REG - Fresnillo Plc - Replacement: Interim results for H1 2014 <Origin Href="QuoteRef">FRES.L</Origin> - Part 1
29/10/2014 10:31
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RNS Number : 3516O
Fresnillo PLC
06 August 2014
Fresnillo plc
28 Grosvenor Street
London W1K 4QR
United Kingdom
www.fresnilloplc.com
The following amendment has been made to the 'Interim results for the six months to 30 June 2014' announcement released on
5 August 2014 at 07:00 under RNS No 2367O.
In the dividend section within the Financial Review the word 'interim' has been replaced by the word 'special'.
All other details remain unchanged.
The full amended text is shown below.
5 August 2014
Fresnillo plc interim results
for the six months to 30 June 2014
Highlights (H1 2014/H1 2013 comparisons)
· Silver production (21.3m ounces, including Silverstream up 1.3%) buoyed by strong performance at Saucito and
increased Silverstream volumes
· Gold production down 18.9% to 191,317 ounces as a result of temporary disruptions at Herradura and suspension of
Soledad-Dipolos, but recovering as Herradura resumed production in March and the Dynamic Leaching Plant came on line
· Significantly lower realised commodity prices (silver US$20.26 per oz, down 17.9%; gold US$1,302.07 per oz, down
11.5%) impacting financial performance
· Profit attributable to equity shareholders, including Silverstream revaluation effects, decreased by 10.1% to
US$130.1m
· Basic and diluted EPS US$0.177 per share, down 11.5%
· Cash generation from operations remains significant at US$336.7m down 32.2%
· Strong balance sheet with cash, cash equivalents and short term investments of US$1,164.3m
· Special dividend of US$36.8m (5.0 US cents per share) declared reflecting the Board's confidence in the financial
position and outlook; but no change to previously stated policy.
· Near term growth projects Saucito II and San Julián on track to begin production in 4Q 2014 and 2H 2015 respectively
· 2014 production guidance maintained at 43 million silver ounces, including the Silverstream, and 450,000 attributable
gold ounces
Highlights for 1H14
US$ million unless stated H1 14 H1 13 % change
Silver Production (koz) - Attributable* 21,334 20,980 1.7
Gold Production (oz) - Attributable 191,317 235,827 -18.9
Total Revenue 677.1 925.9 -26.9
Adjusted Revenue1 750.4 982.3 -23.6
Exploration expenses 69.0 114.7 -39.8
EBITDA2 324.5 486.3 -33.3
Attributable Profit 130.1 144.8 -10.2
Cash generated by operations before changes in working capital 336.7 496.4 -32.2
Basic and Diluted EPS (US$)3 0.177 0.200 -11.5
Dividend per ordinary share (US$) 0.0500 0.0490 2.0
* Silver production includes volumes realised under the Silverstream Contract.
1 Adjusted revenue is the revenue shown in the income statement adjusted to add back treatment and refining costs and lead
and zinc 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 Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as gross profit plus depreciation
less administrative, selling and exploration expenses.
3 The weighted average number of shares H1 2014 was 736,894 (724,615 in H1 2013). See Note 8 in the Interim Consolidated
Financial Statements.
Octavio Alvídrez, Chief Executive Officer of Fresnillo plc, said:
"In a challenging pricing environment, our operations continue to perform very well although our financial results for the
period have been impacted by lower gold and silver prices, and by the lower gold ounces sold that followed the suspension
of operations at Soledad-Dipolos and the temporary stoppage at Herradura. The latter issue has now been resolved and gold
production is returning to normal levels.
"We are focused on maximising the efficiency of our operations, controlling costs and optimising grades at Fresnillo, while
ensuring we are on time and on budget to deliver Saucito II and San Julián. While EBITDA margins have declined somewhat,
they remain among the best in the industry, demonstrating the success we have had in controlling costs across the business.
Meanwhile precious metals prices have shown signs of stability over recent months.
With a strong balance sheet, high quality assets and a solid pipeline of projects for growth, we continue to invest in the
business for the long term and paying dividends to shareholders thus creating value throughout the cycles."
Commentary on the Group's results
Fresnillo plc's operating results were underpinned by a solid performance at the Saucito and Noche Buena mines, and the
resumption of operations and the start-up of the dynamic leaching plant at Herradura. However, the Group continued to face
some challenges such as lower grades at the Fresnillo and Ciénega mines. To compensate for this, the volumes of ore
processed were increased and efficiency measures implemented. Additional activities such as external consultation on
adjustments to the mining method and conducting more infill drilling to increase certainty of our geological model are
currently being carried out and are expected to stabilise the ore grade at the Fresnillo mine.
The Group's financial results for the first six months of 2014 were negatively impacted by the decline in precious metal
prices adversely affecting the Group's average realised silver and gold prices, which decreased by 17.9% and 11.5%
respectively, when compared to the same period of 2013.
We were also affected by the reduced sales volumes of gold resulting from the suspended operations at Soledad-Dipolos and
the disrupted production at Herradura. The impact of this, together with the lower precious metals prices, drove adjusted
revenues down by 23.6% to US$750.4 million.
Cost of sales decreased by 6.1% when compared to the first half 2013 as a result of lower adjusted production cost, which
more than compensated for the higher depreciation and the adverse effect of the unproductive costs recorded at Minera
Penmont. The 14.1% decrease in adjusted production costs to US$291.3 million was largely explained by: i) costs not
incurred at Soledad-Dipolos; ii) lower variable production costs at Herradura; iii) the favourable impact of the 4.4%
devaluation of the average spot Mexican peso/US dollar exchange rate; and iv) efficiencies achieved at some of our mines.
These factors were partially mitigated by the increased costs related to the start-up of the dynamic leaching plant and
higher costs associated with the increased production volumes at Noche Buena, Saucito, Ciénega and Fresnillo; as well as
higher unit prices of diesel, contractors and personnel.
