REG - Fresnillo Plc - FY23 Preliminary Results
05/03/2024 07:45
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RNS Number : 6107F Fresnillo PLC 05 March 2024
Fresnillo plc
Financial results for the year ended 31 December 2023
Fresnillo plc today announced its financial results for the full year ended 31
December 2023.
Octavio Alvídrez, CEO said:
"Fresnillo delivered a sound operating performance in 2023 despite a number of
headwinds, a testament to the strength and efforts of our teams. We achieved
our guidance of 105.1 million silver equivalent ounces with gold, lead and
zinc production within our guided range. Silver production benefitted from the
ramp up at Juanicipio and higher ore grade at San Julián (veins) but was
slightly below expectations.
"At the same time, we focused on increasing productivity and raising
development rates while advancing our pipeline of future projects. We
continued to identify and implement cost reduction measures, as well as
improve efficiency across all of our mines. However, the impact of the
revaluation of the Mexican peso against the US dollar and inflation were
headwinds that affected costs across the business. Nonetheless, we are pleased
to announce a final dividend payment of 4.2 US cents per share to
shareholders, in line with our policy.
"Looking ahead, our priorities for 2024 are clear. Safety is of critical
importance, and we continue to work to enhance our performance and instil a
safety-first culture across all our operations. The next two to three years
ahead are about ensuring stable production and managing our costs while
ensuring we develop projects that will deliver our future growth.
"Fresnillo is the world's largest silver producer. We have a strong balance
sheet, a proven track record of delivering on value enhancing growth projects,
a talented and experienced team and a consistent strategy that we are
confident will continue to achieve results."
Financial Highlights - 12 months to 31 December 2023
$ million unless stated 2023 2022 % change
Silver Production(1) (kOz) 56,282 53,740 4.7
Gold Production(1) (Oz) 610,646 635,926 (4.0)
Total Revenue 2,705.1 2,433.0 11.2
Adjusted Revenue(2) 2,869.1 2,593.5 10.6
Gross Profit 503.2 536.0 (6.1)
EBITDA(3) 655.7 751.1 (12.7)
Profit Before Income Tax 114.0 248.6 (54.1)
Profit for the year 288.3 308.3 (6.5)
Basic and Diluted EPS excluding post-tax Silverstream effects (USD)(4) 0.310 0.351 (11.7)
(1) Fresnillo attributable production, plus ounces registered in
production through the Silverstream Contract.
(2) Adjusted Revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and lead and zinc
hedging.
(3) Earnings before interest, taxes, depreciation and amortisation
(EBITDA) is calculated as gross profit plus depreciation less administrative,
selling and exploration expenses. The reconciliation of EBITDA to amounts
determined in accordance with IFRS can be found in the Financial Review.
(4) The weighted average number of ordinary shares was 736,893,589
for 2023 and 2022. See note 12 in the consolidated financial statements.
2023 Highlights
Higher gold and silver prices offset by the dual impact of inflation and the
revaluation of the Mexican peso
· Adjusted revenue increased 10.5% vs 2022 due to higher volumes of
silver sold, and to a lesser extent, the increase in volumes of lead and zinc
sold, combined with the higher gold and silver prices.
· Revenue increased 11.2% year-on-year to US$2,705.1 million due to the
increase in adjusted revenue, partly offset by higher treatment and refining
charges.
· Adjusted production costs 1 (#_ftn1) increased 12.3% vs 2022 to
US$1,624.1 million. This was primarily driven by the adverse impact caused by
the revaluation of the Mexican peso/US dollar exchange rate which, on average,
appreciated 11.7%, along with 3.9% in cost inflation, the additional costs
from the start-up of the flotation plant and ramp up of the mine at Juanicipio
and the start-up of the pyrites plant at Fresnillo.
· Gross profit and EBITDA(3) decreased to US$503.2 million and US$655.7
million, a 6.1% and 12.7% decrease vs 2022 respectively.
· Exploration spend increased 10.0% to US$182.4 million, in line with
our strategy to intensify exploration activities in specific target areas.
· Profit from continuing operations before net finance costs and
income tax of US$114.0 million, down 54.1% as a result of lower gross profit
and higher administrative and exploration expenses.
· Profit for the year attributable to equity shareholders of the Group
of US$233.9 million, down 14.0% on 2022 mainly due to the lower profit from
continuing operations offset by tax income for the period of US$205.0 million,
which compared favourably to the US$67.4 million tax income in 2022.
· US$534.6 million in cash and other liquid funds as of 31 December
2023 notwithstanding investing US$483.4 million in capex, repaying the
US$317.9 million Senior Notes due in November 2023 and paying dividends of
US$108.4 million.
· Net debt was US$304.4 million as at 31 December 2023. This compares
to the net debt position of US$198.7 million as at 31 December 2022.
· The Group signed a five-year committed revolving line of credit for
up to US$350 million.
· Final dividend of 4.2 US cents per share, amounting to US$30.9
million, which is above the amount signalled with the interim dividend
payment.
Final dividend payment
· Final dividend of 4.2 US cents per share, amounting to US$30.9
million. This is in addition to the 2023 interim dividend of 1.40 US cents per
share, amounting to US$10.3 million, which was paid in September 2023 and
represented 1/3 of the expected total dividend for 2023. This brings the total
dividend for the year to 5.6 US cents per share, amounting to US$41.2 million.
This is in line with the Group's dividend policy to pay out 33-50% of the
profit attributable to equity shareholders of the company after making certain
adjustments to exclude extraordinary non-cash effects in the income statement,
which this year in particular included taking out the income tax benefit
resulting from the effect of the revaluation of the Mexican peso on the tax
value of assets and liabilities, which increases in dollar terms the deduction
of future depreciation expenses (in peso terms, which is used for Mexican tax
purposes, there is no impact). However, this favourable effect in dollar terms
could be reversed in the future if the Mexican peso devalues.
Sound operating performance with silver equivalent production in line with
guidance
· Full year attributable silver production of 56.3 moz (including
Silverstream) increased 4.7% vs. FY22, as a result of the ramp-up at
Juanicipio and higher ore grade at San Julián Veins, partly offset by the
lower ore grade at San Julián (DOB) and Fresnillo.
· Full year attributable gold production of 610.6 koz, down 4.0% vs.
FY22 mainly driven by the decrease in gold production at Noche Buena as it
approached the end of its mine life, partially mitigated by the ramp up at
Juanicipio and the higher ore grade at Herradura.
· Full year attributable by-product lead production increased 9.2% vs.
FY22 due to a greater contribution from Juanicipio and higher volume of ore
processed and ore grade at Saucito partly offset by the decreased production
at Ciénega.
· Full year attributable by-product zinc production increased 8.6% vs.
FY22 due to the increased production from Juanicipio and the higher volume of
ore processed and ore grade at Saucito partly offset by the lower ore grade at
San Julián (DOB).
· The flotation plant at Juanicipio was commissioned and production was
successfully ramped up.
· The tie in of the Pyrites plant at Fresnillo to the national power
grid completed in 2Q23, tests and technical work to improve recovery rates
were carried out and a strategy to optimise performance was defined.
Focus on operational improvement and projects that will increase efficiencies
· At Fresnillo, deepening of the San Carlos shaft concluded with
commissioning on-going to optimise the haulage of ore through ramps while the
two sections of the shaft are connected. Development rates increased to an
average of 3,105 metres per month.
· At Saucito, the project to deepen the Jarillas shaft from 630m to
1,000m progressed with completion expected in 2027.
· At Ciénega, several initiatives to decrease personnel rotation were
implemented throughout the year. We expect to see the benefit from these in
2024. A number of cost reduction initiatives identified including optimised
consumption of certain operating materials, increased the efficiency of the
maintenance process and the rationalisation of the contractor base are
expected to decrease costs in 2024.
· At Herradura, the Carbon in Column project to increase gold recovery
from the old leaching pads was commissioned in 2Q 2023 and ramp up started in
2H 2023. The pit slope optimisation programme continued, and recommendations
are being tested in different geotechnical domains of the pit. Once concluded,
the mine design will be reviewed and adjusted accordingly.
Continued progress at our advanced exploration projects and promising
exploration results
· Pre-feasibility level studies at the Orisyvo project, including
mining and processing scenarios, metallurgical, infrastructure, and
water/energy supply advanced at a good pace along with community and
government engagement programmes.
· Core and reverse circulation drilling intensified at the main zone at
the Tajitos project with good results in infill and step-out holes; ongoing
column metallurgical test work delivered good preliminary gold recoveries.
Drilling started in the western part of the district.
· The drilling programme at the three areas of the Guanajuato District
delivered good silver and gold results, including the discovery of a
significant ore shoot and the extension of both vein and stockwork ore bodies.
· Land access negotiations with the local communities continued at
Rodeo. Social, environmental, hydrological and power supply studies advanced
as the community relations programme was maintained in the region.
· In Chile, drilling and additional targets delineation continued with
promising results at Capricornio, and drilling programmes were completed at
Pilarica and Santo Domingo in Peru.
· Silver resources remained broadly stable at 2,219.7 moz (up 0.7%) as
exploration results, mainly at the Guanajuato exploration project and San
Julián veins, offset the mining depletion at mine sites, and higher costs and
cut-off grades. Silver reserves decreased 10.0% to 356.6 moz mainly from
mining depletion and higher costs and cut-off grades at San Julián (DOB),
Juanicipio and Ciénega, partly offset by increased reserves at Fresnillo.
· Gold resources decreased 3.1% to 37.9 moz as a result of extraction
and higher costs and cut-off grades at Herradura, Saucito and Soledad Dipolos
(no mining), partly offset by exploration results and increased mineral
resources at the Guanajuato and Centauro Profundo exploration projects and the
Ciénega mine site. Gold reserves decreased 13.7% to 7.1 moz primarily due to
extraction, and higher costs and cut-off grades at Herradura and Saucito, and
the end of the Noche Buena mine life.
Further improvement in the sustainability of our operations
· Action taken to overhaul our 'I Care, We Care' programme with a
sharper focus on performance and effective management of high potential and
critical risks. We remain determined to restore our safety record to its
previous path, eliminate fatalities and achieve our target of reaching the
International Council on Mining and Metals (ICMM) benchmark ranges.
· Established the Occupational Health Transversal Committee and
Wellbeing Committee to promote healthy habits and emotional wellbeing.
· Increased our electricity supply from renewable sources from 35.6% in
2022 to 53.3% in 2023.
· Encouraged diversity by promoting the first Women in Mining Survey in
Mexico - with 1,230 participants - to improve understanding of how to develop
opportunities for women in mining and launching the second generation of the
Women-to-Women Mentorship programme.
· Conducted workshops for 4,732 employees and contractors as part of
our Harassment Prevention Programme.
· Conducted a comprehensive review of our Code of Ethics and Conduct.
· Approved the Tailings Policy and Commitments for Responsible Tailings
Management, which establishes roles, responsibilities, and duties of the
different participants of the TSFs management system.
2024 outlook and longer term prospects
· Attributable silver production expected to be in the range of 55.0 to
62.0 moz (including Silverstream). Silverstream silver production in 2024 is
estimated to be in the range of 2.5-3.5 moz.
· Attributable gold production expected to be in the range of 580 to
630 koz.
· Expressed in silver equivalent ounces(1), production is expected to
be 101-112 million ounces.
· Capex for 2024 is anticipated to be approximately US$440 million and
will continue to be primarily focused on mining works, sustaining capex and
a haulage conveyor.
· Exploration expenses are expected to be c.US$190 million, maintaining
our strategy to intensify exploration activities in specific target areas.
· We will continue to monitor costs closely, with a number of
initiatives in 2023 that we will continue to develop and deploy during 2024,
further optimising and reducing costs where possible.
· In 2024, we will roll out new technologies - including data analytics
- and promote automation to improve risk management and the wellbeing of our
workers, as well as consolidating the 'I Care, We Care' operating committee to
guarantee the deployment and homogenous safety strategy across our operations.
· Facing into a challenging external environment, we continue to invest
into personnel and infrastructure. We are optimistic about our pipeline and
have confidence in the long term strength and sustainability of Fresnillo.
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://www.lsegissuerservices.com/spark/Fresnillo/events/0880bc27-85cd-4545-9742-8a9fda18376b
Event registration: https://registrations.events/direct/LON8842060
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) 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'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
Working together to build a sustainable future
Although this year was characterised by high levels of cost inflation
exacerbated by the strength of the Mexican peso and compounded by other
negative macroeconomic factors, as well as some operational difficulties,
Fresnillo plc proved to be a resilient business.
By working closely with our people, our suppliers, our communities and the
Government, we were able to achieve a good operating performance while also
taking important steps towards building a sustainable future for Fresnillo
plc.
Delivering on our promises
In terms of silver equivalent ounces, our total production was in line with
our guidance for the year. Silver production was up from the previous year,
primarily due to the ramp up at Juanicipio, while gold production decreased as
our Noche Buena mine approached the end of its life.
We achieved US$2,869.1 million in adjusted revenue during the year. This
represented an increase of 10.5%, primarily due to the increase in the volume
of silver, zinc and lead produced and higher prices for gold and silver. Gross
profit decreased by 6.1% year-on-year to US$503.2 million, primarily driven by
the adverse effect of the revaluation of the Mexican peso against the US
dollar, cost inflation, the recognition of additional costs from the start-up
of the flotation plant at Juanicipio, and the increased use of maintenance
services and contractors, which significantly impacted cost of sales. This was
offset by the increase in adjusted revenue. Cash and other liquid funds
decreased from US$969.1 million to US$534.6 million as the use of funds,
primarily the investment in capital expenditure and dividend payments, in
addition to the redemption of the outstanding US$317.9 million principal
amount of 5.500% Notes due in November 2023, was higher than the cash
generated by the mines.
With a history that can be traced back over 500 years, Fresnillo plc is a
well-established and solidly financed business focused on long-term outcomes
and sustainable shareholder value. Our strategy is robust and proven, 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 2023, we declared an interim dividend of 1.40 US cents per share, with a
final dividend of 4.20 US cents per share, bringing the total for the year to
5.6 US cents per share.
A challenging macro environment
The final effects of the pandemic have now largely worked through the system,
but global geopolitics continue to create stresses in the supply chain,
notably the ongoing tensions between the US and China which are impacting the
timely delivery of equipment and spare parts.
In addition, we have also been affected by changing government policies, which
have extended permitting processes for mining operations and projects.
Cost inflation was 3.9% in 2023 and led to across-the-board hikes in the cost
of labour, materials and equipment. The price of diesel ran counter to this
inflationary trend in the early part of the year but that too increased in
later months.
The effect of inflation was made significantly worse by the unhelpful
peso-dollar exchange rate caused by a relatively positive economy in Mexico.
This was driven by investment attracted by the high rates of interest offered
by the central bank and also by investment from foreign companies, seeking to
establish a presence in Mexico in order to capitalise on its close geographic
proximity to the US.
Working together, thriving together
The year underlined the value of the close working relationships we have
forged over many years with all our stakeholders. Founded on a spirit of trust
and mutual respect, these relationships not only help us navigate our
short-term challenges but also to build a sustainable future that will provide
long-term benefits for all, in line with our Purpose - to contribute to the
wellbeing of people through the sustainable mining of silver and gold.
For example, we are working together with our suppliers to mitigate the
effects of inflation and the strong peso by identifying opportunities to
improve supply chain logistics, reduce costs and increase the speed of
deliveries of equipment, spare parts, and services.
In terms of our workforce, while the recent labour reforms caused some initial
disruption to our activities, they have ultimately helped us build closer
relationships with our people and their unions. Through initiatives such as
greater automation, we are working closely with them to increase productivity
in our mines -- which will enable us to manage the impact of inflation by
producing more from the same resources.
We are also collaborating with our workforce to bolster our organisation,
processes and culture - ensuring that everybody at Fresnillo is aligned as we
collectively address the challenges that lie ahead. Key among these is safety,
and it is with great sadness that we report four fatalities among the
contractors' workforce during 2023, and one in early 2024. These incidents are
unacceptable and serve only to strengthen our resolve to achieve zero harm. We
are intensifying the implementation of our 'I Care, We Care' safety programme,
with a heightened focus on improving our management of high potential risks
and critical risks, together with increased engagement with our contractors'
workforce. The safety of our people is paramount and will never be
compromised.
Our neighbouring communities continue to be the foundation stones that sustain
our existing operations and facilitate future projects - and we value and
nurture our vital partnerships with them. We earn their trust through
meaningful engagement and by being accountable for our actions, working hard
to establish close and harmonious relationships that ensure the seamless
continuation of our social licence to operate across our project pipeline. We
fully understand the concerns that can arise when a new mine is proposed, and
are committed to engaging with local people in order to address their concerns
and explain how our presence can lead to more sustainable communities -
ranging from creating employment opportunities and economic growth to
providing comprehensive support for education and healthcare.
Board activities
The Board met regularly throughout the year and discussed a range of matters,
including the latest mining and regulatory developments in Mexico. For the
second year running, in July we held a valuable working meeting of the Board
which enabled Directors to discuss wider strategic issues with our executive
team. Key topics included: a review of Fresnillo's Purpose, Mission, Vision,
Values and Business Model; megatrends in the global mining industry;
production; mine exploration and development; and the Company's ESG
(environment, social and governance) and climate strategy.
Fresnillo's safety record during the year was a significant cause of concern
at Board level. We have stressed the need for our management team to improve
safety culture across all our sites, and fully support the HSECR Committee's
insistence on the implementation of stricter disciplinary measures.
At the 2023 AGM in London, it was pleasing to see that all the proposed
resolutions were strongly supported by our shareholders, including the
re-appointment of Charlie Jacobs and Bárbara Garza Lagüera as independent
Non-executive Directors, as well as some minor changes to our Directors'
Remuneration Policy.
In September, we engaged consultants Lintstock to manage our annual review of
the Board and its committees, in compliance with our commitment to seek
external support for this review every three years. Lintstock's findings were
discussed at our Board meeting in October and we were delighted to note that
the key outcome of the review was that the Board and its committees continue
to perform very well. Lintstock did however make a number of helpful
suggestions to improve that performance still further and, following
consideration, these will be acted upon during 2024.
Board changes
There were no changes to the Board this year, with all of the Directors being
re-elected at the 2023 AGM.
Outlook
While global macro issues, such as inflation and the slow recovery of certain
economies, the ongoing US-China tensions and the wars in Ukraine and the
Middle East, will dampen confidence and challenge our performance targets, we
will continue to work together with our stakeholders to improve productivity.
At the same time, we will maintain our commitment to investing in exploration
activities in Mexico, Peru and Chile, and strive to transform what is an
undoubtedly exciting pipeline into operational projects that will help us
achieve our ambitions in the years ahead.
Fresnillo does not and cannot operate in a vacuum. We depend on our employees,
our suppliers, our local communities, our shareholders and the Government to
actively engage with our objectives and ambitions in order to fulfil our
Purpose. On behalf of the Board, I thank them and the full range of our
stakeholders for their continued understanding, support and encouragement
during 2023. By working together, we are building a stronger and more
sustainable business.
Alejandro Baillères
Chairman
Chief Executive's statement
Octavio Alvídrez
A sound performance, with exciting projects on the horizon
This year, our teams were again challenged by a mix of external and internal
factors. We worked together with our stakeholders to deliver on our production
expectations while also making good progress in advancing our pipeline of
future projects.
We achieved a sound operating performance in 2023, despite headwinds which
included inflation and an unfavourable peso-dollar exchange rate.
Throughout, we remained extremely grateful to our stakeholders, who continued
to collaborate closely with our own teams to build a sustainable future for
our business, in line with our Purpose. We recognise that Fresnillo thrives
when our stakeholder groups thrive, so working together to support our people,
suppliers, local communities and the Government is not only the right thing to
do - it is a commercial imperative. You can discover more about how we have
worked with our stakeholders in the case studies throughout this report.
The year also saw us advance several exciting projects that we expect to make
further significant progress in the months and years ahead.
Production highlights and price review
In addition to external macro-economic factors, we experienced minor
operational setbacks with a delay to the start-up of operations at the new
Pyrites Plant at Fresnillo, reduced availability of haulage equipment at San
Julián and lower than expected ore grades at Fresnillo that impacted the
year's performance. As a result, although gold production was in line with
guidance, silver production fell below our expectations.
Total silver production was 56.3 moz, up by 4.7% from 53.7 moz in 2022, with
the ramp-up at Juanicipio, together with higher ore grade at San Julián
Veins, partially offset by lower ore grades at San Julián DOB and Fresnillo.
Gold production decreased to 610.6 koz, a reduction of 4.0% from 635.9 koz in
the previous year. This was primarily due to lower production at Noche Buena
as the mine approached the end of its life.
Attributable by-product lead and zinc production increased 9.2% and 8.6% to
57,833 tonnes and 107,705 tonnes respectively, primarily due to the increased
contribution of Juanicipio and higher ore grades and volumes of ore processed
at Saucito.
During 2023, the average realised silver price was US$23.6 and that for gold
US$1,957.7, an increase of 8.8% and 8.8% respectively. The average price for
zinc decreased by 22.6% while the average lead price remained broadly
unchanged at US$0.95 per pound. With central banks around the world raising
interest levels to counter inflation, I believe that silver and gold prices
established a floor during the year. The fact that prices did not fall below
US$20 per ounce and US$1,800 per ounce for silver and gold respectively shows
the strength and long-term sustainability of these metals, even through tough
economic times.
While forecasting global economic conditions is always difficult, I expect
that falling interest rates and increased demand for silver in particular -
driven by the expansion of green investments and specifically in solar panels,
for which silver is a key component - should strengthen prices in 2024.
Our strategy in action
Our strategy is the engine that drives Fresnillo plc forward. It comprises
four strategic pillars and here I report on how we have performed against each
one.
Maximising the potential of existing operations
Ensuring that our operational mines are performing as efficiently as possible
is our primary strategic objective - and this is an area where we rely heavily
on the skills and availability of our people. Following the Mexican
Government's introduction of labour reforms in 2021, we initiated a series of
recruitment and training campaigns. These continue to be successful, and all
our mines were again fully staffed throughout the year.
Across the portfolio, we are continuing to address the ongoing impact of
inflation and the revaluation of the Mexican peso by investing in initiatives
including the greater use of technology and autonomous drilling. We are also
launching schemes to reduce haulage costs, which become more significant when
we work more distant seams that require greater haulage. At the Fresnillo
mine, for example, the deepened San Carlos shaft is set to reduce distances,
speed up haulage and cut costs. This is expected to drive a marked improvement
in our ability to efficiently access seams which account for more than half of
the mine's reserves.
At Saucito, our initiatives include efforts to stabilise areas of poor rock
quality. New equipment was delivered towards the end of the year, leading to
development rates returning to 3,000m per month in December, an achievement
that sets us up well for the year ahead.
We completed the safe ramp-up of our new Juanicipio mine in the third quarter
of 2023 and it is now running at nameplate capacity in line with expectations.
Juanicipio will have a positive impact on both silver and gold production,
helping to offset the lower production at Noche Buena as it nears its end of
life, with higher production of both lead and zinc further supporting our
overall performance.
With recovery rates at the new Pyrites Plant at Fresnillo initially falling
short of anticipated levels, we initiated some technical works and conducted
tests to improve performance. We subsequently took the decision to only
process historical tailings, as recovery rates improved significantly when
following this strategy, and we will continue on the same path in 2024. This
means that volumes processed will inevitably be lower than originally planned
- although recovery rates and profitability will be higher than would be the
case if we processed both current and historical tailings.
Delivering growth through development projects
With our two most recent development projects - the new mine at Juanicipio and
Phase II of the Pyrites Plant at Fresnillo - being commissioned and
therefore moving into our portfolio of existing operations, we are now
focusing on enabling potential new projects to flow from the pipeline and
deliver further growth.
We are continuing to concentrate on identifying M&A targets, not only in
Mexico but also in the wider region. Establishing operations in different
jurisdictions will enable us to de-risk the business by reducing country risk.
However, several of the projects I discuss under the next strategic pillar are
close to moving from the pipeline and becoming standalone projects in their
own right. Our teams are now working to identify which are most suitable in
terms of operational and financial feasibility.
Once further exploration or metallurgical studies have been completed, the
project or projects identified as holding the greatest potential will be
presented to the Board for approval, at which point capital expenditure will
be granted and construction work can commence.
