REG - Fresnillo Plc - Full Year 2017 Preliminary Results <Origin Href="QuoteRef">FRES.L</Origin> - Part 5
27/02/2018 07:06
- Part 5: For the preceding part double click ID:nRSa9902Fd
Company is as follows:
As at 31 December
2017 2016
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 2016 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2016 736,893,589 $368, 545,586 50,000 £50,000
At 31 December 2017 736,893,589 $368, 545,586 50,000 £50,000
As at 31 December 2017 and 2016, 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 2017 and
2016 are as follows:
US cents per Ordinary Share Amount US$ thousands
Year ended 31 December 2017
Final dividend for 2016 declared and paid during the year(1) 21.5 158,432
Interim dividend for 2017 declared and paid during the year(2) 10.6 78,111
32.1 236,543
Year ended 31 December 2016
Final dividend for 2015 declared and paid during the year(3) 3.3 24,686
Interim dividend for 2016 declared and paid during the year(4) 8.6 63,373
11.9 88,059
(1 This dividend was approved by the Board of Directors on 23 May 2017 and
paid on 26 May 2017.)
(2 This dividend was approved by the Board of Directors on 31 July 2017 and
paid on 8 September 2017.)
(3 This dividend was approved by the Board of Directors on 3 May 2016 and paid
on 9 May 2016.)
(4 This dividend was approved by the Board of Directors on 1 August 2016 and
paid on 9 September 2016.)
20. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800 million
aggregate principal amount of 5.500% Senior Notes due 2023 (the "notes").
Movements in the year in the debt recognised in the balance sheet are as
follows:
As at 31 December
2017 2016
US$ thousands US$ thousands
Opening balance 798,027 797,032
Accrued interest 46,267 46,267
Interest paid(1) (46,267) (46,267)
Amortisation of discount and transaction costs 1,019 995
Closing balance 799,046 798,027
(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. 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.
During the year, the Group refined its estimation of costs by further
analysing the currency in which costs will be incurred. The Group has
performed separate calculations of the provision by currency, discounting at
corresponding rates. As at 31 December 2017, the discount rates used in the
calculation of the parts of the provision that relate to Mexican pesos range
from 6.27% to 7.97% (2016: range of 6.61% to 7.74%). The range for the current
year parts that relate to US dollars range from 1.37% to 2.22% (2016: not
applicable).
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 2017 (3 to 27 years from 31 December 2016).
As at 31 December
2017 US$ thousands 2016 US$ thousands
Opening balance 149,109 195,476
Increase/(decrease) to existing provision 1,024 (21,745)
Effect of change in estimation 19,678 -
Effect of changes in discount rate (281) (13,570)
Unwinding of discount 11,729 10,476
Payments (131) (472)
Foreign exchange 3,647 (21,056)
Closing balance 184,775 149,109
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 from 1 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 Net Foreign Sub-total recognised Benefits Return on plan assets (excluding amounts included Actuarial changes Actuarial changes arising from changes in financial assumptions Experience adjustments Foreign exchange Sub-total included Contributions by employer Defined benefit increase due to personnel transfer Balance at
1 January Service cost Interest Exchange in the year paid in net arising from changes in demographic assumptions in OCI 31 December
2017 interest 2017
US$ thousands
Defined benefit obligation (25,377) (956) (1,729) (1,146) (3,831) 883 - - 515 498 - 1,013 - (15) (27,327)
Fair value of plan assets 16,282 - 1,031 731 1,762 (413) (80) - - - - (80) 422 137 18,110
Net benefit liability (9,095) (956) (698) (415) (2,069) 470 (80) - 515 498 - 933 422 122 (9,217)
Pension cost charge to income statement Remeasurement gains/(losses) in OCI
Balance at Net Foreign Sub-total recognised Benefits Return on plan assets (excluding amounts included Actuarial changes Actuarial changes arising from changes in financial assumptions Experience adjustments Foreign exchange Sub-total included Contributions by employer Defined benefit increase due to personnel transfer Balance at
1 January Service cost Interest Exchange in the year paid in net arising from changes in demographic assumptions in OCI 31 December
2016 interest 2016
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)
Of the total defined benefit obligation, US$7.5 million (2016: US$6.7 million)
relates to statutory seniority premiums for unionised workers which are not
funded. The expected contributions to the plan for the next annual reporting
period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown below:
As at 31 December
2017 % 2016 %
Discount rate 7.67 7.52
Future salary increases (NCPI) 5.0 5.0
The life expectancy of current and future pensioners, men and women aged 65
and older will live on average for a further 23.1 and 26.3 years respectively
(2016: 22.3 years for men and 25.5 for women). The weighted average duration
of the defined benefit obligation is 11 years (2016: 12.1 years).
