REG - Fresnillo Plc - Interim results for the six months to 30 June 2014 <Origin Href="QuoteRef">FRES.L</Origin> - Part 4
29/10/2014 10:08
- Part 4: For the preceding part double click ID:nRSE2367Oc
302 215
Total compensation paid to key management personnel 2,091 1,968
Total compensation paid to key management personnel
2,091
1,968
19 Notes to the consolidated cash flow statement
Reconciliation of profit for the year to net cash generated from operating activities
Profit for the period 137,083 176,797
Adjustments to reconcile profit for the period to net cash inflows from operating activities:
Depreciation 132,929 114,261
Employee profit sharing 8,852 9,153
Deferred corporate income tax 7 (25,027) (52,311)
Corporate income tax expense 7 83,104 125,305
Deferred special mining right 7 13,082 -
(Gain) / loss on the sale of property, plant and equipment and other assets (63) 532
Other losses 161 252
Loss on write off of property, plant and equipment 9 4,504 -
Net finance costs 23,735 1,490
Foreign exchange loss 4,412 5,738
Difference between pension contributions paid and amounts recognised in the income statement 462 484
Non cash movement on derivatives 6 751 2,192
Changes in fair value of Silverstream 10 (47,298) 112,496
Working capital adjustments
Increase in trade and other receivables (55,445) (9,991)
(Increase) / decrease in prepayments and other assets 3,895 1,081
Increase in inventories (56,873) (57,155)
Increase in trade and other payables 36,875 13,056
Cash generated from operations 265,138 443,380
Income tax paid (90,176) (199,159)
Employee profit sharing paid (20,302) (55,331)
Net cash from operating activities 154,660 188,890
154,660
188,890
20 Financial instruments
(a) Fair value category
As at 30 June 2014
US$ thousands
Financial assets: At fair value through profit or loss At fair value through OCI (cash flow hedges) Available-for-sale investments at fair value through OCI Loans and receivables
Trade and other receivables1 - - - 171,099
Short term investments - - - 750,000
Available-for-sale financial assets - - 109,384 -
Silverstream contract (note 10) 389,376 - - -
Embedded derivatives within sales contracts1 4,633 - - -
Derivative financial instruments - 4,378 - -
Financial liabilities: At fair value through profit or loss At amortised Cost
Interest-bearing loans - 795,331
Loans from related party (note 18) - 41,451
Trade and other payables - 66,080
Derivative financial instruments 181 -
1 Embedded derivative within sales contracts is presented within Trade and other receivables in the balance sheet.
As at 31 December 2013
US$ thousands
Financial assets: At fair value through profit or loss At fair value through OCI (cash flow hedges) Available-for-sale investments at fair value through OCI Loans and receivables
Trade and other receivables1 - - - 148,859
Available-for-sale financial assets - - 63,245 -
Silverstream contract (note 10) 372,846 - - -
Derivative financial instruments - 2,057 - -
Financial liabilities: At fair value through profit or loss At amortised Cost
Interest-bearing loans - 795,306
Loans from related party (note 18) 40,920
Trade and other payables - 52,132
Embedded derivatives within sales contracts1 1,154 -
Derivative financial instruments 848 -
1 Trade and other receivables and embedded derivative within sales contracts are presented net in Trade and other
receivables in the balance sheet.
(b) Fair value measurement
The fair value of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, other
than those with carrying amounts that are a reasonable approximation of their fair values, are as follows:
Carrying amount Fair value
30 June 2014 31 December 2013 30 June 2014 31 December 2013
US$ thousands
Financial assets:
Short term investments 750,000 - 750,454 -
Available-for-sale financial assets 109,384 63,245 109,384 63,245
Silverstream contract (note 10) 389,376 372,846 389,376 372,846
Embedded derivatives within sales contracts 4,633 - 4,633 -
Derivative financial instruments 4,378 2,057 4,378 2,057
Financial liabilities:
Interest-bearing loans 795,331 795,306 839,8641 780,9201
Loans from related party (note 18) 41,451 40,920 41,4962 40,9202
Embedded derivatives within sales contracts - 1,154 - 1,154
Derivative financial instruments 181 848 181 848
1 Interest-bearing loans are categorised in Level 1 of the fair value hierarchy.
2 Loans from related party are categorised in Level 3 of the fair value hierarchy.
The financial assets and liabilities measured at fair value are categorised into the fair value hierarchy as at 31 December
as follows:
As of 30 June 2014
Fair value measure using
Quoted prices in active markets Level 1 Significant observable Level 2 Significant unobservable Level 3 Total
US$ thousands
Financial assets:
Derivative financial instruments:
Option and forward foreign exchange contracts - 4,378 - 4,378
Silverstream contract (note 10) - - 389,376 389,376
Embedded derivatives within sales contracts - - 4,633 4,633
- 4,378 394,009 398,387
Financial investments available-for-sale:
Quoted investments 109,384 - - 109,384
109,384 4,378 394,009 507,771
Financial liabilities:
Derivative financial instruments:
Options and forward foreign exchange contracts - (181) - (181)
- (181) - (181)
As of 31 December 2013
Fair value measure using
Quoted prices in active markets Level 1 Significant observable Level 2 Significant unobservable Level 3 Total
US$ thousands
Financial assets:
Derivative financial instruments:
Option and forward foreign exchange contracts - 2,057 - 2,057
Silverstream contract (note 10) - - 372,846 372,846
- 2,057 372,846 374,903
Financial investments available-for-sale:
Quoted investments 63,245 - - 63,245
63,245 2,057 372,846 438.148
Financial liabilities:
Derivative financial instruments:
Embedded derivatives within sales contracts - - (1,154) (1,154)
Options and forward foreign exchange contracts - (848) - (848)
- (848) (1,154) 2,002
There have been no significant transfers between Level 1 and Level 2 of the fair value hierarchy, and no transfers into and
out of Level 3 fair value measurements.
A reconciliation of the beginning balance to the ending balance for Level 3 financial instruments other than Silverstream
(which is disclosed in note 10) is shown below:
30 June 2014 31 December 2013
US$ thousands
Balance at 1 January: (1,154) (6,136)
Changes in fair value (3,835) (16,882)
Realised embedded derivatives during the year 9,622 21,864
Balance at 30 June 4,633 (1,154)
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.
Valuation techniques
The following valuation techniques were used to estimate the fair values:
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with various counterparties, principally financial institutions with
investment grade credit ratings. The foreign currency forward (Level 2) contracts are measured based on observable spot
exchange rates, the yield curves of the respective currencies as well as the currency basis spreads between the respective
currencies. The foreign currency option contracts are valued using the Garmam-Kohlhagen formula, the significant inputs to
which include observable spot exchange rates, interest rates and the volatility of the currency.
Silverstream contract
The fair value of the Silverstream contract is determined using a valuation model (for further information relating to the
Silverstream contract see note 10). This derivative has a term of over 20 years and the valuation model utilises a number
of inputs that are not based on observable market data due to the nature of these inputs and/or the duration of the
contract. Inputs that have a significant effect on the recorded fair value are the volume of silver that will be produced
and sold from the Sabinas mine over the contract life, the future price of silver, future foreign exchange rates between
the Mexican peso and US dollar, future inflation and the discount rate used to discount future cash flows.
The estimate of the volume of silver that will be produced and sold from the Sabinas mine requires estimates of the
recoverable silver reserves and resources, the related production profile based on the Sabinas mine plan and the expected
recovery of silver from ore mined. The estimation of these inputs is subject to a range of operating assumptions and may
change over time. Estimates of reserves and resources are updated annually by Peñoles, the operator and sole interest
holder in the Sabinas mine and provided to the Company. The production profile and estimated payable silver that will be
recovered from ore mined is based on the latest plan and estimates, also provided to the Company by Peñoles. The inputs
assume no interruption in production over the life of the Silverstream contract and production levels which are consistent
with those achieved in recent years.
Management regularly assesses a range of reasonably possible alternatives for those significant unobservable inputs
described above, and determines their impact on the total fair value. The significant unobservable inputs are not
interrelated. The fair value of the Silverstream is not significantly sensitive to a reasonable change in future exchange
rates, however, it is to a reasonable change in future silver price, future inflation and the discount rate used to
discount future cash flows.
