REG - Fresnillo Plc - Interim results for the six months to 30 June 2017 <Origin Href="QuoteRef">FRES.L</Origin> - Part 3
01/08/2017 07:08
- Part 3: For the preceding part double click ID:nRSA6672Mb
Balance at 1 January 2017 (Audited) 368,546 1,153,817 (526,910) - 47,608 (728) 1,637,888 2,680,221 36,147 2,716,368
Profit for the period - - - - - - 308,718 308,718 1,391 310,109
Other comprehensive income, net of tax - - - - 12,403 460 - 12,863 - 12,863
Total comprehensive income for the period - - - 12,403 460 308,718 321,581 1,391 322,972
Capital contribution - - - - - - - - 10,457 10,457
Dividends paid 15 - - - - - - (158,432) (158,432) - (158,432)
Balance at 30 June 2017 (Unaudited) 368,546 1,153,817 (526,910) - 60,011 (268) 1,788,174 2,843,370 47,995 2,891,365
Notes to the Interim Condensed Consolidated Financial Statements
1 Corporate Information
Fresnillo plc ("the Company") 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 17.
The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2017 ("interim
consolidated financial statements"), were authorised for issue by the Board of Directors of Fresnillo plc on 31 July 2017.
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 2017 have been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the European Union (EU). They do not include all the
information required for full annual financial statements for the Group, and therefore, should be read in conjunction with
the Group's annual consolidated financial statements for the year ended 31 December 2016 as published in the Annual Report
2016.
These interim consolidated financial statements do not constitute statutory accounts as defined in section 435 of the
Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial year
ended 31 December 2016. A copy of the statutory accounts for that year, which were prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the EU up to 31 December 2016, has been delivered to the
Register of Companies. The auditors' report in accordance with Chapter 3 of Part 16 of the Companies Act 2006 in relation
to those accounts was unqualified.
The interim consolidated financial statements have been prepared on a historical cost basis, except for derivative
financial instruments, available-for-sale financial assets 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 2017 and 31 December
2016, and its operations and cash flows for the periods ended 30 June 2017 and 30 June 2016.
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 2016.
(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 2016.
New standards and interpretations as adopted by the Group
The Group adopted Amendments to IAS 7 and Amendments to IAS 12 from 1 January 2017. As disclosed in the Annual Report 2016,
these did not have an impact on the financial information of the Group. There were no other significant accounting
standards or interpretations or any consequential amendments, required for the Group to adopt effective January 1, 2017.
Impact of standards issued but not yet applied by the Group
Except as set out below, the Group's assessment of new standards issued but not yet effective is consistent with that
disclosed in the Annual Report 2016. The updates set out below reflect management's analysis to date; however, as this
analysis is ongoing these impacts should be considered as indicative.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial
liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Group has
decided not to adopt IFRS 9 until it becomes mandatory on 1 January 2018. The Group does not expect the new guidance to
have a significant impact on the classification and measurement of its financial assets for the following reasons:
Classification and measurement
The equity instruments that are currently classified as available-for-sale financial assets satisfy the conditions for
classification as at fair value through other comprehensive income (FVOCI). Under IFRS 9, gains and losses accumulated in
OCI are not recycled to the income statement. There are no other significant changes to the accounting for these assets.
There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the
accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have
any such liabilities.
Derecognition
The derecognition rules have been transferred from IAS 39 Financial Instruments: Recognition and Measurement and have not
been changed.
Hedge accounting
The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's risk
management practices. At this stage the Group does not expect to identify any new hedge relationships. The Group's existing
hedge relationships appear to qualify as continuing hedges upon the adoption of IFRS 9. As a consequence, the Group does
not expect a significant impact on the accounting for its hedging relationships.
IFRS 9 changes the accounting requirements for the time value of purchased options where only the intrinsic value of such
options has been designated as the hedging instrument. In such cases, changes in the time value of options are initially
recognised in OCI. Where the hedged item is transaction related, amountsinitially recognised in OCI related to change in
the time value of options are reclassified to profit or loss or as a basis adjustment to non-financial assets or
liabilities upon maturity of the hedged item, or, in the case of a hedged item that realises over time, the amounts
initially recognised in OCI are amortised to profit or loss on a systematic and rational basis over the life of the hedged
item. Under IAS 39, the change in time value of options is recorded in the income statement. The initial adjustment from
retained earnings to hedging reserve as at 1 January 2017 would be US$23.0 million and the adjustment decreasing financial
cost for the six months period ended 30 June 2017 US$35.2 million.
