REG - Fresnillo Plc - Half-year Report
01/08/2023 07:00
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RNS Number : 8750H Fresnillo PLC 01 August 2023
Fresnillo plc
21 Upper Brook Street
London W1K 7PY
United Kingdom
www.fresnilloplc.com (http://www.fresnilloplc.com)
1 August 2023
Fresnillo plc interim results
for the six months to 30 June 2023
Octavio Alvídrez, Chief Executive Officer, commented:
"We achieved a solid operating performance in the first half. Higher silver
and gold production combined with stronger precious metals prices, also saw a
rise in revenue in the period.
"I am pleased to report we are fully staffed across the business and have now
overcome the challenges presented by the labour reforms in Mexico as well as
the tight labour market. Further, in the period we have delivered on the ramp
up of our new Juancipio mine and begun operations at the new pyrites plant
following the successful tie-in to the national electricity grid earlier this
year.
"These are considerable development milestones and testament to the skill of
our teams on the ground. It is with both huge sadness and regret however that
we confirm two fatal contractor incidents in the period, a stark reminder of
the critical need to ensure safety remains at the heart of everything we do,
for both employees and contractors.
"Though we have made good operational progress, we are facing higher costs
across the business driven by inflation as well as the material impact of the
revaluation of the peso against the US dollar, which have resulted in an
impact on profitability in the period.
"Our priorities in the second half are clear. We will continue to focus on the
safety of our people and instilling a true culture of safety across the
business. We are committed to managing costs and further improving
productivity, while delivering on the promise of Juanicipio as we complete the
ramp up. We are well placed to meet our operating targets for the year."
First half highlights
Financial highlights (1H23/1H22 comparisons)
· Adjusted Revenues 1 (#_ftn1) of US$1,430.8m, up 6.1%; mainly due to
higher gold and silver volumes sold at higher prices, partly offset by a lower
zinc price.
· Revenues of US$1,343.3m, up 6.7%.
· Adjusted production costs 2 (#_ftn2) of US$773.9m, up 17.4% over
1H22 primarily due to the revaluation of the Mexican peso vs. US dollar, cost
inflation, additional costs from the start up of the beneficiation plant at
Juanicipio and an increase in stripping recognised as costs rather than
capitalised.
· Cost of sales of US$1,060.6m, up 18.7% mainly as a result of the
higher adjusted production costs and the effect of the consumption of
inventories at Juanicipio and Noche Buena net of the reassessment of gold
inventories at Herradura.
· Gross profit and EBITDA 3 (#_ftn3) of US$282.7m and US$351.0m, down
22.7% and 23.5%, respectively.
· Exploration expenses of US$96.9m, up 24.7% as exploration spend was
front loaded.
· Profit from continuing operations before net finance costs and income
tax and profit before income tax of US$81.2m and US$47.9m, down 62.8% and
69.2%, respectively.
· Profit for the period of US$89.7m, down 36.4%.
· Basic and diluted EPS from continuing operations of US$8.8 cents per
share, down 44.7%.
· Adjusted EPS 4 (#_ftn4) of US$10.4 cents per share, down 46.4%.
· Cash generated from operations, before changes in working capital, of
US$322.9m, down 29.7%.
· Free cash flow 5 (#_ftn5) of US$18.7m in 1H23 (US$93.5m in 1H22).
· Strong balance sheet with cash and other liquid funds as at 30 June
2023 of US$889.7m (31 December 2022: $969.1m); net debt/EBITDA of 0.42x(6) (31
December 2022: 0.26x).
· Interim dividend of 1.40 US cents per share, totaling US$10.3m (1H22:
25.0m).
Operational highlights (1H23/1H22 comparisons)
As disclosed in the 2Q23 production report on 26 July 2023:
· First half attributable silver production of 28.0 moz (including
Silverstream), up 1.4% vs. 1H22.
· First half attributable gold production of 325.4 koz, up 5.4% vs. 1H22.
· Ramp up at new Juanicipio mine is progressing as planned, with full
nameplate capacity expected in 3Q23.
· Tie-in of the new Pyrites Plant to the national power grid completed
in 2Q23, followed by its commissioning and the start up of operations.
· Ongoing focus on safety, cost control and productivity.
Highlights for 1H23
US$ million unless stated H1 23 H1 22 % change
Silver production (koz) * 28,018 27,632 1.4
Gold production (oz) 325,415 308,752 5.4
Total revenues 1,343.3 1,259.1 6.7
Adjusted revenues(1) 1,430.8 1,349.0 6.1
Cost of Sales 1,060.6 893.2 18.7
Adjusted production costs(2) 773.9 659.3 17.4
Exploration expenses 96.9 77.7 24.7
EBITDA(3) 351.0 459.1 (23.5)
Profit for the period 89.7 141.0 (36.4)
Cash generated by operations before changes in working capital 322.9 459.5 (29.7)
Basic and Diluted EPS (US$)(4) 0.088 0.159 (44.7)
Basic and Diluted EPS, excluding post-tax Silverstream revaluation effects 0.104 0.194 (46.4)
(US$)
Dividend per ordinary share (US$) 0.014 0.034 (58.8)
* Silver production includes volumes realised under the Silverstream contract
(1) Adjusted revenues are the revenues shown in the income statement adjusted
to add back treatment and refining charges and the effects of metals prices
hedging. The Company considers this is a useful additional measure to help
understand underlying factors driving revenue in terms of volumes sold and
realised prices
(2) Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and unproductive
costs. The Company considers this a useful additional measure to help
understand underlying factors driving production costs in terms of the
different stages involved in the mining and plant processes, including
efficiencies and inefficiencies as the case may be and other factors outside
the Company's control such as cost inflation or changes in accounting
criteria.
(3) Earnings before interest, taxes, depreciation and amortisation (EBITDA) is
calculated as profit for the year from continuing operations before income
tax, less finance income, plus finance costs, less foreign exchange
gain/(loss), less revaluation effects of the Silverstream contract and other
operating income plus other operating expenses and depreciation.
(4) The weighted average number of shares for H1 2023 and H1 2022 was 736.9m.
See Note 8 in the Interim Consolidated Financial Statements.
Commentary on the Group's results
Operating results
First half attributable silver production of 28.0 moz (including Silverstream)
increased 1.4% vs. 1H22, primarily due to the ramp-up of Juanicipio, partially
offset by the lower ore grade at San Julián (DOB).
First half attributable gold production of 325.4 koz increased 5.4% vs. 1H22
mainly due to the increased volume of ore processed and higher ore grade at
Herradura and Saucito, partially compensated for by the decrease in gold
production at Noche Buena.
First half by-product lead production increased 2.2% vs. 1H22 due to the
increased contribution from Juanicipio and higher ore processed at Fresnillo,
partly offset by the lower ore grade at Saucito.
First half by-product zinc production decreased 1.5% vs. 1H22 due to the lower
ore grades at Saucito and San Julián (DOB), mitigated by the increased
production at Juanicipio and the higher ore processed at Fresnillo.
With profound sadness we informed the tragic loss of two of our colleagues.
The safety and wellbeing of our people remains our absolute priority and our
aim is to promote a safety culture that is upheld by our robust safety
management system and a preventive culture. The 'I Care, We Care' philosophy
continued to be rolled out across the business, focusing on critical risk and
control management, leadership practices, preventive management, learning from
high-potential incidents and contractor engagement.
Financial results
Total revenues increased 6.7% to US$1,343.3 million in 1H23, mainly due to the
increased volumes of gold and silver sold at higher prices, partly offset by
the lower zinc price.
The average realised silver price increased 2.4% from US$22.8 per ounce in
1H22 to US$23.3 per ounce in 1H23, while the average realised gold price rose
4.1%, from US$1,871.1 per ounce in 1H22 to US$1,948.9 per ounce in 1H23.
However, the average realised zinc and lead by-product prices decreased 29.5%
and 4.7% against their corresponding periods, to US$122.4 cents and US$93.7
cents per pound, respectively.
Adjusted production costs 6 (#_ftn6) increased by 17.4% to US$773.9 million
in 1H23. The US$114.5 million increase resulted mainly from: i) the adverse
effect of the 10.2% average revaluation of Mexican peso vs. the US dollar
(US$45.0 million); ii) underlying cost inflation excluding the revaluation of
the Mexican peso vs. US dollar (US$41.6 million) - these two factors combined
resulted in a cost inflation in US dollars of 13.4%, which increased adjusted
production cost by US$86.6 million; iii) costs from the start-up of the
beneficiation plant and mine ramp up at Juanicipio (US$19.6 million); iv)
higher stripping to cost at Herradura (US$19.5 million); v) increased
maintenance, contractors, operating materials and diesel consumption due to
longer haulage distances, deeper mines and increased development works
(US$16.7 million); and vi) higher volume of ore processed (US$5.4 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$19.8 million); and ii) the reclassification
of fixed costs incurred at Herradura and Noche Buena during the 14 days
illegal stoppage to unproductive costs (-US$13.5 million) (see 1H23
Operational Review -Herradura).
Additionally, the variation in the change in inventories had a negative effect
of US$32.3 million vs. 1H22. The change in inventories in 1H23 of US$26.3
million was explained by the decrease in inventories at Juanicipio as a result
of the start up of the beneficiation plant in 2Q23, and at Noche Buena as it
approached the end of its mine life. This was partly mitigated by the gold
inventory uplift at Herradura.
Depreciation remained broadly stable at US$236.3 million, 1.1% up. This is
mainly due to the depreciation of the additional asset base at Juanicipio, and
to a lesser extent, increased amortisation of capitalised mining works at
Fresnillo and Saucito, partly mitigated by the lower depreciation at Noche
Buena.
The factors mentioned above resulted in an 18.7% increase in cost of sales
compared with 1H22.
The increase in revenues was more than offset by the rise in cost of sales,
resulting in a 22.7% decrease in gross profit to US$282.7 million in 1H23.
Exploration expenses increased by 24.7% from US$77.7 million in 1H22 to
US$96.9 million in 1H23 as the exploration programme was accelerated at both
brownfield and greenfield projects in 1H23.
Other expenses of US$33.5 million in 1H23 increased by US$26.3 million,
primarily explained by the write off of 20 thousand gold ounces, following
illegal extraction of ore from the leaching pads at Soledad-Dipolos.
Driven by a decrease in gross profit, EBITDA decreased by 23.5%, with EBITDA
margin decreasing from 36.5% in 1H22 to 26.1% in 1H23. Similarly, profit from
continuing operations before net finance costs and income tax decreased from
US$218.2 million in 1H22 to US$81.2 million in 1H23, a decrease of 62.8%.
The net Silverstream effect recorded in the 1H23 income statement was a loss
of US$17.0 million (US$23.3 million amortisation profit and -US$40.3 million
revaluation loss), which compared favourably to the net loss of US$36.3
million registered in 1H22. The negative revaluation was mainly driven by the
decrease in the forward silver price curve and an updated mine plan, which
considers a decrease in silver reserves.
Net finance costs of US$19.5 million decreased 30.1% compared to the US$27.9
million recorded in 1H22, primarily due to the higher interest gained on short
term deposits and investments. Financial expenses in 1H23 included mainly: i)
interest paid on the outstanding US$317.9 million from the US$800 million
Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes due
2050.
The decrease in profit from continuing operations, together with the net
Silverstream loss, resulted in a 69.2% decrease in profit from continuing
operations before income tax from US$155.2 million in 1H22 to US$47.9 million
in 1H23.
Tax income for the period was US$19.5 million, which compared favourably to
the US$6.8 million tax expense in 1H22. The effective tax rate, excluding the
special mining rights, was -40.7% (1H22: 4.4%), which was substantially below
the 30% statutory tax rate. The reasons for the unusual positive effective tax
rate was the significant permanent differences between the tax and the
accounting treatment related mainly to: i) the effect of the 11.8% revaluation
of the Mexican peso/US dollar spot exchange rate in 1H23 on the tax value of
assets and liabilities; and ii) the inflation rate (Mexican Consumer Price
Index), which impacted the inflationary uplift of the tax base for assets and
liabilities.
Mining rights income for the first half of the period were US$22.3 million
compared to the mining rights charges of US$7.4 million registered in 1H22.
Profit for the period decreased from US$141.0 million in 1H22 to US$89.7 in
1H23, a 36.4% decrease period-on-period as a result of the factors described
above. Profit due to non-controlling interests was US$25.0 million reflecting
the profit generated at Juanicipio, where MAG Silver owns 44% of the
outstanding shares. Accordingly, profit attributable to equity shareholders of
the Group was US$64.7 million, a 44.9% decrease half-on-half.
Excluding the effects of the Silverstream contract, profit for the year
decreased from US$166.3 million to US$101.6 million, a 38.9% decrease.
Cash generated by operations before changes in working capital decreased by
29.7% to US$322.9 million, mainly as a result of the lower profits generated
in the year.
Capital expenditure in 1H23 totalled US$227.8 million, a 23.8% decrease over
1H22. Investments during the period included mine development and stripping,
purchase of in-mine equipment, construction of a leaching pad at Herradura,
the deepening of the San Carlos and Jarillas shafts and investments in
tailings dams.
Other uses of funds during the period were income tax, special mining rights
and profit sharing paid of US$192.8 million (US$141.2 million in 1H22) and
dividends paid of US$98.0 million (US$176.9 million in 1H22).
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds of US$889.7 million as of 30 June
2023, decreased -8.2% and -22.8% versus 31 December 2022 and 30 June 2022
respectively. Taking into account the cash and other liquid funds of US$889.7
million and the US$1,158.9 million outstanding Senior Notes, Fresnillo plc's
net debt is US$269.2 million as at 30 June 2022. This compares to the net debt
position of US$15.9 million as at 31 December 2022. Considering these
variations, the balance sheet at 30 June 2023 remains strong, with a net debt
/ EBITDA ratio of 0.42x 7 (#_ftn7) .
Interim Dividend
The Board of Directors has declared an interim dividend of 1.40 US cents per
Ordinary Share totalling US$10.3 million, which will be paid on 14 September
2023 to shareholders on the register on 11 August 2023. The dividend will be
paid in UK pounds sterling unless shareholders elect to be paid in US dollars.
This interim dividend is lower than the previous period due to the decrease in
profit in 1H23, and remains in line with the Group's dividend policy. This
decision was made after a comprehensive review of the Group's financial
situation, assuring that the Group is well placed to meet its current and
future financial requirements, including its development and exploration
projects.
As previously disclosed, the corporate income tax reform introduced in Mexico
in 2014 created a withholding tax obligation of 10% (including to foreign
nationals). The 2023 interim dividend will be subject to this withholding
obligation.
Outlook
2023 guidance remains unchanged. Attributable silver production is expected to
be in the range of 57.0 to 64.0 moz (including Silverstream) while
attributable gold production is expected to be in the range of 590 to 640 koz.
Expressed in silver equivalent ounces 8 (#_ftn8) , production is expected to
be 104 -115 million ounces.
Exploration expenses for 2023 are expected to remain around US$175 million.
Capex for 2023 has been revised from US$630 million to US$555 million
following a project review and timetable optimisation.
Analyst Presentation
Management will host a webcast for analysts and investors today at 9am UK.
Registration and access will be provided on the homepage of Fresnillo's
website and directly via this link:
https://kvgo.com/IJLO/Fresnillo_1H23_Interim_Results
Conference call:
Participants will be able to join the call with the usual dialling numbers,
but they will also be able to pre-register through a link, and they will
receive a pin code, confirmation email and a calendar invite directly to their
inbox. When they dial into the call, they can just input the code and gain
access and bypassing the operator.
Conference Call Registration Link:
https://www.netroadshow.com/events/login?show=37639fc5&confId=53607
Avoid wait time - Bypass speaking with an operator to join the call
Receive a calendar invite with call access details including unique PIN.
Only if participants require operator assistance:
Operator Assisted Dial-In:
All Other Locations: +44 20 3936 2999
United Kingdom (Local): +44 20 4587 0498
United Kingdom (Toll-Free): +44 800 358 1035
USA (Local): 1 646 664 1960
USA (Toll-Free): 1 855 9796 654
Global Dial-In Numbers:
https://www.netroadshow.com/conferencing/global-numbers?confId=53607
Access Code: 334950
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)20 7250 1446
Peter Ogden
ABOUT FRESNILLO PLC
Fresnillo plc is the world's largest primary silver producer and Mexico's
largest gold producer, listed on the London and Mexican Stock Exchanges under
the symbol FRES.
Fresnillo plc has 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 has a strong and long tradition of exploring, mining,
a proven track record of mine development, reserve replacement, and production
costs in the lowest quartile of the cost curve for silver. Fresnillo plc's
goal is to maintain the Group's position as the world's largest primary silver
company and Mexico's largest gold producer.
(1) Operations at Soledad-Dipolos are currently suspended.
FORWARD LOOKING STATEMENTS
Information contained in this announcement may include 'forward-looking
statements'. All statements other than statements of historical facts included
herein, including, without limitation, those regarding the Fresnillo Group's
intentions, beliefs or current expectations concerning, amongst other things,
the Fresnillo Group's results of operations, financial position, liquidity,
prospects, growth, strategies and the silver and gold industries are
forward-looking statements. Such forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances.
Forward-looking statements are not guarantees of future performance and the
actual results of the Fresnillo Group's operations, financial position and
liquidity, and the development of the markets and the industry in which the
Fresnillo Group operates, may differ materially from those described in, or
suggested by, the forward-looking statements contained in this document. In
addition, even if the results of operations, financial position and liquidity,
and the development of the markets and the industry in which the Fresnillo
Group operates are consistent with the forward-looking statements contained in
this document, those results or developments may not be indicative of results
or developments in subsequent periods. A number of factors could cause results
and developments to differ materially from those expressed or implied by the
forward-looking statements including, without limitation, general economic and
business conditions, industry trends, competition, commodity prices, changes
in regulation, currency fluctuations (including the US dollar and Mexican Peso
exchanges rates), the Fresnillo Group's ability to recover its reserves or
develop new reserves, including its ability to convert its resources into
reserves and its mineral potential into resources or reserves, changes in its
business strategy and political and economic uncertainty.
1H23 Operational Review
Production
Production H1 2023 H1 2022 % change
Silver (koz) 26,472 26,192 1.1
Silverstream prod'n (koz) 1,546 1,440 7.4
Total Silver prod'n (koz) 28,018 27,632 1.4
Gold (oz) 325,415 308,752 5.4
Lead (t) 27,363 26,779 2.2
Zinc (t) 49,788 50,533 (1.5)
First half attributable silver production of 28.0 moz (including Silverstream)
increased 1.4% vs. 1H22, primarily due to the ramp-up of Juanicipio, partially
offset by the lower ore grade at San Julián (DOB).
