Useful terms and abbreviations. 44

Aggregated data of the Company and Group for the years 2014-2021. 66

Significant events in 2021 and to the date of preparation of this report. 77

1.      Introduction. 99

2.      Group structure. 1010

2.1.   Group structure. 1010

2.2.   Organisational structure of KGHM Polska Miedź S.A. 1111

2.3.   Major assets. 1212

2.4.   Production process. 1717

2.5.   Changes in the Group structure, equity investments and their financing. 1919

3.      Primary Group products. 2222

4.      Macroeconomic conditions and analysis of the market. 2424

4.1.   Macroeconomic environment. 2424

4.2.   Analysis of the global market for the Group’s basic products. 3030

5.      Strategy of KGHM Polska Miedź S.A. 3434

5.1.   Strategy description – Basic elements of the Strategy of KGHM Polska Miedź S.A. 3434

5.2.   Development directions of the KGHM Polska Miedź S.A. Group.. 3737

5.3.   Advancement of the Strategy in 2021. 3838

5.4.   The Strategy OF KGHM Polska Miedź S.A. and climate-related actions. 4646

6.      Economic performance of the Group. 5050

6.1.   Production.. 5050

6.2.   Structure of consolidated sales revenue. 5151

6.3.   C1 cost of producing payable copper in the Group.. 5151

6.4.   Financial results. 5252

6.5.   2021 targets versus achievements and targets for 2022. 5656

6.6.   Financing in the Group.. 5757

7.      Economic results of KGHM Polska Miedź S.A. 6262

7.1.   Production.. 6262

7.2.   Sales. 6565

7.3.   Costs. 6666

7.4.   Financial results. 6868

7.5.   Capital expenditures. 7373

8.      Economic results of KGHM INTERNATIONAL LTD. 7575

8.1.   Production.. 7575

8.2.   revenueS. 7575

8.3.   Costs. 7676

8.4.   Financial performance. 7676

8.5.   Cash expenditures. 7777

9.      Economic results of Sierra Gorda S.C.M. 7979

9.1.   Production.. 7979

9.2.   Sales. 7979

9.3.   Costs. 8080

9.4.   Financial results. 8080

9.5.   Cash expenditures. 8282

10.    Financial results of other segments. 8383

11.    Shareholders and the capital market. 8484

11.1.  Shareholder structure of KGHM Polska Miedź S.A. 8484

11.2.  KGHM Polska Miedź S.A. on the Warsaw Stock Exchange. 8585

12.    Risk management in the Group. 8888

12.1.  Comprehensive risk management system in the KGHM Polska Miedź S.A. Group.. 8888

12.2.  Corporate risk – key risk factors and their mitigation.. 9191

12.3.  Market, credit and liquidity risk. 105105

12.4.  Market risk management. 106106

13.    Human resources in the Company and Group. 110110

13.1.  Employment. 110110

13.2.  Human resources projects. 111111

13.3.  Relations with the trade unions. 114114

13.4.  Occupational health and safety. 115115

14.    Significant contracts for the Company and Group. 118118

14.1.  Information on transactions entered into between related parties, under other than arm’s length conditions. 119119

14.2.  Information on contracts with the entity entitled to audit the financial statements. 119119

14.3.  Information about suppliers and customers. 119119

15.    Litigation and claims. 121121

16.    Environmental protection. 122122

16.1.  KGHM Polska Miedź S.A. 122122

16.2.  KGHM INTERNATIONAL LTD. Group.. 123123

16.3.  Other Group companies in Poland.. 124124

17.    The Management Board and the Supervisory Board of the Parent Entity. 125125

17.1.  Bios and responsibilities of members of the Management Board.. 125125

17.2.  Biograms of members of the Supervisory Board.. 128128

17.3.  Changes in the Parent Entity’s bodies. 131131

17.4.  Remuneration of the Parent Entity’s bodies and of other key managers of the Group.. 132132

18.    Ethics and Corporate Governance. 136136

19.    Regulatory filings published after the balance sheet date. 139139

Appendix 1 Corporate Governance statement. 140140

Appendix 2 KGHM Polska Miedź S.A. Group structure. 154154

Appendix 3 KGHM INTERNATIONAL LTD. Group structure. 155155

Appendix 4 Activities of subsidiaries and joint ventures of KGHM Polska Miedź S.A. 156156

Companies in Poland.. 156156

International companies (and Future 1 Sp. z o.o.) 157157

List of tables, charts and diagrams. 159159

Tables  159159

Charts  160160

Diagrams. 160160

In accordance with Art. 49b point 9 of the Accounting Act, „The Management Board’s Report on the activities of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group in 2021” does not contain a declaration on non-financial information, due to the fact that a separate non-financial report is being prepared and published.

Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation)	Profit on sales plus depreciation/amortisation recognised in profit or loss and recognition/reversal of impairment losses on non-current assets. The KGHM Polska Miedź S.A.  Group’s EBITDA is a sum of EBITDAs of individual operating segments
Barren rock	Rock which accompanies the extraction of mineral ore and is not considered as useful
BAT (Best Available Technique)	Best Available Technique, as defined in Directive 96/61/EC, means the most effective and advanced stage in the development of activities and their methods of operation which indicate the practical suitability of particular techniques for providing in principle the basis for emission limit values designed to prevent and, where that is not practicable, generally to reduce emissions and the impact on the environment as a whole
BREF	“BAT REFerence document”, the reference document of best available techniques (BAT)
Cost of producing payable copper (C1)	Unit cash cost of producing payable copper, reflecting ore mining and processing costs, transport costs, the minerals extraction tax, administrative expenses during the mining phase and smelter treatment and refining charges (TC/RC) less by-product value. C1 cost is in regard to payable copper in own concentrate in the case of the segment KGHM Polska Miedź S.A. and payable copper in end products of individual mines of the segment KGHM INTERNATIONAL LTD. and the segment Sierra Gorda S.C.M.
Copper cathodes	The basic form of electrolytically-refined copper; the product of electrolytic copper refining
Copper concentrate	The product of enriching low-grade copper ore
Copper wire rod	Drawn copper rod, usually with a diameter of 6-12 mm, universally used as a starting material in the cable industry
OFE rod	Oxygen-free copper wire rod produced at the Cedynia Wire Rod Plant using UPCAST technology
Deposit/Orebody	Natural collection of minerals in the earth, arising as a result of various geological processes
Electrolytic copper	The product of electrolytic copper refining
Electrolytic copper refining technology	A process involving the electrolytic refining of metal, in this case copper. The periodic removal of portions of the electrolite is required to maintain the level of contaminates at an acceptable level, which is the one of decisive factors determining the quality of electrolytically-refined copper. The contaminated electrolyte and slimes are used as the raw materials in the recovery of some of the metals accompanying the copper, such as silver, gold, selenium and nickel
Electrorefining	The process of electrolising dissoluble anodes which are produced from refineable alloys. During this process refined metal is collected on starter sheets under controlled conditions, while contaminants remain in the electrolyte as solids or liquid
Flotation (ore enrichment)	A stage in the process of breaking down ore into fragments of varying composition of useful elements which exploits differences in the degree of wettability of individual mineral grains. Well-wetted minerals fall to the bottom of the flotation tank, while the poorly-wetted grains (those whose wettability additionally decreases due to the action of so-called collecting agents, e.g. xanthates) collect at the surface of the froth created from froth-inducing agents
Flotation tailings	Waste remaining after the ore enrichment process; can be utilised or stored
ISO	International Organization for Standardization
LTIFRKGHM (Lost Time Injury Frequency Rate)	Indicator of the number of accidents at work (as defined by the Act dated 30 October 2002 on social insurance in case of occupational accident or disease) in the Company KGHM Polska Miedź S.A., standardised to 1 million worked hours
Mine excavation	Open area left after the mining work
Muck	Rock removed from a mine face. Contains both ore and barren rock
NBP	National Bank of Poland
Net debt	Borrowings and debt securities less cash and cash equivalents. This category includes lease liabilities and excludes reverse factoring liabilities
Ore	Rock which contains one or more useful elements. Ore can be monometallic (containing a single metal) or polymetallic (containing more than one metal)
Payable metal	Volume of metal produced less the loss incurred in further processing to pure metal
Pillar (mining)	An unremoved mass of rock in an underground mine used to support the ceiling against collapse

Pre-precious metals credit unit cost of electrolytic copper production from own concentrate	The sum of costs of mining, flotation, smelter processing per cathode and support functions (the Data Center Division, the Mine-Smelter Emergency Rescue Division and the Head Office), together with cathode selling costs, adjusted by the value of inventories of half-finished products and work in progress divided by the volume of electrolytic copper production from own concentrate. Used solely in the Parent Entity
REACH	Registration, Evaluation, Authorisation and Restriction of Chemicals - regulation issued by the European Parliament and of the European on the safe use of chemicals through their registration and evaluation, and in certain cases through the issuance of permits and restrictions in the sale and use of certain chemicals
Silver smelting and electrolytic refining technology	Comprised of: batch preparation (the mixture of batch elements followed by drying); the smelting of Doré metal and the casting of anodes (melting of the batch in a Kaldo furnace to remove slag or gasify impurities followed by casting of the product [99% silver] into anodes); silver electrorefining (forming into cathodes containing a min. 99.99% silver); melting in an electric induction furnace and the casting of refined silver into commercial form (billets or granules)
SX-EW (solvent extraction and electrowinning)	Copper cathode production technology applied in some plants of KGHM INTERNATIONAL LTD. based on solvent extraction (the process of leaching useful minerals using a solvent) of the copper ore heap, with the aid of diluted sulphuric acid, under the atmospheric conditions
Total unit cost of producing copper from own concentrate	The sum of costs of mining, flotation, smelter processing per cathode and support functions (the Data Center Division, the Mine-Smelter Emergency Rescue Division and the Head Office), together with cathode selling costs, adjusted by the value of inventories of half-finished products and work in progress and less the value of anode slimes, divided by the volume of electrolytic copper production from own concentrate
The Group	The KGHM Polska Miedź S.A. Group
TPM (Total Precious Metals)	Precious metals (gold, platinum, palladium)
TRIR (Total Recordable Incident Rate)	Indicator of the number of accidents at work meeting the conditions of registration as defined in the ICMM (International Council on Mining & Metals) standard, standardised to 200 000 worked hours
Troy ounce (oz t)	A unit of measure mainly used in English-speaking countries. The troy ounce (abbreviated as oz t) is universally used in jewellery and precious metals commerce. 1 troy ounce equals 31.1035 grams
YoY	year on year, i.e. comparison between one year and the next year

BASIC ITEMS OF THE CONSOLIDATED FINANCIAL STATEMENTS

		2021	2020	2019	2018	2017	2016	2015	2014
Revenues from contracts with customers	PLN mn	29 803	23 632	22 723	20 526	20 358	19 156	20 008	20 492
Profit/(loss) for the period	PLN mn	6 155	1 797	1 421	1 658	1 525	(4 449)	(5 009)	2 451
Adjusted EBITDA (1	PLN mn	10 327	6 623	5 229	4 972	5 753	4 666	4 710	4 890
Total assets	PLN mn	48 027	42 780	39 409	37 237	34 122	33 442	36 764	40 374
Liabilities and provisions	PLN mn	20 889	21 699	19 207	18 012	16 337	17 531	16 350	14 844
Earnings per share (EPS) (2	PLN	30.78	9.00	7.11	8.29	7.84	(21.86)	(25.06)	12.25
Share price of the Company (3	PLN	139.40	183.00	95.58	88.88	111.20	92.48	63.49	108.85
Net debt/EBITDA (4		0.6	0.9	1.5	1.6	1.3	1.6	1.4	0.9
Payable copper production (1	kt	753.7	709.1	701.6	633.9	656.4	676.9	697.1	662.9
Payable silver production (1	t	1 366	1 353	1 417	1 205	1 234	1 207	1 299	1 258
Payable copper production cost C1 (1	USD/lb	1.96	1.59	1.70	1.81	1.59	1.41	1.59	1.89
Cash expenditures on property, plant and equipment and intangible assets	PLN mn	3 890	3 458	3 232	2 875	2 796	3 251	3 939	3 434

BASIC ITEMS OF THE SEPARATE FINANCIAL STATEMENTS

		2021	2020	2019	2018	2017	2016	2015	2014
Revenues from contracts with customers	PLN mn	24 618	19 326	17 683	15 757	16 024	15 112	15 939	16 633
Profit/(loss) for the period	PLN mn	5 169	1 779	1 264	2 025	1 323	-4 085	-2 788	2 414
Adjusted EBITDA	PLN mn	5 474	4 458	3 619	3 416	4 160	3 551	4 163	4 331
Total assets	PLN mn	43 458	39 342	35 989	34 250	30 947	30 100	33 120	32 312
Liabilities and provisions	PLN mn	17 618	18 616	16 100	15 205	13 691	14 200	12 841	8 035
Earnings per share (EPS)(2	PLN	25.85	8.90	6.32	10.13	6.62	-20.42	-13.94	12.07
Electrolytic copper production	kt	577.6	560.4	565.6	501.8	522.0	535.6	574.3	576.9
Metallic silver production	t	1 332	1 323	1 400	1 189	1 218	1 191	1 283	1 256
Payable copper production cost C1	USD/lb	2.26	1.62	1.74	1.85	1.52	1.3	1.47	1.82
Cash expenditures on property, plant and equipment and intangible assets	PLN mn	2 407	2 422	2 366	1 907	1 991	2 604	2 481	2 203

MACROECONOMIC DATA (AVERAGE ANNUAL)

		2021	2020	2019	2018	2017	2016	2015	2014
Copper prices per the LME	USD/t	9 317	6 181	6 000	6 523	6 166	4 863	5 495	6 862
Silver prices per the LBMA	USD/oz t	25.14	20.54	16.21	15.71	17.05	17.14	15.68	19.08
Exchange rate	USD/PLN	3.86	3.90	3.8399	3.61	3.78	3.94	3.77	3.15

(data for the years 2014-2019 according to annual reports for these periods, data for the years 2020-2021 according to the current annual report)

¹⁾Comprises Sierra Gorda S.C.M. pursuant to interest held (55%)

²⁾ Attributable to shareholders of the Parent Entity

³⁾ At the end of the period

⁴⁾ Adjusted EBITDA for the year, excluding EBITDA of the joint venture Sierra Gorda S.C.M.

