REG - Fresnillo Plc - FY22 Preliminary Results
07/03/2023 07:00
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RNS Number : 1269S Fresnillo PLC 07 March 2023
Fresnillo plc
Financial results for the year ended 31 December 2022
Fresnillo plc today announced its financial results for the full year ended 31
December 2022.
Octavio Alvídrez, CEO said:
"Fresnillo delivered a resilient operating performance in 2022, with our
people rising to meet a number of external challenges and deliver on our
production guidance. Our financial results were impacted by industry pressures
included volatile precious metal prices and higher cost inflation, while our
workforce continued to feel the impact of the pandemic and caused delays to
our development programme, and more specific to Mexico, the labour reform
which limited the use of contractors requiring us to train new employees.
Despite these, gold and silver production was in line with guidance and we
have made solid progress on our strategy, both maximising the potential of our
current mines, while also continuing to explore on our considerable growth
pipeline. Our new Juanicipio mine is now being commissioned and we expect to
achieve grid connection of the new pyrites plant phase II in the second
quarter. We achieved much in 2022, and I would like to thank all my colleagues
for their diligence. We are announcing a final dividend for 2022 of 13.3 US
cents per share to shareholders, in line with our policy. Looking ahead, we
are confident in our existing operations, and excited about our growth
pipeline. We are the largest silver producer in the world, have high quality
assets, a consistent strategy, a very strong balance sheet, a vibrant culture,
talented personnel and an experienced management team. Fresnillo's future is
bright."
Financial Highlights - 12 months to 31 December 2022
$ million unless stated 2022 2021 % change
Silver Production* (kOz) 53,740 53,095 1.2
Gold Production* (Oz) 635,926 751,203 (15.3)
Total Revenue 2,433.0 2,703.1 (10.0)
Adjusted Revenue** 2,597.2 2,847.9 (8.8)
Gross Profit 536.0 936.9 (42.8)
EBITDA 751.1 1,206.3 (37.7)
Profit Before Income Tax 248.6 611.5 (59.4)
Profit for the year 308.3 438.5 (29.7)
Basic and Diluted EPS excluding post-tax Silverstream effects (USD)*** 0.351 0.572 (38.6)
* 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
2022 and 2021. See note 18 in the consolidated financial statements.
2022 Highlights
Resilient operating performance in line with guidance
· Full year attributable silver production of 53.7 moz (including
Silverstream), in line with guidance, slightly above FY21, with initial
production from Juanicipio and increased volumes of ore processed at
Fresnillo, offset by the lower ore grade at San Julián (DOB).
· Full year attributable gold production of 635.9 koz, in line with
guidance, down 15.3% vs. FY21, primarily due to a lower recovery rate as
higher volumes of sulphide ore are processed and lower ore grade at Herradura,
and a decrease in the volume of ore processed and lower ore grades at Noche
Buena, Saucito and Ciénega.
· Full year attributable by-product lead production decreased 6.4% vs.
FY21 due to a decrease in the volume of ore processed and lower ore grade at
Saucito and decreased ore grade at San Julián (DOB), mitigated by increased
ore throughput and higher ore grade at Fresnillo and increased contribution
from Juanicipio
Challenging operational and economic environment impacted financial results
· Adjusted revenue decreased 8.8% over 2021 primarily due to the lower
volumes of gold sold and the decrease in silver price, mitigated by the
increase in silver production and higher zinc price.
· Revenue decreased 10.0% year-on-year to US$2,433.0 million due to the
lower adjusted revenue combined with higher treatment and refining charges.
· Adjusted production costs to US$1,445.8 million, up 15.2% over 2021
mainly due to cost inflation in US dollar, costs from the start-up of
operations at Juanicipio and increase in the use of infrastructure
contractors, maintenance, operating materials and diesel; mitigated by lower
stripping to cost at Herradura and a decrease in volume of ore processed at
Saucito, Ciénega, San Julián (Veins).
· Gross profit and EBITDA decreased to US$536.0 million and US$751.1
million, a 42.8% and 37.7% decrease over 2021.
· Exploration spend of US$165.8 million, up 27.2% in line with our
strategy to intensify exploration activities in specific targets.
· Profit from continuing operations of US$283.6 million, down 57.5% as
a result of lower gross profit and higher exploration expenses.
· Profit for the year attributable to equity shareholders of the Group
of US$271.9 million, down 35.4% on 2021 mainly due to the lower profit from
continuing operations, mitigated by the US$18.8 million Silverstream
revaluation gain compared to US$0.4 million loss registered in 2021 and tax
income for the period of US$67.4 million, which compared favourably to the
US$156.5 million tax expense in 2021 (See Financial Review section).
· US$969.1 million in cash and other liquid funds(1) as of 31 December
2022 notwithstanding paying dividends of US$202.0 million and investing
US$592.1 million in capex.
· Net debt was US$198.7 million as at 31 December 2022. This compares
to the net cash position of US$67.5 million as at 31 December 2021.
· Final dividend of 13.3 US cents per share, amounting to US$98.0
million. This is in addition to the interim dividend of 3.40 US cents per
share amounting to US$25.1 million.
· This brings the total dividend for the year to 16.7 US cents per
share, in line with the Group's dividend policy.
Maintaining focus on operational improvement and addressing challenges of the
labour reform
· Intensive recruitment and training campaigns were completed, albeit
with some impacts to productivity and development during the year, and our
mines are well staffed for 2023.
· Invested in new equipment to replace what was provided by contractors
prior to the labour reform.
· Infrastructure projects continued to progress:
o The new pumping station was commissioned at the beginning of the year at
Fresnillo, enabling us to increase pumping capacity and ensuring access to
development and production areas.
o The works to deepen the San Carlos shaft were concluded. However,
modifications to the shaft infrastructure to improve its functionality once in
operation were approved and implemented, thus delaying its commissioning to
2Q23.
o At Saucito, we continued with the project to deepen the Jarillas shaft to
1,000 metres with completion expected 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 and advancing project pipeline
· The tie in of the Juanicipio flotation plant to the national grid was
concluded by end of 2022, with commissioning starting immediately afterwards.
· Due to the prioritisation of the connection at Juanicipio, the tie in
of the Pyrites plant at Fresnillo was delayed and start up is now expected in
2Q23.
· Land access discussions continued at Rodeo and we are now in the
process of developing a scoping study.
· Several PFS level studies advanced as scheduled at Orisyvo, together
with additional land acquisition and a strengthened community engagement plan.
6,000-metre drilling programme completed during the year and we are currently
preparing the geotechnical model.
· Expect to commence drilling at the Pilarica silver and the Supaypacha
gold-copper projects in Peru, following delays caused by challenges with land
access, and we anticipate posting resources at Capricornio in Chile during
2023.
· Silver resources decreased 5.0% to 2,203.9 moz primarily due to
mining depletion, higher costs and cut-off grades and a more conservative
approach to resource estimation in Fresnillo, Saucito and Ciénega, balanced
in part by positive exploration results at the Guanajuato exploration project.
Silver reserves decreased 5.6% to 396.1 moz mainly from mining depletion and
higher costs and cut-off grades at Fresnillo and Saucito, and depletion at San
Julián (DOB), partly offset by increased reserves from exploration at San
Julián veins.
· Gold resources remained stable at 39.1 moz. Gold reserves increased
4.4% to 8.2 moz mostly as a result of resource model improvements at
Herradura, balanced in part by mining depletion at Noche Buena.
Advancing and enhancing the sustainability of our operations
· Our goal remains Zero Harm, supported by the 'I Care, We Care'
programme that focuses on leadership, accountability, safety culture, high
potential incident management, engineering systems and lessons learnt.
· Core safety KPIs again saw a reduction in incidents, continuing our
long-term trend.
· Continued to implement best practice governance and engineering to
manage our Tailings Storage Facilities (TSF). Reviews of our facilities by the
Independent Tailings Review Panel have continued: TSF at Juanicipio became our
first facility to fully meet Canadian Dam Association (CDA), Mining
Association of Canada (MAC), International Commission on Large Dams (ICOLD)
and International Council on Mining and Metals (ICMM) principles from the
earliest days of its development, design and construction.
· Initiated our Women for Women Mentorship Programme with a first
generation of mentors and mentees to foster female talent.
· Conducted thorough evaluations of technical and environmental factors
in Noche Buena as part of its closure plan.
2023 outlook and longer term prospects
· Attributable silver production expected to be in the range of 57.0 to
64.0 moz (including Silverstream).
· Attributable gold production expected to be in the range of 590 to
640 koz.
· Capital expenditure is anticipated to be approximately US$630 million
as we continue to invest in mining works and sustaining capex, including
replacing equipment from contractors, while exploration expenses are expected
to be c. US$175 million.
· Global macroeconomic and geopolitical factors likely to continue
impacting our business:
o Precious metals prices are expected to continue to be volatile and
influenced by Government policies.
o Inflationary pressures are expected to continue affecting our costs
· We have undertaken a full scale appraisal of costs resulting in
dozens of initiatives to reduce non-essential costs, including:
o Optimisation of staffing plans, including rationalisation of contractor
roles, to increase productivity and improve efficiency
o An assessment in 2023 across all mines to confirm the optimal development
rate
o At Fresnillo:
§ New pumping station commissioned which improves extraction efficiency
§ Deepening of the San Carlos shaft leading to reduced haulage costs
o At Saucito:
§ Modifications to mine plan resulting in improved logistics within the mine
o At Herradura:
§ Optimisation of slopes leading to lower stripping and haulage costs
§ Installation of duel fuel systems on trucks to reduce diesel consumption
§ Modifications to mine plan resulting in improved logistics within the mine
· Our proven ability to deliver development projects, the investments
we are making into personnel and infrastructure, along with our extensive
medium-term pipeline provide a base for considerable confidence in the
long-term future of the business.
Analyst Presentation
Fresnillo plc will be hosting a webcast presentation for analysts and
investors today at 9:00am (GMT). A link to the webcast will be made available
on Fresnillo's homepage: www.fresnilloplc.com (http://www.fresnilloplc.com) or
can be accessed directly here
https://kvgo.com/IJLO/Fresnillo_FY22_Preliminary_Results
(https://kvgo.com/IJLO/Fresnillo_FY22_Preliminary_Results)
Questions may be submitted via the webcast.
For those unable to access the webcast, a conference line will also be
provided:
Conference Call Dial-in;
Mexico: 00 1 866 966 8830
UK-Wide: +44 (0) 33 0551 0200
UK Toll-Free: 0808 109 0700
USA Local: +1 786 697 3501
USA Toll-Free: 866 580 3963
Password: Fresnillo
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
Mark Mochalski
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 eight operating mines, all of them in Mexico - Fresnillo,
Saucito, Juanicipio, Ciénega, Herradura, Soledad-Dipolos(1), Noche Buena and
San Julián (Veins and Disseminated Ore Body), one development project - the
Pyrites Plant at Fresnillo, which has been completed and is awaiting tie-in of
the plant to the national electricity grid, and four advanced exploration
projects - Orisyvo, Rodeo, Guanajuato and Tajitos as well as a number of other
long term exploration prospects.
Fresnillo plc has mining concessions and exploration projects in Mexico, Peru
and Chile.
Fresnillo plc has a strong and long tradition of exploring, mining, a proven
track record of mine development, reserve replacement, and production costs in
the lowest quartile of the cost curve for silver.
Fresnillo plc's goal is to maintain the Group's position as the world's
largest primary silver company and Mexico's largest gold producer.
(1) Operations at Soledad-Dipolos are currently suspended.
Chairman's statement
Alejandro Baillères
Steady progress in challenging times
In common with organisations across the world, this was a challenging year for
Fresnillo that saw us battle against a number of factors that were to a large
extent beyond our immediate control, including high volatility in metals
prices and inflationary pressures, among others. While some of these
challenges were global in nature, others were more specifically related to the
mining sector in Mexico.
Against this backdrop, Fresnillo plc's operational performance was in line
with our expectations. As our Chief Executive reports in his statement, we
have made steady progress during the year. Thanks to the support and
engagement of all our stakeholders, we are a resilient and responsible
business, and we are committed to deliver returns to shareholders while also
laying foundations for future prosperity.
Reaching our targets
Silver production was broadly stable on the previous year while gold was down,
both in line with our guidance.
We achieved US$2,597.2 million in adjusted revenue during the year. This
represented a decrease of 8.8%, primarily due to the decrease in the volume of
gold produced and lower prices for silver. Gross profit decreased year-on-year
by 42.8% to US$536.0 million, primarily driven by the decrease in the volume
of gold sold, lower silver prices, the adverse effect of cost inflation, and
the increased consumption of operating materials, maintenance and contractors,
which significantly impacted cost of sales. Cash and other liquid funds
decreased from US$1,235.3 million to US$969.1 million as the use of funds,
primarily the investment in capital expenditure and dividend payments, was
higher than the cash generated by the mines.
We recognise that we live in uncertain times and will always approach each
challenge with an open mind, tailoring our response to meet the circumstances
we encounter - always with optimal outcomes for our stakeholders at the
forefront of our minds. However, in one key aspect of our business we remain
steadfastly constant: we will never forsake long-term prosperity for
short-term gain. 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.
For 2022, we declared an interim dividend of 3.40 US cents per share, with a
final dividend of 13.30 US cents per share, bringing the total for the year to
16.70 US cents per share.
Navigating global challenges…
In terms of the macro challenges that faced so many businesses during 2022, we
continued to be impacted by Covid-19 with a fourth and then a fifth wave
reaching Mexico. Although absenteeism understandably rose for a period, the
impact on our operations was limited. Guided by our Purpose - to contribute to
the wellbeing of people through the sustainable mining of silver and gold - we
continued to protect the health and safety of our teams. We worked with the
authorities to implement strict protocols to help prevent the spread of the
virus and facilitated vaccinations for our people and their communities. These
measures are now permanent features of our operations. At the year end, the
vast majority of our workforce had been fully vaccinated with two doses and
almost half had received their booster.
Covid-19 and commercial tensions between the US and China meant that we also
faced supply chain issues during the year, and these affected the timely
delivery of equipment and spare parts. In addition, we saw inflation begin to
impact the business, with increases in operating materials, contractor costs
and other inputs, especially in the second half of the year.
…as well as those closer to home
Turning to the mining industry in Mexico, a number of specific challenges have
placed additional stresses on our Group in recent times.
Firstly, the new labour legislation - which restricts our ability to
subcontract labour - continued to disrupt our activities, although not to the
same extent as in the prior year. This legislation created great pressure on
our workforce, which had historically comprised a high percentage of
contractor personnel, and meant that we had to adjust our business model and
recruit more people into our in-house workforce, especially difficult in a hot
labour market. The recruitment initiatives which our management teams have
been implementing have borne fruit, and all our mines are now either fully
staffed or very close to it.
Secondly, we experienced significant delays in completing the tie-ins to the
national power grid for both our new mine at Juanicipio and the new Pyrites
Plant at the Fresnillo mine. Both these development projects were expected to
be operational early in 2022, bringing valuable income and jobs to local
communities. However, additional requirements and cautionary measures from the
authorities meant that Juanicipio was not able to commence operations until
the first quarter in 2023, with the start up of operations at the Pyrites
Plant now expected to follow in the second quarter of the year.
With similar results, we have also continued to be impacted by delays to
permitting processes, which have increased in both complexity and timescale.
Our exploration teams work hard to identify potentially profitable mines that
are therefore able, in turn, to bring prosperity to local communities,
including many in poor and remote regions, and unforeseen delays in obtaining
permits can have a negative knock-on effect.
Since 2018, we have sourced an average of over 50% of electricity from wind
power. However, we have been frustrated in some of our attempts to play our
part in mitigating climate change. Our goal is for wind power to provide 75%
of our electricity by 2030, but our ability to reach that target requires the
support of Mexico's energy policy. Furthermore, although we have now completed
our investment in the facilities to enable our Herradura haulage fleet to run
on dual fuel (diesel and LNG) engines, which will further cut our carbon
emissions, approval from the authorities to use certain infrastructure was
delayed but has now been approved.
What these issues demonstrate is that a closer and more proactive working
relationship with the Government in Mexico and its various departments - and
their equivalents in Peru and Chile - would bring great benefits to all
parties involved. I know that we are all striving to achieve the same things
for our country: strong growth, economic stability, high quality jobs and
support for local communities. During the coming months we will redouble our
efforts to engage with governments and other authorities in a spirit of trust
and mutual respect in order to help identify a smooth path ahead that achieves
all our diverse objectives.
Board activities
The Board met regularly throughout the year and discussed a range of matters,
including the ongoing impacts of the labour reform, Covid-19, inflation and
supply chain issues. A significant degree of Board focus was directed towards
the delays in commissioning experienced at Juanicipio. This new mine will be
an important asset for Fresnillo in the years to come and it was very pleasing
to see the efforts of the entire Fresnillo team eventually rewarded when the
tie-in to the grid was finally approved in December 2022.
The Board also conducted strategy discussions on the course of the company as
well as on both the Diversity Programme and the Sustainability Strategy. In
2022 the Group successfully increased the participation of women in the
workforce, in line with our Purpose and our values. We regard the increasing
participation and inclusion of women as the first step in our journey to
making diversity a competitive advantage. The 'Women for Women Mentoring
Programme' is now in place, and we are actively developing leadership and
support networks. One of the programme's key outcomes will be the appointment
of more women to superintendent positions across our operations.
Turning to the Sustainability Strategy, through the HSECR Committee the Board
has continued to develop a programme and structures for monitoring and
responding to tails dams potential risks as well as a climate-related risks
and opportunities and our TCFD obligations in particular. Although it was
disappointing that Fresnillo was excluded from the FTSE4Good Index in 2022, we
remain totally committed to decreasing carbon emissions and setting
science-based targets in the future subject to Mexican energy policy. The
steps we are taking require heavy investment and time to yield results - but
we are confident that we are heading in the right direction and will look to
return to the FTSE4Good Index as soon as that is possible.
Following last year's Board Evaluation Review, the Board introduced an
additional working session which specifically focused on the Company's Risk
Framework - including assessment processes, appetite and tolerance - as well
as the long-term Strategic Plan covering the years to 2037.
Board changes
There were no changes to the Board this year, with all of the Directors being
re-elected at the 2022 AGM.
Outlook
Once again, our Purpose will be the corporate and ethical compass that directs
all our actions and ensures that we contribute to the wellbeing of all our
stakeholders - shareholders and our people as well as local communities, the
environment and society at large.
While challenges will remain and global macro issues such as probable economic
recession will continue to play a major role in our financial performance and
bring with them a degree of uncertainty, I am confident that we will maintain
the steady progress of the last 12 months. We have managed the fallout from
the labour reform well and, although nothing is certain, Covid-19 appears
finally to be in retreat across the world. Our new mine at Juanicipio is set
to make an important contribution to silver production in the months and years
ahead and we expect a number of other exciting projects to progress through
our pipeline and become productive operations.
On behalf of the Board, I would like to place on record our gratitude to all
those who have helped shape what has ultimately been a year of progress - our
management teams, our workforce and their communities, and the many suppliers
and partners who work so hard to support us. By continuing to work together,
we will be able to look ahead to future growth and prosperity, investing in
Mexico, Perú and Chile and their people to deliver on the huge potential of
Fresnillo and the opportunities these countries offer.
Alejandro Baillères
Chairman
Chief Executive's statement
Octavio Alvídrez
Addressing our challenges, achieving our goals
Despite challenges, our mines performed to plan in 2022. Fresnillo has again
proved to be a resilient business with the ability to adapt in the face of
volatile external factors, and our ambitions for long-term growth remain
solidly in place and achievable.
The Fresnillo Purpose was pivotal in our response to the challenges we faced
during the year. Our relentless focus on the wellbeing of people touches every
aspect of how we operate, from protecting the health and safety of the teams
working in our mines - and the environment - to how we engage with
stakeholders and negotiate with communities for access to land for exploration
activities.
In particular, our Purpose guided all our efforts to address the impact of the
recent labour reform and the Covid-19 pandemic. Our approach towards our
people sits at the heart of what makes Fresnillo a responsible business and an
employer of choice - and we worked hard to give our teams the help and support
they and their communities needed.
In 2022, this support again included the provision of vaccinations and
healthcare, educational opportunities and jobs, as well as comprehensive
induction programmes and attractive benefits packages to help employees make
the transition from being contractors to being part of our unionised
workforce, in line with new requirements necessitated by the labour reform.
Production highlights and price review
Silver production was broadly comparable to last year, while gold production
reduced. Both of these results were as expected and in line with our guidance.
Total silver production was stable at 53.7 moz (53.1 moz in 2021), with
increased contribution from Juanicipio and continued improvement in volumes
processed at Fresnillo partially offset by the lower ore throughput and
expected grade variability at San Julián Disseminated Ore Body (DOB).
As anticipated, gold production decreased by 15.3% to 635.9 koz. This was
primarily due to a decrease in the recovery rate and lower ore grade at
Herradura, the expected decrease in production at Noche Buena as the mine
approaches the end of its life, and a lower volume of ore processed and ore
grade at Saucito and Ciénega.
Attributable by-product lead production decreased 6.4% to 52,950 tonnes
primarily due to a decrease in volume of ore processed and lower ore grade at
Saucito and decreased ore grade at San Julián (DOB). Attributable by-product
zinc production remained broadly stable at 99,153 tonnes.
The gradual reduction in precious metals prices that characterised the second
half of 2021 was briefly reversed in the first quarter of the year, as
geopolitical tensions in Russia and Ukraine temporarily drove up prices.
However, with central banks continuing to increase interest rates to control
inflation and the US dollar becoming stronger, precious metals prices again
embarked on a downward trend for most of the rest of the year, as investors
sought returns elsewhere. Over the course of 2022, the average realised silver
price was US$21.7 per ounce, a decrease of 12.76%, while the gold price
remained flat at US$1,799.3 per ounce. The average price for zinc increased by
15.9%, whereas that for lead decreased by 3.7%.
Barring more uncertainty impacting confidence, I expect precious metals prices
have now established a realistic floor and the coming months are likely to see
prices react positively.
Consistent and resilient strategy
Since our IPO in 2008, Fresnillo has remained true to the same strategy. Based
on four strategic pillars and now proven across more than a decade, this
strategy has steered our Company through good times as well as more
challenging conditions. Below, I report on how we have performed against each
of the pillars.
Maximising the potential of existing operations
The availability of a trained, experienced workforce continued to challenge
our production ambitions during 2022, although our efforts to mitigate its
impact have proved increasingly successful.
Following the new labour reform introduced by the Mexican Government in 2021,
which restricted our ability to use contractors, we have worked hard to
recruit, train and retain employees in our in-house workforce. We have
achieved almost all of the goals we identified at the start of the year and
all our operations now benefit from a stable workforce. By the year end, we
had completed the staffing process in the Fresnillo District, San Julián and
Ciénega. Overall, our mines are now being worked by close to a full
complement of unionised teams.
The restrictions on outsourcing also continued to reduce the availability of
equipment, some of which had historically been provided by contractors. In
response, we rapidly invested in significant amounts of new equipment, but
unfortunately some of these orders have been affected by global supply chain
bottlenecks and the subsequent delays in deliveries have impacted production.
Ultimately, and despite the short-term challenges it has brought, the switch
from relying on contractors and their equipment to working with our own people
and resources will be positive. It will give us greater stability and control
over our operations and help us to build a more aligned culture and resilient
business.
Although we will always be vigilant and carefully monitor any outbreaks, no
matter how minor, the Covid-19 pandemic appears to be increasingly under
control. We experienced a fourth and then a fifth wave during 2022, but
supported by our Purpose we were able to keep absenteeism and illness to a
minimum and production at our mines was largely unaffected. We continue to
follow strict protocols, as advised by the authorities, and have encouraged
and supported vaccination of our workforce and communities, collaborating with
health authorities to make vaccines available in the remote locations where we
operate. Close to 81% of our workforce have been fully vaccinated with two
doses, and 41% have received the booster. We will continue to implement
testing campaigns across our operations, development and exploration projects
and corporate offices.
Alongside our work to manage Covid-19 and the fallout from the labour reform,
our investments in infrastructure have also helped us to maximise the
potential of our existing operations. For example, we are set to enjoy the
benefits of the deepened San Carlos shaft at our Fresnillo mine. When
complete, the shaft will provide easier and faster access to more than half of
the mine's reserves - reducing haulage times and costs, and resulting in lower
emissions due to fewer trucks working in the mine. The new pumping station
commissioned at the beginning of the year at Fresnillo enabled us to increase
pumping capacity and ensured access to development and production areas.
Delivering growth through development projects
Everybody associated with Fresnillo was delighted to see our new mine at
Juanicipio finally tied-in to the national power grid in December 2022.
Although the mine was completed on target in late 2021, we experienced delays
due to additional testing requirements by the Centro Nacional de Control de
Energía (CENACE). Safety is of course always our top priority, and while the
delays were unexpected, we fully support the prudent approach taken by the
electricity regulator.
Commissioning began immediately after the tie-in and Juanicipio will make a
material contribution to our performance from 2023 onwards. We expect silver
and gold production to reach annual averages of 11.7 moz and 43.5 koz
respectively. During 2022, ore from Juanicipio continued to be processed
through the Fresnillo and Saucito flotation plants.
At phase II of the Pyrites Plant at Fresnillo, we experienced delays in the
tie-in to the grid. As we prioritised the process at Juanicipio, the
timetable for the tie-in of the Pyrites Plant was extended by a few weeks. We
currently expect operations to commence in the second quarter of 2023 and
anticipate that the plant will produce an average of 3.5 moz of silver and 14
koz of gold per year, including production from Saucito.
The potential project to install vibrating screens to improve milling capacity
at the Fresnillo mine remains under consideration. The new flotation circuit
is already improving the recovery of lead and zinc from the lower levels at
Fresnillo, and we will re-evaluate the merits of the vibrating screens once
production at the mine reaches at least 8,000 tons per day.
