REG - Fresnillo Plc - FY21 Preliminary Results
08/03/2022 07:00
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RNS Number : 9555D Fresnillo PLC 08 March 2022
Fresnillo plc
Financial results for the year ended 31 December 2021
Fresnillo plc today announced its financial results for the full year ended 31
December 2021.
Octavio Alvídrez, CEO said:
"The continued impact of the pandemic, combined with the new Mexican labour
reform, have presented Fresnillo with operational challenges during the year.
More recently, we were all devastated to report the passing of Alberto
Baillères, our Honorary Chairman. Don Alberto was a remarkable man. We will
miss his guidance, compassion, encouragement and faith.
Despite the challenges, we delivered a creditable performance. Silver
production of 53.1 moz (including Silverstream), was marginally below
guidance, but flat vs. FY20. Gold production of 751.2 koz, was however ahead
of guidance, down 2.4% vs. FY20.
We reported US$2,847.9 million in adjusted revenue, an increase of 9.2%,
primarily due to better prices for precious metals. Gross profit rose
year-on-year by 6.5% to US$936.9 million. We maintained our strong financial
position as cash and other liquid funds increased from US$1,070.4 million in
2020 to US$1,235.3 million in 2021. We declared an interim dividend of 9.90 US
cents per share, with a final dividend of 24.0 US cents per share, bringing
the total for the year to 33.9 US cents per share, in line with our consistent
dividend policy.
Regrettably, a fourth wave of Covid-19 has reached Mexico and we began to see
the impact of this in terms of staff absenteeism from the 2(nd) week of
December and accelerated throughout the first few weeks of the year. The
safety and well-being of our people is our priority. Covid protocols remain in
place, but we are relieved to see the omicron variant presents a lesser health
risk. Nonetheless, we are seeing greater levels of absenteeism which in turn
is having an impact across our business.
The labour reform in Mexico restricting the ability to subcontract labour came
into effect from 1(st) September 2021 resulting in the requirement to
internalise a high proportion of our contractor workforce. Subsequent
contractor uptake has varied, with underground mines more affected resulting
in an increased number of vacancies and a higher workforce turnover. This has
affected equipment availability and utilisation rates. The actions we
announced to address this challenge will continue, including recruitment
campaigns, training and investment in new equipment. These campaigns are
proving effective. We expect to have completed the staffing process in the
Fresnillo District and Ciénega in the third quarter, while our open pit
mines, which have seen a lesser impact, should be fully staffed during 1Q22.
We made good progress on our development projects. The new Juanicipio mine was
completed at the end of 2021, as planned. However, approval to complete the
tie-in to the national power grid was not granted by Comisión Federal de
Electricidad (CFE), the state-owned electrical company, before year end as
expected. The mill commissioning timeline was therefore extended by
approximately six months. Juanicipio will be an increasingly major influence
in our operations, on average producing 11.7 moz silver and 43.5 koz gold a
year for the life of mine. Similar covid-related delays related to energy
inspection and new requirements also affected the start-up of the new Pyrites
Plant at the Fresnillo mine.
Our longer term growth pipeline remains strong. The increased exploration
budget for 2021 supported an intensive programme across all our operations,
with the aim of increasing the resource base, converting inferred resources
into indicated, and improving the confidence of the grade distribution in our
reserves.
We are making steady progress with our next development projects at Rodeo and
Orisyvo, where we expect to commence production towards the end of 2024 and
2025 respectively, subject to Board approval.
We are committed to playing our part in fighting climate change by mitigating
our environmental impact wherever possible. We have completed our project to
install dual fuel engines that run on both Liquid Natural Gas (LNG) and diesel
as planned. In 2021, 49.7% of our electricity consumption came from renewable
sources and we are focused on achieving our target of using wind power to
provide 75% of our electricity by 2030.
Looking ahead we remain alert to potential on-going challenges that are
outside our control, not least possible further regulatory reform,
inflationary pressures and of course the threat of new covid variants. Lower
production and recovery rates at Herradura and the continuing workforce
shortages at Saucito caused by the new labour reform - as well as the impact
of recent geotechnical instability in the Saucito area - are also likely to
add to the pressures we may face in 2022. In addition, the extension to the
timeline for the tie-in to the national grid of both the Juanicipio plant and
the Pyrites Plant mean that we now expect lower contributions than previously
anticipated from these operations during 2022.
However, we expect our exploration pipeline to continue making good progress,
particularly at the Rodeo Orysivo and Guanajuato projects. Precious metals
prices also established what looks to be a realistic floor towards the end of
the year and our view is that a period of higher prices is the most likely
outcome. We therefore look forward to 2022 with determination and confidence"
Financial Highlights - 12 months to 31 December 2021
$ million unless stated 2021 2020 % change
Silver Production* (kOz) 53,095 53,050 0.1
Gold Production* (Oz) 751,203 769,618 (2.4)
Total Revenue 2,703.1 2,430.1 11.2
Adjusted Revenue** 2,847.9 2,608.1 9.2
Gross Profit 936.9 879.4 6.5
EBITDA 1,206.3 1,169.1 3.2
Profit Before Income Tax 611.5 551.3 10.9
Profit for the year 438.5 375.6 16.8
Basic and Diluted EPS excluding post-tax Silverstream effects (USD)*** 0.572 0.440 30.0
* 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
2021 and 2020. See note 17 in the consolidated financial statements.
2021 Highlights
Strong financial results, supported by high precious metals prices and a
robust operational performance
· Adjusted revenue increased 9.2% over 2020 primarily due to a higher
silver price.
· Revenue increased 11.2% year-on-year to US$2,703.1 million due to the
higher adjusted revenue combined with lower treatment and refining charges.
· Adjusted production costs increased mainly as a result of a 9.6%
cost inflation combined with the 5.6% average revaluation of the Mexican peso
vs. US dollar.
· Gross profit and EBITDA increased to US$936.9 million and US$1,206.3
million, a 6.5% and 3.2% increase over 2020.
· US$1,235.3 million in cash and other liquid funds(1) as of 31
December 2021 notwithstanding paying dividends of US$245.6 million, investing
US$592.1 million in capex and spending US$130.3 million on exploration
expenses to underpin our future growth.
· Net cash was US$67.5 million as at 31 December 2021. This compares to
the net debt position of US$97.4 million as at 31 December 2020.
· Final dividend of 24.0 US cents per Ordinary Share. This is in
addition to the interim dividend of 9.90 US cents per share amounting to
US$73.0 million. This final dividend is higher than the previous year due to
the higher profit in 2021, and remains in line with the Group's dividend
policy.
Maintaining focus on operational improvement, addressing challenges of Labour
Reform and Covid-19
· To support the wellbeing of our people and their communities, we
continued to engage extensively and play our part as a large employer and
supportive neighbour. We maintained our investment in local healthcare
including contributing testing equipment and vaccines - as well as in the
provision of employment opportunities and education programmes.
· Actions to mitigate the impact of new labour reforms include new
recruitment campaigns, training and investment in new equipment, to date
proving effective. We expect to complete the staffing process in the Fresnillo
District and Ciénega in the 3Q 2022. Our open pit mines, which have
experienced less of an impact, should be fully staffed during the first
quarter of the year.
· Infrastructure projects continued to progress:
o The deepening of the San Carlos shaft at Fresnillo remains on track for
completion in 2022.
o At Saucito, we continued with the project to deepen the Jarillas shaft to
1,000 metres with completion in 2025; this will reduce haulage costs by
providing access to deeper levels of the mine where almost half of the
reserves are located.
Progressing new development projects and investing in long term future
· Juanicipio plant construction was completed towards the end of 2021,
as planned though the tie-in to the national power grid was not granted by
Comisión Federal de Electricidad (CFE), the state-owned electrical company,
before year end as expected. The mill commissioning timeline was therefore
extended by approximately six months to comply with new requirements from
Centro Nacional de Control de Energía. (CENACE), the state regulator.
Juanicipio is set to be an increasingly major influence in our operations
later this year, with annual silver and gold production expected to average
11.7 moz and 43.5 koz respectively over the life of mine.
· New Pyrites Plant at the Fresnillo mine was also completed on time.
Similar grid tie-in delays impacted the start-up of the plant. When fully
operational, we anticipate that it will produce an average of 3.5 moz of
silver and 13 koz of gold per year, including production from Saucito.
· US$30 million plant optimisation project to improve the recovery of
lead and zinc from the lower levels of the Fresnillo mine was commissioned as
planned. The flotation circuit was connected on schedule early in the year and
we are now seeing an improved quality of concentrates, better recovery rates
and greater control of impurities.
· The increased exploration budget for 2021 supported an intensive
programme across all our operations, aiming at increasing the resource base,
converting inferred resources into indicated, and improving the confidence of
the grade distribution in our reserves.
o Silver resources stood at 2.3 boz, a slight increase of 1.2% over 2020
mainly as a result of the exploration efforts at Fresnillo and San Julián
Veins. Gold resources remained stable at 39.0 moz.
o Silver reserves decreased 9.0% to 419.8 moz mainly due to depletion at
Fresnillo, Saucito and San Julián (DOB). Gold reserves decreased by 7.7% to
7.8 moz primarily due to more stringent geotechnical and cost considerations
at Herradura and depletion at Noche Buena.
o Exploration continued in Peru and Chile, where we developed new drill
targets and restructured our organisation and reporting procedures in order to
speed up and streamline our activities.
· Advanced exploration projects at Rodeo and Orisyvo continued to make
good progress. We currently expect to commence production at Rodeo and Orisyvo
towards the end of 2024 and 2025 respectively, subject to Board approval.
Cautious 2022 outlook, confidence in longer term prospects
· Lower production and recovery rates at Herradura and the continuing
workforce shortages at Saucito caused by the new labour reform - as well as
the impact of seismicity in the Saucito area, will impact 2022, as will the
extension to the timeline for the tie-in to the national grid of both the
Juanicipio plant and the Pyrites Plant.
· Given this context, our 2022 attributable silver production remains
in the range of 50.5 to 56.5 moz (including Silverstream) while our
attributable gold production continues to be in the range of 600 to 650 koz.
· Further, Fresnillo remains positive about the outlook for precious
metals prices which will support the financial performance of the business.
· Some uncertainty remains including over inflationary pressures and
potential for new regulatory change in Mexico.
· However, our proven ability to deliver development projects on time
and budget, combined with our extensive medium term pipeline provide basis for
considerable confidence in the long term future.
Analyst Presentation
Fresnillo plc will be hosting a webcast presentation for analysts and
investors today at 9:00am (GMT).
Registration and access will be provided on the homepage of Fresnillo's
website and directly via this link:
https://kvgo.com/IJLO/Fresnillo-FY21-Preliminary-Results
For those unable to access the webcast, a conference line will also be
provided:
UK: +44 (0) 33 0551 0200
US: 1 866 966 5335
MX: 00 1 866 966 8830
Password: Quote "Fresnillo" when prompted by the operator
Questions may be submitted via the conference dial-in.
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)7793 858 211
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 Las Casas Rosario & Cluster Cebollitas),
Herradura, Soledad-Dipolos(1), Noche Buena and San Julián (Veins and
Disseminated Ore Body), two development projects - the Pyrites Plant at
Fresnillo and Juanicipio, both of which have been completed but approvals to
operate are pending, and three advanced exploration projects - Orisyvo, Rodeo
and Guanajuato, 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
Living up to our Purpose, building up our resilience
This last year has again seen our Purpose come to the fore - supporting our
people through the continuing challenge of Covid-19, as well as the new labour
reform, and enabling them to maintain satisfactory levels of production. As we
move into 2022, we are continuing to adjust to the labour reform and invest in
infrastructure that will make Fresnillo a more resilient business.
I am pleased to present my first Annual Report statement as Chairman of
Fresnillo. Having been a member of the Board since 2012, I know that I have
the support of a committed Board and management team executing a proven
long-term strategy. Under my Chairmanship, continuity will be the watchword:
we will remain loyal to our core principles, ensuring we always behave in a
way that is faithful to our Purpose and contributes to the wellbeing of all
stakeholders - including shareholders, our workforce, local communities,
suppliers, government authorities and the environment.
Before turning to our performance for 2021, I would like to pay personal
tribute to my father Alberto Baillères, who sadly passed away on 2 February
2022, having stepped down as Chairman in April 2021. He chaired Fresnillo with
distinction since our listing in London, though his leadership of the Group
extended over half a century. The Board and I believe that the best way to
honour his memory is to preserve and build on his legacy of responsibility,
integrity and respect - these are not only the values of Fresnillo but also
the principles by which my father lived his professional and personal life.
Delivering on our promises
As we anticipated, the pandemic again disrupted our activities in 2021,
although not to the same extent as the previous year. The introduction of new
labour legislation added to the challenges we faced and caused additional
disruption during the year, primarily at our underground mines. This meant
that silver production fell marginally below guidance, while higher production
at Herradura helped us to exceed our guidance for gold production.
We achieved US$2,703.1 million in total revenue and US$2,847.9 million in
adjusted revenue during the year. This represented an increase of 11.2% and
9.2% respectively, primarily due to better prices for silver. Gross profit
rose year-on-year by 6.1% to US$936.9 million, primarily driven by higher
prices. Cash and other liquid funds increased from US$1,070.4 million to
US$1,235.3 million, reflecting the increased cash generated by the mines.
Our approach is to remain steady, constant and focused on the long term
through all the various cycles that may impact our business. Our strategy is
well established, and 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 goal 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 $9.90 US cents per share, with a final
dividend of 24.0 US cents per share, bringing the total for the year to 33.9
US cents per share.
Living up to our Purpose
Once again, our Purpose has been at the heart of how we think and act, and it
has supported our people and their communities through what were at times
difficult and demanding days.
Our Purpose is to contribute to the wellbeing of people through the
sustainable mining of silver and gold.
Thanks in large part to the protocols we introduced in our mines and to the
testing and vaccination programme that we continued to support for our people
and their communities, we have managed to loosen the grip of the pandemic. We
have built on the extensive and unprecedented experience we gained in the
previous year, working with the municipal and federal authorities to enable
our people to continue working through the third and fourth waves of Covid-19,
albeit with some inevitable restrictions.
During my many visits to our operating units, it has been particularly
pleasing to see that our people increasingly engage with our Purpose. They
were of course familiar with the words, but since the onset of the pandemic
they have witnessed the actions behind those words. Our Purpose is not an
empty corporate promise but a way of thinking and acting that guides
everything we do and every decision we take, from stope to Boardroom - with
the health and safety of our people always our overriding priority.
Building up our resilience
Our experience with the pandemic has underlined the need for our business, our
people and our communities to be resilient to many factors that could affect
us. During 2021 we focused on building up our resilience across four key
areas.
For example, we continued to build greater production resilience through the
development of our new mine at Juanicipio, which we expect to produce an
annual average of 11.7 MOZ silver and 43.5 KOZ gold when fully operational.
Following construction of the Juanicipio plant on schedule, we expected to be
granted approval for connection to the national power grid by the end of the
year. Unfortunately, this was delayed and as a result we have extended the
commissioning timeline by approximately six months to comply with new
requirements from the authorities. Future Group production will also be
underpinned by the start-up of the new Pyrites plant at Fresnillo. In
addition, we continued to invest in efficiency improvements at the Fresnillo
mine through a series of infrastructure investments.
Our exploration activities have continued to deliver a more resilient
pipeline, with the increased budget for 2021 supporting extensive brownfield
activities in the Fresnillo and San Julián Districts, as well as good
progress at Guanajuato.
Across the business, the support of our workforce has been vital to our past
successes and future plans. We rely on our people for their skills and
commitment and do everything we can to provide them with rewarding careers.
During 2021, one of our greatest challenges was to continue to benefit from a
trained and supportive workforce in the face of major legislative change.
Mexico's new labour reform law came into effect in September, restricting our
ability to subcontract labour. Our response was to work hard to retain as many
of our contractors' people as possible, bringing them in-house to join our
unionised employees. This was a demanding and somewhat disruptive process, and
I would like to thank everybody involved for their perseverance and patience.
Ultimately, we believe that although the move away from outsourcing may be a
challenge in the short term, in the medium and long term it will lead to a
more cohesive and resilient workforce. The Chief Executive comments further on
labour reform in his statement.
During the year, we also supported greater resilience in the communities where
our people live, by maintaining our commitment to investment in local
healthcare - including providing Covid-19 testing equipment and vaccines -
employment, education programmes, capacity building, training and support for
local entrepreneurs.
Board activities
The Board met regularly through the year and discussed a wide range of
matters, from how the Company was supporting vaccination programmes in remote
communities to the impact of the new labour reforms.
One of our most important tasks is to maintain oversight of Fresnillo's
culture, and we received regular updates on how our Purpose and values
continued to be the beacons that guide our actions. During 2021, we were
pleased to see our teams develop a five-hour online training module to promote
diversity, equality and inclusion. We comply with the ethnic diversity targets
set for FTSE100 Boards and continue to make good progress in developing an
inclusive culture. This includes promoting the participation of women in our
workforce, with the total percentage of women increasing to 11.0% in 2021 from
9.7% in the previous year. Our Board composition during 2021 meant that we
were one of the most gender progressive companies in Mexico according to both
the 50/50 Women on Boards Gender Diversity Index and the Women Corporate
Directors Foundation.
Workforce engagement was again a key agenda item for the Board. Bringing
workers' voices into the Boardroom enables us to incorporate their perspective
into our strategic discussions and decision making. Our Designated
Non-Executive Director (NED) for workforce engagement held two online meetings
with unionised and non-unionised employees during the year, gaining valuable
insight into strategically important topics such as health, safety, Covid-19,
ethical culture, inclusion, and gender equality.
I provide more details of the Board's activities in my introduction to the
Governance Report on, including how we supported our people and local
communities through the pandemic.
Board changes
In April 2021, we announced a number of Board changes that took effect at the
AGM in June, including the stepping-down of my father as Chairman of Fresnillo
and my subsequent appointment as his successor.
The Board was delighted to welcome two new directors at the AGM. Héctor
Rangel joined us as an independent non-executive director - a position he
previously held from April 2008 to January 2009 - and Eduardo Cepeda as a
non-executive director. Both directors have extensive expertise in finance and
the business environment in Mexico and have already brought valuable insights
to the Board.
Héctor is the President of BCP Securities Mexico, a joint venture with BCP
Securities LLC, a US investment bank specialising in emerging markets. Prior
to this role, he was the Chief Executive Officer of Nacional Financiera S.N.C.
and Banco Nacional de Comercio Exterior and a member of Mexico's cabinet under
President Felipe Calderon. He has wide-ranging corporate and investment
banking expertise having held various executive positions with the Grupo
Financiero Bancomer from 1991 until 2008, including a tenure as Chairman of
the Board. Héctor has also been appointed a member of the Audit Committee.
Eduardo was President and Senior Country Officer at JP Morgan based in Mexico
City from 1993 to 2019. He was also Chief Executive Officer of JP Morgan
Wealth Management Latin America from 2009 to 2012. As a key participant in the
growth and development of JP Morgan's business in Mexico and Latin America, he
has led many important investment banking transactions, both in the public and
private sectors.
The Board also approved several recommendations from the Nominations Committee
during the year. These included the appointment of Alberto Tiburcio as
Chairman of the Remuneration Committee, with Charles Jacobs becoming a member
of the Nominations Committee. At the same time, I was honoured to succeed my
father as Chairman of the Nominations Committee, and as a member of the
Remuneration Committee.
Outlook
There is an inevitable degree of caution around expectations for 2022 and
beyond, with operational challenges being potentially worsened by the pandemic
- and the knock-on effect on workforce availability - as well as by the
ongoing impact following the implementation of the new labour law. However,
one thing is certain: we will remain steadfast to our Purpose and will
continue to put the health and safety of our people at the centre of every
decision.
On behalf of the Board, I would like to thank all our people - from those
working in the mines to our executive management team - for their dedication
and expertise during the year. We have increased production, built up our
resilience and equipped Fresnillo with the strength and attributes to continue
delivering long-term value to all our stakeholders. Together, supported by our
culture and guided by our Purpose, we face the future with confidence.
Alejandro Baillères
Chairman
Chief Executive's statement
A creditable performance, a more resilient future
Following the most disrupted and unforeseen year in our history, 2021 was an
altogether calmer and more predictable period for Fresnillo. Guided by our
Purpose, we continued to focus on the wellbeing of people while, at the same
time, achieving a respectable operational performance and continuing to
position the Company to meet the challenges of future years.
Although Covid-19 again casted a shadow over the world, the lessons we learnt
during 2020 were instrumental in helping Fresnillo minimise the pandemic's
impact - keeping our people safe, supporting our efficiency improvement
programmes and, ultimately, enabling us to record a creditable performance.
While we remain vigilant regarding the evolution of the pandemic and its
potential impact on our operations, our teams have adapted well to new
protocols and this helped us deliver silver production marginally short of
guidance, with gold production exceeding expectations.
To support the wellbeing of our people and their communities, we continued to
engage extensively and play our part as a large employer and supportive
neighbour. As a result, we maintained our investment in local healthcare - for
example by contributing testing equipment and vaccines - as well as in the
provision of employment opportunities and education programmes, including an
initiative to ensure that families in remote communities could access
educational content via the internet while schools were closed due to the
pandemic.
Environment, Social and Governance (ESG) matters sit at the heart of our
Purpose, and in 2021 we further strengthened our commitment by expanding our
ESG team. Our first ESG Compliance Manager is now in post - and in the coming
months we expect to appoint an Operations Manager based in the mines to
provide feedback directly to our senior management.
Production highlights and price review
With some restrictions necessitated by the pandemic adding to limited short
term disruption as a result of the new labour reforms discussed below, our
production of silver fell marginally below guidance while production of gold
exceeded forecasts.
Total silver production was 53.1 MOz, in line with the previous year. Higher
ore grades at San Julián DOB and, to a lesser extent, the contribution of
development ore from Juanicipio, were offset by a lower ore grade and volume
at Saucito and Fresnillo.
Gold production was down by 2.4% vs. the previous year, to 751.2 KOz. This was
primarily due to a lower ore grade at Ciénega, and a lower ore grade and
volume of ore processed at San Julián Veins, partly mitigated by a greater
volume of ore processed and a higher ore grade at Noche Buena.
Attributable by-product lead production decreased 10.5% to 56,573 tonnes
primarily due to a decrease in volume of ore processed and lower ore grade at
Saucito and Fresnillo and a lower ore grade at Ciénega, while attributable
by-product zinc production decreased 6.9% due to a lower volume of ore
processed and ore grade at Saucito and, to a lesser extent, lower ore grade
and recovery rate at Ciénega.
Precious metals prices began the year on a high, continuing the trend
established in 2020. However, they fell away to an extent during the second
half as the global economic uncertainty created by the pandemic receded and
investors again sought returns in areas such as equities and crypto
currencies. The average realised silver price was US$24.9 per ounce, an
increase of 16.9% over the previous year, and for gold prices remained
relatively flat at US$1,795.0 per ounce. Average prices for zinc and lead
increased by 31.7% and 21.6% respectively.
Delivering value through a proven strategy
Our strategy has remained unchanged since our earliest days. Tried, tested and
proven to deliver long-term shareholder value, it was again the engine room
for our performance during 2021. The strategy consists of four distinct
pillars:
Maximising the potential of existing operations
Our ability to drive production was impacted to an extent by Mexico's new
labour reform which restricted our ability to subcontract labour. The law came
into effect on September 1(st) 2021, and led to us having to bring a
proportion of our contractor workforce into the company as employees.
Historically, a trained and motivated contractor workforce has been a key
aspect of our way of working and the reform has necessitated significant work.
While we took steps to prepare following the announcement of the reform in
April, subsequent contractor uptake varied. In particular, our underground
mines in the Fresnillo District and at Ciénega were more affected due to a
higher number of contractor personnel working on site, and this led to an
increased number of staff vacancies and greater workforce rotation. This in
turn affected equipment availability and utilisation rates.
We continue to take a series of actions to mitigate the impact of the law,
including new recruitment campaigns, training and investment in new equipment.
These actions are proving effective and we expect to complete the staffing
process in the Fresnillo District and Ciénega in the third quarter of 2022.
Our open pit mines, which have experienced less of an impact, should be fully
staffed during the first quarter of the year. I believe that in the long term
the switch to relying on our own resources instead of those of contractors
will make Fresnillo a more operationally resilient business.
Home to the Fresnillo and Saucito mines as well as our new mine at Juanicipio,
the Fresnillo district is the foundation for the Group's silver production,
due to its extensive reserves and resources. As we mine deeper, our challenge
is to develop more metres across a greater number of veins and to focus on
productivity, cost control and technology investment. We made progress on a
number of infrastructure investments during the year, including a new pumping
station and electricity infrastructure.
The deepening of the San Carlos shaft at Fresnillo remains on track for
completion in 2022. It will provide easier and faster access to 56% of the
mine's reserves, enabling us to significantly reduce haulage costs. At
Saucito, we continued with the project to deepen the Jarillas shaft to 1,000
metres. Again, when completed in 2025, this will reduce haulage costs by
providing access to deeper levels of the mine where almost half of the
reserves are located.
Delivering growth through development projects
Our new mine at Juanicipio was completed towards the end of 2021, as planned.
Unfortunately, approval to complete the tie-in to the national power grid was
not granted by Comisión Federal de Electricidad (CFE), the state-owned
electrical company, before year end as expected. The mill commissioning
timeline was therefore extended by approximately six months to comply with new
requirements from Centro Nacional de Control de Energía. (CENACE), In the
meantime, we are continuing pre-commissioning testing before ramping up
operations once the required permits have been granted.
From 2022 onwards, Juanicipio will be an increasingly major influence in our
operations, with silver and gold production expected to reach annual averages
of 11.7 MOz and 43.5 KOz respectively. During 2021, development ore from
Juanicipio was processed in the Fresnillo processing plant, with 1.8 MOz of
silver and 3.7 KOz of gold produced during the period.
Delays related to energy inspection and certification, together with issues
caused by the pandemic, also affected the start-up of the new Pyrites Plant at
the Fresnillo mine. Although completed late in 2020, connection to the
national power grid was unexpectedly delayed by similar circumstances to those
we experienced at Juanicipio. The result was again an extension of six months
to the commissioning timeline in order to comply with new requirements. Once
the Pyrites Plant is fully operational, we anticipate that it will produce an
average of 3.5 MOz of silver and 13 KOz of gold per year, including production
from Saucito.