Date	Event	Section
CHANGE IN MACROECONOMIC CONDITIONS
2021	An increase in average annual prices of copper, silver and molybdenum respectively by 51%, 22% and 82%	4
2021	Changes in average annual exchange rates: USD/PLN by -1%, USD/CAD by -7% and USD/CLP by -4%	4
KGHM Polska Miedź S.A. ON THE STOCK EXCHANGE
2021	A decrease in the share price of KGHM Polska Miedź S.A. by 24% from PLN 183.00 to PLN 139.40	11
CHANGES IN THE COMPOSITION OF KGHM POLSKA MIEDŹ S.A.’S BODIES
23 March 2021	Appointment of the Management Board of KGHM Polska Miedź S.A. to the new 11th term	17
20 April 2021	Resignation of Katarzyna Lewandowska from serving as a Member of the Supervisory Board of KGHM Polska Miedź S.A.	17
14 May 2021	The appointment (as of 15 May 2021) of Dariusz Świderski to the Management Board of KGHM Polska Miedź S.A. as Vice President of the Management Board (Production) of KGHM Polska Miedź S.A.	17
6 July 2021	Appointment to the Supervisory Board of KGHM Polska Miedź S.A. of Robert Kaleta and Katarzyna Krupa	17
25 October 2021	The resignation of Marek Pietrzak from serving as a Member of the Supervisory Board of KGHM Polska Miedź S.A. and his appointment (as of 26 October 2021) to the Management Board of KGHM Polska Miedź S.A. as Vice President of the Management Board (Corporate Affairs).	17
21 February 2022	Dismissal of Dariusz Świderski from the Management Board of KGHM Polska Miedź S.A. from the position of Vice President of the Management Board  (Production) of KGHM Polska Miedź S.A.	17
14 March 2022	The appointment (as of 15 March 2022) of Marek Świder to the Management Board of KGHM Polska Miedź S.A. as Vice President of the Management Board (Production) of KGHM Polska Miedź S.A.	17
veryfication OF ASSETS
17 February 2021	Information on the identification of indications to verify the recoverable amount of domestic and international assets of the KGHM Polska Miedź S.A. Group	6,7
11 March 2021	Information on the results of work related to testing for the impairment of the recoverable amount of domestic and international assets of the KGHM Polska Miedź S.A. Group	6,7
12 July 2021	Information on the identification of indications to verify the recoverable amount of international assets of the KGHM Polska Miedź S.A. Group	6,7
5 August 2021	Information on completing work related to testing for the impairment of the international mining assets of the KGHM Polska Miedź S.A. Group	6,7
ALLOCATION OF PROFIT
10 May 2021	The Management Board’s proposal regarding the allocation of profit for 2020 (recommended dividend payout of PLN 300 million)	-
7 June 2021	Decision of the Ordinary General Meeting of KGHM Polska Miedź S.A. to pay a dividend in the amount of PLN 300 million, representing PLN 1.50 per share	11

SIGNIFICANT AGREEMENTS
26 March 2021	Conclusion of an agreement to sell shares in the company PGE EJ 1 sp. z o.o. to the State Treasury	14
29 March 2021	Conclusion of a bank loan agreement between Sierra Gorda S.C.M. and Bank Gospodarstwa Krajowego	14
23 September 2021	Consent of the Management Board of the Company to sign a tripartite agreement with NuScale Power LLC and PBE Molecule Sp. z o.o. Sp. k., with respect to preparations to advance an investment involving the construction of nuclear energy sources	14
FINANcing in the group
16 June 2021	Consent of the Management Board of the Company to sign an Annex to an unsecured loan agreement in the amount of PLN 900 million dated 11 December 2017 with the European Investment Bank	6.6
27 October 2021	Consent of the Management Board of the Company to extend the term of an unsecured revolving syndicated credit facility agreement in the amount of USD 1 500 million	6.6
2 December 2021	Information on extending the term of an unsecured revolving syndicated credit facility agreement. As a result of the decision of one of the members of the syndicate to not exercise its right to extend its participation, the amount of available credit facility will amount to USD 1 438 million	6.6
OTHER
28 January 2021	Approval by the Supervisory Board of the Budget of KGHM Polska Miedź S.A. and the Budget of the KGHM Group for 2021	6.5
14 October 2021	Receipt of a document titled “Offer Notice” from Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation in connection with the intent to sell the entirety of the shares of Sumitomo in the joint venture company Sierra Gorda SCM to the Australian mining group South32	2
16 November 2021	Adoption of a Climate Policy by the Management Board of KGHM Polska Miedź S.A.	5
24 November 2021	Decision not to exercise the right of first refusal to acquire shares in the joint venture company Sierra Gorda SCM belonging to Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation	2
14 January 2022	Approval by the Supervisory Board of the Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040	5
14 January 2022	Approval by the Supervisory Board of the Budget of KGHM Polska Miedź S.A. and of the KGHM Polska Miedź S.A. Group for 2022	6.5
10 February 2022	Repayment of a loan granted to the joint venture Sierra Gorda S.C.M. – the Group received a payment from Sierra Gorda S.C.M. due to loan drawn in the amount of PLN 431 million (USD 110 million)
22 February 2022	Finalisation of the sale of all shares held by Sumitomo in the joint venture company Sierra Gorda SCM to the Australian mining group South32	2
10 March 2022	Act amending the act on minerals extraction tax came into force. Formula used to calculate the tax rates for copper and silver was amended, which in the transitional period from 1 January to 30 November 2022 sets the tax rate based on a decrease in the coefficient by 0.25 (this coefficient amounted to 0.85, and after the change amounts to 0.6), which in consequence reduces the monthly tax charge by approx. 30%.

KGHM Polska Miedź S.A. is the Parent Entity of a Group which is a world-class producer of copper and silver with over 60 years of experience in the copper ore mining and processing sector. In Poland, KGHM Polska Miedź S.A. operates one of the world’s largest copper deposits, guaranteeing continuous production in Poland for the next several decades. KGHM Polska Miedź S.A. also produces silver, gold, lead and rock salt, as well as being one of the leading exporters in the country and one of the largest companies in Poland.

The Group is a global and innovative organisation, which conducts technologically advanced exploration-mining and metallurgical activities and has a geographically diversified portfolio of mining projects. The business model is divided into 7 areas, through which the Group ensures a complete chain of value creation, from exploration to the sale of finished products:

Diagram 1.               Business model of the KGHM Polska Miedź S.A. Group

The KGHM Polska Miedź S.A. Group includes the Parent Entity – KGHM Polska Miedź S.A. – and 69 subsidiaries. Uniformity in such a complex organisation is ensured by KGHM’s values – zero harm, teamwork, results-driven, accountability and courage. For 60 years they have been the Company’s business compass, indicating the direction of development and the means of operation on the international market.

For almost 25 years the Company has been listed on the Warsaw Stock Exchange. The Company is included in the WIG20 and WIG30 indices.

KGHM Polska Miedź S.A. actively supports the realms of science, the arts and sport. Through its Foundation founded in 2003, KGHM Polska Miedź engages in charitable activities.

2.1.    Group structure

As at 31 December 2021, the Group was composed of the Parent Entity – KGHM Polska Miedź S.A. – and 69 subsidiaries (including one closed-end, non-public investment fund), located on four continents: Europe, North America, South America and Asia. Some of these subsidiaries form their own groups. The largest of these, in terms both of the number of entities as well as the value of equity, is the KGHM INTERNATIONAL LTD. Group, whose main assets are located in Canada, the USA and Chile. It was comprised of KGHM INTERNATIONAL LTD. and its 26 subsidiaries. At the end of the reporting period the KGHM Polska Miedź S.A. Group owned shares in two joint ventures - Sierra Gorda S.C.M. and NANO CARBON Sp. z o.o. in liquidation.

The detailed structure of the KGHM Polska Miedź S.A. Group, together with the relationships between entities, may be found in Appendices 2 and 3.

The Group’s main entities, which are engaged in the mining sector, comprise three primary reporting segments which are independently evaluated by management bodies. These are: KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD. and Sierra Gorda S.C.M. Other companies, excluding Future 1 Sp. z o.o., Future 3 Sp. z o.o., Future 4 Sp. z o.o., Future 5 Sp. z o.o. and Future 7 Sp. z o.o. in liquidation, are part of the segment called Other segments.

The following diagram presents the significant production assets and projects underway within the reporting segments: KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD., Sierra Gorda S.C.M. and Other segments.

Diagram 2.               Reporting segments of the KGHM Polska Miedź S.A. Group

The following companies were not included in any of the aforementioned segments:

-     Future 1 Sp. z o.o., which acts as a holding company with respect to the KGHM INTERNATIONAL LTD. Group,

-     Future 3 Sp. z o.o., Future 4 Sp. z o.o., Future 5 Sp. z o.o. (which operate in the structure related to the establishment of a Tax Group) and Future 7 Sp. z o.o. in liquidation.

These companies do not conduct operating activities which could impact the results achieved by individual segments, as a result of which their inclusion could disrupt the data presented in the consolidated financial statements due to the significant internal settlements with the other entities from the Group.

The segments KGHM Polska Miedź S.A., KGHM INTERNATIONAL LTD. and Sierra Gorda S.C.M. have separate Management Boards, which report their operational results to the Management Board of the Parent Entity.

The segment KGHM Polska Miedź S.A. only includes the Parent Entity, while the segment Sierra Gorda S.C.M. only includes the joint venture Sierra Gorda. Diagram 2 presents the remaining companies of the KGHM Polska Miedź S.A. Group with a breakdown by segment: KGHM INTERNATIONAL LTD. and Other segments.

CHANGES IN THE BASIC PRINCIPLES FOR MANAGING THE GROUP

In October 2021 the Supervisory Board of KGHM Polska Miedź S.A. appointed a new member of the Management Board, assigning him the function of Vice President of the Management Board (Corporate Affairs). Under the assigned duties, the Vice President of the Management Board (Corporate Affairs) exercises comprehensive corporate supervision over the domestic and international subsidiaries of the Group, which until now have been exercised by the President of the Management Board.

Following the restructuration of KGHM INTERNATIONAL LTD., comprised of the transferral of management and most support processes to the Company’s Head Office, this action being a result of the adopted strategy of implementation of the cooperation model and integration of key international assets with domestic activities, in 2021 actions were continued mainly with respect to developing unified reporting principles, coherent internal regulations, procedures and standardised solutions with respect to individual functional areas of the international entities.

In addition, in 2021 in terms of general management principles in force to date, actions were undertaken aimed at coordinating new processes in the Group, including among others as regards commercial activities, aimed at maintaining the continuity and operational safety of the core production business. One of the most important aspects in this regard were actions arising from the COVID-19 pandemic. Coordination of these actions at the level of the Parent Entity were aimed at restricting the pandemic’s negative impact on the operations of the Group’s entities.

2.2.    Organisational structure of KGHM Polska Miedź S.A.

In 2021, the multi-divisional organisational structure of the Company, acting under the name KGHM Polska Miedź S.A., comprised the Head Office of the Company and 10 Divisions.

Diagram 3.               Organisational structure of the Company as at 31 December 2021

CHANGES IN THE BASIC PRINCIPLES FOR MANAGING THE COMPANY

As a result of a Resolution of the Ordinary General Meeting of KGHM Polska Miedź S.A. adopted on 19 June 2020,  changes were made to the Statutes of the Company with respect to the adoption of resolutions by the Management Board in matters exceeding the scope of ordinary management.

Based on changes to the Statutes registered in the National Court Register (KRS), on 12 August 2020 the Management Board introduced changes to the Bylaws of the Management Board, which were approved by the Supervisory Board on 21 January 2021.

On 29 March 2021 the Supervisory Board of the Warsaw Stock Exchange adopted new corporate governance principles for companies listed on the GPW’s Main Market  – „Best Practice for GPW Listed Companies 2021” (Best Practice 2021).

The Management Board decided to adapt the Bylaws of the Management Board to Best Practice 2021, which were then approved by the Supervisory Board. In addition, the Supervisory Board of KGHM Polska Miedź S.A., taking into account the adopted Best Practice 2021, adopted changes to the Bylaws of the Supervisory Board. As a result of the changes introduced to the Bylaws of the Management Board and of the Supervisory Board, the Company published Statement on the Company’s compliance with the principles of Best Practice 2021.

2.3.    Major assets

The KGHM Polska Miedź S.A. Group holds geographically diversified mining assets (copper ore mines with associated minerals, such as silver, molybdenum, nickel, gold and other precious metals) located in Poland, the USA, Chile and Canada as well as metallurgical facilities in Poland. The key international asset – the Sierra Gorda mine, which is a joint venture of KGHM INTERNATIONAL LTD., Sumitomo Metal Mining and the Sumitomo Corporation (since 22 February 2022 South32) – is located in Chile. In addition, the KGHM Polska Miedź S.A. Group has a mine project which is at the preproduction phase (Victoria), as well as other exploration projects.

The major assets of the KGHM Polska Miedź S.A. Group are presented in the diagram below.

Diagram 4.               Location of the production assets of the KGHM Polska Miedź S.A. Group

PolaND

Polkowice-Sieroszowice mine
Location Lower Silesia, Poland Ownership KGHM Polska Miedź S.A. Type of mine underground Main ore type copper ore Associated metals silver, lead, rock salt, gold Type of orebody stratiform End product copper ore Copper in extracted ore in 2021 195.4 kt	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) area. Within the Sieroszowice mining area, there are also rich deposits of rock salt above the copper-bearing horizon.
Mining of the deposit is conducted using room-and-pillar methods with natural roof settlement, using blasting technology. The Polkowice-Sieroszowice mine’s current production capacity is around 12 million tonnes of ore per year.

Rudna mine

Location Lower Silesia, Poland Ownership KGHM Polska Miedź S.A. Type of mine underground Main ore type copper ore Associated metals silver, lead, gold Type of orebody stratiform End product copper ore Copper in extracted ore in 2021 175.7 kt

The Rudna mine is located in Lower Silesia, to the north of the town of Polkowice. It mines the copper deposit in the Rudna mining area as well as in parts of the mining areas of Sieroszowice, Lubin-Małomice and Głogów Głęboki-Przemysłowy (Deep Głogów). The copper orebody in the currently mined deposit ranges from 844 meters to 1250 meters. Mining is conducted using room-and-pillar methods with natural roof settlement with hydraulic backfill, using blasting technology. The current average production capacity is approx. 12 million tonnes of ore per year.

