Preliminary conclusions following audits and inspections in KGHM Polska Miedź S.A. Capital Group

KGHM Polska Miedź S.A. announces the results of audits and inspections carried out in the context of the activities of the Company's management in recent years. These audits were aimed at identifying irregularities in the spending of funds and covered various aspects such as business, management, investment, marketing and sponsorship activities. 17 audits and inspections have been completed, seven are close to finalisation and a further five audits are at various stages of progress. The audit material concerning medical equipment purchases has been forwarded to the public prosecutor's office, which is investigating the case. Two notifications were also sent to the public prosecutor's office as a result of an inspection carried out at KGHM ZANAM.

The following areas of KGHM Capital Group's operation were audited:

• purchases of goods aimed at preventing the COVID-19 pandemic,
• purchasing and management processes for photovoltaic farms,
• financing of the Zagłębie Lubin football club,
• functioning of the Tailings Plant Division of KGHM,
• operation of foreign assets, particularly in the KGHM International group
• activities of the KGHM Polska Miedź Foundation,
• purchasing processes at KGHM ZANAM S.A.,
• marketing and sponsorship services.

Irregularities identified

KGHM is in the process of implementing post-audit recommendations. The main objective is first and foremost to rectify the consequences of the irregularities detected. The first findings of the audits indicate a number of irregularities, including:

• the lack of proper corporate governance,
• management errors,
• pursuit of objectives unrelated to the activities of KGHM,
• failure to apply the procedures in force and the Code of Ethics of KGHM Polska Miedź S.A. Capital Group.

Purchases of Covid masks are being investigated by the prosecutor's office

An audit of PPE purchases in China found that, despite having business contacts and international experience to carry out the purchases, KGHM carried out these purchases primarily from two intermediary companies.

Key findings from the audit show huge increases in revenue for these companies in 2020, suggesting that these companies did not engage in activities on such a scale previously. It was shown that the company, using these intermediaries, purchased more expensive medical supplies, including masks, than the same protective equipment purchased earlier directly from foreign suppliers. These purchases accounted for approximately 80 per cent of the total expenditure on medical supplies at the time, leading to higher costs. The lack of involvement of key KGHM employees who specialised in contacts and purchases in the Chinese market and the lack of use of formal procedures in the purchasing process were also identified.

'The audit revealed numerous deficiencies in the Covid purchase process. The case is being investigated by the public prosecutor's office and we are drawing conclusions so that such situations would not occur in the future. We take the results of all audits and inspections very seriously, we analyse them from a legal point of view, and we will make decisions on further steps on that basis,’ said Piotr Krzyżewski, KGHM’s Vice President of the Management Board for Financial Affairs.

Record expenditure in the election year

The audit showed a jump in the value of donations made by the KGHM Polska Miedź Foundation between 2022 and 2023. In 2021, donations of nearly PLN 20 million were awarded, but this has already risen to PLN 34 million (a 70 per cent increase) by 2022. In 2023, the Foundation made donations of almost PLN 57.7 million, which means an increase of 165 per cent compared to 2021 and 56 per cent compared to 2022.

The analysis showed that in the period under review, more and more funds went to entities outside Lower Silesia every year. In 2016, as many as 90 per cent of donations concerned the region in which KGHM operates; in 2023, it was only 45 per cent.

The Foundation has also increased its support for volunteer firefighting units from across Poland. Thus, a total of around PLN 9.3 million was spent on VFUs in 2023, compared to around PLN 193,000 in 2016 – this is an increase by more than 48 times, which means over 4,800 (four thousand eight hundred) per cent. Support for TSOs was sometimes linked to official ceremonies concerning the symbolic transfer of funds with the participation of politicians from the then ruling party.

Among the projects subsidised by the KGHM Foundation in 2023 were also social education and promotion campaigns or information and education campaigns for a total of PLN 5.43 million. This amount went to four beneficiaries: Polonika Republic of Poland Foundation in Warsaw PLN 550,000, Pokolenie Association in Katowice PLN 400,000, Independent Media Foundation in Warsaw PLN 900,000, AMF Foundation in Warsaw PLN 580,000, Pokolenie Association in Katowice PLN 3,000,000. These were information campaigns encouraging participation in the planned nationwide referendum.

The audit highlights that the increase in funds provided by the Foundation raises questions about the transparency and advisability of spending.

The audit of KGHM Polska Miedź S.A.'s expenditure on sponsoring, marketing and advertising is still in progress, but the first conclusions indicate that the activities were carried out without supervision, and some funds were transferred to entities that did not meet the conditions of accepted sponsoring practices.

