REG - Fresnillo Plc - FY19 Preliminary Results
03/03/2020 07:00
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RNS Number : 8118E Fresnillo PLC 03 March 2020
Fresnillo plc
Financial results for the year ended 31 December 2019
Fresnillo plc today announced its financial results for the full year ended 31
December 2019. Octavio Alvídrez, CEO said:
"2019 was a more challenging year as expected, but we remain determined and
optimistic for the future.
Production did not meet our expectations in 2019. Total silver production fell
by 11.6% to 54.6 moz as a result of the expected lower ore grade at Saucito as
well as lower than expected ore grades at Fresnillo and San Julián Veins and
Disseminated Ore Body (DOB). Gold production of 875.9 koz was down compared to
2018 due to the expected lower production from Noche Buena and a lower ore
grade at San Julián Veins.
This challenging operating environment was reflected in our financial
performance, with gross profit and EBITDA decreasing by 40.9% and 26.3%
respectively. Profit margins decreased accordingly but still remained at
healthy levels. We maintained a solid financial position, with US$336.6
million in cash and other liquid funds 1 as of 31 December 2019,
notwithstanding paying dividends of US$142.2 million, investing US$559.3
million in capex and spending US$157.9 million on exploration to underpin
future growth.
Our focus in 2020 is on maximising the potential of our existing operations.
We are committed to working smarter and more efficiently in order to extract
maximum value from our asset base. We have implemented a major performance
improvement plan across our portfolio that includes intensive infill drilling
to improve the certainty of the geological model, dilution control and raising
development rates, together with actions to address contractor productivity
and equipment availability.
We are investing in infrastructure, plant and machinery including the new
Tunnel Boring Machine which is now being ramped up at Fresnillo - one of the
first of its kind. We have also begun to define a new programme to control
costs and increase productivity.
Though it will take time for these measures to take full effect, we do expect
production to stabilise in 2020 and start increasing during 2021.
We continue to invest in our longer term development projects in line with our
organic growth strategy. I was pleased to confirm Board approval for the
Juanicipio project in early 2019. Juanicipio will be a core element in the
Group's future production of silver. Production at Fresnillo will also benefit
from the new US$53.8m Pyrites Plant which is on track for completion in 2020.
The safety of our employees and contractors is our key priority so it is with
deep sadness that I confirm two fatalities during the year. We remain
determined to instil a safety first culture. The "I Care, We Care" has proven
to be effective and has contributed to the reduction in our Lost Time Injury
Frequency Rate.
We have made excellent progress with our other ESG commitments in the year.
Effective and safe management of our tailings facilities has been a major
focus after the tragic events in Brazil. Already in line with international
standards, we have gone a step further by establishing our own Independent
Tailings Review Panel and appointed third party specialists to perform dam
safety inspections and review our tailing dam governance system.
As a major participant in the extractive industry, we have a responsibility to
integrate renewables and clean technologies into our energy mix. Although the
percentage of our energy consumption met by wind power decreased slightly in
2019, due to a significant increase in overall energy use, we remain committed
to achieving our goal of using wind power to generate 75% of our electricity
consumption by the end of the year. We are rolling out dual fuel engines in
haulage trucks, initially at Herradura, which has also had a positive impact
on greenhouse gas (GHG) emissions.
Looking ahead, we will continue to manage operational challenges, as we make
progress with the performance improvement initiatives. As previously guided,
we expect silver production to be in line with 2019, before returning to
growth in 2021, driven by operational improvements at the Fresnillo mine, the
Pyrites plant, Juanicipio and San Julián. Gold is expected to decline driven
by the planned Noche Buena closure and lower production from Herradura. We
also anticipate that fixed costs will remain relatively high during 2020,
before the cost management initiatives have an impact.
While the broader macro economic environment remains uncertain, we are
confident on the outlook for mining in Mexico, where we have welcomed the
on-going support of the Mexican Government. We will continue to work hard to
ensure that mining is supported by all parts of the federal and state
administration.
We will rise to the immediate challenges confronting our business today, and
we move forward with certainty and vigour. Our assets are of high quality and
our exploration pipeline continues to confirm promising prospects. We have a
clear strategy, a talented and committed team, and we look ahead with
confidence."
Twelve months to 31 December 2019
$ million unless stated 2019 2018 % change
Silver Production* (kOz) 54,614 61,804 (11.6)
Gold Production* (Oz) 875,913 922,527 (5.1)
Total Revenue 2,119.6 2,103.8 0.8
Adjusted Revenue** 2,270.2 2,243.4 1.2
Gross Profit 461.7 780.7 (40.9)
EBITDA 674.0 915.1 (26.3)
Profit Before Income Tax 178.8 483.9 (63.1)
Profit for the year 205.8 350.0 (41.2)
Basic and Diluted EPS excluding post-tax Silverstream effects (USD)*** 0.231 0.461 (49.9)
* Fresnillo attributable production, plus ounces registered in
production through the Silverstream Contract
** Adjusted Revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and lead and zinc hedging
*** The weighted average number of ordinary shares was 736,893,589 for
2019 and 2018. See note 17 in the consolidated financial statements.
2019 Highlights
Higher gold and silver prices offset by lower volumes and operational setbacks
· Adjusted revenue of US$2,270.2 million, up 1.2% over 2018, due to
higher gold and silver prices.
· Profit margins decreased but remained at healthy levels. Gross
profit and EBITDA down 40.9% and 26.3%, to US$461.7 million and US$674.0
million respectively.
· Profit from continuing operations of US$171.7 million, down 66.1%.
· Capex of US$559.3 million, down 16.4% primarily due to the
commissioning of several projects including the pyrites plant at Saucito and
the dynamic leaching plant at Herradura in 2018.
· Strong balance sheet and low leverage ratio; cash and other liquid
funds 2 of US$336.6 million, down 40.0% mainly due to the high level of capex
and dividends albeit being lower 16.4% and 52.3% respectively vs. 2018.
· Dividends of US$142.2 million paid, down 52.3% mainly due to lower
profits for the period, in accordance with our dividend policy.
Delivering on development projects and operational improvements
· Full year silver production of 54.6 moz (including Silverstream)
down 11.6% on 2018, driven by the lower ore grades at Saucito, Fresnillo and
San Julián, both veins and disseminated ore body.
· Gold production of 875.9 koz down 5.1% vs. 2018 mainly driven by
the anticipated lower volume of ore processed at Noche Buena, exacerbated by
lower ore grades at San Julián.
· Board approval of Juanicipio early in 2019. Mine development at
Juanicipio reached over 25 km, with ore from these activities set to be
processed at the Fresnillo beneficiation plant from June 2020.
· Construction of the Juanicipio beneficiation plant has been delayed
by six months with commissioning now expected in mid 2021.
· The Fresnillo Full Potential (FFP) project underway to address the
structural challenges posed by deeper operations, narrower veins and greater
ore variability at the Fresnillo and Saucito mines.
· Construction of the new Pyrites Plant at Fresnillo on track for
completion in 2H 2020.
· The second phase of the beneficiation plant optimisation at
Fresnillo also continued to progress.
· Successfully commissioned new US$22.7m state-of-the-art tunnel
boring machine (TBM) at Fresnillo.
· US$69.3m project to deepen the Jarillas shaft to 1,000 metres at
Saucito progresses, with completion due in 2024.
· Silver resources increased 2.4%; gold resources remained stable at
39.0 moz.
· Silver reserves increased 1.7% reflecting the recognition of
reserves at Juanicipio for the first time offset by the decrease in reserves
at the underground silver mines.
· Gold reserves decreased 16.0% mainly due to the exclusion of
reserves at Soledad & Dipolos following the absence of an agreement with
the Ejido community, and the exclusion of a number of benches at Herradura
resulting from the negative infill drilling results and revised calculations.
· We are committed to improving our safety record as we regret to
report that two fatalities occurred during 2019.
· We began work on defining a new programme to control costs and
increased productivity in 2H19.
Outlook - stable 2020, return to silver growth in 2021
· In 2020, Fresnillo expects to produce in the range of 51 to 56 moz
of silver and 815 to 900 koz of gold.
· The 2019 capex projects will continue in 2020 and will account for
the majority of our investment in the year ahead, together with an increase in
capex as the construction of Juanicipio progresses.
Analyst Presentation
Fresnillo plc will be hosting a presentation for analysts and investors today
at 09.00 (GMT) at Bank of America Merrill Lynch Financial Centre, 2 King
Edward St., EC1A 1HQ, London, United Kingdom.
The presentation will also be available via a live webcast. A link to the
webcast will be made available on Fresnillo's homepage: www.fresnilloplc.com
(http://www.fresnilloplc.com) or can be accessed directly here
https://kvgo.com/IJLO/Fresnillo_FY19_Preliminary_Results
(https://kvgo.com/IJLO/Fresnillo_FY19_Preliminary_Results) .
If you are not attending the presentation in person, but wish to ask
questions, you will need join the live conference call as questions cannot be
submitted via the webcast function.
Conference Call:
To access the conference call, please use the following details:
UK: 0808 109 0700
US: + 1 866 966 5335
Mexico: 00 1 866 966 8830
Int'l: +44 (0) 20 3003 2666
Password: Fresnillo
A recording of the conference call will be available for 7 days following the
presentation. The access details for the replay are as follows:
Number: +44 (0) 20 8196 1998
Pin: 8829454#
For further information, please visit our website: www.fresnilloplc.com
(http://www.fresnilloplc.com) or contact:
Fresnillo plc
London Office Tel: +44(0)20 7339 2470
Gabriela Mayor, Head of Investor Relations
Patrick Chambers
Mexico City Office Tel: +52 55 52 79 3206
Ana Belém Zárate
Powerscourt Tel: +44(0)20 7250 1446
Peter Ogden
About Fresnillo plc
Fresnillo plc is the world's largest primary silver producer and Mexico's
largest gold producer, listed on the London and Mexican Stock Exchanges under
the symbol FRES.
Fresnillo plc has seven operating mines, all of them in Mexico - Fresnillo,
Saucito, Ciénega (including the San Ramón satellite mine Las Casas Rosario
& Cluster Cebollitas), Herradura, Soledad-Dipolos(1), Noche Buena and San
Julián (Veins and Disseminated Ore Body), three development projects - the
Pyrites Plant at Fresnillo, the optimisation of the beneficiation plant also
at Fresnillo and Juanicipio, and six advanced exploration projects - Orisyvo,
Centauro great potential and Centauro Deep, Guanajuato, Rodeo and Tajitos as
well as a number of other long term exploration prospects.
Fresnillo plc has mining concessions and exploration projects in Mexico, Peru
and Chile. Fresnillo plc has a strong and long tradition of exploring, mining,
a proven track record of mine development, reserve replacement, and production
costs in the lowest quartile of the cost curve for silver. Fresnillo plc's
goal is to maintain the Group's position as the world's largest primary silver
company and Mexico's largest gold producer.
(1) Operations at Soledad-Dipolos are currently suspended.
cHAIRMAN'S STATEMENT
Addressing our operational setbacks, reaffirming our commitment
In many respects, this has been a disappointing year. We have failed to
achieve our expected production volumes and the improvement in our health and
safety record has proved elusive. These matters are discussed below or
elsewhere in this report.
Furthermore, it is important to reiterate that our commitment to delivering
long-term benefits to all of our stakeholders remains undiminished. Indeed,
this commitment was formalised during the year through the definition and
approval of our Purpose, in line with the requirements of the new UK Corporate
Governance Code, as we promised in last year's annual report.
A challenging year for our operations
Unfortunately, our efforts to address a number of the key issues that have
been holding back production did not deliver the anticipated outcomes,
particularly in the first half of the year at our Fresnillo, San Julián and
Herradura mines.
During the year we experienced unexpectedly low ore grades and production,
delays to infrastructure projects, shortfalls in contractor performance,
higher costs and ineffective maintenance, among other issues. In the face of
these challenges, our response has been to increase the pace and scale of
investments in a series of projects and take corrective actions to bring
production back to acceptable levels in the short term, and to achieve steady
growth in future years.
These projects include: the appointment of new teams at Fresnillo and Saucito;
significant investment in development works at Fresnillo, specifically one of
the first tunnel boring machines of its kind in the world as well as new
equipment and technologies; the deepening of hoisting shafts at Fresnillo and
Saucito to access deeper reserves; the expansion of the flotation plant at
Fresnillo to treat higher lead and zinc grades, and the tailings
treatment/pyrite flotation plant at Fresnillo.
Production saw a gradual improvement in the second half of the year, largely
due to these actions. In addition, the commissioning in Q3 2019 of a new
leaching pad at Herradura is already leading to faster gold recovery.
I would also like to highlight that during 2019 the Board approved our next
new mine, at Juanicipio. Construction has commenced and mine development
already stands at over 25 kms of underground workings, and we expect the first
production stope to be fully prepared by 3Q 2020. After careful analysis, we
have made minor adjustments to the project. For example, construction of the
beneficiation plant is now expected in mid 2021 and capex has been increased
from US$395 million to US$440 million. However, material from development and
initial production stopes will be processed at the Fresnillo beneficiation
plant from June 2020. 2019 was the first year in which we have recognised
reserves at Juanicipio, confirming our belief that this will be an
exceptionally high grade mine with the potential to be the foundation for
growth in future years.
Financial performance
The year saw production decrease due to a range of challenges. Fresnillo
generated $2,270.2 million in adjusted revenue, up 1.2% due to higher precious
metal prices. Net Profit decreased 41.2% year on year mainly due to higher
costs, while cash and other liquid funds fell by $224.2 million to $336.6
million primarily due to capex investments in new projects.
Articulating our Purpose
Our Purpose is to contribute to the wellbeing of people, through the
sustainable mining of silver and gold.
Linking and strengthening our Vision and Values, our Purpose articulates our
contribution to society at large and how we will continue to prosper over time
- in financial terms and through the positive contribution we make to local
communities and the lives of people in Mexico and beyond.
Mining can be a major force for good, but only when it is carried out
sustainably and for the benefit of all. We aim to satisfy current demand for
our precious metals, which are important investment assets as well as being
essential to many industrial products such as medical equipment, solar panels
and mobile phones, among others.
At the same time, we are continuing to develop increasingly sophisticated and
sustainable mining practices that will create greater efficiency and
healthier, safer work environments.
This twin-track approach will ensure our ongoing sustainability as a business,
underpin our long-term ability to deliver growth and returns, continue to
create employment and help us win recognition as a positive influence for all
our stakeholders - local communities and shareholders, our workforce,
customers and suppliers as well as governments.
How we are realising our Purpose
Our Purpose expresses our commitment to the wellbeing of all stakeholders; I
will outline how we delivered benefits for our key stakeholder groups during
the year:
Shareholders
Our operational performance inevitably led to adjustments in our production
forecasts, a situation that I know has been frustrating for investors and
analysts. While I share their concerns, I am confident that the measures now
in place are already providing greater certainty and better results, and will
continue to do so in the future.
Our dividend policy remains unchanged. We aim to pay out 33-50% of profit
after tax each year, while making certain adjustments to exclude non-cash
effects in the income statement. Dividends are paid in the approximate ratio
of one-third as an interim dividend and two-thirds as a final dividend. Before
declaring a dividend, the Board carries out a detailed analysis of the
profitability of the business, underlying earnings, capital requirements and
cash flow. Our aim is to maintain enough flexibility to be able to react to
movements in precious metals prices and seize attractive business
opportunities.
We declared an interim dividend of 2.6 US cents per share, with a final
dividend of 11.9 US cents per share, bringing the total for the year to 14.5
US cents per share.
Employees and contractors
Our people are the bedrock of our business. We depend on their skills and hard
work for each and every ounce of precious metal we recover from the earth -
and we owe them the very highest standards of health and safety. This is an
area that still requires more focus, cultural change and investment. We regret
that two people lost their lives while working at our facilities during the
year. Our thoughts and prayers are with the families and friends who lost
loved ones.
Our response has been to step up the implementation of our I Care, We Care
programme. This has already had an impact at the mines where it is in
operation, and it will soon be part of everyday working practices across the
Group.
In addition to high standards of health and safety, our people also deserve
the best in training and development. During the year, we provided 120 hours
of such support to individuals, helping them build their skills, improve their
earnings and access all the advantages of long-term careers. In light of the
ongoing skills shortages across our industry, we continued to forge strong
relationships with leading universities and the top earth science institutions
in Mexico. In addition, we have reviewed our recruitment processes to ensure
that they maximise the potential of women. Our recruitment of interns and
Engineers in Training demonstrate good progress regarding improved diversity,
with the percentage of women in these roles increasing from 27.02% in 2018 to
34.84 % in 2019.
Working practices in the Group are characterised by a spirit of partnership
and mutual respect, and this was instrumental in the agreement by our
unionised employees at the Fresnillo mine to introduce Sunday working. Once
fully implemented in 2020, this will give us an additional 52 days of ore
extraction. I would like to reaffirm my appreciation for the hard work and
expertise, which our teams bring to their work, at every mine and no matter
whether they are employees or contractors.
Local communities
As well as providing much needed employment, our mines play important roles in
the lives of local people and their families. We rely on local communities for
labour and for the general goodwill that helps us maintain our licence to
operate - and in return, we invest in a wide range of locally-based
programmes. The ultimate aim is to support the creation of sustainable
businesses that can prosper without relying exclusively on mining operations.
Consultation is a key element of our community partnerships, never more so
than in the early days of a mining project. The Mexican administration has
recently emphasised the vital role that consultation with indigenous people
has in the permitting process for mines. We fully support this stance and
believe that the experiences we have gained in recent years will stand us in
good stead for the challenges ahead.
Children are a particular focus for our community activities, and during 2019,
8,700 children benefited from our long-established Picando Letras programme,
which aims to encourage reading. We also continue to offer Health Weeks to
local people, and in 2019 over 10,500 individuals benefited from high quality
health advice and practical support that they would otherwise not have been
able to access.
Environmental impact
As our Purpose makes clear, we are a business that aims to serve humanity for
decades to come. While extractive industries can impact the availability of
resources for future generations, we are committed to developing sustainable
mining practices which enable us to contribute to the wellbeing of people
while having minimum impact on the environment.
Our climate commitment increases energy efficiency and reduces greenhouse gas
emissions. Our drive to increase the use of wind power and innovative dual
fuel vehicles prepares the company for a transition to a low carbon future,
while also cutting costs. These are concrete examples of how we are embedding
sustainability in the DNA of our company.
Board activities
This has been a busy year for the Board. In addition to carrying out our
regular activities, we have invested considerable time and expertise in
understanding and responding to new regulatory requirements. The new UK
Corporate Governance Code and the Companies Miscellaneous (Reporting)
Regulations both came into effect on 1 January 2019.
I wish to emphasise here the Board's focus on stakeholder engagement, and in
particular workforce engagement, in line with the new Code. During the year
the Board assigned the responsibility for overseeing our workforce engagement
to Arturo Fernández. We also considered our approach and processes towards
stakeholder input into decision-making processes, ensuring the Board's
continued compliance with Section 172.
As constituents of the FTSE Index, we have always adopted the highest
standards of corporate governance and believe that the new and revised
regulations will have a significant impact on the drive to restore public
trust in business. Executive pay is an important element in trust, and I was
pleased that 99% of votes cast at the AGM were in favour of our policy,
endorsing our approach to executive remuneration.
Our aim is for our culture to foster the necessary mindset and behaviours to
deliver on our commitment to the sustainable mining of silver and gold. This
culture must embrace ethics and safety, while also driving innovation and
operational excellence to enhance productivity while reducing costs and our
environmental footprint. During the year, the Board again provided master
classes and online training modules for teams across the business, helping
them to understand our Purpose, to engage with our culture and to live our
Values of Responsibility, Integrity, Trust and Loyalty. The Board has
committed to placing even greater focus on our culture in the year ahead.
Changes to the Board
Following Jaime Serra Puche's resignation at the 2019 AGM, we were pleased to
welcome Luis Robles to the Board, as an Independent Non-executive Director. A
former Chairman of the largest bank in Mexico, BBVA Bancomer, Luis brings
valuable experience and expertise to his role. During his career in the
banking and financial sectors, he served on various national and international
associations, including as Chairman of the Latin American Banking Federation
from 2010 to 2012 as well as various roles in the Mexican Banking Association
and as Chairman from 2014 to 2017. Luis is a member of both our Audit and
Remuneration Committees.
The Board considers that its composition has the appropriate balance of
skills, experience and gender to oversee the performance of the executive team
and the development of long-term strategy.
Outlook
During the last six months of the year we saw a gradual upturn in production,
as the projects and initiatives I have outlined began to feed through into
results. I expect this trend to continue, with the year ahead being
characterised by greater stability. However, significant improvements will
not be seen until 2021.
Despite the operational setbacks of 2019, I have confidence in the Group's
underlying strengths, in our strategy and teams, in our culture and behaviour,
and in our ability to make valuable contributions to the wellbeing of all our
stakeholders.
I would like to place on record my thanks to Board members for their support,
and also to pay tribute to the senior management team, which has worked hard
to address the year's challenges.
Alberto Baillères
- Non-executive Chairman
chief's executive statement
Rising to challenges, moving forward with confidence
2019 was a year when several negative factors combined to drive down the
performance of our mines and caused us to revise our guidance to the markets.
We fell short of the high mine planning and operational execution standards
that we have come to expect from our teams, which contributed to lower ore
grades and tonnages than anticipated. Delays to infrastructure projects, poor
contractor performance, higher costs, new regulatory pressures in Mexico and
low equipment availability were significant challenges faced during the year.
None of these challenges is insurmountable in its own right - but what marks
2019 as an unusual year is that they coincided at several operations,
indicating systemic failures that are now being addressed.
Having realised that we were going to miss our target for silver production,
we revised our guidance in Q2 2019 and introduced extensive corrective
measures. Inevitably, it is taking time for these measures to have the desired
effect and our overall operating performance for this year has therefore been
adversely impacted. We expect production to stabilise in 2020, with results
improving during 2021.
In addition, although gold production was within the guidance provided at the
Capital Markets Day in December, we failed to reach the revised target we had
communicated in August, of 880-910 koz. This was primarily due to delays in
the construction of the 13th leaching pad at Herradura. We had no alternative
but to deposit ore at the top of existing pads, and this led to a slower
recovery than initially forecast. Furthermore, the project to implement a
Carbon-in-Column process at Noche Buena to increase gold recovery was delayed.
While this was successfully concluded later in 2019, it contributed to further
decrease gold production against expectation.
Production highlights and price review
In short, total silver production fell by 11.6% to 54.6 moz. At the Fresnillo
mine, this was primarily due to decreasing vein width, increased dilution and
greater ore variability, contractor underperformance and the need for
additional infrastructure as we extend the mine to greater depths. Ore grade
variability was also a factor in performance at Saucito and San Julián,
together with narrower veins at Saucito.
Gold production of 875.9 koz was down more than expected compared to 2018
driven by the anticipated lower volume of ore processed at Noche Buena,
further exacerbated by lower ore grades at San Julián.
There was a steady increase in gold and silver prices during the second half
of the year, on the back of healthy demand and a slight reduction in supply.
In 2019, average realised silver prices rose by 3.9% while those for gold
increased by 11.7%. Average prices for zinc and lead decreased, by 9.3% and
10.5% respectively.
A time to pause, reflect and prepare
Despite the disappointments of 2019, it is important to stand back and take
stock of how far we have come, and how the work we are doing today will bear
fruit in the future. As we made clear in last year's annual report, 2019 was
an opportunity to consolidate our growth while advancing our pipeline.
Following a decade where we consistently created value through growth and
returns, these last 12 months have been a valuable time for us to pause,
reflect and prepare ourselves in order to rise to the challenges we are
facing.
How are we going to deliver a performance that will regain the confidence of
our stakeholders? By remaining true to the strategy that has seen us
established as the world's largest silver producer and Mexico's largest gold
producer. This strategy has four pillars, and here I will outline our progress
against each one.
Maximising the potential of existing operations
This is the key focus for 2020 and is central to our commitment to consolidate
our achievements to date. We are committed to working smarter and more
efficiently in order to extract maximum value from our asset base.
Our efforts during 2019 and for the coming year focus primarily on the
Fresnillo district. The Fresnillo Full Potential (FFP) project is already
helping us to address the structural challenges posed by deeper operations,
narrower veins and greater ore variability at the Fresnillo and Saucito mines.
At the same time, FFP addresses processing issues that include delayed
development and preparation of mining areas, infrastructure, efficiency and
productivity.
With regard to infrastructure improvements, we commissioned our new US$22.7m
state-of-the-art tunnel boring machine (TBM) in December 2019, with ramp up in
the first quarter of 2020. Designed specifically for the conditions at the
Fresnillo mine and capable of boring at least 300 metres per month, this is
one of the first TBMs of its kind. Further investments in infrastructure at
Fresnillo include a new pumping station to improve drainage as well as a new
elevator that will cut the travel time of our teams by up to an hour.
On the surface, we are making good progress on our US$30m plant optimisation
project at the Fresnillo mine, which will help us manage the higher lead and
zinc contents in the deeper areas of the mine. As planned, we have commenced
the expansion of the flotation plant. On track for completion by mid 2020,
this will complement the additional thickening capacity installed in 2017.
Once the mine is developed and able to sustain a production rate of 9,000
tonnes per day, we will implement the third element in the plant optimisation
project - the installation of additional vibrating screens, which will further
increase the capacity of the plant.
At Saucito, we are continuing with our US$69.3m project to deepen the Jarillas
shaft to 1,000 metres. Due for completion in 2024, this will enable us to
efficiently hoist ore from the deeper levels of the mine where 42% of the
reserves are located.
Technology sits at the heart of initiatives to improve our processes. For
example, we are currently implementing semi-automatic operations of long hole
drills, in order to increase productivity and equipment utilisation. A total
of 15 long hole stopes are being prepared at Fresnillo, with ten of these set
for completion by the end of Q2 2020. We also introduced a new communications
system in 2019, to improve planning and control processes at the mine. This
system provides management with real-time data on everything from manpower
allocation to equipment availability - boosting productivity by making sure
that we have the equipment and resources we need, when and where we need them.
In addition, we have increased our focus on maintenance in order to improve
the availability and reliability of critical equipment.
We have also addressed the lack of reliability of our geological models by
creating four specialised teams, each headed by senior operations and
exploration specialists and supported by the executive team. These teams are
tasked with: improving sampling and geological mapping; ensuring greater
quality assurance and control, including at our laboratories; enhancing our
geological and resource modelling processes; and implementing measures such as
full 3D cavity monitoring technology to improve dilution control and improving
the conciliation of reserve estimates and actual tonnages and grades.
Cost management is a key factor in maximising the potential of our existing
operations. As Fresnillo has matured as a company, we have realised that our
cost control processes have not always kept pace. We are therefore introducing
new initiatives to ensure that the fundamentals of sound accounting and cost
management remain in place and continue to work effectively. Any developments
will take time to feed through into the financial numbers, but we have already
made a good start and will continue to focus on this important area through
2020.
Delivering growth through development projects
Situated in the Fresnillo district approximately eight kilometres from the
main Fresnillo shaft, the Juanicipio project will be a core element in the
Group's future production of silver.
The Board approved the development of Juanicipio early in 2019, and
construction is now well underway with over 25 km of underground development
already completed and processing of development ore currently expected to
commence in mid 2020, ahead of schedule. A joint project with MAG Silver in
which we hold 56%, the mine is forecast to produce 11.7 moz of silver and 43.5
koz of gold per year on average, with total indicated and inferred resources
of 275.0 moz of silver and 1.48 moz of gold. With an initial mine life of 12
years and considerable potential at depth, Juanicipio's reserves were
recognised for the first time in 2019.
Production at the Fresnillo mine will benefit from the new Pyrites Plant. On
track for completion in 2020, this 14,000 tonnes per day plant will increase
the recovery of silver and gold from the current and historical tailings of
Fresnillo. Once operating at full capacity, and including total production
from the Saucito plant, it is estimated to produce an average of 3.5 moz of
silver and 13 koz of gold every year.