Lubin mine

Location Lower Silesia, Poland Ownership KGHM Polska Miedź S.A. Type of mine underground Main ore type copper ore Associated metals silver, lead, gold Type of orebody stratiform End product copper ore Copper in extracted ore in 2021 71.6 kt

The Lubin mine is located in Lower Silesia, Poland, to the north-west of the town of Lubin. It mines the copper deposit in the mining area Lubin-Małomice at a depth from 550 meters to 1006 meters. Mining is conducted using room-and-pillar methods with natural roof settlement with hydraulic backfill, in the vicinity of the support pillar of the town of Lubin, using blasting technology. The mine’s current production capacity is around 8.4 million tonnes of ore per year.

Głogów Copper Smelter and Refinery

Location Lower Silesia, Poland Ownership KGHM Polska Miedź S.A. Type of metallurgical plant smelter/refinery End product electrolytic copper Electrolytic copper production in 2021 455.5 kt

This complex of metallurgical plants located in Głogów comprises two copper concentrate smelting lines based on the one-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 30 thousand tonnes annually), silver (around 1400 tonnes), gold (around 2 tonnes) and sulphuric acid (over 500 thousand tonnes).

Legnica Copper Smelter and Refinery

Location Lower Silesia, Poland Ownership KGHM Polska Miedź S.A. Type of metallurgical plant smelter/refinery End product electrolytic copper Electrolytic copper production in 2021 122.1 kt

The copper smelter and refinery located in Legnica has a current production capacity of 120 thousand tonnes of electrolytic copper. In operation since the 1950s based on shaft furnace technology. Apart from electrolytic copper, the plant also annually produces around 30 thousand tonnes of refined lead and also around 100 thousand tonnes of sulphuric acid, as well as copper sulphate and nickel sulphate.

Cedynia Wire Rod Plant

Location Lower Silesia, Poland Ownership KGHM Polska Miedź S.A. Type of metallurgical plant processing End product copper wire rod and Cu-OFE rod Production in 2021 264.3 kt of copper wire and 17.6 kt of Cu-OFE rod

Production at the Cedynia Wire Rod Plant, located in the vicinity of Orsk, is based on the use of copper cathodes from the Głogów Copper Smelter and Refinery and 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 around 265 thousand tonnes annually and around 18 thousand tonnes annually of oxygen-free copper wire rod produced in an UPCAST line, including oxygen-free, silver-bearing copper wire rod.

THE UNITED STATES

Robinson mine

Location Nevada, USA Ownership 100% KGHM INTERNATIONAL LTD. Type of mine open pit Main ore type copper ore Associated metals gold and molybdenum Type of orebody porphyry/skarn End product copper and gold concentrate, molybdenum concentrate Payable copper production in 2021 53.7 kt

The mine is located in White Pine county, Nevada, USA, around 11 km west of Ely (approx. 400 km north of Las Vegas), in the Egan range, at an average altitude of 2130 meters a.s.l., near highway no. 50. The mine is comprised of 3 large pits: Liberty, Tripp-Veteran and Ruth. Currently, Ruth is in operation. The sulphide ore is extracted by conventional methods, and is then processed in a concentrating plant into a copper and gold concentrate, and separately into molybdenum concentrate.

Carlota mine
Location Arizona, USA Ownership 100% KGHM INTERNATIONAL LTD. Type of mine open pit Main ore type copper ore Type of orebody porphyry End product copper cathodes Payable copper production in 2021 5.4 kt	The Carlota mine is located in the Western part of the Miami-Globe mining region, in the state of Arizona at an altitude of 1 300 meters a.s.l. Surrounding the mine is mountainous, desert terrain. Copper ore extraction by the Carlota mine is by conventional methods typical for open-pit metals mines, i.e. the ore is mined by blasting and then is transported by haulage trucks. In 2018 mining re-commenced in the Eder South area, while in 2021 mining commenced in the Eder North area.
Due to the nature of the oxide ore, it is processed using the heap leach, solvent-extraction and electrowinning method. The end product is electrolytic copper in the form of cathodes. By a decision dated 17 September 2020 the Management Board of KGHM Polska Miedź S.A. approved the designation of the Carlota mine as held for sale. The Carlota mine, starting from 30 June 2021, has been recognised as an asset held for sale. The process of disposing of the mine continues.

Canada

Sudbury Basin
Location Sudbury, Ontario, Canada Ownership 100% KGHM INTERNATIONAL LTD. Type of mine underground Main ore type copper, nickel, platinum, palladium and gold ore Type of orebody footwall/contact Ni End product copper and nickel ore with precious metals Payable copper production in 2021 1.9 kt	The Sudbury Basin is located in central Ontario in Canada, approx. 400 km north of Toronto. In this region KGHM INTERNATIONAL LTD. owns a variety of assets, though since April 2019 mining has only been conducted in the underground McCreedy West mine, due to the fact that the Morrison/Levack mine has been placed into Care & Maintenance. Extraction is through mining methods which are dependent on the geometry of the deposit – mainly a mechanised method of selective extraction using undercutting of successive levels from bottom to top at various mine levels. All of the ore extracted from the mine, containing copper, nickel and precious metals, is processed in the Clarabelle plant in Sudbury, owned by Vale.

Victoria project
Location Sudbury Basin, Ontario, Canada Ownership 100% KGHM INTERNATIONAL LTD. Type of mine underground Main ore type copper-nickel ore Associated metals gold, platinum and palladium Mine life 14 years End product copper, nickel and precious metals ore Forecasted annual production 16 kt Ni, 18 kt Cu	This project is located in the Canadian province of Ontario, around 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 region commenced. 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 thus far has confirmed the continuity and characteristics of the mineralisation to the level of approximately 2200 meters below the surface.
Based on analytical work performed in 2017, the current base scenario assumes the Victoria project will be developed in two stages, comprised of the sinking of a first shaft along with additional exploration, followed by a second shaft for production. In 2021, based on exploratory work performed, approx. 6 million tonnes of project ore resources were re-categorised to a higher recognition category (from Inferred to Indicated). In addition, work focused on preparing the foundations for the shaft’s headframe, the waste rock containment pad and the site’s parking lot, as well as a water treatment plant.
Ajax project
Location Kamloops, British Columbia, Canada Ownership KGHM INTERNATIONAL LTD. 80%; Abacus Mining and Exploration Inc. 20% Type of mine open pit Main ore type copper ore Associated metals precious metals (gold and silver) Mine life 19 years End product copper concentrate Forecasted annual production 53 kt Cu, 114 thousand ounces Au	The Ajax project is located in British Columbia, Canada, 400 km north-east of Vancouver near the town of Kamloops. The project assumes the construction of an open-pit copper and gold mine and an ore processing plant, with associated infrastructure. Up to 2016 work had been carried out on a Feasibility Study for the project, setting out the preliminary economic conditions for the venture. In December 2017 the Ministers of Environment and of Energy, Mines and Petroleum Resources of British Columbia (provincial authorities) decided against the granting of an Environmental Assessment Certificate for the Ajax project.
In June 2018, the Government of Canada, through the Governor-in-Council (Cabinet) issued a negative decision regarding the Ajax project as the project is likely to cause significant adverse environmental effects. The decisions were made through the environmental impact assessment process, and reflect the substantial engagement of provincial and federal governmental agencies, First Nations and a broad spectrum of stakeholders, including thousands of representatives of local communities. As a result of the decision not to grant an EA Certificate, in 2021 work continued which was mainly related to monitoring and securing of the project terrain in accordance with law in force.

Chile

Sierra Gorda mine and Sierra Gorda Oxide project
Location Region II, Chile Ownership1) 55% KGHM INTERNATIONAL LTD, 45% SMM SIERRA GORDA INVERSIONES LIMITADA, incl. respectively: -Sumitomo Metal Mining Co., Ltd. (31.5%) -Sumitomo Corporation (13.5%) Type of mine open pit Main ore type copper ore Associated metals molybdenum, gold Mine life 23 years for the current deposit based on phase 1 of the investment, including actions to remove bottlenecks. Moreover, there is a possibility to extend the mine’s life using new deposits End product copper concentrate, molybdenum concentrate Payable production in 2021 189.8 kt of copper in concentrate, 14.9  million pounds of molybdenum in concentrate – on a 100% basis, share of KGHM Polska Miedź S.A. is 55%	The Sierra Gorda mine is located in the Atacama desert, in the Sierra Gorda administrative area 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. On 1 July 2015 the Sierra Gorda mine commenced commercial production (since then it has prepared statements of profit or loss). The ore is extracted using explosives, and next is loaded and hauled away in trucks to the processing plant, where it is crushed and milled. The end product of Sierra Gorda’s processing plant is copper concentrate and molybdenum concentrate.
1)  In 2021, Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation made a decision to sell all of their interests in the joint venture company Sierra Gorda SCM to the Australian mining group South32. The Management Board of KGHM Polska Miedź S.A. decided to refrain from exercising its right of first refusal to acquire the shares of the company Sierra Gorda SCM. In the first quarter of 2022 the shares belonging to Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation were transferred to South32.
In 2021, actions were continued aimed at limiting the negative impact of the COVID-19 pandemic by implementing safety measures. Sierra Gorda concentrated on implementing an optimisation program aimed at improving the work of the mine, processing plant, infrastructure and tailings storage facility. The actions taken resulted in an increase in the annual average daily volume of the mine’s sulphide ore throughput from a base level of 110 thousand tonnes of ore daily to the level of 129 thousand tonnes of ore daily. Going forward the Sierra Gorda mine is aiming to increase the plant’s cost and operating efficiency. In 2021, an agreement was signed involving the transfer of the Oxide project from the structures of KGHM Chile SpA to Sierra Gorda SCM. Preparatory actions were also continued as regards subsequent stages to develop the project, involving among others the commencement of work on updating project documentation. The Sierra Gorda Oxide project involves the leaching of the copper oxide ore of Sierra Gorda on a permanent heap and the production of high-quality copper cathodes in a solvent extraction and electrowinning (SX-EW) installation, with production capacity of approx. 30 thousand tonnes/year. At present most of the oxide ore planned for processing has already been excavated and is currently stored near the site of the future plant.

Franke mine
Location Antofagasta region, Chile Ownership 100% KGHM INTERNATIONAL LTD. Type of mine open pit Type of orebody IOCG (ore type containing iron, copper and gold) End product copper cathodes Payable copper production in 2021 10.7 kt	The mine is located in a desert area of northern Chile, in the Altamira district, near the southern boundary of the Antofagasta region, near a public road connecting the mine with the Pan-American highway. Mining is conducted by conventional open-pit methods. Due to the nature of the oxide ore, it is processed using the heap leach, solvent-extraction and electrowinning method. The end product is electrolytic copper in the form of cathodes.
The Franke mine, starting from 30 June 2021, has been recognised as an asset held for sale. The process of disposing of the mine continues.

OTHER ASSETS

In recent years, in the group of the companies located in Poland, there have been no substantial changes in the structure of the main assets. In terms of assuring the operations of the core business of KGHM Polska Miedź S.A. the domestic companies operating mainly on its behalf are still significant, including among others:

-        PeBeKa S.A. – mining work contractor,

-        KGHM ZANAM S.A. – a supplier and service provider for mining machinery, and also provides production maintenance services in selected areas and participates in investment tasks,

-        KGHM Metraco S.A. – a supplier of copper scrap,

-        „Energetyka” sp. z o.o. – the company secures part of the energy needs of KGHM Polska Miedź S.A.

Investments in closed-end investment funds fill a role in the management of selected non-core assets. A significant portion of these Funds’ assets are investments in the general field of healthcare, including the Polish Spa Group (Polska Grupa Uzdrowisk).

Moreover, amongst the international companies is a group operating under the DMC Mining Services brand: DMC Mining Services Ltd., FNX Mining Company Inc. (a branch of DMC), Raise Boring Mining Services S.A. de C.V. (from 11 February 2022 operating under the changed name DMC Mining Services Mexico, S.A. de C.V.), DMC Mining Services Corporation, DMC Mining Services Colombia S.A.S., DMC Mining Services (UK) Ltd. and DMC Mining Services Chile SpA, which provide services in shaft sinking, preparatory 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 capital engaged, the shares of the company TAURON Polska Energia S.A., listed on the Warsaw Stock Exchange, represent a significant investment. As at 31 December 2021 the share of KGHM Polska Miedź S.A. in the share capital of TAURON Polska Energia S.A. amounted to 10.39%. The value of the shares of TAURON Polska Energia S.A. held by KGHM Polska Miedź S.A. amounted to PLN 483 million.

2.4.    Production process

Production in the Group is based on the processes illustrated in the following two diagrams:

Diagram 5.               Integrated  geological, mining and metallurgical activities in KGHM Polska Miedź S.A.

Production in KGHM Polska Miedź S.A. is a fully integrated process, in which the end product of one technological phase is the starting material (half-finished product) used in the next phase. Mining in KGHM Polska Miedź S.A. is performed by three mining Divisions: Lubin, Rudna and Polkowice-Sieroszowice. In the subsequent phase the Concentrators Division prepares concentrate for the smelters and refineries, while the Tailings Division is responsible for storing and managing the tailings generated by the copper ore enrichment process. The organisational structure of KGHM includes two metallurgical facilities:

the Legnica Copper Smelter and Refinery and the Głogów Copper Smelter and Refinery, as well as the Cedynia copper wire rod plant.

Mining

The technology of mining the copper ore in all 3 mines is based on the room-and-pillar system with the use of blasting technology for ore extraction. This involves access and preparatory work, comprised of the excavation of a drift network on all sides of the site to be mined, cutting of the unmined rock mass with rooms and drifts separating a number of technological pillars, as well as extraction of the ore followed by the transport of the ore to underground dumping stations, where the large rocks (oversized) are crushed and sifted through a grate, and then the crushed muck is transported to the storage areas near the shafts, from which it is transported to the surface by skip hoisting shafts.

