REG - Fresnillo Plc - Full Year 2017 Preliminary Results <Origin Href="QuoteRef">FRES.L</Origin> - Part 2
27/02/2018 07:05
- Part 2: For the preceding part double click ID:nRSa9902Fa
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 cover
its production costs.
Cash cost per ounce
2017 2016 Change %
Fresnillo US$ per silver ounce 0.7 2.1 (66.2)
Saucito US$ per silver ounce 1.5 (0.4) N/A
Ciénega US$ per gold ounce (163.7) (217.2) N/A
San Julián (phase I) US$ per silver ounce (4.3) (7.8)* N/A
San Julián (phase II) US$ per silver ounce 3.9* - N/A
Herradura US$ per gold ounce 492.9 470.7 4.7
Noche Buena US$ per gold ounce 793.5 765.9 3.6
*Indicator may not be representative as it corresponds to the start-up period,
when a significant volume of ore from stock pile is processed.
The particular variations in cash cost for each mine are explained as follows:
Fresnillo: US$0.71/oz (2017) vs. US$2.09/oz (2016), (-66.3%)
The decrease in cash cost per ounce is mainly explained by: the higher
by-product credits per silver ounce, due to the increase in zinc volumes sold,
and higher lead and zinc prices (-US$1.60/oz); lower treatment and refining
charges (-US$0.26/oz); and increase in ore grade (-US$0.07/oz). This was
partly offset by higher cost per tonne (+US$0.54/oz).
Saucito: US$1.50/oz (2017) vs. -US$0.39/oz (2016), (N/A)
The increase was driven by: the higher cost per tonne (+US$1.69/oz); the
expected lower silver grade (+US$0.53/oz); and lower by-product credits per
ounce of silver resulting from the decrease in volume of gold sold
(+US$0.08/oz). These adverse effects were partly offset by lower treatment and
refining charges (-US$0.39/oz) and lower profit sharing (-US$0.03/oz).
Ciénega: -US$163.74/oz (2017) vs. -US$217.19/oz (2016), (-24.6%)
The increase in cash cost was primarily due to: the higher cost per tonne
(+US$225.41/oz); and the expected decrease in gold grade (+US$23.81/oz). These
unfavourable factors were partly offset by higher by-product credits per ounce
of gold, due to the increased volumes of silver and lead sold, and higher lead
and zinc prices (-US$179.45/oz); lower treatment and refining charges
(-US$13.40/oz); and lower profit sharing (-US$2.92/oz).
Herradura: US$492.86/oz (2016) vs. US$470.72/oz (2016), (+4.7%)
The increase in cash cost resulted from: the higher cost per tonne
(+US$29.81/oz); the lower gold grade (+US$25.95/oz); higher profit sharing
(+US$0.66/oz); and lower by-product credits per gold ounce, due to the
decreased volume of silver sold at a lower price (+US$0.61/oz). These adverse
effects were offset by: a favourable inventory valuation effect, as ounces
with a higher cost of production in the current period are mixed with the
initial lower cost of inventory affecting cost of sales (-US$34.76/oz); and
lower treatment and refining charges (-US$0.13/oz).
Noche Buena: US$793.48/oz (2017) vs. US$765.90/oz (2016), (+3.6%)
The increase in cash cost per ounce was mainly due to: the favourable effect
of the reversal of the write down of gold inventories on the leaching pads in
2016, which did not occur in 2017 (+US$37.59/oz); and lower by-product credits
(+US$2.22/oz). This was partly offset by the higher ore grade (-US$6.07/oz)
and others (-US$6.17/oz).
San Julián phase I: as operations commenced in August 2016, AISC for 2016 is
not considered representative as it corresponds to the start-up period, when a
significant volume of ore from the stock pile is processed.
San Julián phase II: as operations commenced in July 2017, there are no
comparable year-on-year figures.
In addition to the traditional cash cost described above, the Group is
reporting all-in sustaining costs (AISC), in accordance with the guidelines
issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus on-site general,
corporate and administrative costs, community costs related to current
operations, capitalised stripping and underground mine development, sustaining
capital expenditures and remediation expenses.
We consider all-in sustaining costs to be a reasonable indicator of a mine's
ability to generate free cash flow when compared with the corresponding metal
price. We also believe it is a means to monitor not only current production
costs, but also sustaining costs as it includes mine development costs
incurred to prepare the mine for future production, as well as sustaining
capex.
All-in sustaining cost
2017 2016 Change %
Fresnillo US$ per silver ounce 8.20 7.82 5.0
Saucito US$ per silver ounce 7.09 4.77 48.6
Ciénega US$ per gold ounce 691.43 428.00 61.6
San Julián (phase I) US$ per silver ounce 0.83 (7.06)* (111.7)
San Julián (phase II) US$ per silver ounce 7.88*
Herradura US$ per gold ounce 807.66 731.69 10.4
Noche Buena US$ per gold ounce 870.05 823.04 5.7
*Indicator may not be representative as it corresponds to the start-up period,
when a significant volume of ore from stock pile is processed.
Fresnillo: Higher, mainly due to higher sustaining capex and an increase in
capitalised mine development, partially offset by a decrease in cash cost.
Saucito: Higher, as a result of the higher cash cost, an increase in
sustaining capex and higher capitalised mine development.
Ciénega: Higher, primarily explained by the higher cash cost, an increase in
sustaining capex and higher capitalised mine development.
Herradura: Higher, mainly due to an increase in capitalised stripping costs;
and to a lesser extent, the higher cash cost detailed above, partially offset
by lower sustaining capex.
Noche Buena: Higher, driven by the higher cash cost detailed above.
San Julián:
San Julián (phase I): as operations commenced in August 2016, AISC for 2016
is not considered representative as it corresponds to the start-up period,
when a significant volume of ore from the stock pile is processed.
San Julián (phase II): as operations commenced in July 2017, there are no
comparable year-on-year figures.
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.
Contribution by mine to consolidated gross profit, excluding hedging gains and
losses
2017 2016 Change
US$ million % US$ million % Amount %
Herradura 292.8 32.0 309.3 35.7 (16.5) (5.3)
Saucito 228.2 24.9 269.4 31.1 (41.2) (15.3)
Fresnillo 191.6 20.9 158.6 18.3 33.0 20.8
San Julián 93.1 10.1 26.3 3.0 66.8 254.0
Noche Buena 56.9 6.2 54.1 6.2 2.8 5.2
Ciénega 53.8 5.9 48.2 5.6 5.6 11.6
Total for operating mines 916.4 100 865.9 100 50.5 5.8
MXN/USD exchange rate hedging (losses) and gains 0.0 -2.8 2.8 (100)
Metal hedging and other subsidiaries 9.0 19.0 (10.0) (52.6)
Total Fresnillo plc 925.4 882.1 43.3 4.9
( )
Total gross profit, net of hedging gains and losses, increased by 4.9% to
US$925.4 million in 2017.
The US$43.3 million increase in gross profit was mainly explained by: i) the
higher profits associated with increased production of US$142.9 million; ii)
the US$72.3 million estimated benefit of the increase in metal prices; and
iii) the US$4.7 million favourable effect of the Mexican peso/US dollar
exchange rate devaluation. These factors were partly offset by: i) the lower
ore grades mainly at Saucito and Herradura, which had an estimated adverse
impact of US$88.1 million; ii) cost inflation estimated at US$40.2 million;
and others of US$48.3 million.
Herradura and Saucito remained the largest contributors to the Group´s
consolidated gross profit, albeit with a decrease in their gross profit when
compared to 2016. Gross profit at the Fresnillo mine increased by 20.8% over
2016, while the mine's contribution to the Group's total gross profit
increased to 20.9%. San Julián was the fourth largest contributor, providing
10.1% of total gross profit, while Noche Buena and Ciénega's share of the
Group's total gross profit remained broadly unchanged.
