How do we create value?
The KGHM Group’s broad business model enables us to consistently and effectively integrate all the stages of value creation for our clients. Our experience and competencies bring together the specific links in the value chain of our mining organization.
Selected social components in the value chain which define our responsible business model:
Trends and market environment
- Economic recovery in developed countries; recovery of the Chinese economy is most important for our operations.
- The transformation of the Chinese economy and attempts at its modernization. The year 2016 brought a slight deceleration in the GDP growth to 6.7% (compared with 6.9% in the previous year).
- A rebound in commodity prices in 2016. At the start of the year, this applied mainly to oil and precious metals, but in subsequent months other commodities were also favored.
- The general Bloomberg Commodity Index (BCOM) increased by 11%, mainly due to increases in quotations of fuels (+16%) and industrial commodities (+20%).
- At the end of 2016, the price of copper in USD was 22% higher than at the beginning of the year.
- In 2016, silver recorded the highest increase in average annual prices (+9%) among precious metals, and the Gold/Silver ratio remained at a relatively high average level of 73.
- Interest rate increases in the USA.
- Investor optimism and confidence in the stock markets improved.
- Development of a low-emission economy, renewable energy sources, focus on energy efficiency.
KGHM Business Model
Exploration and assessment - geological works aimed at discovering new deposits or assessing the existing ones. This stage ends with documenting the deposits which are then assessed for the feasibility of their extraction.
Ore extraction - extraction of ore using either surface, underground or borehole mining methods, using a relevant mining technology.
Land rehabilitation - we apply standards which ensure the correct closure of our mine facilities, in terms of safety and environmental protection. Land rehabilitation plans are prepared years in advance and are included in deposit development plans.
Ore enrichment - Ore enrichment is a process consisting of mechanical treatment to obtain a copper concentrate with enough copper content to enable its smelting.
Smelting and refining - The production in KGHM Polska Miedź S.A.’s smelters and refineries is based mainly on copper concentrates produced in house however purchased raw materials are also used. At this stage, silver and gold bars are produced, among other things.
Processing - Copper cathodes produced by KGHM in smelters and refineries are converted into copper wire, oxygen-free copper rod, low-alloy copper rod and copper billets. Our smelters and refineries specialize in manufacturing various types of products: the rolled and smelted products are manufactured in the Cedynia Copper Smelter and Refinery, and copper billets in the Legnica Copper Smelter and Refinery.
Sales and trading
Sales are achieved while maintaining security of trading by taking into account the principles contained in the sales policy, credit risk management policy and market risk management policy, as well as in our Code of Ethics. One of the solutions employed to ensure security of trading is the appropriate diversification of sales—both by product and by geography—and the diversification of clients.
Deposit development comprises three segments of KGHM’s value chain:
Exploration and Assessment, Ore Extraction and Land Rehabilitation
Exploration and assessment and, at a later stage, extraction, enables the Company to produce and sell the key products in its product portfolio. The availability of quality deposits and continuous exploration efforts are the building blocks for developing KGHM’s competitive advantage. Furthermore, the Company’s involvement in exploration progressively extends the time of its operation.
Why are these segments important to KGHM:
- Ensuring the prospects of the continuous mining exploration of documented ore deposits is one of the foundations of KGHM’s development and value creation.
- Ore extraction is the key element of KGHM’s activities which enables metal production and sales on the market.
- The processes of rehabilitating post-mining sites to bring them back to people and nature are part of KGHM’s environmental policy. This practice builds trust amongst stakeholders, helps to ensure a positive reputation and assists in the reliability of the acceptance of new mining projects.
Areas of value creation
Diversification of assets located in countries with stable economies and experienced management. The KGHM Group has experienced teams of experts in all areas of mining and smelting, operating in Europe and in the Americas.
The sixth largest copper producer in the world
The second largest silver producer in the world
In 2016, KGHM Polska Miedź S.A incurred PLN 47M on exploration projects in Poland.
Continuation and execution of exploration projects which enable the development of KGHM Polska Miedź S.A.’s resource base in the following locations: Radwanice-Gaworzyce, Retków-Ścinawa and Głogów, Zatoka Pucka, Bytom Odrzański, Kulów-Luboszyce, Synklina Grodziecka, Nowe Miasteczko.