The US$30 million plant optimisation project to improve recovery of lead and
zinc from the lower levels at Fresnillo continued as planned. The flotation
circuit was connected on schedule early in the year and we are now seeing an
improved quality of concentrates, better recovery rates and greater control of
impurities. Originally planned for this coming year, the installation of
vibrating screens to improve milling capacity at the plant continues to be an
option. However, we are not yet totally satisfied that doing so will create
the right balance between throughput and recovery, and other courses of action
remain under consideration.
Extending the growth pipeline
The increased exploration budget for 2021 supported an intensive programme
across all our operations, with the aim of increasing the resource base,
converting inferred resources into indicated, and improving the confidence of
the grade distribution in our reserves. In total, our exploration teams
drilled 835,396 metres, around 91% of which was in brownfield sites, notably
in the Fresnillo and San Julián districts. We obtained good results that have
increased both inferred and indicated resources at these sites. The remaining
9% involved activities on greenfield projects in Guanajuato in Mexico and at
the Capricornio and Condoriaco projects in Chile. We also intensified our
geological mapping and geochemical sampling activities in the Fresnillo,
Herradura and San Julián districts, as well as in Guanajuato.
Our advanced exploration projects at Rodeo and Orisyvo continued to make good
progress. We engaged local communities to acquire access to land at Rodeo,
which holds inferred and indicated resources amounting to 13.8 MOz of silver
and 1.3 MOz of gold. Although negotiations have been subject to delay, we
nevertheless expect to finalise them in 2022. At Orisyvo, we carried out
conceptual work - including detailed metallurgy testing which has enabled us
to update the feasibility study - and have prepared a 6,000-metre drilling
programme to confirm the geotechnical model. The key to further progress is
again access to land, and we have started discussions with the owners. We
currently expect to commence production at Orisyvo towards the end of 2025.
Exploration continued in Peru and Chile, where we developed new drill targets
and restructured our organisation and reporting procedures in order to speed
and streamline our activities. We also participated in a number of the new
arrangements for awarding concessions that are currently being pursued by the
Peruvian government.
With inflationary pressures likely to compress our margins and the labour
reform challenges of this year set to continue, we have reduced the
exploration budget for 2022. Nevertheless, I am confident that the skills of
our exploration teams and the outstanding geologies of both our brownfield and
greenfield sites will continue to ensure that we increase or maintain our
reserves and resources.
Silver resources stood at 2.3 Boz, a slight increase of 1.2% over 2020 mainly
as a result of the exploration efforts at Fresnillo and San Julián Veins.
Gold resources remained stable at 39.0 MOz. Silver reserves decreased 8.2% to
419.8 MOz mainly due to depletion at Fresnillo, Saucito and San Julián (DOB).
Gold reserves decreased by 7.1% to 7.8 MOz primarily due to more stringent
geotechnical and cost considerations at Herradura and depletion at Noche
Buena.
Advancing and enhancing the sustainability of our operations
The safety of our people is always our top priority, and we continued to roll
out the 'I Care, We Care' programme across the business. This has helped us
achieve a significant reduction in incidents over recent years, including in
2021 when we saw the Total Recordable frequency rate improve from 13.9
injuries per one million hours worked to 10.4 and the Lost Time Injury rate
from 6.2 to 5.8. However, we were deeply saddened that in August one of our
employees experienced a fatal accident at the Fresnillo mine. We worked with
the relevant authorities to carry out a full independent investigation and are
continuing to provide support to the employee's family and colleagues. We are
committed to following up on this incident and to complying with measures
derived from the Root Cause Analysis (RCA) process in order to avoid similar
accidents in the future. This incident is a timely reminder that no matter how
hard we may work to reduce the likelihood of incidents, safety is a
never-ending challenge that requires diligence and the correct observance of
protocols at all times.
We have continued to build greater resilience into our portfolio of Tailings
Storage Facilities (TSFs) and are committed to implementing sector-specific
standards and best practices that follow the guidelines of the International
Council of Mining and Metals (ICMM), the International Commission on Large
Dams (ICOLD), the Canadian Dam Association (CDA) and the Mining Association of
Canada (MAC). Our Independent Tailings Review Panel provides holistic guidance
and recommendations for the safe design, construction and operation of our
TSFs. We also have Master Services Agreements in place with a number of
consultancies and, through them, have named our Engineers of Record. In
addition, we have implemented satellite monitoring of our units and have
reinforced surveillance and instrumental monitoring of our structures to
enable improved decision-making during construction and operation. We fully
understand community concerns around TSFs and will continue to invest in their
safety in the short, medium and long term.
As the COP26 conference again underlined, climate change is engaging and
energising governments and organisations across the world - and we are
committed to playing our part by mitigating our environmental impact wherever
possible. We will complete our project to install dual fuel engines that run
on both Liquid Natural Gas (LNG) and diesel in 2022 as planned, and during the
last year we invested in infrastructure to ensure we have the appropriate LNG
storage capacity at Herradura. We anticipate seeing the first environmental
and cost benefits next year, as both our diesel consumption and CO(2)
footprint decrease. In addition, we remain committed to achieving our target
of using wind power to provide 75% of our electricity by 2030, assuming that
Mexico's energy policy allows us to do so.
We continue to analyze our Energy Strategy in order to pursue a
decarbonisation pathway that will be operationally and technologically viable.
We are committed to playing our role in mitigating climate change and have
improved our TCFD disclosures year on year. During the year ahead, we aim to
carry out a thorough review of our current operations to gain insights that
will allow us to ramp up our actions from disclosure to action and set
emission reduction targets.
The hard work and commitment of our people towards ESG was again recognised by
a broad group of authorities and our peers. For example, we were proud to be
recognised as one of the World's Most Ethical Companies by Ethisphere, for the
second successive year. We have also been members of the FTSE4Good Index since
2017.
Looking ahead
A degree of uncertainty surrounds the coming 12 months, driven to a
significant extent by issues that are beyond our control. Inflationary
pressures, the impacts of various laws and the attitude of the Government in
Mexico to mining all have the potential to influence our progress. Part of a
broad range of issues that are currently affecting many industries in Mexico,
the exploration, concessions and permitting processes for mining are no longer
as efficient and dynamic as in the past, and these could present difficulties.
Furthermore, there is a latent risk that power self-supply contracts could be
annulled along with the Wholesale Electricity Market (MEM), hampering our
ability to increase the role of renewables in our energy portfolio and
potentially increasing operating costs.
Lower production and recovery rates at Herradura and the continuing workforce
shortages at Saucito caused by the new labour reform - as well as the impact
of recent geotechnical instability in the Saucito area - are also likely to
add to the pressures we may face in 2022. In addition, the extension to the
timeline for the tie-in to the national grid of both the Juanicipio plant and
the Pyrites Plant mean that we now expect lower contributions than previously
anticipated from these operations during 2022.
On the upside, we expect our exploration pipeline to continue making good
progress, particularly at the Rodeo and Orisyvo projects as well as at
Guanajuato and across the Fresnillo district. Precious metals prices also
established what looks to be a realistic floor towards the end of the year.
Although prices in 2022 will as always be influenced by economic conditions in
China, the US and the EU, as well as other variables, our view is that a
period of higher prices is the most likely outcome.
I would like to thank the Board and all our people for their support over the
last 12 months. This has been another challenging period for a variety of
reasons, and Fresnillo would not have been able to deliver such a good set of
results in difficult circumstances without their expertise, cooperation and
willingness to always go the extra mile for our business.
To conclude, on behalf of all my colleagues at Fresnillo, I would like to
offer my sincere condolences following the death of Mr Alberto Baillères. His
leadership, vision and direction were largely responsible for making our
Company the force it is today, and our thoughts are with his family at this
difficult time. He will be greatly missed.
Octavio Alvídrez
Chief Executive Officer
FINANCIAL REVIEW
The consolidated Financial Statements of Fresnillo plc are prepared in
accordance with International Financial Reporting Standards adopted pursuant
to Regulation (EC) No 1606/2002 as it applies in the European Union. 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 2021 figures compared to 2020, unless otherwise noted. The financial
information and year-on-year variations are presented in US dollars, except
where indicated.
The following report presents how we have managed our financial resources.
COMMENTARY ON FINANCIAL PERFORMANCE
In 2021, the Group achieved a satisfactory financial performance which was
supported by higher metals prices, and partly offset by cost inflation, the
adverse effect of the revaluation of the Mexican peso vs. the US dollar and
Company-specific challenges. In particular, Adjusted revenue increased 9.2%
over 2020 primarily due to a higher silver price, while revenue increased
11.2% year-on-year to US$2,703.1 million due to the higher adjusted revenue
combined with lower treatment and refining charges. Adjusted production
costs (2) increased mainly as a result of 9.6% cost inflation combined with
the 5.6% average revaluation of the Mexican peso vs. US dollar. These
increases were amplified by the higher volumes of ore processed at Herradura
and Noche Buena and the increase in waste material moved at Herradura
following the lifting of Covid-19 operational restrictions in 1H20, and by
increased consumption of operating materials, higher maintenance costs and
additional personnel required to comply with the labour reform. Additionally,
costs from processing development ore at Juanicipio further increased adjusted
production costs. As a result, gross profit and EBITDA increased to US$936.9
million and US$1,206.3 million, a 6.5% and 3.2% increase over 2020
respectively.
We maintained our strong financial position, with US$1,235.3 million in cash
and other liquid funds(1) as of 31 December 2021 notwithstanding paying
dividends of US$245.6 million in accordance with our policy, investing
US$592.1 million in capex and spending US$130.3 million on exploration
expenses to underpin our future growth.
INCOME STATEMENT
2021 US$ million 2020 US$ million Amount Change US$ million Change %
Adjusted revenue 1 (#_ftn1) 2,847.9 2,608.1 239.8 9.2
Total revenue 2,703.1 2,430.1 273.0 11.2
Cost of sales (1,766.2) (1,550.7) (215.5) 13.9
Gross profit 936.9 879.4 57.5 6.5
Exploration expenses 130.3 107.3 23.0 21.4
Operating profit 666.7 649.7 17.0 2.6
EBITDA 2 (#_ftn2) 1,206.3 1,169.1 37.2 3.2
Income tax expense including special mining rights 173.1 175.6 (2.5) (1.4)
Profit for the period 438.5 375.6 62.9 16.7
Profit for the period, excluding post-tax Silverstream effects 438.8 325.9 112.9 34.6
Basic and diluted earnings per share (US$/share) (5) 0.572 0.508 0.064 12.6
Basic and diluted earnings per share, excluding post-tax Silverstream effects 0.572 0.440 0.132 30.0
(US$/share)
The Group's financial results are largely determined by the performance of our
operations. However, other factors, such as a number of macroeconomic
variables, lie beyond our control and affect financial results. These include:
METALS PRICES
The average realised silver price increased 16.9% from US$21.3 per ounce in
2020 to US$24.9 per ounce in 2021, while the average realised gold price
remained flat year-on-year at US$1,795.0 per ounce in 2021 (up 0.1%).
Furthermore, the average realised lead and zinc by-product prices increased
21.6% and 31.7% over the previous year, to US$1.00 and US$1.39 per pound,
respectively.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 31 December 2021 was $20.58
per US dollar, compared to the exchange rate at 31 December 2020 of $19.95 per
US dollar. The 3.2% spot devaluation had an adverse effect on taxes and mining
rights as it resulted in an increase in related deferred tax liabilities. It
also affected the net monetary peso asset position, which contributed to the
US$1.9 million foreign exchange loss recognised in the income statement.
The average spot Mexican peso/US dollar exchange rate appreciated by 5.6% from
$21.49 per US dollar in 2020 to $20.28 per US dollar in 2021. As a result,
there was an adverse effect of US$36.0 million on the Group's costs
denominated in Mexican pesos (approximately 45% of total costs) when converted
to US dollars.
COST INFLATION
In 2021, cost inflation was 9.6%. The main components of our cost inflation
basket are listed below:
Labour
Unionised employees received on average a 6.5% increase in wages in Mexican
pesos, while non-unionised employees received on average a 4.0% increase in
wages in Mexican pesos; when converted to US dollars, this resulted in a
weighted average labour inflation of 12.0%.
Energy
Electricity
The weighted average cost of electricity in US dollars increased 12.6% from
US$7.77 cents per kw in 2020 to US$8.74 cents per kw in 2021, 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 21.8% to 87.9 US
cents per litre in 2021, compared to 72.2 US cents per litre in 2020. This was
primarily due to the global economic recovery following the sharp slowdown in
trade in 1H20 due to the Covid-19 pandemic.
Operating materials
Year over year change in unit price %
Steel balls for milling 11.9
Sodium cyanide 9.8
Other reagents 8.0
Lubricants 5.7
Steel for drilling 5.2
Explosives 2.8
Tyres 0.8
Weighted average of all operating materials 6.2
Unit prices of the majority of our key operating materials increased in US
dollar terms. This was primarily driven by higher demand for some of these
products as global mining activity recovered following the adverse impact of
Covid-19, while several mines and projects worldwide also continued to ramp up
production. As a result, the weighted average unit prices of all operating
materials increased year-on-year by 6.2%.
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 2021, increases per unit (i.e. per metre developed
/ per tonne hauled) granted to contractors whose agreements were due for
review during the period, resulted in a weighted average increase of
approximately 9.5% in US dollars, after considering the revaluation of the
Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 4.5% on average in US
dollar terms.
Other costs
Other cost components include freight which increased by an estimated 7.0% in
US dollars, while insurance costs increased by 15.3% in US dollars mainly due
to higher market premiums as a result of Covid-19 claims. The remaining cost
inflation components experienced average deflation of 0.3% in US dollars over
2020.
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)
2021 2020 Amount Change %
US$ million
US$ million
US$ million
Adjusted revenue (( 3 (#_ftn3) )) 2,847.9 2,608.1 239.8 9.2
Metals prices hedging (1.4) 2.4 (3.7) N/A
Treatment and refining charges (143.5) (180.4) 36.9 (20.5)
Total revenue 2,703.1 2,430.1 273.0 11.2
Adjusted revenue increased by US$239.8 million mainly as a result of the
higher silver, lead and zinc prices and increased volumes of silver sold.
Treatment and refining charges decreased 20.5% as explained below. As a
result, total revenue rose to US$2,703.1 million, an 11.2% increase against
2020.
ADJUSTED REVENUE 4 (#_ftn4) BY METAL
2021 2020
US$ million % US$ million % Volume Variance Price Total net %
US$ million
Variance
change
US$ million
US$ million
Gold 1,305.2 45.8 1,327.9 50.9 (24.6) 1.9 (22.7) (1.7)
Silver 1,163.9 40.9 970.5 37.2 27.7 165.8 193.4 19.9
Lead 117.4 4.1 104.9 4.0 (9.3) 21.8 12.5 11.9
Zinc 261.3 9.2 204.7 7.9 (7.3) 63.9 56.6 27.7
Total adjusted revenue 2,847.9 100.0 2,608.1 100.0 (13.6) 253.4 239.8 9.2
The higher silver, zinc and lead prices resulted in a positive effect on
Adjusted revenue of US$253.4 million. This was partially offset by the US$13.6
million adverse effect of the lower volumes of gold, lead and zinc sold,
mitigated by higher silver sales volumes. The lower gold volumes sold were
primarily due to a lower ore grade at Ciénega and Herradura, and a lower ore
grade and volume of ore processed at San Julián Veins, while the higher
silver volumes resulted from the higher ore grade at San Julián DOB and the
contribution of development ore from Juanicipio (for further details, see 2021
Operational Review).
Changes in the contribution by metal were the result of the relative changes
in metals prices and volumes produced. The contribution of gold to total
adjusted revenues decreased from 50.9% in 2020 to 45.8% in 2021, while that
for silver increased from 37.2% in 2020 to 40.9% in 2021.
ADJUSTED REVENUE BY Mine
Herradura continued to be the greatest contributor to Adjusted revenue,
representing 27.1% (2020: 30.0%). Saucito's contribution reduced to 21.0% in
2021 (2020: 22.8%) driven by the lower volumes of silver sold, mitigated by
the higher silver price and increased volumes of gold sold. Fresnillo remained
the third most important contributor to Adjusted revenue, with its share
increasing to 16.1% (2020: 15.6%). San Julián's contribution to the Group's
Adjusted revenue increased to 18.8% in 2021 (2020: 15.6%) primarily due to the
increase in volumes of silver sold as a result of the higher silver ore grade
at the DOB. Ciénega's contribution to the Group's Adjusted revenue decreased
to 8.0% (2020: 9.6%) as a result of the lower gold and silver volumes sold,
mitigated by the higher silver price. Noche Buena's contribution to Adjusted
revenue remained stable at 6.0% in 2021 (5.8% in 2020).
The contribution by metal and by mine to Adjusted revenues is expected to
change further in the future, as new projects are incorporated into the
Group's operations and as precious metals prices fluctuate.
ADJUSTED REVENUE4 BY MINE
2021 2020
(US$ million) % (US$ million) %
Herradura 770.8 27.1 778.9 29.9
Saucito 597.7 21.0 593.6 22.8
Fresnillo 459.5 16.1 407.2 15.6
San Julián (DOB) 344.5 12.1 218.0 8.3
Ciénega 227.8 8.0 248.3 9.6
San Julián (Veins) 192.5 6.7 191.2 7.3
Noche Buena 169.9 6.0 152.6 5.8
Juanicipio 85.2 3.0 18.3 0.7
Total 2,847.9 100 2,608.1 100
VOLUMES OF METAL SOLD
2021 % contribution 2020 % contribution % change
of each mine
of each mine
Silver (koz)
Saucito 11,446 24.4 14,133 31.0 (19.0)
Fresnillo 11,082 23.7 11,664 25.6 (5.0)
San Julián (DOB) 10,813 23.1 7,594 16.7 42.4
Ciénega 4,907 10.5 5,246 11.5 (6.5)
San Julián (Veins) 4,077 8.7 3,907 8.6 4.4
Juanicipio 2,932 6.3 794 1.7 269.3
Herradura 932 2.0 1,300 2.9 (28.3)
Pyrites Plant at Saucito 601 1.3 944 2.1 (36.3)
Noche Buena 14 0.0 25 0.1 (44.0)
Pyrites Plant at Fresnillo 3 0.0 0 0.0 NA
Total silver (koz) 46,807 45,607 2.6
Gold (oz)
Herradura 416,310 57.2 429,093 57.9 (3.0)
Saucito 81,304 11.2 75,096 10.1 8.3
Noche Buena 94,237 13.0 77,494 10.5 21.6
San Julián (Veins) 50,794 7.0 60,672 8.2 (16.3)
Ciénega 45,352 6.2 60,077 8.1 (24.5)
Fresnillo 28,834 4.0 32,637 4.4 (11.7)
Juanicipio 5,908 0.8 0.0 0.0 NA
Pyrites Plant at Saucito 2,260 0.3 3,396 0.5 (33.5)
San Julián (DOB) 2,130 0.3 1,397 0.2 52.5
Pyrites Plant at Fresnillo 8 0.0 0 0.0 NA
Total gold (oz) 727,137 740,891 (1.9)
Lead (t)
Saucito 22,878 43.0 26,093 45.1 (12.3)
Fresnillo 17,353 32.6 19,446 33.6 (10.8)
San Julián (DOB) 8,270 15.5 6,464 11.2 27.9
Ciénega 3,626 6.8 5,634 9.7 (38.9)
Juanicipio 1,067 2.0 0.0 0.0 NA
Total lead (t) 53,194 57,801 (8.0)
Zinc (t)
Saucito 31,911 37.4% 34,654 39.4 (7.9)
Fresnillo 29,532 34.6% 28,256 32.1 4.5
San Julián (DOB) 16,928 19.9% 17,028 19.4 (0.6)
Ciénega 5,393 6.3% 7,832 8.9 (31.1)
Juanicipio 1,511 1.8% 0.0 0.0 NA
Total zinc (t) 85,275 87,996 (3.1)
HEDGING
In 2021 we entered into a hedging programme executed for a total volume of
1,800,000 ounces of silver with monthly settlements throughout 2021 until
February 2022. Similar to last year's transaction, this was structured as a
collar with an average floor price of US$22 per ounce, and an average price
ceiling of US$50.33 per ounce.
Additionally, a portion of our by-product zinc production during 2021 and the
first quarter of 2022 was hedged using a similar financial structure to that
of silver.
The table below illustrates the expired structures, their results and the
outstanding volume as of 31 December 2021.
Concept As of 31 December 2021 As of 31 December 2021
Silver(1) Zinc(2)
Weighted Floor 20.60 usd/oz 2,491 usd/tonne
Weighted Cap 49.79 usd/oz 3,130 usd/tonne
Expired volume 5,748,000 oz 16,960 tonne
Profit/Loss (US$ dollars) 0 (1,351,186)
Total outstanding volume 300,000 oz 5,960 tonne
(1)Monthly settlements until February 2022
(2)Monthly settlements until April 2022
TREATMENT AND REFINING CHARGES
Treatment and refining charges 5 (#_ftn5) are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and zinc
concentrate decreased in dollar terms by 14.6% and 39.6% respectively.
Furthermore, silver refining charges remained flat over the year. The decrease
in treatment charges per tonne of lead and zinc, combined with the lower
volumes of lead and zinc concentrates shipped from our mines to Met-Mex,
resulted in a 20.5% decrease in treatment and refining charges set out in the
income statement in absolute terms when compared to 2020.
COST OF SALES
Concept 2021 2020 Amount Change %
US$ million
US$ million
US$ million
Adjusted production costs (( 6 (#_ftn6) )) 1,255.1 1,079.1 176.0 16.3
Depreciation 528.2 505.4 22.8 4.5
Profit sharing 15.6 18.7 (3.1) 16.6
Hedging (3.8) (4.1) 0.3 (7.7)
Change in work in progress (29.6) (66.4) 36.8 (55.4)
Unproductive costs including inventory reversal and unabsorbed production 0.8 18.0 (17.2) (95.6)
costs(( 7 (#_ftn7) ))
Cost of sales 1,766.2 1,550.7 215.5 13.9
Cost of sales increased 13.9% to US$1,766.2 million in 2021. The US$215.5
million increase is due to a combination of the following factors:
• An increase in Adjusted production costs (+US$176.0 million). This was
primarily due to: i) cost inflation, excluding the Mexican peso vs. US dollar
revaluation effect (US$66.2 million); ii) the adverse effect of the 5.6%
revaluation of the Mexican peso vs. US dollar average exchange rate (US$36.0
million) 8 (#_ftn8) ; iii) a higher volume of material moved at Herradura and
Noche Buena following the lifting of Covid-19 operational restrictions in 1H20
(US$51.8 million); iv) increased development and infrastructure works at our
underground mines, maintenance, personnel, consumption of operating materials
(US$41.2 million); v) costs from the start-up of operations at Juanicipio
(US$14.0 million); and vi) higher stripping ratio at Herradura (US$12.1
million). These adverse effects were mitigated by a decreased volume of ore
processed at our underground mines (-US$43.5 million) and others (-US$1.8
million).
• The variation in the change in work in progress had a negative effect
of US$36.8 million versus 2020. This resulted mainly from the recognition of a
smaller favourable effect from the reassessment of recoverable gold
inventories at the leaching pads in 2021 compared to that recognised in 2020,
together with the increase in the cost per ounce in the last quarter of the
year at Herradura: US$29.6 million in 2021 vs. US$66.4 million in 2020.
• Depreciation (+US$22.8 million). This is mainly due to higher
depreciation at Noche Buena as it approaches the end of its mine life and
increased amortisation of capitalised mining works and increased depletion
factors at Fresnillo and San Julián.
• Profit sharing (-US$3.1 million).
• Mexican peso/US dollar hedging (+US$0.3 million). As part of our
programme to manage our exposure to foreign exchange risk associated with
costs incurred in Mexican pesos, we entered into a combination of put and call
options structured at zero cost (collars) in 2021. These derivatives finally
expired in March 2021 and they generated a positive result of US$3.8 million
during the first quarter of 2021. As of 31 December 2021, there was no further
outstanding position.
These negative effects were mitigated by:
• The variation in unproductive costs, which had a favourable effect of
US$17.2 million. In 2021, US$0.8 million was registered as unproductive costs
related to fixed production cost (labour cost and depreciation) incurred in
Minera San Julián due to a shortfall in electricity; in 2020 US$18.0 million
was registered in relation to costs incurred during the partial stoppages at
Herradura and Noche Buena as a result of the Covid-19 measures imposed by the
state government.
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST (AISC)
Cost per tonne is a key indicator to measure the effects of changes in
production costs and cost control performance at each mine. This indicator is
calculated as total production costs, plus ordinary mining rights, less
depreciation, profit sharing and exchange rate hedging effects, divided by
total tonnage processed. We have included cost per tonne hauled/moved as we
believe it is a useful indicator to thoroughly analyse cost performance for
the open pit mines.
Cost per tonne 2021 2020 % change
Fresnillo US$/tonne milled 84.7 69.9 21.2
Saucito US$/tonne milled 89.8 72.0 24.7
San Julián (Veins) US$/tonne milled 81.5 71.8 13.4
San Julián (DOB) US$/tonne milled 39.2 39.0 0.5
Ciénega US$/tonne milled 86.1 76.7 12.2
Herradura US$/tonne deposited 21.7 18.3 18.6
Herradura US$/tonne hauled 3.5 3.3 6.1
Noche Buena US$/tonne deposited 11.0 10.8 1.9
Noche Buena US$/tonne hauled 3.8 3.3 13.2
Fresnillo: Cost per tonne increased 21.2% to US$84.7 in 2021, with the adverse
effect of the revaluation of the Mexican peso vs. the US dollar together with
cost inflation of 9.83% at this mine accounting for approximately half of the
increase. The remaining increase was primarily driven by: i) additional costs
associated with maintenance to the vertical conveyor; ii) increased use of
explosives, due to the use of electronic initiators to improve the precision
and safety of explosive charges; iii) increase in the consumption of reagents
due to smaller particles of zinc contained in the mineral; and iv) increase in
personnel costs in preparation for the start of operations at the Pyrites
Plant and the new labour reform. Additionally, the lower volume of ore fed to
the mills (-5.2%) also had a negative effect.