This is a very exciting moment for everybody at Fresnillo plc, as we work hard
to define the next generation of projects for the development stage. Seeing a
project transform from a possibility in the minds of our exploration experts
through feasibility stages and development before emerging as an operational
mine is something that galvanises each and every one of us. We have high hopes
that the projects currently under consideration will play their part in
boosting production, generating long-term shareholder value, providing
employment, supporting communities, and delivering tax revenues that will
benefit Governments.
Extending the growth pipeline
We have mining concessions and exploration projects in Mexico, Peru and Chile.
These include four advanced exploration projects - Orisyvo, Rodeo, Guanajuato
and Tajitos - as well as a number of other long-term prospects.
A low strip ratio, open pit, heap leaching disseminated gold project located
in the Herradura Corridor of north-western Sonora state, Tajitos is currently
progressing along our pipeline at a faster pace than other projects. We
carried out 83,224 metres of core and reverse circulation drilling over 2023
and completed additional metallurgical investigations and geotechnical studies
towards the end of the year. The next step is to produce a new preliminary
economic study and to consider the possibility of purchasing more land for
mine development.
Rodeo is following closely behind Tajitos. Rodeo is an open pit, heap leaching
gold project in central Durango state, and we progressed several regional
studies in 2023, including hydrological, environmental, and social base lines
along with an analysis of power supply and infrastructure alternatives. Our
exploration teams have worked with the local Ejidos to discuss land access
agreements. Once these are concluded, we will commence pre-feasibility to
feasibility level exploration, engineering, and development programmes.
Orisyvo is a world-class, high-sulphidation epithermal disseminated gold
deposit located in
the Sierra Madre mountains of Chihuahua state. We updated the project's
pre-feasibility study in 2023 and strengthened our engagement with local
communities. In addition, detailed geotechnical studies have been completed.
While Orisyvo shows excellent production potential, there are challenges we
need to address around the resources and capex required to progress the
project.
At Guanajuato, a historic, world-class gold and silver epithermal vein field
stretching more
than 40 kilometres along the central Mexican state of Guanajuato, we
intensified our exploration activities during the year, including the drilling
of 83,576 metres which gave good results. We have also completed a preliminary
economic study, and identified possibilities for conceptual mining and
processing scenarios.
Elsewhere, we advanced greenfield drill programmes designed to test expansion
targets at the Candameña and San Juan projects in Mexico and Capricornio in
Chile. In Peru, we strengthened our engagement efforts with the local
community and Government, enabling the resumption of drilling at the Pilarica
project and the initiation of the programme at Santo Domingo.
With regard to exploration prospects around our existing operations, we have
continued to investigate opportunities at Juanicipio, which show good
potential, in the wider Fresnillo district and also at San Julián. In total,
we completed 933,185 metres of drilling during 2023, a decrease of 2.4% over
2022. Around 92% of this total was devoted to brownfield targets.
Silver in consolidated overall mineral resources remained broadly unchanged
vs. 2022 at 2.2 bn oz as the positive exploration results at the Guanajuato
exploration project and San Julián veins were offset by mining at the mine
sites, and higher costs and increased cut-off grades. Gold in consolidated
overall mineral resources decreased 3.1% vs. 2022 to 37.9 moz primarily driven
by extraction, and higher cost and cut-off grades at Herradura, Saucito and
Soledad and Dipolos (no mining), partly mitigated by the positive exploration
results and increased mineral resources at Guanajuato and Centauro Profundo
exploration projects and the Ciénega mine.
Silver in consolidated overall ore reserves decreased 10.0% to 356.6 moz
mainly from mining depletion and higher costs and cut-off grades at San
Julián (DOB), Juanicipio and Ciénega, partly offset by increased ore
reserves at Fresnillo. Gold in consolidated overall ore reserves decreased
13.7% to 7.1 moz mostly as a result of extraction and higher costs and cut-off
grades at Herradura and Saucito and the end of the Noche Buena mine life.
For 2024, the exploration budget will remain broadly in line with that for
2023.
Advancing and enhancing the sustainability of our operations
The wellbeing of our workforce is integral to the sustainable mining of silver
and gold. It forms an essential component of our Purpose. It is one of the
beacons that guide us in everything we do: no amount of silver and gold
production, successful exploration, or other accomplishments can compensate
for any degree of harm befalling our people. Violations to our policies or
standards, and behaviours that could endanger our workforce, will not be
tolerated.
The tragic loss of four contractors' workers in 2023, and one in early 2024,
was not only unforeseen but also profoundly distressing for everyone at
Fresnillo plc. The long-term trend of our health and safety metrics has shown
continued improvement over the years, with steady reductions in both the Total
Recordable Injury Frequency Rate (TRIFR) and the Lost Time Injury Frequency
Rate (LTIFR). However, recent events have cast a shadow across our hard-earned
reputation, with our TRIFR and LTIFR rising to 12.08 and 7.40 respectively,
focusing efforts like never before.
The occupational health and well-being of our people stand as our foremost
priorities, and we are committed to strengthening our culture of proactive
risk prevention across the organisation. Looking ahead, we have laid plans to
intensify our preventive efforts, reinforcing a safety-centric culture that
effectively manages high potential and critical risks. This includes an even
sharper focus on visible leadership and further enhancing how we implement
lessons learnt. This is a long journey and there are no easy fixes, but we are
resolute in our unyielding pursuit of zero harm, ensuring that all our team
members return home safely. Anchored by the continuous evolution of our 'I
Care, We Care' programme, we are confident that these initiatives will pave
the way to safeguarding lives and preventing incidents - and to firmly
restoring our safety record on its intended course.
From increasing productivity, embracing our safety culture and driving
innovation, our workforce plays an important role in the delivery of our
strategy. We continue to maintain a close working relationship with both
unionised and non-unionised employees to build trust and mutual
accountability. These engagements have become increasingly relevant post the
labour and mining reforms. After several years without any labour disputes, we
experienced a temporary suspension of activities at Herradura in the second
quarter of the year. The illegal stoppage by a very small group of unionised
personnel was not approved by the union and did not have a material impact on
the operations at Herradura. We will continue to have constructive dialogue
with our workforce to better understand their concerns and expectations in
these complex regulatory and economic environments.
Since our endorsement of the UN Global Compact in 2009, our commitment to
responsible business practices has been a cornerstone of how we operate. Every
year, we communicate our progress and hold ourselves accountable to the
highest standards. Guided by our Purpose, our commitment to sustainability was
further demonstrated during 2023 through the strategic alignment with 11 of
the UN's Sustainable Development Goals across our four ESG pillars: doing
business ethically and responsibly; caring for our people; protecting the
environment; and partnering with our communities.
Our achievements during 2023 - together with our ongoing plans for future
years - demonstrate good progress against our ESG commitments.
For example, during the first half of the year, the Board approved our new
Tailings Policy. We have successfully implemented our Tailings Storage
Facilities (TSFs) governance framework across our operations, and all mining
units are now subject to Dam Safety Inspections. We also commenced the design
stage of the TSF at Orisyvo. We developed a facility at Ciénega that conforms
to the guidelines of the Mining Association of Canada (MAC), the International
Commission on Large Dams (ICOLD) and the Canadian Dam Association (CDA).
Moving forward, we expect to conclude Potential Failure Mode Assessments
(PFMA) for each site in 2024, enabling us to assess and pre-emptively manage
major risks, thereby optimising efficiency.
We continue to champion operational and energy efficiency measures. The
multimodal fuel station project that supplies Liquid Natural Gas (LNG) and
diesel in our Herradura mine was finally approved by the Government during the
period, allowing better control and more efficient operation of our dual-motor
haulage fleet and the optimisation of the LNG-diesel substitution ratio. We
look forward to benefitting from lower costs and a reduced carbon footprint in
2024.
We also continued to engage with the Mexican Government to explore how we
could increase the share of renewables in our energy matrix. Following an
administrative rearrangement of our current energy portfolio, we sourced over
50% of our energy needs from wind. This is similar to 2019 levels, and is
particularly noteworthy considering the increase in our overall electricity
consumption since then, due to our expanding operations. By optimising our
available renewable sources across our facilities, we are confidently moving
back on track to achieving our ambitious goal of 75% renewables by 2030.
Regarding our climate change mitigation and adaptation strategies, we have now
harmonised our risk framework with the central Enterprise Risk Framework
(ERM), enabling us to allocate divisional and site-level risks and controls to
designated risk owners, with the goal of further refining site-specific
nuances through a standardised methodology. At the same time, we have
satisfactorily concluded our regional climate modelling. This has generated
industry-valuable insights and enabled us to undertake decarbonisation pathway
analyses in two of our most representative facilities. These analyses aim to
identify feasible decarbonisation technologies and scenarios, while providing
further crucial insights to guide our overall decarbonisation journey.
Last year, I expressed disappointment that we had been omitted from the
FTSE4Good Index due to heightened climate change requirements. Our commitment
to reclaim our position in this prestigious index remains a top priority for
Fresnillo plc - and I am confident that the work underway will pay dividends
in the near future, not only enhancing our reputation but, most importantly,
fortifying our risk management and operational resilience. As we forge ahead,
our institutional practices will continue to exemplify our proactive stance in
shaping a more sustainable future for our business, our stakeholders and the
planet.
We fully recognise the importance of close, proactive working relationships
with the Government in Mexico and its departments, as well as with their
equivalents in Peru and Chile where we have exploration projects. Several
changes to the laws governing mining were approved in May 2023. While we do
not believe these will have any material impact on our current operations or
advanced exploration projects, certain aspects of the new legislation are
harmful to the industry. Others may require additional clarifications, which
have yet to be issued. We continue to engage with the Government regarding
these and other matters in order to obtain a positive outcome for all - for
the Government, for the people of Mexico and for our business.
Looking ahead
We expect the global economic landscape to remain challenging, with greater
uncertainty driven by geopolitical tensions, faltering economies and
destabilising events including the wars in Ukraine and the Middle East. In
Mexico, the forthcoming election may bring a change of Government and a new
set of priorities. We will continue to work with the Government, regardless of
its political leanings, to make sure that the mining industry in general and
Fresnillo in particular can continue to bring prosperity and jobs to the
people of Mexico.
For our business, 2024 and the following two to three years are about stable
production and managing our costs while at the same time developing projects
that will form the basis of future growth.
In addition to redoubling our efforts to protect the health and safety of our
people, we will strive to mitigate the impact of inflation and exchange rates
on our costs, working with our internal teams and as well as suppliers to
identify efficiencies across the business which will enable us to achieve more
without increasing resources. We are well-positioned from a financial
standpoint with strong cash flow and a robust balance sheet in place to ensure
that we are able to seize opportunities - whether for M&A or to develop
new growth projects - as they arise.
Our pipeline continues to be a major source of optimism. Last year I reported
that some potential projects could shortly be making their way into our
operational portfolio, and I expect us to make further progress during the
year ahead.
When times are difficult, collaboration and cooperation become more critical
than ever. From the teams in our mines, offices and Boardroom to suppliers,
local communities, Government officials and investors, we have worked together
to deliver a sound performance for the year, with the prospect of better times
in the long term. I would like to thank everybody associated with Fresnillo
for your unwavering support during the year.
-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 intends to explain the main factors affecting performance as well as
provide a detailed analysis of the financial results in order to enhance the
understanding of the Group's Financial Statements. All comparisons refer to
2023 figures compared to 2022, unless otherwise noted. The financial
information and year-on-year variations are presented in US dollars, except
where otherwise indicated.
The following report presents how we have managed our financial resources.
Commentary on financial performance
The Group's financial performance in 2023 reflects the operational challenges
faced at the mines, coupled with the adverse effects of the revaluation of the
Mexican peso vs. the US dollar and inflationary pressures across the cost
base.
Adjusted revenue(1) increased 10.5% vs 2022 to US$2,869.1 million. This was
primarily due to the higher volumes of silver sold, and to a lesser extent,
the increase in volumes of lead and zinc sold, combined with the higher gold
and silver prices. Revenue increased 11.2% year-on-year to US$2,705.1 million
due to the increase in adjusted revenue, partly offset by higher treatment and
refining charges.
Adjusted production costs (2) increased 12.3% vs 2022. This was primarily
driven by the adverse impact caused by the revaluation of the Mexican peso/US
dollar exchange rate which, on average, appreciated 11.7%, a 3.9% in cost
inflation, the additional costs from the start-up of the flotation plant and
ramp up of the mine at Juanicipio and the start-up of the pyrites plant at
Fresnillo, together with longer haulage distances, maintenance and contractors
at San Julián (DOB and Veins), Ciénega and Herradura.
As a result, gross profit and EBITDA(3) decreased to US$503.2 million and
US$655.7 million, a 6.1% and 12.7% decrease vs 2022 respectively.
We maintained our strong financial position, with US$534.6 million in cash and
other liquid funds as of 31 December 2023 notwithstanding paying dividends of
US$108.4 million in accordance with our policy, investing US$483.4 million in
capex, repaying the US$317.9 million Senior Notes due in November 2023, and
spending US$182.4 million on exploration expenses.
In early 2024, the Group signed a five-year committed revolving line of credit
for up to US$350 million. This facility is part of Fresnillo's strategy to
maintain a strong balance sheet and financial flexibility, which are core to
the Company's capital structure and investment case.
Income statement highlights
2023 2022 Amount change US$ million Change %
US$ million US$ million
Adjusted revenue(1) 2,869.1 2,597.2 271.9 10.5
Total revenue 2,705.1 2,433.0 272.1 11.2
Cost of sales (2,201.8) (1,897.0) (304.8) 16.1
Gross profit 503.2 536.0 (32.8) (6.1)
Exploration expenses 182.4 165.8 16.6 10.0
Operating profit 142.5 283.6 (141.1) (49.8)
EBITDA(3) 655.7 751.1 (95.4) (12.7)
Tax income net of special mining rights(4) (174.3) (59.7) (114.6) 192.0
Profit for the period 288.3 308.3 (20.0) (6.5)
Profit for the period, excluding post-tax Silverstream effects 282.9 295.1 (12.2) (4.1)
Basic and diluted earnings per share (US$/share) (4) 0.317 0.369 (0.052) (14.1)
Basic and diluted earnings per share, excluding post-tax Silverstream effects 0.310 0.351 (0.041) (11.7)
(US$/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 Tax income resulted from the favourable impact of the revaluation
of the Mexican peso vs. the US dollar.
5 The weighted average number of Ordinary Shares was 736,893,589 for
2023 and 2022. 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 beyond of our control, including a number
of macroeconomic variables, affect our financial results. These include:
Metals prices
The average realised silver price increased 8.8% from US$21.7 per ounce in
2022 to US$23.6 per ounce in 2023, while the average realised gold price rose
8.8% to US$1,957.7 per ounce in 2023. The average realised zinc by-product
price decreased 22.6% to US$1.18 per pound, while the lead by-product price
decreased 1.4% vs 2022 to US$0.95 per pound.
MX$/US$ exchange rate
The Mexican peso/US dollar spot exchange rate at 31 December 2023 was $16.89
per US dollar, compared to the exchange rate at 31 December 2022 of $19.36 per
US dollar. The 12.8% spot revaluation had a favourable effect on taxes and
mining rights.
The average spot Mexican peso/US dollar exchange rate appreciated by 11.7%
from $20.13 per US dollar in 2022 to $17.77 per US dollar in 2023, thus having
an adverse effect of US$113.3 million on the Group's costs denominated in
Mexican pesos (approximately 45% of total costs) when converted to US dollars.
Cost inflation
In 2023, cost inflation was 3.9%. The main components driving our cost
inflation are listed below:
Labour
Unionised workers received on average an 8.5% increase in wages in Mexican
pesos, while non-unionised employees received on average a 7.5% increase in
wages in Mexican pesos; when converted to US dollarsthis resulted in a
weighted average labour inflation of 22.5%.
Energy
Electricity
The weighted average cost of electricity in US dollars increased 4.8% from
US$9.26 cents per kW in 2022 to US$9.70 cents per kW in 2023, due to the
higher average generating cost of the Comisión Federal de Electricidad (CFE),
the national utility.
Diesel
The weighted average cost of diesel increased 17.0% in US dollars to 106.9 US
cents per litre in 2023, compared to 91.4 US cents per litre in 2022. 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-on-year change in unit price %
Lubricants 27.5
Other reagents 8.7
Steel for drilling 7.4
Tyres 5.0
Steel balls for milling (3.4)
Explosives (3.8)
Sodium cyanide (5.9)
Weighted average of all operating materials 1.0
The weighted average unit prices of all operating materials increased by 1.0%
over the year as the unit prices of lubricants and reagents continued to
increase in US dollar terms reflecting global inflationary pressures and
supply disruptions. This was partly offset by the decrease in the unit price
of sodium cyanide, explosives and steel balls for drilling. There has been no
significant impact on the unit cost of operating materials from the
revaluation of the Mexican peso/US dollar exchange rate as the majority of
these items are dollar-denominated.
Contractors
Agreements are signed individually with each contractor company and include
specific terms and conditions that cover not only labour, but also operating
materials, equipment, and maintenance, among others. Contractor costs are
mainly denominated in Mexican pesos and are an important component of
our total production costs. In 2023, 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 14.4% in US dollars, after considering the revaluation of the
Mexican peso vs the US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 12.5% on average in US
dollar terms.
Other costs
Other cost components include freight which increased by an estimated 26.6% in
US dollars and insurance costs which increased by 4.8% in US dollars, mainly
due to higher market premiums. The remaining cost inflation components
experienced an average inflation of 5.4% in US dollars vs 2022.
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
2023 2022 Amount Change %
US$ million US$ million US$ million
Adjusted revenue(5) 2,869.1 2,597.2 271.9 10.5
Metals prices hedging 0.0 (3.8) 3.8 0.0
Treatment and refining charges (164.0) (160.5) (3.5) (2.2)
Total revenue 2,705.1 2,433.0 272.1 11.2
5 Adjusted revenue is revenue as disclosed in the income statement
adjusted to exclude treatment and refining charges and metals prices hedging.
Adjusted revenue increased by US$271.9 million primarily driven by the higher
volumes of silver sold, and to a lesser extent, of lead and zinc sold and the
higher gold and silver prices. Treatment and refining charges increased 2.2%
as explained below. As a result, total revenue increased to US$2,705.1
million, an 11.2% increase against 2022.
Adjusted revenue(1) by metal
2023 2022
US$ million % contribution US$ million % contribution Volume Price Total net Change %
variance variance change
US$ million US$ million US$ million
Gold 1,186.2 41.4 1,114.2 42.9 (27.8) 99.8 72.0 6.5
Silver 1,310.6 45.7 1,089.2 41.9 128.1 93.3 221.4 20.3
Lead 121.5 4.2 106.6 4.1 16.4 (1.6) 14.8 14.0
Zinc 250.8 8.7 287.2 11.1 32.6 (69.1) (36.5) (12.7)
Total adjusted revenue 2,869.1 100.0 2,597.2 100.0 149.4 122.4 271.9 10.5
The increase in volumes of silver sold was primarily due to the ramp up of
production at Juanicipio. The volumes of gold sold decreased, mainly driven by
the lower production at Noche Buena as it approached the end of its mine life.
The volumes of lead and zinc sold benefitted from the higher contribution from
Juancipio and the higher volume of ore processed and ore grade at Saucito (for
further detail, see Review of operations). The total sale volume effect
(higher silver, zinc and lead volumes sold partly offset by lower gold volumes
sold), resulted in a positive effect on adjusted revenues of US$149.4 million,
representing 54.9% of the total variation. The remaining 45.1% of the increase
in adjusted revenues was primarily explained by the higher silver and gold
prices, mitigated by the lower price of zinc.
Changes in the contribution by metal were the result of the relative changes
in metals prices and volumes produced. The contribution of silver to total
adjusted revenues increased from 41.9% in 2022 to 45.7% in 2023, while that
for gold decreased from 42.9% in 2022 to 41.4% in 2023.
Adjusted revenue by mine
Herradura continued to be the greatest contributor to adjusted revenue,
representing 24.7% (2022: 24.4%). Saucito's contribution remained relatively
unchanged at 18.4%, whilst Juanicipio became the third most important
contributor to adjusted revenue, with its share increasing to 17.2% (2022:
10.0%). Fresnillo's contribution decreased to 16.7% in 2023 (2022: 18.3%),
albeit generating a similar level of adjusted revenue year on year. San
Julián's contribution to the
Group's adjusted revenue decreased to 14.1% in 2023 (2022: 16.0%) primarily
due to the lower volumes of silver and gold sold. Ciénega's contribution to
the Group's adjusted revenue decreased to 5.9% (2022: 6.9%) as a result of the
lower volumes of all metals sold, mitigated by the higher gold and silver
price. Noche Buena's contribution to adjusted revenue decreased to 3.0% in
2023 (5.5% in 2022).
The contribution by metal and by mine to adjusted revenues is expected to
change further in the future, as new projects are incorporated into the
Group's operations and as precious metals prices fluctuate.
2023 2022
(US$ million) % contribution (US$ million) % contribution Change %
Herradura 708.7 24.7 634.9 24.4 11.6
Saucito 527.8 18.4 485.9 18.7 8.6
Juanicipio 492.5 17.2 259.0 10.0 90.2
Fresnillo 479.6 16.7 475.8 18.3 0.8
San Julián (Veins) 205.1 7.1 175.1 6.7 17.1
San Julián (DOB) 201.3 7.0 242.5 9.3 (17.0)
Ciénega 169.3 5.9 180.3 6.9 (6.1)
Noche Buena 84.8 3.0 143.8 5.5 10.5
Total 2,869.1 100 2,597.2 100 11.6
16 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
2023 % contribution of each mine 2022 % contribution of each mine Change %
Silver (koz)
Juanicipio 15,318 27.4 8,697 17.3 76.1
Fresnillo 11,535 20.7 12,222 24.4 (5.6)
Saucito 10,387 18.6 10,620 21.2 (2.2)
San Julián (DOB) 6,544 11.7 8,117 16.2 (19.4)
San Julián (Veins) 5,368 9.6 4,502 9.0 19.2
Ciénega 3,864 6.9 4,344 8.7 (11.0)
Pyrites plant at Saucito 1,799 3.2 854 1.7 110.7
Herradura 615 1.1 777 1.5 (20.8)
Pyrites plant at Fresnillo 378 0.7 0 0.0 100.0
Noche Buena 5 0.0 9 0.0 (44.4)
Total silver (koz) 55,813 50,142 11.3
Gold (oz)
Herradura 358,210 59.2 351,156 56.7 2.0
Saucito 64,507 10.7 65,689 10.6 (1.8)
San Julián (Veins) 40,253 6.7 42,516 6.9 (5.3)
Noche Buena 39,203 6.5 71,921 11.6 (45.5)
Ciénega 33,407 5.5 35,275 5.7 (5.3)
Juanicipio 31,803 5.3 20,268 3.3 56.9
Fresnillo 30,234 5.0 28,277 4.6 6.9
Pyrites plant at Saucito 4,713 0.8 2,585 0.4 82.3
San Julián (DOB) 1,739 0.3 1,546 0.2 12.5
Pyrites plant at Fresnillo 718 0.1 4 0.0 >100
Total gold (oz) 604,787 619,237 (2.3)
Lead (t)
Fresnillo 19,441 33.5 19,667 39.2 (1.1)
Saucito 17,732 30.6 16,114 32.1 10.0
Juanicipio 11,783 20.3 4,487 8.9 162.6
San Julián (DOB) 6,363 11.0 6,677 13.3 (4.7)
Ciénega 2,682 4.6 3,267 6.5 (17.9)
Total lead (t) 58,001 50,212 15.5
Zinc (t)
Fresnillo 37,636 39.0 35,890 41.9 4.9
Saucito 27,211 28.2 23,604 27.6 15.3
Juanicipio 16,796 17.4 6,758 7.9 148.5
San Julián (DOB) 11,929 12.4 14,771 17.3 (19.2)
Ciénega 2,989 3.1 4,564 5.3 (34.5)
Total zinc (t) 96,561 85,587 12.8
Treatment and refining charges
Treatment and refining charges(3) are reviewed annually using international
benchmarks. Treatment charges per tonne of zinc concentrate increased in
dollar terms by 4.9%, while treatment charge per tonne of lead concentrate and
silver refining charges decreased by 10.5% and 41.2% vs 2022, respectively.