Presentation and disclosure
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change
the nature and extent of the Group's disclosures about its financial instruments particularly in the year of the adoption
of the new standard.
IFRS 15 Revenue from Contracts with Customers
The IASB has issued a new standard for the recognition of revenue arising from contracts with customers. The new revenue
standard will supersede all current revenue recognition requirements under IFRS.
The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a
customer. The Group has evaluated recognition and measurement of revenue based on the five-step model in IFRS 15 and has
not identified any financial impacts, hence no adjustments will result from the adoption of IFRS 15. The Group has elected
to adopt the new standard from 1 January 2018 applying the modified retrospective adoption method.
Certain disclosures will change as a result of the requirements of IFRS 15. The Group expects this to include a breakdown
of revenue from customers and revenue from other sources, including the movement in the value of embedded derivatives in
sales contracts.
The IASB and IFRS Interpretation committee have issued certain 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.
3 Segment reporting
For management purposes, the Group is organised into operating segments based on producing mines.
At 30 June 2017 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; including the San Ramon satellite mine;
- The Herradura mine, located in the State of Sonora, a surface gold mine;
- The Soledad-Dipolos mine, located in the State of Sonora, a surface gold mine; and
- The Noche Buena mine, located in the State of Sonora, a surface gold mine; and
- The San Julian mine, located on the border of Chihuahua / Durango states, an underground silver-gold mine1.
1 Phase one of San Julian mine commenced commercial production in the third quarter of 2016, phase two is expected to
commence commercial production in the third quarter of 2017. As of 31 December 2016 this segment was included in "other"
segments based on the aggregation criteria in the corresponding IFRS.
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 2017 and 2016, substantially 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 2017 and 2016, respectively.
Six months ended 30 June 2017
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos 4 Saucito Noche San Julian Other5 Adjustments and eliminations Total
Buena
Revenues:
Third party1 188,610 281,274 92,912 - 221,165 110,811 101,061 - - 995,833
Inter-Segment - - - - - - - 39,953 (39,953) -
Segment revenues 188,610 281,274 92,912 - 221,165 110,811 101,061 39,953 (39,953) 995,833
Segment profit2 133,010 166,136 51,514 - 162,244 36,866 69,303 30,726 (12,882) 636,917
Depreciation and amortisation (167,959)
Employee profit sharing (8,923)
Gross profit as per the income statement 460,035
Capital expenditure3 49,456 61,233 19,006 - 53,239 8,670 55,568 17,169 - 264,341
1Total third party revenues include treatment and refining charges amounting US$73.6 million.
2 Segment profit excluding foreign exchange hedging losses, depreciation and amortisation and employee profit sharing.
3 Capital expenditure represents the cash outflow in respect of additions to property, plant and equipment. See note 10 for
a description of these additions.
4 Operations at Soledad-Dipolos were suspended in 2H 2013 as a result of the dispute disclosed in note 16.
5 Other inter-segment revenue corresponds to leasing services provided by Minera Bermejal, S.A. de C.V; capital expenditure
corresponds to Minera Juanicipio S.A de C.V.
Six months ended 30 June 2016
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos 4 Saucito Noche San Julian Other5 Adjustments and eliminations Total
Buena
Revenues:
Third party1 152,862 327,687 83,232 - 215,935 105,642 - - 1,519 886,877
Inter-Segment - - - - - - - 38,682 (38,682) -
Segment revenues 152,862 327,687 83,232 - 215,935 105,642 - 38,682 (37,163) 886,877
Segment profit2 101,143 186,633 48,285 15,246 166,728 31,317 - 29,874 (6,984) 572,242
Foreign exchange hedging losses (2,571)
Depreciation and amortisation (165,327)
Employee profit sharing (9,946)
Gross profit as per the income statement 394,398
Capital expenditure3 26,484 38,004 17,194 - 43,615 2,027 64,856 6,636 - 198,816
1Total third party revenues include treatment and refining charges amounting US$74.1 million.