First half attributable gold production of 325.4 koz increased 5.4% vs. 1H22
mainly due to the increased volume of ore processed and higher ore grade at
Herradura and Saucito, partially compensated for by the decrease in gold
production at Noche Buena.
First half by-product lead production increased 2.2% vs. 1H22 due to the
increased contribution from Juanicipio and higher ore processed at Fresnillo,
partly offset by the lower ore grade at Saucito.
First half by-product zinc production decreased 1.5% vs. 1H22 due to the lower
ore grades at Saucito and San Julián (DOB), mitigated by the increased
production at Juanicipio and the higher ore processed at Fresnillo.
Fresnillo mine production
H1 2023 H1 2022 % change
Ore Processed (t) 1,336,142 1,194,359 11.9
Production
Silver (koz) 6,789 6,609 2.7
Gold (oz) 19,747 18,148 8.8
Lead (t) 10,972 10,432 5.2
Zinc (t) 22,790 20,139 13.2
Ore Grades
Silver (g/t) 177 189 (6.3)
Gold (g/t) 0.64 0.67 (4.5)
Lead (%) 0.96 1.04 (7.7)
Zinc (%) 2.27 2.35 (3.4)
First half silver production increased 2.7% vs. 1H22 mainly as a result of the
increase in volume of ore processed, partly offset by the lower ore grade and
recovery rate.
Mine development rates increased half on half to an average of 3,197m per
month in 1H23 (1H22: 2,883m per month), primarily due to the higher
productivity of the unionised personnel.
First half by-product gold production increased 8.8% vs. 1H22 primarily as a
result of the higher volume of ore processed, partly offset by the lower ore
grade.
The silver ore grade in 2023 is expected to remain in the range of 185-205
g/t, while the gold ore grade is expected to remain in the range of 0.50-0.70
g/t.
Progress at the San Carlos shaft has been slower than anticipated due to
service infrastructure redesign. The commissioning of the San Carlos shaft has
been delayed to year end, which will provide further time to optimise haulage
of ore through ramps whilst the two sections of the shaft are connected. This
project is expected to support a reduction in haulage costs.
Pyrites Plant at Fresnillo
The tie in of the Pyrites Plant to the national grid at Fresnillo was
completed in 2Q23 and commissioning began immediately with ramp up of
production expected in 2H23.
This facility and the Pyrites plant (phase I) at Saucito are together expected
to produce an average of 3.5 moz silver and 13 koz gold per year, once both
are operating at full capacity.
Saucito mine production
H1 2023 H1 2022 % change
Ore Processed (t) 1,034,921 1,008,158 2.7
Production
Silver (koz) 5,811 5,781 0.5
Gold (oz) 40,080 33,172 20.8
Lead (t) 8,251 9,444 (12.6)
Zinc (t) 12,993 15,665 (17.1)
Ore Grades
Silver (g/t) 197 199 (1.0)
Gold (g/t) 1.52 1.30 16.9
Lead (%) 0.95 1.09 (12.8)
Zinc (%) 1.65 1.97 (16.2)
First half silver production remained at similar levels vs. 1H22, as higher
volumes of ore processed were offset by the lower ore grade resulting from the
delays in preparation, thus limiting operational flexibility.
We continued working on increasing the availability of equipment and improving
the productivity of our personnel and expect to further increase volumes of
ore processed in 2H23 to reach the optimal run rate of c. 7,000 tpd.
First half by-product gold production increased 20.8% vs. 1H22 as a result of
the higher ore grade and increase in volume of ore processed.
Full year 2023 silver ore grade is estimated to remain between 190-210 g/t,
while the gold ore grade is estimated to continue to be around 1.20-1.40 g/t.
PYRITES PLANT (PHASE I)
H1 2023 H1 2022 % change
Pyrite Concentrates Processed (t) 55,844 65,690 (15.0)
Production
Silver (koz) 238 277 (14.1)
Gold (oz) 601 932 (35.5)
Ore Grades
Silver (g/t) 192 176 9.1
Gold (g/t) 1.44 1.40 2.9
First half silver production decreased 14.1% vs. 1H22 due to the decreased
volume of pyrite concentrates processed and lower recovery rates, partly
mitigated by the higher ore grade.
First half gold production decreased 35.5% vs. 1H22 as a result of the lower
recovery rate and the decrease in volume of pyrite concentrates processed,
partly offset by a higher ore grade.
Juanicipio - Attributable
H1 2023* H1 2022** % change
Ore Processed (t) 335,855 167,751 100.2
Production
Silver (koz) 4,214 2,672 57.7
Gold (oz) 9,351 6,412 45.8
Lead (t) 2,718 1,286 111.4
Zinc (t) 4,309 2,041 111.1
Ore Grades
Silver (g/t) 448 582 (23.0)
Gold (g/t) 1.18 1.53 (22.9)
Lead (%) 0.94 0.92 2.2
Zinc (%) 1.74 1.73 0.6
* Includes ore processed as part of the initial tests during the commissioning
of the Juanicipio plant and ore processed at the Fresnillo and Saucito
beneficiation plants.
** Ore processed at the Fresnillo and Saucito beneficiation plants.
Attributable first half silver and gold production reached 4.2 moz and 9.4 koz
respectively as the ramp-up progressed as planned following the commissioning
completed in 1Q23. Full nameplate capacity is expected to be reached by 3Q23.
As previously reported, ore will continue to be processed at the nearby
Saucito and Fresnillo plants as required.
Ciénega mine production
H1 2023 H1 2022 % change
Ore Processed (t) 501,401 563,094 (11.0)
Production
Gold (oz) 17,434 18,907 (7.8)
Silver (koz) 1,991 2,485 (19.9)
Lead (t) 1,504 1,684 (10.7)
Zinc (t) 1,921 2,596 (26.0)
Ore Grades
Gold (g/t) 1.18 1.14 3.5
Silver (g/t) 144 159 (9.4)
Lead (%) 0.47 0.47 0.0
Zinc (%) 0.72 0.82 (12.2)
First half gold production decreased 7.8% vs. 1H22 mainly due to the lower
volume of ore processed, partly mitigated by the higher ore grade.
First half silver production decreased 19.9% vs. 1H22 due to the decrease in
volume of ore processed and lower ore grade as a result of the increased
dilution.
The gold and silver ore grades for 2023 are estimated to remain in the ranges
of 1.0-1.1 g/t and 150-160 g/t respectively.
San Julián mine production
H1 2023 H1 2022 % change
Ore Processed Veins (t) 558,257 583,966 (4.4)
Ore Processed DOB(t) 1,050,158 1,076,326 (2.4)
Total production at San Julián
Gold (oz) 22,292 23,433 (4.9)
Silver (koz) 7,008 7,968 (12.0)
Production Veins
Gold (oz) 20,464 21,710 (5.7)
Silver (koz) 2,480 2,235 11.0
Production DOB
Gold (oz) 1,828 1,723 6.1
Silver (koz) 4,528 5,733 (21.0)
Lead (t) 3,917 3,933 (0.4)
Zinc (t) 7,775 10,093 (23.0)
Ore Grades Veins
Gold (g/t) 1.20 1.22 (1.6)
Silver (g/t) 152 131 16.0
Ore Grades DOB
Gold (g/t) 0.09 0.08 12.5
Silver (g/t) 156 193 (19.2)
Lead (%) 0.48 0.45 6.7
Zinc (%) 0.99 1.20 (17.5)
San Julián Veins
First half gold production decreased 5.7% vs. 1H22 mainly due to the decrease
in volume of ore processed and the lower ore grade as a result of lower
equipment availability, which limited access to the San Atanasio vein with
higher ore grades.
First half silver production increased 11.0% vs. 1H22 mainly due to the higher
ore grade at San Antonio, Ultima Tierra and Elisa stopes, partly offset by the
lower volume of ore processed.
Additional anchoring equipment is expected to arrive in 3Q23, which will
contribute to the normalisation of mining cycles.
We continue to expect the 2023 silver and gold ore grades to average 130-140
g/t and 1.20-1.30 g/t, respectively.
San Julián Disseminated Ore Body
First half silver production decreased 21.0% vs. 1H22 respectively, mainly due
to the lower ore grade in the areas in the periphery of the ore body and
structural geological features which slowed down the long hole drilling
cycles.
We continue to expect the 2023 silver ore grade to be in the range of 130-140
g/t.
Herradura mine production
H1 2023 H1 2022 % change
Ore Processed (t) 11,705,553 9,518,276 23.0
Total Volume Hauled (t) 50,669,525 64,333,382 (21.2)
Production
Gold (oz) 189,869 160,644 18.2
Silver (koz) 344 387 (11.1)
Ore Grades
Gold (g/t) 0.74 0.68 8.8
Silver (g/t) 1.55 1.83 (15.3)
First half gold production increased 18.2% vs. 1H22 mainly driven by the
increased volume of ore processed and higher ore grade in the sulphides in the
lower areas of the pit and positive variations with the geological model. The
aforementioned factors were partly offset by the lower recovery rate driven by
the temporary suspension of operations following an illegal stoppage by a very
small group of unionised employees, as reported in May, and the slower pace of
irrigation.
The adjusted production costs were impacted by the increase in waste material
hauled charged to costs, rather than capitalised, despite the 28.9% decrease
in the total volume of waste material hauled (capitalised and charged to
costs). This is because in 1H22 the stripping ratio for the main component of
the Herradura mine of c. 7.3 was significantly higher than the prevailing
stripping ratio for the life of the mine (LOM) of this component (under IFRIC
20 stripping costs above the average LOM stripping ratio are capitalised),
this higher stripping ratio was due to the need to prepare and gain access to
the mineral benches; whereas in 1H23 the 3.4 stripping ratio was below the
prevailing stripping ratio for LOM of this component, thus recognising all the
stripping as cost in the income statement.
The gold ore grade in 2023 is estimated to be in the range of 0.65-0.75 g/t.
Noche Buena mine production
H1 2023 H1 2022 % change
Ore Processed (t) 2,510,639 4,384,077 (42.7)
Total Volume Hauled (t) 8,424,676 13,283,655 (36.6)
Production
Gold (oz) 25,878 47,103 (45.1)
Silver (koz) 8 14 (42.9)
Ore Grades
Gold (g/t) 0.47 0.57 (17.5)
Silver (g/t) 0.17 0.26 (34.6)
First half gold production decreased 45.1% vs. 1H22 as a result of the
decrease in the volume of ore processed and lower ore grade following the mine
closure process which started in May.
The 2023 estimated gold ore grade remains in the range of 0.40-0.50 g/t, as
the mine approaches the end of its operational life.
Soledad-Dipolos mine
The Company has recently 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 has
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
Interim Consolidated Income Statement. The Company is taking relevant actions
so that the illegal leaching activities be ceased a soon as possible. The
Company does not currently expect any further losses of this inventory to be
significant.
Below we provide an update on other projects which are expected to contribute
to our medium and long term growth. These projects have not yet been approved
by the Board and are subject to ongoing internal review. However, certain
minor works and exploration activities might be in progress in preparation for
Board approval and as such, are included within the 2023 approved capex and
exploration budget.
Advanced exploration projects
Rodeo
Rodeo is an open pit, heap leaching gold project located in central Durango
state. Disseminated gold occurs in volcanic rocks showing thorough oxidation
down to depths exceeding 200 meters, with good metallurgical recoveries in
ores coming from a projected low strip ratio pit. During 1H 2023 several
regional studies continued, including hydrological, environmental, and social
base lines along with the analysis of power supply and infrastructure
alternatives. A community and local-to-state level government engagement
programme has been implemented, focused on education and health initiatives
that have been well received. Several land access alternatives continue in
negotiation with the local Ejidos and once agreements are reached,
comprehensive pre-feasibility to feasibility level exploration, engineering,
and development programmes will be performed.
Orisyvo
Orisyvo is a world-class, high-sulphidation epithermal disseminated gold
deposit located in the Sierra Madre mountains of Chihuahua state. Several
activities aimed at delivering an updated pre-feasibility study progressed as
scheduled during 1H 2023. Simultaneously, a region-wide community and local
government engagement programme fostering the improvement of educational,
health, environmental care and entrepreneurship skills of local stakeholders
has been strengthened and the preparation for the required indigenous
consultation and land acquisition strategies have advanced as scheduled as
well.
Some of the technical works in progress include the analysis of alternatives
for power supply, conceptual mine design and engineering scenarios, detailed
environmental studies for permitting and options for tailings storage. The
detailed geotechnical studies of the mineralised and barren rocks have been
completed, and initial bio-oxidation and Albion metallurgical processing
technologies delivered promising results for increasing the gold recovery in
sulphide ores and a full-scale investigation of these methods is underway.
Tajitos
Tajitos is a low strip ratio open-pit, heap-leach, orogenic type, disseminated
gold project located in the Herradura Corridor of northwestern Sonora state.
During 1H 2023, 46,972 meters of core and reverse circulation drilling were
completed in the main resource area, as part of a programme designed to fully
evaluate the ore bodies to deliver an updated resource estimation by the end
of the year. Additional metallurgical investigations and geotechnical studies
are scheduled for 2H 2023, as we look to produce a new preliminary economic
study in 2024.
After completing over 95% of claim consolidation of the district and acquiring
an important land block, environmental studies for permitting the exploration
drilling of the remaining exploration targets in the region are underway and
additional land purchase for mine development is under consideration.
Guanajuato
Guanajuato is a historic, world-class gold and silver epithermal vein field
stretching more than 40 kilometers along the central Mexican state of
Guanajuato. Exploration was intensified in 1H 2023, with core drilling
amounting to 44,704 meters distributed in the three main sectors making up the
district. Good results have been obtained from quartz veins and stockwork
zones, the latter amenable to massive, low-cost mining methods in the Veta
Madre, Peregrina, and San Gregorio areas. The application of our upper-level
epithermal model has yielded significant intercepts below hydrothermally
altered, barren zones at the surface. Investigations of the use of ore-sorting
technologies for the Guanajuato ores and detailed metallurgical test work are
in progress. A preliminary economic study was completed, delivering
possibilities for conceptual mining and processing scenarios for the district.
These types of studies will continue as an updated resource estimation becomes
available in late 2023.
Exploration
Exploration was accelerated during 1H 2023 on both brownfield and greenfield
projects; the 490, 996 meters completed by the end of June represent a 3%
increase from the same period of 2022. 90% of the drilling was devoted to
brownfield targets, including in-mine zones for resource conversion/expansion
and increase of the certainty of reserves for short to medium-term mine
planning, and also the evaluation of early-stage peripheral targets. In
particular, drilling was intensified at the Fresnillo and San Julian
districts.
Greenfield drill programmes designed to test expansion targets at the
Candameña and San Juan projects in Mexico and Capricornio in Chile advanced
well. In Peru, good results were obtained from the strengthening of our
community and government engagement initiatives, allowing our teams to resume
drilling at the Pilarica project and the initiation of the programme at Santo
Domingo, both of which remain in progress.
The evaluation of our full portfolio was renewed in 1H 2023, delivering an
updated ranking of our prospect pipeline for budget allocation to continue our
programme of project generation using an array of geological, geochemical,
geophysical, and remote sensing techniques. The effort to strengthen our
portfolio will continue as a standard practice of our exploration teams.
In the first six months, US$96.9 million of exploration expenses were recorded
in the income statement, an increase of 24.7% over 1H22. Total risk capital
invested in exploration for the full year 2023 remains at approximately US$175
million.
Related party transactions
Details of related party transactions that have taken place in the first six
months of the current financial year are detailed in note 16 of the interim
consolidated financial statements.
Health and safety, environment and community relations
We are committed to our Purpose: "Contribute to the wellbeing of people
through the sustainable mining of silver and gold". This commitment underlines
the importance of integrating responsible business practices deeply into our
business model and considering factors that affect stakeholders at every
critical decision-making level.
Our People
Our workforce is vital to achieve our organisational purpose; thus, we
prioritise their health, safety and wellbeing, and aim to attract, nurture,
and retain top talent, ensuring long-term engagement. We promote leadership
development programmes, wellbeing initiatives, continuous improvement projects
and actively collaborate with unions to foster trust through ongoing dialogue.
Our goal is to cultivate an inclusive culture where diversity is valued, and
all employees feel respected and empowered to reach their full potential.
Table 1. Workforce composition
As at June 30, As at December 31, 2022 % Change
2023
Unionised employees 5,817 6,360 -8.54
Non-unionised employees 1,562 1,710 -8.65
Total unionised and non-unionised employees 7,379 8,070 -8.56
Unionised and non-unionised women (%) 13.80 14.03 -
Contractors 13,060 13,639 -4.25
Total workforce 20,439 21,709 -5.85
Total women (%) 11.78 12.11 -
Table 2. Turnover
As at June 30, 2023 As at June 30, 2022
Voluntary turnover (%) 5.10 4.14
Total turnover (%) 12.36 6.45
We have continued to increase the participation of women in our workforce
throughout recent years. The percentage of unionised and non-unionised women
was 13.80% (14.03% in 2022) while the percentage of our overall total
workforce, including contractors, was 11.78% (12.11% in 2022). In 2022 we
achieved our 2025 target, well ahead of time, of 12% of women in our workforce
and we expect to maintain it throughout 2023. We also expect to continue
making progress towards our target of 8% women in managerial roles by 2025.
The increase in total turnover in 1H23 was explained by: i) the administrative
reorganisation that was undertaken to achieve efficiencies and cost
reductions; and ii) the workforce consolidation at the Herradura district
following the closure of mine operations at Noche Buena.
During the period we continued our female and reproductive health programmes
such as gestational follow-up and gynaecological check-ups and finalised the
construction of lactation facilities at Penmont and Juanicipio, adding to
those already constructed in Ciénega and Saucito last year, while at
Fresnillo, San Julián and exploration offices, flexible schedules exist to
allow for lactation at home.
Our 'Women for Women' Mentoring Programme's first generation graduated, and an
open invitation has been distributed among our female staff for a new
generation to begin in the second half of the year, which will incorporate
lessons learnt from the first generation to enhance the programme's
effectiveness. We have also defined a set of KPIs for the Women Leadership
Program that aim to measure our understanding of aspects of representation,
retention, compensation, development and environment to better assess our
Diversity, Equity and Inclusion (DEI) strategy progress over time. Finally, we
also supported the creation of the first Women in the Mining Industry Survey
in collaboration with the Mexican Mining Chamber and KPMG.
Our organisation began its cultural evolution journey in 2021 focused on human
dignity and respect, equal opportunities and non-discrimination. Our goal
remains to prioritise the wellbeing of our workforce through results oriented
collaborative ecosystems that strive to improve the company's effectiveness
and efficiency. As part of these endeavours, we have updated and deployed a
new organisational competencies model based on agility, inclusive
collaboration, results-oriented commitment, trust-based communication, talent
development and emotional intelligence.