Extending the growth pipeline
Our commitment to exploration across the peaks and troughs of economic cycles
has remained consistent since our IPO 11 years ago - and while our current
priority is to focus on our existing operations, exploration will continue to
be the cornerstone of our longer-term strategy.
During 2019, our team of 100 experienced geologists again worked hard to
explore new opportunities, both in the areas around our operations and to a
lesser degree in new districts. In total, we invested some US$170m in these
activities in 2019.
The results include the identification of a large number of targets in the
Fresnillo district, as well as at San Julián, aimed at extending the life of
our mines. These are areas where we already have a deep understanding of the
geology, and are confident in our ability to exploit new opportunities both
quickly and cost-effectively. The projects at Orisyvo and in the Ciénega
district also continue to offer exciting potential. However, we have decided
to slow the pace of these projects to prioritise current operations, while
continuing to de-risk them so we can move them forward when the time is right.
During the year we continued to carry out further work in Peru and Chile,
where we have a total of four projects showing good potential. In Peru we are
concentrating our efforts on permits and drilling parametric holes, while in
Chile our focus is on exploration options with well-established local
partners.
As the audit of reserves and resources is a lengthy process, this year for
operating mines we brought it forward to 31 May, compared to December in
previous years. The earlier timing of the audit meant that costs considered in
the estimation were taken from 2018, and not from the most recent 2019 cost
base.
Silver resources stood at 2.3 boz, a 2.4% increase over 2018 mainly as a
result of exploration at San Julián and, to a lesser extent, Guanajuato. Gold
resources remained stable at 39.0 moz. Silver reserves rose slightly, by 1.7%
to 484 moz as the recognition of reserves at Juanicipio for the first time was
offset by decreases in all our underground silver mines. Gold reserves
decreased 16.0%, due to the exclusion of reserves at Soledad-Dipolos and a
decrease in reserves at Herradura.
All the Group's reserves are in the probable category because of a lack of
detailed mine plans, and geotechnical and financial models. A key focus for
2020 will be tackling these issues and converting resources into reserves.
Advancing and enhancing the sustainability of our operations
We will never compromise the safety of our employees or contractors. Our
priority is that everyone goes home to their families at the end of their
shift.
Safety is a never-ending challenge for the mining industry, and it is with
great sadness that I have to report that despite our best efforts, we had two
fatalities during the year. Although this is an improvement on the previous
year, it is unacceptable. We are striving to create a working environment that
protects all our people from harm, at all times. For example, our I Care, We
Care programme brings together industry best practices, systems and
behaviours, and was one of primary reasons that the year saw a reduction in
our Lost Time Injury Frequency Rate. Over the last 12 months, the programme
has been rolled-out to all employees and contractors, focusing on engagement
and accountability.
While our tailings storage facilities (TSFs) are considerably smaller than
those of other mining companies, we nevertheless recognise their potential to
cause human and environmental harm, as highlighted by the recent tragedy in
Brazil. We have therefore taken significant steps to ensure the ongoing safety
of these facilities. We have 11 TSFs, each one constructed in line with local
geologic and seismic conditions. Although all dams comply with Mexican safety
requirements, which are similar to standards set in the USA, Canada and Chile,
we have taken the decision to go beyond such legislation. We have established
our own Independent Tailings Review Panel and appointed independent
specialists to perform dam safety inspections and also review and update our
tailings dam governance system. We expect their findings to be finalised in
2020.
Although the percentage of our energy consumption met by wind power decreased
slightly in 2019, due to a significant increase in overall energy use, we
remain committed to achieving our long-term goal for wind power to generate
75% of our electricity consumption. We are also installing dual fuel engines
in haulage trucks, initially at Herradura. The usage of Liquid Natural Gas has
already led to a 5% fall in greenhouse gas emissions. Both these projects are
excellent examples of how wise investment can benefit the environment while
also cutting costs.
Our social and environmental performance has consistently been recognised by
many organisations. In 2019, among other accolades, we were placed first in
the prestigious Integridad Corporativa scheme, which ranked 500 large national
and international companies operating in Mexico for their corporate integrity.
Looking ahead
The coming year will see us continue to manage challenges, as we make progress
with the initiatives I have outlined in this statement.
Production at our underground silver mines in 2020 is expected to remain at a
broadly similar level to 2019, as the anticipated positive impact of the
operating initiatives at the Fresnillo mine is likely to be partly offset by
the lower ore grade we expect at Saucito.
Gold production is expected to decrease slightly mainly as a result of lower
production at Herradura.
We also anticipate that fixed costs will remain relatively high during 2020.
As a result, our financial performance could temporarily deteriorate next year
in the face of these pressures before our cost management initiatives have an
impact. An improvement in operational performance is expected to contribute to
lowering the cost per tonne of ore milled as we continue to make significant
investment in efficiency initiatives, while we remain committed to improved
safety.
The broader environment is to a degree characterised by uncertainty. Trade
disagreements, particularly between the US and China, together with ongoing
political and economic issues elsewhere including Europe, could lead to
headwinds for the mining industry. On the other hand, the greater uncertainty
and risk of conflicts in several points of the world, as well as the
coronavirus, could lead to higher precious metal prices. Furthermore, there
appears to be support for our industry at the higher levels of the new
Government in Mexico and we will continue to work hard to ensure that mining
is supported by all parts of the federal and state administration.
But while we are striving to rise to the immediate challenges confronting our
business today, we are nevertheless moving forward with certainty and vigour.
Our assets are of high quality and our pipeline continues to confirm promising
prospects. Buoyed by a clear strategy and supported by a talented and
committed team, we look ahead with confidence.
Octavio Alvídrez
- Chief Executive Officer
Financial review
The consolidated Financial Statements of Fresnillo plc are prepared in
accordance with International Financial Reporting Standards (IFRS), as adopted
by the EU. This Financial Review is intended to convey the main factors
affecting performance and to provide a detailed analysis of the financial
results in order to enhance understanding of the Group's Financial Statements.
All comparisons refer to 2019 figures compared to 2018, unless otherwise
noted. The financial information and year-on-year variations are presented in
US dollars, except where indicated.
By following strict controls on cash, costs and expenses and while adhering to
our capex budgets, we have maintained a healthy cash and other liquid
funds (1) position and a low leverage ratio. This has enabled us to invest
in the business and deliver returns to shareholders.
The following report presents how we have managed our financial resources.
COMMENTARY ON FINANCIAL PERFORMANCE
2019 continued to be a challenging year for the Group. This was reflected in
the financial performance for the year, with gross profit and EBITDA
decreasing from 2018 by 40.9% and 26.3% respectively and profit margins
decreasing accordingly. We maintained a solid financial position, with
US$336.6 million in cash and other liquid funds (1) as of 31 December 2019
notwithstanding paying dividends of US$142.2 million in accordance with our
policy, investing US$559.3 million in capex and spending US$157.9 million on
exploration to underpin our future growth.
Adjusted revenue increased slightly year-on-year due to higher gold and silver
prices, which were mostly offset by the lower volumes of gold and silver sold.
This slight increase was more than offset by the increase in adjusted
production costs 3 (#_ftn3) , higher depreciation and the much smaller
positive effect from changes in inventory in 2019 compared to that in 2018
resulting from the gold content in the leaching pads at Herradura being
re-assessed. As a result, gross profit and EBITDA decreased 40.9% and 26.3%
over 2018.
INCOME STATEMENT
2019 2018 Amount Change %
US$ million
US$ million
US$ million
Adjusted revenue( 2) 2,270.2 2,243.4 26.8 1.2
Total revenue 2,119.6 2,103.8 15.9 0.8
Cost of sales (1,657.9) (1,323.1) (334.9) 25.3
Gross profit 461.7 780.7 (319.0) (40.9)
Exploration expenses 157.9 172.8 (14.9) (8.6)
Operating profit 171.7 506.7 (335.0) (66.1)
EBITDA (3) 674.0 915.1 (241.1) (26.3)
Income tax expense including mining rights (27.1) 134.0 (161.1) N/A
Profit for the year 205.8 350.0 (144.2) (41.2)
Profit for the year, excluding post-tax Silverstream effects 172.0 339.5 (167.5) (49.3)
Basic and diluted earnings per share (US$/share) (4) 0.277 0.475 (0.198) (41.7)
Basic and diluted earnings per share, excluding post-tax Silverstream effects 0.231 0.461 (0.230) (49.9)
(US$/share)
1 Cash and other liquid funds are disclosed in note 30(c) to the financial
statements.
2 Adjusted revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and gold, lead and zinc
hedging.
3 Earnings before interest, taxes, depreciation and amortisation (EBITDA)
is calculated as gross profit plus depreciation less administrative, selling
and exploration expenses.
4 The weighted average number of ordinary shares was 736,893,589 for 2019
and 2018. See note 17 in the consolidated financial statements.
The Group's financial results are largely determined by the performance at our
operations. However, there are other factors such as a number of macroeconomic
variables that lie beyond our control and which affect financial results.
These include:
PRECIOUS METAL PRICES
In 2019, the average realised silver price increased by 3.9% from US$15.5 per
ounce in 2018 to US$16.1 per ounce in 2019, while the average realised gold
price rose 11.7% from US$1,269.1 per ounce in 2018 to US$1,418.0 per ounce. In
contrast, the average realised lead and zinc by-product prices decreased 9.3%
and 10.5% year-on-year, to US$0.89 and US$1.15 per pound, respectively.
However, the Group was affected by the results of the one-off five-year gold
hedging programme entered into in 2014, and a series of financial derivatives
entered into in 2019 to hedge a portion of its lead and zinc production, both
of which are further described below.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 31 December 2019 was $18.85
per US dollar, compared to $19.68 per US dollar at the beginning of the year.
The 4.3% spot revaluation had a favourable effect on: i) the net monetary peso
asset position, which contributed to the US$4.5 million foreign exchange gain;
and ii) taxes and mining rights as the revaluation resulted in a decrease in
related deferred tax liabilities.
The average spot Mexican peso/US dollar exchange rate remained broadly
unchanged at $19.3 per US dollar (2018: $19.2 per US dollar). As a result,
there was an insignificant effect on the Group's costs denominated in Mexican
pesos (approximately 45% of total costs) when converted to US dollars.
COST INFLATION
In 2019, cost inflation was 3.8%. The main components of our cost inflation
basket are listed below:
LABOUR
Unionised employees received on average a 7.5% increase in wages in Mexican
pesos, and administrative employees at the mines received a 5.5% increase;
when converted to US dollars, the weighted average labour inflation was 6.5%.
ENERGY
ELECTRICITY
The Group's weighted average cost of electricity increased by 4.1% from 7.1 US
cents per kW in 2018 to 7.4 US cents per kW in 2019. This increase was mainly
due to the higher average generating cost of the Comisión Federal de
Electricidad (CFE), the national utility.
DIESEL
The weighted average cost of diesel in US dollars increased 6.7% to 87.9 US
cents per litre in 2019, compared to 82.42 US cents per litre in 2018.
OPERATING MATERIALS
Year over year change in unit price %
Sodium cyanide 4.4
Steel balls for milling 1.8
Steel for drilling 1.8
Lubricants 1.4
Tyres 0.8
Explosives 0.1
Other reagents (9.7)
Weighted average of all operating materials 1.2
Unit prices of the majority of operating materials remained broadly stable in
US dollar terms, with the exception being sodium cyanide, which experienced
year-on-year inflation of 4.4%. However, this was partly offset by the
decrease in the unit price of other reagents, such as zinc sulphate. As a
result, the weighted average unit prices of all operating materials increased
by 1.2% over the year. The majority of these items are dollar-denominated.
CONTRACTORS
Agreements are signed individually with each contractor company and include
specific terms and conditions that cover not only labour, but also operating
materials, equipment and maintenance, amongst others. Contractor costs are
mainly denominated in Mexican pesos and are an important component of our
total production costs. In 2019, increases granted to contractors, whose
agreements were due for review during the period, resulted in a weighted
average increase of 4.7% in US dollars.
MAINTENANCE
Unit prices of spare parts for maintenance increased slightly, by 1.4% on
average in US dollar terms.
OTHER costS
Other cost components include freight and insurance costs, which increased by
an estimated 10.3% and 2.5% in US dollars, respectively. The remaining cost
inflation components experienced average inflation of 1.1% in US dollars over
2018.
The effects of the above external factors, combined with the Group's internal
variables, are further described below through the main line items of the
income statement.
REVENUE
CONSOLIDATED REVENUE (1) (US$ MILLIONS)
2019 2018 Amount Change %
US$ million
US$ million
US$ million
Adjusted revenue (1) 2,270.2 2,243.4 26.8 1.2
Gold, lead and zinc hedging (6.0) 1.6 (7.6) N/A
Treatment and refining charges (144.6) (141.2) (3.4) 2.4
Total revenue 2,119.6 2,103.8 15.9 0.8
Adjusted revenue increased by US$26.8 million mainly as a result of the
increase in gold and silver prices. Total revenue remained broadly unchanged
at US$2,119.6 million.
1 Adjusted revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and gold, lead and zinc
hedging.
ADJUSTED REVENUE (1) BY METAL (US$ MILLION)
2019 2018
US$ million % US$ million % Volume Variance US$ million Price Variance US$ million Total net change %
US$ million
Silver 766.9 33.8 815.8 36.4 (81.1) 32.2 (48.9) (6.0)
Gold 1,202.8 53.0 1,118.1 49.8 (44.1) 128.8 84.7 7.6
Lead 102.1 4.5 105.6 4.7 6.6 (10.2) 3.5 (3.3)
Zinc 198.4 8.7 203.9 9.1 16.9 (22.4) (5.5) (2.7)
Total adjusted revenue 2,270.2 100.0 2,243.4 100.0 (101.7) 128.5 26.8 1.2
The increase in gold and silver prices, partially offset by the lower lead and
zinc prices, resulted in a positive effect in Adjusted revenue of US$128.5
million. This was mostly offset by the US$101.7 million adverse effect of the
lower volumes of silver and gold sold, partially offset by the higher lead and
zinc sales volumes. Silver volumes sold were impacted by the lower production
at each of the silver underground mines, while the volumes of gold sold were
affected by the expected lower production from the Noche Buena mine and the
lower grade at San Julián veins.
ADJUSTED REVENUE BY METAL
2019 2018
Gold 53.0% 49.9%
Silver 33.8% 36.3%
Zinc 8.7% 9.1%
Lead 4.5% 4.7%
Total 100.0% 100.0%
Herradura continued to be the greatest contributor to Adjusted revenue,
representing 30.6% due to the slight increase of 1.8% in volume of gold sold
at a higher price. Saucito's contribution remained broadly stable at 21.7% in
2019 (2018: 21.9%), while Fresnillo contributed a lesser share of Adjusted
revenue but remained the third most important, contributing 15.9%. The
contribution to the Group's Adjusted revenue from the San Julián mine
decreased from 16.4% in 2018 to 15.0% in 2019, reflecting the lower volumes of
gold and silver sold. As expected, Noche Buena's contribution continued to
decrease from 9.4% in 2018 to 7.8% in 2019, reflecting the gradual depletion
of the mine as it approaches the end of its mine life. Ciénega's contribution
to the Group's Adjusted revenue increased slightly, from 8.3% in 2018 to 9.0%
in 2019 as a result of the higher gold and silver prices and the increase in
lead and zinc volumes sold.
The contribution by metal and by mine to Adjusted revenues is expected to
change further in the future, as new projects are incorporated into the
Group's operations and as precious metal prices fluctuate.
1 Adjusted revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and gold, lead and zinc
hedging.
ADJUSTED REVENUE(1) BY MINE
2019 2018
Herradura 693.9 30.6% 608.2 27.1%
Saucito 493.4 21.7% 492.0 21.9%
Fresnillo 361.7 15.9% 378.3 16.9%
Ciénega 204.7 9.0% 187.1 8.3%
San Julián (Disseminated Ore Body) (DOB) 184.5 8.1% 187.4 8.4%
Noche Buena 176.7 7.8% 211.4 9.4%
San Julián (Veins) 155.3 6.9% 179.1 8.0%
Total 2,270.2 100% 2,243.4 100%
VOLUMES OF METAL SOLD
2019 % participation of each mine 2018 % participation of each mine % change
Silver (koz)
Saucito 15,923 33.6 17,968 34.2 (11.4)
Fresnillo 11,778 24.8 13,890 26.4 (15.2)
San Julián (Veins) 4,215 8.9 5,255 10.0 (19.8)
San Julián (DOB) 7,368 15.5 7,806 14.9 (5.6)
Ciénega 5,330 11.2 5,459 10.4 (2.4)
Herradura 1,573 3.3 1,503 2.9 4.7
Noche Buena 23 0.0 7 0.0 228.6
Pyrites plant at Saucito 1,212 2.6 653 1.2 85.6
Total silver (koz) 47,422 100 52,541 100 (9.7)
Gold (koz)
Herradura 496 58.5 460 52.2 7.8
Noche Buena 105 12.4 167 18.9 (37.1)
San Julián (Veins) 62 7.3 77 8.7 (19.5)
Saucito 72 8.5 74 8.4 (2.7)
Ciénega 62 7.3 63 7.1 (1.6)
Fresnillo 46 5.4 37 4.2 24.3
San Julián (DOB) 1 0.1 1 0.1 0.0
Pyrites plant at Saucito 4 0.5 3 0.3 33.3
Total gold (koz) 848 100 882 100 (3.9)
Lead (t)
Fresnillo 19,544 39.8 18,097 37.2 8.0
Saucito 19,719 40.2 20,362 41.9 (3.2)
Ciénega 4,385 8.9 4,385 9.0 0.0
San Julián (DOB) 5,405 11.0 5,770 11.9 (6.3)
Total lead (t) 49,053 100 48,614 100 0.9
Zinc (t)
Fresnillo 26,350 33.5 26,248 36.3 0.4
Saucito 25,622 32.6 22,599 31.3 13.4
San Julián (DOB) 19,034 24.2 18,538 25.6 2.7
Ciénega 7,590 9.7 4,887 6.8 55.3
Total zinc (t) 78,596 100 72,272 100 8.8
Hedging
In 2019, a loss of US$6.0 million was recognised in the income statement as a
result of the hedging of gold, lead and zinc. This compared unfavourably to
the US$1.6 million gain registered in 2018. The following paragraphs outline
our hedging activities and explain the background to the 2019 loss.
In the second half of 2014, Fresnillo plc initiated a five-year one-off
hedging programme to protect the value of the investment made in the
acquisition of Newmont's minority stake (44%) in Penmont. The hedging
programme was executed for a total volume of 1,559,689 ounces of gold with
monthly settlements until December 2019.
The table below illustrates the expiry of the derivatives over the last five
years of the hedging programme.
Concept 2019 2018 2017 2016 2015
Weighted floor (US$/oz) 1,100 1,100 1,100 1,100 1,100
Weighted cap (US$/oz) 1,424 1,423 1,424 1,438 1,431
Expired volume (oz) 346,152 366,432 324,780 220,152 266,760
(Loss)/gain recognised in income (9.85) - - 0.05 1.02
Fresnillo plc's hedging policy remained unchanged for the remainder of the
portfolio, providing shareholders with full exposure to gold and silver
prices.
We hedged a portion of our by-product zinc production in the first half of
2019 with maturities throughout the year, while in the last quarter of 2019 we
hedged a portion of our by-product lead production with maturities in 2020.
The table below illustrates the expired hedging volume, the results in 2019
and the outstanding balance for 2020.
As of 31 December 2019
Concept Zinc Lead
Weighted floor (US$/tonne) 2,636 2,094
Weighted cap (US$/tonne) 3,085 2,290
Expired volume (tonne) 18,592 0
Gain (US$ dollars) 3.9 0
Total outstanding volume (tonne) 0 8,760
TREATMENT AND REFINING CHARGES
Treatment and refining charges (1) are reviewed annually using international
benchmarks. Treatment charges per tonne of lead and zinc concentrate increased
in dollar terms by 4.0% and 51.7%, respectively, compared to 2018, while
silver refining charges declined by 17.0% over the year as a result of the
lower mine supply of lead concentrates. The significant rise in the treatment
charge per tonne of zinc is explained by the increase in mine supply, which is
surpassing the limited worldwide smelting capacity. The increase in treatment
charges per tonne of lead and zinc and reduction in silver charges, combined
with the higher volumes of zinc concentrates shipped from our mines to
Met-Mex, resulted in a 2.4% increase in treatment and refining charges set out
in the income statement in absolute terms when compared to 2018.
1 Treatment and refining charges include the cost of treatment and
refining as well as the margin charged by the refiner.
COST OF SALES
Concept 2019 2018 Amount Change %
US$ million
US$ million
US$ million
Adjusted production costs (2) 1,173.0 952.0 221.0 23.2
Depreciation 489.5 411.8 77.8 18.9
Profit sharing 9,1 12.5 (3.4) (27.4)
Change in work in progress and others (11.1) (53.6) 42.5 (79.3)
Others (2.6) 0.4 (3.0) N/A
Cost of sales 1,657.9 1,323.1 334.8 25.3
2 Adjusted production costs is calculated as total production costs less
depreciation and profit sharing. The Company considers this a useful
additional measure to help understand underlying factors driving production
costs in terms of the different stages involved in the mining and plant
processes, including efficiencies and inefficiencies as the case may be and
other factors outside the Company's control such as cost inflation or changes
in accounting criteria.
Cost of sales increased 25.3% to US$1,657.9 million in 2019. The US$334.8
million increase is explained by the following combination of factors:
• An increase in Adjusted production costs (+US$221.1 million). This
was primarily due to: i) an increase in development works mainly at Fresnillo,
San Julián veins and Saucito (+US$56.9 million); ii) additional maintenance,
operating materials and contractors associated with longer haulage distances,
narrower veins, better equipment availability and the infill drilling
programme mainly at Herradura, Ciénega and San Julián DOB (+US$46.2
million); iii) higher stripping costs expensed at Herradura following the
reassessment of the number of mining components from two to one effective from
2H 2018 (+US$46.1 million); iv) cost inflation of 3.8% (+US$35.4 million); v)
the additional adjusted production costs associated with the first complete
year of operations at the Pyrites Plant at Saucito and the second line of the
Dynamic Leaching Plant at Herradura (+US$33.4 million); and vi) other costs
(+US$3.1 million).
• Depreciation (+US$77.8 million). This is mainly due to the increased
depletion factors, the full year of operation at the Pyrites plant and the
second line of the dynamic leaching plant and the amortisation of capitalised
mining works.
• The decrease in the change in work in progress of US$42.5 million
(of which -US$85.6 million related to the reassessment of gold contents in the
leaching pads at Herradura and US$43.1 million were explained by the variation
of change in inventories excluding the latter effect). Change in work in
progress was -US$11.1 million in 2019 mainly as a result of the increase in
unit cost at Herradura and Noche Buena, together with an increase in the
volume of inventories at the dynamic leaching plants. This compared negatively
to the -US$53.6 million registered in 2018 mainly as a result of the
re-assessment of the gold content in the leaching pads at Herradura (see notes
(2c) and (5) in the notes to the financial statements).
These negative effects were partly offset by year-on-year decrease in:
• Profit sharing (-US$3.4 million) and others (-US$3.0 million).
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST (AISC)
Cost per tonne is a key indicator to measure the effects of changes in
production costs and cost control performance at each mine. This indicator is
calculated as total production costs, plus ordinary mining rights, less
depreciation, profit sharing and exchange rate hedging effects, divided by
total tonnage processed. We have included cost per tonne hauled/moved as we
believe it is a useful indicator to thoroughly analyse cost performance for
the open pit mines.
Cost per tonne 2019 2018 Change %
Fresnillo US$/tonne milled 62.7 49.4 27.0
Saucito US$/tonne milled 67.8 60.1 12.8
Ciénega US$/tonne milled 78.3 70.8 10.5
San Julián (Veins) US$/tonne milled 72.0 57.4 25.5
San Julián (DOB) US$/tonne milled 39.1 36.2 8.0
Herradura US$/tonne deposited 18.1 13.2 37.0
Herradura US$/tonne hauled 3.3 3.1 7.8
Noche Buena US$/tonne deposited 9.8 6.8 45.2
Noche Buena US$/tonne hauled 2.5 2.1 18.6
Cash cost per ounce, calculated as 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
generate competitive profit margins.
Fresnillo: Mainly due to an increase in development works and maintenance
activities, together with increased consumption of operating materials.
Additionally, cost inflation for this mine was 4% mainly due to contractors
and labour.
Saucito: Mainly due to the full year of operations of the new pyrites plant
following its commissioning at the end of 1H 2018; cost inflation for this
mine was 4.1% primarily due to contractors, operating materials and labour.
Ciénega: Primarily due to increased contractor, operating materials and
labour costs.
San Julián (Veins): Mainly due to the increase in development.
San Julián (DOB): Mainly due to the increased consumption of operating
materials to improve stability in certain areas.
Herradura: Mainly due to the increase in maintenance and higher consumption of
operating materials associated with longer haulage distances and the increased
stripping costs expensed following the reassessment of the number of mining
components from two to one. Additionally, cost inflation for this mine was
3.2% mainly due to diesel, maintenance and labour
Noche Buena: Primarily as a result of lower economies of scale due to the
decrease in volume of ore processed, winding down as it approaches it nears
end of mine life.
Cash cost per ounce (3) 2019 2018 Change %
Fresnillo US$ per silver ounce 2.3 0.5 360.0
Saucito US$ per silver ounce 2.3 1.0 130.0
Ciénega US$ per gold ounce -0.2 25.9 N/A
San Julián (Veins) US$ per silver ounce 0.8 (3.6) N/A
San Julián (DOB) US$ per silver ounce 7.0 5.7 23.6
Herradura US$ per gold ounce 818.6 504.0 62.4
Noche Buena US$ per gold ounce 847.8 735.4 15.3
Fresnillo: Principally due to lower silver ore grade, higher cost per tonne
and higher treatment charges, partially mitigated by the higher by
product credits.
Saucito: Mainly as a result of the higher cost per tonne , the lower silver
grade and the higher treatment charges, partially mitigated by the increase in
by-product credits per ounce of silver resulting from the higher price of gold
and increased volume of zinc sold.
Ciénega: Primarily due to the higher by-product credits per gold ounce due to
the increase in silver price and increased base metal contents sold. This was
partially offset by the higher cost per tonne; the decrease in silver grade
and higher treatment and refining charges.
San Julián (Veins): Mainly due to the lower ore grade and higher cost per
tonne, mitigated by higher by-product credits per ounce of silver.
San Julián (DOB): Mainly explained by the lower ore grade achieved and higher
treatment and refining charges resulting from the increase in volumes of lead
and zinc concentrates send to Met-Mex.
Herradura: A result of the higher cost per tonne and the reassessment of the
number of mining components from two to one.
Noche Buena: Due to higher cost per tonne.
In addition to the traditional cash cost, 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
All-in sustaining cost per ounce 2019 2018 Change %
Fresnillo US$ per silver ounce 13.54 8.92 51.8
Saucito US$ per silver ounce 10.97 8.64 27.0
Ciénega US$ per gold ounce 1,212.14 1,413.87 (14.3)
San Julián (Veins) US$ per silver ounce 14.79 5.05 192.9
San Julián (DOB) US$ per silver ounce 10.79 10.01 7.8
Herradura US$ per gold ounce 962.99 806.73 19.4
Noche Buena US$ per gold ounce 922.86 1,029.68 (10.4)
Fresnillo: The US$4.6 per ounce increase was explained by higher capitalised
mine development per ounce, an increase in sustaining capex per ounce and the
higher cash cost.
Saucito: Mainly due to higher capitalised mine developments per ounce and
increase in cash cost, mitigated by lower sustaining capex per ounce.
Ciénega: Primarily driven by lower sustaining capex per ounce and the factors
benefiting cash cost.
San Julián (Veins): Due to higher capitalised mine development per ounce,
increased sustaining cost per ounce and the factors affecting cash cost.
San Julián (DOB): Driven by the higher sustaining capex per ounce and the
increase in cash cost, mitigated by a decrease in capitalised mine development
per ounce.