In 2016, KGHM Polska Miedź S.A. incurred capital expenditure on fixed assets and intangible assets relating to mining of PLN 1,164M.
In 2016, KGHM Polska Miedź S.A. extracted ore of 33.6M t (wet weight) or 32M t (dry weight). Further processing of the ore enabled the production of goods which can be used in the following sectors: power engineering, electronics, healthcare, architecture and construction materials.
Cost of products, merchandise and materials sold by the KGHM Group amounted to PLN 15,242M.
Sales revenue of the KGHM Group amounted to PLN 19,156M.
Mineral extraction tax of PLN 1,338M.
Other taxes and charges of PLN 499M.
Tax-funded expenditure to improve living conditions through local and central investment projects.
The present value of liabilities in respect of employee benefits amounts to PLN 2,007M. Costs of the current employment amount to PLN 69M.
In 2016, our records showed that 920 employees left the Company (mainly due to retirement) and 961 new employees were hired. The employment growth ratio was 0.2% compared to the prior year.
In 2016, KGHM Polska Miedź S.A. incurred PLN 631M on projects aimed at the protection of the environment, including PLN 616M on the Pyrometallurgy Modernization Program in the Głogów I Smelter and Refinery.
The Company managed to reduce emission and waste: The sum of direct emission in 2016: 1,507,784 t CO2e (a decrease compared with 2015) The sum of indirect emissions in 2016: 1,918,068 t CO2e (a decrease compared with 2015) The sum of non-hazardous waste weight in 2016: 31,111,364 Mg (a decrease compared with 2015) The sum of hazardous waste weight in 2016: 112,064 Mg (a decrease of nearly one half compared with 2015)
In 2016, the KGHM Polska Miedź S.A. Foundation made donations amounting to:
- PLN 13,244,158 – to organizations and institutions
- PLN 891,762 – to private individuals.
The number of beneficiaries of the KGHM Polska Miedź S.A. Foundation: 374 (legal persons) and 143 (private individuals). In 2016, KGHM Polska Miedź S.A. organized 54 volunteering events.
Total fees for the utilization of the environment incurred by KGHM Polska Miedź S.A. Divisions in 2016 amounted to PLN 24M. The fees paid were over PLN 7M lower than in 2015.Letters of credit amounting to PLN 348M (PLN 324M as at December 31, 2015) were issued by KGHM Polska Miedź S.A. to secure liabilities in respect of mine decommissioning and the rehabilitation of mining areas.
Funds transferred by KGHM Polska Miedź S.A. to the rural commune of Głogów allowed the liming of soil used for agricultural purposes on an area of more than 780 hectares.
Processing comprises three segments of KGHM’s value chain: Ore Enrichment, Smelting and Mining, and Processing.
Activities undertaken in this area begin by converting the extracted ore into a semi-finished product which is then ready for further processing. These steps are one of the key moments when production capital is converted into finished products which are ready to be traded and sold.
Why these segments are important for KGHM:
- Due to the production capability of Polish smelters and refineries, the KGHM Polska Miedź S.A. Group is one of the global leaders in metallurgy.
- The processed products, which are of a consistently high quality respond to market needs and are purchased by clients worldwide.
Areas of value creation
In 2016, the Group produced 742 kt of equivalent copper and 667 kt of payable copper.
The cost of production of copper in concentrate C1 in the Group amounted to 1.41USD/pound.
Raw materials which meet the specific quality criteria, mainly copper cathodes with a copper content of 99.99%.
In 2016, the quantity of copper in the concentrate amounted to 424.3kt.
Investment loan from the European Investment Bank of PLN 2.0bn with a financing period of twelve years.
- production from own raw materials: 376.0 kt
- production from external raw materials: 159.6 kt
Copper wire and rod Cu OFE and CU Ag: 267.4 kt
Round copper billets: 13.0 kt
Metallic silver: 1,191 t
Metallic gold: 113.8 koz t
Refined lead: 30.1 kt
In 2016, the number of employees in KGHM Polska Miedź S.A. was 18,266, of which:
smelters and refineries: 3,530
other Divisions: 2,266.