Administrative expenses
Administrative expenses increased 22.9% from US$59.1 million to US$72.7
million, due mainly to additional administrative personnel hired to service a
larger number of mines and projects and an increase in services provided by
third parties (advisors, consultants and service providers). Furthermore,
increased administrative services provided by Servicios Industriales Peñoles,
S.A.B de C.V. in relation to San Julián (phase I and phase II) also
contributed to the increase in administrative expenses during the year.
Exploration expenses
Business unit / project (US$ millions) Exploration expenses 2017 Exploration expenses 2016 Capitalised expenses 2017 Capitalised expenses 2016
Ciénega 10.8 14.0
Fresnillo 15.8 8.0
Herradura 19.1 13.6
Saucito 11.7 9.6
Noche Buena 6.1 1.3
San Ramón 4.4 4.3
San Julián 8.4 4.4
Orisyvo 1.9 2.2 0.0 0.2
Centauro Deep 2.7 3.2 0.1 1.0
Guanajuato 7.9 3.9 0.8 0.6
Juanicipio 0.0 0.0 2.3 14.6
Others 52.3 56.7 1.0 0.3
TOTAL 141.1 121.2 4.2 16.7
Exploration expenses increased by 16.4% to US$141.1 million in 2017, due to
intensified exploration activities, mainly around our mining districts, and
advanced exploration projects. An additional US$4.2 million was capitalised,
mainly relating to exploration expenses at the Juanicipio project, and to a
lesser extent at Guanajuato. As a result, risk capital invested in exploration
totalled US$145.3 million in 2017, a 5.4% increase over 2016. In 2018, total
invested in exploration is expected to be approximately US$200 million, of
which US$8 million is estimated to be capitalised.
EBITDA
2017 2016 Amount Change
US$ million US$ million %
Gross Profit 925.4 882.1 43.3 4.9
+ Depreciation 367.6 346.5 21.1 6.1
- Administrative expenses (72.7) (59.1) (13.5) 22.8
- Exploration expenses (141.1) (121.2) (19.9) 16.4
- Selling expenses (19.1) (16.3) (2.8) 17.4
EBITDA 1,060.1 1,032.0 28.0 2.7
EBITDA margin 50.6 54.2
EBITDA is a gauge of the Group's financial performance and a key indicator to
measure debt capacity. It is calculated as gross profit plus depreciation,
less administrative, selling and exploration expenses. In 2017, EBITDA
increased 2.7% to US$1,060.1 million mainly due to the higher revenue. This
was partly offset by the higher adjusted production costs, exploration and
administrative expenses. However, EBITDA margin expressed as a percentage of
revenue decreased, from 54.2% in 2016 to 50.6% in 2017.
Other income and expenses
In 2017, other income and expenses of US$16.8 million was recognised in the
income statement, mainly resulting from the sale of non-strategic mining
claims to Argonaut Gold Inc around its Castillo mine. This compares favourably
against the US$9.0 million expense recorded in 2016, which included disposals
of fixed assets, remediation works and costs incurred in the maintenance of
closed mines.
Silverstream effects
The Silverstream contract is accounted for as a derivative financial
instrument carried at fair value. The revaluation of the Silverstream contract
generated a US$70.3 million non-cash gain mainly as a result of converting
resources into reserves at Sabinas and the higher forward price of silver. In
addition, a US$43.3 million non-cash gain was generated by: the unwinding of
the discounted values; and the difference between payments (volume and price)
actually received and accrued in 2017 and payments estimated in the valuation
model as at 31 December 2016. The total effect recorded in the 2017 income
statement was a gain of US$113.7 million, which adversely compares to the
US$133.5 million gain registered in 2016.
Since the IPO, cumulative cash received has been US$593.0 million, while total
non-cash revaluation gains of US$797.4 million have been taken to the income
statement. The Group expects that further unrealised gains or losses 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 below and in notes 14 and 30 to the Consolidated Financial
Statements.
Finance costs and income
Finance costs and income in 2017 rose by 3.6%, from US$32.2 million to US$34.0
million, mainly due to the decrease in borrowing costs capitalised in 2017
compared to 2016.
In addition, a US$41.1 million non-cash finance loss was generated by the
mark-to-market time value of the outstanding gold hedging programme which was
put in place to protect the investment made in the acquisition of the 44%
stake of Newmont in Penmont in 2014.
Foreign exchange
A foreign exchange loss of US$6.4 million was recorded as a result of the
realised transactions in the year and the positive effect of the 4.5% spot
revaluation of the Mexican peso against the US dollar on the value of
peso-denominated net monetary assets. This compared favourably against the
US$18.4 million foreign exchange loss recognised in 2016.
We also enter into certain exchange rate derivative instruments as part of a
programme to manage our exposure to foreign exchange risk associated with the
purchase of equipment denominated in Euro (EUR), Swedish Krona (SEK) and
Canadian Dollar (CAD). At the end of the year, the total EUR, SEK and CAD
outstanding net forward position was EUR 8.79 million, CAD 0.76 million
and SEK 32.06 million with maturity dates from March through September 2018.
The volume that expired in 2017 was EUR 9.23 million with a weighted average
strike of 1.1368 USD/EUR, and SEK 15.31 million with a weighted average strike
of 8.43 SEK/USD, which has generated a gain of US$6,532 and US$55,119
respectively, both being recorded in the income statement.
Taxation
Corporate income tax expense decreased from US$260.0 million in 2016 to
US$153.5 million in 2017, despite the 3.2% increase in profit before income
tax. This decrease resulted mainly from the effect of the 4.5% revaluation of
the Mexican peso/US dollar spot exchange rate in 2017 versus the 20.1%
devaluation in 2016 on the tax value of assets and liabilities; together with
the impact of the higher inflation rate (6.7% in 2017 vs 3.4% in 2016) on the
inflationary uplift of the tax base of assets and liabilities.
The effective tax rate, excluding the special mining rights, was 20.7%, which
was below the 30% statutory tax rate. This was mainly due to the tax credit
related to the special tax on diesel, the inflationary uplift of the assets,
liabilities and tax losses, and the revaluation of the Mexican peso against
the US dollar, which impacted the carrying amount of assets and liabilities
(denominated in US dollars) and their tax bases (denominated in Mexican pesos)
(see Note 10 to the Financial Statements). Including the effect of the special
mining rights, the effective tax rate was 24.4% in 2017.
Profit for the year
Profit for the year increased from US$425 million to US$560.8 million, while
profit attributable to equity shareholders of the Group increased to US$560.6
million, up from US$427.0 million in 2016.
Excluding the effects of the Silverstream Contract, profit for the year
increased from US$331.5 million to US$481.2 million. Similarly, profit
attributable to equity shareholders of the Group, excluding the Silverstream
effects, increased to US$481.0 million, up from US$333.5 million.
Cash flow
A summary of the key items from the cash flow statement is set out below:
2017 2016 Amount Change
US$ million US$ million US$ %
Cash generated by operations before changes in working capital 1,073.7 1,023.3 50.4 4.9
(Increase)/decrease in working capital (2.9) (10.6) 7.7 72.6
Taxes and employee profit sharing paid (309.3) (114.8) (194.5) 169.4
Net cash from operating activities 761.5 898.0 136.5 (15.2)
Silverstream Contract 43.3 47.6 (4.2) (8.9)
Purchase of property, plant & equipment (604.8) (434.1) (170.7) 39.3
Dividends paid to shareholders of the Company (236.6) (88.2) (148.3) 168.2
Net interest (paid) (21.0) (21.1) 0.1 (0.5)
Net increase in cash during the period after foreign exchange differences (16.0) 411.8 (427.8) N/A
Cash and other liquid funds at 31 December* 896.0 912.0 (16.0) (1.7)
* Cash and other liquid funds are disclosed in Note 31(c) to the financial
statements.
Cash generated by operations before changes in working capital increased by
4.9% to US$1,073.7 million, mainly as a result of the higher profits generated
in the year. Working capital increased US$2.9 million mainly due to an
increase in trade and other receivables resulting from the higher volumes sold
and the higher gold, lead and zinc prices (US$44.4 million); and an increase
in prepayments and other assets (US$0.7 million). This increase in working
capital was partly offset by a decrease in inventories (US$5.7 million) and an
increase in trade and other payables (US$36.4 million).