The fair values of the plan assets were as follows:
As at 31 December
2017 US$ thousands 2016 US$ thousands
Government debt 556 746
State owned companies 4,559 3,914
Mutual funds (fixed rates) 12,995 11,622
18,110 16,282
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 2017 is as shown below:
Assumptions Discount rate Future salary increases Life expectancy of pensioners
(NCPI)
Sensitivity Level 0.5% 0.5% 0.5% + 1
0.5% Decrease increase decrease Increase
Increase
(Decrease)/increase to the net defined benefit obligation (US$ thousands) (1,381) 1,516 164 (158) 440
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
2017 US$ thousands 2016 US$ thousands
Trade payables 93,664 68,216
Other payables to related parties (note 27) 9,057 3,173
Accrued expenses 18,600 16,797
Other taxes and contributions 13,628 33,447
134,949 121,633
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
2017 US$ thousands 2016 US$ thousands
Saucito 64,511 32,933
Herradura 28,813 29,544
Noche Buena 1,643 3,677
Ciénega 16,688 6,454
Fresnillo 19,570 12,079
San Julián 27,403 39,895
Other(1) 83,729 20,133
242,357 144,715
(1 Other includes commitments of) (Minera Bermejal, S. de R.L. de C.V. and
Minera Juanicipio, S.A. de C.V.) ((2016: Minera Bermejal, S. de R.L. de C.V.
and 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
2017 US$ thousands 2016 US$ thousands
Within one year 491 1,095
After one year but not more than five years 108 1,875
599 2,970
(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
2017 US$ thousands 2016 US$ thousands
Within one year 3,424 6,790
After one year but not more than five years 1,538 3,399
4,962 10,189
As at 31 December
2017 US$ thousands 2016 US$ thousands
Minimum lease payments expensed in the year 4,916 4,142
26. Contingencies
As of 31 December 2017, 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
(SAT, by its Spanish acronym) 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.
As such, 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.
- There are currently a number of ongoing tax inspections that have
been initiated by the SAT. No findings or claims have been communicated to the
Company in respect of these, other than relating to Penmont as discussed
below. It is not practical to determine the amount of any potential claims or
the likelihood of any unfavourable outcome arising from these or any future
inspections that may be initiated. However, management believes that its
interpretation of the relevant legislation is appropriate and that the Group
has complied with all regulations and paid or accrued all taxes and
withholdings that are applicable.
- With regards to Penmont tax audits, which commenced during 2015,
the Company considers it completed the provision of all documentation required
in order to demonstrate that all the 2012-2013 non-taxable income and tax
deductions which are being challenged, are appropriate. Penmont formally filed
a writ before the Mexican Taxpayers Ombudsman (PRODECON per its Spanish
acronym) requesting a conclusive agreement in the matter. SAT's first, second
and third response to the request detailed that, while the documentation
provided was sufficient to demonstrate that all of non-taxable income and the
majority of the tax deductions are correct, there are still two tax deductions
to be approved. In this sense, discussion with the SAT continue, and as long
as the conclusive agreement is still in progress, the current auditing process
is suspended and the tax authorities cannot determine a tax deficiency until
PRODECON issues the final agreement under the terms agreed between Penmont and
the SAT.
- 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 2017 and going forward.
- New income tax and VAT legislation in respect of contractors came
into effect on 1 January 2017, requiring management to ensure that contractors
are compliant with their own tax obligations, including employment tax. This
has created a new obligation for Fresnillo to obtain and retain sufficient
evidence of contractors' fiscal compliance in order to deduct costs related to
the contractors for income tax purposes and to recover input VAT. In late
2017, the 2018 Federal Revenue Law clarified that if the online portal
(established by the tax authorities to facilitate compliance) is used in 2018,
it would be sufficient to discharge any 2017 compliance obligations.
Management considers that it is well progressed in meeting its obligations for
2017 and does not consider that any significant economic exposure will arise
as a result of this new legislation with respect to the current year.
- 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 Court noted in that same year that certain
remediation activities were necessary to comply with the relevant regulatory
requirements and requested the guidance of the Federal Environmental Agency
(SEMARNAT) in this respect. The Agrarian Court 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 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 Agrarian Court in respect of the approximately 300
hectares where Penmont conducted mining activities. The agrarian community
Ejido El Bajio appealed this procedural order from the Agrarian Court and a
Federal District Court denied this appeal. The agrarian community has
presented in the month of August 2017 a further and last recourse against this
ruling by the Federal District Court and the final result is pending.