Cost per tonne decreased at Fresnillo and Ciénega over the first half of the year, reflecting the positive effect of our
cost reduction initiatives and economies of scale achieved at these underground mines.
However, cost per tonne at Herradura increased mainly due to the natural higher restart production costs compared to the
uninterrupted full capacity operations in the first half of 2013.
Cost per tonne at Noche Buena was affected by the higher personnel and maintenance costs associated with the replacement of
contractors by unionised workers relocated to Noche Buena from the suspended Soledad-Dipolos mine. In addition, the natural
higher costs associated with the initial start-up of the expansion further impacted cost per tonne. However, this effect
will reverse once production runs at full capacity.
Gross profit decreased by 43.1% to US$295.1 million in the first half 2014 as a result of the factors mentioned above.
Exploration expenses recorded in the income statement totalled US$69.0 million, representing a 39.9% decrease compared to
the first half 2013. This was in accordance with the Group's decision to reduce exploration expenses in light of current
market conditions. Our exploration objectives for the year will be met as we intensify the drilling campaign over the
second half of the year but we expect to do so slightly below the US$225m budget level.
Promising drill intersections were obtained particularly at San Ramón in the Ciénega district, South Veins at Fresnillo,
Cardones at Guanajuato and Pilarica, where increases in resources are anticipated in the year end estimates. In addition,
metallurgical testwork and preliminary economic assessments are in progress at the Orisyvo, Candameña and Lucerito
projects.
EBITDA decreased by 33.3% when compared to the first half of 2013 as a result of the lower gross profit which was partially
mitigated by reduced exploration expenses. EBITDA margin decreased to 47.9% from 52.5% in the first half 2013 but remains
robust.
The positive revaluation of the Silverstream impacted the Group's financial results by US$47.3 million due to higher
forward silver prices, lower interest rates (LIBOR) and higher silver ounces sold over the period. In contrast, a US$112.5
million loss was recorded in the first half of 2013.
Income tax expense declined by 20.4% to US$58.1 million as a result of lower profits generated in the first half 2014. The
effective tax rate, excluding special mining right, was 27.9%, and 34,2% including the effects of the special mining
right.
Net profit for the period was US$137.1 million, a 22.5% decrease when compared to the first half 2013, whilst profit
attributable to equity shareholders of the group totalled US$130.1 million, representing a 10.1% decrease over the same
period of 2013.
Cash flow generated by operations, before changes in working capital, decreased by 32.2% to US$336.7 million in the first
half of 2014 as a result of the lower profits. Working capital increased by 35.0% to US$71.5 million which resulted mainly
from an increase in the volume of dore sold to Met-Mex in the last three months of the period, and also from higher
inventories at the leaching pads at Herradura and Noche Buena.
In the first half 2014, capital expenditures totalled US$212.0 million, a decrease of 34.6% when compared to the same
period of 2013. Investments included the construction of the Saucito II and San Julián projects, purchase of components for
mobile equipment at Herradura and Fresnillo, development works at Saucito and Ciénega, and construction of leaching pads at
Noche Buena.
The Group maintained a strong balance sheet. Cash, cash equivalents and short term investments (together defined as "short
term funds") as of June 2014 amounted to US$1,164.3 million, a 7.0% decrease when compared to the year-end 2013 cash and
cash equivalents of US$1,251.7 million. Taking into account the short term funds of US$1,164.3 million, the US$795.3
million bond and loan from Newmont of US$41.5 million, Fresnillo's net cash is US$327.5 million.
Although the 2014 dividend was brought forward and paid in November 2013, the Board has declared a one-off special dividend
of 5.0 US cents per share, equivalent to US$36.8 million payable on 11 September 2014 to shareholders on the register as at
15 August 2014. This decision was made after a comprehensive review of the Company's and 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. Additionally, when making their recommendation, management and the Board took into consideration that
both gold and silver prices have been sustained at high enough levels over the half and that cost inflation has been
contained, enabling the company to continue to generate healthy profit margins and good levels of cash flow.
It must be noted that Fresnillo plc's existing dividend policy remains in place which takes into account the profitability
of the business and underlying growth in earnings, as well as our capital requirements and cash flows while maintaining an
appropriate level of dividend cover. To reiterate the policy, a total dividend of between 33 and 50 percent of profit after
tax is paid out each year in the approximate proportion of one-third to be paid as an interim dividend, two-thirds to be
paid as a final dividend.
Growth
Fresnillo plc has always maintained a disciplined approach to profitable growth by continuously investing in its solid
portfolio of projects and prospects. After concluding the construction of the Dynamic Leaching Plant and following its
successful start-up, the work on the construction of the Saucito II and San Julián projects remained on time and on
budget.
During the first six months of 2014 significant progress was achieved in the construction of the beneficiation plant and
development works at Saucito II. This project is expected to be concluded in the fourth quarter of 2014 and will produce an
average of 8.4 million ounces of silver and 35,000 ounces of gold per year at full capacity.
Furthermore, construction of the leaching plant at the San Julián project commenced and detailed engineering works
continued for the flotation plant. This US$515.0 million silver-gold project remains on track to start operations in the
second half of 2015 with an expected average production of 10.3 million ounces of silver and 44,000 ounces of gold per year
once at full capacity.
Outlook
Fresnillo plc has always taken a conservative and long-term view. A solid portfolio of mines and development projects which
yield returns even in a low metal price environment along with stringent cost control, allows us to balance profitable
results with sustainable growth.
However, a certain degree of volatility in the precious metals prices is expected to remain, caused by increased
geopolitical risk in countries such as Ukraine, Iraq and Israel and by speculation of economic distress in the Eurozone and
the likelihood of the US Federal Reserve increasing interest rates in the near future.
