REG - Fresnillo Plc - Financial Results for the Year Ended 31 Dec 2015 <Origin Href="QuoteRef">FRES.L</Origin> - Part 7
01/03/2016 07:12
- Part 7: For the preceding part double click ID:nRSA5523Qf
changes in fair value of commodity derivatives financial instruments
contracts and embedded derivatives in sales.
Year ended 31 December Increase/(decrease) in commodity prices Effect on Effect on equity:
profit before tax: increase/ increase/
(decrease) (decrease)
US$ thousands US$ thousands
Gold Silver Zinc Lead
2015 15% 20% 25% 20% (51,326) 50,764
(10%) (15%) (25%) (15%) 52,915 136,469
2014 10% 20% 15% 10% (93,922) (791)
(10%) (20%) (10%) (15%) 49,405 49,612
Commodity price risk - Silverstream
Future silver price is one of the inputs to the Silverstream valuation model. The following table demonstrates the
sensitivity of the Silverstream contract valuation to a reasonably possible change in future silver prices, with all other
inputs to the Silverstream valuation model held constant. It is assumed that the same percentage change in silver price is
applied to all applicable periods in the valuation model. There is no impact on the Group's equity, other than the
equivalent change in retained earnings.
Year ended 31 December Increase/ Effect on profit before tax: increase/
(decrease) in (decrease)
silver price US$ thousands
2015 20% 104,659
(15%) (78,494)
2014 20% 103,125
(20%) (103,125)
Interest rate risk
The Group is exposed to interest rate risk from the possibility that changes in interest rates will affect future cash
flows or the fair values of its financial instruments, principally relating to the cash balances and the Silverstream
contract held at the balance sheet date. Interest-bearing loans and loans from related parties are at a fixed rate,
therefore the possibility of a change in interest rate only impacts its fair value but not its carrying amount. Therefore,
interest-bearing loans and loans from related parties are excluded from the table below.
The following table demonstrates the sensitivity of financial assets and financial liabilities (excluding Silverstream) to
a reasonably possible change in interest rate applied to a full year from the balance sheet date. There is no impact on the
Group's equity other than the equivalent change in retained earnings.
Year ended 31 December Basis point increase/ Effect on profit before tax: increase/
(decrease) (decrease)
in interest rate US$ thousands
2015 50 2,525
(10) (505)
2014 25 1,140
(10) (456)
The sensitivity shown in the table above primarily relates to the full year of interest on cash balances held as at the
year end.
Interest rate risk - Silverstream
Future interest rates are one of the inputs to the Silverstream valuation model. The following table demonstrates the
sensitivity of the Silverstream contract valuation to a reasonably possible change in interest rates, with all other inputs
to the Silverstream valuation model held constant. It is assumed that the same change in interest rate is applied to all
applicable periods in the valuation model. There is no impact on the Group's equity, other than the equivalent change in
retained earnings.
Year ended 31 December Basis point increase/ Effect on profit before tax: increase/
(decrease) (decrease)
in interest rate US$ thousands
2015 50 (17,853)
(10) 3,729
2014 25 (15,067)
(10) 3,123
100 (24,144)
Inflation rate risk
Inflation rate risk-Silverstream
Future inflation rates are one of the inputs to the Silverstream valuation model. The following table demonstrates the
sensitivity of the Silverstream contract to a reasonably possible change in the inflation rate, with all other inputs to
the Silverstream valuation model held constant. It is assumed that the same change in inflation is applied to all
applicable periods in the valuation model. There is no impact on the Group's equity, other than the equivalent change in
retained earnings.
Year ended 31 December Basis point (increase/ Effect on profit before tax: increase/
(decrease) (decrease)
in inflation rate US$ thousands
2015 100 389
(100) (382)
2014 100 697
(100) (680)
Equity price risk
The Group has exposure to changes in the price of equity instruments that it holds as available-for-sale assets.