- 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
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 2017 and 2016 and balances as at 31 December 2017 and 2016.
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
2017 US$ thousands 2016 US$ thousands 2017 US$ thousands 2016 US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 225,741 189,584 397 301
Other:
Industrias Peñoles, S.A.B. de C.V. 4,925 5,974 - -
Servicios Administrativos Peñoles, S.A. de C.V. - - 2,434 1,612
Servicios Especializados Peñoles, S.A. de C.V. - - 1,786 36
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 1,650 908
Eólica de Coahuila S.A. de C.V. - - 1,926 -
Other 392 34 864 316
Sub-total 231,058 195,592 9,057 3,173
Less-current portion 231,058 195,592 9,057 3,173
Non-current portion - - - -
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2017 US$ thousands 2016 US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 538,887 467,529
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
2017 US$ thousands 2016 US$ thousands
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,101,579 1,905,503
Other income 3,173 2,381
Total income 2,104,752 1,907,884
(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$139.9 million (2016: US$141.1million) and
include sales credited to development projects of US$8.3 million (2016: US$1.6
million).)
Year ended 31 December
2017 US$ thousands 2016 US$ thousands
Expenses:
Administrative services(2):
Servicios Administrativos Peñoles, S.A. de C.V.(3) 26,323 24,309
Servicios Especializados Peñoles, S.A. de C.V. 18,239 16,015
44,562 40,324
Energy:
Termoelectrica Peñoles, S. de R.L. de C.V. 20,415 16,011
Fuerza Eólica del Istmo S.A. de C.V. 1,678 1,794
Eólica de Coahuila S.A. de C.V. 13,666 -
35,759 17,805
Operating materials and spare parts:
Wideco Inc 4,534 5,254
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 6,420 3,140
10,954 8,394
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 8,406 8,268
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 8,157 7,155
Other expenses: 3,795 2,085
Total expenses 111,633 84,031
(2 Includes US$6.4 million (2016: US$4.7 million) corresponding to expenses
reimbursed.)
(3 Includes US$7.5 million (2016: US$9.5 million) relating to engineering
costs that were capitalised.)
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the
Executive Committee who receive remuneration.
Year ended 31 December
2017 US$ thousands 2016 US$ thousands
Salaries and bonuses 2,689 2,416
Post-employment benefits 235 208
Other benefits 373 345
Total compensation paid in respect of key management personnel 3,297 2,969
Year ended 31 December
2017 US$ thousands 2016 US$ thousands
Accumulated accrued defined pension entitlement 4,433 4,237
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 2017
and 2016 are as follows:
Year ended 31 December
Class of services 2017 US$ thousands 2016 US$ thousands
Fees payable to the Group's auditor for the audit of the Group's annual 1,187 1,149
accounts
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 226 222
Audit-related assurance services 308 350
Tax compliance services 19 21
Other non-audit services 27 -
Total 1,767 1,742
29. Notes to the consolidated statement of cash flows
Notes 2017 US$ thousands 2016 US$ thousands
Reconciliation of profit for the year to net cash generated from operating
activities
Profit for the year 560,807 424,962
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 5 367,609 346,502
Employee profit sharing 7 17,150 15,145
Deferred income tax 10 (3,101) 102,549
Current income tax expense 10 183,783 190,729
(Gain)/loss on the sale of property, plant and equipment and other assets 8 (25,333) 1,103
Other losses - 981
Write-off of property, plant and equipment - 3,005
Impairment of available-for-sale financial assets 8 36 -
Net finance costs 33,674 33,019
Foreign exchange loss/(gain) 11,434 (539)
Difference between pension contributions paid and amounts recognised in the (58) (944)
income statement
Non cash movement on derivatives 41,389 40,345
Changes in fair value of Silverstream 14 (113,656) (133,528)
Working capital adjustments
(Increase) in trade and other receivables (44,381) (39,526)
(Increase)/decrease in prepayments and other assets (708) 113
Decrease in inventories 5,745 23,725
Increase in trade and other payables 36,426 5,133
Cash generated from operations 1,070,816 1,012,774
Income tax paid (292,063) (102,255)
Employee profit sharing paid (17,282) (12,561)
Net cash from operating activities 761,471 897,958
30. Financial instruments