The higher treatment charges per tonne of zinc and increase in volumes of lead
and zinc concentrates shipped from our mines to Met-Mex, combined with the
lower treatment charges per tonne of lead and silver refining charges resulted
in a 2.2% increase in treatment and refining charges set out in the income
statement in absolute terms when compared to 2022.
Cost of sales
Concept 2023 2022 Amount Change %
US$ million US$ million US$ million
Adjusted production costs(4) 1,624.1 1,445.8 178.3 12.3
Depreciation 497.3 500.6 (3.3) (0.7)
Profit sharing 2.2 9.6 (7.4) (77.1)
Hedging (0.2) 0.0 (0.2) (100.0)
Change in work in progress 52.6 (61.6) 114.2 N/A
Unproductive costs including inventory reversal and unabsorbed production 25.9 2.6 23.3 896.2
costs(5)
Cost of sales 2,201.8 1,897.0 304.8 16.1
Cost of sales increased 16.0% to US$2,201.8 million in 2023. The US$304.8
million increase is due to a combination of the following factors:
• An increase in Adjusted production costs (+US$178.3 million;
+12.3%). I) the adverse effect of the 11.7% average revaluation of Mexican
peso vs. the US dollar (US$113.3 million); ii) underlying cost inflation
excluding the revaluation of the Mexican peso vs. US dollar (US$56.9 million)
- these two factors combined resulted in a cost inflation in US dollars of
12.4%, which increased adjusted production cost by US$170.2 million; iii)
costs from the start-up of the beneficiation plant and mine ramp up at
Juanicipio (US$43.4 million); iv) others (US$32.9 million); v) longer haulage
distances and increase in maintenance and contractors at San Julián (DOB and
Veins), Ciénega and Herradura (US$29.7 million); and vii) costs from the
start-up of the pyrites plant at Fresnillo (US$8.8 million). These adverse
effects were mitigated by: i) a decrease in mining costs as depositing
activities stopped at Noche Buena as part of the mine closure process which
started in May (-US$81.9 million) and cost reductions due to economies of
scale and operating efficiencies at Saucito and Fresnillo (US$24.7 million).
• The variation in the change in work in progress had an adverse
effect of US$114.2 million vs 2022. This resulted mainly from the decrease in
inventories of ore at Juanicipio, as the flotation plant was commissioned and
it ramped up to full capacity, and the decrease of gold content on the
leaching pads at Noche Buena. In 2022, there was a positive effect in relation
to the increase in inventories of ore at Juanicipio and gold content at the
leaching pads at Herradura.
• The variation in unproductive costs, which had an unfavourable
effect of (+US$23.3 million). In 2023, US$25.9 million was registered as
unproductive costs. These costs related mainly to the temporary stoppage of
activities at Herradura and fixed costs incurred at Noche Buena from the
conclusion of mining activities.
These negative effects were slightly mitigated mainly by:
• Profit sharing (-US$7.4 million) mainly due to lower profits.
• Depreciation (-US$3.3 million). This is mainly due to lower
depreciation at Noche Buena - as it approaches the end of its mine life and
the majority of the assets have been fully depreciated - and at San Julián
due to a lower depletion factor. This was partly offset by the higher
depreciation at Juanicipio.
3 Treatment and refining charges include the cost of treatment and
refining as well as the margin charged by the refiner.
4 Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and unproductive
costs. The Company considers this a useful additional measure to help
understand underlying factors driving production costs in terms of the
different stages involved in the mining and plant processes, including
efficiencies and inefficiencies, as the case may be, and other factors outside
the Company's control such as cost inflation or changes in accounting
criteria.
5 Unproductive costs primarily include unabsorbed production costs
such as non-productive costs from the temporary suspension of activities at
Herradura and non-productive fixed mine costs incurred at Noche Buena from the
finalisation of mining activities.
6 Cost inflation would have been 7.9% excluding the effect of the
Mexican peso revaluation (0.8%).
Cost per tonne, cash cost per ounce and all-in sustaining cost (AISC)
Cost per tonne is a key indicator to measure the effects of changes in
production costs and cost control performance at each mine. This indicator is
calculated as total production costs, plus ordinary mining rights, less
depreciation, profit sharing and exchange rate hedging effects, divided by
total tonnage processed. We have included cost per tonne hauled/moved as we
believe it is a useful indicator to thoroughly analyse cost performance for
the open pit mines.
Cost per tonne 2023 2022 % change
Fresnillo (standalone) US$/tonne milled 97.8 91.5 6.9
Fresnillo pyrites process US$/tonne milled 3.3 N/A N/A
Fresnillo Total US$/tonne milled 101.1 91.5 10.5
Saucito (standalone) US$/tonne milled 122.0 113.3 7.7
Saucito pyrites process US$/tonne milled 19.2 6.2 209.7
Saucito Total US$/tonne milled 141.2 119.5 18.2
Juanicipio US$/tonne milled 114.8 N/A N/A
San Julián (Veins) US$/tonne milled 109.0 91.0 19.8
San Julián (DOB) US$/tonne milled 50.0 44.8 11.6
Ciénega US$/tonne milled 135.8 116.3 16.8
Herradura US$/tonne deposited 24.2 19.7 22.8
Herradura US$/tonne hauled 5.4 4.7 14.9
Noche Buena US$/tonne deposited 13.1 13.9 (5.8)
Noche Buena US$/tonne hauled 3.9 3.9 0.0
Fresnillo: Cost per tonne increased 10.6% to US$101.1 in 2023, primarily
driven by the adverse effect of the 11.7% revaluation of the Mexican peso vs
the US dollar and underlying cost inflation. This was mitigated by the higher
volume of ore processed, as well as cost reductions due to economies of scale
and operating efficiencies.
Saucito: Cost per tonne increased 18.2% to US$141.2, mainly driven by the
adverse effect of the revaluation of the Mexican peso vs. the US dollar, cost
of raw material, underlying cost inflation and the increased consumption of
reagents at the pyrites plant. This was partly mitigated by the increased
volume of ore processed.
San Julián Veins: Cost per tonne increased 19.8% to US$109.0, primarily
driven by the adverse effect of the revaluation of the Mexican peso vs. the US
dollar, the underlying cost inflation and an increase in the use of
maintenance services and infrastructure contractors.
San Julián DOB: Cost per tonne increased 11.6% to US$50.0, mainly driven by
the adverse effect of the revaluation of the Mexican peso vs. the US dollar
and cost inflation.
Ciénega: Cost per tonne increased 16.8% to US$135.8, driven by the
revaluation of the Mexican peso vs. the US dollar, underlying cost inflation
and a lower volume of ore processed, an increase in development and a
greater use of infrastructure contractors.
Herradura: Cost per tonne of ore hauled increased 22.8%, primarily as a result
of the longer haulage distances and increase in maintenance, the adverse
effect of the revaluation of the Mexican peso vs. the US dollar, and
underlying cost inflation.
Noche Buena: Cost per tonne decreased to US$13.1 in 2023, primarily driven by
the lower mining costs incurred as extraction ended in 2Q23, partly offset by
the revaluation of the Mexican peso vs. the US dollar and underlying cost
inflation.
Cash cost per ounce, calculated as total cash cost (cost of sales plus
treatment and refining charges, less depreciation) less revenue from
by-products divided by the silver or gold ounces sold, when compared to the
corresponding metal price, is an indicator of the ability of the mine to
generate competitive profit margins.
Cash cost per ounce 2023 2022 % change
Fresnillo US$ per silver ounce 10.2 5.7 78.9
Saucito US$ per silver ounce 8.7 4.5 93.3
Juanicipio US$ per silver ounce 6.8 N/A N/A
San Julián (Veins) US$ per silver ounce 9.6 7.1 35.2
San Julián (DOB) US$ per silver ounce 11.8 6.9 71.0
Ciénega US$ per gold ounce 1,597.8 518.5 208.2
Herradura US$ per gold ounce 1,378.8 1,155.5 19.3
Noche Buena US$ per gold ounce 1,780.8 1,269.9 40.2
Fresnillo: Cash cost per silver ounce increased to US$10.2 (2022: US$5.7)
mainly due to the increase in cost per tonne, the lower silver ore grade, an
increase in mining rights and the lower zinc by-product credits. Margin per
ounce decreased 16.3% to US$13.4 (2022: US$16.0). Expressed as a percentage of
the silver price, it decreased to 56.8% (2022: 73.7%).
Saucito: Cash cost per silver ounce increased to US$8.7 per ounce (2022:
US$4.5 per silver ounce) mainly as a result of a higher cost per tonne,
increased mining rights, and lower zinc by-product credits per silver ounce.
Margin per ounce decreased 13.1% to US$14.9 in 2023 (2022: US$17.2). Expressed
as a percentage of the silver price, it decreased from 79.3% to 63.1%.
San Julián Veins: Cash cost per ounce of silver increased to US$9.6 per
ounce, mainly due to the higher cost per tonne and lower gold by-product
credits per silver ounce, and increased mining rights, mitigated by a higher
silver ore grade. Margin per ounce decreased 4.8% to US$14.0 (2022: US$14.7),
while margin expressed as a percentage of the silver price decreased from
67.5% in 2022 to 59.3% in 2023.
San Julián DOB: Cash cost increased to US$11.8 per ounce of silver driven by
a lower silver ore grade, the increase in cost per tonne and lower zinc
by-product credits per silver ounce. Margin per ounce decreased 20.3% to
US$11.8 (2022: US$14.8), while margin expressed as a percentage of the silver
price decreased from 68.2% in 2022 to 50.0% in 2023.
Ciénega: The increase in cash cost per gold ounce from US$518.5 in 2022 to
US$1,597.8 in 2023 was primarily due to a higher cost per tonne, increased
mining rights and a decrease in zinc and lead by-product credits per gold
ounce. Margin per ounce decreased 71.9% to US$359.9 in 2023
(2022: US$1,280.8). Expressed as a percentage of the gold price, the margin
decreased to 18.4% (2022: 71.2%).
Herradura: Cash cost per gold ounce increased to US$1,378.8 per ounce of gold,
mainly due to the higher cost per tonne. Margin per ounce decreased 5.6% from
US$643.8 to US$578.9, while margin expressed as a percentage of the gold price
decreased from 35.8% in 2022 to 29.6% in 2023.
Noche Buena: Cash cost per gold ounce increased to US$1,780.8, mainly due to
the consumption of inventories on the leaching pads, and a lower gold ore
grade, partly mitigated by a lower cost per tonne. Margin per ounce decreased
66.6% to US$176.9 in 2023 (2022: US$529.4). Expressed as a percentage of the
gold price, it decreased from 29.4% to 9.0% in 2023.
In addition to the traditional cash cost, the Group is reporting All-In
Sustaining Cost (AISC) in accordance with the guidelines issued by the World
Gold Council.
This cost metric is calculated as traditional cash cost plus on-site general,
corporate and administrative costs, community costs related to current
operations, capitalised stripping and underground mine development, sustaining
capital expenditures and remediation expenses.
We consider AISC to be a reasonable indicator of a mine's ability to generate
free cash flow when compared with the corresponding metal price. We also
believe it is a means to monitor not only current production costs, but also
sustaining costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
All-in sustaining cost (AISC)
AISC 2023 2022 % change
Fresnillo US$ per silver ounce 20.43 16.27 25.6
Saucito US$ per silver ounce 21.63 16.8 28.8
Juanicipio US$ per silver ounce 11.4 N/A N/A
San Julián (Veins) US$ per silver ounce 23.92 21.84 9.5
San Julián (DOB) US$ per silver ounce 14.50 8.79 65.0
Ciénega US$ per gold ounce 3,178.47 2,011.14 58.0
Herradura US$ per gold ounce 1,608.67 1,527.36 5.3
Noche Buena US$ per gold ounce 1,873.04 1,359.63 37.8
Fresnillo: All-in sustaining cost increased by 25.6% to US$20.4, explained by
the higher cash cost and an increase in capitalised development, partly
mitigated by the lower sustaining capex.
Saucito: All-in sustaining cost increased 28.8% to US$21.6 per ounce due to
the increase in cash cost and higher sustaining capex per ounce, partly offset
by a decrease in capitalised mine development cost per ounce.
San Julián Veins: All in sustaining cost increased 9.2% to US$23.9 per ounce
due to the increased cash cost and higher sustaining capex, partly mitigated
by lower capitalised mine development per ounce.
San Julián DOB: The 65.0% increase in all in sustaining cost was mainly
driven by the increase in cash cost, increased sustaining capex and a higher
capitalised development cost per ounce.
Ciénega: The US$1,167.4 per ounce increase in all-in sustaining cost was
primarily driven by the higher cash cost and, to a lesser extent, an increase
in mine development per ounce, partly offset by the lower sustaining capex.
Herradura: All-in sustaining cost increased 5.3% to US$1,608.7 per ounce,
mainly due to the higher cash cost.
Noche Buena: The 37.8% increase to US$1,873.0 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 6.1% from
US$536.0 million in 2022 to US$503.2 million in 2023.
The US$32.8 million decrease in gross profit was mainly due to: i) the
variation in change of inventories (-US$145.1 million); ii) the MXP/USD
revaluation effect (-$113.3 million); iii) the lower zinc and lead prices
(-US$70.4 million); iv) underlying cost inflation of 3.9% (-$56.9 million); v)
the decrease in silver equivalent ounces produced (-US$24.3 million); vi)
increase in unproductive costs primarily from the illegal stoppage at
Herradura and Noche Buena (-US$19.0 million); vii) others (-US$17.3
million); and viii) higher haulage distances and spare parts for maintenance
at Herradura (-US$16.5 million).These negative effects were mitigated by: i)
the start up of the beneficiation plant and ramp up of the Juanicipio mine
(US$206.2 million); ii) higher gold and silver prices (US$192.9 million); and
iii) the positive effect of the gold inventory uplift at Herradura (US$30.9
million).
On a per mine basis, Juanicipio became the largest contributor to the Group's
consolidated gross profit, reflecting the successful ramp up of production at
the flotation plant. Herradura dropped to second contributor, decreasing its
percentage share from 27.5% to 25.1%. The higher costs at Saucito and
Fresnillo significantly affected the gross profit at both mines, which
decreased by 18.4% and 41.6% vs 2022, respectively, thus decreasing their
contribution to the consolidated gross profit. San Julián's contribution to
the Group's gross profit remained broadly unchanged at 11.4% in 2023, despite
the 6.6% decrease in gross profit. The decrease in production volumes,
together with the cost pressures, significantly affected profitability at
Ciénega and Noche Buena.
Contribution by mine to consolidated gross profit, excluding hedging gains and
losses
2023 2022 Change
US$ million % contribution US$ million % contribution US$ million %
Juanicipio 202.8 41.0 132.8 24.8 70.0 52.7
Herradura 124.2 25.1 147.1 27.5 (22.9) (15.6)
Saucito 80.4 16.2 98.5 18.4 (18.1) (18.4)
Fresnillo 61.2 12.4 104.8 19.6 (43.6) (41.6)
San Julián 56.3 11.4 60.3 11.3 (4.0) (6.6)
Noche Buena (0.1) 0.0 3.3 0.6 (3.4) (103.0)
Ciénega (29.8) (6.0) (11.3) (2.1) (18.5) 163.7
Total for operating mines 495.0 100 535.5 100 (40.5) (7.6)
Metal hedging and other subsidiaries 8.2 0.5 7.7 >100.0
Total Fresnillo plc 503.2 536.0 (32.8) (6.1)
Administrative and corporate expenses
Administrative and corporate expenses increased 36.5% from US$94.1 million in
2022 to US$128.4 million in 2023, mainly due to the adverse effects of the
revaluation of the Mexican peso vs the US Dollar on administrative expenses
denominated in pesos, including personnel salaries, and the increase resulting
from the review of the Shared Services Agreement with Peñoles in line with
the increased services provided.
Exploration expenses
Business unit/project (US$ million) Exploration expenses 2023 Exploration expenses 2022 Capitalised expenses 2023 Capitalised expenses 2022
Fresnillo 22.9 12.3 - -
San Julián 19.6 24.6 - -
Saucito 13.5 12.0 - -
Juanicipio 7.3 11.7 - -
Ciénega 6.7 7.2 - -
Herradura 5.7 4.8 - -
Noche Buena 0.7 1.4 - -
Guanajuato 18.6 11.6 1.6 1.0
Orisyvo 6.7 4.0 0.6 -
Valles (Herradura) 4.3 5.8 - -
Centauro Deep 0.4 0.5 - -
Others 76.1 69.9 1.3 0.8
Total 182.4 165.8 3.5 1.8
As expected, exploration expenses increased by 10.1% from US$165.8 million in
2022 to US$182.4 million in 2023, 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$16.7 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; together with the adverse effect of the revaluation
of the Mexican peso vs. the US dollar. An additional US$3.5 million was
capitalised, mainly relating to exploration expenses at the Guanajuato
project. As a result, risk capital invested in exploration totalled US$185.9
million in 2023, compared to US$167.6 million in 2022 (of which US$1.8 million
was capitalised). This represents a year-on-year increase of 11.0%.
EBITDA
2023 2022 Amount Change %
US$ million US$ million US$ million
Profit from continuing operations before income tax 114.0 248.6 (134.6) (54.1)
- Finance income (50.6) (26.5) (24.1) 90.9
+ Finance costs 88.8 81.6 7.2 8.8
- Revaluation effects of Silverstream contract (7.7) (18.8) 11.1 (59.0)
- Foreign exchange loss, net (2.0) (1.4) (0.6) 42.9
- Other operating income (35.3) (71.9) 36.6 (50.9)
+ Other operating expense 51.2 38.8 12.4 32.0
+ Depreciation 497.3 500.6 (3.3) (0.7)
EBITDA 655.7 751.1 (95.4) (12.7)
EBITDA margin 24.2 30.9 - -
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 2023,
EBITDA decreased 12.7% to US$655.7 million primarily driven by the lower gross
profit and higher administrative and exploration expenses. As a result, EBITDA
margin expressed as a percentage of revenue decreased, from 30.9% in 2022 to
24.2% in 2023.
Other operating income and expense
In 2023, a net loss of US$15.8 million was recognised in the income statement
mainly as a result of the illegal extraction of ore from the leaching pads at
Soledad-Dipolos by third parties. This compares unfavourably to the net gain
of US$33.1 million recognised in the income statement in 2022 which was mainly
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
2023 income statement was a gain of US$7.7 million (US$48.4 million
amortisation profit and US$40.7 million revaluation loss), which compared
negatively to the net gain of US$18.8 million registered in 2022. The negative
revaluation was mainly driven by a decrease in the production plan following
an update to the Sabinas silver reserves and a lower inflation forecast.
Since the IPO, cumulative cash of US$809.9 million has been received vs US$350
million initially paid in 2007. The Group expects that further unrealised
gains or losses related to the valuation of the Silverstream contract 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$38.2 million compared favourably to the US$55.2
million recorded in 2022. The US$17.7 million decrease was primarily due to
the positive effect of the increased interest gained in short term deposits
and investments. In addition, the 2023 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 2023, the Group capitalised US$2.1
million of borrowing costs (2022: US$8.5 million).
Foreign exchange
A foreign exchange gain of US$2.0 million was recorded in 2023, which compared
favourably to the US$1.4 million gain in 2022.
The Group also enters into certain exchange rate derivative instruments as
part of a program to manage its exposure to foreign exchange risk associated
with the purchase of equipment denominated in Euro (EUR). As of December 31st
2023, the total EUR outstanding net forward position was EUR 5.08 million with
maturity dates through September 2024. Volumes that expired during the second
half of 2023 were EUR 7.07 million with a weighted average strike of 1.1043
USD/EUR, which have generated a marginal result in the period of -US$0.163
million.
Taxation
Tax income for the period was US$205.0 million, which compared favourably to
the US$67.4 million tax income in 2022. The effective tax rate, excluding the
special mining rights, was -179.8%, compared to the 30% statutory tax rate.
The reason 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 12.8% revaluation of the Mexican peso/US
dollar spot exchange rate in 2023 versus the 5.9% revaluation in 2022 on the
tax value of assets and liabilities (-US$214.5 million); and ii) the inflation
rate (Mexican Consumer Price Index), which impacted the inflationary uplift of
the tax base for assets and liabilities (-US$54.8 million).
The reason for the positive effective tax rate in 2022 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 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 iii) the benefit from the lower border
zone tax which applied to Herradura and Noche Buena operations (-US$17.5
million).
Mining rights in 2023 was US$30.8 million compared to mining rights of US$7.7
million charged in 2022.
Profit for the period
Profit for the period decreased from US$308.3 million in 2022 to US$288.3
million in 2023, a 6.5% 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$295.1 million to US$282.9 million, a 4.1% decrease.
Profit due to non-controlling interests increased from US$36.4 million in 2022
to US$54.4 million in 2023 reflecting the higher profit generated at
Juanicipio, where MAG Silver owns 44% of the outstanding shares.
Profit attributable to equity shareholders of the Group decreased from
US$271.9 million in 2022 to US$233.9 million in 2023, down 14.0%.
Cash flow
A summary of the key items from the cash flow statement is set out below:
2023 2022 Amount Change %
US$ million US$ million US$ million
Cash generated by operations before changes in working capital 649.3 743.1 (93.8) (12.6)
Decrease/increase in working capital 20.6 (66.1) 86.7 (131.2)
Taxes and employee profit sharing paid (244.0) (174.7) (69.3) 39.7
Net cash from operating activities 425.9 502.2 (76.3) (15.2)
Silverstream contract 40.2 33.4 6.8 20.4
Capital contributions and loans by minority shareholders (0.6) 8.3 (8.8) N/A
Proceeds from the layback agreement 22.8 15.0 7.8 52.0
Purchase of property, plant and equipment (483.4) (592.1) 108.7. (18.4)
Repayment of interest-bearing loans (317.9) - (317.9) 100.0
Dividends paid to shareholders of the Company (108.4) (202.0) 93.6 (46.3)
Financial expenses and foreign exchange effects (6.4) (27.2) 20.8 (76.5)
Net (decrease)/increase in cash during the period after foreign exchange (434.5) (266.2) (168.3) 63.2
differences
Cash and other liquid funds at 31 December(1) 534.6 969.1 (434.5) (44.8)
Cash generated by operations before changes in working capital decreased by
12.6% to US$649.3 million, primarily due to the lower profits generated in the
year. Working capital decreased US$20.6 million, mainly due to: i) a decrease
in ore inventories of US$54.6 million; and ii) a US$10.4 million decrease in
prepayments mainly to contractors. This was partly offset by a US$45.6 million
increase in trade receivables from related parties.
Taxes and employee profit sharing paid increased 39.7% vs 2022 to US$244.0
million mainly due to an increase in provisional tax payments paid in 2023;
and the higher final income tax paid in 2023, net of provisional taxes paid,
corresponding to the 2022 tax fiscal year. This was partially offset by a
decrease in mining rights payments and lower profit sharing paid.
As a result of the above factors, net cash from operating activities decreased
15.2% from US$502.2 million in 2022 to US$425.9 million in 2023.
The Group received other sources of cash, including: i) the proceeds of the
Silverstream contract of US$40.2 million; and ii) proceeds from the layback
agreement granting Orla the right to expand the Camino Rojo oxide pit onto
Fresnillo's mineral concession of US$22.8 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$483.4
million. Capital expenditures for 2023 are described below:
Purchase of property, plant and equipment
2023
US$ million
Saucito mine 125.1 Mine development, purchase of in-mine equipment, deepening of the Jarillas
shaft and tailings dam.
Fresnillo mine 97.8 Mine development and mining works, purchase of in-mine equipment, deepening of
the San Carlos shaft and tailings dam.
Juanicipio mine 82.2 Mine development and equipment.
San Julián Veins and DOB 74.8 Mining works, tailings dam and purchase of in-mine equipment.
Herradura mine 56.9 Stripping, carbon in column project and purchase of in-mine equipment.
Ciénega mine 43.8 Mining works, purchase of in-mine equipment and construction of tailings dam.
Other 2.8 Minera Bermejal.
Total purchase of property, plant and equipment 483.4
ii) Dividends paid to shareholders of the Group in 2023 totalled US$108.4
million, a 46.3% decrease vs 2022, in line with our dividend policy which
includes a consideration of profits generated in the year. The 2023 payment
included the 2022 final dividend of 13.3 cents per share paid in May 2023,
totalling US$98.0 million, and the 2023 interim dividend paid in September of
US$10.3 million.
iii) Financial expenses and foreign exchange effects of US$6.4 million, a
decrease of 76.5% vs 2022. Financial expenses in 2023 and 2022 included:
i) interest paid on the US$317.9 million from the US$800 million 5.500%
Senior Notes due November 2023; and ii) interest paid on the 4.250% Senior
Notes due 2050. In addition, financial expenses in 2022 included the interests
paid in relation to the voluntary amendment to the income tax and mining
rights' treatment of the stripping costs and the deduction of exploration
expenses.