Saucito: Cost per tonne increased 24.7% to US$89.8, with the adverse effect of
the revaluation of the Mexican peso vs. the US dollar and cost inflation of
9.85% at this mine accounting for approximately half of the increase. The
remaining increase was primarily driven by: i) electrical maintenance and
repairs to rectify damage to the pumping equipment caused by two floods during
the year, and mechanical corrective maintenance to the flotation plant; ii)
increase in personnel in preparation for the labour reform; iii) increase in
contractors due to higher volume of waste hauled and supportive works such as
anchoring and shotcreting to mitigate risks caused by increased seismicity in
operating areas, and increased development. Additionally the lower volume of
ore fed to the mill (-12.0%) had a negative effect.
San Julián (veins): Cost per tonne increased 13.5% to US$81.5, with the
adverse effect of the revaluation of the Mexican peso vs. the US dollar and
cost inflation of 7.68% at this mine accounting for almost two thirds of the
increase. The remaining increase was driven by higher contractor costs.
San Julián (DOB): Cost per tonne remained stable at US$39.2 per tonne, mainly
due to the adverse effect of the revaluation of the Mexican peso vs. the US
dollar, and cost inflation of 7.68% at this mine, which together represented
approximately 85% of the total adverse effect. Additionally, the 7.1% decrease
in volumes of ore processed further impacted cost per tonne. These adverse
effects were practically offset by the decrease in the use of contractors for
supporting works.
Ciénega: Cost per tonne increased 12.3% to US$86.1, driven by the adverse
effect of the revaluation of the Mexican peso vs. the US dollar and cost
inflation of 7.84% at this mine, which together represented approximately 80%
of the increase. The remaining 20% was primarily the result of higher
contractor costs due to an increase in mine development. Additionally, the
2.7% decrease in volume of ore processed further impacted cost per tonne.
Herradura: Cost per tonne of ore deposited increased 18.6%, with the adverse
effect of the revaluation of the Mexican peso vs. the US dollar and cost
inflation of 10.17% at this mine accounting for approximately half of the
increase. The remaining increase was primarily driven by: i) the increase of
the stripping ratio from 4.5:1 in 2020 to 5.1:1 in 2021; and ii) the adverse
effect of recognising unproductive costs within cost of sales but excluded
from adjusted production costs during the temporary suspension of mining
activities at the beginning of the Covid-19 pandemic in 1H20. This was
mitigated by efficiencies gained through lower consumption of diesel,
explosives and reagents per tonne processed and the 2.6% increase in the
volume of ore processed.
Noche Buena: Cost per tonne increased marginally 1.9% to US$11.0 in 2021, due
to: i) the adverse effect of the revaluation of the Mexican peso vs. the US
dollar, and cost inflation of 9.87% at this mine; ii) increase in the use of
contractors; and iii) the adverse effect of recognising unproductive costs
from the suspension of mining activities at the beginning of the Covid-19
pandemic within cost of sales but excluded from adjusted production costs in
2020. Most of this increase was offset by a lower stripping ratio and
increased volumes of ore processed.
Cash cost per ounce 2021 2020 % change
Fresnillo US$ per silver ounce 5.4 5.9 (8.3)
Saucito US$ per silver ounce (0.8) 0.8 N/A
San Julián (Veins) US$ per silver ounce 1.8 (6.0) N/A
San Julián (DOB) US$ per silver ounce 4.8 7.0 (31.4)
Ciénega US$ per gold ounce (523.1) (276.2) (89.4)
Herradura US$ per gold ounce 900.4 727.9 23.7
Noche Buena US$ per gold ounce 1,029.5 1,158.5 (11.1)
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: Cash cost per silver ounce decreased to US$5.4 (2020: US$5.9)
principally due to higher by-product credits and lower treatment and refining
charges, partly offset by a higher cost per tonne. Margin per ounce increased
26.0% to US$19.4. Expressed as a percentage of the silver price, it increased
to 78.1% (2020: 72.3%).
Saucito: Cash cost per silver ounce decreased to -US$0.9 per ounce (2020:
US$0.8 per silver ounce) mainly as a result of higher gold, lead and zinc
by-product credits per silver ounce. This was partially offset by an increase
in cost per tonne and a lower silver ore grade. Margin per ounce increased to
US$25.8 in 2021 (2020: US$20.5). Expressed as a percentage of the silver
price, it increased from 96.2% to 103.6%.
San Julián (veins): Cash cost per ounce of silver increased mainly due to
lower gold by-product credits and higher cost per tonne; mitigated by a higher
silver ore grade. Margin per ounce decreased to US$23.0 (2020: US$27.3), while
margin expressed as a percentage of the silver price decreased from 128.2% in
2020 to 92.6% in 2021.
San Julián (DOB): Cash cost decreased 31.4% to US$4.8 per ounce of silver
driven by a higher silver ore grade and lower treatment and refining charges,
partially offset by the higher cost per tonne and increased special mining
rights.
Ciénega: The decrease in cash cost per gold ounce from -US$276.2 per ounce in
2020 to -US$523.1 per ounce in 2021 was primarily due to an increase in silver
by-product credits. This was partly offset by a lower gold ore grade and
higher cost per tonne. Margin per ounce increased to US$2,318.1 in 2021 (2020:
US$2,068.6). Expressed as a percentage of the gold price, the margin increased
to 129.1% (2020: 115.4%).
Herradura: Cash cost per gold ounce increased to US$900.4 per ounce of gold
mainly as a result of: i) a lower ore grade; ii) higher cost per tonne. These
adverse effects were mitigated by the favourable effect of the variation of
change in inventories and the lower mining rights. Margin per ounce and margin
expressed as a percentage of the gold price decreased to US$894.6 and 49.8%,
respectively.
Noche Buena: Cash cost per gold ounce decreased by 11.1% to US$1,029.5, mainly
due to a higher gold ore grade and reduced mining rights. Margin per ounce
increased to US$765.4 in 2021 (2020: US$633.9). Expressed as a percentage of
the gold price, it increased from 35.4% to 42.6% in 2021.
In addition to the traditional cash cost, the Group is reporting All-In
Sustaining Cost (AISC) in accordance with the guidelines issued by the World
Gold Council.
This cost metric is calculated as traditional cash cost plus on-site general,
corporate and administrative costs, community costs related to current
operations, capitalised stripping and underground mine development, sustaining
capital expenditures and remediation expenses.
We consider AISC to be a reasonable indicator of a mine's ability to generate
free cash flow when compared with the corresponding metal price. We also
believe it is a means to monitor not only current production costs, but also
sustaining costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
ALL-IN SUSTAINING COST (AISC)
AISC 2021 2020 % change
Fresnillo US$ per silver ounce 16.34 12.92 26.5
Saucito US$ per silver ounce 9.53 6.94 37.3
San Julián (Veins) US$ per silver ounce 14.04 5.04 178.4
San Julián (DOB) US$ per silver ounce 6.34 8.85 (28.3)
Ciénega US$ per gold ounce 656.11 618.32 6.1
Herradura US$ per gold ounce 1,100.20 881.92 24.8
Noche Buena US$ per gold ounce 1,122.21 1,502.92 (25.3)
In addition to the traditional cash cost, the Group is reporting All-In
Sustaining Cost (AISC) in accordance with the guidelines issued by the World
Gold Council.
Fresnillo: All-in sustaining cost increased 26.5% over 2020 to US$16.3,
explained by a higher sustaining capex in absolute terms and per ounce (-5.0%
silver ounces sold).
Saucito: All-in sustaining cost increased to US$9.5 per ounce due to higher
sustaining capex related to higher sustaining capex in absolute terms and per
ounce (-20.1% silver ounces sold), mitigated by lower cash cost.
San Julián (veins): All in sustaining cost increased to US$14.0 per ounce due
to higher sustaining capex and capitalised mine development.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.
San Julián (DOB): The 29.2% decrease in all in sustaining cost was mainly
driven by the lower cash cost.
Ciénega: The US$37.8 per ounce increase in all in sustaining cost was
primarily driven by the higher sustaining capex, mitigated by the lower cash
cost.
Herradura: All-in sustaining cost increased to US$1,100.2 per ounce mainly due
to the higher cash cost and increased capitalised stripping.
Noche Buena: The US$380.7 per ounce decrease to US$1,122.2 per ounce in all-in
sustaining cost was the result of lower capitalised stripping and sustaining
capex.
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, including hedging gains and losses, increased by 6.5% from
US$879.4 million in 2020 to US$936.9 million in 2021.
The US$57.5 million increase in gross profit was mainly due to: i) the
favourable effect of higher average realised silver, lead and zinc prices
(US$253.4 million); ii) the positive effect from processing development ore
from Juanicipio (US$53.5 million); and iii) lower treatment and refining
charges (US$36.9 million); and iv) others (US$23.0 million). These positive
effects were partially offset by: i) cost inflation, including the effect of
the revaluation of the Mexican peso (-US$102.2 million); ii) the smaller
favourable effect from the reassessment of recoverable gold inventories at the
leaching pads in 2021 compared to the one recorded in 2020 (-US$58.0 million);
iii) an increase in cost related to development, infrastructure, maintenance
and increased workforce, mainly at Saucito, and Fresnillo (-US$41.2 million);
iv) the adverse effect of lower volumes processed at the underground mines,
net of the positive impact from the higher volume of ore processed at the open
pit mines (-US$40.9 million); v) higher volume moved at Herradura due to
continuous operations in 2021 vs. the disruption in 2020 due to the Covid-19
pandemic (-US$32.1 million); vi) higher depreciation (-US$22.8 million); and
vii) higher stripping at Herradura (-US$12.1 million).
Herradura remained the largest contributor to the Group's consolidated gross
profit despite recording a decrease in its percentage share from 43.4% in 2020
to 30.7% in 2021. Saucito remained the second largest contributor to
consolidated gross profit, albeit decreasing its participation to 22.7% in
2021 as a result of its relative weighting. The higher silver grade at San
Julián (DOB), together with the higher silver, lead and zinc prices, resulted
in a US$171.5 million gross profit in 2021, increasing its contribution from
8.4% in 2020 to 18.7% in 2021. San Julián replaced Fresnillo as the third
largest contributor to consolidated gross profit despite an increase in
Fresnillo's percentage share from 12.7% in 2020 to 14.7% in 2021. Ciénega's
share of the Group's total gross profit decreased to 4.6% in 2021, while Noche
Buena's contribution continued to decrease as it approaches the end of its
mine life. Notwithstanding, Noche Buena generated an EBITDA and cash flow from
operating activities of US$66.6 million and US$75.2 million, respectively,
recording a US$24.7 million gross profit.
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING HEDGING GAINS AND
LOSSES
2021 2020 Change
US$ million % US$ million % US$ million %
Herradura 281.1 30.6 372.3 43.4 (91.2) (24.5)
Saucito 208.7 22.7 200.2 23.4 8.5 4.2
San Julián 173.1 18.8 71.9 8.4 101.2 140.8
Fresnillo 136.7 14.9 109.1 12.7 27.6 25.3
Juanicipio 53.5 5.8 0.0 0.0 53.5 N/A
Ciénega 42.5 4.6 64.4 7.5 (21.9) (34.0)
Noche Buena 23.5 2.6 39.0 4.6 (15.5) (39.7)
Total for operating mines 919.1 100 856.9 100 62.2 7.3
Metal hedging and other subsidiaries 17.8 22.5 (4.7) (20.9)
Total Fresnillo plc 936.9 879.4 57.5 6.5
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses increased 10.8% from US$93.4 million in
2020 to US$103.5 million in 2021, due to an increase in fees paid to advisors
(legal, labour, tax and technical), the increase in non-recurring corporate
services provided by Servicios Industriales Peñoles S.A.B. de C.V. and the
adverse effect of the revaluation of the Mexican peso vs. the US dollar.
EXPLORATION EXPENSES
Business unit/project (US$ million) Exploration expenses 2021 Exploration Capitalised expenses 2021 Capitalised
expenses 2020
expenses 2020
Ciénega 6.4 5.6 - -
Fresnillo 6.1 6.4 - -
Herradura 6.1 11.5 - -
Saucito 15.0 11.0 - -
Noche Buena 1.0 0.9 - -
San Julián 22.6 16.5 - -
Orisyvo 5.2 3.6 0.1 -
Centauro Deep 0.2 0.1 - 3.3
Guanajuato 8.1 4.3 1.0
Juanicipio 0.0 - 8.1 4.8
Valles (Herradura) 5.1 0.0 -
Others 54.5 47.4 0.6 0.4
Total 130.3 107.3 9.8 8.5
As expected, exploration expenses increased by 21.4% from US$107.3 million in
2020 to US$130.3 million in 2021, in line with our strategy to focus
exploration on specific targets, mainly at the Fresnillo and San Julián
districts. The year-on-year increase of US$23.0 million was due to our
intensified exploration activities aimed at increasing the resource base,
converting resources into reserves and improving the confidence of the grade
distribution in reserves. An additional US$9.8 million was capitalised, mainly
relating to exploration expenses at the Juanicipio project. As a result, risk
capital invested in exploration totalled US$140.1 million in 2021, compared to
US$115.8 million in 2020(of which US$8.5 million was capitalised) This
represents a year-on-year increase of 21.0%.
EBITDA
2021 2020 Amount Change %
US$ million
US$ million
US$ million
Profit from continuing operations before income tax 611.5 551.3 60.2 10.9
- Finance income (8.9) (12.2) 3.3 (27.0)
+ Finance costs 61.8 141.3 (79.5) (56.3)
- Revaluation effects of Silverstream contract 0.4 (71.0) 71.4 N/A
- Foreign exchange loss, net 1.9 40.3 (38.4) (95.3)
- Other operating income (11.9) (10.0) (1.9) 19.0
+ Other operating expense 23.3 14.8 8.5 57.4
+ Depreciation 528.2 505.4 22.8 4.5
+ Depreciation included in unproductive costs - 9.2
EBITDA 1,206.3 1,169.1 37.2 3.2
EBITDA margin 44.6 48.1
EBITDA is a gauge of the Group's financial performance and a key indicator to
measure debt capacity. It is calculated as profit for the year from continuing
operations before income tax, less finance income, plus finance costs, less
foreign exchange gain / (loss), less the net Silverstream effects and other
operating income plus other operating expenses and depreciation. In 2021,
EBITDA increased 3.2% to US$1,206.3 million primarily driven by the higher
gross profit, partly offset by higher exploration and administrative expenses.
As a result, EBITDA margin expressed as a percentage of revenue decreased,
from 48.1% in 2020 to 44.6% in 2021.
OTHER OPERATING INCOME AND EXPENSE
In 2021, a net loss of US$11.3 million was recognised in the income statement
mainly as a result of maintenance costs of closed mines and remediation works
at both a tailings facility at Fresnillo and at Saucito, following the
presence of high temperature water in an underground production area.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative financial
instrument carried at fair value. The net Silverstream effect recorded in the
2021 income statement was a small loss of US$0.4 million (US$43.0 million
amortisation profit and US$43.4 million revaluation loss), which compared
negatively to the net gain of US$71.0 million registered in 2020. The negative
revaluation was mainly driven by the decrease in the forward silver price
curve, increase in the LIBOR reference rate; and a decrease in the production
plan following an update to the Sabinas silver resource; partially mitigated
by higher inflation expectations and amortisation effects.
Since the IPO, cumulative cash received has been US$736.3 million vs. US$350
million initially paid in 2007. The Group expects that further unrealised
gains or losses related to the valuation of the Silverstream 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 in notes
13 and 29 to the consolidated financial statements.
NET FINANCE COSTS
Net finance costs of US$52.9 million compared favourably to the US$129.1
million recorded in 2020. The US$76.2 million decrease was primarily due to
payments made in 2020, which did not apply in 2021, in relation to: i) the
US$60.8 million premium paid on early redemption of 60.2% of the existing
US$800 million principal senior notes due 2023; and ii) US$24.9 million in
interest and surcharges, which resulted from the 2020 tax amendment agreed
with the Mexican Tax Administration Service.
The 2021 net finance costs mainly reflected: i) interest paid on the
outstanding US$317.9 million from the US$800 million of 5.500% Senior Notes
due 2023, and ii) interest paid on the US$850 million principal amount of
4.250% Senior Notes due 2050. Detailed information is provided in note 9 to
the consolidated financial statements. A portion of the interest from the
Senior Notes is capitalised, hence not included in finance costs. During the
year ended 31 December 2021, the Group capitalised US$8.4 million of borrowing
costs (2020: US$8.8 million).
FOREIGN EXCHANGE
A foreign exchange loss of US$1.9 million was recorded as a result of the 3.2%
devaluation of the Mexican peso against the US dollar over the period. This
compared favourably to the US$40.3 million loss in 2020.
The Group also enters into certain exchange rate derivative instruments as
part of a programme to manage its exposure to foreign exchange risk associated
with the purchase of equipment denominated in Euro (EUR) and Swedish krona
(SEK). As of 31 December 2021, the total EUR and SEK outstanding net forward
position was EUR 25.7 million and SEK 5.1 million with maturity dates through
September 2022. Volumes that expired during 2021 were EUR 16.3 million with a
weighted average strike of 1.2012 USD/EUR and SEK 25.36 million with a
weighted average strike of 8.5703 SEK/USD, which have generated a marginal
loss in the period of -US$0.7 million.
TAXATION
Income tax expense for the period was US$156.5 million, which was similar to
that of US$140.6 million in 2020. The effective tax rate, excluding the
special mining rights, was 25.6%, which was below the 30% statutory tax rate.
The reason for the lower effective tax rate was the significant permanent
differences between the tax and the accounting treatment related mainly to: i)
the inflation rate which impacted the inflationary uplift of the tax base for
assets and liabilities (-US$49.4 million); ii) the border zone tax benefit
which benefited the Herradura and Noche Buena operations (-US$10.1 million);
and iii) special mining right taxable for corporate income tax (-US$5.0
million). These factors were partially offset by: i) the devaluation of the
Mexican peso which had an important impact on the tax value of assets and
liabilities (US$32.1 million); and ii) deferred tax assets not recognised
(US$6.5 million).
The effective tax rate in 2020 was 25.5% mainly due to: i) the border zone tax
benefit which benefited the Herradura and Noche Buena operations (-US$35.8
million); ii) the inflation rate which impacted the inflationary uplift of the
tax base for assets and liabilities (-US$23.0 million); iii)
taxable/deductible foreign exchange effects for Mexican tax purposes (-US$16.9
million); and iv) special mining right taxable for corporate income tax
(-US$10.5 million). These factors were partially offset by: i) the devaluation
of the Mexican peso which had an important impact on the tax value of assets
and liabilities (US$55.1 million); and ii) deferred tax assets not recognised
(US$4.9 million).
Mining rights in 2021 were US$16.6 million compared to US$35.0 million charged
in 2020.
PROFIT FOR THE PERIOD
Profit for the period increased from US$375.6 million in 2020 to US$438.5
million in 2021, a 16.8% increase year-on-year as a result of the factors
described above.
Excluding the effects of the Silverstream contract, profit for the year
increased from US$325.9 million to US$438.8 million, a 34.6% increase.
CASH FLOW
A summary of the key items from the cash flow statement is set out below:
2021 2020 Amount Change %
US$ million
US$ million
US$ million
Cash generated by operations before changes in working capital 1,208.3 1,168.7 39.5 3.4
Decrease/(increase) in working capital 58.0 (129.8) 187.8 N/A
Taxes and employee profit sharing paid (371.1) (121.3) (249.9) 206.0
Net cash from operating activities 895.1 917.7 (22.5) (2.5)
Proceeds from the layback agreement 25.0 0.0 25.0 100.0
Silverstream contract 49.0 33.7 15.3 45.3
Debt Restructuring 0.0 350.0 (350.0) N/A
Purchase of property, plant and equipment (592.1) (412.3) (179.7) 43.6
Dividends paid to shareholders of the Company (245.6) (104.7) (140.9) 134.6
Transaction costs senior notes 0.0 (64.7) 64.7 N/A
Financial expenses and foreign exchange effects (39.9) (44.1) 4.3 (9.7)
Net increase in cash during the period after foreign exchange differences 164.9 733.8 (569.0) (77.5)
Cash and other liquid funds at 31 December 9 (#_ftn9) 1,235.3 1,070.4 164.9 15.4
Cash generated by operations before changes in working capital increased by
3.4% to US$1,208.3 million, mainly as a result of the higher profits generated
in the year. Working capital decreased US$58.0 million, mainly due to: i) a
US$85.6 million decrease in accounts receivable due to: a) decrease in trade
receivables from related parties (US$61.8 million); b) VAT recovered (US$30.0
million); c) MXP/USD exchange rate effect (-US$7.9 million); and others d)
US$1.7 million); and ii) a US$19.2 million increase in accounts payable. This
was partly offset by: i) an increase in ore inventories of US$44.6 million;
and ii) a US$2.2 million increase in prepayments.
Taxes and employee profit sharing paid increased 206.0% over 2020 to US$371.1
million mainly due to: i) an increase in provisional tax payments resulting
from the higher profit factor determined to calculate the estimated taxable
income; ii) higher final income tax paid in March 2021, net of provisional
taxes paid (corresponding to the 2020 tax fiscal year); iii) an increase in
mining rights; and iv) higher profit sharing paid.
As a result of the above factors, net cash from operating activities decreased
2.5% from US$917.7 million in 2020 to US$895.1 million in 2021.
The Group received other sources of cash, including: i) capital contribution
and note payable by minority shareholders in subsidiaries of US$73.6 million;
and ii) the proceeds of the Silverstream contract of US$49.0 million.
Furthermore, in December 2020, the Group entered into multiple contracts with
Orla Mining Ltd., granting Orla the right to expand the Camino Rojo oxide pit
onto Fresnillo's mineral concession. The effectiveness of the agreement was
subject to the approval of the Mexican Federal Competition Commission
(COFECE), which was granted in February 2021, at which time, a payment of
US$25.0 million was made to Fresnillo plc (See note 2 to the consolidated
financial statements).
Main uses of funds were:
i) the purchase of property, plant and equipment for a total of US$592.1
million, a 43.6% increase over 2020. Capital expenditures for 2021 are
described below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
2021
US$ million
Fresnillo mine 108.3 Mine development and mining works, purchase of in-mine equipment, deepening of
the San Carlos shaft and tailings dam.
Saucito mine 101.2 Mine development, purchase of in-mine equipment, deepening of the Jarillas
shaft and tailings dam.
Herradura mine 54.4 Stripping, construction of leaching pad, sustaining capex and purchase of
equipment for dynamic leaching plants.
Ciénega mine 45.4 Mining works, purchase of in-mine equipment and construction of tailings dam.
San Julián Veins and DOB 40.9 Mining works and purchase of in-mine equipment.
Noche Buena mine 0.4 Sustaining capex
Juanicipio project 214.3 Mine development and construction of beneficiation plant
Other 27.2 Minera Bermejal.
Total purchase of property, plant and equipment 592.1
ii) Dividends paid to shareholders of the Group in 2021 totalled US$245.6
million, a 134.6% increase over 2020, in line with our dividend policy which
includes a consideration of profits generated in the year. The 2021 payment
included the 2020 final dividend of 23.5 cents per share paid in June 2021,
totalling US$172.6 million, and the 2021 interim dividend paid in September of
US$73.0 million.
iii) Financial expenses and foreign exchange effects of US$39.9 million
decreased US$4.3 million vs. 2020. Financial expenses in 2021 included: i)
interest paid on the outstanding US$317.9 million from the US$800 million
5.500% Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes
due 2050. In 2020, financial expenses reflected the interest paid in relation
to the US$800 million Senior Notes due 2023 before the tender offer in October
2020, ii) the interest paid on the remaining US$317.9 million of outstanding
debt following the tender offer.
The sources and uses of funds described above resulted in an increase in net
cash of US$164.9 million (net increase in cash and other liquid assets), which
combined with the US$1,070.4 million balance at the beginning of the year
resulted in cash and other liquid assets of US$1,235.3 million at the end of
December 2021.
BALANCE SHEET
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds(( 10 (#_ftn10) )) of US$1,235.3
million as of 31 December 2021, increasing 15.4% versus 31 December 2020.
Taking into account the cash and other liquid funds of US$1,235.3 million and
the US$1,167.8 million outstanding Senior Notes, Fresnillo plc's net cash was
US$67.5 million as of 31 December 2021. This compares to the net debt position
of US$97.4 million as of 31 December 2020. Considering these variations, the
balance sheet at 31 December 2021 remains strong, with a net debt / EBITDA
ratio of -0.06x(( 11 (#_ftn11) ))
Inventories increased 10.1% to US$487.8 million mainly due to the increase of
the inventories of gold content in ore on leaching pads valued at cost.
Trade and other receivables decreased 15.0% to US$436.1 million as a result of
reduced receivables to Met-Mex and a decrease in value added tax receivables.
The change in the value of the Silverstream derivative from US$576.1 million
at the end of 2020 to US$529.5 million as of 31 December 2021 reflects
proceeds of US$46.2 million corresponding to 2021 (US$49.0 million in cash and
-US$2.8 million in accounts receivables) and the Silverstream effect in the
income statement of -US$0.4 million.
The net book value of property, plant and equipment was US$2,799.1 million at
31 December 2021, representing a 3.4% increase over 31 December 2020. The
US$90.9 million increase was mainly due to construction of leaching pads,
capitalised development works and the purchase of in-mine equipment.
The Group's total equity was US$3,802.7 million as of 31 December 2021, a 5.2%
increase over 31 December 2020. This was mainly explained by the increase in
retained earnings, reflecting the 2021 profit.
DIVIDENDS
Based on the Group's 2021 performance, the Directors have recommended a final
dividend of 24.0 US cents per Ordinary Share, which will be paid on 27 May
2022 to shareholders on the register on 29 April 2022. 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 9.90 US cents per share
amounting to US$73.0 million. This final dividend is higher than the previous
year due to the higher profit in 2021, and remains in line with the Group's
dividend policy.
As previously disclosed, 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 applied. Dividend payments relating to 2021 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
· We operate in a complex global environment, where opportunities
come with corresponding risks. Taking and managing risk responsibly is
essential to running our business safely, effectively and in a way that
creates value for all our stakeholders. Risk management is one of our
management team's core responsibilities and is central to our decision-making
process.
Our approach
Effective risk management enables us to manage both the threats and the
opportunities associated with our strategy and operations. Our risk management
process helps us identify, evaluate, plan, communicate, and manage material
risks that have the potential to impact our business objectives. While risk
management is a key accountability and performance criterion for our leaders,
all employees have responsibility for identifying and managing risks. Our risk
management framework reflects the importance of risk awareness across
Fresnillo plc. It enables us to identify, assess, prioritise and manage risks
in order to deliver the value creation objectives defined in our business
model.