We will continue to focus on operational excellence, investing in productivity and cost reduction initiatives and
strengthening our growth pipeline. However, we will give priority to optimising output from the Fresnillo mine and to
concluding the Saucito II and San Julián projects on time and on budget. We are confident that by being consistent in
executing our value creation strategy, Fresnillo plc will be able to deliver solid results to its stakeholders.
Presentation for Analysts
Octavio Alvídrez, Chief Executive Officer, and Mario Arreguín, Chief Financial Officer, will host a presentation for
analysts on Tuesday 5th August at 9am (BST) at Bank of America Merrill Lynch, 2 King Edward St, London EC1A 1HQ
For analysts unable to attend dial in details are:
Dial-in number: +44 (0)1452 555 566
Conference ID: 25367848
A replay of the conference call will be available for 7 days after the call at:
Dial in number: +44 (0)1452 550 000
Conference ID: 25367848
For further information, please visit our website:
www.fresnilloplc.com
or contact:
Fresnillo plc
London Office Tel: +44 (0)20 7399 2470
Gabriela Mayor, Head of Investor Relations
Mexico City Office Tel: +52 55 52 79 3206
Ana Belem Zárate
Brunswick Tel: +44 (0)20 7404 5959
Carole Cable
David Litterick
About Fresnillo plc
Fresnillo plc is the world's largest primary silver producer and Mexico's second largest gold producer, listed on the
London and Mexican Stock Exchanges under the symbol FRES.
Fresnillo has six operating mines, all of them in Mexico - Fresnillo, Saucito, Ciénega (including the San Ramón satellite
mine), Herradura, Soledad-Dipolos and Noche Buena; two development projects -Saucito II and San Julián; and four advanced
exploration prospects - Centauro Deep, Juanicipio, Orisyvo and Las Casas Rosario as well as a number of other long term
exploration prospects. In total, Fresnillo plc has mining concessions covering approximately 2.1 million hectares in
Mexico.
Fresnillo has a strong and long tradition of mining, a proven track record of mine development, reserve replacement, and
production costs in the lowest quartile of the
cost curve for both silver and gold.
Fresnillo's goal is to maintain the Group's position as the world's largest primary silver company, producing 65 million
ounces of silver and 500,000 ounces of gold by 2018.
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.
Operational Review
Attributable silver production, including the Silverstream, remained at similar levels when compared to the same period
2013 as a result of higher production at Saucito and increased contribution from the Sabinas mine; which compensated for
the lower silver grades at Fresnillo.
Attributable gold production for the first half 2014 continued to be impacted by the stoppage of operations at
Soledad-Dipolos and disrupted operations at Herradura in the first two months of the year. To a lesser extent, gold
production was also affected by the anticipated decline in ore grades at Ciénega during the period. Notwithstanding, the
expansion of the capacity at Noche Buena and the start-up of commercial production at the Dynamic Leaching Plant in March
2014 partially offset the above adverse effects.
The flexibility provided by our quality assets and the synergies achieved through the consolidation of mining districts
meant that we were well placed to cope with the challenges during the period and as a result, have achieved solid operating
results. This, together with the additional measures being taken to stabilise ore grades at the Fresnillo and Ciénega
mines, give us the confidence that our full year production targets of 43 million ounces of silver and 450,000 ounces of
gold will be met.
At the same time, the Group continued to make progress in the projects that will contribute towards the achievement of its
medium and long term goals. The construction of the expansion of the Saucito mine, namely Saucito II, remained on track to
be concluded in the fourth quarter of 2014 on budget. Similarly, the San Julián project continued with the construction of
the leaching plant and further development works and is on track to start production in the second half 2015.
Furthermore, we continued to invest in our exploration programme which is paramount to providing profitable growth in the
years and decades to come. In the first half of the year, promising exploration results were obtained at San Ramón
(Ciénega), Cardones (Guanajuato) and Pilarica (Peru) and we expect to report an increase in resources at year end.
We are saddened to report that in April, one of our contractors at the Juanicipio project suffered a fatal accident due to
inadequate communication among workers while conducting their activities, which resulted in a breach of our safety
policies. We deeply regret this accident and remain committed to implementing the "No More Accidents" programme and
reinforcing our training campaigns. We extend our sincere condolences to the family of our colleague.
Production
Production H1 2014 H1 2013 % change
Silver (kOz) - attributable 19,132 19,144 -0.1
Silverstream prod'n (kOz) 2,202 1,836 19.9
Total Silver prod'n (kOz) 21,334 20,980 1.7
Gold (Oz) - attributable 191,317 235,827 -18.9
Lead (t) 12,143 12,421 -2.2
Zinc (t) 13,795 11,957 15.4
Attributable silver production for the first half 2014, excluding the Silverstream, maintained similar levels when compared
to the same period 2013 as a result of higher volumes of ore processed at Saucito resulting from an optimised process and
maintenance programme and additional ore processed from the development of the Jarillas vein. These factors compensated for
the lower silver ore grades at Fresnillo and Ciénega.
Attributable gold production for the first six months of 2014 decreased 18.9% when compared to the same period 2013 mainly
as a result of: i) the disrupted operations at Herradura due to the temporary suspension of explosives permits which
affected the second half of 2013 and the first two months of 2014; ii) the stoppage of operations at Soledad- Dipolos
related to the legal proceeding regarding the Ejido "El Bajío" litigation process; and iii) the expected lower gold ore
grade at Ciénega. However, the higher ore deposited (+13.6%) and higher recovery rates (+14.5%) at Noche Buena partially
mitigated the aforementioned effect.
Year to date by-product lead production remained at similar levels compared to 2013 as the increase in production at
Saucito was offset by the lower grades at Ciénega and Fresnillo.
By-product zinc production for the first half 2014 increased by 15.4% when compared to the same period 2013 as a result of
higher recovery rates, ore processed and ore grades at Saucito. Similarly, higher ore throughput and ore grades at
Fresnillo also contributed to the increase in zinc production.