Extending the growth pipeline
As the successful development of Juanicipio demonstrates, our exploration
teams have a track record of strengthening our asset portfolio across the
price cycles of precious metals. While the exploration budget for 2022 was
reduced marginally from the previous year in response to compressed margins
and the labour reform challenges, we nevertheless continued to make good
progress on advanced and priority early-stage projects in Mexico, Peru and
Chile. In total, we drilled 955,798 metres across the portfolio with our teams
of geologists carrying out an intensive field-based programme at several
promising prospective sites.
At Rodeo, we continued negotiations to acquire the right to access land, and
we hope to conclude these by mid year. We successfully negotiated rights for
2.8 million cubic meters of water and are now developing a scoping study.
Located in the state of Durango, this gold-silver project has inferred
resources amounting to 1.3 moz of gold and 13.8 moz of silver and potential
for further growth.
The gold project at Orisyvo continued advancing and several activities are
progressing even faster than at Rodeo, with some development works expected to
start in 2023. We concluded negotiations regarding land access for the
construction of the tailings dam, water dam and industrial area in 2022, and
will initially fund developments via risk capex as the pre-feasibility and
feasibility stages continue. We carried out a 2,049-metre drilling programme
during the year and are currently preparing the geotechnical model. We also
continued exploration activities at the silver-gold Guanajuato project,
drilling a total of over 66,000 metres with encouraging results.
In Peru, we are looking forward to drilling commencing at the Pilarica silver
and the Supaypacha gold-copper projects, following delays caused by challenges
with land access, and we anticipate posting resources at Capricornio in Chile
during 2023.
Silver resources decreased 5.0% to 2,203.9 moz primarily due to mining
depletion, higher costs and cut-off grades and a more conservative approach to
resource estimation in Fresnillo, Saucito and Ciénega, balanced in part by
positive exploration results at the Guanajuato exploration project; gold
resources remained stable at 39.1 moz. Silver reserves decreased 5.6% to 396.1
moz mainly from mining depletion and higher costs and cut-off grades at
Fresnillo and Saucito, and depletion at San Julián (DOB), partly offset by
increased reserves from exploration at San Julián veins. Gold reserves
increased 4.4% to 8.2 moz mostly as a result of resource model improvements at
Herradura, balanced in part by mining depletion at Noche Buena.
For 2023, the exploration budget will remain broadly in line with that for
2022.
Advancing and enhancing the sustainability of our operations
Our goal is zero harm. This ambition is supported by the comprehensive 'I
Care, We Care' programme that focuses on leadership, accountability, safety
culture, high potential incident management, engineering systems and lessons
learnt. In 2022 we focused our efforts on implementing critical controls and
visible leadership practices across our mining operations.
Our core safety KPIs saw a slight reduction in incidents, continuing our
long-term trend. The Total Recordable frequency rate improved from 10.4
injuries per one million hours worked to 10.3, with the Lost Time Injury rate
falling from 5.8 to 5.4. However, none of this success can overshadow the
sadness and regret that we experienced at the loss of a colleague's life early
in 2022, which was a sober reminder of the work ahead. We must never relax or
become complacent as we pursue zero harm.
During the last 12 months, we continued to implement best practice governance
and engineering to manage our Tailings Storage Facilities (TSF). Our aim is to
ensure that our standards match global best practice, and we are now moving
from implementing short-term solutions that meet immediate needs to long-term
answers that match the life of our mines and will protect the future safety of
local communities. As this approach embraces the building of new and larger
TSFs where appropriate, we recognise the requirement for higher capex although
this will stabilise over time.
Reviews of our facilities by the Independent Tailings Review Panel have
continued, with virtual and in-person site visits providing recommendations
that guide our implementation plans. We are developing our Emergency and
Response Plans and maturing our Tailings Management System, which includes a
dashboard to monitor key indicators for every level of involvement and
responsibility. Among the year's key achievements, the TSF at Juanicipio
became our first facility to fully meet Canadian Dam Association (CDA), Mining
Association of Canada (MAC), International Commission on Large Dams (ICOLD)
and International Council on Mining and Metals (ICMM) principles from the
earliest days of its development, design and construction.
We continue to mature our capabilities to disclose climate-related financial
information, joining the TCFD Consortium in Mexico during the year in order to
share best practices and participating in the Financial Reporting Council's
(FRC) Lab Net-zero Disclosures research project. We launched a Climate
Modelling project with the University of Arizona to generate future climate
projections under different scenarios, and this will support the development
of our adaptation strategy.
However, it was disappointing that two of our key climate change mitigation
initiatives failed to make the progress we had expected. The project to
install dual fuel engines that run on both Liquid Natural Gas and diesel was
completed as planned but start-up was delayed as we awaited official permits
from the Government, which have since been received. Furthermore, our
long-term goal for 75% of our electricity consumption to be provided by wind
power by 2030 may be impacted by the Government's energy reforms. We are
working with the authorities to gain clarity around this issue, which we
believe can make important contributions to Mexico's drive to combat climate
change.
Our commitment to our Purpose underlines the importance of deeply integrating
responsible business practices into our business model while understanding the
factors that affect stakeholders at all critical decision-making levels. It
was disappointing to be omitted from the FTSE4Good Index after being included
in it for four successive years. However, we acknowledge that we need to move
faster and go further in setting targets to reduce emissions at a time when
expectations around this topic are increasing. We are redoubling our efforts
to identify and assess decarbonisation pathways, whether through new
technologies or energy efficiencies.
Looking ahead
Global macroeconomic and geopolitical factors that all businesses faced during
2022 are likely to continue impacting our prospects. Despite the best efforts
of our partners, the commercial tensions between the US and China and
post-Covid issues will constrict supply chains and lead to delivery delays for
mining equipment and spare parts. If major economies enter or remain in
recession, then we expect to see a negative impact on demand. Meanwhile,
although a slowdown in rising interest rates may lift prices for precious
metals, inflationary pressures will continue affecting our costs.
Challenges that are more native to Mexico - such as delays in permits and the
granting of concessions as well as political issues including energy reform -
will also impact the business, and here I echo the thoughts of our Chairman.
We will work with regional and national government departments, and with all
relevant local authorities, to ease any bureaucratic delays that may prevent
us making further good progress. Our Purpose is to support the wellbeing of
people - and that includes bringing prosperity and valuable jobs to local
communities, as well as paying our taxes to support the ambitions of the
Government.
Our business is rich with potential. We have stabilised operations at our
existing mines and look forward to the Juanicipio mine increasing our total
production in 2023 and beyond. At the same time, we expect to increase
resources at several projects that are moving along our pipeline. Indeed, we
anticipate some of these projects to make their way into our operational
portfolio in the next two to three years.
Finally, I wish to thank the Board and our people for their continued support
during 2022. I believe we have worked together well and made good progress in
what have at times been challenging circumstances. While some of those
challenges will continue, we are committed to working through them and to
fulfil the potential of our portfolio and pipeline. Our prospects are bright.
- Octavio Alvídrez
Chief Executive Officer
Financial review
The consolidated Financial Statements of Fresnillo plc are prepared in
accordance with UK-adopted international accounting standards. 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
2022 figures compared to 2021, 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 2022, the Group's financial performance reflected the operational
challenges faced at the mines, alongside the inflationary pressures across the
cost base.
In particular, Adjusted revenue(1) decreased 8.8% over 2021 primarily due to
the decrease in volumes of gold sold and the lower silver price, while revenue
decreased 10.0% year-on-year to US$2,433.0 million due to the lower adjusted
revenue combined with higher treatment and refining charges.
Adjusted production costs( 2) increased 15.2% over 2021, primarily driven by
8.4% cost inflation, the additional costs from the start-up of operations at
Juanicipio and the increase in the use of infrastructure contractors, higher
personnel costs following the internalisation process, increased maintenance
and an increase in consumption of operating materials and diesel due to longer
haulage distances at some of our mines.
As a result, gross profit and EBITDA(3) decreased to US$536.0 million and
US$751.1 million, a 42.8% and 37.7% decrease over 2021 respectively.
We maintained our strong financial position, with US$969.1 million in cash and
other liquid funds(1) as of 31 December 2022 notwithstanding paying dividends
of US$202.0 million in accordance with our policy, investing US$592.1 million
in capex and spending US$165.8 million on exploration expenses.
Income Statement
2022 US$ million 2021 US$ million Amount Change US$ million Change %
Adjusted revenue(1) 2,597.2 2,847.9 (250.7) (8.8)
Total revenue 2,433.0 2,703.1 (270.1) (10.0)
Cost of sales (1,897.0) (1,766.2) (130.8) 7.4
Gross profit 536.0 936.9 (400.9) (42.8)
Exploration expenses 165.8 130.3 35.5 27.2
Operating profit 283.6 666.7 (383.1) (57.5)
EBITDA(3) 751.1 1,206.3 (455.2) (37.7)
Income tax expense including special mining rights (59.7) 173.1 (232.8) N/A
Profit for the period 308.3 438.5 (130.2) (29.7)
Profit for the period, excluding post-tax Silverstream effects 295.1 438.8 (143.7) (32.7)
Basic and diluted earnings per share (US$/share)( 4) 0.369 0.572 (0.203) (35.5)
Basic and diluted earnings per share, excluding post-tax Silverstream effects 0.351 0.572 0.221 (38.6)
(US$/share)
1 Adjusted revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and metals prices hedging.
2 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.
3 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.
4 The weighted average number of Ordinary Shares was 736,893,589 for
2022 and 2021. See Note 18 to the consolidated financial statements.
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 decreased 12.6% from US$24.9 per ounce in
2021 to US$21.7 per ounce in 2022, while the average realised gold price
remained flat year-on-year at US$1,799.3 per ounce in 2022 (up 0.2%). The
average realised lead by-product price decreased 3.8% to US$0.96 per pound,
while the zinc by-product price increased 9.5% over the previous year to
US$1.52 per pound.
MX$/US$ exchange rate
The Mexican peso/US dollar spot exchange rate at 31 December 2022 was $19.36
per US dollar, compared to the exchange rate at 31 December 2021 of $20.58 per
US dollar. The 5.9% spot revaluation had a favourable effect on taxes and
mining rights.
The average spot Mexican peso/US dollar exchange rate remained relatively
unchanged at $20.13 per US dollar in 2022 ($20.28 per US dollar in 2021), thus
having an immaterial effect on the Group's costs denominated in Mexican pesos
(approximately 45% of total costs) when converted to US dollars.
Cost inflation
In 2022, cost inflation was 8.4%. The main components of our cost inflation
basket are listed below:
Labour
Unionised workers received on average a 6.8% increase in wages in Mexican
pesos, while non-unionised employees received on average a 5.5% increase in
wages in Mexican pesos; when converted to US dollars, this resulted in a
weighted average labour inflation of 7.9%.
Energy
Electricity
The weighted average cost of electricity in US dollars increased 5.9% from
US$8.74 cents per kW in 2021 to US$9.26 cents per kW in 2022, 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 4.0% to 91.4 US
cents per litre in 2022, compared to 87.9 US cents per litre in 2021. This was
primarily due to the increase in global oil prices and the gradual lifting of
the Mexican Government's fuel tax relief that subsidised the cost of diesel
and gasoline in Mexico.
Operating materials
Year over year change in unit price %
Sodium cyanide 48.9
Explosives 39.6
Other reagents 20.8
Steel balls for milling 16.9
Lubricants 16.1
Steel for drilling 13.2
Tyres 2.2
Weighted average of all operating materials 19.8
Unit prices of our key operating materials increased by significantly in US
dollar terms reflecting global inflationary pressures and supply disruptions
resulting from the zero-Covid policy in China and the invasion of Ukraine by
Russia. As a result, the weighted average unit prices of all operating
materials increased year-on-year by 19.8%.
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 2022, 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 4.9% in US dollars, after considering the revaluation of the
Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 3.4% on average in US
dollar terms.
Other costs
Other cost components include freight which increased by an estimated 13.6% in
US dollars, while insurance costs increased by 8.8% in US dollars mainly due
to higher market premiums. The remaining cost inflation components experienced
average deflation of 12.0% in US dollars over 2021.
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
2022 US$ million 2021 US$ million Amount Change %
US$ million
Adjusted revenue(1) 2,597.2 2,847.9 (250.7) (8.8)
Metals prices hedging (3.8) (1.4) (2.4) 179.0
Treatment and refining charges (160.5) (143.5) (17.0) 11.8
Total revenue 2,433.0 2,703.1 (270.1) (10.0)
Adjusted revenue decreased by US$250.7 million primarily driven by the lower
volumes of gold sold and the lower silver price. Treatment and refining
charges increased 11.8% as explained below. As a result, total revenue
decreased to US$2,433.0 million, a 10.0% decrease against 2021.
Adjusted revenue(1) by metal
2022 2021
US$ million % US$ million % Volume Variance US$ million Price Variance US$ million Total net change US$ million %
Gold 1,114.2 42.9 1,305.2 45.8 (194.0) 2.9 (191.1) (14.6)
Silver 1,089.2 41.9 1,163.9 40.9 77.8 (152.5) (74.7) (6.4)
Lead 106.6 4.1 117.4 4.1 (6.5) (4.4) (10.8) (9.2)
Zinc 287.2 11.1 261.3 9.2 1.0 24.9 25.9 9.9
Total adjusted revenue 2,597.2 100.0 2,847.9 100.0 (121.7) (129.0) (250.7) (8.8)
The decrease in volumes of gold sold were primarily due to the lower recovery
rate and decrease in ore grade at Herradura and lower volumes of ore processed
and ore grades at Noche Buena, Saucito and Ciénega. This adverse effect was
mitigated by the higher volumes of silver sold driven by the increase in
silver production from Juanicipio and the higher ore throughput at Fresnillo
(for further detail, see Review of Operations). The total sale volume effect
(lower gold and lead mitigated by higher silver and zinc volumes sold),
resulted in an adverse impact on adjusted revenues of US$121.7 million,
representing 48.5% of the total variation. The remaining 51.5% of the decrease
in adjusted revenues was primarily explained by the lower silver price,
miigated by the higher price of zinc.
Changes in the contribution by metal were the result of the relative changes
in metals prices and volumes produced. The contribution of gold to total
adjusted revenues decreased from 45.8% in 2021 to 42.9% in 2022, while that
for silver increased from 40.9% in 2021 to 41.9% in 2022.
Adjusted revenue by mine
Despite the 17.6% decrease in Adjusted revenues at Herradura, it continued to
be the greatest contributor to the Group's Adjusted revenue, representing
24.4% (2021: 27.1%). Saucito's contribution reduced to 18.7% in 2022 (2021:
21.0%) primarily driven by the decrease in volumes of all metals sold and the
lower silver price. Fresnillo remained the third most important contributor to
Adjusted revenue, with its share increasing to 18.3% (2021: 16.1%). San
Julián's contribution to the Group's Adjusted revenue decreased to 16.0% in
2022 (2021: 18.8%) primarily due to the lower volumes of silver and gold sold.
Ciénega's contribution to the Group's Adjusted revenue decreased to 6.9%
(2021: 8.0%) as a result of the lower volumes of all metals sold. Noche
Buena's contribution to Adjusted revenue decreased slightly to 5.5% in 2022
(6.0% in 2021).
The contribution by metal and by mine to Adjusted revenues is expected to
change further in the future, as new projects are incorporated into the
Group's operations and as precious metals prices fluctuate.
2022 2021
(US$ million) % (US$ million) %
Herradura 634.9 24.4 770.8 27.1
Saucito 485.9 18.7 597.7 21.0
Fresnillo 475.8 18.3 459.5 16.1
Juanicipio 259.0 10.0 85.2 3.0
San Julián (DOB) 242.5 9.3 344.5 12.1
Ciénega 180.3 6.9 227.8 8.0
San Julián (Veins) 175.1 6.7 192.5 6.7
Noche Buena 143.8 5.5 169.9 6.0
Total 2,597.2 100 2,847.9 100
1 Adjusted revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and metals prices hedging.
Volumes of metal sold
2022 % contribution of each mine 2021 % contribution of each mine % change
Silver (koz)
Fresnillo 12,222 24.4 11,082 23.7 10.3
Saucito 10,620 21.2 11,446 24.4 (7.2)
Juanicipio 8,697 17.3 2,932 6.3 196.6
San Julián (DOB) 8,117 16.2 10,813 23.1 (24.9)
San Julián (Veins) 4,502 9.0 4,077 8.7 10.4
Ciénega 4,344 8.7 4,907 10.5 (11.5)
Pyrites Plant at Saucito 854 1.7 601 1.3 42.1
Herradura 777 1.5 932 2.0 (16.6)
Noche Buena 9 0.0 14 0.0 (35.7)
Pyrites Plant at Fresnillo 0 0.0 3 0.0 (100.0)
Total silver (koz) 50,142 46,807 7.1
Gold (oz)
Herradura 351,156 56.7 416,310 57.2 (15.7)
Noche Buena 71,921 11.6 94,237 13.0 (23.7)
Saucito 65,689 10.6 81,304 11.2 (19.2)
San Julián (Veins) 42,516 6.9 50,794 7.0 (16.3)
Ciénega 35,275 5.7 45,352 6.2 (22.2)
Fresnillo 28,277 4.6 28,834 4.0 (1.9)
Juanicipio 20,268 3.3 5,908 0.8 243.1
Pyrites Plant at Saucito 2,585 0.4 2,260 0.3 14.4
San Julián (DOB) 1,546 0.2 2,130 0.3 (27.4)
Pyrites Plant at Fresnillo 4 0.0 8 0.0 (50.0)
Total gold (oz) 619,237 727,137 (14.8)
Lead (t)
Fresnillo 19,667 39.2 17,353 32.6 13.3
Saucito 16,114 32.1 22,878 43.0 (29.6)
San Julián (DOB) 6,677 13.3 8,270 15.5 (19.3)
Juanicipio 4,487 8.9 1,067 2.0 320.5
Ciénega 3,267 6.5 3,626 6.8 (9.9)
Total lead (t) 50,212 53,194 (5.6)
Zinc (t)
Fresnillo 35,890 41.9 29,532 34.6% 21.5
Saucito 23,604 27.6 31,911 37.4% (26.0)
San Julián (DOB) 14,771 17.3 16,928 19.9% (12.7)
Juanicipio 6,758 7.9 1,511 1.8% 347.3
Ciénega 4,564 5.3 5,393 6.3% (15.4)
Total zinc (t) 85,587 85,275 0.4
Hedging
In 2021 we entered into a hedging programme executed for a total volume of
1,800,000 ounces of silver which had its last monthly settlement in February
2022. This transaction was structured as a collar with an average floor price
of US$22.0 per ounce, and an average price ceiling of US$50.3 per ounce.
Additionally, a portion of our by-product zinc production was hedged from May
2021 through April 2022 using a similar financial structure to that of silver.
The table below illustrates the expired structures and their results as of 31
December 2022. There are no outstanding hedging positions as of 31 December
2022.
As of 31 December 2022 As of 31 December 2022
Silver(1) Zinc(2)
Weighted floor 22 US$/oz 2,491 US$/tonne
Weighted cap 50.33 US$/oz 3,134 US$/tonne
Expired volume 300,000 oz 5,960 tonnes
Profit/Loss (US$ dollars) 0 (3,770,174)
1 Monthly settlements until February 2022.
2 Monthly settlements until April 2022.
Treatment and refining charges
Treatment and refining charges(3) are reviewed annually using international
benchmarks. Treatment charges per tonne of lead and zinc concentrate increased
in dollar terms by 3.4% and 54.4% respectively, while silver refining charges
remained flat over the year. The increase in treatment charges per tonne of
lead and zinc, combined with the relatively stable volumes of lead and zinc
concentrates shipped from our mines to Met-Mex, resulted in an 11.8% increase
in treatment and refining charges set out in the income statement in absolute
terms when compared to 2021.
Cost of sales
Concept 2022 US$ million 2021 US$ million Amount US$ million Change %
Adjusted production costs(4) 1,445.8 1,255.1 190.7 15.2
Depreciation 500.6 528.2 (27.6) (5.2)
Profit sharing 9.6 15.6 (5.9) (38.2)
Hedging 0.0 (3.8) 3.8 (100.0)
Change in work in progress (61.6) (29.6) (32.0) 107.8
Unproductive costs including inventory reversal and unabsorbed production 2.6 0.8 1.8 >100
costs(5)
Cost of sales 1,897.0 1,766.2 130.8 7.4
Cost of sales increased 7.4% to US$1,897.0 million in 2022. The US$130.8
million increase is due to a combination of the following factors:
• An increase in Adjusted production costs (+US$190.7 million). This
was primarily due to: i) cost inflation in US dollars (US$101.2 million); ii)
costs from the start-up of operations at Juanicipio (US$85.7 million); iii)
increase in the use of infrastructure contractors, maintenance (electric and
mechanical), operating materials and diesel (US$79.4 million); iv) higher
volume of ore processed at Fresnillo and San Julián DOB (US$21.7 million);
and v) others (US$3.7 million). These adverse effects were mitigated by lower
stripping to cost at Herradura (-US$53.5 million); and a decrease in volume of
ore processed at Saucito, Ciénega, San Julián (Veins) (-US$47.5 million).
• The variation in Mexican peso/US dollar hedging (+US$3.8
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
2022, there was no further outstanding position.
• The variation in unproductive costs, which had an unfavourable
effect of (+US$1.8 million). In 2022, US$2.6 million was registered as
unproductive costs related to fixed production cost incurred in activities at
the Juanicipio flotation plant; in 2021 US$18.0 million was registered in
relation to fixed costs (labour cost and depreciation) incurred in Minera San
Julián due to a shortfall in electricity.
These negative effects were mitigated by:
• Depreciation (-US$27.6 million). This is mainly due to lower
depreciation at San Julián and Ciénega due to a lower depletion factor and
at Noche Buena as it approaches the end of its mine life and the majority of
the assets have been fully depreciated.
• The variation in the change in work in progress had a favourable
effect of US$32.0 million versus 2021. This resulted mainly from the increase
in inventories of ore at Juanicipio and gold content on the leaching pads at
Herradura whereas in 2021 the positive effect was in relation to the
reassessment of recoverable gold inventories at the leaching pads in 2021
together with the increase in the cost per ounce in the last quarter of the
year at Herradura.
• Profit sharing (-US$5.9 million) mainly due to lower profits.
3 Treatment and refining charges include the cost of treatment and
refining as well as the margin charged by the refiner.
4 Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and unproductive
costs. The Company considers this a useful additional measure to help
understand underlying factors driving production costs in terms of the
different stages involved in the mining and plant processes, including
efficiencies and inefficiencies as the case may be and other factors outside
the Company's control such as cost inflation or changes in accounting
criteria.
5 Unproductive costs primarily include unabsorbed production costs
such as fixed production cost (labour cost and depreciation) incurred in
Minera San Julián due to a shortfall in electricity and fixed costs incurred
in Minera Penmont during the temporary suspension of mining activities at the
beginning of the Covid-19 pandemic, and other costs related to the subsequent
ramp-up of operations and the underutilisation of production capacity once
mining activity was resumed. Unproductive costs are recognised within cost of
sales but excluded from adjusted production costs.
6 Cost inflation would have been 7.9% excluding the effect of the
Mexican peso revaluation (0.8%).
Cost per tonne, cash cost per ounce and all-in sustaining cost (AISC)
Cost per tonne is a key indicator to measure the effects of changes in
production costs and cost control performance at each mine. This indicator is
calculated as total production costs, plus ordinary mining rights, less
depreciation, profit sharing and exchange rate hedging effects, divided by
total tonnage processed. We have included cost per tonne hauled/moved as we
believe it is a useful indicator to thoroughly analyse cost performance for
the open pit mines.
Cost per tonne 2022 2021 % change
Fresnillo US$/tonne milled 91.5 84.7 8.0
Saucito US$/tonne milled 119.5 89.8 33.0
San Julián (Veins) US$/tonne milled 91.0 81.5 11.7
San Julián (DOB) US$/tonne milled 44.8 39.2 14.2
Ciénega US$/tonne milled 116.3 86.1 35.1
Herradura US$/tonne deposited 19.7 21.7 (9.2)
Herradura US$/tonne hauled 4.7 3.5 34.3
Noche Buena US$/tonne deposited 13.9 11.0 27.0
Noche Buena US$/tonne hauled 3.9 3.8 2.6
Fresnillo: Cost per tonne increased 8.0% to US$91.5 in 2022, primarily driven
by cost inflation and an increase in maintenance costs, mitigated by the
higher volume of ore milled.
Saucito: Cost per tonne increased 33.0% to US$119.5, mainly driven by an
increase in the use of infrastructure contractors and maintenance, cost
inflation, and a decrease in the volume of ore milled.
San Julián veins: Cost per tonne increased 11.7% to US$91.0, primarily driven
by cost inflation and an increase in the use of maintenance and consumption of
spare parts for repairs.
San Julián (DOB): Cost per tonne increased 14.2% to US$44.8, mainly driven by
cost inflation and increased use of maintenance.
Ciénega: Cost per tonne increased 35.1% to US$116.3, driven by an increase in
the use of infrastructure contractors and maintenance, cost inflation and a
lower volume of ore milled.
Herradura: Cost per tonne of ore deposited decreased -9.2% primarily as a
result of a decrease in stripping charged to cost. This was partly offset by
an increase in consumption of operating materials, diesel and maintenance due
to longer haulage distances and cost inflation.
Noche Buena: Cost per tonne increased to US$13.9 in 2022, primarily driven by
a higher stripping charged to cost, cost inflation and a lower volume of ore
processed.