The Behaviour Commissioners continued to deal with related cases to the
harassment prevention and attention programme. In addition, three years into
the programme, a review and update of the protocol has been initiated to
incorporate learnings and experiences from its application.
We also updated our Code of Conduct building up on its predecessor with the
purpose of homogenising our applicable behavioural framework with our parent
company, Industrias Peñoles.
Occupational Health
Our approach aims to pre-emptively identify and manage the health risks to
which our workforce is exposed. Preventive care and the promotion of healthier
lifestyles can limit certain chronic diseases and enhance overall wellness and
fitness for work. While our focus is on prevention, emergency response is a
core competence of all our health teams. In recent years, the health
departments of each business unit have expanded beyond occupational health
programmes, establishing a more comprehensive perspective and promoting other
aspects of health, defining five lines of action compatible with the 'I Care,
We Care' philosophy: Health surveillance, Integral wellbeing, Industrial care,
Development and Innovation and Emergency Preparedness.
We persist in implementing measures to reduce psychosocial risk factors and
foster well-being programmes that align with our desired organisational
culture. During the period we concluded the second phase of the Living in
BALance Programme, identifying the top 3 critical risks: anxiety/ depression,
inadequate sleeping habits and work-related stress. We also began a pilot for
a Fatigue Management System at Herradura and Juanicipio, using technology that
allows us to monitor worker's sleep quality in order to reduce accidents,
increase productivity and promote a healthier lifestyle.
We continue working towards the 'Safe and Healthy Workplace Environments'
certification of all our business units by the Mexican Social Security
Institute, a voluntary programme to implement strategies and measures to
improve health, safety and well-being of workers, as well as productivity and
quality in the workplace, achieving the recertification of Penmont during this
period, with an objective to obtain it for the first time in Ciénega and San
Julián later in the year.
Safety
As an organisation, safety stands as one of our core values, and our
unwavering commitment is to meet the objective of zero harm. Our aim is to
foster a safety culture that is upheld by our robust safety management system,
with prevention being a fundamental pillar of our approach. Our 'I Care, We
Care' philosophy promotes leadership, accountability, risk-based management
systems and cross-functional learning. In 2022 we set a goal to achieve zero
fatalities and a Total Recordable Injury Frequency Rates (TRIFR) in the
International Council on Mining and Metals (ICMM) ranges. To achieve this
vision, during 2023 we have continued to deploy the 'I Care, We Care' Safety
Plan, focusing on critical risk and critical control management, compliance
with leadership practices, preventive management, learning from high-potential
incidents and contractor engagement.
The 'I Care, We Care' Operational Committee - formalised last year to ensure
the effective implementation of critical risk management and incident
management - holds monthly meetings to review performance results, progress in
the operating plan, as well as carrying out leadership practices on the field.
Sub-optimal critical risks are emphasised and communicated accordingly across
our operations to capitalise from lessons learnt. As part of the management of
critical risks, awareness sessions were held across our mining units with the
participation of our COO, unit managers and in partnership with the union, to
train the workforce on accident prevention, and to empower them through the
materialisation of the "Right to Say No" Policy in case of a missing or failed
critical control. We have also launched '3 in line,' a mentorship programme
that accelerates learning for young safety supervisors by pairing them with
experienced peers. It aims to foster safety awareness and develop sound
judgment in safety practices.
With profound sadness we regret to inform of the tragic loss of two of our
colleagues - a stark reminder of the critical work ahead in our unwavering
pursuit of zero harm. Despite continued improvement compared to previous
periods, our performance of Total Recordable Injury Frequency Rates (TRIFR)
and Lost Time Injury Frequency Rates (LTIFR) per million hours worked
increased to 12.04 (10.26 in 2022) and 6.79 (5.44 in 2022) respectively. It is
important to highlight though that only 15% of the TRIFR indicator corresponds
to high potential accidents, meaning that 85% of the cumulative injuries of
the period were generated in incidents associated to low potential risks.
Furthermore, we remain steadfast in our diligent reporting of near-miss
incidents to identify any missed or failed critical controls that could lead
to harm, with the purpose of fostering worker engagement in an early warning
system, monitoring the safety of operational areas, and facilitating timely
decision-making.
Table 3. TRIFR and LTIFR performance*
As at June 30, As at December 31, 2022 % Change
2023
Total Recordable Injury Frequency Rates (TRIFR) 12.04 10.26 17.3
Lost Time Injury Frequency Rates (LTIFR) 6.79 5.44 24.8
* Frequencies for every 1,000,000 hours worked
Tailings Storage Facilities
We implement best governance and engineering practices to manage our Tailings
Storage Facilities (TSF). Our governance framework considers:
· The Board and the HSECR Committee establish the mandate and rely on
management for implementation.
· The Technical Review Committee is accountable for oversight.
· The CEO (Accountable Executive), Senior Management of Operations and
Mine Managers (Risk Owners) are accountable for operating in compliance with
the policies and governance.
· Peñoles' Technical Services Co-CEO (Accountable Executive),
Assistant VP Infrastructure and Engineering Corporate Tailings Specialists and
Managers are accountable for the governance.
· TSF Operators, Regional TSF Superintendents and Managers, and
Engineers of Record (EOR) are responsible for Operation, Control and
assurance.
· Independent Tailings Review Panel (ITRP) and Independent Inspectors
provide independent verification.
During the first half of the year, relevant activities have been carried out
in tailings management, starting with the authorisation and issuance of the
Responsible Tailings Management Policy by our Board of Directors, and the
guidelines for the Tailings Management System. These establish the compliance
guidelines for the best international practices adopted by the Company.
At each site, progress has been made in the operational units, projects, and
those under care and maintenance. The Orysivo project has begun its design
phase accompanied by the company that will serve as the design registrar until
this role transitions into the role of the Engineer of Record (EoR), as
outlined in our guidelines. At Ciénega, a secure TSF has been successfully
developed, adhering to the best practice guides of the Mining Association of
Canada (MAC), the International Commission on Large Dams (ICOLD) and the
Canadian Dam Association (CDA). It has been designed to provide a safe space
for depositing tailings until the end of the mine's life. Finally, as the
Juanicipio unit begins operations, its TSF has transitioned to an operational
status with full compliance with standards, accompanied by a formal EoR that
supports day-to-day operations.
Environmental Management
We optimise resource use to curb our impacts and are accountable for our
environmental footprint. We're also committed to implement sound measures to
safeguard biodiversity and ensure that it is not adversely affected by our
operations.
To pursue these ambitions, throughout the period, we developed ICMM high
potential methodology (risk management system) for environmental risks,
resulting in a portfolio identification and prioritisation of top risks, which
we will roll-out in phases in the upcoming months. We also conducted the
engineering survey for the project design that will materialise our ambition
to eliminate freshwater consumption in our mining and mineral processing
activities at the Fresnillo District and are in the process of updating our
conceptual mine closure plan at Noche Buena, including geological, geochemical
and hydrology characterisation studies, among others.
We've also held biodiversity-oriented awareness training, activities and
reforestation campaigns in our neighbouring communities in collaboration with
volunteers from our workforce, communities and business partners, capitalising
on these experiences to instil an environmental-prone culture in our
stakeholders. Additionally, we supported San Julián and Ciénega neighbouring
communities in forest firefighting activities.
Climate Change
We continue to mature our capabilities to disclose climate-related financial
information, considering the risks and opportunities of climate change and
setting the road ahead towards the compliance with the IFRS S1 General
Requirements for Disclosure of Sustainability-related Financial Information
and IFRS S2 Climate-related Disclosures issued by the International
Sustainability Standards Board (ISSB) in June 2023. During the period we
carried out an external assurance of our 2022 Greenhouse Gas (GHG) emissions
and are in the process of issuing an internal reporting procedure,
capitalising from lessons learnt across different voluntary and regulatory
assurance exercises. Additionally, we enrolled in the third generation of
Mexico's UN Global Compact's Climate Accelerator Programme to build capacities
that will support us moving forward in our climate ambitions. Finally, we're
piloting different mineral processing technologies that have the potential to
improve our performance while minimising our impact on the environment.
Community Relations
We earn and maintain the trust of our communities through meaningful
engagement and by being accountable for our impacts. Our community strategy,
which embraces all phases of the mining lifecycle, aims to build mutual
understanding between our operations and local communities, ensuring that we
engage, develop and grow together. We recognise the strategic importance of
going beyond maintaining our social licence to operate - supporting the issues
that matter to our communities and working with them for the long term.
Sustainable Development Goal 3 "Good Health and Wellbeing"
We organised Community Health Weeks for the communities of Fresnillo, San
Julián and Ciénega in partnership with National University Foundation (UNAM
Foundation) and local authorities, providing free dental and eye care, general
medicine and physiotherapy, benefiting a little under 4,000 people. Activities
are programmed at Penmont, Guanajuato and Orysivo for the second half of the
year. Also, as part of our sports and physical reactivation axis at the
Fresnillo District, we initiated the Santos Fresnillo Soccer Academy
activities and organised a championship with Social Cause, inaugurated the
Baseball Academy, and in synergy with 'Fútbol Más', implemented work
sessions with the objective of promoting social cohesion at Penmont.
Sustainable Development Goal 6 "Clean Water and Sanitation"
In Penmont, we carried out a study to determine the conditions of the wells in
10 communities, including level checks, pumping equipment conditions, and well
desilting. The results were presented to state and municipal authorities as
well as civil organisations and NGOs in the area, in order to involve them in
possible maintenance and creation of new wells in the zone. In San Julián,
the community committee is working to develop a collective water system. The
project involves the company contributing a portion of the materials, the
community working together with the NGO FORMAC, and the state of Chihuahua
providing the majority of the resources and manpower.
Sustainable Development Goal 4 "Quality Education"
We sponsored teams from our communities to compete at the Laguna Regional
FIRST Robotics Competition to foster science, technology, engineering and
mathematics (STEM) education. This programme aims to develop the talent and
skills of high school students by promoting teamwork, leadership, solidarity
and project management. The Volunteer of the Year Award, Gracious
Professionalism, Team Spirit and Rookie All Star Award were won by Fresnillo
sponsored teams. Additionally, graduates of our four teams compete for 100%
scholarships in partnership with La Salle University at the Laguna and
Noroeste campuses. We also continued the 'Picando Letras' programme at Penmont
and Juanicipio carrying out reading activities at local schools, such as:
Literary Creation, 'Reencounter with my books' workshop and reading circles,
among others.
Sustainable Development Goal 8 "Decent Work and Economic Growth"
We continued with our entrepreneurial programmes to promote capacity building,
micro-enterprises and productive project development, carrying out workshops
in neighbouring rural communities with the support of the Education for Rural
Development Brigade. We provided training in cleaning and personal hygiene
products, recycling, family gardens and fodder cactus; some of these projects
are already at the marketing stage. On the other hand, 'Emprende Kids' at San
Julián, aims to encourage elementary students to create a business idea
through playful activities, fostering skills such as leadership, teamwork and
communication, with guidance from Pro Empleo.
FINANCIAL REVIEW
The interim consolidated financial statements of the Group for the six months
ended 30 June 2023 have been prepared in accordance with IAS 34 Interim
Financial Reporting as issued by the IASB and as adopted by the UK. All
comparisons refer to the first halves of 2023 and 2022, unless otherwise
noted. The financial information and half year on half year variations are
presented in US dollars, except where indicated. Management recommends reading
this section in conjunction with the Interim Financial Statements and their
accompanying Notes.
INCOME STATEMENT
1H 2023 US$ million 1H 2022 US$ million Amount Change US$ million Change %
Adjusted revenue 9 (#_ftn9) 1,430.8 1,349.0 81.8 6.1
Total revenue 1,343.3 1,259.1 84.2 6.7
Cost of sales 1,060.6 893.2 167.4 18.7
Gross profit 282.7 365.9 (83.2) (22.7)
Exploration expenses 96.9 77.7 19.2 24.7
Operating profit 81.2 218.2 (137.0) (62.8)
EBITDA 10 (#_ftn10) 351.0 459.1 (108.1) (23.6)
Income tax expense including special mining rights (41.8) 14.2 (56.0) N/A
Profit for the period 89.7 141.0 (51.3) (36.4)
Profit for the period, excluding post-tax Silverstream effects 101.6 166.3 (64.7) (38.9)
Basic and diluted earnings per share (US$/share) (5) 0.088 0.159 (0.071) (44.7)
Basic and diluted earnings per share, excluding post-tax Silverstream effects 0.104 0.194 (0.09) (46.4)
(US$/share)
The Group's financial results are largely determined by the performance of our
operations. However, there are other factors such as a number of macroeconomic
variables, that lie beyond our control and which affect financial results.
These include:
METALS PRICES
The average realised silver price increased 2.4% from US$22.8 per ounce in
1H22 to US$23.3 per ounce in 1H23, while the average realised gold price rose
4.1%, from US$1,871.1 per ounce in 1H22 to US$1,948.9 per ounce in 1H23.
However, the average realised zinc and lead by-product prices decreased 29.5%
and 4.7% against their corresponding periods, to US$122.4 cents and US$93.7
cents per pound, respectively. The decrease in zinc and lead prices had an
adverse effect on cash cost as it lowered by product credits.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 30 June 2023 was $17.07 per
US dollar, compared to the exchange rate at 31 December 2022 of $19.36 per US
dollar. The 11.8% spot revaluation had a positive effect on deferred taxes and
mining rights.
The average spot Mexican peso/US dollar exchange rate decreased from $20.28
per US dollar in 1H22 to $18.21 per US dollar in 1H23. As a result, there was
an adverse effect of US$45 million on the Group's costs denominated in Mexican
pesos (approximately 45% of total costs) when converted to US dollars.
COST INFLATION
In 1H23, cost inflation (increase in unit price) considering Fresnillo plc's
basket of goods and services was 13.4% (including the adverse effect of the
revaluation of the Mexican peso vs. US dollar). Underlying cost inflation
(cost inflation excluding the revaluation of the Mexican peso vs. US dollar)
was 6.2%. The main components of our cost inflation (including the effect of
the revaluation of the Mexican peso vs. US dollar) basket are listed below:
Labour
Unionised employees 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 dollars, this resulted in a
weighted average labour inflation of 20.3%.
Energy
Electricity
The weighted average cost of electricity in US dollars increased 18.3% from
US$8.88 cents per kw in 1H22 to US$10.50 cents per kw in the same period of
2023, reflecting an increase in the average generating cost of the Comisión
Federal de Electricidad (CFE), the national utility.
Diesel
The weighted average cost of diesel in US dollars increased 16.2% to 102.97 US
cents per litre in 1H23, compared to 88.59 US cents per litre in 1H22. This
resulted primarily from the revaluation of the Mexican peso vs. US dollar and
the gradual lifting of the Mexican Government's fuel tax relief that
subsidised the cost of diesel and gasoline in Mexico in previous months.
Operating materials
Half on half change in unit price %
Lubricants 33.5
Other reagents 12.1
Sodium cyanide 10.7
Steel for drilling 9.6
Explosives 8.5
Tyres 5.7
Steel balls for milling (0.1)
Weighted average of all operating materials 9.4
Unit prices of the majority of key operating materials significantly increased
in US dollar terms primarily reflecting global inflationary pressures and
supply disruptions. As a result, the weighted average unit prices of all
operating materials over the half increased by 9.4%.
Contractors
Agreements are signed individually with each contractor company and include
specific terms and conditions that cover not only labour, but also operating
materials, equipment and maintenance, amongst others. Contractor costs are
mainly denominated in Mexican pesos and are an important component of our
total production costs. In 1H23, increases per unit (i.e. per metre developed/
per tonne hauled) granted to contractors, resulted in a weighted average
increase of 13.2% in US dollars, after considering the revaluation of the
Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 10.3% on average in US
dollar terms.
Other costs
Other cost components include freight which increased by an estimated 23.4% in
US dollars, while insurance costs increased by 12.0% in US dollars mainly due
to higher market premiums. The remaining cost inflation components experienced
average inflation of 10.2% in US dollars over 1H22.
The effects of the above external factors, combined with the Group's internal
variables, are further described below through the main line items of the
income statement.
REVENUE
CONSOLIDATED REVENUE( 1)
1H 2022 1H 2022 Amount Change %
US$ million
US$ million
US$ million
Adjusted revenue (( 11 (#_ftn11) )) 1,430.8 1,349.0 81.8 6.1
Metals prices hedging 0.0 (3.8) 3.8 N/A
Treatment and refining charges (87.4) (86.2) (1.2) 1.4
Total revenue 1,343.3 1,259.1 84.2 6.7
Adjusted revenue increased by US$81.8 million mainly due to the increased
volumes of gold and silver sold at higher prices, partly offset by the lower
zinc price. Total revenue increased by 6.7% to US$1,343.3 million in 1H23.
ADJUSTED REVENUE 12 (#_ftn12) BY METAL
1H 2023 1H 2022
US$ million % US$ million % Volume Variance Price Total net
US$ million
Variance
change
US$ million
US$ million
%
Gold 625.0 43.7 555.9 41.2 45.1 24.1 69.1 12.4
Silver 632.4 44.2 576.8 42.8 41.2 14.5 55.7 9.6
Lead 55.1 3.9 54.2 4.0 3.5 (2.6) 0.9 1.7
Zinc 118.2 8.3 162.2 12.0 4.8 (48.7) (44.0) 27.1
Total adjusted revenue 1,430.8 100 1,349.0 100 94.5 (12.8) 81.7 6.1
The higher gold volumes sold were primarily due to the increased volume of ore
processed and higher ore grade at Herradura and Saucito. The increase in
volumes of silver sold was primarily driven by the ramp up of production at
Juanicipio (for further detail, see 1H23 Operational Review).
Changes in the contribution by metal were the result of the relative changes
in metal prices and volumes produced. Gold increased its contribution to total
adjusted revenues from 41.2% in 1H22 to 43.7% in 1H23, while silver increased
its contribution from 42.8% in 1H22 to 44.2% in 1H23. Zinc decreased its
contribution from 12.0% in 1H22 to 8.3% in 1H23, reflecting the adverse effect
of the lower price. Lead's contribution to total adjusted revenues remained
flat period-on-period.
ADJUSTED REVENUE 13 (#_ftn13) BY Mine
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.
