3. Important estimates and assumptions

In the consolidated financial statements, estimates are used which are based on assumptions and judgements which affect the applied accounting principles and presented assets, liabilities, income and costs. The estimates, and the assumptions on which they are based, result from historical experience and the analysis of various factors which are considered as prudent, while their results represent the basis for professional judgment as to the value of the item which they concern. In certain vital questions the Management Board relies on the opinions of independent experts.

Estimates and assumptions of importance for the consolidated financial statements of the Group are presented below.

3.1 Impairment of assets of the KGHM Polska Miedź S.A. Group in terms of the market capitalisation

Under IAS 36, one of the reasons to perform impairment testing of assets is to assess whether the carrying amount of the net assets of the Group exceeds the Parent Entity’s market capitalisation. In accordance with its adopted accounting policies KGHM Polska Miedź S.A. recognises the following indications to perform impairment testing of the carrying amount of the Group’s net assets: a significant or prolonged decrease in market capitalisation versus the carrying amount of net assets. A decrease by at least 20% and a decline over a period of 12 months are classified respectively as significant and prolonged by the Group.

The Management Board of KGHM Polska Miedź S.A. continuously monitors market capitalisation and the carrying amount of the net assets of the Group to identify any indications of impairment.

Taking into consideration the 200 000 000 shares issued by KGHM Polska Miedź S.A., the Parent Entity’s market capitalisation in the first half of 2014 and in December 2014 was below the carrying amount of the Group’s net assets. In 2014 the share price of KGHM Polska Miedź S.A. decreased by 7.75%, from PLN 118.00 per share at the end of 2013 to PLN 108.85 per share at the end of 2014. In addition, it was noted that in 2014 the share price rose above PLN 118.00 per share from the end of 2013.

Taking into consideration the insignificant and short-term decrease in the Parent Entity’s market capitalisation in 2014 versus the carrying amount of the net assets, there were no reasons to perform an impairment test of these assets.

3.2 Useful life of property, plant and equipment

The management boards of Group companies perform annual reviews of residual values, depreciation methods and anticipated useful lives of depreciable property, plant and equipment. As a result of a review of the useful life of the Group’s fixed assets in 2014 versus the depreciation rates used as at 31 December 2013, there was a decrease of depreciation costs in 2014 in the amount of PLN 49 million, which was mainly a result of the extension of the estimated useful lives by 1-1.7 years

For assets which are used, in the opinion of a given company’s management board, on a systematic basis, the straight-line method of depreciation is applied. Depreciation is set through the estimation of useful lives and equal distribution of the amounts to be depreciated. It is estimated that the useful lives of assets assumed by Group companies for purposes of depreciation reflect the expected periods in which these assets will provide economic benefits in the future. The net value of property, plant and equipment subject to depreciation using the straight line method as at 31 December 2014 amounted to PLN 10 199 million (as at 31 December 2013, PLN 8 929 million).

For assets whose utilisation, in the opinion of a given company’s management board, is directly related to the amount of mineral extracted from orelexicon.png or the amount of end product, and extraction or production is not evenly distributed during their useful lives, the natural depreciation method (units of production method) is applied. Depreciation is estimated based on the expected amount of mineral reserves tonnage to be extracted, or based on the expected amount of products. The net value of property, plant and equipment subject to depreciation using the units of production method as at 31 December 2014, amounted to PLN 3 552 million (as at 31 December 2013, PLN 3 015 million) and represented mainly the production assets of KGHM INTERNATIONAL LTD.