Taxes and employee profit sharing paid increased 169.4% over 2016 to US$309.3
million.
As a result of the above factors, net cash from operating activities decreased
15.2% from US$898.0 million in 2016 to US$761.5 million in 2017.
Other sources of cash were the proceeds of the Silverstream Contract of
US$43.3 million, proceeds from the sale of non-strategic assets of US$26.1
million and capital contributions from minority shareholders in subsidiaries
of US$18.9 million.
The above funds were mainly used to purchase property, plant and equipment for
a total of US$604.8 million, a 39.3% increase over 2016. Capital expenditures
for 2017 are further described below:
Purchase of property, plant and equipment
2017
US$ million
Fresnillo mine 111.7 Mine development and purchase of in-mine equipment and installation of a new
zinc thickener and vertical conveyor band
Saucito mine 133.7 Development, replacement of in-mine equipment, construction of the Pyrites
Plant and deepening of the Jarillas shaft
Herradura mine 153.2 Stripping activities, sustaining capex and construction of second line of DLP
San Julián 79.1 Completion of San Julián phase II
Ciénega mine 46.5 Development, replacement of in-mine equipment, construction of tailings dam
and purchase of land
Noche Buena 18.7 Mining works and sustaining capex
Juanicipio project 34.1 Exploration expenditure and construction of ramps
Other 27.7
Total purchase of property, plant and equip. 604.8
Dividends paid to shareholders of the Group in 2017 totalled US$236.6 million,
a 168.2% increase from 2016, in line with our dividend policy that includes a
consideration of profits generated in the period. The 2017 payment included
the final 2016 dividend of US$158.4 million and the 2017 interim dividend paid
in September of US$78.2 million.
Net interest of US$21.0 million was paid, mainly reflecting the interest paid
in relation with the issuance of the US$800 million principal amount of 5.500%
Senior Notes.
The sources and uses of funds described above resulted in a decrease in net
cash of US$16.0 million (net decrease in cash and cash equivalents), which
combined with the US$912.0 million balance at the beginning of the year
resulted in cash, cash equivalents and short-term investments of US$896.0
million at the end of 2017.
Balance sheet
Fresnillo plc continued to maintain a solid financial position with cash and
other liquid funds( 6 ) of US$896.0 million as of 31 December 2017. This
represented a 1.7% decrease versus December 2016, as explained above.
Inventories decreased 2.1% to US$271.1 million mainly as a result of the
further decrease in inventories of gold deposited on the leaching pads at
Herradura.
Trade and other receivables increased 40.3% to US$402.1 million as a result of
the increase in income tax recoverable, higher metal volumes sold which
increased receivables, and an increase in value added tax receivable.
The change in the value of the Silverstream derivative from US$467.5 million
at the beginning of the year to US$538.9 million as of 31 December 2017
reflects proceeds of US$42.3 million corresponding to 2017, (US$37.4 million
in cash and US$4.9 million in receivables) and the Silverstream revaluation
effect in the income statement of US$113.7 million.
The net book value of property, plant and equipment was US$2,448.6 million at
year end, representing a 12.3% increase over 2016. The US$268.4 million
increase was mainly due to: the larger asset base following the commissioning
of San Julián; capitalised development works; construction of the Pyrites
Plant and the second DLP line; purchase of additional in-mine equipment; and
the construction of leaching pads at Herradura and Noche Buena.
The Group's total equity was US$3,066.6 million as of 31 December 2017, a
12.9% increase over 2016. This was mainly explained by the increase in
retained earnings, reflecting the 2016 profit, lower dividends paid during the
year, and the net unrealised gains on cash flow hedges.
Dividends
Based on the Group's 2017 performance, the Directors have recommended a final
dividend of 29.8 US cents per Ordinary Share, which will be paid on 4(th) June
2018 to shareholders on the register on 27th April 2018. The dividend will be
paid in UK pounds sterling unless shareholders elect to be paid in US dollars.
This is in addition to the interim dividend of 10.6 US cents per share
totalling U$78.1 million.
RISK MANAGEMENT FRAMEWORK
Our approach to risk management is based on a framework that effectively
embeds a culture of risk awareness across the Group. This framework enables us
to identify, assess, prioritise and manage risks in order to deliver the value
creation objectives defined in our business model.
Risk management system
Our risk management system is based on risk identification, assessment,
prioritisation, mitigation and monitoring processes, which are continually
evaluated, improved and enhanced in line with best practice.
In addition to our established risk management activities, our executives,
operations managers, the controllership group, HSECR managers and exploration
managers regularly engage in strengthening the effectiveness of our current
controls. This supports the Board in its responsibilities of monitoring and
reviewing risk management and the internal control systems.
2017 risk assessment
As part of our 2017 risk assessment exercise, a team of 142 people worked
together to evaluate 108 risks across all our operations, advanced projects,
exploration offices, and support and corporate areas. We identified and
subsequently added a new risk during the year which reflected the specific
circumstances related to the "Increase in the frequency of the reviews by the
tax authorities with special focus on the mining industry".
We narrowed down our 108 risks into major risks which are monitored by
executive management and the Audit Committee. We then further consolidated
these into 12 principal risks which are closely monitored by the Board of
Directors. This new risk is grouped within the "Potential actions by the
Government" principal risk.
As part of our bottom-up process, each business unit head determined the
perceived level of risk for their individual unit. Executive management then
reviewed and challenged each perceived risk level, and compared it to
Fresnillo plc's risk universe as a whole. The results of this exercise were
used as an additional input to identify the Group's principal risks. We
conducted the same risk analysis on advanced projects, detailing the specific
risks faced by each project according to their unique characteristics and
conditions. The risk heat map for each business unit and development project
is included in the Review of Operations.
In 2017, cyber security risk was elevated to a principal risk due to its
increased relevance within the mining industry. As the mining industry
continues to go through a digital transformation, with greater reliance on
automated operational systems, more sophisticated and coordinated attacks are
being launched by a broad range of groups looking to exploit vulnerabilities.
Statement of Directors' responsibilities
The Directors are responsible for preparing the annual report and the Group
and parent company financial statements in accordance with applicable United
Kingdom law and those International Financial Reporting Standards (IFRS)
adopted by the European Union.
The Directors are required to prepare financial statements for each financial
year which present a true and fair view of the financial position of the
Company and of the Group and the financial performance and cash flows of the
Company and of the Group for that period. In preparing those financial
statements, the Directors are required to:
• select suitable accounting policies in accordance with IAS 8:
'Accounting Policies, Changes in Accounting Estimates and Errors' and then
apply them consistently;
• present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the Company and of
the Group's financial position and financial performance;
• state that the Company and the Group has complied with IFRS, subject
to any material departures disclosed and explained in the financial
statements; and
• prepare the accounts on a going concern basis unless, having assessed
the ability of the Company and the Group to continue as a going concern,
management either intends to liquidate the entity or to cease trading, or have
no realistic alternative but to do so.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and of the Group and enable them to ensure that the financial
statements comply with the Companies Acts 2006 and Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets of the
Company and the Group and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Under applicable UK law and regulations the Directors are responsible for the
preparation of a Directors' report, Directors' remuneration report and
corporate governance report that comply with that law and regulations. In
addition the Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Neither the Company nor the Directors accept any liability to any person in
relation to the annual financial report except to the extent that such
liability could arise under English law. Accordingly, any liability to a
person who has demonstrated reliance on any untrue or misleading statement or
omission shall be determined in accordance with section 90A and schedule 10A
of the Financial Services and Markets Act 2000.
In accordance with provision C.1.1 of the UK Corporate Governance Code, the
Directors consider that the Annual Report and Accounts, taken as a whole, is
fair, balanced and understandable and provides information to enable
shareholders to assess the Company's performance, business model and strategy.