(a) Fair value category
As at 31 December 2017
US$ thousands
Financial assets: At fair value Available-for-sale investments at fair value through OCI Loans At fair value through OCI (cash flow hedges)
through profit and
or loss receivables
Trade and other receivables(1) (note 16) - - 236,859 -
Available-for-sale financial assets (note 13) - 144,856 - -
Silverstream contract (note 14) 538,887 - - -
Embedded derivatives within sales contracts(1) (note 4) 6,511 - - -
Derivative financial instruments (note 30(c)) 311 - - 71
Financial liabilities: At fair value At amortised At fair value through OCI (cash flow hedges)
through profit or loss Cost
Interest-bearing loans (note 20) - 799,046 -
Trade and other payables (note 23) - 102,721 -
Derivative financial instruments (note 30(c)) 37 - 19,179
(1 Trade and other receivables and embedded derivative within sales contracts
are presented net in Trade and other receivables in the balance sheet. )
( )
As at 31 December 2016
US$ thousands
Financial assets: At fair value Available-for-sale investments at fair value through OCI Loans At fair value through OCI (cash flow hedges)
through profit and
or loss receivables
Trade and other receivables(1) (note 16) - - 213,750 -
Available-for-sale financial assets (note 13) - 116,171 - -
Silverstream contract (note 14) 467,529 - - -
Derivative financial instruments (note 30(c)) 145 - - 23,005
Financial liabilities: At fair value At amortised At fair value through OCI (cash flow hedges)
through profit or loss Cost
Interest-bearing loans (note 20) - 798,027 -
Trade and other payables (note 23) - 70,442 -
Embedded derivatives within sales contracts(1) (note 4) 2,750 - -
Derivative financial instruments (note 30(c)) - - 646
(1 Trade and other receivables and embedded derivative within sales contracts
are presented net in Trade and other receivables in the balance sheet.)
(b) Fair value measurement
The fair value of financial assets and liabilities, together with the carrying
amounts shown in the balance sheet are as follows:
As at 31 December
Carrying amount Fair value
2017 US$ thousands 2016 US$ thousands 2017 US$ thousands 2016 US$ thousands
Financial assets:
Available-for-sale financial assets 144,856 116,171 144,856 116,171
Silverstream contract (note 14) 538,887 467,529 538,887 467,529
Embedded derivatives within sales contracts 6,511 - 6,511 -
Derivative financial instruments 382 23,150 382 23,150
Financial liabilities:
Interest-bearing loans(1) (note 20) 799,046 798,027 878,864 840,904
Embedded derivatives within sales contracts - 2,750 - 2,750
Derivative financial instruments 19,216 646 19,216 646
(1 Interest-bearing loans are categorised in Level 1 of the fair value
hierarchy.)
The financial assets and liabilities measured at fair value are categorised
into the fair value hierarchy as at 31 December as follows:
As of 31 December 2017
Fair value measure using
Quoted prices in active markets Level 1 US$ thousands Significant observable Level 2 US$ thousands Significant unobservable Level 3 US$ thousands Total US$ thousands
Financial assets:
Derivative financial instruments:
Embedded derivatives within sales contracts - - 6,511 6,511
Options commodity contracts - 71 - 71
Options and forward foreign exchange contracts - 311 - 311
Silverstream contract - - 538,887 538,887
- 382 538,887 539,269
Financial investments available-for-sale:
Quoted investments 144,856 - - 144,856
144,856 382 145,238
Financial liabilities:
Derivative financial instruments:
Options commodity contracts - 19,179 - 19,179
Options and forward foreign exchange contracts - 37 - 37
- 19,216 6,511 25,727
As of 31 December 2016
Fair value measure using
Quoted prices in Significant observable Significant unobservable Level 3 US$ thousands Total US$ thousands
active markets Level 2 US$ thousands
Level 1 US$ thousands
Financial assets:
Derivative financial instruments:
Options commodity contracts - 23,005 - 23,005
Option and forward foreign exchange contracts - 145 - 145
Silverstream contract - - 467,529 467,529
- 23,150 467,529 490,679
Financial investments available-for-sale:
Quoted investments 116,171 - - 116,171
116,171 23,150 467,529 606,850
Financial liabilities:
Derivative financial instruments:
Embedded derivatives within sales contracts - - 2,750 2,750
Options commodity contracts - 66 - 66
Options and forward foreign exchange contracts - 580 - 580
- 646 2,750 3,396
There have been no significant transfers between Level 1 and Level 2 of the
fair value hierarchy, and no transfers into and out of Level 3 fair value
measurements.