The sources and uses of funds described above resulted in a decrease in net
cash of US$434.5 million (net decrease in cash and other liquid assets), which
combined with the US$969.1 million balance at the beginning of the year
resulted in cash and other liquid assets of US$534.6 million at the end of
December 2023.
Balance sheet
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds(1) of US$534.6 million as of 31
December 2023, despite decreasing 44.8% vs 31 December 2022. Taking into
account the cash and other liquid funds of US$534.6 million and the US$839.0
million outstanding Senior Notes, Fresnillo plc's net debt was US$304.4
million as of 31 December 2023. This compares to the net debt of US$198.7
million as of 31 December 2022. Considering these variations, the balance
sheet at 31 December 2023 remains strong, with a net debt/EBITDA ratio of
0.46x(2).
Inventories decreased 9.3% to US$532.7 million mainly due to the decrease of
inventories of gold content, at the leaching pads and to be processed at the
dynamic leaching plants at Herradura, as well as the decreased inventories at
Juanicipio, partly offset by increased inventories of operating materials and
spare parts.
Trade and other receivables increased 19.3% to US$482.4 million as a result of
an increase in receivables to Met-Mex and in value added tax receivables.
The change in the value of the Silverstream derivative from US$511.5 million
at the end of 2022 to US$482.3 million as of 31 December 2023 reflects
proceeds of US$36.9 million corresponding to 2023 (US$31.8 million in cash
and US$5.1 million in accounts receivables) and the Silverstream effect in the
income statement of US$7.7 million.
The net book value of property, plant and equipment remained broadly stable at
US$2,860.9 million at 31 December 2023.
The Group's total equity was US$4,067.2 million as of 31 December 2023, a 3.8%
increase vs 31 December 2022. This was mainly explained by the increase in
retained earnings, reflecting the 2023 profit.
Dividends
Based on the Group's 2023 performance, the Directors have recommended a final
dividend of 4.20 US cents per Ordinary Share, which will be paid on 29 May
2024 to shareholders on the register on 19 April 2024. 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 1.40 US cents per share
amounting to US$10.3 million. This final dividend is lower than the previous
year due to the decrease in profits in 2023. It remains in line with the
Group's dividend policy to pay out 33-50% of the profit attributable to equity
shareholders of the company after making certain adjustments to exclude
extraordinary non-cash effects in the income statement, which this year in
particular included taking out the income tax benefit resulting from the
effect of the revaluation of the Mexican peso on the tax value of assets and
liabilities, which increases in dollar terms the deduction of future
depreciation expenses (in peso terms, which is used for Mexican tax purposes,
there is no impact). However, this favourable effect in dollar terms could be
reversed in the future if the Mexican peso devalues.
As 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. The 2023 final dividend
will be subject to this withholding obligation.
2 Net debt is calculated as debt at 31 December 2023 less Cash and
other liquid funds at 31 December 2023 divided by the EBITDA generated in the
last 12 months.
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 effective management of risk is integral to good management
practice and fundamental in living up to our purpose and delivering our
strategy. By understanding, prioritising and managing risk, we safeguard our
people, our assets, our values and reputation, and the environment, and
identify opportunities to best serve the long-term interests of all our
stakeholders.
· Understanding our risks and developing appropriate responses is
critical to our future success. We are therefore committed to an effective,
robust system of risk identification and response, in order to support the
achievement of our objectives.
Our approach
Effective risk management enables us to manage both the threats and the
opportunities associated with our strategy, operations and projects. 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.
At the front-line operational level, all employees are required and empowered
to identify and manage the risks that arise within their area of
responsibility. This governance structure supports our risk management
framework and enables effective management of material risks.
The top risks of 2023 range across the spectrum of geopolitical, security,
operational, safety, regulatory, cyber, climate change and ESG risks. We have
implemented risk techniques and processes to identify new risks associated
with these topics, while also analysing their impact on all our risks. Our
risk management methodology is applied to all our operating units, projects,
exploration activities and support areas so that we have a comprehensive view
of the uncertainties that could affect the achievement of our strategic goals.
The framework is based on ISO 31000 and COSO ERM.(( 2 (#_ftn2) ))
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. All 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 new mining law and the labour law in Mexico, security close to our
business units, the increase in the cost of operations, geopolitical
instability, our licence to operate and climate disruption all 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 the 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 HSECR
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 gathered, and adjustments are made according to the factors
influencing each risk. In addition, the HSECR Committee continues to meet
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 ratings:
Principal Risks Emerging Risks Operational Risks Cybersecurity Risks ESG Risks Legal & Compliance Risks Finance Risks
Potential actions by the government (political, legal and regulatory) Geopolitical instability High potential incident and critical risk (e.g., rock fall, lack of Data corruption Environmental Risks Employee behaviour and ethics Market Risk
ventilation, electrocution, etc.)
(e.g., forest fires, heat waves, floods, etc.) (foreign currency, commodity price, interest rate, inflation rate and equity
price risks)
Security Water stress and drought Business continuity risks Unauthorised access Sustainability Risks Fraud (bribery and corruption) Credit risk
(e.g., future risk from carbon pricing-scenario analysis)
Global macroeconomic developments (energy and supply chain disruptions, Transition to a low-carbon future (decarbonisation) Increased operating costs and critical input supply shortages Breach and theft of information Corporate Governance Risks Environmental legal requirements Liquidity risk
inflation, productivity and cost)
(e.g., ESG scores)
Impact of metals prices (commodity prices and exchange rates) Technological disruption Productivity and target achievement Business interruption TCFD Provisions Occupational health and safety requirements
(physical and transitional risks)
Human Resources (attract and retain requisite skilled people/talent crisis) Future of the workforce Ability to access and replace mineral reserves (mine development) Lack of ownership of cybersecurity Corruption and illegal practices
Cybersecurity Increased expectations of society and investors Tailings storage Non-compliance with regulations Other licences and authorisations
Projects (performance risk) Replacement on depletion of ore reserves Follow-up to the most relevant findings determined by Internal Auditing (red Health and safety incidents
flags)
Safety (incidents due to unsafe acts or conditions could lead to injuries or Pandemics and infectious diseases Stoppage or loss of operations
fatalities)
Union Relations (labour relations)
Access to Land
Licence to Operate (community relations)
Exploration (new ore resources)
Climate change
Tailings dams (overflow or collapse of tailings deposits)
Environmental Incidents (cyanide spills and chemical contamination)
Risk Rating
Very high High Medium Low Very low
Risk Governance Basis
The Board and the Executive Committee oversee our principal risks, and the
Audit Committee and Internal Audit monitor the overall effectiveness of our
risk management and internal controls framework. In addition, the operational
level of our mining units also oversee risk management in their areas of
responsibility, with insights from assurance and compliance activities. This
process is explained in the following executive table:
Three lines of defence Responsibilities Accountability to
1st. - Unit leaders including mine, exploration and project personnel, as well Identifying, managing, verifying and monitoring risks and controls. Management
as leaders of corporate and support areas.
2nd. - 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.
3rd. - Group Internal Audit. Providing independent verification that risks are being managed and internal Board and Committees
controls are being operated effectively
*A virtual structure in Peñoles that coordinates and provides technical and
administrative services to Fresnillo plc and subsidiaries.
Risk assurance Risk management system Risk management framework
-Assurance for management that risks and critical controls are being managed -Group roles and responsibilities, standards, procedures and guiding
effectively. principles for effective, consistent and integrated risk management.
Capability and culture Risk analysis and management
-Risk identification capability built through coaching and training for -The measurement, monitoring and management of risks requires that the
leaders and teams across our business. performance of critical controls is also measured, monitored and managed.
-Risk culture of active management of risk is embedded into how we run our -Risks and their control information are current, transparent and connected.
business.
-Leader-led analysis and management.
-Risk culture fosters collective ability to identify and understand, openly
discuss and respond to current and future risks.
Systems, technology and data analytics Reporting oversight and insights
-Leverage systems and data analytics to support risk analysis, management and -Management´s oversight is supported by proactive reporting and effective
oversight. escalation.
-Decision-making is supported by connected and insightful risk analysis.
· Our strategy, values and risk appetite inform and shape our risk
management framework. We embed risk management at every level of the
organisation to effectively manage threats and opportunities to our business
and host communities, as well as our environmental impact.
· Our risk management process can be described as a
Plan-Do-Check-Act System. We monitor how well we manage material risks to our
objectives by checking and verifying the implementation of our response plans
(actions and controls) and our actual performance against objectives. We
enhance the check and verify step by applying the three lines of defence
approach.
Our risk management system
ACT
PLAN
CHECK
DO
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 analysis 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.
Disruption to global markets post COVID-19 lockdowns, as well as the impact
from Russia's war with Ukraine, Hamas' war with Israel and attacks on
commercial shipping in the Red Sea by Iran-backed Houthi rebels, has exposed
vulnerabilities in the security of supply of certain raw materials for
industrial production. The mining sector, like many others, faces a new
reality of having to mitigate inflationary impacts across a range of inputs
while dealing with macroeconomic shocks that may impact operations and costs.
Global trade restrictions are likely to further impede supply chains with
certain constraints on the supply of strategic commodities being experienced
at an operational level. Rising geopolitical tensions and conflicts are likely
to further exacerbate supply blockages for goods and services and will
contribute to cost increases.
Gold and silver resources are finite, and this presents challenges for growth
that requires investment in exploration and the maintenance of high-quality
mines.
Mining is a long-term business, and so our strategy aims to create sustained
value over the life of our mining operations and beyond. This involves careful
allocation of key resource inputs - the natural, human, intellectual,
financial, manufactured, and social and relationship capitals - which are
essential to achieving this aim.
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 risk management framework, during 2023 we carried
out activities to: (i) identify new emerging risks in light of geopolitical
instability, technological disruption and climate change; (ii) re-assess the
emerging risks identified in 2022; (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. These activities involved workshops, surveys and meetings with the
Executive Committee, business unit leaders, support and corporate areas, as
well as suppliers, contractors and customers. We also consulted third-party
information from global risk reports, academic publications, risk consulting
experts and industry benchmarks.
Our risk management standards promote communication of up-to-date information
on the Company and industry risks, trends and emerging risks. This year's
emerging risk assessment determined the two most exposed emerging risks to be:
"Geopolitical instability" and "Water stress and drought".
Relevant emerging risks are discussed below:
Emerging Risk Description Potential Impact Mitigations Actions Time Scale
1 Geopolitical instability Current global geopolitical tensions, such as the war between Russia and Disruptions and shortages in the supply chain of critical mining inputs such Inventory control in the mining units to plan purchases in a timely manner and < 5
Ukraine and Hamas and Israel, the problems between Taiwan and China, the as cyanide, ammonia, spare parts, equipment, etc. maintain sufficient stock to guarantee operations.
(Linked to Global macroeconomic development Principal Risk) US-China tariff issues as well as the upcoming US presidential election and
Years
attacks on commercial shipping in the Red Sea by Iran-backed Houthi rebels, Increases in the prices of key inputs such as steel, diesel, cement, etc. Strict control of operating costs to avoid inefficiencies.
may affect our operations and projects.
Volatility in the prices of precious metals and the Mexican peso/US dollar
exchange rate.
2 Water stress and drought Increased depletion of water resources to meet the demand for water Water is critical to mining processes. Without this natural resource, we Strict control and monitoring of water concessions are maintained and actions < 5
consumption in a region, coupled with extreme heat waves in desert regions. cannot extract gold and silver. are envisaged to ensure water for the following years.
(Linked to Climate Change Principal Risk)
Years
Water use efficiencies are generated and water leaving the operation is
reused.
A dedicated team was created to manage all water related topics, including the
impact of climate change.
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 decarbonisation pathways in scenarios, and Global Circulation Models (GCM) under several Representative Years
mitigation strategy. However, we consider this risk to be an emerging risk due 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 investment support for 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 therefore 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 technologies. Years
5 Future of the workforce Create a culture of talent under an inclusive, empowered and confident A lack of experienced and skilled operators, and of talent in some areas of The Human Resources department has a highly specialised training programme in < 5
culture, together with the appropriate career paths, to generate a the mines and projects such as planning, maintenance and safety is place for key roles in our operations, as well as a training programme to
(Linked to Human Resources Principal Risk) future-ready workforce. anticipated. There is a need to develop personnel to fill these positions in develop personnel focused on filling vacant positions. Years
the future so that we have the right capabilities in place to operate the
mines.
6 Increasing societal and investor expectations There is increasing expectation and focus on social equality, fairness and The increasing focus on ESG has the potential to shape the future of the We work hard to respond to investor and societal requests and comments and < 5
sustainability. Financial institutions are also placing greater emphasis on mining industry, supply cost structures, demand for global commodities and promote action plans to meet their expectations. A number of initiatives
environmental, social and governance (ESG) considerations when making capital markets. While this presents us with opportunities for portfolio and demonstrate our progress. We were also listed among the world's most ethical Years
investment decisions. product differentiation, it also has the potential to impact how we operate. companies by Ethisphere and placed second in the Corporate Integrity Ranking
in Mexico.
7 Replacement on depletion of ore reserves The inability to replace depleted ore reserves in key business units through By not replacing ore reserves with new discoveries, the company's production A number of interesting exploration projects such as Orisyvo, Rodeo and > 5
exploration, projects or acquisitions. capacity and eventually its operation would be diminished. Guanajuato could replace the mineral reserves that are currently being
(Linked to Exploration Principal Risk) depleted. We also have several camps that explore new territories every day in Years
search of minerals in Mexico, Peru and Chile.
8 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 continually monitored by the medical team and < 5
which most people do not have immunity. of employees and stop the Company's activities. For example, a new epidemic of receive medical examinations to ensure that there are no outbreaks of
infectious cases emerged in China at the end of 2023, which could possibly contagion. Years
lead to another global pandemic.
Our medical teams monitor international news and medical advances, in order to
be prepared for a new pandemic.
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.
· We define a principal risk as a risk or combination of risks that
would threaten the business model, future performance, solvency or liquidity
of Fresnillo plc. These risks are subject to our normal procedures to
identify, implement and oversee appropriate mitigation actions, supported by
internal audit work to provide assurance over the status of controls or
mitigating actions. These principal risks are considered over the next three
years as a minimum, but we recognise that many of them will be relevant for a
longer period.
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 Fresnillo
plc risk universe (185 individual risks grouped into 33 risk groups) 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 and Hamas-Israel wars, climate disruptions, the effects of
global inflation, and the security, safety and environmental situations close
to our operations, it has been necessary to reassess the principal risks and
reorder their materiality, likelihood and impact, as well as to reassess
related mitigation actions. During the first half of 2023, 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.
Overview of the 2023 risk assessment exercise:
Analysis Survey Trend comparison and review Added value
Risk identified and assessed
10 business workshops. 400+ colleagues in operations, exploration, projects, corporate and support 5 International institutions specialising in risks were consulted. (Aon, AXA, 200 colleagues were trained in basic risk topics.
areas of Baluarte Minero, including Internal Audit. Swiss Re, Hannover Re and Hawcroft)
(Director and manager level)
150 colleagues were trained in advanced risk topics.
10 risk scenarios were built by mining industry risk specialists.
50 interviews with risk owners.
(Managers and leaders at units)
50 colleagues were trained in climate change risks and TCFD framework.
25 gold and silver mines (15 in Mexico and 10 elsewhere in the world) were
consulted regarding their risks.
15 workshops analysing the impacts of risks. (With the areas of Security, 4 specific topics were included in the risk analysis: geopolitical
Safety, Compliance, Legal and ESG)
instability; fraud and compliance; climate change and TCFD risks; and business
8 consulting firms' risk reports (including Marsh, Zurich, EY, PwC, KPMG and continuity risk.
Deloitte) were reviewed.
5 critical processes mapped and reviewed for impact and likelihood (TSFs,
Projects, Environmental incidents, Union and Exploration)
8 risk analysis methodologies used. (ISO-31000, ISO-22301, Markov, Bowtie,
FMEA Model, Monte Carlo, RACI Matrix, Cause and consequence analysis)
As a result of the annual risk assessment for the year 2023, the following
main results were determined:
· The risk of "Potential actions by the government" is assessed as
the main risk for the Company, exacerbated by the recent decisions of the
current government, such as: (a) the new Mining Law published in May 2023,
which complicates and limits mining activities in Mexico; (b) the restriction
on the granting of new mining concessions; (c) the increase in tax audits and
requirements; (d) the labour reform that prohibits outsourcing, generating
complications in relations with contractors; (e) delays and complications in
obtaining permits, licences and authorisations; (f) the implementation of
policies that support the emission of carbon into the atmosphere and reduce
the development of renewable energies; (g) the reform of the energy law 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 (h) 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 and Juanicipio mines (business units located in Fresnillo,
Zacatecas, with the highest perception of insecurity in the country according
to the reports published by INEGI(( 3 (#_ftn3) ))); the increase in
high-impact crimes (homicide, kidnapping and extortion) in Zacatecas, Sonora
and Guanajuato; and the sale and consumption of drugs inside the mines. Thefts
of equipment, cars, machinery, tools and materials and threats of theft of
ore, concentrates and mine and project assets have also increased.
· The "Labour relations" risk has always been a topic of close
attention, especially given the changes to the Federal Labour Law in 2021,
which allows for two or more unions in the Company. This year, "Union" risk
has moved up in the likelihood range due to the labour conflict that occurred
at the Herradura mine in April and May 2023. The conflict is under control and
did not materially impact the operation of the mine; however, there are legal
issues that continue to be processed and could have negative results for the
Company.
· Critical risks in mining operations such as rock falls, loss of
vehicle control, equipment interaction, energy contact, etc. have increased in
the last three years. This is partly due to more reporting and follow-up of
cases. This year we unfortunately had four fatalities, one because of rock
falls inside the mine and three related to contact with heavy equipment.
Because of this situation, the "Safety" risk has increased in likelihood.
· 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. This year we
are including the risk "bribery and corruption" in the category of Fraud
Risks. In all cases, internal controls and timely follow-up as well as
preventive actions have been increased. Early detection actions were also
reinforced. The internal audit area considered these results in its annual
programme 2024.
· During 2023 we worked together with the ESG Department and
Financial controllership to analyse and assess the "Climate Change" risk, and
the critical risks and opportunities 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".
· In terms of "Insurable risks", we made significant progress in
2023. For example, a team was created to manage Fresnillo plc's assets, one of
the duties of which is to keep the asset inventory up to date and align
operational processes relating to the maintenance of critical equipment. This
makes it easier to ensure that the most important assets of the operation and
the company are insured. We also reviewed the insurance policies for the
assets of the business units to ensure that they are adequately considered, in
particular the coverage related to assets (heavy mobile equipment &
property) that could have a significant impact on financial issues and
business interruption in case of loss. With the support of the external
auditor specialised in business continuity ("Hawcroft Consulting International
Group"), the seven units of the Company were inspected during 2023, obtaining
acceptable ratings in all cases and reducing the degree of risk for Fresnillo
plc. From 2021 to 2023, 234 recommendations related to business continuity
risks have been resolved.
· This year, Fresnillo plc's "Individual Risks" increased from 130
to 185 risks, which are grouped into 33 risk groups, because of the analysis
of fraud, water scarcity and management, business continuity, climate change
(TCFD) and cyber security risks.
Risk appetite
· Defining risk appetite is key in embedding the risk management
system into our organisational culture.
· The Company's risk appetite statement helps to align our strategy
with the objectives of each business unit, clarifying which risk levels are,
or are not, acceptable.
· It promotes consistent decision-making on risk, allied to the
strategic focus and risk/reward balance approved by the Board.
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 (February 2024)
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.
Relative position Risk Risk Risk Level Risk Focus**
appetite Velocity*
2023 v. 2022
2023 2022
1 1 Potential actions by the government (political, legal and regulatory) Low Very high Increasing High Strategic, Economic, ESG (V)
2 2 Security Low Very high Stable High Operational, ESG (V)
3 3 Global macroeconomic developments (energy and supply chain disruptions, Low High Stable High Economic, Operational
inflation, productivity and cost)
4 4 Impact of metals prices (commodity prices and exchange rates) High High Stable High Economic (V)
5 5 Human Resources (attract and retain requisite skilled people/talent crisis) Medium High Stable Medium Strategic, Operational
6 6 Cybersecurity Low High Stable High Strategic, Operational
7 7 Projects (performance risk) Medium High Stable Medium Economic, Operational
8 10 Safety (incidents due to unsafe acts or conditions could lead to injuries or Low High Increasing High Operational, ESG (V)
fatalities)
9 11 Union Relations (labour relations) Low High Increasing Medium Operational, ESG (V)
10 8 Access to Land Medium Medium Stable Medium Strategic, Operational (V)
11 9 Licence to Operate (community relations) Low Medium Stable Medium Operational, ESG
12 12 Exploration (new ore resources) High Medium Stable Low Operational, Strategic
13 15 Climate change Medium Medium Increasing Low Operational, Strategic, ESG (V)
14 13 Tailings dams (overflow or collapse of tailings deposits) Low Medium Stable High Operational, ESG (V)
15 14 Environmental Incidents (cyanide spills and chemical contamination) Low Medium Stable High Operational, ESG (V)
Risk rating
Medium High Very High
*Risk Velocity: **Focus:
High: Impact within 6 months of risk occurring Strategic - risks arising from uncertainties that may impact our ability to
achieve our strategic objectives.
Medium: Impact between 6 and 12 months of risk occurring
Economic - risks that directly impact financial performance and realisation of
Low: Impact after more than 12 months of risk occurring future economic benefits.
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.
(V) Risks that were considered for the viability assessment
Social - risks arising from our business that have the potential to impact on
society, including health and safety.
Governance - risks arising from our workplace culture, business conduct and
governance.
ESG - Environmental + Social + Governance.
Risk heat map
The risk impact scale has five levels of Probability and Impact:
Probability
Level Quantitative Qualitative
Almost certain Once a week Happens often
Likely Once a month or more Could happen easily and has occurred under similar conditions
Possible Once or twice a year Could happen and has happened in similar conditions
Unlikely Once or twice every 10 years Has not happened yet, but could happen
Rare Once or twice every 50 years Only in extreme circumstances
Impact
Level EBITDA / Safety and Health / Environment / Communities / Legal / Reputation
Very High Any incident with an impact of more than 50% of EBITDA.
Accident-causing multiple fatalities or permanent disabilities.
Irreversible environmental damage or serious incident that impacts a
community, with long-term effects.
Regulatory breaches which may lead to a revocation of operating permits or a
financial impact exceeding 20% of EBITDA.
Severe impact on Company's international reputation with long-term effects.
High Any incident with an impact of between 20% and 50% of EBITDA.
Accident that causes a single fatality or permanent disability.
Reversible environmental damage or major incident affecting a community, with
medium-term effects.
Regulatory breaches which may lead to a criminal conviction or a financial
impact of more than 20% of EBITDA.
High impact on the Company's national reputation with medium-term effects.
Moderate Any incident with an impact of between 10% and 20% of EBITDA.
Accident resulting in lost time.
Moderate environmental impact or small incident that affects a community, with
short-term effects.
Regulatory breaches which may lead to criminal charges or a financial impact
of between 0.05% and 3% of EBITDA.
Moderate adverse claims and in the national news for a medium-term period.
Low Any incident with an impact of between 5% and 10% of EBITDA.
Accident without lost time.
Minor environmental or community impact.
Regulatory breaches which may result in a financial impact of less than 0.05%
of EBITDA.
Moderate claims and in national news for a short-term period.
Very low Any incident with an impact of less than 5% of EBITDA.
Minor occupational accident.
Very minor environmental or community impact, easily resolved.
Regulatory breaches that will not result in a financial penalty.
Claims that do not reach the formal media.
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 & emerging risks and the operational, technological, strategic
and financial areas, 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, the security situation close to the business units, the potential
actions by the government, the climate impact 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 the human resources
risk and the future of the workforce; between the tailings dams risk and water
stress; between the cybersecurity risk and technological disruption; and
between the 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. It also 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.