Cash cost per ounce, calculated as total cash cost (cost of sales plus
treatment and refining charges, less depreciation) less revenue from
by-products divided by the silver or gold ounces sold, when compared to the
corresponding metal price, is an indicator of the ability of the mine to
generate competitive profit margins.
Cash cost per ounce 2022 2021 % change
Fresnillo US$ per silver ounce 5.7 5.4 4.7
Saucito US$ per silver ounce 4.5 (0.8) N/A
San Julián (Veins) US$ per silver ounce 7.1 1.8 >100
San Julián (DOB) US$ per silver ounce 6.9 4.8 42.6
Ciénega US$ per gold ounce 518.5 (523.1) N/A
Herradura US$ per gold ounce 1,155.5 900.4 28.3
Noche Buena US$ per gold ounce 1,269.9 1,029.5 23.3
Fresnillo: Cash cost per silver ounce increased to US$5.7 (2021: US$5.4)
mainly due to the increase in cost per tonne and the higher treatment and
refining charges, partially offset by lower mining rights and higher lead and
zinc by-product credits.
Saucito: Cash cost per silver ounce increased to US$4.5 per ounce (2021:
-US$0.8 per silver ounce) mainly as a result of a higher cost per tonne and
lower gold, lead and zinc by-product credits per silver ounce. This was
mitigated by a higher silver ore grade and lower mining rights.
San Julián veins: Cash cost per ounce of silver increased to US$7.1 per ounce
mainly due to the lower gold by-product credits per silver ounce and a higher
cost per tonne, mitigated by a higher silver ore grade.
San Julián DOB: Cash cost increased to US$6.9 per ounce of silver driven by a
lower silver ore grade, the increase in cost per tonne and higher treatment
and refining charges, mitigated by higher zinc and lead by-product credits per
silver ounce and lower mining rights.
Ciénega: The increase in cash cost per gold ounce from -US$523.1 in 2021 to
US$518.5 in 2022 was primarily due to a higher cost per tonne, lower gold ore
grade and higher treatment and refining charges. This was mitigated by higher
silver, zinc and lead by-product credits per gold ounce and lower mining
rights and profit sharing.
Herradura: Cash cost per gold ounce increased to US$1,155.5 per ounce of gold
mainly due to the lower gold ore grade, mitigated by the lower cost per tonne.
Noche Buena: Cash cost per gold ounce increased by 23.4% to US$1,269.9, mainly
due to a higher cost per tonne.
In addition to the traditional cash cost, the Group is reporting All-In
Sustaining Cost (AISC) in accordance with the guidelines issued by the World
Gold Council.
This cost metric is calculated as traditional cash cost plus on-site general,
corporate and administrative costs, community costs related to current
operations, capitalised stripping and underground mine development, sustaining
capital expenditures and remediation expenses.
We consider AISC to be a reasonable indicator of a mine's ability to generate
free cash flow when compared with the corresponding metal price. We also
believe it is a means to monitor not only current production costs, but also
sustaining costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
All-in sustaining cost (AISC)
AISC 2022 2021 % change
Fresnillo US$ per silver ounce 16.27 16.34 (0.4)
Saucito US$ per silver ounce 16.8 9.53 76.6
San Julián (Veins) US$ per silver ounce 21.84 14.04 55.6
San Julián (DOB) US$ per silver ounce 8.79 6.34 38.6
Ciénega US$ per gold ounce 2,011.14 656.11 >100
Herradura US$ per gold ounce 1,527.36 1,100.20 38.8
Noche Buena US$ per gold ounce 1,359.63 1,122.21 21.2
Fresnillo: All-in sustaining cost remained stable at US$16.3, explained by the
increase in cash cost.
Saucito: All-in sustaining cost increased 76.8% to US$16.8 per ounce due to
the increase in cash cost and higher capitalised mine development per ounce.
San Julián veins: All in sustaining cost increased to US$21.8 per ounce due
to the increase in cash cost and higher sustaining capex per ounce.
San Julián DOB: The 38.6% increase in all in sustaining cost was mainly
driven by the increase in cash cost and a higher sustaining capex.
Ciénega: The US$1,355.0 per ounce increase in all in sustaining cost was
primarily driven by the higher cash cost and a higher sustaining capex per
ounce of gold.
Herradura: All-in sustaining cost increased to US$1,527.4 per ounce mainly due
to increased capitalised stripping and a higher cash cost.
Noche Buena: The US$237.4 per ounce increase to US$1,359.6 per ounce in all-in
sustaining cost was the result of higher cash cost.
Gross profit
Gross profit, excluding hedging gains and losses, is a key financial indicator
of profitability at each business unit and the Fresnillo Group as a whole.
Total gross profit, including hedging gains and losses, decreased by 42.8%
from US$936.9 million in 2021 to US$536.0 million in 2022.
The US$400.9 million decrease in gross profit was mainly due to: i) the lower
silver and lead price (-US$156.8 million); ii) the lower ore grade and
recovery rate at Herradura as higher volumes of sulphide ore are processed
(-US$135.7 million); iii) cost inflation in US dollars (-$101.2 million); iv)
the net effect of the lower ore grades, excluding Herradura (-US$88.6
million); v) the increase in the use of infrastructure contractors,
maintenance (electric and mechanical), operating materials and diesel
(-US$79.4 million); and vi) the lower volumes processed at Saucito,
Ciénega, San Julián Veins and Noche Buena (-US$75.3 million).These negative
effects were mitigated by: i) the new Juanicipio operation (US$98.8 million);
ii) lower stripping to cost at Herradura (US$53.5 million); iii) others
(US$37.6 million); iv) higher zinc and gold prices (US$27.8 million); and v)
the higher volume processed at Fresnillo and San Julián DOB (US$18.5
million).
On a per mine basis, Herradura remained the largest contributor to the Group's
consolidated gross profit despite recording a 47.7% decrease in its gross
profit. Juanicipio became the second largest contributor, reflecting the
increased volumes of development material and ore processed at the Fresnillo
and Saucito mines. Fresnillo became the third largest contributor to
consolidated gross profit, increasing its percentage share from 14.9% in 2021
to 19.6% in 2022, while the lower production and higher costs at Saucito
decreased its participation from 22.7% in 2021 to 18.4% in 2022. Similarly,
the lower gross profit generated at San Julián decreased its share of the
Group's total gross profit to 11.3% in 2022. The decrease in production
volumes, together with the cost pressures, affected profitability at Ciénega
and Noche Buena. Notwithstanding, both mines generated an EBITDA of US$19.2
million and US$34.5 million respectively, and cash flow from operating
activities of US$25.4 million and US$40.8 million.
Contribution by mine to consolidated gross profit, excluding hedging gains and
losses
2022 2021 Change
US$ million % US$ million % US$ million %
Herradura 147.1 27.5 281.1 30.6 (134.0) (47.7)
Juanicipio 132.8 24.8 53.5 5.8 79.3 148.2
Fresnillo 104.8 19.6 136.7 14.9 (31.9) (23.3)
Saucito 98.5 18.4 208.7 22.7 (110.2) (52.8)
San Julián 60.3 11.3 173.1 18.8 (112.8) (65.2)
Noche Buena 3.3 0.6 23.5 2.6 (20.2) (86.0)
Ciénega (11.3) (2.1) 42.5 4.6 (53.8) (126.6)
Total for operating mines 535.5 100 919.1 100 (383.6) (41.7)
Metal hedging and other subsidiaries 0.5 17.8 (17.3) (97.2)
Total Fresnillo plc 536.0 936.9 (400.9) (42.8)
Administrative and corporate expenses
Administrative and corporate expenses decreased 9.1% from US$103.5 million in
2021 to US$94.1 million in 2022, due to the decrease in fees paid to advisors
(legal, labour, tax and technical).
Exploration expenses
Business unit/project (US$ million) Exploration expenses 2022 Exploration expenses 2021 Capitalised expenses Capitalised expenses 2021
2022
Ciénega 7.2 6.4 - -
Fresnillo 12.3 6.1 - -
Herradura 4.8 6.1 - -
Saucito 12.0 15.0 - -
Noche Buena 1.4 1.0 - -
San Julián 24.6 22.6 - -
Orisyvo 4.0 5.2 - 0.1
Centauro Deep 0.5 0.2 - -
Guanajuato 11.6 8.1 1.0 1.0
Juanicipio 11.7 0.0 - 8.1
Valles (Herradura) 5.8 5.1 - -
Others 69.9 54.5 0.8 0.6
Total 165.8 130.3 1.8 9.8
As expected, exploration expenses increased by 27.2% from US$130.3 million in
2021 to US$165.8 million in 2022, 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$35.5 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$1.8 million was capitalised, mainly
relating to exploration expenses at the Guanajuato project. As a result, risk
capital invested in exploration totalled US$167.6 million in 2022, compared to
US$140.1 million in 2021 (of which US$9.8 million was capitalised). This
represents a year-on-year increase of 19.6%.
EBITDA
2022 US$ million 2021 US$ million Amount US$ million Change %
Profit from continuing operations before income tax 248.6 611.5 (363.0) (59.4)
- Finance income (26.5) (8.9) (17.6) >100
+ Finance costs 81.6 61.8 19.8 32.0
- Revaluation effects of Silverstream contract (18.8) 0.4 (19.2) N/A
- Foreign exchange loss, net (1.4) 1.9 (3.3) N/A
- Other operating income (71.9) (11.9) (60.0) >100
+ Other operating expense 38.8 23.3 15.5 66.5
+ Depreciation 500.6 528.2 (27.6) (5.2)
EBITDA 751.1 1,206.3 (455.2) (37.7)
EBITDA margin 30.9 44.6 - -
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 2022,
EBITDA decreased 37.7% to US$751.1 million primarily driven by the lower gross
profit and higher exploration expenses. As a result, EBITDA margin expressed
as a percentage of revenue decreased, from 44.6% in 2021 to 30.9% in 2022.
Other operating income and expense
In 2022, a net gain of US$33.1 million was recognised in the income statement
mainly as a result of the recognition of the layback agreement granting Orla
the right to expand the Camino Rojo pit onto Fresnillo's mining concession.
Silverstream effects
The Silverstream contract is accounted for as a derivative financial
instrument carried at fair value. The net Silverstream effect recorded in the
2022 income statement was a gain of US$18.8 million (US$40.0 million
amortisation profit and US$21.2 million revaluation loss), which compared
positively to the net loss of US$0.4 million registered in 2021. The negative
revaluation was mainly driven by the increase in the SOFR reference rate and
the lower forward silver price curve, partly mitigated by an increase in the
production plan following an update to the Sabinas silver reserves and a
higher inflation forecast.
Since the IPO, cumulative cash received has been US$769.7 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
14 and 30 to the consolidated financial statements.
Net finance costs
Net finance costs of US$55.2 million compared favourably to the US$52.9
million recorded in 2021. The US$2.3 million increase was primarily due to the
voluntary amendments applied from 2014 to 2021 to the income tax and mining
right's treatment of the stripping costs and the deduction of exploration
expenses. In addition, the 2022 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 10 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 2022, the Group capitalised US$8.5
million of borrowing costs (2021: US$8.4 million).
Foreign exchange
A foreign exchange gain of US$1.4 million was recorded in 2022, which compared
favourably to the US$1.9 million loss in 2021.
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). As of December 31st
2022, the total EUR outstanding net forward position was EUR 12.72 million
with maturity dates through December 2023. Volumes that expired during the
second half of 2022 were EUR 20.47 million with a weighted average strike of
1.0758 USD/EUR, which have generated a marginal result in the period of
-US$2.4 million.
Taxation
Tax income for the period was US$67.4 million, which compared favourably to
the US$156.5 million tax expense in 2021. The effective tax rate, excluding
the special mining rights, was -27.1%, which was below the 30% statutory tax
rate. The reasons for the unusual positive effective tax rate was the
significant permanent differences between the tax and the accounting treatment
related mainly to: i) the effect of the 5.9% revaluation of the Mexican
peso/US dollar spot exchange rate in 2022 versus the 2.0% devaluation in 2021
on the tax value of assets and liabilities (-US$72.9 million); ii) the
inflation rate (Mexican Consumer Price Index), which impacted the inflationary
uplift of the tax base for assets and liabilities (-US$62.7 million); and ii)
the benefit from the lower border zone tax which applied to Herradura and
Noche Buena operations (-US$17.5 million) vs. the US$74.6 million which
resulted from applying the 30% statutory tax rate.
The reason for the lower effective tax rate in 2021 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).
Mining rights in 2022 were US$7.7 million compared to US$16.6 million charged
in 2021. The effective tax rate, including mining rights, was -24.0% in 2022.
Profit for the period
Profit for the period decreased from US$438.5 million in 2021 to US$308.3
million in 2022, a 29.7% decrease year-on-year as a result of the factors
described above.
Excluding the effects of the Silverstream contract, profit for the year
decreased from US$438.8 million to US$295.1 million, a 32.7% decrease.
Profit due to non-controlling interests was US$36.4 million reflecting the
profit generated at Juanicipio, where MAG Silver owns 44% of the outstanding
shares. Accordingly, profit attributable to equity shareholders of the Group
was US$271.9 million.
Cash flow
A summary of the key items from the cash flow statement is set out below:
2022 US$ million 2021 US$ million Amount US$ million Change %
Cash generated by operations before changes in working capital 743.1 1,208.3 (465.2) (38.5)
(Increase)/decrease in working capital (66.1) 58.0 (124.1) N/A
Taxes and employee profit sharing paid (174.7) (371.1) 196.4 52.9
Net cash from operating activities 502.2 895.1 (393.0) (43.9)
Silverstream contract 33.4 49.0 (15.6) (31.9)
Capital contributions and loans by minority shareholders 18.3 73.6 (55.4) (75.2)
Proceeds from the layback agreement 15.0 25.0 (10.0) (40.0)
Purchase of property, plant and equipment (592.1) (592.1) 0.0 0.0
Dividends paid to shareholders of the Company (202.0) (245.6) 43.6 17.8
Financial expenses and foreign exchange effects (36.5) (39.9) 3.4 8.5
Net (decrease)/increase in cash during the period after foreign exchange (266.2) 164.9 (431.1) N/A
differences
Cash and other liquid funds at 31 December (1) 969.1 1,235.3 (266.2) (21.6)
1 Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
Cash generated by operations before changes in working capital decreased by
38.5% to US$743.1 million, mainly as a result of the lower profits generated
in the year. Working capital increased US$66.1 million, mainly due to: i) an
increase in ore inventories of US$99.6 million; and ii) a US$14.1 million
increase in prepayments mainly to contractors. This was partly offset by: i) a
US$51.8 million increase in accounts payable (mainly suppliers); and ii) a
US$7.2 million decrease in accounts receivable.
Taxes and employee profit sharing paid decreased 52.9% over 2021 to US$174.7
million mainly due to: i) a decrease in provisional tax payments resulting
from the lower profit factor determined to calculate the estimated taxable
income and lower revenue; and ii) lower final income tax paid in 2022, net of
provisional taxes paid, corresponding to the 2021 tax fiscal year.
As a result of the above factors, net cash from operating activities decreased
43.9% from US$895.1 million in 2021 to US$502.2 million in 2022.
The Group received other sources of cash, including: i) the proceeds of the
Silverstream contract of US$33.4 million; ii) the capital contribution and
note payable by minority shareholders in subsidiaries of US$18.3 million; and
iii) proceeds from the layback agreement granting Orla the right to expand the
Camino Rojo oxide pit onto Fresnillo's mineral concession of US$15.0 million
(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$592.1
million. Capital expenditures for 2022 are described below:
Purchase of property, plant and equipment
2022 US$ million
Saucito mine 118.0 Mine development, purchase of in-mine equipment, deepening of the Jarillas
shaft and tailings dam.
Fresnillo mine 106.6 Mine development and mining works, purchase of in-mine equipment, deepening of
the San Carlos shaft and tailings dam.
Herradura mine 105.3 Stripping, construction of leaching pad, sustaining capex, infrastructure for
fuel station, carbon in column project.
San Julián Veins and DOB 64.5 Mining works, tailings dam and purchase of in-mine equipment.
Ciénega mine 47.0 Mining works, purchase of in-mine equipment and construction of tailings dam.
Noche Buena mine 0.4 Sustaining capex.
Juanicipio mine 149.6 Mine development and construction of beneficiation plant.
Other 0.7 Minera Bermejal.
Total purchase of property, plant and equipment 592.1
ii) Dividends paid to shareholders of the Group in 2022 totalled US$202.0
million, a 17.8% decrease over 2021, in line with our dividend policy which
includes a consideration of profits generated in the year. The 2022 payment
included the 2021 final dividend of 24.0 cents per share paid in May 2022,
totalling US$176.9 million, and the 2022 interim dividend paid in September of
US$25.1 million.
iii) Financial expenses and foreign exchange effects of US$36.5 million, an
increase of 8.5% vs. 2021, mainly as a result of the interests paid in
relation to the voluntary amendment to the income tax and mining right's
treatment of the stripping costs and the deduction of exploration expenses. In
addition, financial expenses in 2022 and 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.
The sources and uses of funds described above resulted in a decrease in net
cash of US$266.2 million (net decrease in cash and other liquid assets), which
combined with the US$1,235.3 million balance at the beginning of the year
resulted in cash and other liquid assets of US$969.1 million at the end of
December 2022.
Balance sheet
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds(1) of US$969.1 million as of 31
December 2022, despite decreasing 21.6% versus 31 December 2021. Taking into
account the cash and other liquid funds of US$969.1 million and the US$1,167.8
million outstanding Senior Notes, Fresnillo plc's net debt was US$198.7
million as of 31 December 2022. This compares to the net cash position of
US$67.5 million as of 31 December 2021. Considering these variations, the
balance sheet at 31 December 2022 remains strong, with a net debt/EBITDA ratio
of 0.26x(2).
Inventories increased 20.4% to US$587.4 million mainly due to the increase of
inventories of gold content to be processed at the dynamic leaching plants at
Herradura, the built up of inventory at Juanicipio, and increased inventories
of operating materials and spare parts.
Trade and other receivables increased 0.8% to US$404.5 million as a result of
an increase in receivables to Met-Mex and other receivables arising from the
layback agreement with Orla; partly offset by a decrease in value added tax
receivables.
The change in the value of the Silverstream derivative from US$529.5 million
at the end of 2021 to US$511.5 million as of 31 December 2022 reflects
proceeds of US$36.8 million corresponding to 2022 (US$28.5 million in cash and
US$8.3 million in accounts receivables) and the Silverstream effect in the
income statement of US$18.8 million.
The net book value of property, plant and equipment was US$2,862.6 million at
31 December 2022, representing a 2.3% increase over 31 December 2021. The
US$63.5 million increase was mainly due to capitalised development works,
construction of leaching pads and the purchase of in-mine equipment.
The Group's total equity was US$3,916.9 million as of 31 December 2021, a 3.0%
increase over 31 December 2021. This was mainly explained by the increase in
retained earnings, reflecting the 2022 profit.
1 Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
2 Net debt is calculated as debt at 31 December 2022 less Cash and
other liquid funds at 31 December 2022 divided by the EBITDA generated in the
last 12 months.
Dividends
Based on the Group's 2022 performance, the Directors have recommended a final
dividend of 13.3 US cents per Ordinary Share, which will be paid on 26 May
2023 to shareholders on the register on 28 April 2023. 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 3.4 US cents per share
amounting to US$25.1 million. This final dividend is lower than the previous
year due to the decrease in profits in 2022, and remains in line with the
Group's dividend policy.
As previously disclosed in previous reports, 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. 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.
· The global post-pandemic aftershock, geopolitical instability,
digital transformation and climate change have catapulted risk management to
centre stage. Many of us have learned new and vital lessons about effective
risk management over the last year, so that preparing for disruption is one of
our highest priorities.
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 to 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 to deliver the value creation objectives
defined in our business model.
Timely risk monitoring is at the core of our management practices, helping to
deliver on our strategy and our commitments to stakeholders, including
colleagues, communities, and the planet. We are focused on conducting our
business responsibly, safely, and legally, while making risk-informed
decisions when responding to opportunities or threats that present themselves.
With the leadership of the Board and the Executive Committee and guided by our
risk appetite on a risk-by-risk basis, we understand, prioritise, and manage
our risks. Our risk management framework, which we further enhanced during the
year, enables us to undertake this exercise with structure and rigour.
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 post-pandemic impact of COVID-19 and the Russia-Ukraine war pose
unprecedented challenges for everybody, worldwide. We have implemented risk
techniques and processes to identify new risks associated with these events,
while also analysing their 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.
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.
A complete view of our risk universe starts with the analysis of our business,
the external environment in which we operate, the regulatory landscape and our
internal operations. This includes the impacts on and of our strategy,
initiatives, governance, and processes. In addition to our established risk
management activities, our executives - including operations and project
managers, the controllership group, Health, Safety, Security, Environment and
Community Relations (HSECR) team 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, geopolitical instability and climate change
posed new challenges for the risk department and the Executive Committee. Due
to the uncertainty around these topics, all strategic decisions by the Company
were analysed using risk scenarios modelling their potential impacts. In
addition, we continue to use five key processes to better manage our risks:
(i) a monthly procedure for evaluating and mitigating principal risks; (ii) a
process to identify and analyse the impact of the pandemic and geopolitical
instability 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 for each business unit to monitor mitigation actions and risk
level; (iv) impact and probability scenarios which were conducted for risks
related to the supply chain of critical inputs for operations, cost increases
and projects, and (v) collaboration with government, the mining sector, health
experts and communities to ensure that we followed best practice.
It is important to recognise that the Board, the Audit Committee, the HSECRC
Committee and the Executive Committee periodically use working sessions to
review the evolution of principal and emerging risks, as well as the appetite
for each risk. At these working sessions, the views and suggestions of Board
members are heard, and adjustments are made according to the factors
influencing each risk. In addition, the HSECRC Committee now meets before
every Board meeting to review the effectiveness of our risk management and
internal control systems, with particular attention paid to safety, climate,
tailings dams and environmental risks.
To better assess and control our risks, as well as to analyse the relationship
between them, Fresnillo plc has seven risk categories, which have the
following risk rating:
Risk Rating
Very high High Medium Low Very low
RISK GOVERNANCE BASIS
Three lines of defence Responsibilities Accountability to
1(st). - Unit leaders including mine, exploration and project personnel, as Identifying, managing, verifying and monitoring risks and controls. Management
well as leaders of corporate and support areas.
2(nd). - Corporate level oversight functions involve the risk management team, Overseeing risks and the effectiveness of controls, advising on capability and Management and Baluarte Minero*
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
*(A virtual structure that coordinates and provides technical and
administrative services to the mining, metallurgical and chemical businesses
of Peñoles)
· Understanding and mitigating our risks is critical to our future
success. We are therefore committed to an effective, robust system of risk
identification, and an effective response to such risks, in order to support
the achievement of our objectives.
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 our 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 have been adapted to pay
attention to emerging risks. At each location, Health, Safety, Security,
Environment and Community Relations risk-responsible staff monitor local
information and analyses related to these 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
our strategic plan. Furthermore, we consider emerging risks in the context of
longer-term impact and shorter-term risk velocity. We have 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 five-year period.
As the pandemic is now becoming more endemic with varying pathways to recovery
across different countries, the longer-term impact of how we adapt to this new
normal is still uncertain. This includes the productivity of a hybrid
workforce environment, the impacts of tighter labour markets, and supply chain
disruptions. The recent disruptions caused by the post-pandemic demand surge
and the inability of supply chains to keep up, have highlighted the complexity
and vulnerability of the global supply chain infrastructure.
Supply chain disruptions can also be caused by a number of principal risk
events - as described in our principal risks and uncertainties section - such
as natural disasters and geopolitical tensions. Inflationary pressures may
also affect the competitiveness of suppliers, leading to supplier market
contraction further impacting supply chain resilience. Severe supply chain
disruptions have the potential to impact not only inbound and outbound flows
of our feedstock, services and products, but also the delivery of our
sustaining and growth projects.
In the longer term, as the world transitions to a low-carbon future and
consumer demand for sustainable goods flows through the value chain, the
supply-demand dynamics of commodities are expected to shift. This will lead to
increasing demand for sources and solutions with low CO2 emissions, and a
lower social and environmental footprint, in addition to a growing demand for
transparent, sustainable and circular value chains.
To strengthen our emerging risks management framework, during 2022 we carried
out activities to: (i) identify new emerging risks in light of COVID-19,
geopolitical instability and climate change; (ii) re-assess the emerging risks
identified in 2021; (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 Board, 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 stress and drought" and "Transition to a low-carbon future" and
identified three new emerging risks: "Geopolitical instability", "Replacement
on depletion of ore reserves" and "Future of the workforce".
Relevant emerging risks are discussed below:
Emerging Risk Description Impact Mitigations Actions Time Scale
1 Geopolitical instability Current global geopolitical tensions, such as the war between Russia and Disruptions in the supply chain of critical operating inputs such as cyanide, Inventory control in the mining units to plan purchases in a timely manner and < 1
Ukraine, the problems between Taiwan and China, as well as U.S. and Chinese ammonia, spare parts, equipment parts, etc. and rising prices of key inputs maintain sufficient stock to guarantee operations. Strict control of operating
(Linked to Global macroeconomic development Principal Risk) tariff matters, may affect our operations and projects. such as steel, diesel, cement, etc. costs to avoid increases. Years
2 Water stress and drought Lack of sufficient water resources to meet the water consumption demand in a Water is critical to mining processes. Without this natural resource, we Strict control and monitoring of water concessions are maintained and actions > 5
region and strong heatwaves in desert regions. cannot extract gold and silver. are envisaged to ensure water for the following years.
(Linked to Climate Change Principal Risk) Years
3 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.