3.3 Stripping costs

In the reporting period the Group recognised as property, plant and equipment (note 6 - mining and metallurgical assets) costs incurred in 2014 to access ore through pre-stripping during the production phase in open-pitlexicon.png mines belonging to KGHM INTERNATIONAL LTD. amounted to PLN 183 million (in 2013: PLN 282 million). Professional judgment with respect to assessing whether there exists a portion of an orebody to which access has been improved as well as assessment of the level of pre-stripping costs which would be recognised in property, plant and equipment, is performed by a group of engineers and teams of specialists in the Group’s open-pit mines. In 2014 it was determined that the full value of expenditures incurred must be capitalised in mining and metallurgical assets. These assets will be depreciated over periods conforming to the periods of use of the identified orebody, to which access improved as a result of this work. The balance of non-current assets due to stripping costs as at 31 December 2014 amounted to PLN 598 million, or USD 170 million (as at 31 December 2013: PLN 340 million, or USD 113 million).

3.4 Testing for impairment of the Robinson mine

During the analysis performed to identify indications under IAS 36, the Management Board of the Parent Entity identified indications to perform a test for impairment of the assets of the Robinson mine from KGHM INTERNATIONAL LTD. Group (operating segment “KGHM INTERNATIONAL LTD.”) due to a deterioration of ore quality.

The carrying amount of the Cash Generating Unit Robinson mine was estimated at a level of USD 340.1 million (PLN 1 193 million based on the average exchange rate from 31 December 2014 announced by the National Bank of Poland). For purposes of estimating the recoverable amount during this testing a fair value measurement of the assets of the Robinson mine less cost to sell was set, making use of the DCF method, i.e. the method of discounted cash flows. Assumptions used in estimating the recoverable value of the asset:

  • Mine life - 8 years – according to the planned mine production period
  • Saleable metals production - 829 million pounds of copper (91% of revenues) during mine life and 207 thousand ounces of gold (9% of revenues)
  • Average operating margin during mine life - 38.9%
  • Capital expenditures - USD 593 million during mine life
  • Applied income tax rate - 35%
  • Applied discount rate - 8.0%
  • Price curves copper and molybdenum price curves - based on internal macroeconomic assumptions adopted by the Parent Entity and incorporating the comparison with the median of available, multiannual forecasts of financial and analytical institutions

As a result of this testing a fair value less costs to sell of 2% was determined for the Robinson mine of USD 341 million (PLN 1 196 million based on the average exchange rate from 31 December 2014 announced by the National Bank of Poland), which exceeded the carrying amount of assets of the Robinson mine, and consequently did not form the basis for recognising an impairment loss.

The performed sensitivity analysis of the recoverable amount of the assets of the Robinson mine shows that the key assumption used in testing for impairment is the adopted price curves. Assumptions concerning the price curves were adopted while taking into account the professional judgment of the Management Board of the Parent Entity with respect to changes in copper prices in the future, which was reflected in the calculation of the recoverable amount. The Management Board, after taking into account the results of the performed analysis, decided that the recoverable amount of the Robinson mine’s assets would be lower than the carrying amount if the average copper prices in 2015 were to decrease by approx. 0.25% or if the average copper prices for the years 2016-2022 were to decrease by approx. 0.05%.

3.5 Goodwill

Pursuant to IAS 36, at the end of the reporting period annual testing is performed for the impairment of cash -generating units to which goodwill was allocated.

In the current period testing was performed for the impairment of cash-generating units, to which goodwill was allocated in the total amount of PLN 39 million of which:

  • „Energetyka” sp. z o.o. - PLN 26 million
  • other - PLN 13 million

For the purpose of estimating the recoverable amount of the cash-generating units, their fair value less costs to sell was estimated, based on cash flow projections contained in the approved financial plans of the cash-generating units, using the DCF method, i.e. the discounted cash flow method. This measurement to fair value was classified to level three of the fair value hierarchy.

Key assumptions used to measure the most important cash-generating unit:

  • Period of projected cash flows - for the years 2015-2020
  • Rate of EBIT increase in the period of projection - 3.3%
  • Rate of cash flow increase following the period of projection - 2%
  • Discount rate (after taxation) - 4.58% (real)
  • Total capital expenditures in the period of projection - PLN 295 million

The key assumptions were based on sector parameters and on the market and internal conditions of entities, including mainly with respect to realised investments.

