REG - Fresnillo Plc - 1H22 Interim Results
02/08/2022 07:15
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RNS Number : 5474U Fresnillo PLC 02 August 2022
Fresnillo plc
21 Upper Brook Street
London W1K 7PY
United Kingdom
www.fresnilloplc.com (http://www.fresnilloplc.com)
2 August 2022
Fresnillo plc interim results
for the six months to 30 June 2022
Octavio Alvídrez, Chief Executive Officer, commented:
"We have remained committed to our purpose during the year, with the safety
and well-being of our people the key priority in every decision we make as a
company. Though the impact of the pandemic has reduced over time, the recent
fifth wave in Mexico highlights how we must continue to support our people and
our communities, in particular as we face new uncertainties in these
challenging times.
"We have proactively addressed these challenges and I am pleased to report a
good financial performance in the first half. The actions we have taken to
implement the Mexican labour reform have been effective. We are on track to
complete the staffing process at Fresnillo and San Julián by the end of 3Q22,
and at Ciénega and Saucito by year end, despite a tight labour market. The
global supply chain bottlenecks that so many industries are facing, together
with cost inflation will have some impact in the second half. However, we are
confident in our ability to weather these short term challenges, without
limiting our ambitious longer term growth plans. We look forward to achieving
connection to the electricity grid at Juanicipio in the coming weeks, and
rapidly ramping up production, while also continuing to develop the Rodeo and
Orisyvo mining projects.
"We benefit from a consistent strategy, exceptional assets, an exciting growth
pipeline and a very strong balance sheet. We are well placed to deliver on our
objectives this year. We look forward with determination and confidence."
First half highlights
Financial highlights (1H22/1H21 comparisons)
· Adjusted Revenues 1 (#_ftn1) of US$1,349.0m, down 12.6%; 91% of this
mainly due to lower gold volumes and 9% due to lower silver prices.
· Revenues of US$1,259.1m, down 14.2%.
· Gross profit and EBITDA 2 (#_ftn2) of US$365.9m and US$459.1m, down
39.7% and 38.5%, respectively.
· Profit from continuing operations before net finance costs and income
tax and profit before income tax of US$218.2m and US$155.2m, down 53.8% and
65.1%, respectively.
· Profit for the period of US$141.0m, down 54.3%.
· Basic and diluted EPS from continuing operations of US$15.9 cents per
share, down 61.2%.
· Adjusted EPS 3 (#_ftn3) of US$19.4 cents per share, down 53.1%.
· Cash generated from operations, before changes in working capital, of
US$459.5m, down 38.8%.
· Free cash flow 4 (#_ftn4) of US$93.5m in 1H22 (US$305.1m in 1H21).
· Strong balance sheet with cash and other liquid funds 5 (#_ftn5) as
at 30 June 2022 of US$1,151.9m (31 December 2021: $1,235.3m); net debt/EBITDA
of 0.02x 6 (#_ftn6) (31 December 2021: -0.06x).
· Interim dividend of 3.40 US cents per share, totaling US$25.1m (1H21:
73.0m).
Operational highlights (1H22/1H21 comparisons)
As disclosed in the 2Q22 production report on 27 July 2022:
· First half attributable silver production of 27.6 moz (including
Silverstream), up 0.4% vs. 1H21.
· First half attributable gold production of 308.8 koz, down 27.9% vs.
1H21.
· We expect to complete the tie-in of the Juanicipio plant and Pyrites
Plant at Fresnillo to the national electricity grid in the coming weeks.
Commissioning of the Juanicipio plant will follow soon after with the ramp up
of the plant beginning towards the end of the third quarter.
· Ongoing focus on costs control and productivity.
Covid-19 update
We saw a drop in Covid-related absenteeism across our operations from March
onwards following the arrival of the fourth wave of Covid towards the end of
2021, and have seen a more limited impact on our operations during 2Q22.
Despite continuing to implement strict protocols to limit the spread of the
virus, a fifth wave has now reached Mexico and we are seeing a rise in
positive cases in the country. Should this trend continue, we will see an
increase in Covid-related absenteeism in the second half. The safety and
well-being of our people is our priority, and we continue to closely monitor
the spread of the virus and implement a range of safety measures across our
business.
Highlights for 1H22
US$ million unless stated H1 22 H1 21 % change
Silver production (koz) * 27,632 27,530 0.4
Gold production (oz) 308,752 428,356 (27.9)
Total revenues 1,259.1 1,466.8 (14.2)
Adjusted revenues(1) 1,349.0 1,543.1 (12.6)
Cost of Sales 893.2 860.1 3.8
Exploration expenses 77.7 60.9 27.6
EBITDA(2) 459.1 747.0 (38.5)
Profit for the period 141.0 308.4 (54.3)
Cash generated by operations before changes in working capital 459.5 750.4 (38.8)
Basic and Diluted EPS (US$)(3) 0.159 0.410 (61.2)
Basic and Diluted EPS, excluding post-tax Silverstream revaluation effects 0.194 0.414 (53.1)
(US$)
Dividend per ordinary share (US$) 0.034 0.099 (65.7)
* Silver production includes volumes realised under the Silverstream contract
(1) Adjusted revenues are the revenues shown in the income statement adjusted
to add back treatment and refining charges and the effects of metals prices
hedging. The Company considers this is a useful additional measure to help
understand underlying factors driving revenue in terms of volumes sold and
realised prices
(2) Earnings before interest, taxes, depreciation and amortisation (EBITDA) is
calculated as profit for the year from continuing operations before income
tax, less finance income, plus finance costs, less foreign exchange
gain/(loss), less revaluation effects of the Silverstream contract and other
operating income plus other operating expenses and depreciation.
(3) The weighted average number of shares for H1 2022 and H1 2021 was 736.9m.
See Note 8 in the Interim Consolidated Financial Statements.
Commentary on the Group's results
Operating results
First half attributable silver production of 27.6 moz (including
Silverstream), in line with 1H21 as the expected lower ore grade at San
Julián DOB and lower volume of ore processed at Saucito was offset by the
increased contribution of ore from Juanicipio.
First half attributable gold production of 308.8 koz, down 27.9% vs. 1H21
primarily due to the expected decrease in the volume of ore processed and
lower ore grades at Herradura and Saucito.
First half attributable by-product lead and zinc production decreased 15.6%
and 5.7% vs. 1H21 respectively, primarily due to lower volumes of ore
processed and ore grades at Saucito and a decrease in ore grades at San
Julián DOB.
The safety and wellbeing of our people remains our absolute priority and we
continue to nurture a strong safety culture across all our mines through the
reinforcement of our safety training and the monitoring of the adherence to
our safety policies. The 'I Care, We Care' programme continues to be rolled
out across the business and is a central aspect of all operations and new
development projects.
Financial results
Total revenues decreased 14.2% to US$1,259.1 million in 1H22, due mainly to
the lower volume of gold sold and a decrease in silver price, mitigated by
higher zinc and gold prices.
The average realised silver price decreased 13.8% from US$26.4 per ounce in
1H21 to US$22.8 per ounce in 1H22, while the average realised gold price rose
4.6%, from US$1,789.2 per ounce in 1H21 to US$1,871.1 per ounce in 1H22.
Further, the average realised lead and zinc by-product prices increased 2.8%
and 33.1% against their corresponding periods, to US$98.3 and US$173.8 per
pound, respectively.
Adjusted production costs 7 (#_ftn7) increased by 7.9% to US$659.3 million in
1H22. The US$48.2 million increase resulted mainly from: i) cost inflation,
including the Mexican peso vs. US dollar devaluation effect (US$44.1 million);
ii) costs from the start-up of operations at Juanicipio (US$43.1 million);
iii) increase in the use of infrastructure contractors, and maintenance
(electric and mechanical) (US$24.5 million); iv) higher volume of ore
processed at Fresnillo and San Julián DOB (US$7.1 million); v) and others
(US$9.2 million). These adverse effects were mitigated by lower stripping to
cost at Herradura (-US$47.7 million); and a decreased volume of ore processed
at Saucito, Ciénega, San Julián (Veins) and the Pyrites plant (-US$32.2
million).
Additionally, the variation in the change in inventories and others had a
negative effect of US$19.5 million versus 1H21.
Depreciation decreased half on half. This is mainly due to decreased
amortisation of capitalised mining works and lower depletion factors at all of
the mines except for Fresnillo and Juanicipio
The higher adjusted production costs and the variation in change in work in
progress at Herradura, mitigated by the decrease in depreciation and lower
profit sharing resulted in a 3.9% increase in cost of sales compared with
1H21.
The lower total revenues combined with the increase in cost of sales, resulted
in a 39.7% decrease in gross profit to US$365.9 million in 1H22.
Administrative and corporate expenses decreased 4.1% from US$51.2 million in
1H21 to US$49.1 million in 1H22, mainly due to a decrease in fees paid to
advisors (legal, labour, tax and technical).
Exploration expenses increased, as expected, by 27.6% from US$60.9 million in
1H21 to US$77.7 million in 1H22, in line with the budget for this year and our
strategy to focus exploration on specific targets, mainly at our Fresnillo and
San Julián districts. The increase of US$16.8 million seen period-on-period
was due to our intensified exploration activities aimed at increasing the
resource base, converting resources into reserves and improving the confidence
of the grade distribution in reserves.
Driven by a decrease in gross profit, EBITDA decreased by 38.5%, with EBITDA
margin decreasing from 50.9% in 1H21 to 36.5% in 1H22. Similarly, profit from
continuing operations before net finance costs and income tax decreased from
US$471.9 million in 1H21 to US$218.2 million in 1H22, a decrease of 53.8%.
The net Silverstream effect recorded in the 1H22 income statement was a loss
of US$36.3 million (US$20.3 million amortisation profit and US$56.6 million
revaluation loss), which compared negatively to the net loss of US$4.0 million
registered in 1H21. The negative revaluation was mainly driven by the increase
in the LIBOR reference rate; and a decrease in the forward silver price curve;
partially compensated by a new mine plan, which considers an increase in
silver reserves.
Net finance costs of US$27.9 million remained at similar levels to the US$25.4
million recorded in 1H21. Financial expenses in 1H22 included mainly: i)
interest paid on the outstanding US$317.9 million from the US$800 million
Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes due
2050.
We recorded a foreign exchange gain of US$1.2 million in the income statement
as a result of the 2.91% revaluation of the Mexican peso against the US dollar
over the period. This was similar to the US$2.9 million gain in 1H21.
The decrease in profit from continuing operations, together with the net
Silverstream loss, resulted in a 65.1% decrease in profit from continuing
operations before income tax from US$445.4 million in 1H21 to US$155.2 million
in 1H22.
Income tax expense for the period was US$6.8 million, which compared
favourably vs. US$111.1 million in 1H21. The effective tax rate, excluding the
special mining rights, was 4.4%, which was below the 30% statutory tax rate.
The reason for the lower effective tax rate was the significant permanent
differences between the tax and the accounting treatment related mainly to: i)
the inflation rate (Mexican Consumer Price Index), which impacted the
inflationary uplift of the tax base for assets and liabilities; and ii) the
benefit from the lower border zone tax which applied to Herradura and Noche
Buena operations.
Profit for the period decreased from US$308.4 million in 1H21 to US$141.0, a
54.3% decrease period-on-period.
Profit due to non-controlling interests was US$23.6 million reflecting the
profit generated at Juanicipio, where MAG Silver owns 44% of the outstanding
shares. Accordingly, profit attributable to equity shareholders of the Group
was US$117.4 million.
Cash generated by operations before changes in working capital decreased by
38.8% to US$459.5 million, mainly as a result of the lower profits generated
in the year.
Capital expenditure in 1H22 totalled US$299.0 million, a 16.4% increase over
1H21. Investments during the period included mine development and stripping,
purchase of in-mine equipment, construction of a leaching pad at Herradura and
the deepening of the San Carlos and Jarillas shafts.
Other uses of funds during the period were income tax, special mining rights
and profit sharing paid of US$141.2 million (US$253.5 million in 1H21) and
dividends paid of US$176.9 million (US$172.6 million in 1H21).
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds of US$1,151.9 million as of 30 June
2022, decreasing 6.8% versus 31 December 2021 and 4.2% versus 30 June 2021.
Taking into account the cash and other liquid funds of US$1,151.9 million and
the US$1,167.8 million outstanding Senior Notes, Fresnillo plc's net debt is
US$15.9 million as at 30 June 2022. This compares to the net cash position of
US$67.5 million as at 31 December 2021. Considering these variations, the
balance sheet at 30 June 2022 remains strong, with a net debt / EBITDA ratio
of 0.02x 8 (#_ftn8) .
Interim Dividend
The Board of Directors has declared an interim dividend of 3.40 US cents per
Ordinary Share totalling US$25.1 million, which will be paid on 14 September
2022 to shareholders on the register on 12 August 2022. The dividend will be
paid in UK pounds sterling unless shareholders elect to be paid in US dollars.
This interim dividend is lower than the previous period due to the decrease in
profit in 1H22, and remains in line with the Group's dividend policy. This
decision was made after a comprehensive review of the Group's financial
situation, assuring that the Group is well placed to meet its current and
future financial requirements, including its development and exploration
projects.
As previously disclosed, the corporate income tax reform introduced in Mexico
in 2014 created a withholding tax obligation of 10% (including to foreign
nationals) relating to the payment of dividends, which are paid using the Net
Tax Profit Account (CUFIN) generated from 2014 onward. The 2022 interim
dividend will be subject to this withholding obligation.
Growth
We expect to complete the tie-in of the Juanicipio plant and Pyrites Plant at
Fresnillo to the national electricity grid in the coming weeks. Commissioning
of the Juanicipio plant will follow soon after with the ramp up of the plant
beginning towards the end of the third quarter.
Development ore from Juanicipio continued to be processed through the
Fresnillo and Saucito flotation plants during the half. On an attributable
basis, 2,672 koz of silver and 6,412 oz of gold were produced.
Outlook
We remain on track to meet our 2022 full year guidance of 50.5 to 56.5 moz of
attributable silver (including Silverstream) and 600 to 650 koz of
attributable gold production.
The labour reform in Mexico which restricts subcontracting of labour came into
effect from 1st September 2021 resulting in the requirement to internalise a
high proportion of our contractor workforce. The actions we announced to
address this short term challenge, including recruitment campaigns, training
and investment in new equipment, are on-going. We expect to complete the
staffing process at Fresnillo and San Julián by the end of 3Q22, and at
Ciénega and Saucito by year end, and as previously reported, our open pit
mines are now fully staffed. The challenges set out at the beginning of the
year including a tight labour market, global supply chain bottlenecks and cost
inflation remain and these will have some impact in the second half of the
year.
Exploration expenses are expected to remain around US$180 million, of which
approximately US$10 million is anticipated to be capitalised.
Analyst Presentation
Management will host a webcast for analysts and investors today at 9am UK.
Registration and access will be provided on the homepage of Fresnillo's
website and directly via this link:
https://kvgo.com/IJLO/Fresnillo_1H22_Interim_Results
For those unable to access the webcast, a conference line will also be
provided:
Mexico Toll Free: 00 1 866 966 8830
UK-Wide: +44 (0) 33 0551 0200
UK Toll Free: 0808 109 0700
USA Toll Free: 1 866 966 5335
Password: Quote Fresnillo when prompted by the operator
Questions may be submitted via the conference dial-in.
For further information, please visit our website: www.fresnilloplc.com
(http://www.fresnilloplc.com) or contact:
Fresnillo plc
London Office Tel: +44(0)20 7339 2470
Gabriela Mayor, Head of Investor Relations
Patrick Chambers
Mexico City Office Tel: +52 55 52 79 3206
Ana Belém Zárate
Powerscourt Tel: +44(0)20 7250 1446
Peter Ogden
ABOUT FRESNILLO PLC
Fresnillo plc is the world's largest primary silver producer and Mexico's
largest gold producer, listed on the London and Mexican Stock Exchanges under
the symbol FRES.
Fresnillo plc has seven operating mines, all of them in Mexico - Fresnillo,
Saucito, Ciénega (including Las Casas Rosario & Cluster Cebollitas),
Herradura, Soledad-Dipolos1, Noche Buena and San Julián (Veins and
Disseminated Ore Body), two development projects - the Pyrites Plant at
Fresnillo and Juanicipio, both of which have been completed and are awaiting
tie-ins of the plants to the national electricity grid in the coming weeks,
and three advanced exploration projects - Orisyvo, Rodeo and Guanajuato, as
well as a number of other long term exploration prospects.
Fresnillo plc has mining concessions and exploration projects in Mexico, Peru
and Chile. Fresnillo plc has a strong and long tradition of exploring, mining,
a proven track record of mine development, reserve replacement, and production
costs in the lowest quartile of the cost curve for silver. Fresnillo plc's
goal is to maintain the Group's position as the world's largest primary silver
company and Mexico's largest gold producer.
(1) Operations at Soledad-Dipolos are currently suspended.
FORWARD LOOKING STATEMENTS
Information contained in this announcement may include 'forward-looking
statements'. All statements other than statements of historical facts included
herein, including, without limitation, those regarding the Fresnillo Group's
intentions, beliefs or current expectations concerning, amongst other things,
the Fresnillo Group's results of operations, financial position, liquidity,
prospects, growth, strategies and the silver and gold industries are
forward-looking statements. Such forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances.
Forward-looking statements are not guarantees of future performance and the
actual results of the Fresnillo Group's operations, financial position and
liquidity, and the development of the markets and the industry in which the
Fresnillo Group operates, may differ materially from those described in, or
suggested by, the forward-looking statements contained in this document. In
addition, even if the results of operations, financial position and liquidity,
and the development of the markets and the industry in which the Fresnillo
Group operates are consistent with the forward-looking statements contained in
this document, those results or developments may not be indicative of results
or developments in subsequent periods. A number of factors could cause results
and developments to differ materially from those expressed or implied by the
forward-looking statements including, without limitation, general economic and
business conditions, industry trends, competition, commodity prices, changes
in regulation, currency fluctuations (including the US dollar and Mexican Peso
exchanges rates), the Fresnillo Group's ability to recover its reserves or
develop new reserves, including its ability to convert its resources into
reserves and its mineral potential into resources or reserves, changes in its
business strategy and political and economic uncertainty.
1H21 Operational Review
Production
Production H1 2022 H1 2021 % change
Silver (koz) 26,192 25,931 1.0
Silverstream prod'n (koz) 1,440 1,599 (9.9)
Total Silver prod'n (koz) 27,632 27,530 0.4
Gold (oz) 308,752 428,356 (27.9)
Lead (t) 26,779 31,726 (15.6)
Zinc (t) 50,533 53,568 (5.7)
First half attributable silver production of 27.6 moz (including
Silverstream), in line with 1H21 as the expected lower ore grade at San
Julián DOB and lower volume of ore processed at Saucito was mitigated by the
increased contribution of ore from Juanicipio.
First half attributable gold production of 308.8 koz, down 27.9% vs. 1H21
primarily due to a decrease in volume of ore processed and lower ore grade at
Herradura and Saucito.
First half attributable by-product lead and zinc production decreased 15.6%
and 5.7% vs. 1H21 respectively, primarily due to lower volumes of ore
processed and ore grades at Saucito and a decrease in ore grades at San
Julián DOB.