4 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
(Linked to Cybersecurity Principal Risk) through new systems with recognisably superior attributes. practices and new technology. Years
5 Pandemics and 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 Mine and project personnel are continuously monitored by the medical team and < 1
which most people do not have immunity. of employees and stop the Company's activities. receive medical examinations to ensure that there are no outbreaks of
contagion. Years
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 always respond to investor and societal requests and comments and promote < 3
fairness and sustainability. Financial institutions are also placing greater mining industry, supply cost structures, demand for global commodities and action plans to meet their expectations. A number of initiatives demonstrate
emphasis on environmental, social and governance (ESG) considerations when capital markets. While this presents us with opportunities for portfolio and our progress. We were also placed first in the Corporate Integrity Ranking in Years
making investment decisions. product differentiation, it has the potential to impact how we operate. Mexico.
7 Replacement on depletion of ore reserves The inability to replace depletion of ore reserves in key business units By not replacing ore reserves with new discoveries, the company's production There are very interesting exploration projects such as Orisyvo, Rodeo, > 5
through exploration, projects or acquisitions. capacity and eventually its operation would be diminished. Guanajuato that could replace the mineral reserves that are currently being
(Linked to Exploration Principal Risk) exploited. There are also several exploration camps that explore new Years
territories every day in search of minerals in Mexico, Peru and Chile.
8 Future of the workforce Create a culture of talent under an inclusive, empowered and confident culture A lack of talent in some areas of the mines and projects such as planning, The Human Resources department has a highly specialised training programme in < 3
and career path to generate a future-ready workforce. maintenance, safety, etc. is expected. There is a need to develop personnel to the strategic areas of the operation. It also has a training programme for
(Linked to Human Resources Principal Risk) fill these positions in the future. Otherwise, we will not have people developing personnel focused on filling vacant positions. Years
prepared to operate the mines.
· From risk management to strategic resilience.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties outlined in this section reflect the
risks that could materially affect (negatively or positively) our performance,
future prospects or reputation.
As part of our bottom-up process, each business unit head determined the level
of perceived risk for their individual unit's risk universe, and each risk
owner assessed its impact and likelihood. Executive management then reviewed
and challenged each level of perceived risk and compared it to the risk
universe of Fresnillo plc (130) as a whole. The results of this exercise were
used as an additional input to define and assess the Company's principal
risks. We conducted the same risk analysis on our advanced projects, detailing
the specific risks faced by each project based on its unique characteristics
and conditions.
We maintain a risk register through a robust assessment of the potential
principal risks that could affect the Company's performance. This register is
used to ensure that principal risks are identified in a thorough and
systematic way and that agreed definitions of risk are used.
We are aware that not all risks can be completely eliminated and that exposure
to some risks is necessary in the pursuit of our corporate objectives. Mining
is, by its nature, a long-term business and as part of the principal risks
update and evaluation process we identify new or emerging risks which could
impact the Company's sustainability in the long run, even if there is limited
information available at the time of the evaluation.
Due to the effects caused by the global post-pandemic impacts of COVID-19, the
Russia-Ukraine war, climate change, the effects of global inflation and the
security and environmental situations near our operations, it was necessary to
reassess the principal risks and reorder their materiality, likelihood and
impact, as well as reassess related mitigation actions. During the first half
of 2022, the risk team focused its efforts on identifying and assessing
emerging risks, business continuity risks, safety risks and climate change
risks against TCFD criteria. In the second half, we conducted assessments of
fraud, compliance, human resources, security and internal control risks, and
Board members also took part in a working session to review principal and
emerging risks as well as risk appetite.
Overview of the 2022 risk assessment exercise:
Analysis Survey Trend comparison and review Added value
Risk identified and assessed
60 business workshops 360 colleagues in operations, exploration, projects, corporate and support 15 International institutions specialising in risks were consulted. 300 colleagues were trained in basic risk topics.
areas of Peñoles, including Internal Audit.
(Director and manager level)
20 risks scenarios were built by mining industry risk specialists. 250 colleagues were trained in advanced risk topics.
40 interviews with risk owners
(managers and leaders at units) 25 gold and silver mines (15 in Mexico and 10 elsewhere in the world) were 100 colleagues were trained in climate change risks and TCFD framework.
consulted regarding their risks.
25 workshops delivered to the SSMARC team.
4 specific topics were included in the risk analysis: geopolitical
8 consulting firms' risk reports (including Marsh, Zurich, EY, PWC, KPMG and instability, fraud and compliance, climate change and TCFD risks.
Deloitte) were reviewed.
20 critical processes mapped and reviewed for impact and likelihood.
3 new topics were included in the risk analysis: security, water scarcity and
6 risk experts were interviewed. management, physical resilience to natural disasters and extreme weather.
8 risk analysis methodologies used: ISO-31000, ISO-22301, Markov, Bow-Tie,
FMEA Model, Monte Carlo, RACI Matrix, Cause and consequence analysis.
As a result of the annual risk assessment for the year 2022, the following
main results were determined:
· Due to the importance of these risks to the Company, and in order
to better analyse and have more detail on the speed of the risks in terms of
probability, it is necessary to separate two principal risks: "Impact of metal
prices and global macroeconomic developments" and "Tailings and environmental
incidents".
· In relation to the risk "Global macroeconomic developments", this
is mainly due to the increased risk of continued global and Mexican inflation
in 2023, possible economic recessions, disruption of supply of critical inputs
(steel, diesel, cyanide, cement, spare parts, equipment, etc.) and increased
operating costs. It is essential to analyse this risk in detail.
· With regard to "Tailings dams", this is the result of the hard
work carried out by Baluarte Minero and Fresnillo plc's operations to increase
safety and comply with the highest international TSF standards. In order to
comply with these standards, it is necessary to periodically assess the risks
of TSFs.
· 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 relationships
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, Saucito, Juanicipio and Penmont (with the highest perception of
insecurity in the country); 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.
· The "Human Resources" risk has increased severely, due to the
resignation of talent in key positions at the mines and the lack of candidates
to fill important positions within the operating process.
· The "Cybersecurity" risk has increased mainly due to the increase
in remote home office activities, and a sophisticated adversary able to
exploit stolen credentials and identities to amplify ransomware and "big game
hunting" attacks.
· During the months of September and October, the "Fraud" risk
assessment was carried out, identifying risks and areas of opportunity in the
following processes: 1. Payroll (employees and unionised), 2. Award of
contracts for supplies and services, 3. Administration of contracts for
supplies and services, 4. Theft of finished products during transportation, 5.
Theft of unit assets (wiring, spare parts, consumables, etc.) and 6. Attack on
the technological repositories of critical company information. In all cases,
internal controls and timely follow-up and prevention actions have been
increased. Early detection actions were also reinforced. The internal audit
area considered these results in its annual programme 2023.
· During 2022 we worked together with the ESG Department to analyse
and assses the "Climate Change" risk, and the critical risks and oportunities
that make up the "Task Force on Climate-related Financial Disclosures" (TCFD),
assessing the potential impacts and creating risk materialisation scenarios,
which are related to the financial viability statement. Regarding physical
risks we consider: "Changes in frequency and magnitude of extreme events such
as rainfall, droughts and heatwaves affecting our operations and neighbouring
communities" and "Increase in average temperatures, reduction in annual
precipitation and associated water stress". Regarding transitional risks we
consider: "Emerging regulations such as local or transborder carbon taxes, cap
and trade systems or increasing requirements from current emissions
regulations", "Changes in the regulatory framework of renewables" and
"Increase in energy prices".
· This year, Fresnillo plc's "individual risks" increased from 120
to 130 risks, as a result of the analysis of water scarcity and management,
fraud, climate change and cybersecurity risks.
RISK APPETITE
We define risk appetite as 'the nature and extent of risk Fresnillo plc is
willing to accept in relation to the pursuit of its objectives'. We look at
risk appetite from the context of severity of the consequences should the risk
materialise, any relevant internal or external factors influencing the risk,
and the status of management actions to mitigate or control the risk. A scale
is used to help determine the limit of appetite for each risk, recognising
that risk appetite will change over time. If a risk exceeds appetite, it will
threaten the achievement of objectives and may require a change to strategy.
Risks that are approaching the limit of the Group's risk appetite may require
management actions to be accelerated or enhanced to ensure the risks remain
within appetite levels. For catastrophic and operational risks, our risk
appetite for exceptions or deficiencies in the status of our controls that
have safety implications is very low. Our internal audit programme evaluates
these controls with technical experts at operations and the results of that
audit work will determine the risk appetite evaluation, along with the
management response to any issues identified.
OUR RISK MATRIX
Current assessment of principal risks / As of February 2023
A consistent assessment of the probability and impact of risk occurrence is
fundamental to establishing, prioritising and managing the risk profile of the
Company. In common with many organisations and reflecting good practice,
Fresnillo plc uses a probability and impact matrix for this purpose.
Our principal risks, in the table below, note the interconnectivity of our
Strategic, Economic, and Operational risks within an Enviromental, Social and
Governance (ESG) framework.
Risk Velocity: Strategic - risks arising from uncertainties that may impact our ability to
achieve our strategic objectives.
High: Impact within 6 months of risk occurring
Economic - risks that directly impact financial performance and realisation of
Medium: Impact between 6 and 12 months of risk occurring future economic benefits.
Low: Impact after more than 12 months of risk occurring Operational - risks arising from our business that have the potential to
impact people, environment, community and operational performance including
our supply chain.
Environment - risks arising from our business that have the potential to
impact air, land, water, ecosystems and human health.
Social - risks arising from our business that have the potential to impact on
(V) Risks that were considered for the viability assessment society, including health and safety.
Governance - risks arising from our workplace culture, business conduct and
governance.
ESG - Environmental + Social + Governance.
OUR RISK HEAT MAP
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 the current geopolitical
landscape and the post-pandemic effect of COVID-19, which could lead to a
long-term global recession, as well as other operational constraints that
could impact several of our principal risks.
Our analysis highlights the strong relationships between climate change risks
and the water stress, between cybersecurity risk and technological disruption,
and between exploration risk and replacement on depletion of ore reserves.
1
POTENTIAL ACTIONS BY THE GOVERNMENT (political, legal and regulatory)
RISK DESCRIPTION
Regulatory measures or policies issued by the government, at all three levels:
Federal, State and Municipal, may have an adverse impact on the operation of
the Company. This could include: new stricter environmental regulations or
guidelines, environmental taxes, new forms of labour and union contracting,
longer and more complicated permitting and licensing processes, more complex
and time-consuming arrangements for accessing explosives, more complex or
onerous tax compliance obligations for us and our contractors, as well as more
frequent reviews by tax, environmental and social security authorities.
The current federal government has expressed a negative sentiment towards the
mining industry and particularly open-pit mining, which is why it has decided
not to grant any more mining concessions during the current government term
that ends in 2024, and is likely to review in detail the status of the
concessions that have already been granted, seeking to remove those that are
not being exploited or worked. On the other hand, it promotes the right of
indigenous and Afro-Mexican communities to be consulted prior to the granting
of mining concessions, which could potentially affect the granting of new
concessions in Mexico.
In May 2022, a reform to the Mining Law was approved to reserve the
exploration, exploitation, benefit and use of lithium to the State. The aim is
for this mineral to be used for the benefit of national development; although
gold and silver are not mentioned specifically, other minerals declared as
"strategic by the state" are mentioned, and at some point, precious metals
could be considered under this heading. This would directly and seriously
affect the concessions currently exploited by the Company.
Another risk for 2023 is the possible presentation of a comprehensive reform
initiative to the Mining Law via the Senate, in which sensitive matters
affecting the mining sector will be discussed, such as transparency of
information, consultation with indigenous peoples and communities,
modification of the concession regime in terms of its validity and grounds for
cancellation, among others.
The federal government, by investing in a new petrochemical refinery in "Dos
Bocas", Tabasco, and buying an oil refinery in "Deer Park", Texas, indicates
that its energy policy promotes fuel oil and coal, which discourages the
generation of energy based on clean sources. This complicates attention to and
compliance with international climate change goals and standards.
We paid special attention to the following aspects:
- Government actions that negatively impact the mining industry.
- Regulatory changes to mining rights and adverse tax changes.
- Changes in tax regulations.
- Increased frequency of reviews by tax authorities with special attention to
the mining industry.
- Inability to obtain necessary water concessions due to government control or
private interests.
- Failures/delays in obtaining necessary environmental permits.
- Disputes arising from the US-Mexico-Canada Trade Agreement (USMCA or TMEC).
FACTORS CONTRIBUTING TO RISK
· Change of head of the Mexican Economy Minister, who is the federal
government's authority on mining matters. Tatiana Clouthier left the post and
was succeeded by Raquel Buenrostro . This change is perceived as negative for
the mining industry, as Buenrostro has expressed her dissatisfaction with
mining companies for not paying taxes and polluting.
· The federal government reported that it would review the granting of
concessions to mining companies and that no more concessions would be granted
during this six-year term (which ends in 2024). It is therefore possible that
it will withdraw unexploited gold and silver concessions.
· Labour reform that prohibits subcontracting, which mainly generates
complications in relationships with contractors.
· New taxes and discrepancies in the criteria used in audits carried
out by the tax authority.
· Increased frequency of audits by tax authorities with a special focus
on the mining industry.
· The federal government promotes investment in coal instead of
renewable or clean energy. This has made it more difficult to operate with
clean energy.
· The federal government's implementation of policies that support the
use of coal will result in more greenhouse gases being released into the
atmosphere and reduce the development of renewable energy.
· The United States and Canada requested dispute settlement
consultations with Mexico under the North American Free Trade Agreement (T-MEC
or USMCA) over Mexico's energy policies that they consider discriminatory and
say harm international companies and cross-border supplies.
· Since 2020, the so-called Mining Fund, whose main objective was to
distribute resources to communities neighbouring the mines, according to the
royalties paid by companies under the Federal Law of Rights, has been closed.
Since then, although companies continue to pay these royalties, they do not
necessarily translate into investments for the communities neighbouring the
mines.
· In addition, the perception of corruption in Mexico remains high. The
country's score in Transparency International's Corruption Perceptions Index
2022 remained relatively unchanged, despite a higher ranking. As a result,
delays in obtaining permits for certain operations and/or projects remain a
risk.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Engagement and constant communication with all levels of
government.
2. Increased monitoring of the processes being implemented at the
Ministry of Labour and Economy.
3. We remain alert to the changes proposed by the authorities,
including fiscal initiatives on energy and mining, so that we are able to
respond in a timely and relevant manner. Daily monitoring, follow-up and
attention to issues before the Congress of the Union that may affect the
mining industry.
4. In relation to the new labour law prohibiting subcontracting,
changes have been implemented in the relationships with contractors and
personnel structures have been adapted to comply with the law.
5. We continue to collaborate with other members of the mining
community through the Mexican Chamber of Mines to lobby against any new
harmful taxes, royalties or regulations. We also support industry lobbying
efforts to improve the general public's understanding of the mining industry.
6. We continue to comply with all applicable environmental regulations
and are fully committed to sustainable activity.
7. We are committed to maintaining dialogue with the community
throughout the life of a mining project, from initial exploration to eventual
closure, with the objective of building long-term relationships and value,
while ensuring operational continuity.
8. We seek to maintain full compliance with tax authority requirements
and we continue to cooperate with any ongoing tax inspections.
9. We maintain a register and control of vaccinated staff and
encourage all staff to be vaccinated as soon as possible.
10. Follow-up and timely compliance with all suggestions from the health
authorities.
KEY RISK INDICATORS
· Number of media mentions related to mining regulations. These
could include the mention of tax, royalties, the banning of mining activities
in protected areas and legal precedents. The indicator also provides details
about the media itself, such as the speaker profile and political alignment.
· Monitoring and control of the activities and initiatives carried
out by the Ministry of Economy and the Presidency of the Republic.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: Very high (1)
2021: Very high (1)
2
SECURITY
RISK DESCRIPTION
We face the risk of theft of gold doré and silver concentrates as well as of
items including equipment, tools and materials. These thefts can take place
inside the mines or during transportation.
Our employees, contractors and suppliers face the risk of theft, kidnapping,
extortion or damage due to insecurity in some of the regions where we operate.
The influence and dispute of territories by drug cartels, other criminal
elements and general anarchy in some of the regions where we operate, combined
with our exploration activities and projects in certain areas of drug deposit,
transfer or cultivation, makes working in these areas a risk to us.
The Federal Government created the Secretariat of Citizen Security and
Protection as part of the comprehensive strategy to reduce insecurity. It also
created the National Guard, mostly comprising military personnel, with the aim
of combating organised crime and drug cartels. Unfortunately, state or local
police in most states are unprepared and ill-equipped to combat organised
crime, have low wages and are sometimes infiltrated by criminal elements.
According to information from the Secretariat of Security and Citizen
Protection, the National Guard and the Attorney General's Office of the
Republic, the presence of organised crime and high-impact crimes (homicide,
kidnapping and extortion) increased in 2022, in the states where our business
units and projects are located, such as Zacatecas, Guanajuato, and Sonora.
The main risks we face are:
- High-impact robberies.
- Theft of assets such as minerals, equipment, instruments, inputs, etc.
- Consumption and sale of toxic substances in our mining units.
- Homicide.
- Kidnappings.
- Extortions.
- Vandalism.
FACTORS CONTRIBUTING TO RISK
· A severe increased presence of organised crime in the vicinity of
the mining units particularly in Fresnillo, Saucito and Juanicipio.
· A severe increase in the number of high impact crimes (homicide,
kidnapping, extortion) in the regions where our mining units and projects are
located.
· Increased consumption and sale of drugs at the mining units,
particularly Saucito.
· 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.
· The Mexican state of Zacatecas is notorious for high levels of
perceived insecurity and high rates of high-impact crime in 2022. There are
records of several vehicle thefts from company employees and organised crime
checkpoints on the roads near Fresnillo and Saucito mines.
· The Mexican State of Sonora is notorious for being under constant
attack from organised crime gangs. Several attacks have taken place recently
jeopardising the continuity of mining operations and the physical integrity of
workers employed by Herradura and Noche Buena mines.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Our property security teams closely monitor the security situation,
maintaining clear internal communications and coordinating work in areas of
greater insecurity.
2. Management is fully committed to protecting our workforce.
3. We have adopted the following practices to manage our security
risks and prevent and address potential incidents:
a. We maintain close relations with authorities at the federal, state
and local levels, including army camps located near most of our operations.
b. Regular interactions and meetings with the National Guard.
c. 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.
d. 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.
4. We continue to invest in community programmes, infrastructure
improvements and government initiatives to support the development of legal
local communities and discourage criminal acts.
5. We have increased the number of anti-doping tests conducted at the
start of the day in the mining units.
6. Frequent inspections are carried out inside the mines to verify
that drugs are not consumed and sold.
7. Drug consumption prevention campaigns are carried out, focused on
employees.
KEY RISK INDICATORS
· Total number of security incidents affecting our workforce
(thefts, kidnapping, extortion, etc.).
· 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
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: Very high (2)
2021: Very high (2)
3
GLOBAL MACROECONOMIC DEVELOPMENTS (energy and supply chain disruptions,
inflation, productivity and cost)
RISK DESCRIPTION
Geopolitical tensions have the potential to impact our key markets, operations
and investments.
Increased trade tensions may undermine rule-based trading systems and lead to
trade actions (increased tariffs, retaliations, and sanctions) potentially
impacting our operations or investments.
Disruption or restrictions to the supply of any of our key strategic inputs,
such as electricity, water, fuel, sulphuric acid or mining equipment, could
negatively impact production.
As a result of post-pandemic COVID-19 and the Russia-Ukraine war, economies
around the world, including Mexico, were negatively affected by lockdowns and
disruptions in supply chains. Globally, economies almost came to a complete
halt for more than five months during 2020 and some months of 2021. During
2022, we saw significant increases in critical inputs and operating costs and
higher inflationary pressures, along with a shortage of critical inputs and
equipment. We expect this to continue through 2023.
This situation could create an adverse impact on our operations, costs, sales
and earnings, and potentially on the economic viability of projects.
In macroeconomic terms we have the following results:
- The Mexican peso performed strongly during 2022 and is one of the strongest
emerging currencies. On average during 2022 it traded at 20 pesos per US
dollar. At the end of the year the dollar exchange rate was 19.5 pesos.
- General inflation in Mexico was 7.8% in mexican peso terms for 2022.
Company-specific inflation was 8.4% in dollar terms.
- Economic growth for Mexico during 2022 was 4.3%.
FACTORS CONTRIBUTING TO RISK
· The unnerving combination of war, inflation, energy scarcity, and
climate change wasn't what anyone expected as life was just beginning to move
forward from the COVID-19 pandemic.
· Inflation has become a major concern for the global economy, two
years into the pandemic. Price rises are reaching record highs in Europe and
the United States and may be countered by monetary policy. In Latin America,
central banks have been acting quickly and forcefully since last year, raising
interest rates.
· The impact of post-pandemic COVID-19 and the Russia-Ukraine war on
supply chains has been global, prolonged, and resulted in a series of major
shocks to companies' logistical systems.
· Disruptions in the value chain of critical inputs for our operations
such as spare parts (primarily delivered by land transport from the US and
maritime transport from China and Europe).
· Disruptions also include reduced availability of maintenance
teams/contractors to resolve issues, as well as travel restrictions leading to
officials not being able to travel and inspect projects, resulting in delays.
· Increased operating costs due to higher prices for critical inputs
such as steel, cyanide, copper, diesel, haulage equipment, oxygen and truck
tyres.
· Analysts surveyed by Banco de Mexico estimate that Mexico's GDP
growth will decelerate from 3.0% to 0.9% from 2022 to 2023.
· In terms of inflation, we experienced an increase in two of our
main energy inputs compared to the previous year, with diesel (US percentage
per litre) increasing by 4.3% and kWh (US percentage per kWh) by 5.9%
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. In order to maintain our security of supply, contingency plans are
in place to address any short-term disruptions to strategic resources. We
negotiate early with suppliers of key inputs to ensure continuity. Certain key
supplies are purchased from several sources to mitigate potential disruption
arising from exposure to a single supplier.
2. We execute operational excellence initiatives to counter inflation
and improve margins, and also enhance cost competitiveness by improving the
quality of the portfolio.
3. We maintain a rigorous, risk-based supplier management framework to
ensure that we engage solely with reputable product and service providers and
keep in place the necessary controls to ensure the traceability of all
supplies (including avoiding any conduct related to modern slavery).
4. To achieve cost competitiveness, we endeavour to buy the highest
possible proportion of our key inputs, such as fuel and tyres, on as variable
a price basis as possible and to link costs to underlying commodity indices
where this option exists.
5. We are committed to incorporating sustainable technological and
innovative solutions, such as using sea water and renewable power when
economically viable, to mitigate exposure to potentially scarce resources.
KEY RISK INDICATORS
· Percentage of compliance by suppliers and contractors.
· Increase in the price of critical inputs for the operation.
· Increased cost of operation.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (3)
New Principal Risk. In 2021 this risk was considered alongside the metals
prices risk. It has now been deemed to be a separate Principal risk, due to
the increase in its importance.
4
IMPACT OF METALS PRICES (commodity prices and exchange rates)
RISK DESCRIPTION
The volatility in the price of gold and silver is high and unpredictable.
There is an inherent risk when investing or planning for the future price of
these precious metals.
Our results are heavily dependent on commodity prices - principally gold and
silver. The prices of these commodities are strongly influenced by a variety
of external factors, including world economic growth, inventory balances,
industry demand and supply, possible substitution, etc.
FACTORS CONTRIBUTING TO RISK
· The risk is further exacerbated when there are macro economic and
geopolitical factors that directly affect the price of commodities, both
positively and negatively, such as post pandemic COVID-19, the war between
Ukraine and Russia, and generalised inflation around the world.
· Lately, the attraction of investing not only in gold and silver, but also
in other financial instruments such as cryptocurrencies, has increased. This
could lead to investors reducing their investment activities in precious
metals.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. We consider exposure to commodity price fluctuations an integral
part of our business and our usual policy is to sell our products at
prevailing market prices.
2. We monitor the commodity markets closely to determine the effect of
price fluctuations on earnings, capital expenditure and cash flows. Very
occasionally, when we feel it is appropriate, we use derivative instruments
to manage our exposure to commodity price fluctuations. We run our business
plans through various commodity price scenarios and develop contingency plans
as required.
3. We have hedging policies for exchange rate risk, including those
associated with project-related capex and a hedging policy for precious
metals.
4. We focus on cost efficiencies and capital discipline to deliver
competitive all-in sustaining cost.
5. We work to improve debt profile and reduce annual interest bill.
6. We maintain long-term optionality by ensuring our pipeline of
opportunities is continuously replenished.
7. Security, liquidity and return represent the order of priorities
for our investment strategy. We maintain a strong and flexible balance sheet,
consistently returning capital to shareholders while leaving sufficient funds
to progress our short-, medium- and long-term growth plans and maintain the
financial flexibility to take advantage of opportunities as they may arise.
8. We have a risk-averse investment strategy, managing our liquidity
by maintaining adequate cash reserves and financing facilities through the
periodic review of forecast and actual cash flows. We choose to hold surplus
cash in demand or term deposits or highly liquid investments.
9. In order to maximize the extension of the average life of our debt
profile, on 29 September 2020 Fresnillo plc successfully priced a US$850
million 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.
KEY RISK INDICATORS
· Profit sensitivity to percentage change in precious metals prices
and the Mexican peso/US dollar exchange rate.
· EBITDA sensitivity to percentage change in metal prices and the
Mexican peso/US dollar exchange rate.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 High
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (4)
New Principal Risk. In 2021 this risk was considered alongside the global
macroeconomic developments risk. It has now been deemed to be a separate
Principal risk, due to the increase in its importance.
5
HUMAN RESOURCES (attract and retain requisite skilled people/talent crisis)
RISK DESCRIPTION
Fresnillo plc's most valuable asset is its workforce.
