Market risk factors analysis for an international mining company. Multi-dimensional, heavy-tailed-based modelling

Mining companies to properly manage their operations and be ready to make business decisions, are required to analyse potential scenarios for main market risk factors. The most important risk factors for KGHM, one of the biggest companies active in the metals and mining industry, are the price of copper (Cu), traded in US dollars, and the Polish zloty (PLN) exchange rate (USDPLN). The main scope of the paper is to understand the mid- and long-term dynamics of these two risk factors. For a mining company it might help to properly evaluate potential downside market risk and optimize hedging instruments. From the market risk management perspective, it is also important to analyse the dynamics of these two factors combined with the price of copper in Polish zloty (Cu in PLN), which jointly drive the revenues, cash flows, and financial results of the company. Based on the relation between analysed risk factors and distribution analysis, we propose to use two-dimensional vector autoregressive (VAR) model with the a-stable distribution. The non-homogeneity of the data is reflected in two identified regimes: first - corresponding to the 2008 crisis and second - to the stable market situation. As a natural implication of the model fitted to market assets, we derive the dynamics of the copper price in PLN, which is not a traded asset but is crucial for the KGHM company risk exposure. A comparative study is performed to demonstrate the effect of including dependencies of the assets and the implications of the regime change. Since for various international companies, risk factors are given rather in the national than the market currency, the approach is universal and can be used in different market contexts, like mining or oil companies, but also other commodities involved in the global trading system.

Automated summary

This paper focuses on analyzing the mid- and long-term dynamics of two main risk factors – copper price and Polish zloty exchange rate - for KGHM, a major player in the metals and mining industry. The study aims to help mining companies evaluate downside market risks and optimize hedging instruments, while also highlighting the importance of understanding the combined dynamics of these factors with the price of copper in Polish zloty.