Fresnillo mine production
H1 2022 H1 2021 % change
Ore Processed (t) 1,194,359 1,141,223 4.7
Production
Silver (koz) 6,609 6,608 0.0
Gold (oz) 18,148 17,112 6.1
Lead (t) 10,432 9,367 11.4
Zinc (t) 20,139 15,546 29.5
Ore Grades
Silver (g/t) 189 202 (6.5)
Gold (g/t) 0.67 0.69 (3.3)
Lead (%) 1.04 0.97 7.8
Zinc (%) 2.35 1.95 20.5
First half silver production remained in line with. 1H21 due to a lower ore
grade, mitigated by a higher volume of ore processed.
Mine development rates remained at similar levels quarter on quarter averaging
2,900m per month in 2Q22 (1Q22: 2,866m per month). We remain confident that we
can maintain a rate of 2,900 to 3,100m per month on average as previously
stated over the coming months.
First half by-product gold production increased 6.1% vs. 1H21 due to a higher
volume of ore processed and a higher recovery rate.
The silver ore grade in 2022 is expected to remain in the range of 190-210
g/t, while the gold ore grade is expected to remain in the range of 0.55-0.70
g/t.
The deepening of the San Carlos shaft continued to progress with completion
expected by the end of September. This project is expected to support a
decrease in haulage costs and lower greenhouse gas emissions, while providing
access to reserves in the medium term.
Saucito mine production
H1 2022 H1 2021 % change
Ore Processed (t) 1,008,158 1,310,923 (23.1)
Production
Silver (koz) 5,781 6,602 (12.4)
Gold (oz) 33,172 51,578 (35.7)
Lead (t) 9,444 15,490 (39.0)
Zinc (t) 15,665 23,570 (33.5)
Ore Grades
Silver (g/t) 199 184 8.4
Gold (g/t) 1.30 1.58 (17.9)
Lead (%) 1.09 1.38 (21.1)
Zinc (%) 1.97 2.45 (19.7)
First half silver production decreased 12.4% vs. 1H21 due to a lower volume of
ore processed driven by the residual impact of the labour reform in Mexico and
the localised seismicity in certain areas of the mine. This was mitigated by
the higher ore grade due to improved dilution control, as well as successfully
regaining access in 2Q22 to certain areas with higher ore grade, which were
impacted by the seismicity in previous quarters.
We continued our recruitment and training campaigns with the target of
gradually reducing the shortage of personnel through the second half of the
year. However, as explained in the prior quarters, we continue to expect some
variability in the ore grade and volumes of ore processed in 2022 driven by
the need for additional development of the mine in order to recapture
operational flexibility following high levels of localised seismicity and
shortages of personnel reported last year.
First half by-product gold production decreased 35.7% vs. 1H21 due to a lower
volume of ore processed and ore grade for reasons explained above.
Full year 2022 silver ore grade is expected to remain between 175-195 g/t,
while the gold ore grade is estimated to remain around 1.10-1.20 g/t.
The third party review of the short term planning cycle was completed in 1H22,
concluding that the optimal run rate of the beneficiation plant should be
7,000 tpd. The medium and long term planning cycle continues to be under
review.
PYRITES PLANT (PHASE I)
H1 2022 H1 2021 % change
Pyrite Concentrates Processed (t) 65,690 90,283 (27.2)
Production
Silver (koz) 277 304 (9.0)
Gold (oz) 932 1,399 (33.3)
Ore Grades
Silver (g/t) 176 145 21.4
Gold (g/t) 1.40 1.60 (12.6)
First half silver production decreased vs. 1H21 primarily due to a lower
volume of pyrite concentrates processed, mitigated by a higher ore grade and
recovery rate.
First half gold production decreased vs. 1H21 primarily due to a lower volume
of pyrite concentrates processed and lower ore grade, mitigated by a higher
recovery rate.
In 2022, we continue to estimate silver production from the Pyrites plant at
Saucito to be in the range of 700 to 750 koz while gold production is
estimated to remain in the range of 1.5 to 2.5 koz.
We expect to complete the tie-in of the plant to the national electricity grid
in the coming weeks followed by the ramp up of the plant soon after.
Ciénega mine production
H1 2022 H1 2021 % change
Ore Processed (t) 563,094 660,123 (14.7)
Production
Gold (oz) 18,907 26,696 (29.2)
Silver (koz) 2,485 2,723 (8.7)
Lead (t) 1,684 2,191 (23.1)
Zinc (t) 2,596 3,642 (28.7)
Ore Grades
Gold (g/t) 1.14 1.34 (15.4)
Silver (g/t) 159 150 5.9
Lead (%) 0.47 0.54 (13.3)
Zinc (%) 0.82 0.99 (16.9)
First half gold production decreased 29.2% vs. 1H21, due to the lower ore
grade year-on-year, and lower volume of ore processed given the continued
impact of the labour reform in Mexico. First half silver production decreased
8.7% vs. 1H21 due to a lower volume of ore processed, mitigated by a higher
ore grade.
The gold and silver ore grades for 2022 are expected to remain in the range of
1.20-1.40 g/t and 145-155 g/t respectively.
San Julián mine production
H1 2022 H1 2021 % change
Ore Processed Veins (t) 583,966 591,148 (1.2)
Ore Processed DOB(t) 1,076,326 1,003,728 7.2
Total production at San Julián
Gold (oz) 23,433 29,346 (20.1)
Silver (koz) 7,968 8,649 (7.9)
Production Veins
Gold (oz) 21,710 27,147 (20.0)
Silver (koz) 2,235 1,992 12.2
Production DOB
Gold (oz) 1,723 2,199 (21.7)
Silver (koz) 5,733 6,657 (13.9)
Lead (t) 3,933 4,507 (12.7)
Zinc (t) 10,093 10,533 (4.2)
Ore Grades Veins
Gold (g/t) 1.22 1.52 (19.7)
Silver (g/t) 131 115 13.7
Ore Grades DOB
Gold (g/t) 0.08 0.12 (29.2)
Silver (g/t) 193 240 (19.8)
Lead (%) 0.45 0.55 (18.4)
Zinc (%) 1.20 1.38 (13.0)
San Julián Veins
First half gold production decreased 20.0% vs. 1H21 mainly as a result of a
lower ore grade driven by an operational decision to adjust the mine plan to
prioritise extraction from wider veins of the mine with higher silver content
but a lower gold ore grade.
First half silver production increased 12.2% vs. 1H21 due to a higher ore
grade for reasons explained above.
We continue to expect the 2022 silver and gold ore grades to average 120-130
g/t and 1.35-1.55 g/t, respectively.
San Julián Disseminated Ore Body
First half silver production decreased 13.9% vs. 1H21 as a result of the
expected lower ore grade following the higher than anticipated ore grade in
2Q21 as a result of: i) the positive variation with the geological model in
the central area of the ore body; and ii) access to higher ore grade areas
following the mine resequencing in 2019, as set out at the time. This adverse
effect was mitigated by a higher volume of ore processed.
We continue to expect the 2022 silver ore grade to be in the range of 150-170
g/t as we advance towards the lower grade areas in the periphery of the ore
body.
Herradura mine production
H1 2022 H1 2021 % change
Ore Processed (t) 9,518,276 11,494,407 (17.2)
Total Volume Hauled (t) 64,333,382 66,655,154 (3.5)
Production
Gold (oz) 160,644 258,165 (37.8)
Silver (koz) 387 530 (27.0)
Ore Grades
Gold (g/t) 0.68 0.81 (16.3)
Silver (g/t) 1.83 2.03 (9.9)
First half gold production decreased 37.8% vs. 1H21 due to an expected lower
volume of ore processed and ore grade, in line with the mine plan.
The gold ore grade in 2022 is expected to remain in the range of 0.65-0.75
g/t.
Noche Buena mine production
H1 2022 H1 2021 % change
Ore Processed (t) 4,384,077 3,703,923 18.4
Total Volume Hauled (t) 13,283,655 13,248,211 0.3
Production
Gold (oz) 47,103 43,228 9.0
Silver (koz) 14 12 14.6
Ore Grades
Gold (g/t) 0.57 0.52 10.3
Silver (g/t) 0.26 0.19 38.6
First half gold production increased 9.0% vs. 1H21 due to a higher volume of
ore deposited as a result of a lower stripping ratio, decreasing the waste
material moved, in addition to a higher ore grade, partially offset by a lower
recovery rate.
The expected gold ore grade in 2022 is expected to remain in the range of
0.40-0.50 g/t.
Pyrites Plant at Fresnillo
The Pyrites Plant (phase II) was completed on time in 4Q20 but the inspection
that is required to be carried out by the authorities in order to grant the
energy permit was delayed late last year.
We expect to complete the tie-in of the plant to the national electricity grid
in the coming weeks followed by the ramp up of the plant soon after.
Juanicipio
The construction of the Juanicipio project was concluded on schedule in 4Q21.
Ore from the Juanicipio mine was processed through the Fresnillo and Saucito
flotation plants during the half. However, the beneficiation plant at
Juanicipio has not started operations as it is awaiting the tie-in to the
national electricity grid in the coming weeks. As a result, the Group
considered that commercial production at the Juanicipio mine started from
1(st) January 2022, while the plant is still in the commissioning process.
Ramp up of commercial production to 85-90% of nameplate capacity remains
within reach by year end.
On an attributable basis, 2,672 koz of silver and 6,412 oz of gold were
produced in 1H22. The average ore grade processed in 1H22 was 582 g/t of
silver and 1.5 g/t of gold.
Juanicipio is expected to contribute a total average annual production of 11.7
moz silver and 43.5 koz gold, with an initial life of mine of 12 years.
Below we provide an update on other projects which are expected to contribute
to our medium and long term growth. These projects have not yet been approved
by the Board and are subject to ongoing internal review. However, certain
minor works and exploration activities might be in progress in preparation for
Board approval and as such, are included within the 2022 approved capex and
exploration budget.
Advanced exploration projects
Rodeo
Negotiations to acquire the right to access the land while engaging with the
surrounding communities continued to advance at this gold silver project
located in Durango. The water rights for 2.8 million cubic meters were
acquired and a scoping study is being developed. Indicated and inferred
resources amounted to 1.3 million ounces of gold and 13.8 million ounces of
silver as of 31st of May 2021.
Orisyvo
Preliminary stage of the metallurgical research was concluded and further work
began investigating optimal recovery techniques. Our 6,000m geotechnical
drilling programme was concluded and we are in the process of preparing the
geotechnical model with the aim of concluding the conceptual study before then
updating the pre-feasibility study, due to be completed in 2023. Acquisition
of land for the construction of the tailings dam, water dam and industrial
area are on-going.
Guanajuato
Guanajuato is a large historic silver-gold mining district with Fresnillo's
holdings comprised of three areas of interest: the Gigante-Opulencia systems
in the north, the Las Torres-San Gregorio targets in the centre of the
district and La Joya-Cerro Blanco in the south. Exploration activities
continued in 1H22 with 25,082m drilled. At the end of 2021, indicated and
inferred resources at this project totaled 1.7 million ounces of gold and
around 101 million ounces of silver.
Exploration
Significant progress was made during the first half of 2022 by both the mines
and the exploration division teams, drilling a total of 475,592m.
71% of this was completed by the mine teams, focused in improving the
confidence of the grade distribution in the reserves, converting inferred
resources into the indicated category and finding additional mineralisation;
information gathered will be included in an updated resources and reserves
estimation scheduled for the end of the year. 96,114m of drilling were
completed by the exploration division focused on brownfield targets, in
particular at the Fresnillo, San Julián and Herradura districts. All three
programmes delivered positive results.
Exploration at advanced and priority early stage projects in Mexico and Chile
continued at a good pace, drilling 47,500m, following the strategy of
accelerating the development plans at several favourable locations. Good
results were obtained at the Guanajuato, San Juan and Capricornio projects
with drilling scheduled to continue for the rest of the year.
An intensive field-based programme is being carried out at several promising
prospects in Mexico, Peru, and Chile, where teams of our geologists are
advancing mapping and geochemical surveys at a regional level, followed up by
detailed analysis of targets identified using remote sensing and geophysical
techniques. Drilling is scheduled at some of these projects in the second half
of 2022 and during 2023, confirming our commitment to continuously
strengthening our asset portfolio across metal price cycles using a
disciplined "milestone completion"-based approach for budget allocation.
To ensure that our teams are able to complete the exploration programmes, a
strengthened team of environmental and safety professionals has been deployed
across all of our projects in the countries where we operate, taking special
care of the health of our people and the communities surrounding our projects
following a strict Covid-related sanitary protocol.
In the first six months, US$77.7 million of exploration expenses were recorded
in the income statement, an increase of 27.6% over 1H21. Total risk capital
expected to be invested in exploration for the full year 2022 remains at
approximately US$180 million.
Related party transactions
Details of related party transactions that have taken place in the first six
months of the current financial year are detailed in note 16 of the interim
consolidated financial statements.
Health and safety, environment and community relations
We are committed to our Purpose: "Contribute to the wellbeing of people
through the sustainable mining of silver and gold". This commitment underlines
the importance of deeply integrating responsible business practices into our
business model while understanding the factors that affect stakeholders at all
critical decision-making levels. This commitment was once again highlighted
through the recognition of our Environment, Social and Governance (ESG)
performance by the inclusion of Fresnillo plc in the FTSE4Good Index and
Ethisphere's world most ethical companies.
Covid-19
Throughout the Covid-19 outbreak we have made the health and wellbeing of our
people our priority. We saw a drop in Covid-related absenteeism across our
operations from March onwards following the arrival of the fourth wave of
Covid towards the end of 2021, and have seen a more limited impact on our
operations during 2Q22. Despite continuing to implement strict protocols to
limit the spread of the virus, a fifth wave has now reached Mexico and we are
seeing a rise in positive cases in the country. We have maintained our
comprehensive strategy to protect our employees and contractors in our mining
operations, development and exploration projects through the following
measures:
1. Senior Management oversight of the Covid-19 strategy and performance
2. Raising awareness on preventive measures and the benefits of
vaccination
3. Mandatory use of masks and social distancing in the workplace and
transport
4. Supporting and monitoring the progress of vaccination
5. Partnering with authorities to vaccinate, especially in remote
locations for the benefit of our workforce and local communities
6. Hand washing, antibacterial gel and sanitisation of work areas,
accommodation and transportation
7. Sanitary filters supported by rapid testing
8. Testing, monitoring and contagion tracing
9. Daily monitoring and psychological support for active cases
Mexico implements a two dose vaccination scheme with a third dose as booster.
A fourth dose is being administered to the vulnerable population. We have
encouraged and supported vaccination of our workforce and communities,
collaborating with health authorities to make vaccines available in the remote
locations where we operate. Close to 90% of our workforce have been fully
vaccinated (two doses) and 45% have received the booster. We have, and will
continue to implement testing campaigns across our operations, development and
exploration projects and corporate offices.
Our People
Our workforce is fundamental to our purpose, contributing to the wellbeing of
people through the sustainable mining of silver and gold. Their health and
safety have always been our top priority. We engage unions to build trust
through continuous dialogue, leadership development programmes, wellbeing
activities and continuous improvement projects. We seek to attract, develop
and retain the best people, and engage them over the long term. Our harassment
prevention, women development, and cultural evolution initiatives seek to
develop a fair, respectful and inclusive workplace.
In 2022, Mexico pursued the implementation of the 2019 Labour reform resulting
from the United States-Mexico-Canada Agreement (USMCA), which includes the
ratification of Collective Bargain Agreements (CBA) by a majority of workers.
To date, six out of seven CBA's have been ratified with over 95% approval
rates, contributing to labour certainty and trust. To date in 2022, we have
supported the training of 206 union representatives. These leaders were freely
elected to represent unionised workers at the local union committees of our
mining operations.
We engage with the most prestigious Earth Sciences and Engineering
universities in Mexico to secure our talent pipeline. Our 'Engineers in
Training' programme recruited 43 new earth science and engineering
professionals during the year. We continue to implement the 'Leaders with
Vision' programme to develop our pipeline of managers. The seventh generation
of the 'Leaders with Vision' programme have now graduated, and we have since
begun the eighth generation, with an average of 20 participants.
We have increased the participation of women in our workforce. We see the
increasing participation and inclusion of women as the first step in the
journey to making diversity a competitive advantage. Our two strategic
objectives are to enhance the contribution of women to the success of the
Company and have a positive impact on female employees. The percentage of
unionised and non-unionised women reached 13.65% in the first half of the year
(12.66 % in 2021) while our overall total workforce, including contractors,
reached 11.79% in 1H22 (11.01% in 2021). We are making consistent progress to
meet our target of 12% in 2025. Our "Mom with a Miner's M" accompanies and
supports women during pregnancy through providing counselling and flexibility
in working hours, temporary transfer of their working area, special
assignments or working from home. We launched the 'Women for Women Mentoring
Programme' to develop leadership and support networks. The programme has
identified mentees and is currently training mentors. A key outcome of our
strategy is the appointment of more women to superintendent positions across
our operations.
Our Harassment Prevention Programme launched a communication campaign to raise
awareness on structural violence and discrimination. We delivered awareness
workshops for new personnel across our mining operations and introduced a best
practice framework for our exploration and development teams, encompassing a
total of 803 people (229 non-unionised employees, 480 unionised employees and
94 contractors). In addition, we delivered an online training for 277
non-unionised employees on bullying and harassment prevention.
We further launched a culture evolution initiative to foster accountability,
co-creation, agility and collaboration. We identified and trained 36 senior
managers as culture champions. Additionally, 136 non-unionised employees,
including 65 members of the operating units' management, attended culture
workshops.
In the following tables we summarise the composition of our workforce and
turnover throughout the period:
Table 1. Workforce composition
As at 30 June 2022 As at 31 December 2021 % Change
Unionised employees 6,291 5,826 7.98
Non-unionised employees 1,580 1,533 3.07
Total unionised and non-unionised employees 7,871 7,359 6.94
Unionised and non-unionised women (%) 13.65 12.66 -
Contractors 13,201 12,757 3.48
Total workforce 21,072 20,116 4.75
Total women (%) 11.79 11.01 -
Table 2. Turnover
1H 2022 1H 2021
Voluntary turnover (%) 4.14 2.44
Total turnover (%) 6.45 4.06
Board level workforce engagement
The insights gained following the dialogue of our Designated Non-Executive
Director (NED) with the workforce has been used by the Company to improve
current initiatives and launch new ones. The Company implemented a
communication campaign across the Group, updating the workforce on the
progress to date for our initiatives stemming from their feedback on health
& safety, wellbeing, ethics culture, diversity, equity and inclusion,
harassment prevention and leadership.
Occupational Health
Our approach aims to pre-emptively identify and manage the health risks to
which our workforce is exposed. Preventive care and the promotion of healthier
lifestyles can limit certain chronic diseases and enhance overall wellness and
fitness for work. While our focus is on prevention, emergency response is a
core competence of all our health teams.
We continue to implement measures in our business units to mitigate
psychosocial risk factors and promote wellbeing programmes to shape a working
environment aligned with our aspiration of organisational culture.
Additionally, we are working towards the 'Safe and Healthy Workplace
Environments' certification for all our business units by the Mexican Social
Security Institute, a voluntary programme to implement strategies and measures
to improve health, safety and well-being of workers, as well as productivity
and quality in the workplace.
Safety
Our goal is zero harm. Our 'I Care, We Care' programme focuses on leadership,
accountability, safety culture, high potential incidents management,
engineering systems and lessons learnt. In 2022 we have focused our efforts on
the implementation of critical controls and visible leadership practices
across our mining operations.
