REG - Fresnillo Plc - Full Year 2016 Preliminary Results <Origin Href="QuoteRef">FRES.L</Origin> - Part 5
28/02/2017 07:08
- Part 5: For the preceding part double click ID:nRSb0000Yd
capitalised as part of construction in progress.
The table below details construction in progress by operating mine
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Saucito 45,197 2,312
Herradura 37,740 36,868
Noche Buena 15,985 3,354
Ciénega 17,348 13,280
Fresnillo 32,703 7,109
San Julián 270,154 431,864
Other 80,158 66,836
499,285 561,623
During the year ended 31 December 2016, the Group capitalised US$18.2 million of borrowing costs within construction in
progress (2015: US$ 11.1). Borrowing costs were capitalised at the rate of 5.78% (2015: 5.78%).
Sensitivity analysis
As at 31 December 2016 and 2015, the carrying amount of mining assets was fully supported by the higher of value in use and
fair value less cost of disposal (FVLCD) computation of their recoverable amount. Value in use and FVLCD was determined
based on the net present value of the future estimated cash flows expected to be generated from the continued use of the
CGUs. For both valuation approaches management used price assumptions of US$1,250/ounce and US$18/ounce (2015:
US$1,200/ounce and US$18/ounce) for gold and silver, respectively. Management considers that the models supporting the
carrying amounts are most sensitive to commodity price assumptions and have therefore performed a sensitivity analysis for
those CGUs, where a reasonable possible change in prices could lead to impairment. As at 31 December 2016 the carrying
amount of the Herradura mine is US$ 624.6 million, the Noche Buena mine is US$88.1 million (2015: Herradura mine US$654.2
million and Noche Buena mine US$118.8 million) and the San Julián mine US$559.2 which, commenced commercial production in
the third quarter of 2016.
The following table sets out the approximate expected impairment that would be recognised in 2016 and 2015 at hypothetical
decreases in commodity prices:
Decrease in commodity prices Herradura Noche Buena San Julian
US$ thousands US$ thousands US$ thousands
Gold Silver
Year ended 31 December
2016 Low sensitivity 10% 10% - - -
High sensitivity 15% 20% 109,603 - 84,310
2015 Low sensitivity 5% 10% - - -
High sensitivity 10% 20% 131,625 4,738 -
13. Available-for-sale financial assets
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Beginning balance 71,442 86,078
Fair value change 44,729 (14,636)
Ending balance 116,171 71,442
In 2016 no impairment has arisen based on the investment in quoted shares. During 2015, several investments in quoted
shares decreased below the cost paid by the Group therefore an impairment of US$2.9 million was recognised as other
expenses in the income statement.
The fair value of the available-for-sale financial assets is determined by reference to published price quotations in an
active market.
14. 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 ounce for the year ended 31 December 2016 was $5.15 per ounce (2015: $5.10 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 2016 total proceeds received in cash were US$47.5 million (2015: US$39.4 million)
of which, US$2.8 million was in respect of proceeds receivable as at 31 December 2015 (2014: US$6.9 million). Cash received
in respect of the year of US$44.8 million (2015: US$32.5 million) corresponds to 3.8 million ounces of payable silver
(2015: 3.6 million ounces). As at 31 December 2016, a further US$5.9 million (2015: US$2.8 million) of cash corresponding
to 538,756 ounces of silver is due (2015: 317,521 ounces).
The US$133.5 million unrealised gain recorded in the income statement (2015: US$27.7 million gain) resulted from the
updating of assumptions used to value the Silverstream contract. The most significant of these were the increase in the
Sabinas mine silver reserves and resources, the unwinding of the discount and the difference between the payments already
received in 2016 and payments estimated in the valuation model as of 31 December 2015.
