives are calculated at their intrinsic values excluding the discount effect.

Note 8.4 Borrowings

Note 8.4.1 Net debt

* Presented amounts include the preparation fee paid which decreases financial liabilities due to bank loans

Borrowings by currency (translated into PLN) and by type of interest rate

* Presented amounts do not include the preparation fee paid which decreases financial liabilities due to bank loans

In 2017, liabilities due to borrowing increased, the structure of debt has changed, i.e. the amount of non-current liabilities has increased, while the amount of current liabilities has decreased. In the current part, under bilateral agreements signed with banks, the Group makes use of working capital facilities and overdraft facilities with maturities of up to 2 years. As a result of the fact that these bilateral agreements are successively extended for subsequent periods, the Group considers the liquidity risk connected to the received short-term bank loans as low.

Note 8.4.2 Net debt changes

Currency risk and interest rate risk are related to borrowings. A description of exposures to financial risks may be found in Note 7.5.

The fair value of liabilities due to borrowings amounts to PLN 7 167 million (2016: PLN 8 102 million). The fair value was set based on discounted cash flows and was classified to level 2 of the fair value hierarchy.

Note 8.4.3 Detailed information concerning main sources of borrowings

As at 31 December 2016, the Group had open credit lines and loans with a total balance of available financing in the amount of PLN 15 784 million, out of which PLN 8 075 million had been drawn.
The structure of financing sources is presented below.

* Presented amounts do not include the preparation fee paid which decreases financial liabilities due to bank loans

These sources fully cover the current, medium and long-term liquidity needs of the Group.

The syndicated credit in the amount of USD 2 500 million, the investment loans in the amount of PLN 2 900 million and other bilateral bank loans granted to the Parent Entity in the amount of PLN 3 208 million, are unsecured.
Repayment of other liabilities of the Group due to bilateral bank loans and other loans in the amount of PLN 198 million are secured amongst others by proxy rights to bank accounts, statements on submitting to an enforcement regime, contractual mortgages, registered pledges or the assignment of receivables.

Note 8.5 Cash and cash equivalents

Note 8.6 Contingent liabilities due to guarantees granted

Guarantees and letters of credit are an essential financial liquidity management tool of the Group, thanks to which the Group’s companies do not have to use cash in order to secure their obligations towards other entities.

As at 31 December 2017, the Group held contingent liabilities due to guarantees and letters of credit granted in the total amount of PLN 2 325 million and due to promissory note liabilities in the amount of PLN 173 million.

The most significant items are contingent liabilities of the Parent Entity aimed at securing the following obligations:

Sierra Gorda S.C.M. – securing the performance of concluded agreements in the amount of PLN 1 740 million:

• a letter of credit of PLN 479 million granted as security for the proper performance of a long-term contract for the off-take of electricity,
• PLN 174 million as corporate guarantees set as security on the payment of concluded lease agreements,
• PLN 460 million as corporate guarantees securing repayment of short-term working capital facilities,
• PLN 627 million as a corporate guarantee securing repayment of a specified part of payment to guarantees set by Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, securing repayment of a corporate loan drawn by the joint venture Sierra Gorda S.C.M. (granted in the first half of 2017).

other entities:

• securing the restoration costs of the Robinson mine, the Podolsky mine and the Victoria project and obligations related to proper execution of concluded agreements in the amount of PLN 380 million,
• securing the proper execution of future environmental obligations of the Parent Entity related to the obligation to restore terrain, following the conclusion of operations of the Żelazny Most tailings storage facility in the total amount of PLN 320 million (a bank guarantee of PLN 160 million and own promissory note of PLN 160 million).

Based on knowledge held, at the end of the reporting period the Group assessed the probability of payments resulting from contingent liabilities related to:

-   Sierra Gorda S.C.M. - as low,

-   other entities of the Group - as low.

As part of the analysis of the impact of IFRS 9 on the financial statements with respect to the financial guarantees granted to Sierra Gorda, in the Company’s opinion it is necessary to recognise the aforementioned guarantees in the accounting books as per paragraph 4.2.1 point c of IFRS 9. Detailed information may be found in Note 1.4.1.4 (e).