Our Board oversees our principal risks and associated management responses,
while the Audit Committee monitors the effectiveness of risk management and
internal controls. Our risk management system comprises six core elements -
one of which is our risk management framework, which sets out clear roles and
responsibilities, standards and procedures. We also have three lines of
defence to verify that risks are being effectively managed in line with our
policy, standards and procedures, including across core business processes
such as finance, health and safety, social performance, environment and major
hazards.
The COVID-19 pandemic is an unprecedented challenge for everybody, worldwide.
We have implemented risk techniques and processes to identify new risks
associated with the pandemic, while also analysing its impact on all our
risks. The changes to working practices that we have introduced in response to
COVID-19 have created opportunities to accelerate digital transformation and
enhance safety and productivity.
· Every aspect of our risk management framework exists to challenge
and evaluate the status of our risk profile in the pursuit of our business
objectives. We challenge this status through three lines of defence that
support leaders in critically reviewing and validating their own operating
assumptions.
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 and projects managers, the controllership group, HSECR
and exploration managers - regularly engage in strengthening the effectiveness
of our current controls. These actions support the executives and the Board in
each of their responsibilities.
The Company's risk profile has been developed based on the most significant
risks in our business profiles. All of our principal risks were reviewed at
least twice during the year, including through Key Risk Indicators (KRIs),
which were developed to help embed the risk appetite framework in the business
and enhance the monitoring and mitigation of risks.
The global COVID-19 pandemic posed new challenges for the Risk Department and
the Executive Committee in 2020 and 2021. Due to the uncertainty around the
pandemic, all strategic decisions of the Company were analysed using risk
scenarios modelling their potential impacts. In addition five new processes
were implemented: (I) a monthly procedure for evaluating and mitigating
principal risks; (II) a process to identify and analyse the impact of the
pandemic in all the Company's risks including projects, with a main focus on
the health and safety of employees and identification of new risks; (III)
dashboards were constructed for each business unit to monitor mitigation
actions and risk level; (IV) impact and probability scenarios were conducted
for risks related to the supply chain of critical inputs for operations, cost
increase and projects, and (V) collaboration with government, the sector,
health experts and communities to ensure that we followed best practice.
Three lines of defence Responsibilities Accountability to
1(st). - Unit leaders including mine, exploration and project personnel. Also, Identifying, managing, verifying and monitoring risks and controls. Management
leaders of corporate and support areas.
2(nd). - Corporate level oversight functions include the risk management team, Overseeing risks and the effectiveness of controls, advising on capability and Management
the HSECR team, the project oversight function and the Executive Committee. ensuring compliance with our policies, standards and procedures.
3(rd). - Group Internal Audit. Providing independent verification that risks are being managed and internal Board and committees
controls are being operated effectively
EMERGING RISKS
The 2018 UK Corporate Governance Code covers emerging risks and requires 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.
This requirement has been adopted and embedded within the Company's risk
management reporting process and, in parallel with the day-to-day management
of risk, within each business unit and project. The risk control and
assessment processes in mines, exploration offices and projects were adapted
to pay particular attention to emerging risks. At each location, Health,
Safety, Security, Environment and Community Relations (HSECR) risk-responsible
staff monitor local information and analyses related to Fresnillo plc's
emerging risks. This monitoring process involves building scenarios for three,
five and ten years for each emerging risk and quarterly performance indicators
that assess probability and impact.
Fresnillo plc defines an emerging risk as a new manifestation of risk that
cannot yet be fully assessed, a risk that is known to some degree but is not
likely to materialise or have an impact for several years or a risk that the
company is not aware of but that could, due to emerging macro trends in the
mid or long-term future, have significant implications for the achievement of
the organisation's strategic plan. Furthermore, Fresnillo plc considers
emerging risks in the context of longer-term impact and shorter-term risk
velocity. The Company has therefore defined emerging risks as those risks
captured on a risk register that: (I) are likely to be of significant scale
beyond a five-year timeframe; or (II) have the velocity to significantly
increase in severity within the three-year period.
To strengthen our emerging risks management framework, during 2021 we carried
out activities to: (I) identify new emerging risks in light of COVID-19 and
climate change; II) re-assess the emerging risks identified in 2020; (III)
deploy effective monitoring mechanisms; (IV) carry out horizon scanning to
consider disruptive scenarios, and; (V) 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.
Our risk management standards promote communication of up-to-date information
on the Company and industry risks, trends and emerging risks. This year's
emerging risk assessment determined the two most exposed emerging risks to be:
"Water Crisis" and "Technological Disruption" and identified two new emerging
risks: "Transition to a low-carbon future" and "Increasing societal and
investor expectations".
Relevant emerging risks are discussed below:
Emerging Risk Description Impact Mitigations Actions Time Scale
1 Water crisis. Lack of sufficient water resources to meet water consumption demands in a Water is critical to mining processes. Without this natural resource, we Strict control and monitoring of water concessions is maintained and actions > 5
region. cannot extract gold and silver. are envisaged to ensure water for the following years.
(Linked to Climate Change Principal Risk) Years
2 Technological disruption. Failure to identify, invest in, or adopt technological and operational Obsolete or outdated mining processes impact productivity and efficiency Technological advances in the mining industry are constantly monitored > 5
productivity innovations that significantly replace or optimise a process levels and impact sales and profits. (particularly in mine operations) in order to adopt the most appropriate best
through new systems with recognisably superior attributes. practices and new technology. Years
3 Risk of narco states. Countries whose government institutions are significantly influenced by the The safety of employees, contractors and communities near mines is threatened We maintain constant communication with government authorities and the < 5
power and wealth of drug trafficking, and whose leaders simultaneously hold by the presence of drug cartels that increase high-impact crimes. National Guard to coordinate security and citizenship protection operations.
(Linked to Security Principal Risk) positions as government officials and members of the illegal narcotic drug Years
trafficking networks, protected by their legal powers.
4 Infectious diseases. The regional or global spread of a new disease (bacteria or virus) against Another virus such as SARS-CoV-2 coronavirus (COVID-19) may affect the health Much was learned from the COVID-19 pandemic about providing care for < 5
which most people do not have immunity. of employees and stop the Company's activities. employees' health and health prevention measures. We have embedded those
learnings in our business as usual activities. Years
5 Transition to a low-carbon future. The transition to a low-carbon future is a "transition risk" according to the Key areas of uncertainty include future climate change regulation and We have introduced new sources of information to help us identify the impacts > 5
TCFD and presents challenges and opportunities for our portfolio in the short policies, the development of low-carbon technology solutions and the pace of of climate change. These include industry reports and guides, energy
(Linked to Climate Change Principal Risk) and long term. It is considered within the climate change principal risk transition across our value chains, in particular the decarbonisation pathways scenarios, and Global Circulation Models (GCM) under several Representative Years
mitigation strategy. However, we consider this risk to be an emerging risk due across the steel sector. Concentration Pathways (RCP). We have used a well-below two-degree
to the speed of potential new climate change regulations and the obstacles decarbonisation pathway to evaluate the flexibility of the energy strategy.
that government may place in the way of supporting investment in clean energy.
6 Increasing societal and investor expectations. We continued to see increasing expectations and focus on social equality, The increasing focus on ESG has the potential to shape the future of the We respond to investor and societal requests and comments and promote action < 5
fairness and sustainability. Financial institutions are also placing greater mining industry, supply cost structures, demand for global commodities and plans to meet their expectations.
emphasis on environmental, social and governance (ESG) considerations when capital markets. While this presents us with opportunities for portfolio and
Years
making investment decisions. product differentiation, it has the potential to impact how we operate. A number of initiatives demonstrate our progress. For example, our ESG
performance was recognised by our inclusion in the FTSE4Good Index. We were
also listed among the world's most ethical companies by Ethisphere and placed
second in the Corporate Integrity Ranking in Mexico.
2021 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 (120) as a whole. The results of this
exercise were used as an additional input to define the Company´s principal
risks. We conducted the same risk analysis on advanced projects, detailing the
specific risks faced by each project according to their unique characteristics
and conditions.
The risk department narrowed down our 120 risks into major risks which are
monitored by executive management and the Audit Committee. We then further
consolidated these into 13 principal risks which are closely monitored by the
Board of Directors.
Due to the effects caused by the global COVID-19 pandemic, it was necessary to
re-evaluate the Principal and Emerging Risks and to rethink the order of their
relative importance, probability and impact and re-assess the corresponding
mitigation actions. As a result of this analysis, we recognised the effects of
COVID-19 on Fresnillo's 13 Principal Risks rather than incorporate a new risk.
During the first half of 2021, the risk team focused its efforts on
identifying and assessing emerging risks, business continuity risks and
climate change risks according to the TCFD criteria. In the second half of the
year, we conducted fraud, compliance and internal control risk assessments.
Overview of the 2021 risk assessment exercise:
Analysis Survey Trend comparison and review Added value
Risk identified and assessed
20 business workshops 350 colleagues in operations, exploration, projects, corporate and support 15 International Institutions specialising in risks were consulted. 200 colleagues were trained in basic risk topics.
areas of Peñoles, including Internal Audit.
(Director and manager level)
10 risks scenarios were built by mining industry risk specialists. 150 colleagues were trained in advanced risk topics.
30 interviews with risk owners
(managers and leaders at units) 20 gold and silver mines (10 in Mexico and 10 in the world) were consulted 100 colleagues were trained in climate change risks and TCFD framework.
regarding their risks.
10 workshops SSMARC team.
3 new processes of identifying risks were included in response to the COVID-19
6 consulting firms' risk reports (including Marsh, EY, PWC, KPMG and Deloitte) pandemic.
were reviewed.
5 critical processes mapped and reviewed for impact and likelihood.
3 new topics were included in the risk analysis: climate change, fraud and
3 risk experts were interviewed. compliance risks.
5 risk analysis methodologies used: ISO-31000, ISO-22301, Markov, Bow-Tie
& FMEA Model.
As a result of the 2021 annual risk assessment, the most exposed risks were
determined to be:
· The risk of "Potential actions by the government", is assessed as
the main risk for the Company, exacerbated by recent decisions of the current
government, such as: (a) the restriction on the granting of new mining
concessions; (b) the increase in audits and tax requirements; (c) the labour
reform that prohibits outsourcing, leading to complications in the
relationship with contractors; (d) delays and complications in obtaining
permits, licences and authorisations; (e) the implementation of policies that
support the emission of carbon into the atmosphere and reduce the development
of renewable energies; (f) energy law reform that would reduce electricity
supply options for end-users and allocate valuable resources to maintain
obsolete and costly generation technologies, with significant environmental
and social impacts; and (g) the United States-Mexico-Canada Agreement (USMCA
or TMEC) with its new labour provisions.
· The "Security" risk, arising from the accelerated increase in
organised crime in the vicinity of the mining units, particularly in Fresnillo
(with the highest perception of insecurity in the country), Saucito,
Juanicipio and Penmont; the increase in high-impact crimes (homicide,
kidnapping and extortion) in the regions where we operate, especially in
Zacatecas, Guanajuato and Sonora; and the sale and consumption of drugs inside
the mines. Threats of theft of dore, minerals, concentrates and assets from
mines and projects have also increased.
· While gold and silver prices have remained strong despite the
effects of the COVID-19 pandemic, the economic crisis in the world, and
especially in Mexico, is a high risk that has a negative impact on the supply
chain of critical operating inputs, operating costs and contractor
availability. For this reason, the risk of "Impact of metal prices and global
macroeconomic developments" remains within the main risks.
· The risk of "Access to land" has increased in recent years as it
has become increasingly difficult to negotiate the price of land. Landowners
demand more money and benefits for access to land. At the same time, the
Federal Government continues its policy of not granting new mining concessions
and may decide to withdraw mining concessions that are not used or operated.
In addition, the prevailing insecurity in the regions where our mining
interests are located may not allow the necessary work to be carried out to
demonstrate the minimum investments required by law, which could lead to the
cancellation of the concession.
· The risk "Licence to operate" is one of the main risks that have
increased in probability of occurrence and impact, as communities near mines
and projects increasingly demand more benefits. The environmental impact of
mines is an issue of concern to communities near our operations and they are
increasingly demanding more information and mitigating actions. Activism by
mining advocacy groups and other organisations increases the risk of social
conflict, fuelling public perception against mining. Finally, insecurity and
access to water are the issues that most concern people and community leaders
in the regions where we operate.
OUR PRINCIPAL RISKS AND INTERDEPENDENCIES
We continue to consider risks both individually and collectively in order to
fully understand our risk landscape. By analysing the correlation between
Principal and Emerging Risks, we can identify those that have the potential to
cause, impact, or increase another risk and ensure that these are weighted
appropriately.
In performing this exercise, we have considered COVID-19 which could lead to a
long-term global recession and other operating constraints that may have a
knock-on effect on several of our principal risks.
Our analysis highlights the strong relationship between Security and Risk of
Narco State, Climate Change and Water Crisis as well as Cyber security and
Technological disruption.
1
POTENTIAL ACTIONS BY THE GOVERNMENT (political, legal and regulatory)
RISK DESCRIPTION
Regulatory actions can have an adverse impact on the Company. This could We paid special attention to the following aspects:
include stricter environmental regulations, forms of procurement or
explosives, more challenging permit processes, more onerous tax compliance · Government actions that negatively impact the mining industry.
obligations for us and our contractors, as well as more frequent reviews by
tax authorities. · Regulatory changes to mining rights and adverse fiscal changes.
The right of indigenous communities to be consulted regarding mining · Change in tax regulations.
concessions could potentially affect the granting of new concessions in
Mexico. · Increase in the frequency of the reviews by the tax authorities
with special focus on the mining industry.
The Federal Government wants to discourage the generation of energy based on
clean sources and encourage that from fuel oil and coal. · Inability to obtain necessary water concessions because of
government control or private interests.
· Failures/delays in obtaining the required environmental permits.
FACTORS CONTRIBUTING TO RISK
· The Federal Government reported that the delivery of concessions · The Federal Government promotes investment in coal rather than
to mining companies would be reviewed and that no more concessions would be renewable or clean energy. This has led to increased difficulty in operating
granted during this six-year term (ending in 2024). on clean energy.
· Labour Reform prohibiting outsourcing, mainly leading to · The Federal Government implementation of policies that support
complications in the relationship with contractors. the use of coal will lead to more greenhouse gases being released into the
atmosphere and reduce the development of renewable energies.
· New taxes and discrepancies in the criteria used in audits
carried out by the tax authority. · The Federal Government recently purchased a refinery to produce
gasoline and diesel in Houston, USA. This acquisition reinforces the strategy
· Increase in the frequency of the reviews by the tax authorities of encouraging the consumption of fossil fuels derived from coal and fails to
with special focus on the mining industry. promote the use of clean or green energies.
· Potential adverse actions resulting from a change in government · The Federal Government is promoting a reform of the Energy Law to
in the states of Zacatecas, Sonora and Chihuahua. limit access to private investment and strengthen the government-owned Federal
Electricity Commission (Comisión Federal de Electricidad). If this reform is
· The United States-Mexico-Canada Agreement (USMCA or TMEC) with approved, there is a risk that there will not be enough electricity to operate
its new labour provisions. the mines.
· Given that the population does not systematically follow COVID-19 · A Federal Government initiative aims to discontinue the Mining
prevention measures; that health authorities may not effectively implement the Fund (Financial support that the government provides to communities near the
COVID-19 vaccination programme; that there are people who do not want to be mine for social development). This would have an impact on mining development
vaccinated; that there are new variants of the virus such as Delta and in the country.
Omicron, we could experience a reduction in the number of people available to
work in the mines, which would materially affect our productivity. · In addition, Mexico's corruption perception remains high. The
country's score in the International Transparency 2021 Corruption Perception
Index was relatively unchanged, despite a higher ranking. As a result, delay
in obtaining permits for certain operations and/or projects remains a risk.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
· Commitment and constant communication with all levels of · We are committed to maintaining community dialogue throughout the
Government. life of a mining project, from the first exploration to the eventual closure,
with the aim of creating long-term relationships and value, while ensuring
operational continuity.
· Increased monitoring of the processes being implemented at the
Ministry of Labour and Economy.
· We seek to maintain full compliance with the requirements of the
· We remain alert to the changes proposed by the authorities, tax authority.
including energy and mining tax initiatives, so that we can respond in a
timely and relevant manner.
· In doing so, we continue to cooperate with any ongoing tax
inspections.
· In relation to the new labour law prohibiting outsourcing,
changes to the relationship with contractors have been implemented and staff
structures have been adapted to comply with the law.
· We maintain a register and control of vaccinated staff and
encourage all staff to be vaccinated as soon as possible.
· We continue to collaborate with other members of the mining
community through the Mexican Mining Chamber to lobby against any new harmful
taxes, royalties or regulations. We also support industry lobbying efforts to · Follow-up and timely compliance with all suggestions of the
improve the general public's understanding of the mining industry. Health Authorities.
· We continue to comply with all applicable environmental
regulations and are fully committed to operating sustainably.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The Federal or State Government orders another total or partial stoppage of · Number of media mentions related to mining regulations. These
operations in mining units because of a new wave of mass infections, mainly in could include the mention of tax, royalties, the banning of mining activities
Sonora and Zacatecas. in protected areas and legal precedents. The indicator also provides details
about the media itself, such as the speaker profile and political alignment.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: Very high (1)
2020: Very high (1)
2
SECURITY
RISK DESCRIPTION
We face the risk of theft of gold doré and silver concentrates as well as of According to information from the Secretariat of Security and Citizen
items including equipment, tools and materials. These thefts can take place Protection, the National Guard and the Attorney General's Office of the
inside the mines or during transportation. Republic, the presence of organised crime and high-impact crimes (homicide,
kidnapping and extortion) increased in 2021, in the states where our business
Our employees, contractors and suppliers face the risk of theft, kidnapping, units and projects are located, such as Zacatecas, Guanajuato, and Sonora.
extortion or damage due to insecurity in some of the regions where we operate.
The main risks we face are:
The influence and dispute of territories by drug cartels, other criminal
elements and general anarchy in some of the regions where we operate, combined • High-impact robberies.
with our exploration activities and projects in certain areas of drug deposit,
transfer or cultivation, makes working in these areas a particular risk to us. • Theft of assets such as minerals, equipment, instruments, inputs,
etc.
The Federal Government created the Secretariat of Citizen Security and
Protection as part of the comprehensive strategy to reduce insecurity. It also • Consumption and sale of toxic substances in our mining units.
created the National Guard, mostly comprising military personnel, with the aim
of combating organised crime and drug cartels. Unfortunately, state or local • Homicide.
police in most states are unprepared and ill-equipped to combat organised
crime, have low wages and are sometimes infiltrated by crime. • Kidnappings.
• Extortions.
• Vandalism.
FACTORS CONTRIBUTING TO RISK
· A severe increased presence of organised crime in the vicinity of · The Mexican state of Zacatecas is notorious for high levels of
the mining units particularly in Fresnillo, Saucito and Juanicipio. perceived insecurity and high rates of high-impact crime in 2021. There are
records of several vehicle thefts from company employees and organised crime
· A severe increase in the number of high impact crimes (homicide, checkpoints on the roads near Fresnillo and Saucito mines.
kidnapping, extortion) in the regions where our mining units are located.
· The Mexican State of Sonora is notorious for being under constant
· Increased consumption and sale of drugs at the mining units, attack from organised crime gangs. Several attacks have taken place recently
particularly Saucito. jeopardising the continuity of mining operations and the physical integrity of
workers employed by Herradura and Noche Buena mines.
· Theft of concentrates and assets in mining units and/or during
transfer.
· Theft of material, equipment, tools and spare parts from mines
and projects.
· Roadblocks or blockages on the roads and/or highways near the
mining units.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
· Our property security teams closely monitor the security - We continue to invest in community programmes, infrastructure
situation, maintaining clear internal communications and coordinating work in improvements and government initiatives to support the development of legal
areas of greater insecurity. local communities and discourage criminal acts.
· Management is fully committed to protecting our workforce. - We have increased the number of anti-doping tests conducted at
the start of the day in the mining units.
· We have adopted the following practices to manage our security
risks and prevent and address potential incidents: - Frequent inspections are carried out inside the mines to verify
that drugs are not consumed and sold.
- We maintain close relations with authorities at the federal,
state and local levels, including army camps located near most of our - Drug consumption prevention campaigns are carried out, focused
operations. on employees.
- Regular interactions and meetings with the National Guard.
- We continue to implement greater technological and physical
security at our operations, such as the use of a remote monitoring process in
Herradura, Noche Buena and San Julián. In the Saucito and Fresnillo mines, in
addition to the remote monitoring service, we have also built new local
operating and command centres for each business unit. At the Juanicipio
development project, we have the necessary infrastructure to provide security
services during the mine construction process. Juanicipio also benefits from a
local command and operation centre, as well as the remote monitoring service.
- Increase in logistical controls in order to reduce the potential
for theft of mineral concentrate. These controls include the use of real-time
tracking technology; surveillance cameras to identify alterations in the
transported material; protection and support services on distribution routes;
reduction in the number of authorised stops in order to optimise delivery
times and minimise exposure of trucks transporting ore concentrates or doré.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The COVID-19 pandemic has had a negative impact on the security risk. · Total number of security incidents affecting our workforce
High-impact crimes did not decrease - in fact they increased in some regions (thefts, kidnapping, extortion, etc.).
such as Zacatecas.
· Number of sites affected, and work days lost, by region and type
of site.
· Number of media mentions related to safety issues affecting the
mining industry where we operate.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: Very high (2)
2020: Very high (3)
3
IMPACT OF METALS PRICES AND GLOBAL MACROECONOMIC DEVELOPMENTS
RISK DESCRIPTION
With the COVID-19 pandemic, economies across the world, including in Mexico, · Revaluation of the Mexican peso. In March 2021, the dollar
were negatively impacted by the confinement and disruptions to supply chains. exchange rate was around 20.8 pesos, due to the socioeconomic impact of the
Globally, economies almost stopped completely for more than five months in COVID-19 pandemic. At the end of the year the dollar exchange rate was 20.5
2020. pesos.
During 2021, we saw increases in operating costs and greater inflationary · General inflation in Mexico. This was 7.4% in terms of Mexican
pressures, together with a shortage of critical inputs and equipment. We peso for 2021. The specific inflation for the Company was 9.5% in U.S.
expect this to continue during 2022. dollars.
This situation could create an adverse impact on our operations, costs, sales · A decrease in the price of our by-products. In 2021, the average
and profits, and potentially on the economic viability of projects, including prices for lead and zinc increased by 20.9% and 32.7%, respectively, compared
as a result of: to the previous year.
· A possible decrease in precious metals prices, which is the main
driver of risk.
FACTORS CONTRIBUTING TO RISK
· The impact of the pandemic on supply chains has been global, · Increased operating costs due to higher prices for critical
prolonged, and comprised a series of major shocks to companies' logistical inputs such as steel, cyanide, copper, diesel, haulage equipment, oxygen and
systems. truck tyres.
· Disruptions in the value chain of critical inputs for our · In terms of inflation, we experienced an increase in two of our
operations such as spare parts (primarily delivered by land transport from the main energy inputs compared to the previous year, with diesel (US percentage
US and maritime transport from China and Europe). Disruptions also include per litre) increasing by 21% and kWh (US percentage per kWh) by 12%.
reduced availability of maintenance teams/contractors to resolve issues, as
well as travel restrictions leading to officials not being able to travel and · Appearance of Omicron variant of COVID-19 cases. Some countries
inspect projects, resulting in delays. have re-introduced lockdown measures and there is a possibility that Mexico
will follow suit.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
We monitor price movements and market dynamics using primarily third-party Maintain long-term optionality by ensuring our pipeline of opportunities is
analysis and forecasts in order to support our financial projections and cash continuously replenished.
management strategies. Prices will continue to influence budget considerations
in areas such as exploration and the timing of certain capital expenditures. Improve debt profile and reduce annual interest bill.
We have hedging policies for exchange rate risk, including those associated Execute operational excellence initiatives to counter inflation and improve
with project-related capex and a hedging policy for precious metals. margins. Enhance cost competitiveness by improving the quality of the
portfolio.
We focus on cost efficiencies and capital discipline to deliver competitive
all-in sustaining cost. In order to maximise the extension of the average life of our debt profile, on
29 September 2020 Fresnillo plc successfully priced a US$850 M 30-year bond
(Coupon 4.25%) in the international market, coupled with an "Any and All
tender offer" for Fresnillo's 5.50% senior unsecured USD notes due 2023, which
was tendered by US$481.7 M (~60%), significantly reducing the short-term
refinancing risks and improving the liquidity and solvency capabilities of the
Company.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The price of gold and silver rose rapidly as investors took refuge in these · Profit sensitivity to percentage change in precious metals prices
metals. and the Mexican peso/US dollar exchange rate.
Unfortunately, the supply chains of our mining operations suffered disruptions · EBITDA sensitivity to percentage change in metal prices and the
and delays in supplying critical inputs such as cement, cyanide and spare Mexican peso/US dollar exchange rate.
parts.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 High for metal prices
Medium for all macroeconomic developments
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Stable 2021: High (3)
2020: Very high (2)
4
ACCESS TO LAND
RISK DESCRIPTION
Significant failure or delay in accessing surface land above our mining
concessions and other lands of interest is a permanent risk to our strategy
and has a potentially high impact on our objectives.
The biggest risk is failing to gain full control of the lands where we explore
or operate.
Possible barriers to access to land include:
• Increasing landowner expectations.
• Refusal to comply with the terms of previous land acquisitions and
conditions regarding local communities.
• Influence of multiple special interests in land negotiations.
• Conflicts regarding land boundaries, and a subsequent resolution process.
• Succession problems among landowners resulting in a lack of clarity about
the legal right to own and sell land.
• Risk of litigation, such as increased activism by agrarian communities
and/or judicial authorities.
• Presence of indigenous communities in proximity to lands of interest,
where prior and informed consultation and consent of such communities are
required.
• Operations in "Soledad & Dipolos" remain suspended, as the problem
with the ejido "El Bajío" remains unresolved.
FACTORS CONTRIBUTING TO RISK
· The Federal Government may continue its policy of not granting · Social insecurity prevailing in the regions where our mining
new mining concessions. However, this could be mitigated by carefully interests are located may not allow work to be carried out necessary to
negotiating concessions with mining geological interest already granted. demonstrate the minimum investments required by law, leading to the possible
cancellation of the concession.