Herradura: Mainly due to the higher cash costs, mitigated by the decrease in
capitalised stripping per ounce and lower sustaining capex per ounce.
Noche Buena: Result of the lower capitalised stripping per ounce, partly
offset by the higher cash cost.
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.
Total gross profit, net of hedging gains and losses, decreased by 40.9% to
US$461.7 million in 2019.
The US$319.0 million decrease in gross profit was mainly explained by: i) the
much smaller positive effect from changes in inventory in 2019 compared to
that in 2018 (-US$96.1 million, of which -US$85.6 million was explained by the
variation of change in work in progress resulting from the reassessment of
gold contents in the leaching pads and -US$10.5 million resulted from the
imputed impact on revenues); ii) the lower silver ore grades at the silver
underground mines, mitigated by higher grades at Herradura and Noche Buena,
(-US$80.1 million); iii) higher depreciation (-US$77.8 million); iv) the
decrease in volume of ore processed, mainly at Noche Buena (-US$62.2 million);
iv) the increased development works (-US$56.9 million); v) the additional
costs incurred due to increased requirements for maintenance, operating
materials and contractors, associated with longer haulage distances, narrower
veins, better equipment availability and tighter infill drilling (-US$46.1
million); vi) the increased stripping costs expensed following the
reassessment of the number of mining components from two to one at Herradura
(-US$46.1 million); vii) cost inflation (-US$35.4 million); and viii) others
(-US$8.4 million). These adverse factors were partly mitigated by: i) the
higher average realised gold and silver prices (+US$128.5 million); ii) the
variation of change in inventories excluding the effect of the 2018
reassessment of gold contents in the leaching pads at Herradura (+US$43.1
million); and iii) increased gross profit at pyrites plant and second line of
the dynamic leaching plant resulting from its first complete year of
operations (+US$18.5 million).
With the exception of Ciénega, gross profit decreased year-on-year at all
mines. Herradura and Saucito remained the largest contributors to the Group's
consolidated gross profit, with both recording small increases in their
percentage share. In contrast, the lower ore grades at San Julián, together
with the increased production costs and depreciation, resulted in a gross loss
in 2019. Fresnillo and Noche Buena's share of the Group's total gross profit
remained steady at 18.8% and 7.4% respectively, while Ciénega's contribution
increased slightly to 7.3%.
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING HEDGING GAINS AND
LOSSES
Change
2019 % 2018 % Amount %
US$ million
US$ million
US$ million
Herradura 183.2 38.9 278.4 36.2 (95.2) (34.2)
Saucito 131.2 27.9 177.8 23.1 (46.6) (26.2)
Fresnillo 88.7 18.9 144.9 18.9 (56.2) (38.8)
Noche Buena 40.2 8.5 67.2 8.7 (27.0) (40.2)
Ciénega 34.5 7.3 31.9 4.2 2.6 8.2
San Julián (7.3) (1.5) 68.4 8.9 (75.7) (110.7)
Total for operating mines 470.5 100 768.6 100 (298.1) (38.8)
Metal hedging and other subsidiaries (8.8) 12.1 (20.9) N/A
Total Fresnillo plc 461.7 780.7 319.0 (40.9)
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses increased 15.7% from US$83.3 million in
2018 to US$96.4 million, mainly due to an increase in advisory services
provided by consultants (legal, safety, taxes, geological, amongst others),
and increased corporate services provided by Servicios Industriales Peñoles,
S.A.B de C.V., in relation to new operations, namely the pyrites plant and the
second line of the dynamic leaching plant, and approved development projects.
EXPLORATION EXPENSES
Business unit/project (US$ millions) Exploration Exploration Capitalised Capitalised
expenses 2019
expenses 2018
expenses 2019
expenses 2018
Ciénega 7.3 9.9 - -
Fresnillo 14.0 15.6 - -
Herradura 14.4 14.9 - -
Saucito 14.9 16.3 - -
Noche Buena 0.4 2.0 - -
San Ramón 2.0 2.4 - -
San Julián 17.6 12.2 - -
Orisyvo 2.0 5.2 - -
Centauro Deep 0.5 5.4 1.7 1.7
Guanajuato 19.4 16.9 2.8 1.1
Juanicipio 0.0 0.0 5.4 4.8
Others 65.4 72.0 2.3 0.8
Total 157.9 172.8 12.2 8.4
Exploration expenses decreased as planned by 8.6% from US$172.8 million in
2018 to US$157.9 million in 2019, in line with the strategy to focus
exploration at specific targets, including our current operating districts and
advanced exploration projects. An additional US$12.2 million was capitalised,
mainly relating to exploration expenses at the Juanicipio project, Guanajuato
and Centauro Deep. As a result, risk capital invested in exploration totalled
US$170.1 million in 2019, a 6.1% decrease over 2018. In 2020, total invested
in exploration is expected to be approximately US$150 million, of which US$15
million is expected to be capitalised.
EBITDA
2019 2018 Amount Change%
US$ million
US$ million
US$ million
Gross profit 461.7 780.7 (319.0) (40.9)
+ Depreciation 489.5 411.8 77.8 18.9
- Administrative expenses (96.4) (83.3) (13.1) 15.7
- Exploration expenses (157.9) (172.8) 14.9 (8.6)
- Selling expenses (22.9) (21.2) (1.6) 7.6
EBITDA 674.0 915.1 (241.1) (26.3)
EBITDA margin 31.8 43.5
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 2019, EBITDA
decreased 26.3% to US$674.0 million mainly due to the lower gross profit. As a
result, EBITDA margin expressed as a percentage of revenue decreased, from
43.5% in 2018 to 31.8% in 2019.
OTHER OPERATING INCOME AND EXPENSE
In 2019, a net loss of US$12.8 million was recognised in the income statement
mainly as a result of the disposal of assets, environmental activities and
donations. This compared unfavourably to the US$3.3 million net gain
recognised in 2018 mainly as a result of the partial reimbursement for an
insurance claim at Saucito.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative financial
instrument carried at fair value. The total revaluation effect recorded in the
2019 income statement was a gain of US$48.3 million. This includes: i) a
positive non-cash revaluation effect of US$6.7 million mainly as a result of
the market update of certain variables such as the forward price of silver
and the discount rate used; partially offset by the updating of the Sabinas
production plan, which included a new estimate of reserves and resources; and
ii) a US$41.6 million non-cash gain mainly generated by the unwinding of the
discounted values. The total revaluation effect recorded in 2018 was a US$15.0
million gain.
Since the IPO, cumulative cash received has been US$653.6 million. 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 and in
notes 13 and 29 to the consolidated financial statements.
FINANCE COSTS
Net finance costs of US$46.5 million compared unfavourably to the US$26.9
million recorded in 2018. The 2019 net finance costs mainly reflected: i) the
interest on the US$800 million principal amount of 5.5% Senior Notes, net of
interest received and capitalised; and ii) US$15.7 million in interest and
surcharges, which resulted from aligning the tax treatment of mining works
across the Group's underground mines to the agreement reached between SAT,
Prodecon and Fresnillo plc relating to years 2014 to 2018, which was paid in
2019 (the voluntary tax amendment). Detailed information is provided in note
X to the financial statements. A portion of the interests from the Senior
Notes are capitalised, hence not included in finance costs. The amounts
capitalised in 2019 and 2018 were similar so the year on year impact was
immaterial.
FOREIGN EXCHANGE
A foreign exchange gain of US$5.1 million was recorded as a result of the
realised transactions in the year and the 4.3% revaluation of the Mexican peso
against the US dollar over the year on the value of peso-denominated net
monetary assets. This compared positively against the US$8.1 million foreign
exchange loss recognised in 2018.
The Group enters into certain exchange rate derivative instruments to manage
its exposure to foreign exchange risk. The aggregate effect on income in the
year was a loss of US$776,661, which compared negatively to the loss of
US$321,873 registered in 2018.
TAXATION
A corporate income tax credit of US$8.0 million arose in the current year
which compared favourably to the US$120.6 million charge in 2018. The
effective tax rate, excluding the special mining rights, was -4.5% (24.9% in
2018). The reason for the negative tax rate was the significant permanent
differences between the tax and accounting bases, together with the low level
of profit before income tax. The permanent differences were mainly related to:
i) the revaluation of the Mexican peso which had an important impact on the
tax value of assets and liabilities that are denominated in Mexican pesos
(US$37.1 million); ii) the inflation rate which impacted the inflationary
uplift of the tax base for assets and liabilities (US$17.1 million); iii) the
tax credit related to the special tax on diesel (US$10.0 million); iv) a new
border zone tax benefit which benefited the Herradura and Noche Buena
operations (US$6.4 million); and v) the effect recorded in the year in respect
of the voluntary tax amendment relating to the tax treatment for mining works
at underground mines for the years 2014 to 2018 (US$5.1 million).
A mining rights credit of US$19.1 million arose in 2019 compared to a US$13.3
million charge in 2018. The main reason for the negative mining rights was the
effect that the voluntary tax amendment relating to the tax treatment for
mining works for the years 2014 to 2018 had on the deferred mining rights.
PROFIT FOR THE YEAR
Profit for the year decreased from US$350.0 million to US$205.8 million in
2019, a 41.2% decline year-on-year as a result of the factors described above.
Excluding the effects of the Silverstream contract, profit for the year
decreased from US$339.5 million to US$172.0 million.
CASH FLOW
A summary of the key items from the cash flow statement is set out below:
2019 2018 Amount Change %
US$ million
US$ million
US$ million
Cash generated by operations before changes in working capital 685.5 930.7 (245.2) (26.3)
(Increase)/decrease in working capital (56.6) (127.9) 71.3 (55.7)
Taxes and employee profit sharing paid (193.0) (214.4) 21.4 (10.0)
Net cash from operating activities 435.9 588.4 (152.5) (25.9)
Silverstream contract 24.3 36.3 (12.0) (33.1)
Purchase of property, plant & equipment (559.3) (668.7) 109.4 (16.4)
Dividends paid to shareholders of the Company (142.2) (298.1) 155.9 (52.3)
Net interest (paid) (32.9) (15.7) (17.2) 109.6
Net increase in cash during the period after foreign exchange differences (224.2) (335.2) 111.0 (33.1)
Cash and other liquid funds at 31 December (1) 336.6 560.8 (224.2) (40.0)
1 Cash and other liquid funds are disclosed in note 30(c) to the financial
statements.
Cash generated by operations before changes in working capital decreased by
26.3% to US$685.5 million, mainly as a result of the lower profits generated
in the year. Working capital increased US$56.6 million mainly due to: i)
higher trade and other receivables resulting from higher precious metals
prices and an increase in VAT receivables (US$39.2 million); ii) increased ore
inventories in the leaching pads at Herradura and Noche Buena (US$28.7
million); and iii) an increase in prepayments and other assets (US$3.3
million). This increase in working capital was partly offset by an increase in
trade and other payables (US$14.6 million).
Taxes and employee profit sharing paid decreased 10.0% over 2018 to US$193.0
million. This included a US$39.7 million cash payment of income tax and
special mining rights related to the amendment in the treatment of mining
works across the underground mines. For further details, please see note 10 to
the financial statements. The main reason for the 10% decrease was that the
Group was able to recover US$45.7 million of income tax receivables.
As a result of the above factors, net cash from operating activities decreased
25.9% from US$588.4 million in 2018 to US$435.9 million in 2019.
Other sources of cash were the proceeds of the Silverstream contract of
US$24.3 million and capital contributions from minority shareholders in
subsidiaries of US$53.3 million.
Main uses of funds were:
i) purchase property, plant and equipment for a total of US$559.3 million, a
16.4% decrease over 2018. Capital expenditures for 2019 are further described
below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
2019 US$ million
Fresnillo mine 172.8 Mine development and purchase of in-mine equipment, including a tunnel boring
machine, deepening of the San Carlos shaft and the construction of the second
phase of the Pyrites plant and the optimisation of the beneficiation plant.
Saucito mine 126.4 Development, replacement of in-mine equipment and deepening of the Jarillas
shaft.
Herradura mine 37.5 Sustaining capex, construction of leaching pad and land acquisition.
San Julián veins and DOB 65.3 Mine development, construction of a tailings dam and water reservoir and
purchase of in-mine equipment.
Ciénega mine 58.2 Development, replacement of in-mine equipment and construction of a tailings
dam.
Noche Buena mine 5.7 Implementation of the Carbon in Column process, construction of leaching pad
and anti-collision system
Juanicipio project 86.2 Construction of ramps and exploration expenditure
Other 7.2
Total purchase of property, plant and equipment 559.3
ii) Dividends paid to shareholders of the Group in 2019 totalled US$142.2
million, a 52.3% decrease over 2018, in line with our dividend policy which
includes a consideration of profits generated in the year. The 2019 payment
included the final 2018 dividend of US$123.1 million and the 2019 interim
dividend paid in September of US$19.2 million.
iii) Net finance expenses of US$32.9 million, mainly reflecting the interest
paid in relation with the issuance of the US$800 million principal amount of
5.500% Senior Notes, and the interest and surcharges which resulted from the
voluntary tax amendment.
The sources and uses of funds described above resulted in a decrease in net
cash of US$224.2 million (net decrease in cash and other liquid assets), which
combined with the US$560.8 million balance at the beginning of the year
resulted in cash and other liquid assets of US$336.6 million at the end of
2019.
BALANCE SHEET
Fresnillo plc continued to maintain a solid financial position with cash and
other liquid funds( 1) of US$336.6 million as of 31 December 2019, albeit
decreasing 40.0% versus December 2018, as explained above.
Inventories increased 8.6% to US$363.7 million mainly as a result of the
increase in inventories of gold on the leaching pads at Herradura.
Trade and other receivables increased 12.1% to US$517.8 million mainly as a
result of an increase in value added tax recoverable [and the higher precious
metals prices, which increased the accounts receivables with Met-Mex]. The
increase in value added tax recoverable resulted mainly from the additional
review procedures set out by the Mexican tax authorities to validate and
authorise reimbursement of balances to taxpayers, thus resulting in delays in
reimbursements. Management is actively working to ensure that requirements
have been met in order to reduce the time to recover VAT receivable balances.
The change in the value of the Silverstream derivative from US$519.1 million
at the beginning of the year to US$541.3 million as of 31 December 2019
reflects proceeds of US$26.2 million corresponding to 2019 (US$20.9 million in
cash and US$5.3 million in receivables) and the Silverstream revaluation
effect in the income statement of US$48.4 million.
The net book value of property, plant and equipment was US$2,813.4 million at
year end, representing a 4.0% increase over 2018. The US$108.1 million
increase was mainly due to the advancement of development projects;
capitalised development works; purchase of additional in-mine equipment; and
the construction of leaching pads at Herradura and Noche Buena.
The Group's total equity was US$3,278.7 million as of 31 December 2019, a 4.8%
increase over 2018. This was mainly explained by the increase in retained
earnings, reflecting the 2018 profit and the net unrealised gains on cash flow
hedges.
1 Cash and other liquid funds are disclosed in note 30(c) to the financial
statements.
DIVIDENDS
Based on the Group's 2019 performance, the Directors have recommended a final
dividend of 11.9 US cents per Ordinary Share, which will be paid on 2 June
2020 to shareholders on the register on 24 April 2020. 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 2.6 US cents per share
amounting to US$19.2 million. This final dividend is lower than the previous
year due to the lower profit in 2019, and remains in line with the Group's
dividend policy.
The corporate income tax reform introduced in Mexico in 2014 created a
withholding tax obligation of 10% relating to the payment of dividends,
including to foreign nationals.
Historically the Company has been making dividend payments out of retained
earnings generated before the tax reform came into force and no withholding
tax has therefore been applicable. We expect that dividend payments relating
to 2019 and future years will attract the withholding obligation. However,
foreign shareholders may be able to recover such tax depending on their tax
residence and the existence of double taxation agreements.
MANAGING OUR RISKS AND OPPORTUNITIES
Our risk management process aims to strike a balance between mitigating and
monitoring our risks, and maximising the potential reward. We have a
structured internal risk management process in place to identify risks while
simultaneously taking into account the views and interests of our
stakeholders.
Our risk management framework reflects the importance of risk awareness across
the Group. The 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 -
including operations managers, the controllership group, HSECR and exploration
managers - regularly engage in strengthening the effectiveness of our current
controls. This supports the executives and the Board in each of their
responsibilities.
The 2018 UK Corporate Governance Code covers emerging risks for the first
time, and this has required the Board to carry out a robust assessment of the
Company's emerging risks, disclose procedures to identify them and also
explain how these are being managed.
Within the system's identification phase, we capture emerging risks that could
arise as a result of new developments that have a chance of impacting
Fresnillo, either at a macro or operational level. To strengthen our emerging
risks management framework, during the last quarter of 2019 and early 2020 we
carried out activities to: (1) define the emerging risk concept for Fresnillo;
(2) deploy effective monitoring mechanisms; (3) carry out horizon scanning to
consider disruptive scenarios, and; (4) implement mitigating control actions
and enhance our risk awareness culture. This process involved workshops,
surveys and meetings with the Executive Committee, business unit leaders,
support and corporate areas, as well as suppliers, contractors and customers.
We also consulted third party information from global risk reports, academic
publications, risk consulting experts and industry benchmarks.
We define emerging risks as new manifestations of risk that cannot yet be
fully assessed, risks that are known to some degree but are not likely to
materialise or have an impact for several years, or risks that we are not
aware of but that could, due to emerging macro trends in the mid or long term,
have significant implications for our ability to achieve our strategic goals.
An example of an emerging risk is a water crisis, which we define as the lack
of sufficient available water resources to meet the consumption demanded by a
region. Such an outcome could involve water stress, water shortage or loss of
a water source. This risk could represent a long-term threat to our business,
given society's increasing demand for sustainable working practices.
We have a number of mitigation activities in place regarding water
stewardship. Examples include: evaluating water risk using the aqueduct tool
from the World Resources Institute (WRI); carrying out an Environmental Impact
Assessment (EIA) of irrigation and drainage projects to gain knowledge of
water resources and their vulnerability on a local and regional scale;
respecting our water quotas, monitoring our discharges and taking action to
ensure that they adhere to water quality regulations; cooperating with water
authorities and other stakeholders, including communities, to increase water
access; implementing closed water circuits to eliminate the need to discharge
processed water into water streams; reusing wastewater from municipalities and
our own operations and camps, and; accounting for water use, using the Water
Accounting Framework proposed by the Minerals Council of Australia. From 2020
onwards, emerging risk assessment will be embedded as part of the principal
and individual risk management process.
2019 risk assessment
As part of our bottom-up process, each business unit head determined the
perceived level of risk for their individual unit's risk universe. Executive
management then reviewed and challenged each perceived risk level, and
compared it to Fresnillo plc's risk universe (109) as a whole. The results of
this exercise were used as an additional input to define 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.
During our 2019 risk assessment exercise, 144 people provided input to
evaluate 109 risks across all our operations, advanced projects, exploration
offices, and support and corporate areas.
The ERM narrowed down our 109 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.
Following this exercise, there were no changes to the principal risks
identified, however the likelihood and potential impact increased in respect
of Safety, Union Relations, Exploration and Projects.
1.- Impact of metal prices and global macroeconomic developments
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Macroeconomic events could create an adverse impact on our sales and profits, Our hedging policy remains guided by the principle of providing shareholders High for metal prices,
and potentially the economic viability of projects. These events include: with full exposure to gold and silver prices. However, following the
acquisition of 44% of Penmont (and associated companies), we initiated a Medium for all other macroeconomic developments
● A decrease in precious metal prices, which is the primary driver specific hedging programme to protect the value of the investment made in the
for the risk. The average realised price for gold increased year-on-year acquisition, using a collar structure to allow partial continued exposure to
(+11.7% vs 2018) while the average realised price of silver rose by 3.9%. gold prices. The volume associated with this phased hedging programme was
strictly limited to up to 44% of production associated with the acquired RISK RATING (relative position)
● Revaluation of the Mexican peso. In 2019, the peso was devalued by 4.26% Penmont assets and was not extended to other assets in the Group. The initial
versus the average spot exchange rate of the US dollar. total volume hedged was 1,559,689 oz and by the end of 2019, the final portion 2019: Very high (1)
of the programme had expired (346,152 oz) with a loss of US$9.8 million.
● General inflation in Mexico. This was 2.8% in Mexican peso terms during Fresnillo plc is now fully exposed to movements in the gold and silver prices. 2018: Very high (1)
2019. The specific inflation affecting the Company was 3.8% in US dollar
terms. Change in risk level: No change (=)
● A decrease in the price of our by-products. In 2019, the average We are not precluded from entering into derivatives to minimise our exposure
realised prices for lead and zinc decreased 9.3% and 10.5% respectively, over to changes in the prices of lead and zinc by-products. In 2019, the Group
the previous year. hedged a portion of its by-product lead and zinc production. The combined
profit during 2019 was US$3.9 million.
DESCRIPTION OF RISK LEVEL
LINK TO STRATEGY (1-2-3)
We continue to perceive this risk level as very high. According to the
Furthermore, we have hedging policies in place for foreign exchange risk, majority of gold and silver financial analysts, the volatility of metal prices
● Growth pipeline including those associated with capex related to projects. In 2019, we entered is expected to increase. Medium term projections indicate stronger and more
into a number of foreign exchange forward contracts denominated in euros and stable prices due to unpredictable global conditions which include increased
● Development projects Swedish krona. geopolitical uncertainty, low and in places negative yielding government
bonds, and the perception of a slowing global economy.
● Mines in operation In terms of inflation, we experienced an increase in two of our main energy
inputs over the previous year, with diesel (USC$/lt.) increasing by 6.7% and
KWH (USC$) by 4.1%.
KEY RISK INDICATORS
● Gross profit sensitivity to the percentage change in precious metal
prices and to the Mexican peso/US dollar exchange rate.
● EBITDA sensitivity to the percentage change in metal prices and to
Mexican peso/US dollar exchange rate.
2.- Potential actions by the government, e.g. implementation of more stringent
regulations for obtaining permits, etc.
Regulatory actions may have an adverse impact on the Company. This could RESPONSE / MITIGATION RISK APPETITE
include more stringent regulations relating to the environment or explosives,
more challenging processes for obtaining permits, more onerous tax compliance We continue to be alert to the changes that the authorities propose, including Low
obligations for ourselves and our contractors, as well as more frequent any initiatives that are related to mining taxes, so that we are able to
reviews by tax authorities. respond in a timely and relevant manner.
RISK RATING (relative position)
For example: the State of Zacatecas created environmental taxes which appear For example, regarding environmental taxes in Zacatecas, In February 2020 the 2019: Very high (2)
to be aimed at the extractive industry. These taxes were imposed on the Supreme Court of Mexico issued a final ruling settling Fresnillo's legal
following activities undertaken within the State of Zacatecas: challenge, in which it determined that: 2018: Very high (2)
• Extractive activities other than those regulated by 1. Two of the taxes are unconstitutional: (a) tax on extractive activities and Change in risk level: No changes (=)
Mexico's Federal Mining Law (b) tax on deposit of industrial residues.
• Deposit of industrial residues 2. The other two taxes were declared constitutional, since the Supreme Court
considered that Federal jurisdiction is not exclusive on these items: (a)
• Emissions into the air emissions into the air and (b) discharge of industrial residues.
DESCRIPTION OF RISK LEVEL
• Discharge of industrial residues into the ground and
water
We continue to perceive this risk level as very high. Evidence of this
We have extensive engagement programmes with communities that may be impacted risks' influence on our industry can be seen in the increase in the frequency
by our mining activities. At the San Julián mine, for example, we have of the reviews by the tax authorities, the legislation issued relating to the
recently worked in conjunction with the Federal Government and the local imposition of the environmental taxes contained in the 2017 State Law in
We presented a legal challenge against these taxes, on the grounds that the indigenous community to successfully conclude an indigenous consultation Zacatecas and the indigenous consultation to obtain mining concessions.
State of Zacatecas was invading exclusive Federal jurisdiction, given that the exercise for the construction of a water reservoir.
mining industry is regulated at a Federal level.
In addition, Mexico's corruption perception remains high. The country's score
We continue to collaborate with other members of the mining community via the in International Transparency 2019 Corruption Perception Index was relatively
In addition, the right of indigenous communities to be consulted regarding Mexican Mining Chamber to lobby against any new detrimental taxes, royalties, unchanged, despite the ranking been higher 4 (#_ftn4) . As a result, delays
mining concessions could potentially affect the granting of new concessions in or regulations. We also support the industry's lobbying efforts to improve the in obtaining permits for certain operations and/or projects remain a risk.
Mexico. general public's understanding of the mining industry.
We remain confident in the long-term prospects of both our Company and the
LINK TO STRATEGY (1-2-3-4) We remain compliant with all applicable environmental regulations and are mining sector in Mexico more generally. We will continue working with
fully committed to operating in a sustainable way. We are committed to holding Government alongside trade bodies and the Mexican Mining Chamber. Our aim is
● Growth pipeline community dialogue over the lifetime of a mine project, from the earliest to continue to highlight the significant positive impact the mining industry
exploration to eventual closure, aiming to create long-term relationships and makes to infrastructure, education and health in remote communities as well
● Development projects value, while ensuring operational continuity. across Mexico more generally.
● Mines in operation
● Sustainable development We seek to maintain full compliance with tax authority requirements. In doing
so we continue to cooperate with any ongoing tax inspections.
KEY RISK INDICATORS
● Number of media mentions related to mining regulations. These could
include the mention of tax, royalties, the banning of mining activities in
protected areas and legal precedents. The indicator also provides detail on
the media itself, such as speaker profile and political alignment.
3.- Access to land
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Failure or significant delays in accessing the surface land above our mineral Successful land access plays a key role in the management of our mining Medium
concessions and other land of interest is a permanent risk to our strategy, rights, focusing on areas of interest or strategic value. At the end of 2019,
and has a potentially high impact on our objectives. Possible barriers to land after adding required areas and divesting areas of less interest, we held 1.7
access include: million hectares of mining concessions, which represents no change
year-on-year. Other initiatives include: RISK RATING (relative position)
● ising expectations of land owners.
2019: Very high (3)
● Refusal to acknowledge prior land acquisition terms and conditions by
members of a community. · Meticulous analysis of exploration targets and construction project 2018: Very high (3)
designs to minimise land requirements.
● Influence of multiple special interests in land negotiations.
Change in risk level: No changes (=)
· Judicious use of leasing or occupation agreements with purchase options,
● Conflicts in land boundaries with an often arduous resolution process. in compliance with legal and regulatory requirements.
● Succession issues among land owners resulting in a lack of clarity about · Early involvement of our community relations teams during the negotiation
the legal entitlement to possess and sell land. and acquisition processes of socially challenging targets.
DESCRIPTION OF RISK LEVEL
● Litigation risk i.e. increased activism by agrarian communities and/or · Strategic use of our social investment projects to build trust.
judicial authorities.
Despite our strategic actions, we continue to perceive this risk level as very
· Working closely with our land negotiation teams, which comprise high. The mining industry continues to face legal challenges in regard to
● Presence of indigenous communities in proximity to land that is of specialists hired directly by Fresnillo and also provided by Peñoles as part access to land by individuals and local communities who may seek to disregard
interest, where prior and informed consultation and consent of such of the service agreement. previous land agreements. This has been a consistent challenge in recent
communities may be required.
years.
Furthermore, insecurity in our exploration and operational areas as well as
potential actions by the Government increase the complexity of land access As part of an ongoing review of the legal status of our land rights, we
risk. identified certain areas of opportunity and continue to implement measures to
manage this risk on a case-by-case basis. Such measures include, whenever
possible, negotiating with agrarian communities for the outright purchase of
land. We use mechanisms provided under agrarian law and also utilise other
Operations at Soledad & Dipolos remain suspended, as the issue with the legal mechanisms under mining law which afford added protection for land
Ejido El Bajio continues to be unresolved. occupation. These activities form part of our ongoing drive to reduce exposure
to risk regarding surface land.
LINK TO STRATEGY (1-2-3)
● Growth pipeline
● Development projects
● Mines in operation
KEY RISK INDICATORS
● Percentage of land required for advanced exploration projects which is
under occupation or other agreements other than full property ownership
(overall and by project).
