Note 8.1 Capital management policy

Capital management in the Company is aimed at securing funds for business development and maintaining the appropriate level
of liquidity. To this end, the Management Board of the Company analyses ratios calculated on the basis of consolidated financial data.
In accordance with market practice, the Company monitors the Group’s capital, among others using  ratios presented in the table below, which were calculated on the basis of data presented in the Consolidated Financial Statements of the KGHM Group for 2017:

*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, 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, in the long-term, 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 signing of these financial statements, the Company’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 Company has not issued preference shares. Each share grants the right to one vote at the general meeting. The Company does not have treasury shares. Subsidiaries do not have shares of KGHM Polska Miedź S.A.

In the years ended 31 December 2017 and 31 December 2016 there were no changes in either registered share capital or in the number of issued shares.

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 Company.

As far as the Company’s is aware, as at 31 December 2017 and as at the date of signing of these financial statements, the Company’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 Company 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 Company amounts to PLN 660 million, and is recognised in retained earnings in reserve capital item created in accordance with the art. 396 of Commercial Partnerships and Companies Code. Information related to dividends paid may be found in Note 12.2.

Note 8.3 Liquidity management policy

The Management Board is responsible for financial liquidity management in the Company and  compliance with adopted policy.
The Financial Liquidity Committee is a unit supporting the Management Board in this regard.
The management of financial liquidity is performed in accordance with the Financial Liquidity Management Policy (Policy) approved by the Management Board. This document describes in a comprehensive way the process of managing the Company's financial liquidity, indicating the best practice procedures and instruments. The basic principles resulting from this document are:

• assuring the stable and effective financing of the Company’s activities,
• investment of financial surpluses in safe financial instruments,
• limits for individual financial investment categories,
• limits for the concentration of funds in financial institutions,
• the investment level rating for banks, in which the funds are deposited, and
• effective management of working capital.

Under the process of liquidity management, the Company utilises instruments which enhance its effectiveness. One of the primary instruments used by the Company 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

As at 31 December 2017 liabilities due to borrowing amounted to PLN 7 168 million, or USD 1 998 million, EUR 17 million and PLN 160 million (as at 31 December 2016 the debt amounted to PLN 7 932 million, or USD 1 904 million). The decrease in value of debt in PLN is a result of a lower USD/PLN exchange rate. The structure of debt was on a level similar to the one recorded in 2016. In the current part, under bilateral agreements in the amount of PLN 3 208 million signed with banks, the Company has a constant and ongoing access to working capital facilities and overdraft facilities with maturities of up to 2 years. As a result of the above, and that financing availability of these bilateral agreements is successively extended for subsequent periods, the Company 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.

Note 8.4.3 Detailed information concerning main sources of borrowings

As at 31 December 2017, the Company had open credit lines and an investment loan with a total balance of available financing in the amount of PLN 14 811 million, out of which PLN 7 029 million had been drawn (as at 31 December 2016 the Company had open credit lines and an investment loan with a total balance of available financing in the amount of PLN 15 483 million, out of which PLN 7 959 million had been drawn).

The structure of financing sources is presented below.

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

These sources ensure the availability of external financing in the amount of PLN 14 811 million. Funds available for use from these sources in the amount of PLN 7 782 million fully cover the medium and long-term liquidity needs of the Company and 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 bank loans in the amount of PLN 3 208 million, are unsecured.

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 companies do not have to use their cash in order to secure their liabilities towards other entities. Information on contingent liabilities may be found in Note 12.5.

As at 31 December 2017, the Company held contingent liabilities due to guarantees and letters of credit granted in the total amount of PLN 2 280 million and due to promissory note liabilities in the amount of PLN 160 million.

The most significant items are contingent liabilities 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 (as at 31 December 2016 in the amount of PLN 575 million),
• PLN 174 million as corporate guarantees set as security on the payment of concluded lease agreements (as at 31 December 2016 in the amount of PLN 277 million)*,
• PLN 460 million as corporate guarantees securing repayment of short-term working capital facilities (as at
  31 December 2016 in the amount of PLN 437 million)*,
• 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 credit 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 (as at 31 December 2016 in the amount of PLN 387 million),
• securing the proper execution of future environmental obligations of the Company related to the obligation to restore terrain, following the conclusion of operations of the Żelazny Most tailings storage facility – PLN 160 million in the form of a bank guarantee (as at 31 December 2016 in the amount of PLN 96 million) and PLN 160 million in the form of an own promissory note (as at 31 December 2016 in the amount of PLN 224 million).

Based on knowledge held, at the end of the reporting period the Company 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 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 1.4.4 (e).