In May 2023, the federal government published the new mining law that will
negatively affect mining activity in the country by slowing down exploration,
shortening the duration of concessions, raising problems of operational
continuity and forcing negotiations with communities. The new law shortens
concessions to 30 years (five years of preparation with 25 years of operation)
from 50 years, with an automatic 25-year renewal followed by a tender that
could add a further 25 years, with preference for the incumbent. The maximum
total length of a concession has been shortened to 80 years from 100 years.
The law affects new concessions but is still unsettled with regard to current
concessions, pending final rules from the respective government secretaries.
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 audits by tax authorities with particular
scrutiny on the mining industry.
· Complications and failures to obtain 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
In May 2023, the Mexican government approved a package of legal reforms to the
following laws: "Mining Law", "Law on National Waters", "Law on Ecological
Balance and Environmental Protection" and "General Law for the prevention and
integrated management of waste in the field of mining and water concessions",
which directly affect the mining sector, including, among others, the
following notable aspects:
· Granting of new concessions. Elimination of the concept of "free
land" whereby the party requesting a concession in an area that is not
occupied, currently has a right to request the concession on a "first come
first served" basis. Now, all new concessions would be subject to a tender
process ("licitación") supervised by the Federal Government.
· Exploration activities. The Federal Government will be in charge
of the exploration activities directed by the public National Geological
Service institution. It is possible to sign an agreement between the public
institution and private entities to develop exploration activities for five
years. The possibility of signing five-year agreements with the Mexican
Geological Survey is envisaged so that mining companies can participate in the
exploration process.
· Duration of new concessions. New concessions would be valid for
30 years rather than the current 50 years, renewable exclusively for two
periods of 25 years. For the second term of 25 years, the process will be open
to tender. It is not clear how this would affect concessions that are already
in the process of renewal - although from a legal view, no retroactive effect
could be given to shorten the life of concessions granted before the time that
the new mining law comes into effect.
· Inclusion of free, prior and informed consultation with
communities and indigenous peoples. In addition, the payment of 5% of profits
to the communities will be added.
· New grounds for cancellation of concessions, such as public
utility, damage to the population, lack of indigenous consultation, and new
conducts that are now considered crimes.
· Exploration activity stands to be most affected by the new law.
Although details remain to be defined in specific rules, exploration
activities will be centralised with the Mexican Geological Service, previously
a government led research agency, which will allow private exploration after
reaching special collaboration agreements. This could result in public
auctions of new concessions instead of a first applicant priority process.
Furthermore, the concession requirements are the same for each stage of
exploration resulting in a higher regulatory burden for early-stage projects.
This includes the filing of future mine closure plans, when such details are
hard to come by before exploration takes place.
· Water concessions. Concession holders have the right to use water
obtained from mining activities so long as water use rights are paid and the
company complies with the administrative processes and regulatory standards
required by the National Water Commission. However, the law states that
concessions for human and domestic water use should be prioritised over
mining, particularly in states where drought and water scarcity are common,
which could limit water concessions granted for industrial use.
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 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
2023 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. With the news of the new mining law, risk scenarios were developed for each
change and impact, considering the legal and operational criteria to implement
the necessary mitigation and prevention measures. These scenarios are
constantly being updated.
2. Commitment to constant communication with all levels of government.
3. Increased monitoring of the processes being implemented at the Ministry of
Labour and Economy.
4. We continue to collaborate with other members of the mining community
through the Mexican Mining Chamber to lobby against any new harmful taxes,
royalties or regulations. We also support industry lobbying efforts to improve
the general public's understanding of the mining industry.
5. 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.
6. 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.
7. We continue to comply with all applicable environmental regulations and are
fully committed to sustainable activity.
8. 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.
9. We seek to maintain full compliance with tax authority requirements, and we
continue to cooperate with any ongoing tax inspections.
10. We maintain a register and control of vaccinated staff and encourage all
staff to be vaccinated as soon as possible.
11. We follow-up and comply with all suggestions from the health authorities
in a timely manner.
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.
· Indicators of positive progress in negotiations with deputies and
senators on the new mining law through the Mexican Chamber of Mines.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2023: Very high (1)
2022: 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, machinery, 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, crossfire injury or damage due to insecurity in some of the regions
in which 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, ill-equipped and lack financial
resources 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 2023, in the states where our business
units and projects are located, such as Zacatecas 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 (Zacatecas State) and
Penmont (Sonora State).
An increase in the number of high impact crimes (homicide, kidnapping,
extortion) and armed clashes in the regions where our mining units and
projects are located.
Increased consumption and sale of drugs at the mining units, particularly
Saucito.
Increased threats of theft of concentrates and assets at mining units and/or
during transportation.
Increased 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 2023. There are records of
several vehicle thefts from company employees and organised crime checkpoints
on the roads near Fresnillo and Saucito mines, as well as killings and clashes
between criminal groups.
The Mexican state of Sonora is known to suffer constant attacks by organised
crime gangs. Recently there have been several attacks in the areas of
Magdalena, Santa Ana, Altar, Caborca, Pitiquito, Sonoyta and San Luis Río
Colorado, which have endangered the continuity of mining operations and the
physical integrity of workers at the 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:
· We maintain close relationships with authorities at federal,
state and local levels, and it is important to note that military facilities
are located close to most of our operations.
· We interact and meet regularly with the National Guard; and in
some cases with the Army and Navy.
· 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.
· Increase in logistical controls 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; and a
reduction in the number of authorised stops to optimise delivery times and
minimise exposure of trucks transporting ore concentrates or doré.
· We continue to invest in community programmes, infrastructure
improvements and government initiatives to support the development of legal
local communities and discourage criminal acts.
· We have increased the number of anti-doping tests conducted at
the start of the day in the mining units.
· Frequent inspections are carried out inside the mines to verify
that drugs are not consumed and sold.
· 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 workdays lost, by region and type
of site.
· Number of media mentions related to safety issues affecting the
mining industry where we operate.
· Number of high-impact crime cases in the regions where we have
operations and projects.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2023: Very high (2)
2022: 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, as well as the Russia-Ukraine and
Hamas-Israel wars, and attacks on commercial shipping in the Red Sea by
Iran-backed Houthi rebels, 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 and 2023, 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 2024.
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 seen the following impacts in Mexico(( 4
(#_ftn4) )):
· The Mexican peso performed strongly during 2023 and is one of the
strongest emerging currencies. On average during 2023 it traded at 17.5 pesos
per US dollar. At the end of the year the dollar exchange rate was 17 pesos.
· General inflation in Mexico was 4.6% for 2023.
· Economic growth for Mexico during 2023 was 3.2%.
Our sales are prenominal denominated in US dollars, although and important
part of our operating costs are in Mexican pesos. Any strengthening of the
Mexican peso may therefore negatively affect our financial results.
FACTORS CONTRIBUTING TO RISK
The unnerving combination of war, inflation, energy scarcity, disruption and
restrictions to the supply of some of our key strategic inputs and climate
change was unexpected, given that life was just beginning to move forward from
the COVID-19 pandemic.
Inflation has become a major concern for the global economy. 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.
Interruption 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.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. In macroeconomic terms, and trailing only India, China, Indonesia, and
Turkey among the G20, Mexico's GDP grew 3.7% year on year in the first half of
2023. This expansion can be attributed to: firstly, the United States, which
shared a good first half (2.2% YoY) with Mexico, is helping the nation through
trade and remittances; secondly, a boom in private consumption, due to
increases in real wages and a strong labour market; thirdly, gains due to
nearshoring, observable through the recovery of business confidence and
private investment; and, finally, major infrastructure projects (such as new
refineries and transport systems), are now clearly evident in government
expenditure and construction plans.
2. In microeconomics terms, 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.
- For more details see Review of operations
3. We execute operational excellence initiatives to counter inflation and
improve margins, and also enhance cost competitiveness by improving the
quality of the portfolio.
4. 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).
5. 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.
6. 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.
- For more detail see Sustainability at the core of our purpose
7. We have hedging policies for exchange rate risk, including those associated
with project-related capex and a hedging policy for precious metals.
KEY RISK INDICATORS
· Percentage of delivery compliance by suppliers and contractors.
· Shortages of critical operational inputs.
· 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)
Stable 2023: High (3)
2022: High (3)
4
IMPACT OF METALS PRICES (commodity prices)
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. These prices are strongly influenced by a variety of external factors,
including wars, geopolitical disruption, global economic growth, inventory
balances, industry demand and supply, possible substitution, etc.
FACTORS CONTRIBUTING TO RISK
The risk is further exacerbated when macroeconomic and geopolitical factors
directly affect the price of commodities, both positively and negatively. Such
factors include post pandemic COVID-19, the wars between Ukraine-Russia and
Israel-Hamas, and generalised inflation around the world.
Lately, the attraction of investing in other financial instruments such as
cryptocurrencies, in addition to silver and gold, has increased. This could
lead to investors reducing their investment activities in precious metals.
However, geopolitical tensions ignited by the conflict in the Middle East,
coupled with a continuing decline in inflation rates in the United States,
have propelled a remarkable rally in gold prices. After two years of mid to
low prices, gold posted double-digit gains at the end of November 2023 and
surpassed $2,000 dollars, approaching its all-time high of $2,060 dollars per
ounce reached in August 2020. The price continued to hover around the $2,000
dollars barrier, as the end of the ceasefire between Hamas and Israel saw
investors flock to buy what is recognised worldwide as a safe-haven
asset.(( 5 (#_ftn5) ))
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 focus on cost efficiencies and capital discipline to deliver competitive
all-in sustaining cost.
4. We work to improve debt profile and reduce the annual interest bill.
5. We maintain long-term optionality by ensuring our pipeline of opportunities
is continuously replenished.
6. 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.
7. 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.
KEY RISK INDICATORS
· Profit sensitivity to percentage change in precious metals.
· EBITDA sensitivity to percentage change in metals prices and the
Mexican peso/US dollar.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 High
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2023: High (4)
2022: High (4)
5
HUMAN RESOURCES (attract and retain requisite skilled people/talent crisis)
RISK DESCRIPTION
Fresnillo plc's most valuable asset is its workforce - and our people are
critical to the successful execution of our strategy.
We face multiple risks in the selection, recruitment, training and retention
of talented people with technical skills and experience relevant to the mining
sector. Obtaining qualified labour has become a major challenge, and our
industry requires more and more people trained and experienced in mining
processes. Unfortunately, there are not enough candidates with the required
profiles.
Managing talent and maintaining a high-quality labour force in a fast-changing
technological and cultural environment is therefore a key priority. Any
failures in this respect could have a negative impact on the performance of
the existing operations and prospects for future growth.
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.
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 in the areas of 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 2023.
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.
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, 19.24%
are women, as are 31.03% of new joiners, while 28.29% of the female population
was 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 39 students from different Earth
Science professions at our mining units to support their training, and 32
engineers took part in our training programme.
•CETLAR (Centre for Technical Studies of Peñoles), which trains mechanical
and electrical technicians. All seven 2023 graduates 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.
During 2023, we conducted management and leadership skills development
programmes with 14 superintendents, 49 advisors and 43 facilitators.
In order to keep our staff updated and trained, 82% of employees and 92% of
unionised staff received training during the year. A total of 108 employees
participated in institutional development programmes, which means that 60% of
staff with more than two years of service have participated at least once. Of
this 60%, 11.8% are women. 585 courses and studies were provided through
external training, benefiting 456 employees. 82.9% 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.
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.
Support for employees' mental health: 24-hour helpline for all employees,
access to psychological help, support for families and availability of 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 tests 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)
Stable 2023: High (6)
2022: High (5)
6
CYBERSECURITY
RISK DESCRIPTION
We are fully aware that information is a valuable asset that must always be
protected and that requires confidentiality, integrity, and availability in
all our business processes.
As a mining company, we can be threatened by cyber-attacks from a wide range
of groups, from hacktivists and hostile regimes to organised criminals. Their
objectives range from reputational damage and the halting of operations to
exploiting mining's role in regional supply chains, and affecting national and
global economies. Some cybercriminals look to find unprotected, misconfigured,
or unpatched mining systems to exploit, and with the industry's heavy reliance
on technology and automated systems to support operations, this is becoming
more prevalent. Others exploit social engineering (phishing) to obtain
information that can compromise information systems and obtain sensitive data
or even affect the operation.
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 the 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.
· Lack of cybersecurity ownership - Failure to assign
responsibility for implementing and adopting daily cybersecurity practices.
· 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.
Cybercriminals are using new techniques and tactics to carry out their
attacks, making them more difficult to detect. Attacks targeting companies in
the industrial and mining sector are becoming more sophisticated every day,
due to the sector's historically low level of cybersecurity coupled with a
high potential for serious damage.
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).
Another important factor is the integration of digital technologies, such as
Industrial Internet of Things (IIoT), Cloud, Artificial Intelligence (AI) and
Machine Learning (ML), which can increase the scope for attack, due to their
very design, features, and capabilities. These technologies can be used for
legitimate and productive purposes (such as automating repetitive processes in
a company or reinforcing its cybersecurity), but they can also be used by
hackers to carry out cyberattacks.
In addition, the degree of maturity of cybersecurity and cybercrime
regulations that could deter criminals is still developing at both national
and global levels, but is not yet adequate.
Access to hacking services and tools is readily available, low-cost, and
heavily automated. Without proper punishment for perpetrators globally,
attackers can easily launch sophisticated attacks with little risk.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
The Cybersecurity function continues to update and strengthen cybersecurity in
all our processes. Its activities are aligned with business strategies and
responsible for safeguarding digital security as a second line of defence,
reinforcing the activities that secure our information, from data repositories
to the tools for transmitting and sharing information.
During 2023 we activated the following mitigation actions:
1. Aligned with business strategies, our cybersecurity programme is based
on a governance model with three lines of defence, involving all operational,
tactical, and strategic business levels to prevent and mitigate computer
risks.
2. We maintain continuous awareness of cybersecurity at all levels of the
organisation, through workshops, communications, campaigns, and exercises that
allow us to understand and strengthen our cybersecurity culture. Cybersecurity
is a risk that requires the more active involvement of Executive teams, and
during 2023 we carried out awareness and training exercises focused on this
level.
3. Our approach is also based on the NIST Cybersecurity Framework which is
used to assess and improve our ability to prevent, detect and respond to
cyberattacks.
4. Efforts to increase the maturity level of the Security Operations
Centre (SOC) have enabled us to benefit from improved analytics that correlate
information from multiple business unit sources, helping us to easily identify
the impact of a threat and address the incident in a timely manner.
Cybersecurity incident response plans are in place and regularly assessed to
ensure we can respond quickly and effectively to cybersecurity incidents.
5. We conduct ongoing assessments of the technology controls implemented
in operations and services to maintain our risk appetite at acceptable levels.
We constantly monitor threat intelligence to analyse trends in the
environment, allowing us to anticipate and apply necessary controls and
adjustments in our operations.
6. In addition, our systems, networks, and assets are continuously
monitored through cybersecurity tools that use Artificial Intelligence and
Machine Learning technology to analyse behaviours across our networks,
identifying and mitigating advanced threats.
7. We established solid bases for due compliance with the Mexican Law "Ley
Federal de Protección de Datos Personales en Posesión de Particulares"
(LFPDPPP). We carried out the second phase of the audit of our Personal Data
Management System with the NYCE office, with the objective of achieving
Certification in our business units.
8. Our plan for 2024 is to focus our efforts on reducing cyber risks,
implementing and maturing controls in line with the threat landscape and
emphasising the importance of individual employee responsibility for remaining
vigilant and alert to cyber threats. Risk Assessment, Disaster Recovery Plans,
Data Loss Prevention, Pen testing and IT/OT Network Behavioural Analysis are
among the initiatives that will increase our Level of Cybersecurity Maturity
(based on NIST CSF)
A governance model, continuous risk monitoring, information security policies,
cybersecurity tools, services and assessments, awareness-raising campaigns and
training form the basis for our IT/OT operational guarantee.
KEY RISK INDICATORS
· Number of successful cyberattacks.
· Number of cybersecurity incidents affecting our Company.
· Number of data breaches.
· Number of malware infections.
· Cost of cyberattacks.
· 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)
Stable 2023: High (6)
2022: High (6)
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:
· Current or new government regulations that obstruct, limit or
restrict the granting of mining concessions; delay or failure to obtain
permits, licences, authorisations, etc.
· 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 include: fluctuations in ore and recovery
volumes; 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 key mining teams are not
available 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
planning and progress of projects.
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 also 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.
· 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
Project Management Institute (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 2023 included: Orisyvo (gold), Rodeo
(gold), Guanajuato (silver & gold), and Tajitos (gold).
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 2023: High (7)
2022: High (7)
8
SAFETY
RISK DESCRIPTION
Nothing is more important than the safety and wellbeing of our employees,
contractors and communities. The mining industry is inherently hazardous, with
the potential to cause illness or injury, damage to the environment and
disruption to communities. Our objective is first and foremost to have zero
fatalities. We believe all incidents and injuries are preventable, so our
focus is on identifying, managing and, where possible, eliminating risks.
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 four fatalities were recorded during 2023, and
also that we experienced a significant increase in accidents related to:
· Rockfall/terrain failure.
· Loss of vehicle/equipment control.
· Team-vehicle-person interaction.
· Accident in transport of staff.
· Contact with electric power.
· Fire.
· Contact with hazardous substances.
During 2023 we had 396 high potential incidents, 6% more than 2022.(( 6
(#_ftn6) ))
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. Quarterly meetings to discuss the main safety risks at each mining unit,
projects and exploration sites, overseen by the Executive Committee. The Board
receives regular updates on the main risks.
2. Implementation of technical and safety standards and procedures for slope
geotechnical, tailings management, underground mining and process safety.
3. We constantly seek to improve our safety and health risk management
procedures, with a focus on the early identification of risks and the
prevention of fatalities.
4. 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 performance.
d. Reporting, research and learning from our accidents: we share good
practices and learn from our mistakes.
5. 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.
6. Critical controls and verification tools are regularly strengthened through
the verification programme and regular audits of critical controls for
potentially high-risk activities.
7. The safety of our staff is an essential value and a way of life. We
continually 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.
8. During the year, we continued to implement support measures to strengthen,
address and prevent the causes of accidents, injuries and fatalities. Our
activities included:
· Strengthening safety objectives, including establishing proactive
performance indicators that allow us to anticipate events.
· Encouraging managers to own safety 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.
· 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
· Fatality rate
· Accident rate
· Days lost rate
· High potential incidents rate
LINK TO STRATEGY RISK APPETITE
4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2023: High (8)
2022: Medium (10)
9
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
In May 2023, a very small group of unionised personnel at Herradura illegally
prevented site access for other workers for a short period.
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) could include 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 into 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.
· Stoppages of operations, strike attempts and protests that may
occur.
· Number of media mentions related to mining union developments.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2023: Medium (9)
2022: Medium (11)
10
ACCESS TO LAND
RISK DESCRIPTION
Significant failure or delay in accessing key 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 land where we explore
or operate.
Possible barriers to access to land include:
· Increasing landowner expectations.
· Failure 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 issue with the
ejido "El Bajío" remains unresolved.
FACTORS CONTRIBUTING TO RISK
The new mining law greatly complicates access to land and the procedures for
obtaining permits.
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. 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 to manage
social challenges during the negotiation and acquisition process.
· 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.
3. 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.
4. 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)
Stable 2023: Medium (10)
2022: High (8)
11
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 continual engagement and contributions 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 fueling 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
1. Efficient risk management allows us to detect threats associated with our
operation. This process helps us identify, assess, plan for, communicate and
manage significant risks that could potentially impact our social licence.
2. The risk identification mechanism includes social studies, our complaints
and claims process, and the deployment of community programmes, as well as
meetings with key stakeholders and media monitoring.
3. We evaluate and prevent detected risks from materialising through
specialised workshops, risk management and specific action plans for each
risk.
4. Risks classified as High Risk are escalated to RED teams, which work to
identify specific solutions and have the decision-making authority to offer
concrete and timely actions.
5. Continual and direct contact is maintained with the leaders of each
business unit to support the discussion and mitigation of the specific risks
in their areas of responsibility.
6. We continually improve our governance of complaints. All complaints are
received, evaluated and managed with the involvement of those directly
responsible, with dissatisfied actors being kept informed about the status of
each case until satisfactory closing agreements are reached.
7. We have implemented a digital 'hotline' reporting process which helps
capture concerns from the community, with cases remaining anonymous if
requested. This additional communications channel has increased the options
available to communities and therefore their ability to bring concerns to our
attention.
8. A community service programme has been implemented which includes the
following features:
-Promotion of our social strategy, which encompasses all phases of the mining
life cycle. Key activities include communicating our best practices in social
and environmental responsibility in order to avoid the materialisation of
risks or mitigate their effect should they arise.
-The strategy includes our desire for shared asset equity where permitted in
the communities where we have a presence, maintaining our licence to operate
based on trust. 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 paying our fair
share of taxes contribute to regional development as part of local and state
economic output.
-Our social investment portfolio focuses on supporting quality education,
enabling affordable access to water, encouraging healthy communities through
sport and promoting economic development. The aim is to make communities
sustainable, working in collaboration with civil society organisations (NGOs)
while always seeking government participation in tripartite partnership to
ensure a sustainable balance between participants.
-Environmental performance: Optimising our use of resources, curbing any
negative impacts of our activities and being transparent and accountable for
our environmental footprint are crucial elements of sustainable mining and
help us to be perceived positively by communities and regulators.
-Health and safety performance: we aim to instil a safety culture focused on
"taking care of our people", based on shared values across the organisation,
driven by senior management and focused on high potential incidents. Our "live
in balance" approach to health aims to identify and proactively manage the
risks of exposure of our workforce, who are our key community spokespeople.
- We take a responsible approach to managing the impacts of the reform to
regulate subcontracting, with our response to the New Labour Legislation in
Mexico ensuring compliance. By extending job offers to the qualified
workforce, we have been able to mitigate 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)
Stable 2023: Medium (11)
2022: Medium (9)
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.
The growing level of insecurity, a more challenging land access scenario, and
delays in obtaining government permits detailed previously, translates into a
longer timeframe to deliver new discoveries and improve the category of
resources. In addition, difficulties in obtaining new mineral concessions
could hamper the exploration in new target areas.
As our production increases and more mines approach the end of their lives,
replenishing our reserves and maintaining low costs becomes increasingly
challenging.
FACTORS CONTRIBUTING TO RISK
In Mexico, the new mining law published in May 2023 establishes that
exploration activities in new concessions will be carried out solely by the
Mexican Geological Survey. New concessions would be granted through a bidding
process following exploration orders submitted to the survey. However,
pre-existing concessions can continue to be explored by the owners and can be
traded after obtaining authorisation from the federal Ministry of Economy.
Fresnillo plc concession holdings (1.6M ha) will allow us to continue with our
brownfield and greenfield exploration programmes, at least in the mid-term.
Obtaining access to new concessions will become difficult.
This year, we have seen complications and delays to the exploration programme,
mainly for the following reasons:
· Restrictions on new mining concessions.
· Delays in procedures regarding access to land.
· Presence of organised crime (insecurity) in the regions where we
have projects and exploration camps.
· Delays and failures to obtain permits and licences from
government authorities.
· Increased exploration costs.
· In Chile, risk factors include lack of water in the "Atacama"
desert in the north and possibility of conflict with forestry or agricultural
interests in the south, overall higher costs compared to those in Mexico,
seasonal restrictions to exploration in the High Andes, scarcity of open
grounds for staking, poor infrastructure in remote zones, presence of
anti-mining communities or NGOs, and strong competition for mining claims and
staff.
· In Peru, the main risk factors include the long lead time
required to obtain social permits (emphasising the need for strong community
relations teams and programmes), delays in obtaining government permits, poor
infrastructure in mountainous regions, the presence of anti-mining communities
or NGOs and the possibility of illegal mining.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. During 2023, we invested a total of US$186.0 million in exploration
activities. Our objectives for 2024 include a budgeted risk capital investment
in exploration of approximately US$190.0 million.
3. 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.
4. 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 2024 will
allocate 38% to brownfield targets, 29% to advanced projects and 33% to early
exploration stages including regional prospecting work.
5. 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, 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)
Stable 2023: Medium (12)
2022: Medium (12)
13
CLIMATE CHANGE
RISK DESCRIPTION
Climate change is one of the major challenges of our time and our commitment
to being part of the global response presents both opportunities and risks for
our business.
