TIDMFRES
RNS Number : 8118E
Fresnillo PLC
03 March 2020
Fresnillo plc
Financial results for the year ended 31 December 2019
Fresnillo plc today announced its financial results for the full
year ended 31 December 2019. Octavio Alvídrez, CEO said:
"2019 was a more challenging year as expected, but we remain
determined and optimistic for the future.
Production did not meet our expectations in 2019. Total silver
production fell by 11.6% to 54.6 moz as a result of the expected
lower ore grade at Saucito as well as lower than expected ore
grades at Fresnillo and San Julián Veins and Disseminated Ore Body
(DOB). Gold production of 875.9 koz was down compared to 2018 due
to the expected lower production from Noche Buena and a lower ore
grade at San Julián Veins.
This challenging operating environment was reflected in our
financial performance, with gross profit and EBITDA decreasing by
40.9% and 26.3% respectively. Profit margins decreased accordingly
but still remained at healthy levels. We maintained a solid
financial position, with US$336.6 million in cash and other liquid
funds[1] as of 31 December 2019, notwithstanding paying dividends
of US$142.2 million, investing US$559.3 million in capex and
spending US$157.9 million on exploration to underpin future
growth.
Our focus in 2020 is on maximising the potential of our existing
operations. We are committed to working smarter and more
efficiently in order to extract maximum value from our asset base.
We have implemented a major performance improvement plan across our
portfolio that includes intensive infill drilling to improve the
certainty of the geological model, dilution control and raising
development rates, together with actions to address contractor
productivity and equipment availability.
We are investing in infrastructure, plant and machinery
including the new Tunnel Boring Machine which is now being ramped
up at Fresnillo - one of the first of its kind. We have also begun
to define a new programme to control costs and increase
productivity.
Though it will take time for these measures to take full effect,
we do expect production to stabilise in 2020 and start increasing
during 2021.
We continue to invest in our longer term development projects in
line with our organic growth strategy. I was pleased to confirm
Board approval for the Juanicipio project in early 2019. Juanicipio
will be a core element in the Group's future production of silver.
Production at Fresnillo will also benefit from the new US$53.8m
Pyrites Plant which is on track for completion in 2020.
The safety of our employees and contractors is our key priority
so it is with deep sadness that I confirm two fatalities during the
year. We remain determined to instil a safety first culture. The "I
Care, We Care" has proven to be effective and has contributed to
the reduction in our Lost Time Injury Frequency Rate.
We have made excellent progress with our other ESG commitments
in the year. Effective and safe management of our tailings
facilities has been a major focus after the tragic events in
Brazil. Already in line with international standards, we have gone
a step further by establishing our own Independent Tailings Review
Panel and appointed third party specialists to perform dam safety
inspections and review our tailing dam governance system.
As a major participant in the extractive industry, we have a
responsibility to integrate renewables and clean technologies into
our energy mix. Although the percentage of our energy consumption
met by wind power decreased slightly in 2019, due to a significant
increase in overall energy use, we remain committed to achieving
our goal of using wind power to generate 75% of our electricity
consumption by the end of the year. We are rolling out dual fuel
engines in haulage trucks, initially at Herradura, which has also
had a positive impact on greenhouse gas (GHG) emissions.
Looking ahead, we will continue to manage operational
challenges, as we make progress with the performance improvement
initiatives. As previously guided, we expect silver production to
be in line with 2019, before returning to growth in 2021, driven by
operational improvements at the Fresnillo mine, the Pyrites plant,
Juanicipio and San Julián. Gold is expected to decline driven by
the planned Noche Buena closure and lower production from
Herradura. We also anticipate that fixed costs will remain
relatively high during 2020, before the cost management initiatives
have an impact.
While the broader macro economic environment remains uncertain,
we are confident on the outlook for mining in Mexico, where we have
welcomed the on-going support of the Mexican Government. We will
continue to work hard to ensure that mining is supported by all
parts of the federal and state administration.