We have focused our efforts on empowering our people to effectively use the
Hazard Identification and Risk Assessment and Critical Risk Verification
Tools. An Operational Committee has been formalised to ensure the effective
implementation of critical risk management and incident management across our
mining operations.
We have reinforced leadership practices for senior management and the
management teams at the operations as well as workshops with our employees,
contractors and service providers. As part of our commitment to the programme,
our Senior Operations Managers and Executives gathered in the Fresnillo
District to strengthen our four leadership practices: i) Planning and
communication, ii) Field verification, iii) Generation, review and improvement
of action plans and iv) Recognition and accountability. The group verified the
critical risks found at both the Fresnillo and Saucito mines, as well as the
Juanicipio project, with data taken from incident analysis, including: rock
fall, loss of vehicle control, explosives handling and uncontrolled release of
energy.
Our performance of Total Recordable Injury Frequency Rates (TRIFR) and Lost
Time Injury Frequency Rates (LTIFR) per million hours worked, decreased to
9.53 (10.42 in 2021) and 5.04 (5.76 in 2021) in 1H22, respectively. Despite
the sustained improvement in injury frequency, we deeply regret the one fatal
accident at the beginning of 2022. This is a sober reminder of the work ahead
to achieve our goal of zero harm.
Table 3. TRIFR and LTIFR*
1H 2022 2021 % Change
Total Recordable Injury Frequency Rates (TRIFR) 9.53 10.42 -8.5
Lost Time Injury Frequency Rates (LTIFR) 5.04 5.76 -12.5
* Frequencies for every 1,000,000 hours worked
As part of the workforce engagement feedback, we conducted an assessment of
transport services to improve quality and safety. Workshops and campaigns
were organised to promote road safety and encourage safer driving. We provided
group coaching to strengthen leadership and effective communication skills for
the management teams across our mining operations.
Tailings Storage Facilities
We implement best practise governance and engineering to manage our Tailings
Storage Facilities (TSF). Our governance framework considers:
· The Board and the HSECR Committee establishing the mandate and
relying on management to implement.
· The Technical Review Committee being accountable for oversight.
· The CEO (Accountable Executive), Senior Management of Operations and
Mine Managers (Risk Owners) being accountable for operating in compliance with
the policies and governance.
· Peñoles' Technical Services Co-CEO (Accountable Executive),
Assistant VP of Infrastructure and Engineering Corporate Tailings Specialists
and Managers also being accountable for the governance.
· TSF Operators, Regional TSF Superintendents and Managers, and
Engineers of Record (EOR) being responsible of Operation, Control and
assurance.
· Independent Tailings Review Panel (ITRP) and Independent Inspectors
providing independent verification.
The Independent Reviews of our ITRF continues with virtual and in person site
visits, providing recommendations that guide our implementation plans. We are
developing our Emergency and Response Plans and maturing our Tailings
Management System along with a dashboard with key indicators for every level
of involvement and responsibility. We have made good progress in our
recruitment and training programmes.
Among our key accomplishments, Juanicipio became our first TSF that fully met
Canadian Dam Association (CDA), Mining Association of Canada (MAC),
International Commission on Large Dams (ICOLD) and International Council on
Mining and Metals (ICMM) Principles from the initiation of its development,
design and construction. Knight Piésold, a global consulting firm providing
specialised services to the mining industry, officially accepted the role as
Engineer of Record for our San Carlos (Fresnillo Mine) TSF. San Carlos became
our first TSF designed and constructed by a third-party consultant under our
old standards that has been certified to comply with all the requirements
established by a new competent international consultant for their formal
assumption of the role of Engineer of Record.
Environmental Management
We launched an initiative to increase the use of the municipal wastewater in
the Fresnillo District to reduce the consumption of in-mine groundwater for
our mining and mineral processing activities. We've also held reforestation
campaigns across our units and projects in collaboration with volunteers from
our workforce, communities and business partners, capitalising on these
experiences to instil an environmental-prone culture in our stakeholders.
We are committed to biodiversity conservation. During the period, we pioneered
the natural breeding of a golden eagle pair as well as caring for scarlet
macaws and toucans as part of our Environmental Management Unit in the
Fresnillo District. San Julián designated a 20 -hectare area as a
conservation zone at the launch of our Wildlife Conservation Management Unit,
promoting the conservation and non-extractive use of the Pinabete Pseudotsuga
tree, a species declared endangered by Mexican environmental authorities.
Finally, we also inaugurated our forestry nursery at Penmont, specialising in
23 endemic species, with a capacity of 150 thousand saplings per year, and
whose facilities will be open to the public for educational purposes.
Climate Change
We continue to mature our capabilities to disclose climate-related financial
information, considering the risks of climate change. We have joined the TCFD
Consortium in Mexico to share best practices and participated in the Financial
Reporting Council's (FRC) Lab research project "Net-zero disclosures". We
launched a Climate Modelling project with the University of Arizona to
generate future climate projections under different scenarios, to support the
development of our adaptation strategy.
Community Relations
We earn and maintain the trust of our communities through meaningful
engagement and by being accountable for our actions. Our community strategy,
which embraces all phases of the mining lifecycle, aims to build mutual
understanding between our operations and local communities, ensuring that we
engage, develop and grow together. Our grievance mechanism is intended to
provide a fair way to respond to concerns and resolve disputes. We recognise
the strategic importance of going beyond maintaining our social licence to
operate - supporting the issues that matter to our communities and working
with them for the long term.
Sustainable Development Goal 3 "Good Health and Wellbeing"
Throughout the Covid-19 pandemic, we've collaborated with Mexican authorities
to support the logistics of vaccination for our workforce and communities as
well as offering free testing. In the Fresnillo District, we organised a
Health Week to serve the communities of Fresnillo, Saucito and Juanicipio.
To this end, we partnered with the National University Foundation (UNAM
Foundation), the Mexican Institute of Social Security (IMSS) and Zacatecas'
Health Ministry, providing free dental and eye care, general medicine,
physiotherapy, as well as chronic diseases, reproductive health and
gynaecological consultations, benefiting 14 neighbouring communities. Our
"Leaders on the horizon" football league at Penmont develops social cohesion,
promoting respect, joy, responsibility, and teamwork through games and sports.
Sustainable Development Goal 4 "Quality Education"
We sponsored teams from our communities to compete at the Laguna Regional
FIRST Robotics Competition. This programme aims to develop the talent and
skills of high school children by promoting teamwork, leadership and project
management. Additionally, graduates of our four teams compete for 100%
scholarships in partnership with LaSalle University Laguna. We support schools
with hygiene equipment, masks, and school furniture in San Julián and we
supported school improvements of classrooms, restrooms and sports areas at
Juanicipio. We further continued our support though the donation of 3,000
Larousse books at Penmont and San Julián.
Sustainable Development Goal 8 "Decent Work and Economic Growth"
We continued with our entrepreneurial programmes to promote capacity building,
micro-enterprises and productive project such as the Vegetable Gardens,
Backyard Poultry and Sustainable Carpentry Workshop at Juanicipio,
entrepreneurial programmes in partnership with Proempleo CDMX and CEDO at the
Penmont and Fresnillo Districts, and the Masks, Uniforms and Equipment sewing
workshops at San Julián and Juanicipio, among others.
FINANCIAL REVIEW
The interim consolidated financial statements of the Group for the six months
ended 30 June 2022 have been prepared in accordance with IAS 34 Interim
Financial Reporting as issued by the IASB and as adopted by UK. All
comparisons refer to the first halves of 2022 and 2021, unless otherwise
noted. The financial information and half year on half year variations are
presented in US dollars, except where indicated. Management recommends reading
this section in conjunction with the Interim Financial Statements and their
accompanying Notes.
INCOME STATEMENT
1H 2022 US$ million 1H 2021 US$ million Amount Change US$ million Change %
Adjusted revenue 9 (#_ftn9) 1,349.0 1,543.1 (194.1) (12.6)
Total revenue 1,259.1 1,466.8 (207.8) (14.2)
Cost of sales 893.2 860.1 33.2 3.8
Gross profit 365.9 606.8 (240.9) (39.7)
Exploration expenses 77.7 60.9 16.8 27.6
Operating profit 218.2 471.9 (253.7) (53.8)
EBITDA 10 (#_ftn10) 459.1 747.0 (287.9) (38.5)
Income tax expense including special mining rights 14.2 136.9 (122.7) (89.6)
Profit for the period 141.0 308.4 (167.4) (54.3)
Profit for the period, excluding post-tax Silverstream effects 166.3 311.2 (144.9) (46.6)
Basic and diluted earnings per share (US$/share) (5) 0.159 0.410 (0.251) (61.2)
Basic and diluted earnings per share, excluding post-tax Silverstream effects 0.194 0.414 (0.220) (53.1)
(US$/share)
The Group's financial results are largely determined by the performance of our
operations. However, there are other factors such as a number of macroeconomic
variables, that lie beyond our control and which affect financial results.
These include:
METALS PRICES
The average realised silver price decreased 13.8% from US$26.4 per ounce in
1H21 to US$22.8 per ounce in 1H22, while the average realised gold price rose
4.6%, from US$1,789.2 per ounce in 1H21 to US$1,871.1 per ounce in 1H22.
Further, the average realised lead and zinc by-product prices increased 2.8%
and 33.1% against their corresponding periods, to US$98.3 and US$173.8 per
pound, respectively.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 30 June 2022 was $19.98 per
US dollar, compared to the exchange rate at 31 December 2021 of $20.58 per US
dollar. The 2.91% spot revaluation had a limited positive effect on the net
monetary peso asset position, which contributed to the US$1.2 million foreign
exchange gain recognised in the income statement.
The average spot Mexican peso/US dollar exchange rate remained relatively
unchanged at $20.28 per US dollar in 1H22 ($20.18 per US dollar in 1H21), thus
having an immaterial effect on the Group's costs denominated in Mexican pesos
(approximately 45% of total costs) when converted to US dollars.
COST INFLATION
In 1H22, cost inflation considering Fresnillo plc's basket of goods and
services was 7.57%. The main components of our cost inflation basket are
listed below:
Labour
Unionised employees received on average a 6.8% increase in wages in Mexican
pesos, while non-unionised employees received on average a 5.5% increase in
wages in Mexican pesos; when converted to US dollars, this resulted in a
weighted average labour inflation of 6.3%.
Energy
Electricity
The weighted average cost of electricity in US dollars slightly increased 0.7%
from US$8.82 cents per kw in 1H21 to US$8.88 cents per kw in the same period
of 2022, reflecting the average generating cost of the Comisión Federal de
Electricidad (CFE), the national utility, remaining flat period on period.
Diesel
The weighted average cost of diesel in US dollars decreased 1.1% to 88.59 US
cents per litre in 1H22, compared to 89.61 US cents per litre in 1H21. This
resulted from the Mexican Government's fuel tax relief, subsidising the cost
of diesel and gasoline in Mexico, looking to insulate consumers from the
increase in global oil prices.
Operating materials
Half on half change in unit price %
Sodium cyanide 50.3
Explosives 31.3
Other reagents 25.8
Steel balls for milling 24.1
Steel for drilling 11.9
Lubricants 8.2
Tyres 1.3
Weighted average of all operating materials 18.9
Unit prices of the majority of key operating materials significantly increased
in US dollar terms primarily reflecting global inflationary pressures and
supply disruptions resulting from Covid-19 lockdowns in China and the impact
of the invasion of Ukraine by Russia. As a result, the weighted average unit
prices of all operating materials over the half increased by 18.9%.
Contractors
Agreements are signed individually with each contractor company and include
specific terms and conditions that cover not only labour, but also operating
materials, equipment and maintenance, amongst others. Contractor costs are
mainly denominated in Mexican pesos and are an important component of our
total production costs. In 1H22, increases per unit (i.e. per metre developed/
per tonne hauled) granted to contractors, resulted in a weighted average
increase of 6.9% in US dollars, after considering the devaluation of the
Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 1.8% on average in US
dollar terms.
Other costs
Other cost components include freight which increased by an estimated 11.9% in
US dollars, while insurance costs increased by 5.5% in US dollars mainly due
to higher market premiums as a result of Covid-19 claims. The remaining cost
inflation components experienced average inflation of 11.4% in US dollars over
1H21.
The effects of the above external factors, combined with the Group's internal
variables, are further described below through the main line items of the
income statement.
REVENUE
CONSOLIDATED REVENUE( )
1H 2022 1H 2021 Amount Change %
US$ million
US$ million
US$ million
Adjusted revenue (( 11 (#_ftn11) )) 1,349.0 1,543.1 (194.1) (12.6)
Metals prices hedging (3.8) 0.0 (3.8) N/A
Treatment and refining charges (86.2) (76.2) (10.0) (13.1)
Total revenue 1,259.1 1,466.8 (207.8) (14.2)
Adjusted revenue decreased by US$194.0 million mainly due to the lower volume
of gold sold and to a lesser extent, the decrease in silver price. As a
result, total revenue decreased by 14.2% to US$1,259.1 million in 1H22.
ADJUSTED REVENUE BY METAL
1H 2022 1H 2021
US$ million % US$ million % Volume Variance Price Total net
US$ million
Variance
change
US$ million
US$ million
%
Gold 555.9 41.2 720.0 46.7 (192.8) 28.6 (164.2) (22.8)
Silver 576.8 42.8 629.1 40.8 37.4 (89.7) (52.3) (8.3)
Lead 54.2 4.0 62.1 4.0 (9.5) 1.6 (7.9) (12.7)
Zinc 162.2 12.0 131.8 8.5 (11.7) 42.0 30.3 23.1
Total adjusted revenue 1,349.0 100 1,543.1 100.0 (176.6) (17.5) (194.1) (12.6)
Lower gold volumes sold were primarily due to the decreased volume of ore
processed and lower ore grade at Herradura and Saucito, while the higher
silver volumes were due to the ore processed from Juanicipio at Fresnillo and
Saucito's beneficiation plants (for further detail, see 1H22 Operational
Review).
Changes in the contribution by metal were the result of the relative changes
in metal prices and volumes produced. Gold decreased its contribution to total
adjusted revenues from 46.7% in 1H21 to 41.2% in 1H22, while silver increased
its contribution from 40.8% in 1H21 to 42.8% in 1H22. Zinc also increased its
contribution from 8.5% in 1H21 to 12.0% in 1H22. Lead's contribution to
total adjusted revenues remained flat period-on-period.
ADJUSTED REVENUE 12 (#_ftn12) BY Mine
The contribution by metal and by mine to Adjusted revenues is expected to
change further in the future, as new projects are incorporated into the
Group's operations and as precious metals prices fluctuate.
1H 2022 1H 2021
(US$ million) % (US$ million) %
Herradura 302.9 22.4 449.7 29.1
Saucito 250.8 18.6 338.9 22.0
Fresnillo 243.6 18.1 245.9 15.9
San Julián (DOB) 148.0 11.0 187.2 12.1
Juanicipio 140.1 10.4 25.1 1.6
Ciénega 98.6 7.3 121.9 7.9
Noche Buena 86.4 6.4 75.4 4.9
San Julián (Veins) 78.8 5.8 99.0 6.4
Total 1,349.0 100 1,543.1 100
VOLUMES OF METAL SOLD
1H 2022 % contribution 1H 2021 % contribution % change
of each mine
of each mine
Silver (koz)
Fresnillo 5,943 23.5% 6,163 25.9% (3.6)
Saucito 5,138 20.3% 5,966 25.0% (13.9)
San Julián (DOB) 4,759 18.8% 5,680 23.8% (16.2)
Juanicipio 4,494 17.7% 785 3.3% 472.5
Ciénega 2,311 9.1% 2,449 10.3% (5.6)
San Julián (Veins) 1,878 7.4% 1,934 8.1% (2.9)
Pyrites Plant at Saucito 423 1.7% 332 1.4% 27.4
Herradura 389 1.5% 502 2.1% (22.5)
Noche Buena 5 0.0% 8 0.0% (37.5)
Total silver (koz) 25,340 23,817 6.4
Gold (oz)
Herradura 162,404 54.7% 243,857 60.6% (33.4)
Noche Buena 40,671 13.7% 41,845 10.4% (2.8)
Saucito 29,360 9.9% 46,714 11.6% (37.1)
San Julián (Veins) 18,980 6.4% 26,766 6.7% (29.1)
Ciénega 17,875 6.0% 24,593 6.1% (27.3)
Fresnillo 15,235 5.1% 14,881 3.7% 2.4
Juanicipio 10,464 3.5% 1,273 0.3% 722.0
Pyrites Plant at Saucito 1,264 0.4% 1,330 0.3% (5.0)
San Julián (DOB) 740 0.3% 1,147 0.3% (35.5)
Total gold (oz) 296,993 402,405 (26.2)
Lead (t)
Fresnillo 9,358 37.4% 8,638 29.3% 8.3%
Saucito 8,382 33.5% 14,199 48.2% (41.0)
San Julián (DOB) 3,642 14.6% 4,350 14.8% (16.3)
Juanicipio 2,082 8.3% 272 0.9% 665.4
Ciénega 1,556 6.2% 2,017 6.8% (22.9)
Total lead (t) 25,020 29,477 (15.1)
Zinc (t)
Fresnillo 16,063 38.0% 13,509 29.5% 18.9
Saucito 12,798 30.2% 20,055 43.8% (36.2)
San Julián (DOB) 8,241 19.5% 8,757 19.1% (5.9)
Ciénega 2,170 5.1% 3,085 6.7% (29.7)
Juanicipio 3,047 7.2% 399 0.9% 663.7
Total zinc (t) 42,318 45,806 (7.6)
METALS PRICE HEDGING
The hedging programme we entered into for a total volume of 1,800,000 ounces
of silver had its last expiration in February of 2022. This transaction was
structured as a collar with an average floor price of US$22 per ounce, and an
average price ceiling of US$50.33 per ounce.
Additionally, a portion of our expected by-product zinc production was hedged
from May 2021 through April 2022 using a similar financial structure as with
silver.
The table below illustrates the expired structures and their results.
Concept As of June 30(th) 2022 As of June 30(th) 2022
Silver(1) Zinc(2)
Weighted Floor 22 usd/oz 2,491 usd/ton
Weighted Cap 50.33 usd/oz 3,134 usd/ton
Expired volume 300,000 oz 5,960 ton
Profit/Loss (US$ dollars) 0 -3,770,174
Total outstanding volume 0 0
(1)Monthly settlements until February 2022
(2)Monthly settlements until April 2022
There are no outstanding hedging positions as of June 30(th) 2022.
TREATMENT AND REFINING CHARGES
Similar to previous years, the 2022 treatment and refining charges(( 13
(#_ftn13) )) (TRCs) per tonne and per ounce are currently being negotiated
with Met-Mex (Peñoles' smelter and refinery) in accordance with international
benchmarks and will apply retrospectively from January 2022. We expect these
negotiations to conclude by October 2022. However, we accrued a US$12.4
million increase to the charge (1H21: US$17.8 million decrease to the charge)
for an expected change in treatment and refining charges in these Interim
Financial Statements to reflect current market conditions which are expected
to materialise once negotiations are concluded.
The combination of higher treatment charges per tonne of zinc and lead
refining charges, mitigated by the lower volumes of lead and zinc concentrates
shipped from our mines to Met-Mex, resulted in a 13.1% increase in treatment
and refining charges set out in the income statement in absolute terms when
compared to 1H21.
