3. Impairment of assets
3.0 - Impairment of assets
In the current period, due to the change in key assumptions used for estimating the Company’s capital involvement (shares in Future 1) and loans granted to Future 1 and the KGHM INTERNATIONAL LTD. Group., the Company performed an impairment testing of these assets. Significant changes to parameters of mining assets of the KGHM INTERNATIONAL LTD. Group concerned the mine lives, copper production volumes, assumed operating costs and the level of capital expenditures during a mine’s life. In order to assess the impairment, the fair value of the investment in KGHM INTERNATIONAL LTD. was estimated based on the sum of the fair values of individual CGUs within KGHM INTERNATIONAL LTD., decreased by liabilities and increased by other assets.
The value of shares in Future 1 is recognised at cost and as at 31 December 2017 amounted to PLN 1 367 million, while the carrying amount of loans granted to the KGHM INTERNATIONAL LTD. Group, together with interest, amounted to PLN 5 556 million.
The following CGUs have been selected for the purpose of assessment of the recoverable amount of the assets of the KGHM INTERNATIONAL LTD. Group:
- the Robinson mine,
- the Sudbury Basin, comprising the operating Morrison mine, the McCreedy mine which is in the process of closure and the pre-operational Victoria project,
- the Franke mine,
- the 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 and the value in use of CGUs Robinson, Carlota and Franke. For the Ajax project, in accordance with the prudent valuation principle, an additional, upper limit was adopted for the measurement which is at the level of the value of real estate of this CGU.
As for the recoverable amount of the involvement in Sierra Gorda, due to a lack of indications of changes in the recoverable amount, it was recognised at its carrying amount.
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% | ||||
Results of the test performed as at 31 December 2016 are presented in the following table:
| Test elements | PLN million |
|---|---|
| Discounted future cash flows of KGHM INTERNATIONAL LTD.(Enterprise value) 1 750 mln USD * 4,1793 | 6 017 |
| Estimated costs to sell | 30 |
| Recoverable amount of investment in KGHM INTERNATIONAL LTD.(Enterprise value) | 5 987 |
| Carrying amount of loans granted to the KGHM INTERNATIONAL LTD. Group, together with interest | 5 556 |
| Carrying amount of shares in Future 1 | 1 367 |
| Impairment losses on shares in Future 1 | 330 |
| Allowances for impairment on receivables due to loans granted to the KGHM INTERNATIONAL LTD Group | 606 |
* Impairment loss and allowances for impairment are a result of impairment of mining assets in Canada and USA, and therefore they do not have an impact on the recoverable amount of assets in Chile. It means that, from the point of view of separate financial statements of KGHM Polska Miedź S.A., the estimated cash flows from KGHM International (loans granted to KGHM International) and Future 1 Sp. z o.o. (loans granted by Future 1 to KGHM International) were worsened. As the result, the impairment loss of PLN 936 million was allocated to loans granted to KGHM International and shares in Future 1, proportionally to the contractual values of loans granted by KGHM Polska Miedź S.A. and Future 1 to KGHM INTERNATIONAL LTD.
Note 3.1 Impairment testing of shares in the subsidiary Future 1 Sp. z o.o. and loans granted to the KGHM INTERNATIONAL LTD. Group
In the current period, due to the change in key assumptions used for estimating the Company’s capital involvement (shares in Future 1) and loans granted to Future 1 and the KGHM INTERNATIONAL LTD. Group., the Company performed an impairment testing of these assets. Significant changes to parameters of mining assets of the KGHM INTERNATIONAL LTD. Group concerned the mine lives, copper production volumes, assumed operating costs and the level of capital expenditures during a mine’s life. In order to assess the impairment, the fair value of the investment in KGHM INTERNATIONAL LTD. was estimated based on the sum of the fair values of individual CGUs within KGHM INTERNATIONAL LTD., decreased by liabilities and increased by other assets.
The value of shares in Future 1 is recognised at cost and as at 31 December 2017 amounted to PLN 1 367 million, while the carrying amount of loans granted to the KGHM INTERNATIONAL LTD. Group, together with interest, amounted to PLN 5 556 million.
The following CGUs have been selected for the purpose of assessment of the recoverable amount of the assets of the KGHM INTERNATIONAL LTD. Group:
- the Robinson mine,
- the Sudbury Basin, comprising the operating Morrison mine, the McCreedy mine which is in the process of closure and the pre-operational Victoria project,
- the Franke mine,
- the 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 and the value in use of CGUs Robinson, Carlota and Franke. For the Ajax project, in accordance with the prudent valuation principle, an additional, upper limit was adopted for the measurement which is at the level of the value of real estate of this CGU.
As for the recoverable amount of the involvement in Sierra Gorda, due to a lack of indications of changes in the recoverable amount, it was recognised at its carrying amount.