1H 2023 1H 2022
(US$ million) % (US$ million) %
Herradura 379.7 26.5 302.9 22.4
Saucito 252.7 17.7 250.8 18.6
Fresnillo 243.4 17.0 243.6 18.1
Juanicipio 215.5 15.1 140.1 10.4
San Julián (DOB) 114.1 8.0 148.0 11.0
San Julián (Veins) 96.0 6.7 78.8 5.8
Ciénega 80.6 5.6 98.6 7.3
Noche Buena 48.8 3.4 86.4 6.4
Total 1,430.8 100 1,349.0 100
VOLUMES OF METAL SOLD
1H 2023 % contribution 1H 2022 % contribution % change
of each mine
of each mine
Silver (koz)
Juanicipio 6,879 25.4% 4,494 19.1% 53.1
Fresnillo 6,042 22.3% 5,943 25.4% 1.7
Saucito 5,099 18.8% 5,138 21.9% (0.8)
San Julián (DOB) 3,776 14.0% 4,759 20.3% (20.7)
San Julián (Veins) 2,415 8.9% 1,878 8.0% 28.6
Ciénega 1,797 6.6% 2,311 9.8% (22.2)
Pyrites Plant at Saucito 698 2.6% 423 1.8% 65.0
Herradura 350 1.3% 389 1.7% (10.0)
Noche Buena 3 0.0% 5 0.0% (40.0)
Total silver (koz) 27,059 25,340 6.8
Gold (oz)
Herradura 191,073 59.4% 162,404 54.7% 17.7
Saucito 36,083 11.2% 29,360 9.9% 22.9
Noche Buena 24,742 7.7% 40,671 13.7% (39.2)
San Julián (Veins) 20,183 6.3% 18,980 6.4% 6.3
Ciénega 16,187 5.0% 17,875 6.0% (9.4)
Fresnillo 15,918 5.0% 15,235 5.1% 4.5
Juanicipio 14,791 4.6% 10,464 3.5% 41.4
Pyrites Plant at Saucito 1,595 0.5% 1,264 0.4% 26.2
San Julián (DOB) 893 0.3% 740 0.3% 20.7
Total gold (oz) 321,465 296,993 8.2
Lead (t)
Fresnillo 9,829 36.9% 9,358 37.4% 5.0
Saucito 7,443 27.9% 8,382 33.5% (11.2)
Juanicipio 4,379 16.4% 2,082 8.3% 110.3
San Julián (DOB) 3,626 13.6% 3,642 14.6% (0.4)
Ciénega 1,392 5.2% 1,556 6.2% (10.5)
Total lead (t) 26,669 25,020 6.6
Zinc (t)
Fresnillo 18,753 42.8% 16,063 38.0% 16.7
Saucito 10,726 24.5% 12,798 30.2% (16.2)
San Julián (DOB) 6,371 14.6% 8,241 19.5% (22.7)
Juanicipio 6,291 14.4% 3,047 7.2% 106.5
Ciénega 1,636 3.7% 2,170 5.1% (24.6)
Total zinc (t) 43,777 42,318 3.4
TREATMENT AND REFINING CHARGES
Similar to previous years, the 2023 treatment and refining charges(( 14
(#_ftn14) )) (TRCs) per tonne and per ounce are currently being negotiated
with Met-Mex (Peñoles' smelter and refinery) in accordance with international
benchmarks and will apply retrospectively from January 2023. We expect these
negotiations to conclude by October 2023.
The increased volumes of lead and zinc concentrates shipped from our mines to
Met-Mex resulted in a 1.4% increase in treatment and refining charges set out
in the income statement in absolute terms when compared to 1H22.
COST OF SALES
1H 2023 1H 2022 Amount Change %
US$ million
US$ million
US$ million
Adjusted production costs (( 15 (#_ftn15) )) 773.9 659.3 114.6 17.4
Depreciation 236.3 233.7 2.6 1.1
Profit sharing 2.9 5.6 (2.8) (49.2)
Hedging (0.1) 0.0 (0.1) 100.0
Change in inventories 26.3 (6.0) 32.3 N/A
Unproductive costs(( 16 (#_ftn16) )) 21.5 0.5 21.0 >100
Cost of sales 1,060.6 893.2 167.4 18.7
Cost of sales increased 18.7% to US$1,060.6 million in 1H23. The US$167.4
million increase is explained by the following combination of factors:
• An increase in Adjusted production costs (US$114.6 million). This was
primarily due to: i) the adverse effect of the 10.2% average revaluation of
Mexican peso vs. the US dollar (US$45.0 million); ii) underlying cost
inflation excluding the revaluation of the Mexican peso vs. US dollar (US$41.6
million) - these two factors combined resulted in a cost inflation in US
dollars of 13.4%, which increased adjusted production cost by US$86.6 million;
iii) costs from the start-up of the beneficiation plant and mine ramp up at
Juanicipio (US$19.6 million); iv) higher stripping to cost at Herradura
(US$19.5 million); v) increased maintenance, contractors, operating materials
and diesel consumption due to longer haulage distances, deeper mines and
increased development works (US$16.7 million); and vi) higher volume of ore
processed (US$5.4 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$19.8 million); and
ii) the reclassification of fixed costs incurred at Herradura and Noche Buena
during the 14 days illegal stoppage to unproductive costs (-US$13.5 million).
• The variation in the change in inventories had a negative effect of
US$32.3 million versus 1H22 primarily due to a decrease in inventories at
Juanicipio as a result of the start up of the beneficiation plant in 2Q23, and
at Noche Buena as it approached the end of its mine life. This was partly
mitigated by the gold inventory uplift at Herradura with an estimated positive
effect of US$21.6 million (see notes 2c and 5 to the financial statements).
• Unproductive costs of US$21.5 million (+US$21.0 million vs 1H22)
mainly related to fixed costs incurred during the temporary illegal stoppage
at Herradura and Noche Buena.
• Depreciation (+US$2.6 million). This is mainly due to the depreciation
of the additional asset base at Juanicipio, and to a lesser extent, increased
amortisation of capitalised mining works at Fresnillo and Saucito, partly
mitigated by the lower depreciation at Noche Buena.
These negative effects were mitigated by the lower profit sharing (-US$2.8
million).
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST (AISC)
Cost per tonne is a key indicator to measure the effects of changes in
production costs and cost control performance at each mine. This indicator is
calculated as total production costs, plus ordinary mining rights, less
depreciation, profit sharing and exchange rate hedging effects, divided by
total tonnage processed. We have included cost per tonne hauled/moved as we
believe it is a useful indicator to thoroughly analyse cost performance for
the open pit mines.
Cost per tonne 1H 2023 1H 2022 % change
Fresnillo US$/tonne milled 91.69 87.23 5.1
Saucito US$/tonne milled 137.67 116.22 18.5
San Julián (Veins) US$/tonne milled 107.32 89.12 20.4
San Julián (DOB) US$/tonne milled 49.50 41.23 20.0
Ciénega US$/tonne milled 141.45 105.80 33.7
Herradura US$/tonne deposited 19.41 20.02 (3.0)
Herradura US$/tonne hauled 4.86 5.04 (3.5)
Noche Buena US$/tonne deposited 10.19 9.72 4.8
Noche Buena US$/tonne hauled 3.04 3.21 (5.3)
Fresnillo: Cost per tonne increased 5.1% to US$91.7 in 1H23, driven by the
underlying cost inflation and the adverse effect of the revaluation of the
Mexican peso vs. the US dollar. This was mitigated by the decrease in
development contractors and the higher volume of ore milled.
Saucito: Cost per tonne increased 18.5% to US$137.7, mainly driven by the
adverse effect of the revaluation of the Mexican peso vs. the US dollar
underlying cost inflation and increased use of operating materials and
maintenance.
San Julián Veins: Cost per tonne increased 20.4% to US$107.3, primarily
driven by the underlying cost inflation, the adverse effect of the revaluation
of the Mexican peso vs. the US dollar, an increase in the use of maintenance
and personnel.
San Julián (DOB): Cost per tonne increased 20.0% to US$49.5, mainly driven by
the underlying cost inflation, the adverse effect of the revaluation of the
Mexican peso vs. the US dollar, and an increase in the use of maintenance
energy and personnel.
Ciénega: Cost per tonne increased 33.7% to US$141.5 mainly driven by an
increase in development and infrastructure contractors, underlying cost
inflation, the revaluation of the Mexican peso vs. the US dollar and the lower
volume of ore milled.
Herradura: Cost per tonne of ore deposited decreased by 3.0% to US$19.4 as the
adverse effect of the revaluation of the Mexican peso vs. the US dollar and
underlying cost inflation was more than offset by the favourable effect of the
increase in volumes of ore deposited at the leaching pads.
Noche Buena: Cost per tonne increased 4.8% to US$10.2 in 1H23, primarily
driven by the underlying cost inflation and the revaluation of the Mexican
peso vs. the US dollar.
Cash cost per ounce, calculated as total cash cost (cost of sales plus
treatment and refining charges, less depreciation) less revenue from
by-products divided by the silver or gold ounces sold, when compared to the
corresponding metal price, is an indicator of the ability of the mine to
generate competitive profit margins.
Cash cost per ounce 1H 2023 1H 2022 % change
Fresnillo US$ per silver ounce 7.41 3.53 110.1
Saucito US$ per silver ounce 6.84 2.52 171.0
San Julián (Veins) US$ per silver ounce 7.10 5.41 31.4
San Julián (DOB) US$ per silver ounce 10.23 4.45 129.9
Ciénega US$ per gold ounce 1,455.39 84.00 1,632.6
Herradura US$ per gold ounce 1,214.70 1,248.08 (2.7)
Noche Buena US$ per gold ounce 1,573.75 1,098.34 43.3
Fresnillo: Cash cost per silver ounce increased to US$7.4 (1H22: US$3.5 per
silver ounce) mainly due to the lower silver ore grade, a decrease in zinc
by-product credits per silver ounce due to the lower price of zinc, and a
higher cost per tonne.
Saucito: Cash cost per silver ounce increased to US$6.8 per ounce (1H22:
US$2.5 per silver ounce) as a result of a higher cost per tonne and lower zinc
by-product credits per silver ounce (lower volumes of zinc sold at a lower
price).
San Julián Veins: Cash cost per ounce of silver increased to US$7.1 per ounce
mainly due to the higher cost per tonne and lower gold by-product credits per
silver ounce, largely mitigated by a higher silver ore grade.
San Julián (DOB): Cash cost per silver ounce increased to US$10.2 per ounce
of silver driven by the lower silver ore grade (-19.2%), a higher cost per
tonne and lower zinc by-product credits per silver ounce (lower volumes of
zinc .
Ciénega: The increase in cash cost per gold ounce to US$1,455.4 per ounce in
1H23 was primarily due to a higher cost per tonne and a decrease in silver,
zinc and lead by-product credits per gold ounce.
Herradura: Cash cost per gold ounce decreased to US$1,214.7 mainly due to the
higher gold ore grade, the uplift in gold inventories at the leaching pads and
a decrease in cost per tonne.
Noche Buena: Cash cost per gold ounce decreased by 43.3% to US$1,573.8 per
ounce primarily driven by the decrease in gold ore grade and the lower cost
per tonne.
In addition to the traditional cash cost, the Group is reporting All-In
Sustaining Cost (AISC) in accordance with the guidelines issued by the World
Gold Council.
This cost metric is calculated as traditional cash cost plus on-site general,
corporate and administrative costs, community costs related to current
operations, capitalised stripping and underground mine development, sustaining
capital expenditures and remediation expenses.
We consider AISC to be a reasonable indicator of a mine's ability to generate
free cash flow when compared with the corresponding metal price. We also
believe it is a means to monitor not only current production costs, but also
sustaining costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
ALL-IN SUSTAINING COST (AISC)
AISC 1H 2023 1H 2022 % change
Fresnillo US$ per silver ounce 15.27 12.52 22.0
Saucito US$ per silver ounce 18.40 14.20 29.5
San Julián (Veins) US$ per silver ounce 22.24 16.39 35.7
San Julián (DOB) US$ per silver ounce 12.53 6.40 95.8
Ciénega US$ per gold ounce 3,072.87 1,302.58 135.9
Herradura US$ per gold ounce 1,390.22 1,755.78 (20.8)
Noche Buena US$ per gold ounce 1,564.17 1,154.23 35.5
Fresnillo: All-in sustaining cost increased 22.0% over 1H22 primarily due to a
higher cash cost, mitigated by lower sustaining capex and a decrease in
capitalised mine development per ounce.
Saucito: All-in sustaining cost increased to US$18.4 per ounce due to higher
cash cost, partially offset by a lower sustaining capex.
San Julián Veins: All-in sustaining cost increased to US$22.2 per ounce due
to a higher cash cost, increased sustaining capex, and higher capitalised mine
development per ounce.
San Julián DOB: All-in sustaining cost increased to US$12.5 per ounce driven
by the increase in cash cost, partly mitigated by the lower sustaining capex.
Ciénega: The increase in all-in sustaining cost was primarily driven by the
higher cash cost and increased mine development.
Herradura: All-in sustaining cost decreased by 20.8% mainly due to the lower
cash cost and a decrease in capitalised stripping.
Noche Buena: The 35.5% increase in all-in sustaining cost was the result of
the higher cash cost.
GROSS PROFIT
Gross profit, excluding hedging gains and losses, is a key financial indicator
of profitability at each business unit and the Fresnillo Group as a whole.
Total gross profit, including hedging gains and losses, decreased by 22.7%
from US$365.9 million in 1H22 to US$282.7 million in 1H23.
The US$83.2 million decrease in gross profit was mainly explained by: i) the
variation in change of inventories (-US$54.2 million); ii) the lower zinc and
lead prices (-US$51.3 million); iii) the MXP/USD revaluation effect (-$45.0
million); iv) underlying cost inflation (-$41.6 million); v) increase in
unproductive costs primarily from the illegal stoppage at Herradura and Noche
Buena (-US$21.0 million); vi) higher stripping to cost at Herradura
(-US$19.5 million); and vii) others (-US$12.8 million).These negative
effects were mitigated by: i) the start up of the beneficiation plant and ramp
up of the Juanicipio mine (US$59.2 million); ii) a higher volume of ore
extracted (US$42.6 million); iii) higher gold and silver prices (US$38.5
million); and iv) the positive effect of the gold inventory uplift at
Herradura (US$21.8 million).
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING HEDGING GAINS AND
LOSSES
1H 2023 1H 2022 Change
US$ million % US$ million % US$ million %
Herradura 86.8 31.9 65.3 17.7 21.5 32.9
Juanicipio 79.0 29.0 82.9 22.5 (3.9) (4.7)
Fresnillo 45.1 16.6 69.3 18.8 (24.2) (34.9)
Saucito 39.8 14.6 62.8 17.1 (23.0) (36.6)
San Julián 36.4 13.4 60.2 16.3 (23.8) (39.5)
Noche Buena 3.0 1.1 20.9 5.7 (17.9) (85.6)
Ciénega (17.9) (6.6) 6.8 1.9 (24.7) (363.2)
Total for operating mines 272.2 100.0 368.2 100.0 (96.0) (26.1)
Metal hedging and other subsidiaries 10.5 (2.3) 12.8 N/A
Total Fresnillo plc 282.7 365.9 (83.2) (22.7)
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses increased 11.6% from US$49.1 million in
1H22 to US$54.8 million in 1H23, mainly due to the negative effect of the
revaluation of the Mexican peso against the US dollar in administrative
expenses denominated in pesos, and an increase in fees paid to advisors
(legal, labour, tax and technical). An increase in non-recurring engineering
and construction services provided by Servicios Industriales Peñoles, S.A.B
de C.V., together with an adjustment to reflect the higher costs of services
provided, also contributed to the increase in administrative expenses
EXPLORATION EXPENSES
Business unit/project (US$ million) Exploration expenses 1H 2023 Exploration Capitalised expenses 1H 2023 Capitalised
expenses 1H 2022
expenses 1H 2022
Ciénega 4.2 3.4 - -
Fresnillo 10.1 6.1 - -
Herradura 2.8 2.4 - -
Saucito 6.4 6.1 - -
Noche Buena 0.7 0.4 - -
San Julián 10.6 11.3 - -
Orisyvo 2.1 2.2 - 0.6
Centauro Deep 0.3 0.2 - -
Guanajuato 9.2 4.0 - 1.3
Juanicipio 3.9 5.6 - -
Others 46.6 36.0 0.4 0.4
Total 96.9 77.7 0.4 2.2
Exploration expenses increased by 24.7% from US$77.7 million in 1H22 to
US$96.9 million in 1H23, in line with our strategy to focus exploration on
specific targets, mainly at our Fresnillo and San Julián districts and
Guanajuato. The increase of US$19.2 million seen period-on-period 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. In addition, US$0.4 million was capitalised in 1H23,
compared to US$2.2 million in 1H23. As a result, risk capital invested in
exploration increased 19.0%, from US$79.9 million in 1H22 to US$97.3 million
in 1H23. The full year guidance of US$175 million remains unchanged.
EBITDA
1H 2023 1H 2022 Amount Change %
US$ million
US$ million
US$ million
Profit from continuing operations before income tax 47.9 155.2 (107.3) (69.1)
- Finance income (26.5) (7.0) (19.5) 278.6
+ Finance costs 46.0 34.9 11.1 31.8
+ Revaluation effects of Silverstream contract 17.0 36.3 (19.3) (53.2)
- Foreign exchange gain (loss), net (3.2) (1.2) (2.0) 166.7
- Other operating income (1.9) (2.2) 0.3 (13.6)
+ Other operating expense 35.4 9.4 26.0 276.6
+ Depreciation 236.3 233.7 2.6 1.1
EBITDA 351.0 459.1 (108.1) (23.5)
EBITDA margin 26.1% 36.5%
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), plus the net Silverstream effects and other
operating income plus other operating expenses and depreciation. In 1H23,
EBITDA decreased 23.5% to US$351.0 million primarily driven by the lower gross
profit and, to a lesser extent, a higher exploration expense. As a result,
EBITDA margin expressed as a percentage of revenue decreased, from 36.5% in
1H22 to 26.1% in 1H23.
OTHER OPERATING INCOME AND EXPENSE
In 1H23, a net loss of US$33.5 million was recognised in the income statement
mainly due to identification of certain suspected illegal extraction of an
estimated 20,000 ounces of gold from the Soledad-Dipolos leaching pads, which
resulted in a write off of US$21.9 million of gold contents in inventory.
Maintenance costs of closed mines also contributed to the net loss in other
expenses. This compares unfavourably to the net loss of US$7.2 million
recognised in the income statement in 1H22, mainly as a result of maintenance
costs of closed mines.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative financial
instrument carried at fair value. The net Silverstream effect recorded in the
1H23 income statement was a loss of US$17.0 million (US$23.3 million
amortisation profit and -US$40.3 million revaluation loss), which compared
favourably to the net loss of US$36.3 million registered in 1H22. The negative
revaluation was mainly driven by the decrease in the forward silver price
curve and an updated mine plan, which considers a decrease in silver reserves
at the Sabinas mine.
Since the IPO, cumulative cash received has been US$789.9 million vs. US$350
million initially paid. The Group expects that further unrealised gains or
losses related to the valuation of the Silverstream will be taken to the
income statement in accordance with silver price cyclicality or changes in the
variables considered in valuing this contract. Further information related to
the Silverstream contract is provided in the balance sheet section in notes 10
and 18 to the consolidated financial statements.