Climate change is a systemic challenge that requires coordinated actions
between nations, industries and by society at large. It demands a long-term
outlook to address both physical risks and transition risks, and the
uncertainties that both categories entail.
The mining industry specifically is highly exposed and sensitive to climate
change. 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.
On the other hand, our operations and projects are expected to face acute
physical risks from extreme weather 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 and safety of our
people, damage access roads and mine infrastructure, disrupt operations and
affect our neighboring communities.
In addition, the mining industry is also expected to face chronic risks, such
as the rise in temperatures, which may increase our water demand, or a
decrease in annual precipitation, that most certainly will exacerbate water
stress in the regions where we operate. These risks may also intensify the
competition to access water resources, increasing risks to the social licence
to operate.
Drought in northern and central Mexico is already affecting water availability
in the Fresnillo (Zacatecas) and Penmont (Sonora) Districts, while higher than
expected rainfall in the Sierra District (Durango and Chihuahua) is affecting
infrastructure in the region. In addition, the increasing severity of storm
surges is causing delays in the delivery of key supply materials.
The most important risk we currently face relates to compliance with all the
provisions and requirements of international agreements to reduce pollution
and GHG emissions, and regulatory disclosure standards, which are subject to
regulatory jurisdiction in both Mexico and the UK.
Failure to adapt to the transition and physical impacts of climate change,
include:
· Government legislation to reduce social and environmental impact,
including limiting 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
Simply staying up to date with the latest iteration of climate-related
standards will no longer be seen as sufficient going forward.
The Mexican Government's implementation of policies that support the use of
coal will lead to more GHG emissions being released into the atmosphere and
reduce the development of renewable energies in the country.
Current and emerging climate regulations, such as carbon pricing mechanisms,
have the potential to result in increased cost, shift our products' supply and
demand dynamics, and create legal compliance issues and litigation, all of
which could impact the Group's financial performance and reputation.
Our operations also face business continuity risk due to the physical impacts
of climate change, including extreme weather events, such as hurricanes or
heavy rainfall, or chronic risks that may change climate patterns, such as
more frequent droughts or increased temperatures.
Rising temperatures will exacerbate water stress in some regions, undermining
the performance of water-dependent operations, complicating site restoration,
and bringing companies into direct competition with communities for water
resources.
Employee health and safety may 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 licence to operate will become more difficult in
communities where climate change exacerbates existing vulnerabilities and
increases direct competition for resources between the company and the
community.
The supply of critical inputs to mining processes, such as water and energy,
is also likely to face greater constraints and price surges.
Increased vulnerability to the aforementioned risks will make project
financing more difficult to secure and drive up insurance costs.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. We recognise that climate change is a threat to human life and the planet
as we know it today; we are therefore strengthening our company-wide climate
change risk culture, underlining our commitment to take action to protect the
planet's climate.
2. Climate change has formed part of our strategic thinking and investment
decisions since our Initial Public Offering (IPO), demonstrated by our power
self-supply strategy and evolution towards renewable sources.
3. We measure and report our Scope 1 and 2 greenhouse gas emissions, backed by
assurance in recent years. We are also committed to increasing the share of
renewables in our energy portfolio. On water scarcity, we are reducing our
reliance on underground water through more efficient water usage and increased
use of municipal wastewater as a proportion of our total water consumption.
4. We report according to the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD) regarding: a) Governance, b)
Strategy, c) Risk Management and d) Metrics and targets. This year, the ESG,
financial controllership and risk departments collaboratively reassessed the
Company's Climate Risk and Opportunities (CROs) analysis and recalibrated
climate scenarios. Work is ongoing to define criteria for financial analysis.
Additionally, strides have been made towards compliance with cross-industry
and metals and mining industry indicators.
5. 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.
Work is ongoing to strengthen the site-level climate risk framework.
6. 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 ESG and Risks departments support the process to refine the
identification and risk assessment of physical and transitional risks.
Additionally, other key departments are regularly involved in these
discussions and assessments to refine calibration.
7. We use the guides from industry associations (i.e. ICMM), international
scientific reports (i.e. IPCC, IEA), flagship reports from market and industry
experts, reports from industry peers and reports by the Mexican Government to
identify the physical impacts of climate change.
8. To gain a general understanding, we consult scenarios built by the Mexican
Government Reports and use the Global Climate Models (GCMs), different
Representative Concentration Pathways (RCPs) coupled with Shared Socioeconomic
Pathways (SSPs) and International Energy Agency (IEA) transition scenarios.
9. In addition, we use Aqueduct, a tool developed by the World Resources
Institute (WRI), to better understand water stress under different climate
change scenarios for the 2020-2030 period.
10. 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.
11. Our operations and exploration prospects contribute to the supply of the
materials essential to building a low-carbon economy.
12. We are analysing the feasibility of setting targets to reduce our GHG
emissions over the short-, medium- and long-term.
KEY RISK INDICATORS
· Record of temperature and weather events (rainfall, storms,
snowfall, frost, heat waves, etc.) by region.
· Energy consumption / tons of mineral processed.
· CO(2)e emissions / tons of mineral processed.
· Percentage of electricity from renewable sources.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2023: Medium (12)
2022: Medium (15)
14
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, collapse or
overtopping 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.
Having permits, licences and certifications from the government to be able to
operate becomes a risk due to the time involved in these procedures and the
legal complications.
Planning new tailings dams with the necessary time and to international
standards is a major risk, due to the limitations of the land around our mines
and the costs and time involved in construction. If we fail to plan or
construct dams in a timely manner, we run the risk of disrupting operations.
FACTORS CONTRIBUTING TO RISK
Some historic tailings dams have been designed, constructed and operated,
under old controls and standards, which do not comply with all recommended
best practices.
Historic tailings dams located in rural areas are now surrounded by facilities
or residential areas, increasing the consequences of failure.
Tailings dam failures could lead to landslides or cave-ins.
The climate in recent years has become harsher in the regions where we
operate, including more severe and prolonged rainfall and high winds that
impact the geomembrane liners, as well as snowfall and frost that complicate
operations, among other factors.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. In 2023 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.
9. The Board and the HSECR Committee continue to keep these issues under
scrutiny.
10. Periodically we are inspected by the ITRP, which issues corrective and
preventive recommendations to keep the tailings dams in good condition.
11. The business continuity risks of all Fresnillo plc tailings deposits are
reviewed annually by experts from Hawcroft Consulting Group.
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 ITRP
· Dam safety inspections and dam safety reviews.
· Storage capacity versus levels of operation
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2023: Medium (14)
2022: Medium (13)
LINK TO STRATEGY RISK APPETITE
4 Low
15
ENVIRONMENTAL INCIDENTS
RISK DESCRIPTION
Environmental incidents are an inherent risk in our industry. These incidents
include the 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.
We continue to be alert to the following risks:
· Cyanide management risk.
· Impact on the environment 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 SO2, 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
Climate change in the regions where we operate is beginning to increase the
risk of incidents impacting the environment, mainly due to more extreme
rainfall.
Due to disruptions and lack of supply of critical inputs for operations, there
are moments in the mining units where there is an increased risk of an
incident affecting the environment.
Failure to address the recommendations of external audits, especially those
related to the environment, could result in an environmental incident.
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.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. Our environmental management system ensures compliance with national and
international regulations and best practices. It 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 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.
5. 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.
6. Fresnillo and Saucito are ISO 9001 certified; Fresnillo, Saucito, Herradura
and Noche Buena are ISO 14001 and ISO 45011 certified.
7. In addition, Fresnillo and Saucito achieved the badge of environmental
excellence issued by the Environmental Protection Attorney's Office (PROFEPA).
Our Herradura and Noche Buena leaching operations comply with the Cyanide Code
issued by the International Cyanide Code Institute with the respective
certification.
8. 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.
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)
Stable 2023: Medium (15)
2022: Medium (14)
LINK TO STRATEGY RISK APPETITE
4 Low
Year ended 31 December 2023 Year ended 31 December 2022
Notes US$ thousands US$ thousands
Pre-Silverstream Silverstream Total Pre-Silverstream Silverstream Total
revaluation
revaluation
revaluation
revaluation
effect
effect
effect
effect
Revenues 5 2,705,086 2,705,086 2,432,990 2,432,990
Cost of sales 6 (2,201,848) (2,201,848) (1,896,970) (1,896,970)
Gross profit 503,238 503,238 536,020 536,020
Administrative expenses (128,428) (128,428) (94,123) (94,123)
Exploration expenses 7 (182,447) (182,447) (165,790) (165,790)
Selling expenses (34,023) (34,023) (25,619) (25,619)
Other operating income 9 35,324 35,324 71,860 71,860
Other operating expenses 9 (51,169) (51,169) (38,755) (38,755)
Profit before net finance costs and income tax 142,495 142,495 283,593 283,593
Finance income 10 50,623 50,623 26,460 26,460
Finance costs 10 (88,846) (88,846) (81,621) (81,621)
Revaluation effects of Silverstream contract 14 - 7,732 7,732 - 18,785 18,785
Foreign exchange gain 2,014 2,014 1,354 1,354
Profit before income tax 106,286 7,732 114,018 229,786 18,785 248,571
Corporate income tax 11 207,367 (2,320) 205,047 73,009 (5,635) 67,374
Special mining right 11 (30,765) (30,765) (7,654) (7,654)
Income tax 11 176,602 (2,320) 174,282 65,355 (5,635) 59,720
Profit for the year 282,888 5,412 288,300 295,141 13,150 308,291
Attributable to:
Equity shareholders of the Company 228,497 5,412 233,909 258,747 13,150 271,897
Non-controlling interest 54,391 54,391 36,394 36,394
282,888 5,412 288,300 295,141 13,150 308,291
Earnings per share: (US$)
Basic and diluted earnings per Ordinary Share 12 0.317 0.369
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per Ordinary Share 12 0.310 0.351
( )
Year ended 31 December
Notes 2023 2022
US$ thousands
US$ thousands
Profit for the year 288,300 308,291
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
Gain on cash flow hedges recycled to income statement - 3,770
Changes in the fair value of cost of hedges - (1,380)
Total effect of cash flow hedges - 2,390
Foreign currency translation (2,318) 234
Income tax effect on items that may be reclassified subsequently to profit or 11 - (717)
loss:
Net other comprehensive (loss)/income that may be reclassified subsequently to (2,318) 1,907
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 452 4,733
Total effect of cash flow hedges 452 613
Changes in the fair value of equity investments at fair value through other (53,136) (5,712)
comprehensive income (FVOCI)
Remeasurement loss on defined benefit plans 22 (126) (712)
Income tax effect on items that will not be reclassified to profit or loss 11 15,826 1,644
Net other comprehensive loss that will not be reclassified to profit or loss (36,984) (4,167)
Other comprehensive loss, net of tax (39,302) (2,260)
Total comprehensive income for the year, net of tax 248,998 306,031
Attributable to:
Equity shareholders of the Company 194,476 271,618
Non-controlling interests 54,522 34,413
248,998 306,031
.
As at 31 December
Notes 2023 2022
US$ thousands
US$ thousands
ASSETS
Non-current assets
Property, plant and equipment (PPE) 13 2,860,916 2,862,564
Equity instruments at FVOCI 30 (b) 107,991 158,813
Silverstream contract 14 446,538 475,256
Deferred tax asset 11 665,302 343,688
Inventories 15 69,760 91,620
Other receivables 16 43,528 38,458
Other assets 4,553 3,700
4,198,588 3,974,099
Current assets
Inventories 15 462,973 495,744
Trade and other receivables 16 419,666 404,499
Prepayments 23,178 34,429
Income tax recoverable 62,740 -
Derivative financial instruments 30 79 231
Silverstream contract 14 35,802 36,218
Cash and cash equivalents 17 534,580 969,060
1,539,018 1,940,181
Total assets 5,737,606 5,914,280
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 50 (91)
Fair value reserve of financial assets at FVOCI 18 42,591 79,786
Foreign currency translation reserve 18 (4,204) (1,886)
Retained earnings 18 2,737,962 2,612,469
3,771,852 3,685,731
Non-controlling interests 295,345 231,206
Total equity 4,067,197 3,916,937
As at 31 December
Notes 2023 2022
US$ thousands
US$ thousands
Non-current liabilities
Interest-bearing loans 20 839,002 840,678
Notes payable 30(a) 22,726 95,853
Lease liabilities 25 9,777 9,920
Provision for mine closure cost 21 280,467 242,380
Pensions and other post-employment benefit plans 22 13,211 9,462
Deferred tax liability 11 133,202 111,120
1,298,385 1,309,413
Current liabilities
Trade and other payables 23 258,105 258,867
Interest-bearing loans 20 - 317,879
Notes payable 30 a) 72,634 9,109
Income tax payable 21,779 81,235
Derivative financial instruments 30 - 487
Lease liabilities 25 4,813 5,209
Provision for mine closure cost 21 11,849 4,827
Employee profit sharing 2,844 10,317
372,024 687,930
Total liabilities 1,670,409 1,997,343
Total equity and liabilities 5,737,606 5,914,280
These financial statements were approved by the Board of Directors on 4 March
2024 and signed on its behalf by:
Mr Juan Bordes
Non-executive Director
4 March 2024
Year ended 31 December
Notes 2023 2022
US$ thousands
US$ thousands
Net cash from operating activities 29 425,922 502,185
Cash flows from investing activities
Purchase of property, plant and equipment 3 (483,409) (592,129)
Proceeds from the sale of property, plant and equipment and other assets 1,592 1,357
Proceeds from Silverstream contract 14 40,158 33,355
Proceeds from the Layback Agreement 2 (c) 22,800 15,000
Purchase of equity instruments at FVOCI (2,313) -
Interest received 51,641 28,235
Net cash used in investing activities (369,531) (514,182)
Cash flows from financing activities
Proceeds from notes payable 30(a) 22,726 8,140
Payment of notes payable 30(a) (32,965) (10,008)
Repayment of interest-bearing loans 20 (317,879) -
Principal element of lease payments 25 (a) (6,068) (5,125)
Dividends paid to shareholders of the Company(1) 19 (108,351) (201,950)
Capital contribution(2) 9,667 10,143
Interest paid(3) (62,964) (55,308)
Net cash used in financing activities (495,834) (254,108)
Net decrease in cash and cash equivalents during the year (439,443) (266,105)
Effect of exchange rate on cash and cash equivalents 4,963 (117)
Cash and cash equivalents at 1 January 969,060 1,235,282
Cash and cash equivalents at 31 December 17 534,580 969,060
(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 2023 in respect of senior notes and notes payable less amounts
capitalised and paid totalling US$2.1 million (2022: US$8.5 million) which
were included within Purchase of property, plant and equipment (note 13).)
( )
(
)
Attributable to the equity holders of the Company
Notes Share Share premium Capital reserve Hedging reserve Cost of hedging reserve Fair value reserve of financial assets at FVOCI Foreign currency translation reserve Retained earnings Total Non-controlling interests Total
capital
equity
US$ thousands
Balance at 1 January 2022 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
Profit for the year - - - - - - - 233,909 233,909 54,391 288,300
Other comprehensive income, net of tax - - - 173 - (37,195) (2,318) (93) (39,433) 131 (39,302)
Total comprehensive income for the year - - - 173 - (37,195) (2,318) 233,816 194,476 54,522 248,998
Hedging loss transferred to the carrying value of PPE purchased during the - - - (32) - - - - (32) (50) (82)
year
Capital contribution - - - - - - - - - 9,667 9,667
Dividends declared and paid 19 - - - - - - - (108,323) (108,323) - (108,323)
Balance at 31 December 2023 368,546 1,153,817 (526,910) 50 - 42,591 (4,204) 2,737,962 3,771,852 295,345 4,067,197
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 financial information for the year ended 31 December 2023 and 2022
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 2023 and 2022 have been extracted from the
consolidated financial statements of Fresnillo plc for the year ended 31
December 2023 which have been approved by the directors on 4 March 2024 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. 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 2023 99.9% of the production were sold to
Peñoles' metallurgical complex, Met-Mex (2022: all the production), for
smelting and refining. Further information about the Group operating mines and
its principal activities is disclosed in note 3.
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 sand 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 in the
Strategic Review. 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 hedging activities; 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 2025 (the 'going concern
period'). The Directors have also considered the cash position as of 31
December 2023 (US$534.6 million) and the net current asset position
(US$1,167.0 million). In addition, they reviewed a more conservative cash flow
scenario with reduced silver and gold prices of US$22.8/ounce and
US$1,793/ounce respectively throughout the going concern's period, whilst
maintaining current budgeted expenditure while only considering projects
approved by the Executive Committee. This resulted in a lower cash position,
but still increase the cash balance year on year, maintaining sufficient
liquidity throughout the period. Finally, to maintain a strong liquidity,
during January 2024, the Company entered into a committed syndicated revolving
credit facility ("the facility") with a maximum amount available of US$350.0
million. The terms of this facility include financial covenants related to
leverage and interest cover ratios and the facility is available for a period
of 5 years. Under all going concern scenarios modelled, management forecasts
compliance with such covenants.
The Directors have further calculated prices (US$19.7/ounce and US$1,579/ounce
for silver and gold respectively), which should they prevail to the end of
2025 would result in cash balances decreasing to minimal levels by the end of
2025, 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. On the other hand, 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.
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 2023 and 2022, 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 2022.
New standards, interpretations and amendments (new standards) adopted by the
Group
A number of new or amended standards (the Standards) became applicable for the
current reporting period. The adoption of these Standards did not have any
impact on the accounting policies, financial position or performance of the
Group.
The Group has evaluated the applicability of Pillar II rules considering that
the Parent Company and the main subsidiaries of the Group are tax resident in
Mexico, management also assessed the status of the Pillar II legislation in
the country, however no laws or regulations have been enacted to the date of
this report.
Standards, interpretations and amendments issued but not yet effective
The International Accounting Standards Board (IASB) has issued other
amendments resulting from improvements to IFRSs that management considers do
not have any impact on the financial position or performance of the Group. The
Group has not early adopted any standard, interpretation or amendment that was
issued but is not yet effective.
(c) Significant accounting judgements, estimates and assumptions
The preparation of the Group's consolidated financial statements in conformity
with IFRS requires management to make judgements, estimates and assumptions
that affect the reported amounts of assets, liabilities and contingent
liabilities at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting period. These judgements
and estimates are based on management's best knowledge of the relevant facts
and circumstances, with regard to prior experience, but actual results may
differ from the amounts included in the consolidated financial statements.
Information about such judgements and estimates is contained in the accounting
policies and/or the notes to the consolidated financial statements.
Judgements
Areas of judgement, apart from those involving estimations, that have the most
significant effect on the amounts recognised in the consolidated financial
statements for the year ended 31 December 2023 are:
Recoverability of Soledad and Dipolos assets:
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 in 2013, resulting in the suspension of operations at Soledad &
Dipolos. Whilst the claim and the definitive court order did not affect the
Group's legal title over the mining concession or the ore currently held in
leaching pads near the mine site, land access at the mine site is required to
further exploit the concession at Soledad & Dipolos.
Penmont is the legal and registered owner of the land where the leaching pads
are located but has not yet been able to gain physical access to these pads
due to opposition by certain local individuals. This land was purchased by
Penmont from the Federal Government of Mexico in accordance with legal
procedures. The Group has a reasonable expectation that Penmont will
eventually regain access to the Soledad & Dipolos assets and process the
ore content in the Soledad & Dipolos leaching pads. This expectation
considers different scenarios, including but not limited to the different
legal proceedings that Minera Penmont has presented in order to regain access
to the land, and other proceedings that members of the El Bajío agrarian
community have presented seeking the cancellation of Penmont's property deed
over this area, which proceedings are pending final resolution. Therefore, the
Group continues to recognise property, plant & equipment and inventory
related to Soledad & Dipolos, as disclosed in note 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.
In regard to the inventory, during the first half of the year the Company
identified certain suspected illegal extraction of gold content at its
Soledad-Dipolos leaching pads. The Company estimates a loss of approximately
20,000 ounces of gold content and consequently recognised a write off of
US$21.9 million regarding the Soledad-Dipolos gold contents in inventory,
which has been presented as other expenses in the Consolidated Income
Statement. The Company took relevant actions with the support of diverse
authorities to stop the illegal extraction. During the second half of the
year, a procedural visit by authorities took place. During the visit of the
authorities to the mine site it was confirmed there were no personnel carrying
out any illegal mining activities at Soledad & Dipolos leaching pads.
Thus, the Company does not currently expect any further losses of this
inventory.
The inventory write-off considered both the estimation of recoverable amount
of gold existing at the leaching pad, and potential volume of solution being
irrigated on the area that is believed to have been leached to date. However,
the nature of estimation means that actual outcome may differ from those
estimates.
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, as appeals are progressing as expected. 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 2023.
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.
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 received
upon the approval of COFECE, US$15.0 million that was received in November
2022 and US$22.8 million that was received in November 2023.
Due to the fact that the contracts were negotiated together, the Group
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 was 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. In December 2022
the Group successfully provided the required support to Orla with respect to
the negotiations relevant to the acquisition of the rights to access from the
local ejido, which was a performance obligation in accordance to the Layback
Agreement. Thus, the Company considered at that point that all the obligations
established in the Layback Agreement to have been completed and recognised the
total value of the agreement (US$67.2 million) in profit or loss as other
income.
Juanicipio project:
Commercial production is the term used for the point at which a mining
operation is available for use and capable of operating in the manner intended
by management. This generally means that the operation can produce its
intended output at stable and sustainable levels. The determination of when a
mine reaches commercial production can be complex and judgemental. The Group
considered a number of factors when making this judgement, including
completion of substantially all construction development activities in
accordance with design, a production ramp up period which achieved an average
throughput of 70% of mill nameplate capacity, grades in line with mine plan
and recoveries consistent with design.
The Group assessed the production start date for the mine and the plant
separately. The Group had determined that the Juanicipio mine started
operations from 1 January 2022. After connecting the plant to the national
electricity grid, the Group has concluded Juanicipio plant has reached
commercial production on 1 June 2023 following a successful commissioning
period of the plant and facilities. As commercial production has been
achieved, the Group has started to depreciate all the plant assets and
recognised the corresponding charge as production cost.
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 the use of 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.
The Group monitors the metallurgical balances to confirm the grade and
recovery of the ore in inventories. Based on new technical information and the
reconsideration of actual recovery grades and updated leaching targets, the
Group updated its estimate of gold content in leaching pads increasing this by
30.7 thousand ounces of gold as at 1 January 2023.
This change in estimation was incorporated prospectively in inventory from 1
January 2023. The increase in the number of ounces reduced the weighted
average cost of inventory. Had the estimation not changed, production cost
during 2023 would have been US$30.9 million higher, with an offsetting impact
against the work-in-progress inventory balance as of 31 December 2023.
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 a portion of mineral resources considering the expected rate
of conversion to reserves 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. 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. Estimated cash flows are not significantly
sensitive to reasonable possible changes to key assumptions on which
management bases the recoverable value calculations. The carrying value of
deferred tax assets is disclosed in note 11.
(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 based on actual life of mines are as
follows:
Years
Buildings 6
Plant and equipment 10
Mining properties and development costs(1) 10
Other assets 5
(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.
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 FVOCI, 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 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. Gains and losses are
recognised in profit or loss when the asset is derecognised, modified or
impaired..
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 effective interest rate
(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 considering proven and
probable reserves 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 based on the estimated mine production which includes
ore reserves and a certain amount of mineral resources. 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 costs 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
customers 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 recognised when control of the asset
sold is transferred to the customers. Indicators of control transferring
include an unconditional obligation to pay, legal title, physical possession,
transfer of risk and rewards and customers 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.
Invoiced revenues to our customers for products other than refined silver and
gold, 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 customers. Refining and
treatment charges represent an element of the cost that will be incurred by
our customers in processing the products further to extract the metal content
for onward sale to its customers (See note 5(c)).
(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, which are identified by project, in areas where the Group
carriers out exploration activity. Currently the Group carries out exploration
activities in Mexico and Latin America.
- 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
(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 and
commodity 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 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 note 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 2023, 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 Cienega mine, located in the state of Durango, an underground silver-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.