A reconciliation of the beginning balance to the ending balance is shown below:
2016 2015
US$ thousands US$ thousands
Balance at 1 January: 384,771 392,276
Cash received in respect of the year (44,796) (32,456)
Cash receivable (5,974) (2,769)
Remeasurement gains recognised in profit and loss 133,528 27,720
Balance at 31 December 467,529 384,771
Less - Current portion 28,718 26,607
Non-current portion 438,811 358,164
See note 30 for further information on the inputs that have a significant effect on the fair value of this derivative, see
note 31 for further information relating to market and credit risks associated with the Silverstream asset.
15. Inventories
As at 31 December
2016 2015
US$ thousands US$ thousands
Finished goods1 5,736 1,711
Work in progress2 189,047 251,900
Ore stockpile3 18,253 -
Operating materials and spare parts 70,348 73,104
283,384 326,715
Accumulated write-down of work in progress inventory4 (2,269) (22,578)
Allowance for obsolete and slow-moving inventories (4,265) (3,562)
Balance as 31 December at lower of cost and net realisable value 276,850 300,575
Less - Current portion 187,499 224,200
Non-current portion5 89,351 76,375
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 Ore stockpile includes ore mineral obtained during the development phase at San Julián.
4 Corresponds to ore inventory of the Soledad-Dipolos mine resulting from net realisable value calculations. (31 December
2015: Corresponds to ore inventory at Noche Buena and Soldead-Dipolos)
5 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$1,042.4 million (2015: US$1,001.0 million). The
adjustment to the net realisable value allowance against work-in-progress inventory decreased US$20.3 million during the
year (2015: US$5.0 million increase). The adjustment to the allowance for obsolete and slow-moving inventory recognised as
an expense was US$0.7 million (2015: US$0.9 million).
16. Trade and other receivables
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Trade and other receivables from related parties (note 27)1 189,619 115,805
Value Added Tax receivable 70,426 99,948
Advances and other receivable from contractors 14,651 13,641
Other receivables from related parties (note 27) 5,973 2,769
Loans granted to contractors 1,401 2,595
Other receivables arising on the sale of fixed assets 386 759
Other receivables 4,693 2,775
287,149 238,292
Provision for impairment of 'other receivables' (471) (300)
Trade and other receivables classified as current assets 286,678 237,992
Other receivables classified as non-current assets:
Loans granted to contractors 990 2,289
990 2,289
287,668 240,281
1 Trade receivables from related parties' includes the fair value of embedded derivatives arising due to provisional
pricing in sales contracts of US$(2.8) million as at 31 December 2016 (2015: US$(0.5) million).
Trade receivables are shown net of any corresponding advances, are non-interest bearing and generally have payment terms of
46 to 60 days.
Loans granted to contractors bear interest of between LIBOR plus 1.5% to LIBOR plus 3% and mature over two years.
The total receivables denominated in US$ were US$206.8 million (2015: US$127 million), and in pesos US$80.9 million (2015:
US$113.3 million).
As of 31 December for each year presented, with the exception of 'other receivables' in the table above, all trade and
other receivables were neither past due nor impaired. The amount past due and considered as impaired as of 31 December 2016
is US$0.5 million (2015: US$0.3 million).
In determining the recoverability of receivables, the Group performs a risk analysis considering the type and age of the
outstanding receivable and the credit worthiness of the counterparty, see note 31(b).
17. Cash and cash equivalents and short term investments
The Group considers cash and cash equivalents and short term investments when planning its operations and in order to
achieve its treasury objectives.
As at 31 December
2016 2015
US$ thousands US$ thousands
Cash at bank and on hand 2,592 4,104
Short-term deposits 709,362 377,316
Cash and cash equivalents 711,954 381,420
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 four 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.
As at 31 December
2016 2015
US$ thousands US$ thousands
Short-term investments 200,000 118,718
Short-term investments are made for fixed periods no longer than four months and earn interest at fixed rates without an
option for early withdrawal. As at 31 December 2016 short-term investments are held in fixed-term bank deposits of
US$200,000 (31 December 2015: US$118,718).
18. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
2016 2015
Class of share Number Amount Number Amount
Ordinary Shares each of US$0.50 1,000,000,000 $500,000,000 1,000,000,000 $500,000,000
Sterling Deferred Ordinary Shares each of £1.00 50,000 £50,000 50,000 £50,000
Issued share capital of the Company is as follows:
Ordinary Shares Sterling Deferred Ordinary Shares
Number US$ Number £
At 1 January 2015 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2015 736,893,589 $368, 545,586 50,000 £50,000
At 31 December 2016 736,893,589 $368, 545,586 50,000 £50,000
As at 31 December 2016 and 2015, all issued shares with a par value of US$0.50 each are fully paid. The rights and
obligations attached to these shares are governed by law and the Company's Articles of Association. Ordinary shareholders
are entitled to receive notice and to attend and speak at any general meeting of the Company. There are no restrictions on
the transfer of the Ordinary shares.
The Sterling Deferred Ordinary Shares only entitle the shareholder on winding up or on a return of capital to payment of
the amount paid up after repayment to Ordinary Shareholders. The Sterling Deferred Ordinary Shares do not entitle the
holder to payment of any dividend, or to receive notice or to attend and speak at any general meeting of the Company. The
Company may also at its option redeem the Sterling Deferred Ordinary Shares at a price of £1.00 or, as custodian, purchase
or cancel the Sterling Deferred Ordinary Shares or require the holder to transfer the Sterling Deferred Ordinary Shares.
Except at the option of the Company, the Sterling Deferred Ordinary Shares are not transferrable.
Reserves
Share premium
This reserve records the consideration premium for shares issued at a value that exceeds their nominal value.
Capital reserve
The capital reserve arose as a consequence of the Pre-IPO Reorganisation as a result of using the pooling of interest
method.
Hedging reserve
This reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be
an effective hedge, net of tax. When the hedged transaction occurs, the gain or the loss is transferred out of equity to
the income statement or the value of other assets.
Available-for-sale financial assets reserve
This reserve records fair value changes on available-for-sale investments, net of tax. On disposal or on impairment, the
cumulative changes in fair value are recycled to the income statement.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the
financial information of entities with a functional currency different to that of the presentational currency of the
Group.
Retained earnings/accumulated losses
This reserve records the accumulated results of the Group, less any distributions and dividends paid.
19. Dividends declared and paid
The dividends declared and paid during the years ended 31 December 2016 and 2015 are as follows:
US cents per Amount
Ordinary Share US$ thousands
Year ended 31 December 2016
Final dividend for 2015 declared and paid during the year1 3.3 24,686
Interim dividend for 2016 declared and paid during the year2 8.6 63,373
11.9 88,059
Year ended 31 December 2015
Final dividend for 2014 declared and paid during the year3 3.0 22,107
Interim dividend for 2015 declared and paid during the year4 2.1 15,475
5.1 37,582
1 This dividend was approved by the Board of Directors on 3 May 2016 and paid on 9 May 2016.
2 This dividend was approved by the Board of Directors on 1 August 2016 and paid on 9 September 2016.
3 This dividend was approved by the Board of Directors on 18 May 2015 and paid on 22 May 2015.
4 This dividend was approved by the Board of Directors on 3 August 2015 and paid on 10 September 2015.
20. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800 million aggregate principal amount of 5.500% Senior Notes
due 2023 (the "notes").