● Total US$ and percentage of project budget spent on HSECR activities,
including community relations (at projects and exploration sites)
4.- Security
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Our people, contractors and suppliers face the risk of kidnapping, extortion We closely monitor the security situation, maintaining clear internal Low
or harm due to insecurity conditions in some of the regions where we operate. communications and coordinating work in areas of greater insecurity. We have
We face the risk of restricted access to operations/projects and theft of adopted the following practices to manage our security risks and prevent and
assets. deal with possible incidents:
RISK RATING (relative position)
2019: Very high (4)
The influence of drug cartels, other criminal elements and general lawlessness ● We maintain close relations with authorities at federal, state and
in some of the regions where we operate, combined with our exploration and local levels, including army encampments located near the majority of our 2018: Very high (4)
project activities in certain areas of transfer or cultivation of drugs, makes operations. We also communicate with the newly created National Guard.
working in these areas a particular risk for us.
Change in risk level: No changes (=)
● We continue to implement increased technological and physical security
at our operations, such as the use of a remote monitoring process at
Herradura, Noche Buena and San Julián. At the Saucito and Fresnillo mines, in
LINK TO STRATEGY (1-2-3-4) addition to the remote monitoring service we have also constructed new local
operation and command centres for each business unit. At the Juanicipio
● Growth pipeline development project, we have the necessary infrastructure in place to provide DESCRIPTION OF RISK LEVEL
security services during the mine construction process. Juanicipio also
● Development projects benefits from a local operation and command centre, as well as the remote We continue to perceive this risk level as very high. We have continued to
monitoring service. The implementation at Ciénega mine has taken longer than experience a very high level of security incidents, both in frequency and
● Mines in operation expected due to changes related to priorities and increased scope. However, we severity.
are continuing to implement measures to increase security across all business
● Sustainable development units during 2020.
● We have maintained our logistics controls in order to reduce the Following the change of administration, we have yet to see evidence of the new
potential for theft of mineral concentrate. These controls include: the use of national security strategy. Although the National Guard began operations
KEY RISK INDICATORS real-time tracking technology; surveillance cameras; tests to identify during 2019, official security indexes have not yet improved.
alterations in transported material; guard services; control checkpoints in a
● Total number of security incidents affecting our workforce (thefts, "safe corridor"; and reduced number of authorised stops in order to optimise
kidnapping, extortion, etc.) delivery times and minimise the exposure of convoys.
We refer to The Global Peace Index(( 5 (#_ftn5) )) ranking, which indicates a
● Number of sites affected and work days lost, by region and type of site. ● We continue to invest in community programmes, infrastructure higher likelihood of violent demonstrations and political instability. This
improvements, and Government initiatives to support the development of lawful index uses three broad themes: level of safety and security in society; the
● Number of media mentions related to security issues affecting the mining local communities and discourage criminal acts. extent of ongoing domestic or international conflict; and the degree of
industry where we operate.
militarisation. Mexico ranks 140 of 163 countries worldwide (from best to
● Both internally and among our contractors, we continue to promote the worst), as a country with a low state of peace, and remained in the same
reporting of criminal acts to the authorities. position in the ranking during 2019, despite the peace score lowering by 4.8
per cent against the previous year. In addition, we also use the Mexico Peace
Index ranking as a reference. This is a comprehensive index of the following
indicators: homicides; violent crimes; weapons crimes; organised crime; and
Management is fully committed to safeguarding our workforce. For example, we detention without a sentence. The index ranks states from 1 to 5, where 1
have suspended work at the San Nicolás del Oro prospect because of the level represents the most peaceful. Chihuahua (3.6 on the index) and Zacatecas (3.3)
of insecurity in the state of Guerrero. tend to rank among the less peaceful states in Mexico, while Sonora (2.2) and
Durango (2.1) are located in the medium to low range.
5.- Safety
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
It is an inherent risk in our industry that incidents due to unsafe acts or Regrettably, we suffered two fatal accidents during 2019, both in the first Low
conditions could lead to injuries or fatalities. half of the year, meaning that we were very far from achieving our goal of
zero fatalities. In addition, we recorded 492 non-incapacitating accidents
compared to 454 during 2018.
RISK RATING (relative position)
Our workforce face risks such as fire, explosion, electrocution and carbon
monoxide poisoning, as well as risks specific to each mine site and
2019: Very High (5)
development project. These include rock falls caused by geological conditions, A key objective is to improve the culture of safety in our mining operations,
cyanide contamination, and heavy or light equipment collisions involving including by generating greater awareness of the risks that can be present. 2018: High (6)
machinery or personnel.
Change in risk level:
Management has continued to take serious actions to address and prevent the
LINK TO STRATEGY (4) root causes of fatal accidents and strengthened our safety initiatives. These
include:
● Sustainable development
DESCRIPTION OF RISK LEVEL
· Building safety targets into personal performance metrics to We perceive this risk as increasing, in terms of likelihood and impact.
KEY RISK INDICATORS incentivise safe behaviour and effective risk management.
● Accident rate · The continuing roll out of the ¨I care, we care" programme at our
mines to improve safety performance and develop competences in our We are seeing an increase in the intensity of extreme weather events, such as
● Days lost rate supervisors. rain, mist, wind, earthquakes and high temperatures, at our locations.
● Accident frequency · Providing leadership workshops.
· In February 2020, we will launch our "Ejercicio de 4 Ojos" Frequent transportation of our people to remote business units is an ongoing
programme in the Ciénega, Herradura, Saucito, San Julián and Fresnillo feature of our operations. In many cases, these units have poor accessibility
mines. This programme aims to develop risk competencies by educating by road. Failure to comply with safety programmes, measures and audits or with
leaders, supervisors and the workforce. It also fosters coaching and features the findings of inspections, continues to be a safety risk.
positive incentives as well as a comprehensive review and enhancement process.
· The assignment of Critical Control Risk Protocols to an owner for
follow-up in line with their area of influence.
· The appointment of a permanent specialist advisor to the Chief
Operating Officer, who is in charge of safety, health and community issues and
has the responsibility for addressing our unacceptable safety record.
We continue to deliver training for both employees and contractors. Personnel
received an average of 80 hours of training in 2019. 40 of these 80 hours
involved HSECR training.
Safety is continually monitored by the Board, which has always given it the
highest priority. The Board oversees all accident investigations, ensuring
that the appropriate actions are taken to improve safety systems and
practices.
6.- Union
relations
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
There is a risk of union action or a deterioration in union relations at some Our strategy is to integrate unionised personnel into each BU team. We achieve Low
sites. Internal union politics could impact us negatively, as could pressure this by clearly assigning responsibilities and via programmes aimed at
from other mining unions that want to take over the Fresnillo labour maintaining close relationships with unions at mine sites and at national
contracts. level.
RISK RATING (relative position)
2019: Medium high (6)
LINK TO STRATEGY (2-3) We maintain close communication with union leaders at various levels of the
organisation in order to: raise awareness about the economic situation the 2018: Medium low (7)
● Development projects industry is facing; share our production results; and to encourage union
participation in our initiatives regarding safety and other operational Change in risk level:
● Mines in operation improvements. These initiatives include the safety guardians programme,
alliances for obtaining certifications, integration of high productivity
teams, and family activities.
KEY RISK INDICATORS
DESCRIPTION OF RISK LEVEL
● Union members level of satisfaction During 2019, we ran eight leadership workshops in our business units to
improve management skills in the local trade union committees. 183 key union We perceive this risk level as increasing in likelihood and impact.
● Number of media mentions related to mining union developments leaders attended these workshops.
The New Federal Labour Law came into effect in January 2020, giving more
We are proactive in our interactions with the trade union, and did not rights to workers to create new trade unions or not to belong to any of them.
experience labour-related work stoppages in 2019. If required, we engage This could potentially generate an environment of labour instability in
experienced legal counsel to support us regarding labour issues. We remain Fresnillo, Saucito, Herradura and Noche Buena.
alert to any developments in labour issues or with the trade union.
There is currently a proposed law before Congress to improve the regulation of
We carried out a review of contractual benefits for union members at our mines outsourcing in Mexico. The Outsourcing Law and Regulations project encompasses
smoothly and without setbacks. regulatory framework, procurement process, transfers of assets, employment
law, data protection and customer remedies. This proposal could impact the
costs and work carried out by our contractors.
Our executive management and the Board recognise the importance of union
relations and follow any developments with interest.
During the year we continued to build on our good relations with unions at
national and local levels. However, trends such as government discussions
regarding further changes to labour laws have led to us increasing our
perceived level of risk.
7.-
Exploration
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
We are highly dependent on the success of the exploration programme to meet During 2019, we invested a total of US$157.9 million in exploration Medium
our strategic value-creation targets and our long-term production and reserves activities. Our objectives for 2020 include a budgeted risk capital investment
goals. in exploration of approximately US$140 million.
RISK RATING (relative position)
In addition to the growing level of insecurity and access to land detailed in The approximate spending split is 60% for operating mines (reserves and 2019: High (7)
previous risks, other risks that may impact prospecting and converting resources), 15% mining districts (resources), 12% development projects, 8%
inferred resources include: the lack of a robust portfolio of prospects in our main prospects and 5% prospecting. 2018: Medium (8)
pipeline with sufficient potential in terms of indicated and inferred
resources; and insufficient concession coverage in target areas. Change in risk level:
Our exploration strategy also includes:
We also risk the loss of purchase opportunities due to slow decision making.
As our production escalates and more mines approach the end of their lives, ● A focus on increasing regional exploration drilling programmes to DESCRIPTION OF RISK LEVEL
replenishing our reserves becomes increasingly challenging. intensify efforts in the districts with high potential.
We perceive this risk level as increasing in likelihood and impact.
● For local exploration, aggressive in-field exploration to upgrade the
resources category and convert inferred resources into reserves.
LINK TO STRATEGY (1)
● A team of highly trained and motivated geologists, including both This is mainly due to the following:
● Growth pipeline employees and long-term contractors.
· Delays in procedures regarding access to land.
● Advisory technical reviews by international third party experts,
up-to-date and integrated GIS databases, drone technology, remote sensing · Restrictions of new mining concessions.
KEY RISK INDICATORS imagery and software for identifying favourable metallogenic belts and
districts to be field-checked by the team. · Geological sampling falling below standard.
● Drill programmes completed (overall and by project).
● A commitment to maintain a pipeline of drill-ready high priority · Reserves not being replenished.
● Change in the number of ounces in reserves and resources. projects.
● Rate of conversion from resources to reserves.
Maintaining a reasonable investment in exploration, even when metal prices are
low, has been our policy through the years. While continuous investment has
always been a hallmark of our exploration strategy, replenishing exploited
reserves and increasing our total amount of resources could be a challenge in
the future. During 2019 we saw an increase in our total gold and silver
resources.
8.- Projects (performance
risk)
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Pursuing advanced exploration and project development opportunities are Our investment evaluation process determines how best to direct available Medium
essential to meeting our strategic goals. However, they carry certain risks: capital using technical, financial and qualitative criteria.
RISK RATING (relative position)
· Economic viability: the impact of capital cost to develop and maintain ● Technical: we assess the resource estimate and confirmed resources, the
the mine; future metal prices; and operating costs through the mine's life metallurgy of the mineral bodies, the investment required in general 2019: High (8)
cycle. infrastructure (e.g. roads, power, general services, housing) and the
infrastructure required for the mine and plant. 2018: Medium (9)
· Access to land: a failure or significant delay in land
acquisition has a very high impact on our projects. ● Financial: we look at risk relative to return for proposed investments Change in risk level:
of capital. We set expected internal rates of return (IRR) per project as
· Uncertainties associated with developing and operating new mines thresholds for approving the allocation of capital based on the present value
and expansion projects: including fluctuations in ore grade and recovery; of expected cash flows from the invested capital, and undertake stochastic and
unforeseen complexities in the mining process; poor rock quality; unexpected probabilistic analysis.
presence of underground water or lack thereof; lack of community support; and
inability or difficulty to obtain and maintain required construction and ● Qualitative: we consider the alignment of the investment with our
operating permits. strategic plan and business model; synergies with other investments and
operating assets; and the implications for safety, security, people,
· Delivery risk: projects may go over budget in terms of cost and time; resourcing and community relations.
they may not be constructed in accordance with the required specifications or
DESCRIPTION OF RISK LEVEL
there may be a delay during construction; and major mining equipment may not
be delivered on time.
We perceive this risk level as increasing in likelihood and impact.
We closely monitor project controls to ensure that we deliver approved
projects on time, on budget and in line with the defined specifications. The
executive management team and Board of Directors are regularly updated on
progress. Each advanced exploration project and major capital development The increasing number of projects under development increases the risk of
project has a risk register containing the identified and assessed risks non-completion according to budget and timeline.
LINK TO STRATEGY (2) specific to the project.
● Development projects.
We identify the following threats in project development:
The project development pipeline in 2019 included:
· Insufficient resources for the implementation of projects.
KEY RISK INDICATORS · • Continuing the construction of the tailings flotation plant
(Pyrites project). · Change in operational priorities which may impact projects.
● Earned value (rate of financial advancement rate vs. physical
advancement). · • Continuing the second stage of the Fresnillo flotation plant · Inadequate structure in place for the supervision of the
to cope with higher base metal contents. projects.
● Acquisition percentage of required land.
· • Approving and commencing construction of the Juanicipio · Lack of efficient and effective contractors.
● Percentage of major equipment ordered and received according to plan. project.
● Percentage of completion of mine development. · • Continuing the construction of the third tailings dam at the
Ciénega mine. During 2019, we commissioned the water dam and the expansion of the tailings
deposit at San Julián; the 13th leaching pad at Herradura; and the seventh
leaching pad and Carbon-in-Column (activated carbon) project in Noche Buena.
We are in the process of implementing capital project management, based on
good practices and in line with the Project Management Body of Knowledge
(PMBOK) standard of the Project Management Institute (PMI). The aim is to At the Juanicipio Project, we face the following threats:
safeguard our ability to generate growth through development projects.
· Inability to contract a suitable engineering firm to design the
tailings dam. Engineering firms are declining bids due to considerable
potential liabilities.
· Lack of an accurate model of the current tailings chemistry. Any
change to the anticipated chemistry levels could result in re-design and
construction changes.
· Lack of support from local communities due to low levels of
skills leading to fewer opportunities for employment.
9.- Public perception against
mining
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Across the world, public opinion is wary of the potential adverse social and Communities are our strategic partners. To win and maintain their trust, we Low
environmental consequences of mining operations. This sentiment is manifested must show understanding and effective engagement, and be accountable for our
through increased regulatory obligations for mining companies and increased impact. Our well-established programme for community engagement includes:
social activism by communities and other grassroots organisations.
· Increased understanding and accountability: RISK RATING (relative position)
- Monitoring public opinion within local and international media. 2019: High (9)
LINK TO STRATEGY (1-2-3-4)
- Holding continuous dialogue with our key local stakeholders through 2018: High (5)
· Growth pipeline formal and informal meetings.
Change in heat map: No changes (=)
· Development projects - Carrying out social baseline, human rights and perception studies to
better understand our positive and negative impacts.
· Mines in operation
- Operating a grievance mechanism to address stakeholder concerns.
· Sustainable development
· Purposeful and aspirational engagement with local communities: DESCRIPTION OF RISK CHANGE
- Maintaining a Social Investment Portfolio to create long term value, Over the years we have perceived a persistent pattern of protests and
KEY RISK INDICATORS aligned with the UN Global Goals for sustainable development. We have conflicts leading to delays and abandonment of projects in the national and
identified four pillars where we can make a real difference: Education, Water, international mining sector. Opposition not only arises from concerns of local
· Number of local actions by non-governmental organisations (NGOs) or other Health and Capacity building. communities, but also from national and international activism. Conflicts and
local social groups against mining, by region.
activism fuel the public perception against mining. We continue to perceive
- Partnering with NGOs in these four pillars of social investment: this complex issue as a high risk.
· Number of actions by NGOs or other local social groups against mining in Education (IBBY, INNOVEC & First Robotics), Water (Captar AC) and Health
the Americas. (National University Foundation).
· Number of media mentions related to demonstrations against the mining · Collaborating with peers in the international and Mexican mining We have maintained our social licence to operate in our communities.
industry. community to promote the benefits of the mining industry and responsible Continuing to maintain and protect this licence demands strong ongoing
mining practices. collaboration with the local community and stakeholders.
· Communicating our best practices regarding social and environmental
responsibility.
10.- Cyber
security
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
We recognise the importance of the confidentiality, continuity, integrity and During 2019 we introduced a set of new initiatives to enhance our Cyber Low
security of our data and production systems. Security Programme, supported by external advisors. The main objective of
the programme is to identify and manage the cyber security risks and align
As a mining company, we may be under threat of cyber attacks from a broad set them to our mission and business strategy.
of attacker groups, from "hacktivists" and hostile regimes to organised
RISK RATING (relative position)
criminals. Their goals include a desire to take advantage of the role that
mining plays in regional and global supply chains as well as in national
2019: Medium (10)
economies. Certain groups may also attempt to exploit vulnerabilities created
by the industry's heavy reliance on automated operational systems. In our
2018: Medium (10)
case, this could include initiatives such as Operations Technology and In line with best practice, our approach is based on two key frameworks:
Information Technology (OTIT) Integration and Digital Mine.
Change in risk level: No changes (=)
● The US National Institute of Standards and Technology Cyber Security
LINK TO STRATEGY (2-3) Framework (NIST CSF) which outlines how companies can assess and improve their
ability to prevent, detect and respond to cyber attacks.
● Development projects
● Mines in operation
DESCRIPTION OF RISK LEVEL
● Control Objectives for Information and Related Technologies (COBIT), which
was created by ISACA, the international professional association for IT Globally, we continue to see new cyber security attacks aimed at the
management and governance, to provide an implementable set of IT-related industrial sector. These include phishing, ransomware and vulnerability
KEY RISK INDICATORS controls, processes and enablers. exploitation campaigns and represent a continuous threat to our Company.
● Total number of cyber security incidents affecting our Company.
● Number of media mentions related to cyber security issues affecting the Our approach is also based on the MITRE ATT&CK™ which is used as a
mining industry. foundation for the development of specific threat models and methodologies in
the private sector, in government, and in the cyber security product and
service community.
A governance model, continuous risk assessment, information security policies,
awareness and training campaigns will form the basis for our IT/OT operational
assurance.
Our plan for 2020 is to focus our efforts on risk mitigation projects designed
to protect information and key assets, according to the risk appetite set by
management.
As our strategy continues to mature during 2020, we will support it with a
series of awareness and training campaigns.
The Audit Committee continues to monitor and oversee this risk.
11.- Environmental
incidents
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Environmental incidents are an inherent risk in our industry. These incidents Our environmental management system ensures compliance with international Low
include the possible overflow or collapse of tailing deposits, cyanide spills regulations and best practice, provides transparency, and supports initiatives
and dust emissions, any of which could have a high impact on our people, that reduce our environmental footprint.
communities and business.
RISK RATING (relative position)
Herradura, Saucito, Fresnillo and Noche Buena are certified under ISO 14001. 2019: Medium Low (11)
LINK TO STRATEGY (4) Ciénega and San Julián are working towards achieving certification (ISO
14001 and 45000) during 2020. 2018: Medium Low (11)
● Sustainable development
Juanicipio has been recommended for certification. Additionally, Ciénega, Change in risk level: No changes (=)
Herradura, Saucito, San Julián, Juanicipio and Fresnillo are certified to
clean industry standards. Our leaching operations in Herradura and Noche Buena
KEY RISK INDICATORS comply with the Cyanide Code issued by the International Cyanide Management
Institute.
● Number of BUs with ISO 14001:2004 certification.
DESCRIPTION OF RISK LEVEL
● Number of BUs with Clean Industry certification.
Management is very aware of the risks associated with tailings dams. Our environmental management system, together with our investment in
● Number of BUs with International Cyanide Code certification. Therefore, prior to the construction of a dam, we undertake a number of preventative measures and training, are key factors which reduce the risk of
studies to confirm the suitability of the area. These studies include major environmental incidents.
● Number of environmental permits for all advanced exploration projects geotechnical, geological, geophysical, hydrological and seismic analysis.
(according to schedule). Before construction begins, the CNA (National Commission for Water) undertakes
various studies and then continues to periodically review dams in relation to
ongoing environmental impacts. Based on the perceived level of risk due to recent severe and catastrophic
industry developments, the Board decided to increase the severity of this risk
in 2018 and maintained the same level in 2019.
Early in 2019 we launched a series of initiatives to align our governance The Board and HSECR continue to keep these issues under close scrutiny. It is
practices with current best practice. These initiatives included: important to note that our tailings dams differ from those involved in recent
high profile incidents, such as the tragedy in Brazil.
· Updating the inventory of Tailings Storage Facilities (TSFs) and
validating the data register.
· Starting a programme of third-party reviews beginning with dam
safety inspections for all TSFs.
· Establishing an Independent Tailing Review Panel (ITRP)
consisting of recognised international experts.
· Accelerating a programme of independent expert reviews of all
sites.
· ITRP reviewing and prioritising recommendations arising from
inspections.
We rigorously adhere to the requirements established by each project's
environmental permit (Environmental Impact Statement issued by the Ministry of
Environment, SEMARNAT). We also continue to support contractors in their
efforts to integrate environmental management systems.
12.- Human
Resources
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Our people are critical to delivering our objectives. We face risks in Recruitment: we have assessed our hiring requirements for key positions for Medium
selecting, recruiting, training and retaining the diverse and talented people 2020, and aim to meet them by internal training and promotion, and by
we need. recruitment through:
● Our close relationships with universities offering earth sciences RISK RATING (relative position)
programmes. We have dedicated programmes to identify potential candidates
A lack of reliable contractors with sufficient infrastructure, machinery, based on performance who may be hired as interns and/or employees on 2019: Low (12)
performance track record and skilled people is also a risk that could impact graduation. We welcomed 124 professional practitioners, 67 trainees and
our ability to develop and construct mining works. scholarships and 107 engineers into our coaching programme. 2018: Low (12)
● CETEF (Centre for Technical Studies Fresnillo) which teaches specific Change in risk level: No changes (=)
mining operational skills. All four graduates hired in 2019 joined as
LINK TO STRATEGY (1-2-3-4) full-time employees.
● Growth pipeline ● CETLAR (the Peñoles Centre for Technical Studies) which trains
mechanics and electrical technicians. All 10 graduates were hired as full-time
● Development projects employees in 2019 across Fresnillo's business units. DESCRIPTION OF RISK LEVEL
● Mines in operation During 2019 we contracted 105 experienced personnel to fulfil our We value and respect all people from diverse backgrounds. We aspire to develop
requirements. an inclusive culture where our people feel valued and are inspired to
● Sustainable development
contribute to their fullest potential.
Retention: Our aim is to be the employer of choice, and we recognise that in
order to be a profitable and sustainable company, we have to generate value
for our employees and their families. We do this by providing a healthy, safe,
KEY RISK INDICATORS productive and team-oriented working environment that not only encourages our We aim to carefully align our human resources with our operational and growth
people to fulfil their potential but also supports process improvements. Our requirements. We believe that we have currently achieved this alignment, due
● Number of positions filled by area of speciality, for vacancies and new focus is on continuous improvement, driven by training, development and to the success of activities including our ongoing university recruitment and
positions. personal growth opportunities; in summary we concentrate on fair hiring, fair employee retention strategies.
remuneration and benefits and gender equality. During 2019, 94 employees were
● Employee turnover rate. promoted (66% of our structure at a professional level) and 25 transfers took
place between business units.
● Average hours of training and professional development per employee.
Contractor resourcing continues to be a major challenge. We maintain a broad
Performance: We have continued our performance evaluation process, reinforcing base of contractors in order to provide us with operational flexibility and
● Number of contractor personnel relative to unionised personnel per BU. formal feedback. We promote the certification of key technical skills for aim to professionalise them to the same level as our own employees.
operational personnel, and the administrative and leadership skills
development programme for required positions. We develop our high potential
middle managers through the Leaders with Vision programme.
Contractors: We have long-term drilling and mining contracts. We invest
significantly in training contractors, particularly on safety and
environmental requirements. We have supported the enrolment of 70 of our
contractor companies into the self-management Programme on Health and Safety
at Work (PASST), promoted by the Mexican Secretariat of Labour and Social
Welfare (STPS). Of these companies, 60% have been certified, with the
remainder in the process of being certified.
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
2 March 2020
Year ended 31 December 2019 Year ended 31 December 2018
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 2,119,641 2,119,641 2,103,785 2,103,785
Cost of sales 5 (1,657,932) (1,657,932) (1,323,057) (1,323,057)
Gross profit 461,709 461,709 780,728 780,728
Administrative expenses (96,436) (96,436) (83,339) (83,339)
Exploration expenses 6 (157,913) (157,913) (172,799) (172,799)
Selling expenses (22,851) (22,851) (21,237) (21,237)
Other operating income 8 9,803 9,803 11,703 11,703
Other operating expenses 8 (22,582) (22,582) (8,360) (8,360)
Profit from continuing operations before net finance costs and income tax 171,730 171,730 506,696 506,696
Finance income 9 24,176 24,176 20,372 20,372
Finance costs 9 (70,670) (70,670) (50,010) (50,010)
Revaluation effects of Silverstream contract 13 48,376 48,376 14,956 14,956
Foreign exchange gain/(loss) 5,143 5,143 (8,084) (8,084)
Profit from continuing operations before income tax 130,379 48,376 178,755 468,974 14,956 483,930
Corporate income tax 10 22,519 (14,513) 8,006 (116,162) (4,487) (120,649)
Special mining right 10 19,053 19,053 (13,315) (13,315)
Income tax 10 41,572 (14,513) 27,059 (129,477) (4,487) (133,964)
Profit for the year from continuing operations 171,951 33,863 205,814 339,497 10,469 349,966
Attributable to:
Equity shareholders of the Company 170,134 33,863 203,997 339,377 10,469 349,846
Non-controlling interest 1,817 1,817 120 120
171,951 33,863 205,814 339,497 10,469 349,966
Earnings per share: (US$)
Basic and diluted earnings per Ordinary Share from continuing operations 11 - 0.277 - 0.475
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per Ordinary Share from continuing 11 0.231 - 0.461 -
operations
( )
Year ended 31 December
Notes 2019 2018
US$ thousands
US$ thousands
Profit for the year 205,814 349,966
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
Gain on cash flow hedges recycled to income statement 5,983 1,582
Loss on cost of hedge recycled to income statement - (269)
Changes in the fair value of cost of hedges (1,280) 14,353
Changes in the fair value of cash flow hedges 1,454 -
Total effect of cash flow hedges 6,157 15,666
Foreign currency translation 545 (185)
Income tax effect on items that may be reclassified subsequently to profit or 10 (1,847) (4,699)
loss:
Net other comprehensive income that may be reclassified subsequently to profit 4,855 10,782
or loss:
Items that will not be reclassified to profit or loss:
Losses on cash flow hedges recycled to other assets - (233)
Changes in the fair value of cash flow hedges (236) (58)
Total effect of cash flow hedges (236) (291)
Changes in the fair value of equity investments at FVOCI 44,805 (46,579)
Remeasurement (losses)/gains on defined benefit plans 21 (2,342) 2,610
Income tax effect on items that will not be reclassified to profit or loss 10 (12,998) 19,999
Net other comprehensive income/(expense) that will not be reclassified to 29,229 (24,261)
profit or loss
Other comprehensive income/(expense), net of tax 34,084 (13,479)
Total comprehensive income for the year, net of tax 239,898 336,487
Attributable to:
Equity shareholders of the Company 238,140 336,377
Non-controlling interests 1,758 110
239,898 336,487
As at 31 December
Notes 2019 2018
US$ thousands
US$ thousands
ASSETS
Non-current assets
Property, plant and equipment 2(b),12 2,813,417 2,693,104
Equity instruments at FVOCI 29 123,024 78,219
Silverstream contract 13 518,696 498,274
Derivative financial instruments 29 - 20
Deferred tax asset 10 110,770 88,883
Inventories 14 91,620 91,620
Other receivables 15 23,014 -
Other assets 3,622 3,199
3,684,163 3,453,319
Current assets
Inventories 14 272,120 243,404
Trade and other receivables 15 437,642 411,157
Income tax recoverable 57,124 50,871
Prepayments 18,344 15,488
Derivative financial instruments 29 2,623 294
Silverstream contract 13 22,558 20,819
Cash and cash equivalents 16 336,576 560,785
1,146,987 1,302,818
Total assets 4,831,150 4,756,137
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Share capital 17 368,546 368,546
Share premium 17 1,153,817 1,153,817
Capital reserve 17 (526,910) (526,910)
Hedging reserve 17 139 (229)
Cost of hedging reserve 17 918 (2,374)
Fair value reserve of financial assets at FVOCI 17 54,734 23,370
Foreign currency translation reserve 17 (250) (795)
Retained earnings 17 2,093,666 2,033,860
3,144,660 3,049,285
Non-controlling interests 134,059 78,968
Total equity 3,278,719 3,128,253
As at 31 December
Notes 2019 2018
US$ thousands
US$ thousands
Non-current liabilities
Interest-bearing loans 19 801,239 800,127
Lease liabilities 24 8,009 -
Provision for mine closure cost 20 231,056 189,842
Pensions and other post-employment benefit plans 21 10,704 6,393
Deferred tax liability 10 321,347 470,925
1,372,355 1,467,287
Current liabilities
Trade and other payables 22 159,768 133,140
Income tax payable 3,991 10,960
Derivative financial instruments 29 1,789 3,807
Lease liabilities 24 4,535 -
Employee profit sharing 9,993 12,690
180,076 160,597
Total liabilities 1,552,431 1,627,884
Total equity and liabilities 4,831,150 4,756,137
These financial statements were approved by the Board of Directors on XX March
2020 and signed on its behalf by:
Mr Arturo Fernández
Non-executive Director
2 March 2020
Year ended 31 December
Notes 2019 2018
US$ thousands
US$ thousands
Net cash from operating activities 28 435,909 588,359
Cash flows from investing activities
Purchase of property, plant and equipment 3 (559,264) (668,669)
Proceeds from the sale of property, plant and equipment and other assets 1,309 78
Repayments of loans granted to contractors - 1,327
Silverstream contract 13 24,303 36,303
Proceeds from the sale of debt investments - 20,087
Interest received 24,176 19,520
Net cash used in investing activities (509,476) (591,354)
Cash flows from financing activities
Principal elements of lease payments 2(b) (4,681) -
Dividends paid to shareholders of the Company(1) 18 (142,179) (298,068)
Capital contribution 53,256 23,613
Interest paid(2) 19 (57,069) (35,177)
Net cash used in financing activities (150,673) (309,632)
Net decrease in cash and cash equivalents during the year (224,240) (312,627)
Effect of exchange rate on cash and cash equivalents 31 (2,622)
Cash and cash equivalents at 1 January 560,785 876,034
Cash and cash equivalents at 31 December 16 336,576 560,785
(1 )(Includes the effect of hedging of dividend payments made in currencies
other than US dollar.)