( )
The operating performance and financial results for each of these mines are
reviewed by management. As the Group´s chief operating decision maker (CODM)
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. Administrative
expenses, Exploration expenses, Selling expenses, and Other income and
expenses not related to production activities included in the consolidated
income statement are not allocated to operating segments. Also, the Group's
financing (including finance cost and finance income) and income taxes are
managed on a Group basis and 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 2023 99.9% of revenue was derived from customers based in Mexico (2022: 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 2023 and 2022,
respectively. Revenues for the year ended 31 December 2023 and 2022 include
those derived from contracts with customers and other revenues, as showed in
note 5.
Year ended 31 December 2023
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio(4) Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 422,963 708,242 162,013 590,269 84,210 385,469 351,920 - - 2,705,086
Inter-segment 4,254 - - - - - 90,368 52,287 (146,909) -
Segment revenues 427,217 708,242 162,013 590,269 84,210 385,469 442,288 52,287 (146,909) 2,705,086
Segment profit(2) 156,849 157,233 18,926 185,995 5,632 158,663 271,558 33,602 14,312 1,002,770
Depreciation and amortisation in cost of sales (497,303)
Employee profit sharing in cost of sales (2,229)
Gross profit as per the income statement 503,238
Capital expenditure(3) 97,809 56,923 43,841 125,052 52 74,824 82,167 2,741 - 483,409
(1 During 2023 all segment revenues were derived from Met-Mex, except in
Juanicipio which includes sales to another customer of US$0.6 million.)
(2 The Group's CODM primarily uses this measure to monitor the operating
results directly related to the production of its business units separately to
make decisions about resource allocation and performance assessment. Segment
profit excluding foreign exchange hedging gains, depreciation and amortisation
and employee profit sharing. Segment profit for Fresnillo and Saucito
considers the sales and the corresponding processing cost of the ore from
Juanicipio.)
(3 Capital expenditure represents the cash outflow including interest
capitalised in respect of additions to property, plant and equipment, such as
mine development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine closure
provision. Significant additions include stripping cost at Herradura mine and
the construction of tailing damns at San Julian and Saucito mines.)
(4 Some of the ore production of Juanicipio mine has been processed through
Fresnillo and Saucito facilities.)
(5 Other inter-segment) (revenue corresponds to) (leasing services provided by
Minera Bermejal, S.A. de C.V)(; capital expenditure mainly corresponds to)
(Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2022
US$ 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 in cost of sales (500,569)
Employee profit sharing in cost of sales (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 The Group's CODM primarily uses this measure to monitor the operating
results directly related to the production of its business units separately to
make decisions about resource allocation and performance assessment. 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.)
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. The country of incorporation or
registration is also their principal place of business.
(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-23 31-Dec-22 31-Dec-23 31-Dec-22 31-Dec-23 31-Dec-22
Minera Juanicipio, S. A. de C.V. 44% 44% 35,853 31,398 195,991 160,046
Equipos Chaparral, S. A. de C.V. 44% 44% 18,311 5,105 97,377 69,561
Other subsidiaries with non-controlling interests not considered to be - - 227 (109) 1,977 1,599
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 2023 and 2022
Minera Juanicipio, S. A. de C.V. Equipos Chaparral, S. A. de C.V.
31-Dec-23 31-Dec-22 31-Dec-23 31-Dec-22
Revenue 442,288 215,736 - -
Profit before income tax 102,447 100,635 45,412 5,390
Income tax (charge)/credit (20,962) (29,277) (3,797) 6,212
Profit for the year 81,485 71,358 41,615 11,602
Other comprehensive gain/(loss) 31 (248) 8 31
Total comprehensive income 81,516 71,110 41,623 11,633
Attributable to non-controlling interests 35,867 31,288 18,314 5,119
Dividends paid to non-controlling interests - - - -
Summarised statement of financial position as at 31 December 2023 and 2022
Minera Juanicipio, S. A. de C.V. Equipos Chaparral, S. A. de C.V.
31-Dec-23 31-Dec-22 31-Dec-23 31-Dec-22
Current
Assets 120,396 77,596 34,990 13,226
Liabilities (197,260) (80,984) (35,708) (31,299)
Total current net liabilities (76,864) (3,388) (718) (18,073)
Non-current
Assets 776,156 630,418 222,030 202,263
Liabilities (253,858) (263,290) - (26,097)
Total non-current net assets 522,298 367,128 222,030 176,166
Net assets 445,434 363,740 221,312 158,093
Attributable to:
Equity holders of parent 249,443 203,694 123,935 88,532
Non-controlling interest 195,991 160,046 97,377 69,561
Summarised cash flow information for the year ended 31 December 2023 and 2022
Minera Juanicipio, S. A. de C.V. Equipos Chaparral, S. A. de C.V.
31-Dec-23 31-Dec-22 31-Dec-23 31-Dec-22
Operating 133,299 127,113 (33,126) (28,354)
Investing (48,936) (115,961) 340 261
Financing (57,448) (24,777) 509 23,663
Net increase/(decrease) in cash and cash equivalents 26,915 (13,625) (32,277) (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
2023 2022
US$ thousands
US$ thousands
Revenues from contracts with customers 2,706,292 2,440,063
Revenues from other sources:
Provisional pricing adjustment on products sold (1,206) (3,302)
Hedging loss on sales - (3,771)
2,705,086 2,432,990
(b) Revenues by product sold
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Lead concentrates (containing silver, gold, lead and by-products) 1,320,155 1,090,735
Doré and slag (containing gold, silver and by-products) 708,036 648,002
Zinc concentrates (containing zinc, silver and by-products) 290,138 326,912
Precipitates (containing gold and silver) 301,707 238,171
Activated carbon (containing gold, silver and by-products) 84,416 129,170
Iron concentrates (containing silver, gold, lead and by-products) 634 -
2,705,086 2,432,990
(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
2023 2022
US$ thousands
US$ thousands
Silver 1,319,423 1,089,189
Gold 1,177,386 1,114,168
Zinc 250,782 283,453
Lead 121,483 106,640
Value of metal content in products sold 2,869,074 2,593,450
Refining and treatment charges(1) (163,988) (160,460)
Total revenues(2)(,) 2,705,086 2,432,990
(1 The methodology to determine the refining and treatment charges takes into
account industry benchmark charges and adjustments to reflect ore composition
and transport costs (refer to note 27(b).)
(2 Includes provisional price adjustments which represent changes in the fair
value of trade receivables resulting in a loss of US$1.2 million (2022: loss
of US$3.3 million)) (and hedging loss of US$ nil million (2022: loss of US$3.8
million). For further detail, refer to note 2(n).
)
( )
The average realised prices for the gold and silver content of products sold,
prior to the deduction of treatment and refining charges, were:
Year ended 31 December
2023 2022
US$ per ounce
US$ per ounce
Gold(2) 1,957.72 1,799.26
Silver(2) 23.64 21.72
(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
2023 2022
US$ thousands
US$ thousands
Depreciation and amortisation 497,303 500,569
Contractors 393,997 367,003
Energy 256,507 231,505
Operating materials 292,450 269,720
Maintenance and repairs 299,924 252,907
Personnel expenses 210,583 175,508
Mine equipment leased (1) 69,754 48,991
Mining concession rights and contributions 23,045 22,044
Surveillance 23,983 18,741
Insurance 12,056 11,069
Freight 9,365 11,843
IT services 11,464 11,401
Other 23,154 34,675
Cost of production 2,123,585 1,955,976
Unabsorbed production costs(2) 25,920 2,592
Gain on foreign currency hedges (232) -
Change in work in progress and finished goods (ore inventories) (3) 52,575 (61,598)
2,201,848 1,896,970
(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 cost incurred during the testing period at Juanicipio plant
and Fresnillo's pyrites plant as a result of the delays to the commencement of
production of US$3.9 million and US$3.0 million respectively, non-productive
cost for the temporary stoppage of activities in Penmont US$10.2 million and
non-productive fixed mine cost incurred in Noche Buena resulting from
finalisation of mining activities US$8.7 million (2022: Corresponds to costs
incurred in Juanicipio plant activities (note 2 (c))).)
(3 Refer to note 2 (c) for more detail related to change in work in progress
inventories for the year ended 31 December 2023 following a change in
estimation.)
( )
(
)
( )
( )
7. Exploration expenses
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Contractors 122,973 111,981
Mining concession rights and contributions 28,777 25,570
Personnel expenses (note 8(a)) 13,315 10,779
Assays 8,950 6,269
Administrative services 2,057 2,086
Rentals 570 603
Other 5,805 8,502
182,447 165,790
These exploration expenses were mainly incurred in the operating mines located
in Mexico; the Guanajuato, Orisyvo and Valles projects; and the Tajitos
prospect. Exploration expenses of US$14.1 million (2022: US$17.9 million) were
incurred in the year on projects located in Peru and Chile.
Cash flows relating to exploration activities are as follows:
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Operating cash out flows related to exploration activities 182,359 166,068
8. Personnel expenses
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Salaries and wages 109,470 87,534
Statutory healthcare and housing contributions 42,393 32,856
Other benefits 28,414 26,458
Bonuses 34,099 19,752
Employees' profit sharing 2,390 9,841
Post-employment benefits 12,799 8,792
Vacations and vacations bonus 6,541 5,448
Legal contributions 6,104 4,202
Training 2,532 3,749
Other 5,313 3,708
250,055 202,340
(a) Personnel expenses are reflected in the following line items:
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Cost of sales (note 6)(1) 215,952 175,508
Administrative expenses 20,788 16,053
Exploration expenses (note 7) 13,315 10,779
250,055 202,340
(1 Includes amounts recognised as unabsorbed production cost amounting US$5.4
million (2022: US$ nil).)
(b) The monthly average number of employees during the year was as follows:
Year ended 31 December
2023 2022
No.
No.
Mining 3,497 3,967
Plant 1,091 1,074
Exploration 270 265
Maintenance 1,327 1,382
Administration and other 1,118 1,237
Total 7,303 7,925
9. Other operating income and expenses
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Other income:
Reversal of accruals(1) 25,793 -
Recovery of personnel expenses 4,156 -
Gain on sale of property, plant and equipment and other assets 882 -
Layback Agreement (note 2 (c)) - 67,182
Rentals 35 767
Other 4,458 3,911
35,324 71,860
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Other expenses:
Write-off of inventories (note 2 (c)) 21,861 -
Cost subject to insurance claims 8,349 4,246
Environmental activities(2) 3,963 2,997
Maintenance(3) 3,477 2,939
Change in mine closure cost provision (4) 3,226 -
Write-off of PPE assets(5) 1,920 11,315
Donations 1,685 8,794
Consumption tax expensed 943 2,073
Other 5,745 6,391
51,169 38,755
(1 The Group has reversed the accrued energy costs recognised since July 2020,
following the favourable ruling in favour of its related parties
Termóelectrica Peñoles, S.A. de C.V. and Eólica de Coahuila, S.A. de C.V,
filed against the Mexican Government regarding an increase of energy supply
costs required to be recharged to its customers.)
(2 Main activities were related with improvement in tailing dams in Fresnillo
and Cienega (2022: 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)).)
(3 Costs relating to the rehabilitation of the facilities of Compañía Minera
las Torres, S.A. de C.V. (a closed mine).)
(4 Relates to changes in estimates after the completion of mining activities.)
(5 Mainly correspond to mobile equipment damaged (2022: mobile equipment
damaged and mining works collapsed).)
10. Finance income and finance costs
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Finance income:
Interest on short-term deposits and investments 47,592 20,956
Interest on tax receivables 2,479 4,507
Other 552 997
50,623 26,460
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Finance costs:
Interest on interest-bearing loans and notes payables 60,741 51,395
Unwinding of discount on provisions (note 21) 22,578 15,243
Interest on tax amendment - 11,519
Interest on lease liabilities (note 25(a)) 1,220 720
Other 4,307 2,744
88,846 81,621
11. Income tax expense
a) Major components of income tax expense:
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 80,769 134,896
Amounts under/ (over) provided in previous years 4,235 (1,710)
85,004 133,186
Deferred:
Origination and reversal of temporary differences (292,371) (206,196)
Revaluation effects of Silverstream contract 2,320 5,636
(290,051) (200,560)
Corporate income tax (205,047) (67,374)
Special mining right
Current:
Special mining right charge (note 11 (e)) 22,708 38,230
Amounts under provided in previous years 1,686 1,954
24,394 40,184
Deferred:
Origination and reversal of temporary differences 6,371 (32,530)
Special mining right 30,765 7,654
Income tax expense reported in the income statement (174,282) (59,720)
Year ended 31 December
2023 2022
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)
Changes in fair value of cash flow hedges (135) (184)
Changes in the fair value of cost of hedges - 414
Changes in fair value of equity investments at FVOCI 15,941 1,714
Remeasurement losses on defined benefit plans 20 114
Income tax effect reported in other comprehensive income 15,826 927
During 2022, following conversations held by the Company with the Servicio de
Admnistracion Tributario (SAT) regarding its income tax audits for the years
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$11.5 million of interest
and surcharges presented in finance costs.
(b) Reconciliation of the income tax expense at the Group's statutory income
rate to income tax expense at the Group's effective income tax rate:
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Accounting profit before income tax 114,018 248,571
Tax at the Group's statutory corporate income tax rate 30.0% 34,205 74,571
Exchange rate effect on tax value of assets and liabilities(1) (214,521) (72,888)
Inflationary uplift of the tax base of assets and liabilities (54,763) (62,666)
Incentive for Northern Border Zone 1,760 (17,491)
Deferred tax asset not recognised 11,688 7,893
Expenses not deductible for tax purposes 14,277 7,045
Inflationary uplift of tax losses (5,361) (7,843)
Current income tax underprovided in previous years 2,137 3,107
Non-taxable/non-deductible foreign exchange effects 16,689 1,167
Inflationary uplift on tax refunds (744) (1,352)
Special mining right deductible for corporate income tax (9,230) (2,296)
Other (1,184) 3,379
Corporate income tax at the effective tax rate of (179.8%) (2022: (27.1%)) (205,047) (67,374)
Special mining right 30,765 7,654
Tax at the effective income tax rate of (152.9%) (2022: (24.02%)) (174,282) (59,720)
(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
2023 2022
US$ thousands
US$ thousands
Opening net assets/(liability) 232,568 (1,445)
Income statement credit arising on corporate income tax 290,051 200,560
Income statement credit arising on special mining right (6,371) 32,530
Exchange difference 26 (4)
Net charge related to items directly charged to other comprehensive income 15,826 927
Closing net asset 532,100 232,568
The amounts of deferred income tax assets and liabilities as at 31 December
2023 and 2022, considering the nature of the related temporary differences,
are as follows:
Consolidated balance sheet Consolidated income statement
2023 2022 2023 2022
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Related party receivables (181,236) (158,797) 22,439 5,095
Other receivables (6,233) (3,974) 2,259 727
Inventories 152,378 115,383 (36,995) (18,213)
Prepayments (3,499) (2,423) 1,076 (449)
Derivative financial instruments including Silverstream contract (138,171) (147,887) (9,852) (6,125)
Property, plant and equipment arising from corporate income tax 366,694 142,241 (224,453) (192,396)
Exploration expenses and operating liabilities 107,711 91,265 (16,446) 19,724
Other payables and provisions 87,705 74,162 (13,543) 3,930
Losses carried forward 141,091 117,689 (23,402) (27,250)
Post-employment benefits 2,100 1,504 (576) (356)
Deductible profit sharing 852 3,095 2,243 1,842
Special mining right deductible for corporate income tax 7,445 10,738 3,293 12,954
Equity investments at FVOCI 1,368 (16,937) (2,364) (1,903)
Other (17,416) (11,172) 6,270 1,860
Net deferred tax asset related to corporate income tax 520,789 214,887
Deferred tax credit related to corporate income tax (290,051) (200,560)
Related party receivables arising from special mining right (44,963) (39,541) 5,422 1,391
Inventories arising from special mining right 37,124 28,685 (8,439) (7,353)
Property plant and equipment arising from special mining right (11,689) 7,887 19,576 (27,185)
Other 30,839 20,650 (10,188) 617
Net deferred tax liability related to special mining rights 11,311 17,681
Deferred tax credit (283,680) (233,090)
Reflected in the statement of financial position as follows:
Deferred tax assets 665,302 343,688
Deferred tax liabilities (133,202) (111,120)
Net deferred tax asset 532,100 232,568
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$141.1
million (2022: US$117.7 million) has been recognised in respect of tax losses
amounting to US$470.3 million (2022: US$391.6 million). If not utilised,
US$7.1 million (2022: US$33.2 million) will expire within five years and
US$463.2 million (2022: US$358.4 million) will expire between six and ten
years. Of the total deferred tax asset related to losses, US$69.4 million
(2022: US$34.4 million) is covered by the existence of taxable temporary
differences, the remaining US$71.7 million (2022: US$83.3 million) corresponds
to Fresnillo plc which maintained a deferred net asset position. Despite the
accounting loss in the Parent Company in the current and prior periods,
management has considered the taxable profit generated in the current year of
US$91.3 million and based on a consideration of this, combined with future
financial and tax projections, considers that there is evidence that
sufficient taxable profits will be available against which these unused tax
losses can be utilised.
The Group has also performed an assessment of the recoverability of tax losses
from mining entities based on financial projections that are consistent with
the Group's impairment assessment (refer to note 13), together with relevant
tax projections which consider the amount and timing of certain tax
deductions. Based on those assumptions, the Group expects to fully utilise its
recognised losses.
The Group has further tax losses and other similar attributes carried forward
of US$112.3 million (2022: US$91.9 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 expiry.
(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$1,015 million (2022: US$1,006 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. 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.
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 2023 and 2022, earnings per share have been calculated as
follows:
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Earnings:
Profit attributable to equity holders of the Company 233,909 271,897
Adjusted profit attributable to equity holders of the Company 228,497 258,747
Adjusted profit is profit as disclosed in the Consolidated Income Statement
adjusted to exclude revaluation effects of the Silverstream contract of US$7.7
million gain (US$5.4 million net of tax) (2022: US$18.8 million gain (US$13.2
million net of tax)).
Adjusted earnings per share have been provided in order to provide a measure
of the underlying performance of the Group, prior to the revaluation effects
of the Silverstream contract, a derivative financial instrument.
2023 2022
thousands
thousands
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
2023 2022
US$
US$
Earnings per share:
Basic and diluted earnings per share 0.317 0.369
Adjusted basic and diluted earnings per Ordinary Share 0.310 0.351
13. Property, plant and equipment
Year ended 31 December 2023(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 2023 412,984 2,828,920 3,001,661 377,813 461,490 7,082,868
Additions 903 103,835 5,428 37,839 358,579 506,584
Disposals(5) (308) (26,480) (2,763) (12,345) - (41,896)
Transfers and other movements 22,305 226,170 236,380 49,741 (534,596) -
At 31 December 2023 435,884 3,132,445 3,240,706 453,048 285,473 7,547,556
Accumulated depreciation
At 1 January 2023 (222,166) (1,810,484) (1,947,868) (239,786) - (4,220,304)
Depreciation for the year(1) (24,837) (205,238) (240,595) (30,276) - (500,946)
Disposals(5) 290 24,627 2,763 6,930 - 34,610
At 31 December 2023 (246,713) (1,991,095) (2,185,700) (263,132) - (4,686,640)
Net book amount at 31 December 2023 189,171 1,141,350 1,055,006 189,916 285,473 2,860,916
(1 Depreciation for the year includes US$498.5 million recognised as an
expense in the income statement and US$2.5 million capitalised as part of
construction in progress.)
(2 From the additions in "other assets" category US$28.1 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 2023 is US$37.2 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$1.9 million correspond to a
write off of assets as disclosed in note 9.)
Year ended 31 December 2022(3)
Land and Plant and equipment(4) Mining properties and development costs Other assets(2) Construction in progress Total
buildings
US$ 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$11.3 million correspond to a
write of assets as disclosed in note 9.)
The table below details construction in progress by operating mine and
development projects
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Fresnillo 73,761 186,666
Saucito 94,092 80,566
Juanicipio 29,028 67,228
Cienega 13,432 53,204
San Julian 56,938 34,203
Herradura 13,307 27,208
Noche Buena - 9,583
Other(1) 4,914 2,832
285,472 461,490
(1) (Mainly) (corresponds to Minera Bermejal, S.A. de C.V. (2022: Minera
Bermejal, S.A. de C.V.).)
During the year ended 31 December 2023, the Group capitalised US$2.1 million
of borrowing costs paid within construction in progress (2022: US$8.6
million). Borrowing costs were capitalised at the rate of 5.02% (2022: 5.02%).
Sensitivity analysis
As disclosed in note 2(f) management performs at each reporting date an
assessment to determine whether there are any indicators of impairment. As at
31 December 2023, the carrying amounts of mining assets is supported by their
recoverable values.
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.
The models are most sensitive to changes in commodity price assumptions,
operating costs 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 2023:
· A decrease of 10% in gold and silver prices would result in an
impairment charge of US$228.7 million.
· An increase of 10% in operating costs would result in an
impairment charge of US$ million 116.1 million.
· A decrease of 5% in the forecasted volume of gold and silver
produced would result in an impairment charge of US$92.2 million.
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. The agreement
required an upfront payment of US$350 million by Fresnillo. 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 2023 was $5.65 per ounce (2022: $5.54 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 to the Group 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 24 years considering ore reserves and certain mineral
resources based on the expected conversion rate to reserves. 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 2023 total
proceeds received in cash were US$40.2 million (2022: US$33.4 million) of
which, US$8.3 million was in respect of proceeds receivable as at 31 December
2022 (2022: US$4.8 million in respect of proceeds receivable as at 31 December
2021). Cash received in respect of the year of US$31.8 million (2022: US$28.5
million) corresponds to 2.29 million ounces of payable silver (2022: 2.06
million ounces). As at 31 December 2023, a further US$5.1 million (2022:
US$8.3 million) of cash receivable corresponding to 278,342 ounces of silver
is due (2022: 453,158 ounces).
A reconciliation of the beginning balance to the ending balance is shown
below:
2023 2022
US$ thousands
US$ thousands
Balance at 1 January 511,474 529,544
Cash received in respect of the year (31,816) (28,513)
Cash receivable (5,050) (8,342)
Remeasurement gains recognised in profit and loss 7,732 18,785
Balance at 31 December 482,340 511,474
Less - Current portion 35,802 36,218
Non-current portion 446,538 475,256
The US$7.7 million unrealised gain recorded in the income statement (31
December 2022: US$18.8 million loss) resulted mainly from the financial profit
obtained from the contract amortisation, which was partially compensated with
lower reserves considered in the production mine plan and a lower inflation
rate expected.
Significant assumptions used in the valuation of the Silverstream contract are
as follows:
- Forecasted volumes (millions of ounces/moz)
- Silver to be produced and sold over the life of mine 82.8 moz (2022:
103.2 moz)
- Average annual silver to be produced and sold 3.5moz (2022: 4.0 moz)
- Weighted average discount rate 9.79% (2022: 9.82%)
- Future silver prices (US$ per ounce)
Year ended 31 December Year 1 Year 2 Year 3 Year 4 Year 5 Long-term
2023 24.41 25.44 26.43 26.64 26.85 19.58
2022 24.45 25.53 26.22 27.12 27.33 18.81
The fair value of the Silverstream contract is determined using a valuation
model including unobservable inputs (Level 3). This derivative has a term of
24 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 inflation and
the discount rate used to discount future cash flows. In line with a market
participant would consider, the model includes the proportion of resources
that are expected to be converted into reserves. Out of the 82.8m ounces
included in the model, 56% relates to reserves and 44% relates to resources
(which were adjusted by a conversion factor of 50%). (2022: 55% and 45%
respectively). For purposes of the fair value measurement, those resources are
assumed to be mined once reserves are exhausted. This approach has been
applied consistently in both 2023 and 2022.
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 reserves and resources over the life of mine. The sensitivity of
these key inputs is as follows:
Commodity price Discount rate Volumes produced
Year ended 31 December Increase/ Effect on profit before tax: increase/ Basis point increase/ Effect on profit before tax: increase/ Increase/ Effect on profit before tax: increase/
(decrease) in
(decrease)
(decrease)
(decrease)
(decrease)
(decrease)
silver price
US$ thousands
in interest rate
US$ thousands
in reserves and resources
US$ thousands
2023 10% 63,222 - - 10% 48,141
(10%) (63,222) (75) 27,473 (10%) (48,141)
2022 20% 133,736 100 (41,860) 6% 30,600
(15%) (100,302) (25) 11,452 (6%) (30,600)
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.
