Glossary of sectoral and financial terms

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Raw Material

Copper Concentrate is primarily purchased on the international market, with Chile as the main supplier. of the Copper Concentrate purchase price is determined by international prices of metals contained and respective yields (copper, gold, silver, nickel, zinc, lead and other precious metals can be found in Copper Concentrate), subtracted from the TC/RC, or Treatment Charge (TC)/Refining Charge (RC). The TC/RC is the charge paid to the transformer for the mineral copper processing and refining into metal copper and is negotiated between suppliers and smelters, such as Paranapanema.

There may also be adjustments to Copper Concentrate price based on precious metals content as well as those specific characteristics of Copper Concentrate offered, which ranges from mine to mine.

Copper Scrap consists of recycled copper bought both in the local and international markets used either in the raw material mix to produce Cathode and other alloys for copper products. In 2013 the raw materials mix was 75% Copper Concentrate and 25% Copper Scrap.


Paranapanema produces Primary Copper, Copper Products and By-products from Copper Concentrate and Copper Scrap. The Company also conducts operation of Transformation (Toll) of copper scrap received from customers into Copper Products.

Primary Copper, also known as Copper Cathode, is the copper commodity in its metal form. Production process consists in converting Copper Concentrate into metal Copper.

Copper Products are tubes, fittings, rods, wires, bars and others, whose main raw material are Cathodes and copper alloys and copper alloys with other nonferrous metals such as tin, lead and zinc. In addition to the cost of copper , Primary Copper requires other costs to be transformed into Copper Products, such as labor, energy, etc.

By-products results from the processing of Copper Concentrate into Cathodes. The main by-products are Sulfuric Acid and Anodic Slime (material containing precious metals such as Gold and Silver), besides Slag, Oleum and Revert.

Toll refers to transactions where the Company receives copper scrap from its customers and transforms it into Copper Products. Transformation costs incurred are similar to Copper Products obtained from Primary Copper.


Paranapanema’s Net Revenues are derived from sales volumes and prices charged by Primary Copper, Copper Products, Toll and By-Products.
The selling price of Primary Copper or Copper Cathode is established by London Metal Exchange (LME) transactions and is converted into Reais (BRL) based on the exchange rate at the time of sale closing, as well as the Cathode Premium, which is the remuneration charged by the Company to transform Copper Concentrate into Primary Copper.

Copper Products selling price is determined by the mix of copper, tin, lead and zinc contained in the product (in line with those applied for Primary Copper, i.e. LME), plus Premium, value charged by Paranapanema to transform the Primary Copper into value added products. As it occurs in Primary Copper, revenues from sales of Copper Products are also impacted by the USD exchange rate, even if sales are booked for Brazilian customers.

By-product prices are linked to the USD. Sulfuric Acid is quoted based on FMB (Fertilizer Market Bulletin) plus premiums or discounts, while Anodic Slime price is set based on contained precious metals.

Toll average price per ton is materially lower than those of Copper Products, which Paranapanema does not incur in metal revenues or costs (copper received from customers is in the form of scrap). The Premium charged in Toll operations are usually priced in Reais but, in some occasions USD based contracts are adjusted by the dollar exchange rate.


Paranapanema Inventories are primarily comprised of commodities such as Copper, Gold, Silver, Zinc, Tin and Lead. Commodity inventories have high liquidity and monetization values that are marked by very liquid markets.

Management dedicates special attention to adjusting inventories levels to operational needs and, since 4Q13, keeps a program called Stock Short to monitor inventory levels, pursuing more integration and efficiency in Supply Chain, Logistics, Industrial and Commercial on Inventories use.

Adjusted EBITDA

Paranapanema adjusts its EBIDTA of items called “non-recurring”, which are amounts not related to Management expectations that may occur in the future to the same degree as presented in the respective period.

Hedge and Hedge Accounting

The Company follows a risk management policy approved by the Board of Directors, in order to prevent unexpected economic impacts from fluctuations in metal commodities prices, exchange rates and interest rates on profitability and cash flow.