The following table demonstrates the sensitivity of the Silverstream contract valuation to reasonably possible change those
inputs:
30 June 2014 Increase/ Effect on fair value: increase/
(decrease) (decrease)
US$ thousands
Future silver price 25% 124,784
(25%) (124,784)
Future inflation 100 basis point 936
(100 basis point) (910)
Interest rate 100 basis point (22,780)
(100 basis point) 25,351
31 December 2013 Increase/ Effect on fair value: increase/
(decrease) (decrease)
US$ thousands
Future silver price 25% 121,546
(25%) (121,546)
Future inflation 100 basis point 1,069
(100 basis point) (1,037)
Interest rate 100 basis point (24,144)
(100 basis point) 27,140
Quoted investments
Fair value of available-for-sale financial assets is derived from quoted market prices in active markets.
Interest-bearing loans
Fair value of the Group's interest-bearing loan, is derived from quoted market prices in active markets.
Loans with related parties
Fair value of the Group's loan from related party is determined using a discounted cash flow method based on market
interest rates at each reporting date.
Embedded derivatives within sales contracts:
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 is
separated from the sales contract.
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.
At 30 June 2014 the fair value of embedded derivatives within sales contracts was US$4.6 million (31 December 2013:
US$(1.2) million). The revaluation effects of embedded derivatives arising from these sales contracts are recorded as an
adjustment to revenue.
(c) Derivative financial instruments
The Group enters into certain forward and option contracts in order to manage its exposure to foreign exchange risk
associated with costs incurred in Mexican pesos and other currencies.
The Group entered into a number of forward derivative contracts to hedge its exposure to fluctuations in foreign exchange
rates. The outstanding forward derivative contracts as at 30 June 2014 are as follows:
As at 30 June 2014
Term Currency Contract value Contract 2013 Fair value
(thousands) exchange rate (US$ thousands)
Euro denominated forward contracts 2014 EUR 352 EUR1.32:US$1 to EUR1.38:US$1 13
The Group's euro-denominated forward derivative instruments mature on 10 September 2014 at a weighted average rate of
US$1.33: E1.
The Group also entered into Mexican peso-US dollar collars to hedge its exposure to fluctuations in foreign exchange rates.
Collar derivative instruments mature over the period from 14 July 2014 to 8 June 2015. The collar instruments hedge costs
denominated in Mexican peso amounting to US$236 million with a range of floor prices from MX$13.00 to MX$13.62:US$1 and a
range of capped prices from MX$13.50 to MX$14.50:US$1. The fair value of the put options at 30 June 2014 was an asset of
US$5.7 million, and the fair value of the call options at 30 June 2014 was a liability of US$1.5 million.
Forward derivative contracts that were outstanding as at 31 December 2013 were as follows:
As at 31 December 2013
Term Currency Contract value Contract 2013 Fair value
(thousands) exchange rate (US$ thousands)
Euro denominated forward contracts 2014 EUR 3,248 EUR1.31:US$1 to EUR1.38:US$1 216
US dollar denominated forward contracts 2014 USD 8,000 MX$12.58:US$1 to MX$12.61:US$1 (317)
The Group's euro-denominated forward derivative instruments mature over a period from 12 March to 10 September 2014 at a
weighted average rate of US$1.31: E1. The Group also entered into a number of US dollar denominated forward contracts to
hedge its exposure to fluctuations in foreign exchange rates. These derivative instruments mature on13 January 2014 with a
weighted average rate of MX$12.60: US$1.
The Group also entered into Mexican peso-US dollar collars to hedge its exposure to fluctuations in foreign exchange rates.
Collar derivative instruments mature over the period from 13 January 2014 to 15 December 2014. The collar instruments hedge
costs denominated in Mexican peso amounting to US$221 million with a range of floor prices from MX$12.40 to MX$13.59:US$1
and a range of capped prices from MX$13.21 to MX$14.50:US$1. The fair value of the put options at 31 December 2013 was an
asset of US$5.0 million, and the fair value of the call options at 31 December 2013 was a liability of US$3.7 million.
This information is provided by RNS
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