NET FINANCE COSTS
Net finance costs decreased -30.1% to US$19.5 million in 1H23, primarily due
to the favourable effect of the higher interest gained on short term deposits
and investments. Financial expenses in 1H23 included mainly: i) interest paid
on the outstanding US$317.9 million Senior Notes due 2023, and ii) interest
paid on the 4.250% Senior Notes due 2050.
FOREIGN EXCHANGE
A foreign exchange gain of US$3.2 million was recorded over the period. This
was higher than the US$1.2 million gain registered in 1H22.
The Group also enters into certain exchange rate derivative instruments as
part of a programme to manage its exposure to foreign exchange risk associated
with the purchase of equipment denominated in Euro (EUR) and Swedish krona
(SEK). As of 30 June 2023, the total EUR outstanding net forward position was
EUR 5.04 million with maturity dates through December 2023. Volumes that
expired during the first half of 2023 were EUR 7.22 million with a weighted
average strike of 1.0635 USD/EUR, which have generated a marginal result in
the period of US$0.124 million.
TAXATION
Tax income for the period was US$19.5 million, which compared favourably to
the US$6.8 million tax expense in 1H22. The effective tax rate, excluding the
special mining rights, was -40.7%, which was substantially below the 30%
statutory tax rate. The reasons for the unusual positive effective tax rate
were the significant permanent differences between the tax and the accounting
treatment related mainly to: i) the effect of the 11.8% revaluation of the
Mexican peso/US dollar spot exchange rate in 1H23 on the tax value of assets
and liabilities; and ii) the inflation rate (Mexican Consumer Price Index),
which impacted the inflationary uplift of the tax base for assets and
liabilities.
The effective tax rate, excluding the special mining rights, was 4.4% in 1H22.
Mining rights income for the first half of the period was US$22.3 million
compared to US$7.4 million charged in 1H22. The reasons for the positive tax
rate in mining rights were the same as the ones affecting income tax.
PROFIT FOR THE PERIOD
Profit for the period decreased from US$141.0 million in 1H22 to US$89.7
million in 1H23, a 36.4% decrease period-on-period as a result of the factors
described above. Profit due to non-controlling interests was US$25.0 million
reflecting the profit generated at Juanicipio, where MAG Silver owns 44% of
the outstanding shares. Accordingly, profit attributable to equity
shareholders of the Group was US$64.7 million, a 44.9% decrease half-on-half.
Excluding the effects of the Silverstream contract, profit for the year
decreased from US$166.3 million to US$101.6 million, a 38.9% decrease.
CASH FLOW
A summary of the key items from the cash flow statement is set out below:
1H 2023 1H 2022 Amount Change %
US$ million
US$ million
US$ million
Cash generated by operations before changes in working capital 322.9 459.5 (136.6) (29.7)
Decrease in working capital 75.4 76.8 (1.4) (1.8)
Taxes and employee profit sharing paid (192.8) (141.2) (51.7) 36.6
Net cash from operating activities 205.5 395.1 (189.6) (48.0)
Silverstream contract 20.2 18.3 1.9 10.4
Capital contributions and loans by minority shareholders 25.0 10.1 14.9 147.4
Purchase of property, plant and equipment (227.8) (299.0) 71.3 (23.8)
Dividends paid to shareholders of the Company (98.0) (176.9) 78.8 (44.6)
Financial expenses and foreign exchange effects 1.5 (29.0) 30.5 N/A
Net (decrease)/increase in cash during the period after foreign exchange (79.4) (83.4) 4.0 (4.8)
differences
Cash and other liquid funds at 30 June 889.7 1,151.9 (262.2) (22.8)
Cash generated by operations before changes in working capital decreased by
29.7% to US$322.9 million, mainly as a result of the lower profits generated
in the year. Working capital decreased US$75.4 million, mainly due to: i) a
US$43.7 million decrease in inventories; ii) a decrease in trade and other
receivables of US$22.8 million; iii) a US$9.2 million decrease in prepayments;
and iv) a US$0.3 million increase in accounts payable.
Taxes and employee profit sharing paid increased 36.6% over 1H22 to US$192.8
million mainly due to: i) the provisional tax payments paid in 1H23; ii) the
higher final income tax paid in 1H23, net of provisional taxes paid
(corresponding to the 2022 tax fiscal year); iii) an increase in mining
rights; and iv) profit sharing paid.
As a result of the above factors, net cash from operating activities decreased
48.0% from US$395.1 million in 1H22 to US$205.5 million in 1H23.
The Group received other sources of cash including; i) the proceeds of the
Silverstream contract of US$20.2 million and; ii) notes payable by minority
shareholders in subsidiaries and capital contribution of US$25.0 million.
Main uses of funds were:
i) the purchase of property, plant and equipment for a total of US$227.8
million, a 23.8% decrease over 1H22. Capital expenditures for 1H23 are
described below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
1H 2023
US$ million
Saucito mine 54.1 Mine development, purchase of in-mine equipment, deepening of the Jarillas
shaft and tailings dam.
Fresnillo mine 43.5 Mine development and mining works, purchase of in-mine equipment, deepening of
the San Carlos shaft and tailings dam.
Juanicipio project 41.3 Mine development and equipment
San Julián Veins and DOB 34.3 Mining works, tailings dam and purchase of in-mine equipment.
Herradura mine 28.7 Stripping, carbon in column project and purchase of mine equipment.
Ciénega mine 23.9 Mining works, purchase of in-mine equipment and construction of tailings dam.
Other 2.0 Minera Bermejal.
Total purchase of property, plant and equipment 227.8
ii) Dividends paid to shareholders of the Group in 1H23 totalled US$98.0
million, a 44.6% decrease over 1H22 as a result of the 2022 final dividend of
13.3 cents per share paid in May 2023, in line with our dividend policy.
iii) Financial income and foreign exchange effects of US$1.5 million in 1H23.
Financial expenses in 1H23 included: i) interest paid on the outstanding
US$317.9 million from the US$800 million Senior Notes due 2023, and ii)
interest paid on the 4.250% Senior Notes due 2050. Interest received during
the period totalled US$27.0 million.
The sources and uses of funds described above resulted in a net decrease in
cash of US$79.4 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$889.7 million at the end of
June 2023.
BALANCE SHEET
Fresnillo plc continued to maintain a solid financial position during the
period with cash and other liquid funds of US$889.7 million as of 30 June
2023, decreasing 8.2% versus 31 December 2022 and 22.8% versus 30 June 2022.
Taking into account the cash and other liquid funds of US$889.7 million and
the US$1,158.9 million outstanding Senior Notes, Fresnillo plc's net debt is
US$269.2 million as at 30 June 2023. This compares to the net debt position of
US$198.7 million as at 31 December 2022. Considering these variations, the
balance sheet at 30 June 2023 remains strong, with a net debt / EBITDA ratio
of 0.42x(( 17 (#_ftn17) ))
Inventories decreased 7.4% to US$543.6 million mainly driven by the
consumption of inventories at Juanicipio due to the start up of the
beneficiation plant, and at Noche Buena as it approached the end of its mine
life.
Trade and other receivables increased 9.0% to US$441.1 million mainly as a
result of income tax recoverable.
The change in the value of the Silverstream derivative from US$511.5 million
at the end of the 2022 to US$477.2 million as of 30 June 2023 reflects
proceeds of US$17.3 million in the period (US$11.8 million in cash and US$5.4
million in accounts receivables) and the Silverstream revaluation effect in
the income statement of US$17.0 million.
The net book value of property, plant and equipment was US$2,860.6 million at
the end of June, broadly stable over 31 December 2022.
The Group's total equity was US$3,877.2 million as of 30 June 2023, a 1.0%
decrease over 31 December 2022. This was mainly explained by the decrease in
retained earnings as a result of the dividends paid during the period.
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
Operational Review, with further detail in the Annual Report 2022. The
financial position of the Group, its cash flows and liquidity position are
described in the Financial Review. In addition, 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 were set out in the Annual
Report 2022.
In making their assessment of the Group's ability to manage its future cash
requirements, the Directors have considered the Company and Group budgets and
the cash flow forecasts for the period to 31 December 2024 (being the going
concern assessment period). The Directors have also considered the cash
position at 30 June 2023 (US$889.7 million), as described in the financial
review. In addition, they reviewed a more conservative cash flow scenario with
reduced silver and gold prices of US$21.1 and US$1,734 respectively throughout
this period, whilst maintaining current budgeted expenditure and only
considering projects approved by the Executive Committee. This resulted in our
current cash and cash equivalents balances reducing over time but maintaining
sufficient liquidity throughout the period.
The Directors have further calculated prices (US$18.3 and US$1,481 for silver
and gold respectively), which should they prevail to the end of 2024 would
result in cash balances decreasing to minimal levels by the end of 2024,
without applying mitigations.
Should metal prices remain below the stressed prices above for an extended
period, management have identified specific elements of capital and
exploration expenditures which could be deferred without adversely affecting
production profiles throughout the period. Finally, management could amend the
mining plans to concentrate on production with a higher margin in order to
accelerate cash generation without affecting the integrity of the mine plans.
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.
DIVIDENDS
The Board of Directors has declared an interim dividend of 1.40 US cents per
Ordinary Share totalling US$10.3 million, which will be paid on 14 September
2023 to shareholders on the register on 11 August 2023. The dividend will be
paid in UK pounds sterling unless shareholders elect to be paid in US dollars.
This interim dividend is lower than the previous period due to the decrease in
profit in 1H23, and remains in line with the Group's dividend policy. This
decision was made after a comprehensive review of the Group's financial
situation, assuring that the Group is well placed to meet its current and
future financial requirements, including its development and exploration
projects.
As previously disclosed, the corporate income tax reform introduced in Mexico
in 2014 created a withholding tax obligation of 10% (including to foreign
nationals). The 2023 interim dividend will be subject to this withholding
obligation.
MANAGING OUR RISKS AND OPPORTUNITIES WITH RESILIENCE
Taking risks responsibly is key to delivering our strategy in a way that
creates value for our investors, shareholders and employees.
Effective risk management is an essential part of our culture and strategy.
The accurate and timely identification, assessment and management of principal
and emerging risks give us a clear understanding of the actions required to
achieve our objectives. We have embedded a global risk management framework
across Fresnillo plc which aims to ensure consistency and the application of
the appropriate level of oversight at all times.
Key elements of integrated risk management:
· We recognise that risks are inherent to our business: Only
through adequate risk management can internal stakeholders be effectively
supported in making key strategic decisions and implementing our strategy.
· Exposure to risks must be consistent with our risk appetite: The
Board defines and regularly reviews the acceptable level of exposure to
emerging and principal risks: Risks are aligned with our risk appetite, taking
into consideration the balance between threats and opportunities.
· We are all responsible for managing risks: Each business activity
carries out risk evaluations to ensure the sound identification, management,
monitoring and reporting of risks that could impact the achievement of our
goals.
· Risk is analysed using a consistent framework: Our risk
management methodology is applied to all our operating, projects, exploration
activities and support areas, so that we have a comprehensive view of the
uncertainties that could affect us in achieving our strategic goals.
· We are committed to continuous improvement: Lessons learned, and
best practices are incorporated into our procedures to protect and unlock
value sustainably.
I. How we manage risk.
As we explained in our 2022 Annual Report, the Company ended 2022 having made
good progress in risk management, including implementing actions that
mitigated our most important risks. In parallel, the Enterprise Risk
Management (ERM) team developed a training programme focused on identifying
and mitigating fraud, security and business continuity risks, which was rolled
out across the business to raise awareness of our risk culture. During this
current year, we are continuing to enhance our risk framework by increasing
the use of metrics and scenarios to more precisely articulate the risk
appetite and tolerance limits within which we wish to operate.
We maintain a risk register through a robust assessment of the potential
principal risks that could affect the Company's performance. This register
ensures that principal risks are identified in a thorough and systematic way
and that agreed definitions of risk are used.
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.
During the first half of 2023, our risk team focused its efforts on
identifying and assessing emerging risks, safety and climate change (ESG)
risks according to the TCFD criteria. For the second part of the year, we will
be assessing fraud, compliance, cybersecurity and community relations risks.
II. Assessment of Principal Risks for the first half of the year 2023.
Due to the effects caused by: a. Mexico's new mining law, b. global
post-pandemic impacts of COVID-19, c. Russia's invasion of Ukraine, d. some
increased insecurity in the regions surrounding our mining operations, e.
disruptions to supply chains of key inputs and inflation leading to higher
operating costs and f. climate change consequences, it has been necessary to
re-evaluate the Principal Risks set out in the 2022 Annual Report, to rethink
their relative importance, probability and impact, and to re-assess the
corresponding mitigation actions.
The following is a description of the Principal Risks with the greatest impact
and likelihood of occurrence during the first half of the year 2023:
Principal risks Risk description Factors contributing to risk Mitigation actions
Potential actions by the government Regulatory actions can have an adverse impact on the Company. These could · In May, the Mexican government approved a package of legal reforms to the 1. With the news of the new mining law, risk scenarios were developed
include stricter environmental regulations, forms of procurement or following laws: "Mining Law", "Law on National Waters", "Law on Ecological for each change and impact, considering the legal and operational criteria to
(political, legal and regulatory) explosives, more challenging permit processes, more onerous tax compliance Balance and Environmental Protection" and "General Law for the prevention and implement the necessary mitigation and prevention measures. These scenarios
obligations for us and our contractors, as well as more frequent reviews by integrated management of waste in the field of mining and water concessions", are updated quarterly.
tax authorities. which directly affect the mining sector, including, among others, the
following notable aspects:
2. Commitment to constant communication with all levels of government.
The right of indigenous communities to be consulted regarding mining
concessions could potentially affect the granting of new concessions in - Granting of new concessions. Elimination of the concept of "free
Mexico. land" whereby the party requesting a concession in an area that is not
occupied, has a right to request the concession on a "first come first served" 3. Increased monitoring of the processes being implemented at the
basis. Now, all new concessions would be subject to a tender process Ministry of Labour and Economy.
(licitación) supervised by the Federal Government.
The federal government aims to discourage the generation of energy based on
clean sources and to encourage that from fuel oil and coal.
4. We remain alert to the changes proposed by the authorities,
- Exploration activities. The Federal Government will be in charge including energy and mining tax initiatives, so that we can respond in a
of the exploration activities directed by the public Mexican Geological timely and relevant manner.
We paid special attention to the following aspects: 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 5. We continue to collaborate with other members of the mining
•Government actions that negatively impact the mining industry. exploration process. community through the Mexican Mining Chamber to lobby against any new harmful
taxes, royalties or regulations. We also support industry lobbying efforts to
•Regulatory changes to mining rights and adverse fiscal changes. improve the general public's understanding of the mining industry.
•Increase in the frequency of the reviews by the tax authorities with - Duration of new concessions. New concessions would be valid for
special focus on the mining industry. 30 years rather than 50 years, renewable exclusively for two periods of 25
years. For the second term of 25 years, it will be open to a tender process.
•Inability to obtain necessary water concessions because of government It is not clear how this would affect concessions that are already in the
control or private interests. 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
•Failures/delays in obtaining the required environmental permits. new mining law comes into effect.
- Inclusion of free, prior and informed consultation with
communities and indigenous peoples, along with the payment of 5% of profits to
the communities.
- 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.
· The legal reform to the mining law during 2022 about lithium could have
negative consequences for gold and silver or any other mineral considered
strategic because its exploitation could be reserved to the State.
· Labour reform that prohibits subcontracting, which mainly generates
complications in relationships with contractors..
· The implementation of policies that support the emission of coal into the
atmosphere and reduce the development of renewable energies.
· New taxes and discrepancies in the criteria used in audits carried out by
the tax authority.
· Increase in the frequency of the reviews by the tax authorities, as well as
environmental, labour and civil protection authorities, with special focus on
the mining industry.
· The United States-Mexico-Canada Agreement (USMCA or TMEC) with new labour
dispositions.
Security Our employees, contractors and suppliers face the risk of theft, kidnapping, · Increased presence of organised crime in the vicinities of mining 1. Our property security teams closely monitor the security situation,
extortion or damage due to insecurity in some of the regions where we operate. units, particularly in Fresnillo, Saucito, Juanicipio and Penmont. maintaining clear internal communications and coordinating work in areas of
greater insecurity.
The influence and dispute of territories by drug cartels, other criminal · A severe increase in the number of high impact crimes (homicide,
elements and general anarchy in some of the regions where we operate, combined kidnapping, extortion) in the regions where our mining units are located. 2. We have adopted the following practices to manage our security
with our exploration activities and projects in certain areas of drug deposit,
risks and prevent and treat possible incidents:
transfer or cultivation, makes working in these areas a particular risk to us.
· Consumption and sale of drugs at the mining units, particularly
in Saucito. a. Close and constant communication with federal and state security
The Federal Government created the Secretariat of Citizen Security and
authorities.
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 · Theft of assets in mining units and/or during transfer.
police in most states are unprepared and ill-equipped to combat organised
b. Regular interactions and meetings with the National Guard.
crime, have low wages and are sometimes infiltrated by criminal elements.
· Roadblocks or blockages on the roads and/or highways near the
mining units. 3. An increase in the number of anti-doping tests at the start of the
According to information from the Secretariat of Security and Citizen day in the mining units.
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, Guanajuato, and Sonora. 4. Frequent inspections inside the mines to verify that drugs are not
consumed and sold.
The main risks we face are:
5. Drug consumption prevention campaigns, with a focus on employees.
-High-impact robberies.
-Theft of assets such as minerals, equipment, instruments, inputs, etc.
6. An increase in logistical controls in order to reduce the potential
-Consumption and sale of toxic substances in our mining units. for theft of mineral concentrate. These controls include the use of real-time
tracking technology; surveillance cameras to identify alterations in the
-Homicide. transported material; protection and support services on distribution routes;
reduction in the number of authorised stops in order to optimise delivery
-Kidnappings. times and minimise exposure of trucks transporting ore concentrates or doré.
-Extortions.
-Vandalism.
Global macroeconomic developments Metal price performance for both gold and silver, has not been affected for · The impact of the post pandemic COVID-19 and Russia-Ukraine war 1. Regarding critical inputs for operations and projects, supplies have
the time being. Even the price of gold has reached record levels. We see this on supply chains has been global, prolonged, and comprised a series of major been secured for this year through alliances and agreements with suppliers and
(energy and supply chain disruptions, inflation, productivity and cost) risk as stable with no threat in the short term. shocks to companies' logistical systems. contractors.
On the other hand, about global macroeconomic development, during the first · Disruptions in the value chain of critical inputs for our 2. We constantly seek to maintain a broad supplier base to ensure a range
half of 2023, we saw increases in operating costs and greater inflationary operations such as spare parts (primarily delivered by land transport from the of options for the purchase of critical inputs and reduce the likelihood of
pressures, together with a shortage of critical inputs and equipment. We US and maritime transport from China and Europe). shortages.
expect this situation to continue during the second part of the year and in
2024.