Responsibility statement of the Directors in respect of the annual report and
accounts
I confirm on behalf of the Board that to the best of its knowledge:
a) the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and profit and
loss of the Company and the undertakings included in the consolidation taken
as a whole; and
b) the management report (encompassed within the 'Overview', 'Strategic
report', 'Performance' and 'Governance' sections) includes a fair review of
the development and performance of the business, and the position of the
Company and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they
face.
Signed for and on behalf of the Board
Charles Jacobs
Senior Independent Director
26 February 2018
Consolidated Income Statement
Year ended 31 December
Year ended 31 December 2017 Year ended 31 December 2016
Notes US$ thousands US$ thousands
Pre-Silverstream revaluation effect Silverstream revaluation effect Total Pre-Silverstream revaluation effect Silverstream revaluation effect Total
Continuing operations:
Revenues 4 2,093,308 2,093,308 1,905,503 1,905,503
Cost of sales 5 (1,167,903) (1,167,903) (1,023,388) (1,023,388)
Gross profit 925,405 925,405 882,115 882,115
Administrative expenses (72,710) (72,710) (59,157) (59,157)
Exploration expenses 6 (141,108) (141,108) (121,182) (121,182)
Selling expenses (19,110) (19,110) (16,277) (16,277)
Other operating income 8 28,203 28,203 1,398 1,398
Other operating expenses 8 (11,371) (11,371) (10,442) (10,442)
Profit from continuing operations before net finance costs and income tax 709,309 709,309 676,455 676,455
Finance income 9 14,576 14,576 6,958 6,958
Finance costs 9 (89,653) (89,653) (80,323) (80,323)
Revaluation effects of Silverstream contract 14 - 113,656 113,656 - 133,528 133,528
Foreign exchange loss (6,399) (6,399) (18,378) (18,378)
Profit from continuing operations before income tax 627,833 113,656 741,489 584,712 133,528 718,240
Corporate income tax 10 (119,365) (34,097) (153,462) (219,808) (40,058) (259,866)
Special mining right 10 (27,220) (27,220) (33,412) (33,412)
Income tax expense 10 (146,585) (34,097) (180,682) (253,220) (40,058) (293,278)
Profit for the year from continuing operations 481,248 79,559 560,807 331,492 93,470 424,962
Attributable to:
Equity shareholders of the Company 481,019 79,559 560,578 333,516 93,470 426,986
Non-controlling interest 229 229 (2,024) (2,024)
481,248 79,559 560,807 331,492 93,470 424,962
Earnings per share: (US$)
Basic and diluted earnings per Ordinary Share from continuing operations 11 - 0.761 - 0.579
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per Ordinary Share from continuing 11 0.653 - 0.453 -
operations
( )
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
Notes 2017 US$ thousands 2016 US$ thousands
Profit for the year 560,807 424,962
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
Losses on cash flow hedges recycled to income statement - 1,184
Income tax effect 10 - (355)
Changes in the fair value of cash flow hedges - (52,918)
Income tax effect 10 - 15,875
Net effect of cash flow hedges - (36,214)
Changes in the fair value of available-for-sale financial assets 13 8,808 44,729
Income tax effect 13 (2,642) (13,418)
Impairment of available-for-sale financial assets taken to income during the 36 -
year
Income tax effect 10 (11) -
Net effect of available-for-sale financial assets 6,191 31,311
Foreign currency translation 118 3
Net other comprehensive income/(expense) that may be reclassified subsequently 6,309 (4,900)
to profit or loss:
Items that will not be reclassified to profit or loss:
Remeasurement gains on defined benefit plans 22 933 2,443
Income tax effect 10 (148) (388)
Net other comprehensive income that will not be reclassified to profit or loss 785 2,055
Other comprehensive income/(expense), net of tax 7,094 (2,845)
Total comprehensive income for the year, net of tax 567,901 422,117
Attributable to:
Equity shareholders of the Company 567,672 424,141
Non-controlling interests 229 (2,024)
567,901 422,117
Consolidated Balance Sheet
As at 31 December
As at 31 December
Notes 2017 US$ thousands 2016 US$ thousands
ASSETS
Non-current assets
Property, plant and equipment 12 2,448,596 2,180,217
Available-for-sale financial assets 13 144,856 116,171
Silverstream contract 14 506,569 438,811
Derivative financial instruments 30 - 16,532
Deferred tax asset 10 48,950 20,023
Inventories 15 91,620 89,351
Other receivables 16 129 990
Other assets 3,389 3,385
3,244,109 2,865,480
Current assets
Inventories 15 179,485 187,499
Trade and other receivables 16 342,506 286,678
Income tax recoverable 59,588 -
Prepayments 3,543 2,839
Derivative financial instruments 30 382 6,618
Silverstream contract 14 32,318 28,718
Short-term investments 17 - 200,000
Cash and cash equivalents 17 876,034 711,954
1,493,856 1,424,306
Total assets 4,737,965 4,289,786
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Share capital 18 368,546 368,546
Share premium 18 1,153,817 1,153,817
Capital reserve 18 (526,910) (526,910)
Available-for-sale financial assets reserve 18 53,799 47,608
Foreign currency translation reserve 18 (610) (728)
Retained earnings 18 1,962,708 1,637,888
3,011,350 2,680,221
Non-controlling interests 55,245 36,147
Total equity 3,066,595 2,716,368
Non-current liabilities
Interest-bearing loans 20 799,046 798,027
Derivative financial instruments 30 14,224 16
Provision for mine closure cost 21 184,775 149,109
Provision for pensions and other post-employment benefit plans 22 9,217 9,095
Deferred tax liability 10 491,677 463,050
1,498,939 1,419,297
Consolidated Balance Sheet
As at 31 December
As at 31 December
Notes 2017 US$ thousands 2016 US$ thousands
Current liabilities
Trade and other payables 23 134,949 121,633
Income tax payable 18,328 18,842
Derivative financial instruments 30 4,992 630
Employee profit sharing 14,162 13,016
172,431 154,121
Total liabilities 1,671,370 1,573,418
Total equity and liabilities 4,737,965 4,289,786
These financial statements were approved by the Board of Directors on 26
February 2018 and signed on its behalf by:
Mr Arturo Fernandez
Non-executive Director
26 February 2018
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
Notes 2017 US$ thousands 2016 US$ thousands
Net cash from operating activities 29 761,471 897,958
Cash flows from investing activities
Purchase of property, plant and equipment (604,751) (434,050)
Proceeds from the sale of property, plant and equipment and other assets 8 26,078 277
Repayments of loans granted to contractors 925 2,626
Short-term investments 17 200,000 (81,282)
Silverstream contract 14 43,349 47,565
Purchase of available-for-sale financial assets (19,877) -
Interest received 14,535 6,958
Net cash used in investing activities (339,741) (457,906)
Cash flows from financing activities
Dividends paid to shareholders of the Company 19 (236,560) (88,219)
Capital contribution 18,869 7,361
Interest paid(1) 20 (35,503) (28,028)
Net cash used in financing activities (253,194) (108,886)
Net increase in cash and cash equivalents during the year 168,536 331,166
Effect of exchange rate on cash and cash equivalents (4,456) (632)
Cash and cash equivalents at 1 January 711,954 381,420
Cash and cash equivalents at 31 December 17 876,034 711,954
(1 Total interest paid during the year ended 31 December 2017 less amounts
capitalised totalling US$11.4 million (31 December 2016: US$18.2 million)
which were included within the caption Purchase of property, plant and
equipment.)