Our ability to achieve our business strategy depends on attracting, developing
and retaining a wide range of internal and external skilled and experienced
people.
Managing talent and maintaining a high-quality labour force in a fast-changing
technological and cultural environment is a key priority for us. Any failures
in this respect could have a negative impact on the performance of the
existing operations and prospects for future growth.
The COVID-19 pandemic has several health risks for employees, with our
workers in the mines on the frontline in terms of health and safety risks. The
way that mining works (especially underground), where there are several
workers in one place, increases the possibility of contagion. Due to the
complex nature of mining operations and the remote locations in which they are
often located, it is difficult to implement health measures and carry medical
prevention equipment. At times, we have had no option but to quarantine
workers, even when national lockdown regulations did not force us to do so.
Our people are critical to meeting our goals. We face multiple risks in the
processes of selection, recruitment, training and retention of talented people
with technical skills and experience.
Obtaining qualified labour in the mining sector has become a major risk, and
our industry requires more and more people trained and experienced in mining
processes. Unfortunately, there are not enough candidates with the required
profiles.
Digital and technological innovation has the potential to generate substantial
improvements in the productivity, safety and environmental management of the
Company. However, to achieve this, in addition to demanding significant
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 be resistant to change and unwilling to accept the impact of
automation or to acquire new technological skills.
The lack of reliable contractors with sufficient infrastructure, machinery,
performance history and trained people is also a risk that could affect our
ability to develop and build mining works.
In addition, it is difficult to hire the employees of contractors working for
the company.
.
FACTORS CONTRIBUTING TO RISK
· Business interruption or underperformance may arise from a lack
of access to capability. Tight labour markets are leading to heightened
competition for diverse talent and critical skills, such as digital, climate
and energy.
· Changing societal expectations are placing pressure on our
corporate and employer brand - who we are and what we stand for.
· There was a significant increase in staff turnover during 2022.
· Talent retention also became more difficult this year.
· At some mines we have a lack of specialised personnel to cover
working hours.
· In certain regions where we operate there are not enough
candidates with the necessary skills to operate the mining equipment.
· With the new labour law prohibiting outsourcing, we had to hire
staff from contractors, and this caused added complications.
· Unfortunately, not everyone follows measures to prevent COVID-19
and that increases the risk of contagion.
· Workers in the mining sector have been particularly affected by
the pandemic, given the employment architecture of the industry, which can
feature remote fly in-fly out or drive in-drive out operations, congested
underground working conditions, and workers residing in mine-site compounds or
neighbouring communities. These conditions make some COVID-19 preventative
measures difficult to implement, which makes mineworkers vulnerable to both
acquiring and spreading the virus.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. We develop the talents of our employees through training and career
development, invest in initiatives to widen the talent pool and are committed
to our diversity and inclusion policy. Through these actions we aim to
increase employee retention, as well as the number of women, people with
disabilities and employees with international experience in the workplace.
2. Our employee performance management system is designed to attract and
retain key employees by creating suitable reward and remuneration structures
and providing personal development opportunities. We have a talent management
system to identify and develop internal candidates for key management
positions, as well as identify suitable external candidates where appropriate.
3. We aim for continuous improvement, driven by opportunities for training,
development and personal growth; in short, we focus on fair recruitment, fair
pay and benefits and gender equality. In the trusted staff structure, 19.87%
are women as are 28.81% of new joiners, while 21.40% of the female population
were promoted during the year.
4. 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:
• Our close relationships with universities that offer earth science
programmes. We have programmes dedicated to identifying potential
performance-based candidates who can be hired as trainees and/or employees at
graduation. During the year, we hosted 16 students from different Earth
Science professions at our mining units to support their training, and 104
engineers took part in our training programme.
• CETLAR (Centre for Technical Studies of Peñoles), which trains mechanical
and electrical technicians. The 7 graduates of 2022 were hired as full-time
employees.
5. Retention: Our goal is to be the employer of choice, and we recognise that
to be a profitable and sustainable company, we need to generate value for our
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.
Management and leadership skills development programmes were conducted during
2022 with 30 superintendents, 129 advisors and 69 facilitators.
In order to keep our staff updated and trained, 88% of employees and 99% of
unionised staff have received training this year. In 2022, 232 employees
participated in institutional development programmes, which means that 45% of
staff with more than two years of service have participated at least once. Of
this 45%, 10.4% are women. 702 courses and studies were conducted through
external training, benefiting 520 employees. 77.3% of our leaders have
participated in institutional development programmes focused on leadership.
6. Performance: The virtual internship programme continued this year in
conjunction with Peñoles, with courses in mining, geology, metallurgy and
topography. In total there were 698 students (57.02% men and 42.98% women).
We have continued our performance assessment process, reinforcing formal
feedback. We promote the certification of key technical skills for operational
personnel and have implemented a programme to develop administrative and
leadership skills for the required positions. We develop our high-potential
intermediate managers through the Leaders with Vision programme.
7. Pandemic: The safety of our workforce is protected with sanitary protocols
in each mining unit in accordance with the recommendations of the Sanitary
Authority.
A range of security measures has been implemented:
-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.
KEY RISK INDICATORS
· Number of positions filled by area of speciality, for vacancies
and new positions.
· Employee turnover rate.
· 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
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (5)
2021: High (6)
6
CYBERSECURITY
RISK DESCRIPTION
Information is one of our most valuable assets and we work hard to protect it.
We fully recognise the importance of the confidentiality, continuity,
integrity and security of our data and systems.
As a mining company, we can be under threat of cyber attacks from a broad set
of groups, from "hacktivists" and hostile regimes to organised criminals.
Their objectives range from taking advantage of mining's role in regional and
global supply chains, to impacting national economies.
Some threat actors also focus on finding unprotected, misconfigured and
unpatched systems and exploit them, due to the industry's heavy reliance on
technology and automated systems that support operations.
The following are the top eight cybersecurity and privacy risks that have been
identified through environment monitoring and workshops with business units,
operations, and IT. These risks comprise Peñoles/Fresnillo overall
cybersecurity and privacy risk profile:
-Corruption of data - Critical data where any unauthorised modification can
have adverse impacts.
-Unauthorised access - Cybersecurity and privacy incidents due to incorrect
access permissions or system abuse, exploitation or misuse.
-Breach and data theft - Disclosure of critical and sensitive company data by
an internal or external source.
-Business disruption - Disrupting key applications or systems for a period of
time.
-Lack of cybersecurity ownership - Failure to assign responsibility for
implementing and adopting cybersecurity practices on a daily basis.
-Non-compliance - Cybersecurity and privacy incidents resulting in
non-compliance with applicable regulations, including privacy.
-Health and safety incidents - Breach of availability, integrity or
confidentiality of data which impacts health and safety.
-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
part to the COVID-19 pandemic and the proliferation of new digital
technologies, the increasing degree of connectivity and a material increase in
the monetisation of cybercrime.
· Theft of information through social engineering and "phishing"
campaigns (fraudulent attempts to obtain sensitive information or data, such
as usernames or passwords, by appearing to be a trustworthy entity in an
electronic communication).
· An increased reliance on cloud systems and infrastructure can
make IT defences less robust and may bypass security controls
· 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.
· There is a global lack of regulation regarding cybersecurity and
e-crime that could deter criminals.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Our information security management model is designed with
defensive structural controls to prevent and mitigate the effects of computer
risks. It employs a set of rules and procedures, including a Disaster Recovery
Plan, to restore critical IT functions in the event of an attack.
2. Our systems are continuously monitored by cybersecurity experts at
a Security Operations Centre (SOC). Incident response plans are in place and
tested periodically to ensure we can respond quickly and effectively.
3. Our systems are regularly audited to identify any potential threats
to the operations and additional systems have been put in place to protect our
assets and data.
4. We have implemented a training and awareness programme, which is
designed to increase awareness of cyber risk and ensure that employees take
the appropriate actions.
5. We have invested in global IT security platforms and Managed
Security Services Providers (MSSPs) in order to proactively monitor and manage
our cyber risks. We conduct routine third-party penetration tests to
independently confirm the security of our IT systems and we seek to enhance
the monitoring of our operational technology platforms.
6. Since 2020, a fully staffed cybersecurity office has been in place
to improve our cybersecurity position. Its main objective is to identify and
manage cybersecurity risks and align them with our business mission and
strategy, as well as monitor the supporting processes. Aligned to best
practices and standards, its approach is based on two key frameworks:
a. The U.S. National Institute of Standards and Technology (NIST CSF)
Cybersecurity Framework that describes how companies can assess and improve
their ability to prevent, detect, and respond to cyberattacks.
b. Information Control Objectives and Technologies to Others (COBIT),
which was created by ISACA, the international professional association for IT
management and governance, to provide an implementable set of IT-related
controls, processes and facilitators.
7. Our approach is also based on the MITRE ATT&CK™ which is used
as the basis for the development of specific threat models and methodologies
in the private sector, government and in the cybersecurity products and
services community.
8. We also monitor the environment for relevant alerts and act
proactively to assess our readiness, reinforcing our capabilities as needed.
9. A governance model, continuous risk monitoring, information
security policies, awareness-raising campaigns and training form the basis for
our IT/OT operational guarantee.
10. Our plan for 2023 is to focus our efforts on incorporating key
indicators around cyber risk reduction in the cybersecurity dashboard,
implementing and maturing controls in line with the threat landscape and
emphasising the importance of individual responsibility to each employee, in
order for them to stay vigilant and alert to cyber threats.
KEY RISK INDICATORS
• Total number of cybersecurity incidents affecting our Company.
• Number of media mentions related to cybersecurity issues
affecting the mining industry.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (6)
2021: High (9)
7
PROJECTS (performance risk)
RISK DESCRIPTION
The pursuit of advanced exploration and project development opportunities is
essential to achieving our strategic goals. However, this carries certain
risks:
- Economic viability: the impact of the cost of capital to develop and
maintain the mine; future metals prices; and operating costs throughout the
mine's life cycle.
- Access to land: a significant failure or delay in land acquisition has a
very high impact on our projects.
- Uncertainties associated with the development and operation of new mines
and expansion projects: includes fluctuations in the degree of ore and
recovery; unforeseen complexities in the mining process; poor quality of the
ore; unexpected presence of groundwater or lack of water; lack of community
support; and inability or difficulty in obtaining and maintaining the required
building and operating permits.
- 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 delivered on
time.
Other important risks:
- Failure to effectively manage our development projects could result in
delays to the start of production and cost overruns.
- Projects that cannot be delivered on time, on budget and according to
planned specifications.
- Geotechnical conditions of the ore body / poor rock quality.
- High costs making it difficult to justify the project.
- Delay in the development of the project due to lack or delay of critical
equipment, supplies and spare parts.
- Disruptions in the supply chain for construction materials and equipment.
The following risks relate specifically to prospective projects in Chile and
Peru:
- Government instability, especially in Peru.
- Potential actions by the government (political, legal and regulatory).
- Security.
- Licence to operate (community relations)
- Access to water (national regulation and geographic complications).
- Environmental compliance.
- Competition for land (threat from green power generation companies, for
example thermosolar).
- Informal mining.
- Industrial safety compliance (National Geological and Mining Service
SERNAGEOMIN).
- Increased mining taxes and fees.
FACTORS CONTRIBUTING TO RISK
· Uncontrolled increases in the costs of critical inputs directly
affect the progress of projects and affect the planning of each project.
· In some regions there are no specialised contractors or
contractors with the technology to develop the projects.
· Contractor productivity may be lower than anticipated, causing
delays in the programme.
· Increase in the number of high impact crimes (homicide,
kidnapping, extortion) in the regions of the projects.
· We have identified the following threats to project
development:
- Insufficient resources for project execution.
- Changes in operational priorities that can affect 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
1. Our investment assessment process determines how best to manage available
capital using technical, financial and qualitative criteria.
• Technical: we evaluate and confirm the resource estimate; conduct
metallurgical research of mineral bodies to optimise the recovery of economic
elements; calculate and determine the investment required for the overall
infrastructure (including roads, energy, water, general services, housing) and
the infrastructure required for the mine and plant.
• Financial: we analyse the risk in relation to the return on the proposed
capital investments; set the expected internal rates of return (IRR) per
project as thresholds for approving the allocation of capital based on the
current value of expected cash flows of invested capital; and perform
stochastic and probabilistic analyses.
• 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.
2. 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.
3. The executive management team and the Board of Directors are regularly
updated on progress. Each advanced exploration project and major capital
development project has a risk record containing the project-specific
identified and assessed risks.
The project development process in 2022 included:
· Orisyvo, Rodeo, Guanajuato, and Tajitos.
· Fresnillo - San Carlos mega pumping station ramp. Tailings flotation
plant. Adequacy of Pyrites plant, 2nd phase. Fresnillo south and power
substation reinforcement. Installation of the 30 MW power transformer.
· Proaño/Fresnillo - Over-elevation of the San Carlos tailings dam.
· Saucito - Deepening of Jarillas ramp and continuing the construction
of the tailings dam, Cell 4B.
· La Ciénega - Continuing the construction of the third tailings dam.
· San Julián - Constructing stage four of the tailings dam.
· La Herradura - Fuel station and constructing the carbon-in-column
process.
KEY RISK INDICATORS
• Earned value (rate of financial advancement vs. physical
advancement).
• Percentage of required land acquired
• Percentage of major equipment ordered and received according to
plan.
• Percentage of mine development completed.
LINK TO STRATEGY RISK APPETITE
2 Medium
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: High (7)
2021: High (7)
8
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 the 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
new mining concessions. However, this could be mitigated by carefully
negotiating concessions with mining geological interest already granted.
· It is becoming increasingly difficult to negotiate land prices,
with landowners demanding more money and benefits for access to land.
· Social insecurity prevailing 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, leading to the possible
cancellation of the concession.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Successful access to land plays a key role in managing our mining rights,
focusing on areas of strategic interest or value.
2. At the end of 2022, we have 270,268 hectares in the process of being
granted and 1,415,960 hectares of mining concessions granted. In total, we
have 1,686,228 hectares in the control of Fresnillo plc. This represents an
increase of 8,307 hectares compared to 2021.
3. Other initiatives include:
· Meticulous analysis of exploration objectives and construction
project designs to minimise land requirements.
· Judicious use of lease or occupation contracts with purchase
options, in compliance with legal and regulatory requirements.
· Early participation of our community relations teams during the
negotiation and acquisition of socially challenging objectives.
· Strategic use of our social investment projects to build trust.
· Close collaboration with our land negotiation teams, which
include specialists hired directly by Fresnillo and also provided by Peñoles
as part of the service agreement.
4. 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
manage this risk on a case-by-case basis. Such measures include, wherever
possible, negotiations with agricultural communities for the direct purchase
of land.
5. We use mechanisms provided for in agricultural law and also use other legal
mechanisms under mining legislation that provide greater protection for land
occupation. These activities are part of our ongoing drive to reduce risk
exposure to surface land.
KEY RISK INDICATORS
• Percentage of land required for advanced exploration projects that are
under occupation or agreements other than total ownership (generally and per
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
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (8)
2021: High (4)
9
LICENCE TO OPERATE (community relations)
RISK DESCRIPTION
At both a local and global level, the mining industry's stakeholders have high
expectations relating to social and environmental performance. These
expectations go beyond the responsible management of negative impacts to
include continuous engagement and contribution to stakeholder development.
Failure to adequately address these expectations increases the risk of
opposition to mining projects and operations. Negative sentiment towards
mining or specifically towards Fresnillo plc could have an impact on our
reputation and acceptability in the regions where we have a presence.
We monitor the following risks:
- Negative perception of the Company's social and environmental
performance.
- Failure to identify and address legitimate concerns and expectations
of the community and of society at large.
- 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 performance.
· Rising expectations on shared benefits regarding land agreements.
· 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.
· Insecurity and access to water are the issues of greatest concern to people
and community leaders in the regions where we have a presence.
· The environmental impact of a mine is also an issue that can concern
communities close to our operations.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Efficient risk management allows us to detect threats such as social
opportunities, associated with our operation. This process helps us identify,
assess, plan for, communicate and manage significant risks that could
potentially impact our social license.
The risk identification mechanism includes social studies, complaints and
claims process, deployment of social programs, as well as meetings with key
stakeholders and media monitoring.
For this, we implement a process of evaluation of detected risks, we work on
them through specialized workshops, risk management and action plans for each
one, through committees that prevent their materialization.
The social risks that are classified as High Risk are escalated for their
administration in RED teams, which allow finding specific solutions with the
areas and personnel that have the decision-making level to offer concrete and
timely actions.
Likewise, constant and direct contact is maintained with the leaders of each
business unit, discussing the risks that, in their field of action, they
exercise and manage mitigation alternatives.
Governance in complaints is improved every year. They are received, evaluated
and managed, involving those directly responsible, while keeping dissatisfied
actors informed about the status of each case, until satisfactory closing
agreements are reached.
An internet listening module was implemented, which makes it possible to
capture concerns from the community, whose cases can even remain anonymous,
thus expanding coverage in sectors where technology makes it easier to find
questions about the organization and offer care in the same way that cases
presented in person.
1. COVID-19 Response: Collaboration with Health Authorities to support the
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.
2. 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.
3. 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.
4. Health and Safety performance: Our goal is to instil a safety culture
focused on 'caring for our people', based on shared values across the
organisation, driven by senior management and focused on high potential
incidents. Our approach to health aims to pre-emptively identify and manage
the risks to which our workforce is exposed.
5. Sharing the benefits of mining: In addition to effective stakeholder
engagement, sharing the benefits of mining also plays an important role in
supporting our social acceptability. Employment, procurement, talent
development and the payment of our fair share of taxes contribute to regional
development. Our Social Investment portfolio focuses on Education, Water,
Health & Sports and Capacity Building to support our communities, in
collaboration with non-governmental organisations (NGOs). For our education
focus, we work with ENSAMBLE ALEJANDÍA, INNOVEC and First Robotics; for
Water, with Captar AC Y FORMAC; and for Health with the National University
Foundation y FutbolMas; para Desarrollo de Capacidades, con Proempleo y CEDO.
6. Responsible approach to managing the impacts of the reform to regulate
subcontracting: Our response to the New Labour Legislation in Mexico has
ensured compliance with the reform. Extending job offers to the qualified
workforce has also mitigated the negative impacts of the reform on local
people and communities.
KEY RISK INDICATORS
· Number of local actions by non-governmental organisations (NGOs) or
other local social groups against mining, by region.
· Number of actions by NGOs or other local social groups against mining
in the Americas.
· Number of media mentions related to demonstrations against the mining
industry.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (9)
2021: High (5)
10
SAFETY
RISK DESCRIPTION
Our operations and projects are inherently hazardous, with the potential to
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.
Our workforce faces risks such as fire, explosion, electrocution and carbon
monoxide poisoning, as well as risks specific to each mine site and
development project.
These include rockfalls caused by geological conditions, cyanide
contamination, explosion, becoming trapped, electrocution, insect bites,
falls, heavy or light equipment collisions involving machinery or personnel
and accidents occurring while personnel are being transported.
A poor safety record or serious accidents could have a long-term impact on
morale and on our reputation and productivity.
FACTORS CONTRIBUTING TO RISK
· We are saddened to report that one fatality was recorded during
2022, and also that we experienced a significant increase in the accident rate
related to:
-Rockfall/terrain failure
-Loss of vehicle/equipment control
-Team-vehicle-person interaction
-Transport of staff
-Contact with electric power
-Fire
-Becoming trapped
-Contact with hazardous substances
· During 2022 we had 373 high potential incidents, 3% more than
2021.
· Frequent transportation of our people to remote business units is
an ongoing feature of our operations. In many cases, these units have poor
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
operations.
· Omissions and failures to follow security protocols.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. 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.
3. Our Safety and Occupational Health Strategy is based on four pillars:
a. Safety and health risk management: workers at all levels are able to
identify hazards and controls, so that all jobs are carried out safely.
b. Leadership: all employees and contractors are health and safety leaders and
we demonstrate our commitment through each individual's responsible behaviour.
c. Contractor management: our contractors are an integral part of our safety
team and culture, and we work together to improve.
d. Reporting, research and learning from our accidents: we share good
practices and learn from our mistakes.
4. The Strategy strives to achieve our four main goals of: zero fatalities,
zero occupational illnesses, the development of a resilient culture and the
automation of hazardous processes.
5. Critical controls and verification tools are regularly strengthened through
the verification programme and regular audits of critical controls for
potentially high-risk activities.
6. 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.
7. During the year, we continued to implement support measures to strengthen,
address and prevent the causes of accidents, injuries and fatalities. These
included:
· Strengthening safety objectives, including establishing proactive
performance indicators that allow us to anticipate events.
· Encouraging managers to own security risks to operations,
ensuring 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 2022, 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.
KEY RISK INDICATORS
● Accident rate
● Days lost rate
● Accident frequency
LINK TO STRATEGY RISK APPETITE
4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: Medium (10)
2021: Medium (10)
11
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 allows the existence of several unions within a
company and gives freedom of choice to the employee. This has led to a
complex, rarefied work environment at the Fresnillo mine, with violent clashes
between the union and a group of workers seeking to register a new independent
union.
· The risk is that the fighting will continue and worsen and
eventually the mine's workforce will be reduced. There is also a risk that
this conflict could spread to other mines.
· 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
1. We maintain good relations with our employees and unions, founded
on trust, regular dialogue and good working conditions. We are committed to
safety, nondiscrimination, diversity and inclusion, and compliance with
Mexico's strict labour regulations.
2. There are long-term labour agreements (usually three years) in
place with all the unions at our operations, helping to ensure labour
stability.
3. We seek to identify and address labour issues that may arise
throughout the period covered by the labour agreements and to anticipate any
potential issues in good time. Employees of our contractor companies are an
important part of our workforce and under Mexican law fulfil the same duties
and are subject to the same responsibilities as our own employees. We treat
contractors as strategic associates and build long-term, mutually beneficial
relationships with them.
4. We maintain constructive relationships with our employees and their
unions through regular communication and consultation. Union representatives
are regularly involved in discussions about the future of the workforce.
5. Increased communication with trade union leaders in mining units to
monitor the working environment.
6. Meetings have been held with groups of workers who want to
introduce new unions to the Company.
7. Our strategy is to integrate unionised personnel into each team in
the business unit. We achieve this by clearly assigning responsibilities and
through programmes aimed at maintaining close relations with trade unions in
mines and at the national level.
8. We maintain close communication with trade union leaders at various
levels of the organisation in order to: raise awareness of the economic
situation facing the industry; share our production results; and encourage
union participation in our security initiatives and other operational
improvements.
9. These initiatives include the Security Guardians programmes,
certification partnerships, integration of high productivity equipment, and
family activities.
10. We are proactive in our interactions with unions. When appropriate, we
hire experienced legal advisors to support us on labour issues. We remain
attentive to any developments in labour or trade union issues.
11. We conducted a review of the contractual benefits for union members in
our mines.
12. Our executive leadership and the Executive Committee recognise the
importance of trade union relations and follow any developments with interest.
KEY RISK INDICATORS
· Union members' level of satisfaction.
· Number of media mentions related to mining union developments.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (11)
2021: High (8)
12
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.
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 on new mining concessions.
· 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 2022, we invested a total of US$167.6 million in exploration
activities. Our objectives for 2023 include a budgeted risk capital investment
in exploration of approximately US$175.0 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 2023 will
allocate 26% to brownfield targets, 40% 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.
KEY RISK INDICATORS
· Drill programmes completed (overall and by project).
· Change in the number of ounces in reserves and resources.
· Rate of conversion from resources to reserves.
LINK TO STRATEGY RISK APPETITE
1 Medium
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2021: Medium (13)
2022: Medium (12)
13
TAILINGS DAMS (overflow or collapse of tailings deposits)
RISK DESCRIPTION
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 disruption to the quality of life of
neighbouring communities as well as our operations.
Implications of future regulations for our tailing's management.
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
We manage our TSFs in a manner that allows the effectiveness of their design,
operation and closure to be monitored at the highest levels of the Company.
Catastrophic failures of TSFs are unacceptable and their potential for
failure is evaluated and addressed throughout the life of each facility. Our
TSFs are constantly monitored and all relevant information is provided to the
authorities, regulating bodies and the communities that could be affected.
We manage our TSFs using data, modelling, and construction and operating
methods validated and recorded by qualified technical teams and reviewed by
independent international experts, whose recommendations we implement in order
to strengthen the control environment. Risk management includes timely risk
identification, control definition and verification. Controls are based on
the consequences of the potential failure of the tailings facilities.
The Global Industry Standard on Tailings Management (GISTM) was published in
2020 and we have committed to adopting this standard at all our operations. We
launched a new tailings policy during the year, based on the GISTM,
reinforcing our commitment to the safety and health of our workforce,
communities and the environment.
In accordance with this new standard, we have updated our risk assessment
methods with a focus on more detailed risk identification, failure modes and
controls in order to avoid catastrophic failures.
Our tailings policy ensures the stability of our TSFs throughout their
lifecycles, managing any potential or actual impact on the environment with
sound governance and open communication with stakeholders.
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.
In 2022 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's findings 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.
KEY RISK INDICATORS
· Percentage of TSFs that comply with international design and
construction standards.
· Findings of the Independent Tailings Review Panel (ITRP)
· Dam safety inspections and dam safety reviews.
· Storage capacity versus levels of operation
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (13
2021: Medium (11)
LINK TO STRATEGY RISK APPETITE
4 Low
14
ENVIRONMENTAL INCIDENTS
RISK DESCRIPTION
Environmental incidents are an inherent risk in our industry. These incidents
include the possible overflow or collapse of tailings deposits, cyanide spills
and dust emissions, any of which could have a high impact on our people,
communities and businesses.