· Disruptions also include reduced availability of maintenance 3. We focus on cost, efficiency and capital discipline to deliver a
teams/contractors to resolve issues, resulting in delays. competitive total cost of operation and maintenance.
This condition could create an adverse impact on our operations, costs, sales
and profits, and potentially on the economic viability of projects.
· Increased operating costs due to higher prices for critical 4. We increase cost competitiveness by improving the quality of the
inputs such as steel, cyanide, copper, diesel, haulage equipment, oxygen and supplier and contractor portfolio.
truck tyres.
Union Relations We run the risk of an outside union seeking to destabilise the current union. · In May 2023, operations at the Herradura mine, operated by the 1. As a result of this minor conflict, talks were held with
Company's wholly-owned subsidiary, Minera Penmont, S. de R.L. de C.V. representatives of the dissident group in order to reach agreements so as not
(labour relations) ("Penmont"), were temporarily suspended following an illegal work stoppage by to affect the Company's operations.
a small group of unionised Penmont personnel.
National union politics could adversely affect us, as could pressure from
other mining unions seeking to take over Fresnillo's labour contracts. · The work stoppage, which prevented other workers from accessing
the site, was neither approved by the union nor supported by the vast majority 2. There is a lot of communication with the representatives of the union's
of Herradura's unionised workers, with whom Penmont has a very constructive sections, in order to address their concerns and requests, and today we have a
and long-term relationship. very stable relationship without any threats.
Unionised staff may not agree with the decisions or compensation the Company
provides (managing and resolving conflicts; safe and comfortable work
conditions; promotions and discipline; wage negotiations; work and life
balance; recruitment and retention and payment of profits), and may be 3. The Company's legal team is prepared to handle any legal proceedings
dissatisfied with the Company's decisions, even going as far as a partial that may arise in connection with profit sharing.
operational stoppage or strike.
III. Our risk matrix.
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 in line with good practice, we
use a probability and impact matrix for this purpose.
IV. Emerging Risks.
We define 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. To strengthen our emerging risks management
framework, during 2023 we carried out activities to: (I) identify new emerging
risks; II) re-assess emerging risks identified in 2021-22; (III) deploy
effective monitoring mechanisms; (IV) carry out horizon scanning to consider
disruptive scenarios, and; (V) implement mitigating control actions and
enhance our risk awareness culture. This process involved workshops, surveys
and meetings with the Executive Committee, business unit leaders, support and
corporate areas, as well as suppliers, contractors and customers. We also
consulted third party information from global risk reports, academic
publications, risk consulting experts and industry benchmarks. Our risk
management standards promote communication of up-to-date information on the
Company and industry risks, trends and emerging risks.
The emerging risk assessment conducted during the first half of the year
concluded that the risks we presented in the 2022 annual report are current.
The only relevant change we observed is the increase in the risk of "Water
stress and drought", as the temperatures we have reached this spring and
summer in the regions of Sonora, Durango, Chihuahua and Zacatecas, where we
have operations and projects, have reached ranges that had not occurred
before, reaching temperatures of more than 50 degrees Celsius. The same is the
case with rain and storms.
Emerging Risk Description Impact Mitigations Actions Time Scale
1 Water stress and drought Lack of sufficient water resources to meet the water consumption demand in a Water is critical to mining processes. Without this natural resource, we Strict control and monitoring of water concessions is maintained and actions > 3
region and strong heat waves in desert regions. cannot extract gold and silver. are envisaged to ensure water for the coming years.
(Linked to climate change principal risk)
Years
Water consumption planning was improved in order to make better use of the
water leaving the operating process.
2 Geopolitical instability Current global geopolitical tensions, such as the war between Russia and Disruptions in the supply chain of critical operating inputs such as cyanide, Inventory control in the mining units to plan purchases in a timely manner and < 1
Ukraine, the problems between Taiwan and China, as well as U.S. and Chinese ammonia, spare parts, equipment parts, etc. and rising prices of key inputs maintain sufficient stock to guarantee operations. Strict control of operating
(Linked to global macroeconomic development principal risk) tariff matters, may affect our operations and projects. such as steel, diesel, cement, etc. costs to avoid increases. Years
3 Transition to a low-carbon future The transition to a low-carbon future is a "transition risk" according to the Key areas of uncertainty include future climate change regulation and We have introduced new sources of information to help us identify the impacts > 5
TCFD and presents challenges and opportunities for our portfolio in the short policies, the development of low-carbon technology solutions and the pace of of climate change. These include industry reports and guides, energy
(Linked to climate change principal risk) and long term. It is considered within the climate change principal risk transition across our value chains, in particular the decarbonisation pathways scenarios, and Global Circulation Models (GCM) under several Representative Years
mitigation strategy. However, we consider this risk to be an emerging risk due across the steel sector. Concentration Pathways (RCP). We have used a well-below two-degree
to the speed of potential new climate change regulations and the obstacles decarbonisation pathway to evaluate the flexibility of the energy strategy.
that government may place in the way of supporting investment in clean energy.
4 Technological disruption Failure to identify, invest in, or adopt technological and operational Obsolete or outdated mining processes impact productivity and efficiency Technological advances in the mining industry are constantly monitored > 5
productivity innovations that significantly replace or optimise a process levels and impact sales and profits. (particularly in mine operations) in order to adopt the most appropriate best
(Linked to cybersecurity principal risk) through new systems with recognisably superior attributes. practices and new technology. Years
Automated equipment (tunneling jumbos) operating with artificial intelligence
has been included in some business units.
5 Infectious diseases (pandemics) The regional or global spread of a new disease (bacteria or virus) against Another virus such as SARS-CoV-2 coronavirus (COVID-19) may affect the health Mine and project personnel are continuously monitored by the medical team and < 1
which most people do not have immunity. of employees and stop the Company's activities. receive medical examinations to ensure that there are no outbreaks of
contagion. Years
6 Increasing societal and investor expectations We continued to see increasing expectations and focus on social equality, The increasing focus on ESG has the potential to shape the future of the We always respond to investor and societal requests and comments and promote < 3
fairness and sustainability. Financial institutions are also placing greater mining industry, supply cost structures, demand for global commodities and action plans to meet their expectations. A number of initiatives demonstrate
emphasis on environmental, social and governance (ESG) considerations when capital markets. While this presents us with opportunities for portfolio and our progress. For example, we were placed first in the Corporate Integrity Years
making investment decisions. product differentiation, it has the potential to impact how we operate. Ranking in Mexico.
7 Replacement on depletion of ore reserves The inability to replace depletion of ore reserves in key business units By not replacing ore reserves with new discoveries, the company's production There are very interesting exploration projects such as Orisyvo, Rodeo, > 5
through exploration, projects or acquisitions. capacity and eventually its operation would be diminished. Guanajuato that could replace the mineral reserves that are currently being
(Linked to exploration principal risk) exploited. There are also several exploration camps that explore new Years
territories every day in search of minerals in Mexico, Peru and Chile.
8 Future of the workforce Create a culture of talent under an inclusive, empowered and confident culture A lack of talent in some areas of the mines and projects such as planning, The Human Resources department has a highly specialized training programme in < 3
and career path to generate a future-ready workforce. maintenance, safety, etc. is expected. There is a need to develop personnel to the strategic areas of the operation. It also has a training programme for
(Linked to human resources principal risk) fill these positions in the future. Otherwise, we will not have people developing personnel focused on filling vacant positions. Years
prepared to operate the mines.
Statement of directors' responsibilities
The Directors of the Company hereby confirm that to the best of their
knowledge:
· the condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as issued by the
International Accounting Standards Board IASB and as adopted by UK and gives a
true and fair view of the assets, liabilities, financial position and profit
and loss account of the Fresnillo Group as required by DTR 4.2.4; and
· the interim management report includes a fair review of the
information required by
o DTR 4.2.7 (being an indication of important events that have occurred during
the first six months of the financial year and their impact on the condensed
set of financial statements; and a description of the principle risks and
uncertainties for the remaining six months of the year); and
o DTR 4.2.8 (being related party transactions that have taken place in the
first six months of the current financial year and that have materially
affected the financial position or performance of the entity during that
period and changes since the last annual report).
As mentioned in the Annual Report 2022, the Directors of the Company are:
Alejandro Baillères Chairman
Juan Bordes Non-executive director
Arturo Fernández Non-executive director
Fernando Ruiz Non-executive director
Eduardo Cepeda Non-executive director
Charlie Jacobs Senior Independent non-executive director
Bárbara Garza Lagüera Independent non-executive director
Georgina Kessel Independent non-executive director
Dame Judith Macgregor Independent non-executive director
Alberto Tiburcio Independent non-executive director
Guadalupe de la Vega Independent non-executive director
Héctor Rangel Independent non-executive director
On behalf of the board of directors of Fresnillo plc
Octavio Alvídrez
Chief Executive Officer
INDEPENDENT REVIEW REPORT TO FRESNILLO PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2023 which comprises Interim Consolidated Income Statement, Interim
Consolidated Statement of Comprehensive Income, Interim Consolidated Balance
Sheet, Interim Consolidated Statement of Cash Flows and the related notes 1 to
18. We have read the other information contained in the half yearly financial
report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set of
financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2023 is not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 2a, the annual financial statements of the group are
prepared in accordance with UK adopted international accounting standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
International Standard on Review Engagements 2410 (UK) "Review of Interim
Financial Information Performed by the Independent Auditor of the Entity"
issued by the Financial Reporting Council, however future events or conditions
may cause the entity to cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the Company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
1 August 2023
Interim Consolidated Income Statement
Notes For the six months ended 30 June
2023 (Unaudited) 2022 (Unaudited)
(in thousands of US dollars)
| Pre-Silverstream revaluation effect Silverstream revaluation effect Total Pre- Silverstream revaluation effect Silverstream revaluation effect Total
Continuing operations:
Revenues 4 1,343,333 1,343,333 1,259,062 1,259,062
Cost of sales 5 (1,060,647) (1,060,647) (893,203) (893,203)
Gross profit 282,686 282,686 365,859 365,859
Administrative expenses (54,766) (54,766) (49,114) (49,114)
Exploration expenses (96,862) (96,862) (77,699) (77,699)
Selling expenses (16,415) (16,415) (13,718) (13,718)
Other operating income 1,916 1,916 2,220 2,220
Other operating expenses 2 (c) (35,399) (35,399) (9,396) (9,396)
Profit from continuing operations before net finance costs and income tax 81,160 81,160 218,152 218,152
Finance income 6 26,473 26,473 7,008 7,008
Finance costs 6 (46,010) (46,010) (34,913) (34,913)
Revaluation effects of Silverstream contract 10 (17,009) (17,009) (36,259) (36,259)
Foreign exchange gain 3,241 3,241 1,238 1,238
Profit from continuing operations before income tax 64,864 (17,009) 47,855 191,485 (36,259) 155,226
Corporate income tax 7 14,437 5,103 19,540 (17,714) 10,878 (6,836)
Special mining right 7 22,325 22,325 (7,426) (7,426)
Income tax (expense)/credit 7 36,762 5,103 41,865 (25,140) 10,878 (14,262)
Profit for the period from continuing operations 101,626 (11,906) 89,720 166,345 (25,381) 140,964
Attributable to:
Equity shareholders of the Company 76,632 (11,906) 64,726 142,753 (25,381) 117,372
Non-controlling interests 24,994 24,994 23,592 23,592
101,626 (11,906) 89,720 166,345 (25,381) 140,964
Earnings per share: (US$)
Basic and diluted earnings per ordinary share from continuing operations 8 0.088 0.159
Adjusted earnings per share: (US$)
Adjusted basic and diluted earnings per ordinary share from continuing 8 0.104 0.194
operations
Interim Consolidated Statement of Comprehensive Income
For the six months ended 30 June
2023 2022
(Unaudited) (Unaudited)
(in thousands of US dollars)
Profit for the period 89,720 140,964
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Loss on cash flow hedges recycled to income statement - 3,771
Changes in the fair value of cost of hedges - 194
Total effect of cash flow hedges - 3,965
Foreign currency translation (3,078) 348
Income tax effect on items that may be reclassified subsequently to loss or - (1,189)
profit
Net other comprehensive income/(loss) that may be reclassified subsequently to (3,078) 3,124
profit or loss
Items that will not be reclassified to profit or loss:
Changes in the fair value of cash flow hedges 72 (1,532)
Total effect of cash flow hedges 72 (1,532)
Changes in the fair value of equity investments at fair value through other (43,989) (38,076)
comprehensive income (FVOCI)
Income tax effect on items that will not be reclassified to profit or loss 13,175 11,883
Net other comprehensive loss that will not be reclassified to loss or profit (30,742) (27,725)
Other comprehensive loss, net of tax (33,820) (24,601)
Total comprehensive income, net of tax 55,900 116,363
Attributable to:
Equity shareholders of the Company 30,935 93,918
Non-controlling interests 24,965 22,445
55,900 116,363
Interim Consolidated Balance Sheet
Notes As of 30 June As of 31 December
2023 2022
(Unaudited) (Audited)
(in thousands of US dollars)
ASSETS
Non-current assets
Property, plant and equipment 9 2,860,551 2,862,564
Equity instruments at FVOCI 18 117,137 158,813
Silverstream contract 10,18 442,183 475,256
Deferred tax asset 7 528,666 343,688
Inventories 11 69,760 91,620
Other receivables 12 45,004 38,458
Other assets 4,100 3,700
4,067,401 3,974,099
Current assets
Inventories 11 473,887 495,744
Trade and other receivables 12 375,343 404,499
Income tax recoverable 65,718 -
Prepayments 24,827 34,429
Derivative financial instruments 18 208 231
Silverstream contract 10,18 34,992 36,218
Cash and cash equivalents 13 889,684 969,060
1,864,659 1,940,181
Total assets 5,932,060 5,914,280
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders of the Company
Share capital 368,546 368,546
Share premium 1,153,817 1,153,817
Capital reserve (526,910) (526,910)
Hedging reserve 29 (91)
Fair value reserve of financial assets at FVOCI 48,994 79,786
Foreign currency translation reserve (4,964) (1,886)
Retained earnings 2,579,189 2,612,469
3,618,701 3,685,731
Non-controlling interests 258,522 231,206
Total equity 3,877,223 3,916,937
Non-current liabilities
Interest-bearing loans 841,017 840,678
Notes payable 118,579 95,853
Lease liabilities 9,908 9,920
Provision for mine closure cost 276,650 242,380
Provision for pensions and other post-employment benefit plans 10,814 9,462
Deferred tax liability 7 200,125 111,120
1,457,093 1,309,413
Current liabilities
Trade and other payables 249,479 258,867
Interest-bearing loans 317,879 317,879
Notes payable 9,644 9,109
Income tax payable 7,432 81,235
Derivative financial instruments 18 271 487
Lease liabilities 4,960 5,209
Provision for mine closure cost 4,827 4,827
Employee profit sharing 3,252 10,317
597,744 687,930
Total liabilities 2,054,837 1,997,343
Total equity and liabilities 5,932,060 5,914,280
Interim Consolidated Statement of Cash Flows
Notes For the six months ended 30 June
2023 2022
(Unaudited) (Unaudited)
(in thousands of US dollars)
Net cash from operating activities 17 205,497 395,143
Cash flows from investing activities
Purchase of property, plant and equipment (227,752) (299,026)
Proceeds from the sale of property, plant and equipment and other assets 422 660
Silverstream contract 10 20,187 18,257
Interest received 27,024 7,923
Purchase of equity instruments at FVOCI (2,313) -
Net cash used in investing activities (182,432) (272,186)
Cash flows from financing activities
Proceeds from notes payable(1) 22,726 -
Payment of notes payable - (9,941)
Principal elements of lease payment 1 (3,878) (2,641)
Dividends paid to shareholders of the Company(2) (98,033) (176,875)
Capital contribution(3) 2,309 10,120
Interest paid(4) (29,867) (27,448)
Net cash used in financing activities (106,743) (206,785)
Net increase in cash and cash equivalents during the period (83,678) (83,828)
Effect of exchange rate on cash and cash equivalents 4,302 440
Cash and cash equivalents at 1 January 13 969,060 1,235,282
Cash and cash equivalents at 30 June 13 889,684 1,151,894
(1) 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.
(2) Includes the effect of hedging of dividend payments made in currencies
other than US dollar (note 14).
(3) Corresponds to capital contributions provided by Minera los Lagartos, S.A.
de C.V.
(4) Total interest paid during the six months ended 30 June 2023 less amounts
capitalised totalling US$2.0 million (30 June 2022: US$4.3 million) which is
included within the caption Purchase of property, plant and equipment.
Interim Consolidated Statement of Changes in Equity
Notes Share Share Capital reserve Hedging Cost of Fair value Foreign Retained Total attributable Non-controlling interests Total
capital
premium
currency
earnings
equity
Reserve hedging reserve of
translation to shareholders
reserve
reserve(1) financial of the Company
assets at
FVOCI
(in thousands of US dollars)
Balance at 1 January 2022 (Audited) 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 period 117,372 117,372 23,592 140,964
Other comprehensive income, net of tax - - - 2,813 38 (26,653) 348 - (23,454) (1,147) (24,601)
Total comprehensive income for the period - - - 2,813 38 (26,653) 348 117,372 93,918 22,445 116,363
Hedging gain transferred to the carrying value of PPE purchased during the - - - (1,879) - - - - (1,879) 776 (1,103)
period
Capital contribution - - - - - - - - - 10,120 10,120
Dividends paid 14 - - - - - - - (176,854) (176,854) - (176,854)
Balance at 30 June 2022 (Unaudited) 368,546 1,153,817 (526,910) (1,108) - 57,131 (1,772) 2,483,605 3,533,309 217,889 3,751,198
Balance at 1 January 2023 (Audited) 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 period 64,726 64,726 24,994 89,720
Other comprehensive income, net of tax - - - 79 - (30,792) (3,078) - (33,791) (29) (33,820)
Total comprehensive income for the period 79 (30,792) (3,078) 64,726 30,935 24,965 55,900
Hedging gain transferred to the carrying value of PPE purchased during the - - - 41 - - - - 41 42 83
period
Capital contribution - - - - - - - - - 2,309 2,309
Dividends paid 14 - - - - - - - (98,006) (98,006) - (98,006)
Balance at 30 June 2023 (Unaudited) 368,546 1,153,817 (526,910) 29 - 48,994 (4,964) 2,579,189 3,618,701 258,522 3,877,223
Notes to the Interim Condensed Consolidated Financial Statements
1 Corporate Information
Fresnillo plc ("the Company", together with its subsidiaries, "the Group") is
a public limited company registered in England and Wales with the registered
number 6344120.