The number of employees participating in a single training event was 31,133, of which 21,485 were training sessions for hourly workers, and 9,648 for staff workers. In 2016, 681 employees participated in industry-related conferences and symposia in Poland and abroad. In 2016, 112 people took advantage of subsidies for tertiary education. In 2016, 686 of the Company’s employees took advantage of foreign language courses.
Continuous preventive measures:
- 120 instances of protective measures securing work associated with fire and chemical hazard
- 125 training sessions of KGHM employees in which 2,087 people participated
- 633 preventive inspections in which over 1,562 of KGHM’s facilities were inspected
- 379 inspections of 14,740 fire extinguishers
- 185 inspections of 1,255 hydrants
- more than 180,000 readouts of hazardous gas concentration.
In 2016, 42 accidents were recorded in KGHM’s smelters and refineries. The frequency rate in KGHM’s smelters and refineries was 11.9 in 2016, i.e. 2.5 points lower than in 2015 (14.4).
In 2016, more than 170 research and development projects and scientific expert opinions were completed, totaling more than PLN 44M.
Launching of the new flash furnace production line in the Głogów I Copper Smelter and Refinery in 2016. The new production line ensures maintaining a high processing capacity for at least several decades, and at the same time reduction of copper losses in the new production process will bring nearly PLN 9M of savings.
The Prime Minister’s Award for Excellent Scientific and Technical Achievements was presented to the team of experts from KGHM Polska Miedź and the Wrocław Technical University in November 2016. As part of their research, the scientists awarded developed an innovative method for designing magnetic circuit and electrical engine construction.
The MillVis system, which is an innovative solution enabling the improvement of the energy and technology efficiency of the processes executed in the Concentrators Division, won the Lower Silesia Champion in Technology 2016 title.
Distinction for implementing a smart industrial automation system which enables reducing the use of grinding beads and electricity in the Ore Processing Plants.
Smelting and refining production of KGHM Polska Miedź S.A. in 2016:
Electrolytic copper: 536.6 k t
Copper wire and rod Cu OFE and CU Ag: 267.4 kt
Round copper billets: 13.0 kt
Metallic silver: 1,911 t
Metallic gold: 113.8 koz t
Refined lead: 30.1 kt
Growth in other sectors of the economy, including: production of electronic equipment and high technologies, power engineering, construction, healthcare which use KGHM’s products.
Sales and trading
At this stage, our production is monetized and profits are generated – this is the Company’s main source of income. Moreover, this segment is a source of social capital by building trust and long-term relations.
Why is it important for KGHM Polska Miedź S.A.?
- Ensuring sales of the manufactured products guarantees sustainable and stable revenues.
Area of value creation
Cost of products, merchandise and materials sold of PLN 15,242M.
Sales revenue amounted to PLN 19,156M.
Cathodes and cathode parts: 246.4 kt
Copper wire and OFE rod: 265.1 kt
Other copper products: 13.1 kt
Total copper products: 524.6 kt
Metallic silver: 1,189 kt
Metallic gold: 112.5 koz t
Refined lead: 29.7 kt
Copper payable: 35.2 kt
Silver payable: 90.6 t
Cathodes and cathode parts: PLN 4,937M
Copper wire and OFE rod: PLN 5,293M
Other copper products: PLN 260M
Total copper products: PLN 10,490M
Metallic silver: PLN 2,596M
Metallic gold: PLN 556M
Refined lead: PLN 230M
Other products and services: PLN 316M
Merchandise and materials: PLN 148M
In 2016, KGHM Polska Miedź S.A. cooperated with 3,100 suppliers. Thanks to a systematically developed base of key business partners, we concluded 76 new partnership agreements in 2016.
In 2016, KGHM Polska Miedź S.A. concluded contracts for the sale of its core products with 206 clients.