As a result of the testing performed, the recoverable amount of „Energetyka” sp. z o.o. (EV), was set at the level of PLN 437 million.

By comparing the recoverable amounts of cash-generating units with their carrying amounts, the total impairment loss on goodwill was determined to be PLN 25 million, which was allocated to the following units:

  • „Energetyka” sp. z o.o. – PLN 12 million
  • other - PLN 13 million

3.6 Testing for impairment of intangible assets with indefinite useful lives

The Group performed the annual test for impairment under IAS 36 in order to assess if there was an impairment of intangible assets with indefinite useful lives. As at 31 December 2014 the Group classified to this group of intangible assets the water rights held in Chile with a carrying amount of PLN 217 million (USD 62 million, based on the average exchange rate from 31 December 2014 announced by the NBP). The judgment in respect to indefinite useful life was made based on the nature of this asset, i.e. the inexhaustibility of the source. As part of the testing for impairment of this asset, its recoverable amount was estimated by determining its fair value. For this purpose the assessment of an independent assessor was used to estimate the capacity of the source, which was set at the level of USD 150 thousand for one liter of water from the source per second (PLN 526.1 thousand, based on the average exchange rate from 31 December 2014 announced by the National Bank of Poland). Due to the fact that the total capacity of the source (the total permissible offtake) is 431 litres from the source per second, the recoverable amount was set at PLN 227 million (USD 65 million, based on the average exchange rate from 31 December 2014 announced by the NBP). After comparing the recoverable amount to the carrying amount, no impairment was recognised. The measurement was classified to level 2 of the fair value hierarchy in accordance with IFRS 13.

3.7 Test for impairment of intangible assets not yet available for use

In accordance with IAS 36, the Group performed an annual estimate of the recoverable amount of intangible assets which are not yet available for use, whose carrying amount as at 31 December 2014 amounted to PLN 86 million (as at 31 December 2013: PLN 69 million). The tests performed at the end of the reporting period and for the comparable period did not identify any impairment of these assets.

3.8 Exploration and evaluation assets

Taking into consideration the current stage of advancement of the projects classified to exploration and evaluation assets and the positive results of the work carried out, the management boards of Group companies did not identify any indications that the carrying amount of their exploration and evaluation assets may exceed their recoverable amounts.

3.9 Joint ventures (jointly controlled entities)

In the current period the most significant item, which was classified by the Group as a joint venture under IFRS 11, is the „JV Sierra Gorda” agreement, in which the share of KGHM INTERNATIONAL LTD. equals 55%, entered into to develop the extraction of copper and molybdenum in the Sierra Gorda (Chile) area.

Classification of Sierra Gorda S.C.M. as a joint venture agreement, despite the 55% share of the Group, was made based on analysis of the terms of the agreement between the parties and contractual stipulations which indicated a jointly controlled relationship.

In the consolidated financial statements, the shares in the jointly controlled entities were measured using the equity method. According to this method the shares in the jointly controlled entities were measured at the moment of initial recognition at cost, and then on dates ending subsequent reporting periods were respectively adjusted by any changes which appeared after the date of their acquisition in the value of assets attributable to the share of the joint operator.

3.10 Start of depreciation of the assets of Sierra Gorda from allocation of the purchase price

As a result of the acquisition of KGHM INTERNATIONAL LTD., for the purpose of accounting for the acquisition price, the fair value of the Sierra Gorda project was estimated using the discounted cash flow method. The carrying amount as at 31 December 2014 amounted to USD 1 236 million. The excess of the fair value over the carrying amount of the investment in Sierra Gorda, which was recognised in the consolidated financial statements at the level of USD 651 million (PLN 2 283 million at the average exchange rate on 31 December 2014 announced by the NBP), is mainly in respect of the measurement of the assets of Sierra Gorda (the deposits of the investment project). Depreciation of the assets of Sierra Gorda (including measurement to fair value at the date of acquisition of KGHM INTERNATIONAL LTD.) will begin at the moment when commercial production is reached. Due to the fact that in 2014 Sierra Gorda S.C.M. did not achieve the commercial production level, defined as bringing the project’s assets to an operational state as measured by:

  • achievement of 65% of copper ore processing capacity for at least 60 consecutive days; and
  • at least 40% molybdenum content in concentrate for at least 30 consecutive days

settlement of the excess of fair value in the consolidated financial statements is expected at the beginning of 2015.