· It is becoming increasingly difficult to negotiate land prices,
with landowners demanding more money and benefits for access to land.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Successful access to land plays a key role in managing our mining rights, · Strategic use of our social investment projects to build trust.
focusing on areas of strategic interest or value.
· Close collaboration with our land negotiation teams, which
At the end of 2021, after disinvesting certain areas of mining interest, we include specialists hired directly by Fresnillo and also provided by Peñoles
maintained 1.439 million hectares of mining concessions granted. A further as part of the service agreement.
238,090 hectares is in the process of being granted. In total, we have 1.678
million hectares, representing a year-on-year decrease of 2,000 hectares. As part of an ongoing review of the legal status of our land rights, we
identify certain areas of opportunity and continue to implement measures to
Other initiatives include: manage this risk on a case-by-case basis. Such measures include, wherever
possible, negotiations with agricultural communities for the direct purchase
· Meticulous analysis of exploration objectives and construction of land.
project designs to minimise land requirements.
We use mechanisms provided for in agricultural law and also use other legal
· Judicious use of lease or occupation contracts with purchase mechanisms under mining legislation that provide greater protection for land
options, in compliance with legal and regulatory requirements. occupation. These activities are part of our ongoing drive to reduce risk
exposure to surface land.
· Early participation of our community relations teams during the
negotiation and acquisition of socially challenging objectives.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
During 2021, insecurity problems in our exploration and operations areas have • Percentage of land required for advanced exploration projects that are
increased. In addition, the government suspended activities, which caused under occupation or agreements other than total ownership (generally and per
delays to the land-regularisation processes. project).
• Total U.S. dollars and percentage of project budget spent on HSECR
activities, including community relations (on exploration projects and sites).
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 Medium
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: High (4)
2020: High (7)
5
LICENCE TO OPERATE (community relations)
RISK DESCRIPTION
At both a local and global level, the mining industry's stakeholders have high We monitor the following risks:
expectations relating to social and environmental performance. These
expectations go beyond the responsible management of negative impacts to · Negative perception of the Company's social and environmental
include continuous engagement and contribution to stakeholder development. performance.
Failure to adequately address these expectations increases the risk of · Failure to identify and address legitimate concerns and
opposition to mining projects and operations. Negative sentiment towards expectations of the community and of society at large.
mining or specifically towards Fresnillo plc could have an impact on our
reputation and acceptability in the regions where we have a presence. · Insufficient or ineffective engagement and communication.
· Failure to contribute purposefully to community development.
FACTORS CONTRIBUTING TO RISK
· Higher expectations and scrutiny of social and environmental · Insecurity and access to water are the issues of greatest concern
performance. to people and community leaders in the regions where we have a presence.
· Rising expectations on shared benefits regarding land agreements. · The environmental impact of a mine is also an issue that can
concern communities close to our operations.
· Perceived competition on access to natural resources, notably
water.
· Significant reduction in government spending on community
infrastructure, development programmes and services.
· Anti-mining activism fuelling opposition to mining.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
•COVID-19 Response: Collaboration with Health Authorities to support the v
logistics of vaccination centres in the regions where we operate. Campaigns to
raise awareness of preventive measures such as the use of masks. Rapid testing
support for remote communities. Collaboration with parents and school
authorities on the safe return to classes.
•Community Engagement: Our strategy, which embraces all phases of the mining
lifecycle, is based on purposeful engagement to address concerns and
expectations. Key activities include:
-Organising formal and informal meetings to enable stakeholder identification
and engagement planning.
-Carrying out social baseline studies that include human rights and due
diligence regarding indigenous peoples, and perception studies that support
our Social Management plans and help us manage impacts, risks and
opportunities.
-Operating a grievance mechanism to address stakeholder concerns.
-Monitoring public opinion within local and international media.
-Collaborating with peers to adopt best practices in social performance.
-Communicating our best practices regarding social and environmental
responsibility.
•Environmental performance: Optimising our use of resources, curbing any
negative impact of our activities and being transparent and accountable
regarding our environmental footprint are crucial elements of sustainable
mining and help us to be positively perceived by communities and regulators.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The COVID-19 pandemic increased the risk to our social licence to operate in · Number of local actions by non-governmental organisations (NGOs) or
some regions, mainly as a result of nearby communities being worried about other local social groups against mining, by region.
contracting the virus from contractors and suppliers visiting the area.
· Number of actions by NGOs or other local social groups against mining
COVID-19 has increased social expectations regarding corporate citizenship. in the Americas.
The response of the mining industry to COVID-19 will shape relationships with
stakeholders and perceptions of the industry over the coming years. · Number of media mentions related to demonstrations against the mining
industry.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: High (5)
2020: Medium (10)
6
HUMAN RESOURCES (attract and retain skilled people)
RISK DESCRIPTION
Fresnillo plc's most valuable asset is its workforce. Our people are critical to meeting our goals. We face multiple risks in the
processes of selection, recruitment, training and retention of talented people
The COVID-19 pandemic has several health risks for employees. The way that with technical skills and experience.
mining works (especially underground), where there are several workers in one
place, further increases the possibility of contagion. Due to the complex Obtaining qualified labour in the mining sector has become a major risk. More
nature of mining operations and the remote locations in which they are often and more people trained and experienced in mining processes are required.
located, it is difficult to implement health measures and carry medical Unfortunately, there are not enough candidates with the required profiles.
prevention equipment.
Digital and technological innovation has the potential to generate substantial
Close working conditions at mine sites are placing workers in the frontline in improvements in the productivity, safety and environmental management of the
terms of health and safety risks, prompting us to quarantine workers when Company. However, to achieve this, in addition to demanding significant
national lockdown regulations did not force us to do so. investment, different skillsets will be required in the workforce. There is a
risk that our workforce will either be unable to transform as needed or will
Faced with the risk of contagion from the COVID-19 pandemic threat, we be resistant to change and unwilling to accept the impact of automation or to
implemented several strategies to protect and preserve the health of employees acquire new technological skills.
and contractors in all business units. The close cooperation between our human
resources function and our medical team has been fundamental to the The lack of reliable contractors with sufficient infrastructure, machinery,
application of timely tests and the care of infected personnel. performance history and trained people is also a risk that could affect our
ability to develop and build mining works.
However, the risk of contagion continues and increased in the months of
September to December, mainly in the Fresnillo District, where the highest In addition, it is difficult to hire the employees of contractors working for
number of cases of contagion across the Company has been detected. This the company.
situation is likely to be exacerbated when the new strains of the virus reach
Mexico.
Until such a time that the vaccine is broadly available, and the population
becomes immune to COVID-19, this will remain a very high risk to the Fresnillo
plc workforce and in general to all humanity.
FACTORS CONTRIBUTING TO RISK
· Unfortunately, not everyone follows measures to prevent COVID-19 · There was a significant increase in staff turnover during 2021.
and that increases the risk of contagion.
· Talent retention became more difficult this year.
· Workers in the mining sector have been particularly affected by
the pandemic, given the employment architecture of the industry, which can · At some mines we have a lack of specialised personnel to cover
feature remote fly in-fly out or drive in-drive out operations, congested working hours.
underground working conditions, and workers residing in mine-site compounds or
neighbouring communities. These conditions make some COVID-19 preventative · In certain regions where we operate there are not enough
measures difficult to implement, which makes mineworkers vulnerable to both candidates with the necessary skills to operate the mining equipment.
acquiring and spreading the virus.
· With the new labour law prohibiting outsourcing, we had to hire
staff from contractors, and this caused added complications.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our employee performance management system is designed to attract and retain In partnership with the University of Arizona, we developed a five-hour online
key employees by creating suitable reward and remuneration structures and training module on Diversity, Equality and Inclusion for our executives,
providing personal development opportunities. We have a talent management managers and high potential talent. Management and leadership skills
system to identify and develop internal candidates for key management development programmes were conducted with 40 superintendents, 76 counsellors
positions, as well as identify suitable external candidates where appropriate. and 74 facilitators.
We aim for continuous improvement, driven by opportunities for training, In order to keep our staff updated and trained, 83% of employees and 98% of
development and personal growth; in short, we focus on fair recruitment, fair unionised staff have received training this year. In 2021, 216 employees
pay and benefits and gender equality. In the trusted staff structure, 18% are participated in institutional development programmes, which means that 59% of
women as are 34% of new joiners, while 18% of the female population were staff with more than two years of service have participated at least once. Of
promoted during the year. this 59%, 12% are women (18% of employees are female). 502 courses and studies
were conducted through external training, benefiting 383 employees. 83% of our
leaders have participated in institutional development programmes focused on
leadership.
Recruitment: We have evaluated our recruitment requirements for key positions,
and our goal is to meet them through internal training and promotion, as well
as by recruitment through:
Performance: The virtual internship programme continued this year in
• Our close relationships with universities that offer earth science conjunction with Peñoles, with courses in mining, geology, metallurgy and
programmes. We have programmes dedicated to identifying potential topography. In total there were 572 students and 36 teachers (42.27% men and
performance-based candidates who can be hired as trainees and/or employees at 57.73% women).
graduation. During the year, we hosted 42 students from different Earth
Science professions at our mining units to support their training, and 87 We have continued our performance assessment process, reinforcing formal
engineers took part in our training programme. feedback. We promote the certification of key technical skills for operational
personnel and have implemented a programme to develop administrative and
• CETLAR (Centre for Technical Studies of Peñoles), which trains mechanical leadership skills for the required positions. We develop our high-potential
and electrical technicians. Ten of the 12 2021 graduates were hired as intermediate managers through the Leaders with Vision programme.
full-time employees.
Pandemic: The safety of our workforce is protected with sanitary protocols in
Retention: Our goal is to be the employer of choice, and we recognise that to each mining unit in accordance with the recommendations of the Sanitary
be a profitable and sustainable company, we need to generate value for our Authority.
employees and their families. We do this by providing a healthy, safe,
productive and team-oriented work environment that not only encourages our
people to reach their potential, but also supports process improvements.
A series of security measures have been applied:
-Use of sanitary measures within mining units,
-Constant health monitoring of employees,
-Temperature control,
-Social distancing,
-Strict hygiene,
-Home office,
-Selective Covid-19 tests.
Support for employees' mental health: 24-hour helpline for all employees,
access to psychological help, support for families and available medical
advice.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
Undoubtedly the COVID-19 pandemic is one of the biggest threats facing our · Number of positions filled by area of speciality, for vacancies
people. Employee health and well-being has been affected by this pandemic and and new positions.
has led to changes in staff management.
· Employee turnover rate.
Homeworking and isolation at the mines and projects have changed traditional
work dynamics across the business. · Average hours of training and professional development per
employee.
· Number of contractor personnel relative to unionised personnel per
business unit.
· Number of rapid, suspicious and PCR test per business unit.
· Evolution of confirmed cases in hospital and at home
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Medium
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: High (6)
2020: High (4)
7
PROJECTS (PERFORMANCE RISK)
RISK DESCRIPTION
The pursuit of advanced exploration and project development opportunities is Other important risks:
essential to achieving our strategic goals. However, this carries certain
risks: · Failure to effectively manage our development projects could
result in delays to the start of production and cost overruns.
· Economic viability: the impact of the cost of capital to develop
and maintain the mine; future metal prices; and operating costs throughout the · Projects that cannot be delivered on time, on budget and
mine's life cycle. according to planned specifications.
· Access to land: a significant failure or delay in land · Geotechnical conditions of the ore body / poor rock quality.
acquisition has a very high impact on our projects.
· High costs making it difficult to justify the project.
· Uncertainties associated with the development and operation of
new mines and expansion projects: includes fluctuations in the degree of ore · Delay in the development of the project due to lack or delay of
and recovery; unforeseen complexities in the mining process; poor quality of critical equipment, supplies and spare parts.
the ore; unexpected presence of groundwater or lack of water; lack of
community support; and inability or difficulty in obtaining and maintaining · Disruptions in the supply chain for construction materials and
the required building and operating permits. equipment.
· Delivery risk: Projects can exceed the budget in terms of cost
and time; they cannot be built according to the required specifications or
there may be a delay during construction; and major mining teams cannot be The following risks relate specifically to the Juanicipio project:
delivered on time.
· Regularising electricity consumption with CFE.
· Delays in the design and obtaining permits related to the tailing
dams.
· Obtaining building permits with CONAGUA.
· Lack of qualified labour.
· Lack of specialised contractors.
· Low contractor productivity.
FACTORS CONTRIBUTING TO RISK
· In some regions there are no specialised contractors or · We have identified the following threats to project
contractors with the technology to develop the projects. development:
· Contractor productivity may be lower than anticipated, causing - Insufficient resources for project execution.
delays in the programme.
- Change in operational priorities that can affect projects.
· Increase in the number of high impact crimes (homicide,
kidnapping, extortion) in the regions of the projects. - Inadequate management structure for project supervision.
- Lack of efficient and effective contractors.
- Delays in obtaining necessary permits for construction and
operation.
- Lengthy procedures for land acquisition, electricity supply and
water.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our investment assessment process determines how best to manage available The executive management team and the Board of Directors are regularly updated
capital using technical, financial and qualitative criteria. on progress. Each advanced exploration project and major capital development
project has a risk record containing the project-specific identified and
• Technical: we evaluate and confirm the resource estimate; conduct assessed risks.
metallurgical research of mineral bodies to optimise the recovery of economic
elements; calculate and determine the investment required for the overall The project development process in 2021 included:
infrastructure (including roads, energy, water, general services, housing) and
the infrastructure required for the mine and plant. · Continuing the construction of the Juanicipio project.
• Financial: we analyse the risk in relation to the return on the proposed · Continuing the construction of the third tailings dam at La Ciénega.
capital investments; set the expected internal rates of return (IRR) per
project as thresholds for approving the allocation of capital based on the · Constructing the 14th leaching pad at La Herradura.
current value of expected cash flows of invested capital; and perform
stochastic and probabilistic analyses. · Constructing the carbon-in-column process at La Herradura.
• Qualitative: we consider the alignment of investment with our Strategic
Plan and business model; identify synergies with other investments and
operating assets; and consider the implications for safety and the
environment, the safety of facilities, people, resources and community
relations.
The management of our projects is based on the PMBOK standard of the Institute
of Project Management (PMI). It allows us to closely monitor project controls
to ensure the delivery of approved projects on time, within budget and in
accordance with defined specifications.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
COVID-19 affected project development and led to delays in approvals, for • Earned value (rate of financial advancement rate vs. physical
example at the Juanicipio mine and Pyrites Plant. advancement).
The contractors failed to meet commitments, leading to disruptions in the • Percentage of required land acquired
supply of critical inputs such as cement, fuels and spare parts.
• Percentage of major equipment ordered and received according to
plan.
• Percentage of mine development completed.
LINK TO STRATEGY RISK APPETITE
2 Medium
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Stable 2021: High (7)
2020: High (6)
8
UNION RELATIONS (labour relations)
RISK DESCRIPTION
Our highly skilled unionised workforce and experienced management team are
critical to sustaining our current operations, executing development projects
and achieving long-term growth without major disruption.
We run the risk of an outside union seeking to destabilise the current union.
National union politics could adversely affect us, as could pressure from
other mining unions seeking to take over Fresnillo's labour contracts.
FACTORS CONTRIBUTING TO RISK
· The Labour Reform published in May 2019 allows the existence of · The risk is that the fighting will continue and worsen and
several unions within a company and gives the employee the freedom of choice. eventually the mine's workforce will be reduced. There is also a risk that
This has led to a complex, rarefied work environment at the Fresnillo mine, this conflict could spread to other mines.
with violent clashes between the union and a group of workers seeking to
register a new independent union.
· In addition, the TMEC (new trade agreement between Mexico, Canada
and the United States replacing NAFTA) with new labour and trade union
provisions.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Increased communication with trade union leaders in mining units to monitor We are proactive in our interactions with the union. When appropriate, we hire
the working climate. experienced legal advisors to support us on labour issues. We remain attentive
to any developments in labour or trade union issues.
Meetings have been held with groups of workers who want to introduce new
unions to the Company. We started 2021 by conducting five Regional Labour Update Forums with company
leaders and unions in Sonora, Coahuila and Zacatecas with 500 participants.
A specialist group in labour relations was formed to meet the demands of
dissident workers. From February to the end of the year, we carried out a job training programme
for operational leaders of companies at the level of middle management, with
Our strategy is to integrate unionised personnel into each team in the the participation of 906 leaders.
business unit. We achieve this by clearly assigning responsibilities and
through programmes aimed at maintaining close relations with trade unions in We conducted a review of the contractual benefits for union members in our
mines and at the national level. mines.
We maintain close communication with trade union leaders at various levels of Our executive leadership and the Executive Committee recognise the importance
the organisation in order to: raise awareness of the economic situation facing of trade union relations and follow any developments with interest.
the industry; share our production results; and encourage union participation
in our security initiatives and other operational improvements.
These initiatives include the Security Guardians programmes, certification
partnerships, integration of high productivity equipment, and family
activities.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
Although the pandemic did not severely affect this risk, it did slightly · Union members' level of satisfaction.
complicate the negotiations and delayed some agreements, but with no
significant impact. Faced with the pandemic, the union requested the Company · Number of media mentions related to mining union developments.
to take care of all the sanitary measures recommended by the health authority
so that the workers could return to the mining units. Today, the union
continues to support the safety measures that we adopted.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Decreasing 2021: High (8)
2020: High (5)
9
CYBERSECURITY
RISK DESCRIPTION
Information is one of our most valuable assets and we work hard to protect it. 1. Corruption of data - Critical data where any unauthorized modification can
We fully recognise the importance of the confidentiality, continuity, have adverse impacts.
integrity and security of our data and systems.
2. Unauthorised access - Cybersecurity and privacy incidents due to incorrect
As a mining company, we can be under threat of cyber attacks from a broad set access permissions or system abuse, exploit or misuse.
of groups, from "hacktivists" and hostile regimes, to organised criminals.
Their objectives range from taking advantage of mining's role in regional and 3. Breach and data theft - Disclosure of critical and sensitive company data
global supply chains, to impacting national economies. by an internal or external source.
Some threat actors also focus on finding unprotected, misconfigured and 4. Business disruption - Disrupting key applications or systems for a period
unpatched systems and exploit them, due to the industry's heavy reliance on of time.
technology and automated systems that supports operations.
5. Lack of cybersecurity ownership - Failure to assign responsibility for
The following are the top eight cybersecurity and privacy risks that have been implementing and adopting cybersecurity practices on a daily basis.
identified through environment monitoring and workshops with business units,
operations, and IT. These risks comprise Peñoles/Fresnillo overall 6. Non-compliance - Cybersecurity and privacy incidents resulting in
cybersecurity and privacy risk profile: non-compliance with applicable regulations, including privacy.
7. Health and safety incidents - Breach of availability, integrity or
confidentiality of data which impacts health and safety.
8. Halt or loss of operations - Cybersecurity and privacy incidents which
result in loss of operating licence or closure of operations.
FACTORS CONTRIBUTING TO RISK
· Cyber risks have increased significantly in recent years owing in · An increased reliance on cloud systems and infrastructure can
part to the COVID-19 pandemic and the proliferation of new digital make IT defences less robust and may bypass security controls
technologies, the increasing degree of connectivity and a material increase in
monetisation of cybercrime. · Access to hacking tools and training is readily available and
heavily automated. Without proper punishment for perpetrators globally,
attackers can easily launch sophisticated attacks with little risk.
· Theft of information through social engineering and "phishing" · There is a global lack of regulation regarding cybersecurity and
campaigns (fraudulent attempts to obtain sensitive information or data, such e-crime that could deter criminals.
as usernames or passwords, by appearing to be a trustworthy entity in an
electronic communication).
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our information security management model is designed with defensive • The U.S. National Institute of Standards and Technology (NIST CSF)
structural controls to prevent and mitigate the effects of computer risks. It Cybersecurity Framework that describes how companies can assess and improve
employs a set of rules and procedures, including a Disaster Recovery Plan, to their ability to prevent, detect, and respond to cyberattacks.
restore critical IT functions in the event of an attack.
• Information Control Objectives and Technologies to Others (COBIT), which
Our systems are continuously monitored by cybersecurity experts at a Security was created by ISACA, the international professional association for IT
Operations Center (SOC). Incident response plans are in place and tested management and governance, to provide an implementable set of IT-related
periodically to ensure we can respond quickly and effectively. controls, processes and facilitators.
Our systems are regularly audited to identify any potential threats to the Our approach is also based on the MITRE ATT&CK™ which is used as the
operations and additional systems have been put in place to protect our assets basis for the development of specific threat models and methodologies in the
and data. private sector, government and in the cybersecurity products and services
community.
We have implemented a training and awareness programme, which is designed to
increase awareness of cyber risk and ensure that employees take the We also monitor the environment for relevant alerts and act proactively to
appropriate actions. assess our readiness, reinforcing our capabilities as needed.
We have invested in global IT security platforms and Managed Security Services A governance model, continuous risk monitoring, information security policies,
Providers (MSSPs) in order to proactively monitor and manage our cyber risks. awareness-raising campaigns and training forms the basis of our IT/OT
We conduct routine third-party penetration test to independently confirm the operational guarantee.
security of our IT systems and we seek to enhance the monitoring of our
operational technology platforms.
Our plan for 2022 is to focus our efforts on incorporating key indicators
around cyber risk reduction in the cybersecurity dashboard, implementing and
Since 2020, a fully staffed cybersecurity office has been in place to improve maturing controls in line with the threat landscape and emphasising the
our cybersecurity position. Its main objective is to identify and manage importance of individual responsibility to each employee, in order for them to
cybersecurity risks and align them with our business mission and strategy, as stay vigilant and alert to cyber threats.
well as monitor the supporting processes. Aligned to best practices and
standards, its approach is based on two key frameworks:
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
With the COVID-19 pandemic, this risk has increased mainly due to the • Total number of cybersecurity incidents affecting our Company.
accelerated digital transformation, increased "phishing" attacks and a
reduction in the robustness of IT defences due to remote working. • Number of media mentions related to cybersecurity issues
affecting the mining industry.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Stable 2021: High (9)
2020: Medium (8)
10
SAFETY
RISK DESCRIPTION
It is an inherent risk in our industry that incidents due to unsafe acts or Our workforce faces risks such as fire, explosion, electrocution and carbon
conditions could lead to injuries or fatalities. monoxide poisoning, as well as risks specific to each mine site and
development project.
Safety and health incidents could result in harm to our employees, contractors
and local communities. Ensuring their safety and wellbeing is our ethical These include rockfalls caused by geological conditions, cyanide
obligation and first priority, and is one of our core values. contamination, explosion, becoming trapped, electrocution, insect bites,
falls, heavy or light equipment collisions involving machinery or personnel
Our operations and projects are inherently hazardous, with the potential to and accidents occurring while personnel are being transported.
cause illness or injury, damage to the environment, and disruption to
communities. Major hazards include process safety, underground mining, surface
mining and tailings and water storage.
FACTORS CONTRIBUTING TO RISK
· We are saddened to report that one fatality was recorded during · Frequent transportation of our people to remote business units is
2021, and also that we experienced a significant increase in the accident rate an ongoing feature of our operations. In many cases, these units have poor
related to: accessibility by road. Failure to comply with safety programmes, measures and
audits or with the findings of inspections, continues to be a safety risk.
· Our people not being sensitive to the latent risks of our
-Rockfall/terrain failure operations.
-Loss of vehicle/equipment control
-Team-vehicle-person interaction · Omissions and failures to follow security protocols.
-Transport of staff
-Contact with electric power
-Fire
-Becoming trapped
-Contact with hazardous substances
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Nothing is more important than the safety and wellbeing of our employees,
contractors and communities. We believe all incidents are preventable, so we
concentrate on identifying, understanding, managing and, where possible,
removing the hazard or removing people from the hazardous area.
We constantly seek to improve our safety and health risk management
procedures, with focus on the early identification of risks and the prevention
of fatalities.
Unfortunately, we suffered a fatal accident during the second half of this
year, which means that even with the extraordinary efforts we are making, we
have failed to achieve our goal of zero fatalities. Additionally, we recorded
363 high potential incidents (24% more than 2020)
At Fresnillo plc, the safety of our staff is an essential value and a way of
life. We tirelessly seek to improve our performance, strengthening our
preventive culture, raising awareness of the risks generated by our
operational activities and establishing controls and mechanisms to eliminate
fatalities.
During the year, we continued to implement support measures to strengthen,
address and prevent the causes of accidents, injuries and fatalities. These
include:
· Strengthening safety objectives, including establishing proactive
performance indicators that allow us to anticipate events.
· Encouraging managers to own security risks to operations, so that
this is a fundamental part of daily activities and that management can be held
accountable according to performance and results.
· Regularly reviewing and auditing Health, Safety, Environmental
and Sustainable (HSE&S) processes, training and controls to promote and
improve effectiveness at managed and (where practicable) non-managed
operations.
· Monitoring monthly HSE&S performance at the Group level and
sharing learnings from HSE&S incident investigations.
· Continuing the implementation of the "I Care, We Care" programme
in all our operations, including strengthening the programme's five lines of
action.
· In 2021, the Chief Executive Officer launched a strategy to
intensify the "I Care, We Care" programme. This strategy focuses on critical
risks, controls and processes in order to prevent high potential accidents.
· Assigning Critical Risk Control Protocols to an owner for
follow-up in line with their area of influence.
· Strengthening incident investigations with a special focus on
high-potential ones.
· Increasing the focus on high-potential incidents (HPI).
· Strengthening the cross-functional communication of lessons
learnt, in order to reduce the reoccurrence of similar accidents.
· Enhancing hazard identification and risk assessment.
· Confirming the continuous monitoring of security management as
the highest priority of the SSMARC committee. The committee oversees all
accident investigations, ensuring appropriate measures are taken to improve
safety systems and practices.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The COVID-19 pandemic did not significantly affect this risk. ● Accident rate
● Days lost rate
● Accident frequency
LINK TO STRATEGY RISK APPETITE
4 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: Medium (10)
2020: Medium (11)
11
TAILINGS AND ENVIRONMENTAL INCIDENTS
RISK DESCRIPTION
Environmental incidents are an inherent risk in our industry. These incidents · Impact on the environment in the area of influence through
include the possible overflow or collapse of tailings deposits, cyanide spills erosion/deforestation/forest loss or disturbance of biodiversity as a result
and dust emissions, any of which could have a high impact on our people, of the operations of the business unit or project activities.
communities and businesses.