We will rise to the immediate challenges confronting our
business today, and we move forward with certainty and vigour. Our
assets are of high quality and our exploration pipeline continues
to confirm promising prospects. We have a clear strategy, a
talented and committed team, and we look ahead with
confidence."
Twelve months to 31 December 2019
$ million unless stated 2019 2018 % change
Silver Production* (kOz) 54,614 61,804 (11.6)
Gold Production* (Oz) 875,913 922,527 (5.1)
Total Revenue 2,119.6 2,103.8 0.8
Adjusted Revenue** 2,270.2 2,243.4 1.2
Gross Profit 461.7 780.7 (40.9)
EBITDA 674.0 915.1 (26.3)
Profit Before Income Tax 178.8 483.9 (63.1)
Profit for the year 205.8 350.0 (41.2)
Basic and Diluted EPS excluding
post-tax Silverstream effects
(USD)*** 0.231 0.461 (49.9)
* Fresnillo attributable production, plus ounces registered in
production through the Silverstream Contract
** Adjusted Revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
lead and zinc hedging
*** The weighted average number of ordinary shares was
736,893,589 for 2019 and 2018. See note 17 in the consolidated
financial statements.
2019 Highlights
Higher gold and silver prices offset by lower volumes and
operational setbacks
-- Adjusted revenue of US$2,270.2 million, up 1.2% over 2018,
due to higher gold and silver prices.
-- Profit margins decreased but remained at healthy levels.
Gross profit and EBITDA down 40.9% and 26.3%, to US$461.7 million
and US$674.0 million respectively.
-- Profit from continuing operations of US$171.7 million, down 66.1%.
-- Capex of US$559.3 million, down 16.4% primarily due to the
commissioning of several projects including the pyrites plant at
Saucito and the dynamic leaching plant at Herradura in 2018.
-- Strong balance sheet and low leverage ratio; cash and other
liquid funds[2] of US$336.6 million, down 40.0% mainly due to the
high level of capex and dividends albeit being lower 16.4% and
52.3% respectively vs. 2018.
-- Dividends of US$142.2 million paid, down 52.3% mainly due to
lower profits for the period, in accordance with our dividend
policy.
Delivering on development projects and operational
improvements
-- Full year silver production of 54.6 moz (including
Silverstream) down 11.6% on 2018, driven by the lower ore grades at
Saucito, Fresnillo and San Julián, both veins and disseminated ore
body.
-- Gold production of 875.9 koz down 5.1% vs. 2018 mainly driven
by the anticipated lower volume of ore processed at Noche Buena,
exacerbated by lower ore grades at San Julián.
-- Board approval of Juanicipio early in 2019. Mine development
at Juanicipio reached over 25 km, with ore from these activities
set to be processed at the Fresnillo beneficiation plant from June
2020.
-- Construction of the Juanicipio beneficiation plant has been
delayed by six months with commissioning now expected in mid
2021.
-- The Fresnillo Full Potential (FFP) project underway to
address the structural challenges posed by deeper operations,
narrower veins and greater ore variability at the Fresnillo and
Saucito mines.
-- Construction of the new Pyrites Plant at Fresnillo on track for completion in 2H 2020.
-- The second phase of the beneficiation plant optimisation at
Fresnillo also continued to progress.
-- Successfully commissioned new US$22.7m state-of-the-art
tunnel boring machine (TBM) at Fresnillo.
-- US$69.3m project to deepen the Jarillas shaft to 1,000 metres
at Saucito progresses, with completion due in 2024.
-- Silver resources increased 2.4%; gold resources remained stable at 39.0 moz.
-- Silver reserves increased 1.7% reflecting the recognition of
reserves at Juanicipio for the first time offset by the decrease in
reserves at the underground silver mines.
-- Gold reserves decreased 16.0% mainly due to the exclusion of
reserves at Soledad & Dipolos following the absence of an
agreement with the Ejido community, and the exclusion of a number
of benches at Herradura resulting from the negative infill drilling
results and revised calculations.
-- We are committed to improving our safety record as we regret
to report that two fatalities occurred during 2019.
-- We began work on defining a new programme to control costs
and increased productivity in 2H19.
