REG - Fresnillo Plc - Interim results for the six months to 30 June 2016 <Origin Href="QuoteRef">FRES.L</Origin> - Part 4
02/08/2016 07:10
- Part 4: For the preceding part double click ID:nRSB9222Fc
Derivative financial instruments 1 - - 117,075
Financial liabilities: At fair value through profit or loss At amortised Cost At fair value through OCI (cash flow hedges)
Interest-bearing loans - 797,032 -
Trade and other payables - 97,440 -
Embedded derivatives within sales contracts1 532 - -
Derivative financial instruments - - 1,427
1 Trade and other receivables and embedded derivatives within sales contracts are presented net in Trade and other
receivables in the balance sheet.
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 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 2016 31 December 2015 30 June 2016 31 December 2015
US$ thousands
Financial liabilities:
Interest-bearing loans1 797,539 797,032 861,040 805,352
1 The fair value of interest-bearing loans is derived from quoted market prices in active markets (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 2016
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:
Embedded derivatives within sales contracts - - 6,724 6,724
Option commodity contracts - 1,039 - 1,039
Option and forward foreign exchange contracts - 109 - 109
Silverstream contract (Note 10) - - 471,559 471,559
Financial assets available-for-sale:
Quoted investments 136,371 - - 136,371
136,371 1,148 478,283 615,802
Financial liabilities:
Derivative financial instruments:
Option commodity contracts - 72,448 - 72,448
Option and forward foreign exchange contracts - 498 - 498
- 72,946 - 72,946
As of 31 December 2015
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 commodity contracts - 116,995 - 116,995
Option and forward foreign exchange contracts - 80 - 80
Silverstream contract (Note 10) - - 384,771 384,771
Financial assets available-for-sale:
Quoted investments 71,442 - - 71,442
71,442 117,075 384,771 573,288
Financial liabilities:
Derivative financial instruments:
Embedded derivatives within sales contracts - - 532 532
Option and forward foreign exchange contracts - 1,427 - 1,427
- 1,427 532 1,959
There have been no significant transfers between Level 1 and Level 2 of the fair value hierarchy, and no transfers into and
out of Level 3 fair value measurements.
A reconciliation of the opening balance to the closing balance for Level 3 financial instruments other than Silverstream
(which is disclosed in Note 10) is shown below:
2016 2015
US$ thousands
Balance at 1 January (532) (2,911)
Changes in fair value 6,609 (2,250)
Realised embedded derivatives during the year 647 3,671
Balance at 30 June 6,724 (1,490)
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 option commodity (Level 2) contracts are measured based on observable spot commodity
prices, the yield curves of the respective commodity as well as the commodity basis spreads between the respective
commodities. The option contracts are valued using the Black-Scholes model, the significant inputs to which include
observable spot commodities price, interest rates and the volatility of the commodity.
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with various counterparties, principally financial institutions with
investment grade credit ratings. The foreign currency forward (Level 2) contracts are measured based on observable spot
exchange rates, the yield curves of the respective currencies as well as the currency basis spreads between the respective
currencies. The foreign currency option contracts are valued using the Black-Scholes model, the significant inputs to which
include observable spot exchange rates, interest rates and the volatility of the currency.
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 contract is not significantly sensitive to a reasonable change in future
inflation, however, it is to a reasonable change in future silver price, future exchange rate and the discount rate used to
discount future cash flows as explained in Note 10.
The following table demonstrates the sensitivity of the Silverstream contract valuation to reasonably possible change in
those inputs:
30 June 2016 Increase/ Effect on profit before tax: increase/
(decrease) (decrease)
US$ thousands
Silver price 15% 93,686
(15%) (93,686)
Foreign exchange rate: strengthening/(weakening) of the US dollar 10% (1,329)
(5%) 769
Interest rate 35 basis point (14,869)
(15 basis point) 6,607
31 December 2015 Increase/ Effect on profit before tax: increase/
(decrease) (decrease)
US$ thousands
Silver price 20% 104,659
(15%) (78,494)
Foreign exchange rate: strengthening/(weakening) of the US dollar 10% (1,622)
(10%) 1,982
Interest rate 50 basis point (15,067)
(10 basis point) 3,123
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.
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 2016 the fair value of embedded derivatives within sales contracts was a gain of US$7.2 million (31 December
2015: gain of US$2.3 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 also enters into option contracts to manage
its exposure to commodity price risk.
The following table summarize the fair value of derivative financial instruments held as of 30 June 2016 and 31 December
2015.
As at 30 June 2016 As at 31 December 2015
(in thousands of US dollars)
Assets:
Currency contracts
Forward contracts
Euro 49 1
Swedish krona 60 1
Option Contracts1
US dollar - 78
Commodity contracts
Option Contracts1
Gold - 113,000
Lead 588 1,060
Zinc 451 2,935
Total derivative related assets 1,148 117,075
Less - Current portion 1,148 19,602
Non-current portion2 - 97,473
As at 30 June 2016 As at 31 December 2015
(in thousands of US dollars)
Liabilities:
Currency contracts
Forward contracts
Euro 20 -
Canadian dollar 83 -
Option Contracts1
US dollar 396 1,427
Commodity contracts
Option contracts1
Gold 72,448 -
Total derivative related liabilities 72,947 1,427
Less - Current portion 6,957 1,427
Non-current portion2 65,990 -
1 Option contracts operate as zero cost collars.
2 Non-current portion corresponds to Gold option contracts that mature in a period over one year from the reporting date
until 30 December 2019.
This information is provided by RNS
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