(2 Total interest paid during the year ended 31 December 2019 less amounts
capitalised totalling US$6.1 million (31 December 2018: US$11.1 million) which
were included within the caption Purchase of property, plant and equipment.)
Attributable to the equity holders of the Company
Notes Share Share premium Capital reserve Hedging reserve Cost of hedging reserve Available-for-sale financial assets reserve Fair value reserve of financial assets at FVOCI Foreign currency translation reserve Retained earnings Total Non-controlling interests Total
capital
equity
US$ thousands
Balance at 1 January 2018 368,546 1,153,817 (526,910) - 53,799 (610) 1,962,708 3,011,350 55,245 3,066,595
Adjustments for initial application of IFRS 9 (13,376) (53,799) 49,622 17,553 - - -
Profit for the year - - - - - - - - 349,846 349,846 120 349,966
Other comprehensive income, net of tax - - - (229) 11,002 - (26,252) (185) 2,195 (13,469) (10) (13,479)
Total comprehensive income for the year - - - (229) 11,002 - (26,252) (185) 352,041 336,377 110 336,487
Capital contribution - - - - - - - - - - 23,613 23,613
Dividends declared and paid 18 - - - - - - - - (298,442) (298,442) - (298,442)
Balance at 31 December 2018 368,546 1,153,817 (526,910) (229) (2,374) - 23,370 (795) 2,033,860 3,049,285 78,968 3,128,253
Profit for the year - - - - - - - - 203,997 203,997 1,817 205,814
Other comprehensive expense, net of tax - - - 912 3,292 - 31,364 545 (1,970) 34,143 (59) 34,084
Total comprehensive income for the year - - - 912 3,292 - 31,364 545 202,027 238,140 1,758 239,898
Hedging gain (loss) transferred to the carrying value of PPE purchased during 29(c)) (544) (544) 77 (467)
the year
Capital contribution - - - - - - - - - - 53,256 53,256
Dividends declared and paid 18 - - - - - - - - (142,221) (142,221) - (142,221)
Balance at 31 December 2019 368,546 1,153,817 (526,910) 139 918 - 54,734 (250) 2,093,666 3,144,660 134,059 3,278,719
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 26.
The consolidated financial statements of the Group for the year ended 31
December 2019 were authorised for issue by the Board of Directors of Fresnillo
plc on 2 March 2020.
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 2019 and 2018, 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 trade receivables, derivative financial instruments, equity
securities, investment in funds 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 2019 and 2018, 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 adopted in the preparation of the consolidated
financial statements are consistent with those applied in the preparation of
the consolidated financial statements for the year ended 31 December 2018,
except for the following:
New standards, interpretations and amendments (new standards) adopted by the
Group
IFRS 16, Leases
The Group has adopted IFRS 16, Leases from 1 January 2019 but has not restated
comparatives for the 2018 reporting period, as permitted under the specific
transitional provisions in the standard ("modified retrospective approach").
The adjustments arising from the new leasing rules are therefore recognised in
the opening balance sheet on 1 January 2019.
On adoption of IFRS 16, the Group recognised lease liabilities in relation to
leases which had previously been classified as 'operating leases' under the
principles of IAS 17 Leases. These liabilities were measured at the present
value of the remaining lease payments, discounted using the incremental
borrowing rate as of 1 January 2019. The weighted average lessee's incremental
borrowing rate applied to the lease liabilities on 1 January 2019 was 4.2% for
contracts denominated in US dollars and 10.1% for contracts denominated in
Mexican pesos. Contracts in other currencies are not material.
The resulting lease liability as of 1 January 2019 was determined as follows:
US$ thousands
Operating lease commitments disclosed as at 31 December 2018 16,130
Discounted using the lessee's incremental borrowing rate of at the date of 14,181
initial application
Less - Short-term leases recognised on a straight-line basis as expense (146)
Less - Low-value leases recognised on a straight-line basis as expense (2,552)
Less - Other adjustments (184)
Lease liability recognised as at 1 January 2019 11,299
Less - Current portion 3,758
Non-current portion 7,541
The associated right-of-use assets were measured at the amount equal to the
lease liability, prepaid or accrued lease payments relating to that lease
recognised in the statement of financial position immediate before the initial
application date were nil, therefore there was no adjustment to retained
earnings on adoption. The right-of-use assets were evaluated for indicators of
impairment in accordance with IAS 36, no indicators were identified.
The recognised right-of-use asset relate to the following types of assets
which are included as part of PPE caption:
US$ thousands
Computer equipment 7,749
Buildings 3,550
11,299
In applying IFRS 16 for the first time, the Group has used the following
practical expedients permitted by the standard:
the use of a single discount rate to a portfolio of leases with reasonably
similar characteristics;
the accounting for operating leases with a remaining lease term of less than
12 months as at 1 January 2019 as short-term leases, and
the use of hindsight in determining the lease term where the contract contains
options to extend or terminate the lease.
From 1 January 2019 the Group has amended its accounting policy to recognised
and measure lease contracts, see Note 2 (m).
Other Narrow Scope Amendments
The Group also adopted other amendments to IFRSs' as well as the
interpretation IFRIC 23 "Uncertainty over Income Tax Treatments (UTP)", which
were effective for accounting periods beginning on or after 1 January 2019.
The Group has reassessed its accounting policy under the implementation
guidance of IFRIC 23 and clarified that detection risk is not considered in
respect of recognition or measurement of uncertain tax positions. The impact
of adoption did not have a material effect on the Group Consolidated
Financial Statements.
Other than the amendment mentioned above, there were no significant new
standards that the Group was required to adopt effective from 1 January 2019.
Standards, interpretations and amendments issued but not yet effective
Certain new accounting standards and interpretations have been published that
are not mandatory for 31 December 2019 reporting periods and have not been
early adopted by the group. These standards are not expected to have a
material impact on the entity in the current or future reporting periods and
on foreseeable future transactions.
The IASB and IFRS Interpretation committee have issued other amendments
resulting from improvements to IFRSs that management considers do not have any
impact on the accounting policies, financial position or performance of the
Group. The Group has not early adopted any standard, interpretation or
amendment that was issued but is not yet effective.
(c) Significant accounting judgments, estimates and assumptions
The preparation of the Group's consolidated financial statements in conformity
with IFRS requires management to make judgements, estimates and assumptions
that affect the reported amounts of assets, liabilities and contingent
liabilities at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting period. These judgements
and estimates are based on management's best knowledge of the relevant facts
and circumstances, with regard to prior experience, but actual results may
differ from the amounts included in the consolidated financial statements.
Information about such judgements and estimates is contained in the accounting
policies and/or the notes to the consolidated financial statements.
Judgements
Areas of judgement, apart from those involving estimations, that have the most
significant effect on the amounts recognised in the consolidated financial
statements for the year ended 31 December 2019 are:
Stripping costs, note 2(e):
The Group incurs waste removal costs (stripping costs) during the development
and production phases of its surface mining operations. During the production
phase, stripping costs (production stripping costs) can be incurred both in
relation to the production of inventory in that period and the creation of
improved access and mining flexibility in relation to ore to be mined in the
future. The former are included as part of the costs of inventory, while the
latter are capitalised as a stripping activity asset, where certain criteria
are met.
Once the Group has identified production stripping for a surface mining
operation, judgment is required in identifying the separate components of the
ore bodies for that operation, to which stripping costs should be allocated.
Generally, a component will be a subset of the total ore body that is made
more accessible as a result of the stripping activity. In identifying
components of the ore body, the Group works closely with the mining operations
personnel to analyse each of the mine plans since components are usually
identified during the mine planning stage. The Group reassesses the components
of ore bodies in line with the preparation and update of mine plans which
usually depend on newest information of reserves and resources.
As a result, effective 1 July 2018 the Group changed the components identified
at Centuaro pit and therefore the measurement of the corresponding stripping
costs. During the current year, this reassessment did not give rise to any
changes in the identification of components.
Contingencies, note 25
By their nature, contingencies will be resolved only when one or more
uncertain future events occur or fail to occur. The assessment of the
existence and potential quantum of contingencies inherently involves the
exercise of significant judgement and the use of estimates regarding the
outcome of future events.
Estimates and assumptions
Significant areas of estimation uncertainty considered by management in
preparing the consolidated financial statements include:
Estimated recoverable ore reserves and mineral resources, note 2(e):
Ore reserves are estimates of the amount of ore that can be economically and
legally extracted from the Group's mining properties; mineral resources are an
identified mineral occurrence with reasonable prospects for eventual economic
extraction. The Group estimates its ore reserves and mineral resources based
on information compiled by appropriately qualified persons relating to the
geological and technical data on the size, depth, shape and grade of the ore
body and suitable production techniques and recovery rates, in conformity with
the Joint Ore Reserves Committee (JORC) code 2012. Such an analysis requires
complex geological judgements to interpret the data. The estimation of
recoverable ore reserves and mineral resources is based upon factors such as
geological assumptions and judgements made in estimating the size and grade of
the ore body, estimates of commodity prices, foreign exchange rates, future
capital requirements and production costs.
As additional geological information is produced during the operation of a
mine, the economic assumptions used and the estimates of ore reserves and
mineral resources may change. Such changes may impact the Group's reported
balance sheet and income statement including:
· The carrying value of property, plant and equipment and mining
properties may be affected due to changes in estimated future cash flows,
which consider both ore reserves and mineral resources;
· Depreciation and amortisation charges in the income statement may
change where such charges are determined using the unit-of-production method
based on ore reserves;
· Stripping costs capitalised in the balance sheet, either as part
of mine properties or inventory, or charged to profit or loss may change due
to changes in stripping ratios;
· Provisions for mine closure costs may change where changes to the
ore reserve and resources estimates affect expectations about when such
activities will occur;
· The recognition and carrying value of deferred income tax assets
may change due to changes regarding the existence of such assets and in
estimates of the likely recovery of such assets.
Estimate of recoverable ore on leaching pads
In the Group's open pit mines, certain mined ore is placed on leaching pads
where a solution is applied to the surface of the heap to dissolve the gold
and enable extraction. The determination of the amount of recoverable gold
requires estimation with consideration of the quantities of ore placed on the
pads and the grade of that ore (based on assay data) and the estimated
recovery percentage (based on metallurgical studies and current technology).
The grades of ore placed on pads are regularly compared to the quantities of
metal recovered through the leaching process to evaluate the appropriateness
of the estimated recovery (metallurgical balancing). The Group monitors the
results of the metallurgical balancing process and recovery estimates are
refined based on actual results over time and when new information becomes
available. Any potential future adjustment would be applicable from the point
of re-estimation and would not by itself change the value of inventory and as
such no sensitivity included.
Silverstream, note 13:
The valuation of the Silverstream contract as a derivative financial
instrument requires estimation by management. The term of the derivative is
based on the Sabinas life of mine and the value of this derivative is
determined using a number of estimates, including the estimated recoverable
ore reserves and mineral resources and future production profile of the
Sabinas mine on the same basis a market participant would consider, the
estimated recoveries of silver from ore mined, estimates of the future price
of silver and the discount rate used to discount future cash flows. For
further detail on the inputs that have a significant effect on the fair value
of this derivative, see note 30. The impact of changes in silver price
assumptions, foreign exchange, inflation and the discount rate is included in
note 30. Management considers that an appropriate sensitivity for volumes
produced and sold is on the total recoverable reserve and resource quantities
over the contract term rather than annual production volumes over the mine
life. A reasonably possible change in total recoverable resources and reserves
quantities does not result in a significant change in the value of the
contract.
Estimation of the mine closure costs, notes 2 (j) and 20:
Significant estimates and assumptions are made in determining the provision
for mine closure cost as there are numerous factors that will affect
the ultimate amounts payable. These factors include estimates of the extent
and costs of rehabilitation activities, the currency in which the cost will be
incurred, technological changes, regulatory changes, cost increases, mine life
and changes in discount rates. Those uncertainties may result in future actual
expenditure differing from the amounts currently provided. The provision at
the balance sheet date represents management's best estimate of the present
value of the future closure costs required.
Income tax, notes 2 (q) and 10:
The recognition of deferred tax assets, including those arising from
un-utilised tax losses require management to assess the likelihood that the
Group will generate taxable earnings in future periods, in order to utilise
recognised deferred tax assets. Estimates of future taxable income are based
on forecast cash flows from operations and the application of existing tax
laws in each jurisdiction. To the extent that future cash flows and taxable
income differ significantly from estimates, the ability of the Group to
realise the net deferred tax assets recorded at the balance sheet date could
be impacted.
(d) Foreign currency translation
The Group's consolidated financial statements are presented in US dollars,
which is the parent company's functional currency. The functional currency for
each entity in the Group is determined by the currency of the primary economic
environment in which it operates. The determination of functional currency
requires management judgement, particularly where there may be more than one
currency in which transactions are undertaken and which impact the economic
environment in which the entity operates. For all operating entities, this is
US dollars.
Transactions denominated in currencies other than the functional currency of
the entity are translated at the exchange rate ruling at the date of
the transaction. Monetary assets and liabilities denominated in foreign
currencies are re-translated at the rate of exchange ruling at the balance
sheet date. All differences that arise are recorded in the income statement.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rates as at the dates of the
initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated into US dollars using the exchange rate at the date
when the fair value is determined.
For entities with functional currencies other than US dollars as at the
reporting date, assets and liabilities are translated into the reporting
currency of the Group by applying the exchange rate at the balance sheet date
and the income statement is translated at the average exchange rate for the
year. The resulting difference on exchange is included as a cumulative
translation adjustment in other comprehensive income. On disposal of an
entity, the deferred cumulative amount recognised in other comprehensive
income relating to that operation is recognised in the income statement.
(e) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation
and impairment, if any. Cost comprises the purchase price and any costs
directly attributable to bringing the asset into working condition for its
intended use. The cost of self-constructed assets includes the cost of
materials, direct labour and an appropriate proportion of production
overheads.
The cost less the residual value of each item of property, plant and equipment
is depreciated over its useful life. Each item's estimated useful life
has been assessed with regard to both its own physical life limitations and
the present assessment of economically recoverable reserves of the mine
property at which the item is located. Estimates of remaining useful lives are
made on a regular basis for all mine buildings, machinery and equipment, with
annual reassessments for major items. Depreciation is charged to cost of sales
on a unit-of-production (UOP) basis for mine buildings and installations,
plant and equipment used in the mine production process or on a straight-line
basis over the estimated useful life of the individual asset when not related
to the mine production process. Changes in estimates, which mainly affect
unit-of-production calculations, are accounted for prospectively.
Depreciation commences when assets are available for use. Land is not
depreciated.
The expected useful lives are as follows:
Years
Buildings 6
Plant and equipment 4
Mining properties and development costs(1) 16
Other assets 3
(1 Depreciation of mining properties and development cost are determined using
the unit-of-production method.)
An item of property, plant and equipment is de-recognised upon disposal or
when no future economic benefits are expected from its use or disposal. Any
gain or loss arising at de-recognition of the asset (calculated as the
difference between the net disposal proceeds and the carrying amount
of the asset) is included in the income statement in the year that the asset
is de-recognised.
Non-current assets or disposal groups are classified as held for sale when it
is expected that the carrying amount of the asset will be recovered
principally through sale rather than through continuing use. Assets are not
depreciated when classified as held for sale.
Disposal of assets
Gains or losses from the disposal of assets are recognised in the income
statement when all significant risks and rewards of ownership are transferred
to the customer, usually when title has been passed.
Mining properties and development costs
Payments for mining concessions are expensed during the exploration phase of a
prospect and capitalised during the development of the project when incurred.
Purchased rights to ore reserves and mineral resources are recognised as
assets at their cost of acquisition or at fair value if purchased as part
of a business combination.
Mining concessions, when capitalised, are amortised on a straight-line basis
over the period of time in which benefits are expected to be obtained from
that specific concession.
Mine development costs are capitalised as part of property, plant and
equipment. Mine development activities commence once a feasibility study
has been performed for the specific project. When an exploration prospect has
entered into the advanced exploration phase and sufficient evidence of the
probability of the existence of economically recoverable minerals has been
obtained pre-operative expenses relating to mine preparation works are also
capitalised as a mine development cost.
The initial cost of a mining property comprises its construction cost, any
costs directly attributable to bringing the mining property into operation,
the initial estimate of the provision for mine closure cost, and, for
qualifying assets, borrowing costs. The Group cease the capitalisation of
borrowing cost when the physical construction of the asset is complete and is
ready for its intended use.
As mine development prior to commercial production is necessary to bring
mining assets into the condition necessary for its intended use, revenues from
metals recovered from ore mined during such activities are credited to mining
properties and development costs. Upon commencement of production, capitalised
expenditure is depreciated using the unit-of-production method based on the
estimated economically proven and probable reserves to which they relate.
Mining properties and mine development are stated at cost, less accumulated
depreciation and impairment in value, if any.
Construction in progress
Assets in the course of construction are capitalised as a separate component
of property, plant and equipment. On completion, the cost of construction is
transferred to the appropriate category of property, plant and equipment. The
cost of construction in progress is not depreciated.
Subsequent expenditures
All subsequent expenditure on property, plant and equipment is capitalised if
it meets the recognition criteria, and the carrying amount of those
parts that are replaced, is de-recognised. All other expenditure including
repairs and maintenance expenditure is recognised in the income statement as
incurred.
Stripping costs
In a surface mine operation, it is necessary to remove overburden and other
waste material in order to gain access to the ore bodies (stripping activity).
During development and pre-production phases, the stripping activity costs are
capitalised as part of the initial cost of development and construction of the
mine (the stripping activity asset) and charged as depreciation or depletion
to cost of sales, in the income statement, based on the mine's units of
production once commercial operations begin.
Removal of waste material normally continues throughout the life of a surface
mine. At the time that saleable material begins to be extracted from the
surface mine the activity is referred to as production stripping.
Production stripping cost is capitalised only if the following criteria is
met:
· It is probable that the future economic benefits (improved access
to an ore body) associated with the stripping activity will flow to the Group;
· The Group can identify the component of an ore body for which
access has been improved; and
· The costs relating to the improved access to that component can
be measured reliably.
If not all of the criteria are met, the production stripping costs are charged
to the income statement as operating costs as they are incurred.
Stripping activity costs associated with such development activities are
capitalised into existing mining development assets, as mining properties and
development cost, within property, plant and equipment, using a measure that
considers the volume of waste extracted compared with expected volume, for a
given volume of ore production. This measure is known as "component stripping
ratio", which is revised annually in accordance with the mine plan. The amount
capitalised is subsequently depreciated over the expected useful life of the
identified component of the ore body related to the stripping activity asset,
by using the units of production method. The identification of components and
the expected useful lives of those components are evaluated as new information
of reserves and resources is available. Depreciation is recognised as cost of
sales in the income statement.
The capitalised stripping activity asset is carried at cost less accumulated
depletion/depreciation, less impairment, if any. Cost includes the
accumulation of costs directly incurred to perform the stripping activity that
improves access to the identified component of ore, plus an allocation of
directly attributable overhead costs. The costs associated with incidental
operations are excluded from the cost of the stripping activity asset.
(f) Impairment of non-financial assets
The carrying amounts of non-financial assets are reviewed for impairment if
events or changes in circumstances indicate that the carrying value may not be
recoverable. At each reporting date, an assessment is made to determine
whether there are any indications of impairment. If there are indicators
of impairment, an exercise is undertaken to determine whether carrying values
are in excess of their recoverable amount. Such reviews are undertaken on an
asset by asset basis, except where such assets do not generate cash flows
independent of those from other assets or groups of assets, and then the
review is undertaken at the cash generating unit level.
If the carrying amount of an asset or its cash generating unit exceeds the
recoverable amount, a provision is recorded to reflect the asset at
the recoverable amount in the balance sheet. Impairment losses are recognised
in the income statement.
The recoverable amount of an asset
The recoverable amount of an asset is the greater of its value in use and fair
value less costs of disposal. In assessing value in use, estimated future cash
flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks
specific to the asset. The cash flows used to determine the recoverable amount
of mining assets are based on the mine plan for each mine. The mine plan is
determined on the basis of the estimated and economically proven and probable
reserves, as well as certain other resources that are assessed as highly
likely to be converted into reserves. Fair value less cost of disposal is
based on an estimate of the amount that the Group may obtain in an orderly
sale transaction between market participants. For an asset that does not
generate cash inflows largely independently of those from other assets, or
groups of assets, the recoverable amount is determined for the cash generating
unit to which the asset belongs. The Group's cash generating units are the
smallest identifiable groups of assets that generate cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.
Reversal of impairment
An assessment is made each reporting date as to whether there is any
indication that previously recognised impairment losses may no longer exist or
may have decreased. If such an indication exists, the Group makes an estimate
of the recoverable amount. A previously recognised impairment loss is reversed
only if there has been a change in estimates used to determine the asset's
recoverable amount since the impairment loss was recognised. If that is the
case, the carrying amount of the asset is increased to the recoverable amount.
That increased amount cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognised in
previous years. Such impairment loss reversal is recognised in the income
statement.
(g) Financial assets and liabilities
The Group classifies its financial assets in the following measurement
categories:
· those to be measured at amortised cost.
· those to be measured subsequently at fair value through OCI, and.
· those to be measured subsequently at fair value through profit or
loss.
The classification depends on the Group's business model for managing the
financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses will either be recorded in
profit or loss or OCI. For investments in equity instruments that are not held
for trading, this will depend on whether the group has made an irrevocable
election at the time of initial recognition to account for the equity
investment at fair value through other comprehensive income (FVOCI).
The Group reclassifies debt investments when and only when its business model
for managing those assets changes.
Regular way purchases and sales of financial assets are recognised on
trade-date, the date on which the Group commits to purchase or sell the asset.
At initial recognition, the Group measures a financial asset at its fair value
plus, in the case of a financial asset not at fair value through profit or
loss (FVPL), transaction costs that are directly attributable to the
acquisition of the financial asset. Transaction costs of financial assets
carried at FVPL are expensed in profit or loss.
Financial assets with embedded derivatives are considered in their entirety
when determining whether their cash flows are solely payment of principal and
interest.
Subsequent measurement of debt instruments depends on the Group's business
model for managing the asset and the cash flow characteristics of the asset.
Classification
The Group classifies its financial assets in one of the following categories.
Amortised cost
Assets that are held for collection of contractual cash flows where those cash
flows represent solely payments of principal and interest are measured at
amortised cost. Interest income from these financial assets is included in
finance income using the effective interest rate method. Any gain or loss
arising on derecognition is recognised directly in profit or loss and
presented in other gains/(losses) together with foreign exchange gains and
losses. Impairment losses are presented as separate line item in the statement
of profit or loss.
The Group's financial assets at amortised cost include receivables (other than
trade receivables which are measured at fair value through profit and loss).
Fair value through other comprehensive income
Assets that are held for collection of contractual cash flows and for selling
the financial assets, where the assets' cash flows represent solely payments
of principal and interest, are measured at FVOCI. Movements in the carrying
amount are taken through OCI, except for the recognition of impairment gains
or losses, interest income and foreign exchange gains and losses which are
recognised in profit or loss. When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is reclassified from
equity to profit or loss and recognised in other gains/(losses). Interest
income from these financial assets is included in finance income using the
effective interest rate method. Foreign exchange gains and losses are
presented in other gains/(losses) and impairment expenses are presented as
separate line item in the statement of profit or loss. As at 31 December 2019
and 2018 there were no such instruments.
Equity instruments designated as fair value through other comprehensive income
Upon initial recognition, the Group can elect to classify irrevocably its
equity investments as equity instruments designated at fair value through OCI
when they meet the definition of equity under IAS 32 Financial Instruments:
Presentation and are not held for trading. The classification is determined on
an instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to profit or
loss. Dividends are recognised as other income in the statement of profit or
loss when the right of payment has been established, except when the Group
benefits from such proceeds as a recovery of part of the cost of the financial
asset, in which case, such gains are recorded in OCI. Equity instruments
designated at fair value through OCI are not subject to impairment
assessment.
The Group elected to classify irrevocably its listed equity investments under
this category.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or FVOCI are measured
at FVPL. A gain or loss on a debt investment that is subsequently measured at
FVPL is recognised in profit or loss and presented net within other
gains/(losses) in the period in which it arises.
Changes in the fair value of financial assets at FVPL are recognised in other
gains/(losses) in the statement of profit or loss as applicable.
The Group's trade receivables and derivative financial instruments, including
the Silverstream contract, are classified as fair value through profit or
loss.
De-recognition of financial assets
Financial assets are derecognised when the rights to receive cash flows from
the financial assets have expired or have been transferred and the Group has
transferred substantially all the risks and rewards of ownership.
Impairment of financial assets
The Group assesses on a forward-looking basis the expected credit losses
associated with its debt instruments carried at amortised cost and FVOCI. The
impairment methodology applied depends on whether there has been a significant
increase in credit risk.
For receivables (other than trade receivables which are measured at FVPL), the
Group applies the simplified approach permitted by IFRS 9, which requires
expected lifetime losses to be recognised from initial recognition of the
receivables.