2 Segment profit excluding foreign exchange hedging losses, depreciation and amortisation and employee profit sharing.
3 Capital expenditure represents the cash outflow in respect of additions to property, plant and equipment. See note 10 for
a description of these additions.
4 Operations at Soledad-Dipolos were suspended in 2H 2013 as a result of the dispute disclosed in Note 16.
5 Other includes inter-segment revenue corresponds to leasing services provided by Minera Bermejal, S.A. de C.V.; capital
expenditure corresponds to Minera Juanicipio S.A de C.V. The presentation of capital expenditure has been changed to be
consistent with the presentation in the 2017 table above.
4 Revenues
Revenues reflect the sale of goods, being concentrates, doré, slag, and precipitates of which the primary contents are
silver, gold, lead and zinc.
(a) Revenues by product sold
Lead concentrates (containing silver, gold, lead and by-products) 405,714 386,568
Doré and slag (containing gold, silver and by-products) 392,085 433,377
Zinc concentrates (containing zinc, silver and by-products) 74,113 45,149
Precipitates (containing gold and silver) 123,921 21,783
995,833 886,877
995,833
886,877
Substantially all lead and zinc concentrates, precipitates, doré and slag, were sold to Peñoles' metallurgical complex,
Met-Mex, for smelting and refining.
(b) Value of metal content in products sold
For products other than refined silver and gold, invoiced revenues are derived from the value of metal content adjusted by
treatment and refining charges incurred by the metallurgical complex of the customer. The value of the metal content of the
products sold, before treatment and refining charges is as follows:
Silver 413,205 342,883
Gold 543,912 542,280
Zinc 65,559 40,373
Lead 46,790 35,398
Value of metal content in products sold 1,069,466 960,934
Adjustment for treatment and refining charges (73,633) (74,057)
Total revenues1 995,833 886,877
Total revenues1
995,833
886,877
1 Includes provisional price adjustments which represent changes in the fair value of embedded derivatives resulting in a
gain of US$1.9 million (2016: gain of US$7.3 million). During the six month period ended 30 June 2017 there were no results
from hedging recognised in revenue (2016: gain of US$1.5 million).
The average realised prices for the gold and silver content of products sold prior to the deduction of treatment and
refining charges, were:
Gold2 1,250.25 1,245.61
Silver2 17.44 16.58
Gold2
1,250.25
1,245.61
Silver2
17.44
16.58
2 For the purpose of the calculation of revenue of product sold does not include the results from hedging.
5 Cost of sales
Depreciation and amortisation (Note 10) 167,959 165,327
Personnel expenses1 41,571 42,670
Maintenance and repairs 51,351 45,551
Operating materials 69,101 64,788
Energy 66,996 56,726
Contractors 101,349 81,684
Mining concession rights and contributions 5,050 5,600
Freight 4,652 3,802
Insurance 2,285 2,586
Other 9,521 5,495
Cost of production 519,835 474,229
Losses on foreign currency hedges - 2,571
Change in work in progress and finished goods (ore inventories) 15,963 38,257
Change in net realisable value allowance against inventory (Note 12) - (22,578)
Cost of sales 535,798 492,479
Cost of sales
535,798
492,479
1 Personnel expenses include employees´ profit sharing of US$8.9 million for the six months ended 30 June 2017 (six months
ended 30 June 2016: US$9.9 million).
6 Other operating income
During the first six months of the year, certain mining concessions from the Fresnillo district were sold to a third party
for a cash consideration of US$26.0 million, resulting in a gain of US$24.8 million. Of this consideration, 13.0 million
has been received in the period, the remainder is expected to be received by the end of the year.