A reconciliation of the opening balance to the closing balance for Level 3
financial instruments other than Silverstream (which is disclosed in note 14)
is shown below:
2017 US$ thousands 2016 US$ thousands
Balance at 1 January: (2,750) (532)
Changes in fair value 15,068 (1,718)
Realised embedded derivatives during the year (5,807) (500)
Balance at 31 December 6,511 (2,750)
The fair value of the financial assets and liabilities is included at the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.
The following valuation techniques were used to estimate the fair values:
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with various
counterparties, principally financial institutions with investment grade
credit ratings. The foreign currency forward (Level 2) contracts are measured
based on observable spot exchange rates, the yield curves of the respective
currencies as well as the currency basis spreads between the respective
currencies. The foreign currency option contracts are valued using the Black
Scholes model, the significant inputs to which include observable spot
exchange rates, interest rates and the volatility of the currency.
Option commodity contracts
The Group enters into derivative financial instruments with various
counterparties, principally financial institutions with investment grade
credit ratings. The option commodity (Level 2) contracts are measured based on
observable spot commodity prices, the yield curves of the respective commodity
as well as the commodity basis spreads between the respective commodities. The
option contracts are valued using the Black Scholes model, the significant
inputs to which include observable spot commodities price, interest rates and
the volatility of the commodity.
Silverstream contract
The fair value of the Silverstream contract is determined using a valuation
model including unobservable inputs (Level 3). This derivative has a term of
over 20 years and the valuation model utilises a number of inputs that are not
based on observable market data due to the nature of these inputs and/or the
duration of the contract. Inputs that have a significant effect on the
recorded fair value are the volume of silver that will be produced and sold
from the Sabinas mine over the contract life, the future price of silver,
future foreign exchange rates between the Mexican peso and US dollar, future
inflation and the discount rate used to discount future cash flows.
The estimate of the volume of silver that will be produced and sold from the
Sabinas mine requires estimates of the recoverable silver reserves and
resources, the related production profile based on the Sabinas mine plan and
the expected recovery of silver from ore mined. The estimation of these inputs
is subject to a range of operating assumptions and may change over time.
Estimates of reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided to the
Company. The production profile and estimated payable silver that will be
recovered from ore mined is based on the latest plan and estimates, also
provided to the Company by Peñoles. The inputs assume no interruption in
production over the life of the Silverstream contract and production levels
which are consistent with those achieved in recent years
Management regularly assesses a range of reasonably possible alternatives for
those significant unobservable inputs described above, and determines their
impact on the total fair value. The significant unobservable inputs are not
interrelated. The fair value of the Silverstream is not significantly
sensitive to a reasonable change in future exchange rates, however, it is to a
reasonable change in future silver price, future inflation and the discount
rate used to discount future cash flows.
For further information relating to the Silverstream contract see note 14.
The sensitivity of the valuation to the inputs relating to market risks, being
the price of silver, foreign exchange rates, inflation and the discount rate
is disclosed in note 31.
Quoted investments:
The fair value of available-for-sale financial assets is derived from quoted
market prices in active markets. (Level 1)
Interest-bearing loans
The fair value of the Group's interest-bearing loan, is derived from quoted
market prices in active markets. (Level 1)
Embedded derivatives within sales contracts:
Sales of concentrates, precipitates and doré bars are 'provisionally priced'
and revenue is initially recognised using this provisional price and the
Group's best estimate of the contained metal. Revenue is subject to final
price and metal content adjustments subsequent to the date of delivery (see
note 2 (p)). This price exposure is considered to be an embedded derivative
and is separated from the sales contract.
At each reporting date, the provisionally priced metal content is revalued
based on the forward selling price for the quotational period stipulated in
the relevant sales contract. The selling price of metals can be reliably
measured as these metals are actively traded on international exchanges but
the estimated metal content is a non-observable input to this valuation (Level
3).
At 31 December 2017 the fair value of embedded derivatives within sales
contracts was US$6.5 million (2016: US$(2.7) million). The revaluation effects
of embedded derivatives arising from these sales contracts are recorded as an
adjustment to revenues.