( )
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders of the Company
Notes Share capital Share premium Capital reserve Hedging reserve Available-for-sale financial assets reserve Foreign currency translation reserve Retained earnings Total Non-controlling interests Total equity
US$ thousands
Balance at 1 January 2016 368,546 1,153,817 (526,910) 36,214 16,297 (731) 1,296,906 2,344,139 30,202 2,374,341
Profit/(loss) for the year - - - - - - 426,986 426,986 (2,024) 424,962
Other comprehensive income, net of tax - - - (36,214) 31,311 3 2,055 (2,845) - (2,845)
Total comprehensive income for the year - - - (36,214) 31,311 3 429,041 424,141 (2,024) 422,117
Capital contribution - - - - - - - - 7,969 7,969
Dividends declared and paid 19 - - - - - - (88,059) (88,059) - (88,059)
Balance at 31 December 2016 368,546 1,153,817 (526,910) - 47,608 (728) 1,637,888 2,680,221 36,147 2,716,368
Profit/(loss) for the year - - - - - - 560,578 560,578 229 560,807
Other comprehensive income, net of tax - - - - 6,191 118 785 7,094 - 7,094
Total comprehensive income for the year - - - - 6,191 118 561,363 567,672 229 567,901
Capital contribution - - - - - - - - 18,869 18,869
Dividends declared and paid 19 - - - - - - (236,543) (236,543) - (236,543)
Balance at 31 December 2017 368,546 1,153,817 (526,910) - 53,799 (610) 1,962,708 3,011,350 55,245 3,066,595
1. Corporate information
Fresnillo plc. ("the Company") is a public limited company and registered in
England and Wales with registered number 6344120 and is the holding company
for the Fresnillo subsidiaries detailed in note 5 of the Parent Company
accounts ('the Group').
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 27.
The consolidated financial statements of the Group for the year ended 31
December 2017 were authorised for issue by the Board of Directors of Fresnillo
plc on 26 February 2018.
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 operating mines and its principal activities is disclosed in note 3.
The auditor's report on those financial statements was unqualified and did not
contain a statement under section 498 of the Companies Act 2006.
The audited financial statements will be delivered to the Registrar of
Companies in due course. The financial information contained in this document
does not constitute statutory accounts as defined in section 435 of the
Companies Act 2006
2. Significant accounting policies
(a) Basis of preparation and consolidation, and statement of compliance
Basis of preparation and statement of compliance
The Group's consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted by the
European Union as they apply to the financial statements of the Group for the
years ended 31 December 2017 and 2016, and in accordance with the provisions
of the Companies Act 2006.
The consolidated financial statements have been prepared on a historical cost
basis, except for derivative financial instruments, available-for-sale
financial assets and defined benefit pension scheme assets which have been
measured at fair value.
The 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 when otherwise indicated.
Basis of consolidation
The consolidated financial statements set out the Group's financial position
as of 31 December 2017 and 2016, and the results of operations and cash flows
for the years then ended.
Entities that constitute the Group are those enterprises controlled by the
Group regardless of the number of shares owned by the Group. The Group
controls an entity when the Group is exposed to, or has the right to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity. Entities are consolidated
from the date on which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of the Group.
The Group applies the acquisition method to account for business combinations
in accordance with IFRS 3.
All intra-group balances, transactions, income and expenses and profits and
losses, including unrealised profits arising from intra-group transactions,
have been eliminated on consolidation. Unrealised losses are eliminated in the
same way as unrealised gains except that they are only eliminated to the
extent that there is no evidence of impairment.
Non-controlling interests in the net assets of consolidated subsidiaries are
identified separately from the Group's equity therein. The interest of
non-controlling shareholders may be initially measured either at fair value or
at the non-controlling interest's proportionate share of the acquiree's
identifiable net assets. The choice of measurement basis is made on an
acquisition by-acquisition basis. Subsequent to acquisition, non-controlling
interests consist of the amount attributed to such interests at initial
recognition and the non-controlling interest's share of changes in equity
since the date of the combination. Any losses of a subsidiary are attributed
to the non-controlling interests even if that results in a deficit balance.
Transactions with non-controlling interests that do not result in loss of
control are accounted for as equity transactions - that is, a transaction with
the owners in their capacity as owners. The difference between fair value of
any consideration paid and the relevant share acquired of the carrying value
of net assets of the subsidiary is recorded in equity. Gains or losses on
disposals to non-controlling interest are also recorded in equity.
(b) Changes in accounting policies and disclosures
The accounting policies applied are consistent with those applied in the
preparation of the consolidated financial statements for the year ended
31 December 2016. During 2017, there were no amendments to existing
accounting policies.
New standards, interpretations and amendments (new standards) adopted by the
Group
The Group has adopted from 1 January 2017 Amendments to IAS 7. The amendments
require an entity to provide disclosures that enable users of financial
statements to evaluate changes in liabilities arising from financing
activities. The Group also has adopted Amendments to IAS 12. The amendments
clarify the accounting for deferred tax where an asset is measured at fair
value and that fair value is below the asset's tax base. They also clarify
certain other aspects of accounting for deferred tax assets. These
amendments had no impact in the financial information of the Group.
Other than the above mentioned amendments there were no significant new
standards that the Group was required to adopt effective from 1 January 2017.
Standards, interpretations and amendments issued but not yet effective
The standards and interpretations that are issued, but not yet effective, up
to the date of issuance of the Group's financial statements are disclosed
below. The Group intends to adopt these standards, as applicable to the
Group's financial statements, when they become effective, except where
indicated.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments addresses the classification, measurement and
derecognition of financial assets and financial liabilities, introduces new
rules for hedge accounting and a new impairment model for financial assets.
The Group has decided not to adopt IFRS 9 until it becomes mandatory on 1
January 2018. The Group does not expect the new
- More to follow, for following part double click ID:nRSa9902Fc 93.1 10.1 26.3 3.0 66.8 254.0 Noche Buena 56.9 6.2 54.1 6.2 2.8 5.2 Ciénega 53.8 5.9 48.2 5.6 5.6 11.6 Total for operating mines 916.4 100 865.9 100 50.5 5.8 MXN/USD exchange rate hedging (losses) and gains 0.0 -2.8 2.8 (100) Metal hedging and other subsidiaries 9.0 19.0 (10.0) (52.6) Total Fresnillo plc 925.4
882.1 43.3 4.9
2016
Change
US$ million
%
US$ million
%
Amount
%
Herradura
292.8
32.0
309.3
35.7
(16.5)
(5.3)
Saucito
228.2
24.9
269.4
31.1
(41.2)
(15.3)
Fresnillo
191.6
20.9
158.6
18.3
33.0
20.8
San Julián
93.1
10.1
26.3
3.0
66.8
254.0
Noche Buena
56.9
6.2
54.1
6.2
2.8
5.2
Ciénega
53.8
5.9
48.2
5.6
5.6
11.6
Total for operating mines
916.4
100
865.9
100
50.5
5.8
MXN/USD exchange rate hedging (losses) and gains
0.0
-2.8
2.8
(100)
Metal hedging and other subsidiaries
9.0
19.0
(10.0)
(52.6)
Total Fresnillo plc
925.4
882.1
43.3
4.9
Total gross profit, net of hedging gains and losses, increased by 4.9% to US$925.4 million in 2017.
The US$43.3 million increase in gross profit was mainly explained by: i) the higher profits associated with increased
production of US$142.9 million; ii) the US$72.3 million estimated benefit of the increase in metal prices; and iii) the
US$4.7 million favourable effect of the Mexican peso/US dollar exchange rate devaluation. These factors were partly offset
by: i) the lower ore grades mainly at Saucito and Herradura, which had an estimated adverse impact of US$88.1 million; ii)
cost inflation estimated at US$40.2 million; and others of US$48.3 million.
Herradura and Saucito remained the largest contributors to the Group´s consolidated gross profit, albeit with a decrease in
their gross profit when compared to 2016. Gross profit at the Fresnillo mine increased by 20.8% over 2016, while the mine's
contribution to the Group's total gross profit increased to 20.9%. San Julián was the fourth largest contributor, providing
10.1% of total gross profit, while Noche Buena and Ciénega's share of the Group's total gross profit remained broadly
unchanged.
Administrative expenses
Administrative expenses increased 22.9% from US$59.1 million to US$72.7 million, due mainly to additional administrative
personnel hired to service a larger number of mines and projects and an increase in services provided by third parties
(advisors, consultants and service providers). Furthermore, increased administrative services provided by Servicios
Industriales Peñoles, S.A.B de C.V. in relation to San Julián (phase I and phase II) also contributed to the increase in
administrative expenses during the year.