Production of gold and silver was within the Group's expectations and we remain confident of achieving our full year target
of 43 million ounces of silver, including Silverstream, and 450,000 ounces of gold.
Fresnillo mine production
Production H1 2014 H1 2013 % change
Silver (kOz) 10,547 11,197 -5.8
Gold (Oz) 15,879 13,640 16.4
Lead (t) 6,672 7,165 -6.9
Zinc (t) 7,409 6,886 7.6
Year to date silver production decreased by 5.8% compared to the same period 2013 due to lower silver ore grades (258.17
g/t in 1H14 vs 287.20 g/t in 1H13), which resulted from: i) the anticipated natural decline in silver ore grades; ii) the
delay in development works at the San Carlos and San Alberto areas resulting from mechanical failures of the contractor's
in-mine equipment; iii) dilution of ore as a result of rock instability in the deeper stopes, which are currently being
controlled through adjustments to the mining method; and iv) a lower real ore grade than indicated in the geological model.
The adverse effect of the decline in ore grade was partially mitigated by higher volumes of ore processed and improved
recovery rates.
We continue to work with consultants to achieve the optimal mining method in order to mitigate dilution.
Gold production for the first half 2014 increased 16.4% when compared to the same period 2013 as a result of higher
recovery rates (+6.1%), ore grades (+5.0%) and ore processed. Similarly, by-product zinc production increased 7.6% over the
first half 2013 as a result of higher ore processed and ore grades.
Year to date by-product lead production decreased by 6.9% when compared to the first half 2013 due to lower ore grades and
to a lesser extent, lower recovery rates.
Saucito mine production
Production H1 2014 H1 2013 % change
Silver (kOz) 6,315 5,628 12.2
Gold (Oz) 26,823 22,041 21.7
Lead (t) 3,084 2,581 19.5
Zinc (t) 3,427 2,151 59.3
Silver production for the first half 2014 increased 12.2% over the same period in 2013 due to the increased ore processed,
which resulted from: i) the additional material from the development carried out as part of the preparation of the Jarillas
vein at Saucito II and which was in part processed at Fresnillo due to the available capacity at the plant; and ii) lower
than expected time to carry out the maintenance programme at the beneficiation plant, thus increasing the availability of
the equipment to process higher volumes of ore.
These favourable effects were slightly impacted by the lower silver ore grades (320.68 g/t in 1H14 vs 336.65 g/t in 1H13)
as a result of the unusual higher ore grades mined at the Jarillas vein in 2013. However, year to date silver ore grades at
Saucito are in line with the previously guided range and are expected to remain at those levels for the rest of 2014.
Year to date gold production increased 21.7% when compared to the same period of 2013 due to higher volumes of ore
processed and better ore grades. Similarly, year to date by-product lead and zinc production significantly increased by
19.5% and 59.3% respectively over the same period 2013 as a result of higher ore processed and ore grades. In addition,
improved recovery rates also contributed to the increase in zinc production.
Ciénega mine production
Production H1 2014 H1 2013 % change
Gold (Oz) 53,984 59,644 -9.5
Silver (kOz) 2,072 2,188 -5.3
Lead (t) 2,387 2,675 -10.8
Zinc (t) 2,959 2,919 1.4
Year to date gold production decreased 9.5% when compared to the same period 2013 mainly as a result of the expected
decline in ore grades resulting from the depletion of higher grade stopes (2.62 g/t in 1H14 vs 3.13 g/t in 1H13). However,
the higher volumes of ore processed as a result of the optimisation project to increase milling capacity to 3,600 tpd and
the efficiency achieved in the maintenance programme partially compensated for the lower gold grades.
Silver production for the first half 2014 decreased 5.3% when compared to the same period 2013 as a result of the lower ore
grades ( 111.53 g/t in 1H14 vs 127.17 g/t in 1H13). This decrease was explained by the increased dilution due to narrower
veins at San Ramón and increased ore volumes processed from the main Ciénega mine. Nevertheless, higher ore throughput
partially compensated for the above negative effect.
Year to date by-product lead production decreased 10.8% when compared to the first six months of 2013 as a result of lower
ore grades (-12.0%) and recovery rates (-6.5%).
Herradura mine production - Attributable
Production H1 2014 H1 2013 % change
Gold (Oz) 58,532 91,233 -35.8
Silver (kOz) 170 112 51.8
Year to date attributable gold production, including the output from the dynamic leaching plant, decreased 35.8% when
compared to the same period 2013 as a result of the impact of the temporary suspension of explosives permit which was
lifted in mid-March 2014 affecting the volumes of ore deposited at the leaching pads. The process of depositing mineral on
the leaching pads was normalised over the second quarter, and the recovery cycles are expected to reach regular levels in
the second half 2014.
The above adverse effect was partially offset by the increased ore processed at the Dynamic Leaching Plant and the expected
higher gold grade (0.71 g/t in 1H14 vs 0.61 g/t in 1H13).
By-product silver production for the first half 2014 increased 51.8% over the same period of 2013 due to improved recovery
rates and higher ore grades.
Soledad-Dipolos mine production - Attributable
Production H1 2014 H1 2013 % change
Gold (Oz) - 22,226 -100.0
Silver (kOz) - 14 -100.0
Operations at this mine continued to be suspended as a result of the court ruling to vacate the area at the site of the
Soledad-Dipolos mine as part of the legal proceedings surrounding the Ejido "El Bajío" litigation process (Further
information related to this process is provided in note 17 to the Financial Statements). It is expected that throughout the
rest of 2014 this suspension will remain. However, the Company continues to analyse the alternatives with regard to the
future of the Soledad-Dipolos mine and expects to have a final decision within the next twelve months.