COST OF SALES
Concept 1H 2022 1H 2021 Amount Change %
US$ million
US$ million
US$ million
Adjusted production costs (( 14 (#_ftn14) )) 659.3 611.1 48.2 7.9
Depreciation 233.7 265.4 (31.6) (11.9)
Profit sharing 5.6 12.3 (6.7) (54.5)
Hedging 0.0 (3.8) 3.8 N/A
Change in inventory and unproductive costs(( 15 (#_ftn15) )) (5.5) (25.0) 19.5 (78.0)
Cost of sales 893.2 860.1 33.2 3.9
Cost of sales increased 3.9% to US$893.2 million in 1H22. The US$33.2 million
increase is explained by the following combination of factors:
• An increase in Adjusted production costs (US$48.2 million). This was
primarily due to: i) cost inflation in US dollars (US$44.1 million); ii) costs
from the start-up of operations at Juanicipio (US$43.1 million); iii) increase
in the use of infrastructure contractors, maintenance (electric and
mechanical) and internalisation process at Saucito (US$24.5 million); iv)
higher volume of ore processed at Fresnillo and San Julián DOB (US$7.1
million); v) and others (US$9.2 million). These adverse effects were mitigated
by lower stripping to cost at Herradura (-US$47.7 million); and a decreased
volume of ore processed at Saucito, Ciénega, San Julián (Veins) and the
Pyrites plant (-US$32.2 million).
• The variation in the change in inventories and others had a negative
effect of US$19.5 million versus 1H21.
• Mexican peso/US dollar hedging (US$3.8 million).
These negative effects were offset by:
• Depreciation (-US$31.6 million). This is mainly due to decreased
amortisation of capitalised mining works and lower depletion factors at all of
the mines except for Fresnillo and Juanicipio.
• Profit sharing (-US$6.7 million) due to lower profits at the operating
mines.
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST (AISC)
Cost per tonne is a key indicator to measure the effects of changes in
production costs and cost control performance at each mine. This indicator is
calculated as total production costs, plus ordinary mining rights, less
depreciation, profit sharing and exchange rate hedging effects, divided by
total tonnage processed. We have included cost per tonne hauled/moved as we
believe it is a useful indicator to thoroughly analyse cost performance for
the open pit mines.
Cost per tonne 1H 2022 1H 2021 % change
Fresnillo US$/tonne milled 87.23 79.95 9.1
Saucito US$/tonne milled 116.22 76.27 52.4
San Julián (Veins) US$/tonne milled 89.12 78.73 13.2
San Julián (DOB) US$/tonne milled 41.23 39.81 3.6
Ciénega US$/tonne milled 105.80 83.52 26.7
Herradura US$/tonne deposited 20.02 19.47 2.8
Herradura US$/tonne hauled 5.04 3.36 50.1
Noche Buena US$/tonne deposited 9.72 11.27 (13.8)
Noche Buena US$/tonne hauled 3.21 3.15 1.9
Fresnillo: Cost per tonne increased 9.1% to US$87.2 in 1H22, driven by cost
inflation and an increase in maintenance costs. This was mitigated by the
increased volume of ore milled.
Saucito: Cost per tonne increased 52.4% to US$116.2, mainly driven by an
increase in the use of infrastructure contractors and maintenance, cost
inflation, and a decrease in the volume of ore milled.
San Julián Veins: Cost per tonne increased 13.2% to US$89.1, primarily driven
by cost inflation and an increase in the use of maintenance.
San Julián (DOB): Cost per tonne increased 3.6% to US$41.2, mainly driven by
a cost inflation, mitigated by the increased volume of ore processed and a
decrease in the use of contractors.
Ciénega: Cost per tonne increased 26.7% to US$105.8 mainly driven by cost
inflation and an increase in the use of maintenance. Additionally, a lower
volume of ore milled also drove the cost per tonne higher period-on-period.
Herradura: Cost per tonne of ore deposited increased by 2.8% to US$20.0
primarily driven by a decrease in the volume of ore processed and cost
inflation of 8.0%. This was offset by a decrease in stripping charged to cost.
Noche Buena: Cost per tonne decreased 13.8% to US$9.7 in 1H22, primarily
driven by a decrease in the use of maintenance and spare parts and, to a
lesser extent, a higher volume of ore processed. This was partially offset by
cost inflation and a higher stripping cost.
Cash cost per ounce, calculated as total cash cost (cost of sales plus
treatment and refining charges, less depreciation) less revenue from
by-products divided by the silver or gold ounces sold, when compared to the
corresponding metal price, is an indicator of the ability of the mine to
generate competitive profit margins.
Cash cost per ounce 1H 2022 1H 2021 % change
Fresnillo US$ per silver ounce 3.53 6.41 (45.0)
Saucito US$ per silver ounce 2.52 (4.37) N/A
San Julián (Veins) US$ per silver ounce 5.41 (0.48) N/A
San Julián (DOB) US$ per silver ounce 4.45 4.66 (4.5)
Ciénega US$ per gold ounce 84.00 (606.99) N/A
Herradura US$ per gold ounce 1,248.08 756.42 65.0
Noche Buena US$ per gold ounce 1,098.34 1,235.33 (11.1)
Fresnillo: Cash cost per silver ounce decreased to US$3.5 (1H21: US$6.4 per
silver ounce) mainly due to the higher gold, lead and zinc by-product credits
and lower mining rights, partially offset by a lower ore grade, higher
treatment and refining charges and a higher cost per tonne.
Saucito: Cash cost per silver ounce increased to US$2.5 per ounce (1H21:
-US$4.4 per silver ounce) as a result of a higher cost per tonne and lower
gold, lead and zinc by-product credits per silver ounce. This was mitigated by
a higher silver ore grade and lower mining rights.
San Julián Veins: Cash cost per ounce of silver increased by US$5.41 per
ounce mainly due to the lower gold by-product credits per silver ounce and
higher cost per tonne, mitigated by lower mining rights.
San Julián (DOB): Cash cost remained flat half on half at US$4.5 per ounce of
silver driven by higher zinc by-product credits per silver ounce and lower
mining rights, offset by a lower ore grade and higher treatment and refining
charges.
Ciénega: The increase in cash cost per gold ounce from -US$607.0 per ounce in
1H21 to US$84.0 per ounce in 1H22 was primarily due to a higher cost per
tonne, lower gold ore grade and higher treatment and refining charges. This
was mitigated by higher silver, zinc and lead by-product credits per gold
ounce and lower mining rights.
Herradura: Cash cost per gold ounce increased to US$1,248.1 mainly due to the
lower gold ore grade and the variation in the change of inventories, which
resulted from the decrease in the inventory volume (-6.7%) in 1H22 combined
with the increase in the value of the inventories in 1H21 mainly caused by the
effect of the reassessment of recoverable gold inventories at the leaching
pads in 2020.
Noche Buena: Cash cost per gold ounce decreased by 11.1% to US$1,098.3 per
ounce mainly due to higher gold ore grade, offset by the variation in the
change of inventories, which resulted from the decrease in the cost per ounce
and a decrease in the volume of inventory in 1H22 combined with the increase
in volume of inventory in 1H21.
In addition to the traditional cash cost, the Group is reporting All-In
Sustaining Cost (AISC) in accordance with the guidelines issued by the World
Gold Council.
This cost metric is calculated as traditional cash cost plus on-site general,
corporate and administrative costs, community costs related to current
operations, capitalised stripping and underground mine development, sustaining
capital expenditures and remediation expenses.
We consider AISC to be a reasonable indicator of a mine's ability to generate
free cash flow when compared with the corresponding metal price. We also
believe it is a means to monitor not only current production costs, but also
sustaining costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
ALL-IN SUSTAINING COST (AISC)
AISC 1H 2022 1H 2021 % change
Fresnillo US$ per silver ounce 12.52 14.45 (13.4)
Saucito US$ per silver ounce 14.20 3.46 310.8
San Julián (Veins) US$ per silver ounce 16.39 11.48 42.8
San Julián (DOB) US$ per silver ounce 6.40 6.01 6.4
Ciénega US$ per gold ounce 1,302.58 405.67 221.1
Herradura US$ per gold ounce 1,755.78 874.36 100.8
Noche Buena US$ per gold ounce 1,154.23 1,497.08 (22.9)
Fresnillo: All-in sustaining cost decreased 13.4% over 1H21 to US$12.5 per
ounce, explained by a lower cash cost, partially offset by higher capitalised
mine development per ounce.
Saucito: All-in sustaining cost increased to US$14.2 per ounce due to higher
cash cost, increased sustaining capex and higher capitalised mine development
per ounce.
San Julián Veins: All-in sustaining cost increased to US$16.4 per ounce due
to a higher cash cost and higher sustaining capex, mitigated by lower
capitalised mine development.
San Julián DOB: The 6.4% increase in all-in sustaining cost was mainly driven
by the higher sustaining capex.
Ciénega: The increase in all-in sustaining cost was primarily driven by the
higher cash cost.
Herradura: All-in sustaining cost increased by 100.8% mainly due to the
increase in capitalised stripping and higher cash cost.
Noche Buena: The US$342.9 per ounce decrease in all-in sustaining cost was the
result of the lower capitalised stripping and lower cash cost.
GROSS PROFIT
Gross profit, excluding hedging gains and losses, is a key financial indicator
of profitability at each business unit and the Fresnillo Group as a whole.
Total gross profit, including hedging gains and losses, decreased by 39.7%
from US$606.8 million in 1H21 to US$365.9 million in 1H22.
The US$240.9 million decrease in gross profit was mainly explained by: i) the
lower ore grade mostly at Herradura, and also at San Julian (DOB), Saucito,
San Julián (Veins) and Ciénega (-US$208.3 million); ii) lower silver price
(-US$89.8 million); iii) lower volumes processed at our underground and open
pit operations (-US$84.9); iv) cost inflation including the MXP/USD
devaluation effect (-$44.1 million); v) increase in the use of infrastructure
contractors and maintenance (electric and mechanical) (-US$25.1 million); vi)
the variation in change of inventories (-US$19.8); vii) higher treatment and
refining charges (-US$10.0 million) and; others (-US$8.9 million).These
negative effects were mitigated by: i) the new Juanicipio operation (US$77.7
million); ii) higher gold, lead and zinc prices (US$72.3 million); iii) lower
stripping to cost at Herradura (US$47.7 million); iv) lower depreciation
(US$31.6 million); and v) a higher volume of ore processed at San Julián
(DOB), Noche Buena and Fresnillo (US$20.6 million).
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING HEDGING GAINS AND
LOSSES
1H 2022 1H 2021 Change
US$ million % US$ million % US$ million %
Fresnillo 69.3 18.8 85.3 14.7 (16.0) (18.8)
Herradura 65.3 17.7 203.6 35.0 (138.3) (67.9)
Saucito 62.8 17.1 145.9 25.1 (83.1) (57.0)
San Julián 60.2 16.3 110.2 19.0 (50.0) (45.4)
Noche Buena 20.9 5.7 6.7 1.1 (14.2) 211.9
Ciénega 6.8 1.9 29.5 5.1 (22.7) (76.9)
Juanicipio 82.9 22.5 0.0 0.0 82.9 100.0
Total for operating mines 368.2 100 581.2 100 (213.0) (36.6)
Metal hedging and other subsidiaries (2.3) 25.6 (27.9) N/A
Total Fresnillo plc 365.9 606.8 (240.9) (39.7)
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses decreased 4.1% from US$51.2 million in
1H21 to US$49.1 million in 1H22, mainly due to a decrease in fees paid to
advisors (legal, labour, tax and technical).
EXPLORATION EXPENSES
Business unit/project (US$ million) Exploration expenses 1H 2022 Exploration Capitalised expenses 1H 2022 Capitalised
expenses 1H 2021
expenses 1H 2021
Ciénega 3.4 2.6 - -
Fresnillo 6.1 3.0 - -
Herradura 2.4 3.0 - -
Saucito 6.1 4.7 - -
Noche Buena 0.4 0.4 - -
San Julián 11.3 11.1 - -
Orisyvo 2.2 1.6 0.6 0.1
Centauro Deep 0.2 0.0 - -
Guanajuato 4.0 3.1 1.3 0.3
Juanicipio 5.6 0.0 - 2.7
Others 36.0 31.3 0.4 0.2
Total 77.7 60.9 2.2 3.3
Exploration expenses increased, as expected, by 27.6% from US$60.9 million in
1H21 to US$77.7 million in 1H22, in line with the budget for this year and our
strategy to focus exploration on specific targets, mainly at our Fresnillo and
San Julián districts. The increase of US$16.8 million seen period-on-period
was due to our intensified exploration activities aimed at increasing the
resource base, converting resources into reserves and improving the confidence
of the grade distribution in reserves. An additional US$2.2 million was
capitalised, mainly relating to exploration expenses at the Guanajuato
project. As a result, risk capital invested in exploration totalled US$79.9
million in 1H22, while in 1H21, US$3.3 million was capitalised, totalling
US$64.2 million in risk capital invested in exploration, a 24.5% increase over
1H21. For the remainder of 2022, total invested in exploration is expected to
remain at US$180 million, of which approximately US$10 million is expected to
be capitalised.
EBITDA
1H 2022 1H 2021 Amount Change %
US$ million
US$ million
US$ million
Profit from continuing operations before income tax 155.2 445.4 (290.1) (65.1)
- Finance income (7.0) (5.6) (1.4) 25.0
+ Finance costs 34.9 31.0 3.9 12.6
+ Revaluation effects of Silverstream contract 36.3 4.0 32.3 807.5
- Foreign exchange gain (loss), net (1.2) (2.9) 1.7 (58.6)
- Other operating income (2.2) (2.8) 0.6 (21.4)
+ Other operating expense 9.4 12.5 (3.1) (24.8)
+ Depreciation 233.7 265.4 (31.6) (11.9)
EBITDA 459.1 747.0 (287.9) (38.5)
EBITDA margin 36.5% 50.9%
EBITDA is a gauge of the Group's financial performance and a key indicator to
measure debt capacity. It is calculated as profit for the year from continuing
operations before income tax, less finance income, plus finance costs, less
foreign exchange gain / (loss), plus the net Silverstream effects and other
operating income plus other operating expenses and depreciation. In 1H22,
EBITDA decreased 38.5% to US$459.1 million primarily driven by the lower gross
profit and, to a lesser extent, a higher exploration expense. As a result,
EBITDA margin expressed as a percentage of revenue decreased, from 50.9% in
1H21 to 36.5% in 1H22.
OTHER OPERATING INCOME AND EXPENSE
In 1H22, a net loss of US$7.2 million was recognised in the income statement
mainly as a result of maintenance costs of closed mines.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative financial
instrument carried at fair value. The net Silverstream effect recorded in the
1H22 income statement was a loss of US$36.3 million (US$20.3 million
amortisation profit and US$56.6 million revaluation loss), which compared
negatively to the net loss of US$4.0 million registered in 1H21. The negative
revaluation was mainly driven by the increase in the LIBOR reference rate; and
a decrease in the forward silver price curve; partially mitigated by a new
mine plan, which considers an increase in silver reserves.
Since the IPO, cumulative cash received has been US$754.6 million vs. US$350
million initially paid. The Group expects that further unrealised gains or
losses related to the valuation of the Silverstream will be taken to the
income statement in accordance with silver price cyclicality or changes in the
variables considered in valuing this contract. Further information related to
the Silverstream contract is provided in the balance sheet section in notes 10
and 18 to the consolidated financial statements.
NET FINANCE COSTS
Net finance costs of US$27.9 million remained at similar levels to the US$25.4
million recorded in 1H21. Financial expenses in 1H22 included mainly: i)
interest paid on the outstanding US$317.9 million from the US$800 million
Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes due
2050.
FOREIGN EXCHANGE
A foreign exchange gain of US$1.2 million was recorded as a result of the
2.91% revaluation of the Mexican peso against the US dollar over the period.
This was similar to the US$2.9 million gain in 1H21.
The Group also enters into certain exchange rate derivative instruments as
part of a programme to manage its exposure to foreign exchange risk associated
with the purchase of equipment denominated in Euro (EUR) and Swedish krona
(SEK). As of June 30th 2022, the total EUR and SEK outstanding net forward
position was EUR 29.70 million with maturity dates through December 2023.
Volumes that expired during the first half of 2022 were EUR 3.51 million with
a weighted average strike of 1.1119 USD/EUR and SEK 5.05 million with a
weighted average strike of 10.2124 SEK/USD, which have generated a marginal
result in the period of -US$1.842 million.
TAXATION
Income tax expense for the period was US$6.8 million, which compared
favourably vs. US$111.1 million in 1H21. The effective tax rate, excluding the
special mining rights, was 4.4%, which was below the 30% statutory tax rate.
The reason for the lower effective tax rate was the significant permanent
differences between the tax and the accounting treatment related mainly to: i)
the inflation rate (Mexican Consumer Price Index), which impacted the
inflationary uplift of the tax base for assets and liabilities; and ii) the
benefit from the lower border zone tax which applied to Herradura and Noche
Buena operations. The effective tax rate, including mining rights, was 9.1% in
1H22.
The effective tax rate, excluding mining rights, in 1H21 was 24.9%.
Mining rights for the first half of the year were US$7.4 million compared to
US$25.8 million charged in 1H21 due to lower profit levels.
PROFIT FOR THE PERIOD
Profit for the period decreased from US$308.4 million in 1H21 to US$141.0, a
54.3% decrease period-on-period as a result of the factors described above.
Profit due to non-controlling interests was US$23.6 million reflecting the
profit generated at Juanicipio, where MAG Silver owns 44% of the outstanding
shares. Accordingly, profit attributable to equity shareholders of the Group
was US$117.4 million.
Excluding the effects of the Silverstream contract, profit for the year
decreased from US$311.2 million to US$166.3 million, a 46.6% decrease.
CASH FLOW
A summary of the key items from the cash flow statement is set out below:
1H 2022 1H 2021 Amount Change %
US$ million
US$ million
US$ million
Cash generated by operations before changes in working capital 459.5 750.4 (290.9) (38.8)
Decrease in working capital 76.8 15.1 61.7 407.7
Taxes and employee profit sharing paid (141.2) (253.5) 112.3 (44.3)
Net cash from operating activities 395.1 512.0 (116.9) (22.8)
Proceeds from the layback agreement 0.0 25.0 (25.0) N/A
Silverstream contract 18.3 22.5 (4.2) (18.7)
Purchase of property, plant and equipment (299.0) (256.8) (42.2) 16.4
Dividends paid to shareholders of the Company (176.9) (172.6) (4.3) (2.5)
Financial expenses and foreign exchange effects (29.0) (18.2) (10.9) (59.7)
Net (decrease)/increase in cash during the period after foreign exchange (83.4) 132.5 (215.9) N/A
differences
Cash and other liquid funds at 30 June 16 (#_ftn16) 1,151.9 1,202.9 (51.0) (4.2)
Cash generated by operations before changes in working capital decreased by
38.8% to US$459.5 million, mainly as a result of the lower profits generated
in the year. Working capital decreased US$76.8 million, mainly due to: i) a
decrease in trade and other receivables of US$70.3 million mainly due to VAT
recovered; and ii) an US$26.9 million increase in accounts payable; partially
offset by iii) a US$12.4 million increase in inventories; and iv) an increase
in prepayments of US$8.0 million.