The work related to mining of the copper ore is fully mechanised, in a 4-shift labour system, with the use of motorised mining rigs, most of which are equipped with air-conditioned cabins and systems supporting the work of the operators. Mining work is conducted in the following cycle: drilling the blasting holes with the support of motorised drilling rigs, loading blasting material into drilled holes by motorised blasting rigs, group blasting in mining areas, followed by which the time of waiting for (without the presence of mining craw) the possible occurrence of seismic tremors caused by the blasting works and the ventilation of the areas blasted (from 30 minutes to 2 hours; in seismically-sensitive areas this time may be longer) is introduced. The next stage involves the loading of the muck using motorised loaders into haulage vehicles and its transport to dumping stations. The exposed face is protected by roof anchor bolts using bolting rigs. The crushed muck is transported by conveyor belts or mine rail trolleys to the storage sites near the shafts, and is then transported to the surface. After the muck is unloaded at the shaft top, it is transported by conveyor belts or railway to the located at each of the three mines.

The operations and processes applied at each of the three ore concentrators are the same. However, due to the varied lithological and mineralogical composition of the ore from individual mines, the production layout of each facility differs. The processing technologies applied include the following individual operations: screening and crushing, milling and classification, flotation and drying of the concentrate.

The flotation process results in concentrate with an average copper content of approx. 22-23%, and flotation waste. The Rudna mine concentrator produces concentrate with the highest copper content (approx. 26%), while the lowest is at the Lubin mine concentrator (approx. 13.7%). The Polkowice mine concentrator produces concentrate of approx. 24.5% copper content.

The dried concentrate of approx. 8.5% moisture content is transported by rail to the following smelter/refineries: the Legnica Copper Smelter and Refinery located in Legnica, the Głogów I Copper Smelter and Refinery and the Głogów II Copper Smelter and Refinery, located in Głogów.

The flotation waste, in the form of slimes, are transported through pipelines to the Żelazny Most Tailings Storage Facility, where the sedimentation of the solid particles takes place and the clarified water is collected and redirected to the ore concentrators. The storage site also serves as a retention-dosage reservoir for excess mine and process water in circulation. Excess water is hydrotechnically discharged (periodically) to the Odra River. This method was developed and implemented in partnership with research institutions, and it has been officially approved for use under the provisions of the Water Law. Studies demonstrate that the discharging of mine and process water to the Odra River cannot result in any changes that would make the proper functioning of water ecosystems impossible or prevent conformance with the applicable water quality requirements.

Metallurgy

The copper smelters/refineries produce electrolytic copper from own concentrates as well as from purchased metal-bearing material (copper concentrates, copper scrap, blister copper).

The Legnica Copper Smelter and Refinery uses a multi-stage process whose main stages include: preparation of the charge material, its reduction smelting in shaft furnaces to the form of matte copper, conversion to the form of blister copper with approx. 98.5% copper content; fire refining in anode furnaces to produce anodes of 99.2% copper content; and electrorefining. The final product is electrolytic copper cathodes with 99.99% copper content.

The Głogów Copper Smelter and Refinery applies one-stage flash furnace technology, based on a license of the Finnish company Outokumpu. The concentrate dried to a moisture content of 0.3% H₂O, is smelted in a flash furnace into blister copper containing around 98.6% Cu, which is subject to fire refining in anode furnaces. The slag, which still contains on approximately 12%-14% copper, is sent to an electric furnace, where the copper is removed while the CuPbFe alloy obtained is sent to the convertors, from which the resulting copper, containing 98.5% copper, is also sent for refining in anode furnaces. The copper anodes produced from fire refining are then sent for electrorefining, and the end product is electrolytic copper in the form of cathodes containing 99.99% copper.

Approx. 49% of the electrolytic copper produced by KGHM Polska Miedź S.A.’s smelters and refineries are further processed in the Cedynia Copper Wire Rod Division, where copper wire rod is produced by a continuous smelting, casting and rolling process as well as oxygen-free copper rod and oxygen-free, low-alloy, silver-bearing copper rod based on UPCAST technology are produced.

The anode slime produced during the electrorefining process at KGHM’s smelters and refineries contains precious metals, and is the raw material used by the Precious Metals Plant at the Głogów Copper Smelter and Refinery to produce the following products: refined silver, gold, platinum-palladium concentrate and selenium. The electrolyte in the Tank Hall, once the copper is removed, is used to produce crude nickel sulphate.

The lead-bearing dust and slimes collected as a result of the removal of dust from technological exhaust gases at the smelters and refineries are smelted, together with decopperised convertor slag from the flash furnace production line, in Dörschel furnaces at the Lead Section of the Głogów Copper Smelter and Refinery into crude lead containing 99.3% lead. This crude lead is then refined at the Legnica Copper Smelter and Refinery to obtain the end product in the form of refined lead containing 99.85% lead.

THE Segment KGHM INTERNATIONAL LTD.

The core business of the KGHM INTERNATIONAL LTD. Group of companies is the mined production of metals, such as copper, nickel, gold, platinum and palladium, from both open-pit and underground mines, as well as advancement of mining and exploration projects. The following drawing shows a simplified flowchart of the core business of the KGHM INTERNATIONAL LTD. Group.

Diagram 6.               Simplified flowchart of the core business of the KGHM INTERNATIONAL LTD. Group

2.5.    Changes in the Group structure, equity investments and their financing

EQUITY INVESTMENTS IN DOMESTIC ASSETS

In 2021, PLN 38 million was incurred on equity investments comprised of the acquisition of shares of Polish companies of the Group. In addition, PLN 20 million in loans were granted to Group companies.

In 2021, the amount of proceeds from Polish entities of the Group was significantly higher than equity investments and amounted to PLN 145 million, including PLN 53 million from the sale of shares, PLN 46 million from the redemption of Investment Certificates and PLN 37 million from dividends paid.

Table 1.    Changes in the Group’s structure and organisation (Polish assets) in 2021

Acquisition of newly-issued shares in the increased share capital of KGHM ZANAM S.A.	On 15 November 2021 the General Meeting of KGHM ZANAM S.A. adopted a resolution to increase the share capital of the Company by PLN 38 million. On 16 November 2021 an agreement was entered into with KGHM Polska Miedź S.A. to acquire all of the newly-issued shares in the increased share capital of the Company. The shares were paid for in cash. The increase in share capital was court registered in February 2022.
Sale of shares in PGE EJ 1 sp. z o.o.	On 26 March 2021 a sales agreement for 100% of the interest in the share capital of PGE EJ 1 sp. z o.o. was signed between shareholders representing 100% of the share capital of PGE EJ 1 sp. z o.o. and the State Treasury. The Agreement was signed by all shareholders in the company PGE EJ 1 sp. z o.o., and apart from KGHM Polska Miedź S.A. these were: PGE Polska Grupa Energetyczna S.A., Enea S.A. and TAURON Polska Energia S.A. (Partners). PGE EJ 1 sp. z o.o. is responsible for the preparation and realisation of an investment involving the construction and operation of Poland's first nuclear power plant. KGHM Polska Miedź S.A. had 10% of the shares in PGE EJ 1 sp. z o.o. The final sales price for the shares in the company PGE EJ 1 sp. z o.o. held by KGHM Polska Miedź S.A. amounted to PLN 53 million (after reflecting the post-transaction adjustment arising from the obligation to update the market value of the shares of PGE EJ 1 sp. z o.o., as at the date of payment of the sales price). In addition, the Partners and PGE EJ 1 sp. z o.o. signed an annex to the agreement dated 15 April 2015 regarding WorleyParsons, according to which the Partners are proportionally responsible for liabilities or are entitled to claims that may potentially arise as a result of resolution of a dispute with WorleyParsons, up to the level of claims together with accrued interest as at 26 March 2021.
Merger of the KGHM VI FIZAN Fund with KGHM VII FIZAN Fund	On 31 May 2021 the Investors Meeting of KGHM VI FIZAN and the Investors Meeting of KGHM VII FIZAN adopted resolutions expressing their consent to a merger of the Funds. KGHM Polska Miedź S.A. was the sole participant in the KGHM VI FIZAN and KGHM VII FIZAN Funds. KGHM VI FIZAN was the acquired Fund, and KGHM VII FIZAN was the acquiring Fund. The merger was performed through a transfer of the assets of the acquired Fund to the acquiring Fund and distribution to the participants in the acquired Fund of investment certificates (hereafter: IC) of the acquiring Fund in exchange for IC of the acquired Fund. KGHM Polska Miedź S.A. (hereafter: Participant), in exchange for 21 290 IC of KGHM VI FIZAN with a total value of PLN 110 million, received 8 824 IC, series F of KGHM VII FIZAN with a total issue price of PLN 110 million. On 30 July 2021 the new series F of the IC of KGHM VII FIZAN was registered. An order for removal of the KGHM VI FIZAN fund from the registry of investment funds was issued on 30 July 2021.
Redemption of Investment Certificates of KGHM VII FIZAN	On 24 June 2021, as part of the procedure of merging the KGHM VI FIZAN Fund with KGHM VII FIZAN, KGHM Polska Miedź S.A. made a call for the buyback of 421 Investment Certificates (hereafter Certificates) of KGHM VII FIZAN (hereafter Fund), from a total pool of 30 591 units held by KGHM Polska Miedź S.A. On 30 June 2021 the Fund bought back the Certificates, followed on 6 July 2021 by the payout of funds in this regard in the amount of PLN 5 million, resulting from the measurement of the Certificates in accordance with their net asset value as at the date of the buyback. As at the date of the buyback, or on 30 June 2021, the Certificates were removed from the registry of participants of the Fund and redeemed under the law. On 17 December 2021, KGHM Polska Miedź S.A. submitted a subsequent call for the buyback of 3 700 of the Investment Certificates of KGHM VII FIZAN out of the total pool of  38 994 units held by KGHM Polska Miedź S.A. On 30 December 2021 the Fund bought back the Certificates, and then on 31 December 2021 by the paid out of funds in this regard in the amount of PLN 40 million, resulting from the measurement of the Certificates in accordance with their net asset value as at the date of the buyback. As at the date of the buyback, or on 30 December 2021, the aforementioned Certificates were removed from the registry of participants of the Fund and redeemed under the law

Conclusion of liquidation proceedings in non-operating companies Future 6 sp. z o.o. in liquidation and Future 7 sp. z o.o. in liquidation and payout of funds from the liquidation

On 16 June 2021 the process of liquidating the companies Future 6 sp. z o.o. (Future 6) and Future 7 sp. z o.o. (Future 7) was concluded. The process of liquidating the non-operating companies Future 6 sp. z o. o. and Future 7 sp. z o.o. began in July 2020. De-registration of the company Future 6 sp. z o.o. occurred on 31 December 2021, and of Future 7 sp. z o.o. on 3 January 2022.

Decrease in the share capital of Cuprum Development Sp. z o.o. (a portfolio company of KGHM VII FIZAN)

On 2 June 2021 the Shareholders’ Meeting of Cuprum Development Sp. z o.o. adopted a resolution on a decrease in the share capital and redemption of 14 624 shares with a nominal value of PLN 500 each, representing 99.56% of the share capital. The shares subject to redemption were acquired by the company on 8 September 2021 from the sole shareholder, i.e. KGHM VII FIZAN, for the purpose of redemption. Total consideration for all of the shares acquired for the purpose of redemption amounted to PLN 47 million. The funds to buy the shares for the purpose of redemption came from the disposal of the company’s main asset – real estate located in Wrocław. The share capital of the company was reduced from PLN 7 million to PLN 32 500.

In addition, the following events occurred after the balance sheet date:

-       On 21 February 2022 the KGHM VII Closed-end, Non-public Investment Fund (hereafter: Fund), 100% of whose Investment Certificates are owned by KGHM Polska Miedź S.A. (hereafter: KGHM),  sold to Polski Holding Hotelowy sp. z o.o. all of the shares directly held in the company Interferie Medical SPA sp. z o.o. with its registered head office in Legnica, i.e. 41 309 shares representing 67.37% of the share capital and the same number of votes at the shareholders’ meeting. The remaining 32.63% of the share capital of the company Interferie Medical SPA sp. z o.o. were held by the indirect subsidiary of the Fund – INTERFERIE S.A.

-       on 28 February 2022, as a result of settling a call to sell the shares of INTERFERIE S.A. (hereafter: the Company), announced by Polski Holding Hotelowy sp. z o.o., companies in the Fund’s portfolio – Fundusz Hotele 01 Sp. z o.o. S.K.A. and Fundusz Hotele 01 Sp. z o.o. – sold all of the shares held in the Company, or a total of 10 152 625 shares, representing 69.71% of the share capital and granting the right to the same percent of votes at the general meeting of the company.

As a result of the above, neither KGHM nor any of the entities of the KGHM Group hold shares in the Companies: INTERFERIE S.A. and Interferie Medical SPA sp. z o.o.

EQUITY INVESTMENTS IN INTERNATIONAL ASSETS

Equity investments carried out in 2021 were made by increases in share capital.

Table 2.       Changes in the Group’s structure and organisation (international assets) in 2021

Increases in share capital
Quadra FNX FFI S.à r.l.	In order for the company Quadra FNX FFI S.à r.l to retain the status of Foreign Financial Institution under Chilean law, it was necessary to increase the company’s share capital by USD 2.5 million (PLN 10 million1) to the level set forth in the aforementioned law. As a result, KGHMI Holdings Ltd. acquired 2 500 000 shares in the increased share capital of the company Quadra FNX FFI S.à r.l.
KGHMI Holdings Ltd.	Due to the need to increase the share capital of the company Quadra FNX FFI S.à r.l., KGHM INTERNATIONAL LTD. increased the share capital of the company KGHMI Holdings Ltd. by CAD 3.1 million (representing the equivalent of USD 2.5 million and PLN 10 million1). As a result, KGHM INTERNATIONAL LTD. acquired 3 103 000 shares in the increased share capital of the company KGHMI Holdings Ltd.
KGHM Ajax Mining Inc.	In 2021, the company KGHM INTERNATIONAL LTD. and the JV partner Abacus Mining and Exploration Corporation increased the share capital of KGHM Ajax Mining Inc. by a total amount representing the equivalent in CAD of USD 3 million (PLN 12 million1), i.e. KGHM INTERNATIONAL LTD. by USD 2.4 million and Abacus Mining and Exploration Corporation by USD 0.6 million.