Underground and surface mines, various forms of copper processing (ore, enrichment, leaching)
Our core business involves the mined production of metals, mainly copper, molybdenum, nickel, gold, and silver, from both surface mines (USA and Chile) as well as underground mines (Poland and Canada). We have a fully integrated production process in which the output of one technological phase constitutes the input for the next technological phase.
Integrated mining, processing, smelting and refining processes in KGHM Polska Miedź S.A.
Due to the low concentration of useful substances, the copper ores extracted in KGHM mines require a number of physical and chemical processes. Selecting an appropriate technology and the effectiveness of the enrichment process (concentration of the useful substance) depends largely on the nature of the resources, legal regulations and other indicators, e.g. economic indicators.
The enrichment process carried out in Polish ore enrichment plants is based on flotation. As a result of the enrichment, we obtain a copper concentrate and flotation tailings which are sent to the Żelazny Most Tailings Storage Facility. The copper concentrate with an average content of approx. 22 percent of Cu is subjected to further metallurgical processing in copper smelters and refineries where electrolytic copper is obtained as a result of fire refining and electrorefining.
Copper ore leaching technology is used in two of KGHMI’s mines (Franke and Carlota). As a result of leaching, i.e. dissolving useful substances using a leaching agent, a very weakly concentrated solution is obtained. It is further concentrated in solvent extraction (SX) and electrowinning (EW) operations. Electrolytic copper is obtained in these processes.
Simplified flowchart of the core business of the KGHM INTERNATIONAL LTD. Group
The Polkowice-Sieroszowice mine is located in Lower Silesia, to the west of the town of Polkowice. Currently, it conducts mining works in four mining areas: “Polkowice”, “Radwanice Wschodnie”, “Sieroszowice” and in a part of the “Głogów Głęboki – Przemysłowy” (Deep Głogów) deposit. Within the “Sieroszowice” deposit, there are also rich deposits of rock salt above the copper-bearing horizon. Mining is conducted using blasting technology together with various room-and-pillar methods with natural room settlement. The Polkowice Sieroszowice mine’s current production capacity is around 12M t of ore per year.
The Rudna mine is located in Lower Silesia, to the north of the town of Polkowice. Primarily it mines the “Rudna” deposit, but it also develops and operates in the “Sieroszowice” and “Głogów Głęboki-Przemysłowy” (Deep Głogów) deposits. The copper orebody in the Rudna deposit ranges from 844 meters to 1,250 meters, and in the Deep Głogów deposit is up to 1,385 meters. The current average production capacity is approx. 12M t of ore per year.
The Lubin mine is located in Lower Silesia, Poland, to the north of the town of Lubin. The Lubin-Małomice copper orebody lies at a depth ranging from 368 meters to 1,006 meters. The deposit is mined by blasting technology using the room-and-pillar method with natural roof settlement and with hydraulic backfill in the vicinity of the support pillar of the town of Lubin. The mine’s current production capacity is around 8M t of ore per year.
This complex of metallurgical plants located in Głogów comprises two copper concentrate smelting lines based on the single-stage smelting of concentrate in a flash furnace directly into blister copper. Apart from electrolytic copper, the Głogów Copper Smelter and Refinery produces crude lead (around 30k t annually), silver (around 1,200 t), Pt-Pd slime (around 80 kg), gold (around 2.7 t) and sulfuric acid (over 570k t). The most recent investments underway at the Głogów Copper Smelter and Refinery complex are a steam drier at Głogów II Copper Smelter and Refinery and a concentrate fluidized bed roaster at Głogów I Copper Smelter and Refinery.
The copper smelter and refinery located in Legnica has a current production capacity of 110k t of electrolytic copper. It has been in operation since the 1950s using shaft furnace technology. In addition to electrolytic copper, the plant also produces round billets, 30k t annually of refined lead and 122k t of sulfuric acid, as well as copper sulfate and nickel sulfate. Plans to increase production at the Legnica Copper Smelter and Refinery to 160k t of electrolytic copper annually include construction on the grounds of the Legnica Copper Smelter and Refinery of a scrap smelting installation and modification of the copper electrorefining process (to a single-stage process).