Exploration expenses
Business unit / project (US$ millions) Exploration expenses 2017 Exploration expenses 2016 Capitalised expenses 2017 Capitalised expenses 2016
Ciénega 10.8 14.0
Fresnillo 15.8 8.0
Herradura 19.1 13.6
Saucito 11.7 9.6
Noche Buena 6.1 1.3
San Ramón 4.4 4.3
San Julián 8.4 4.4
Orisyvo 1.9 2.2 0.0 0.2
Centauro Deep 2.7 3.2 0.1 1.0
Guanajuato 7.9 3.9 0.8 0.6
Juanicipio 0.0 0.0 2.3 14.6
Others 52.3 56.7 1.0 0.3
TOTAL 141.1 121.2 4.2 16.7
Exploration expenses increased by 16.4% to US$141.1 million in 2017, due to intensified exploration activities, mainly
around our mining districts, and advanced exploration projects. An additional US$4.2 million was capitalised, mainly
relating to exploration expenses at the Juanicipio project, and to a lesser extent at Guanajuato. As a result, risk capital
invested in exploration totalled US$145.3 million in 2017, a 5.4% increase over 2016. In 2018, total invested in
exploration is expected to be approximately US$200 million, of which US$8 million is estimated to be capitalised.
EBITDA
2017US$ million 2016US$ million Amount Change%
Gross Profit 925.4 882.1 43.3 4.9
+ Depreciation 367.6 346.5 21.1 6.1
- Administrative expenses (72.7) (59.1) (13.5) 22.8
- Exploration expenses (141.1) (121.2) (19.9) 16.4
- Selling expenses (19.1) (16.3) (2.8) 17.4
EBITDA 1,060.1 1,032.0 28.0 2.7
EBITDA margin 50.6 54.2
EBITDA is a gauge of the Group's financial performance and a key indicator to measure debt capacity. It is calculated as
gross profit plus depreciation, less administrative, selling and exploration expenses. In 2017, EBITDA increased 2.7% to
US$1,060.1 million mainly due to the higher revenue. This was partly offset by the higher adjusted production costs,
exploration and administrative expenses. However, EBITDA margin expressed as a percentage of revenue decreased, from 54.2%
in 2016 to 50.6% in 2017.
Other income and expenses
In 2017, other income and expenses of US$16.8 million was recognised in the income statement, mainly resulting from the
sale of non-strategic mining claims to Argonaut Gold Inc around its Castillo mine. This compares favourably against the
US$9.0 million expense recorded in 2016, which included disposals of fixed assets, remediation works and costs incurred in
the maintenance of closed mines.
Silverstream effects
The Silverstream contract is accounted for as a derivative financial instrument carried at fair value. The revaluation of
the Silverstream contract generated a US$70.3 million non-cash gain mainly as a result of converting resources into
reserves at Sabinas and the higher forward price of silver. In addition, a US$43.3 million non-cash gain was generated by:
the unwinding of the discounted values; and the difference between payments (volume and price) actually received and
accrued in 2017 and payments estimated in the valuation model as at 31 December 2016. The total effect recorded in the 2017
income statement was a gain of US$113.7 million, which adversely compares to the US$133.5 million gain registered in 2016.
Since the IPO, cumulative cash received has been US$593.0 million, while total non-cash revaluation gains of US$797.4
million have been taken to the income statement. The Group expects that further unrealised gains or losses 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 below and in
notes 14 and 30 to the Consolidated Financial Statements.
Finance costs and income
Finance costs and income in 2017 rose by 3.6%, from US$32.2 million to US$34.0 million, mainly due to the decrease in
borrowing costs capitalised in 2017 compared to 2016.
In addition, a US$41.1 million non-cash finance loss was generated by the mark-to-market time value of the outstanding gold
hedging programme which was put in place to protect the investment made in the acquisition of the 44% stake of Newmont in
Penmont in 2014.
Foreign exchange
A foreign exchange loss of US$6.4 million was recorded as a result of the realised transactions in the year and the
positive effect of the 4.5% spot revaluation of the Mexican peso against the US dollar on the value of peso-denominated net
monetary assets. This compared favourably against the US$18.4 million foreign exchange loss recognised in 2016.
We also enter into certain exchange rate derivative instruments as part of a programme to manage our exposure to foreign
exchange risk associated with the purchase of equipment denominated in Euro (EUR), Swedish Krona (SEK) and Canadian Dollar
(CAD). At the end of the year, the total EUR, SEK and CAD outstanding net forward position was EUR 8.79 million, CAD 0.76
million and SEK 32.06 million with maturity dates from March through September 2018. The volume that expired in 2017 was
EUR 9.23 million with a weighted average strike of 1.1368 USD/EUR, and SEK 15.31 million with a weighted average strike of
8.43 SEK/USD, which has generated a gain of US$6,532 and US$55,119 respectively, both being recorded in the income
statement.
Taxation
Corporate income tax expense decreased from US$260.0 million in 2016 to US$153.5 million in 2017, despite the 3.2% increase
in profit before income tax. This decrease resulted mainly from the effect of the 4.5% revaluation of the Mexican peso/US
dollar spot exchange rate in 2017 versus the 20.1% devaluation in 2016 on the tax value of assets and liabilities; together
with the impact of the higher inflation rate (6.7% in 2017 vs 3.4% in 2016) on the inflationary uplift of the tax base of
assets and liabilities.
The effective tax rate, excluding the special mining rights, was 20.7%, which was below the 30% statutory tax rate. This
was mainly due to the tax credit related to the special tax on diesel, the inflationary uplift of the assets, liabilities
and tax losses, and the revaluation of the Mexican peso against the US dollar, which impacted the carrying amount of assets
and liabilities (denominated in US dollars) and their tax bases (denominated in Mexican pesos) (see Note 10 to the
Financial Statements). Including the effect of the special mining rights, the effective tax rate was 24.4% in 2017.
Profit for the year
Profit for the year increased from US$425 million to US$560.8 million, while profit attributable to equity shareholders of
the Group increased to US$560.6 million, up from US$427.0 million in 2016.
Excluding the effects of the Silverstream Contract, profit for the year increased from US$331.5 million to US$481.2
million. Similarly, profit attributable to equity shareholders of the Group, excluding the Silverstream effects, increased
to US$481.0 million, up from US$333.5 million.
Cash flow
A summary of the key items from the cash flow statement is set out below:
2017US$ million 2016US$ million AmountUS$ Change%
Cash generated by operations before changes in working capital 1,073.7 1,023.3 50.4 4.9
(Increase)/decrease in working capital (2.9) (10.6) 7.7 72.6
Taxes and employee profit sharing paid (309.3) (114.8) (194.5) 169.4
Net cash from operating activities 761.5 898.0 136.5 (15.2)
Silverstream Contract 43.3 47.6 (4.2) (8.9)
Purchase of property, plant & equipment (604.8) (434.1) (170.7) 39.3
Dividends paid to shareholders of the Company (236.6) (88.2) (148.3) 168.2
Net interest (paid) (21.0) (21.1) 0.1 (0.5)
Net increase in cash during the period after foreign exchange differences (16.0) 411.8 (427.8) N/A
Cash and other liquid funds at 31 December* 896.0 912.0 (16.0) (1.7)
* Cash and other liquid funds are disclosed in Note 31(c) to the financial statements.
Cash generated by operations before changes in working capital increased by 4.9% to US$1,073.7 million, mainly as a result
of the higher profits generated in the year. Working capital increased US$2.9 million mainly due to an increase in trade
and other receivables resulting from the higher volumes sold and the higher gold, lead and zinc prices (US$44.4 million);
and an increase in prepayments and other assets (US$0.7 million). This increase in working capital was partly offset by a
decrease in inventories (US$5.7 million) and an increase in trade and other payables (US$36.4 million).
Taxes and employee profit sharing paid increased 169.4% over 2016 to US$309.3 million.
As a result of the above factors, net cash from operating activities decreased 15.2% from US$898.0 million in 2016 to
US$761.5 million in 2017.