7 Finance income and finance costs
Six months ended 30 June
2017 2016
(in thousands of US dollars)
Finance income:
Interest on short term deposits 5,569 1,627
Other 2,243 2,094
7,812 3,721
Finance costs:
Interest on interest-bearing loans 16,669 13,488
Unwinding of discount on provisions 5,451 4,921
Fair value movements on derivatives1 34,508 135,126
Other 350 627
56,978 154,162
1 Principally relates to the time value associated with gold commodity options- see Note 19 for further detail.
8 Income tax expense
Current corporate income tax:
Income tax charge1 62,095 82,461
Amounts under/(over) provided in previous periods 8,676 (1,607)
70,771 80,854
Deferred corporate income tax:
Origination and reversal of temporary differences (25,070) (40,122)
Revaluation effects of Silverstream contract 16,451 32,976
(8,619) (7,146)
Corporate income tax 62,152 73,708
Current special mining right:
Special mining right charge2 10,287 8,417
10,287 8,417
Deferred special mining right:
Origination and reversal of temporary differences 4,844 7,384
Special mining right 15,131 15,801
Income tax expense as reported in the income statement 77,283 89,509
Income tax expense as reported in the income statement
77,283
89,509
1 During 2016 the Mexican Internal Revenue Law granted to taxpayers a credit in respect of an excise tax (Special Tax on
Production and Services, or IEPS for its acronym in Spanish) paid when purchasing diesel used for general machinery and
certain mining vehicles. The credit can be applied against either the Group's own corporate income tax or the income tax
withheld from third parties. The credit is calculated on an entity-by-entity basis and expires one year after the purchase
of the diesel. During the six months period ended 30 June 2017 the Group applied a credit of US$15.3 million in respect of
the period (30 June 2016: 12.2 million).
2The special mining right allows the deduction of payments for mining concession rights up to the amount of the special
mining right payable within the same legal entity. In the six months ended 30 June 2017, the Group credited US$7.6 million
(2016: US$4.3million) of mining concession rights against the special mining right. Prior to credits permitted under the
special mining right regime, the current special mining right charge would have been US$17.9 million (2016: US$12.7).
The total mining concession rights paid during the six month period were US$7.3 million (2016: US$8.1 million) and have
been recognised in the income statement within cost of sales and exploration expenses. Mining concessions rights paid in
excess of the special mining right cannot be credited to special mining rights in future fiscal periods, and therefore, no
deferred tax asset has been recognised in relation to the excess.
The effective tax rate for corporate income tax for the six months ended 30 June 2017 is 16.04% (six months ended 30 June
2016: 28.89%) and 20.57% including the special mining right (six months ended 30 June 2016: 35.08%). The main factors that
reduced the effective tax rate for corporate income tax below 30% are the effect of foreign exchange rates as a result the
appreciation of the Mexican peso against US dollar and the IEPS tax incentive described above.
9 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.
As of 30 June 2017 and 30 June 2016, earnings per share have been calculated as follows:
Six months ended 30 June
2017 2016
(in thousands of US dollars)
Earnings:
Profit from continuing operations attributable to equity holders of the Company 308,718 167,036
Adjusted profit from continuing operations attributable to equity holders of the Company 270,335 90,093
Adjusted profit is profit as disclosed in the Interim Consolidated Income Statement adjusted to exclude revaluation effects
of the Silverstream contract of US$54.8 million gain (US$38.3 million net of tax) (2016: US$109.9 million gain and US$76.9
million net of tax).
Adjusted earnings per share have been provided in order to provide a measure of the underlying performance of the Group,
prior to the revaluation effects of the Silverstream contract, a derivative financial instrument.
Six months ended 30 June
2017 2016
Number of shares: Weighted average number of ordinary shares in issue ('000) 736,894 736,894
Six months ended 30 June
2017 2016
Earnings per share: Basic and diluted earnings per ordinary share from continuing operations (US$) Adjusted basic and diluted earnings per ordinary share from continuing operations (US$) 0.419 0.367 0.227 0.122
10 Property, plant and equipment
The changes in property, plant and equipment during the six months ended 30 June 2017 are additions of US$288.4 million
(six months ended 30 June 2016: US$202.8 million) and depreciation and amortisation of US$176.4 million, of which US$8.4
million was capitalised as a part of the cost of other fixed assets (six months ended 30 June 2016: US$172.4 million, of
which US$7.1 million was capitalised). Significant additions include mine development, construction of leaching pads,
purchase of mine equipment and capitalised stripping activity. These include the construction of facilities at San Julian
phase II, the second dynamic leaching plant at Herradura and the construction of the pyrites plant at Saucito.