Taxes and employee profit sharing paid decreased 44.3% over 1H21 to US$141.2
million mainly due to: i) a decrease in provisional tax payments resulting
from the lower profit factor determined to calculate the estimated taxable
income and lower revenue; and ii) lower final income tax paid in 1H22, net of
provisional taxes paid (corresponding to the 2021 tax fiscal year.
As a result of the above factors, net cash from operating activities decreased
22.8% from US$512.0 million in 1H21 to US$395.1 million in 1H22.
The Group received other sources of cash including; i) the proceeds of the
Silverstream contract of US$18.3 million and; ii) note payable by minority
shareholders in subsidiaries of US$10.1 million.
Main uses of funds were:
i) the purchase of property, plant and equipment for a total of US$299.0
million, a 16.4% increase over 1H21. Capital expenditures for 1H22 are
described below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
1H 2022
US$ million
Herradura mine 75.4 Stripping, construction of leaching pad 14 and purchase of mine equipment.
Fresnillo mine 45.5 Mine development and mining works, purchase of in-mine equipment, deepening of
the San Carlos shaft and tailings dam.
Saucito mine 45.0 Mine development, purchase of in-mine equipment, deepening of the Jarillas
shaft and tailings dam.
San Julián Veins and DOB 28.0 Mining works, tailings dam and purchase of in-mine equipment.
Ciénega mine 19.1 Mining works, purchase of in-mine equipment and construction of tailings dam.
Noche Buena mine 0.1 Sustaining capex
Juanicipio project 82.9 Mine development and construction of beneficiation plant
Other 3.0 Minera Bermejal.
Total purchase of property, plant and equipment 299.0
ii) Dividends paid to shareholders of the Group in 1H22 totalled US$176.9
million, a 2.5% increase over 1H21 as a result of the 2021 final dividend of
24.0 cents per share paid in May 2022, in line with our dividend policy.
iii) Financial expenses and foreign exchange effects of US$29.0 million
increased US$10.9 million period-on-period. Financial expenses in 1H22
included: i) interest paid on the outstanding US$317.9 million from the US$800
million Senior Notes due 2023, and ii) interest paid on the 4.250% Senior
Notes due 2050.
The sources and uses of funds described above resulted in a net decrease in
cash of US$83.4 million (net decrease in cash and other liquid assets), which
combined with the US$1,235.3 million balance at the beginning of the year
resulted in cash and other liquid assets of US$1,151.9 million at the end of
June 2022.
BALANCE SHEET
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds(( 17 (#_ftn17) )) of US$1,151.9
million as of 30 June 2022, decreasing 6.8% versus 31 December 2021 and 4.2%
versus 30 June 2021. Taking into account the cash and other liquid funds of
US$1,151.9 million and the US$1,167.8 million outstanding Senior Notes,
Fresnillo plc's net debt is US$15.9 million as at 30 June 2022. This compares
to the net cash position of US$67.5 million as at 31 December 2021.
Considering these variations, the balance sheet at 30 June 2022 remains
strong, with a net debt / EBITDA ratio of 0.02x(( 18 (#_ftn18) ))
Inventories increased 2.5% to US$500.2 million mainly as a result of inventory
of operating materials and spare parts.
Trade and other receivables decreased 12.3% to US$332.6 million mainly as a
result of a decrease in value added tax receivables and reduced receivables to
Met-Mex.
The change in the value of the Silverstream derivative from US$529.5 million
at the end of the 2021 to US$474.5 million as of 30 June 2022 reflects
proceeds of US$18.8 million in the period (US$13.4 million in cash and US$5.4
million in accounts receivables) and the Silverstream revaluation effect in
the income statement of US$36.3 million.
The net book value of property, plant and equipment was US$2,865.7 million at
the end of June, representing a 2.4% increase over 31 December 2021. The
US$55.3 million increase was mainly due to capitalised mine development and
stripping and purchase of in-mine equipment.
The Group's total equity was US$3,751.2 million as of 30 June 2022, a 1.4%
decrease over 31 December 2021. This was mainly explained by the decrease in
retained earnings, reflecting the 1H22 profit.
GOING CONCERN
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out above in the
Operational Review, with further detail in the Annual Report 2021. The
financial position of the Group, its cash flows and liquidity position are
described in the Financial Review. In addition, the Group's objectives,
policies and processes for managing its capital; its financial risk management
objectives; details of its financial instruments and hedging activities; and
its exposures to credit risk and liquidity risk were set out in the Annual
Report 2021.
In making their assessment of the Group's ability to manage its future cash
requirements, the Directors have considered the Company and Group budgets and
the cash flow forecasts for the period to 31 December 2023. In addition, they
reviewed a more conservative cash flow scenario with reduced silver and gold
prices of US$19.9 and US$1,712 respectively throughout this period, whilst
maintaining current budgeted expenditure while only considering projects
approved by the Executive Committee. This resulted in our current cash
balances reducing over time but maintaining sufficient liquidity throughout
the period.
The Directors have further calculated prices (US$14.7 and US$1,211 for silver
and gold respectively), which should they prevail to the end of 2023 would
result in cash balances decreasing to minimal levels by the end of 2023,
without applying mitigations.
Should metal prices remain below the stressed prices above for an extended
period, management have identified specific elements of capital and
exploration expenditures which could be deferred without adversely affecting
production profiles throughout the period. Finally, management could amend the
mining plans to concentrate on production with a higher margin in order to
accelerate cash generation without affecting the integrity of the mine plans.
After reviewing all of the above considerations, the Directors have a
reasonable expectation that management have sufficient flexibility in adverse
circumstances to maintain adequate resources to continue in operational
existence for the foreseeable future. The Directors, therefore, continue to
adopt the going concern basis of accounting in preparing the annual financial
statements.
DIVIDENDS
The Board of Directors has declared an interim dividend of 3.40 US cents per
Ordinary Share totalling US$25.1 million, which will be paid on 14 September
2022 to shareholders on the register on 12 August 2022. The dividend will be
paid in UK pounds sterling unless shareholders elect to be paid in US dollars.
This interim dividend is lower than the previous period due to the decrease in
profit in 1H22, and remains in line with the Group's dividend policy. This
decision was made after a comprehensive review of the Group's financial
situation, assuring that the Group is well placed to meet its current and
future financial requirements, including its development and exploration
projects.
As previously disclosed, the corporate income tax reform introduced in Mexico
in 2014 created a withholding tax obligation of 10% (including to foreign
nationals) relating to the payment of dividends, which are paid using the Net
Tax Profit Account (CUFIN) generated from 2014 onward. The 2022 interim
dividend will be subject to this withholding obligation.
MANAGING OUR RISKS AND OPPORTUNITIES WITH RESILIENCE
Effective risk management is an essential part of our culture and strategy.
The accurate and timely identification, assessment and management of principal
and emerging risks provide a clear understanding of the actions required to
achieve our objectives. We have embedded a global risk management framework
across Fresnillo plc which aims to ensure consistency and the application of
the appropriate level of oversight at all times.
Key elements of integrated risk management:
· We recognise that risks are inherent to our business: Only
through adequate risk management can internal stakeholders be effectively
supported in making key strategic decisions and implementing our strategy.
· Exposure to risks must be consistent with our risk appetite: The
Board defines and regularly reviews the acceptable level of exposure to
emerging and principal risks: Risks are aligned with our risk appetite, taking
into consideration the balance between threats and opportunities.
· We are all responsible for managing risks: Each business activity
carries out risk evaluations to ensure the sound identification, management,
monitoring and reporting of risks that could impact the achievement of our
goals.
· Risk is analysed using a consistent framework: Our risk
management methodology is applied to all our operations, projects, exploration
activities and support areas, so that we have a comprehensive view of the
uncertainties that could affect us in achieving our strategic goals.
· We are committed to continuous improvement: Lessons learned, and
best practices are incorporated into our procedures to protect and unlock
value sustainably.
I. How we manage risk.
As we explained in our 2021 Annual Report, the Company ended 2021 having made
good progress in risk management, including implementing actions that
mitigated our most important risks. In parallel, the Enterprise Risk
Management (ERM) team developed a training programme focused on identifying
and mitigating emerging risks, tailings dams and our TCFD framework, which was
rolled out across the business to raise awareness of our risk culture. During
this current year, we are continuing to enhance our risk framework by
increasing the use of metrics and scenarios to more precisely articulate the
risk appetite and tolerance limits within which we wish to operate.
During the first part of 2022, our risk team focused its efforts on
identifying and assessing emerging risks, business continuity risks and
climate change risks according to the TCFD criteria. For the second part of
the year, we will be assessing fraud, cybersecurity and safety risks.
II. Assessment of Principal Risks for the first half of 2022.
Due to the continued impact of the global COVID-19 pandemic, Russia's invasion
of Ukraine, some increased insecurity in the regions surrounding our mining
operations, disruptions to critical input supply chains and higher inflation
leading to higher operating costs, it has been necessary to re-evaluate the
Principal Risks set out in the 2021 Annual Report, to rethink their relative
importance, probability and impact, and to re-assess the corresponding
mitigation actions.
The following is a description of the principal risks with the greatest change
in impact and likelihood during the first half of the year:
Principal risks Risk description Factors contributing to risk Mitigation actions
Potential actions by the Government Regulatory actions can have an adverse impact on the Company. These could -The restriction on the granting of new mining concessions. -Commitment to constant communication with all levels of government.
include stricter environmental regulations, forms of procurement or
explosives, more challenging permit processes, more onerous tax compliance
obligations for us and our contractors, as well as more frequent reviews by
tax authorities. - Labour reform prohibiting outsourcing, mainly leading to complications in -Increased monitoring of the processes being implemented at the Ministry of
the relationship with contractors. Labour and Economy.
The right of indigenous communities to be consulted regarding mining
concessions could potentially affect the granting of new concessions in - The new mining law, which mainly regulates lithium but could have an impact -We remain alert to the changes proposed by the authorities, including energy
Mexico. on gold and silver. and mining tax initiatives, so that we can respond in a timely and relevant
manner.
The federal government aims to discourage the generation of energy based on -The Government implementation of policies that support the emission of coal
clean sources and to encourage that from fuel oil and coal. and reduce the development of renewable energy sources. -We continue to collaborate with other members of the mining community through
the Mexican Mining Chamber to lobby against any new harmful taxes, royalties
or regulations. We also support industry lobbying efforts to improve the
general public's understanding of the mining industry.
We paid special attention to the following aspects: -New taxes and discrepancies in the criteria used in audits carried out by the
tax authority.
•Government actions that negatively impact the mining industry.
-Increase in the frequency of reviews by the tax authorities with special
•Regulatory changes to mining rights and adverse fiscal changes. focus on the mining industry.
•Increase in the frequency of the reviews by the tax authorities with
special focus on the mining industry.
-The United States-Mexico-Canada Agreement (USMCA or TMEC) with new labour
•Inability to obtain necessary water concessions because of government dispositions.
control or private interests.
•Failures/delays in obtaining the required environmental permits.
Security Our employees, contractors and suppliers face the risk of theft, kidnapping, -Increased presence of organised crime in the vicinities of mining units, -Our property security teams closely monitor the security situation,
extortion or damage due to insecurity in some of the regions where we operate. particularly in Fresnillo, Saucito, Juanicipio and Penmont operations. maintaining clear internal communications and coordinating work in areas of
greater insecurity.
The influence and dispute of territories by drug cartels, other criminal -A severe increase in the number of high impact crimes (homicide, kidnapping,
elements and general anarchy in some of the regions where we operate, combined extortion) in the regions where our mining units are located. -We have adopted the following practices to manage our security risks and
with our exploration activities and projects in certain areas of drug deposit,
prevent and treat possible incidents:
transfer or cultivation, makes working in these areas a particular risk to us.
-Consumption and sale of drugs at the mining units, particularly Saucito.
-Close and constant communication with federal and state security authorities.
The Federal Government created the Secretariat of Citizen Security and
Protection as part of the comprehensive strategy to reduce insecurity. It also
created the National Guard, mostly comprising military personnel, with the aim -Theft of assets in mining units and/or during transfer.
of combating organised crime and drug cartels. Unfortunately, in most states
-Regular interactions and meetings with the National Guard.
the state or local police are unprepared and ill-equipped to combat organised
crime, have low wages and are sometimes infiltrated by criminal elements.
-Roadblocks or blockages on the roads and/or highways near the mining units.
-An increase in the number of anti-doping tests at the start of the day in the
mining units.
-Frequent inspections inside the mines to verify that drugs are not consumed
and sold.
-Drug consumption prevention campaigns, with a focus on employees.
-An increase in logistical controls in order to reduce the potential for theft
of mineral concentrate. These controls include the use of real-time tracking
technology; surveillance cameras to identify alterations in the transported
material; protection and support services on distribution routes; reduction in
the number of authorised stops in order to optimise delivery times and
minimise exposure of trucks transporting ore concentrates or doré.
Impact of metals prices and global macroeconomic developments Metal price performance for both gold and silver, has not been affected for - The impact of the pandemic on supply chains has been global, prolonged, and -We constantly review the price performance of precious metals such as gold
the time being. Even the price of gold has reached record levels. We see this comprised a series of major shocks to companies' logistical systems. and silver in order to react and take action.
risk as stable with no threat in the short term.
- Disruptions in the value chain of critical inputs for our operations such as -We constantly seek to maintain a broad supplier base to ensure a range of
On the other hand, during the first half of 2022, driven by global spare parts (primarily delivered by land transport from the US and maritime options for purchasing critical inputs and to reduce the likelihood of
macroeconomic developments, we saw increases in operating costs and greater transport from China and Europe). Disruptions also include reduced shortages.
inflationary pressures, together with a shortage of critical inputs and availability of maintenance teams/contractors to resolve issues, as well as
equipment. We expect this situation to continue during the second half of the travel restrictions leading to officials not being able to travel and inspect
year and into 2023. projects, resulting in delays.
-We focus on cost, efficiencies and capital discipline to deliver competitive
all-in sustaining cost.
This has the potential to have an adverse impact on our operations, costs, - Increased operating costs due to higher prices for critical inputs such as
sales and profitability, and potentially on the economic viability of steel, cyanide, copper, diesel, haulage equipment, oxygen and truck tyres.
projects.
-We enhance cost competitiveness by improving the quality of the portfolio.
- In terms of inflation, we experienced an increase in two of our main energy
inputs compared to the previous year, with diesel (USD per litre) increasing
by 21% and electricity (USD per kWh) rising by 12%.
- Appearance of a new COVID-19 variant. Some countries have re-introduced
lockdown measures and there is a possibility that Mexico will follow suit.
III. Our risk matrix.
A consistent assessment of the probability and impact of risk occurrence is
fundamental to establishing, prioritising and managing the risk profile of the
Company. In common with many organisations and in line with good practice, we
use a probability and impact matrix for this purpose.
IV. Emerging Risks.
We define an emerging risk as a new manifestation of risk that cannot yet be
fully assessed, a risk that is known to some degree but is not likely to
materialise or have an impact for several years, or a risk that the company is
not aware of but that could, due to emerging macro trends in the mid or
long-term future, have significant implications for the achievement of our
strategic plan. Furthermore, we consider emerging risks in the context of
longer-term impact and shorter-term risk velocity.
Therefore, emerging risks include those in our risk register that:: (I) are
likely to be of significant scale beyond a five-year timeframe; or (II) have
the velocity to significantly increase in severity within the five-year
period. To strengthen our emerging risks management framework, during the
first half of 2022 we carried out activities to: (I) identify new emerging
risks; II) re-assess emerging risks identified in 2021; (III) deploy effective
monitoring mechanisms; (IV) carry out horizon scanning to consider disruptive
scenarios, and; (V) implement mitigating control actions and enhance our risk
awareness culture. This process involved workshops, surveys and meetings with
the Executive Committee, business unit leaders, support and corporate areas,
as well as suppliers, contractors and customers. We also consulted third party
information from global risk reports, academic publications, risk consulting
experts and industry benchmarks.
Our risk management standards promote communication of up-to-date information
on the Company and industry risks, trends and emerging risks. This year's
emerging risk assessment determined the two most exposed emerging risks to be:
" Water stress and drought" and "Technological Disruption" and identified 3
new emerging risks: "Impact of geopolitical tensions", "Replacement on
depletion of ore reserves" and "Future of the workforce".
Emerging Risk Description Impact Mitigations Time Scale
1 Geopolitical tensions Current global geopolitical tensions, such as the war between Russia and Disruptions in the supply chain of critical operating inputs such as cyanide, Inventory control in the mining units to plan purchases in a timely manner and < 5
Ukraine, tensions between Taiwan and China, U.S. and Chinese tariffs, all have ammonia, spare parts, equipment parts, etc. and rising prices of key inputs maintain sufficient stock to guarantee operational continuity. Strict control
the potential to impact our operations and projects. such as steel, diesel, cement, etc. of operating costs to avoid increases. Years
2 Water stress (chronic risk) and drought (acute risk) Lack of sufficient water resources to meet the water consumption demands in a Water is critical to mining processes. Without this natural resource, we Strict control and monitoring of water concessions is maintained and actions > 5
region, along with strong heat waves in desert regions. cannot extract gold and silver. are envisaged to ensure water for the following years.
(Linked to Climate Change Principal Risk) Years
3 Transition to a low-carbon future The transition to a low-carbon future is a "transition risk" according to the Key areas of uncertainty include future climate change regulation and We have introduced new sources of information to help us identify the impacts > 5
TCFD and presents challenges and opportunities for our portfolio in the short policies, the development of low-carbon technology solutions and the pace of of climate change. These include industry reports and guides, energy
(Linked to Climate Change Principal Risk) and long term. It is considered within the climate change principal risk transition across our value chains, in particular the decarbonisation pathways scenarios, and Global Circulation Models (GCM) under several Representative Years
mitigation strategy. However, we consider this risk to be an emerging risk due across the steel sector. Concentration Pathways (RCP). We have used a well-below two-degree
to the speed of potential new climate change regulations and the obstacles decarbonisation pathway to evaluate the flexibility of the Group's energy
that government may place in the way of supporting investment in clean energy. strategy.
4 Technological disruption Failure to identify, invest in, or adopt technological and operational Obsolete or outdated mining processes impact productivity and efficiency Technological advances in the mining industry are constantly monitored > 5
productivity innovations that significantly replace or optimise a process levels and impact sales and profits. (particularly in mine operations) by the Technology and Development team of
through new systems with recognisably superior attributes. Baluarte Minero to adopt the most appropriate best practices and new Years
technology.
5 Infectious diseases (pandemics) The regional or global spread of a new disease (bacteria or virus) against Another virus such as SARS-CoV-2 coronavirus (COVID-19) may affect the health Mine and project personnel are continuously monitored by the medical team and < 5
which most people do not have immunity. of employees and stop the Company's activities. receive medical examinations to ensure that there are no outbreaks of
contagion. Years
6 Increasing societal and investor expectations We continued to see increasing expectations and focus on social equality, The increasing focus on ESG has the potential to shape the future of the We respond to investor and societal requests and comments and promote action < 5
fairness and sustainability. Financial institutions are also placing greater mining industry, supply cost structures, demand for global commodities and plans to meet their expectations. A number of initiatives demonstrate our
emphasis on environmental, social and governance (ESG) considerations when capital markets. While this presents us with opportunities for portfolio and progress. For example, our ESG performance was recognised by our inclusion in Years
making investment decisions. product differentiation, it has the potential to impact how we operate. the FTSE4Good Index. We were also listed among the world's most ethical
companies by Ethisphere and placed second in the Corporate Integrity Ranking
in Mexico.