Noche Buena mine production - Attributable
Production H1 2014 H1 2013 % change
Gold (Oz) 36,099 27,044 33.5
Silver (kOz) 28 5 460.0
Attributable gold production for the first six months of 2014 increased 33.5% when compared to the corresponding period
2013 due to higher ore deposited (+13.6%) and recovery rates (49.48% in 1H14 vs 43.21% in 1H13). These increases were
explained by the additional trucks and loaders in operation and increased areas under irrigation, which resulted from the
ramping-up of production to the expanded capacity of 75,000 attributable gold ounces per year.
Year to date attributable silver production increased to 27,862 ounces mainly as a result of improved recovery rates and
higher ore grades.
Growth Projects
Saucito II
As previously stated, the construction of Saucito II is on track to be concluded in the fourth quarter of 2014 on budget.
In the first six months of 2014 detailed engineering works were concluded and significant progress was achieved in the
milling and flotation areas with the assembly of the mills and flotation cells structures. Mine development has advanced
further than scheduled.
This US$235 million project will produce an average of 8.4 million ounces of silver and 35,000 ounces of gold per year at
full capacity.
San Julián
Construction of the San Julián project is progressing on time and on budget. Over the first half 2014, development of the
vein system continued, additional orders for equipment were placed, surface land was acquired and construction of the
leaching plant commenced.
This US$515 million silver-gold project remains on track to start operations in the second half of 2015 with an expected
average production of 10.3 million ounces of silver and 44,000 ounces of gold per year once at full capacity.
Exploration
The 2014 exploration budget (including capitalised exploration expenses) was set at US$225 million dollars of which US$71
million were for exploration at mines currently in operation and for development works to confirm resources. The remaining
US$154 million were for exploration projects of which in the first half 2014 US$30.0 million dollars were spent principally
on drilling in the Fresnillo, Ciénega, and Herradura districts, and the San Julián, Orisyvo, Guanajuato, Rodeo and Pilarica
advanced projects. Additionally, 119,080 metres of core and reverse circulation drilling was completed using 30 drills, and
10 additional rigs have been recently added to accelerate the programme. Several joint venture proposals in Mexico, Peru
and Chile are currently being evaluated.
At the Ciénega district additional silver-gold resources were discovered on the San Gregorio and Campo 2 veins near the San
Ramón satellite mine. Systematic drilling was carried out in three target areas at the Fresnillo district and interesting
silver values were intersected on veins to the south of the mine.
Drilling was re-initiated at the San Julián project focused on increasing resources on the gold-silver bearing veins. In
addition, eight structures with silver and gold will be drill tested.
A district-wide effort is being made to advance our resource position at Guanajuato, where nine vein systems are being
drilled. Good silver-gold values were obtained at Opulencia, El Gigante and Cardones, which are within trucking distance
from the Las Torres processing plant. Drilling and metallurgical testwork continue on properties where we are exploring for
gold and silver-gold in the Rodeo district. In Peru, silver mineralisation was extended along strike by drilling at
Pilarica and we continue to evaluate other properties in this district.
Our exploration objectives for the year will be met as we intensify the drilling campaign over the second half of the year
but we expect to do so slightly below the US$225m budget level.
Resource and reserve estimates will be updated and audited by SRK at year end.
Health and safety, human resources, environment and community relations
During the first half of 2014 Fresnillo plc has continued with the implementation of the Health, Safety, Environment and
Community Relations (HSECR) System. The HSECR System reached an overall maturity level of 77% in the fourth independent
assessment conducted by PricewaterhouseCoopers (PwC) where the Integrated Management System plays a central role in the
HSECR maturity process. The efforts to integrate Health, Safety and Environment under a single Integrated Management System
brought the first positive outcomes with "La Ciénega" becoming the first business unit to achieve a joint (integrated)
certification in OHSAS 18001/ ISO 14001.
Fresnillo promoted preventive care and healthier lifestyles as part of the efforts to limit certain chronic diseases and
enhance overall wellness and fitness at work. In addition, Fresnillo plc's occupational health programme aims to identify
pre-emptively and manage the health risks to which our workforce is exposed. Over the period we reported two new cases of
occupational diseases as one employee was diagnosed with a hearing impairment and another with pneumoconiosis (lung
disease) by the Mexican Health Authority.
The Safety Strategy is based on managing our knowledge of safety, engaging our stakeholders through the "No More Accidents"
programme, and launching initiatives to embed safety in our culture. In the first half of 2014 the Total Recordable Injury
Frequency rate (TRIF) rose to 3.77 (3.22 in 2013 and 4.66 in 2012) and the Lost Time Injury Frequency Rate (LTIFR) rose to
0.71 (0.43 in 2013 and 1.19 in 2012). Regrettably there was a fatal accident of a contractor in the Juanicipio project,
caused by inadequate communication while performing clearing tasks in the ramp. Safety remains Fresnillo plc's number one
priority and we are launching, with the support of Dupont, the "Safe Start" project which focuses on the human factors
that are involved in the majority of incidents and injuries.
Communities are our strategic partners and having their trust requires understanding and engaging with them effectively and
being accountable for our impact. Over this half year, Fresnillo plc conducted a community perception study across all our
operating units. This perception audit has allowed each of the business units to update their social risks and
opportunities. Fresnillo plc is following the guidelines set out by the International Finance Corporation (IFC) and the
International Council of Mining and Metals (ICMM). In addition, Fresnillo plc has launched the implementation of a state of
the art information system to support community relations and social investment which includes analysis and logs of
activities organised by the company for the communities and all contribution requests made by the communities.