Production at the Cedynia Wire Rod Plant located in the vicinity of Orsk is based on the use of copper cathodes, 75% of which come from the Głogów Copper Smelter and Refinery and 25% from the Legnica Copper Smelter and Refinery. The basic product of the Cedynia Wire Rod Plant is copper wire rod produced in a Contirod line amounting to over 250k t annually and more than 16k t annually of oxygen-free copper wire rod (OFE) produced in a UPCAST line, including oxygen-free, silver-bearing copper wire rod.
The mine is located in White Pine county, Nevada, USA, approx. 11 km west of Ely (approx. 400 km north of Las Vegas), in the Egan range, at an average altitude of 2,130 meters a.s.l., near highway no. 50. The mine comprises 3 large pits: Liberty, Tripp-Veteran and Ruth. Currently, Ruth is in operation. The ore is extracted using conventional surface methods, and is then processed into a copper and gold concentrate, and separately into molybdenum concentrate in a concentrating plant.
The mine is located on the edge of the town of Sudbury (Ontario Province, Canada). The ore is accessed and mined with the aid of leased infrastructure of the Craig mine owned by Glencore. Mineralization in the Morrison deposit most commonly occurs in the form of ore veins. Mining is carried out at a level of approx. 1,300 meters using mining techniques adapted to the deposit’s geometry – this is mainly a mechanized method of selective extraction using undercutting of successive levels from bottom to top. All of the ore extracted from the mine is processed in the Clarabelle plant in Sudbury, owned by Vale.
This project is located in the Canadian province of Ontario, approx. 35 km west of the town of Sudbury. In 2002 rights were acquired to the Victoria mineral deposit and a campaign of exploration in this terrain commenced. All of the ore extracted from the mine will be processed in the Clarabelle plant in Sudbury, owned by Vale. The current development scenario for the project calls for the sinking of 2 shafts to access the deposit (a production shaft and a ventilation shaft). Exploration work performed so far confirmed the continuity and characteristics of the mineralization to a level of approximately 2,200 meters below the surface. As part of the work conducted, basic infrastructure was developed in order to access utilities (electricity, gas).
In 2016, a decision was made to review the project’s technical and economic assumptions by independent consultants. Due to the current macroeconomic environment, the Management Board of KGHM Polska Miedź S.A. decided to modify the adopted schedule for the project.
The Ajax project is located in British Columbia, Canada, 255 km north-east of Vancouver near the City of Kamloops. The project assumes the construction and operation of an surface copper and gold mine and an ore processing plant with associated infrastructure. In January 2012, Abacus Mining and Exploration Inc. prepared a feasibility study, based on which the preliminary economic parameters of this project were described. Due to a substantial risk of not receiving an environmental permit based on the assumed technological parameters of the project, including the siting of basic mine plant infrastructure, the assumptions of the feasibility study for 2012 were reviewed in terms of identifying the risk factors and potential for increasing the project’s value. On 13 January 2016, an Updated Feasibility Study was published, replacing the earlier version dated 6 January 2012.
Abacus Mining and Exploration Inc. 20%
The Updated Feasibility Study reflects changes to the project, under which the mine’s infrastructure was moved farther away from the nearest buildings in the City of Kamloops, technological improvements were incorporated and the processing facility’s throughput capacity was increased from 60 to 65kt of ore per day.
Currently, KGHM AJAX MINING INC. is focused on obtaining the necessary environmental permit and on continuing to build good relationships with First Nations as well as with the citizens of the City of Kamloops.
In 2016, a decision was made to review the technical and economic assumptions of the feasibility study by independent consultants. Simultaneously, under the current optimizing activities, the employment structure was adjusted to the scope and schedule of the work on the Ajax project.
On 4 March 2017, Stk’emlúpsemc te Secwépemc Nation announced that they do not give free, prior and informed consent for the publicly-reviewed development plan by KGHM AJAX MINING INC. to build a mine. In the opinion of the Company’s Management Board, despite this announcvement, it is possible, at the current stage of the project, to continue the process of obtaining relevant permits aimed at developing the surface mine. The projected cash flows, which were taken into account in the impairment testing of the Ajax project as of 31 December 2016, are realistic and are the best reflection of the achievable plans.