Outlook - stable 2020, return to silver growth in 2021
-- In 2020, Fresnillo expects to produce in the range of 51 to
56 moz of silver and 815 to 900 koz of gold.
-- The 2019 capex projects will continue in 2020 and will
account for the majority of our investment in the year ahead,
together with an increase in capex as the construction of
Juanicipio progresses.
Analyst Presentation
Fresnillo plc will be hosting a presentation for analysts and
investors today at 09.00 (GMT) at Bank of America Merrill Lynch
Financial Centre, 2 King Edward St., EC1A 1HQ, London, United
Kingdom.
The presentation will also be available via a live webcast. A
link to the webcast will be made available on Fresnillo's homepage:
www.fresnilloplc.com or can be accessed directly here
https://kvgo.com/IJLO/Fresnillo_FY19_Preliminary_Results .
If you are not attending the presentation in person, but wish to
ask questions, you will need join the live conference call as
questions cannot be submitted via the webcast function.
Conference Call:
To access the conference call, please use the following
details:
UK: 0808 109 0700
US: + 1 866 966 5335
Mexico: 00 1 866 966 8830
Int'l: +44 (0) 20 3003 2666
Password: Fresnillo
A recording of the conference call will be available for 7 days
following the presentation. The access details for the replay are
as follows:
Number: +44 (0) 20 8196 1998
Pin: 8829454#
For further information, please visit our website:
www.fresnilloplc.com or contact:
Fresnillo plc
London Office Tel: +44(0)20 7339 2470
Gabriela Mayor, Head of Investor
Relations
Patrick Chambers
Mexico City Office Tel: +52 55 52 79 3206
Ana Belém Zárate
Powerscourt Tel: +44(0)20 7250 1446
Peter Ogden
About Fresnillo plc
Fresnillo plc is the world's largest primary silver producer and
Mexico's largest gold producer, listed on the London and Mexican
Stock Exchanges under the symbol FRES.
Fresnillo plc has seven operating mines, all of them in Mexico -
Fresnillo, Saucito, Ciénega (including the San Ramón satellite mine
Las Casas Rosario & Cluster Cebollitas), Herradura,
Soledad-Dipolos(1) , Noche Buena and San Julián (Veins and
Disseminated Ore Body), three development projects - the Pyrites
Plant at Fresnillo, the optimisation of the beneficiation plant
also at Fresnillo and Juanicipio, and six advanced exploration
projects - Orisyvo, Centauro great potential and Centauro Deep,
Guanajuato, Rodeo and Tajitos as well as a number of other long
term exploration prospects.
Fresnillo plc has mining concessions and exploration projects in
Mexico, Peru and Chile. Fresnillo plc has a strong and long
tradition of exploring, mining, a proven track record of mine
development, reserve replacement, and production costs in the
lowest quartile of the cost curve for silver. Fresnillo plc's goal
is to maintain the Group's position as the world's largest primary
silver company and Mexico's largest gold producer.
(1) Operations at Soledad-Dipolos are currently suspended.
cHAIRMAN'S STATEMENT
Addressing our operational setbacks, reaffirming our
commitment
In many respects, this has been a disappointing year. We have
failed to achieve our expected production volumes and the
improvement in our health and safety record has proved elusive.
These matters are discussed below or elsewhere in this report.
Furthermore, it is important to reiterate that our commitment to
delivering long-term benefits to all of our stakeholders remains
undiminished. Indeed, this commitment was formalised during the
year through the definition and approval of our Purpose, in line
with the requirements of the new UK Corporate Governance Code, as
we promised in last year's annual report.
A challenging year for our operations
Unfortunately, our efforts to address a number of the key issues
that have been holding back production did not deliver the
anticipated outcomes, particularly in the first half of the year at
our Fresnillo, San Julián and Herradura mines.
During the year we experienced unexpectedly low ore grades and
production, delays to infrastructure projects, shortfalls in
contractor performance, higher costs and ineffective maintenance,
among other issues. In the face of these challenges, our response
has been to increase the pace and scale of investments in a series
of projects and take corrective actions to bring production back to
acceptable levels in the short term, and to achieve steady growth
in future years.