Other sources of cash were the proceeds of the Silverstream Contract of US$43.3 million, proceeds from the sale of
non-strategic assets of US$26.1 million and capital contributions from minority shareholders in subsidiaries of US$18.9
million.
The above funds were mainly used to purchase property, plant and equipment for a total of US$604.8 million, a 39.3%
increase over 2016. Capital expenditures for 2017 are further described below:
Purchase of property, plant and equipment
2017US$ million
Fresnillo mine 111.7 Mine development and purchase of in-mine equipment and installation of a new zinc thickener and vertical conveyor band
Saucito mine 133.7 Development, replacement of in-mine equipment, construction of the Pyrites Plant and deepening of the Jarillas shaft
Herradura mine 153.2 Stripping activities, sustaining capex and construction of second line of DLP
San Julián 79.1 Completion of San Julián phase II
Ciénega mine 46.5 Development, replacement of in-mine equipment, construction of tailings dam and purchase of land
Noche Buena 18.7 Mining works and sustaining capex
Juanicipio project 34.1 Exploration expenditure and construction of ramps
Other 27.7
Total purchase of property, plant and equip. 604.8
Dividends paid to shareholders of the Group in 2017 totalled US$236.6 million, a 168.2% increase from 2016, in line with
our dividend policy that includes a consideration of profits generated in the period. The 2017 payment included the final
2016 dividend of US$158.4 million and the 2017 interim dividend paid in September of US$78.2 million.
Net interest of US$21.0 million was paid, mainly reflecting the interest paid in relation with the issuance of the US$800
million principal amount of 5.500% Senior Notes.
The sources and uses of funds described above resulted in a decrease in net cash of US$16.0 million (net decrease in cash
and cash equivalents), which combined with the US$912.0 million balance at the beginning of the year resulted in cash, cash
equivalents and short-term investments of US$896.0 million at the end of 2017.
Balance sheet
Fresnillo plc continued to maintain a solid financial position with cash and other liquid funds 6 of US$896.0 million as
of 31 December 2017. This represented a 1.7% decrease versus December 2016, as explained above.
Inventories decreased 2.1% to US$271.1 million mainly as a result of the further decrease in inventories of gold deposited
on the leaching pads at Herradura.
Trade and other receivables increased 40.3% to US$402.1 million as a result of the increase in income tax recoverable,
higher metal volumes sold which increased receivables, and an increase in value added tax receivable.
The change in the value of the Silverstream derivative from US$467.5 million at the beginning of the year to US$538.9
million as of 31 December 2017 reflects proceeds of US$42.3 million corresponding to 2017, (US$37.4 million in cash and
US$4.9 million in receivables) and the Silverstream revaluation effect in the income statement of US$113.7 million.
The net book value of property, plant and equipment was US$2,448.6 million at year end, representing a 12.3% increase over
2016. The US$268.4 million increase was mainly due to: the larger asset base following the commissioning of San Julián;
capitalised development works; construction of the Pyrites Plant and the second DLP line; purchase of additional in-mine
equipment; and the construction of leaching pads at Herradura and Noche Buena.
The Group's total equity was US$3,066.6 million as of 31 December 2017, a 12.9% increase over 2016. This was mainly
explained by the increase in retained earnings, reflecting the 2016 profit, lower dividends paid during the year, and the
net unrealised gains on cash flow hedges.
Dividends
Based on the Group's 2017 performance, the Directors have recommended a final dividend of 29.8 US cents per Ordinary Share,
which will be paid on 4th June 2018 to shareholders on the register on 27th April 2018. The dividend will be paid in UK
pounds sterling unless shareholders elect to be paid in US dollars. This is in addition to the interim dividend of 10.6 US
cents per share totalling U$78.1 million.
RISK MANAGEMENT FRAMEWORK
Our approach to risk management is based on a framework that effectively embeds a culture of risk awareness across the
Group. This framework enables us to identify, assess, prioritise and manage risks in order to deliver the value creation
objectives defined in our business model.
Risk management system
Our risk management system is based on risk identification, assessment, prioritisation, mitigation and monitoring
processes, which are continually evaluated, improved and enhanced in line with best practice.
In addition to our established risk management activities, our executives, operations managers, the controllership group,
HSECR managers and exploration managers regularly engage in strengthening the effectiveness of our current controls. This
supports the Board in its responsibilities of monitoring and reviewing risk management and the internal control systems.
2017 risk assessment
As part of our 2017 risk assessment exercise, a team of 142 people worked together to evaluate 108 risks across all our
operations, advanced projects, exploration offices, and support and corporate areas. We identified and subsequently added a
new risk during the year which reflected the specific circumstances related to the "Increase in the frequency of the
reviews by the tax authorities with special focus on the mining industry".
We narrowed down our 108 risks into major risks which are monitored by executive management and the Audit Committee. We
then further consolidated these into 12 principal risks which are closely monitored by the Board of Directors. This new
risk is grouped within the "Potential actions by the Government" principal risk.
As part of our bottom-up process, each business unit head determined the perceived level of risk for their individual unit.
Executive management then reviewed and challenged each perceived risk level, and compared it to Fresnillo plc's risk
universe as a whole. The results of this exercise were used as an additional input to identify the Group's principal risks.
We conducted the same risk analysis on advanced projects, detailing the specific risks faced by each project according to
their unique characteristics and conditions. The risk heat map for each business unit and development project is included
in the Review of Operations.
In 2017, cyber security risk was elevated to a principal risk due to its increased relevance within the mining industry. As
the mining industry continues to go through a digital transformation, with greater reliance on automated operational
systems, more sophisticated and coordinated attacks are being launched by a broad range of groups looking to exploit
vulnerabilities.
Statement of Directors' responsibilities
The Directors are responsible for preparing the annual report and the Group and parent company financial statements in
accordance with applicable United Kingdom law and those International Financial Reporting Standards (IFRS) adopted by the
European Union.
The Directors are required to prepare financial statements for each financial year which present a true and fair view of
the financial position of the Company and of the Group and the financial performance and cash flows of the Company and of
the Group for that period. In preparing those financial statements, the Directors are required to:
• select suitable accounting policies in accordance with IAS 8: 'Accounting Policies, Changes in Accounting Estimates and
Errors' and then apply them consistently;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the Company and of the Group's
financial position and financial performance;
• state that the Company and the Group has complied with IFRS, subject to any material departures disclosed and explained
in the financial statements; and
• prepare the accounts on a going concern basis unless, having assessed the ability of the Company and the Group to
continue as a going concern, management either intends to liquidate the entity or to cease trading, or have no realistic
alternative but to do so.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the
Companies Acts 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the
Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
Under applicable UK law and regulations the Directors are responsible for the preparation of a Directors' report,
Directors' remuneration report and corporate governance report that comply with that law and regulations. In addition the
Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Neither the Company nor the Directors accept any liability to any person in relation to the annual financial report except
to the extent that such liability could arise under English law. Accordingly, any liability to a person who has
demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A
and schedule 10A of the Financial Services and Markets Act 2000.
In accordance with provision C.1.1 of the UK Corporate Governance Code, the Directors consider that the Annual Report and
Accounts, taken as a whole, is fair, balanced and understandable and provides information to enable shareholders to assess
the Company's performance, business model and strategy.
Responsibility statement of the Directors in respect of the annual report and accounts
I confirm on behalf of the Board that to the best of its knowledge:
a) the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company
and the undertakings included in the consolidation taken as a whole; and
b) the management report (encompassed within the 'Overview', 'Strategic report', 'Performance' and 'Governance' sections)
includes a fair review of the development and performance of the business, and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and
uncertainties that they face.