As of 30 June 2017 the Group has contractual commitments related to the construction and acquisition of property, plant and
equipment of US$207.5 million (31 December 2016: US$124.1 million).
11 Silverstream contract
Cash received in respect of the period of US$17.1 million (six months ended 30 June 2016: US$17.4 million) corresponds to
1.9 million ounces of payable silver (six months ended 30 June 2016: 1.9 million ounces). As at 30 June 2017, a further
US$5.1 million (30 June 2016: US$5.8 million) of cash corresponding to 456,814 ounces of silver is due (30 June 2016:
437,431 ounces).
A reconciliation of the beginning balance to the ending balance is shown below.
2017 2016
(in thousands of US dollars)
Balance at 1 January: 467,529 384,771
Cash received in respect of the period (17,054) (17,353)
Cash receivable (5,146) (5,778)
Remeasurement gains recognised in profit or loss 54,834 109,919
Balance at 30 June 500,163 471,559
Less - Current portion 31,387 36,209
Non-current portion 468,776 435,350
The US$54.8 million unrealised gain recorded in the income statement (30 June 2016: US$109.9 million gain) resulted from
the updating of assumptions used to value the Silverstream contract. The most significant of these were the increase in the
Sabinas mine silver reserves and resources, the unwinding of the discount, and the increase in the forward price of
silver.
12 Inventories
Finished goods1 8,159 5,736
Work in progress2 173,781 189,047
Ore stockpiles3 18,035 18,253
Operating materials and spare parts 69,938 70,348
Inventories at lower of cost and net realisable value 269,913 283,384
Accumulated write-down of work in progress inventory4 (2,269) (2,269)
Allowance for obsolete and slow-moving inventories (4,922) (4,265)
Balance at lower of cost and net realisable value 262,722 276,850
Less - Current portion 173,371 187,499
Non-current portion5 89,351 89,351
89,351
89,351
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.
3 Ore stockpile includes ore mineral obtained during the development phase at San Julián.
4 Corresponds to ore inventory of the Soledad-Dipolos mine resulting from net realisable value calculations.
5 The non-current inventories are expected to be processed more than 12 months from the reporting date.
13 Trade and other receivables
Trade receivables from related parties (Note 17)1 180,722 189,619
Value added tax receivable 68,220 70,426
Advances and other receivable from contractors 23,846 14,651
Other receivables arising on the sale of property, plant and equipment 15,152 386
Other receivables from related parties (Note 17) 5,146 5,973
Loans granted to contractors 1,451 1,401
Other receivables 5,817 4,693
300,354 287,149
Provision for impairment of other receivables (535) (471)
299,819 286,678
Other receivables classified as non-current assets:
Loans granted to contractors 786 990
786 990
300,605 287,668
300,605
287,668
1 Trade receivables from related parties include the fair value of embedded derivatives arising due to provisional pricing
in sales contracts of (US$0.9) million as at 30 June 2017 (December 2016: US$(2.8) million).
14 Cash, cash equivalents and short term investments
The Group considers cash and cash equivalents and short term investments when planning its operations and in order to
achieve its treasury objectives.
Cash at bank and on hand 5,407 2,592
Short-term deposits 389,496 709,362
Cash and cash equivalents 394,903 711,954
394,903
711,954
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 four 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.
Short-term investments 490,000 200,000
490,000
200,000
Short-term investments are made for fixed periods no longer than four months and earn interest at fixed rates without an
option for early withdrawal. As at 30 June 2017 and 31 December 2016 all short-term investments are held in fixed-term
bank deposits.
15 Dividends paid
Dividends declared by the Company are as follows:
Per shareUS Cents Amounts$Million
Six months ended 30 June 2017
Total dividends paid during the period1 21.5 158.4
Six months ended 30 June 2016
Total dividends paid during the period2 3.4 24.7
1 Final dividend for 2016 approved at the Annual General Meeting on 23 May 2017 and paid on 26 May 2017.
2 Final dividend for 2015 approved at the Annual General Meeting on 3 May 2016 and paid on 9 May 2016.
16 Contingencies
The contingencies in the Group's annual consolidated financial statements for the year ended 31 December 2016 as published
in the 2016 Annual Report, are still applicable as of 30 June 2017, including the El Bajio agrarian community conflict and
Minera Penmont tax audit as described below:
- As previously reported by the Company, the Unitarian Agrarian Court in Hermosillo, Sonora issued in February 2014
a procedural order determining, amongst other aspects, that Minera Penmont ("Penmont") must remediate the lands subject of
the litigation to the state they were in before Penmont's occupation.