These projects include: the appointment of new teams at
Fresnillo and Saucito; significant investment in development works
at Fresnillo, specifically one of the first tunnel boring machines
of its kind in the world as well as new equipment and technologies;
the deepening of hoisting shafts at Fresnillo and Saucito to access
deeper reserves; the expansion of the flotation plant at Fresnillo
to treat higher lead and zinc grades, and the tailings
treatment/pyrite flotation plant at Fresnillo.
Production saw a gradual improvement in the second half of the
year, largely due to these actions. In addition, the commissioning
in Q3 2019 of a new leaching pad at Herradura is already leading to
faster gold recovery.
I would also like to highlight that during 2019 the Board
approved our next new mine, at Juanicipio. Construction has
commenced and mine development already stands at over 25 kms of
underground workings, and we expect the first production stope to
be fully prepared by 3Q 2020. After careful analysis, we have made
minor adjustments to the project. For example, construction of the
beneficiation plant is now expected in mid 2021 and capex has been
increased from US$395 million to US$440 million. However, material
from development and initial production stopes will be processed at
the Fresnillo beneficiation plant from June 2020. 2019 was the
first year in which we have recognised reserves at Juanicipio,
confirming our belief that this will be an exceptionally high grade
mine with the potential to be the foundation for growth in future
years.
Financial performance
The year saw production decrease due to a range of challenges.
Fresnillo generated $2,270.2 million in adjusted revenue, up 1.2%
due to higher precious metal prices. Net Profit decreased 41.2%
year on year mainly due to higher costs, while cash and other
liquid funds fell by $224.2 million to $336.6 million primarily due
to capex investments in new projects.
Articulating our Purpose
Our Purpose is to contribute to the wellbeing of people, through
the sustainable mining of silver and gold.
Linking and strengthening our Vision and Values, our Purpose
articulates our contribution to society at large and how we will
continue to prosper over time - in financial terms and through the
positive contribution we make to local communities and the lives of
people in Mexico and beyond.
Mining can be a major force for good, but only when it is
carried out sustainably and for the benefit of all. We aim to
satisfy current demand for our precious metals, which are important
investment assets as well as being essential to many industrial
products such as medical equipment, solar panels and mobile phones,
among others.
At the same time, we are continuing to develop increasingly
sophisticated and sustainable mining practices that will create
greater efficiency and healthier, safer work environments.
This twin-track approach will ensure our ongoing sustainability
as a business, underpin our long-term ability to deliver growth and
returns, continue to create employment and help us win recognition
as a positive influence for all our stakeholders - local
communities and shareholders, our workforce, customers and
suppliers as well as governments.
How we are realising our Purpose
Our Purpose expresses our commitment to the wellbeing of all
stakeholders; I will outline how we delivered benefits for our key
stakeholder groups during the year:
Shareholders
Our operational performance inevitably led to adjustments in our
production forecasts, a situation that I know has been frustrating
for investors and analysts. While I share their concerns, I am
confident that the measures now in place are already providing
greater certainty and better results, and will continue to do so in
the future.
Our dividend policy remains unchanged. We aim to pay out 33-50%
of profit after tax each year, while making certain adjustments to
exclude non-cash effects in the income statement. Dividends are
paid in the approximate ratio of one-third as an interim dividend
and two-thirds as a final dividend. Before declaring a dividend,
the Board carries out a detailed analysis of the profitability of
the business, underlying earnings, capital requirements and cash
flow. Our aim is to maintain enough flexibility to be able to react
to movements in precious metals prices and seize attractive
business opportunities.
We declared an interim dividend of 2.6 US cents per share, with
a final dividend of 11.9 US cents per share, bringing the total for
the year to 14.5 US cents per share.
Employees and contractors
Our people are the bedrock of our business. We depend on their
skills and hard work for each and every ounce of precious metal we
recover from the earth - and we owe them the very highest standards
of health and safety. This is an area that still requires more
focus, cultural change and investment. We regret that two people
lost their lives while working at our facilities during the year.
