Presentation of risks and uncertainties associated with the execution of the new strategy  

Risks in various areas of the KGHM Group’s operations are identified and evaluated on an on-going basis. Each time we seek methods to mitigate or take advantage of these risks. We regularly prepare a Risk Response Plan and Mitigating Measures for the key risks. Other risks are monitored continuously by the Corporate Risk Management and Supervisory Standards Department, and financial risks are monitored by by the Executive Director, Director for Finance and Risk Management.

Our comprehensive approach also covers identification of the risks associated with achieving the adopted strategic objectives. In 2016, we commenced the process of revising the risks included in the main Strategy and the Executive and Supporting Strategies.

The majority of the risks associated with the pursuit of our Strategy stem from the macroeconomic situation. The changes in the mining industry and non-ferrous metal industry generate risks which the Company is unable to influence. It can, however, protect against these risks and minimize their potential negative impact.

Being aware of the potential risks, we are better prepared and able to respond quickly should they materialize.

Corporate risk management

In 2016, we were exposed mainly to the risks of changes in the prices of copper and silver. The risk of changes in exchange rates was also important for KGHM Polska Miedź S.A. As part of managing these risks, we concluded hedging transactions on the copper market with a total notional amount of 171.5kton and on the silver market with a total notional amount of 4.05M oz . Moreover, in 2016 we concluded transactions hedging against a change in the USD/PLN exchange rate for a total notional amount of USD 900M (including USD 360M hedged sales revenues in 2016).

As part of managing currency risk, we apply natural hedging by borrowing in the currencies in which our revenues are expressed.

The risk of interest rate changes was minimized in 2016 by hedging transactions against an increase in the (LIBOR USD) interest rate.

In response to the technology-related risks associated with possible changes in the geological and mining conditions in our mines and the growing calorific value of copper concentrates produced by the Concentrates Division, we began the construction of a concentrate roasting installation at the Głogów I smelter, aimed at reducing the calorific value of smelted concentrates by eliminating excess organic elements in the concentrate produced.

Key risks

The Risk Model in a key tool used to identify risks in the KGHM Group. The structure of the model is based on risk sources and is divided into five categories: Technological, Value Chain, Market, External and Internal. In addition, we distinguished and identified a number of categories which correspond to specific areas of our operations or management.

Risk factors

Diagram Risks in KGHM Polska Miedź S.A.

Organizational structure of the risk management function

The organizational structure of risk management in KGHM Polska Miedź S.A. follows the good practices of corporate governance and the widely-known “three lines of defense” model.

Diagram Organizational structure of the risk management in the KGHM Group

In December 2016, the corporate risk management system of the KGHM Group was audited by an external consultant, Deloitte Advisory. The audit was conducted in accordance with the Best Practice of GPW Listed Companies 2016. The outcome of the audit confirmed the effectiveness of the solutions applied.

Human capital and risk on the international market

The global nature of the KGHM Group also translates into a risk associated with human capital. We want to attract and retain the best employees needed to carry out our activities.

We are constantly improving the effectiveness of our recruitment processes. Since 2015, we have also been executing a staff mobility program. The program ensures the compliance of our human resources management policy with the best market practices and the continuity of risk management (including legal, tax, immigration risks) in the process of sending employees to international secondments. In the international mobility of our employees, we also see an opportunity for sharing the knowledge, experience and best practices among KGHM Group companies. In 2016, an interdisciplinary team revised the Mobility Policy to increase the effectiveness and transparency of the process. The solutions developed will be implemented in 2017.

In 2016, the international mobility process covered more than a dozen of the KGHM Group’s employees.