- In the opinion of the Company, this procedural order was excessive since this level of remediation was not part of
the original agrarian ruling which ordered Penmont to vacate the lands in dispute, which Penmont did in July 2013, and also
because the procedural order appeared not to consider the fact that Penmont conducted its activities pursuant to valid
mining concessions and environmental impact permits. In December 2016, the Unitarian Agrarian Court in Hermosillo, Sonora
issued a resolution stating that Penmont complied with the agrarian ruling by having returned the land in dispute and,
furthermore, that remediation activities are to be conducted in accordance with applicable environmental guidelines and
regulations, as supervised by the competent authorities. Penmont has already presented a conceptual mine closure and
remediation plan before the Unitarian Agrarian Court in respect of the approximately 300 hectares where Penmont conducted
mining activities. Remediation activities in this respect are pending as the agrarian members have not yet permitted
Penmont physical access to the lands. The agrarian community Ejido El Bajio appealed the above-mentioned resolution from
December 2016 and the District Court in Sonora has denied the Ejido's motion. The matter remains to be finally resolved.
- In addition, and as also previously reported by the Company, claimants in the El Bajio matter presented other
claims against occupation agreements they entered into with Penmont, covering land parcels separate from the land described
above. Penmont has no significant mining operations or specific geological interest in the affected parcels and these lands
are therefore not considered strategic for Penmont. As previously reported, the Agrarian Court issued rulings declaring
such occupation agreements over those land parcels to be null and void and that Penmont must remediate such lands to the
state that they were in before Penmont's occupation as well as returning any minerals extracted from this area. Given that
Penmont has not conducted significant mining operations or has had specific geological interest in these land parcels, any
contingencies relating to such land parcels are not considered material by the Company. The case relating to the claims
over these land parcels remains subject to final conclusion.
- Various claims and counterclaims have been made between the relevant parties in the El Bajio matter. There remains
significant uncertainty as to the finalisation and ultimate outcome of these legal proceedings.
- With regards to Penmont tax audits, which commenced during 2015, the Company considers it completed the provision
of all documentation required in order to demonstrate that all the 2012-2013 non-taxable income and tax deductions which
are being challenged, are appropriate. Penmont formally filed a writ before the Mexican Taxpayers Ombudsman (PRODECON per
its Spanish acronym) requesting a conclusive agreement in the matter. The Mexican Authority's (SAT per its Spanish acronym)
first response to the request detailed that, while the documentation provided was sufficient to demonstrate that the
majority of non-taxable income and tax deductions are correct, there are still some of them to be approved. In response,
Penmont has provided SAT with additional documentation, which is currently under evaluation, to enable SAT to issue a
second response to the Company's request for a conclusive agreement.
17 Related party balances and transactions
The Group had the following related party transactions during the six months ended 30 June 2017 and 30 June 2016 and
balances as at 30 June 2017 and 31 December 2016.
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 2017 As at 31 December 2016 As at 30 June 2017 As at 31 December 2016
(in thousands of US dollars)
Trade:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 180,375 189,584 - 301
Other:
Industrias Peñoles, S.A.B. de C.V. 5,146 5,974 - -
Servicios Administrativos Peñoles, S.A de C.V. - - 2,858 1,612
Servicios Especializados Peñoles, S.A. de C.V. - - 2,129 36
Fuerza Eólica del Istmo, S.A. de C.V. - - 1,377 -
Other 347 34 2,642 1,224
185,868 195,592 9,006 3,173
Related party accounts receivable and payable will be settled in cash.
Other balances due from related parties:
(in thousands of US dollars)
Silverstream contract:
Industrias Peñoles, S.A.B. de C.V. 500,163 467,529
The Silverstream contract can be settled in either silver or cash. Details of the Silverstream contract are provided in
Note 11.