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 16.
The interim condensed consolidated financial statements of the Group for the
six months ended 30 June 2023 ("interim consolidated financial statements")
were authorised for issue by the Board of Directors of Fresnillo plc on 1
August 2023.
The Group's principal business is the mining and beneficiation of non-ferrous
minerals, and the sale of related production. The primary contents of this
production are silver, gold, lead and zinc. Further information about the
Group's operating mines and its principal activities is disclosed in Note 3.
2 Significant accounting policies
(a) Basis of preparation and statement of compliance
The interim consolidated financial statements of the Group for the six months
ended 30 June 2023 have been prepared in accordance with IAS 34 Interim
Financial Reporting as issued by the International Accounting Standards Board
IASB and as adopted by the UK.
These interim consolidated financial statements do not constitute statutory
accounts as defined in section 435 of the Companies Act 2006. A copy of the
statutory accounts for the year ended 31 December 2022 has been delivered to
the Registrar of Companies. The auditor's report in accordance with Chapter 3
of Part 16 of the Companies Act 2006 in relation to those accounts was
unqualified, did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying the report and did not
contain a statement under section 498(2) or section 498(3) of the UK Companies
Act 2006.
The interim 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 interim 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 where otherwise indicated.
The impact of seasonality or cyclicality on operations is not considered
significant on the interim consolidated financial statements.
(b) Basis of consolidation
The interim consolidated financial statements set out the Group's financial
position as of 30 June 2023 and 31 December 2022, and its operations and cash
flows for the six-month periods ended 30 June 2023 and 30 June 2022.
The basis of consolidation adopted in the preparation of the interim
consolidated financial statements is consistent with that applied in the
preparation of the consolidated financial statements for the year ended 31
December 2022.
(c) Changes in accounting policies and presentation
The accounting policies adopted in the preparation of the interim 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, amendments and interpretations as adopted by the Group
A number of new or amended standards became applicable for the current
reporting period. The Group did not have to change its accounting policies or
make retrospective adjustments as a result of adopting these standards.
Impact of standards issued but not yet applied by the Group
The IASB has issued other amendments resulting from improvements to IFRSs that
management considers do not have any impact on the accounting policies,
financial position or performance of the Group. The Group has not early
adopted any standard, interpretation or amendment that was issued but is not
yet effective.
Significant accounting judgments, estimates and assumptions
Significant accounting judgments, estimates and assumptions are consistent
with those disclosed in the consolidated financial statements for the year
ended 31 December 2022 except as set out below.
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.
Considering the above-mentioned factors, the Group has concluded Juanicipio
mine has reached commercial production on 1 June 2023 following a successful
commissioning period. Juanicipio mine, processing facility and other vital
systems are operating in line with, or rapidly approaching design capacity.
The Juanicipio mill is operating at approximately 85% of its capacity of 4,000
tonnes per day ("tpd") with metal recovery in line with design. As commercial
production has been achieved, the Group has started to depreciate all the
plant assets and recognised the corresponding charge as production cost.
Estimate of recoverable ore on leaching pads
In the Group's open pit mines, certain mined ore is placed on leaching pads
where a solution is applied to the surface of the heap to dissolve the gold
and enable extraction. The determination of the amount of recoverable gold
requires estimation with consideration of the quantities of ore placed on the
pads, the grade of the ore (based on assay data) and the estimated recovery
percentage (based on metallurgical studies and current technology).
The grades of ore placed on pads are regularly compared to the quantities of
metal recovered through the leaching process to evaluate the appropriateness
of the estimated recovery (metallurgical balancing). The Group monitors the
results of the metallurgical balancing process and recovery estimates are
refined based on actual results over time and when new information becomes
available.
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 the six-month period ended 30 June 2023 would have been US$21.6 million
higher, with an offsetting impact against the work-in-progress inventory
balance as of 30 June 2023.
Soledad y Dipolos inventory
The Company has recently 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 has
recognised a write off of US$21.9 million regarding the Soledad-Dipolos gold
contents in inventory, which has been presented as other expenses in the
Interim Consolidated Income Statement. The Company is taking relevant actions
so that the illegal leaching activities be ceased a soon as possible. The
Company does not currently expect any further losses of this inventory to be
significant.
The inventory write-off considered both the estimation of recoverable amount
of gold existing at the leaching pad, and potential volume of solution being
irrigated on the area that is believed to have been leached to date. However,
the nature of estimation means that actual outcome may differ from those
estimates.
(d) Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out above in the
Operational Review, with further detail in the Annual Report 2022. The
financial position of the Group, its cash flows and liquidity position are
described in the Financial Review. In addition, the Group's objectives,
policies and processes for managing its capital; its financial risk management
objectives; details of its financial instruments and hedging activities; and
its exposures to credit risk and liquidity risk were set out in the Annual
Report 2022.
In making their assessment of the Group's ability to manage its future cash
requirements, the Directors have considered the Group budgets and the cash
flow forecasts for the period to 31 December 2024 (being the going concern
assessment period). The Directors have also considered the cash position at 30
June 2023 (US$ 889.7 million), as described in the financial review. In
addition, they reviewed a more conservative cash flow scenario with reduced
silver and gold prices of US$21.1 and US$1,734 respectively throughout this
period, whilst maintaining current budgeted expenditure and only considering
projects approved by the Executive Committee. This resulted in our current
cash and cash equivalents balances reducing over time but maintaining
sufficient liquidity throughout the period.
The Directors have further calculated prices (US$18.3 and US$1,481 for silver
and gold respectively), which should they prevail to the end of 2024 would
result in cash balances decreasing to minimal levels by the end of 2024,
without applying mitigations.
Should metal prices remain below the stressed prices above for an extended
period, management have identified specific elements of capital and
exploration expenditures which could be deferred without adversely affecting
production profiles throughout the period. Finally management could amend the
mining plans to concentrate on production with a higher margin in order to
accelerate cash generation without affecting the integrity of the mine plans.
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 interim financial
statements.
3 Segment reporting
For management purposes, the Group is organised into operating segments based
on producing mines.
At 30 June 2023 the Group has seven reportable operating segments represented
by seven producing mines 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 gold mine;
The Herradura mine, located in the State of Sonora, a surface gold mine;
The Noche Buena mine, located in the 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, located 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 does
not review segment assets and liabilities, the Group has not disclosed this
information.
In the six months ended 30 June 2023 and 2022, all revenue was derived from
customers based in Mexico.
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 interim
consolidated income statements, 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 interim
consolidated income statement. Other income and expenses included in the
interim consolidated income statement are not allocated to operating segments.
Transactions between reportable segments are accounted for on an arm's length
basis similar to transactions with third parties.
Operating segments
The following tables present revenue and profit information regarding the
Group's operating segments for the six months ended 30 June 2023 and 2022,
respectively. Revenues for the six months ended 30 June 2023 and 30 June 2022
include those derived from contracts with customers and other revenues, as
showed in note 4.
Six months ended 30 June 2023
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio Other(4) Adjustments and eliminations Total
Buena
Revenues:
Third party 221,728 379,509 76,150 308,791 48,436 197,639 111,080 - - 1,343,333
Inter-Segment(3) 250 75,177 54,031 (129,458) -
Segment revenues 221,978 379,509 76,150 308,791 48,436 197,639 186,257 54,031 (129,458) 1,343,333
Segment profit(1) 91,241 82,283 5,116 92,242 5,047 87,442 104,837 11,040 42,599 521,847
Depreciation and amortisation (236,310)
Employee profit sharing (2,851)
Gross profit as per the income statement 282,686
Capital expenditure(2) 43,470 28,732 23,927 54,120 2 34,348 41,289 1,864 227,752
(1) Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing.
(2) Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including stripping cost, mine development and
purchase of mine equipment, excluding additions relating to changes in the
mine closure provision. Significant additions include striping cost at
Herradura mine, mining works at San Julian and Fresnillo and tailing dams at
Saucito and Fresnillo.
(3) The ore production of Juanicipio mine has been partially processed through
Fresnillo and Saucito facilities while achieving name plate capacity of plant
facilities.
(4) 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.
Six months ended 30 June 2022
US$ thousands Fresnillo Herradura Cienega Saucito Noche San Julian Juanicipio(4) Other(5) Adjustments and eliminations Total
Buena
Revenues:
Third party(1) 266,353 302,679 92,533 303,507 85,898 211,870 - - (3,778) 1,259,062
Inter-Segment - - - - - - 120,140 92,235 (212,375) -
Segment revenues 266,353 302,679 92,533 303,507 85,898 211,870 120,140 92,235 (216,153) 1,259,062
Segment profit(2) 113,514 47,971 32,668 111,533 28,341 125,661 92,533 73,179 (20,188) 605,212
Depreciation and amortisation (233,735)
Employee profit sharing (5,618)
Gross profit as per the income statement 365,859
Capital expenditure(3) 45,500 75,443 19,125 44,995 53 28,010 82,919 2,981 - 299,026
(1)Adjustments and eliminations correspond to hedging loss (note 4).
(2) Segment profit excluding foreign exchange hedging gains, depreciation and
amortisation and employee profit sharing.
(3) Capital expenditure represents the cash outflow in respect of additions to
property, plant and equipment, including striping cost, mine development and
purchase of mine equipment, excluding additions relating to changes in the
mine closure provision. Significant additions include striping cost at
Herradura mine and purchase of mobile equipment at Saucito.
(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 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
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Revenues from contracts with customers 1,351,158 1,278,721
Revenues from other sources
Provisional pricing adjustment on products sold (7,825) (15,888)
Hedging loss on sales - (3,771)
1,343,333 1,259,062
(b) Revenues by product sold
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Lead concentrates (containing silver, gold, lead and by-products) 638,354 572,337
Doré and slag (containing gold, silver and by-products) 387,037 312,802
Zinc concentrates (containing zinc, silver and by-products) 141,458 186,503
Precipitates (containing gold and silver) 135,577 111,645
Activated carbon (containing gold, silver and by-products) 40,907 75,775
1,343,333 1,259,062
All lead and zinc concentrates, precipitates, doré, activated carbon and
slag, were sold to Peñoles' metallurgical complex, Met-Mex, for smelting and
refining.
(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:
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Silver 631,111 576,885
Gold 626,375 555,702
Zinc 118,163 158,445
Lead 55,111 54,243
Value of metal content in products sold 1,430,760 1,345,275
Refining and treatment charges (87,427) (86,213)
Total revenues(1) 1,343,333 1,259,062
(1) Includes provisional price adjustments which represent changes in the fair
value of trade receivables resulting in a loss of US$7.8 million (2022: loss
of US$15.9 million). During the six-month period ended 30 June 2023, there
were no hedging on sales (2022: loss of US$3.8 million).
The average realised prices for the gold and silver content of products sold
prior to the deduction of treatment and refining charges, were:
Six months ended 30 June
2023 2022
(in US dollars per ounce)
Gold(2) 1,948.08 1,871.08
Silver(2) 23.31 22.77
(2) For the purpose of the calculation, revenue by content of products sold
does not include the results from hedging.
5 Cost of sales
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Depreciation and amortisation 236,310 233,735
Contractors 191,518 180,513
Operating materials 140,268 123,590
Maintenance and repairs 140,563 111,629
Energy 127,835 100,034
Personnel expenses(1) 107,471 79,016
Mine equipment leased 32,841 16,423
Mining concession rights and contributions 12,087 10,355
Surveillance 12,147 8,703
Freight 4,958 5,460
Insurance 6,034 5,457
Other 986 23,770
Cost of production 1,013,018 898,685
Unabsorbed production costs(2) 21,481 500
Gain on foreign currency hedges (132) -
Change in work in progress and finished goods (ore inventories) (3) 26,280 (5,982)
Cost of sales 1,060,647 893,203
(1) Personnel expenses include employees' profit sharing of US$2.9 million for
the six months ended 30 June 2023 (six months ended 30 June 2022: US$5.6
million).
(2) Corresponds to fixed cost at Juanicipio and pyrites plant of US$3.9
million and US$1.7 million respectively, non-productive cost for the temporary
stoppage of activities in Penmont US$11.9 million and non-productive fixed
mine cost incurred in Noche Buena resulting from finalisation of mining
activities US$4.0 million (2022: fixed costs incurred in Juanicipio plant
activities).
(3) Refer to note 2 (c) for more detail related to change in work in progress
inventories for the six months ended 30 June 2023 following a change in
estimation.
6 Finance income and finance costs
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Finance income:
Interest on short-term deposits and investments 24,434 4,202
Interest on tax receivables 1,663 2,656
Other 376 150
26,473 7,008
Finance costs:
Interest on interest-bearing loans and notes payables 30,353 24,597
Interest on lease liabilities 561 276
Unwinding of discount on provisions 11,103 7,551
Other 3,993 2,489
46,010 34,913
7 Income tax expense
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Current corporate income tax:
Income tax charge 26,800 93,705
Amounts (over)/under provided in previous periods 4,515 (5,100)
31,315 88,605
Deferred corporate income tax:
Origination and reversal of temporary differences (45,752) (70,891)
Revaluation effects of Silverstream contract (5,103) (10,878)
(50,855) (81,769)
Corporate income tax (19,540) 6,836
Current special mining right:
Special mining right charge(1) 9,655 24,582
9,655 24,582
Deferred special mining right:
Origination and reversal of temporary differences (31,980) (17,156)
Special mining right (22,325) 7,426
Income tax (credit)/expense as reported in the income statement (41,865) 14,262
(1) The total mining concession rights paid during the six-month period were
US$14.8 million (2022: US$12.5 million) and have been recognised in the income
statement within cost of sales and exploration expenses.
Tax charged within the six-month period ended 30 June 2023 has been calculated
by applying the effective rate of tax which is expected to apply to the Group
for the period ended 31 December 2023 using rates substantively enacted by 30
June 2023 as required by IAS 34 Interim Financial Reporting.
The effective tax rate for corporate income tax for the six months ended 30
June 2023 is (40.83%) (six months ended 30 June 2022: 4.40%) and (87.48%)
including the special mining right (six months ended 30 June 2022: 9.19%). The
main factors that decrease the effective tax rate for corporate income tax
below 30% are the foreign exchange effect on tax value of assets and
liabilities (76.70%) and the uplift of tax values corresponding to fixed
assets (9.83%). The net deferred tax asset increased to US$328.5 million (31
December 2022: net deferred tax asset of US$232.6 million) primarily due the
reduction of deferred tax liabilities in respect of fixed assets, derivatives
including the Silverstream contract and equity instruments at FVOCI.
8 Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for the period
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.
For the six months ended 30 June 2023 and 30 June 2022, earnings per share
have been calculated as follows:
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Earnings:
Profit from continuing operations attributable to equity holders of the 64,726 117,372
Company
Adjusted profit from continuing operations attributable to equity holders of 76,632 142,753
the Company
Adjusted profit is profit as disclosed in the Interim Consolidated Income
Statement adjusted to exclude revaluation effects of the Silverstream contract
of US$17.0 million loss (US$11.9 million net of tax) (2022: US$36.3 million
loss and US$25.4 million net of tax).
Adjusted earnings per share have been provided in order to provide a measure
of the underlying performance of the Group, prior to the revaluation effects
of the Silverstream contract, a derivative financial instrument.
Six months ended 30 June
2023 2022
Number of shares:
Weighted average number of ordinary shares in issue ('000) 736,894 736,894
Six months ended 30 June
2023 2022
Earnings per share:
Basic and diluted earnings per ordinary share from continuing operations (US$) 0.088 0.159
Adjusted basic and diluted earnings per ordinary share from continuing
operations (US$)
0.104 0.194
9 Property, plant and equipment
The changes in property, plant and equipment, including right-of-use assets,
during the six months ended 30 June 2023 are principally additions of US$250.2
million (six months ended 30 June 2022: US$310.6 million) and depreciation and
amortisation of US$241.4 million, of which US$1.3 million was capitalised as a
part of the cost of other fixed assets (six months ended 30 June 2022:
US$237.6 million, of which US$2.7 million was capitalised). Significant
additions include stripping cost at Herradura mine, mining works at San Julian
and Fresnillo and tailing dams at Saucito and Fresnillo.
As of 30 June 2023, the Group has contractual commitments related to the
construction and acquisition of property, plant and equipment of
US$144.9million (30 June 2022: US$219.0 million).
10 Silverstream contract
On 31 December 2007, the Group entered into an agreement with Peñoles through
which it is entitled to receive the proceeds received by the Peñoles Group in
respect of the refined silver sold from the Sabinas Mine ('Sabinas'), a
polymetallic mine owned and operated by the Peñoles Group, for an upfront
payment of US$350 million. In addition, a per ounce cash payment of US$2.00 in
years one to five and US$5.00 thereafter (subject to an inflationary
adjustment that commenced from 31 December 2013) is payable to Peñoles. The
cash payment per ounce for the period ended 30 June 2023 was US$5.65 per ounce
(30 June 2022: US$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 of US$1.00
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 25 years. Changes in the contract's fair value, other than
those represented by the realisation of the asset through the receipt of
either cash or refined silver, are charged or credited to the income
statement.
In the six months ended 30 June 2023, total proceeds received in cash were
US$20.2 million (2022: US$18.3 million) of which, US$8.3 million was in
respect of proceeds receivable as at 31 December 2022 (2021: US$4.8 million).
Cash received in respect of the period of US$11.8 million (six months ended 30
June 2022: US$13.4 million) corresponds to 1.16 million ounces of payable
silver (six months ended 30 June 2022: 1.01 million ounces). As at 30 June
2023, a further US$5.4 million (30 June 2022: US$5.4 million) of cash
corresponding to 323,626 ounces of silver is due (30 June 2022: 360,944
ounces).
A reconciliation of the beginning balance to the ending balance as at 30 June
2023 and 31 December 2022 is shown below.
30 June 31 December 2022
2023
(in thousands of US dollars)
Beginning balance 511,474 529,544
Cash received in respect of the period (11,846) (28,513)
Cash receivable (5,444) (8,342)
Remeasurement (loss)/gain recognised in profit or loss (17,009) 18,785
Ending balance 477,175 511,474
Less - Current portion 34,992 36,218
Non-current portion 442,183 475,256
The US$17.0 million unrealised loss recorded in the income statement (six
months ended 30 June 2022: US$36.3 million loss) resulted mainly from an
update in the production mine plan with lower reserves and a decrease in the
forward silver price curve.
Significant assumptions used in the valuation of the Silverstream contract are
as follows:
- Forecasted volumes (millions of ounces/moz)
- Silver to be produced and sold over the life of mine 86.6 moz (31 December
2022: 103.2 moz)
- Average annual silver to be produced and sold 3.5 moz (31 December 2022: 4.0
moz)
- Weighted average discount rate 9.84% (31 December 2022: 9.82%)
- Future silver prices (US$ per ounce)
As at Year 1 Year 2 Year 3 Year 4 Year 5 Long-term
30 June 2023 22.98 23.96 24.81 26.65 25.86 19.89
31 December 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
over 25 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 and
the discount rate used to discount future cash flows. Other inputs into the
valuation are future inflation and future foreign exchange rates between the
Mexican peso and US dollar.