7 Replacement on depletion of ore reserves The inability to replace depletion of ore reserves in key business units By not replacing ore reserves with new discoveries, the company's production Projects such as Orisyvo, Rodeo and Guanajuato could replace the mineral > 5
through exploration, projects or acquisitions. capacity and eventually its operation would be diminished. reserves that are currently being exploited. There are also several
(Linked to Exploration Principal Risk) exploration offices located across Mexico, Peru and Chile that are searching Years
for new discoveries.
8 Future of the workforce Failure to create an inclusive culture, empowering talent to be confident Absent specific action, a lack of talent may arise in planning, maintenance, The Human Resources department has a highly specialized training programme in > 5
while providing a clear career path in order to generate a future-ready safety and other departments. There is a need to develop personnel to fill the strategic areas of the operation. It also has a training programme for
(Linked to Human Resources Principal Risk) workforce. these positions in the future. Otherwise, we will not have people prepared to developing personnel focused on filling vacant positions. Years
operate the mines.
Statement of directors' responsibilities
The Directors of the Company hereby confirm that to the best of their
knowledge:
· the condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as issued by the
International Accounting Standards Board IASB and as adopted by UK and gives a
true and fair view of the assets, liabilities, financial position and profit
and loss account of the Fresnillo Group as required by DTR 4.2.4; and
· the interim management report includes a fair review of the
information required by
o DTR 4.2.7 (being an indication of important events that have occurred during
the first six months of the financial year and their impact on the condensed
set of financial statements; and a description of the principle risks and
uncertainties for the remaining six months of the year); and
o DTR 4.2.8 (being related party transactions that have taken place in the
first six months of the current financial year and that have materially
affected the financial position or performance of the entity during that
period and changes since the last annual report).
As mentioned in the Annual Report 2021, the Directors of the Company are:
Alejandro Baillères Chairman
Juan Bordes Non-executive director
Arturo Fernández Non-executive director
Fernando Ruiz Non-executive director
Eduardo Cepeda Non-executive director
Charlie Jacobs Senior Independent non-executive director
Bárbara Garza Lagüera Independent non-executive director
Georgina Kessel Independent non-executive director
Dame Judith Macgregor Independent non-executive director
Alberto Tiburcio Independent non-executive director
Guadalupe de la Vega Independent non-executive director
Héctor Rangel Independent non-executive director
On behalf of the board of directors of Fresnillo plc
Octavio Alvídrez
Chief Executive Officer
INDEPENDENT REVIEW REPORT TO FRESNILLO PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2022 which comprises Interim Consolidated Income Statement, Interim
Consolidated Statement of Comprehensive Income, Interim Consolidated Balance
Sheet, Interim Consolidated Statement of Cash Flows and the related notes 1 to
18. We have read the other information contained in the half yearly financial
report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set of
financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 is not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 2a, the annual financial statements of the group are
prepared in accordance with UK adopted international accounting standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
International Standard on Review Engagements 2410 (UK) "Review of Interim
Financial Information Performed by the Independent Auditor of the Entity"
issued by the Financial Reporting Council, however future events or conditions
may cause the entity to cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
2 August 2022
Interim Consolidated Income Statement
Notes For the six months ended 30 June
2022 (Unaudited) 2021 (Unaudited)
(in thousands of US dollars)
| Pre-Silverstream revaluation effect Silverstream revaluation effect Total Pre- Silverstream revaluation effect Silverstream revaluation effect Total
Continuing operations:
Revenues 4 1,259,062 1,259,062 1,466,840 1,466,840
Cost of sales 5 (893,203) (893,203) (860,051) (860,051)
Gross profit 365,859 365,859 606,789 606,789
Administrative expenses (49,114) (49,114) (51,213) (51,213)
Exploration expenses (77,699) (77,699) (60,900) (60,900)
Selling expenses (13,718) (13,718) (13,056) (13,056)
Other operating income 2,220 2,220 2,768 2,768
Other operating expenses (9,396) (9,396) (12,538) (12,538)
Profit from continuing operations before net finance costs and income tax 218,152 218,152 471,850 471,850
Finance income 6 7,008 7,008 5,565 5,565
Finance costs 6 (34,913) (34,913) (30,960) (30,960)
Revaluation effects of Silverstream contract 10 (36,259) (36,259) (4,023) (4,023)
Foreign exchange gain 1,238 1,238 2,921 2,921
Profit from continuing operations before income tax 191,485 (36,259) 155,226 449,376 (4,023) 445,353
Corporate income tax 7 (17,714) 10,878 (6,836) (112,355) 1,207 (111,148)
Special mining right 7 (7,426) (7,426) (25,842) (25,842)
Income tax (expense)/credit 7 (25,140) 10,878 (14,262) (138,197) 1,207 (136,990)
Profit for the period from continuing operations 166,345 (25,381) 140,964 311,179 (2,816) 308,363
Attributable to:
Equity shareholders of the Company 142,753 (25,381) 117,372 304,942 (2,816) 302,126
Non-controlling interests 23,592 23,592 6,237 6,237
166,345 (25,381) 140,964 311,179 (2,816) 308,363
Earnings per share: (US$)
Basic and diluted earnings per ordinary share from continuing operations 8 0.159 - 0.410
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per ordinary share from continuing 8 0.194 0.414 -
operations
Interim Consolidated Statement of Comprehensive Income
For the six months ended 30 June
2022 2021
(Unaudited) (Unaudited)
(in thousands of US dollars)
Profit for the period 140,964 308,363
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Loss on cash flow hedges recycled to income statement 3,771 -
Gain on cost of hedging recycled to income statement - (3,827)
Changes in the fair value of cost of hedges 194 (3,873)
Total effect of cash flow hedges 3,965 (7,700)
Foreign currency translation 348 24
Income tax effect on items that may be reclassified subsequently to loss or (1,189) 2,310
profit
Net other comprehensive income/(loss) that may be reclassified subsequently to 3,124 (5,366)
profit or loss
Items that will not be reclassified to profit or loss:
Changes in the fair value of cash flow hedges (1,532) (434)
Total effect of cash flow hedges (1,532) (434)
Changes in the fair value of equity investments at FVOCI (38,076) 8,577
Income tax effect on items that will not be reclassified to profit or loss 11,883 (2,443)
Net other comprehensive (loss)/profit that will not be reclassified to loss or (27,725) 5,700
profit
Other comprehensive (loss)/profit, net of tax (24,601) 334
Total comprehensive income, net of tax 116,363 308,697
Attributable to:
Equity shareholders of the Company 93,918 302,531
Non-controlling interests 22,445 6,166
116,363 308,697
Interim Consolidated Balance Sheet
Notes As of 30 June As of 31 December
2022 2021
(Unaudited) (Audited)
(in thousands of US dollars)
ASSETS
Non-current assets
Property, plant and equipment 9 2,865,721 2,799,075
Equity instruments at fair value through other comprehensive income (FVOCI) 18 126,449 164,525
Silverstream contract 10,18 443,031 494,392
Derivative financial instruments 18 197 -
Deferred tax asset 7 119,767 67,300
Inventories 11 91,620 91,620
Other receivables 12 61,871 58,548
Other assets 3,561 3,587
3,712,217 3,679,047
Current assets
Inventories 11 408,582 396,184
Trade and other receivables 12 332,638 401,424
Prepayments 28,334 20,282
Derivative financial instruments 18 424 96
Silverstream contract 10,18 31,468 35,152
Cash and cash equivalents 13 1,151,894 1,235,282
1,953,340 2,088,420
Total assets 5,665,557 5,767,467
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Share capital 368,546 368,546
Share premium 1,153,817 1,153,817
Capital reserve (526,910) (526,910)
Hedging reserve (1,108) (2,042)
Cost of hedging reserve - (38)
Fair value reserve of financial assets at FVOCI 57,131 83,784
Foreign currency translation reserve (1,772) (2,120)
Retained earnings 2,483,605 2,543,087
3,533,309 3,618,124
Non-controlling interests 217,889 184,548
Total equity 3,751,198 3,802,672
Non-current liabilities
Interest-bearing loans 1,157,991 1,157,545
Notes payable 8,814 -
Lease liabilities 6,784 6,146
Derivative financial instruments 18 597 -
Provision for mine closure cost 269,187 256,956
Provision for pensions and other post-employment benefit plans 7,563 6,506
Deferred tax liability 7 10,334 68,745
1,461,270 1,495,898
Current liabilities
Trade and other payables 292,178 270,317
Notes Payable 90,036 107,918
Income tax payable 53,993 62,287
Derivative financial instruments 18 2,452 3,885
Lease liabilities 4,872 4,681
Provision for mine closure cost 3,351 3,351
Employee profit sharing 6,207 16,458
453,089 468,897
Total liabilities 1,914,359 1,964,795
Total equity and liabilities 5,665,557 5,767,467
Interim Consolidated Statement of Cash Flows
Notes For the six months ended 30 June
2022 2021
(Unaudited) (Unaudited)
(in thousands of US dollars)
Net cash from operating activities 17 395,143 512,035
Cash flows from investing activities
Purchase of property, plant and equipment (299,026) (256,794)
Proceeds from the sale of property, plant and equipment and other assets 660 162
Silverstream contract 10 18,257 22,453
Interest received 7,923 4,866
Proceeds from the layback agreement - 25,000
Net cash used in investing activities (272,186) (204,313)
Cash flows from financing activities
Proceeds from notes payable(1) - 23,625
Payment of notes payable (9,941) -
Principal elements of lease payment 1 (2,641) (3,327)
Dividends paid to shareholders of the Company(2) (176,875) (172,620)
Capital contribution(3) 10,120 31
Interest paid(4) (27,448) (24,837)
Net cash used in financing activities (206,785) (177,128)
Net increase in cash and cash equivalents during the period (83,828) 130,594
Effect of exchange rate on cash and cash equivalents 440 1,889
Cash and cash equivalents at 1 January 13 1,235,282 1,070,415
Cash and cash equivalents at 30 June 13 1,151,894 1,202,898
(1) Corresponds to interest-bearing notes payable received from Minera los
Lagartos, S.A. de C.V. which holds a non-controlling interest in Juanicipio
project.
(2) Includes the effect of hedging of dividend payments made in currencies
other than US dollar (note 14).
(3) Corresponds to capital contributions provided by Minera los Lagartos, S.A.
de C.V.
(4) Total interest paid during the six months ended 30 June 2022 less amounts
capitalised totalling US$4.3 million (30 June 2021: US$4.1 million) which is
included within the caption Purchase of property, plant and equipment.
Interim Consolidated Statement of Changes in Equity
Notes Share Share Capital reserve Hedging Cost of Fair value Foreign Retained Total attributable Non-controlling interests Total
capital
premium
currency
earnings
equity
Reserve hedging reserve of
translation to shareholders
reserve
reserve(1) financial of the Company
assets at
FVOCI
(in thousands of US dollars)
Balance at 1 January 2021 (Audited) 368,546 1,153,817 (526,910) 3,292 1,072 117,420 (1,467) 2,363,275 3,479,045 135,559 3,614,604
Profit for the period - - - - - - - 302,126 302,126 6,237 308,363
Other comprehensive income, net of tax - - - (2,912) (2,711) 6,004 24 - 405 (71) 334
Total comprehensive income for the period - - - (2,912) (2,711) 6,004 24 302,126 302,531 6,166 308,697
Hedging loss transferred to the carrying value of PPE purchased during the - - - 62 - - 62 - 62
period
- -
Capital contribution - - - - - - - - - 31 31
Dividends paid 14 - - - - - - - (173,174) (173,174) - (173,174)
Balance at 30 June 2021 (Unaudited) 368,546 1,153,817 (526,910) 442 (1,639) 123,424 (1,443) 2,492,227 3,608,464 141,756 3,750,220
Balance at 1 January 2022 (Audited) 368,546 1,153,817 (526,910) (2,042) (38) 83,784 (2,120) 2,543,087 3,618,124 184,548 3,802,672
Profit for the period 117,372 117,372 23,592 140,964
Other comprehensive income, net of tax - - - 2,813 38 (26,653) 348 - (23,454) (1,147) (24,601)
Total comprehensive income for the period - - - 2,813 38 (26,653) 348 117,372 93,918 22,445 116,363
Hedging gain transferred to the carrying value of PPE purchased during the - - - (1,879) - - - - (1,879) 776 (1,103)
period
Capital contribution - - - - - - - - - 10,120 10,120
Dividends paid 14 - - - - - - - (176,854) (176,854) - (176,854)
Balance at 30 June 2022 (Unaudited) 368,546 1,153,817 (526,910) (1,108) - 57,131 (1,772) 2,483,605 3,533,309 217,889 3,751,198
Notes to the Interim Condensed Consolidated Financial Statements
1 Corporate Information
Fresnillo plc ("the Company", together with its subsidiaries, "the Group") is
a public limited company registered in England and Wales with the registered
number 6344120.
Industrias Peñoles S.A.B. de C.V. ("Peñoles") currently owns 75 percent of
the shares of the Company and the ultimate controlling party of the Company is
the Baillères family, whose beneficial interest is held through Peñoles. The
registered address of Peñoles is Calzada Legaria 549, Mexico City 11250.
Copies of Peñoles' accounts can be obtained from www.penoles.com.mx. Further
information on related party balances and transactions with Peñoles group
companies is disclosed in Note 16.
The interim condensed consolidated financial statements of the Group for the
six months ended 30 June 2022 ("interim consolidated financial statements")
were authorised for issue by the Board of Directors of Fresnillo plc on 1
August 2022.
The Group's principal business is the mining and beneficiation of non-ferrous
minerals, and the sale of related production. The primary contents of this
production are silver, gold, lead and zinc. Further information about the
Group's operating mines and its principal activities is disclosed in Note 3.
2 Significant accounting policies
(a) Basis of preparation and statement of compliance
The interim consolidated financial statements of the Group for the six months
ended 30 June 2022 have been prepared in accordance with IAS 34 Interim
Financial Reporting as issued by the International Accounting Standards Board
IASB and as adopted by UK.
These interim consolidated financial statements do not constitute statutory
accounts as defined in section 435 of the Companies Act 2006. A copy of the
statutory accounts for the year ended 31 December 2021 has been delivered to
the Register of Companies. The auditor's report in accordance with Chapter 3
of Part 16 of the Companies Act 2006 in relation to those accounts was
unqualified, did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying the report and did not
contain a statement under section 498(2) or section 498(3) of the UK Companies
Act 2006.
The interim consolidated financial statements have been prepared on a
historical cost basis, except for trade receivables, derivative financial
instruments, equity securities and defined benefit pension scheme assets which
have been measured at fair value.
The interim consolidated financial statements are presented in dollars of the
United States of America (US dollars or US$) and all values are rounded to the
nearest thousand ($000) except where otherwise indicated.
The impact of seasonality or cyclicality on operations is not considered
significant on the interim consolidated financial statements.
(b) Basis of consolidation
The interim consolidated financial statements set out the Group's financial
position as of 30 June 2022 and 31 December 2021, and its operations and cash
flows for the six-month periods ended 30 June 2022 and 30 June 2021.
The basis of consolidation adopted in the preparation of the interim
consolidated financial statements is consistent with that applied in the
preparation of the consolidated financial statements for the year ended 31
December 2021.
(c) Changes in accounting policies and presentation
The accounting policies adopted in the preparation of the interim consolidated
financial statements are consistent with those applied in the preparation of
the consolidated financial statements for the year ended 31 December 2021,
except for the adoption of some amendment and the consideration of new
transactions:
- Proceeds deducted from the cost of Property, plant and equipment
Amendments to IAS 16, 'Property, plant and equipment' prohibit a company from
deducting from the cost of property, plant and equipment amounts received from
selling items produced while the company is preparing the asset for its
intended use. Instead, a company will recognise such sales proceeds and
related cost in profit or loss. This resulted in a change to the group's
accounting policies.
Ore generated as part of the development stage may be processed and sold,
giving rise to revenue before the commencement of commercial production. Prior
to 1 January 2022, where such processing was necessary to bring mining assets
into the condition required for their intended use (for example, in testing
the plants at the mining unit in development), revenues from metals recovered
from such activities were credited to mining properties and development costs.
From 1 January 2022, such revenue is recognised in profit or loss and cost of
sales is measured based on expected operating cost once commercial production
has been initiated.
- Leases
In the current year, the Group entered into a new type of lease transaction.
The accounting policy in respect of leases has been clarified to include that
variable lease payments that are not linked to price changes due to changes in
a market rate or the value of an index and are linked to future performance or
use of an underlying asset are not included in the measurement of the lease
liability. Such cost are recognized in profit and loss as incurred.
New standards, amendments and interpretations as adopted by the Group
A number of new or amended standards became applicable for the current
reporting period. The Group did not have to change its accounting policies or
make retrospective adjustments as a result of adopting these standards.
Impact of standards issued but not yet applied by the Group
The IASB has issued other amendments resulting from improvements to IFRSs that
management considers do not have any impact on the accounting policies,
financial position or performance of the Group. The Group has not early
adopted any standard, interpretation or amendment that was issued but is not
yet effective.
Significant accounting judgments, estimates and assumptions
Significant accounting judgments, estimates and assumptions are consistent
with those disclosed in the consolidated financial statements for the year
ended 31 December 2021.
Additionally, as discussed in next section, the Group has evaluated the impact
of the COVID-19 pandemic implications in the evaluation of significant
judgements as of 30 June 2022 resulted in no changes required.
Juanicipio project
The Group assesses the stage of each mine under development/construction to
determine when a mine moves into the production phase, this being when the
mine is substantially complete and ready for its intended use. The criteria
used to assess the start date are determined based on the nature of each mine
project, considering its complexity, location and other relevant factors.
The criteria to assess this date considers the level of capital expenditure
compared with the estimated construction cost, the availability of ore
reserves to sustain ongoing extraction, the extraction of ore from production
areas, and the production feasibility considering the operating resources
available.
When production phase is considered to have commenced, all related costs are
reclassified from "Construction in progress" to the relevant class of
"Property, plant and equipment". At this stage, the capitalisation of
development costs ceases, depreciation commences, and additional costs are
either recognised as costs of inventories or expenses, except for those that
qualify for capitalisation relating to mining asset additions or improvements,
underground mine development or mineable reserve development.
During 2021 the Group finalised the construction of the Juanicipio project. As
of 1st January 2022 the mine started commercial production, while the plant
commissioning activities are expected to commence during the second half of
the year due to delays in the tie-in of the plant to the national electricity
grid. Consequently, the Group assessed the production start date separately
for the mine and the plant. As a result, the Group determined that the
Juanicipio mine started operations from 1st January 2022, while the plant
facilities continue the commissioning process.
(d) Effect of COVID-19
The Company continues to actively monitor the impact of the COVID-19 pandemic,
including the impact on economic activity and financial reporting. Throughout
the pandemic, the Company has taken a number of measures to safeguard the
health of its employees and their local communities while continuing to
operate safely and responsibly. In the first half of 2022, the Company
incurred US$1.1 million (2021: US$2.5 million) of COVID-19 related costs
mainly associated with community support, the acquisition of additional
personal protective equipment and higher transportation costs. As the pandemic
continues to progress and evolve, it is difficult to predict the full extent
and duration of resulting operational and economic impacts for the Company,
but these may impact a number of reporting periods. This uncertainty impacts
judgements made by the Company, including those relating to determining the
recoverable values of the Company's non-current assets.