· An event involving a leak or spill of cyanide or SO(2), which due
We continue to be alert to the following risks: to its chemical properties could generate an event of major consequence on the
premises of the business unit and / or in the nearby area.
· Cyanide management risk.
· Implications of future regulations for our tailings management.
· Ensuring the stability of our tailings storage facilities (TSFs)
during their entire lifecycles is central to our operations. A failure or
collapse of any of our TSFs could result in fatalities, damage to the
environment, regulatory violations, reputational damage and the disruption of
the quality of life of neighbouring communities as well as our operations.
FACTORS CONTRIBUTING TO RISK
· Design, construction and operation of current tailings dams under
local and national controls, which do not comply with recommended best
practices.
· Historic tailings dams with little or no operation construction
design.
· Little known conditions of the state of some tailings dams, both
current and historical.
· Some historical tailings dams located in rural areas are now
surrounded by facilities or residential areas, increasing the consequences of
failure.
· Tailings dam failures that could cause landslides or collapses.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our operations are inherently hazardous. We seek to achieve operational
excellence to ensure that our employees and contractors go home safe and
healthy, and that there are no adverse impacts on the communities and the
environment where we operate.
Our environmental management system ensures compliance with national and
international regulations and best practices, provides transparency and
supports initiatives that reduce our environmental footprint. We are a company
responsible for its activities and the fulfilment of the environmental
commitments made.
Our environmental management system, together with our investment in
preventive measures and training, are key factors that reduce the risk of
large environmental incidents.
Based on the level of perceived risk due to recent serious and catastrophic
developments in the industry, the Board decided to increase the severity of
this risk in 2018 and maintained the same level in 2021.
Herradura, Saucito, Fresnillo, Noche Buena, San Julián and Ciénega each have
an integrated certificate of management. Fresnillo and Saucito have ISO 9001;
Herradura and Noche Buena have GIS ISO 14001 and 45000.
The Executive Committee is well aware of the risks associated with tailings
dams. Therefore, before we construct a reservoir, we carry out a series of
studies to confirm the suitability of the area. These studies include
geotechnical, geological, geophysical, hydrological and seismic analyses.
Before construction begins, the Ministry of Environment and Natural Resources
(SEMARNAT), through the Federal Office for Environmental Protection (PROFEPA),
conducts several assessment studies and then continues to periodically review
deposits in relation to the works.
Environmental protection and safety are critical for cyanide leaching systems.
We comply with international best practices as promoted by the International
Cyanide Management Institute (ICMI) and the Mexican standard
NOM-155-SEMARNAT-2007, which establishes environmental requirements for gold
and silver leaching systems.
Safe management of our tailings facilities has always been a priority. With
increased focus on the issue of tailings dam safety across the global mining
industry, we have taken the opportunity to renew and increase this focus.
In 2021 we launched a number of initiatives to align our governance practices
with current best practices. These initiatives included:
• Updating the inventory of the TSFs and validating the data log.
• Initiating a third-party review programme of dam safety inspections for
all TSFs.
• Establishing an Independent Tailings Review Panel (ITRP) comprising
renowned international experts.
• Accelerating a review programme by independent experts for all sites.
• Reviewing the ITRP and prioritising recommendations arising from
inspections.
The Board and the HSECR Committee continue to keep these issues under
scrutiny. It is important to note that our tailings dams differ from those
involved in high-profile incidents, such as the tragedy in Brazil.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The construction programmes for new tailings dams and the expansion of • Number of business units with ISO 14001:2004 certification.
existing ones were adjusted, due to the increased complexity caused by the
pandemic, such as the required health and safety protocols. • Number of business units with Clean Industry certification.
• Number of business units with International Cyanide Code certification.
• Number of environmental permits for all advanced exploration projects
(according to schedule).
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Stable 2021: Medium (11)
2020: Medium (9)
LINK TO STRATEGY RISK APPETITE
4 Low
12
CLIMATE CHANGE
RISK DESCRIPTION
The mining industry is highly exposed and sensitive to climate change risk. These chronic risks may intensify the competition to access water resources,
increasing risks to the social licence to operate. The societal responses to
Climate change is a systemic challenge and will require coordinated actions transition to a low carbon economy include more stringent regulations to
between nations, between industries and by society at large. It demands a reduce emissions, a transformation of the global energy system, changes in
long-term perspective to address both physical climate change and low-carbon behaviour and consumption choices and emerging technologies.
transition risks and uncertainties.
Adaptation measures are necessary to build the flexibility to respond to
Due to climate change, our operations and projects are expected to face acute physical and transitional changes.
physical risks from extreme events such as high temperatures, droughts and
extreme rainfall from more frequent and intense hurricanes in the Pacific. The most important risk we currently face is to comply with all the provisions
and requirements of international agreements to reduce pollution and
These natural disasters may affect the health & safety of our people, greenhouse gas emissions.
damage access roads and mine's infrastructure, disrupt operations and affect
our neighbouring communities. In addition, the rise in temperatures may Failure to adapt to the transition and physical impacts of climate change,
increase our water demand while the decrease in annual precipitation include:
exacerbates water stress in the regions where we operate.
-government legislation to limit mining activities.
-regulations limiting greenhouse gas emissions from the mining industry.
-acute physical risks such as the increased likelihood of extreme weather
events; and
-chronic physical risks such as changing weather patterns including rising
temperatures and sea levels.
FACTORS CONTRIBUTING TO RISK
· The Federal Government promotes investment in coal rather than in · The supply of critical inputs to mining processes, such as water
renewable or clean energy. This has led to operating on clean energy becoming and energy, is likely to face greater constraints.
more difficult.
· Employee health and safety will be put at risk by increases in
· The Federal Government's implementation of policies that support communicable diseases, exposure to heat-related illnesses and the likelihood
the use of coal will lead to more greenhouse gases being released into the of accidents related to rising temperatures.
atmosphere and reduce the development of renewable energies.
· Obtaining and maintaining a social licence to operate will become
· Current and emerging climate regulations have the potential to more difficult in communities where climate change exacerbates existing
result in increased cost, to change supply and demand dynamics for our vulnerabilities and increases direct competition between the company and the
products and create legal compliance issues and litigation, all of which could community for resources.
impact the Group´s financial performance and reputation. Our operations also
face risk due to the physical impacts of climate change, including extreme · Increased physical and non-physical risks will make project
weather. financing more difficult to secure.
· Warming temperatures will increase water scarcity in some · Global warming and its effects such as droughts, hurricanes,
locations, inhibiting water-dependent operations, complicating site winter storms, heavy rains, can cause stoppages in unit operations.
rehabilitation and bringing companies into direct competition with communities
for water resources.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
· Climate change has formed part of our strategic thinking and · We use the guides from industry associations (i.e. ICMM),
investment decisions for over two decades. international scientific reports (i.e. IPCC), reports from industry peers and
reports of the Mexican Government to identify the physical impacts of climate
· We are considering the recommendations of the Task Force on change.
Climate-related Financial Disclosures (TCFD) regarding: Governance, Strategy,
Risk Management and Metrics and targets.
· To gain a general understanding, we use the outcomes of scenarios
built by the Mexican Government Reports, using the Global Circulation Models
· We recognise the importance of maturing our approach to (GCMs) and different Representative Concentration Pathways (RCPs).
integrating physical climate change risks and adaptation into financial
planning and decision-making processes. We are committed to enhancing our
understanding of the site-level impacts and vulnerabilities to refine our
adaptation measures. · In addition, we use Aqueduct, a tool developed by the World
Resources Institute (WRI), to better understand water stress under different
climate change scenarios in the 2020-2030 period.
· The pervasive and complex nature of climate change means that it
can act as an amplifier of other risks such as environmental incidents, access
to water, health & safety of our people, government regulations, and · We are implementing a series of controls to manage the threat of
social licence to operate. The Head of Sustainability and the Head of Risks extreme weather, including structural integrity programmes across all critical
support the process to refine the identification and risk assessment of assets, emergency response plans and flood management plans. These controls
physical and transitional risks. keep our people safe and help our operations return to normal capacity as
quickly as possible.
· We are increasing the supply of the materials essential to
building a low-carbon economy.
· We are setting targets to reduce our emissions (on an absolute
and intensity basis) over the short, medium and long term.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
· The COVID-19 crisis and climate change demonstrate that we live · Energy demand/value added
in an interconnected world. We are faced with global challenges that need
coordinated responses where each actor takes on their role. No country can · CO2/energy consumption
deal with these issues alone.
· Zero-carbon fuel share
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Stable 2021: Medium (12)
2020: Medium (12)
13
EXPLORATION (New ore resources)
RISK DESCRIPTION
We are highly dependent on the success of the exploration programme to meet
our strategic value-creation targets and our long-term production and reserves
goals.
In addition to the growing level of insecurity and more challenging access to
land detailed in previous risks, other risks that may impact prospecting and
converting inferred resources include: the lack of a robust portfolio of
prospects in our pipeline with sufficient potential in terms of indicated and
inferred resources; and insufficient concession coverage in target areas.
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,
replenishing our reserves becomes increasingly challenging.
FACTORS CONTRIBUTING TO RISK
We perceive this risk level as increasing in likelihood and impact.
This is mainly due to the following:
· Delays in procedures regarding access to land.
· Restrictions of new mining concessions.
· Geological sampling falling below standard.
· Reserves not being replenished.
Maintaining a reasonable investment in exploration, even when metals 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.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
During 2021, we invested a total of US$140.1 million in exploration
activities. Our objectives for 2022 include a budgeted risk capital investment
in exploration of approximately US$180 million.
The approximate spending split is 55% for operating mines (reserves and
resources) and 45% for the Exploration Division; which in turn applies a
balanced, priority-based process to allocate the budget.
For reference, the mines division uses approximately 60% of its budget for
resource conversion and ore grade certainty, and 40% for step-out and
expansion drilling. Furthermore, the Exploration Division budget for 2022 will
allocate 26% to brownfield targets, 19% to development projects, 20% to
advanced projects and 34% to early exploration stages including regional
prospecting work.
Our exploration strategy also includes:
· A focus on increasing regional exploration drilling programmes to
intensify efforts in the districts with high potential.
· For local exploration, aggressive drilling programmes to upgrade
the resources category and convert inferred resources into reserves.
· A team of highly trained and motivated geologists, including both
employees and long-term contractors.
· Advisory technical reviews by international third-party experts
and routine use of up-to-date and integrated GIS databases, cutting edge
geophysical and geochemical techniques (including drone technology), large to
small scale hyperspectral methods, remote sensing imagery and analytical
software for identifying favourable regions to be field-checked by the team.
· A commitment to maintain a pipeline of drill-ready high priority
projects.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
· The pandemic has halted exploration work in some areas and has · Drill programmes completed (overall and by project).
led to a shortage of contractors.
· Change in the number of ounces in reserves and resources.
· Rate of conversion from resources to reserves.
LINK TO STRATEGY RISK APPETITE
1 Medium
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Return to Principal Risk 2021: Medium (13)
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 regulations.
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. The Directors have elected to
prepare the Group and parent company financial statements in accordance with
the UK-adopted International Financial Reporting Standards ('IFRSs') in
conformity with the Companies Act 2006.
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;
• make judgements and accounting estimates that are reasonable and
prudent;
• 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 IFRSs 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 whether UK-adopted international accounting standards have been
followed, 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 unless it is appropriate to presume that the Company and/ or the
Group will not continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's and Group's transactions and
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 Act 2006. 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 Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement 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.
Directors' Responsibility Statement under the UK Corporate Governance Code
In accordance with Provision 27 of the 2018 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 necessary 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
Each of the Directors confirm that to the best of their knowledge:
a) the consolidated financial statements, prepared in accordance with
UK-adopted international accounting standards 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 annual report (including the Strategic 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.
For and on behalf of the Board
Alberto Tiburcio
Independent Director
7 March 2022
Consolidated Income Statement
Year ended 31 December
Year ended 31 December 2021 Year ended 31 December 2020
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 2,703,095 2,703,095 2,430,055 2,430,055
Cost of sales 5 (1,766,170) (1,766,170) (1,550,689) (1,550,689)
Gross profit 936,925 936,925 879,366 879,366
Administrative expenses (103,534) (103,534) (93,407) (93,407)
Exploration expenses 6 (130,291) (130,291) (107,328) (107,328)
Selling expenses (25,035) (25,035) (24,106) (24,106)
Other operating income 8 11,914 11,914 9,997 9,997
Other operating expenses 8 (23,246) (23,246) (14,839) (14,839)
Profit from continuing operations before net finance costs and income tax 666,733 666,733 649,683 649,683
Finance income 9 8,874 8,874 12,249 12,249
Finance costs 9 (61,750) (61,750) (141,319) (141,319)
Revaluation effects of Silverstream contract 13 (416) (416) 70,961 70,961
Foreign exchange loss (1,909) (1,909) (40,321) (40,321)
Profit from continuing operations before income tax 611,948 (416) 611,532 480,292 70,961 551,253
Corporate income tax 10 (156,598) 125 (156,473) (119,349) (21,288) (140,637)
Special mining right 10 (16,563) (16,563) (35,037) (35,037)
Income tax 10 (173,161) 125 (173,036) (154,386) (21,288) (175,674)
Profit for the year from continuing operations 438,787 (291) 438,496 325,906 49,673 375,579
Attributable to:
Equity shareholders of the Company 421,500 (291) 421,209 324,451 49,673 374,124
Non-controlling interest 17,287 17,287 1,455 1,455
438,787 (291) 438,496 325,906 49,673 375,579
Earnings per share: (US$)
Basic and diluted earnings per Ordinary Share from continuing operations 11 0.572 - 0.507
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per Ordinary Share from continuing 11 0.572 0.440 -
operations
( )
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
Notes 2021 2020
US$ thousands
US$ thousands
Profit for the year 438,496 375,579
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
(Gain)/loss on cash flow hedges recycled to income statement(1) (2,476) 4,335
Changes in the fair value of cost of hedges (5,396) 220
Total effect of cash flow hedges (7,872) 4,555
Foreign currency translation (653) (1,217)
Income tax effect on items that may be reclassified subsequently to profit or 10 2,362 (1,366)
loss:
Net other comprehensive income that may be reclassified subsequently to profit (6,163) 1,972
or loss:
Items that will not be reclassified to profit or loss:
Changes in the fair value of cash flow hedges (994) 304
Total effect of cash flow hedges (994) 304
Changes in the fair value of equity investments at FVOCI (48,051) 89,552
Remeasurement gains on defined benefit plans 21 5,710 147
Income tax effect on items that will not be reclassified to profit or loss 10 13,805 (26,980)
Net other comprehensive (loss)/income that will not be reclassified to profit (29,530) 63,023
or loss
Other comprehensive (loss)/income, net of tax (35,693) 64,995
Total comprehensive income for the year, net of tax 402,803 440,574
Attributable to:
Equity shareholders of the Company 386,060 439,130
Non-controlling interests 16,743 1,444
402,803 440,574
1 The amounts recognised in hedging reserve and cost of hedging reserve at 31
December 2020 have been amended to reflect the nature of the components of the
valuation of certain derivatives at that date.
Consolidated Balance Sheet
As at 31 December
As at 31 December
Notes 2021 2020
US$ thousands
US$ thousands
ASSETS
Non-current assets
Property, plant and equipment 12 2,799,075 2,708,195
Equity instruments at fair value through other comprehensive income (FVOCI) 29 164,525 212,576
Silverstream contract 13 494,392 534,697
Deferred tax asset 10 67,300 120,676
Inventories 14 91,620 91,620
Other receivables 15 58,548 -
Other assets 3,587 3,429
3,679,047 3,671,193
Current assets
Inventories 14 396,184 351,587
Trade and other receivables 15 401,424 512,927
Prepayments 20,282 18,207
Derivative financial instruments 29 96 6,290
Silverstream contract 13 35,152 41,443
Cash and cash equivalents 16 1,235,282 1,070,415
2,088,420 2,000,869
Total assets 5,767,467 5,672,062
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(1) 17 (2,042) 3,292
Cost of hedging reserve(1) 17 (38) 1,072
Fair value reserve of financial assets at FVOCI 17 83,784 117,420
Foreign currency translation reserve 17 (2,120) (1,467)
Retained earnings 17 2,543,087 2,363,275
3,618,124 3,479,045
Non-controlling interests 184,548 135,559
Total equity 3,802,672 3,614,604
1 The amounts recognised in hedging reserve and cost of hedging reserve at 31
December 2020 have been amended to reflect the nature of the components of the
valuation of certain derivatives at that date.
Consolidated Balance Sheet
As at 31 December
As at 31 December
Notes 2021 2020
US$ thousands
US$ thousands
Non-current liabilities
Interest-bearing loans 19 1,157,545 1,156,670
Lease liabilities 24 6,146 7,697
Provision for mine closure cost 20 256,956 244,808
Pensions and other post-employment benefit plans 21 6,506 11,977
Deferred tax liability 10 68,745 295,595
1,495,898 1,716,747
Current liabilities
Trade and other payables 22 378,235 225,208
Income tax payable 62,287 88,066
Derivative financial instruments 29 3,885 -
Lease liabilities 24 4,681 5,048
Provision for mine closure cost 20 3,351 880
Employee profit sharing 16,458 21,509
468,897 340,711
Total liabilities 1,964,795 2,057,458
Total equity and liabilities 5,767,467 5,672,062
These financial statements were approved by the Board of Directors on 8 March
2022 and signed on its behalf by:
Mr Juan Bordes
Non-executive Director
8 March 2022
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
Notes 2021 2020
US$ thousands
US$ thousands
Net cash from operating activities 28 895,141 917,685
Cash flows from investing activities
Purchase of property, plant and equipment 3 (592,052) (412,326)
Proceeds from the sale of property, plant and equipment and other assets 6,042 266
Proceeds from Silverstream contract 13 48,986 33,710
Proceeds from the Layback Agreement 2 (c) 25,000 -
Interest received 10,459 12,249
Net cash used in investing activities (501,565) (366,101)
Cash flows from financing activities
Proceeds from Note payable(1) 41,665 63,669
Principal element of lease payments 24 (a) (5,971) (5,780)
Dividends paid to shareholders of the Company(2) (245,561) (104,686)
Capital contribution(3) 31,885 53
Proceeds from the issuance of interest-bearing loans 19 - 828,325
Repayment of interest-bearing loans 19 - (542,956)
Interest paid(4) 19 (49,334) (59,891)
Net cash generated (used in)/from financing activities (227,316) 178,734
Net increase in cash and cash equivalents during the year 166,260 730,318
Effect of exchange rate on cash and cash equivalents (1,393) 3,521
Cash and cash equivalents at 1 January 1,070,415 336,576
Cash and cash equivalents at 31 December 16 1,235,282 1,070,415
(1 )(Corresponds to a short-term interest-bearing note payable received from
Minera los Lagartos, S.A. de C.V. which holds a non-controlling interest in
Juanicipio project.)
(2 )(Includes the effect of hedging of dividend payments made in currencies
other than US dollar (note 18).)
(3)( Corresponds to capital contributions provided by Minera los Lagartos,
S.A. de C.V. which holds a non-controlling interest in the Juanicipio
project.)
(4 )(Total interest paid during the year ended 31 December 2021 less amounts
capitalised totalling US$8.4 million (2020: US$8.8 million) which were
included within the caption Purchase of property, plant and equipment (note
12). )
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders of the Company
Notes Share Share premium Capital reserve Hedging reserve(1) Cost of hedging reserve(1) Fair value reserve of financial assets at FVOCI Foreign currency translation reserve Retained earnings Total Non-controlling interests Total
capital
equity
US$ thousands
Balance at 1 January 2020 368,546 1,153,817 (526,910) 139 918 54,734 (250) 2,093,666 3,144,660 134,059 3,278,719
Profit for the year - - - - - - - 374,124 374,124 1,455 375,579
Other comprehensive income, net of tax - - - 3,259 154 62,686 (1,217) 124 65,006 (11) 64,995
Total comprehensive income for the year - - - 3,259 154 62,686 (1,217) 374,248 439,130 1,444 440,574
Hedging loss transferred to the carrying value of PPE purchased during the - - - (106) - - - - (106) 3 (103)
year
Capital contribution - - - - - - - - - 53 53
Dividends declared and paid 18 - - - - - - - (104,639) (104,639) - (104,639)
Balance at 31 December 2020 368,546 1,153,817 (526,910) 3,292 1,072 117,420 (1,467) 2,363,275 3,479,045 135,559 3,614,604
Profit for the year - - - - - - - 421,209 421,209 17,287 438,496
Other comprehensive income, net of tax - - - (4,535) (1,110) (33,636) (653) 4,785 (35,149) (544) (35,693)
Total comprehensive income for the year - - - (4,535) (1,110) (33,636) (653) 425,994 386,060 16,743 402,803
Hedging loss transferred to the carrying value of PPE purchased during the - - - (799) - - - - (799) 361 (438)
year
Capital contribution - - - - - - - - - 31,885 31,885
Dividends declared and paid 18 - - - - - - - (246,182) (246,182) - (246,182)
Balance at 31 December 2021 368,546 1,153,817 (526,910) (2,042) (38) 83,784 (2,120) 2,543,087 3,618,124 184,548 3,802,672
1 The amounts recognised in hedging reserve and cost of hedging reserve at 31
December 2020 have been amended to reflect the nature of the components of the
valuation of certain derivatives at that date.
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 2021 were authorised for issue by the Board of Directors of Fresnillo
plc on 8 March 2022.
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 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 UK-adopted international accounting standards 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 2021 and 2020, 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 it 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 2020.
New standards, interpretations and amendments (new standards) adopted by the
Group
A number of new or amended standards (the Standards) became applicable for the
current reporting period. The adoption of these Standards did not have any
impact on the accounting policies, financial position or performance of the
Group.
Standards, interpretations and amendments issued but not yet effective
The IASB has issued other amendments resulting from improvements to IFRSs that
management considers do not have any impact on the, 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 judgements, 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 2021 are:
Recognition and classification of assets at Soledad and Dipolos mine:
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.
Whilst the claim and the definitive court order did not affect the group's
legal title over the mining concession or the ore currently held in leaching
pads near the mine site, land access at the mine site is required to further
exploit the concession at Soledad & Dipolos.
Penmont is the legal and registered owner of the land where the leaching pads
are located but has not yet been able to gain physical access to these pads
due to opposition by certain local individuals. The Group has a reasonable
expectation that Penmont will eventually regain access to the Soledad &
Dipolos assets and process the ore content in the Soledad & Dipolos
leaching pads.This expectation considers different scenarios, including but
not limited to the different legal proceedings that Minera Penmont has
presented in order to regain access to the lands, which proceedings are
pending final resolution. Therefore, the Group continues to recognise
property, plant & equipment and inventory related to Soledad &
Dipolos, as disclosed in note 12 and note 14, respectively. Due to the fact
that it is not yet certain when access may be granted so that the inventory
can be processed, this inventory is classified as a non-current asset.
As previously reported by the Group, claimants from the El Bajío community
also presented claims against occupation agreements they entered into with
Penmont, covering land parcels other than the surface land where Soledad &
Dipolos is located. Penmont has had no significant mining operations or
specific geological interest in the affected parcels and these lands are
therefore not considered strategic for Penmont. The Agrarian Court has 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. The case relating to the claims over these land
parcels remains subject to final conclusion. However, given that Penmont has
not conducted significant mining operations or had specific geological
interest in these land parcels, any contingencies relating to such land
parcels are not considered material by the Group. There are no material assets
recognised in respect of these land parcels at 31 December 2021 or 31 December
2020.
Layback Agreement:
In December 2020, the Group entered into multiple contracts with Orla Mining
Ltd. and its Mexican Subsidiary, Minera Camino Rojo, S.A. de C.V. (together
herein referred to as "Orla"), granting Orla the right to expand the Camino
Rojo oxide pit onto Fresnillo's "Guachichil D1" mineral concession. Based on
the terms of the contracts, the Group will transfer the legal rights to access
and mine the mineral concession to Orla.
Due to the fact that the contracts were negotiated together, the Group has
considered the layback contracts as a single agreement (Layback Agreement) for
the purpose of determining the accounting implications of the transaction. The
Group determined that the transaction should be accounted for as the sale of a
single intangible asset. As such, it is relevant to consider the point at
which control transfers in accordance with the requirements of IFRS 15
regarding when a performance obligation is satisfied and in light of the
continuing performance obligations on the part of the Group.
The effectiveness of the agreement was subject to the approval of the Mexican
Federal Competition Commission (COFECE), which was granted in February 2021.
The consideration includes three payments: US$25.0 million that was paid upon
the approval of COFECE, US$15.0 million that will be paid no later than 1
December 2022, US$22.8 million no later than 1 December 2023. The future
amounts due bear interest at an annual rate of 5%. Upon notification of
approval by COFECE, the Group recognised the fair value of consideration set
out in the contract (US$67.2 million, being the cash flows set out above
discounted at the risk-free rate).
As set out in the Layback Agreement, as at 31 December 2021 the Group
continues to provide support to Orla in respect of other negotiations relevant
to their acquisition of the rights to access from the local ejido, thus the
Company has recognised the total value of the agreement as deferred income.
Based on the expected time of complete the transfer of control of the asset,
the Company the deferred income is classified as current.
The ongoing support does not affect the Group's contractual right to the
future payments set out above. The amount receivable as at 31 December 2021
amounts to US$40.6 million, of which US$16.7 million is current and US$23.9
million is non-current.
Juanicipio project:
During 2021 Juanicipio has turned from construction to commissioning
activities and continues processing mineralised material from development
through plants at Fresnillo and Saucito Juanicipio has extended its
commissioning period mainly derived from delays in key services such as the
power to the plant facilities. As of 31 December 2021, the Group has
evaluated the status of Juanicipio for accounting implications and has
concluded it continues in a development stage.
Climate change:
In the climate disclosure in the Strategic Report, the Group's set out its
assessment of climate risks and opportunities (CROs). The Group recognises
that there may be potential financial statement implications in the future in
respect of the mitigation and adaptation measures to the physical and
transition risks. The potential effect of climate change would be in respect
of assets and liabilities that are measured based on an estimate of future
cash flows. The group specifically considered the effect of climate change on
the valuation of property, plant and equipment, deferred tax assets, the
Silverstream contract, and the provision for mine closure cost. The Group does
not have any assets or liabilities for which measurement is directly linked to
climate change performance (for example: Sustainability-Linked Bonds).