The mine is located in a desert area of northern Chile, in Taltal commune, Antofagasta region. Mining is conducted by conventional surface methods from two orebodies: China and Franke. Due to the nature of the ore, it is processed using the heap leach, solvent-extraction and electrowinning method. The end product is electrolytic copper in the form of cathodes. Franke Operational Continuity Project Environmental Impact Assessment was submitted to the Environmental Assessment Authority in December 2016, extending use of the Plant by 4.5 years, maintaining the level of production. Approval is expected during H2 2017.
The Sierra Gorda mine is located in the Atacama desert, in the Sierra Gorda commune in the Antofagasta region, in northern Chile, approx. 60 km south-west of the city of Calama. The mine is situated at an altitude of 1,700 meters a.s.l. and 4 km from the town of Sierra Gorda. The ore extracted from the Sierra Gorda mine is processed into copper and molybdenum concentrates. In April 2015 the molybdenum installation commenced production, and from July 1, 2015 the Sierra Gorda mine has commenced commercial production (since then it has prepared operational statements of profit or loss). In 2016 Sierra Gorda, with the support of teams of specialists employed by the partners and the support of external companies, has taken actions aimed at improving the stability of the installation as well as improving its quality and efficiency parameters. Moreover, the long-term mine operating plan has been reviewed.
45% Sumitomo group companies:
Sumitomo Metal Mining Co., Ltd. (31.5%)
- Sumitomo Corporation (13.5%)
Moreover, there is a possibility to extend the mine’s life using new deposits
“The Sierra Gorda Oxide project aims to process the oxide ore. Under consideration is the recovery of metal in an installation using SX/EW technology. The oxide ore is currently stored separately for later heap leaching. In 2016 works were oriented on the relocation of the Lixiviation Plant, SX and EW according with the actual limit of the TSF (tailing storage facility) of the Concentrator Plant.
To ensure the sustainability of our technological chain, we also have investments in other domestic companies. The most important of these include:
- PEBEKA S.A.
mining services contractor,
- KGHM ZANAM S.A.
a supplier of mining machinery and provider of maintenance services, which also provides traffic maintenance services in selected areas and participates in carrying out construction projects,
- KGHM Metraco S.A.
a supplier of scrap copper,
- „ENERGETYKA” Sp. z o.o.
a power engineering company securing part of KGHM Polska Miedź S.A.’s demand for power.
Furthermore, among foreign companies, a group of companies operating under the DMC Mining Services brand, which includes FNX Mining Company Inc., Raise Boring Mining Services S.A. de C.V. and DMC Mining Services Corporation, provides shaft sinking services, development work, construction of above-ground and underground mine facilities, mine drilling, tunnel drilling for general construction purposes and engineering services.
In terms of the amount of committed capital, the shares of TAURON Polska Energia S.A., a company listed on the Warsaw Stock Exchange, are also an important equity investment.
Investments in closed-ended investment funds are a tool used to diversify the investment risk for KGHM Polska Miedź S.A. Following the Group’s strategy, they play a role in the management of selected non-core assets and are a tool for undertaking projects aimed at adding value. The funds focus on investments broadly in the fields of healthcare, real estate and new technology.
KGHM’s comprehensive competencies
Our 55 years of successful mineral development and exploration activities are the best proof of our experience and competencies.
Our global operations make us the sixth largest global producer of copper and the third largest global producer of silver, with more than 33,000 employees.
Why are we valuable in the sector?
We have diversified assets
Our facilities are located in economically and politically stable countries which support the development of mining
We have high quality resources at our disposal
The production assets in Poland (accounting for more than one half of the Group’s production) are located on one of the world’s largest copper ore deposits with the prospect of many more years of operation (30–40 years)
We undertake projects with a dynamic profile
Intensive exploration in regions neighboring the production assets lead to an increase in the level of documented resources. We are creating a portfolio of assets which guarantee continuous value building for shareholders
We rely on trained employees and competent management
We have significant experience and proven competencies in carrying out projects, and an in-depth understanding of the mining and smelting industry.