Signed for and on behalf of the Board
Charles Jacobs
Senior Independent Director
26 February 2018
Consolidated Income Statement
Year ended 31 December
Year ended 31 December 2017 Year ended 31 December 2016
Notes US$ thousands US$ thousands
Pre-Silverstream Silverstream Total Pre-Silverstream Silverstream Total
revaluation revaluation revaluation revaluation
effect effect effect effect
Continuing operations:
Revenues 4 2,093,308 2,093,308 1,905,503 1,905,503
Cost of sales 5 (1,167,903) (1,167,903) (1,023,388) (1,023,388)
Gross profit 925,405 925,405 882,115 882,115
Administrative expenses (72,710) (72,710) (59,157) (59,157)
Exploration expenses 6 (141,108) (141,108) (121,182) (121,182)
Selling expenses (19,110) (19,110) (16,277) (16,277)
Other operating income 8 28,203 28,203 1,398 1,398
Other operating expenses 8 (11,371) (11,371) (10,442) (10,442)
Profit from continuing operations before net finance costs and income tax 709,309 709,309 676,455 676,455
Finance income 9 14,576 14,576 6,958 6,958
Finance costs 9 (89,653) (89,653) (80,323) (80,323)
Revaluation effects of Silverstream contract 14 - 113,656 113,656 - 133,528 133,528
Foreign exchange loss (6,399) (6,399) (18,378) (18,378)
Profit from continuing operations before income tax 627,833 113,656 741,489 584,712 133,528 718,240
Corporate income tax 10 (119,365) (34,097) (153,462) (219,808) (40,058) (259,866)
Special mining right 10 (27,220) (27,220) (33,412) (33,412)
Income tax expense 10 (146,585) (34,097) (180,682) (253,220) (40,058) (293,278)
Profit for the year from continuing operations 481,248 79,559 560,807 331,492 93,470 424,962
Attributable to:
Equity shareholders of the Company 481,019 79,559 560,578 333,516 93,470 426,986
Non-controlling interest 229 229 (2,024) (2,024)
481,248 79,559 560,807 331,492 93,470 424,962
Earnings per share: (US$)
Basic and diluted earnings per Ordinary Share from continuing operations 11 - 0.761 - 0.579
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per Ordinary Share from continuing operations 11 0.653 - 0.453 -
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
Notes 2017 2016
US$ thousands US$ thousands
Profit for the year 560,807 424,962
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
Losses on cash flow hedges recycled to income statement - 1,184
Income tax effect 10 - (355)
Changes in the fair value of cash flow hedges - (52,918)
Income tax effect 10 - 15,875
Net effect of cash flow hedges - (36,214)
Changes in the fair value of available-for-sale financial assets 13 8,808 44,729
Income tax effect 13 (2,642) (13,418)
Impairment of available-for-sale financial assets taken to income during the year 36 -
Income tax effect 10 (11) -
Net effect of available-for-sale financial assets 6,191 31,311
Foreign currency translation 118 3
Net other comprehensive income/(expense) that may be reclassified subsequently to profit or loss: 6,309 (4,900)
Items that will not be reclassified to profit or loss:
Remeasurement gains on defined benefit plans 22 933 2,443
Income tax effect 10 (148) (388)
Net other comprehensive income that will not be reclassified to profit or loss 785 2,055
Other comprehensive income/(expense), net of tax 7,094 (2,845)
Total comprehensive income for the year, net of tax 567,901 422,117
Attributable to:
Equity shareholders of the Company 567,672 424,141
Non-controlling interests 229 (2,024)
567,901 422,117
Consolidated Balance Sheet
As at 31 December
ASSETS
Non-current assets
Property, plant and equipment 12 2,448,596 2,180,217
Available-for-sale financial assets 13 144,856 116,171
Silverstream contract 14 506,569 438,811
Derivative financial instruments 30 - 16,532
Deferred tax asset 10 48,950 20,023
Inventories 15 91,620 89,351
Other receivables 16 129 990
Other assets 3,389 3,385
3,244,109 2,865,480
Current assets
Inventories 15 179,485 187,499
Trade and other receivables 16 342,506 286,678
Income tax recoverable 59,588 -
Prepayments 3,543 2,839
Derivative financial instruments 30 382 6,618
Silverstream contract 14 32,318 28,718
Short-term investments 17 - 200,000
Cash and cash equivalents 17 876,034 711,954
1,493,856 1,424,306
Total assets 4,737,965 4,289,786
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Share capital 18 368,546 368,546
Share premium 18 1,153,817 1,153,817
Capital reserve 18 (526,910) (526,910)
Available-for-sale financial assets reserve 18 53,799 47,608
Foreign currency translation reserve 18 (610) (728)
Retained earnings 18 1,962,708 1,637,888
3,011,350 2,680,221
Non-controlling interests 55,245 36,147
Total equity 3,066,595 2,716,368
Non-current liabilities
Interest-bearing loans 20 799,046 798,027
Derivative financial instruments 30 14,224 16
Provision for mine closure cost 21 184,775 149,109
Provision for pensions and other post-employment benefit plans 22 9,217 9,095
Deferred tax liability 10 491,677 463,050
1,498,939 1,419,297
10
491,677
463,050
1,498,939
1,419,297
Consolidated Balance Sheet
As at 31 December
Current liabilities
Trade and other payables 23 134,949 121,633
Income tax payable 18,328 18,842
Derivative financial instruments 30 4,992 630
Employee profit sharing 14,162 13,016
172,431 154,121
Total liabilities 1,671,370 1,573,418
Total equity and liabilities 4,737,965 4,289,786
1,671,370
1,573,418
Total equity and liabilities
4,737,965
4,289,786
These financial statements were approved by the Board of Directors on 26 February 2018 and signed on its behalf by:
Mr Arturo Fernandez
Non-executive Director
26 February 2018
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
Notes 2017 2016
US$ thousands US$ thousands
Net cash from operating activities 29 761,471 897,958
Cash flows from investing activities
Purchase of property, plant and equipment (604,751) (434,050)
Proceeds from the sale of property, plant and equipment and other assets 8 26,078 277
Repayments of loans granted to contractors 925 2,626
Short-term investments 17 200,000 (81,282)
Silverstream contract 14 43,349 47,565
Purchase of available-for-sale financial assets (19,877) -
Interest received 14,535 6,958
Net cash used in investing activities (339,741) (457,906)
Cash flows from financing activities
Dividends paid to shareholders of the Company 19 (236,560) (88,219)
Capital contribution 18,869 7,361
Interest paid1 20 (35,503) (28,028)
Net cash used in financing activities (253,194) (108,886)
Net increase in cash and cash equivalents during the year 168,536 331,166
Effect of exchange rate on cash and cash equivalents (4,456) (632)
Cash and cash equivalents at 1 January 711,954 381,420
Cash and cash equivalents at 31 December 17 876,034 711,954
1 Total interest paid during the year ended 31 December 2017 less amounts capitalised totalling US$11.4 million (31
December 2016: US$18.2 million) which were included within the caption Purchase of property, plant and equipment.
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders of the Company
Notes Share Share premium Capital reserve Hedging reserve Available-for-sale financial assets reserve Foreign currency translation reserve Retained earnings Total Non-controlling interests Total
capital equity
US$ thousands
Balance at 1 January 2016 368,546 1,153,817 (526,910) 36,214 16,297 (731) 1,296,906 2,344,139 30,202 2,374,341
Profit/(loss) for the year - - - - - - 426,986 426,986 (2,024) 424,962
Other comprehensive income, net of tax - - - (36,214) 31,311 3 2,055 (2,845) - (2,845)
Total comprehensive income for the year - - - (36,214) 31,311 3 429,041 424,141 (2,024) 422,117
Capital contribution - - - - - - - - 7,969 7,969
Dividends declared and paid 19 - - - - - - (88,059) (88,059) - (88,059)
Balance at 31 December 2016 368,546 1,153,817 (526,910) - 47,608 (728) 1,637,888 2,680,221 36,147 2,716,368
Profit/(loss) for the year - - - - - - 560,578 560,578 229 560,807
Other comprehensive income, net of tax - - - - 6,191 118 785 7,094 - 7,094
Total comprehensive income for the year - - - - 6,191 118 561,363 567,672 229 567,901
Capital contribution - - - - - - - - 18,869 18,869
Dividends declared and paid 19 - - -
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