The main ways in which climate has affected the preparation of the financial
statements are:
• The Group has already made certain climate-related strategic decisions,
such as to focus on decarbonisation and to increase wind energy. Where
decisions have been approved by the Board, the effects were considered in the
preparation of these financial statements by way of inclusion in future cash
flow projections underpinning the estimation of the recoverable amount of
property, plant and equipment and deferred tax assets, as relevant.
• As described in Note 13, the costs inherent in the Silverstream contract
are determined based on the provisions of that contract. This reduces the
exposure of the valuation of the asset to the effect of any cost implications
related to CROs.
• Further information about the potential effect of CROs on the provision
for mine closure cost is set out in Note 20.
The Group's strategy consists of mitigation and adaptation measures. To
mitigate the impacts by and on climate change the company relies on renewable
electricity, fuel replacement and efficiency opportunities to reduce the
carbon footprint. The approach to adaptation measures is based on climate
models to produce actionable information for the design, construction,
operation and closure of its mining assets, considering climate change. Future
changes to the Group's climate change strategy or global decarbonisation
signposts may impact the Group's significant judgements and key estimates and
result in material changes to financial results and the carrying values of
certain assets and liabilities in future reporting periods. However, as at the
balance sheet date the Group believes there is no material impact on balance
sheet carrying values of assets or liabilities. Although this is an estimate,
it is not considered a critical estimate.
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 the recoverable amount, 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, the grade of the 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 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 would
not result in a significant change in the value of the contract.
Income tax, notes 2 (q) and 10:
The recognition of deferred tax assets, including those arising from
un-utilised tax losses, requires 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.
COVID-19
The COVID-19 outbreak developed rapidly in 2020, with a significant number of
infections around the world. The development and fluidity of the situation
precludes any prediction as to the ultimate impact of COVID-19; however, the
Group seeks to obtain the best possible information to enable the assessment
of the risks involved and implement appropriate measures to respond.
During 2021, the Group continues to apply measures to safeguard the health of
its employees and their local communities while continuing to operate safely
and responsibly. During 2021 operations have not been suspended, all mines
have operated at normal production capacity. The Group incurred in other
production costs of US$4.7 million (2020: US$4.5 million) resulting from
COVID-19 which include community support, the acquisition of additional
personal protective equipment and other safety measures and are presented in
cost of sales.
During 2021 and 2020, attempts at containment of COVID-19 have resulted in
decreased economic activity, which has adversely affected the broader global
economy. In the current environment, assumptions about future commodity
prices, exchange rates, and interest rates are subject to greater variability
than normal, which could in the future affect the valuation of the Group's
assets and liabilities, both financial and non-financial. As at 31 December
2021 and 2020, there were no material changes to the valuation of the Group's
asset and liabilities due to COVID-19.
(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 (except mobile
equipment) or on a straight-line basis over the estimated useful life of the
individual asset that are 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 average expected useful lives are as follows:
Years
Buildings 8
Plant and equipment 10
Mining properties and development costs(1) 8
Other assets 4
(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.
Ore generated as part of the development stage may be processed and sold,
giving rise to revenue before the commencement of commercial production. Where
such processing is necessary to bring mining assets into the condition
required for their intended use (for example, in testing the plants at the
mining unit in development), revenues from metals recovered from such
activities are credited to mining properties and development costs. When the
processing does not contribute to brining the mining assets into the condition
required for their intended use (for example, when the processing of the ore
extracted is supported by assets outside of the development project), the
revenue is considered as incidental and it is recognized in profit or loss. In
the latter case, cost of sales is measured based on expected operating cost
once commercial production has been initiate.
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 are
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 indicators 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 based on 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 2021
and 2020 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.
The Group classifies its financial liabilities as follows:
Financial liabilities are classified, at initial recognition, as financial
liabilities at fair value through profit or loss, loans and borrowings,
payables, or as derivatives designated as hedging instruments in an effective
hedge, as appropriate.
All financial liabilities are recognised initially at fair value and, in the
case of loans and borrowings and payables, net of directly attributable
transaction costs.
The Group's financial liabilities include trade and other payables and loans
and borrowings.
Classification
For purposes of subsequent measurement, financial liabilities held by the
Group are classified as financial liabilities as amortised cost.
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the EIR method. Gains and losses
are
recognised in profit or loss when the liabilities are derecognised as well as
through the EIR amortisation process.
Amortised cost is calculated by considering any discount or premium on
acquisition and fees or costs that are an integral part of the EIR. The EIR
amortisation is included as finance costs in the statement of profit or loss.
De-recognition of financial liabilities
A financial liability is derecognised when the obligation under the liability
is discharged or cancelled or expires. When an existing financial liability is
replaced by another from the same lender on substantially different terms, or
the terms of an existing liability are substantially modified, such an
exchange or modification is treated as the derecognition of the original
liability and the recognition of a new liability. The difference in the
respective carrying amounts is recognised in the statement of profit or loss.
(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).
Work in progress inventory comprises ore in leaching pads as processing is
required to extract benefit from the ore. The recovery of gold is achieved
through the heap leaching process. The leaching process may take months to
obtain the expected metal recovery and mainly depends on the continuity of the
leaching process. When the ore in leaching pads is in active leaching, it is
classified as current. When the leaching process has stopped and not expected
to restart within twelve months, ore in the leaching pads affected is
classified as non-current.
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 its employees based on Mexico:
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 present value of defined benefit obligations under the 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 capped to three months of salary or average
of the profit sharing paid the last three years.
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 deductible for income tax
purposes.
(m) Leases
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.
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.
(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. Inventory in transit to the smelter
or refinery does not represent a significant proportion of total revenue at
the end of the reporting period given the distance to the mine units.
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:
- Costs incurred in geographical proximity to existing mines in order to
replenish or increase reserves, and
- 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 from
which time further expenses are capitalised as exploration costs on balance
sheet as Property, plant and equipment.
(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 as finance income or finance cost respectively.
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.
When hedging with forward contracts, the forward element is included in the
designation of the financial instrument. Therefore, there is no cost of
hedging in relation to forward contracts.
(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 based on 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 2021, 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;
The Herradura 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 2021 and 2020, 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 2021 and 2020,
respectively. Revenues for the year ended 31 December 2021 and 2020 include
those derived from contracts with costumers and other revenues, as showed in
note 4.
Year ended 31 December 2021
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Other(4) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 493,582 769,896 215,623 547,294 168,849 509,247 (1,396) 2,703,095
Inter-Segment 147,727 (147,727) -
Segment revenues 493,582 769,896 215,623 547,294 168,849 509,247 147,727 (149,123) 2,703,095
Segment Profit(2) 224,558 285,354 106,498 321,349 77,158 322,734 144,006 (4,800) 1,476,857
Foreign exchange hedging losses 3,827
Depreciation and amortisation(3) (528,206)
Employee profit sharing (15,553)
Gross profit as per the income statement 936,925
Capital expenditure(3) 108,335 54,371 45,392 101,160 381 40,922 241,491 - 592,052
(1 Total third party revenues include treatment and refining charges amounting
US$143.5 million. Adjustments and eliminations correspond to hedging gains
(note 4).)
(2 Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing. Segment profit for Fresnillo and
Saucito considers the sales and the corresponding processing cost of the
development ore from Juanicipio project.)
(3 Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including mine development, construction of
leaching pads, and purchase of mine equipment, excluding additions relating to
changes in the mine closure provision. Significant additions include the
construction of )(the leaching)( plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).)
(4 Other inter-segment )(revenue corresponds to )(leasing services provided by
Minera Bermejal, S.A. de C.V and incidental )(ore sales from )(Juanicipio
development project)( to Fresnillo; capital expenditure mainly corresponds to
Minera Juanicipio S.A de C.V)(. and Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2020
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 366,245 777,455 230,221 521,817 151,402 380,552 2,363 2,430,055
Inter-Segment 119,412 (119,412) -
Segment revenues 366,245 777,455 230,221 521,817 151,402 380,552 119,412 (117,049) 2,430,055
Segment Profit(2) 191,042 400,540 129,479 325,099 53,661 211,681 101,615 (4,593) 1,408,524
Foreign exchange hedging gains 4,145
Depreciation and amortisation(3) (514,572)
Employee profit sharing (18,731)
Gross profit as per the income statement 879,366
Capital expenditure(4) 92,627 30,182 35,071 73,376 19,674 36,329 125,067 - 412,326
(1 Total third party revenues include treatment and refining charges amounting
US$180.55 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 Includes depreciation and amortisation included in unabsorbed production
cost amounted US$9.1 million.)
(4 Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including mine development, construction of
leaching pads, and purchase of mine equipment, excluding additions relating to
changes in the mine closure provision. Significant additions include the
construction of )(the leaching)( plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).)
(5 Other inter-segment )(revenue corresponds to )(leasing services provided by
Minera Bermejal, S.A. de C.V and incidental )(ore sales from )(Juanicipio
development project)( to Fresnillo; capital expenditure mainly corresponds to
Minera Juanicipio S.A de C.V)(. and Minera Bermejal, S. de R.L. de C.V.)
( )
( )
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré, slag,
precipitates and activated carbon of which the primary contents are silver,
gold, lead and zinc.
(a) Revenues by source
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Revenues from contracts with customers 2,705,720 2,425,098
Revenues from other sources:
Provisional pricing adjustment on products sold (1,274) 2,594
Hedging (loss)/gain on sales (1,351) 2,363
2,703,095 2,430,055
(b) Revenues by product sold
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Lead concentrates (containing silver, gold, lead and by-products) 1,157,623 989,072
Doré and slag (containing gold, silver and by-products) 806,289 800,326
Zinc concentrates (containing zinc, silver and by-products) 346,892 236,758
Precipitates (containing gold and silver) 259,835 275,367
Activated carbon (containing gold, silver and by-products) 132,456 128,532
2,703,095 2,430,055
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
2021 2020
US$ thousands
US$ thousands
Silver 1,163,879 970,532
Gold 1,305,277 1,328,000
Zinc 259,987 204,733
Lead 117,448 107,272
Value of metal content in products sold 2,846,591 2,610,537
Adjustment for treatment and refining charges (143,496) (180,482)
Total revenues(1)(,) 2,703,095 2,430,055
(1 Includes provisional price adjustments which represent changes in the fair
value of trade receivables resulting in a loss of US$1.2 million (2020: gain
of US$2.6 million)) (and hedging loss of US$1.3 million (2020: gain of US$2.3
million). For further detail, refer to note 2(n).)
The average realised prices for the gold and silver content of products sold,
prior to the deduction of treatment and refining charges, were:
Year ended 31 December
2021 2020
US$ per ounce
US$ per ounce
Gold(2) 1,794.96 1,792.44
Silver(2) 24.87 21.28
(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
2021 2020
US$ thousands
US$ thousands
Depreciation and amortisation (note 12) 528,206 505,377
Contractors 403,568 357,278
Energy 233,667 189,239
Operating materials 221,773 203,217
Maintenance and repairs 199,264 175,087
Personnel expenses (note 7) 135,758 116,103
Mining concession rights and contributions 20,266 20,409
Surveillance 9,832 7,028
Insurance 9,628 7,141
Freight 8,433 8,037
Other 28,284 18,213
Cost of production 1,798,679 1,607,129
Unabsorbed production costs(1) 956 19,403
Gain on foreign currency hedges (3,827) (4,145)
Change in work in progress and finished goods (ore inventories) (29,638) (71,698)
1,766,170 1,550,689
(1 Corresponds to production cost incurred in Minera San Julian as a result of
a plant stoppage (2020: Minera Penmont as a result of the operational impact
related to COVID-19, see note 2 c). Main unabsorbed production cost includes
US$9.1 million of depreciation and amortisation and US$3.1 million of
Contractors).)
6. Exploration expenses
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Contractors 89,005 71,279
Mining concession rights and contributions 21,494 21,099
Administrative services 4,614 6,052
Personnel expenses (note 7) 6,425 2,753
Assays 1,651 1,299
Rentals 468 457
Other 6,634 4,389
130,291 107,328
These exploration expenses were mainly incurred in the operating mines located
in Mexico; the Juanicipio, Guanajuato, Orisyvo and Centauro Deep projects; and
the Mexico Nuevo and Mirador de Cristo prospects. Exploration expenses of
US$14.5 million (2020: US$10.4 million) were incurred in the year on projects
located in Peru and Chile.
The following table sets forth liabilities (generally trade payables)
corresponding to exploration activities of the Group companies engaged only in
exploration, principally Exploraciones Mineras Parreña, S.A. de C.V.
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Liabilities related to exploration activities 348 666
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
2021 2020
US$ thousands
US$ thousands
Operating cash out flows related to exploration activities 130,915 106,768
7. Personnel expenses
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Salaries and wages 66,488 54,202
Statutory healthcare and housing contributions 23,771 20,441
Employees' profit sharing 16,662 19,275
Other benefits 18,679 13,233
Bonuses 14,906 12,770
Social security 5,777 3,084
Post-employment benefits 4,300 5,944
Vacations and vacations bonus 3,262 3,420
Training 2,867 3,080
Legal contributions 2,130 2,101
Other 4,028 4,070
162,870 141,620
(a) Personnel expenses are reflected in the following line items:
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Cost of sales (note 5) 135,758 116,103
Administrative expenses 20,687 22,764
Exploration expenses (note 6) 6,425 2,753
162,870 141,620
(b) The monthly average number of employees during the year was as follows:
Year ended 31 December
2021 2020
No.
No.
Mining 2,883 2,222
Plant 1,032 926
Exploration 432 403
Maintenance 1,259 1,255
Administration and other 1,062 1,010
Total 6,668 5,816
8. Other operating income and expenses
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Other income:
Insurance recovery - 2,738
Gain on sale of property, plant and equipment and other assets 5,026 -
Rentals 1,802 1,278
Other 5,086 5,981
11,914 9,997
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Other expenses:
Loss on sale of property, plant and equipment - 700
Loss on theft of inventory 143 1,477
Maintenance(1) 3,663 3,692
Donations 538 387
Environmental activities(2) 4,813 768
Saucito rehabilitation cost for mine flood 4,803 -
Cost of insurance claims 1,422 1,085
Other 7,864 6,730
23,246 14,839
(1 Costs relating to the rehabilitation of the facilities of Compañía Minera
las Torres, S.A. de C.V. (a closed mine).)
(2 During 2021 main activities were related with the evaluation of improvement
in tailing dams in Fresnillo and Cienega (2020: remediation activities in
Cienega mine).)
( )
9. Finance income and finance costs
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Finance income:
Interest on short-term deposits and investments 5,167 4,606
Interest on tax receivables 3,637 7,642
Fair value movement on derivatives - 1
Other 70 -
8,874 12,249
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Finance costs:
Interest on interest-bearing loans 48,888 43,542
Premium paid on early notes redemption (note 19) - 60,835
Interest on tax amendments (note 10) - 24,890
Interest on lease liabilities 504 644
Unwinding of discount on provisions 11,522 10,755
Other 836 653
61,750 141,319
( )
10. Income tax expense
a) Major components of income tax expense:
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 268,945 208,370
Amounts under provided in previous years 7,696 (67)
276,641 208,303
Deferred:
Origination and reversal of temporary differences (120,043) (88,954)
Revaluation effects of Silverstream contract (125) 21,288
(120,168) (67,666)
Corporate income tax 156,473 140,637
Special mining right
Current:
Special mining right charge (note 10 (e)) 53,147 24,739
Amounts under provided in previous years 363 6,602
53,510 31,341
Deferred:
Origination and reversal of temporary differences (36,947) 3,696
Special mining right 16,563 35,037
Income tax expense reported in the income statement 173,036 175,674
Year ended 31 December
2021 2020
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 743 1,953
Changes in fair value of cash flow hedges 298 (91)
Changes in the fair value of cost of hedges 1,619 (3,320)
Changes in fair value of equity investments at FVOCI 14,415 (26,866)
Remeasurement losses on defined benefit plans (908) (23)
Income tax effect reported in other comprehensive income 16,167 (28,347)
(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
2021 2020
US$ thousands
US$ thousands
Accounting profit before income tax 611,533 551,253
Tax at the Group's statutory corporate income tax rate 30.0% 183,460 165,376
Expenses not deductible for tax purposes 3,442 2,921
Inflationary uplift of the tax base of assets and liabilities (49,389) (22,972)
Current income tax (over)/underprovided in previous years 1,569 44
Exchange rate effect on tax value of assets and liabilities(1) 32,078 55,110
Non-taxable/non-deductible foreign exchange effects 1,892 (16,923)
Inflationary uplift of tax losses (4,165) (1,170)
Inflationary uplift on tax refunds (1,732) (2,077)
Incentive for Northern Border Zone (10,077) (35,810)
Deferred tax asset not recognised 6,465 4,916
Special mining right taxable/(deductible) for corporate income tax (4,969) (10,488)
Other (2,101) 1,710
Corporate income tax at the effective tax rate of 25.5% (2020: 25.5%) 156,473 140,637
Special mining right 16,563 35,037
Tax at the effective income tax rate of 28.2% (2020: 31.9%) 173,036 175,674
(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 incentive for Norther Border Zone.
The future effects of inflation and exchange rate will depend on future market
conditions.
(c) Movements in deferred income tax liabilities and assets:
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Opening net liability (174,919) (210,577)
Income statement credit arising on corporate income tax 120,168 67,666
Income statement (charge)/credit arising on special mining right 36,947 (3,696)
Exchange difference 192 35
Net charge related to items directly charged to other comprehensive income 16,167 (28,347)
Closing net liability (1,445) (174,919)
The amounts of deferred income tax assets and liabilities as at 31 December
2021 and 2020, considering the nature of the related temporary differences,
are as follows:
Consolidated balance sheet Consolidated income statement
2021 2020 2021 2020
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Related party receivables (153,702) (266,986) (113,284) 65,505
Other receivables (3,247) (3,292) (45) (1,083)
Inventories 97,170 231,584 134,414 (46,572)
Prepayments (2,872) (1,833) 1,039 792
Derivative financial instruments including Silverstream contract (153,111) (170,122) (14,352) 10,422
Property, plant and equipment arising from corporate income tax (50,155) (116,051) (65,896) (63,066)
Exploration expenses and operating liabilities 110,989 61,099 (49,890) 5,176
Other payables and provisions 78,092 73,706 (4,386) (4,390)
Losses carried forward 90,439 75,043 (15,396) (22,041)
Post-employment benefits 1,034 1,904 (38) (225)
Deductible profit sharing 4,937 6,453 1,516 (3,455)
Special mining right deductible for corporate income tax 23,692 21,655 (2,037) (3,578)
Equity investments at FVOCI (20,554) (35,944) (975) (157)
Other (9,309) (341) 9,161 (4,994)
Net deferred tax liability related to corporate income tax 13,403 (123,125)
Deferred tax credit related to corporate income tax - (120,169) (67,666)
Related party receivables arising from special mining right (38,150) (28,781) 9,368 6,263
Inventories arising from special mining right 21,332 16,896 (4,436) 187
Property plant and equipment arising from special mining right (19,298) (39,913) (20,615) (2,750)
Other 21,268 4 (21,264) (4)
Net deferred tax liability (1,445) (174,919)
Deferred tax credit (157,116) (63,970)
Reflected in the statement of financial position as follows:
Deferred tax assets 67,300 120,676
Deferred tax liabilities-continuing operations (68,745) (295,595)
Net deferred tax liability (1,445) (174,919)
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.
Based on management's internal forecast, a deferred tax asset has been
recognised in respect of tax losses amounting to US$301.5 million (2020:
US$248.4 million). If not utilised, US$30.6 million (2020: US$12.7 million)
will expire within five years and US$279.9 million (2020: US$235.7 million)
will expire between six and ten years. Of the total deferred tax asset related
to losses, US$35.7 million is covered by the existence of taxable temporary
differences, the remaining US$49.9 million corresponds to Fresnillo plc which
maintained a deferred net asset position. The Group has conducted a feasible
tax planning that will allow applied the tax losses before its expiration.
The Group has further tax losses and other similar attributes carried forward
of US$72.6 million (2020: US$64.6 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 is expected to reverse in the foreseeable
future. The temporary differences for which a deferred tax liability has not
been recognised aggregate to US$1,056 million (2020: US$1,797 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%.
On 30 December 2018, the Decree of tax incentives for the northern border
region of Mexico was published in the Official Gazette, which provided 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. The tax incentives were
applicable since 1 January 2019 and remain in force until 31 December 2020. On
30 December 2020 and extension of the Decree was published in the Official
Gazette which remain in force until 31 December 2024. 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. For the fiscal year 2021 the SMR allows as a credit the 50% of 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 2021, the Group credited US$11.5
million (2020: US$21.3 million) of mining concession rights against the SMR.
Total mining concessions rights paid during the year were US$22.9 million
(2020: US$21.3 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 charge would have been US$64.6 million (2020: US$46.1 million).
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for the year
attributable to equity shareholders of the Company by the weighted average
number of Ordinary Shares in issue during the period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2021 and 2020, earnings per share have been calculated as
follows:
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Earnings:
Profit from continuing operations attributable to equity holders of the 421,473 374,124
Company
Adjusted profit from continuing operations attributable to equity holders of 421,764 324,451
the Company
Adjusted profit is profit as disclosed in the Consolidated Income Statement
adjusted to exclude revaluation effects of the Silverstream contract of
US$0.04 million loss (US$0.03 million net of tax) (2020: US$71.0 million gain
(US$49.7 million net of tax)).
Adjusted earnings per share have been provided in order to provide a measure
of the underlying performance of the Group, prior to the revaluation effects
of the Silverstream contract, a derivative financial instrument.
2021 2020
thousands
thousands
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
2021 2020
US$
US$
Earnings per share:
Basic and diluted earnings per share 0.572 0.507
Adjusted basic and diluted earnings per Ordinary Share from continuing 0.572 0.440
operations
12. Property, plant and equipment
Year ended 31 December 2020(3)
Land and Plant and Equipment Mining properties and development costs Other assets Construction in Progress Total
buildings
US$ thousands
Cost
At 1 January 2020 323,568 2,271,110 2,321,849 329,529 629,776 5,875,832
Additions 1,930 20,409 3,709 12,910(2) 377,137 416,095
Disposals (1,015) (27,690) (91,266) (3,268) - (123,239)
Transfers and other movements 17,538 122,096 173,362 16,882 (329,878) -
At 31 December 2020 342,021 2,385,925 2,407,654 356,053 677,035 6,168,688
Accumulated depreciation
At 1 January 2020 (162,328) (1,345,809) (1,406,781) (147,497) - (3,062,415)
Depreciation for the year(1) (9,234) (221,497) (256,181) (30,741) - (517,653)
Disposals 387 26,448 91,687 1,053 - 119,575
At 31 December 2020 (171,175) (1,540,858) (1,571,275) (177,185) - (3,460,493)
Net Book amount at 31 December 2020 170,846 845,067 836,379 178,868 677,035 2,708,195
Year ended 31 December 2021(3)
Land and Plant and Equipment Mining properties and development costs Other assets Construction in Progress Total
buildings
US$ thousands
Cost
At 1 January 2021 342,021 2,385,252 2,408,327 356,055 677,035 6,168,690
Additions 8,059 154,908 98,192 12,661 351,614 625,434
Disposals (134) (9,555) (151,807) (426) - 161,922
Transfers and other movements 4,659 110,839 102,580 5,921 (223,999) -
At 31 December 2021 354,605 2,641,444 2,457,292 374,211 804,650 6,632,202
Accumulated depreciation
At 1 January 2021 (171,175) (1,540,185) (1,571,948) (177,185) - (3,460,493)
Depreciation for the year(1) (27,489) (199,392) (271,573) (34,965) - (533,419)
Disposals 11 9,066 151,332 376 - 160,785
At 31 December 2021 (198,653) (1,730,511) (1,692,189) (211,774) - (3,833,127)
Net Book amount at 31 December 2021(4) 155,952 910,933 765,103 162,437 804,650 2,799,075
(1 Depreciation for the year includes US$ $529.4 million (2020: US$515.9
million) recognised as an expense in the income statement and US$4.6 million
(2020: US$1.7 million), capitalised as part of construction in progress.)
(2 From the additions in "other assets" category US$(7.8) million (2020:
US$3.9 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)
(4 The amount of Property, plant and equipment related to Soledad &
Dipolos at 31 December 2021 is US$35.4 million (2020: US$35.9 million) and
reflects capitalised mining works and the amount recognised in the cost of
PP&E related to estimated remediation and closure activities.)
( )
The table below details construction in progress by operating mine and
development projects
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Saucito 85,926 45,845
Herradura 29,479 55,120
Noche Buena 9,685 10,069
Ciénega 38,976 56,032
Fresnillo 188,146 154,276
San Julián 17,304 20,801
Juanicipio 425,513 320,306
Other(1) 9,621 14,586
804,650 677,035
(1 )(Mainly)( corresponds to Minera Bermejal, S.A. de C.V. (2020: Minera
Bermejal, S.A. de C.V.).)
During the year ended 31 December 2021, the Group capitalised US$8.4 million
of borrowing costs within construction in progress (2020: US$8.8 million).
Borrowing costs were capitalised at the rate of 5.02% (2020: 5.02%).
Sensitivity analysis
Management considers that the models supporting the carrying amounts of mining
assets are most sensitive to commodity price assumptions. Management has
considered whether a reasonably possible change in prices could lead to
impairment and concluded that it would not.
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 2021 was $ 5.43 per ounce (2020: $5.37
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 2021 the weighted average discount rate applied for the purposes of
the valuation model was 7.92% (2020: 7.43%).
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 28 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 2021 total proceeds received in cash
were US$49.0 million (2020: US$33.7 million) of which, US$4.8 million was in
respect of proceeds receivable as at 31 December 2020 (2020: US$7.6 million).
Cash received in respect of the year of US$41.3 million (2020: US$28.4
million) corresponds to 2.4 million ounces of payable silver (2020: 2.3
million ounces). As at 31 December 2021, a further US$4.8 million (2020:
US$7.6 million) of cash receivable corresponding to 274,237 ounces of silver
is due (2020: 362,295 ounces).
The US$0.4 million unrealised loss recorded in the income statement (31 Dec
2020: US$71.0 million gain) resulted mainly from the decrease in the forward
silver price curve, increase in the LIBOR reference rate and an update in a
new production mine plan. These effects were compensated by the amortization
effects and higher inflation forecasts.