(h) Inventories
Finished goods, work in progress and ore stockpile inventories are measured at
the lower of cost and net realisable value. Cost is determined using the
weighted average cost method based on cost of production which excludes
borrowing costs.
For this purpose, the costs of production include:
personnel expenses, which include employee profit sharing, materials and
contractor expenses which are directly attributable to the extraction and
processing of ore;
the depreciation of property, plant and equipment used in the extraction and
processing of ore; and
related production overheads (based on normal operating capacity).
Operating materials and spare parts are valued at the lower of cost or net
realisable value. An allowance for obsolete and slow-moving inventories is
determined by reference to specific items of stock. A regular review is
undertaken by management to determine the extent of such an allowance.
Net realisable value is the estimated selling price in the ordinary course of
business less any further costs expected to be incurred to completion and
disposal.
(i) Cash and cash equivalents
For the purposes of the balance sheet, cash and cash equivalents comprise cash
at bank, cash on hand and short-term deposits held with banks that are readily
convertible into known amounts of cash and which are subject to insignificant
risk of changes in value. Short-term deposits earn interest at the respective
short-term deposit rates between one day and three months. For the purposes of
the cash flow statement, cash and cash equivalents as defined above are shown
net of outstanding bank overdrafts.
(j) Provisions
Mine closure cost
A provision for mine closure cost is made in respect of the estimated future
costs of closure, restoration and for environmental rehabilitation costs
(which include the dismantling and demolition of infrastructure, removal of
residual materials and remediation of disturbed areas) based on a mine closure
plan, in the accounting period when the related environmental disturbance
occurs. The provision is discounted and the unwinding of the discount is
included within finance costs. At the time of establishing the provision, a
corresponding asset is capitalised where it gives rise to a future economic
benefit and is depreciated over future production from the mine to which it
relates. The provision is reviewed on an annual basis by the Group for changes
in cost estimates, discount rates or life of operations. Changes to estimated
future costs are recognised in the balance sheet by adjusting the mine closure
cost liability and the related asset originally recognised. If, for mature
mines, the revised mine assets net of mine closure cost provisions exceed the
recoverable value, the portion of the increase is charged directly as an
expense. For closed sites, changes to estimated costs are recognised
immediately in profit or loss.
(k) Employee benefits
The Group operates the following plans:
Defined benefit pension plan
This funded plan is based on each employee's earnings and years of service.
This plan was open to all employees in Mexico until it was closed to new
entrants on 1 July 2007. The plan is denominated in Mexican Pesos. For members
as at 30 June 2007, benefits were frozen at that date subject to indexation
with reference to the Mexican National Consumer Price Index (NCPI).
The cost of providing benefits under the defined benefit plan is determined
using the projected unit credit actuarial valuation method and prepared by an
external actuarial firm as at each year-end balance sheet date. The discount
rate is the yield on bonds that have maturity dates approximating the terms of
the Group's obligations and that are denominated in the same currency in which
the benefits are expected to be paid. Actuarial gains or losses are recognised
in OCI and permanently excluded from profit or loss.
Past service costs are recognised when the plan amendment or curtailment
occurs and when the entity recognises related restructuring costs or
termination benefits.
The defined benefit asset or liability comprises the present value of the
defined benefit obligation less the fair value of plan assets out of which
the obligations are to be settled directly. The value of any asset is
restricted to the present value of any economic benefits available in the form
of refunds from the plan or reductions in the future contributions to the
plan.
Net interest cost is recognised in finance cost and return on plan assets
(other than amounts reflected in net interest cost) is recognised in OCI and
permanently excluded from profit or loss.
Defined contribution pension plan
A defined contribution plan is a post-employment benefit plan under which the
Group pays fixed contributions into a separate entity and has no legal or
constructive obligation to pay further amounts. Obligations for contributions
to defined contribution pension plans are recognised as an employee benefit
expense in profit or loss when they are due. The contributions are based on
the employee's salary.
This plan started on 1 July 2007 and it is voluntary for all employees to join
this scheme.
Seniority premium for voluntary separation
This unfunded plan corresponds to an additional payment over the legal
seniority premium equivalent to approximately 12 days of salary per year
for those unionised workers who have more than 15 years of service.
Non-unionised employees with more than 15 years of service have the right
to a payment equivalent to 12 days for each year of service. For both cases,
the payment is based on the legal current minimum salary.
The cost of providing benefits for the seniority premium for voluntary
separation is determined using the projected unit credit actuarial valuation
method and prepared by an external actuarial firm as at each year-end balance
sheet date. Actuarial gains or losses are recognised as income or expense in
the period in which they occur.
Other
Benefits for death and disability are covered through insurance policies.
Termination payments for involuntary retirement (dismissals) are charged to
the income statement, when incurred.
(l) Employee profit sharing
In accordance with the Mexican legislation, companies in Mexico are subject to
pay for employee profit sharing ('PTU') equivalent to ten percent of the
taxable income of each fiscal year.
PTU is accounted for as employee benefits and is calculated based on the
services rendered by employees during the year, considering their most recent
salaries. The liability is recognised as it accrues and is charged to the
income statement. PTU, paid in each fiscal year, is considered deductible for
income tax purposes.
(m) Leases
As explained in note 2 (b) above, the Group has changed its accounting policy
for leases where the Group is the lessee.
From 1 January 2019
Group as a lessee
The Group assesses at contract inception whether a contract is, or contains, a
lease. That is, if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration. From 1
January 2019, leases are recognised as a right-of-use asset and a
corresponding liability at the date at which the leased asset is available for
use by the Group.
Assets and liabilities arising from a lease are initially measured on a
present value basis. Lease liabilities include the net present value of the
following lease payments:
fixed payments (including in-substance fixed payments), less any lease
incentives receivable variable lease payment that are based on an index or a
rate;
amounts expected to be payable by the lessee under residual value guarantees;
the exercise price of a purchase option if the lessee is reasonably certain to
exercise that option; and
payments of penalties for terminating the lease, if the lease term reflects
the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the
lease. If that rate cannot be determined, the lessee's incremental borrowing
rate is used, being the rate that the lessee would have to pay to borrow the
funds necessary to obtain an asset of similar value in a similar economic
environment with similar terms and conditions.
Right-of-use assets are measured at cost comprising the following:
the amount of the initial measurement of lease liability;
any lease payments made at or before the commencement date less any lease
incentives received;
any initial direct costs; and
restoration costs.
Each lease payment is allocated between the liability and finance cost. The
finance cost is charged to profit or loss over the lease period so as to
produce a constant periodic rate of interest on the remaining balance of the
liability for each period. The right-of-use asset is depreciated over the
shorter of the asset's useful life and the lease term on a straight-line
basis.
The Group is exposed to potential future increases in variable lease payments
based on an index or rate, which are not included in the lease liability until
they take effect. When adjustments to lease payments based on an index or rate
take effect, the lease liability is reassessed and adjusted against the
right-of-use asset.
Payments associated with short-term leases and leases of low-value assets are
recognised on a straight-line basis as an expense in profit or loss.
Short-term leases are leases with a lease term of 12 months or less. Low-value
assets comprise IT-equipment.
Prior to 1 January 2018
Group as a lessee
Finance leases which transfer to the Group substantially all the risks and
benefits incidental to ownership of the leased item, are capitalised at the
inception of the lease at the fair value of the leased asset, or if lower, at
the present value of the minimum lease payments. Lease payments are
apportioned between the finance charges and reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are reflected in the income statement.
Capitalised leased assets are depreciated over the shorter of the estimated
useful life of the asset and the lease term, if there is no reasonable
certainty that the Group will obtain ownership by the end of the lease term.
Operating lease payments are recognised as an expense in the income statement
on a straight-line basis over the lease term.
Group as a lessor
Leases where the Group does not transfer substantially all the risks and
benefits of ownership of the asset are classified as operating leases. Initial
direct costs incurred in negotiating an operating lease are added to the
carrying amount of the leased asset and recognised over the lease term on the
same basis as rental income. Contingent rents are recognised as revenue in the
period in which they are earned.
(n) Revenue from contracts with customers
Revenue is recognised when control of goods or services transfers to the
customer based on the performance obligations settle in the contracts with
customers.
Sale of goods
Revenue associated with the sale of concentrates, precipitates, doré bars and
activated carbon (the products) is recognized when control of the asset sold
is transferred to the customer. Indicators of control transferring include an
unconditional obligation to pay, legal title, physical possession, transfer of
risk and rewards and customer acceptance. This generally occurs when the goods
are delivered to the customer's smelter or refinery agreed with the buyer; at
which point the buyer controls the goods.
The revenue is measured at the amount to which the Group expects to be
entitled, being the estimate of the price expected to be received in the
expected month of settlement and the Group's estimate of metal quantities
based on assay data, and a corresponding trade receivable is recognised. Any
future changes that occur before settlement are embedded within the
provisionally priced trade receivables and are, therefore, within the scope of
IFRS 9 and not within the scope of IFRS 15.
Given the exposure to the commodity price, these provisionally priced trade
receivables will fail the cash flow characteristics test within IFRS 9 and
will be required to be measured at fair value through profit or loss up from
initial recognition and until the date of settlement. These subsequent changes
in fair value are recognised in revenue but separately from revenue from
contracts with customers.
Refining and treatment charges under the sales contracts are deducted from
revenue from sales of concentrates as these are not related to a distinct good
or service.
(o) Exploration expenses
Exploration activity involves the search for mineral resources, the
determination of technical feasibility and the assessment of commercial
viability of an identified resource.
Exploration expenses are charged to the income statement as incurred and are
recorded in the following captions:
Cost of sales: costs relating to in-mine exploration, that ensure continuous
extraction quality and extend mine life, and
Exploration expenses:
o Costs incurred in geographical proximity to existing mines in order to
replenish or increase reserves, and
o Costs incurred in regional exploration with the objective of locating new
ore deposits in Mexico and Latin America and which are identified by project.
Costs incurred are charged to the income statement until there is sufficient
probability of the existence of economically recoverable minerals and a
feasibility study has been performed for the specific project.
(p) Selling expenses
The Group recognises in selling expenses a levy in respect of the
Extraordinary Mining Right as sales of gold and silver are recognised. The
Extraordinary Mining Right consists of a 0.5% rate, applicable to the owners
of mining titles. The payment must be calculated over the total sales of all
mining concessions. The payment of this mining right must be remitted no later
than the last business day of March of the following year and can be credited
against corporate income tax.
The Group also recognises in selling expenses a discovery premium royalty
equivalent to 1% of the value of the mineral extracted and sold during the
year from certain mining titles granted by the Mexican Geological Survey (SGM)
in the San Julian mine. The premium is settled to SGM on a quarterly basis.
(q) Taxation
Current income tax
Current income tax assets and liabilities for the current and prior periods
are measured at the amount expected to be recovered from or paid to the
taxation authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted, at the reporting date in
the country the Group operates.
Deferred income tax
Deferred income tax is provided using the liability method on temporary
differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary
differences, except:
where the deferred income tax liability arises from the initial recognition of
goodwill or of an asset or liability in a transaction that is not a business
combination and, at the time of transaction, affects neither the accounting
profit nor taxable profit loss; and
in respect of taxable temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, where the timing of
the reversal of the temporary differences can be controlled and it is probable
that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible temporary
differences, carry forward of unused tax credits and unused tax losses, to
the extent that it is probable that taxable profit will be available against
which the deductible temporary differences, and the carry forward of unused
tax credits and unused tax losses can be utilised, except:
where the deferred income tax asset relating to deductible temporary
differences arise from the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss;
and
in respect of deductible temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, deferred income tax
assets are recognised only to the extent that it is probable that the
temporary differences will reverse in the foreseeable future and taxable
profit will be available against which the temporary differences can be
utilised.
The carrying amount of deferred income tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the
deferred income tax asset to be utilised.
Unrecognised deferred income tax assets are reassessed at each balance sheet
date and are recognised to the extent that it has become probable that future
taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that
are expected to apply to the year when the asset is realised or the liability
is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date.
Deferred income tax relating to items recognised directly in other
comprehensive income is recognised in equity and not in the income statement.
Deferred income tax assets and deferred income tax liabilities are offset, if
a legally enforceable right exists to set off current tax assets against
current income tax liabilities and the deferred income taxes relate to the
same taxable entity and the same taxation authority.
Mining Rights
The Special Mining Right is considered an income tax under IFRS and states
that the owners of mining titles and concessions are subject to pay an annual
mining right of 7.5% of the profit derived from the extractive activities (See
note 10 (e)). The Group recognises deferred tax assets and liabilities on
temporary differences arising in the determination of the Special Mining Right
(See note 10).
Sales tax
Expenses and assets are recognised net of the amount of sales tax, except:
When the sales tax incurred on a purchase of assets or services is not
recoverable from the taxation authority, in which case, the sales tax is
recognised as part of the cost of acquisition of the asset or as part of the
expense item, as applicable;
When receivables and payables are stated with the amount of sales tax
included.
The net amount of sales tax recoverable from, or payable to, the taxation
authority is included as part of receivables or payables in the balance sheet.
(r) Derivative financial instruments and hedging
The Group uses derivatives to reduce certain market risks derived from changes
in foreign exchange and commodities price which impact its financial and
business transactions. Hedges are designed to protect the value of expected
production against the dynamic market conditions.
Such derivative financial instruments are initially recognised at fair value
on the date on which a derivative contract is entered into and are
subsequently remeasured at fair value. Derivatives are carried as assets when
the fair value is positive and as liabilities when the fair value is negative.
The full fair value of a derivative is classified as non-current asset or
liability if the remaining maturity of the item is more than 12 months.
Any gains or losses arising from changes in fair value on derivatives during
the year that do not qualify for hedge accounting are taken directly to
the income statement.
Derivatives are valued using valuation approaches and methodologies (such as
Black Scholes and Net Present Value) applicable to the specific type
of derivative instrument. The fair value of forward currency and commodity
contracts is calculated by reference to current forward exchange rates
for contracts with similar maturity profiles, European foreign exchange
options are valued using the Black Scholes model. The Silverstream contract is
valued using a Net Present Value valuation approach.
The documentation includes identification of the hedging instrument, the
hedged item, the nature of the risk being hedged and how the Group will assess
whether the hedging relationship meets the hedge effectiveness requirements
(including the analysis of sources of hedge ineffectiveness and how the hedge
ratio is determined). A hedging relationship qualifies for hedge accounting if
it meets all of the following effectiveness requirements:
• There is 'an economic relationship' between the hedged item and the
hedging instrument.
• The effect of credit risk does not 'dominate the value changes' that
result from that economic relationship.
• The hedge ratio of the hedging relationship is the same as that resulting
from the quantity of the hedged item that the Group actually hedges and the
quantity of the hedging instrument that the Group actually uses to hedge that
quantity of hedged item.
Hedges which meet the criteria for hedge accounting are accounted for as
follows:
Cash flow hedges
For derivatives that are designated and qualify as cash flow hedges, the
effective portion of changes in the fair value of derivative instruments are
recorded as in other comprehensive income and are transferred to the income
statement when the hedged transaction affects profit or loss, such as when a
forecast sale or purchase occurs. For gains or losses related to the hedging
of foreign exchange risk these are included, in the line item in which the
hedged costs are reflected. Where the hedged item is the cost of
a non-financial asset or liability, the amounts recognised in other
comprehensive income are transferred to the initial carrying amount of the
non-financial asset or liability. This is not a reclassification adjustment
and will not be recognised in OCI for the period. The ineffective portion of
changes in the fair value of cash flow hedges is recognised directly as
finance costs, in the income statement of the related period.
If the hedging instrument expires or is sold, terminated or exercised without
replacement or rollover, or if its designation as a hedge is revoked, any
cumulative gain or loss recognised directly in other comprehensive income from
the period that the hedge was effective remains separately in other
comprehensive income until the forecast transaction occurs, when it is
recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in other
comprehensive income is immediately transferred to the income statement.
When hedging with options, the Group designates only the intrinsic value
movement of the hedging option within the hedge relationship. The time value
of the option contracts is therefore excluded from the hedge designation. In
such cases, changes in the time value of options are initially recognised in
OCI as a cost of hedging. Where the hedged item is transaction related,
amounts initially recognised in OCI related to the change in the time value of
options are reclassified to profit or loss or as a basis adjustment to
non-financial assets or liabilities upon maturity of the hedged item, or, in
the case of a hedged item that realises over time, the amounts initially
recognised in OCI are amortised to profit or loss on a systematic and rational
basis over the life of the hedged item.
(s) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of an asset that necessarily takes 12 or more months to get ready
for its intended use or sale (a qualifying asset) are capitalised as part of
the cost of the respective asset. Borrowing costs consist of interest and
other costs that an entity incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the amount
capitalised represents the actual borrowing costs incurred. Where surplus
funds are available for a short term from funds borrowed specifically to
finance a project, the income generated from the temporary investment of such
amounts is also capitalised and deducted from the total capitalised borrowing
cost. Where the funds used to finance a project form part of general
borrowings, the amount capitalised is calculated using a weighted average of
rates applicable to relevant general borrowings of the Group during the
period.
All other borrowing costs are recognised in the income statement in the period
in which they are incurred.
(t) Fair value measurement
The Group measures financial instruments at fair value at each balance sheet
date. Fair values of financial instruments measured at amortised cost are
disclosed in notes 29 and 30.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The fair value measurement is based on the presumption
that the transaction to sell the asset or transfer the liability takes place
either:
In the principal market for the asset or liability, or
In the absence of a principal market, in the most advantageous market for the
asset or liability
The principal or the most advantageous market must be accessible to the Group.
The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market
participant's ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant that would
use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data are available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs.
All assets and liabilities for which fair value is measured or disclosed in
the financial statements are categorised within the fair value hierarchy,
described as follows, based on the lowest level input that is significant to
the fair value measurement as a whole:
Level 1 - Quoted (unadjusted) market prices in active markets for identical
assets or liabilities
Level 2 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable
Level 3 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable
For assets and liabilities that are recognised in the financial statements on
a recurring basis, the Group determines whether transfers have occurred
between levels in the hierarchy by re-assessing categorisation (based on the
lowest level input that is significant to the fair value measurement as a
whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of
assets and liabilities on the basis of the nature, characteristics and risks
of the asset or liability and the level of the fair value hierarchy as
explained above. Further information on fair values is described in note 29.
(u) Dividend distribution
Dividends payable to the Company's shareholders are recognised as a liability
when these are approved by the Company's shareholders or Board
as appropriate. Dividends payable to minority shareholders are recognised as
a liability when these are approved by the Company's subsidiaries.
3. Segment reporting
For management purposes, the Group is organised into operating segments based
on producing mines.
At 31 December 2019, the Group has seven reportable operating segments as
follows:
The Fresnillo mine, located in the state of Zacatecas, an underground silver
mine;
The Saucito mine, located in the state of Zacatecas, an underground silver
mine;
The Ciénega mine, located in the state of Durango, an underground gold mine;
including the San Ramon satellite mine;
The Herradura mine, located in the state of Sonora, a surface gold mine;
The Soledad-Dipolos mine, located in the state of Sonora, a surface gold mine;
The Noche Buena mine, located in state of Sonora, a surface gold mine; and
The San Julian mine, located on the border of Chihuahua / Durango states, an
underground silver-gold mine.
The operating performance and financial results for each of these mines are
reviewed by management. As the Group´s chief operating decision maker does
not review segment assets and liabilities, the Group has not disclosed this
information.
Management monitors the results of its operating segments separately for the
purpose of performance assessment and making decisions about resource
allocation. Segment performance is evaluated without taking into account
certain adjustments included in Revenue as reported in the consolidated income
statement, and certain costs included within Cost of sales and Gross profit
which are considered to be outside of the control of the operating management
of the mines. The table below provides a reconciliation from segment profit to
Gross profit as per the consolidated income statement. Other income and
expenses included in the consolidated income statement are not allocated to
operating segments. Transactions between reportable segments are accounted for
on an arm's length basis similar to transactions with third parties.
In 2019 and 2018, substantially all revenue was derived from customers based
in Mexico.
Operating segments
The following tables present revenue and profit information regarding the
Group's operating segments for the year ended 31 December 2019 and 2018,
respectively. Revenues for the year ended 31 December 2019 and 2018 include
those derived from contracts with costumers and other revenues, as showed in
note 4.
Year ended 31 December 2019
US$ thousands Fresnillo Herradura Cienega Soledad- Saucito Noche San Julian Other(5) Adjustments and eliminations Total
Dipolos(4)
Buena
Revenues:
Third party(1) 316,214 692,444 189,441 - 439,170 176,291 312,065 (5,984) 2,119,641
Inter-Segment 94,967 (94,967) -
Segment revenues 316,214 692,444 189,441 - 439,170 176,291 312,065 94,967 (100,951) 2,119,641
Segment Profit(2) 164,570 218,661 84,926 - 238,133 58,295 128,221 66,547 965 960,318
Depreciation and amortisation (489,529)
Employee profit sharing (9,079)
Gross profit as per the income statement 461,709
Capital expenditure(3) 172,846 37,520 58,220 - 126,384 5,709 65,325 93,260 - 559,264
(1 Total third party revenues include treatment and refining charges amounting
US$144.6 million. Adjustments and eliminations correspond to hedging gains
(note 4).)
(2 Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing.)
(3 Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including mine development, construction of
leaching pads, and purchase of mine equipment, excluding additions relating to
changes in the mine closure provision. Significant additions include the
construction of )(the leaching)( plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).)
(4 During )(2019)(, this segment did not operate due to the Bajio conflict
(note 25).)
(5 Other inter-segment )(revenue corresponds to )(leasing services provided by
Minera Bermejal, S.A. de C.V)(; capital expenditure mainly corresponds to
Minera Juanicipio S.A de C.V)(. and Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2018
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos(4) Saucito Noche San Julian Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 333,009 607,073 172,922 - 436,491 210,994 341,714 1,582 2,103,785
Inter-Segment 85,101 (85,101) -
Segment revenues 333,009 607,073 172,922 - 436,491 210,994 341,714 85,101 (83,519) 2,103,785
Segment Profit(2) 211,530 322,985 79,154 - 274,505 85,903 176,518 65,690 (11,281) 1,205,004
Depreciation and amortisation (411,764)
Employee profit sharing (12,512)
Gross profit as per the income statement 780,728
Capital expenditure(3) 121,146 116,002 72,895 - 148,440 50,209 83,129 76,848 - 668,669
(1 Total third party revenues include treatment and refining charges amounting
US$141.2 million. Adjustments and eliminations correspond to hedging gains
(note 4).)
(2 Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing.)
(3 Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including mine development, construction of
leaching pads, purchase of mine equipment and capitalised stripping activity,
excluding additions relating to changes in the mine closure provision.
Significant additions include the construction of )(facilities at San Julian
phase II, the )(second )(dynamic leaching)( plant at Herradura and the
construction of the pyrites plant at Saucito.)
(4 During )(2018)(, this segment did not operate due to the Bajio conflict
(note 25).)
(5 Other inter-segment )(revenue corresponds to )(leasing services provided by
Minera Bermejal, S.A. de C.V)(; capital expenditure mainly corresponds to
Minera Juanicipio S.A de C.V)(. and Minera Bermejal, S. de R.L. de C.V.)( )
( )
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré, slag,
precipitates and activated carbon of which the primary contents are silver,
gold, lead and zinc.
(a) Revenues by source
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Revenues from contracts with customers 2,125,962 2,102,694
Revenues from other sources:
Provisional pricing adjustment on products sold (337) (491)
Hedging (loss)/gain on sales (5,984) 1,582
2,119,641 2,103,785
(b) Revenues by product sold
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Lead concentrates (containing silver, gold, lead and by-products) 812,933 804,882
Doré and slag (containing gold, silver and by-products) 853,589 818,067
Zinc concentrates (containing zinc, silver and by-products) 220,023 249,182
Precipitates (containing gold and silver) 227,796 231,654
Activated carbon (containing gold, silver and by-products) 5,300 -
2,119,641 2,103,785
All concentrates, precipitates, doré, slag and activated carbon were sold to
Peñoles' metallurgical complex, Met-Mex, for smelting and refining.
(c) Value of metal content in products sold
For products other than refined silver and gold, invoiced revenues are derived
from the value of metal content adjusted by treatment and refining charges
incurred by the metallurgical complex of the customer. The value of the metal
content of the products sold, before treatment and refining charges is as
follows:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Silver 776,784 815,837
Gold 1,183,116 1,118,087
Zinc 202,281 204,499
Lead 102,058 106,536
Value of metal content in products sold 2,264,239 2,244,959
Adjustment for treatment and refining charges (144,598) (141,174)
Total revenues(1)(,) 2,119,641 2,103,785
(1 Includes provisional price adjustments which represent changes in the fair
value of trade receivables resulting in a loss of US$0.3 million (2018: loss
of US$0.5 million)) (and hedging loss of US$6.0 million (2018: gain of US$1.6
million). For further detail, refer to note 2(n).)
The average realised prices for the gold and silver content of products sold,
prior to the deduction of treatment and refining charges, were:
Year ended 31 December
2019 2018
US$ per ounce
US$ per ounce
Gold(2) 1,418.0 1,269.1
Silver(2) 16.1 15.5
(2 For the purpose of the calculation, revenue by content of products sold
does not include the results from hedging.)
( )
5. Cost of sales
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Depreciation and amortisation (note 12) 489,529 411,764
Personnel expenses (note 7) 110,704 94,653
Maintenance and repairs 189,042 150,021
Operating materials 233,159 191,954
Energy 219,531 176,333
Contractors 363,737 291,970
Freight 10,613 11,633
Insurance 5,819 4,956
Mining concession rights and contributions 12,910 13,271
Other 33,994 29,680
Cost of production 1,669,038 1,376,235
Change in work in progress and finished goods (ore inventories) (11,106) (53,178)
1,657,932 1,323,057
6. Exploration expenses
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Contractors 116,207 127,734
Mining concession rights and contributions 22,243 23,441
Administrative services 6,885 6,734
Personnel expenses (note 7) 3,731 4,137
Assays 1,815 3,615
Rentals 1,135 1,378
Other 5,897 5,760
157,913 172,799
These exploration expenses were mainly incurred in areas of the Fresnillo,
Herradura, La Ciénega, Saucito and San Julian mines, Juanicipio development
project and Guanajuato, San Javier, Valles, Centauro Deep and Carina projects.
In addition, exploration expenses of US$14.9 million (2018: US$6.3 million)
were incurred in the year on projects located in Peru and Chile.
The following table sets forth liabilities (generally trade payables)
corresponding to exploration activities of the Group companies engaged only in
exploration, principally Exploraciones Mineras Parreña, S.A. de C.V.
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Liabilities related to exploration activities 106 112
The liabilities related to exploration activities recognised by the Group
operating companies are not included since it is not possible to separate the
liabilities related to exploration activities of these companies from their
operating liabilities.
Cash flows relating to exploration activities are as follows:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Operating cash out flows related to exploration activities 157,919 174,634
7. Personnel expenses
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Salaries and wages 55,156 46,542
Employees' profit sharing 9,578 13,003
Bonuses 13,892 12,367
Statutory healthcare and housing contributions 20,304 17,976
Other benefits 13,622 10,682
Vacations and vacations bonus 4,262 2,870
Social security 2,490 2,369
Post-employment benefits 5,582 4,026
Legal contributions 2,476 2,190
Training 3,210 3,033
Other 5,729 7,404
136,301 122,462
(a) Personnel expenses are reflected in the following line items:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Cost of sales (note 5) 110,704 94,653
Administrative expenses 21,866 23,672
Exploration expenses (note 6) 3,731 4,137
136,301 122,462
(b) The monthly average number of employees during the year was as follows:
Year ended 31 December
2019 2018
No.
No.