Movements in the year in the debt recognised in the balance sheet are as follows:
As at 31 December
2016 US$ thousands 2015 US$ thousands
Opening balance 797,032 796,160
Accrued interest 46,267 46,267
Interest paid1 (46,267) (46,267)
Amortisation of discount and transaction costs 995 872
Closing balance 798,027 797,032
1 Accrued interest is payable semi-annually on 13 May and 13 November.
The Group has the following restrictions derived from the issuance of the senior notes (the Notes):
Change of control:
Should the rating of the senior notes be downgraded as a result of a change of control (defined as the sale or transfer of
35% or more of the common shares; the transfer of all or substantially all the assets of the Group; starting a dissolution
or liquidation process; or the loss of the majority in the board of directors) the Group is obligated to repurchase the
notes at an equivalent price of 101% of their nominal value plus the interest earnt at the repurchase date, if requested to
do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property that may have a material impact on business performance (key
assets). Nevertheless, the Group may pledge the aforementioned properties provided that the repayment of the Notes keeps
the same level of priority as the pledge on those assets.
21. 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
2016 is in a range of 6.61% to 7.74% (2015: range of 4.65% to 7.13%). Uncertainties in estimating these costs include
potential changes in regulatory requirements, decommissioning, dismantling, reclamation alternatives, timing, and the
discount, foreign exchange and inflation rates applied.
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 27 years from 31 December 2016 (4 to 21 years from 31 December 2015).
As at 31 December
2016 2015
US$ thousands US$ thousands
Opening balance 195,476 153,802
Increase to existing provision (21,745) 48,680
Effect of changes in discount rate (13,570) 7,341
Unwinding of discount 10,476 8,586
Payments (472) -
Foreign exchange (21,056) (22,933)
Closing balance 149,109 195,476
22. Pensions and other post-employment benefit plans
The Group has a defined contribution plan and a defined benefit plan.
The defined contribution plan was established as from1 July 2007 and consists of periodic contributions made by each
non-unionised worker and contributions made by the Group to the fund matching workers' contributions, capped at 8% of the
employee's annual salary.
The defined benefit plan provides pension benefits based on each worker's earnings and years of services provided by
personnel hired through 30 June 2007 as well as statutory seniority premiums for both unionised and non-unionised workers.
The overall investment policy and strategy for the Group's defined benefit plan is guided by the objective of achieving an
investment return which, together with contributions, ensures that there will be sufficient assets to pay pension benefits
and statutory seniority premiums for non-unionised workers as they fall due while also mitigating the various risks of the
plan. However, the portion of the plan related to statutory seniority premiums for unionised workers is not funded. The
investment strategies for the plan are generally managed under local laws and regulations. The actual asset allocation is
determined by current and expected economic and market conditions and in consideration of specific asset class risk in the
risk profile. Within this framework, the Group ensures that the trustees consider how the asset investment strategy
correlates with the maturity profile of the plan liabilities and the respective potential impact on the funded status of
the plan, including potential short term liquidity requirements.
Death and disability benefits are covered through insurance policies.
The following tables provide information relating to changes in the defined benefit obligation and the fair value of plan
assets:
Pension cost charge to income statement Remeasurement gains/(losses) in OCI
Balance at 1 January 2016 Service cost Net Interest Foreign Exchange Sub-total recognised in the year Benefits paid Return on plan assets (excluding amounts included in net Actuarial changes arising from changes in demographic Actuarial changes arising from changes in financial Experience adjustments Foreign exchange Sub-total included in OCI Contributions by employer Defined benefit increase due to personnel transfer Balance at 31 December 2016
interest assumptions assumptions
US$ thousands
Defined benefit obligation (32,165) (649) (1,803) 5,573 3,121 816 - (744) 2,636 1,103 - 2,995 - (144) (25,377)
Fair value of plan assets 17,631 - 927 (3,003) (2,076) (432) (552) - - - - (552) 1,570 141 16,282
Net benefit liability (14,534) (649) (876) 2,570 1,045 384 (552) (744) 2,636 1,103 - 2,443 1,570 (3) (9,095)
Pension cost charge to income statement Remeasurement gains/(losses) in OCI
Balance at 1 January 2015 Service cost Net Interest Foreign Exchange Sub-total recognised in the year Benefits paid Return on plan assets (excluding amounts included in net Actuarial changes arising from changes in demographic Actuarial changes arising from changes in financial Experience adjustments Foreign exchange Sub-total included in OCI Contributions by employer Defined benefit increase due to personnel transfer Balance at 31 December 2015
interest assumptions assumptions
US$ thousands
Defined benefit obligation (33,664) (1,024) (1,981) 5,085 2,080 1,031 - (577) (1,160) 170 - (1,567) - (45) (32,165)
Fair value of plan assets 19,826 - 1,121 (2,954) (1,833) (758) (706) - - - - (706) 1,065 37 17,631
Net benefit liability (13,838) (1,024) (860) 2,131 247 273 (706) (577) (1,160) 170 - (2,273) 1,065 (8) (14,534)
Of the total defined benefit obligation, US$6.7 million (2015: US$8.6 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions to the plan for the next annual reporting period are
nil.
