6. Involvement in joint ventures
|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
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.
Valuation of involvement in joint venture Sierra Gorda S.C.M.
At the end of the reporting period, the Group performed a valuation of its involvement in Sierra Gorda, firstly by performing a valuation of the interest in Sierra Gorda S.C.M. using the equity method. The Group’s share (55%) of losses of Sierra Gorda amounted to PLN (6 015) million and was higher than the carrying amount of the joint venture by PLN 4 816 million. After recognising the share of losses in the amount of PLN (1 199) million, the carrying amount of the interest in Sierra Gorda amounts to 0. In accordance with the accounting policies, the Group ceases to recognise its share of further losses of Sierra Gorda S.C.M.
However, due to operating results of Sierra Gorda and a significant change in parameters of international mining assets, such as mine lives, metals production volumes, assumed operating costs and the level of capital expenditures during a mine’s life the Group performed an impairment testing of involvement in joint venture Sierra Gorda, the carrying amount of which amounted to USD 2 083 million (PLN 8 707 million at the average exchange rate as at 30 December 2016 announced by the NBP) and was the value of loan granted to the joint venture.
To determine the recoverable amount in the performed test, the fair value measurement of the tested asset was made (less costs to sell) making use of the DCF method, i.e. the method of discounted cash flows.
As a result of the performed test, the loan’s fair value was determined to be at the level of USD 1 032 million (PLN 4 313 million at the average exchange rate as at 30 December 2016 announced by the NBP). The carrying amount was higher than the fair value of a loan granted, and therefore an impairment allowance was recognised in the amount of USD 1 051 million (PLN 4 394 million at the average exchange rate as at 30 December 2016). Assumptions concerning the price curves were adopted while taking into account the professional judgment of the Parent Entity’s Management Board with respect to the future fluctuations of these amounts which was reflected in the calculation of the recoverable amount. Assumptions adopted for testing were described in Part 3.
The loan granted to Sierra Gorda is not a net investment in the joint venture Sierra Gorda S.C.M. (as defined in IAS 21.15) because settling the loan is expected by the Group and planned to take place in the foreseeable future.
Note 6.1 Joint ventures accounted for using the equity method
|Sierra Gorda S.C.M.||Other
entities||Total||Sierra Gorda S.C.M.||Other entities||Total|
|At the beginning of the financial year||534||28||562||4 333||30||4 363|
|Acquisition of shares||671||-||671||928||-||928|
|Share of losses of joint ventures accounted for using the equity method||(1 199)||( 1)||(1 200)||(4 455)||( 2)||(4 457)|
|Impairment loss on interest in a joint venture||-||-||-||( 671)||-||( 671)|
|Elimination of unrealised gains between the investor and the joint venture||-||-||-||( 110)||-||( 110)|
|Exchange differences from the translation of a foreign operation||( 6)||-||( 6)||509||-||509|
|At the end of the financial year||-||27||27||534||28||562|
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|
| ||Sierra Gorda S.C.M.||Chile||55||50||-||534|
| ||Other||Poland|| || ||27||28|
|6.1||Total|| || || ||27||562|
Condensed financial data of Sierra Gorda S.C.M. is presented in the table below.
|Non-current assets||15 348||21 774|
|Current assets, including:||1 352||1 076|
|Cash and cash equivalents||382||183|
|Non-current liabilities, including:||21 011||18 762|
|Liabilities due to bank loans||2 967||3 160|
|Liabilities due to loans granted by jointly-controlling entities||15 795||13 616|
|Current liabilities, including:||2 408||1 698|
|Liabilities due to bank loans||374||330|
|Fair value of net assets||(6 719)||2 390|
|The Group’s share in net assets (55%)||(3 695)||1 315|
|Value of unrecognised losses from Sierra Gorda S.C.M. investment||4 816||-|
|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||( 340)||-|
|Value of the investment in the consolidated statement of financial position||-||534|
|Sales revenue||2 534||1 105|
|Depreciation/amortisation||(1 533)||( 671)|
|Impairment loss on property, plant and equipment||(12 233)||(7 999)|
|Interest costs||(1 464)||( 644)|
|Other incomes/(costs)||(2 347)||(1 331)|
|Loss before income tax||(15 043)||(9 540)|
|Income tax||4 107||1 440|
|Loss for the period||(10 936)||(8 100)|
|Total comprehensive income||(10 936)||(8 100)|
|The Group’s share (55%) in loss for the period, of which:||(6 015)||(4 455)|
|recognised share of joint ventures’ losses||(1 199)||(4 455)|
|not recognised share of joint ventures’ losses||(4 816)||-|
|Note||Other information on the Group’s involvement in the joint venture Sierra Gorda S.C.M.|
|Group’s share in commitments (investment and operating)||2 579||2 510|
|Group’s share in the total amount of future minimal payments due to leasing agreements for mining equipment||1 044||1 094|
|12.5||Guarantees granted by the Group||1 289||855|
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|
|At the beginning of the financial year||7 504||6 231|
|4.4||Allowance for impairment of loans granted||(4 394)||-|
|Exchange differences from the translation of a foreign operation||570||807|
|At the end of the financial year||4 313||7 504|
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, the Group performed impairment testing of mining assets and recognised an allowance for impairment of loans granted in the amount of PLN 4 394 million (Part 3).
Loans are granted to Sierra Gorda S.C.M. 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.