We also have experienced teams of experts in all areas of mining and smelting—wherever we conduct our operations—to provide us with the necessary support in building the Company’s value
We are innovative
In 2016, we carried out more than 170 research and development projects and prepared expert scientific opinions amounting to more than PLN 44M.
In 2016, a newly-constructed flash furnace production line was launched in the Głogów I Copper Smelter and Refinery as a component of the comprehensive Pyrometallurgy Modernization Program. The main modifications and improvements under this project involved a change in concentrate casting technology in the shaft furnaces into modern flash furnace technology with a concentrate smelting capacity of 1,050kt per year.
This is the largest flash and electrical furnace installation in the world, comprising a state-of-the-art copper smelting production line. This unique technology is currently only used in three places worldwide.
With machinery designed specifically for this technology, this is the largest project in Poland in decades at this level of innovation and complexity.
How we generate profits, including characteristics of the industry-specific cost structure
RESULT-ORIENTED – The results achieved are aimed at the long-term success of KGHM
The KGHM Group manages capital so that it is able to generate returns for the shareholders and derive benefits for other stakeholders. Being able to adapt to the changes, continuous investment in people and resources is the key to the success of our company.
In the long-term, we strive to maintain our capital ratio at a level above 0.5 and a net debt/EBITDA ratio of below 1.0.
Nearly 80% of the Group’s sales revenue is generated by the KGHM Polska Miedź S.A. segment
The Company’s cost of sales, selling costs and administrative expenses (cost of products, merchandise and materials sold plus selling costs and administrative expenses) in 2016 amounted to PLN 12,517 million and were 1% lower as compared to 2015, mainly due to the lower costs of the minerals extraction tax.
Expenses by nature of KGHM Polska Miedź S.A. (PLN M)
| ||2016||2015||Change (%)||4Q’16||3Q’16||2Q’16||1Q’16|
|Depreciation/amortization of property, plant and equipment and intangible assets||993||910||+9,1%||257||246||247||243|
|Employee benefits expenses||3 023||2 992||+1,0%||805||760||760||698|
|Materials and energy, including:||5 482||5 481||+0,02%||1 487||1 178||1 416||1 400|
|purchased metal-bearing materials||3 469||3 352||+3,5%||975||706||903||885|
|electrical and other energy||745||735||+1,4%||186||172||190||198|
|External services||1 392||1 420||-2,0%||390||324||349||329|
|Taxes and charges, including:||1 725||1 824||-5,4%||486||429||420||390|
|minerals extraction tax||1 338||1 439||-7,0%||396||335||314||293|
|Total expenses by type||12 776||12 782||-0,05%||3 479||2 999||3 219||3 079|
The structure of expenses by type in 2016 is presented below. Compared to the prior year, they were at a very similar level.
Structure of expenses by type in 2016
The Company’s operating costs are decisively impacted by the costs of electrolytic copper production (prior to decrease by the value of by-products), whose share is about 88%.
Cost of producing copper in concentrate – C1 (USD/lb)
Cost of producing copper in concentrate – C1 (unit cash cost of producing payable copper in concentrate, reflecting costs of ore extraction and processing, transport costs, minerals extraction tax, administrative costs during the mining stage, and smelter treatment and refining charges (TC/RC), less the value of by-products) was as follows: 1.47 USD/lb in 2015 and 1.30 USD/lb in 2016. The C1 cost was impacted by a weakening in the PLN against the USD (the C1 cost achieved in 2016, using the USD/PLN exchange rate and metals prices for 2015, would have amounted to 1.50 USD/lb) and higher content of silver in own concentrate of 4.6 percent.
Pre-precious metals credit unit cost of electrolytic copper production – from own concentrate (PLN/ton)
The pre-precious metals credit unit cost of copper production from own concentrate (unit cost prior to decrease by the value of anode slimes containing silver and gold among other things) was 240 PLN/ton (1.2%) higher than that recorded in 2015, alongside a lower minerals extraction tax (-410 PLN/ton). The higher cost was due to the lower production of electrolytic copper from own concentrate of 44.5k ton of copper (-11%) due to the shutdown at the Głogów I Copper Smelter and Refinery in the third quarter of 2016.