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
2023 2022
US$ thousands
US$ thousands
Finished goods(1) 34,212 27,257
Work in progress(2) 314,802 375,603
Ore stockpile(3) 4,779 26,020
Operating materials and spare parts 185,624 163,947
539,417 592,827
Allowance for obsolete and slow-moving inventories (6,684) (5,463)
Balance as 31 December 532,733 587,364
Less - Current portion 462,973 495,744
Non-current portion(4) 69,760 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$292.7 million (2022: US$307.6 million) and in stockpiles US$22.1
million (2022: US$58.8 million) that will be processed in dynamic leaching
plants (note 2(c)).)
(3 As at 31 December 2022 ore stockpile included ore mineral obtained during
the development phase at Juanicipio which has been processed during 2023.)
(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 2023 and 2022 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$2,201.8
million (2022: US$1,906.8 million). During 2023 and 2022, there was no
adjustment to net realisable value allowance against work-in-progress
inventory. The adjustment to the allowance for obsolete and slow-moving
inventory recognised as an expense was US$1.2 million (2022: US$2.6 million).
16. Trade and other receivables
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Trade receivables from related parties (note 27) 306,668 275,844
Value Added Tax receivable 93,010 85,979
Other receivables from related parties (note 27a) 11,509 8,377
Other receivables from contractors 2,662 52
Other receivables 6,170 8,697
Other receivables arising from the Layback Agreement (note 2 (c)) - 25,994
420,019 404,943
Expected credit loss of 'Other receivables' (353) (444)
Trade and other receivables classified as current assets 419,666 404,499
Other receivables classified as non-current assets:
Other receivable from contractors 773 1,638
Value Added Tax receivable 42,755 36,820
Trade and other receivables classified as non-current assets 43,528 38,458
Total trade and other receivables 463,194 442,957
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$316.3 million (2022: US$311.7
million), and in Mexican pesos US$147.6 million (2022: US$131.2 million)
Balances corresponding to Value Added Tax receivables and US$6.2 million
within Other receivables (2022: US$8.7 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 2023 is US$0.4 million (2022: US$0.4 million). Trade receivables
from related parties and other receivables from related parties (see note 14)
are classified as financial assets at FVTPL and are therefore not considered
in the expected credit loss analysis. In determining the recoverability of
receivables, the Group performs a risk analysis considering the type and age
of the outstanding receivable and the credit worthiness of the counterparty,
see note 31(b).
17. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its operations and
in order to achieve its treasury objectives.
As at 31 December
2023 2022
US$ thousands
US$ thousands
Cash at bank and on hand 3,556 2,516
Short-term deposits 531,024 966,544
Cash and cash equivalents 534,580 969,060
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
2023 2022
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 2022 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2022 736,893,589 $368,545,586 50,000 £50,000
At 31 December 2023 736,893,589 $368,545,586 50,000 £50,000
As at 31 December 2023 and 2022, 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 2023 and
2022 are as follows:
US cents per Amount
Ordinary Share
US$ thousands
Year ended 31 December 2023
Final dividend for 2022 declared and paid during the year(1) 13.3 98,007
Interim dividend for 2023 declared and paid during the year(2) 1.4 10,317
14.7 108,324
Year ended 31 December 2022
Final dividend for 2021 declared and paid during the year(3) 24.00 176,855
Interim dividend for 2022 declared and paid during the year(4) 3.40 25,054
27.4 201,909
(1 This dividend was approved by the Shareholders on 23 May 2023 and paid on
26 May 2023.)
(2 This dividend was approved by the Board of Directors on 31 July 2023 and
paid 14 September 2023)
(3 This dividend was approved by the Shareholders on 17 May 2022 and paid on
27 May 2022)
(4 This dividend was approved by the Board of Directors on 1 August 2022 and
paid 14 September 2022)
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
2023 2022
US$ thousands
US$ thousands
Dividends declared 108,324 201,909
Foreign exchange effect (1) -
Dividends recognised in retained earnings 108,323 201,909
Foreign exchange and hedging effect 28 41
Dividends paid 108,351 201,950
The directors have proposed a final dividend of US$4.2 cents per share, which
is subject to approval at the annual general meeting and is not recognised as
a liability as at 31 December 2023. 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 in the Irish Stock
Exchange. The proceeds were partially used to finance the repurchase mentioned
above.
On 13 November 2023, the Company paid the outstanding amount of the 5.500%
Notes at its maturity date including due interest for a total of US$326.6
million.
Movements in the year in the debt recognised in the balance sheet are as
follows:
As at 31 December
2023 2022
US$ thousands US$ thousands
Opening balance 1,158,557 1,157,545
Payments of 5.500% Notes (317,879) -
Accrued interest 53,919 56,475
Interest paid(1) (56,371) (56,371)
Amortisation of discount and transaction costs 776 908
Closing balance 839,002 1,158,557
Less - Current portion - 317,879
Non-current portion 839,002 840,678
(1 Interest was payable semi-annually on 13 May and 13 November for 5.500%
senior notes and is payable semi-annually on 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 2023, the discount rates
used in the calculation of the parts of the provision that relate to Mexican
pesos range from 9.87% to 11.19% (2022: range from 10.08% to 10.62%). The
range for the current year parts that relate to US dollars range from 3.70% to
4.68% (2022: range from 3.08% to 4.44%).
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 estimation of reserves and resources, which ranges
from 2 to 21 years from 31 December 2023 after the ending of mine operation at
Noche Buena mine (1 to 22 years from 31 December 2022). As at 31 December 2023
the weighted average term of the provision is 10 years (2022: 12 years).
As at 31 December
2023 2022
US$ thousands
US$ thousands
Opening balance 247,207 260,307
(Decrease) increase to existing provision (2,111) 23,757
Effect of changes in discount rate 1,436 (63,061)
Unwinding of discount rate 22,578 15,243
Payments (4,376) (1,085)
Foreign exchange 27,582 12,046
Closing balance 292,316 247,207
Less - Current portion 11,849 4,827
Non-current portion 280,467 242,380
The provision is sensitive to a reasonably possible change in discount rates,
exchange rate US Dollar compared to Mexican peso, and change in future costs.
The sensitivity of these key inputs is as follows:
Discount rate Foreign currency Estimated costs
Year ended 31 December Basis point increase/ Effect on provision: increase/ Strengthening/ Effect on provision: increase/ Increase/ Effect on provision: increase/
(decrease)
(decrease)
(weakening)
(decrease)
(decrease)
(decrease)
in interest rate
US$ thousands
of US dollar
US$ thousands
in estimated costs
US$ thousands
2023 50 11,710 10% (21,990) 5% 14,616
(50) (24,205) (5%) 12,731 (5%) (14,616)
2022 50 12,030 5% (8,679) 5% 12,360
(50) (13,110) (5%) 9,593 (5%) (12,360)
Change on the provision would be principally offset by a change to the value
of the associated asset unless the asset is fully depreciated, in which case
the change in estimate is recognised directly within the income statement.
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 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 in OCI(1) 31 December
2023 interest 2023
US$ thousands
Defined benefit obligation (26,014) (1,797) (2,559) (3,952) (8,308) 2,133 (457) (457) (25) (32,671)
Fair value of plan assets 16,552 1,871 2,527 4,398 (2,133) 331 331 332 (20) 19,460
Net benefit liability (9,462) (1,797) (688) (1,425) (3,910) - 331 (457) (126) 332 (45) (13,211)
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 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 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)
(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$13.9 million (2022: US$10.7
million) relates to statutory seniority premiums for unionised workers which
are not funded. The expected contributions to the plan for the next annual
reporting period are nil. The principal assumptions used in determining
pension and other post-employment benefit obligations for the Group's plans
are shown below:
As at 31 December
2023 2022
%
%
Discount rate 10.08 10.23
Future salary increases (National Consumer Price Index) 5.25 5.25
The life expectancy of current and future pensioners, men and women aged 65
and older will live on average for a further 23.2 and 26.0 years respectively
(2022: 23.9 years for men and 26.7 for women). The weighted average duration
of the defined benefit obligation is 8.7 years (2022: 10.8 years).
The fair values of the plan assets were as follows:
As at 31 December
2023 2022
US$ thousands
US$ thousands
State owned companies 337 -
Mutual funds (fixed rates) 19,123 16,552
19,460 16,552
As at 31 December 2023 and 2022, 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 2023 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 2023 (1,152) 1,243 215 (226) 289
(Decrease)/increase to the net defined benefit obligation (US$ thousands)
Year ended 31 December 2022 (967) 1,044 176 (174) 145
(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
2023 2022
US$ thousands
US$ thousands
Trade payables 118,110 140,297
Other payables to related parties (note 27(a)) 56,434 35,969
Accrued expenses 54,749 60,321
Other taxes and contributions 28,812 22,280
258,105 258,867
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 taxes 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 mines and
development project is as follows:
As at 31 December
2023 2022
US$ thousands
US$ thousands
Saucito 30,761 33,980
Fresnillo 26,503 48,629
San Julian 14,655 9,745
Juanicipio 12,246 47,809
Herradura 6,610 11,024
Cienega 2,984 10,753
Noche Buena 206 227
Other(1) 4,040 414
98,005 162,581
(1 Mainly corresponds to Minera el Bermejal, S. de R.L. de C.V.)
(
)
( )
( )
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 2023 31 December 2022
US$ thousands
US$ thousands
IT equipment 10,387 10,914
Plant and equipment 3,501 3,776
Buildings 702 439
Total lease liability 14,590 15,129
Less - Current portion 4,813 5,209
Non-current portion 9,777 9,920
The total cash outflow for leases for the year ended 31 December 2023, except
short term and low value leases, amounts to US$7.3 million (2022: US$5.8
million), including finance costs of US$1.2 million (2022: US$0.7 million).
The table below details right-of-use assets included as property plant and
equipment in note 13.
Year ended 31 December 2023
Buildings Computer equipment Plant and Equipment Total
US$ thousands
Cost
At 1 January 2023 4,620 21,284 3,933 29,837
Additions 723 4,286 123 5,132
Disposals (308) (6,291) - (6,599)
At 31 December 2023 5,035 19,279 4,056 28,370
Accumulated depreciation
At 1 January 2023 (2,585) (12,394) (234) (15,213)
Depreciation for the year (739) (4,880) (567) (6,186)
Disposals 290 6,119 - 6,409
At 31 December 2023 (3,034) (11,155) (801) (14,990)
Net book amount at 31 December 2023 2,001 8,124 3,255 13,380
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
Amounts recognised in profit and loss for the year, additional to depreciation
of right-of-use assets, included US$1.2 million (2022: US$0.7 million)
relating to interest expense, US$73.7 million (2022: US$60.4 million) on
relating variable lease payments (note 6) of which US$4.2 million (2022:
US$11.4 million) were capitalised as a part of stripping cost, US$0.9 million
(2022: US$0.8 million) relating to short-term leases and US$2.9 million
(2022:US$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 2023, 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.
It is not practical to determine the amount of any potential claims or the
likelihood of any unfavourable outcome arising from this or any future
inspections that may be initiated. However, management believes that its
interpretation of the relevant legislation is appropriate and that the Group
has complied with all regulations and paid or accrued all taxes and
withholdings that are applicable.
- On 8 May 2008, the Company and Peñoles entered into the
Separation Agreement (the 'Separation Agreement'). This agreement relates to
the separation of the Group and the Peñoles Group and governs certain aspects
of the relationship between the Fresnillo Group and the Peñoles Group
following the initial public offering in May 2008 ('Admission'). The
Separation Agreement provides for cross-indemnities between the Company and
Peñoles so that, in the case of Peñoles, it is held harmless against losses,
claims and liabilities (including tax liabilities) properly attributable to
the precious metals business of the Group and, in the case of the Company, it
is held harmless by Peñoles against losses, claims and liabilities which are
not properly attributable to the precious metals business. Save for any
liability arising in connection with tax, the aggregate liability of either
party under the indemnities shall not exceed US$250 million in aggregate.
- On 24 March 2022, the SAT initiated an audit of the income tax
computation of Comercializadora de Metales Fresnillo for the year 2016.
Findings were shared by the SAT on 22 March 2023, which mainly relate to the
tax treatment of the Silverstream transaction. The Company responded on 20
April 2023 and began a Conclusive Agreement procedure before the Mexican tax
ombudsman (PRODECON). On 16 June 2023 and on 5 July 2023, the Company provided
additional documentation and information to the SAT through PRODECON. On
January 31st 2024, the PRODECON closed the Conclusive Agreement procedure as
no agreement was reached between the company and the SAT. It is expected that
the SAT´s final conclusion on the matter will be notified to the Company no
later than May 2024. The Directors believe that management´s interpretation
of the relevant legislation and assessment of taxation is appropriate. Also,
the Directors consider that no tax liability is required to be recognised in
respect of these claims or risks as the SAT´s final conclusion is yet to be
determined.
- 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$13.6 million in respect of the insurance claim, however this
does not constitute a final settlement and management continues to pursue a
higher insurance payment. Due to the fact that negotiations are on-going and
there is uncertainty regarding the timing and amount involved in reaching a
final settlement with the insurer, it is currently not practicable to
determine the total amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances; however,
there is no certainty that this interest will be realised until the underlying
balance is recovered. Due to that uncertainty, it is also not practicable to
estimate the amount of interest income earned but not recovered to date.
27. Related party balances and transactions
The Group had the following related party transactions during the years ended
31 December 2023 and 2022 and balances as at 31 December 2023 and 2022.
Related parties are those entities owned or controlled by the ultimate
controlling party, as well as those who have a minority participation in Group
companies and key management personnel of the Group.
(a) Related party balances
Accounts receivable Accounts payable
As at 31 December As at 31 December
2023 2022 2023 2022
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 306,668 275,844 5,840 421
Other:
Industrias Peñoles, S.A.B. de C.V.(1) 5,050 8,342 - -
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 261 - 739 -
Servicios Administrativos Peñoles, S.A. de C.V. - - 24,486 4,630
Servicios Especializados Peñoles, S.A. de C.V. - - 7,147 8,964
Fuentes de Energía Peñoles, S.A. de C.V. - - 6,239 1,062
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 3,362 3,206
Peñoles Tecnología, S.A. de C.V. - - 1,261 490
Eólica de Coahuila S.A. de C.V. - - 2,986 13,466
Minera Capela, S.A. de C.V. - - 9 -
Grupo Nacional Provincial, S.A. B. de C.V.(2) 5,715 - - -
Other 483 35 4,365 3,730
Sub-total 318,177 284,221 56,434 35,969
Less-current portion 318,177 284,221 56,434 35,969
Non-current portion - - - -
(1 This balance corresponds to the cash receivable related to the Silverstream
contract, see note 14.)
(2 This balance corresponds to excess payments to the defined contribution
plan which will be refunded.)
Related party accounts receivable and payable will be settled in cash.
Other balances with related parties:
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 482,340 511,474
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
2023 2022
US$ thousands
US$ thousands
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. (2) 2,704,452 2,436,761
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 241 606
Other income 4,012 4,959
Total income 2,708,705 2,442,326
(1 Figures do not include the effects of hedging as the derivative
transactions are not undertaken with related parties.)
(2 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 (refer to note
5(c)).)
( )
Year ended 31 December
2023 2022
US$ thousands
US$ thousands
Expenses:
Administrative services:
Servicios Administrativos Peñoles, S.A. de C.V. (2) 56,636 34,755
Servicios Especializados Peñoles, S.A. de C.V. (3) 26,626 24,558
Peñoles Tecnología, S.A. de C.V. 5,343 4,356
88,605 63,669
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 28,454 20,630
Fuentes de Energía Peñoles, S.A. de C.V. 15,945 3,259
Eólica de Coahuila S.A. de C.V. 33,563 31,031
77,962 54,920
Operating materials and spare parts:
Wideco Inc 5,383 6,610
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 35,551 9,694
40,934 16,304
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 10,068 7,492
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 18,909 16,443
Other expenses: 3,960 4,395
Total expenses 240,438 163,223
(2 Includes US$0.6 million (2022: US$0.8 million) corresponding to expenses
reimbursed.)
(3 Includes US$9.6 (2022: US$ nil) 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
2023 2022
US$ thousands
US$ thousands
Salaries and bonuses 3,412 2,792
Post-employment benefits 290 244
Other benefits 435 316
Total compensation paid in respect of key management personnel 4,137 3,352
As at 31 December
2023 2022
US$ thousands
US$ thousands
Accumulated accrued defined benefit pension entitlement 5,035 4,035
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 2023
and 2022 are as follows:
Year ended 31 December
Class of services 2023 2022
US$ thousands
US$ thousands
Fees payable to the Group's auditor for the audit of the Group's annual 1,616 1,879
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 650 316
Audit-related assurance services(1) 773 437
Total 3,039 2,632
(1 Includes US$0.6 million (2022: US$0.4 million) for the limited review of
the Half Yearly financial report,) (US$)(0.1 million (2022: US$ nil) for the
limited assurance services over certain GHG's KPIs and US$0.1 (2022: US$0.1
million) for the Mexican tax audit opinions.)
29. Notes to the consolidated statement of cash flows
Notes 2023 2022
US$ thousands
US$ thousands
Reconciliation of profit for the year to net cash generated from operating
activities
Profit for the year 288,300 308,291
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 13 498,469 501,769
Employee profit sharing 8 2,390 9,841
Deferred income tax credit 11 (283,680) (233,090)
Current income tax expense 11 109,398 173,370
Write-off of assets 9 1,920 11,315
(Gain)/loss on the sale of property, plant and equipment and other assets (882) 305
Net finance costs 36,974 55,148
Foreign exchange (gain)/loss (1,142) 823
Difference between pension contributions paid and amounts recognised in the 2,061 1,259
income statement
Non-cash movement on derivatives (2) -
Layback agreement 2 (c) - (67,182)
Changes in fair value of Silverstream 14 (7,732) (18,785)
Change in mine closure cost provision 9 3,226 -
Other 38 -
Working capital adjustments
(Increase)/decrease in trade and other receivables (45,597) 7,199
Decrease/(increase) in prepayments and other assets 10,396 (14,064)
Decrease/(increase) in inventories 54,631 (99,562)
Increase in trade and other payables 1,196 40,282
Cash generated from operations 669,964 676,919
Income tax paid(1) (233,060) (158,343)
Employee profit sharing paid (10,982) (16,391)
Net cash from operating activities 425,922 502,185
(1) (Income tax paid includes US$187.0 million corresponding to corporate
income tax (2022: US$116.1 million) and US$46 million corresponding to special
mining right (2022: US$53.3 million), for further information refer to note
11.)
30. Financial instruments
(a) Fair value category
As at 31 December 2023
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
cost
Trade and other receivables(1) 9,894 - - 311,718
Equity instruments at FVOCI - 107,991 - -
Silverstream contract (note 14) - - - 482,340
Derivative financial instruments - - 79 -
Financial liabilities: Amortized Fair value (hedging instruments) Fair value through profit or loss
cost
Interest-bearing loans (note 20) 839,002 - -
Notes payable(2) 95,360 - -
Trade and other payables (note 23) 174,544 - -
( )
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) 27,719 - - 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 -
( )
(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 6.72% to 7.36% with a maturity of nine to eighteen months
US$72.6 million short-term and US$22.7 million long-term (2022: nine to
eighteen months US$9.1 million short-term and US$95.8 million long-term,).
During the year, proceeds and payments from these Notes amounted to US$22.7
million and US$33.0 million respectively (2022: US$8.1 million and US$10.0
million). Interest paid amount US$7.6 million (2022: US$4.2 million).)
(
)
( )
( )
(b) Fair value measurement
The value of financial assets and liabilities other than those measured at
fair value are as follows:
As at 31 December
Carrying amount Fair value
2023 2022 2023 2022
US$ thousands
US$ thousands
US$ thousands
US$ thousands
Financial assets:
Trade and other receivables 9,894 27,719 9,894 27,719
Financial liabilities:
Interest-bearing loans(1) (note 20) 839,002 1,158,557 645,745 990,588
Trade and other payables 174,544 176,266 174,544 176,266
Notes payable 95,360 104,962 95,324 104,962
(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 2023
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 - - 306,668 306,668
Other receivables from related parties(1) - - 5,050 5,050
Derivative financial instruments:
Option and forward foreign exchange contracts - 79 - 79
Silverstream contract - - 482,340 482,340
Other financial assets:
Equity instruments at FVOCI 107,991 - - 107,991
107,991 79 794,058 902,128
(1 This balance corresponds to the cash receivable related to the Silverstream
contract, see note 14.)
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 - - 275,844 275,844
Other receivables from related parties(1) - - 8,342 8,342
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
(1 This balance corresponds to the cash receivable related to the Silverstream
contract, see note 14.)
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:
2023 2022
US$ thousands
US$ thousands
Balance at 1 January: 275,844 265,473
Sales 2,706,292 2,440,063
Cash collection (2,674,262) (2,426,390)
Changes in fair value 27,034 (20,178)
Realised embedded derivatives during the year (28,240) 16,876
Balance at 31 December 306,668 275,844
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 2023, approximately 89.8% of the
investments correspond to 9,314,877 shares (2022: 9,314,877 shares) of Mag
Silver, Corp. for an amount of US$96.9 million (2022: US$145.5 million) and
5.1% of Endeavor Silver Corp. represented by 2,800,000 (2022: 2,800,000
shares) shares for an amount of US$5.5 million (2022: US$9.1 million). These
equity investments are listed on the Toronto stock Exchange. The prices per
share as 31 December 2023 were US$10.41 (2022: US$15.62) and US$1.96 (2022:
US$3.24), respectively. During the year the Group purchased 1,000,000 shares
of Osisko Mining Inc., a Canadian exploration company, for a total
consideration of US$2.3 million.
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
2023 10% (1,504) (275)
(5%) 871 276
2022 5% 742 1,120
(5%) (820) 3,610
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
2023 10% 10% 10% 10% 26,375 -
(10%) (10%) (10%) (10%) (26,375) -
2022 10% 20% 20% 15% 31,529 -
(10%) (15%) (15%) (15%) (27,660) -
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 as explained in note 14.
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
2023(1) - -
(75) (3,307)
2022 100 8,667
(25) (2,167)
The sensitivity shown in the table above primarily relates to the full year of
interest on cash balances held as at the year end.
(1 Based on actual market conditions management considers an increase in
interest rates is likely remote.)
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)
2023 40% - 43,196
(45%) - (48,596)
2022 10% - 15,881
(25%) - (39,703)
(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 2023 and 2022. 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 2023, 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 2023, being
US$482.3 million (2022: US$511.5 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using projected cash flows
from operations and by monitoring the maturity of both its financial assets
and liabilities.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2023
Interest-bearing loans 37,986 75,973 75,973 1,685,699 1,875,631
Trade and other payables 180,565 - - - 180,565
Notes payable 72,634 22,726 - - 95,360
Lease liabilities 5,944 7,502 2,829 494 16,769
US$ thousands
Within 1 year 2-3 years 3-5 years > 5 years Total
As at 31 December 2022
Interest-bearing loans 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 6,055 6,933 3,129 1,620 17,737
Derivative financial instruments - liabilities 487 - - - 487
The payments for financial derivative instruments 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 2023
Inflows 5,777 - - - 5,777
Outflows (5,587) - - - (5,587)
Net 190 - - - 190
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)
The above liquidity tables include expected inflows and outflows from currency
option contracts which the Group expects to be exercised during 2024 as at 31
December 2023 and during 2023 as at 31 December 2022, 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
2023 and 2022 consisted of only cash and cash equivalents, which details are
disclosed in note 17.
32. Subsequent events
During January 2024 the Company entered into a syndicated revolving credit
facility ("the facility") with a term from January 2024 to January 2029. The
maximum amount available under the facility is US$350.0 million. The facility
is unsecured and has an interest rate on drawn amounts of SOFR plus an
interest margin of 1.15%. The terms of this facility include financial
covenants related to leverage and interest cover ratios. No amounts have been
drawn from the facility to date.
1 (#_ftnref1) 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.
2 (#_ftnref2) The Committee of Sponsoring Organizations of the Treadway
Commission Enterprise Risk Management framework.
3 (#_ftnref3) National Institute of Statistics and Geography (INEGI)
4 (#_ftnref4) Banco de Mexico / December 2023 Report
5 (#_ftnref5) US Federal Reserve / December 2023 Report
6 (#_ftnref6) Information provided by the Safety Department of Fresnillo plc
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