REG - Fresnillo Plc - Financial Results for the Year Ended Dec 2014 <Origin Href="QuoteRef">FRES.L</Origin> - Part 5

FresnilloAnnouncement

04/03/2015 07:24

- Part 5: For the preceding part double click  ID:nRSD4641Gd 

Endeavor Mining's share decreased below the cost paid by the Group. This
decrease has been consistent during the past 12-month period, which is considered to be prolonged; therefore, an impairment
of US$982 thousands was recognised as other expenses in the income statement. At December 2013 the published quoted price
of Orex Minerals' share decreased below the cost paid by the Group therefore an impairment of US$2.1 million was recognized
as other expenses in the income statement. At 31 December 2014 based on the published quoted price a reversal of impairment
of US$192 thousands was recognized in other comprehensive income of the year. 
 
The fair value of the available-for-sale financial assets is determined by reference to published price quotations in an
active market. 
 
11. 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
$2.00 in years one to five and $5.00 thereafter (subject to an inflationary adjustment commencing on 31 December 2013) is
payable to Peñoles. The cash payment per once for the year ended 31 December 2014 was $5.05 per ounce (2013: $5 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 per ounce of shortfall. 
 
The Silverstream contract represents a derivative financial instrument which has been recorded at fair value and classified
within non-current and current assets as appropriate. Changes in the contract's fair value, other than those represented by
the realisation of the asset through the receipt of either cash or refined silver, are charged or credited to the income
statement. In the year ended 31 December 2014 total proceeds received in cash were US$58.7 million (2013: US$63.8 million)
of which, US$8.1 million was in respect of proceeds receivable as at 31 December 2013 (2013: US$11.0 million). Cash
received in respect of the year of US$50.6 million (2013: US$52.8 million) corresponds to 4.1 million ounces of payable
silver (2013: 3.5 million ounces).  As at 31 December 2014, a further US$6.9 million (2013: US$8.1 million) of cash
corresponding to 638,681 ounces of silver is due (2013: 560,465 ounces). 
 
The most significant drivers of the US$77.1 million unrealised gain taken to income statement (2013: US$54.0 million loss)
were the updating of assumptions used to value the Silverstream contract. The most significant of these were an increase of
the Sabinas mine silver reserves, the decrease of the reference discount rate (LIBOR)  and the difference between the
payments already received in 2014 and payments estimated in the valuation model as of 31 December 2013. These were
partially offset by a decrease in the forward price of silver which was lower than the previous year. 
 
A reconciliation of the beginning balance to the ending balance is shown below: 
 
                                                             2014            2013            
                                                             US$ thousands   US$ thousands   
 Balance at 1 January:                                       372,846         487,779         
 Cash received in respect of the year                        (50,650)        (52,830)        
 Cash receivable                                             (6,974)         (8,127)         
 Remeasurement gains/(losses) recognised in profit and loss  77,054          (53,976)        
 Balance at 31 December                                      392,276         372,846         
 Less - Current portion                                      33,311          38,763          
 Non-current portion                                         358,965         334,083         
                                                                                             
 
 
12. Inventories 
 
                                                                   As at 31 December  
                                                                   2014               2013            
                                                                   US$ thousands      US$ thousands   
 Finished goods1                                                   2,094              2,180           
 Work in progress2                                                 252,826            130,451         
 Operating materials and spare parts                               70,904             77,854          
                                                                   325,824            210,485         
 Write-down of work in progress inventory3                         (17,565)           -               
 Allowance for obsolete and slow-moving inventories                (2,647)            (2,344)         
 Balance as 31 December at lower of cost and net realisable value  305,612            208,141         
 Less - Current portion                                            221,200            208,141-        
 Non-current portion4                                              84,412             -               
                                                                                                      
 
 
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. 
 
3    Corresponds to ore inventory of Noche Buena and Soledad-Dipolos mines. 
 
4    The non-current inventories are expected to be processed more than 12 months from the reporting date. 
 
Concentrates are a product containing sulphides with variable content of precious and base metals and are sold to smelters
and/or refineries. Doré is an alloy containing a variable mixture of gold and silver that is delivered in bar form to
refineries. This content once processed by the smelter and refinery is sold to customers in the form of refined products. 
 
The amount of inventories recognised as an expense in the year was US$846.4 million (2013: US$777.8 million). The amount of
write down of inventories recognised as an expense was US$18.2 million (2013: US$0.9 million). 
 