An operating incident that damages the environment could affect both our
relationship with local stakeholders and our reputation, reducing the social
value we generate.
We operate in challenging environments, including forests and agricultural
areas in Chihuahua and Durango, and the Sonora Desert, where water scarcity is
a key problem.
Environmental issues directly related to climate change are considered under
our specific Climate Change principal risk below.
We continue to be alert to the following risks:
· Cyanide management risk.
· Impact on the environment in the area of influence through
erosion/deforestation/forest loss or disturbance of biodiversity as a result
of the operations of the business unit or project activities.
· An event involving a leak or spill of cyanide or SO(2), which due
to its chemical properties could generate an event of major consequence on the
premises of the business unit and / or in the nearby area.
FACTORS CONTRIBUTING TO RISK
· We have strengthened the regulatory risk pillar of the
environmental management model, incorporating monthly updates of environmental
regulations. Furthermore, we now regularly monitor the Environmental Authority
inspection processes to assure compliance with our environmental commitments
and action plans.
· Failure to manage our major hazards or mass passenger transport
could result in a catastrophic event or other long-term damage.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. 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 recognise that we are responsible for our activities and for delivering on
our environmental commitments.
3. Our environmental management system, together with our investment
in preventive measures and training, are key factors that reduce the risk of
large environmental incidents.
4. We have a comprehensive approach to incident prevention. Relevant
risks are assessed, monitored and controlled in order to achieve our goal of
zero incidents with significant environmental impact. We work to raise
awareness among employees and contractors, providing training to promote
operational excellence. The potential environmental impact of a project is a
key consideration when assessing its viability, and we encourage the
integration of innovative technology in the project design to mitigate such
impacts.
5. We prioritise the efficient use of natural renewable resources by
using sea water, favouring the use of renewable power sources, achieving
higher rates of reuse and recovery of water through the use of thickened
tailings technology and reducing greenhouse gas emissions.
6. We recognise that environmental sustainability is key to our
ability to generate social value and we perform regular risk assessments in
order to identify potential impacts and develop preventive and mitigating
strategies.
7. Each site maintains updated environmental emergency preparedness
and detailed closure plans with appropriate financial provisions to ensure
physical and chemical stability once operations have ceased.
8. Fresnillo and Saucito are ISO 9001 certified; Fresnillo, Saucito,
Herradura and Noche Buena are ISO 14001 and ISO 45011 certified.
9. In addition, Fresnillo, Saucito and Juanicipio are certified
according to the standards of the Clean Industry; the first two achieved the
badge of environmental excellence issued by the Environmental Protection
Attorney's Office (PROFEPA). Our Herradura leaching operation complies with
the Cyanide Code issued by the International Cyanide Code Institute with the
respective certification.
1. 10. 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-155SEMARNAT-2007, which establishes environmental requirements for gold
and silver leaching systems.
2. 11. 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.
KEY RISK INDICATORS
• Number of business units with ISO 9001, 14001, 45001 Certification.
• Number of business units with Clean Industry Certification.
• Number of business units with International Cyanide Code Certification.
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (14)
2021: Medium (11)
LINK TO STRATEGY RISK APPETITE
4 Low
15
CLIMATE CHANGE
RISK DESCRIPTION
The mining industry is highly exposed and sensitive to climate change risk.
Climate change is a systemic challenge and will require coordinated actions
between nations, between industries and by society at large. It demands a
long-term perspective to address both physical climate change and low-carbon
transition risks and uncertainties.
Due to climate change, our operations and projects are expected to face acute
physical risks from extreme events such as high temperatures, droughts and
extreme rainfall from more frequent and intense hurricanes in the Pacific.
These natural disasters may affect the health & safety of our people,
damage access roads and mine infrastructure, disrupt operations and affect our
neighbouring communities. In addition, the rise in temperatures may increase
our water demand while the decrease in annual precipitation exacerbates water
stress in the regions where we operate.
These chronic risks may intensify the competition to access water resources,
increasing risks to the social licence to operate. The societal responses to
transition to a low carbon economy include more stringent regulations to
reduce emissions, a transformation of the global energy system, changes in
behaviour and consumption choices and emerging technologies.
Adaptation measures are necessary to build the flexibility to respond to
physical and transitional changes.
One of the most important risk we currently face relates to compliance with
all the provisions and requirements of international agreements to reduce
pollution and greenhouse gas emissions.
Failure to adapt to the transition and physical impacts of climate change,
include:
-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
renewable or clean energy. This has led to operating on clean energy becoming
more difficult.
· The Federal Government's implementation of policies that support
the use of coal will lead to more greenhouse gases being released into the
atmosphere and reduce the development of renewable energies.
· Current and emerging climate regulations have the potential to
result in increased cost, to change supply and demand dynamics for our
products and create legal compliance issues and litigation, all of which could
impact the Group´s financial performance and reputation. Our operations also
face risk due to the physical impacts of climate change, including extreme
weather.
· Warming temperatures will increase water scarcity in some
locations, inhibiting water-dependent operations, complicating site
rehabilitation and bringing companies into direct competition with communities
for water resources.
· The supply of critical inputs to mining processes, such as water
and energy, is likely to face greater constraints.
· Employee health and safety will be put at risk by increases in
communicable diseases, exposure to heat-related illnesses and the likelihood
of accidents related to rising temperatures.
· Obtaining and maintaining a social licence to operate will become
more difficult in communities where climate change exacerbates existing
vulnerabilities and increases direct competition between the company and the
community for resources.
· Increased physical and non-physical risks will make project
financing more difficult to secure.
· Global warming and its effects such as droughts, hurricanes,
winter storms and heavy rains, can cause stoppages in operations.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Climate change has formed part of our strategic thinking and
investment decisions for over two decades.
2. We are considering the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD) regarding: Governance, Strategy,
Risk Management and Metrics and targets.
3. We recognise the importance of maturing our approach to 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.
4. The pervasive and complex nature of climate change means that it
can amplify other risks such as environmental incidents, access to water,
health & safety of our people, government regulations, and social licence
to operate. The Head of Sustainability and the Head of Risks support the
process to refine the identification and risk assessment of physical and
transitional risks.
5. We use the guides from industry associations (i.e. ICMM),
international scientific reports (i.e. IPCC), reports from industry peers and
reports of the Mexican Government to identify the physical impacts of climate
change.
6. To gain a general understanding, we use the outcomes of scenarios
built by the Mexican Government Reports, using the Global Circulation Models
(GCMs) and different Representative Concentration Pathways (RCPs).
7. 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.
8. We are implementing a series of controls to manage the threat of
extreme weather, including structural integrity programmes across all critical
assets, emergency response plans and flood management plans. These controls
keep our people safe and help our operations return to normal capacity as
quickly as possible.
9. We are increasing the supply of the materials essential to building
a low-carbon economy.
10. We are setting targets to reduce our emissions (on an absolute and
intensity basis) over the short, medium and long term.
KEY RISK INDICATORS
· Energy demand/value added
· CO2/energy consumption
· Zero-carbon fuel share
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: Medium (15)
2021: Medium (12)
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 Accounting Standards ('IFRSs').
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 position, 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 Non-Executive Director
6 March 2023
Consolidated Income Statement
Year ended 31 December
Year ended 31 December 2022 Year ended 31 December 2021
Notes US$ thousands US$ thousands
Pre-Silverstream Silverstream Total Pre-Silverstream Silverstream Total
revaluation
revaluation
revaluation
revaluation
effect
effect
effect
effect
Continuing operations:
Revenues 5 2,432,990 2,432,990 2,703,095 2,703,095
Cost of sales 6 (1,896,970) (1,896,970) (1,766,170) (1,766,170)
Gross profit 536,020 536,020 936,925 936,925
Administrative expenses (94,123) (94,123) (103,534) (103,534)
Exploration expenses 7 (165,790) (165,790) (130,291) (130,291)
Selling expenses (25,619) (25,619) (25,035) (25,035)
Other operating income 9 71,860 71,860 11,914 11,914
Other operating expenses 9 (38,755) (38,755) (23,246) (23,246)
Profit from continuing operations before net finance costs and income tax 283,593 283,593 666,733 666,733
Finance income 10 26,460 26,460 8,874 8,874
Finance costs 10 (81,621) (81,621) (61,750) (61,750)
Revaluation effects of Silverstream contract 14 - 18,785 18,785 - (416) (416)
Foreign exchange gain/(loss) 1,354 1,354 (1,909) (1,909)
Profit from continuing operations before income tax 229,786 18,785 248,571 611,948 (416) 611,532
Corporate income tax 11 73,009 (5,635) 67,374 (156,598) 125 (156,473)
Special mining right 11 (7,654) (7,654) (16,563) (16,563)
Income tax 11 65,355 (5,635) 59,720 (173,161) 125 (173,036)
Profit for the year from continuing operations 295,141 13,150 308,291 438,787 (291) 438,496
Attributable to:
Equity shareholders of the Company 258,747 13,150 271,897 421,500 (291) 421,209
Non-controlling interest 36,394 36,394 17,287 17,287
295,141 13,150 308,291 438,787 (291) 438,496
Earnings per share: (US$)
Basic and diluted earnings per Ordinary Share from continuing operations 12 0.369 0.572
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per Ordinary Share from continuing 12 0.351 0.572
operations
( )
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
Notes 2022 2021
US$ thousands
US$ thousands
Profit for the year 308,291 438,496
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
Loss/(gain) on cash flow hedges recycled to income statement 3,770 (2,476)
Changes in the fair value of cost of hedges (1,380) (5,396)
Total effect of cash flow hedges 2,390 (7,872)
Foreign currency translation 234 (653)
Income tax effect on items that may be reclassified subsequently to profit or 11 (717) 2,362
loss:
Net other comprehensive income/(loss) that may be reclassified subsequently to 1,907 (6,163)
profit or loss:
Items that will not be reclassified to profit or loss:
Losses recycled to the value of other assets (4,120) -
Changes in the fair value of cash flow hedges 4,733 (994)
Total effect of cash flow hedges 613 (994)
Changes in the fair value of equity investments at FVOCI (5,712) (48,051)
Remeasurement (loss)/gains on defined benefit plans 22 (712) 5,710
Income tax effect on items that will not be reclassified to profit or loss 11 1,644 13,805
Net other comprehensive loss that will not be reclassified to profit or loss (4,167) (29,530)
Other comprehensive income/(loss), net of tax (2,260) (35,693)
Total comprehensive income for the year, net of tax 306,031 402,803
Attributable to:
Equity shareholders of the Company 271,618 386,060
Non-controlling interests 34,413 16,743
306,031 402,803
.
Consolidated Balance Sheet
As at 31 December
As at 31 December
Notes 2022 2021
US$ thousands
US$ thousands
ASSETS
Non-current assets
Property, plant and equipment 13 2,862,564 2,799,075
Equity instruments at fair value through other comprehensive income (FVOCI) 30 158,813 164,525
Silverstream contract 14 475,256 494,392
Deferred tax asset 11 343,688 67,300
Inventories 15 91,620 91,620
Other receivables 16 38,458 58,548
Other assets 3,700 3,587
3,974,099 3,679,047
Current assets
Inventories 15 495,744 396,184
Trade and other receivables 16 404,499 401,424
Prepayments 34,429 20,282
Derivative financial instruments 30 231 96
Silverstream contract 14 36,218 35,152
Cash and cash equivalents 17 969,060 1,235,282
1,940,181 2,088,420
Total assets 5,914,280 5,767,467
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Share capital 18 368,546 368,546
Share premium 18 1,153,817 1,153,817
Capital reserve 18 (526,910) (526,910)
Hedging reserve 18 (91) (2,042)
Cost of hedging reserve 18 - (38)
Fair value reserve of financial assets at FVOCI 18 79,786 83,784
Foreign currency translation reserve 18 (1,886) (2,120)
Retained earnings 18 2,612,469 2,543,087
3,685,731 3,618,124
Non-controlling interests 231,206 184,548
Total equity 3,916,937 3,802,672
As at 31 December
Notes 2022 2021
US$ thousands
US$ thousands
Non-current liabilities
Interest-bearing loans 20 840,678 1,157,545
Notes payable 30 95,853 -
Lease liabilities 25 9,920 6,146
Provision for mine closure cost 21 242,380 256,956
Pensions and other post-employment benefit plans 22 9,462 6,506
Deferred tax liability 11 111,120 68,745
1,309,413 1,495,898
Current liabilities
Trade and other payables(1) 23 258,867 270,317
Interest-bearing loans 20 317,879 -
Notes payable(1) 30 9,109 107,918
Income tax payable 81,235 62,287
Derivative financial instruments 30 487 3,885
Lease liabilities 25 5,209 4,681
Provision for mine closure cost 21 4,827 3,351
Employee profit sharing 10,317 16,458
687,930 468,897
Total liabilities 1,997,343 1,964,795
Total equity and liabilities 5,914,280 5,767,467
(1 The amounts recognised in Notes payable as at 31 December 2021 has been
presented separately from Trade and other payables to better reflect the
nature of the balance.)
These financial statements were approved by the Board of Directors on 6 March
2023 and signed on its behalf by:
Mr Juan Bordes
Non-executive Director
6 March 2023
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
Notes 2022 2021
US$ thousands
US$ thousands
Net cash from operating activities 29 502,185 895,141
Cash flows from investing activities
Purchase of property, plant and equipment 3 (592,129) (592,052)
Proceeds from the sale of property, plant and equipment and other assets 1,357 6,042
Proceeds from Silverstream contract 14 33,355 48,986
Proceeds from the Layback Agreement 2 (c) 15,000 25,000
Interest received 28,235 10,459
Net cash used in investing activities (514,182) (501,565)
Cash flows from financing activities
Proceeds from notes payable 30 8,140 41,665
Payment of notes payable 30 (10,008) -
Principal element of lease payments 25 (a) (5,125) (5,971)
Dividends paid to shareholders of the Company(1) (201,950) (245,561)
Capital contribution(2) 10,143 31,885
Interest paid(3) (55,308) (49,334)
Net cash used in financing activities (254,108) (227,316)
Net (decrease)/increase in cash and cash equivalents during the year (266,105) 166,260
Effect of exchange rate on cash and cash equivalents (117) (1,393)
Cash and cash equivalents at 1 January 1,235,282 1,070,415
Cash and cash equivalents at 31 December 17 969,060 1,235,282
(1) (Includes the effect of hedging of dividend payments made in currencies
other than US dollar (note 19).)
(2) (Corresponds to capital contributions provided by Minera los Lagartos,
S.A. de C.V.)
(3) (The amount corresponds to the interest paid during the year ended 31
December 2022 related to senior notes and notes payable less amounts
capitalised totalling US$8.5 million (2021: US$8.4 million) which were
included within Purchase of property, plant and equipment (note 13).)
( )
Consolidated Statement of Changes in Equity
Year ended 31 December
(
)
Attributable to the equity holders of the Company
Notes Share Share premium Capital reserve Hedging reserve Cost of hedging reserve Fair value reserve of financial assets at FVOCI Foreign currency translation reserve Retained earnings Total Non-controlling interests Total
capital
equity
US$ thousands
Balance at 1 January 2021 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 19 - - - - - - - (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
Profit for the year - - - - - - - 271,897 271,897 36,394 308,291
Other comprehensive income, net of tax - - - 1,169 38 (3,998) 234 (606) (3,163) (1,981) (5,144)
Total comprehensive income for the year - - - 1,169 38 (3,998) 234 271,291 268,734 34,413 303,147
Hedging loss transferred to the carrying value of PPE purchased during the - - - 782 - - - - 782 2,102 2,884
year
Capital contribution - - - - - - - - - 10,143 10,143
Dividends declared and paid 19 - - - - - - - (201,909) (201,909) - (201,909)
Balance at 31 December 2022 368,546 1,153,817 (526,910) (91) - 79,786 (1,886) 2,612,469 3,685,731 231,206 3,916,937
1. Corporate information
Fresnillo plc. ("the Company") is a public limited company and registered in
England and Wales with registered number 6344120 and is the holding company
for the Fresnillo subsidiaries detailed in note 5 of the Parent Company
accounts ('the Group').
Industrias Peñoles S.A.B. de C.V. ('Peñoles') currently owns 75 percent of
the shares of the Company and the ultimate controlling party of the Company is
the Baillères family, whose beneficial interest is held through Peñoles. The
registered address of Peñoles is Calzada Legaria 549, Mexico City 11250.
Copies of Peñoles' accounts can be obtained from www.penoles.com.mx. Further
information on related party balances and transactions with Peñoles' group
companies is disclosed in note 27.
The consolidated financial statements of the Group for the year ended 31
December 2022 were authorised for issue by the Board of Directors of Fresnillo
plc on 6 March 2023.
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. During 2022 and 2021 all the
production were sold to Peñoles' metallurgical complex, Met-Mex, for smelting
and refining. Further information about the Group operating mines and its
principal activities is disclosed in note 3.
The financial information for the year ended 31 December 2022 and 2021
contained in this document does not constitute statutory accounts as defined
in section 435 of the Companies Act 2006. The financial information for the
years ended 31 December 2022 and 2021 have been extracted from the
consolidated financial statements of Fresnillo plc for the year ended 31
December 2022 which have been approved by the directors on 6 March 2023 and
will be delivered to the Registrar of Companies in due course. The auditor's
report on those financial statements was unqualified and did not contain a
statement under section 498 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 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 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 ($000) except when otherwise indicated.
Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out above. The
financial position of the Group, its cash flows and liquidity position are
described in the Financial Review. In addition, note 31 to the financial
statements includes the Group's objectives, policies and processes for
managing its capital; its financial risk management objectives; details of its
financial instruments; and its exposures to credit risk and liquidity risk.
In making their assessment of the Group's ability to manage its future cash
requirements, the Directors have considered the Company and Group budgets and
the cash flow forecasts for the period to 31 December 2024 (being the going
concern assessment period). The Directors have also considered the cash
position as of 31 December 2022 (US$ 969.1 million) and the net current asset
position (US$1,252.3 million), which includes the debt repayment due in 2023
(US$317.9 million), as described in the financial review. In addition, they
reviewed a more conservative cash flow scenario with reduced silver and gold
prices of US$20.0 and US$1,718 respectively throughout this period, whilst
maintaining current budgeted expenditure and only considering projects
approved by the Executive Committee. This resulted in our current cash and
cash equivalents balances reducing over time but maintaining sufficient
liquidity throughout the period.
The Directors have further calculated prices (US$18.5 and US$1,574 for silver
and gold respectively), which should they prevail to the end of 2024 would
result in cash balances decreasing to minimal levels by the end of 2024,
without applying mitigations.
Should metal prices remain below the stressed prices above for an extended
period, management have identified specific elements of capital and
exploration expenditures which could be deferred without adversely affecting
production profiles throughout the period. Finally, management could amend the
mining plans to concentrate on production with a higher margin in order to
accelerate cash generation without affecting the integrity of the mine plans.
Previously, the Directors reviewed scenarios that incorporated an estimated
potential impact of government-imposed stoppages due to Covid-19 restrictions.
The Directors reassessed the situation in the current year, considering in
particular the fact mining was declared an essential activity by the Federal
Government and there have been no further stoppages at any of our mines.
Furthermore, as previously reported, we have implemented additional health and
safety measures at each of our mines [coupled with extensive targeted and
random testing]. The Directors concluded that the risk of government-imposed
stoppages was low and therefore disclosure of a specific Covid scenario is no
longer relevant.
After reviewing all of the above considerations, the Directors have a
reasonable expectation that management have sufficient flexibility in adverse
circumstances to maintain adequate resources to continue in operational
existence for the foreseeable future. The Directors, therefore, continue to
adopt the going concern basis of accounting in preparing the annual financial
statements.
Basis of consolidation
The consolidated financial statements set out the Group's financial position
as of 31 December 2022 and 2021, 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 2021,
except for the adoption of some amendment as follow:
- Proceeds deducted from the cost of Property, plant and equipment
Amendments to IAS 16, 'Property, plant and equipment' prohibit a company from
deducting from the cost of property, plant and equipment amounts received from
selling items produced while the company is preparing the asset for its
intended use. Instead, a company will recognise such sales proceeds and
related cost in profit or loss. This resulted in a change to the Group's
accounting policies.
Ore generated as part of the development stage may be processed and sold,
giving rise to revenue before the commencement of commercial production. Prior
to 1 January 2022, where such processing was 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 were credited to mining properties and development costs.
From 1 January 2022, such revenue is recognised in profit or loss and cost of
sales is measured based on operating cost once commercial production has
been initiated. The adoption of this amendment did not have any impact on the
financial position or performance of the Group as there were no sales from ore
processed by plants in their testing period in the years where the amendment
is applicable.
New standards, interpretations and amendments (new standards) adopted by the
Group
Other than above, a number of new or amended standards became applicable for
the current reporting period. The Group did not have to change its accounting
policies or make retrospective adjustments as a result of adopting these
standards.
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 accounting policies,
financial position or performance of the Group. The Group has not early
adopted any standard, interpretation or amendment that was issued but is not
yet effective.
(c) Significant accounting 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 2022 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.
In addition to, but separate from, the lands mentioned above, Penmont is the
legal and registered owner of the land where the Soledad & Dipolos
leaching pads are located but has not yet been able to gain physical access to
these pads due to opposition by certain local individuals. This land was
purchased by Penmont from the Federal Government of Mexico in accordance with
due legal process. 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 potential
negotiation scenarios and the different legal proceedings that Penmont has
presented in order to regain access to the lands, as well as other ongoing
proceedings including claims by members of the agrarian community requesting
the cancellation of Penmont's property deed over this area, which claims
Penmont believes are without merit. All such proceedings are pending final
resolution. Therefore, the Group continues to recognise property, plant &
equipment and inventory related to Soledad & Dipolos, as disclosed in note
13 and note 15, 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.
Furthermore, 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 2022 or 31 December 2021.
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 was paid in November 2022, and
US$22.8 million that will be paid no later than 1 December 2023. The future
amounts 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 the Group had continued 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 had recognised the
total value of the agreement as deferred income. In December 2022 the Group
successfully concluded with the support to Orla with respect to the
negotiations relevant to the acquisition of the rights to access. Thus, the
Company considers all the obligations established in the Layback Agreement to
have been completed and has recognised the total value of the agreement in
profit or loss as other income.
Juanicipio project:
The Group assesses the stage of each mine under development/construction to
determine when a mine moves into the production phase, this being when the
mine is substantially complete and ready for its intended use. The criteria
used to assess the start date are determined based on the nature of each mine
project, considering its complexity, location and other relevant factors.
The criteria to assess this date considers the level of capital expenditure
compared with the estimated construction cost, the availability of ore
reserves to sustain ongoing extraction, the extraction of ore from production
areas, and the production feasibility considering the operating resources
available.
When the production phase is considered to have commenced, all related costs
are transferred from "Construction in progress" to the relevant class of
"Property, plant and equipment". At this stage, the capitalisation of
development costs ceases, depreciation commences, and additional costs are
either recognised as costs of inventories or expenses, except for those that
qualify for capitalisation relating to mining asset additions or improvements,
underground mine development or mineable reserve development.
During 2021 the Group finalised the construction of the Juanicipio project. As
of 1 January 2022, the mine started commercial production, while the plant
commissioning activities were postponed due to delays in the connection of the
plant to the national electricity grid. Consequently, the Group assessed the
production start date for the mine and the plant separately. As a result, the
Group determined that the Juanicipio mine started operations from 1 January
2022. During 2022 the activities necessary to connect the plant to the
national electricity grid continued and in December were concluded
satisfactorily. The Group has determined that as of 31 December 2022, the
plant facilities are substantially complete and the commissioning process has
begun. As at 31 December 2022 the plant's assets US$228.3 million are
presented within Property plant and equipment and its depreciation will
commence once production takes place. The costs incurred as a part of the
testing of equipment prior to the connection to the power grid including
employees training has been considered as unabsorbed production cost as
presented in note 6.
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 14, 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 21.
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. In
addition, societal expectations are driving government action that may impose
further requirements and cost on companies in the future. Future changes to
the Group's climate change strategy, global decarbonisation signposts and
regulation 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, refer to note 13;
· 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, refer to note 13;
· 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, refer to note 13;
· Provisions for mine closure costs may change where changes to the
ore reserve and resources estimates affect expectations about when such
activities will occur, refer to note 21;
· 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, refer to note 11.
Estimate of recoverable ore on leaching pads, (note 15)
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 14):
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, and the impact of changes in key assumptions are included
in note 14.
Income tax, notes 2 (q) and 11:
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
During 2022, the Group continued to apply measures to safeguard the health of
its employees and their local communities while continuing to operate safely
and responsibly. During 2022 operations have not been suspended, all mines
have operated at normal production capacity. The Group incurred other
production costs of US$2.7 million (2021: US$4.7 million) related to COVID-19
measures which include community support, the acquisition of additional
personal protective equipment and other safety measures. These are presented
in cost of sales.
During 2022 and 2021, 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
2022, there were no material changes to the valuation of the Group's asset and
liabilities as a result of 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 recognised in profit or loss.
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
Financial assets
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.
Purchases or sales of financial assets that require delivery of assets within
a time frame established by regulation or convention in the market place
(regular way trades) are recognised on the trade date, i.e., the date that 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 holds the following financial assets:
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).
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.
Financial liabilities
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, loans and
borrowings and derivative financial instruments.
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.
(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 for 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 within 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 in 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.
Variable lease payments that are not linked to price changes due to changes in
a market rate or the value of an index and are linked to future performance or
use of an underlying asset are not included in the measurement of the lease
liability. Such cost are recognized in profit and loss as incurred.
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, doré, slag, precipitates
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.
Sales contracts with our customer establish that for products other than
refined silver and gold, refining and treatment charges are deducted from
revenue from sales of products. Refining and treatment charges represent an
element of the cost that will be incurred by our customer in processing the
products further to extract the metal content for onward sale to its
customers.
