REG - Fresnillo Plc - Interim results for the six months to 30 June 2017 <Origin Href="QuoteRef">FRES.L</Origin> - Part 4
01/08/2017 07:08
- Part 4: For the preceding part double click ID:nRSA6672Mc
1 Embedded derivatives from sales contracts are presented net within Trade and other receivables in the balance sheet.
As at 31 December 2016
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) - - 213,750 -
Available-for-sale financial assets - 116,171 - -
Silverstream contract (Note 11) 467,529 - - -
Derivative financial instruments (Note 19) 145 - - 23,005
Financial liabilities: At fair value through profit or loss At amortised Cost At fair value through OCI (cash flow hedges)
Interest-bearing loans - 798,027 -
Trade and other payables - 70,442 -
Embedded derivatives within sales contracts (Note 19) 2,750 - -
Derivative financial instruments (Note 19) - - 646
1 Embedded derivatives from sales contracts are presented net within 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 2017 31 December 2016 30 June 2017 31 December 2016
US$ thousands
Financial liabilities:
Interest-bearing loans1 798,429 798,027 885,184 840,904
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 2017
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 - 83 - 83
Option and forward foreign exchange contracts - 305 - 305
Silverstream contract (Note 11) - - 500,163 500,163
Financial assets available-for-sale:
Quoted investments 133,855 - - 133,855
133,855 388 500,163 634,406
Financial liabilities:
Derivative financial instruments:
Embedded derivatives within sales contracts - - 898 898
Option commodity contracts - 12,342 - 12,342
- 12,342 898 13,240
As of 31 December 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:
Option commodity contracts - 23,005 - 23,005
Option and forward foreign exchange contracts - 145 - 145
Silverstream contract (Note 11) - - 467,529 467,529
Financial assets available-for-sale:
Quoted investments 116,171 - - 116,171
116,171 23,150 467,529 606,850
Financial liabilities:
Derivative financial instruments:
Embedded derivatives within sales contracts - - 2,750 2,750
Options commodity contracts - 66 - 66
Option and forward foreign exchange contracts - 580 - 580
- 646 2,750 3,396
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 11) is shown below:
2017 2016
US$ thousands
Balance at 1 January (2,750) (532)
Changes in fair value 7,447 6,609
Realised embedded derivatives during the year (5,595) 647
Balance at 30 June (898) 6,724
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
The fair value of the Silverstream contract is determined using a valuation model (for further information relating to the
Silverstream contract see Note 11). The term of the derivative is based on Sabinas life of mine which is currently 41 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 11.
The following table demonstrates the sensitivity of the Silverstream contract valuation to reasonably possible change in
those inputs:
30 June 2017 Increase/ Effect on profit before tax: increase/
(decrease) (decrease)
US$ thousands
Silver price 10% 67,266
(10%) (67,266)
Foreign exchange rate: strengthening/(weakening) of the US dollar 15% (965)
(10%) 822
Interest rate 85 basis point (52,936)
(25 basis point) 17,583
31 December 2016 Increase/ Effect on profit before tax: increase/
(decrease) (decrease)
US$ thousands
Silver price 25% 157,406
(20%) (125,925)
Foreign exchange rate: strengthening/(weakening) of the US dollar 15% (1,436)
(10%) 1,223
Interest rate 65 basis point (35,908)
(20 basis point) 12,051
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 2017 the fair value of embedded derivatives within sales contracts had a liability position of US$0.9 million
(31 December 2016: liability of US$2.8 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 2017 and 31 December
2016.
As at 30 June 2017 As at 31 December 2016
(in thousands of US dollars)
Assets:
Currency contracts
Forward contracts
Euro 243 145
Swedish krona 62 -
Commodity contracts
Option Contracts1
Gold 83 23,005
Total derivative related assets 388 23,150
Less - Current portion 379 6,618
Non-current portion2 9 16,532
As at 30 June 2017 As at 31 December 2016
(in thousands of US dollars)
Liabilities:
Currency contracts
Forward contracts
Euro - 570
Canadian dollar - 10
Commodity contracts
Option contracts1
Gold 12,342 16
Lead - 2
Zinc - 48
Total derivative related liabilities 12,342 646
Less - Current portion 1,130 630
Non-current portion2 11,212 16
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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