Our thoughts and prayers are with the families and friends who lost
loved ones.
Our response has been to step up the implementation of our I
Care, We Care programme. This has already had an impact at the
mines where it is in operation, and it will soon be part of
everyday working practices across the Group.
In addition to high standards of health and safety, our people
also deserve the best in training and development. During the year,
we provided 120 hours of such support to individuals, helping them
build their skills, improve their earnings and access all the
advantages of long-term careers. In light of the ongoing skills
shortages across our industry, we continued to forge strong
relationships with leading universities and the top earth science
institutions in Mexico. In addition, we have reviewed our
recruitment processes to ensure that they maximise the potential of
women. Our recruitment of interns and Engineers in Training
demonstrate good progress regarding improved diversity, with the
percentage of women in these roles increasing from 27.02% in 2018
to 34.84 % in 2019.
Working practices in the Group are characterised by a spirit of
partnership and mutual respect, and this was instrumental in the
agreement by our unionised employees at the Fresnillo mine to
introduce Sunday working. Once fully implemented in 2020, this will
give us an additional 52 days of ore extraction. I would like to
reaffirm my appreciation for the hard work and expertise, which our
teams bring to their work, at every mine and no matter whether they
are employees or contractors.
Local communities
As well as providing much needed employment, our mines play
important roles in the lives of local people and their families. We
rely on local communities for labour and for the general goodwill
that helps us maintain our licence to operate - and in return, we
invest in a wide range of locally-based programmes. The ultimate
aim is to support the creation of sustainable businesses that can
prosper without relying exclusively on mining operations.
Consultation is a key element of our community partnerships,
never more so than in the early days of a mining project. The
Mexican administration has recently emphasised the vital role that
consultation with indigenous people has in the permitting process
for mines. We fully support this stance and believe that the
experiences we have gained in recent years will stand us in good
stead for the challenges ahead.
Children are a particular focus for our community activities,
and during 2019, 8,700 children benefited from our long-established
Picando Letras programme, which aims to encourage reading. We also
continue to offer Health Weeks to local people, and in 2019 over
10,500 individuals benefited from high quality health advice and
practical support that they would otherwise not have been able to
access.
Environmental impact
As our Purpose makes clear, we are a business that aims to serve
humanity for decades to come. While extractive industries can
impact the availability of resources for future generations, we are
committed to developing sustainable mining practices which enable
us to contribute to the wellbeing of people while having minimum
impact on the environment.
Our climate commitment increases energy efficiency and reduces
greenhouse gas emissions. Our drive to increase the use of wind
power and innovative dual fuel vehicles prepares the company for a
transition to a low carbon future, while also cutting costs. These
are concrete examples of how we are embedding sustainability in the
DNA of our company.
Board activities
This has been a busy year for the Board. In addition to carrying
out our regular activities, we have invested considerable time and
expertise in understanding and responding to new regulatory
requirements. The new UK Corporate Governance Code and the
Companies Miscellaneous (Reporting) Regulations both came into
effect on 1 January 2019.
I wish to emphasise here the Board's focus on stakeholder
engagement, and in particular workforce engagement, in line with
the new Code. During the year the Board assigned the responsibility
for overseeing our workforce engagement to Arturo Fernández. We
also considered our approach and processes towards stakeholder
input into decision-making processes, ensuring the Board's
continued compliance with Section 172.
As constituents of the FTSE Index, we have always adopted the
highest standards of corporate governance and believe that the new
and revised regulations will have a significant impact on the drive
to restore public trust in business. Executive pay is an important
element in trust, and I was pleased that 99% of votes cast at the
AGM were in favour of our policy, endorsing our approach to
executive remuneration.
Our aim is for our culture to foster the necessary mindset and
behaviours to deliver on our commitment to the sustainable mining
of silver and gold. This culture must embrace ethics and safety,
while also driving innovation and operational excellence to enhance
productivity while reducing costs and our environmental footprint.