(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 11 (e)). The Group recognises deferred tax assets and liabilities on
temporary differences arising in the determination of the Special Mining Right
(See note 11).
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.
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 is
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 30 and 30 (b).
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 30.
(u) Dividend distribution
Dividends on the Company's ordinary shares are recognised when they have been
appropriately authorised and are no longer at the Company's discretion.
Accordingly, interim dividends are recognised when they are paid and final
dividends are recognised when they are declared following approval by
shareholders at the Company's Annual General Meeting.
3. Segment reporting
For management purposes, the Group is organised into operating segments based
on producing mines.
At 31 December 2022, 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;
The San Julian mine, located on the border of Chihuahua / Durango states, an
underground silver-gold mine, and
The Juanicipio mine, in the State of Zacatecas, an underground silver mine.(1)
(1) (The Juanicipio mine is now considered as a segment due to the
commencement of its operations and its contribution to the Group's revenues
and segment profit. Accordingly, the comparative segment information has been
restated to reflect this change.)
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 2022 and 2021, 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 2022 and 2021,
respectively. Revenues for the year ended 31 December 2022 and 2021 include
those derived from contracts with costumers and other revenues, as showed in
note 5.
Year ended 31 December 2022
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio(4) Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 503,759 634,438 169,504 594,250 142,733 392,084 (3,778) 2,432,990
Inter-segment 215,736 148,362 (364,098) -
Segment revenues 503,759 634,438 169,504 594,250 142,733 392,084 215,736 148,362 (367,876) 2,432,990
Segment profit(2) 197,043 127,919 39,551 197,791 44,436 190,842 154,544 106,275 (12,203) 1,046,198
Depreciation and amortisation (500,569)
Employee profit sharing (9,609)
Gross profit as per the income statement 536,020
Capital expenditure(3) 106,579 105,322 47,019 117,989 424 64,490 149,629 677 - 592,129
(1 Adjustments and eliminations correspond to hedging loss (note 5).)
(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 ore
from Juanicipio.)
(3 Capital expenditure represents the cash outflow including interest
capitalised in respect of additions to property, plant and equipment, such as
mine development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine closure
provision. Significant additions include stripping cost at Herradura mine and
purchase of mobile equipment at Juanicipio and Saucito mines.)
(4 The ore production of Juanicipio mine has been processed through Fresnillo
and Saucito facilities.)
(5 Other inter-segment) (revenue corresponds to) (leasing services provided by
Minera Bermejal, S.A. de C.V)(; capital expenditure mainly corresponds to)
(Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2021
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio(4) Other(5) 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 75,393 72,334 (147,727) -
Segment revenues 493,582 769,896 215,623 547,294 168,849 509,247 75,393 72,334 (149,123) 2,703,095
Segment profit(2) 224,558 285,354 106,498 321,349 77,158 322,734 60,473 83,533 (4,800) 1,476,857
Foreign exchange hedging losses 3,827
Depreciation and amortisation (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 Adjustments and eliminations correspond to hedging loss (note 5).)
(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 ore
from Juanicipio.)
(3 Capital expenditure represents the cash outflow) (including interest
capitalised) (in respect of additions to property, plant and equipment, such
as 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 mine.)
(4 The ore production of Juanicipio mine has been processed through Fresnillo
and Saucito facilities.)
(5 Other inter-segment) (revenue corresponds to) (leasing services provided by
Minera Bermejal, S.A. de C.V)(; capital expenditure mainly corresponds to)
(Minera Bermejal, S. de R.L. de C.V.)
4. Group information
The list of the Company's subsidiaries included in the consolidated financial
statements and its principal activities are shown in Note 5 on the Parent
Company's separate financial statements.
(a) Material partly-owned subsidiaries
The table below shows the detail of non-wholly owned subsidiaries of the Group
that have non-controlling interests:
Portion of ownership interest held by non-controlling interest Profit (loss) allocated to non-controlling interest Accumulated non-controlling interest
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
Minera Juanicipio, S. A. de C.V. 44% 44% 31,398 15,621 160,046 128,742
Equipos Chaparral, S. A. de C.V. 44% 44% 5,105 249 69,561 54,122
Other subsidiaries with non-controlling interests not considered to be - - (109) 1,417 1,599 1,684
material
Set out below is the summarised financial information for each subsidiary that
has non-controlling interests that are material to the Group. Figures are
presented in thousands of US dollars unless otherwise indicated.
Summarised income statement for the year ended 31 December 2022 and 2021
Minera Juanicipio, S. A. de C.V. Equipos Chaparral, S. A. de C.V.
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
Revenue 215,736 75,393 - -
Profit before income tax 100,635 56,706 5,390 146
Income tax (charge)/credit (29,277) (21,205) 6,212 421
Profit for the year for continuing operations 71,358 35,501 11,602 567
Other comprehensive (loss)/income (248) (38) 31 455
Total comprehensive income 71,110 35,463 11,633 1,022
Attributable to non-controlling interests ,31,288 15,604 5,119 449
Dividends paid to non-controlling interests - - - -
Summarised statement of financial position as at 31 December 2022 and 2021
Minera Juanicipio, S. A. de C.V. Equipos Chaparral, S. A. de C.V.
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
Current
Assets 77,596 90,086 13,226 35,911
Liabilities 80,984 284,340 31,299 44,651
Total current net assets/(liabilities) (3,388) (194,254) (18,073) (8,740)
Non-current
Assets 630,418 486,849 202,263 131,745
Liabilities 263,290 - 26,097 -
Total non-current net assets 367,128 486,849 176,166 131,745
Net assets 363,740 292,595 158,093 123,005
Attributable to:
Equity holders of parent 203,694 163,853 88,532 68,883
Non-controlling interest 160,046 128,742 69,561 54,122
Summarised cash flow information for the year ended 31 December 2022 and 2021
Minera Juanicipio, S. A. de C.V. Equipos Chaparral, S. A. de C.V.
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
Operating 127,113 55,540 (28,354) -
Investing (115,961) (254,830) 261 -
Financing (24,777) 166,480 23,663 -
Net decrease in cash and cash equivalents (13,625) (32,810) (4,430) -
(
)
( )
( )
5. 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
2022 2021
US$ thousands
US$ thousands
Revenues from contracts with customers 2,440,063 2,705,720
Revenues from other sources:
Provisional pricing adjustment on products sold (3,302) (1,274)
Hedging loss on sales (3,771) (1,351)
2,432,990 2,703,095
(b) Revenues by product sold
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Lead concentrates (containing silver, gold, lead and by-products) 1,090,735 1,157,623
Doré and slag (containing gold, silver and by-products) 648,002 806,289
Zinc concentrates (containing zinc, silver and by-products) 326,912 346,892
Precipitates (containing gold and silver) 238,171 259,835
Activated carbon (containing gold, silver and by-products) 129,170 132,456
2,432,990 2,703,095
(c) Value of metal content in products sold
Invoiced revenues are derived from the value of metal content which is
determined by commodity market prices and adjusted for the treatment and
refining charges to be incurred by the metallurgical complex of our customer.
The value of the metal content of the products sold, before treatment and
refining charges is considered as an alternative performance measure for the
Group. The Group considers this a useful additional measure to help understand
underlying factors driving revenue in terms of volumes sold and realised
prices. The value of production sold by metal is as follows:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Silver 1,089,189 1,163,879
Gold 1,114,168 1,305,277
Zinc 283,453 259,987
Lead 106,640 117,448
Value of metal content in products sold 2,593,450 2,846,591
Refining and treatment charges (160,460) (143,496)
Total revenues(1)(,) 2,432,990 2,703,095
(1 Includes provisional price adjustments which represent changes in the fair
value of trade receivables resulting in a loss of US$3.3 million (2021: loss
of US$1.2 million)) (and hedging loss of US$3.8 million (2021: loss of US$1.4
million). For further detail, refer to note 2(n).)
The average realised prices for the gold and silver content of products sold,
prior to the deduction of treatment and refining charges, were:
Year ended 31 December
2022 2021
US$ per ounce
US$ per ounce
Gold(2) 1,799.26 1,794.96
Silver(2) 21.72 24.87
(2 For the purpose of the calculation, revenue by content of products sold
does not include the results from hedging.)
6. Cost of sales
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Depreciation and amortisation 500,569 528,206
Contractors 367,003 403,568
Energy 231,505 233,667
Operating materials 269,720 221,773
Maintenance and repairs 252,907 199,264
Personnel expenses (note 8) 175,508 135,758
Mine equipment leased (1) 48,991 -
Mining concession rights and contributions 22,044 20,266
Surveillance 18,741 9,832
Insurance 11,069 9,628
Freight 11,843 8,433
IT services 11,401 6,034
Other 34,675 22,250
Cost of production 1,955,976 1,798,679
Unabsorbed production costs(2) 2,592 956
Gain on foreign currency hedges - (3,827)
Change in work in progress and finished goods (ore inventories) (61,598) (29,638)
1,896,970 1,766,170
(1 Corresponds to mine equipment leased to contractors, the lease payments are
based on a variable rate linked to the usage of the assets.)
(2 Corresponds to costs incurred in Juanicipio plant activities (note 2 (c))
(2021: Corresponds to production cost incurred in Minera San Julian as a
result of a plant stoppage).)
( )
(
)
( )
( )
7. Exploration expenses
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Contractors 111,981 89,842
Mining concession rights and contributions 25,570 21,790
Administrative services 2,086 4,614
Personnel expenses (note 8) 10,779 6,425
Assays 6,269 1,783
Rentals 603 468
Other 8,502 5,369
165,790 130,291
These exploration expenses were mainly incurred in the operating mines located
in Mexico; the Guanajuato, Orisyvo and Valles projects; and the Mexico Nuevo
and Tajitos prospects. Exploration expenses of US$17.9 million (2021: US$14.5
million) were incurred in the year on projects located in Peru and Chile.
The following table sets forth liabilities (generally trade payables)
corresponding to exploration activities of the Group companies engaged only in
exploration, principally Exploraciones Mineras Parreña, S.A. de C.V.
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Liabilities related to exploration activities 70 348
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
2022 2021
US$ thousands
US$ thousands
Operating cash out flows related to exploration activities 166,068 130,915
8. Personnel expenses
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Salaries and wages 87,534 66,488
Statutory healthcare and housing contributions 32,856 23,771
Employees' profit sharing 9,841 16,662
Other benefits 26,458 18,679
Bonuses 19,752 14,906
Social security 257 5,777
Post-employment benefits 8,792 4,300
Vacations and vacations bonus 5,448 3,262
Training 3,749 2,867
Legal contributions 4,202 2,130
Other 3,451 4,028
202,340 162,870
(a) Personnel expenses are reflected in the following line items:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Cost of sales (note 6) 175,508 135,758
Administrative expenses 16,053 20,687
Exploration expenses (note 7) 10,779 6,425
202,340 162,870
(b) The monthly average number of employees during the year was as follows:
Year ended 31 December
2022 2021
No.
No.
Mining 3,967 2,883
Plant 1,074 1,032
Exploration 265 432
Maintenance 1,382 1,259
Administration and other 1,237 1,062
Total 7,925 6,668
9. Other operating income and expenses
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Other income:
Gain on sale of property, plant and equipment and other assets - 5,026
Layback Agreement (note 2 (c)) 67,182 -
Rentals 767 1,802
Other 3,911 5,086
71,860 11,914
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Other expenses:
Write-off of assets(1) 11,315 -
Maintenance(2) 2,939 3,663
Donations 8,794 538
Environmental activities(3) 2,997 4,813
Saucito rehabilitation cost for mine flood - 4,803
Cost of insurance claims 4,246 1,422
Consumption tax expensed 2,073 1,183
Other 6,391 6,824
38,755 23,246
(1 Mainly correspond to mobile equipment damage and mining works collapsed)
(2 Costs relating to the rehabilitation of the facilities of Compañía Minera
las Torres, S.A. de C.V. (a closed mine).)
(3) (Main activities were related with the evaluation of improvement in
tailing dams in Fresnillo and Cienega and closure activities in the San Ramon
satellite mine (closed at the end of 2020) (2021: main activities were related
with the evaluation of improvement in tailing dams in Fresnillo and Cienega))
10. Finance income and finance costs
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Finance income:
Interest on short-term deposits and investments 20,956 5,167
Interest on tax receivables 4,507 3,637
Other 997 70
26,460 8,874
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Finance costs:
Interest on interest-bearing loans and notes payables 51,395 48,888
Interest on tax amendments (Note 11) 11,519 -
Interest on lease liabilities 720 504
Unwinding of discount on provisions 15,243 11,522
Other 2,744 836
81,621 61,750
11. Income tax expense
a) Major components of income tax expense:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 134,896 268,945
Amounts under provided in previous years (1,710) 7,696
133,186 276,641
Deferred:
Origination and reversal of temporary differences (206,196) (120,043)
Revaluation effects of Silverstream contract 5,636 (125)
(200,560) (120,168)
Corporate income tax (67,374) 156,473
Special mining right
Current:
Special mining right charge (note 11 (e)) 38,230 53,147
Amounts under provided in previous years 1,954 363
40,184 53,510
Deferred:
Origination and reversal of temporary differences (32,530) (36,947)
Special mining right 7,654 16,563
Income tax expense reported in the income statement (59,720) 173,036
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Consolidated statement of comprehensive income:
Deferred income tax (charge)/credit related to items recognised directly in
other comprehensive income:
Gain on cash flow hedges recycled to income statement (1,131) 743
Changes in fair value of cash flow hedges (184) 298
Changes in the fair value of cost of hedges 414 1,619
Changes in fair value of equity investments at FVOCI 1,714 14,415
Remeasurement losses on defined benefit plans 114 (908)
Income tax effect reported in other comprehensive income 927 16,167
Following conversations held by the Company with the Servicio de Admnistracion
Tributario (SAT) regarding its income tax audits for the year 2014, 2015 and
2016 at Desarrollos Mineros Fresne, the Group decided to voluntarily amend the
income tax and mining right´s treatment of: (i) the stripping costs, and (ii)
the deduction of exploration expenses.
These amendments were applied to tax returns from 2014 to 2021 (for the year
2021 the amendment also included Minera Penmont as the merging entity of
Desarrollos Mineros Fresne) and resulted in an increase in the current
corporate income tax charge of US$ 3.2 million and current special mining
right charge of US$2.7 million and a recoverable income tax balance of US$ 3.2
million.This effect was offset by a decrease in deferred corporate income tax
of US$3.4 million. The amendment also resulted in US$11.5 million of interest
and surcharges presented in finance costs.
(b) Reconciliation of the income tax expense at the Group's statutory income
rate to income tax expense at the Group's effective income tax rate:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Accounting profit before income tax 248,571 611,532
Tax at the Group's statutory corporate income tax rate 30.0% 74,571 183,460
Expenses not deductible for tax purposes 7,045 3,442
Inflationary uplift of the tax base of assets and liabilities (62,666) (49,389)
Current income tax (over)/underprovided in previous years 3,107 1,569
Exchange rate effect on tax value of assets and liabilities(1) (72,888) 32,078
Non-taxable/non-deductible foreign exchange effects 1,167 1,892
Inflationary uplift of tax losses (7,843) (4,165)
Inflationary uplift on tax refunds (1,352) (1,732)
Incentive for Northern Border Zone (17,491) (10,077)
Deferred tax asset not recognised 7,893 6,465
Special mining right deductible for corporate income tax (2,296) (4,969)
Other 3,379 (2,101)
Corporate income tax at the effective tax rate of (27.1%) (2021: 25.5%) (67,374) 156,473
Special mining right 7,654 16,563
Tax at the effective income tax rate of (24.02%) (2021: 28.2%) (59,720) 173,036
(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
2022 2021
US$ thousands
US$ thousands
Opening net liability (1,445) (174,919)
Income statement credit arising on corporate income tax 200,560 120,168
Income statement credit arising on special mining right 32,530 36,947
Exchange difference (4) 192
Net charge related to items directly charged to other comprehensive income 927 16,167
Closing net asset/(liability) 232,568 (1,445)
The amounts of deferred income tax assets and liabilities as at 31 December
2022 and 2021, considering the nature of the related temporary differences,
are as follows:
Consolidated balance sheet Consolidated income statement
2022 2021 2022 2021
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Related party receivables (158,797) (153,702) 5,095 (113,284)
Other receivables (3,974) (3,247) 727 (45)
Inventories 115,383 97,170 (18,213) 134,414
Prepayments (2,423) (2,872) (449) 1,039
Derivative financial instruments including Silverstream contract (147,887) (153,111) (6,125) (14,352)
Property, plant and equipment arising from corporate income tax 142,241 (50,155) (192,396) (65,896)
Exploration expenses and operating liabilities 91,265 110,989 19,724 (49,890)
Other payables and provisions 74,162 78,092 3,930 (4,386)
Losses carried forward 117,689 90,439 (27,250) (15,396)
Post-employment benefits 1,504 1,034 (356) (38)
Deductible profit sharing 3,095 4,937 1,842 1,516
Special mining right deductible for corporate income tax 10,738 23,692 12,954 (2,037)
Equity investments at FVOCI (16,937) (20,554) (1,903) (975)
Other (11,172) (9,309) 1,860 9,161
Net deferred tax asset related to corporate income tax 214,887 13,403
Deferred tax credit related to corporate income tax (200,560) (120,169)
Related party receivables arising from special mining right (39,541) (38,150) 1,391 9,368
Inventories arising from special mining right 28,685 21,332 (7,353) (4,436)
Property plant and equipment arising from special mining right 7,887 (19,298) (27,185) (20,615)
Other 20,650 21,268 617 (21,264)
Net deferred tax (asset)/liability related to special mining rights 17,681 (14,848)
Deferred tax credit (233,090) (157,116)
Reflected in the statement of financial position as follows:
Deferred tax assets 343,688 67,300
Deferred tax liabilities (111,120) (68,745)
Net deferred tax asset/(liability) 232,568 (1,445)
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 of US$117.7
million (2021: US$90.4 million) has been recognised in respect of tax losses
amounting to US$391.6 million (2021: US$301.5 million). If not utilised,
US$33.2 million (2021: US$29.5 million) will expire within five years and
US$358.4 million (2021: US$272.0 million) will expire between six and ten
years. Of the total deferred tax asset related to losses, US$34.4 million
(2021: US$23.3 million) is covered by the existence of taxable temporary
differences, the remaining US$83.3 million (2021: US$67.1 million) corresponds
to Fresnillo plc which maintained a deferred net asset position. The Group has
performed an assessment of the recoverability of tax losses before their
expiration, thus there is convincing other evidence that sufficient taxable
profit will be available against which the unused tax losses can be utilised.
The Group has further tax losses and other similar attributes carried forward
of US$91.9 million (2021: US$72.6 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$1,006 million (2021: US$1,056 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 remained in force until 31 December 2020.
On 30 December 2020 and extension of the Decree was published in the Official
Gazette which remains 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 2022, the Group credited US$0.00
million (2021: US$11.5 million) of mining concession rights against the SMR.
Total mining concessions rights paid during the year were US$24.6 million
(2021: US$22.9 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$38.3 million (2021: US$64.6 million).
12. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for the year
attributable to equity shareholders of the Company by the weighted average
number of Ordinary Shares in issue during the period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2022 and 2021, earnings per share have been calculated as
follows:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Earnings:
Profit from continuing operations attributable to equity holders of the 271,897 421,209
Company
Adjusted profit from continuing operations attributable to equity holders of 258,747 421,500
the Company
Adjusted profit is profit as disclosed in the Consolidated Income Statement
adjusted to exclude revaluation effects of the Silverstream contract of
US$18.8 million gain (US$13.1 million net of tax) (2021: US$0.4 million loss
(US$0.3 million net of tax)).
Adjusted earnings per share have been provided in order to provide a measure
of the underlying performance of the Group, prior to the revaluation effects
of the Silverstream contract, a derivative financial instrument.
2022 2021
thousands
thousands
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
2022 2021
US$
US$
Earnings per share:
Basic and diluted earnings per share 0.369 0.572
Adjusted basic and diluted earnings per Ordinary Share 0.351 0.572
13. Property, plant and equipment
Year ended 31 December 2022(3)
Land and Plant and equipment(4) Mining properties and development costs Other assets(2) Construction in progress Total
buildings
US$ thousands
Cost
At 1 January 2022 354,605 2,641,444 2,457,292 374,211 804,650 6,632,202
Additions 2,971 30,249 11,750 (16,947) 556,509 584,532
Disposals(5) (224) (104,445) (21,999) (7,198) - (133,866)
Transfers and other movements 55,632 261,672 554,618 27,747 (899,669) -
At 31 December 2022 412,984 2,828,920 3,001,661 377,813 461,490 7,082,868
Accumulated depreciation
At 1 January 2022 (198,653) (1,730,511) (1,692,189) (211,774) - (3,833,127)
Depreciation for the year(1) (23,647) (176,445) (271,552) (34,861) - (506,505)
Disposals(5) 134 96,472 15,873 6,849 - 119,328
At 31 December 2022 (222,166) (1,810,484) (1,947,868) (239,786) - (4,220,304)
Net book amount at 31 December 2022 190,818 1,018,436 1,053,793 138,027 461,490 2,862,564
(1 Depreciation for the year includes US$501.8 million recognised as an
expense in the income statement and US$4.7 million, capitalised as part of
construction in progress.)
(2 From the additions in "other assets" category US$(27.3) million corresponds
to the reassessment of mine closure rehabilitations costs, see note 21.)
(3 Amounts include Right-of-use assets as described in note 25)
(4 The amount of Property, plant and equipment related to Soledad &
Dipolos at 31 December 2022 is US$35.6 million and reflects capitalised mining
works and the amount recognised in the cost of Property plant and equipment
related to estimated remediation and closure activities.)
(5 From the total net amount of disposals, US$11.3 million correspond to a
write of assets as disclosed in note 9.)
Year ended 31 December 2021(3)
Land and Plant and equipment(4) Mining properties and development costs Other assets(2) Construction in progress Total
buildings
US$ 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 155,952 910,933 765,103 162,437 804,650 2,799,075
( )
(1 Depreciation for the year includes US$529.4 million recognised as an
expense in the income statement and US$4.6 million, capitalised as part of
construction in progress.)
(2 From the additions in "other assets" category US$3.9 million corresponds to
the reassessment of mine closure rehabilitations costs, see note 21.)
(3 Amounts include Right-of-use assets as described in note 25)
(4 The amount of Property, plant and equipment related to Soledad &
Dipolos at 31 December 2021 is US$35.4 million and reflects capitalised mining
works and the amount recognised in the cost of Property plant and equipment
related to estimated remediation and closure activities.)
The table below details construction in progress by operating mine and
development projects
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Saucito 80,566 85,926
Herradura 27,208 29,479
Noche Buena 9,583 9,685
Ciénega 53,204 38,976
Fresnillo 186,666 188,146
San Julián 34,203 17,304
Juanicipio 67,228 425,513
Other(1) 2,832 9,621
461,490 804,650
(1) (Mainly) (corresponds to Minera Bermejal, S.A. de C.V. (2021: Minera
Bermejal, S.A. de C.V.).)
During the year ended 31 December 2022, the Group capitalised US$8.6 million
of borrowing costs within construction in progress (2021: US$8.4 million).
Borrowing costs were capitalised at the rate of 5.02% (2021: 5.02%).
Sensitivity analysis
The key assumptions on which management bases the recoverable value
calculations of the mining assets are commodity prices, future capital
requirements, production costs, reserves and resources volumes (reflected in
production volumes) and discount rate.
Management considers that the recoverable value models support the carrying
amounts of mining assets as at 31 December 2022. The models are most sensitive
to changes in commodity price assumptions and production volumes.
Other than as disclosed below, management has considered no reasonably
possible change in any other key assumption above would cause the carrying
value of any of its mining assets to exceed its recoverable amount.
In the absence of any changes to any of the other key assumptions, a change in
the below assumptions would have the following impact as at 31 December 2022:
· A decrease of 10% in gold and 15% in silver prices would result
in an impairment charge of US$318.6 million.
· A decrease of 10% in the forecasted volume of silver produced
would result in an impairment charge of US$128.0 million. A decrease of 10% in
the forecasted volume of gold produced would not result in an impairment
charge.
14. Silverstream contract
On 31 December 2007, the Group entered into an agreement with Peñoles through
which the Group 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
to Peñoles per ounce of silver for the year ended 31 December 2022 was $5.54
per ounce (2021: $5.43 per ounce). Under the contract, the Group has the
option to receive a net cash settlement from Peñoles attributable to the
silver produced and sold from Sabinas, to take delivery of an equivalent
amount of refined silver or to receive settlement in the form of both cash and
silver. If, by 31 December 2032, the amount of silver produced by Sabinas is
less than 60 million ounces, a further payment is due from Peñoles of US$1
per ounce of shortfall.
The Silverstream contract represents a derivative financial instrument which
has been recorded at 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 26 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 2022 total proceeds received in cash
were US$33.4 million (2021: US$49.0 million) of which, US$4.8 million was in
respect of proceeds receivable as at 31 December 2021 (2021: US$7.7 million in
respect of proceeds receivable as at 31 December 2020). Cash received in
respect of the year of US$28.5 million (2021: US$41.3 million) corresponds to
2.06 million ounces of payable silver (2021: 2.4 million ounces). As at 31
December 2022, a further US$8.3 million (2021: US$4.8 million) of cash
receivable corresponding to 453,158 ounces of silver is due (2021: 274,237
ounces).