3.11 Testing for impairment of the joint venture Sierra Gorda

As a result of a change in the tax system in Chile announced in 2014 which will come into force on 1 January 2017, there arose indications that an impairment test had to be performed of the Sierra Gorda S.C.M. project, accounted for using the equity method, which is the separate operating segment “Sierra Gorda Project”.

The carrying amount of Sierra Gorda as at 31 December 2014 amounted to USD 1 236 million (PLN 4 333 million, based on the average exchange rate from 31 December 2014 announced by the National Bank of Poland). To determine the recoverable amount during the testing, an estimate was made of the fair value of the tested assets less costs to sell, making use of the DCF method, i.e. the method of discounted cash flows.

Calculation of the recoverable amount was performed on the basis of the projected results, assuming:

  • completion of the investment’s second phase, comprising development of the existing infrastructure, (assuming an increase in the mine’s processing capacity);
  • prolongation of the mine life as a result of mining of the mineralized areas Pampa Lina and Salvadora which are adjacent to the Sierra Gorda mine, based on the infrastructure of the investment’s second stage;
  • Completion of the oxide ore project (Oxide), with estimated production of 342 thousand tonnes of copper in 2017-2032;
  • a copper and molybdenum price curve based on internal macroeconomic assumptions adopted by the Parent Entity and incorporating the median of available, multiannual forecasts of financial and analytical institutions.
  • selection of a corporate income tax model for business activities in Chile which assumes a target corporate income tax rate of 27% starting from 2018, which will be paid on taxable income earned by the company in a given year as well as additional taxation on foreign companies equal to the difference between the 35% tax rate and the paid tax rate of 27% (effectively 8% of taxable income, representing 11% of taxable income less income tax paid by the company) paid when profit is distributed. In order to make use of this taxation option the foreign shareholder must meet the condition of tax residency in a country with which Chile has an agreement to avoid double taxation. KGHM Polska Miedź S.A. is in the process of creating an organisational structure which will allow this option to be chosen, while achievement of these changes is not restricted by any external factors.

Key assumptions used in the measurement:

Mine life/forecast period 42 years (to 2056)
Saleable metals production 26.0 billion pounds of copper (86% of revenues),
813 million pounds of molybdenum (10% of revenues),
2.4 million ounces of gold (3% of revenues),
77.4 million ounces of silver (1% of revenues)
Average operating margin during 44,60%
Capital expenditures USD 5 803 million to be incurred in the years 2015-2056 of which USD 3 054 million by 2018, USD 2 749 million in the period 2019-2056)
Applied income tax rate for the years 2015–2017 - 22.5%- 25.5%
from 2018 - 27%
Applied discount rate after taxation
- for the Catabella mine 8%
- for mineralized areas Pampa Lina and Salvadora 9%

As a result of this testing a fair value less costs to sell of 2% was determined for Sierra Gorda at the level of USD 1 275 million (PLN 4 472 million based on the average exchange rate from 31 December 2014 announced by the National Bank of Poland), which exceeded the carrying amount of the investment in the Sierra Gorda project and did not form the basis for recognising an impairment loss.