(e) Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out above in the
Operational Review, with further detail in the Annual Report 2021. The
financial position of the Group, its cash flows and liquidity position are
described in the Financial Review. In addition, the Group's objectives,
policies and processes for managing its capital; its financial risk management
objectives; details of its financial instruments and hedging activities; and
its exposures to credit risk and liquidity risk were set out in the Annual
Report 2021.
In making their assessment of the Group's ability to manage its future cash
requirements, the Directors have considered the Company and Group budgets and
the cash flow forecasts for the period to 31 December 2023. In addition, they
reviewed a more conservative cash flow scenario with reduced silver and gold
prices of US$19.9 and US$1,712 respectively throughout this period, whilst
maintaining current budgeted expenditure while only considering projects
approved by the Executive Committee. This resulted in our current cash
balances reducing over time but maintaining sufficient liquidity throughout
the period.
The Directors have further calculated prices (US$14.7 and US$1,211 for silver
and gold respectively), which should they prevail to the end of 2023 would
result in cash balances decreasing to minimal levels by the end of 2023,
without applying mitigations.
Should metal prices remain below the stressed prices above for an extended
period, management have identified specific elements of capital and
exploration expenditures which could be deferred without adversely affecting
production profiles throughout the period. Finally management could amend the
mining plans to concentrate on production with a higher margin in order to
accelerate cash generation without affecting the integrity of the mine plans.
After reviewing all of the above considerations, the Directors have a
reasonable expectation that management have sufficient flexibility in adverse
circumstances to maintain adequate resources to continue in operational
existence for the foreseeable future. The Directors, therefore, continue to
adopt the going concern basis of accounting in preparing the annual financial
statements.
3 Segment reporting
For management purposes, the Group is organised into operating segments based
on producing mines.
At 30 June 2022 the Group has seven reportable operating segments represented
by seven producing mines as follows:
The Fresnillo mine, located in the State of Zacatecas, an underground silver
mine;
The Saucito mine, located in the State of Zacatecas, an underground silver
mine;
The Cienega mine, located in the State of Durango, an underground gold mine;
The Herradura mine, located in the State of Sonora, a surface gold mine;
The Noche Buena mine, located in the State of Sonora, a surface gold mine
The San Julian mine, located on the border of Chihuahua / Durango states, an
underground silver-gold mine; and
The Juanicipio mine, in the State of Zacatecas, an underground silver mine.
The operating performance and financial results for each of these mines are
reviewed by management. As the Group´s chief operating decision maker does
not review segment assets and liabilities, the Group has not disclosed this
information.
In the six months ended 30 June 2022 and 2021, all revenue was derived from
customers based in Mexico.
Management monitors the results of its operating segments separately for the
purpose of performance assessment and making decisions about resource
allocation. Segment performance is evaluated without taking into account
certain adjustments included in revenue as reported in the interim
consolidated income statements, and certain costs included within cost of
sales and gross profit which are considered to be outside of the control of
the operating management of the mines. The table below provides a
reconciliation from segment profit to gross profit as per the interim
consolidated income statement. Other income and expenses included in the
interim consolidated income statement are not allocated to operating segments.
Transactions between reportable segments are accounted for on an arm's length
basis similar to transactions with third parties.
Operating segments
The following tables present revenue and profit information regarding the
Group's operating segments for the six months ended 30 June 2022 and 2021,
respectively. Revenues for the six months ended 30 June 2022 and 30 June 2021
include those derived from contracts with costumers and other revenues, as
showed in note 4.
Six months ended 30 June 2022
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio(4) Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 266,353 302,679 92,533 303,507 85,898 211,870 - - (3,778) 1,259,062
Inter-Segment - - - - - - 120,140 92,235 (212,375) -
Segment revenues 266,353 302,679 92,533 303,507 85,898 211,870 120,140 92,235 (216,153) 1,259,062
Segment profit(2) 113,514 47,971 32,668 111,533 28,341 125,661 92,533 73,179 (20,188) 605,212
Depreciation and amortisation (233,735)
Employee profit sharing (5,618)
Gross profit as per the income statement 365,859
Capital expenditure(3) 45,500 75,443 19,125 44,995 53 28,010 82,919 2,981 - 299,026
(1)Total third party revenues include treatment and refining charges amounting
US$86.2 million. Adjustments and eliminations correspond to hedging loss (note
4).
(2) Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing.
(3) Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including striping cost, mine development and
purchase of mine equipment, excluding additions relating to changes in the
mine closure provision. Significant additions include striping cost at
Herradura mine and purchase of mobile equipment at Saucito.
(4) The ore production of Juanicipio mine has been processed through Fresnillo
and Saucito facilities.
(5) Other inter-segment revenue corresponds to leasing services provided by
Minera Bermejal, S.A. de C.V; capital expenditure mainly corresponds to
Minera Bermejal, S. de R.L. de C.V.
Six months ended 30 June 2021
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio(4) Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 246,170 449,062 115,542 309,613 74,883 271,570 - - 1,466,840
Inter-Segment - - - - - - 21,341 54,075 (75,416) -
Segment revenues 246,170 449,062 115,542 309,613 74,883 271,570 21,341 54,075 (75,416) 1,466,840
Segment profit(2) 129,318 223,548 60,718 203,534 20,787 182,866 17,082 43,902 (1,082) 880,673
Foreign exchange hedging gains 3,827
Depreciation and amortisation (265,366)
Employee profit sharing (12,345)
Gross profit as per the income statement 606,789
Capital expenditure(3) 43,662 27,730 20,485 36,510 278 20,185 100,765 7,180 - 256,795
(1)Total third party revenues include treatment and refining charges amounting
US$76.2 million.
(2) Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing.
(3) Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including mine development, construction of
leaching pads, and purchase of mine equipment, excluding additions relating to
changes in the mine closure provision. Significant additions include the
construction of the leaching plant at Fresnillo and the facilities of the
Juanicipio development project.
(4) The development ore of Juanicipio mine has been processed through
Fresnillo facilities.
(5) Other inter-segment revenue corresponds to leasing services provided by
Minera Bermejal, S.A. de C.V; capital expenditure mainly corresponds to Minera
Bermejal, S. de R.L. de C.V.
4 Revenues
Revenues reflect the sale of goods, being concentrates, doré, slag,
precipitates and activated carbon of which the primary contents are silver,
gold, lead and zinc.
(a) Revenues
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Revenues from contracts with customers 1,278,721 1,481,812
Revenues from other sources
Provisional pricing adjustment on products sold (15,888) (14,972)
Hedging loss on sales (3,771) -
1,259,062 1,466,840
(b) Revenues by product sold
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Lead concentrates (containing silver, gold, lead and by-products) 572,337 629,775
Doré and slag (containing gold, silver and by-products) 312,802 459,668
Zinc concentrates (containing zinc, silver and by-products) 186,503 178,441
Precipitates (containing gold and silver) 111,645 134,679
Activated carbon (containing gold, silver and by-products) 75,775 64,277
1,259,062 1,466,840
All lead and zinc concentrates, precipitates, doré, activated carbon and
slag, were sold to Peñoles' metallurgical complex, Met-Mex, for smelting and
refining.
(c) Value of metal content in products sold
For products other than refined silver and gold, invoiced revenues are derived
from the value of metal content adjusted by treatment and refining charges
incurred by the metallurgical complex of the customer. The value of the metal
content of the products sold, before treatment and refining charges is as
follows:
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Silver 576,885 629,096
Gold 555,702 720,042
Zinc 158,445 131,805
Lead 54,243 62,135
Value of metal content in products sold 1,345,275 1,543,078
Adjustment for treatment and refining charges (86,213) (76,238)
Total revenues(1) 1,259,062 1,466,840
(1) Includes provisional price adjustments which represent changes in the fair
value of trade receivables resulting in a loss of US$15.9 million (2021: loss
of US$15.0 million) and hedging loss of US$3.8 million (2021: nil).
The average realised prices for the gold and silver content of products sold
prior to the deduction of treatment and refining charges, were:
Six months ended 30 June
2022 2021
(in US dollars per ounce)
Gold(2) 1,871.08 1,789.24
Silver(2) 22.77 26.41
(2) For the purpose of the calculation, revenue by content of products sold
does not include the results from hedging.
5 Cost of sales
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Depreciation and amortisation (Note 9) 233,735 265,366
Contractors 180,513 200,637
Operating materials 123,590 106,983
Maintenance and repairs 111,629 93,958
Energy 100,034 117,505
Personnel expenses(1) 79,016 68,081
Mine equipment leased 16,423 -
Mining concession rights and contributions 10,355 9,885
Surveillance 8,703 4,044
Freight 5,460 4,417
Insurance 5,457 4,580
Other 23,770 13,259
Cost of production 898,685 888,715
Unabsorbed production costs(2) 500 956
Gain on foreign currency hedges - (3,827)
Change in work in progress and finished goods (ore inventories) (5,982) (25,793)
Cost of sales 893,203 860,051
(1) Personnel expenses include employees' profit sharing of US$5.6 million for
the six months ended 30 June 2022 (six months ended 30 June 2021: US$8.9
million).
(2) Corresponds to fixed costs incurred in Juanicipio plant activities
(2021: fixed production cost (labour cost and depreciation) incurred in Minera
San Julian due to a power outage).
6 Finance income and finance costs
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Finance income:
Interest on short-term deposits and investments 4,202 2,551
Interest on tax receivables 2,656 2,316
Other 150 698
7,008 5,565
Finance costs:
Interest on interest-bearing loans and notes payables 24,597 23,764
Interest on lease liabilities 276 288
Unwinding of discount on provisions 7,551 6,460
Other 2,489 448
34,913 30,960
7 Income tax expense
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Current corporate income tax:
Income tax charge 93,705 178,812
Amounts (over)/under provided in previous periods (5,100) 6,430
88,605 185,242
Deferred corporate income tax:
Origination and reversal of temporary differences (70,891) (72,887)
Revaluation effects of Silverstream contract (10,878) (1,207)
(81,769) (74,094)
Corporate income tax 6,836 111,148
Current special mining right:
Special mining right charge(1) 24,582 33,771
24,582 33,771
Deferred special mining right:
Origination and reversal of temporary differences (17,156) (7,929)
Special mining right 7,426 25,842
Income tax expense as reported in the income statement 14,262 136,990
(1) Until 2021 the special mining right allows the deduction of payments for
mining concession rights up to the amount of the special mining right payable
within the same legal entity. In the six months ended 30 June 2021, the
Group credited US$5.7 million of mining concession rights against the special
mining right. Prior to credits permitted under the special mining right
regime, the current special mining right charge in 2021 would have been
US$38.8.
The total mining concession rights paid during the six-month period were
US$12.5 million (2021: US$11.4 million) and have been recognised in the income
statement within cost of sales and exploration expenses.
Tax charged within the six-month period ended 30 June 2022 has been calculated
by applying the effective rate of tax which is expected to apply to the Group
for the period ended 31 December 2022 using rates substantively enacted by 30
June 2022 as required by IAS 34 Interim Financial Reporting.
The effective tax rate for corporate income tax for the six months ended 30
June 2022 is 4.40% (six months ended 30 June 2021: 24.96%) and 9.19% including
the special mining right (six months ended 30 June 2021: 30.76%). The main
factors that decrease the effective tax rate for corporate income tax below
30% are the foreign exchange effect on tax value of assets and liabilities and
the uplift of tax values corresponding to fixed assets. The net deferred tax
asset increased to US$109.4 million (31 December 2021: net deferred tax
liability of US$1.4 million) primarily due to the increase in tax losses and
the reduction of deferred tax liabilities in respect of fixed assets,
derivatives including the Silverstream contract and equity instruments at
FVOCI.
8 Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for the period
attributable to equity shareholders of the Company by the weighted average
number of ordinary shares in issue during the period.
The Company has no dilutive potential ordinary shares.
For the six months ended 30 June 2022 and 30 June 2021, earnings per share
have been calculated as follows:
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Earnings:
Profit from continuing operations attributable to equity holders of the 117,372 302,126
Company
Adjusted profit from continuing operations attributable to equity holders of 142,753 304,942
the Company
Adjusted profit is profit as disclosed in the Interim Consolidated Income
Statement adjusted to exclude revaluation effects of the Silverstream contract
of US$36.3million loss (US$25.4 million net of tax) (2021: US$4.0 million loss
and US$2.8 million net of tax).
Adjusted earnings per share have been provided in order to provide a measure
of the underlying performance of the Group, prior to the revaluation effects
of the Silverstream contract, a derivative financial instrument.
Six months ended 30 June
2022 2021
Number of shares:
Weighted average number of ordinary shares in issue ('000) 736,894 736,894
Six months ended 30 June
2022 2021
Earnings per share:
Basic and diluted earnings per ordinary share from continuing operations (US$) 0.159 0.410
Adjusted basic and diluted earnings per ordinary share from continuing
operations (US$)
0.194 0.414
9 Property, plant and equipment
The changes in property, plant and equipment, including right-of-use assets,
during the six months ended 30 June 2022 are principally additions of US$310.6
million (six months ended 30 June 2021: US$256.8 million) and depreciation and
amortisation of US$237.6 million, of which US$2.7 million was capitalised as a
part of the cost of other fixed assets (six months ended 30 June 2021:
US$267.2 million, of which US$1.1 million was capitalised). Significant
additions include stripping cost at Herradura mine and purchase of mobile
equipment at Saucito and Juanicipio mines.
As of 30 June 2022, the Group has contractual commitments related to the
construction and acquisition of property, plant and equipment of US$219.0
million (30 June 2021: US$216.5 million).
10 Silverstream contract
On 31 December 2007, the Group entered into an agreement with Peñoles through
which it is entitled to receive the proceeds received by the Peñoles Group in
respect of the refined silver sold from the Sabinas Mine ('Sabinas'), a base
metals mine owned and operated by the Peñoles Group, for an upfront payment
of US$350 million. In addition, a per ounce cash payment of US$2.00 in years
one to five and US$5.00 thereafter (subject to an inflationary adjustment that
commenced from 31 December 2013) is payable to Peñoles. The cash payment per
ounce for the period ended 30 June 2022 was US$5.54 per ounce (30 June 2021:
US$5.43 per ounce). Under the contract, the Group has the option to receive a
net cash settlement from Peñoles attributable to the silver produced and sold
from Sabinas, to take delivery of an equivalent amount of refined silver or to
receive settlement in the form of both cash and silver. If, by 31 December
2032, the amount of silver produced by Sabinas is less than 60 million ounces,
a further payment is due from Peñoles of US$1.00 per ounce of shortfall. At
30 June 2022 the weighted average rate applied for the purposes of the
valuation model calculated with reference to annual undiscounted cash flow was
9.38% (30 June 2021: 7.83%).
In the six months ended 30 June 2022, total proceeds received in cash were
US$18.3 million (2021: US$22.5 million) of which, US$4.8 million was in
respect of proceeds receivable as at 31 December 2021 (2020: US$7.6 million).
Cash received in respect of the period of US$13.4 million (six months ended 30
June 2021: US$14.8 million) corresponds to 1.01 million ounces of payable
silver (six months ended 30 June 2021: 1.09 million ounces). As at 30 June
2022, a further US$5.4 million (30 June 2021: US$7.8 million) of cash
corresponding to 360,944 ounces of silver is due (30 June 2021: 383,179
ounces).
A reconciliation of the beginning balance to the ending balance is shown
below.
2022 2021
(in thousands of US dollars)
Balance at 1 January: 529,544 576,140
Cash received in respect of the period (13,415) (14,804)
Cash receivable (5,371) (7,793)
Remeasurement loss recognised in profit or loss (36,259) (4,023)
Balance at 30 June 474,499 549,520
Less - Current portion 31,468 41,759
Non-current portion 443,031 507,761
The US$36.3 million unrealised loss recorded in the income statement (six
months ended 30 June 2021: US$4.0 million loss) resulted mainly from the
increase in LIBOR reference rate and a relevant decrease in the forward silver
price curve. These effects were partially compensated by a new production mine
plan which considers an increase in silver reserves.
As a result of the reforms mandated by the Financial Stability Board,
benchmark InterBank Offered Rates (IBORs) such as LIBOR are being replaced by
new 'official' benchmark rates, known as alternative Risk Free Rates (RFRs).
Thus the US dollar LIBOR rate will cease on 30 June 2023. In order to
determine the applicable discount rate to the Silverstream contract,
Management is evaluating which RFR to apply from that date. Management expects
that the discount rate using the new RFRs plus the applicable spread will not
differ significantly from the discount rate using US dollar LIBOR plus the
applicable spread.
11 Inventories
As at 30 June As at 31 December 2021
2022
(in thousands of US dollars)
Finished goods(1) 16,601 19,137
Work in progress(2) 341,608 344,805
Ore stockpile(3) 14,874 3,234
Operating materials and spare parts 132,448 125,824
Inventories at lower of cost and net realisable value 505,531 493,000
Allowance for obsolete and slow-moving inventories (5,329) (5,196)
Balance at lower of cost and net realisable value 500,202 487,804
Less - Current portion 408,582 396,184
Non-current portion(4) 91,620 91,620
(1) Finished goods include metals contained in concentrates and doré bars,
and concentrates on hand or in transit to a smelter or refinery.
(2) Work in progress includes metals contained in ores on leaching pads and in
stockpiles that will be processed in dynamic leaching plants (note 2(c)).
(3) Ore stockpile includes ore mineral obtained at Juanicipio (30 June 2021
ore obtained during the development phase at Juanicipio).
(4) Non-current inventories relate to ore in leaching pads where the leaching
process has stopped and is not expected to restart within twelve months.
12 Trade and other receivables
As at 30 June As at 31 December 2021
2022
(in thousands of US dollars)
Trade and other receivables from related parties (Note 16)(1) 244,635 265,473
Value added tax receivable 54,282 103,448
Other receivables from related parties (Note 16) 5,473 4,886
Other receivable from contractors 1,503 27
Other receivables 11,042 11,478
Other receivables arising from the layback agreement 16,413 16,684
333,348 401,996
Expected credit loss of 'Other receivables' (710) (572)
332,638 401,424
Other receivables classified as non-current assets:
Other receivable from contractors 2,930 -
Value Added Tax receivable 35,671 34,634
Other receivables arising from the layback agreement 23,270 23,914
61,871 58,548
394,509 459,972
(1)Trade receivables from related parties are valued at fair value based on
forward market prices.
Balances corresponding to Value Added Tax receivables and US$11.0 million
within Other receivables (2021:US$11.5 million) are not financial assets.
13 Cash and cash equivalents
The Group considers cash and cash equivalents when planning its operations and
in order to achieve its treasury objectives.
As at 30 June As at 31 December 2021
2022
(in thousands of US dollars)
Cash at bank and on hand 2,558 2,834
Short-term deposits 1,149,336 1,232,448
Cash and cash equivalents 1,151,894 1,235,282
Cash at bank earns interest at floating rates based on daily bank deposits.
Short-term deposits are made for varying periods of between one day and three
months, depending on the immediate cash requirements of the Group, and earn
interest at the respective short-term deposit rates. Short-term deposits can
be withdrawn at short notice without any penalty or loss in value.