Our Environmental Management System ensures effective compliance with Mexican regulations, ensures transparency and
supports initiatives that reduce our environmental footprint. In the first half of 2014, the Water Intensity measured 0.19
cubic metres per tonne of mineral processed (0.22 in 2013) while the Greenhouse gas (GHG) intensity rose to 0.019 tonnes of
CO2 equivalent per tonne of mineral processed (0.015 in 2013). The Group was recognised with the GEI2 national award for
the disclosure and auditing of its greenhouse gas inventory. Additionally, Fresnillo plc disclosed its performance in the
water and climate change programmes of the Carbon Disclosure Project (CDP).
We remain strongly committed to attracting, selecting, developing and retaining the best people to successfully support our
business strategy. In the first half of 2014, Fresnillo plc's workforce totalled 3,438 employees (3,262 in 2013) and 3,789
contractors (3,150 in 2013). Total and voluntary turnover rates are respectively at 3.29% and 2.88% (8.2% and 4.7% in
2013). Women represent 11.58% of the employee workforce (8.83% in 2013). Our commitment to employee development continued
with training programmes throughout the whole company. During the period under review, the "Leaders with Vision" programme
took place reinforcing the required abilities and skills to be a leader and promoting further knowledge of the company's
processes. We have also continued with the follow up of our personnel performance evaluation to identify areas of
opportunity and promote communication. In addition, the second generation of mining technicians from the CETEF graduated
during this period.
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 18 of the financial statements.
Financial Review
The interim consolidated financial statements of Fresnillo plc for the first half of 2014 and 2013 have been prepared in
accordance with IAS 34 "Interim Financial Statements" as adopted by the European Union. Management recommends reading this
section in conjunction with the Interim Financial Statements and their accompanying Notes.
Commentary on financial performance
Financial performance in the first six months of 2014 reflected principally the adverse effect of the on-going decline of
precious metals prices and the reduced sales volumes of gold resulting from the suspended production at Soledad-Dipolos and
disrupted operations at Herradura. Gross profit, EBITDA and profit from continuing operations before net finance cost and
income tax decreased by 43.1%, 33.3% and 50.6% respectively.
Adjusted revenues of US$750.4 million decreased by 23.6% compared to the first six months of 2013 as a result of the 17.9%
and 11.5% decreases in silver and gold realised prices respectively, and lower volumes of gold sold mainly at the Herradura
district. This was partially mitigated by higher volumes of silver sold.
Adjusted production costs decreased by 14.1% over the first half of 2013 as a result of: i) costs not incurred at the
Soledad-Dipolos mine due to the suspended operations resulting from the court ruling regarding the Ejido "El Bajío" legal
process; ii) variable production costs not incurred at Herradura due to disrupted operations after the temporary suspension
of explosives permits (1st January 2014 to 26th February 2014); iii) the 4.4% devaluation of the average Mexican peso/US
dollar spot exchange rate which decreased costs denominated in Mexican pesos when converted to US dollars at a higher
exchange rate; and iv) efficiencies achieved at a number of our operating mines.
Depreciation increased by 16.6% as a result of: i) the increased asset base at Penmont mines and Ciénega; and ii) higher
depletion factor at Fresnillo, Saucito and Noche Buena resulting from the higher production volumes.
Cost of sales for the first half 2014 decreased 6.1% as a result of the lower adjusted production costs and the favourable
impact of the increase in inventories; which were partially mitigated by the higher depreciation and unproductive costs
recorded at the Penmont mines.
The net effect of the decline in revenues and lower cost of sales resulted in a 43.1% decrease in gross profit to US$295.1
million in the first half 2014.
Exploration expenses recorded in the income statement decreased by 39.9% over the first half of 2014 in accordance with our
decision to reduce exploration expenses in light of current market conditions and as a result of the lower pace at which we
explored this year at Centauro Deep, Corredor Herradura and Nuevo Corredor Herradura.
The aforementioned factors resulted in EBITDA of US$324.5 million, with EBITDA margin decreasing from 52.5% in the first
half of 2013 to 47.9% in the first half of this year.
An additional favourable impact in the income statement was the US$47.3 million revaluation gain on Silverstream which
resulted from higher silver prices, lower interests rates (LIBOR) on 30 June 2014 compared to the ones prevailing at 31
December 2013 and an increase in the number of ounces sold over the period compared with the first half of last year. In
contrast, a US$112.5 million loss was recorded in the first half of 2013.
In the first six months of 2014, net finance costs amounted to US$24.5 million as a result of the interest paid in relation
to the US$800 million debt facility raised in November 2013.
Income tax expense declined by 20.4% to US$58.1 million as a result of lower profits generated in the first half 2014. The
effective tax rate, excluding mining rights, was 27.9%, and 34.2% including the effects of the mining rights.
As a result of the above factors, profit for the period of US$137.1 million decreased by 22.5% compared to the first half
2013.
The Group ended the first half 2014 with short term funds of US$1,164.3 million. The main sources of cash were the cash
from operating activities of US$154.7 million and the US$31.4 million proceeds from the Silverstream. This, together with
the funds at the beginning of the year, were used to purchase property, plant and equipment for US$212.0 million, pay
dividends of US$50.1 million and cover the net finance expense of US$19.4 million.
Fresnillo plc's net cash is US$327.5 million, reflecting short term funds of US$1,164.3 million net of the US$795.3 million
interest-bearing loan (Senior notes issued in Nov 2013) and the US$41.5 million loan from Newmont.