The performed sensitivity analysis of the recoverable amount of the investment in Sierra Gorda shows that the key assumptions used in testing for impairment are the adopted price curves and the discount rate. Assumptions concerning the price curves and the discount rate were adopted while taking into account the professional judgment of the Parent Entity’s Management Board with respect to changes to these amounts in the future, which was reflected in the calculation of the recoverable amount. It was decided that, for the purposes of monitoring the risk of impairment of the investment in Sierra Gorda in subsequent reporting periods, the recoverable amount would be lower than the carrying amount if the average annual copper prices for the years 2015-2024 were to decrease by approx. 1.0% versus the adopted assumptions, or if the discount rate were to increase by approx. 1.25% versus the adopted assumptions.

3.12 Impairment of the „Elektrownia Blachownia Nowa” Sp. z o.o. project

In 2013, an agreement was signed by KGHM Polska Miedź S.A., TAURON Polska Energia S.A. and TAURON Wytwarzanie S.A., based on which it was decided to temporarily suspend the project to build a gas-steam block in the company “Elektrownia Blachownia Nowa” Sp. z o.o. This was due to the current situation on the electricity and natural gas market, resulting in higher investment risk and subsequently the need to review and optimise the project.

The Parties committed themselves to ensure the functioning of the company “Elektrownia Blachownia Nowa” Sp. z o.o. as well as to secure the results of the Project achieved to date and to continue monitoring of the energy market and the regulatory environment, in terms of the possibility to rapidly re-commence realisation of the project.

The Parties to the agreement agree that a decision to re-commence the project will be made in the form of a separate agreement, which in accordance with the Parties’ expectations should be signed by 31 December 2016.

Changes in 2014 on the energy market and in the associated regulatory environment did not provide a basis to restart the project to build a gas-steam block. Due to present indicators, the investment held in the company „Elektrownia Blachownia Nowa” Sp. z o.o. was tested for impairment.

As a result of this test, the recoverable amount was set at PLN 18 million. This amount was lower than the carrying amount of the investment (PLN 32 million), which justified the recognition of impairment loss in the amount of PLN 14 million.

3.13 Impairment of available-for-sale financial assets

In accordance with accounting policy, the Group measured the fair value of shares classified to the category of available-for-sale financial assets. Analysis of the value of shares versus their purchase price is performed at the end of each quarter. The most important item of available-for-sale financial assets are investment in Tauron Polska Energia S.A., whose shares are listed on the Warsaw Stock Exchange. At the end of the reporting period the fair value of this investment was higher then its carrying amount, and as a result there was a partial reversal of a previous impairment loss in the amount of PLN 124 million, which was recognised as an increase of other comprehensive income.

As at 31 December 2014, the carrying amount of available-for-sale financial assets amounted to PLN 988 million (as at 31 December 2013, PLN 868 million).

3.14 Receivables due to loans granted

The KGHM INTERNATIONAL LTD. Group has granted a long-term loan to the Sierra Gorda S.C.M. to finance its mining projects in Chile. As at 31 December 2014, the balance of loan granted (including accrued interest) amounted to USD 1 777 million. The repayment date of this loan was set at 2024. According to the financial projections prepared by Sierra Gorda S.C.M., the expense of repaying this loan was included in the plans for the years in which maturity of the loan falls. Due to the fact that settling the loan is planned and probable in the forseeable future, the loan is not a net investment under IAS 21.15 and the assessment as to its recoverability was prepared independently of the analysis with respect to the recoverable amount of the investment in Sierra Gorda. On the basis of the adopted financial projections, no risk concerning the recoverability of the loan granted was identified.

3.15 Valuation of inventories

In the consolidated financial statements the amount of the inventories of the KGHM INTERNATIONAL LTD. Group, which arise from the leaching process, is determined based on the estimated recovery of metal from ore. The nature of the process of leaching copper from ore restricts the precision of monitoring the level of inventories arising during this process. In subsequent reporting periods, adjustments are made to the estimated recovery of copper from the leaching of ore in a given reporting period to the level of production achieved in the subsequent period.