14 Dividends paid
Dividends declared by the Company are as follows:
Per share Amounts
US Cents $Million
Six months ended 30 June 2022
Total dividends paid during the period(1) 24.0 176.9
Six months ended 30 June 2021
Total dividends paid during the period(2) 23.5 173.2
(1) Final dividend for 2021 approved at the Annual General Meeting on 17 May
2022 and paid on 27 May 2022.
(2) Final dividend for 2020 approved at the Annual General Meeting on 24 June
2021 and paid on 28 June 2021.
A reconciliation between dividend declared, dividends affected to retained
earnings and dividend presented in the cash flow statements is as follows:
Six months ended 30 June
2022 2021
US$ thousands
US$ thousands
Dividends declared 176,854 173,170
Foreign exchange effect - 4
Dividends recognised in retained earnings 176,854 173,174
Foreign exchange and hedging effect 21 (554)
Dividends paid 176,875 172,620
The directors have declared an interim dividend of US$3.40 cents per share and
is not recognised as a liability as at 30 June 2022. Dividends paid from the
profits generated from 1 January 2014 to residents in Mexico and to
non-resident shareholders may be subject to an additional tax of up to 10%,
which will be withheld by the Group.
15 Contingencies
The contingencies in the Group's annual consolidated financial statements for
the year ended 31 December 2021 as published in the 2021 Annual Report, are
still applicable as of 30 June 2022, with the followings updates:
- With regards to tax audits by the Mexican tax authorities
(SAT, by its Spanish acronym), we summarise the status of on-going
inspections:
- On 10 June 2021, SAT initiated an audit of the income tax and mining
rights computations of Desarrollos Mineros Fresne, S de R.L. de C.V. for the
year 2016. The findings are similar to the 2014 and 2015 Tax Audit Findings,
and relate to the tax treatments of capitalised stripping cost, exploration
expenditure, in-period deduction of certain ore extraction services as an
expense, and the VAT paid for those services. On 6 June 2022, the SAT
delivered its findings to which the company responded and initiated a
procedure with the Mexican Taxpayer Ombudsman (PRODECON) to procure a
Conclusive Agreement with SAT in respect of these findings.
It is not practical to determine the amount of any potential claims or the
likelihood of any unfavourable outcome arising from this or any future
inspections that may be initiated. However, management believes that its
interpretation of the relevant legislation is appropriate and that the Group
has complied with all regulations and paid or accrued all taxes and
withholdings that are applicable.
16 Related party balances and transactions
The Group had the following related party transactions during the six months
ended 30 June 2022 and 30 June 2021 and balances as at 30 June 2022 and 31
December 2021.
Related parties are those entities owned or controlled by the ultimate
controlling party, as well as those who have a minority participation in Group
companies and key management personnel of the Group.
(a) Related party accounts receivable and payable
Accounts receivable Accounts payable
As at 30 June 2022 As at 31 December 2021 As at 30 June 2022 As at 31 December 2021
(in thousands of US dollars)
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 244,635 265,473 271 298
Other:
Industrias Peñoles, S.A.B. de C.V. 5,371 4,842 - -
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2 6 - -
Servicios Administrativos Peñoles, S.A de C.V. - - 8,658 4,519
Servicios Especializados Peñoles, S.A. de C.V. - - 6,543 179
Fuentes de Energía Peñoles, S.A. de C.V. - - 2,964 5,220
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 1,216 2,154
Eólica de Coahuila S.A. de C.V. - - 17,255 13,589
Minera Capela, S.A. de C.V. - - - 714
Other 100 38 4,341 4,257
250,108 270,359 41,248 30,930
Related party accounts receivable and payable will be settled in cash.
Other balances due from related parties:
As at 30 June 2022 As at 31 December 2021
(in thousands of US dollars)
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 474,499 529,544
The Silverstream contract can be settled in either silver or cash. Details of
the Silverstream contract are provided in note 10.
(b) Principal transactions with affiliates are as follows:
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Income:
Sales(1):
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 1,262,832 1,466,840
Other income 884 1,591
Total income 1,263,716 1,468,431
(1) Figures are net of treatment and refining charges of US$86.2 million (June
2021: US$76.2 million).
( )
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Expenses:
Administrative Services:
Servicios Administrativos Peñoles, S.A. de C.V.(2) 17,065 16,289
Servicios Especializados Peñoles, S.A. de C.V. (2) 13,289 9,623
30,354 25,912
Energy:
Fuentes de Energía Peñoles, S.A. de C.V. 1,529 2,202
Termoeléctrica Peñoles, S. de R.L. de C.V. 9,704 10,390
Eólica de Coahuila, S.A. de C.V. 15,722 19,214
26,955 31,806
Operating materials and spare parts:
Wideco Inc 3,159 1,758
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 4,686 5,081
7,845 6,839
Equipment repairs and administrative services:
Serviminas, S.A. de C.V. 3,791 3,966
Insurance premiums:
Grupo Nacional Provincial, S.A.B. de C.V. 6,515 4,782
Other expenses 3,755 1,492
Total expenses 79,215 74,797
(2) Based on the Service Agreement with Servicios Administrativos Peñoles,
S.A. de C.V., ("SAPSA") and Servicios Especializados Peñoles, S.A. de C.V.
("SEPSA"), both wholly owned Peñoles' subsidiaries, the companies provided
administrative services during the six months ended 30 June 2022 for a total
amount of US$30.4 million (US$25.6 million for the six months ended 30 June
2021). During the period there were no administrative expenses capitalised
(US$1.9 million for six months ended 30 June 2021).
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the
Executive Committee who receive remuneration.
Six months ended 30 June
2022 2021
(in thousands of US dollars)
Salaries and bonuses 1,435 1,812
Post-employment pension 118 126
Other benefits 123 150
Total compensation paid to key management personnel 1,676 2,088
17 Notes to the consolidated statement cash flows
Notes Six months ended 30 June
2022 2021
(in thousands of US dollars)
Reconciliation of profit for the period to net cash generated from operating
activities
Profit for the period 140,964 308,363
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 9 234,281 265,979
Employee profit sharing 5,809 12,661
Deferred income tax credit 7 (98,925) (82,023)
Current income tax expense 7 113,187 219,013
Gain on the sale of property, plant and equipment (102) (22)
Net finance costs 27,875 25,387
Foreign exchange gain (450) (3,572)
Difference between pension contributions paid and amounts recognised in the 601 608
income statement
Non-cash movement on derivatives 25 1
Changes in fair value of Silverstream 10 36,259 4,023
Working capital adjustments
Decrease in trade and other receivables 70,285 9,341
(Increase)/decrease in prepayments and other assets (8,027) 2,037
Increase in inventories (12,399) (24,536)
Increase in trade and other payables 26,940 28,285
Cash generated from operations 536,323 765,545
Income tax paid(1) (125,008) (232,297)
Employee profit sharing paid (16,172) (21,213)
Net cash from operating activities 395,143 512,035
(1) Income tax paid includes US$71.7 million corresponding to corporate income
tax (June 2021: US$204.3 million) and US$53.3 million corresponding to special
mining right (June 2021: US$28.0 million), for further information refer to
note 7.
18 Financial instruments
a. Classification
As at 30 June 2022
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
cost
Trade and other receivables (1) 43,508 - - 250,006
Equity instruments at FVOCI - 126,449 - -
Silverstream contract - - - 474,499
Derivative financial instruments - - 621 -
Financial liabilities: Amortised Fair value (hedging instruments) Fair value through profit or loss
Cost
Interest-bearing loans 1,157,991 - -
Trade and other payables 122,794 - -
Notes payable 98,850 - -
Derivative financial instruments 3,049 -
(1 Relates to trade and other receivables from related parties and
contractors, net of the provision for impairment)
As at 31 December 2021
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
Cost
Trade and other receivables (1) 41,217 - - 270,315
Equity instruments at FVOCI - 164,525 - -
Silverstream contract - - - 529,544
Derivative financial instruments - - 96 -
Financial liabilities: Amortised Fair value (hedging instruments) Fair value through profit or loss
Cost
Interest-bearing loans 1,157,545 - -
Trade and other payables 161,117 - -
Notes payable 107,918 - -
Derivative financial instruments - 3,885 -
(1 Relates to trade and other receivables from related parties and
contractors, net of the provision for impairment)
b. Fair value measurement
Fair value hierarchy
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The fair value measurement is based on the presumption
that the transaction to sell the asset or transfer the liability takes place
either: a) in the principal market for the asset or liability, or b) in the
absence of a principal market, in the most advantageous market for the asset
or liability. The principal or the most advantageous market must be accessible
to the Group.
The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market
participant's ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant that would
use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data are available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs.
All assets and liabilities for which fair value is measured or disclosed in
the interim consolidated financial statements are categorised within the fair
value hierarchy, described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level 1 - Quoted (unadjusted) market prices in active markets for identical
assets or liabilities
Level 2 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable
Level 3 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable
For assets and liabilities that are recognised in the financial statements on
a recurring basis, the Group determines whether transfers have occurred
between levels in the hierarchy by re-assessing categorisation (based on the
lowest level input that is significant to the fair value measurement as a
whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of
assets and liabilities on the basis of the nature, characteristics and risks
of the asset or liability and the level of the fair value hierarchy as
explained above.
The value of financial assets and liabilities other than those measured at
fair value are as follows:
Carrying amount Fair value
30 June 31 December 2021 30 June 31 December 2021
2022 2022
US$ thousands
Financial assets:
Trade and other receivables 43,508 41,217 65,653 41,217
Financial liabilities:
Interest-bearing loans(1) 1,157,991 1,157,545 951,348 1,237,689
Trade and other payables 122,794 161,117 122,794 161,117
Note payable 98,850 107,918 98,850 107,918
(1) Interest-bearing loans are categorised in Level 1 of the fair value
hierarchy.
The carrying amounts of all other financial instruments are measured at fair
value.
The financial assets and liabilities measured at fair value are categorised
into the fair value hierarchy as follows:
As of 30 June 2022
Fair value measure using
Quoted prices in active markets Significant observable (Level 2) Significant unobservable (Level 3) Total
(Level 1)
US$ thousands
Financial assets:
Trade receivables (Note 12)(1) - - 250,006 250,006
Derivative financial instruments:
Option and forward foreign exchange contracts - 621 - 621
Silverstream contract (Note 10) - - 474,499 474,499
Other financial assets:
Equity instruments at FVOCI 126,449 - - 126,449
126,449 621 724,505 851,575
Financial liabilities:
Derivative financial instruments:
Option and forward foreign exchange contracts - 3,049 - 3,049
- 3,049 - 3,049
(1)Includes receivable corresponding Silverstream contract of US$4.8 million.
As of 31 December 2021
Fair value measure using
Quoted prices in active markets (Level 1) Significant observable (Level 2) Significant unobservable (Level 3) Total
US$ thousands
Financial assets:
Trade receivables (Note 12) (1) - - 270,315 270,315
Derivative financial instruments:
Option commodity contracts - 66 - 66
Option and forward foreign exchange contracts - 30 - 30
Silverstream contract - - 529,544 529,544
Other financial assets:
Equity instruments at FVOCI 164,525 - - 164,525
164,525 96 799,859 964,480
Financial liabilities:
Derivative financial instruments:
Option commodity contracts - 2,987 - 2,987
Option and forward foreign exchange contracts
- 898 - 898
- 3,885 - 3,885
(1)Includes receivable corresponding Silverstream contract of US$7.6 million.
There have been no significant transfers between Level 1 and Level 2 of the
fair value hierarchy, and no transfers into or out of Level 3 fair value
measurements.
A reconciliation of the opening balance to the closing balance for Level 3
financial instruments other than Silverstream and the related receivable with
the contract(which is disclosed in Note 10) is shown below:
2022 2021
US$ thousands
Balance at 1 January 265,473 326,833
Sales 3,028,144 3,349,471
Cash collection (3,033,093) (3,347,886)
Changes in fair value(1) (16,924) (5,479)
Realised embedded derivatives during the year(1) 1,034 (9,493)
Balance at 30 June 244,634 313,446
(1 Changes in fair value and realised embedded derivatives during the year are
recognised in revenues.)
Valuation techniques
The following valuation techniques were used to estimate the fair values:
Option commodity contracts
The Group enters into derivative financial instruments with various
counterparties, principally financial institutions with investment grade
credit ratings. The Level 2 option commodity contracts are measured based on
observable spot commodity prices, the yield curves of the respective commodity
as well as the commodity basis spreads between the respective commodities. The
option contracts are valued using the Black-Scholes model, the significant
inputs to which include observable spot commodities price, interest rates and
the volatility of the commodity.
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with various
counterparties, principally financial institutions with investment grade
credit ratings. The Level 2 foreign currency forward contracts are measured
based on observable spot exchange rates, the yield curves of the respective
currencies as well as the currency basis spreads between the respective
currencies. The foreign currency option contracts are valued using the
Black-Scholes model, the significant inputs to which include observable spot
exchange rates, interest rates and the volatility of the currency.
Silverstream contract (see note 10)
The fair value of the Silverstream contract is determined using a valuation
model. The term of the derivative, which is based on Sabinas' life of mine, is
currently 34 years and the valuation model utilises a number of inputs that
are not based on observable market data due to the nature of these inputs
and/or the duration of the contract. Inputs that have a significant effect on
the recorded fair value are the volume of silver that will be produced and
sold from the Sabinas mine over the contract life, the future price of silver,
future foreign exchange rates between the Mexican peso and US dollar, future
inflation and the discount rate used to discount future cash flows.
The estimate of the volume of silver that will be produced and sold from the
Sabinas mine requires estimates of the recoverable silver reserves and
resources, the related production profile based on the Sabinas mine plan and
the expected recovery of silver from ore mined. The estimation of these inputs
is subject to a range of operating assumptions and may change over time.
Estimates of reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided to the
Company. The production profile and estimated payable silver that will be
recovered from ore mined is based on the latest plan and estimates, also
provided to the Company by Peñoles. The inputs assume no interruption in
production over the life of the Silverstream contract and production levels
which are consistent with those achieved in recent years.
Management regularly assesses a range of reasonably possible alternatives for
those significant unobservable inputs described above, and determines their
impact on the total fair value. The significant unobservable inputs are not
interrelated. The fair value of the Silverstream contract is not significantly
sensitive to a reasonable change in future inflation and exchange rate,
however, it is to a reasonable change in future silver price and the discount
rate used to discount future cash flows.
The following table demonstrates the sensitivity of the Silverstream contract
valuation to reasonably possible changes in those inputs. There are no changes
to equity other than those derived from the changes in profit before tax.
Effect on profit before tax: increase/
(decrease)
Increase/
US$ thousands
(decrease)
30 June 2022
Silver price 15% 95,345
(15%) (95,345)
Interest rate 75 basis point (31,912)
Effect on profit before tax: increase/
(decrease)
Increase/
US$ thousands
(decrease)
31 December 2021
Silver price 15% 104,419
(15%) (104,419)
Interest rate 25 basis point 3,088
Equity investments
The fair value of equity investments is derived from quoted market prices in
active markets.
Interest-bearing loans
The fair value of the Group's interest-bearing loan is derived from quoted
market prices in active markets.
Receivables from provisional sales
Sales of concentrates, precipitates and doré bars are 'provisionally priced'
and revenue is initially recognised using this provisional price and the
Group's best estimate of the contained metal. Revenue is subject to final
price and metal content adjustments subsequent to the date of delivery. This
price exposure is considered to be an embedded derivative and therefore the
entire related trade receivable is measured at fair value.
At each reporting date, the provisionally priced metal content is revalued
based on the forward selling price for the quotational period stipulated in
the relevant sales contract. The selling price of metals can be reliably
measured as these metals are actively traded on international exchanges but
the estimated metal content is a non-observable input to this valuation.
.
c. Capital management
The primary objective of the Group's capital management is to ensure that it
maintains a strong credit rating and healthy capital ratios that support
its business and maximise shareholder value. Management considers capital to
consist of equity and interest-bearing loans, including loans from related
parties, as disclosed in the balance sheet, excluding net unrealised gains or
losses on revaluation of cash flow hedges and debt instruments. In order to
ensure an appropriate return for shareholder's capital invested in the Group
management thoroughly evaluates all material projects and potential
acquisitions and approves them at its Executive Committee before submission to
the Board for ultimate approval, where applicable. The Group's dividend policy
is based on the profitability of the business and underlying growth in
earnings of the Group, as well as its capital requirements and cash flows,
including cash flows from the Silverstream.
One of the Group's metrics of capital is cash and other liquid assets which as
at 30 June 2022 and 2021 consisted of only cash and cash equivalents.
1 (#_ftnref1) Adjusted revenues are the revenues shown in the income
statement adjusted to add back treatment and refining charges and the effects
of metals prices hedging. The Company considers this is a useful additional
measure to help understand underlying factors driving revenue in terms of
volumes sold and realised prices.
2 (#_ftnref2) Earnings before interest, taxes, depreciation and amortisation
(EBITDA) is calculated as profit for the year from continuing operations
before income tax, less finance income, plus finance costs, less foreign
exchange gain/(loss), less revaluation effects of the Silverstream contract
and other operating income plus other operating expenses and depreciation.
3 (#_ftnref3) Prior to Silverstream valuation effects.
4 (#_ftnref4) Free cash flow calculated as net cash flow after the effect of
foreign exchange on cash, less dividend payments.
5 (#_ftnref5) Cash and other liquid funds are disclosed in note 18(d) to the
Financial Statements
6 (#_ftnref6) Net Debt is calculated as debt at 30 June 2020 less Cash and
other liquid funds at 30 June 2020 divided by the EBITDA generated in the last
12 months
7 (#_ftnref7) Adjusted production cost is calculated as total production
costs less depreciation, profit sharing and the effects of exchange rate
hedging.
8 (#_ftnref8) Net debt is calculated as debt at 30 June 2020 less Cash and
other liquid funds at 30 June 2020 divided by the EBITDA generated in the last
12 months
9 (#_ftnref9) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
10 (#_ftnref10) Earnings before interest, taxes, depreciation and
amortisation (EBITDA) is calculated as profit for the year from continuing
operations before income tax, less finance income, plus finance costs, less
foreign exchange gain/(loss), plus revaluation effects of the Silverstream
contract and other operating income plus other operating expenses and
depreciation.
11 (#_ftnref11) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
12 (#_ftnref12) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
13 (#_ftnref13) Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
14 (#_ftnref14) Adjusted production costs are calculated as cost of sales
less depreciation, profit sharing, hedging, change in inventories and
unproductive costs. The Company considers this a useful additional measure to
help understand underlying factors driving production costs in terms of the
different stages involved in the mining and plant processes, including
efficiencies and inefficiencies as the case may be and other factors outside
the Company's control such as cost inflation or changes in accounting
criteria.
15 (#_ftnref15) Unproductive costs primarily include unabsorbed production
costs such as fixed costs incurred in Juanicipio plant activities in 1H22
and fixed production cost (labour cost and depreciation) incurred in Minera
San Julián due to a shortfall in electricity in February 2021. Unproductive
costs are recognised within cost of sales but excluded from adjusted
production costs.
16 (#_ftnref16) Cash and other liquid funds are disclosed in note 18(c) to
the consolidated financial statements.
17 (#_ftnref17) Cash and other liquid funds are disclosed in note 18(c) to
the consolidated financial statements.
18 (#_ftnref18) Net debt is calculated as debt at 30 June 2022 less Cash and
other liquid funds at 30 June 2022 divided by the EBITDA generated in the last
12 months.
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