The following table demonstrates the sensitivity of available-for-sale assets to a reasonably possible change in market
price of these equity instruments, reflecting the effect on the Group's profit before tax and equity:
Year ended 31 December Increase/ Effect on Effect on equity: increase/
(decrease) profit before tax: increase/ (decrease)
in equity price (decrease) US$ thousands
(US$ thousands)
2015 50% - 35,721
(30%) (5,135) (16,297)
2014 60% - 51,157
(40%) (16,983) (17,632)
(b) Credit risk
Exposure to credit risk arises as a result of transactions in the Group's ordinary course of business and is applicable to
all financial assets and derivative financial instruments. The financial assets are trade and other receivables, cash and
cash equivalents, short-term investments, the Silverstream contract and available-for-sale financial assets.
The Group's policies are aimed at minimising losses as a result of counterparties' failure to honour their obligations.
Individual exposures are monitored with customers subject to credit limits to ensure that the Group's exposure to bad debts
is not significant. The Group's exposure to credit risk is influenced mainly by the individual characteristics of each
counter party. The Group's financial assets are with counterparties with what the Group considers to have an appropriate
credit rating. As disclosed in note 28, the counterparties to a significant proportion of these financial assets are
related parties. At each balance sheet date, the Group's financial assets were neither impaired nor past due, other than
'Other receivables' as disclosed in note 17. The Group's policies are aimed at minimising losses from foreign currency
hedging contracts. The Company's foreign currency hedging contracts are entered into with large financial institutions with
strong credit ratings.
The Group has a high concentration of trade receivables with one counterparty Met-Mex Peñoles, the Group's primary customer
throughout 2015 and 2014. A further concentration of credit risk arises from the Silverstream contract. Both Met-Mex and
the counterparty to the Silverstream contract are subsidiaries in the Peñoles group which currently owns 75 per cent of the
shares of the Company and is considered by management to be of appropriate credit rating.
The Group's surplus funds are managed by Servicios Administrativos Fresnillo, S.A. de C.V., which manages cash and cash
equivalents, including short-term investments investing in a number of financial institutions. Accordingly, on an ongoing
basis the Group deposits surplus funds with a range of financial institutions, depending on market conditions. In order to
minimize exposure to credit risk, the Group only deposits surplus funds with financial institutions with a credit rating of
MX-1 (Moody´s) and mxA-1+ (Standard and Poor's) and above. As at 31 December 2015, the Group had concentrations of credit
risk as 61 percent of surplus funds were deposited with one financial institution of which 96 percent was held in short
term Mexican government paper.
The maximum credit exposure at the reporting date of each category of financial asset above is the carrying value as
detailed in the relevant notes. See note 14 for the maximum credit exposure to available-for-sale financial assets, note 18
for short-term investments and cash and cash equivalents and note 28 for related party balances with Met-Mex. The maximum
credit exposure with relation to the Silverstream contract is the value of the derivative as at 31 December 2015, being
US$384.8 million (2014: US$392.2 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using projected cash flows from operations and by monitoring the
maturity of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted
payments.
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2015
Interest-bearing loans (note 21) 46,267 92,534 92,534 938,801 1,170,137
Trade and other payables 57,440 - - - 57,440
Derivative financial instruments - liabilities 342,108 730,303 317,359 1,389,770
Embedded derivatives within sales contracts - liability 532 - - - 532
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2014
Interest-bearing loans (note 21) 46,267 92,534 92,534 985,068 1,216,403
Trade and other payables 70,340 - - - 70,340
Derivative financial instruments - liabilities 261,051 - - - 261,051
Embedded derivatives within sales contracts - liability 2,911 - - - 2,911
1,262,670
The payments disclosed for financial derivative instruments in the above table are the gross undiscounted cash flows.
However, those amounts may be settled gross or net. The following table shows the corresponding estimated inflows based on
the contractual terms:
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2015
Inflows 347,301 746,924 319,165 - 1,413,390
Outflows 342,108 730,303 317,359 - 1,389,770
Net 5,193 16,621 1,806 - 23,620
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2014
Inflows 239,238 - - - 239,238
Outflows 261,051 - - - 261,051
Net (21,813) - - - (21,813)
The above liquidity tables include expected inflows and outflows from currency option contracts which the Group expects to
be exercised during 2016 as at 31 December 2015 and in 2015 as at 31 December 2014, either by the Group or counterparty.
Management considers that the Group has adequate current assets and forecast cash from operations to manage liquidity risks
arising from current liabilities and non-current liabilities.
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 certain 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 available-for-sale financial assets. 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.
This information is provided by RNS
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