¹⁾ at the average exchange rate of the NBP from 31 December 2021

	COPPER CATHODES Copper cathodes made from electrolytic copper with a minimum copper content of 99.99% are the basic product of KGHM Polska Miedź S.A. They meet the highest quality requirements and for many years have been registered as Grade „A” on the London Metal Exchange (LME) and on the Shanghai Futures Exchange (SHFE) under three brands: HMG-S, HMG-B and HML. Additionally in February 2022 registration of KGHM’s cathodes on the new exchange in China, i.e. the International Energy Exchange in Shanghai (INE), was completed. Copper cathodes are also the primary product of the Carlota mine in the USA and the Franke mine in Chile, belonging to the KGHM INTERNATIONAL LTD. Group. The main customers for the cathodes are producers of wire rod, other rods, flat bars, pipes, sheets and conveyor belts.
	COPPER WIRE ROD 8 mm copper wire rod is manufactured through the Contirod® continuous process of melting, casting and drawing. It is mainly produced from cathodes manufactured by KGHM Polska Miedź S.A. and is the second most numerous copper product volume-wise produced by KGHM. Wire rod is produced in five classes of quality, depending on the needs of the customer. The product is primarily used in the cable, electromechanical and electrotechnical industries.
	SILVER Electrolytic silver is produced mainly by KGHM Polska Miedź S.A., in the form of bars (ingots, billets) and grains containing 99.99% silver. Silver bars (weighing approx. 32 kg) hold a certificate registered on COMEX in New York as well as a Good Delivery certificate issued by the London Bullion Market Association. Grain silver is packed in bags weighing 25 kg or 500 kg. The main customers for silver are financial institutions, the jewellery industry, photographic industry, and the electronics and electrical industries as well as producers of coins and medallions.
	COPPER CONCENTRATE Produced by the Robinson mine in the USA, part of the KGHM INTERNATIONAL LTD. Group, containing about 20% of copper. This product is also produced by the Sierra Gorda mine in Chile (copper content is above 20%). Both of these concentrates also include gold and silver as additional products. The copper concentrates are sold for further processing as a commercial product.
	MOLYBDENUM OXIDES One of the main commercial products of the company Sierra Gorda is molybdenum oxide, arising from the processing of the molybdenum sulphide concentrate (containing approx. 48% Mo) produced by the Sierra Gorda mine. Molybdenum is used in the aircraft, defence, oil, nuclear and electronics industries.

	MOLYBDENUM CONCENTRATE Another commercial product (apart from copper concentrate) produced by the Robinson mine in the USA, part of the KGHM INTERNATIONAL LTD. Group. Production of molybdenum concentrate is derivative of the process of copper concentrate production.
	GOLD Gold in the form of bars weighing approximately 0.5 kg, 1 kg, 4 kg, 6 kg and 12 kg, containing 99.99% gold, is produced by KGHM Polska Miedź S.A. Gold is used in the jewellery industry, by banks and in the electrical industry.
	ORE CONTAINING COPPER, NICKEL AND TPM (PRECIOUS METALS – GOLD, PLATINUM, PALLADIUM) Ores containing copper, nickel and TPM are produced by the mines in the Sudbury Basin in Canada, part of the KGHM INTERNATIONAL LTD. Group. They are sold for further processing to one of the plants in the Basin.
	OXYGEN-FREE COPPER ROD Two types of rod are produced using UPCAST® technology: Cu-OFE oxygen-free rod and CuAg(OF) oxygen-free, silver-bearing rod. Depending on customer need, the rod is produced in several diameters: 8 mm, 12.7 mm, 16 mm, 20 mm, 22 mm, 24 mm and 25 mm with possible silver content. Customers for this product are in the cable industry, with application in the form of thin wires, enamelled wires and fire-resistant cables, as well as cables for transmitting audio and video signals. Oxygen-free copper rod is an ideal material for the process of extrusion into flat profiles and for processing through the Conform® process. It can also be used in the process of drawing into flat and round profiles. In addition, oxygen-free, silver-bearing rod is used in the manufacture of trolleys and commutators.
	ETP/OFE nuggets Nuggets obtained from Cu ETP1 (99.90% Cu) wire rod and Cu OFE (99.99% Cu) rod for use in the manufacture of alloys and in galvanisation. Sample nugget sizes: diameter of 8 mm, 12.7 mm; length of 10-35 mm

Copper price	Silver price	Molybdenum price	USD/PLN exchange rate
9 317 USD/t	25.14  USD/oz t	16.18 USD/lb	3.86 USD/PLN

4.1.    Macroeconomic environment

The year 2021 in the international economic arena was for many reasons exceptional, and from the point of view of the global pandemic it was a turning point. Pharmaceutical companies began the mass distribution of vaccines against SARS-CoV-2 which, in combination with the enormous quantitative easing programs introduced by central banks, raised investor optimism. Indices of the equity markets once again rose, in many cases exceeding historic records. Commodities also rose in value, with some reaching historic maximums, including copper prices.

 It was also a period in which there was a change in the presidency of the USA. Donald Trump’s control of the White House passed to Joe Biden, who in many areas had strongly different views. They did however agree on the question of the need for further economic stimulus, in particular until such time as the vaccinations programs achieve a level insuring that the risk of subsequent lockdowns is highly limited, and the health care system stabilizes and becomes unburdened. The rebuilding the labour market was recognised as the most important. A similar direction was followed in Europe and Asia, with the differences only coming from the details of the stimulus applied. Together with numerous fiscal incentives, the world’s economies were stimulated by a monetary impulse. In the first months of 2021, central banks continued to maintain low interest rates and continued to print money. A change in rhetoric came in the second half of the year, when the situation on the labour markets and in the economy began in many countries to return to a pre-pandemic state. The supply of energy commodities was reduced by reluctance towards new investments, given the rapid rise in demand resulting from emergence from the pandemic-induced restrictions in the global economy, led to a jump in the prices of energy commodities. In Europe the problem was worse due to rising geopolitical tensions. At the same time, strained or frequently severed supply chains along with consumer demand pushed by strong fiscal and monetary stimulus resulted in a destabilisation of prices around the world. Both the producer price index (PPI) as well as the consumer price index (CPI, which includes base inflation) soared, leading to substantially higher global inflationary expectations. After several months, the representatives of central banks took action, aimed at the gradual discontinuance of quantitative easing programs or the commencement of a cycle of interest rate hikes. Representatives of the American Federal Reserve, the world’s largest monetary institution, began to restrict quantitative easing (QE) with a target of ceasing purchases of assets in March 2022. At the end of the year, the central banks of England and Switzerland raised interest rates, and a similar reaction was witnessed by central banks in Central-Eastern Europe and in many other emerging economies in the world. The increase in interest rates was initiated by developing countries. The jump in inflation rates in these countries also resulted in a rapid normalisation of monetary policy parameters. Following decisions that were taken primarily in the last quarter of the year, in many cases the level of interest rates is already higher than prior to the announcement by WHO of the global pandemic.

As regards the question of economic activity it is worth noting that the world became increasingly effective in dealing with the pandemic environment. Lockdowns were of a more targeted nature, as opposed to effecting the entire economy. Health services with each successive wave became more effective, though the health care systems remained tremendously strained. Delta and omicron strains appeared, which showed that the coronavirus was mutating, and subsequent mutations may be more infectious and/or dangerous. According to the last report of the International Monetary Fund (IMF), an increase in global GDP in 2021 was estimated at 5.9% versus a decrease of 3.1% in 2020. The estimated rate of growth rose significantly both in developed economies (5.0% in 2021 from -4.5% in 2020), as well as developing economies (6.5% in 2021 from -2.1% in 2020). The results of  the United States’ economy in 2021 was estimated at 5.6% (-3.4% in 2020), while the increase in economic activity in the eurozone is 5.2% year-to-year. The rate of growth in China in 2021 was estimated at 8.1%, accelerating from 2.3% in 2020. In the World Economic Outlook published in January 2022, the IMF’s economists assessed the increase in global GDP by 0.5 percentage points less than in the autumn report. The updated outlook results to a large extent from a lowering of the rate of growth in the world’s two largest economies: the USA and China, whilst amongst the arguments for reducing the rate of growth are the rapid spread of the omicron variant, the strains on supply chains, rising energy commodities prices, higher inflation and slower than previously expected consumer demand in China.

Chart 1.   Forecasts of real GDP growth per the International Monetary Fund from January 2022 versus previous forecasts

Forecast (F) of actual GDP growth – International Monetary Fund – Economic Outlook – January 2022 compared to October 2021; for Chile data from October 2021, compared to July 2021; Source: KGHM Polska Miedź, International Monetary Fund

In terms of the commodities market, several events and turning points are worth noting. The necessity to carry out the green revolution put forward by several institutions and the role that copper will play, led to attention being focused on the red metal by many market participants (producers, consumers, commercial companies and investors). The start of the year did not see a continuation of the upward price trend that began in 2020. Nevertheless, unflagging demand, financial investor interest and subsequent declarations on achieving emissions neutrality not only by various governments, but also by individual companies, provided a signal for further price rises. A key moment was the declaration by China of the intention to achieve emissions neutrality, a country which in the past had frequently avoided the subject of reducing polluting emissions. Also positively received were the pollution reduction goals announced by the new administration of Joe Biden. The situation thus reached a turning point, as both countries had for decades been amongst the world’s highest emitters of carbon dioxide.

Chart 2.          Change in commodities prices in 2021 (first vs last day of the year)

Source: Refinitiv, KGHM Polska Miedź S.A.

Table 3.    Macroeconomic factors significant for the operations of the KGHM Polska Miedź S.A. Group – average prices ⁽¹

	Unit	2021	2020	Change (%)	4Q’21	3Q’21	2Q’21	1Q’21
Copper price on the LME	USD/t	9 317	6 181	+50.7	9 699	9 372	9 700	8 504
Copper price on the LME	PLN/t	36 017	23 975	+50.2	39 166	36 303	36 438	32 115
Silver price per the LBMA	USD/oz t	25.14	20.54	+22.4	23.33	24.36	26.69	26.26
Molybdenum price per the CRU	USD/lb	16.18	8.90	+81.8	19.74	19.81	13.93	11.25
USD/PLN exchange rate per the NBP		3.8647	3.8978	(0.8)	4.0421	3.8740	3.7611	3.7752
USD/CAD exchange rate per the Bank of Canada		1.2535	1.3415	(6.6)	1.2603	1.2600	1.2282	1.2660
USD/CLP exchange rate per the Bank of Chile		759	792	(4.2)	826	771	715	724

¹⁾ arithmetic average of daily quotations

Over the course of the year quite a number of interesting events occurred on the copper market. Due to concerns about an increase in the number of infections related to the mass movement of people during the Chinese New Year, Chinese authorities decided to suspend work in production facilities. This led to an above-average for the period increase in copper demand. The usual accumulation of inventories did not occur, as material was continually processed. At the same time demand for copper also rose in highly-developed countries, which were emerging from the pandemic-induced restrictions. Financial investors were stimulated to act by analytical reports of investment banks, in which analysts raced one another as regards price forecasts for the coming years.

The dynamically-rising price caused concern, however, in the Chinese authorities as to the sustainability of the economic rise and the cost of functioning of the economy. Consequently, following numerous verbal interventions, the Chinese authorities decided to release some of the metal stored earlier by the State Reserves Bureau (SRB), which until then had occurred very infrequently. Despite the volume of metal sold being lower than expected, several auctions sufficed to quench the rise in the red metal’s prices bring balance to the market, mainly the domestic one. The deficit of metal faced by the market’s participants can be seen in information presented by the International Copper Study Group, which estimates that in the first eleven months of 2021 the copper market was in a state of deficit at the level of 339 thousand tonnes. The deficit in the whole year 2021 was estimated by the same institution at 42 thousand tonnes. It should however be recalled that these data are based among others on so-called apparent demand in China, meaning data reflecting net imports together with production, but excluding changes in warehouses, and therefore could be underestimated. On the other hand, a number of financial institutions as well as those specialising in the metals market have estimated a somewhat higher deficit on the copper market in 2021, on average at a level of around 125 thousand tonnes.

Taking into consideration the portfolio of mine projects, it is highly probable that over the next several years a substantial amount of new material will enter the copper market. Most of the mine production which soon will be made available will come from projects which are currently in the final phase of realisation. It should however be noted that there are several events which may significantly impact the fundamental situation on the market over the long-term. In jurisdictions which until now have accounted for the world’s largest copper reserves, such as Peru and Chile, political changes have occurred whose consequences could increase uncertainty in the conduct of the mining business in subsequent years. A political turn to the left in these countries could mean a less predictable investment climate and a desire for higher taxation in order to equalise social well-being. It should also be noted that the desire to tax the mining sector is taking on a global character. Likewise, trends in climate policy do not support the advancement of expensive and complex investment projects. Arguments predicting another commodities super-cycle espoused by certain investment banks proposed, among others, that current prices have to rise and maintain a high level in order to motivate mining companies on the one hand to commit to more difficult investments, and on the other to increase their recycling activities.

Strong demand for copper led to a substantial draining of inventories in the fourth quarter of 2021. LME warehouse levels fell to a historic low, resulting in substantial volatility of forward curves and an immense level of backwardation (over 1000 USD/t on the intraday scale), meaning a market where futures contract prices for subsequent periods are lower than spot prices. This market condition resulted from the fears of its participants about the availability of material, as a result of which the red metal was/is worth more „today” than „tomorrow”. In subsequent weeks the market situation calmed, among others thanks to the intervention of the LME authorities. Nonetheless, the level of inventories remains substantially lower than the historic  average, while the forward curve until the end of the year continued to unremittingly reflect the fears of market participants, maintaining deep backwardation.

The average annual price of copper (cash settlement on the LME) in 2021 amounted to 9 317 USD/t. The highest price was recorded on 10 May. At that time it amounted to 10 724.50 USD/t, and set a historic record. The lowest level was recorded on 2 February. On that day the price of the red metal amounted to 7 755.50 USD/t. Taking into consideration the cash settlement price, copper in 2021 rose by 22% (the closing price on the first versus last day of the year). It is also worth noting that 2021 was also a record year in terms of copper prices denominated in the Polish złoty. The average price in 2021 amounted to 36 017 PLN/t (daily LME prices calculated after the NBP fixing).

Chart 3.          Copper price (average monthly) per the London Metal Exchange (in USD/t)

Source: Bloomberg, KGHM Polska Miedź S.A.

