Electricidad, voz y datos

The Parent Entity considers the following factors in selecting a hedging strategy: current and forecasted market conditions, the internal situation, and the cost of hedging. The Parent Entity transacts only those derivatives for which it has the ability to assess their value internally, using standard pricing models appropriate for a particular type of derivative, and which can be traded without significant loss of value with a counterparty other than the one with whom the transaction was initially entered into. In evaluating the market value of a given instrument, the Parent Entity makes use of information obtained from leading information services, banks, and brokers.

The Parent Entity’s internal policy, which regulates market risk management principles, permits the use of the following types of instruments:

 Swaps,

 Forwards and futures,  Options,

 Structures combining the above instruments.

The instruments applied may be, therefore, either of standardised parameters (publicly traded instruments) or non-standardised parameters (over-the-counter instruments). Primarily applied are cash flow hedging instruments meeting the requirements for effectiveness as understood by hedge accounting. The effectiveness of the financial hedging instruments applied by the Parent Entity in the reporting period is continually monitored and assessed (details in Note 2.2.8.7 Accounting policy – Hedge accounting).

The Parent Entity quantifies its market risk exposure using a consistent and comprehensive measure. Market risk management is supported by simulations (such as scenario analysis, stress-tests, backtests) and calculated risk measures. The risk measures being used are mainly based on mathematical and statistical modelling, which uses historical and current market data concerning risk factors and takes into consideration the current exposure of the Parent Entity to market risk.

One of the measures used as an auxiliary tool in making decisions in the market risk management process is EaR - Earnings at Risk (profit for the period exposed to risk). This measure indicates the lowest possible level of profit for the period for a selected level of confidence (for example, with 95% confidence the profit for the period for a given year will be not lower than…). The EaR methodology enables the calculation of pre-tax profit incorporating the impact of changes in market prices of copper, silver and foreign exchange rates in the context of budgeted results.

Due to the risk of unexpected production cutbacks (for example because of force majeure) or failure to achieve planned foreign currency revenues, as well as purchases of metals contained in purchased copper-bearing materials, the Parent Entity has set limits with respect to commitment in derivatives:

 up to 85% of monthly volume sales of copper from own concentrates,  up to 85% of monthly volume sales of silver from own concentrates,

 up to 85% of monthly foreign-currency revenues from the sale of products from own concentrates. These limits are in respect both of hedging transactions as well as of the instruments financing these transactions.

The maximum time horizon within which the Parent Entity makes decisions concerning the hedging of market risk is set up in accordance with the technical and economic planning process, and amounts to 5 years.

35.1.2 Commodity risk

The Parent Entity is exposed to the risk of changes in market prices of copper, silver and gold. Other companies of the Group are additionally exposed to the risk of changes in market prices of nickel, lead, molybdenum, platinum and palladium.

In the Parent Entity the price formulas used in physical delivery contracts are mainly based on average monthly quotations from the London Metal Exchange (LME) for copper and from the London Bullion Market Association (LBMA) for silver and gold. The Parent Entity’s commercial policy is to set the price base for physical delivery contracts as the average price of the appropriate future month. As a result the Parent Entity is exposed to the risk of decline in metals prices from the moment of entering into a sale contract until the moment of setting the contractual average metal price from the month of dispatch.

There are also other formulas in the Group for setting metals sales prices.

The analysis of the Group’s exposure to the risk of changes in metal prices should be performed on a net basis, i.e. by deducting the volume of metals contained in materials purchased from external sources, from the volume of sales.

35. Financial risk management (continued)

Exposure of the Group to commodity risk is presented below:

For the period from 1 January 2012

to 31 December 2012 to 31 December 2011 from 1 January 2011

Sales Purchases Sales Purchases

Copper [tonnes] 685 408 195 112 572 941 154 881

Silver [tonnes] 1 267 35 1 180 52

Sensitivity of the Group’s financial instruments to commodity risk at the end of the reporting period is presented in Note 35.1.6 Sensitivity analysis of commodity and currency risk.

35.1.3. Currency risk

Some Group companies are exposed to the risk of changes in currency rates, as it is generally accepted that physical contracts are either concluded or denominated in USD, although in the companies of the Group costs are also incurred in other base currencies than the USD – mainly the Polish złoty (PLN), the Canadian dollar (CAD) and the Chilean peso (CLP). This leads to the arising of risk related to volatility in the USD/PLN, USD/CAD and USD/CLP exchange rates, from the moment a commercial contract is signed until the moment the exchange rate is set. Additionally, in a situation where a foreign customer pays in local currency for the metal they import, there also arises risk related to volatility in other exchange rates, for example: EUR/PLN and GBP/PLN.

Moreover, Group companies are exposed to the risk of changes in foreign exchange rates due to the fact of drawing loans and incurring other liabilities (for example from the import of goods and services) which are denominated in currencies other than the currencies in which these companies achieve revenues.

Sensitivity of the Group’s financial instruments to currency risk at the end of the reporting period is presented in Note 35.1.6 Sensitivity analysis of commodity and currency risk.

35.1.4. Commodity and currency risk management in the Parent Entity

In the Group only the Parent Entity applies hedging strategies, as understood by the hedge accounting. In order to reduce the market risk, related to changes in commodity prices and in foreign exchange rates, the Parent Entity makes use mainly of derivatives.

The nominal of copper price hedging strategies settled in 2012 represented approx. 35% (in 2011 35%) of the total1 _{sales of this metal realised by the Parent Entity. With respect to silver sales this figure amounted to approx.}

27% (in 2011 9%). In the case of the currency market, hedged revenues from sales represented approx. 16% (in 2011 19%) of total revenues from sales realised by the Parent Entity.

In 2012 the Parent Entity implemented copper price hedging strategies with a total volume of 196.5 thousand tonnes and a time horizon falling in years 2013-2015, using options (Asian options), including: option strategies: seagull and collar.

During the reporting period no silver price hedging strategies were implemented by the Parent Entity.

In the case of the forward currency market, in 2012 the Parent Entity implemented transactions hedging revenues from sales with a total nominal amount of USD 720 million and a time horizon falling in years 2014- 2015. The Parent Entity made use of option strategies: collars (European options).

Condensed table of open transactions in derivatives

(by type of hedged asset and instruments used as at 31 December 2012; the hedged nominal/volume included in the presented periods is equally balanced in the months)

COPPER MARKET