The principal assumptions used in determining pension and other post-employment benefit obligations for the Group's plans
are shown below:
As at 31 December
2016 2015
% %
Discount rate 7.52 6.79
Future salary increases (NCPI) 5.0 5.0
The mortality assumptions are that for current and future pensioners, men and women aged 65 will live on average for a
further 22.3 and 25.5 years respectively (2015: 20.2 years for men and 23.4 for women). The weighted average duration of
the defined benefit obligation is 12.1 years (2015: 11.7 years).
The fair values of the plan assets were as follows:
As at 31 December
2016 2015
US$ thousands US$ thousands
Government debt 746 1,084
State owned companies 3,914 3,017
Mutual funds (fixed rates) 11,622 13,530
16,282 17,631
The pension plan has not invested in any of the Group's own financial instruments nor in properties or assets used by the
Group.
A quantitative sensitivity analysis for significant assumptions as at 31 December 2016 is as shown below:
Assumptions Discount rate Future salary increases(NCPI) Life expectancy of pensioners
Sensitivity Level 0.5% Increase 0.5% Decrease 0.5% increase 0.5% decrease + 1 Increase
(Decrease)/increase to the net defined benefit obligation (US$ thousands) (1,352) 1,491 552 239 186
The sensitivity analysis above has been determined based on a method that extrapolates the impact on net defined benefit
obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The pension
plan is not sensitive to future changes in salaries other than in respect of inflation.
23. Trade and other payables
As at 31 December
2016 2015
US$ thousands US$ thousands
Trade payables 68,216 53,303
Other payables to related parties (note 27) 3,173 4,137
Accrued expenses 16,797 15,988
Other taxes and contributions 33,447 16,202
121,633 89,630
Trade payables are mainly for the acquisition of materials, supplies and contractor services. These payables do not accrue
interest and no guarantees have been granted. The fair value of trade and other payables approximate their book values.
The Group's exposure to currency and liquidity risk related to trade and other payables is disclosed in note 31.
24. Commitments
A summary of capital expenditure commitments by operating mine is as follows:
As at 31 December
2016 2015
US$ thousands US$ thousands
Saucito 32,933 29,131
Herradura 29,544 13,897
Noche Buena 3,677 285
Ciénega 6,454 7,685
Fresnillo 12,079 6,181
San Julián 39,895 86,301
Other1 20,133 2,029
144,715 145,509
1 Other includes commitments from Minera Bermejal, S. de R.L. de C.V. and Minera Juanicipio, S.A. de C.V. (2015: Minera
Juanicipio, S.A. de C.V.)
25. Operating leases
(a) Operating leases as lessor
Future minimum rentals receivable under non-cancellable operating leases are as follows:
As at 31 December
2016 2015
US$ thousands US$ thousands
Within one year 1,095 1,984
After one year but not more than five years 1,875 487
2,970 2,471
(b) Operating leases as lessee
The Group has financial commitments in respect of non-cancellable operating leases for land, offices and equipment. These
leases have renewal terms at the option of the lessee with future lease payments based on market prices at the time of
renewal. There are no restrictions placed upon the Group by entering into these leases.