Income Statement
Income Statement Key Line Items
Six months ended 30 June
(in millions of US$)
H1 2014 H1 2013 % change
Adjusted Revenue1 750.4 982.3 -23.6
Lead and zinc hedging 0.0 0.1 -100.0
Treatment & Refining charges -73.3 -56.5 29.7
Total Revenues 677.1 925.9 -26.9
Cost of sales 382.0 407.0 -6.1
Gross Profit 295.1 518.9 -43.1
Exploration expenses 69.0 114.7 -39.8
EBITDA2 324.5 486.3 -33.3
Profit before income tax 208.2 249.8 -16.7
Mining Right 13.1 - N/A
Income tax expense 58.1 73.0 -20.4
Profit for the period 137.1 176.8 -22.5
Profit for the period, excluding post-tax Silverstream revaluation effects 104.0 257.6 -59.6
Attributable profit 130.1 144.8 -10.2
Attributable profit, excluding post-tax Silverstream revaluation effects 97.0 225.6 -57.0
Basic and diluted Earnings per share (US$/share)3 0.177 0.200 -11.5
Basic and diluted Earnings per share, excluding post-tax Silverstream revaluation effects (US$/share) 0.132 0.311 -57.6
1 Adjusted revenue is the revenue shown in the income statement adjusted to add back treatment and refining costs and lead
and zinc 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 Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as gross profit plus depreciation
less administrative, selling and exploration expenses.
3 The weighted average number of shares H1 2014 was 736,894 (H1 2013: 724,615). See Note 8 in the Consolidated Financial
Statements.
Fresnillo plc's financial results rely, to a great extent, on the Group's operational performance, asset quality, skilled
personnel and management execution towards our strategic goals. Notwithstanding, there are certain macroeconomic variables
affecting the financial results, which are beyond the Group's control. A description of these variables is provided below.
Precious metal prices
Gold and silver spot prices decreased by 15.2% and 23.8% respectively compared to the first half of 2013 and had a minor
decline of 0.7% and 3.9% respectively over the second half of 2013. This effect resulted mainly from the announcement made
by the U.S. Federal Reserve at the end of May 2013 with regards to the reduction of the monetary stimulus programme, which
triggered gold sales and ETF liquidation, and subsequently severely impacted gold and silver prices in the next two months
(June-July 2013). In addition, lower inflation expectations, particularly in the developed economies, and fading Eurozone
concerns further impacted precious metals prices. However, increased geopolitical tension in Ukraine, Iraq and Israel in
the first half of 2014 relieved some of the pressure in precious metals prices albeit for a short period. The spot gold
price reached its lowest level of 2014 in January at US$1,221.0 per ounce, while the spot silver price bottomed in June at
US$18.71 per ounce.
The average silver price realised by Fresnillo plc over the half decreased by 17.9% from US$24.67 per ounce in the first
half of 2013 to US$20.26 per ounce and the average realised gold price decreased by 11.5% over the first half to
US$1,302.07 per ounce.
Similarly, lead prices decreased by 2.0% when compared to the first half 2013. However, zinc prices increased by 9.4% half
on half.
Hedging
Fresnillo plc remains fully exposed to volatility in precious metals prices in accordance with its policy of not hedging
silver and gold production. However, the Group does not preclude from entering into derivatives to minimise its exposure to
changes in the prices of lead and zinc by-products.
In the first half of the year, the Group entered into a zero cost collar structure to mitigate the risks related to the
sale of lead, hedging 1,800 tonnes with floor and cap prices of US$2,100 per tonne and US$2,450 per tonne respectively. 900
tonnes expired in the first half of 2014 resulting with a US$0.01 million gain recorded in the income statement. The total
outstanding position as of 30 June is 900 tonnes with monthly settlements until December 2014.
In addition, the Group hedged a portion of its zinc production, which did not have an effect in the income statement. The
chart below illustrates the expired hedging structures in the first half of 2014 and the outstanding hedging position as of
30 June.
Concept 1H14 As of June 30th
Jan. '14 - Feb. '14 Mar. '14 - Jun. '14 Jul. '14 - Jun. '15
Weighted Floor (usd/ton) 1,900 1,900 1,900
Weighted Cap (usd/ton) 2,200 2,320 2,390
Expired volume 320 1,920 --
Outstanding volume -- -- 8,820
Fresnillo plc entered into derivative contracts to hedge foreign exchange exposure. The results from these activities is
further explained in the cost of sales section.
Foreign exchange rates
The average spot Mexican peso/US dollar exchange rate devalued by 4.4% from $12.56 per US dollar in the first half of 2013
to $13.12 per US dollar in the same period of 2014. This devaluation generated a favourable effect estimated at US$6.1
million in the Group's production costs as costs denominated in Mexican pesos (approximately two thirds of total costs)
were lower when converted to US dollars at a higher exchange rate.
Cost Inflation
To calculate cost inflation, we estimate the unit price increase for each component of the adjusted production costs and
calculate the weighted average. The estimated cost inflation for the first half 2014 was 0.9%, which includes the positive
effect of the 4.4% devaluation of Mexican peso/US dollar exchange rate.
Energy, which covers electricity, diesel and gasoline, showed the highest cost inflation with a weighted unit price
increase of 4.0% during the period. Personnel, contractor and maintenance costs remained steady in dollar terms; whilst
operating materials presented a deflation in unit prices for the first time in several years. Overall, cost inflation has
been contained for the first half of the year.
Labour
Employees received a 5.5% increase in wages in Mexican pesos and administrative employees at the mines received a 4.5%
increase. Taking into consideration the 4.4% devaluation of the Mexican peso against the US dollar, cost inflation of
personnel was 0.8%.
Inflation of key operating materials
Key operating materials HALF OVER HALF CHANGES
Steel balls for milling -0.6%
Steel for drilling -0.3%
Explosives -3.8%
Tyres 0.2%
Sodium cyanide -2.8%
Other reagents -1.1%
Lubricants -0.5%
Weighted average of all operating materials -2.2%
Unit prices of the majority of key operating materials decreased during the first half 2014 due to the lower demand for
these inputs, resulting in a net weighted average decrease of -2.2%.
Electricity
In the first half of 2014, the weighted average cost of electricity increased by 1.6% from US$11.1 cents per kw in the
first six months of 2013 to US$11.3 cents per kw in the same period of 2014. Electricity rates are set by the national
utility, Comisión Federal de Electricidad (CFE), based on their average generating cost.