(c) Derivative financial instruments
The Group enters into certain forward and option contracts in order to manage
its exposure to foreign exchange risk associated with costs incurred
in Mexican pesos and other currencies. The Group also enters into option
contracts to manage its exposure to commodity price risk as described in
- More to follow, for following part double click ID:nRSa9902Ff 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 that commenced from 31 December
2013) is payable to Peñoles. The cash payment per ounce for the year ended 31 December 2017 was $5.20 per ounce (2016:
$5.15 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. The term of the derivative is based on Sabinas life of mine which is
currently 38 years. 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 2017 total proceeds received in cash were US$43.3 million (2016: US$47.5 million) of which, US$5.9 million was in
respect of proceeds receivable as at 31 December 2016 (2015: US$2.8 million). Cash received in respect of the year of
US$37.3 million (2016: US$44.8 million) corresponds to 3.6 million ounces of payable silver (2016: 3.8 million ounces). As
at 31 December 2017, a further US$4.9 million (2016: US$5.9 million) of cash receivable corresponding to 422,375 ounces of
silver is due (2016: 538,756 ounces).
The US$113.6 million unrealised gain recorded in the income statement (2016: US$133.5 million gain) resulted from the
updating of assumptions used to value the Silverstream contract. The most significant of these were the increase in the
Sabinas mine silver reserves and resources, the unwinding of the discount, an increase in the forward price of silver, and
the difference between the payments already received during the year ended 31 December 2017 and payments estimated in the
valuation model as of 31 December 2016.
A reconciliation of the beginning balance to the ending balance is shown below:
2017 2016
US$ thousands US$ thousands
Balance at 1 January: 467,529 384,771
Cash received in respect of the year (37,373) (44,796)
Cash receivable (4,925) (5,974)
Remeasurement gains recognised in profit and loss 113,656 133,528
Balance at 31 December 538,887 467,529
Less - Current portion 32,318 28,718
Non-current portion 506,569 438,811
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
2017 2016
US$ thousands US$ thousands
Finished goods1 10,957 5,736
Work in progress2 175,016 189,047
Ore stockpile3 15,115 18,253
Operating materials and spare parts 75,331 70,348
276,419 283,384
Accumulated write-down of work in progress inventory4 - (2,269)
Allowance for obsolete and slow-moving inventories (5,314) (4,265)
Balance as 31 December at lower of cost and net realisable value 271,105 276,850
Less - Current portion 179,485 187,499
Non-current portion5 91,620 89,351
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.
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$1,170.1 million (2016: US$1,042.4 million) before
changes to the net realisable value of inventory. The adjustment to the net realisable value allowance against
work-in-progress inventory decreased US$2.2 million during the year (2016: US$20.3 million decrease). The adjustment to the
allowance for obsolete and slow-moving inventory recognised as an expense was US$1.04 million (2016: US$0.7 million).
16. Trade and other receivables
Year ended 31 December
2017 2016
US$ thousands US$ thousands
Trade and other receivables from related parties (note 27)1 226,134 189,619
Value Added Tax receivable 85,979 70,426
Advances and other receivables from contractors 19,832 14,651
Other receivables from related parties (note 27) 4,925 5,973
Loans granted to contractors 1,403 1,401
Other receivables arising on the sale of fixed assets 57 386
Other receivables 4,612 4,693
342,942 287,149
Provision for impairment of 'other receivables' (436) (471)
Trade and other receivables classified as current assets 342,506 286,678
Other receivables classified as non-current assets:
Loans granted to contractors 129 990
129 990
342,635 287,668
1 Trade receivables from related parties includes the fair value of embedded derivatives arising due to provisional pricing
in sales contracts of US$6.5 million as at 31 December 2017 (2016: US$(2.8) 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$242.3 million (2016: US$206.8 million), and in pesos US$100.3 million
(2016: US$80.9 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 2017
is US$0.4 million (2016: US$0.5 million).
In determining the recoverability of receivables, the Group performs a risk analysis considering the type and age of the
outstanding receivable and the credit worthiness of the counterparty, see note 31(b).
17. Cash and cash equivalents and short term investments
The Group considers cash and cash equivalents and short term investments when planning its operations and in order to
achieve its treasury objectives.
As at 31 December
2017 2016
US$ thousands US$ thousands
Cash at bank and on hand 4,265 2,592
Short-term deposits 871,769 709,362
Cash and cash equivalents 876,034 711,954
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
2017 2016
US$ thousands US$ thousands
Short-term investments - 200,000
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 2017 there were no short-term investments (31 December 2016: US$200,000 held
in fixed-term bank deposits).
18. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
2017 2016
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 2016 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2016 736,893,589 $368, 545,586 50,000 £50,000
At 31 December 2017 736,893,589 $368, 545,586 50,000 £50,000
As at 31 December 2017 and 2016, 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 2017 and 2016 are as follows:
US cents per Amount
Ordinary Share US$ thousands
Year ended 31 December 2017
Final dividend for 2016 declared and paid during the year1 21.5 158,432
Interim dividend for 2017 declared and paid during the year2 10.6 78,111
32.1 236,543
Year ended 31 December 2016
Final dividend for 2015 declared and paid during the year3 3.3 24,686
Interim dividend for 2016 declared and paid during the year4 8.6 63,373
11.9 88,059
1 This dividend was approved by the Board of Directors on 23 May 2017 and paid on 26 May 2017.
2 This dividend was approved by the Board of Directors on 31 July 2017 and paid on 8 September 2017.
3 This dividend was approved by the Board of Directors on 3 May 2016 and paid on 9 May 2016.
4 This dividend was approved by the Board of Directors on 1 August 2016 and paid on 9 September 2016.
20. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800 million aggregate principal amount of 5.500% Senior Notes
due 2023 (the "notes").
Movements in the year in the debt recognised in the balance sheet are as follows:
As at 31 December
2017 US$ thousands 2016 US$ thousands
Opening balance 798,027 797,032
Accrued interest 46,267 46,267
Interest paid1 (46,267) (46,267)
Amortisation of discount and transaction costs 1,019 995
Closing balance 799,046 798,027
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. 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.
During the year, the Group refined its estimation of costs by further analysing the currency in which costs will be
incurred. The Group has performed separate calculations of the provision by currency, discounting at corresponding rates.
As at 31 December 2017, the discount rates used in the calculation of the parts of the provision that relate to Mexican
pesos range from 6.27% to 7.97% (2016: range of 6.61% to 7.74%). The range for the current year parts that relate to US
dollars range from 1.37% to 2.22% (2016: not applicable).
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 2017 (3 to 27 years from 31 December 2016).
As at 31 December
2017 2016
US$ thousands US$ thousands
Opening balance 149,109 195,476
Increase/(decrease) to existing provision 1,024 (21,745)
Effect of change in estimation 19,678 -
Effect of changes in discount rate (281) (13,570)
Unwinding of discount 11,729 10,476
Payments (131) (472)
Foreign exchange 3,647 (21,056)
Closing balance 184,775 149,109
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 from 1 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 2017 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 2017
interest assumptions assumptions
US$ thousands
Defined benefit obligation (25,377) (956) (1,729) (1,146) (3,831) 883 - - 515 498 - 1,013 - (15) (27,327)
Fair value of plan assets 16,282 - 1,031 731 1,762 (413) (80) - - - - (80) 422 137 18,110
Net benefit liability (9,095) (956) (698) (415) (2,069) 470 (80) - 515 498 - 933 422 122 (9,217)
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)
Of the total defined benefit obligation, US$7.5 million (2016: US$6.7 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions to the plan for the next annual reporting period are
nil.
The principal assumptions used in determining pension and other post-employment benefit obligations for the Group's plans
are shown below:
As at 31 December
2017 2016
% %
Discount rate 7.67 7.52
Future salary increases (NCPI) 5.0 5.0
The life expectancy of current and future pensioners, men and women aged 65 and older will live on average for a further
23.1 and 26.3 years respectively (2016: 22.3 years for men and 25.5 for women). The weighted average duration of the
defined benefit obligation is 11 years (2016: 12.1 years).
The fair values of the plan assets were as follows:
As at 31 December
2017 2016
US$ thousands US$ thousands
Government debt 556 746
State owned companies 4,559 3,914
Mutual funds (fixed rates) 12,995 11,622
18,110 16,282
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 2017 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) (1,381) 1,516 164 (158) 440
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
2017 2016
US$ thousands US$ thousands
Trade payables 93,664 68,216
Other payables to related parties (note 27) 9,057 3,173
Accrued expenses 18,600 16,797
Other taxes and contributions 13,628 33,447
134,949 121,633
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
2017 2016
US$ thousands US$ thousands
Saucito 64,511 32,933
Herradura 28,813 29,544
Noche Buena 1,643 3,677
Ciénega 16,688 6,454
Fresnillo 19,570 12,079
San Julián 27,403 39,895
Other1 83,729 20,133
242,357 144,715
1 Other includes commitments of Minera Bermejal, S. de R.L. de C.V. and Minera Juanicipio, S.A. de C.V. (2016: Minera
Bermejal, S. de R.L. de C.V. and 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
2017 2016
US$ thousands US$ thousands
Within one year 491 1,095
After one year but not more than five years 108 1,875
599 2,970
(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
2017 2016
US$ thousands US$ thousands
Within one year 3,424 6,790
After one year but not more than five years 1,538 3,399
4,962 10,189
As at 31 December
2017 2016
US$ thousands US$ thousands
Minimum lease payments expensed in the year 4,916 4,142
26. Contingencies
As of 31 December 2017, 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 (SAT, by its Spanish acronym) 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.