As at 31 December 2014 the provisionally-set value of inventories amounted to PLN 309 million (as at 31 December 2013, PLN 276 million). In 2014 there was an adjustment of inventories arising from the leaching process whose value was provisionally set in the previous reporting periods, in the amount of PLN 88 million
(in 2013 there was no adjustment of inventories).

3.16 Measurement of future employee benefits liabilities

Future employee benefits, i.e. retirement or disability benefits, jubilee bonuses, post-mortem benefits and post-employment coal equivalent payments are equal to the present value of the defined benefit obligation. The amount of these obligations depends on many factors, which are used as assumptions in the actuarial method. Every change in these assumptions impacts the carrying amount of the liability.

One of the basic assumptions for setting the amount of these liabilities is the interest rate. At the end of the reporting period, based on the opinion of an independent actuary, an appropriate discount rate is applied for the Group entities for setting the present value of estimated future cash flow due to these benefits. In setting the discount rate for the reporting period, the actuary extrapolates current interest rates of government bonds along the profitability curve expressed in the currency of the future benefits payments, to obtain a discount rate enabling the discounting of payments whose maturities are longer than the maturities of the bonds.
Remaining macroeconomic assumptions used to measure liabilities due to future employee benefits, such as inflation or the minimum salary, are based in part on current market conditions. The assumptions applied to measurement as at 31 December 2014 may be found in note 24.

The sensitivity of future employee benefits liabilities to changes in assumptions was set based on the amounts of the Parent Entity. In the remaining Group companies, due to the immaterial amounts of liabilities in this regard, the impact of changes on the basic parameters adopted for the calculation of provisions on future employee benefits liabilities in the consolidated financial statements would be immaterial.

Impact of changes in the indicators on the balance of liabilities (Parent Entity)

At
31 December 201431 December 2013
an increase in the discount rate by 1% (260) (168)
a decrease in the discount rate by 1% 348 215
an increase in the coal price and salary increase rates by 1% 335 214
a decrease in the coal price and salary increase rates by 1% (261) (172)

A change in the main actuarial assumptions (discount rate, salary increase rate and coal price increase rate) as at 31 December 2014 versus assumptions applied as at 31 December 2013 caused an increase in liabilities due to employee benefits in the amount of PLN 452 million.

As at 31 December 2014 the carrying amount of employee benefits liabilities was PLN 2 146 million (as at 31 December 2013, PLN 1 694 million).

3.17 Provisions for decommissioning costs of mines and other technological facilities

These provisions represent the discounted-to-present-value estimated future decommissioning costs of mines and other facilities. Reassessment of this provision at the end of the reporting period is affected by the following indicators:

1. In the Parent Entity:

a) the index of changes in prices in the construction-assembly sector published by the Central Statistical Office (GUS),

b) the forecasted discount rate calculated based on the yield on treasury bonds with maturities nearest to the planned financial outflow,

2. In the KGHM INTERNATIONAL LTD. Group:

a) the rate of return on investments in US 10-20 year treasury notes of the Federal Reserve of the United States of America, and

b) the rate of return on investments in 5-year government bonds issued by the governments of Canada and Chile.

The yield on treasury bonds and the inflation rate are set separately for future periods, i.e. for the first, second and third years, and jointly for periods from the fourth year.

In the KGHM Polska Miedź S.A Group, in order to estimate provisions for the decommissioning costs of mines and other technological facilities located in individual countries, the following discount rates were applied:

Impact of changes in the discount rate on the balance of the provision for decommissioning costs of mines and other technological facilities

At 31 December 2014At 31 December 2013
an increase in the discount rate by 1% -372 -205
a decrease in the discount rate by 1% 339 278

In the Parent Entity, in financial year 2014 the number of discount periods remained at the same level as in 2013. The program and schedule for decommissioning technological facilities of KGHM Polska Miedź S.A. and the estimation of decommissioning costs of mines and other technological facilities has been in development since 2001. They are being developed in cooperation with our subsidiary, KGHM Cuprum Sp. z o.o. – CBR.
The last estimate of decommissioning costs of other technological facilities was made in 2013. The updated program and schedule for decommissioning technological facilities was developed assuming a timeframe for production from the mines of KGHM Polska Miedź S.A. in current concessioned areas to the year 2063.