The estimate of the volume of silver that will be produced and sold from the
Sabinas mine requires estimates of the recoverable silver reserves and
resources, the related production profile based on the Sabinas mine plan and
the expected recovery of silver from ore mined. The estimation of these inputs
is subject to a range of operating assumptions and may change over time.
Estimates of reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided to the
Company. The production profile and estimated payable silver that will be
recovered from ore mined is based on the operational mine plan, with certain
amendments to reflect a basis that a market participant would consider, that
is provided to the Company by Peñoles. The inputs assume no interruption in
production over the life of the Silverstream contract and production levels
which are consistent with those achieved in recent years.
Management regularly assesses a range of reasonably possible alternatives for
those significant unobservable inputs described above and determines their
impact on the total fair value. The fair value of the Silverstream contract is
significantly sensitive to a reasonably possible change in future silver
price. the discount rate used to discount future cash flows and total
recoverable resources and reserves over the life of mine. The sensitivity of
these key inputs is as follows:
Effect on profit before tax: increase/
(decrease)
Increase/
US$ thousands
(decrease)
30 June 2023
Silver price 15% 94,432
(15%) (94,432)
Interest rate 25 basis point (8,966)
(50 basis point) 18,837
Effect on profit before tax: increase/
(decrease)
Increase/
US$ thousands
(decrease)
31 December 2022
Silver price 20% 133,736
(15%) (100,302)
Interest rate 100 basis point (41,860)
(25 basis point) 11,452
Management considers that an appropriate sensitivity for volumes produced and
sold is on the total recoverable reserve and resource quantities over the
contract term rather than annual production volumes over the mine life.
Reasonably possible change in total recoverable resources and reserves
quantities over the life of the mine of an increase of approximately 6% (31
December 2022: 6%) would result in an increase in the value of the contract of
US$28.6 million (31 December 2022: US$30.6 million) (a reduction of 6% (31
December 2022: 6%) in reserves and resources quantity would decrease the fair
value of the contract by US$28.6 million (31 December 2022: US$30.6 million).
The significant unobservable inputs are not interrelated. The Sabinas mine is
a polymetallic mine that contains copper, lead and zinc as well as silver,
which is produced as a by-product. Therefore, changes to base metals prices
(rather than the price of silver) are most relevant to the Sabinas mine
production plans and the overall economic assessment of the mine.
The effects on profit before tax and equity of reasonably possible changes to
the inflation rates and the US dollar exchange rate compared to the Mexican
peso on the Silverstream contract are not material.
11 Inventories
As at 30 June As at 31 December 2022
2023
(in thousands of US dollars)
Finished goods(1) 33,316 27,257
Work in progress(2) 334,379 375,603
Ore stockpile(3) 12,574 26,020
Operating materials and spare parts 169,665 163,947
Inventories at lower of cost and net realisable value 549,934 592,827
Allowance for obsolete and slow-moving inventories (6,287) (5,463)
Balance at lower of cost and net realisable value 543,647 587,364
Less - Current portion 473,887 495,744
Non-current portion(4) 69,760 91,620
(1) Finished goods include metals contained in concentrates and doré bars,
and concentrates on hand or in transit to a smelter or refinery.
(2) Work in progress includes metals contained in ores on leaching pads and in
stockpiles that will be processed in dynamic leaching plants (note 2(c)).
(3) Ore stockpile includes ore mineral obtained at Juanicipio.
(4) Non-current inventories relate to ore in leaching pads where the leaching
process has stopped and is not expected to restart within twelve months. As 30
June 2023 the decrease in the value of inventory corresponds to the write-off
adjustment described in note 2(c).
12 Trade and other receivables
As at 30 June As at 31 December 2022
2023
(in thousands of US dollars)
Trade and other receivables from related parties (Note 16)(1) 268,088 275,844
Value added tax receivable 67,903 85,979
Other receivables from related parties 5,577 8,377
Other receivable from contractors 2,410 52
Other receivables 8,469 8,697
Other receivables arising from the layback agreement 23,267 25,994
375,714 404,943
Expected credit loss of 'Other receivables' (371) (444)
375,343 404,499
Other receivables classified as non-current assets:
Other receivable from contractors 1,176 1,638
Value Added Tax receivable 43,828 36,820
45,004 38,458
420,347 442,957
(1)Trade receivables from related parties are valued at fair value based on
forward market prices.
Balances corresponding to Value Added Tax receivables and US$8.4 million
within Other receivables (2022:US$8.7 million) are not financial assets.
13 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 30 June As at 31 December 2022
2023
(in thousands of US dollars)
Cash at bank and on hand 5,570 2,516
Short-term deposits 884,114 966,544
Cash and cash equivalents 889,684 969,060
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.
14 Dividends paid
Dividends declared by the Company are as follows:
Per share Amounts
US Cents $Million
Six months ended 30 June 2023
Total dividends paid during the period(1) 13.3 98.0
Six months ended 30 June 2022
Total dividends paid during the period(2) 24.0 176.9
(1) Final dividend for 2022 approved at the Annual General Meeting on 23 May
2023 and paid on 26 May 2023.
(2) Final dividend for 2021 approved at the Annual General Meeting on 17 May
2022 and paid on 27 May 2022.
A reconciliation between dividend declared, dividends recognised in retained
earnings and dividend presented in the cash flow statements is as follows:
Six months ended 30 June
2023 2022
US$ thousands
US$ thousands
Dividends declared 98,006 176,854
Foreign exchange effect - -
Dividends recognised in retained earnings 98,006 176,854
Foreign exchange and hedging effect 27 21
Dividends paid 98,033 176,875
The directors have declared an interim dividend of US$1.40 cents per share and
is not recognised as a liability as at 30 June 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.
15 Contingencies
The contingencies in the Group's annual consolidated financial statements for
the year ended 31 December 2022 as published in the 2022 Annual Report, are
still applicable as of 30 June 2023, with the following updates:
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 PRODECON. On 16 June 2023 and on 5
July 2023, the Company provided additional documentation and information to
the SAT through PRODECON. The SAT´s response is expected in August 2023.
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.
16 Related party balances and transactions
The Group had the following related party transactions during the six months
ended 30 June 2023 and 30 June 2022 and balances as at 30 June 2023 and 31
December 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 accounts receivable and payable
Accounts receivable Accounts payable
As at 30 June 2023 As at 31 December 2022 As at 30 June 2023 As at 31 December 2022
(in thousands of US dollars)
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 268,088 275,844 3,795 421
Other:
Industrias Peñoles, S.A.B. de C.V. 5,444 8,342 8 -
Metalúrgica Met-Mex Peñoles, S.A. de C.V. - - 421 -
Servicios Administrativos Peñoles, S.A de C.V. 17 - 17,801 4,630
Servicios Especializados Peñoles, S.A. de C.V. 1 - 12,748 8,964
Fuentes de Energía Peñoles, S.A. de C.V. - - 2,991 1,062
Termoeléctrica Peñoles, S. de R.L. de C.V. - - 2,358 3,206
Eólica de Coahuila S.A. de C.V. - - 17,409 13,466
Minera Capela, S.A. de C.V. 30 - - -
Peñoles Tecnología, S.A. de C.V. - - 3,137 -
Other 85 35 6,274 4,220
273,665 284,221 66,942 35,969
Related party accounts receivable and payable will be settled in cash.
Other balances due from related parties:
As at 30 June 2023 As at 31 December 2022
(in thousands of US dollars)
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 477,175 511,474
The Silverstream contract can be settled in either silver or cash. Details of
the Silverstream contract are provided in note 10.
(b) Principal transactions with affiliates are as follows:
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Income:
Sales(1):
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 1,343,333 1,262,832
Other income 1,180 884
Total income 1,344,513 1,263,716
(1) Figures do not include the effects of hedging as the derivative
transactions are not undertaken with related parties.
( )
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Expenses:
Administrative Services:
Servicios Administrativos Peñoles, S.A. de C.V.(2) 29,438 17,065
Servicios Especializados Peñoles, S.A. de C.V. (2) 8,830 13,289
Peñoles Tecnología, S.A. de C.V. 4,479 2,350
42,747 32,704
Energy:
Fuentes de Energía Peñoles, S.A. de C.V. 4,801 1,529
Termoeléctrica Peñoles, S. de R.L. de C.V. 14,614 9,704
Eólica de Coahuila, S.A. de C.V. 13,927 15,722
33,342 26,955
Operating materials and spare parts:
Wideco Inc 2,503 3,159
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 15,613 4,686
18,116 7,845
Equipment repairs and administrative services:
Serviminas, S.A. de C.V. 3,849 3,791
Insurance premiums:
Grupo Nacional Provincial, S.A.B. de C.V. 1,597 6,515
Other expenses 3,175 1,405
Total expenses 102,826 79,215
(2) Based on the Service Agreement with Servicios Administrativos Peñoles,
S.A. de C.V., ("SAPSA") and Servicios Especializados Peñoles, S.A. de C.V.
("SEPSA"), both wholly owned Peñoles' subsidiaries, the companies provided
administrative services during the six months ended 30 June 2023 for a total
amount of US$38.3 million (US$30.4 million for the six months ended 30 June
2022). During the period US$6.7 million were administrative expenses
capitalised (30 June 2022: nil) as the services were in relation to capital
expenditures.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the
Executive Committee who receive remuneration.
Six months ended 30 June
2023 2022
(in thousands of US dollars)
Salaries and bonuses 1,700 1,435
Post-employment pension 126 118
Other benefits 139 123
Total compensation paid to key management personnel 1,965 1,676
17 Notes to the consolidated statement cash flows
Notes Six months ended 30 June
2023 2022
(in thousands of US dollars)
Reconciliation of profit for the period to net cash generated from operating
activities
Profit for the period 89,720 140,964
Adjustments to reconcile profit for the period to net cash inflows from
operating activities:
Depreciation and amortisation 236,924 234,281
Employee profit sharing 2,935 5,809
Deferred income tax credit 7 (82,835) (98,925)
Current income tax expense 7 40,970 113,187
Loss/(gain) on the sale of property, plant and equipment 841 (102)
Net finance costs 19,529 27,875
Foreign exchange gain (2,874) (450)
Difference between pension contributions paid and amounts recognised in the 731 601
income statement
Non-cash movement on derivatives (2) 25
Changes in fair value of Silverstream 10 17,009 36,259
Operating cash flow before change in working capital 322,948 459,524
Working capital adjustments
Decrease in trade and other receivables 22,791 70,285
Decrease/(increase) decrease in prepayments and other assets 9,201 (8,027)
Decrease/(increase) in inventories 43,718 (12,399)
Increase in trade and other payables (326) 26,940
Cash generated from operations 398,332 536,323
Income tax paid(1) (182,078) (125,008)
Employee profit sharing paid (10,757) (16,172)
Net cash from operating activities 205,497 395,143
(1) Income tax paid includes US$135.5 million corresponding to corporate
income tax (June 2022: US$71.7 million) and US$46.5 million corresponding to
special mining right (June 2022: US$53.3 million), for further information
refer to note 7.
18 Financial instruments
a. Classification
As at 30 June 2023
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
cost
Trade and other receivables (1) 26,613 - - 273,532
Equity instruments at FVOCI 117,137 - -
Silverstream contract - - - 477,175
Derivative financial instruments - - 208 -
Financial liabilities: Amortised Fair value (hedging instruments) Fair value through profit or loss
Cost
Interest-bearing loans - 1,158,896 - -
Trade and other payables - 151,333 - -
Notes payable - 128,223 - -
Derivative financial instruments - - 271 -
(1 Relates to trade and other receivables from related parties and
contractors, net of the provision for impairment)
As at 31 December 2022
US$ thousands
Financial assets: Amortized Fair value through OCI Fair value (hedging instruments) Fair value through profit or loss
Cost
Trade and other receivables (1) 27,276 - - 284,186
Equity instruments at FVOCI - 158,813 - -
Silverstream contract - - - 511,474
Derivative financial instruments - - 231 -
Financial liabilities: Amortised Fair value (hedging instruments) Fair value through profit or loss
Cost
Interest-bearing loans 1,158,557 - -
Trade and other payables 176,266 - -
Notes payable 104,962 - -
Derivative financial instruments - 487 -
(1 Relates to trade and other receivables from related parties and
contractors, net of the provision for impairment)
b. Fair value measurement
Fair value hierarchy
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: a) in the principal market for the asset or liability, or b) 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 interim consolidated financial statements are categorised within the fair
value hierarchy, described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level 1 - Quoted (unadjusted) market prices in active markets for identical
assets or liabilities
Level 2 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable
Level 3 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable
For assets and liabilities that are recognised in the financial statements on
a recurring basis, the Group determines whether transfers have occurred
between levels in the hierarchy by re-assessing categorisation (based on the
lowest level input that is significant to the fair value measurement as a
whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of
assets and liabilities on the basis of the nature, characteristics and risks
of the asset or liability and the level of the fair value hierarchy as
explained above.
The value of financial assets and liabilities other than those measured at
fair value are as follows:
Carrying amount Fair value
30 June 31 December 2022 30 June 31 December 2022
2023 2023
US$ thousands
Financial assets:
Trade and other receivables 26,613 27,276 26,613 27,276
Financial liabilities:
Interest-bearing loans(1) 1,158,896 1,158,557 951,348 990,588
Trade and other payables 151,333 176,266 151,333 176,266
Note payable 128,223 104,962 128,223 104,962
(1) Interest-bearing loans are categorised in Level 1 of the fair value
hierarchy.
The carrying amounts of all other financial instruments are measured at fair
value.
The financial assets and liabilities measured at fair value are categorised
into the fair value hierarchy as follows:
As of 30 June 2023
Fair value measure using
Quoted prices in active markets Significant observable (Level 2) Significant unobservable (Level 3) Total
(Level 1)
US$ thousands
Financial assets:
Trade receivables (Note 12)(1) - - 273,532 273,532
Derivative financial instruments:
Option and forward foreign exchange contracts - 208 - 208
Silverstream contract (Note 10) - - 477,175 477,175
Other financial assets:
Equity instruments at FVOCI 117,137 - - 117,137
117,137 208 750,707 868,052
Financial liabilities:
Derivative financial instruments:
Option and forward foreign exchange contracts - 271 - 271
- 271 - 271
(1)Includes receivable corresponding Silverstream contract of US$5.4 million.
As of 31 December 2022
Fair value measure using
Quoted prices in active markets (Level 1) Significant observable (Level 2) Significant unobservable (Level 3) Total
US$ thousands
Financial assets:
Trade receivables (Note 12) (1) - - 284,186 284,186
Derivative financial instruments:
Option and forward foreign exchange contracts - 231 - 231
Silverstream contract (Note 10) - - 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)Includes receivable corresponding Silverstream contract of US$8.3 million.
There have been no significant transfers between Level 1 and Level 2 of the
fair value hierarchy, and no transfers into or out of Level 3 fair value
measurements.
A reconciliation of the opening balance to the closing balance for Level 3
financial instruments other than Silverstream and the related receivable with
the contract (which is disclosed in Note 10) is shown below:
2023 2022
US$ thousands
Balance at 1 January 275,844 265,473
Sales 1,351,158 1,278,721
Cash collection (1,351,089) (1,283,670)
Changes in fair value(1) (4,969) (16,924)
Realised embedded derivatives during the year(1) (2,856) 1,034
Balance at 30 June 268,088 244,634
(1 Changes in fair value and realised embedded derivatives during the year are
recognised in revenues.)
Valuation techniques
The following valuation techniques were used to estimate the fair values:
Option commodity contracts
The Group enters into derivative financial instruments with various
counterparties, principally financial institutions with investment grade
credit ratings. The Level 2 option commodity contracts are measured based on
observable spot commodity prices, the yield curves of the respective commodity
as well as the commodity basis spreads between the respective commodities. The
option contracts are valued using the Black-Scholes model, the significant
inputs to which include observable spot commodities price, interest rates and
the volatility of the commodity.
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 Level 2 foreign currency forward 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.
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 10.
Equity investments
The fair value of equity investments is derived from quoted market prices in
active markets.
Interest-bearing loans
The fair value of the Group's interest-bearing loan is derived from quoted
market prices in active markets.
Receivables from provisional sales
Sales of concentrates, precipitates and doré bars are 'provisionally priced'
and revenue is initially recognised using this provisional price and the
Group's best estimate of the contained metal. Revenue is subject to final
price and metal content adjustments subsequent to the date of delivery. 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.
c. 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, including loans from related
parties, as disclosed in the balance sheet, excluding net unrealised gains or
losses on revaluation of cash flow hedges and debt instruments. 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 as
at 30 June 2023 and 2022 consisted of only cash and cash equivalents.
1 (#_ftnref1) Adjusted revenues are the revenues shown in the income
statement adjusted to add back treatment and refining charges and the effects
of metals prices hedging. The Company considers this is a useful additional
measure to help understand underlying factors driving revenue in terms of
volumes sold and realised prices.
2 (#_ftnref2) 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 (#_ftnref3) 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 (#_ftnref4) Prior to Silverstream valuation effects.
5 (#_ftnref5) Free cash flow calculated as net cash flow after the effect of
foreign exchange on cash, less dividend payments.
(6) Net Debt is calculated as debt at 30 June 2023 less Cash and other liquid
funds at 30 June 2023 divided by the EBITDA generated in the last 12 months
6 (#_ftnref6) Adjusted production cost is calculated as total production
costs less depreciation, profit sharing and the effects of exchange rate
hedging.
7 (#_ftnref7) Net debt is calculated as debt at 30 June 2023 less Cash and
other liquid funds at 30 June 2023 divided by the EBITDA generated in the last
12 months
8 (#_ftnref8) Au:Ag ratio of 80:1
9 (#_ftnref9) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
10 (#_ftnref10) 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), plus revaluation effects of the Silverstream
contract and other operating income plus other operating expenses and
depreciation.
11 (#_ftnref11) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
12 (#_ftnref12) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
13 (#_ftnref13) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and metals prices
hedging.
14 (#_ftnref14) Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
15 (#_ftnref15) 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.
16 (#_ftnref16) Unproductive costs primarily include unabsorbed production
costs such as non-productive cost for the temporary illegal stoppage at
Herradura, fixed costs incurred at Juanicipio and pyrites plant, and fixed
mine costs at Noche Buena as a result of the end of its mine life.
17 (#_ftnref17) Net debt is calculated as debt at 30 June 2023 less Cash and
other liquid funds at 30 June 2023 divided by the EBITDA generated in the last
12 months.
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