As such, 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.
- There are currently a number of ongoing tax inspections that have been initiated by the SAT. No findings or claims
have been communicated to the Company in respect of these, other than relating to Penmont as discussed below. It is not
practical to determine the amount of any potential claims or the likelihood of any unfavourable outcome arising from these
or any future inspections that may be initiated. However, management believes that its interpretation of the relevant
legislation is appropriate and that the Group has complied with all regulations and paid or accrued all taxes and
withholdings that are applicable.
- With regards to Penmont tax audits, which commenced during 2015, the Company considers it completed the provision of
all documentation required in order to demonstrate that all the 2012-2013 non-taxable income and tax deductions which are
being challenged, are appropriate. Penmont formally filed a writ before the Mexican Taxpayers Ombudsman (PRODECON per its
Spanish acronym) requesting a conclusive agreement in the matter. SAT's first, second and third response to the request
detailed that, while the documentation provided was sufficient to demonstrate that all of non-taxable income and the
majority of the tax deductions are correct, there are still two tax deductions to be approved. In this sense, discussion
with the SAT continue, and as long as the conclusive agreement is still in progress, the current auditing process is
suspended and the tax authorities cannot determine a tax deficiency until PRODECON issues the final agreement under the
terms agreed between Penmont and the SAT.
- 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 2017 and
going forward.
- New income tax and VAT legislation in respect of contractors came into effect on 1 January 2017, requiring
management to ensure that contractors are compliant with their own tax obligations, including employment tax. This has
created a new obligation for Fresnillo to obtain and retain sufficient evidence of contractors' fiscal compliance in order
to deduct costs related to the contractors for income tax purposes and to recover input VAT. In late 2017, the 2018 Federal
Revenue Law clarified that if the online portal (established by the tax authorities to facilitate compliance) is used in
2018, it would be sufficient to discharge any 2017 compliance obligations. Management considers that it is well progressed
in meeting its obligations for 2017 and does not consider that any significant economic exposure will arise as a result of
this new legislation with respect to the current year.
- 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 Court noted in that same year that certain remediation activities were necessary to comply with the
relevant regulatory requirements and requested the guidance of the Federal Environmental Agency (SEMARNAT) in this respect.
The Agrarian Court 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 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 Agrarian Court in respect of the approximately
300 hectares where Penmont conducted mining activities. The agrarian community Ejido El Bajio appealed this procedural
order from the Agrarian Court and a Federal District Court denied this appeal. The agrarian community has presented in the
month of August 2017 a further and last recourse against this ruling by the Federal District Court and the final result is
pending.
- 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 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 2017 and 2016 and balances as at
31 December 2017 and 2016.
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
2017 2016 2017 2016
US$ thousands US$ thousands US$ thousands US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 225,741 189,584 397 301
Other:
Industrias Peñoles, S.A.B. de C.V. 4,925 5,974 - -
Servicios Administrativos Peñoles, S.A. de C.V. - - 2,434 1,612
Servicios Especializados Peñoles, S.A. de C.V. - - 1,786 36
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 1,650 908
Eólica de Coahuila S.A. de C.V. - - 1,926 -
Other 392 34 864 316
Sub-total 231,058 195,592 9,057 3,173
Less-current portion 231,058 195,592 9,057 3,173
Non-current portion - - - -
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2017 2016
US$ thousands US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 538,887 467,529
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
2017 2016
US$ thousands US$ thousands
Income:
Sales:1
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,101,579 1,905,503
Other income 3,173 2,381
Total income 2,104,752 1,907,884
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$139.9 million (2016: US$141.1million) and include sales
credited to development projects of US$8.3 million (2016: US$1.6 million).
Year ended 31 December
2017 2016
US$ thousands US$ thousands
Expenses:
Administrative services2:
Servicios Administrativos Peñoles, S.A. de C.V.3 26,323 24,309
Servicios Especializados Peñoles, S.A. de C.V. 18,239 16,015
44,562 40,324
Energy:
Termoelectrica Peñoles, S. de R.L. de C.V. 20,415 16,011
Fuerza Eólica del Istmo S.A. de C.V. 1,678 1,794
Eólica de Coahuila S.A. de C.V. 13,666 -
35,759 17,805
Operating materials and spare parts:
Wideco Inc 4,534 5,254
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 6,420 3,140
10,954 8,394
Equipment repair and administrative
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