The turn of January and February 2021 was a period when silver took centre stage on the financial market. Following a speculative upturn on the shares of the company Gamestop, this metal turned out to be another target of the speculative insurgency of investors associated on the internet forum Reddit. The intention of individual investors was to enforce the closing of supposedly enormous short positions of investments banks out of the market (a so-called short squeeze). The main instrument used for this purpose turned out to be derivatives, which was mostly felt by the options market, whose parameters remained unsteady for many weeks. Following these events, the price of silver briefly broke the 30 USD/oz t level (marking the maximum yearly price in the continuous trading system of 30.03 USD/oz t), following which in subsequent months its value systematically decreased. The minimum was reached at the end of September and amounted to 21.39 USD/oz t. Contrary to historic dependencies, the price of silver (and also gold) did not react to heightened expectations or global inflation. Evident instead were the impact of fears about the sustainability of growth and the change in monetary policy, which, after February’s price jump, led to a drop in interest in precious metals as well as a decrease in warehoused silver and gold in ETFs. The continuation of global interest rates at record low levels held back investor interest in precious metals. The price of silver ended 2021 at around 23.10 USD/oz t. The average price of this metal according to the London Bullion Market Association (LBMA) in 2021 rose by around 22% and amounted to 25.14 USD/oz t versus 20.54 USD/oz t in 2020.

Chart 4.          Silver price (average monthly) per the London Bullion Market Association (in USD/oz t)

Source: Bloomberg, KGHM Polska Miedź S.A.

The price of molybdenum rose systematically during the year, reaching its maximum price in September, and for several weeks remained above 20 USD/lb. Increasing demand for steel containing molybdenum (FeMo; in China +12% year-to-year) together with fears about metal supply being lower due to logistical interruptions and restricted mine production led to multi-year highs being reached. In the fourth quarter of 2021 prices recorded a slight decrease, mainly due to fears about demand being affected by an energy crisis impacting the stainless steel production. The average price of the metal in 2021 amounted to 16.18 USD/lb and was 82% higher than the average for 2020 (8.90 USD/lb).

Chart 5.          Molybdenum price (average monthly) per the CRU (in USD/lb)

Source: CRU, KGHM Polska Miedź S.A.

Quotations of the Polish złoty, both in comparison to the euro as well as the American dollar, continued to be under the influence of the heightened volatility extent for some time on the financial markets. Currency interventions at the end of 2020 by the National Bank of Poland (NBP) aimed at maintaining a favourable PLN exchange rate for Polish exporters, were meant to anchor market participants at the start of 2021 around the level desired by the NBP. Subsequent weeks showed however that the situation on the currency market may turn out to be far from stable. At the start of June 2021 the Polish złoty reached its minimum versus the euro (approx. 4.45) and the American dollar (approx. 3.65). In subsequent months centre stage was taken by the conflict between Poland and the European Commission and rising prices in the economy with a continuation at the same time of the existing monetary policy chosen by the Monetary Policy Council. A change occurred in the fourth quarter, when the NBP unexpectedly altered its rhetoric, raised interest rates and continued to tighten monetary policy in subsequent months. The PLN exchange rate reached its highest level versus the euro and the USD in November, at the levels respectively of approx. 4.72 and approx. 4.19. The PLN ended 2021 at around 4.06 to the USD (NBP fixing of 31 December 2021). The average USD/PLN exchange rate (per the NBP) in 2021 amounted to 3.8647 and was lower by 1% than in 2020 (3.8978 USD/PLN).

Chart 6.          USD/PLN exchange rate (average monthly) per the National Bank of Poland

Source: Bloomberg, KGHM Polska Miedź S.A.

Despite subsequent waves of coronavirus infections and the associated restrictions introduced by the government, the Canadian economy is returning to growth. This does not however alter the fact that after three quarters GDP remains below the level of 2020. As regards the question of monetary policy, in November the Canadian central bank ended its quantitative easing program, while inflation, which remains above the target level (1-3%), is slowly leading to a change in monetary policy rhetoric and increases the likelihood of interest rate hikes. In 2021 the Canadian dollar recorded a slight strengthening versus the American dollar, taking into consideration the quotations of this currency pair in the first and last days of the year. The average USD/CAD exchange rate (per the Bank of Canada) in 2021 amounted to 1.2535 and was 7% lower than the rate recorded in 2020 (1.3415).

Chart 7.          USD/CAD exchange rate (average monthly) per the Bank of Canada

Source: Bloomberg, KGHM Polska Miedź S.A.

Events in Chile in 2021 were mainly dictated by the electoral calendar. Since the mass protests of 2019 the citizens of Chile have expected changes in their constitution, which in consequence led to the victory of the leftist candidate Gabriel Boric. A substantial challenge for the mining industry will be the further evolution of tax law and the direction of new legislation. The first draft act and the copper mining taxation it contained met with substantial opposition by the industry’s representatives and resulted in continued negotiations. If the current wording of the act is adopted, it is highly probable that the attractiveness of investing in copper resources-rich Chile in terms of new mining projects will be substantially decreased. These fears to a large extent have been reflected in the price of copper which is significant not only for the country’s balance of payments, but also for the USD/CLP exchange rate, which during the year systematically weakened. The average annual USD/CLP exchange rate (per the Bank of Chile) in 2021 amounted to 759, meaning a strengthening of the local currency as compared to the USD by 4% (792 in 2020).

Chart 8.          USD/CLP exchange rate (average monthly) USD/CLP per the Bank of Chile

Source: Bloomberg, KGHM Polska Miedź S.A.

Macroeconomic conditions at the start of 2022

The start of 2022 was rich with another batch of events of significance for the global economy. Though the world is dealing with the highly-contagious omicron strain, a regional director of the World Health Organisation (WHO) stated at the end of January that it is highly probable that the end of the pandemic in Europe is in sight. The level of vaccinations amongst society and resistance gained from enduring the disease is leading an increasing number of European countries to ease or completely remove restrictions. While this is a positive signal for economic activity, the coronavirus remains a threat to the continuity of international supply chains and continues to be a cause of potential interruptions to commercial trade.

The global economy continues to deal with an energy crisis which, given limited capacity to increase supply, is driving up energy prices. These in turn, given supply chains for other goods which remain strained and thanks to strong consumer demand, are causing higher inflation on the global scale and are driving up costs. Rising costs are increasingly perceptible in subsequent links of the global economy. Moreover, in response to rising prices and the risk of inflation expectations getting out of control, central banks are further tightening the monetary policy. The question being posed by market participants is not whether the leading central banks will raise interest rates, but what the scale of the tightening will be and the impact of these hikes on global economic activity.

There has been no decrease in doubts as to the further development of the situation, while the events in eastern Europe and the Russian invasion in Ukraine are not facilitating an assessment of the market environment. Particularly in the context of energy carrier prices, and amongst these natural gas, whose primary supplier to Europe is Russia. There also appeared above-average volatility on the currency market. The weakening currencies of countries in our region, in combination with the jump in energy commodities prices, are driving inflation, which already at the turn of the year was the highest in many years. An additional problem for European industry are the rising costs of European CO₂ emission rights certificates, which in recent weeks have been marking new price records. The increase in the prices of these certificates may lead to discussions on a broader scale and is leading to actions aimed at reforming the system and perhaps restricting speculative activities.

The impact of the war in Ukraine on the European and global economy is difficult to assess at this time, but problems with the supply of numerous products, including steel, as well as serious interruptions in the production and export of agricultural products, may have serious social and economic repercussions.

4.2.    Analysis of the global market for the Group’s basic products

The primary products of the KGHM Group, i.e. copper concentrates, cathodes, copper wire rod and silver in the form of bars and grains, are traded on the highly-competitive global market as well as in reference to the commodity markets. Markets for the individual products offered by KGHM have varied rules and customs concerning trading and standard prices. Their incomparability is also due to the characteristics of products, which impacts their usage and the diversity of market participants.

COPPER

The primary products offered by the companies of the KGHM Group are concentrates, cathodes and copper wire rod.

For all of these products, the price benchmark (i.e. the global benchmark of copper prices for physical sales contracts of copper-bearing materials and products) is stock market quotations, with the cash settlement of the London Metal Exchange (LME) being most commonly used. Less commonly used are alternative quotations of copper on the stock exchanges in New York (COMEX) and the Shanghai (Shanghai Futures Exchange -SHFE). Grade “A” type refined copper cathodes, with a copper content of at least 99.99%, are quoted on the LME (under the standard BS:EN 1978:1998 - Cu-CATH-1, the standard sets the maximum level of impurities for Cu-Cath-1 copper at 0.0065%). In order to be able to apply stock exchange prices to purchase/sale transactions of the products to which this quality standard is not applied (i.e. all types of copper-bearing materials such as copper concentrates, copper scrap or more processed products like copper wire rod), market participants have developed a premium and discount system, which adjusts stock quotations. It allows setting of a market price for a product which takes into account its processing stage, its physical state and chemical makeup, as well as costs of transport and insurance to an agreed delivery destination and the current availability of the metal in a given location.

Copper concentrates

Copper concentrate is a product made by processing and enriching copper ore, which usually has a relatively low metal content and is not suitable for direct metallurgical processing. Usually, copper content in concentrate varies from percentages in the teens to several tens of percent, which enables further processing in copper smelters and refineries. The cost of transporting products with a lower copper content (for example copper ore) basically eliminates them from trade in the global market (with certain exceptions), therefore it may be assumed that copper concentrate is the first product of processing copper ore that may be generally traded. As a result of metallurgical processes copper is produced as well as the by-products of processing (mainly precious metals, sulphuric acid, lead etc.). The main participants of the concentrate markets are mines supplying the product on the market and smelters and refineries, for which the concentrates are materials for production. Trading companies also play a role in the international trading, intermediating in the purchase/sale transactions and offering additional services expected by the parties. In 2021, the total global production of copper in copper concentrate is estimated at 17.4 million tonnes (according to CRU).

Chart 9.          Geographical breakdown of copper concentrates production in 2021 (source: CRU, KGHM Polska Miedź S.A.)

Copper concentrates require processing into refined copper, which leads to incurring processing costs and the incomplete recovery of metals at individual production stages. Therefore, the transaction price should have a set of discounts as compared to quoted prices for refined copper. The benchmark of these discounts (for TC/RC) is determined during negotiations with the main producers of concentrates (Freeport McMoRan, Antofagasta) and their customers (mainly Chinese and Japanese smelters and refineries).

Companies of the KGHM Group participate in the copper concentrate markets mainly by selling concentrate from Sierra Gorda in Chile and from Robinson in the USA. At the same time KGHM purchases copper concentrates from the market with characteristics suitable for more efficient utilisation of the production capabilities of the smelters and refineries in Poland.

Copper cathodes

Refined copper in the form of copper cathodes is the end product of the smelting and refining processes to which the copper-bearing materials are subjected (including concentrates, copper blister, anodes and copper scrap). Primary commodities exchanges (including the LME and SHFE) enable cathodes to be registered (Grade A type, with a copper content of at least 99.99% under the BS:EN 1978:1998 - Cu-CATH-1 standard), and therefore their trading on exchanges and through LME-approved warehouses. The copper cathodes produced by KGHM are registered on the LME and SHFE as well as on INE, under the brands: HML, HMG-B and HMG-S. Unregistered cathodes are also traded on the physical market (for example those that do not meet quality parameters or the minimal yearly production conditions set by exchanges). One example of unregistered cathodes produced by KGHM are the Carlota and Franke brands. The main participants in the cathodes market are mining and smelting companies producing copper in the form of cathodes and wire rod plants and other companies engaged in copper processing, which use cathodes to produce wire rod, other rods, flat bars, pipes, sheets and belts. Similarly as in the case of copper concentrates, trading companies and financial institutions intermediating in the cathodes trade also participate in the market. In 2021, CRU estimated total global production of refined copper at 24.3 million tonnes.

It is a standard practice on the Grade “A” copper cathodes market to add a producer’s premium to the prices set by global exchanges. Its level allows the producer to cover the cost of transport and insurance to the agreed delivery destination, and it also includes the premium for quality (of a given cathodes brand) and supply-demand situation on a given market.

The companies of the KGHM Group participate on the cathodes market mainly by selling cathodes from the Group’s Polish assets. The Głogów Copper Smelter and Refinery produces cathodes of the HMG-S and HMG-B brands, while the Legnica Copper Smelter and Refinery produces cathodes of the HML brand, registered on the exchanges in London (LME) and in Shanghai (SHFE). Moreover, the KGHM Group offers cathodes produced through the leaching and electrowinning (SX/EW) process in the Franke mine in Chile and in the Carlota mine in the United States. Production of refined copper in KGHM Polska Miedź S.A. amounted to 577.6 thousand tonnes, which represents approx. 2.4% of global production.

Chart 10.        Geographical breakdown of refined copper production in 2021 (source: CRU, KGHM Polska Miedź S.A.)

Chart 11.        Geographical breakdown of refined copper consumption in 2021 (source: CRU, KGHM Polska Miedź S.A.)

Copper wire rod

Copper wire rod is manufactured in the continuous process of melting, casting and drawing in plants processing refined copper. The material used in this production cycle is mainly copper in the form of cathodes, although higher-grade copper scrap may also be used. Wire rod is a half-finished product used in the production of single wires and strands used to produce conducting cores in cables and electric wires (for example: enamelled cable, car cables, power cords etc.). Similarly

as for copper cathodes, trading companies are also involved in trading of half-finished products, apart from companies with production facilities (wire rod plants and companies processing wire rod into cables and bundled wires). The wire rod market, due to the quality characteristics of the product, is more of a local market, which also means that it is highly competitive and demanding. In 2021, total global production of copper in the form of wire rod is estimated by CRU at 19.3 million tonnes.

Chart 12.        Geographical breakdown of copper wire rod production in 2021 (source: CRU, KGHM Polska Miedź S.A.)

Chart 13.        Geographical breakdown of global wire rod consumption in 2021 (source: CRU, KGHM Polska Miedź S.A.)

Wire rod’s price structure, apart from the copper quotations on the London Metals Exchange, also includes a producer’s fee (added to cathodes) and the refining charges due to the costs of processing cathodes into wire rod. KGHM Polska Miedź S.A. produces wire rod in the Cedynia Wire Rod Plant in Orsk.

Copper wire rod and wires are utilised in numerous sectors of the modern economy, while the products created from them (cables and bundled wires) account for approx. 60% of world copper consumption. The vast majority of wire rod and wires  (estimated at over 10 million tonnes annually), is used in construction and infrastructure. Amongst the most popular products manufactured from wire rod and wires are power lines, cables in the electrical installations in buildings and winding wires (together approx. 70%).