In 2022–2023, particularly in the pre-election period, there was a sharp rise in sponsorship expenses at KGHM. In 2022, the sponsorship budget amounted to PLN 51.6 million; in 2023, it exceeded PLN 54 million, representing an increase by more than 100% compared to 2016 and by more than 50% compared to 2021.

It is worth noting that more than PLN 13.2 million was spent only on media associated with the then ruling right wing from the sponsorship and advertising budget between 2016 and 2023.

The audit also shows that while sponsorship expenses in Lower Silesia accounted for around 90% of the total sponsorship budget at KGHM in 2016, they totalled only 64 per cent in 2023. The remaining money went to provinces where KGHM does not conduct its core business. In the 2023 election year, this refers in particular to Masovia (approx. 12.7 million), Pomerania (approx. 1.9 million) and Wielkopolska (approx. 1.7 million) provinces.

In addition, KGHM has donated a total of PLN 38.5 million to the Polish National Foundation since its establishment in 2016. The purposes for which the donated funds were used are questionable.

According to the auditors, the action of KGHM Polska Miedź S.A in 2023 was one-directional and aimed at the selection of contractors favourable for the then ruling government.

Irregularities in infrastructure purchases and management

Numerous negligences and omissions in infrastructure management and delays in investment activities were found in the operation of one of the company's divisions – the Tailings Plant. The anomalies found may have resulted in the need to reduce the amount of flotation tailings stored at KGHM during the summer. Only thanks to rapid corrective action in March and the following months of this year was the situation brought under control and stabilised.

'The situation we found at the Tailings Plant required us to take immediate action. At the beginning of our work at the Management Board , the Żelazny Most reservoir was indeed filled, and it was necessary to quickly and effectively rebuild retention at the Extractive Waste Neutralisation Plant and to ensure the possibility of reducing discharges in the summer. With the efforts of the entire organisation, we are rectifying the mistakes that were made in the past,’ explained Mirosław Laskowski, KGHM's Vice President of the Management Board for Production.

Further irregularities were revealed by an audit of the procurement and management of photovoltaic farms. The audit of transactions for the purchase of photovoltaic farms revealed irregularities, including exceeding the maximum price limits set by the board of directors, the lack of adequate verification of contractors prior to transactions, the lack of supervision of the purchasing process and technical defects in the installations purchased.

Analysis of the activities of Zagłębie Lubin S.A.

The audit of the Zagłębie Lubin football club's activities revealed financial problems and the lack of budgetary discipline, and the key cost category with the highest increases and budget overruns was salaries paid to players particularly in 2023. In 2023 alone, the total increase in costs (according to the published Financial Statements) amounted to a total of approximately PLN 18.5 million (compared to 2022).

The club took undue risks by planning very significant expenditure that was not covered by the budget, which involved a high degree of business risk. This made it necessary to use funds donated by KGHM for investment in expanding the sports infrastructure used for training young people as part of the Football Academy. Consequently, these investments could not be accomplished.

Procurement processes at KGHM ZANAM S.A.

As a result of the inspection activities at KGHM ZANAM, possible abuses committed by former members of the managing staff were identified, such as exposing the company to the unfavourable disposition of property. The collected material formed the basis for the notification of the suspicion of a possible criminal offence involving actions leading to the unfavourable disposition of the company's property by influencing the process of selecting contractors as part of ongoing procurement projects.

At the same time, as a result of other inspection activities carried out, material was obtained in relation to three other employees of KGHM ZANAM, making it possible to report a suspicion of the possible commission of the criminal offence of acting and omitting to act in contravention of the duties incumbent on the aforementioned persons, as well as exceeding the granted authority to act, which resulted in causing damage of great value to the company.

Corrective actions

Audits and inspections at KGHM are cross-cutting, in-depth verification activities are needed in many cases and they are already underway. However, it can be seen that the activities of the Company's previous management were focused largely on marketing activities and less on its core business, namely mining and metallurgy.

A number of corrective actions have been taken at KGHM to anticipate the results of the audits, including the sponsorship part. The copper company's focus in the coming years will be on improvement of production efficiency, process optimisation and cost reduction. Among other things, this means that some of the sponsorship projects will not continue.

KGHM takes all measures to ensure transparency and integrity in the management of its projects and investments. The audit process is one of the key tools used for the assessment and verification of internal procedures to ensure that all of the company's activities are carried out according to the highest ethical and business standards.

Legal analyses are currently underway at KGHM regarding the possibility of taking specific legal action, in particular the filing of notifications of possible criminal offences to the detriment of KGHM and the initiation of legal proceedings for damages.