(b) Principal transactions with affiliates are as follows:
Income:
Sales1:
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 995,833 885,358
Other income 1,170 891
Total income 997,003 886,249
Total income
997,003
886,249
1 Figures do not include hedging results as the derivative transactions are not undertaken with related parties. Figures
are net of treatment and refining charges of US$73.6 million (June 2016: US$74.1 million).
Expenses:
Administrative Services:
Servicios Administrativos Peñoles, S.A. de C.V.2 11,630 10,297
Servicios Especializados Peñoles, S.A. de C.V. 2 8,828 8,327
20,458 18,624
Energy:
Fuerza Eólica del Istmo, S.A. de C.V. 1,615 1,794
Termoeléctrica Peñoles, S. de R.L. de C.V. 9,996 7,615
11,611 9,409
Operating materials and spare parts:
Wideco Inc 2,452 2,247
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,814 871
5,266 3,118
Equipment repairs and administrative services:
Serviminas, S.A. de C.V. 2,697 2,947
Insurance premiums:
Grupo Nacional Provincial, S.A.B. de C.V. 1,021 949
Other expenses: 4,323 4,285
Total expenses 45,376 39,332
Total expenses
45,376
39,332
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"), wholly owned Peñoles' subsidiaries, the companies provided administrative
services during the six months ended 30 June 2017 for a total amount of US$20.4 million (US$18.6 million for the six months
ended 30 June 2016). Services include administrative expenses of US$16.0 million (US$14 million for the six months ended 30
June 2016) and US$4.4 million operating expenses capitalised as exploration and development expenditure (US$4.6 million for
six months ended 30 June 2016).
(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.
Salaries and bonuses 2,239 1,996
Post-employment pension 137 154
Other benefits 136 106
Total compensation paid to key management personnel 2,512 2,256
Total compensation paid to key management personnel
2,512
2,256
18 Notes to the consolidated statement cash flows
Reconciliation of profit for the period to net cash generated from operating activities
Profit for the period 310,109 165,626
Adjustments to reconcile profit for the period to net cash inflows from operating activities:
Depreciation and amortisation 5,10 167,959 165,327
Employee profit sharing 9,137 10,243
Deferred income tax expense 8 3,992 238
Current income tax expense 8 73,291 89,271
(Gain)/loss on the sale of property, plant and equipment 6 (24,686) 910
Other losses/(gains) 31 (148)
Net finance costs 14,658 15,315
Foreign exchange loss 5,700 3,121
Difference between pension contributions paid and amounts recognised in the income statement 457 124
Non cash movement on derivatives 7 34,508 135,126
Changes in fair value of Silverstream 11 (54,834) (109,919)
Working capital adjustments
Decrease/(increase) in trade and other receivables 6,002 (10,702)
Decrease in prepayments and other assets 712 1,368
Decrease in inventories 14,129 4,634
Increase in trade and other payables 4,943 5,247
Cash generated from operations 566,108 475,781
Income tax paid1 (194,763) (55,394)
Employee profit sharing paid (17,184) (12,492)
Net cash from operating activities 354,161 407,895
354,161
407,895
1 Income tax paid includes US$170.3 million corresponding to corporate income tax (June 2016: US$50.1 million) and US$24.5
corresponding to special mining right (June 2016: US$5.3 million).
19 Financial instruments
a. Fair value category
As at 30 June 2017
US$ thousands
Financial assets: At fair value through profit or loss Available-for-sale investments at fair value through OCI Loans and receivables At fair value through OCI (cash flow hedges)
Trade and other receivables1 (Note 13) - - 209,437 -
Available-for-sale financial assets - 133,855 - -
Silverstream contract (Note 11) 500,163 - - -
Derivative financial instruments (Note 19) 305 - - 83
Financial liabilities: At fair value through profit or loss At amortised Cost At fair value through OCI (cash flow hedges)
Interest-bearing loans (Note 19) - 798,429 -
Trade and other payables - 92,584 -
Embedded derivatives within sales contracts (Note 19) 898 - -
Derivative financial instruments (Note 19) - - 12,342
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