A reconciliation of the beginning balance to the ending balance is shown
below:
2022 2021
US$ thousands
US$ thousands
Balance at 1 January 529,544 576,140
Cash received in respect of the year (28,513) (41,338)
Cash receivable (8,342) (4,842)
Remeasurement gains/(loss) recognised in profit and loss 18,785 (416)
Balance at 31 December 511,474 529,544
Less - Current portion 36,218 35,152
Non-current portion 475,256 494,392
The US$18.8 million unrealised gain recorded in the income statement (31
December 2021: US$0.4 million loss) resulted mainly from an update in the
production mine plan with higher reserves, the amortization effect, and an
increase in the forward silver price curve, these effects were partially
offset by an increase in the discount rates (SOFR).
Significant assumptions used in the valuation of the Silverstream contract are
as follows:
- Forecasted volumes (millions of ounces/moz)
- Silver to be produced and sold over the life of mine 103.2 moz
(2021: 97.4 moz)
- Average annual silver to be produced and sold 4.0 moz (2021: 3.5
moz)
- Weighted average discount rate 9.82% (2021: 7.92%)
- Future silver prices (US$ per ounce)
Year ended 31 December Year 1 Year 2 Year 3 Year 4 Year 5 Long-term
2022 24.45 25.53 26.22 27.12 27.33 18.81
2021 22.54 22.19 21.90 21.63 21.39 18.51
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 26 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 fair value of the Silverstream contract is
significantly sensitive to a reasonably possible change in future silver
price. the discount rate used to discount future cash flows and total
recoverable resources and reserves over the life of mine. The sensitivity of
these key inputs is as follows:
Commodity price Discount rate
Year ended 31 December Increase/ Effect on profit before tax: increase/ Basis point increase/ Effect on profit before tax: increase/
(decrease) in
(decrease)
(decrease)
(decrease)
silver price
US$ thousands
in interest rate
US$ thousands
2022 20% 133,736 100% (41,860)
(15%) (100,302) (25%) 11,452
2021 15% 104,419 25% (13,219)
(15%) (104,419) - -
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.
Reasonably possible change in total recoverable resources and reserves
quantities over the life of the mine of an increase of approximately 6% would
result in an increase in the value of the contract of US$30.6 million (a
reduction of 6% in reserves and resources quantity would decrease the fair
value of the contract by US$30.6 million).
The significant unobservable inputs are not interrelated. The Sabinas mine is
a polymetallic mine that contains copper, lead and zinc as well as silver,
which is produced as a by-product. Therefore, changes to base metals prices
(rather than the price of silver) are most relevant to the Sabinas mine
production plans and the overall economic assessment of the mine.
The effects on profit before tax and equity of reasonably possible changes to
the inflation rates and the US dollar exchange rate compared to the Mexican
peso on the Silverstream contract are not material. The Group's exposure to
reasonably possible changes in other currencies is not material.
15. Inventories
As at 31 December
2022 2021
US$ thousands
US$ thousands
Finished goods(1) 27,257 19,137
Work in progress(2) 375,603 344,805
Ore stockpile(3) 26,020 3,234
Operating materials and spare parts 163,947 125,824
592,827 493,000
Allowance for obsolete and slow-moving inventories (5,463) (5,196)
Balance as 31 December 587,364 487,804
Less - Current portion 495,744 396,184
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 for an
amount of US$307.6 million (2021: US$316.6 million) and in stockpiles US$58.8
million (2021: US$28.2 million) 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. As at
31 December 2022 and 2021 non-current inventories corresponds to Soledad &
Dipolos mine unit (note 2 (c)).)
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 amount of inventories recognised as an expense in the year was US$1,906.8
million (2021: US$1,770.3 million). During 2022 and 2021, 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$2.59 million (2021: US$0.1 million).
16. Trade and other receivables
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Trade receivables from related parties (note 27) 275,844 265,473
Value Added Tax receivable 85,979 103,448
Other receivables from related parties (note 27) 8,377 4,886
Other receivables from contractors 52 27
Other receivables 8,697 11,478
Other receivables arising from the Layback Agreement (note 2 (c)) 25,994 16,684
404,943 401,996
Expected credit loss of 'Other receivables' (444) (572)
Trade and other receivables classified as current assets 404,499 401,424
Other receivables classified as non-current assets:
Other receivable from contractors 1,638 -
Value Added Tax receivable 36,820 34,634
Other receivables arising from the Layback Agreement (note 2 (c)) - 23,914
Trade and other receivables classified as non-current assets 38,458 58,548
Total trade and other receivables 442,957 459,972
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$311.7 million (2021: US$315.6
million), and in Mexican pesos US$131.2 million (2021: US$144.4 million)
Balances corresponding to Value Added Tax receivables and US$8.7 million
within Other receivables (2021: US$10.4 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 2022 is US$0.4 million (2021: US$0.6 million). Trade receivables
from related parties and other receivables from related parties (see note 14)
are classified as financial assets at FVTPL and are therefore not considered
in the expected credit loss analysis. In determining the recoverability of
receivables, the Group performs a risk analysis considering the type and age
of the outstanding receivable and the credit worthiness of the counterparty,
see note 31(b).
17. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its operations and
in order to achieve its treasury objectives.
As at 31 December
2022 2021
US$ thousands
US$ thousands
Cash at bank and on hand 2,516 2,834
Short-term deposits 966,544 1,232,448
Cash and cash equivalents 969,060 1,235,282
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.
18. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
2022 2021
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 2021 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2021 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2022 736,893,589 $368,545,586 50,000 £50,000
As at 31 December 2022 and 2021, 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
This reserve records the accumulated results of the Group, less any
distributions and dividends paid.
19. Dividends declared and paid
The dividends declared and paid during the years ended 31 December 2022 and
2021 are as follows:
US cents per Amount
Ordinary Share
US$ thousands
Year ended 31 December 2022
Final dividend for 2021 declared and paid during the year(1) 24.00 176,855
Interim dividend for 2022 declared and paid during the year(2) 3.40 25,054
27.4 201,909
Year ended 31 December 2021
Final dividend for 2020 declared and paid during the year(3) 23.50 173,170
Interim dividend for 2021 declared and paid during the year(4) 9.90 72,952
33.40 246,122
(1 This dividend was approved by the Shareholders on 17 May 2022 and paid on
27 May 2022)
(2 This dividend was approved by the Board of Directors on 1 August 2022 and
paid 14 September 2022)
(3 This dividend was approved by the Shareholders on 24 June 2021 and paid on
28 June 2021)
(4 This dividend was approved by the Board of Directors on 3 August 2021 and
paid 15 September 2021)
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
2022 2021
US$ thousands
US$ thousands
Dividends declared 201,909 246,122
Foreign exchange effect - 60
Dividends recognised in retained earnings 201,909 246,182
Foreign exchange and hedging effect 41 (621)
Dividends paid 201,950 245,561
As previously reported, 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. As a matter of prudency, in 2022 the
Directors put forward a resolution to shareholders in order to regularise the
position. The resolution was passed at the 2021 annual general meeting. This
matter will have no effect on the monies received pursuant to these dividends
and will not adversely impact shareholders or the Company. The Company
therefore considers the matter closed.
The directors have proposed a final dividend of US$13.3 cents per share, which
is subject to approval at the annual general meeting and is not recognised as
a liability as at 31 December 2022. 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.
20. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800 million
aggregate principal amount of 5.500% Senior Notes due November 2023 (the
5.500% Notes). On 29 September 2020, the Group repurchased certain of its
5.500% Notes that had a carrying value of US$482.1 million for a consideration
of US$543.0 million.
On 2 October 2020, the Group completed its offering of US$850 million
aggregate principal amount of 4.250% Senior Notes due 2050. The proceeds were
partially used to finance the repurchase mentioned above.
Movements in the year in the debt recognised in the balance sheet are as
follows:
As at 31 December
2022 2021
US$ thousands US$ thousands
Opening balance 1,157,545 1,156,670
Accrued interest 56,475 56,384
Interest paid(1) (56,371) (56,370)
Amortisation of discount and transaction costs 908 861
Closing balance 1,158,557 1,157,545
Less - Current portion 317,879 -
Non-current portion 840,678 1,157,545
(1 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 earned at the
repurchase date, if requested to do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property that may have a
material impact on business performance (key assets). Nevertheless, the Group
may pledge the aforementioned properties provided that the repayment of the
Notes keeps the same level of priority as the pledge on those assets.
21. Provision for mine closure cost
The provision represents the discounted values of the 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 2022, the discount rates
used in the calculation of the parts of the provision that relate to Mexican
pesos range from 10.08% to 10.62% (2021: range from 6.39% to 8.33%). The range
for the current year parts that relate to US dollars range from 3.08% to 4.44%
(2021: range from 0.57% to 1.40%).
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 1 to 22
years from 31 December 2022 (3 to 24 years from 31 December 2021). As at 31
December 2022 the weighted average term of the provision is 12 years (2021: 12
years).
As at 31 December
2022 2021
US$ thousands
US$ thousands
Opening balance 260,307 245,688
Increase to existing provision 23,757 17,078
Effect of changes in discount rate (63,061) (7,821)
Unwinding of discount rate 15,243 11,622
Payments (1,085) (879)
Foreign exchange 12,046 (5,381)
Closing balance 247,207 260,307
Less - Current portion 4,827 3,351
Non-current portion 242,380 256,956
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 2022 decreased by 50 basis
points then the provision would be US$13.0 million higher (2021: US$43.4
million). If the discount rate increased by 50 basis points then the provision
would be US$12.0 million lower (2021: US$27.2 million).
22. Pensions and other post-employment benefit plans
The Group has a defined contribution plan and a defined benefit plan.
The defined contribution plan was established as from 1 July 2007 and consists
of periodic contributions made by each 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 Sub-total included Contributions by employer Defined benefit decrease 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(1) 31 December
2022 interest 2022
US$ thousands
Defined benefit obligation (25,673) (1,260) (1,826) (1,651) (4,737) 2,065 1,894 1,894 437 (26,014)
Fair value of plan assets 19,167 1,333 1,160 2,493 (2,065) (2,615) (2,615) - (428) 16,552
Net benefit liability (6,506) (1,260) (493) (491) (2,244) - (2,615) 1,894 (721) 9 (9,462)
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 Sub-total included Contributions by employer Defined benefit decrease 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(1) 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) 551 (841) 1,744 1,744 732 (2,400) 19,167
Net benefit liability (11,977) (1,249) (739) 956 (1,032) - 1,744 3,946 5,690 732 81 (6,506)
(1 The effect corresponding to partially-owned subsidiaries has been allocated
in the non-controlling interest of the year.)
Of the total defined benefit obligation, US$10.7million (2021: US$9.6 million)
relates to statutory seniority premiums for unionised workers which are not
funded. The expected contributions to the plan for the next annual reporting
period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown below:
As at 31 December
2022 2021
%
%
Discount rate 10.23 7.99
Future salary increases (National Consumer Price Index) 5.25 5.00
The life expectancy of current and future pensioners, men and women aged 65
and older will live on average for a further 23.98 and 26.72 years
respectively (2021: 24.08 years for men and 27.05 for women). The weighted
average duration of the defined benefit obligation is 10.8 years (2021: 12.1
years).
The fair values of the plan assets were as follows:
As at 31 December
2022 2021
US$ thousands
US$ thousands
State owned companies - 3,180
Mutual funds (fixed rates) 16,552 15,987
16,552 19,167
As at 31 December 2022 and 2021, 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 2022 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
Year ended 31 December 2022 (967) 1,044 176 (174) 145
(Decrease)/increase to the net defined benefit obligation (US$ thousands)
Year ended 31 December 2021 (1,079) 1,174 157 (156) 208
(Decrease)/increase to the net defined benefit obligation (US$ thousands)
The sensitivity analysis above has been determined based on a method that
extrapolates the impact on net defined benefit obligation as a result of
reasonable changes in key assumptions occurring at the end of the reporting
period. The pension plan is not sensitive to future changes in salaries other
than in respect of inflation.
23. Trade and other payables
As at 31 December
2022 2021
US$ thousands
US$ thousands
Trade payables 140,297 130,187
Other payables to related parties (note 27) 35,969 30,930
Accrued expenses 60,321 22,319
Layback Agreement (note 2 (c)) - 67,182
Other taxes and contributions 22,280 19,699
258,867 270,317
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 31.
24. Commitments
A summary of capital expenditure commitments by operating mine and development
project is as follows:
As at 31 December
2022 2021
US$ thousands
US$ thousands
Saucito 33,980 49,127
Herradura 11,024 21,258
Noche Buena 227 213
Ciénega 10,753 15,710
Fresnillo 48,629 43,541
San Julián 9,745 6,379
Juanicipio 47,809 103,100
Other 414 970
162,581 240,298
( )
(
)
( )
( )
25. Leases
(a) The Group as lessee
The Group leases various offices, buildings, plant and equipment and IT
equipment. The resulting lease liability is as follows:
As at
31 December 2022 31 December 2021
US$ thousands
US$ thousands
IT equipment 10,914 8,406
Plant and equipment 3,776 -
Buildings 439 2,421
Total lease liability 15,129 10,827
Less - Current portion 5,209 4,681
Non-current portion 9,920 6,146
The total cash outflow for leases for the year ended 31 December 2022, except
short term and low value leases, amounts to US$5.8 million (2021: US$6.5
million), including finance costs of U$0.7 million (2021: US$0.5 million).The
table below details right-of-use assets included as property plant and
equipment in note 13
Year ended 31 December 2022
Buildings Computer equipment Plant and Equipment Total
US$ thousands
Cost
At 1 January 2022 4,332 15,704 - 20,036
Additions 288 5,580 3,933 9,801
At 31 December 2022 4,620 21,284 3,933 29,837
Accumulated depreciation
At 1 January 2022 (1,786) (7,719) - (9,505)
Depreciation for the year (799) (4,675) (234) (5,708)
At 31 December 2022 (2,585) (12,394) (234) (15,213)
Net book amount at 31 December 2022 2,035 8,890 3,699 14,624
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$0.7 million (2021: US$0.5 million)
relating to interest expense, US$60.4 million on relating variable lease
payments (note 6) of which US$11.4 million were capitalised as a part of
stripping cost (2021: nil), US$0.8 million (2021: US$0.7 million) relating to
short-term leases and US$3.3 million (2021: $3.3 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.
26. Contingencies
As of 31 December 2022, 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.
- 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$13.6 million in respect of the insurance claim, however this
does not constitute a final settlement and management continues to pursue a
higher insurance payment. Due to the fact that negotiations are on-going and
there is uncertainty regarding the timing and amount involved in reaching a
final settlement with the insurer, it is currently not practicable to
determine the total amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances; however,
there is no certainty that this interest will be realised until the underlying
balance is recovered. Due to that uncertainty, it is also not practicable to
estimate the amount of interest income earned but not recovered to date.
27. Related party balances and transactions
The Group had the following related party transactions during the years ended
31 December 2022 and 2021 and balances as at 31 December 2022 and 2021.
Related parties are those entities owned or controlled by the ultimate
controlling party, as well as those who have a minority participation in Group
companies and key management personnel of the Group.
(a) Related party balances
Accounts receivable Accounts payable
As at 31 December As at 31 December
2022 2021 2022 2021
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 275,844 265,473 421 298
Other:
Industrias Peñoles, S.A.B. de C.V.(1) 8,342 4,842 - -
Metalúrgica Met-Mex Peñoles, S.A. de C.V. - 6 - -
Servicios Administrativos Peñoles, S.A. de C.V. - - 4,630 4,519
Servicios Especializados Peñoles, S.A. de C.V. - - 8,964 179
Fuentes de Energía Peñoles, S.A. de C.V. - - 1,062 5,220
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 3,206 2,154
Eólica de Coahuila S.A. de C.V. - - 13,466 13,589
Minera Capela, S.A. de C.V. - - 714
Other 35 38 4,220 4,257
Sub-total 284,221 270,359 35,969 30,930
Less-current portion 284,221 270,359 35,969 30,930
Non-current portion - - - -
(1 This balance corresponds to the cash receivable related to the Silverstream
contract, see note 14.)
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 511,474 529,544
The Silverstream contract can be settled in either silver or cash. Details of
the Silverstream contract are provided in note 14.
(b) Principal transactions with affiliates, including Industrias Peñoles
S.A.B de C.V., the Company's parent, are as follows:
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,436,761 2,704,447
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 606 23
Other income 4,959 2,708
Total income 2,442,326 2,707,178
(1 Figures do not include the effects of hedging as the derivative
transactions are not undertaken with related parties.)
( )
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Expenses:
Administrative services:
Servicios Administrativos Peñoles, S.A. de C.V. (2) 34,755 35,654
Servicios Especializados Peñoles, S.A. de C.V. (3) 18,918 19,105
Peñoles Tecnología, S.A. de C.V. 4,356 1,425
58,029 56,184
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 20,630 19,597
Fuentes de Energía Peñoles, S.A. de C.V. 3,259 5,019
Eólica de Coahuila S.A. de C.V. 31,031 39,423
54,920 64,039
Operating materials and spare parts:
Wideco Inc 6,610 5,465
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 9,694 10,579
16,304 16,044
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 7,492 10,029
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 16,443 16,422
Other expenses: 4,395 7,441
Total expenses 157,583 170,159
(2 Includes US$0.8 million (2021: US$3.1 million) corresponding to expenses
reimbursed.)
(3 Includes US$nil (2021: US$2.6 million) relating to engineering costs that
were capitalised.)
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the
Executive Committee.
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Salaries and bonuses 2,792 3,142
Post-employment benefits 244 192
Other benefits 316 337
Total compensation paid in respect of key management personnel 3,352 3,671
Year ended 31 December
2022 2021
US$ thousands
US$ thousands
Accumulated accrued defined benefit pension entitlement 4,035 4,138
This compensation includes amounts paid to directors disclosed in the
Directors' Remuneration Report.
The accumulated accrued defined pension entitlement represents benefits
accrued at the time the benefits were frozen. There are no further benefits
accruing under the defined benefit scheme in respect of current services.
28. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31 December 2022
and 2021 are as follows:
Year ended 31 December
Class of services 2022 2021
US$ thousands
US$ thousands
Fees payable to the Group's auditor for the audit of the Group's annual 1,879 1,413
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 316 382
Audit-related assurance services 437 497
Total 2,632 2,292
29. Notes to the consolidated statement of cash flows
Notes 2022 2021
US$ thousands
US$ thousands
Reconciliation of profit for the year to net cash generated from operating
activities
Profit for the year 308,291 438,496
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 13 501,769 529,390
Employee profit sharing 8 9,841 16,662
Deferred income tax credit 11 (233,090) (157,116)
Current income tax expense 11 173,370 330,151
Write-off of assets 9 11,315 -
Loss/(gain) on the sale of property, plant and equipment and other assets 305 (5,041)
Net finance costs 55,148 52,863
Foreign exchange loss 823 1,306
Difference between pension contributions paid and amounts recognised in the 1,259 625
income statement
Non-cash movement on derivatives - 531
Layback agreement (note 2 (c)) (67,182) -
Changes in fair value of Silverstream 14 (18,785) 416
Working capital adjustments
Decrease in trade and other receivables 7,199 85,581
Increase in prepayments and other assets (14,064) (2,233)
Increase in inventories (99,562) (44,596)
Increase in trade and other payables 40,282 19,252
Cash generated from operations 676,919 1,266,287
Income tax paid(1) (158,343) (349,840)
Employee profit sharing paid (16,391) (21,306)
Net cash from operating activities 502,185 895,141
(1) (Income tax paid includes US$116.1 million corresponding to corporate
income tax (2021: US$321.8 million) and US$53.3 corresponding to special
mining right (2021: US$28.0 million), for further information refer to note
11.)
30. Financial instruments
(a) Fair value category
As at 31 December 2022
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
cost
Trade and other receivables(1) 27,276 - - 284,186
Equity instruments at FVOCI - 158,813 - -
Silverstream contract (note 14) - - - 511,474
Derivative financial instruments - - 231 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 20) 1,158,557 - -
Notes payable(2) 104,962 - -
Trade and other payables (note 23) 176,266 - -
Derivative financial instruments - 487 -
( )
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(1) 41,217 - - 270,315
Equity instruments at FVOCI - 164,525 - -
Silverstream contract (note 14) - - - 529,544
Derivative financial instruments - - 96 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 20) 1,157,545 - -
Notes payable(2) 107,918 - -
Trade and other payables (note 23) 161,117 - -
Derivative financial instruments - 3,885 -
( )
(1 Trade and other receivables and embedded derivative within sales contracts
are presented net in Trade and other receivables in the balance sheet.)
(2 Corresponds to interest-bearing notes payable received from Minera los
Lagartos, S.A. de C.V. which holds a non-controlling interest in Juanicipio
project. The notes are denominated in US Dollars and bear interest at a rate
that ranges between 2.15% to 6.34% with a maturity of nine to eighteen months
(2021: twelve months). During the year, proceeds and payments from these Notes
amounted to US$8.1 million and US$10.0 million respectively (2021: US$41.7
million and US$nil).)
(
)
( )
( )
(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
2022 2021 2022 2021
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Financial assets:
Trade and other receivables 27,276 41,217 27,276 41,217
Financial liabilities:
Interest-bearing loans(1) (note 20) 1,158,557 1,157,545 990,588 1,237,689
Trade and other payables 176,266 161,117 176,266 161,117
Note payable 104,962 107,918 104,962 107,918
(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 2022
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 - - 284,186 284,186
Derivative financial instruments: - - - -
Option and forward foreign exchange contracts - 231 - 231
Silverstream contract - - 511,474 511,474
Other financial assets:
Equity instruments at FVOCI 158,813 - - 158,813
158,813 231 795,660 954,704
Financial liabilities:
Derivative financial instruments:
Option and forward foreign exchange contracts - 487 - 487
- 487 - 487
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 - 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 - 2,987 - 2,987
Option and forward foreign exchange contracts - 898 - 898
- 3,885 - 3,885
There have been no transfers between Level 1 and Level 2 of the fair value
hierarchy, and no transfers into and out of Level 3 fair value measurements.
A reconciliation of the opening balance to the closing balance for Level 3
financial instruments other than Silverstream (which is disclosed in note 14)
is shown below:
2022 2021
US$ thousands
US$ thousands
Balance at 1 January: 265,473 326,834
Sales 2,440,063 2,705,720
Cash collection (2,426,390) (2,765,807)
Changes in fair value (20,178) (3,695)
Realised embedded derivatives during the year 16,876 2,421
Balance at 31 December 275,844 265,473
( )
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 commodity 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
For further information relating to the valuation techniques were used to
estimate the fair value of the Silverstream contract as well as the
sensitivity of the valuation to the key inputs are disclosed in note 14.
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 2022, approximately 91.6% of the
investments correspond to 9,314,877 shares (2021: 9,314,877 shares) of Mag
Silver, Corp. for an amount of US$145.5 million (2021: US$146.1 million) and
5.7% of Endeavor, Inc. represented by 2,800,000 (2021: 2,800,000 shares)
shares for an amount of US$9.1 million (2021: US$11.9 million). These equity
investments are listed on the Canadian Stock Exchange. The prices per share as
31 December 2022 were US$15.62 (2021: US$15.69) and US$3.24 (2021: US$4.23),
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.
31. Financial risk management
Overview
The Group's principal financial assets and liabilities, other than
derivatives, comprise trade and other receivables, cash, equity instruments at
FVOCI, interest-bearing loans, notes payable 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 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 which impact is disclosed in
note 14) 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
2022 5% 742 1,120
(5%) (820) 3,610
2021 10% 2,123 1,251
(5%) (1,229) (1,587)
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 which impact is disclosed in note 14) 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
2022 10% 20% 20% 15% 31,529 -
(10%) (15%) (15%) (15%) (27,660) -
2021 10% 15% 25% 15% 40,688 (4,861)
(10%) (15%) (15%) (15%) (36,638) 2,707
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
and notes payable 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, notes payable 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 which impact is disclosed in
note 14) 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
2022 100 8,667
(25) (2,167)
2021 25 3,088
- -
The sensitivity shown in the table above primarily relates to the full year of
interest on cash balances held as at the year end.
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)
2022 10% - 15,881
(25%) - (39,703)
2021 25% - 40,707
(45%) - (73,272)
(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 27, 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 16. 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 2022 and 2021. 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 2022, the Group had concentrations of credit risk as
35 percent of surplus funds were deposited with one financial institution of
which the total investment was held in short term deposits.
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 17 for the maximum credit exposure to cash and cash equivalents note
16 for other receivables and note 27 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 2022, being
US$511.5 million (2021: US$529.5 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using projected cash flows
from operations and by monitoring the maturity of both its financial assets
and liabilities.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2022
Interest-bearing loans (note 20) 374,249 75,973 75,973 1,723,686 2,249,881
Trade and other payables 176,266 - - - 176,266
Note payable 9,109 95,853 - - 104,962
Lease liabilities (note 25) 6,055 6,933 3,129 1,620 17,737
Derivative financial instruments - liabilities 487 - - - 487
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2021
Interest-bearing loans (note 20) 56,370 412,236 75,973 1,761,672 2,306,251
Trade and other payables 161,117 - - - 161,117
Note payable 107,918 - - - 107,918
Lease liabilities (note 25) 5,054 5,213 846 639 11,752
Derivative financial instruments - liabilities 3,885 - - - 3,885
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 2022
Inflows 13,319 - - - 13,319
Outflows (13,322) - - - (13,322)
Net (3) - - - (3)
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)
The above liquidity tables include expected inflows and outflows from currency
option contracts which the Group expects to be exercised during 2023 as at 31
December 2022 and during 2022 as at 31 December 2021, 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, excluding net unrealised gains
or losses on revaluation of derivatives financial instruments and Equity
instruments at FVOCI. Refer to notes 18, 20 and 30 respectively for a
quantitative summary of these items.
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
2022 and 2021 consisted of only cash and cash equivalents, which details are
disclosed in note 17.
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