13. Provision for mine closure cost 
 
The provision represents the discounted values of the estimated cost to decommission and rehabilitate the mines at the
estimated date of depletion of mine deposits. The discount rate used in the calculation of the provision as at 31 December
2014 is in a range of 3.22% to 7.51% (2013: 7%). Uncertainties in estimating these costs include potential changes in
regulatory requirements, decommissioning, dismantling, and reclamation alternatives and timing, the levels of discount
foreign exchange and inflation rates. 
 
Mexican regulations regarding the decommissioning and rehabilitation of mines are limited and less developed in comparison
to regulations in many other jurisdictions. It is the Group's intention to rehabilitate the mines beyond the requirements
of Mexican law, and estimated costs reflect this level of expense. The Group intends to fully rehabilitate the affected
areas at the end of the life of the mines. 
 
The provision is expected to become payable at the end of the production life of each mine, based on the reserves and
resources, which ranges from 3 to 19 years from 31 December 2014 (3 to 30 years from 31 December 2013). 
 
                                 As at 31 December  
                                 2014               2013            
                                 US$ thousands      US$ thousands   
 Opening balance                 127,008            104,712         
 Increase to existing provision  33,973             15,341          
 Unwinding of discount           8,725              7,507           
 Payments                        (452)              -               
 Foreign exchange                (15,452)           (552)           
 Closing balance                 153,802            127,008         
                                                                    
 
 
14. Contingencies 
 
As of 31 December 2014, the Group has the following contingencies: 
 
-      The Group is subject to various laws and regulations which, if not observed, could give rise to penalties. 
 
-      Tax periods remain open to review by the Mexican tax authorities in respect of income taxes for five years following
the date of the filing of corporate income tax returns, during which time the authorities have the right to raise
additional tax assessments including penalties and interest. Under certain circumstances the reviews may cover longer
periods. 
 
In addition, because a number of tax periods remain open to review by the tax authorities, there is a risk that
transactions, and in particular related party transactions, that have not been challenged in the past by the authorities,
may be challenged by them in the future, and this may result in the raising of additional tax assessments plus penalties
and interest. It is not practical to determine the amount of any such potential claims or the likelihood of any
unfavourable outcome. 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. 
 
-      On 8 May 2008, the Company and Peñoles entered into the Separation Agreement (the 'Separation Agreement'). This
agreement relates to the separation of the Group and the Peñoles Group and governs certain aspects of the relationship
between the Fresnillo Group and the Peñoles Group following the initial public offering in May 2008 ('Admission'). The
Separation Agreement provides for cross-indemnities between the Company and Peñoles so that, in the case of Peñoles, it is
held harmless against losses, claims and liabilities (including tax liabilities) properly attributable to the precious
metals business of the Group and, in the case of the Company, it is held harmless by Peñoles against losses, claims and
liabilities which are not properly attributable to the precious metals business. Save for any liability arising in
connection with tax, the aggregate liability of either party under the indemnities shall not exceed US$250 million in
aggregate. 
 
-      Peñoles has agreed to indemnify the Fresnillo Group in relation to (i) any tax charge, subject to certain
exceptions, the Company may incur as a result of the Pre-IPO Reorganisation (including as a result of a transaction
following Admission of a member of the Fresnillo Group, provided that Peñoles has confirmed that the proposed transaction
will not give rise to a tax charge, or as a result of a transaction of a member of the Peñoles Group on or after
Admission), the Global Offer or Admission and (ii) certain tax aspects of certain other pre-Admission transactions.
Peñoles' liability under these indemnities and in respect of general tax liabilities arising pre-Admission which are not
properly attributable to the precious metals business of the Fresnillo Group shall not exceed US$500 million. If a member
of the Fresnillo Group forming part of Peñoles' tax consolidation pays an intra-group dividend in excess of its net income
tax account ('Cuenta de Utilidad Fiscal Neta' o 'CUFIN') account after Admission and is relieved of tax as a result of the
consolidation, it is required to pay Peñoles an amount in respect of that tax. 
 
-      On 30 November 2012, the Mexican government enacted a new federal labour law.  During 2014 management implemented
certain actions as a part of an ongoing process in order to manage the exposure resulting from the issuance of the new
labour law including any potential impacts on the operations and financial position of the Group, however management does
not expect any potential contingency or significant effect on the Group's financial statements as at 31 December2014and
going forward. 
 