Paranapanema adopts various hedging strategies as a way to neutralize any (i.) disconnects between the sales price and the purchase price of metals and raw materials, (ii.) impact of changes in exchange rates on the value of assets and liabilities and the future value of revenues and costs, and (iii.) interest rate exposure, given by the annual payment amount of floating interest embedded in financial contracts. The use of derivatives is limited exclusively to hedging activities with adoption of Hedge Accounting when necessary.

Adoption of Hedge Accounting will be defined by standards specific to CPC 38 and 39, which should provide at least the following: (a) the exchange risk on both financial and operational elements may adopt the hedge of the fair value or cash flow with derivatives or financial instruments; (b) commodity risk may adopt hedge of the fair value or cash flow with derivative or embedded derivatives and (c) for the interest rates risk may adopt the cash flow hedge with derivatives.

The reading and interpretation of financial statements with the adoption of Hedge Accounting differ from those that do not adopt Hedge Accounting and recognize all the variations on derivatives and financial instruments as Financial Income or Losses.

With the adoption of Hedge Accounting of Cash Flows there is a need to analyze the “Other Comprehensive Income” account presented in Net Worth. This account is used to record future gains and losses on hedges until the moment they actually occur, when they are recognized in the Operational Result of the respective period.

In order to allocate effects of economic hedges in Gross Profit, Paranapanema has adopted Hedge Accounting of the fair value hedging of metals (copper, zinc, lead and tin) and precious metals (gold and silver) inventories.

Management may implement new hedging strategies or modify current strategies, implemented parallel with Hedge Accounting.

Metal Hedge

The Company seeks to neutralize metal price fluctuation on Paranapanema’s income through the fair value hedge of the inventories program by using derivative contracts at stock exchanges, derivatives embedded in Copper Concentrate purchasing contracts and offsetting long and short positions.

The industrial cycle of the smelter causes Paranapanema to carry a “load” of physical inventory of metals and makes use of hedging instruments to protect them, in an effort to approximate metal cost value to metal price at sale moment. For hedging purposes, metal inventories represent a long position. Copper Concentrate sourcing process causes purchase value to be unknown at purchase date, a metals market practice. Values are defined according to LME parameters during months following the purchase date. This period is known as “Quotational Period” (or “QP”). This situation specific to metal markets creates a short position for Paranapanema, until the QP is defined.

Due to amounts usually involved between long and short position of financial transactions, Paranapanema has a long position. To balance this position, the Company sells derivatives to create an additional short, up to the amount to neutralize the exposure. This procedure is in line with Company’s risk management policy.

Exchange Rate Hedge

The Company aims to permanently protect 70% to 100% of net foreign exchange exposure of the 6-12 months projected cash flow through derivative transactions, and offsetting revenues and liabilities pegged to the US Dollar (USD).

Paranapanema maintains liabilities pegged to the USD (short position), mainly with suppliers and credit facilities. As a nature of copper business, future revenues are also pegged to the USD (long position). Net position perceived by Paranapanema, is long. To counteract this situation, Paranapanema sells USD Non Deliverable Forwards (NDFs), thereby reducing its USD exposure. This process is in line with the Company’s risk management policy.

Effects arising from exchange rate hedge are perceived in three accounts in Financial Statements: in Financial Results for transactions settled during the period, in OCI, within Net Worth, where gains and losses of exchange rate mark-to-market variations on future income and expenses awaits transfer to Operating Revenues until they are materialized.

Total Return Swap

Paranapanema entered into an agreement in November 2012 with Deutsche Bank (DB) to exchange flows by which DB is long on CDI (Certificados de Depósitos Interbancários – reference daily interest rate used in Brazilian market) and short on Paranapanema’s share price, PMAM3. The Company has the opposite positions as DB. The Total Return Swap settlement, which could be extended until February 2016, was fully concluded on September and October 2015.