Mining 2,334 2,236
Plant 869 752
Exploration 468 480
Maintenance 1,115 1,035
Administration and other 897 658
Total 5,683 5,161
8. Other operating income and expenses
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Other income:
Insurance recovery(1) 6,494 9,245
Rentals 829 -
Other 2,480 2,458
9,803 11,703
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Other expenses:
Loss on sale of property, plant and equipment 4,866 999
Loss on theft of inventory 4,935 -
Maintenance(2) 1,423 1,278
Donations 1,137 1,313
Environmental activities 2,641 1,216
Real property transfer tax 1,156 -
Consumption tax expensed 853 655
Other 5,571 2,899
22,582 8,360
(1 Corresponds to the insurance claim relating to the theft of doré at Minera
Penmont less its corresponding production cost (2018: Insurance claim
corresponding the flood at the Saucito mine) see Note 25 for further detail.)
(2 Costs relating to the rehabilitation of the facilities of Compañía Minera
las Torres, S.A. de C.V. (a closed mine).)
( )
( )
9. Finance income and finance costs
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Finance income:
Interest on short-term deposits and investments 11,356 15,584
Interest on tax receivables 12,814 1,670
Other 6 3,118
24,176 20,372
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Finance costs:
Interest on interest-bearing loans 41,263 36,258
Interest for lease liabilities 642 -
Fair value movement on derivatives - 274
Unwinding of discount on provisions 11,809 10,044
Other(1) 16,956 3,434
70,670 50,010
(1 Includes US$15.7 million of interest and surcharges incurred as a result of
the amendment to tax positions described in note 10.)
( )
10. Income tax expense
a) Major components of income tax expense:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 112,002 156,715
Amounts under provided in previous years 36,509 11,774
148,511 168,489
Deferred:
Origination and reversal of temporary differences (171,030) (52,327)
Revaluation effects of Silverstream contract 14,513 4,487
(156,517) (47,840)
Corporate income tax (8,006) 120,649
Special mining right
Current:
Special mining right charge (note 10 e)) 3,880 10,860
Amounts under provided in previous years 6,663 -
10,543 10,860
Deferred:
Origination and reversal of temporary differences (29,596) 2,455
Special mining right (19,053) 13,315
Income tax expense reported in the income statement (27,059) 133,964
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Consolidated statement of comprehensive income:
Deferred income tax (charge)/credit related to items recognised directly in
other comprehensive income:
Gain on cash flow hedges recycled to income statement (1,795) (388)
Changes in fair value of cash flow hedges (436) (4,224)
Changes in the fair value of cost of hedges 384 -
Changes in fair value of equity investments at FVOCI (13,441) 20,327
Remeasurement losses on defined benefit plans 372 (415)
Income tax effect reported in other comprehensive income (14,845) 15,300
In 2017 the Mexican tax authorities ("SAT") opened a routine audit into the
2014 tax returns of two underground mining subsidiaries of Fresnillo plc
("Fresnillo" or the "Company"), relating primarily to the tax treatment of
mining works, which is not explicitly dealt with in the Mexican income tax
law. Subsequently, in 2018, the Company and SAT agreed on the tax treatment
deemed most appropriate to mining works disbursements for the year of the
audit resulting in a tax amendment removing the in-year deduction for mining
works, which was documented through an agreement executed between SAT,
PRODECON (Mexico's tax ombudsman) and the Company on 30 November 2018 (the
"Conclusive Agreement"). Following further analysis in 2019, the deductions
for those mining works were reinstated as amortisable deductions over 8 years.
Fresnillo determined it to be in the Company's best interests to align its tax
treatment across its underground mining operations subsidiaries with the
Conclusive Agreements. Accordingly, on 28 June 2019, Fresnillo elected to
amend the tax treatment of mining works across all its underground mines in
operation, retrospectively, for the years 2014 to 2018.
The amendment resulted in an increase in the current corporate income tax
charge of US$38.5 million and current special mining right charge of US$6.8
million; this effect was offset by a decrease in deferred corporate income tax
of US$39.5 million and deferred special mining right of US$12.3 million. After
considering the effect of recoverable tax-related balances arising during the
amendment period, the amount payable upon amendment in respect of corporate
income tax and special mining right was US$32.9 million and US$6.8 million,
respectively. The amendment also resulted in US$15.7 million of interest and
surcharges, presented in finance costs. Of the total amount payable of US$55.3
million, US$22.2 million was offset against corporate income tax and VAT
receivables that existed at the date of the amendment and the remaining
US$33.1 million was paid in cash.
(b) Reconciliation of the income tax expense at the Group's statutory income
rate to income tax expense at the Group's effective income tax rate:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Accounting profit before income tax 178,756 483,930
Tax at the Group's statutory corporate income tax rate 30.0% 53,627 145,179
Expenses not deductible for tax purposes 2,934 2,454
Inflationary uplift of the tax base of assets and liabilities (17,229) (16,599)
Current income tax (over)/underprovided in previous years (275) (4,807)
Effect of conclusive agreement (5,084) -
Exchange rate effect on tax value of assets and liabilities(1) (37,101) (778)
Non-taxable/non-deductible foreign exchange effects 3,982 1,255
Inflationary uplift of tax losses (1,439) (2,909)
Inflationary uplift on tax refunds (3,867) -
Incentive for Northern Border Zone (6,417) -
IEPS tax credit (note 10 (e)) (9,975) (7,012)
Deferred tax asset not recognised 6,688 6,571
Special mining right taxable/(deductible) for corporate income tax 5,718 (3,992)
Other 432 1,287
Corporate income tax at the effective tax rate of (4.5)% (2018: 24.9%) (8,006) 120,649
Special mining right (19,053) 13,315
Tax at the effective income tax rate of (15.1)% (2018: 27.6%) (27,059) 133,964
(1 Mainly derived from the tax value of property, plant and equipment.)
The most significant items reducing the effect of effective tax rate are
inflation effects, exchange rate and the IEPS tax credit. The future effects
of inflation and exchange rate will depend on future market conditions.
According to the recent tax reform enacted, IEPS tax credit will not be
applicable for future years.
(c) Movements in deferred income tax liabilities and assets:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Opening net liability (382,042) (442,727)
Income statement credit arising on corporate income tax 156,518 47,840
Income statement credit/(charge) arising on special mining right 29,596 (2,455)
Exchange difference 196 -
Net (charge)/credit related to items directly charged to other comprehensive (14,845) 15,300
income
Closing net liability (210,577) (382,042)
The amounts of deferred income tax assets and liabilities as at 31 December
2019 and 2018, considering the nature of the related temporary differences,
are as follows:
Consolidated balance sheet Consolidated income statement
2019 2018 2019 2018
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Related party receivables (201,481) (220,131) (18,650) (1,320)
Other receivables (4,375) 1,315 5,690 (3,486)
Inventories 185,012 188,119 3,107 (25,277)
Prepayments (1,041) (1,035) 6 137
Derivative financial instruments including Silverstream contract (158,243) (150,205) 6,262 (1,942)
Property, plant and equipment arising from corporate income tax (179,117) (330,722) (151,605) (11,052)
Exploration expenses and operating liabilities 66,275 50,691 (15,584) (6,570)
Other payables and provisions 69,317 57,303 (12,014) (1,924)
Losses carried forward 53,002 67,059 14,057 1,154
Post-employment benefits 1,702 1,016 (315) 34
Deductible profit sharing 2,998 3,807 809 442
Special mining right deductible for corporate income tax 18,077 29,321 11,244 1,340
Equity investments at FVOCI (9,236) 3,510 (695) -
Other (5,369) (4,396) 1,171 624
Net deferred tax liability related to corporate income tax (162,479) (304,348)
Deferred tax credit related to corporate income tax - - (156,517) (47,840)
Related party receivables arising from special mining right (22,518) (20,161) 2,357 (1,218)
Inventories arising from special mining right 17,083 13,746 (3,337) (2,639)
Property plant and equipment arising from special mining right (42,663) (71,279) (28,616) 6,312
Net deferred tax liability (210,577) (382,042)
Deferred tax credit (186,113) (45,385)
Reflected in the statement of financial position as follows:
Deferred tax assets 110,770 88,883
Deferred tax liabilities-continuing operations (321,347) (470,925)
Net deferred tax liability (210,577) (382,042)
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities
and when the deferred income tax assets and liabilities relate to the same
fiscal authority.
On the basis of management's internal forecast, a deferred tax asset has been
recognised in respect of tax losses amounting to US$ 176.7 million (2018:
US$223.5 million). If not utilised, US$21.2 million (2018: US$37.6 million)
will expire within five years and US$155.5 million (2018: US$185.9 million)
will expire between six and ten years.
The Group has further tax losses and other similar attributes carried forward
of US$59.7 million (2018: US$42.2 million) on which no deferred tax is
recognised due to insufficient certainty regarding the availability of
appropriate future taxable profits. Based on the applicable tax legislation
the tax losses are not subject to expire.
(d) Unrecognised deferred tax on investments in subsidiaries
The Group has not recognised all of the deferred tax liability in respect of
distributable reserves of its subsidiaries because it controls them and only
part of the temporary differences are expected to reverse in the foreseeable
future. The temporary differences for which a deferred tax liability has not
been recognised aggregate to US$1,619 million (2018: US$1,430 million).
(e) Corporate Income Tax ('Impuesto Sobre la Renta' or 'ISR') and Special
Mining Right ("SMR")
The Group's principal operating subsidiaries are Mexican residents for
taxation purposes. The rate of current corporate income tax is 30%.
During 2019 the Mexican Internal Revenue Law granted to taxpayers a credit in
respect of an excise tax (Special Tax on Production and Services, or IEPS for
its acronym in Spanish) paid when purchasing diesel used for general machinery
and certain mining vehicles. The credit could be applied against the annual
corporate income tax. The credit is calculated on an entity-by-entity basis.
During the year ended 31 December 2019, the Group applied a credit of US$9.9
million in respect of the year (2018: US$14.9 million , which was offset by an
adjustment in respect of prior years of US$7.8 million). As the IEPS deduction
is itself taxable, the benefit is recognised at 70% of the IEPS calculated
during the year. The net amount applied by the Group is presented in the
reconciliation of the effective tax rate in note 10(b).
On December 31, 2018, the Decree of tax incentives for the northern border
region of Mexico was published in the Official Gazette, which provides a
reduction of income tax by a third and also a reduction of 50% of the value
added tax rate, for taxpayers that produce income from business activities
carried out within the northern border region. These tax incentives are
applicable since January 1st, 2019 and will remain in force until December
31,2020. Some of the Group companies which produce income from business
activities carried out within Caborca, Sonora, which is considered for
purposes of the Decree as northern border region, applied for this Decree tax
incentives before the Mexican tax authorities, and were granted authorization
for income tax and value added tax purposes.
The special mining right "SMR " states that the owners of mining titles and
concessions are subject to pay an annual mining right of 7.5% of the profit
derived from the extractive activities and is considered as income tax under
IFRS. The SMR allows as a credit the payment of mining concessions rights up
to the amount of SMR payable within the same legal entity. The 7.5% tax
applies to a base of income before interest, annual inflation adjustment,
taxes paid on the regular activity, depreciation and amortization, as defined
by the new ISR. This SMR can be credited against the corporate income tax of
the same fiscal year and its payment must be remitted no later than the last
business day of March of the following year.
During the fiscal year ended 31 December 2019, the Group credited US$14.7
million (2018: US$17.3 million) of mining concession rights against the SMR.
Total mining concessions rights paid during the year were US$21.1 million
(2018: US$22.2 million) and have been recognised in the income statement
within cost of sales and exploration expenses. Mining concessions rights paid
in excess of the SMR cannot be credited to SMR in future fiscal periods, and
therefore no deferred tax asset has been recognised in relation to the excess.
Without regards to credits permitted under the SMR regime, the current special
mining right credit would have been US$18.6 million (2018: US$28.1 million).
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for the year
attributable to equity shareholders of the Company by the weighted average
number of Ordinary Shares in issue during the period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2019 and 2018, earnings per share have been calculated as
follows:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Earnings:
Profit from continuing operations attributable to equity holders of the 203,997 349,846
Company
Adjusted profit from continuing operations attributable to equity holders of 170,134 339,377
the Company
Adjusted profit is profit as disclosed in the Consolidated Income Statement
adjusted to exclude revaluation effects of the Silverstream contract of
US$48.4 million gain (US$33.9 million net of tax) (2018: US$14.9 million gain
(US$10.4 million net of tax)).
Adjusted earnings per share have been provided in order to provide a measure
of the underlying performance of the Group, prior to the revaluation effects
of the Silverstream contract, a derivative financial instrument.
2019 2018
thousands
thousands
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
2019 2018
US$
US$
Earnings per share:
Basic and diluted earnings per share 0.277 0.475
Adjusted basic and diluted earnings per Ordinary Share from continuing 0.231 0.461
operations
12. Property, plant and equipment
Year ended 31 December 2018
Land and Plant and Equipment Mining properties and development costs Other assets Construction in Progress Total
buildings
US$ thousands
Cost
At 1 January 2018 261,805 1,817,591 1,909,385 255,465 471,055 4,715,301
Additions 1,928 76,424 69 546(2) 586,840 665,807
Disposals - (9,768) (2,386) (1,749) - (13,903)
Transfers and other movements 19,566 248,356 269,336 22,469 (559,727) -
At 31 December 2018 283,299 2,132,603 2,176,404 276,731 498,168 5,367,205
Accumulated depreciation
At 1 January 2018 (112,048) (1,051,459) (997,913) (105,285) - (2,266,705)
Depreciation for the year(1) (24,130) (166,204) (208,807) (20,878) - (420,019)
Disposals - 9,159 1,881 1,583 - 12,623
At 31 December 2018 (136,178) (1,208,504) (1,204,839) (124,580) - (2,674,101)
Net Book amount at 31 December 2018 147,121 924,099 971,565 152,151 498,168 2,693,104
Year ended 31 December 2019(3)
Land and Plant and Equipment Mining properties and development costs Other assets Construction in Progress Total
buildings
US$ thousands
Cost
At 31 December 2018 283,299 2,132,603 2,176,404 276,731 498,168 5,367,205
Effect of adoption IFRS 16 (Note 2(b)) 3,550 - - 7,749 - 11,299
At 1 January 2019 286,849 2,132,603 2,176,404 284,480 498,168 5,378,504
Additions 1,209 25,219 2,623 40,786(2) 536,374 606,211
Disposals (106) (52,979) (51,123) (4,675) - (108,883)
Transfers and other movements 35,616 166,267 193,945 8,938 (404,766) -
At 31 December 2019 323,568 2,271,110 2,321,849 329,529 629,776 5,875,832
Accumulated depreciation
At 1 January 2019 (136,178) (1,208,504) (1,204,839) (124,580) - (2,674,101)
Depreciation for the year(1) (26,219) (184,616) (253,044) (27,119) - (490,998)
Disposals 69 47,311 51,102 4,202 - 102,684
At 31 December 2019 (162,328) (1,345,809) (1,406,781) (147,497) - (3,062,415)
Net Book amount at 31 December 2019 161,240 925,301 915,068 182,032 629,776 2,813,417
(1 Depreciation for the year includes US$490.7 million (2018: US$411.8
million) recognised as an expense in the income statement and US$0.3 million
(2018: US$8.3 million), capitalised as part of construction in progress.)
(2 From the additions in "other assets" category US$29.4 million (2018:
US$(4.5) million) corresponds to the reassessment of mine closure
rehabilitations costs, see note 20.)
(3 Figures include Right-of-use assets as described in Note 24 )
The table below details construction in progress by operating mine and
development projects
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Saucito 75,346 88,916
Herradura 53,388 70,536
Noche Buena 10,682 20,834
Ciénega 57,214 47,838
Fresnillo 141,166 48,671
San Julián 41,158 64,236
Juanicipio 231,105 151,092
Other(1) 19,717 6,045
629,776 498,168
(1 Manly corresponds to Minera Bermejal, S.A. de C.V. (2018: Minera Bermejal,
S.A. de C.V.).)
During the year ended 31 December 2019, the Group capitalised US$6.1 million
of borrowing costs within construction in progress (2018: US$11.1). Borrowing
costs were capitalised at the rate of 5.78% (2018: 5.78%).
Sensitivity analysis
As at 31 December 2019 and 2018, the carrying amount of mining assets was
fully supported by the higher of value in use and fair value less cost of
disposal (FVLCD) computation of their recoverable amount. Value in use and
FVLCD was determined based on the net present value of the future estimated
cash flows expected to be generated from the continued use of the CGUs. For
both valuation approaches management used long term price assumptions of
US$1,370/ounce and US$18.7/ounce (2018: US$1,310/ounce and US$19.25/ounce) for
gold and silver, respectively. Management considers that the models supporting
the carrying amounts are most sensitive to commodity price assumptions and
have therefore performed a sensitivity analysis for those CGUs, where a
reasonable possible change in prices could lead to impairment. Management
has considered a low sensitivity by decreasing gold and silver prices by 5%
(2018: gold and silver 5%) and a high sensitivity by decreasing gold and
silver prices by 10% and 15% respectively (2018: gold and silver 10% and 15%
respectively). As at 31 December 2019 the analysis resulted in an impairment
on Herradura of US$356.4 million (2018: 302.7 million) under high sensitivity;
US$127.4 million (2018: US$72.3 million) under low sensitivity and San Julian
US$121.6 million (2018: US$159.3 million) under high sensitivity; US$109.7
million (2018: US$45.4 million) under low sensitivity.
Management also has performed a sensitivity analysis for those subsidiaries
where cumulative impairment may be affected by a reasonably possible change in
production plans. In the current year, management has considered a decrease
in ore grade of 5%. The sensitivity resulted in an additional impairment on
Minera San Julian, S.A. de C.V. of US$45.1 million (2018: nil).
13. 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 2019 was $5.31 per ounce (2018: $5.26 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. At 31
December 2019 the weighted average rate applied for the purposes of the
valuation model was 6.57% (2018: 7.33%).
The Silverstream contract represents a derivative financial instrument which
has been recorded at FVPL 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 35 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 2019 total proceeds received in cash
were US$24.3 million (2018: US$36.3 million) of which, US$3.4 million was in
respect of proceeds receivable as at 31 December 2018 (2017: US$4.9 million).
Cash received in respect of the year of US$20.9 million (2018: US$31.4
million) corresponds to 2.3 million ounces of payable silver (2018: 3.4
million ounces). As at 31 December 2019, a further US$5.2 million (2018:
US$3.4 million) of cash receivable corresponding to 414,963 ounces of silver
is due (2018: 335,914 ounces).
The US$48.4 million unrealised gain recorded in the income statement (31
December 2018: US$15.0 million gain) resulted mainly from the decrease in the
LIBOR reference rate, the unwinding of the discount and the increase in the
forward silver price curve which were partially offset by the updating of the
Sabinas Reserves and Resources, inflation and exchange rate forecasts.
A reconciliation of the beginning balance to the ending balance is shown
below:
2019 2018
US$ thousands
US$ thousands
Balance at 1 January 519,093 538,887
Cash received in respect of the year (20,932) (31,379)
Cash receivable (5,283) (3,371)
Remeasurement gains recognised in profit and loss 48,376 14,956
Balance at 31 December 541,254 519,093
Less - Current portion 22,558 20,819
Non-current portion 518,696 498,274
See note 29 for further information on the inputs that have a significant
effect on the fair value of this derivative, see note 30 for further
information relating to market and credit risks associated with the
Silverstream asset.
14. Inventories
As at 31 December
2019 2018
US$ thousands
US$ thousands
Finished goods(1) 12,154 15,052
Work in progress(2) 252,639 235,094
Ore stockpile(3) - 3,799
Operating materials and spare parts 103,740 87,180
368,533 341,125
Allowance for obsolete and slow-moving inventories (4,793) (6,101)
Balance as 31 December at lower of cost and net realisable value 363,740 335,024
Less - Current portion 272,120 243,404
Non-current portion(4) 91,620 91,620
(1 Finished goods include metals contained in concentrates and doré barson
hand or in transit to a smelter or refinery. )
(2 Work in progress includes metals contained in ores on leaching pads (note
2(c)).)
(3 Ore stockpile includes ore mineral obtained during the development phase at
San Julián.)
(4 The non-current inventories are expected to be processed more than 12
months from the reporting date.)
Concentrates are a product containing sulphides with variable content of
precious and base metals and are sold to smelters and/or refineries. Doré is
an alloy containing a variable mixture of gold and silver that is delivered in
bar form to refineries, activated carbon is a product containing variable
mixture of gold and silver that is delivered in small particles. The 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$1,657.3
million (2018: US$1,323.1 million) before changes to the net realisable value
of inventory. During 2019 and 2018, there was no adjustment to net realisable
value allowance against work-in-progress inventory. The adjustment to the
allowance for obsolete and slow-moving inventory recognised as an expense was
US$1.3 million (2018: US$0.8 million).
15. Trade and other receivables
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Trade and other receivables from related parties (note 26) 206,982 213,292
Value Added Tax receivable 205,232 182,290
Other receivables from related parties (note 26) 7,988 3,371
Other receivables from contractors 2,418 2,755
Other receivables 15,791 10,306
438,411 412,014
Provision for impairment of 'other receivables' (769) (857)
Trade and other receivables classified as current assets 437,642 411,157
Other receivables classified as non-current assets:
Value Added Tax receivable 23,014 -
23,014 -
460,656 411,157
Trade receivables are shown net of any corresponding advances, are
non-interest bearing and generally have payment terms of 46 to 60 days.
The total receivables denominated in US$ were US$219.6 million (2018: US$223.1
million), and in Mexican pesos US$241.0 million (2018: US$187.2 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 credit-impaired. The amount past due and considered as
credit-impaired as of 31 December 2019 is US$0.8 million (2018: US$0.9
million). In determining the recoverability of receivables, the Group performs
a risk analysis considering the type and age of the outstanding receivable and
the credit worthiness of the counterparty, see note 30(b).
16. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its operations and
in order to achieve its treasury objectives.
As at 31 December
2019 2018
US$ thousands
US$ thousands
Cash at bank and on hand 3,347 2,125
Short-term deposits 333,229 558,660
Cash and cash equivalents 336,576 560,785
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 three
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.
17. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
2019 2018
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 2018 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2018 736,893,589 $368, 545,586 50,000 £50,000
At 31 December 2019 736,893,589 $368, 545,586 50,000 £50,000
As at 31 December 2019 and 2018, 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.
Cost of hedging reserve
The changes in the time value of option contracts are accumulated in the costs
of hedging reserve. These deferred costs of hedging are either reclassified to
profit or loss or recognised as a basis adjustment to non-financial assets or
liabilities upon maturity of the hedged item, or, in the case of a hedge item
that realises over time, amortised on a systematic and rational basis over the
life of the hedged item.
Fair value reserve of financial assets at FVOCI
The Group has elected to recognise changes in the fair value of certain
investments in equity securities in OCI, as explained in note 2(g). These
changes are accumulated within the FVOCI reserve within equity. The Group
transfers amounts from this reserve to retained earnings when the relevant
equity securities are derecognised.
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.
18. Dividends declared and paid
The dividends declared and paid during the years ended 31 December 2019 and
2018 are as follows:
US cents per Amount
Ordinary Share
US$ thousands
Year ended 31 December 2019
Final dividend for 2018 declared and paid during the year(1) 16.70 123,061
Interim dividend for 2019 declared and paid during the year(2) 2.60 19,160
19.30 142,221
Year ended 31 December 2018
Final dividend for 2017 declared and paid during the year (3) 29.8 219,594
Interim dividend for 2018 declared and paid during the year(4) 10.7 78,848
40.5 298,442
(1 This dividend was approved by the Board of Directors on 21 May 2019 and
paid on 24 May 2019.)
(2 This dividend was approved by the Board of Directors on 24 July 2019 and
paid on 6 September 2019.)
(3 This dividend was approved by the Board of Directors on 30 May 2018 and
paid on 4 June 2018.)
(4 This dividend was approved by the Board of Directors on 3 September 2018
and paid on 7 September 2018.)
The directors have proposed a final dividend of US$11.9 cents per share, which
is subject to approval at the annual general meeting and is not recognised as
a liability as at 31 December 2019.
Following the year end, the Directors became aware that certain dividends paid
between 2011 and 2019 had been made otherwise than in accordance with the
Companies Act 2006, section 838, because interim accounts had not been filed
at Companies House prior to payment. It is important to note that the Company
has had sufficient distributable profits at the time each relevant dividend
was paid and therefore did not pay out by way of dividends more income than it
had, and no payments were made out of capital. Relevant dividends were the
Interim Dividends in 2011, 2012, 2013 2018 and 2019, the 2013 Extraordinary
Dividend and the 2018 Final Dividend. A resolution will be proposed at the
annual general meeting to be held on 29 May 2020 to authorise the
appropriation of distributable profits to the payment of the relevant
dividends and to remove any right that the Company may have had to claim from
shareholders or Directors or former Directors for repayment of these amounts
by entering into deeds of release in relation to any such claims. This will,
if passed, constitute a related party transaction under IAS 24. The overall
effect of the resolution is to return the parties so far as possible to the
position they would have been in had the relevant dividends been made in full
compliance with the Act.
19. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800 million
aggregate principal amount of 5.500% Senior Notes due 2023 (the "Notes").
Movements in the year in the debt recognised in the balance sheet are as
follows:
As at 31 December
2019 2018
US$ thousands US$ thousands
Opening balance 800,127 799,046
Accrued interest 46,267 46,267
Interest paid(1) (46,267) (46,267)
Amortisation of discount and transaction costs 1,112 1,081
Closing balance 801,239 800,127
(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
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.
20. 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 and
reclamation alternatives, timing, and the discount, foreign exchange and
inflation rates applied.
The Group has performed separate calculations of the provision by currency,
discounting at corresponding rates. As at 31 December 2019, the discount rates
used in the calculation of the parts of the provision that relate to Mexican
pesos range from 6.83% to 7.47% (2018: range of 7.12% to 8.55%). The range for
the current year parts that relate to US dollars range from 1.43% to 1.82%
(2018: range of 2.05% to 2.70%).
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 2 to 29
years from 31 December 2019 (3 to 25 years from 31 December 2018). As at 31
December 2019 the weighted average term of the provision is 13 years (2018:12
years)
As at 31 December
2019 2018
US$ thousands
US$ thousands
Opening balance 189,842 184,775
(Decrease)/increase to existing provision (4,215) 9,758
Effect of changes in discount rate 27,961 (14,279)
Unwinding of discount rate 11,848 10,065
Payments (24) (545)
Foreign exchange 5,644 68
Closing balance 231,056 189,842
21. 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
2019 interest 2019
US$ thousands
Defined benefit obligation (25,721) (975) (1,857) (1,183) (4,015) 708 - - (2,562) 46 - (2,516) - 250 (31,294)
Fair value of plan assets 19,328 1,334 866 2,200 (708) 174 - - - - 174 - (404) 20,590
Net benefit liability (6,393) (975) (523) (317) (1,815) - 174 - (2,562) 46 (2,342) - (154) (10,704)
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
2018 interest 2018
US$ thousands
Defined benefit obligation (27,327) (62) (1,791) 5 (1,848) 884 - - 1,749 821 - 2,570 - - (25,721)
Fair value of plan assets 18,110 - 1,110 27 1,137 (630) 40 - - - - 40 614 57 19,328
Net benefit liability (9,217) (62) (681) 32 (711) 254 40 - 1,749 821 - 2,610 614 57 (6,393)
Of the total defined benefit obligation, US$9.2 million (2018: US$7.4 million)
relates to statutory seniority premiums for unionised workers which are not
funded. The expected contributions to the plan for the next annual reporting
period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown below:
As at 31 December
2019 2018
%
%
Discount rate 7.24 8.42
Future salary increases (NCPI) 5.00 5.15
The life expectancy of current and future pensioners, men and women aged 65
and older will live on average for a further 23.2 and 26.7 years respectively
(2018: 23.1 years for men and 26.6 for women). The weighted average duration
of the defined benefit obligation is 11.3 years (2018: 10.8 years).
The fair values of the plan assets were as follows:
As at 31 December
2019 2018
US$ thousands
US$ thousands
Government debt 61 351
State owned companies 4,907 5,132
Mutual funds (fixed rates) 15,622 13,845
20,590 19,328
As at 31 December 2019 and 2018, all the funds were invested in quoted debt
instruments.