A reconciliation of the beginning balance to the ending balance is shown
below:
2021 2020
US$ thousands
US$ thousands
Balance at 1 January 576,140 541,254
Cash received in respect of the year (41,338) (28,427)
Cash receivable (4,842) (7,648)
Remeasurement (loss)/gains recognised in profit and loss (416) 70,961
Balance at 31 December 529,544 576,140
Less - Current portion 35,152 41,443
Non-current portion 494,392 534,697
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
2021 2020
US$ thousands
US$ thousands
Finished goods(1) 19,137 28,925
Work in progress(2) 344,805 305,888
Ore stockpile(3) 3,234 414
Operating materials and spare parts 125,824 113,111
493,000 448,338
Allowance for obsolete and slow-moving inventories (5,196) (5,131)
Balance as 31 December 487,804 443,207
Less - Current portion 396,184 351,587
Non-current portion(4) 91,620 91,620
(1 Finished goods include metals contained in concentrates and doré bars on
hand or in transit to a smelter or refinery. )
(2 Work in progress includes metals contained in ores on leaching pads and in
stockspiles that will be processed in dynamic leaching plants (note 2(c)).)
(3 Ore stockpile includes ore mineral obtained during the development phase at
Juanicipio.)
(4 Non-current inventories relate to ore in leaching pads where the leaching
process has stopped and is not expected to restart within twelve months.)
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$1,770.3
million (2020: US$1,550.7 million) . During 2021 and 2020, 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$0.1 million (2020: US$0.3 million).
15. Trade and other receivables
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Trade receivables from related parties (note 26) 265,473 326,833
Value Added Tax receivable 103,448 167,957
Other receivables from related parties (note 26) 4,886 8,176
Other receivables from contractors 27 1,918
Other receivables 11,478 8,545
Other receivables arising from the Layback Agreement (note 2 (c)) 16,684 -
401,996 513,429
Expected credit loss of 'Other receivables' (572) (502)
Trade and other receivables classified as current assets 401,424 512,927
Other receivables classified as non-current assets:
Value Added Tax receivable 34,634 -
Other receivables arising from the Layback Agreement (note 2 (c)) 23,914 -
58,548 -
459,972 512,927
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$315.6 million (2020: US$339.6
million), and in Mexican pesos US$144.4 million (2020: US$173.2 million).
Balances corresponding to Value Added Tax receivables and US$10.4 million
within Other receivables (2020: US$8.5 million) are not financial assets.
As of 31 December for each year presented, except for '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 2021 is US$0.6 million (2020: US$0.5 million). Trade receivables
from related partied and other receivables for related parties are classified
as financial assets at FVTPL and therefore not considered in the expected
credit loss analysis. In determining the recoverability of receivables, the
Group performs a risk analysis considering the type and age of the outstanding
receivable and the credit worthiness of the counterparty, see note 30(b).
16. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its operations and
in order to achieve its treasury objectives.
As at 31 December
2021 2020
US$ thousands
US$ thousands
Cash at bank and on hand 2,834 1,955
Short-term deposits 1,232,448 1,068,460
Cash and cash equivalents 1,235,282 1,070,415
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
2021 2020
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 2020 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2020 736,893,589 $368, 545,586 50,000 £50,000
At 31 December 2021 736,893,589 $368, 545,586 50,000 £50,000
As at 31 December 2021 and 2020, 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 2021 and
2020 are as follows:
US cents per Amount
Ordinary Share
US$ thousands
Year ended 31 December 2021
Final dividend for 2020 declared and paid during the year(1) 23.50 173,170
Interim dividend for 2021 declared and paid during the year(2) 9.90 72,952
33.40 246,122
Year ended 31 December 2020
Final dividend for 2019 declared and paid during the year(3) 11.90 87,690
Interim dividend for 2020 declared and paid during the year(4) 2.30 16,949
14.20 104,639
(1 This dividend was approved by the Shareholders on 24 June 2021 and paid on
28 June 2021)
(2 This dividend was approved by the Board of Directors on 3 August 2020 and
paid 15 September 2021)
(3 This dividend was approved by the Shareholders on 26 May 2020 and paid on 2
June 2020.)
(4 This dividend was approved by the Board of Directors on 27 July 2020 and
paid 16 September 2020)
A reconciliation between dividend declared, dividends affected to retained
earnings and dividend presented in the cash flow statements is as follows:
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Dividends declared 246,122 104,639
Foreign exchange effect 59 -
Dividends recognised in retained earnings 246,181 104,639
Foreign exchange and hedging effect (620) 47
Dividends paid 245,561 104,686
The directors have proposed a final dividend of US$24 cents per share, which
is subject to approval at the annual general meeting and is not recognised as
a liability as at 31 December 2021. Dividends paid from the profits generated
from 1 January 2014 to residents in Mexico and to non-resident shareholders
may be subject to an additional tax of up to 10%, which will be withheld by
the Group.
In late 2019, the Directors became aware of a technical breach of the
Companies Act 2006 (the Act) whereby certain dividends paid between 2011 and
2019 (the 'Historic Dividends') had been made without having filed interim
accounts in accordance with the Act. The relevant interim accounts have now
been filed with the Registrar of Companies and these show that the Company had
sufficient distributable reserves at the point at which each of the Historic
Dividends was paid. It is the intention of the Directors, as a matter of
prudency, to put forward a resolution to shareholders in due course to
regularise the position. This decision will have no effect on the monies
received pursuant to these dividends and will not adversely impact
shareholders or the Company. Nevertheless, the Directors will keep the matter
under review.
19. Interest-bearing loans
Senior Notes
On 29 September 2020, the Group repurchased certain of its 5.500% Senior Notes
due 2023 that had a carrying value of US$482.1 million for consideration of
US$543.0 million. Additional accrued interest at the date of the repurchase
included in the settlement amounted US$10.8 million. The premium paid on
purchase of these notes of US$60.9 million was recognised in financial
expenses. The settlement occurred on 2 October 2020.
On 2 October 2020, the Group completed its offering of US$850,000,000
aggregate principal amount of 4.250% Senior Notes due 2050. The proceeds were
partially used to finance the repurchase mentioned above.
Movements in the year in the debt recognised in the balance sheet are as
follows:
As at 31 December
2021 2020
US$ thousands US$ thousands
Opening balance 1,156,670 801,239
Issuance of 4.250% senior notes due 2050(1) - 828,325
Repayments of 5.500% senior notes due 2023 - (482,121)
Accrued interest 56,384 48,873
Interest paid(2) (56,370) (43,144)
Amortisation of discount and transaction costs 861 3,498
Closing balance 1,157,545 1,156,670
(1 Balance is net of unamortized discounts and capitalized transaction costs
of $21.7 million.)
(2 Accrued interest is payable semi-annually on 13 May and 13 November for
5.500 senior notes and 2 April and 2 October for 4.250% senior notes.)
( )
The Group has the following restrictions derived from the issuance of all
outstanding Senior 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 risk-adjusted 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; the effects of climate change, and the
discount, foreign exchange and inflation rates applied. Closure provisions are
typically based on conceptual level studies that are refreshed at least every
three years. As these studies are renewed, they incorporate greater
consideration of forecast climate conditions at closure.
The Group has performed separate calculations of the provision by currency,
discounting at corresponding rates. As at 31 December 2021, the discount rates
used in the calculation of the parts of the provision that relate to Mexican
pesos range from 6.39% to 8.33% (2020: range from 4.35% to 8.12%). The range
for the current year parts that relate to US dollars range from 0.57% to 1.40%
(2020: range from 0.07% to 1.16%).
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 lives of the mines.
The provision is expected to become payable at the end of the production life
of each mine, based on the reserves and resources, which ranges from 3 to 24
years from 31 December 2021 (3 to 24 years from 31 December 2020). As at 31
December 2021 the weighted average term of the provision is 12 years (2020: 12
years).
As at 31 December
2021 2020
US$ thousands
US$ thousands
Opening balance 245,688 231,056
Increase to existing provision 17,078 8,351
Effect of changes in discount rate (7,821) 3,896
Unwinding of discount rate 11,622 10,801
Payments (879) (817)
Foreign exchange (5,381) (7,599)
Closing balance 260,307 245,688
Less - Current portion (note 22) 3,351 880
Non-current portion 256,956 244,808
The provision is sensitive to changes in discount rates. Changes in market
rates and risks not considered in the risk-adjusted cost estimates could
change the discount rate. To illustrate the sensitivity of the provision to
discounting, if the discount rate at 31 December 2021 decreased by 50 basis
points then the provision would be US$43.4 million higher, of which
approximately US$43.3 million would be capitalised within "Property, plant and
equipment" at operating sites and US$0.1 million would be charged to the
income statement for non-operating sites. If the discount rate increased by 50
basis points then the provision would be US$27.2 million lower, of which
approximately US$27.1 million would result in a decrease within "Property,
plant and equipment" at operating sites and US$0.1 million would be credited
to the income statement for non-operating sites.
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 Mexican 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 up to 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
2021 interest 2021
US$ thousands
Defined benefit obligation (31,358) (1,249) (1,906) 1,572 (1,583) 841 3,946 3,946 2,481 (25,673)
Fair value of plan assets 19,381 1,167 (616) 1,283 (841) 1,744 1,744 732 (2,400) 19,167
Net benefit liability (11,977) (517) (739) 956 (300) - 1,744 3,946 5,690 81 (6,506)
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
2020 interest 2020
US$ thousands
Defined benefit obligation (31,294) (1,211) (1,738) 1,595 (1,354) 985 - - (487) 976 - 489 - (184) (31,358)
Fair value of plan assets 20,590 1,089 (1,123) (34) (985) (342) - - - - (342) - 152 19,381
Net benefit liability (10,704) (1,211) (649) 472 (1,388) - (342) - (487) 976 - 147 - (32) (11,977)
Of the total defined benefit obligation, US$9.6 million (2020: US$9.6 million)
relates to statutory seniority premiums for unionised workers which are not
funded. The expected contributions to the plan for the next annual reporting
period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown below:
As at 31 December
2021 2020
%
%
Discount rate 7.99 7.09
Future salary increases (National Consumer Price Index) 5.00 5.00
The life expectancy of current and future pensioners, men and women aged 65
and older will live on average for a further 24.08 and 27.05 years
respectively (2020: 23.4 years for men and 26.9 for women). The weighted
average duration of the defined benefit obligation is 12.1 years (2020: 12.5
years).
The fair values of the plan assets were as follows:
As at 31 December
2021 2020
US$ thousands
US$ thousands
State owned companies 3,180 3,756
Mutual funds (fixed rates) 15,987 15,625
19,167 19,381
As at 31 December 2021 and 2020, 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 2021 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) (1,079) 1,174 157 (156) 208
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
2021 2020
US$ thousands
US$ thousands
Trade payables 130,187 86,838
Note payable(1) 107,918 64,425
Other payables to related parties (note 26) 30,930 19,629
Accrued expenses 22,319 16,368
Layback Agreement (note 2 (c)) 67,182 -
Other taxes and contributions 19,699 37,948
378,235 225,208
( 1 Corresponds to a short-term interest-bearing note payable received from
Minera los Lagartos, S.A. de C.V. which holds a non-controlling interest in
Juanicipio project. During 2021 Juanicipios's shareholders agreed to extend
the maturity of the notes bases on expected cash flows and repayment
intention.)
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.
Balances corresponding to Accrued expenses and Other tax and contributions are
not financial liabilities.
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
2021 2020
US$ thousands
US$ thousands
Saucito 49,127 30,922
Herradura 21,258 23,635
Noche Buena 213 373
Ciénega 15,710 9,304
Fresnillo 43,541 25,256
San Julián 6,379 3,051
Juanicipio 103,100 189,128
Other 970 2,909
240,298 284,579
( )
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 2021 31 December 2020
US$ thousands
US$ thousands
IT equipment 8,406 9,779
Buildings 2,421 2,966
Total lease liability 10,827 12,745
Less - Current portion 4,681 5,048
Non-current portion 6,146 7,697
The total cash outflow for leases for the year ended 31 December 2021, except
short term and low value leases, amount US$6.5 million (2020: US$5.8
million).
The table below details right-of-use assets included as property plant and
equipment in note 12
Year ended 31 December 2021
Building Computer equipment Total
US$ thousands
Cost
At 1 January 2021 4,001 17,527 21,528
Additions 331 2,889 3,220
At 31 December 2021 4,332 20,416 24,748
Accumulated depreciation
At 1 January 2021 (1,059) (8,056) (9,115)
Depreciation for the year (727) (4,375) (5,102)
At 31 December 2021 (1,786) (12,431) (14,217)
Net book amount at 31 December 2021 2,546 7,985 10,531
Amounts recognized in profit and loss for the year, additional to depreciation
of right-of-use assets, included US$0.5 million (2020: US$0.6 million)
relating to interest expense, US$0.7 million (2020: US$0.7million) relating to
short-term leases and US$3.3million (2020: $2.9 million) 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 2021, 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.
- Certain of the Group's income tax returns are currently being
reviewed by the SAT. The status of the material on-going inspections is as
follows:
- On 13 February 2020, SAT initiated an audit of the income tax and
mining rights computations of Desarrollos Mineros Fresne, S de R.L. de C.V.
for the year 2014. On 3 February 2021, the SAT delivered its findings to which
the company responded. The findings relate to the tax treatments of
capitalised stripping cost and exploration expenditure. The company responded
to the SAT and initiated a procedure with the Mexican Taxpayer Ombudsman
(PRODECON) to procure a Conclusive Agreement with SAT in respect of these
findings. The process is ongoing.
- On 11 February 2021, SAT initiated an audit of the income tax and
mining rights computations of Desarrollos Mineros Fresne, S de R.L. de C.V.
for the year 2015. The findings are similar to the 2014 Tax Audit Findings,
and relate to the tax treatments of capitalised stripping cost, exploration
expenditure, and in-period deduction of certain ore extraction services as an
expense. On 8 February 2022, the SAT delivered its findings to which the
company responded. It is expected that the company will initiate a procedure
with PRODECON to procure a Conclusive Agreement with SAT in respect of these
findings.
Due to the current stage of the Conclusive Agreement regarding 2014 and the
audit procedures for 2015, it is not possible to anticipate whether the tax
authorities are going to assess a deficiency to Desarrollos Mineros Fresne, S
de R.L. de C.V. 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 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 had been 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$13.6 million in respect of the insurance claim, however this
does not constitute a final settlement and management continues to pursue a
higher insurance payment. Due to the fact that negotiations are on-going and
there is uncertainty regarding the timing and amount involved in reaching a
final settlement with the insurer, it is currently not practicable to
determine the total amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances; however,
there is no certainty that this interest will be realised until the underlying
balance is recovered. Due to that uncertainty, it is also not practicable to
estimate the amount of interest income earned but not recovered to date.
26. Related party balances and transactions
The Group had the following related party transactions during the years ended
31 December 2021 and 2020 and balances as at 31 December 2021 and 2020.
Related parties are those entities owned or controlled by the ultimate
controlling party, as well as those who have a minority participation in Group
companies and key management personnel of the Group.
(a) Related party balances
Accounts receivable Accounts payable
As at 31 December As at 31 December
2021 2020 2021 2020
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 265,473 326,833 298 170
Other:
Industrias Peñoles, S.A.B. de C.V. 4,842 7,648 - -
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 6 397 - -
Servicios Administrativos Peñoles, S.A. de C.V. - - 4,519 3,156
Servicios Especializados Peñoles, S.A. de C.V. - - 179 2,652
Fuentes de Energía Peñoles, S.A. de C.V. - - 5,220 568
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 2,154 2,662
Eólica de Coahuila S.A. de C.V. - - 13,589 7,342
Minera Capela, S.A. de C.V. 714 -
Other 38 131 4,257 3,079
Sub-total 270,359 335,009 30,930 19,629
Less-current portion 270,359 335,009 30,930 19,629
Non-current portion - - - -
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 529,544 576,140
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
2021 2020
US$ thousands
US$ thousands
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,704,447 2,427,692
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 23 2,761
Other income 2,708 3,618
Total income 2,707,178 2,434,071
(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$143.5 million (2020:
US$180.5 million). During 2021 and 2020 there were no sales credited to
development projects.)
( )
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Expenses:
Administrative services:
Servicios Administrativos Peñoles, S.A. de C.V. (2) 35,654 33,031
Servicios Especializados Peñoles, S.A. de C.V. (3) 19,105 17,932
54,759 50,963
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 19,597 17,616
Fuentes de Energía Peñoles, S.A. de C.V. 5,019 5,051
Eólica de Coahuila S.A. de C.V. 39,423 36,090
64,039 58,757
Operating materials and spare parts:
Wideco Inc 5,465 5,362
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 10,579 7,389
16,044 12,751
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 10,029 6,476
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 16,422 12,278
Other expenses: 7,441 3,351
Total expenses 168,734 144,576
(2 Includes US$3.1 million (2020: US$5.1 million) corresponding to expenses
reimbursed.)
(3 Includes US$2.6 million (2020: US$3.0 million) relating to engineering
costs that were capitalised.)
In 2020, the Group paid US$16.1 million to Industrias Peñoles, S.A.B de C.V.
related to the settlement of amounts due to the SAT arising from the voluntary
tax amendment mentioned in Note 10 (a) in respect of the fiscal year 2013.
This payment was made as settlement of the adjustment in respect of 2013 was
done in accordance with the tax consolidation regime that was applicable in
that year.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the
Executive Committee.
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Salaries and bonuses 3,142 3,092
Post-employment benefits 192 146
Other benefits 337 370
Total compensation paid in respect of key management personnel 3,671 3,608
Year ended 31 December
2021 2020
US$ thousands
US$ thousands
Accumulated accrued defined benefit pension entitlement 4,138 5,005
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 2021
and 2020 are as follows:
Year ended 31 December
Class of services 2021 2020
US$ thousands
US$ thousands
Fees payable to the Group's auditor for the audit of the Group's annual 1,413 1,439
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 382 242
Audit-related assurance services 497 521
Other assurance services - 309
Total 2,292 2,511
28. Notes to the consolidated statement of cash flows
Notes 2021 2020
US$ thousands
US$ thousands
Reconciliation of profit for the year to net cash generated from operating
activities
Profit for the year 438,496 375,579
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 12 529,390 515,909
Employee profit sharing 7 16,662 19,275
Deferred income tax expense/(credit) 10 (157,116) (63,970)
Current income tax expense 10 330,151 239,644
(Gain)/loss on the sale of property, plant and equipment and other assets 8 (5,041) 667
Net finance costs 52,863 129,066
Foreign exchange loss 1,306 22,342
Difference between pension contributions paid and amounts recognised in the 625 1,243
income statement
Non cash movement on derivatives 531 (56)
Changes in fair value of Silverstream 13 416 (70,961)
Working capital adjustments
Decrease/(Increase) in trade and other receivables 85,580 (61,561)
(Increase)/decrease in prepayments and other assets (2,233) 331
Increase in inventories (44,596) (79,467)
Decrease in trade and other payables 19,252 10,933
Cash generated from operations 1,266,287 1,038,974
Income tax paid(1) (349,840) (114,170)
Employee profit sharing paid (21,306) (7,119)
Net cash from operating activities 895,141 917,685
(1) (Income tax paid includes US$321.8 million corresponding to corporate
income tax (020: US$103.6 million) and US$28.0 corresponding to special mining
right (2020: US$10.6 million), for further information refer to note 10.)
29. Financial instruments
(a) Fair value category
As at 31 December 2021
US$ 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) 41,217 - - 270,315
Equity instruments at FVOCI - 164,525 - -
Silverstream contract (note 13) - - - 529,544
Derivative financial instruments - - 96 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 19) - 1,157,545 - -
Trade and other payables (note 22) - 161,117 - -
Note payable (note 22) - 107,918 - -
Derivative financial instruments - 3,885 -
( )
As at 31 December 2020
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) 1,944 - - 334,482
Equity instruments at FVOCI - 212,576 - -
Silverstream contract (note 13) - - - 576,140
Derivative financial instruments - - 6,290 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 19) - 1,157,545 - -
Trade and other payables (note 22) - 106,467 - -
Note payable (note 22) - 64,425 - -
(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
2021 2020 2021 2020
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Financial assets:
Trade and other receivables 41,217 1,944 41,217 1,944
Financial liabilities:
Interest-bearing loans(1) (note 19) 1,157,545 1,156,210 1,237,689 1,297,770
Trade and other payables 161,117 106,467 161,117 106,467
Note payable (note 22) 107,918 64,425 107,918 64,425
(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 2021
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 - - 270,315 270,315
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 66 - 66
Option and forward foreign exchange contracts - 30 - 30
Silverstream contract - - 529,544 529,544
Other financial assets:
Equity instruments at FVOCI 164,525 - - 164,525
164,525 96 799,859 964,480
Financial liabilities:
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 2,987 - 2,987
Option and forward foreign exchange contracts - 898 - 898
- 3,885 - 3,885
As of 31 December 2020
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 - - 334,482 334,482
Derivative financial instruments:
Option commodity contracts (note 29 (c)) - 1,666 - 1,666
Option and forward foreign exchange contracts - 4,624 - 4,624
Silverstream contract - - 576,140 576,140
Other financial assets:
Equity instruments at FVOCI 212,576 - - 212,576
212,576 6,290 910,622 1,129,488
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:
2021 2020
US$ thousands
US$ thousands
Balance at 1 January: 326,834 206,982
Sales 3,247,864 5,352,029
Cash collection (3,307,951) (5,234,771)
Changes in fair value (3,695) 21,165
Realised embedded derivatives during the year 2,421 (18,571)
Balance at 31 December 265,473 326,834
( )
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 several 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). These investments were irrevocably designated at
fair value through OCI as the Group considers these investments to be
strategic in nature. As of 31 December 2021, approximately 89.8% of the
investments correspond to 9,314,877 shares (2020: 9,314,877 shares) of Mag
Silver, Corp. for an amount of US$146.1 million (2020: US$199.5 million) and
7.3% of Endeavor, Inc. represented by 2,800,000 (2020: 2,800,000 shares)
shares for an amount of US$11.9 million (2020: US$14.1 million). These equity
investments are listed on the Canadian Stock Exchange. The prices per share as
31 December 2021 were US$15.69 (2020: US$20.47) and US$4.23 (2020: US$5.05),
respectively.
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 and
other foreign currencies 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.
The following table demonstrates the sensitivity of cash and cash equivalents,
trade and other receivables, trade and other payables and derivatives
financial instruments (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
2021 10% 2,123 1,251
(5%) (1,229) (1,587)
2020 20% 2,792 30,056
(15%) (668) (12,378)
The effects on profit before tax and equity of reasonably possible changes to
the US dollar exchange rate compared to the Mexican peso on the Silverstream
contract are not material. The Group's exposure to reasonably possible changes
in other currencies is not material.
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 (excluding Silverstream)
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
2021 10% 15% 25% 15% 40,688 (4,861)
(10%) (15%) (15%) (15%) (36,638) 2,707
2020 20% 45% 25% 15% 88,037 (7,989)
(20%) (45%) (20%) (15%) (86,165) 22,697
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
2021 15% 104,419
(15%) (104,419)
2020 45% 338,484
(45%) (338,494)
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
2021 25 3,088
- -
2020 25 2,676
(20) (2,141)
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
2021 25% (13,219)
- -
2020 25 (14,689)
(20) 12,239
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)
2021 25% - 40,707
(45%) - (73,272)
2020 70% - 148,803
(40%) - (85,031)
(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 2021 and 2020. 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 several 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 2021, 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 2021, being US$529.5 million (2020: US$576.1
million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using projected cash flows
from operations and by monitoring the maturity of both its financial assets
and liabilities.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2021
Interest-bearing loans (note 19) 56,370 412,236 75,973 1,761,672 2,306,251
Trade and other payables 122,794 - - - 122,794
Note payable (note 22) 107,918 - - - 107,918
Lease liabilities (note 24) 4,681 4,905 661 580 10,827
Derivative financial instruments - liabilities 3,885 - - - 3,885
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2020
Interest-bearing loans (note 19) 56,370 430,620 75,973 1,799,658 2,362,621
Trade and other payables 106,467 - - - 106,467
Note payable (note 22) 64,425 - - - 64,425
Lease liabilities (note 24) 5,048 5,933 907 857 12,745
Derivative financial instruments - liabilities - - - - -
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 2021
Inflows 48,602 - - - 48,602
Outflows (51,588) - - - (51,588)
Net (2,986) - - - (2,986)
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2020
Inflows 45,343 - - - 45,343
Outflows (40,768) - - - (40,768)
Net 4,575 - - - 4,575
The above liquidity tables include expected inflows and outflows from currency
option contracts which the Group expects to be exercised during 2022 as at 31
December 2021 and during 2021 as at 31 December 2020, 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
2021 and 2020 consisted of only cash and cash equivalents.
1 (#_ftnref1) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
2 (#_ftnref2) Earnings before interest, taxes, depreciation and amortisation
(EBITDA) is calculated as profit for the year from continuing operations
before income tax, less finance income, plus finance costs, less foreign
exchange gain/(loss), less revaluation effects of the Silverstream contract
and other operating income plus other operating expenses and depreciation.
3 (#_ftnref3) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
4 (#_ftnref4) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
5 (#_ftnref5) Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
6 (#_ftnref6) Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and unproductive
costs. 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.
7 (#_ftnref7) Unproductive costs primarily include unabsorbed production
costs such as fixed production cost (labour cost and depreciation) incurred in
Minera San Julián due to a shortfall in electricity and fixed costs incurred
in Minera Penmont during the temporary suspension of mining activities at the
beginning of the COVID-19 pandemic, and other costs related to the subsequent
ramp-up of operations and the underutilisation of production capacity once
mining activity was resumed. Unproductive costs are recognised within cost of
sales but excluded from adjusted production costs.
8 (#_ftnref8) Cost inflation of 9.55% (including the effect of the Mexican
peso revaluation) had an adverse effect of US$102.2 million (the sum of i and
ii).
9 (#_ftnref9) Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
10 (#_ftnref10) Cash and other liquid funds are disclosed in note 30(c) to
the consolidated financial statements.
11 (#_ftnref11) Net debt is calculated as debt at 31 December 2021 less Cash
and other liquid funds at 31 December 2021 divided by the EBITDA generated in
the last 12 months.
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