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 2017 – 2021, 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 | Sierra Gorda | KGHM AJAX |
| Mine life / forecast period | 6 years | 19 years | 5 years | 4 years | 24 years | 19 years |
| Level of copper production during mine life [kt] | 257 | 305 | 88 | 9 | 4 352 | 1 005 |
| Average operating margin during mine life | 31% | 61% | 7% | 24% | 36% | 39% |
| Capital expenditures to be incurred during mine life [USD million] | 316 | 1 616 | 6 | 1 | 2 040 (to be
incurred mainly in the years 2017-2019) | 1 635 |
| Applied discount rate after taxation for assets in the operational phase | 9% | 8% | 11% | 10% | 8% | - |
| Applied discount rate after taxation for assets in the pre-operational phase | - | 11% | - | - | - | 8% |
| Costs to sell | 2% | |||||
Results of the test performed as at 31 December 2016 are presented in the following table:
| Test elements | PLN million |
|---|---|
| Discounted future cash flows of KGHM INTERNATIONAL LTD.(Enterprise value) 1 750 mln USD * 4,1793 | 7 313 |
| Estimated costs to sell | 30 |
| Recoverable amount of investment in KGHM INTERNATIONAL LTD.(Enterprise value) | 7 283 |
| Carrying amount of loans granted to the KGHM INTERNATIONAL LTD. Group, together with interest | 8 413 |
| Carrying amount of shares in Future 1 | 4 770 |
| Impairment losses on shares in Future 1 | 4 770 |
| Allowances for impairment on receivables due to loans granted to the KGHM INTERNATIONAL LTD Group | 1 130 |
Impairment loss identified during testing was primarily allocated to the shares in Future 1 (PLN 4 770 million), while the remaining part of the impairment, in the amount of PLN 1 130 million, was recognised in loans granted to the KGHM INTERNATIONAL LTD. Group. Impairment losses and allowances for impairment were recognised in the item other operating costs of the statement of profit or loss (Note 4.2).
Note 3.2 Impairment testing of shares in the subsidiary KGHM Metraco S.A.
The following indications to perform impairment testing were identified in the current reporting period:
- identified impairment of assets of KGHM Metraco S.A.,
- a decrease in expected future cash flows,
- a forecasted value of net assets of KGHM Metraco S.A. lower than the carrying amount of the investment in KGHM Polska Miedź S.A.’s accounting books.
For purposes of estimating the recoverable amount during this testing a fair value measurement of these shares was made, using the DCF (discounted cash flow) method.
The fair value was classified to level 3 of the fair value hierarchy.
BASIC ASSUMPTIONS ADOPTED IN THE IMPAIRMENT TESTING | |
|---|---|
| Assumption | Level adopted for testing |
| Forecast period | A detailed forecast period of 5 years was adopted for the years 2017-2021, on the basis of the assumptions of Metraco S.A.’s plan approved by the Supervisory Board of the company. |
| Average operating margin during the forecast period | 0,28% |
| Capital expenditures during the forecast period | PLN 64 million |
| Discount rate | 5.8% - this is the real discount rate, due to the fact that cash flows adopted in the model were in real terms. |
| Rate of increase after the forecast period | 1% |
As a result of impairment testing of the shares of KGHM Metraco S.A., the recoverable amount was set at PLN 335 million, which is lower than the carrying amount of the investment (PLN 421 million), and therefore it constituted a basis to recognise an impairment loss on the investment in the shares of KGHM Metraco S.A. in the amount of PLN 86 million, i.e. in the amount of the identified impairment.
Note 3.3 Impairment testing of exploration and evaluation assets
Pursuant to IFRS 6, in the current reporting period the Company conducted an analysis aimed at identifying indications of impairment of exploration and evaluation assets (intangible assets not yet available for use).
As a result of the analysis conducted for projects:
- „Exploration and economic assessment of copper mineralisation in the Synklina Grodziecka region” – carrying amount of PLN 118 million,
- „Production of synthetic gas through the underground gasification of brown coal in the Copper Belt (LGOM)”– carrying amount of PLN 18 million,
In the Company’s opinion, work on these projects did not result in identifying mineral reserves and resources that would be commercially significant, which provides the basis to recognise an impairment loss. The identified impairment loss in the amount of PLN 136 million was recognised in the item other operating costs of the statement of profit or loss (Note 4.2).
Note 3.4 Other impairment losses on assets
Other impairment losses on assets concern:
- available-for-sale assets – PLN 57 million (Note 7.3),
- fixed assets under construction and other intangible assets not yet available for use – PLN 18 million,
- write-down of inventories –PLN 59 million.
Information on where impairment losses were recognised in the statement of profit or loss may be found in note 4.4.