In 2021, production of wire rod and cable by KGHM Polska Miedź S.A. amounted to 281.9 thousand tonnes, or nearly 11% of European production. This result makes the Company one of Europe’s leading producers of these copper half-finished products.

SILVER

Approx. 73% of global metallic silver production is a by-product of mining ores of other metals. Silver, due to its unique physical characteristics, is used in the jewellery, electronics and electrical industries, as well as in medicine, optics, the energy industry and many others. It is also applied in the latest technological solutions, among others in infrastructure, the automotive industry and photovoltaics. In total, industry utilises approx. 50% of global silver production. It is also a valued investment metal. According to Metals Focus preliminary estimates, in 2021 global production of mined silver amounted to 25.8 thousand tonnes.

Chart 14.        Geographical breakdown of global mined silver production in 2021 (source: Metal Focus – preliminary data,  KGHM Polska Miedź S.A.)

Usually, participants in the silver market make use of London Bullion Market Association quotations when setting the price for silver in physical transactions, after adjusting for current market conditions.

KGHM sells silver in the form of bars and grains (produced at the Głogów Copper Smelter and Refinery) and is one of the largest producers of metallic silver. In 2021, KGHM produced 1 332 tonnes of silver, making the Company one of the world’s leading producers of silver. This metal in the form of bars is registered under the brand KGHM HG and has a registered certificate on the New York Exchange COMEX as well as Good Delivery certificates issued by the London Bullion Market Association. Silver is supplied in the form of grains to the jewellery and metals industries, which produce alloys containing silver. Silver in the form of bars (ingots) is mainly purchased by financial institutions and industry.

5E – Five development directions
Elasticity/Flexibility	Efficiency	Ecology	E- Industry	Energy

5.1.    Strategy description – Basic elements of the Strategy of KGHM Polska Miedź S.A.

Until the end of 2021 the Company advanced the „Strategy of KGHM Polska Miedź S.A. for the years 2019-2023” which was approved on 19 December 2018. The Strategy was based on four development directions (Elasticity/flexibility, Efficiency, Ecology and E-industry), arising from global market trends. The aforementioned directions were reflected in six identified strategic areas, with individualised and measurable main goals:

Strategic area	Main goal
Production	Maintain cost-effective Polish and international production
Development	Increase the KGHM Polska Miedź S.A. Group’s efficiency and flexibility in terms of its Polish and international assets
Innovation	Increase the KGHM Polska Miedź S.A.  Group’s efficiency through innovation
Financial stability	Ensure long-term financial stability and the development of mechanisms supporting further development
Efficient organisation	Implement systemic solutions aimed at increasing the KGHM Polska Miedź S.A.  Group’s value
People and the environment	Growth based on the idea of sustainable development and safety as well as enhancing the Group’s image of social responsibility

To date, advancement of the Strategy of KGHM Polska Miedź S.A. for the years 2019-2023 enabled the Group to take advantage of favourable macroeconomic trends to increase the scale of its operations and to improve its production results and financial condition.

Nonetheless, due to the rapid changes which took place during this time in the general environment, a review was carried out and the adopted strategic assumptions were updated. The justification for this review and redefinition was concurrent with the extraordinary market situation resulting from the SARS-CoV-2 virus epidemic.

On 14 January 2022 the Company’s Supervisory Board approved the „Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040” as presented by the Management Board. This is the Company’s current binding Strategy, reflecting the macroeconomic environment and the geopolitical situation affecting the mining sector. In the activities planned a particular place is held by the green transformation through renewable energy and modern technology. The updated Strategy does not alter the Company’s current approach to its business activities. KGHM continues to act responsibly and to think long-term about the Company’s future.

Therefore, the Company’s mission and vision remain unchanged, and the goals of the Strategy are ambitious, but attainable. To reflect the changes in the environment, the four existing strategic development directions (Flexibility/elasticity, Efficiency, Ecology and E-industry) were updated to include a fifth element – Energy.

Diagram 7.               Mission, Vision and Development Directions of the Strategy of KGHM Polska Miedź S.A.

This „5E” Strategy is now comprised of 5 pillars (Core business, New activities, Supporting activities, Health, Prosociality), based on 5 updated development directions.

Diagram 8.               5 Pillars based on 5 updated development directions in the Strategy of KGHM Polska Miedź S.A.

These pillars have been assigned individualised main goals as well as key performance indicators, as follows:

I.  PILLAR - Core business, Comprised of the following elements:

-       Advanced technology and R&D creating an intelligent production line.

-       Optimisation of mine production domestically and abroad ensuring long-term operational continuity.

-       Leadership in the development of low-emissions mining capacity as regards new metals and minerals deposits in Poland.

-       Development of metallurgy utilising efficient processing based on Circular Economy principles.

Main goal	Goals for 2030:	Base level (2020)
Strengthen the position of the KGHM Polska Miedź S.A. Group as a global player in the mining and metallurgy sector	1)      Domestic copper production – approx. 600 thousand tonnes of electrolytic copper (including production based on a higher amount of purchased materials and copper from recycling)	approx.  560 kt of electrolytic copper
	2)      International copper production – higher production by the international assets of KGHM by extending their life-of-mine, developing assets in the mine projects portfolio held and increasing the resource base thanks to advancement of the International Exploration Strategy	approx.   150 kt of payable copper
	3)      Silver production – maintain the position amongst the world’s top-three producers of silver (approx. 1200 tonnes of silver annually).	approx.  1 320 tonnes of silver
	4)      Profitability – 10.2% (Average ROCE (return on capital employed) from the last 3 years	8.5%
	5)      Cost competitiveness – 3rd quartile	4th quartile

II.  PILLAR - New activities, Comprised of the following elements:

-       To be one of the leading, environmentally-friendly electricity producers, supporting Poland’s energy transformation.

-       Expansion along the value chain by developing the production of new products from copper and other metals (including initiating relationships with partners in Poland and abroad).

Main goal	Goals for 2030:	Base level (2020)
Diversification and aiming at sustainable development by building internal generation capacity from low-emission sources	1)      Energy produced – min. 50% of consumption.	22% of consumption (694 GWh)
	2)      A reduction in estimated CO2 emissions resulting from electricity consumed – 1.0 million tonnes of CO2.	1.9 million tonnes of CO2 (in 2019).
	3)      Diversification of the commercial offer in terms of metals (increase in share of new half-finished copper products and highly processed copper products (OFE-Cu wire, OFE-Cu granules) and other metals in the total sales of the Group) – 10%.	2%

III.  PILLAR - Supporting activities, Comprised of the following elements:

-       To be a major supplier of Smart Mining solutions for products and services sold in Poland and globally.

-       Ensure the financial stability of the KGHM Polska Miedź S.A. Group and implement systemic solutions aimed at enhancing its value.

Main goal	Goals for 2030:	Base level (2020)
Redefine the way that existing assets supporting the core business are utilised	1)      Recycling of scrap - approx. 350 thousand tonnes of copper scrap (copper-bearing materials of varied metals % content).	124 kt of copper scrap
	2)      Revenues from sales on foreign markets of selected Group companies -  using 2020 as the base year = 100%: an increase by 2030 of 147% versus the base year for the companies KGHM Zanam S.A., Nitroerg S.A. and PeBeKa S.A., and 163% versus the base year for the company DMC Mining Services Ltd.	2020 as base level = 100%

IV.  PILLAR - Health, Comprised of the following elements:

-       Development of activities promoting health and health resorts (spas) as a contribution to extending the length and quality of life for citizens.

Main goal	Goals for 2030:	Base level (2020)
Development of the spa assets held as a contribution to extending the length and quality of life for society as a whole	1)      LTIFR – the goal of 0 accidents.	LTIFR – 7.3
	2)      TRIR – the goal of 0 accidents.	TRIR – 0.52
	3)      Level of support for the area of Health carried out by the KGHM Polska Miedź Foundation – approx. PLN 7 million.	approx.  PLN 11.5 mn1

1) Due to the epidemic situation, the area „Health and Safety” was a particular priority for the KGHM Polska Miedź Foundation in 2020, thus the significantly higher financing in this area in the base year.

V.  PILLAR - PROSOCIALITY, Comprised of the following elements:

Growth based on the idea of sustainable development and safety.

Main goal	Goals for 2030:	Base level (2020)
Growth based on the idea of sustainable development and safety	1)      Support for the fair transformation of the mining sector.	Not applicable
	2)      Number of volunteer projects advanced – 30.	25
	3)      Level of support for the arts, sport and health approx. PLN 48 million.	approx.   PLN 38.5 million

The Strategy of the Group to the year 2030 also includes climate-related goals as respects reducing emissions by KGHM which are consistent with the Climate Policy of KGHM Polska Miedź S.A. – being a complementary document to the Strategy – as well as climate goals for the years 2030 and 2050.

Diagram 9.               Emission reduction targets of KGHM Polska Miedź S.A. and the main directions  of decarbonisation

1. PPA – Power Purchase Agreement, an agreement for the supply of electricity between two parties

2. CCS/CCU - Carbon Capture, Storage and Utilisation Technologies, technologies for capturing, storing and utilizing carbon dioxide

5.2.    DEVELOPMENT DIRECTIONS OF THE KGHM Polska Miedź S.A. Group

POLICY REGARDING THE DEVELOPMENT DIRECTIONS OF THE KGHM Group

During the reporting period being discussed, policy regarding the development directions of the KGHM Polska Miedź S.A. Group was continued. Further actions were also taken aimed at adapting the Group’s organisational functioning model to the business model of KGHM Polska Miedź S.A. and the market environment. In terms of the domestic companies, development policy was also aimed at cooperation between the Group’s entities and at eliminating overlapping areas of competence in terms of individual entities.

With respect to implementation of the Strategy, in the case of the international companies of the Group, KGHM aims to develop unified reporting principles, coherent internal regulations, and standardised solutions with respect to individual functional areas of the international entities.

INTENTIONS REGARDING EQUITY INVESTMENTS

In the case of the companies in Poland, the primary development goal is to ensure continuity and safe working conditions in the core business of KGHM Polska Miedź S.A. and at integrating the Group around the idea of sustainable development, including the implementation of development initiatives under the Circular Economy aimed at limiting the environmental footprint.

In terms of implementation of the Strategy, as regards the Group’s international companies, a variety of reorganisational actions were undertaken aimed at integration of KGHM INTERNATIONAL LTD. in Canada with the Company’s activities in Poland and the transferal of some of the business functions of KGHM INTERNATIONAL LTD. to Poland. In 2021, these actions were continued, mainly in terms of developing uniform internal regulations, procedures and the standardisation of solutions in individual areas of the Company’s activities. In addition, internal actions were undertaken aimed at advancing development scenarios for individual international assets in the Company’s portfolio.

Investment goals

Investment projects planned and approved for advancement in 2021 support the achievement of strategic goals in all areas of the Strategy. Maintaining cost-effective domestic production will be possible by continuing and bringing into operation key investments, such as:

-       Development of the Żelazny Most Tailings Storage Facility - the Southern Quarter and the Tailings Segregation and Thickening Station.

-       Replacement of mining machinery.

-       Outfitting the mines along with the construction of conveyor belts.

-       Construction of mine de-watering systems.

-       Construction of air cooling systems.

-       Modernisation of the electrorefining sections in the metallurgical plants.

Taking into consideration the development of KGHM by enhancing the efficiency and flexibility of the KGHM Group in terms of its Polish assets, investments which will be advanced include:

-       The Deposit Access Program (Deep Głogów along with access and development tunnels).

-       Development of the Żelazny Most Tailings Storage Facility above a crown height of 195 m a.s.l,

-       Documentation for the Hybrid Legnica Smelter and Refinery.

-       Construction of photovoltaic power plants.

-       Searching for and exploring deposits under areas of exploration concessions.

Moreover, following the idea of sustainable development, investment projects will be continued such as those adapting the metallurgical installations to BAT conclusions for the non-ferrous metals industry and to restrict emissions of arsenic (BATAs).

In addition, the Company will continue to carry out work on new, intelligent technologies and production management systems, based on online communication between elements of the production process and advanced data analysis, in accordance with the KGHM 4.0 Program concept.

5.3.    Advancement of the Strategy in 2021

During the reporting period being discussed, KGHM Polska Miedź S.A. advanced the „Strategy of KGHM Polska Miedź S.A. for the years 2019-2023” approved in the last quarter of 2018.

In September 2021 during the Economic Forum in Karpacz, the Company announced a further breakdown of the existing Strategy to include new targets, connected among others with involvement in actions concerning renewable energy sources (RES), on-shore and off-shore windfarms, the use of hydrogen and small nuclear reactor technology, so-called SMRs. Consequently, the Company in the last quarter of 2021 undertook actions aimed at implementing the new strategic directions, which were finally detailed in the document „Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040”, approved in January 2022.

In advancing the Strategy, the Company in 2021 endeavoured to maintain stable production in its domestic and international assets, and a level of costs guaranteeing financial security while ensuring safe working conditions and minimising its impact on the environment and surroundings, pursuant to the idea of sustainable development. To enhance the effectiveness of the actions undertaken, the decision was made to define and establish Strategic Programs.

Following is information on key actions taken in 2021 in individual strategic areas:

Key actions taken in 2021 in the area of Production:

-         Mined production in Poland in 2021 amounted to 442.6 thousand tonnes of copper in ore with a C1 cost of 4 981 USD/t (2.26 USD/lb) of payable copper.

-         Payable copper production abroad:

§  Sierra Gorda: 104.4 thousand tonnes (on a 55% basis); Achieved EBITDA and payable copper production exceeded target amounts,

§  Robinson: 53.6 thousand tonnes,

§  Carlota: 5.5 thousand tonnes,

§  Franke: 10.7 thousand tonnes,

§  Sudbury Basin: 1.9 thousand tonnes.

-         Metallurgical production in 2021 amounted to 577.6 thousand tonnes.

-         Advancement continued on projects aimed at the automatisation of production in KGHM’s Mining Divisions, under the  KGHM 4.0 Strategic Program in the area Industry:

§  Equipment and elements of the de-watering monitoring system were completed, which were built and brought into operation in the Polkowice-Sieroszowice Mine Division together with visualisation in the dispatcher control room.

§  As part of the work on the „Center of Advanced Data Analysis (Centrum Zaawansowanych Danych Analitycznych - CZAD)”: the users positively verified the algorithms involving analysis of the loads borne by the conveyor belts in the mines, developed by KGHM Cuprum. Implementation of the algorithms in a production environment using the EKSPERT system platform is underway.