Diesel
The weighted average cost of diesel for the first six months of 2014 increased by 6.2% from US$77.6 cents per litre in the
first half 2013 to US$82.4 cents per litre in the same period 2014. Diesel prices are controlled by Petróleos Mexicanos
(PEMEX), the national oil company, which aims to gradually align fuel and diesel prices to prevailing international rates.
Contractors
In the first half of 2014, increases granted to contractors, whose agreement was due for review during the period, ranged
from -1.7% to 7.3% (equivalent to 2.6% - 12.0% in Mexican pesos), resulting in a weighted average increase of 0.5% which
includes costs largely relating to operating materials, equipment and labour.
Maintenance
Unit prices of spare parts to provide maintenance increased by an estimated 0.2% in US dollars.
Others
This includes the unit price of freight which largely remained flat with a 1.9% increase, a 1.0% decline in insurance
premium per unit and an average inflation of 4.7% for the remaining components, over the first half of 2013.
Treatment and Refining charges
The 2014 treatment and refining charges (TRCs) per tonne and per ounce are still being negotiated with Met-Mex in
accordance with international benchmarks and will apply retrospectively from January 2014. Treatment and Refining Charges
were assumed to be the same as those which were negotiated for the full year 2013.
Treatment charges per tonne of zinc, and refining charges per ounce of silver for the first half of 2014 increased by 7.9%
and 44.5% respectively compared to the same period of 2013. These significant increases half on half resulted from the
assumptions made at the end of the first half of 2013 based on the Group's expectations that silver refining charges would
decrease and treatment charges for lead and zinc would remain at similar levels. The final outcome turned out to be
different from our assumptions with silver refining charges and treatment charges for zinc increasing in the second half of
2013.
Revenues
Consolidated Revenues
(US$ millions)
H1 2014 H1 2013 Amount %Change
Adjusted Revenue1 750.4 982.3 -231.9 -23.6
Hedging 0.0 0.1 -0.1 -100.0
Treatment and refining charges -73.3 -56.5 -16.8 29.7
Total Revenues 677.1 925.9 -248.8 -26.9
1Adjusted revenue is the revenue shown in the income statement adjusted to add back treatment and refining costs and lead
and zinc 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.
Adjusted revenues of US$750.4 million decreased 23.6% when compared to the first half 2013. This resulted mainly from the
adverse effects of the lower silver and gold realised prices estimated at US$80.3 million and US$50.2 million respectively,
and the impact of the reduced volumes of gold sold at the Herradura district of US$115.0 million.
However, the aforementioned negative aspects were slightly mitigated by the estimated US$9.7 million benefit from the
higher volumes of silver sold from Saucito.
Adjusted Revenues1 by metal
(US$millions)
H12014 H1 2013 VolumeVariance PriceVariance Total %
Silver 373.3 50% 443.9 45% 9.7 -80.3 -70.6 -15.9
Gold 331.5 44% 496.7 51% -115.0 -50.2 -165.2 -33.3
Lead 21.8 3% 22.7 2% -0.4 -0.5 -0.9 -4.0
Zinc 23.7 3% 18.9 2% 2.9 1.9 4.8 25.4
Total Revenues 750.4 100% 982.3 100% -102.8 -129.1 -231.9 -23.6
1 Adjusted revenue is the revenue shown in the income statement adjusted to add back treatment and refining costs and lead
and zinc 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
Silver contribution to adjusted revenues increased from 45% in the first half 2013 to 50% in the same period 2014 mainly
due to increased sales volumes at the Saucito mine. In contrast, the contribution from gold decreased from 51% to 44% in
the first six months of 2014 as a result of the suspended production at Soledad-Dipolos and temporary disrupted operations
at Herradura.
Fresnillo contribution to silver adjusted revenues was 55.4%, a slight decrease when compared to the 58.5% share in the
first half 2013 due to the reduced volumes of silver produced. Similarly, Ciénega's contribution decreased to 9.6%. On the
contrary, Saucito's participation in silver adjusted revenues reached 33.2% in the first half of the year due to higher
production levels.
The split of the contribution to gold adjusted revenues changed in the first half of 2014 reflecting the lower contribution
from the Herradura mine, the nil share from Soledad-Dipolos and the increased participation of Noche Buena to 25.0%.
The contribution by metal and by mine to the adjusted revenues is expected to change further over the upcoming periods as
new projects are incorporated to the Group's operations and precious metal prices fluctuate.
Gold Adjusted Revenues by mine
H1 14 H1 13
Herradura 40.6% 48.1%
Soledad-Dipolos 0.0% 11.7%
Noche Buena 25.0% 14.1%
Ciénega (and San Ramón) 19.2% 16.8%
Fresnillo 5.5% 3.4%
Saucito 9.7% 5.9%
TOTAL 100% 100%
Silver Adjusted Revenues by mine
H1 14 H1 13
Fresnillo 55.4% 58.5%
Saucito 33.2% 29.3%
Ciénega (and San Ramón) 9.6% 10.9%
Herradura 1.6% 1.1%
Soledad-Dipolos 0.0% 0.1%
Noche Buena 0.2% 0.1%
TOTAL 100% 100%
Adjusted Revenues by mine
H1 14 H1 13
Fresnillo 33.3% 30.6%
Herradura 18.7% 24.8%
Ciénega 14.5% 14.4%
Saucito 22.3% 17.0%
Soledad-Dipolos N/A 6.0%
Noche Buena 11.2% 7.2%
TOTAL 100% 100%
Volumes of metal in products sold
Six months ended 30 June
H1 14 H1 13 % change
SILVER (kOz)
Fresnillo 10,214 10,529 -3.0
Ciénega 1,760 1,968 -10.6
Herradura 302 197 53.3
Soledad-Dipolos - 25 -100.0
Saucito 6,103
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