-      In 2009 five members of the El Bajio agrarian community in the state of Sonora, who claimed rights over certain
surface land in the proximity of the operations of Minera Penmont ("Penmont"), submitted a legal claim with the Unitarian
Agrarian Court (Tribunal Unitario Agrario) of Hermosillo Sonora, to have Penmont vacate an area of this surface land. The
land in dispute encompassed a portion of surface area where part of the operations of Soledad-Dipolos is located. Minera
Penmont's mining concessions are held by way of separate title to that relating to the surface land. The litigation
resulted in a definitive court order pursuant to which the Magistrate of the Unitarian Agrarian Court of Hermosillo,
Sonora, ordered Penmont to vacate 1,824 hectares of land in July 2013, resulting in the suspension of operations at
Soledad-Dipolos. 
 
-      In regard to the ejido El Bajio matter previously reported by the Company: 
 
In 2009 five members of the El Bajio agrarian community in the state of Sonora, who claimed rights over certain surface
land in the proximity of the operations of Minera Penmont ("Penmont"), submitted a legal claim to the Unitarian Agrarian
Court (Tribunal Unitario Agrario) of Hermosillo Sonora, to have Penmont vacate an area of this surface land. The land in
dispute encompassed a portion of surface area where part of the operations of Soledad-Dipolos is located. The litigation
resulted in a definitive court order, pursuant to which Penmont was ordered to vacate 1,824 hectares of land. The disputed
land was returned in July 2013, resulting in the suspension of operations at Soledad-Dipolos. 
 
The Magistrate noted that remediation activities are necessary to comply with relevant regulatory requirements and
requested the guidance of the Federal Environmental Agency (SEMARNAT) in this respect. The Agrarian Magistrate further
issued a procedural order in execution of his ruling determining, amongst other aspects, that Penmont must remediate the
lands to the same state that they were before Penmont's occupation. 
 
In the opinion of the Company, the procedural order is excessive since such level of remediation was not considered as part
of the original agrarian ruling and also because the procedural order appears not to consider the fact that Penmont
conducted its activities pursuant to valid mining concessions and environmental impact permits. Penmont has challenged the
procedural order before Federal courts and is awaiting resolution of this filing. Penmont conducted mining activities on
approximately 300 hectares of such lands and the remediation activities in this respect are still pending. 
 
In connection with the foregoing matters, members of the El Bajio agrarian community presented additional claims, including
a separate legal suit before the Unitarian Agrarian Court, claiming US$65 million for damages, alleging that the Group
improperly used the land affected by the court ruling, as well as requesting the cancellation of Penmont's mining
concessions and environmental permits within the El Bajio lands. Such concessions and permits are held by way of separate
title to that relating to the surface land. The claimants have not yet presented substantial evidence to support their
claim and the Group believes that these claims are without merit. Any initial ruling in this case would be subject to the
appeals process in Mexico before judicial authorities other than the Unitarian Agrarian Court of Hermosillo, Sonora. Given
the lack of evidence in support of the damages claim, the Company believes that an adverse and definitive ruling is not
probable. 
 
In addition, claimants have also presented other claims against occupation agreements they entered into with Penmont,
covering land parcels separate from the land described above. Penmont has no significant mining operations or specific
geological interest in the affected parcels and these lands are therefore not considered strategic for Penmont. 
 
Various claims and counterclaims have been made between the relevant parties in this matter including appeals that are
pending as well as criminal complaints. There is significant uncertainty relating to the finalisation and ultimate result
relating to these legal proceedings. 
 
15. Related party balances and transactions 
 
The Group had the following related party transactions during the years ended 31 December 2014 and 2013 and balances as at
31 December 2014 and 2013. 
 
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 balances 
 
                                     Accounts receivable                  Accounts payable                   Loans              
                                     As at 31 December                    As at 31 December                  As at 31 December  
                                     2014                 2013                               2014            2013                 2014            2013            
                                     US$ thousands        US$ thousands                      US$ thousands   US$ thousands        US$ thousands   US$ thousands   
 Trade:                                                                                                                                                           
 Met-Mex Peñoles, S.A. de C.V.       139,620              96,641                             619             -                    -               -               
 Loans:                                                                                                                                                           
 Newmont Mining Corporation. 1       -                    -                                  -               -                    -               40,920          
 Other:                                                                                                                                                           
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