The Group has put in place several arrangements to finance mine equipment through loans and the sale of mine equipment to
contractors. In both cases, contractors are obligated to use these assets in rendering services to the Group as part of the
mining work contract, during the term of financing or credit, which ranges from two to six years. The Group considers that
the related mining work contracts contain embedded operating leases.
The future minimum rental commitments under these leases are as follows:
As at 31 December
2016 2015
US$ thousands US$ thousands
Within one year 6,790 2,720
After one year but not more than five years 3,399 3,115
10,189 5,835
As at 31 December
2016 2015
US$ thousands US$ thousands
Minimum lease payments expensed in the year 4,142 8,008
26. Contingencies
As of 31 December 2016, 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.
− During 2015 the Mexican tax authorities (SAT) commenced a tax audit at Minera Penmont relating to the fiscal years
2012 and 2013. The Group considers that it has provided all documentation required to demonstrate that all non-taxable
income and tax deductions taken over these years are appropriate. SAT is currently evaluating the information provided by
the company. The company has formally filed a writ before the Mexican Taxpayers Ombudsman (PRODECON per its acronym in
Spanish) in order to request a conclusive agreement in this matter.
− 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 December 2016 and
going forward.
− 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 before 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 the Soledad-Dipolos mine are 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 Agrarian Magistrate noted in 2013 that certain remediation activities were necessary 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 state they were
in before Penmont's occupation.
− In the opinion of the Company, this procedural order was excessive since this level of remediation was not part of
the original agrarian ruling and also because the procedural order appeared not to consider the fact that Penmont conducted
its activities pursuant to valid mining concessions and environmental impact permits. In December 2016, the Unitarian
Agrarian Court issued a subsequent procedural order in which the Court recognised that Penmont complied with the agrarian
ruling by having returned the land in dispute and, furthermore, that remediation activities are to be conducted in
accordance with Federal environmental guidelines and regulations, as supervised by the competent Federal authorities.
Remediation activities in this respect are pending as the agrarian members have not yet permitted Penmont physical access
to the lands. Penmont has already presented a conceptual mine closure and remediation plan before the Unitarian Agrarian
Court in respect of the approximately 300 hectares where Penmont conducted mining activities. The agrarian community Ejido
El Bajio has appealed this procedural order from December 2016 and the final result of the appeal is pending.
− In connection with the foregoing matters, and as previously reported by the Company in prior years, members of the
El Bajio agrarian community presented a separate claim before the Unitarian Agrarian Court, alleging US$65 million in
damages as well as requesting the cancellation of Penmont's mining concessions and environmental permits within the El
Bajio lands. In April 2016, the Unitarian Agrarian Court issued a final and definitive ruling on the matter rejecting the
claim, which is consistent with the Company's view, as previously reported, that this lawsuit had no merit.
− In addition, and as also previously reported by the Company, claimants in the El Bajio matter 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. As previously reported, the Unitarian Agrarian Court issued rulings
declaring such occupation agreements over those land parcels to be null and void and that Penmont must remediate such lands
to the state that they were in before Penmont's occupation as well as returning any minerals extracted from this area.
Given that Penmont has not conducted significant mining operations or has specific geological interest in these land
parcels, any contingency relating to such land parcels is not considered material by the Company. The case relating to the
claims over these land parcels remains subject to finalisation.
− Various claims and counterclaims have been made between the relevant parties in the El Bajio matter. There remains
significant uncertainty as to the finalisation and ultimate outcome of these legal proceedings.