Estimate of the decommissioning costs of mines and other technological facilities in the KGHM INTERNATIONAL LTD. Group is performed based on methodology created jointly by the Nevada Department of Environmental Protection (NDEP) and the U.S. Bureau of Land Management (BLM). The most recent update of this model and of the Standard Reclamation Cost Estimator (SRCE) was made in 2014. To calculate the decommissioning costs of mines and technological facilities in the KGHM INTERNATIONAL LTD. Group, it was also assumed that mined production by the Robinson mine will end in 2022, and by the Carlota mine in 2017.

3.18 Deferred tax assets/liabilities

Deferred tax assets/liabilities are measured using the tax rates which are expected to apply at the moment when the assets are realised or the liabilities are settled, based on tax laws that have been enacted or substantively enacted at the end of the reporting period in the given country.

The probability of realising the deferred tax assets with future tax income is based on the budgets of Group companies. The companies of the Group recognised in their accounts deferred tax assets up to the amounts to which it is probable that they will achieve taxable profit which will enable the deduction of deductible temporary differences.

Companies of the Group which historically have generated losses, and whose financial projections do not foresee the achievement of taxable profit enabling the deduction of deductible temporary differences, do not recognise deferred tax assets in their accounts.

In the current reporting period, as a result of the change in the tax system in Chile, the Group remeasured the value of the deferred tax liabilities created in respect of the future dividends to be paid by a foreign entity on the difference between the carrying amount of the net assets of the Sierra Gorda project and their fair value as at the date of acquisition by KGHM Polska Miedź S.A.

At initial recognition of the Sierra Gorda project, its income was taxed according to the First Category Tax in Chile (FCT) at the level of 17%. In addition, the tax system provided for the taxation of dividends paid to owners outside of Chile under the Second Category Tax (SCT). The SCT rate was 35%, and consequently the tax paid could be fully deducted in respect of the SCT, i.e. the total tax rate amounted to 35% (effectively 18% of taxable income, which is 21.7% of taxable income less income tax paid by the company), as a result of which deferred tax liabilities were recognised at the date of acquisition of Sierra Gorda in the amount of USD 222 million (PLN 778 million at the average exchange rate on 31 December 2014 announced by the NBP).

The change in the Chilean tax system adopted in 2014 will take effect from 1 January 2017. These regulations required Sierra Gorda S.C.M. to select one of the new corporate income tax models. The company chose the taxation model which sets the target corporate income tax rate at 27% starting from 2018, which will be paid on taxable income earned by the company for a given year as well as additional tax on foreign companies equal to the difference between the 35% tax rate and the paid tax rate of 27% (effectively 8% of taxable income, which is 11% of taxable income less income tax paid by the company), paid when profit is distributed. In order to make use of this taxation option the foreign shareholder must meet the condition of tax residency in a country with which Chile has an agreement to avoid double taxation. KGHM Polska Miedź S.A. is in the process of creating an organisational structure which will allow this option to be chosen, while achievement of these changes is not restricted by any external factors.

In consideration of the above, the Group remeasured the deferred tax, which resulted in:

  • a decrease in deferred tax liabilities arising from temporary differences on profits due from the investment Sierra Gorda in the amount of USD 91 million (PLN 290 million based on the arithmetic average of average exchange rates announced by the NBP at the end of each month in 2014) through profit or loss in the “income tax expense” position
  • a decrease in value of the investment in Sierra Gorda in the amount of USD 79 million (PLN 251 million based on the arithmetic average of average exchange rates announced by the National Bank of Poland at the end of each month in 2014) due to the estimates of the tax on profits, recognised in the value of the investment in Sierra Gorda, through profit or loss in the “Share in losses of investments accounted for using the equity method” position.