-         Work was carried out on increasing energy generation from own sources, including RES:

§  Talks are underway on the acquisition of photovoltaic farms. A project to construct a photovoltaic power plant of approx. 1.5 MWe at the Cedynia Wire Rod plant was prepared for execution (the contractor selection process is underway). Preparatory work is underway for the execution of 2 subsequent photovoltaic farm projects on grounds belonging to KGHM with a total capacity of around 6.5 MWe. Analytical work is in progress on the utilisation of other grounds belonging to KGHM to develop renewable energy sources.

§  On 30 November 2021 the Town Council of Głogów adopted a change to the municipal land use plan regarding  Głogów’s copper industry terrain. Requests were prepared and agreed for the issuance of environmental conditions decisions together with Informational Enterprise Cards for each of the 3 planned photovoltaic power plants on the grounds of the Głogów Copper Smelter and Refinery, and preparations were made for the issuance of the technical conditions for connecting to KGHM’s power network.

§  Talks are underway on the acquisition of wind farm power plants. On 15 September 2021 the Company  joined a sector agreement for the development of off-shore wind power. Currently KGHM is involved in dialogue with potential partners as regards submitting applications for the issuance of siting permits and the development of off-shore wind farms.

§  On 9 September 2021 a letter of intent was signed on the creation of the Lower Silesia Hydrogen Valley. Work is underway on the formula of cooperation.

§  On 23 September 2021 the Company entered into a tripartite agreement involving preparations for the advancement of an investment involving the construction of nuclear energy sources with NuScale Power LLC – a producer which is developing reactors based on SMR (small modular reactor) technology, and PBE Molecule Sp. z o.o. Sp. k. – an advisory company. Execution of the nuclear energy project is planned by the end of 2030, while the Company expects that the first of the nuclear reactors will be in operation in 2029.

§  On 14 December 2021 consent was obtained via administrative decision for the removal of trees and bushes connected with the construction of a photovoltaic power plant at the „Obora” Sandpit.

Key actions taken in 2021 in the area of DEVELOPMENT:

-     Continued advancement of the Strategic Deposit Access Program:

§  Work on sinking the GG-1 shaft reached a depth of 1293.2 m. Work on Stage VII of sinking the shaft continues within the concrete construction (sinking of the shaft in the 1226-1299.6 m interval). Ventilation outlets were built.

§  Agreements were entered into in the form of notary acts for the purchase of land for the GG-2 „Odra” shaft. Talks are underway with the Gmina (Municipality) of Gaworzyce on building an access road to the shaft as well as procedures involving the selection of a contractor for the following tasks: shaft site drilling, research within the shaft site drillholes, construction of the Primary Transformer Station and of facilities needed to sink the shaft.

§  Talks are underway with the owners of land where the Gaworzyce shaft will be located. The Gmina adopted the requisite resolutions to commence shaft construction. An agreement was signed with the Municipality of Gaworzyce. The terms of purchase of plots of land for the Shaft construction were negotiated.

§  In 2021, 44.3 kilometers of tunneling were excavated in the Rudna and Polkowice-Sieroszowice mining areas, representing 10% more than in 2020. All of the work carried out under the Mine Projects Group enables the successive opening of new mining areas.

§  In terms of the Central Air Conditioning System, work continued on building the Surface-based Air Conditioning Station at the GG-1 Shaft. The main technological and installation work was completed, as well as electrical and automatic work . Technological start-up of the first stage of the installation with a power capacity of around 22 MWt is underway.

§  The technical handover of the first part of the Ice Water Transportation System was completed. Construction continues on building part 2 of the System.

-     Continued advancement of Development of the Żelazny Most Tailings Storage Facility:

§  Southern Quarter: Stages 1, 2 and 3  were completed along with operational permitting. Total advancement of the physical scope of work for the Southern Quarter together with slurry, water and power infrastructure reached 99%. Amendments to the task were introduced involving the construction of power and water infrastructure. Tailings continue to be deposited in the Southern Quarter.

§  Tailings Segregation and Thickening Station (TSTS): work was completed on tasks involving the execution of architecture and internal installations of the hall, internal, water-sewage and ventilation installations, as well as the power building. Work is underway on assembling the technological part of the Station. Total advancement of the physical scope of work on Stage 1 is 100%, and 59% for Stage 2. Total advancement of the physical scope of work on the TSTS is 80%. The process of large-grain tailings segregation and thickening is underway for the purpose of deposition in the Southern Quarter.

-     Exploration projects with respect to exploring for and evaluating copper ore deposits were carried out pursuant to the concessions:

§  In 2021, in the concession areas „Retków-Ścinawa” and „Głogów” geological and other work continued which included the sinking of two drillholes. In the fourth quarter of 2021 the process of altering the Głogów concession commenced.

§  Geological work continued within the Synklina Grodziecka and Konrad concession areas. In the first quarter of 2021 a change to the „Synklina Grodziecka” concession was obtained.

§  In the second quarter of 2021 concessions were obtained for the areas „Bytom Odrzański” and „Kulów-Luboszyce”. In the fourth quarter of 2021 a drillhole for exploratory and evaluation purposes was sunk in the concession area Bytom Odrzański and the sinking of an exploratory drillhole in the concession area „Kulów-Luboszyce” commenced.

§  In the second quarter of 2021 a concession was obtained to explore for and evaluate the Radwanice-Gaworzyce

deposit in the „Radwanice” area. At the end of the third quarter of 2021 geological work commenced.

-     Exploration projects were carried out with respect to exploring for and evaluating of other deposits pursuant to the concessions:

§  On the terrain of the Puck concession in the first half of 2021 laboratory and analytical work was carried out. At the turn of the third and fourth quarters of 2021 two drillholes were sunk.

§  On the terrain of the Nowe Miasteczko concession analysis was performed on the results of geophysical research. A concept was developed to conduct further geological work.

-     Projects involving development of the international assets were continued:

§  In 2021, Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation decided to sell all of the shares they held in the joint venture Sierra Gorda SCM to the Australian mining group South32. The Management Board of KGHM Polska Miedź S.A. decided not to exercise its right of first refusal to acquire the shares of the company Sierra Gorda SCM.

§  Sierra Gorda Oxide: actions continued aimed at preparing for the next stage of project development, involving among others the commencement of work related to updating project documentation. In the fourth quarter of 2021, an agreement was entered into involving the transfer of the Oxide project from the structure of KGHM Chile SpA to Sierra Gorda SCM. At present most of the oxide ore planned for processing has already been excavated and is currently stored near the site of the future copper leaching and recovery (SX-EW) plant.

§  Victoria project: in 2021, based on exploratory work performed, approx. 6 million tonnes of project resources were re-categorised to a higher recognition category (from Inferred to Indicated). In addition, work focused on preparing the foundations for the shaft’s headframe, the waste rock containment pad (a storage site for potentially-acidifying barren rock), preparation of a parking area and a water treatment plant. The electrical infrastructure located on the grounds of the project was connected to the external power network. Work also continued aimed at maintaining good relations with key stakeholders in the project along with actions related to preparing selected elements of the infrastructure, as the preparatory phase for further development of the project. In 2021 the process of acquiring rights to project terrain was finalised.

§  Ajax project: work involved monitoring and securing the project’s terrain, in accordance with law in force. Actions continued aimed at dialogue with stakeholders in the project.

-     Work continued on an investment project involving documentation for the construction of a second Upcast line to produce oxygen-free CuOFE copper at the Cedynia Wire Rod plant along with required technical and logistical infrastructure. In 2021, the documentation was reviewed and the economic feasibility study was updated. A decision was also received regarding the project’s environmental impact. In the fourth quarter of 2021, the process of obtaining the requisite administrative decisions necessary to commence the construction continued.

-     Under the Strategic Program called Hybrid Legnica Smelter and Refinery the investment project „Documentation for Hybrid Legnica Smelter and Refinery - Legnica Smelter and Refinery Scrap Turnover Base” commenced. Design work was carried out related to the execution of documentation. By the end of 2021 a partial update of the Referential Statement of Costs and Program-Area Use Concept for the Scrap Turnover Base and Hybrid Legnica Smelter and Refinery was received, with respect to production balances.

-     In 2021, 18.70% of KGHM’s need for electricity was supplied by its own generating sources, including RES. The lower generation of energy from own generating sources as compared to the prior year was mainly due to restrictions on production compared to the plan for the Gas-Steam Blocks resulting from unfavourable macroeconomic conditions, including high prices of natural gas and CO₂ emissions rights.

Key actions taken in 2021 in the area of INNOVATION:

-     Under the CuBR venture, co-financed by the National Centre for Research and Development (NCRD), R&D projects having a total value of over PLN 180 million are underway. Altogether, 25 projects have been implemented under the four editions of the competition:

§  19 projects have been completed (including 5 projects completed in the fourth quarter of 2021).

§  6 projects are currently being advanced.

§  It is expected that in 2022 the results of a project to design blasting metrics, developed under the Venture, will be implemented. Testing continues to verify mining machine simulators. In 2021, prototypes were tested on a group of around 100 people. Completion of the project and implementation of its results is expected in the second quarter of 2022.

§  A consortium advancing a project under the Venture in cooperation with the company Tauron utilised a prototype CuAg cable on an existing section of a power line, which is intended to substantially reduce energy transmission losses. The cable is undergoing testing which will last 12 months.

-     Advancement of the Implementation Doctorates Program for KGHM employees continued. At the end of the fourth quarter of 2021, 30 Doctoral Students from the two editions were participating in the Program (edition I – 20 members, edition II – 10). During an Underground Mining School in 2021 in Kraków an academic panel dedicated to the Doctoral Students was organised.

-     Actions were commenced connected with the testing of pilot flotation machinery in the Concentrators. A portion of the infrastructure equipment was delivered.

-     R&D work was commenced involving the utilisation of PbZn concentrate at the Głogów Copper Smelter and Refinery. Actions are underway connected with preparing a concept and preliminary documentation.

-     Work continues connected with testing electric, battery-powered self-propelled mining machinery. Testing of a bolting rig and a drilling rig is currently underway in the Lubin mine. In the Polkowice-Sieroszowice mine, tests are being conducted on a transport vehicle adapted to work underground. Preparations are underway to conduct testing of a loader, which should commence in the second quarter of 2022.

-     Following conclusion of the „CuValley Hack” Hackathon, under the Dolina Miedziowa (Copper Valley) program, actions are currently underway connected with continuing cooperation with the participants of the event. The possibility and reasons for holding a subsequent edition of the Hackathon are being analysed.

-     Construction of an EOIF (Elektroniczny Obieg Informacji Firmowej, or Electronic Company Information Flow) workflow platform for R&D processes in KGHM for R&D activities was completed. A version for all users in KGHM was brought online. In addition, a service for the collection and transfer of knowledge in the Group – uSEARCH KGHM – is being developed.

-     Work continues on subsidised research projects and preparing subsidy applications to the following Programs: Horizon Europe, KIC Raw Materials (Knowledge and Innovation Community), the National Environmental Protection Fund and under the European Funds for Modern Economy (successor to the Smart Growth Operational Programme). Actions undertaken by KGHM under subsidised  R&D initiatives in 2021 include among others:

§  Commencement of a project called „Application of Reflux Flotation Cell (RFC) Technology”, involving intensification of the recovery of useful mineral grains.

§  Continued advancement of a project called „Intelligent control of production in underground mining SIMS 2 (NEXGEN-SIMS)”.

§  Continued advancement of a project called „Development of assumptions for technology to improve the recovery of useful metals contained in fine particles in the processing of minerals”, in which methods to improve the flotation of fine grains in the Concentrators Division are being researched.

A positive assessment was obtained to advance the following projects:

§  An electric hammer for crushing lumps (Echo).

§  Brines in RIS (Regional Innovation Scheme) countries (so-called new European Union states which joined the EU after 2004) as a source of critical commodities and energy (BrineRIS).

§  Agile exploration and geomodeling for European critical commodities (AGAMERA).

§  Identification of critical metals available within the EU (VECTOR).

-     In terms of intellectual property:

§  Proceedings are underway to obtain legal protection for the word trademark „KGHM”, submitted in an international procedure, on the territory of China.

§  Applications in respect of four trademarks: the word-figurative trademark „KGHM GROUP”, the word trademark „KGHM GROUP”, the word-figurative trademark „GRUPA KGHM”, and the word-figurative trademark „KGHM” were submitted to the European Union Intellectual Property Office (EUIPO) in Alicante. Application proceedings are underway.

§  By decisions dated 30 September 2021 the Patent Office of the Republic of Poland granted legal protection for two word trademarks: „KGHM” and „GRUPA KGHM”.

§  Applications were submitted to expand trademark protection in selected non-European countries and

in selected classes: international applications through the World Intellectual Property Organization (WIPO) for the word trademark and the word and figurative trademark „KGHM GROUP” (Canada, USA, Norway, Turkey, Russia, Ghana, Belarus) and a national application on the territory of Chile, a national application of the word and figurative trademark „KGHM” on the territory of China. Proceedings are underway.

§  The word and the word and figurative trademark „KGHM” is being monitored in world trademark bases to verify  similar trademarks submitted for protection. 

§  The Patent Office of the Republic of Poland granted a patent to two inventions: „Organ urabiający kombajnu ubierkowego” (Mining unit of the open-end miner) to KGHM Polska Miedź S.A. and FAMUR S.A., and „Sposób pozycjonowania urządzenia i/lub ruchomego członu urządzenia, zwłaszcza w przestrzeni wyrobiska górniczego przodka” (Method for positioning of a device and/or movable element of a device, preferably within the area of the mine face) to KGHM Polska Miedź S.A. and Wrocław University of Science and Technology.

§  Proceedings are underway in the Patent Office of the Republic of Poland for the granting of seven patents to protect the submitted inventions.

Key actions taken in 2021 in the area of Financial stability:

-     In 2021, advancement of the strategic goal of ensuring long-term financial stability focused on continuing actions aimed at basing the financing structure on  diversified sources of financing while taking into account their long-term nature.

In 2021 the KGHM Polska Miedź S.A. Group was fully capable of meeting its financial obligations. The financial needs of Group companies were met by using intra-group cash transfers.   This process is mainly based on managing the Group’s current liquidity based on cash pooling and on guarantees and letters of credit, as well as on long-term owner loans.