27. Related party balances and transactions
The Group had the following related party transactions during the years ended 31 December 2016 and 2015 and balances as at
31 December 2016 and 2015.
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
As at 31 December As at 31 December
2016 2015 2016 2015
US$ thousands US$ thousands US$ thousands US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 189,584 115,786 301 130
Other:
Industrias Peñoles, S.A.B. de C.V. 5,974 2,769 - -
Servicios Administrativos Peñoles, S.A. de C.V. - - 1,612 366
Servicios Especializados Peñoles, S.A. de C.V. - - 36 1,804
Fuerza Eólica del Istmo S.A. de C.V. - - - 916
Other 34 19 1,224 921
Sub-total 195,592 118,574 3,173 4,137
Less-current portion 195,592 118,574 3,173 4,137
Non-current portion - - - -
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 467,529 384,771
The Silverstream contract can be settled in either silver or cash. Details of the Silverstream contract are provided in
note 14.
(b) Principal transactions with affiliates, including Industrias Peñoles S.A.B de C.V., the Company's parent, are as
follows:
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Income:
Sales:1
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 1,905,503 1,458,413
Other income 2,381 982
Total income 1,907,884 1,459,395
1 Figures do not include hedging gains as the derivative transactions are not undertaken with related parties. Figures are
net of the adjustment for treatment and refining charges of US$141.1 million (2015: US$142.48 million) and include sales
credited to development projects of US$1.6 million (2015: US$17.9 million).
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Expenses:
Administrative services2:
Servicios Administrativos Peñoles, S.A. de C.V.3 24,309 23,655
Servicios Especializados Peñoles, S.A. de C.V. 16,015 17,701
40,324 41,356
Energy:
Termoelectrica Peñoles, S. de R.L. de C.V. 16,011 20,332
Fuerza Eólica del Istmo S.A. de C.V. 1,794 6,713
17,805 27,045
Operating materials and spare parts:
Wideco Inc 5,254 6,368
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 3,140 3,320
7,347 9,688
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 8,268 3,860
Property, plant and equipment
Equipos Industriales Naica, S.A. de C.V. - 1,065
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 7,155 8,382
Other expenses: 2,085 2,693
Total expenses 84,031 94,089
2 Includes US$4.7 million (2015: US$4.1 million) corresponding to expenses reimbursed.
3 Includes US$9.5 million (2015: US$8.2 million) relating to engineering costs that were capitalised.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the Executive Committee who receive
remuneration.
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Salaries and bonuses 2,416 3,311
Post-employment benefits 208 257
Other benefits 345 379
Total compensation paid in respect of key management personnel 2,969 3,947
Year ended 31 December
2016 2015
US$ thousands US$ thousands
Accumulated accrued defined pension entitlement 4,237 4,859
This compensation includes amounts paid to directors disclosed in the Directors' Remuneration Report.
The accumulated accrued defined pension entitlement represents benefits accrued at the time the benefits were frozen. There
are no further benefits accruing under the defined benefit scheme in respect of current services.
28. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31 December 2016 and 2015 are as follows:
Year ended 31 December
Class of services 2016 2015
US$ thousands US$ thousands
Fees payable to the Group's auditor for the audit of the Group's annual accounts 1,149 1,274
Fees payable to the Group's auditor and its associates for other services as follows:
The audit of the Company's subsidiaries pursuant to legislation 222 338
Audit-related assurance services 350 328
Tax compliance services 21 24
Tax advisory services - 16
Other assurance services - -
Total 1,742 1,980
29. Notes to the consolidated statement of cash flows
Notes 2016 2015
US$ thousands US$ thousands
Reconciliation of profit for the year to net cash generated from operating activities
Profit for the year 424,962 69,390
Adjustments to reconcile profit for the period to net cash inflows from operating activities:
Depreciation and amortisation 5 346,502 331,209
Employee profit sharing 7 15,145 13,170
Deferred income tax 10 102,549 47,263
Current income tax expense 10 190,729 95,701
Loss on the sale of property, plant and equipment and other assets 8 1,103 3,757
Other losses 981 3,353
Write-off of property, plant and equipment 3,005 -
Impairment of available-for-sale financial assets 8 - 2,896
Net finance
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