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 2019 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) (1,619) 1,780 189 (184) 509
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.
22. Trade and other payables
As at 31 December
2019 2018
US$ thousands
US$ thousands
Trade payables 107,222 91,734
Other payables to related parties (note 26) 17,899 12,321
Accrued expenses 18,410 13,163
Other taxes and contributions 16,237 15,922
159,768 133,140
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 30.
23. Commitments
A summary of capital expenditure commitments by operating mine and development
project is as follows:
As at 31 December
2019 2018
US$ thousands
US$ thousands
Saucito 36,743 52,288
Herradura 9,864 17,701
Noche Buena 252 3,346
Ciénega 6,743 13,779
Fresnillo 58,109 90,181
San Julián 5,516 8,781
Minera Juanicipio 84,609 142,111
201,836 328,187
( )
24. Leases
(a) The Group as lessee
The Group leases various offices, buildings and IT equipment. The resulting
lease liability is as follows:
As at
31 December 2019 1 January 2019
US$ thousands
US$ thousands
IT equipment 9,514 7,749
Buildings 3,030 3,550
Total lease liability 12,544 11,299
Less - Current portion 4,535 3,758
Non-current portion 8,009 7,541
The maturity analysis of the liability is as follow:
As at
31 December 2019 1 January 2019
US$ thousands
US$ thousands
Within one year 4,535 3,758
After one year but not more than five years 7,125 6,450
More than five years 884 1,091
12,544 11,299
The total cash outflow for leases for the year ended 31 December 2019 amount
US$4.7 million.
The table below details right-of-use assets included as property plant and
equipment, see note 12
Year ended 31 December 2019
Building Computer equipment Total
US$ thousands
Cost
At 1 January 2019 3,550 7,749 11,299
Additions 69 5,516 5,585
Disposals (39) (18) (57)
At 31 December 2019 3,580 13,247 16,827
Accumulated depreciation
At 1 January 2019
Depreciation for the year (697) (3,969) (4,666)
Disposals 11 1 12
At 31 December 2019 (686) (3,968) (4,654)
Net Book amount at 31 December 2019 2,894 9,279 12,173
Amounts recognized in profit and loss for the year, additional to depreciation
of right-of-use assets, included US$642.3 relating to interest expense,
US$1,177.99 relating to short-term leases and US$2,590.91 relating to
low-value assets.
(b) The Group as a lessor
Operating leases, in which the Group is the lessor, relate to mobile equipment
owned by the Group with lease terms of between 12 to 36 months. All operating
lease contracts contain market review clauses in the event that the lessee
exercises its option to renew. The lessee does not have an option to purchase
the equipment at the expiry of the lease period. The Group's leases as a
lessor are not material.
25. Contingencies
As of 31 December 2019, 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.
- With regards to tax audits, the status of material on-going
inspections is as follows:
- With respect to Minera Penmont's 2012 and 2013 tax inspections, on 11
July 2018 the Company filed before tax authorities a substance administrative
appeal against the tax assessment, and on 3 September 2018, it filed
additional documentation before tax authorities and is waiting for its
response.
- In connection with Minera Fresnillo and Minera Mexicana La Ciénega
(The Companies) income tax audits for the year 2014, a Conclusive Agreement
was executed on February 19th, 2019 between the SAT, the Companies and the
Mexican Taxpayers Ombudsman (PRODECON per its Spanish acronym). According to
article 69-H of the Mexican Tax Code, settlements reached and executed by
taxpayers and the authority may not be challenged in any way. Such settlements
shall only be effective between the parties; and they shall not constitute a
precedent in any case.
- On March 22nd and June 21st, 2019, SAT initiated income tax audits
for the year 2013 at Minera Saucito and Minera Fresnillo, respectively. The
company has fully responded to the SAT´s request of information and
documentation. In February 2020, the SAT communicated its initial findings to
the Company. These are being analysed and the company has commenced the
process of preparing its response.
- On February 5th, 2020 SAT initiated a Profit Sharing audit and an
Income Tax audit for the year 2014 at Minera Mexicana La Ciénega and
Metalúrgica Reyna, respectively. On February 13th, 2020 SAT initiated Income
Tax audits for the year 2014 at Desarrollos Mineros Fresne and Minera Saucito.
The company is in the process of preparing its response to the SAT´s request
of information and documentation.
- 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.
- 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.
- 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, with which Penmont complied by vacating 1,824 hectares of land,
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.
Remediation activities in this respect are pending as the agrarian members
have not yet permitted Penmont physical access to the lands. A Federal court
has issued a final ruling denying the claimant's allegations that the land
should be remediated to the same state it held prior to Penmont's occupation.
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.
- 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 nor 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 uncertainty as to the
finalisation and ultimate outcome of these legal proceedings.
- As previously reported, the State of Zacatecas issued a law in
2017 to impose environmental taxes on activities such as (i) extraction of
materials other than those regulated by the Federal Mining Law; (ii) emissions
into the air; (iii) discharges of industrial residues into the ground and
water, and (iv) deposit of industrial residues.
The Company challenged the legality of such taxes and in 2017 obtained an
injunction from a Federal court. The State of Zacatecas appealed this
ruling. The Supreme Court of Mexico has issued a final ruling settling the
Company's legal challenge, in which the Court determined that:
1. Two of the taxes are unconstitutional: (a) tax on extractive activities and
(b) tax on the deposit of industrial residues.
2. The other two taxes were declared constitutional: (a) emissions into the
air and (b) discharge of industrial residues into the ground and water.
It is estimated that the annual cost for the Company of complying with the two
taxes is not material at this time.
- In 2011, flooding occurred in the Saucito mine, following which
the Group filed an insurance claim in respect of the damage caused (and in
respect of business interruption). This insurance claim was rejected by the
insurance provider. In early 2018, after the matter was taken to mutually
agreed arbitration, the insurance claim was declared valid; however, there is
disagreement about the appropriate amount to be paid. In October 2018 the
Group received US$13.6 million in respect of the insurance claim, however this
does not constitute a final settlement and management continues to pursue a
higher insurance payment. Due to the fact that negotiations are on-going and
there is uncertainty regarding the timing and amount involved in reaching a
final settlement with the insurer, it is currently not practicable to
determine the total amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances; however,
there is no certainty that this interest will be realised until the underlying
balance is recovered. Due to that uncertainty, it is also not practicable to
estimate the amount of interest income earned to date.
26. Related party balances and transactions
The Group had the following related party transactions during the years ended
31 December 2019 and 2018 and balances as at 31 December 2019 and 2018.
Related parties are those entities owned or controlled by the ultimate
controlling party, as well as those who have a minority participation in Group
companies and key management personnel of the Group.
(a) Related party balances
Accounts receivable Accounts payable
As at 31 December As at 31 December
2019 2018 2019 2018
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 206,982 213,202 409 408
Other:
Industrias Peñoles, S.A.B. de C.V. 5,283 3,371 - -
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,662 -
Servicios Administrativos Peñoles, S.A. de C.V. - - 3,535 3,249
Servicios Especializados Peñoles, S.A. de C.V. - - 4,095 1,556
Fuentes de Energía Peñoles, S.A. de C.V. - - 1,735 1,138
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 1,168 988
Eólica de Coahuila S.A. de C.V. - - 4,772 3,459
Other 43 90 2,185 1,523
Sub-total 214,970 216,663 17,899 12,321
Less-current portion 214,970 216,663 17,899 12,321
Non-current portion - - - -
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 541,254 519,093
The Silverstream contract can be settled in either silver or cash. Details of
the Silverstream contract are provided in note 13.
(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
2019 2018
US$ thousands
US$ thousands
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,125,733 2,119,758
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 6,503 13,652
Other income 7,008 4,419
Total income 2,139,244 2,137,829
(1 Figures do not include the effects of hedging as the derivative
transactions are not undertaken with related parties. Figures are net of the
adjustment for treatment and refining charges of US$144.6 million (2018:
US$141.2 million) and include sales credited to development projects of US$0.1
million (2018: US$17.6 million).)
( )
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Expenses:
Administrative services(2):
Servicios Administrativos Peñoles, S.A. de C.V.(3) 33,107 28,625
Servicios Especializados Peñoles, S.A. de C.V. 19,744 15,830
52,851 44,455
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 15,305 17,383
Fuerza Eólica del Istmo S.A. de C.V. - 2,187
Fuentes de Energía Peñoles, S.A. de C.V. 4,971 3,872
Eólica de Coahuila S.A. de C.V. 41,572 34,147
61,848 57,589
Operating materials and spare parts:
Wideco Inc 7,699 5,783
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 9,502 8,329
17,201 14,112
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 10,012 9,733
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 9,067 8,603
Other expenses: 4,014 2,561
Total expenses 154,993 137,053
(2 Includes US$8.1 million (2018: US$1.7 million) corresponding to expenses
reimbursed.)
(3 Includes US$3.2 million (2018: US$4.2 million) relating to engineering
costs that were capitalised.)
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the
Executive Committee.
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Salaries and bonuses 3,568 3,260
Post-employment benefits 242 245
Other benefits 296 249
Total compensation paid in respect of key management personnel 4,106 3,754
Year ended 31 December
2019 2018
US$ thousands
US$ thousands
Accumulated accrued defined pension entitlement 4,753 4,001
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.
27. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31 December 2019
and 2018 are as follows:
Year ended 31 December
Class of services 2019 2018
US$ thousands
US$ thousands
Fees payable to the Group's auditor for the audit of the Group's annual 1,443 1,306
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 157 176
Audit-related assurance services 437 347
Tax compliance services 10 4
Total 2,047 1,833
28. Notes to the consolidated statement of cash flows
Notes 2019 2018
US$ thousands
US$ thousands
Reconciliation of profit for the year to net cash generated from operating
activities
Profit for the year 205,814 349,966
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 12 490,678 411,764
Employee profit sharing 7 9,578 13,003
Deferred income tax credit 10 (186,113) (45,385)
Current income tax expense 10 159,054 179,349
Loss on the sale of property, plant and equipment and other assets 8 4,866 999
Net finance costs 46,286 27,433
Foreign exchange loss 1,894 8,382
Difference between pension contributions paid and amounts recognised in the 1,129 62
income statement
Non cash movement on derivatives 687 34
Changes in fair value of Silverstream 13 (48,376) (14,956)
Working capital adjustments
(Increase) in trade and other receivables (39,257) (60,384)
(Increase) in prepayments and other assets (3,283) (11,753)
Increase in inventories (28,717) (63,918)
Increase in trade and other payables 14,635 8,174
Cash generated from operations 628,875 802,770
Income tax paid(1) (180,059) (200,088)
Employee profit sharing paid (12,907) (14,323)
Net cash from operating activities 435,909 588,359
(1) (Income tax paid includes US$162.2 million corresponding to corporate
income tax (31 December 2018: US$180.4 million) and US$17.9 corresponding to
special mining right (31 December 2018: US$19.7 million), for further
information refer to note 10.)
29. Financial instruments
(a) Fair value category
As at 31 December 2019
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
cost
Trade and other receivables( )(note 15) 4,353 - - 212,265
Equity instruments at FVOCI - 123,024 - -
Silverstream contract (note 13) - - - 541,253
Derivative financial instruments - 2,623 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 19) 801,239 - -
Trade and other payables (note 22) 117,358 - -
Derivative financial instruments - 1,789 -
( )
( )
As at 31 December 2018
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
cost
Trade and other receivables( )(note 15) 1,986 - - 216,573
Equity instruments at FVOCI - 78,219 - -
Silverstream contract (note 13) - - - 519,093
Derivative financial instruments - 314 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 19) 800,127 - -
Trade and other payables (note 22) 97,169 - -
Derivative financial instruments - 3,807 -
(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 value of financial assets and liabilities other than those measured at
fair value are as follows:
As at 31 December
Carrying amount Fair value
2019 2018 2019 2018
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Financial assets:
Trade and other receivables 4,353 1,986 4,353 1,986
Financial liabilities:
Interest-bearing loans(1) (note 19) 801,239 800,127 870,208 817,936
Trade and other payables 1,789 97,169 1,789 97,169
(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 2019
Fair value measure using
Quoted prices in active markets Level 1 Significant observable Level 2 Significant unobservable Level 3 Total
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Financial assets:
Trade receivables - - 212,265 212,265
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 2,537 - 2,537
Option and forward foreign exchange contracts - 86 - 86
Silverstream contract - - 541,253 541,253
Other financial assets:
Equity instruments at FVOCI 123,024 - - 123,024
123,024 2,623 753,518 879,165
Financial liabilities:
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 1,529 - 1,529
Option and forward foreign exchange contracts - 260 - 260
- 1,789 - 1,789
As of 31 December 2018
Fair value measure using
Quoted prices in Significant observable Significant unobservable Level 3 Total
US$ thousands
US$ thousands
active markets Level 2
US$ thousands
Level 1
US$ thousands
Financial assets:
Trade receivables - - 216,573 216,573
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 240 - 240
Option and forward foreign exchange contracts - 74 - 74
Silverstream contract - - 519,093 519,093
Other financial assets:
Equity instruments at FVOCI 78,219 - - 78,219
78,219 314 735,666 814,199
Financial liabilities:
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 3,660 - 3,660
Option and forward foreign exchange contracts - 147 - 147
- 3,807 - 3,807
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 13)
is shown below:
2019 2018
US$ thousands
US$ thousands
Balance at 1 January: 213,202 225,741
Sales 4,949,494 5,659,205
Cash collection (4,955,376) (5,671,253)
Changes in fair value 15,996 (4,016)
Realised embedded derivatives during the year (16,334) 3,525
Balance at 31 December 206,982 213,202
( )
The fair value of financial assets and liabilities is included at reflects 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 operational mine plan, with certain
amendments to reflect a basis that a market participant would consider, that
is 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 13. 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 30.
Equity investments:
The fair value of equity investments 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).
Trade receivables:
Sales of concentrates, precipitates doré bars and activated carbon 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 (n)). This price exposure is considered to be
an embedded derivative and therefore the entire related trade receivable is
measured at fair value.
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.
30. Financial risk management
Overview
The Group's principal financial assets and liabilities, other than
derivatives, comprise trade receivables, cash, equity instruments at FVOCI,
interest-bearing loans and trade payables.
The Group has exposure to the following risks from its use of financial
instruments:
Market risk, including foreign currency, commodity price, interest rate,
inflation rate and equity price risks
Credit risk
Liquidity risk
This note presents information about the Group's exposure to each of the above
risks and the Group's objectives, policies and processes for assessing and
managing risk. Further quantitative disclosures are included throughout the
financial statements.
The Board of Directors has overall responsibility for the establishment and
oversight of the Group's risk management framework.
The Group's risk management policies are established to identify and analyse
the risks faced by the Group, to set appropriate risk limits and controls, and
to monitor risks and adherence to limits. Risk management policies and systems
are reviewed regularly to reflect changes in market conditions and the Group's
activities. The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Fresnillo Audit Committee has responsibility for overseeing how management
monitors compliance with the Group's risk management policies and procedures
and reviews the adequacy of the risk management framework in relation to the
risks faced by the Group. The Audit Committee is assisted in its oversight
role by Internal Audit, which undertakes both regular and ad hoc reviews of
risk management controls and procedures, the results of which are reported to
the Audit Committee.
(a) Market risk
Market risk is the risk that changes in market factors, such as foreign
exchange rates, commodity prices or interest rates will affect the Group's
income or the value of its financial instruments.
The objective of market risk management is to manage and control market risk
exposures within acceptable parameters, while optimising the return on risk.
In the following tables, the effect on equity excludes the changes in retained
earnings as a direct result of changes in profit before tax.
Foreign currency risk
The Group has financial instruments that are denominated in Mexican peso, euro
and Swedish krona which are exposed to foreign currency risk. Transactions in
currencies other than the US dollar include the purchase of services, fixed
assets, spare parts and the payment of dividends. As a result, the Group has
financial assets and liabilities denominated in currencies other than
functional currency, and holds cash and cash equivalents in Mexican Peso.
In order to manage the Group's exposure to foreign currency risk on
expenditure denominated in currencies other than the US dollar, the Group has
entered into certain forward and option derivative contracts with maturity
dates from 2018 (see note 29 for additional detail).
The following table demonstrates the sensitivity of financial assets and
financial liabilities (excluding Silverstream) to a reasonably possible change
in the US dollar exchange rate compared to the Mexican peso, reflecting the
impact on the Group's profit before tax and equity, with all other variables
held constant. It is assumed that the same percentage change in exchange rates
is applied to all applicable periods for the purposes of calculating
the sensitivity with relation to derivative financial instruments.
Year ended 31 December Strengthening/ Effect on Effect on equity:
(weakening)
profit before tax: increase/
increase/
of US dollar
(decrease)
(decrease)
US$ thousands
US$ thousands
2019 5% 694 2,295
(5%) (767) (1,939)
2018 10% (380) -
(10%) 464 -
The following table demonstrates the sensitivity of financial assets and
financial liabilities to a reasonably possible change in the US dollar
exchange rate compared to the Swedish krona on the Group's profit before tax
and equity, with all other variables held constant. It is assumed that the
same percentage change in exchange rates is applied to all applicable periods.
Year ended 31 December Strengthening/ Effect on profit before tax: increase/
(weakening) of
(decrease)
US dollar
US$ thousands
2019 10% -
(10%) -
2018 10% 19
(10%) 20
The following table demonstrates the sensitivity of financial assets and
financial liabilities (excluding Silverstream) to a reasonably possible change
in the US dollar exchange rate compared to the euro on the Group's profit
before tax and equity, with all other variables held constant. It is assumed
that the same percentage change in exchange rates is applied to all applicable
periods.
Year ended 31 December Strengthening/ Effect on
(weakening)
profit before tax: increase/
of US dollar
(decrease)
US$ thousands
2019 5% -
(5%) (1)
2018 10% 53
(10%) 52
Foreign currency risk - Silverstream
Future foreign exchange rates are one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity of
the Silverstream contract valuation to a reasonably possible change in the
Mexican peso as compared to the US dollar, with all other inputs to
the Silverstream valuation model held constant. It is assumed that the same
percentage change in exchange rates is applied to all applicable periods
in the valuation model.
Year ended 31 December Strengthening/ Effect on profit before tax:
(weakening) of
increase/
US dollar
(decrease)
US$ thousands
2019 5% (40)
(5%) 44
2018 10% (46)
(10%) 56
Commodity risk
The Group has exposure to changes in metals prices (specifically silver, gold,
lead and zinc) which have a significant effect on the Group's results. These
prices are subject to global economic conditions and industry-related cycles.
The Group uses derivative instruments to hedge against an element of gold,
zinc and lead price.
The table below reflects the aggregate sensitivity of financial assets and
liabilities (excluding Silverstream) to a reasonably possible change in
commodities prices, reflecting the impact on the Group's profit before tax
with all other variables held constant.
The sensitivity shown in the table below relates to changes in fair value of
commodity derivatives financial instruments contracts and embedded derivatives
in sales.
Year ended 31 December Increase/(decrease) in commodity prices Effect on Effect on equity:
profit before tax: increase/
increase/
(decrease)
(decrease)
US$ thousands
US$ thousands
Gold Silver Zinc Lead
2019 15% 20% 15% 15% 28,367 (1,939)
(10%) (15%) (15%) (15%) (21,218) 2,295
2018 10% 15% 25% 20% 22,330 (14,910)
(10%) (15%) (20%) (15%) (21,204) 8,703
Commodity price risk - Silverstream
Future silver price is one of the inputs to the Silverstream valuation model.
The following table demonstrates the sensitivity of the Silverstream contract
valuation to a reasonably possible change in future silver prices, with all
other inputs to the Silverstream valuation model held constant.
It is assumed that the same percentage change in silver price is applied to
all applicable periods in the valuation model. There is no impact on
the Group's equity, other than the equivalent change in retained earnings.
Year ended 31 December Increase/ Effect on profit before tax: increase/
(decrease) in
(decrease)
silver price
US$ thousands
2019 20% 146,873
(15%) (110,155)
2018 15% 106,879
(15%) (106,879)
Interest rate risk
The Group is exposed to interest rate risk from the possibility that changes
in interest rates will affect future cash flows or the fair values of its
financial instruments, principally relating to the cash balances and the
Silverstream contract held at the balance sheet date. Interest-bearing loans
are at a fixed rate, therefore the possibility of a change in interest rate
only impacts its fair value but not its carrying amount. Therefore,
interest-bearing loans and loans from related parties are excluded from the
table below.
The following table demonstrates the sensitivity of financial assets and
financial liabilities (excluding Silverstream) to a reasonably possible change
in interest rate applied to a full year from the balance sheet date. There is
no impact on the Group's equity other than the equivalent change in retained
earnings.
Year ended 31 December Basis point increase/ Effect on profit before tax: increase/
(decrease)
(decrease)
in interest rate
US$ thousands
2019 50 1,683
(50) (1,683)
2018 75 4,206
(75) (4,206)
The sensitivity shown in the table above primarily relates to the full year of
interest on cash balances held as at the year end.
Interest rate risk - Silverstream
Future interest rates are one of the inputs to the Silverstream valuation
model. The following table demonstrates the sensitivity of the Silverstream
contract valuation to a reasonably possible change in interest rates, with all
other inputs to the Silverstream valuation model held constant. It is assumed
that the same change in interest rate is applied to all applicable periods in
the valuation model. There is no impact on the Group's equity, other than the
equivalent change in retained earnings.
Year ended 31 December Basis point increase/ Effect on profit before tax: increase/
(decrease)
(decrease)
in interest rate
US$ thousands
2019 50 (32,969)
(50) 36,322
2018 75 (47,151)
(75) 54,775
Inflation rate risk
Inflation rate risk-Silverstream
Future inflation rates are one of the inputs to the Silverstream valuation
model. The following table demonstrates the sensitivity of the Silverstream
contract to a reasonably possible change in the inflation rate, with all other
inputs to the Silverstream valuation model held constant. It is assumed that
the same change in inflation is applied to all applicable periods in the
valuation model. There is no impact on the Group's equity, other than
the equivalent change in retained earnings.
Year ended 31 December Basis point (increase/ Effect on profit before tax: increase/
(decrease)
(decrease)
in inflation rate
US$ thousands
2019 100 96
(100) (87)
2018 100 56
(100) (51)
Equity price risk
The Group has exposure to changes in the price of equity instruments that it
holds as equity investments at FVOCI.
The following table demonstrates the sensitivity of equity investments at
FVOCI to a reasonably possible change in market price of these equity
instruments, reflecting the effect on the Group's profit before tax and
equity:
Year ended 31 December Increase/ Effect on Effect on equity: increase/
(decrease)
profit before tax: increase/
(decrease)
in equity price
(decrease)
US$ thousands
(US$ thousands)
2019 70% - 86,116
(25%) - (30,756)
2018 40% - 31,288
(40%) - (31,288)
(b) Credit risk
Exposure to credit risk arises as a result of transactions in the Group's
ordinary course of business and is applicable to trade and other receivables,
cash and cash equivalents, the Silverstream contract and derivative financial
instruments.
The Group's policies are aimed at minimising losses as a result of
counterparties' failure to honour their obligations. Individual exposures are
monitored with customers subject to credit limits to ensure that the Group's
exposure to bad debts is not significant. The Group's exposure to credit risk
is influenced mainly by the individual characteristics of each counter party.
The Group's financial assets are with counterparties with what the Group
considers to have an appropriate credit rating. As disclosed in note 26, the
counterparties to a significant proportion of these financial assets are
related parties. At each balance sheet date, the Group's financial assets were
neither credit-impaired nor past due, other than 'Other receivables' as
disclosed in note 15. The Group's policies are aimed at minimising losses from
foreign currency hedging contracts. The Company's foreign currency hedging
contracts are entered into with large financial institutions with strong
credit ratings.
The Group has a high concentration of trade receivables with one counterparty
Met-Mex Peñoles, the Group's sole customer throughout 2019 and 2018. A
further concentration of credit risk arises from the Silverstream contract.
Both Met-Mex and the counterparty to the Silverstream contract are
subsidiaries in the Peñoles group which currently owns 75 per cent of the
shares of the Company and is considered by management to be of appropriate
credit rating.
The Group's surplus funds are managed by Servicios Administrativos Fresnillo,
S.A. de C.V., which manages cash and cash equivalents, including short-term
investments investing in a number of financial institutions. Accordingly, on
an ongoing basis the Group deposits surplus funds with a range of financial
institutions, depending on market conditions. In order to minimise exposure to
credit risk, the Group only deposits surplus funds with financial institutions
with a credit rating of MX-1 (Moody´s) and mxA-1+ (Standard and Poor's) and
above. As at 31 December 2019, the Group had concentrations of credit risk as
22 percent of surplus funds were deposited with one financial institution of
which the total investment was held in short term Mexican government paper.
The maximum credit exposure at the reporting date of each category of
financial asset above is the carrying value as detailed in the relevant notes.
See note 16 for the maximum credit exposure to cash and cash equivalents and
note 26 for related party trade and other receivables. The maximum credit
exposure with relation to the Silverstream contract is the value of the
derivative as at 31 December 2019, being US$541.2 million (2018: US$519.1
million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using projected cash flows
from operations and by monitoring the maturity of both its financial assets
and liabilities.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2019
Interest-bearing loans (note 19) 46,267 92,534 846,267 - 985,068
Trade and other payables 125,121 - - - 125,121
Derivative financial instruments - liabilities 1,789 - - - 1,789
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2018
Interest-bearing loans (note 19) 46,267 92,534 92,534 800,000 1,031,335
Trade and other payables 97,169 - - - 97,169
Derivative financial instruments - liabilities 3,807 - - - 3,807
The payments disclosed for financial derivative instruments in the above table
are the gross undiscounted cash flows. However, those amounts may be settled
gross or net. The following table shows the corresponding estimated inflows
based on the contractual terms:
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2019
Inflows 22,186 - - - 22,186
Outflows (20,898) - - - (20,898)
Net 1,287 - - - 1,287
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2018
Inflows 12,608 4,310 - - 16,918
Outflows (12,688) (4,290) - - (16,977)
Net (80) 20 - - (60)
The above liquidity tables include expected inflows and outflows from currency
option contracts which the Group expects to be exercised during 2020 as at 31
December 2019 and during 2019 as at 31 December 2018, either by the Group or
counterparty.
Management considers that the Group has adequate current assets and forecast
cash from operations to manage liquidity risks arising from current
liabilities and non-current liabilities.
Capital management
The primary objective of the Group's capital management is to ensure that it
maintains a strong credit rating and healthy capital ratios that support
its business and maximise shareholder value. Management considers capital to
consist of equity and interest-bearing loans, as disclosed in the balance
sheet, excluding net unrealised gains or losses on revaluation of cash flow
hedges and Equity instruments at FVOCI. In order to ensure an appropriate
return for shareholder's capital invested in the Group management thoroughly
evaluates all material projects and potential acquisitions and approves them
at its Executive Committee before submission to the Board for ultimate
approval, where applicable. The Group's dividend policy is based on the
profitability of the business and underlying growth in earnings of the Group,
as well as its capital requirements and cash flows, including cash flows from
the Silverstream.
One of the Group's metrics of capital is cash and other liquid assets which in
2019 and 2018 consisted of only cash and cash equivalents.
1 Cash and other liquid funds are disclosed in note 30(c) to the financial
statements.
2 Cash and other liquid funds are disclosed in note 30(c) to the financial
statements.
3 Adjusted production costs is calculated as total production costs less
depreciation and profit sharing. The Company considers this a useful
additional measure to help understand underlying factors driving production
costs in terms of the different stages involved in the mining and plant
processes, including efficiencies and inefficiencies as the case may be and
other factors outside the Company's control such as cost inflation or changes
in accounting criteria.
4 Corruption Perception Index 2019 issued by Transparency International
ranks Mexico as 130(th) of 180 (2018: 138(th) of 180) countries by perceived
levels of public sector corruption. [The score achieved was 29/100 in 2019 vs.
28/100 in 2018.]
(( 5 )) Global Peace Index 2019 and Mexico Peace Index 2019 prepared by the
Institute for Economics & Peace.
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