During the year, the Board again provided master classes and online
training modules for teams across the business, helping them to
understand our Purpose, to engage with our culture and to live our
Values of Responsibility, Integrity, Trust and Loyalty. The Board
has committed to placing even greater focus on our culture in the
year ahead.
Changes to the Board
Following Jaime Serra Puche's resignation at the 2019 AGM, we
were pleased to welcome Luis Robles to the Board, as an Independent
Non-executive Director. A former Chairman of the largest bank in
Mexico, BBVA Bancomer, Luis brings valuable experience and
expertise to his role. During his career in the banking and
financial sectors, he served on various national and international
associations, including as Chairman of the Latin American Banking
Federation from 2010 to 2012 as well as various roles in the
Mexican Banking Association and as Chairman from 2014 to 2017. Luis
is a member of both our Audit and Remuneration Committees.
The Board considers that its composition has the appropriate
balance of skills, experience and gender to oversee the performance
of the executive team and the development of long-term
strategy.
Outlook
During the last six months of the year we saw a gradual upturn
in production, as the projects and initiatives I have outlined
began to feed through into results. I expect this trend to
continue, with the year ahead being characterised by greater
stability. However, significant improvements will not be seen until
2021.
Despite the operational setbacks of 2019, I have confidence in
the Group's underlying strengths, in our strategy and teams, in our
culture and behaviour, and in our ability to make valuable
contributions to the wellbeing of all our stakeholders.
I would like to place on record my thanks to Board members for
their support, and also to pay tribute to the senior management
team, which has worked hard to address the year's challenges.
Alberto Baillères
- Non-executive Chairman
chief's executive statement
Rising to challenges, moving forward with confidence
2019 was a year when several negative factors combined to drive
down the performance of our mines and caused us to revise our
guidance to the markets.
We fell short of the high mine planning and operational
execution standards that we have come to expect from our teams,
which contributed to lower ore grades and tonnages than
anticipated. Delays to infrastructure projects, poor contractor
performance, higher costs, new regulatory pressures in Mexico and
low equipment availability were significant challenges faced during
the year. None of these challenges is insurmountable in its own
right - but what marks 2019 as an unusual year is that they
coincided at several operations, indicating systemic failures that
are now being addressed.
Having realised that we were going to miss our target for silver
production, we revised our guidance in Q2 2019 and introduced
extensive corrective measures. Inevitably, it is taking time for
these measures to have the desired effect and our overall operating
performance for this year has therefore been adversely impacted. We
expect production to stabilise in 2020, with results improving
during 2021.
In addition, although gold production was within the guidance
provided at the Capital Markets Day in December, we failed to reach
the revised target we had communicated in August, of 880-910 koz .
This was primarily due to delays in the construction of the 13th
leaching pad at Herradura. We had no alternative but to deposit ore
at the top of existing pads, and this led to a slower recovery than
initially forecast. Furthermore, the project to implement a
Carbon-in-Column process at Noche Buena to increase gold recovery
was delayed. While this was successfully concluded later in 2019,
it contributed to further decrease gold production against
expectation.
Production highlights and price review
In short, total silver production fell by 11.6% to 54.6 moz. At
the Fresnillo mine, this was primarily due to decreasing vein
width, increased dilution and greater ore variability, contractor
underperformance and the need for additional infrastructure as we
extend the mine to greater depths. Ore grade variability was also a
factor in performance at Saucito and San Julián, together with
narrower veins at Saucito.
Gold production of 875.9 koz was down more than expected
compared to 2018 driven by the anticipated lower volume of ore
processed at Noche Buena, further exacerbated by lower ore grades
at San Julián.
There was a steady increase in gold and silver prices during the
second half of the year, on the back of healthy demand and a slight
reduction in supply. In 2019, average realised silver prices rose
by 3.9% while those for gold increased by 11.7%. Average prices for
zinc and lead decreased, by 9.3% and 10.5% respectively.
A time to pause, reflect and prepare
Despite the disappointments of 2019, it is important to stand
back and take stock of how far we have come, and how the work we
are doing today will bear fruit in the future. As we made clear in
last year's annual report, 2019 was an opportunity to consolidate
our growth while advancing our pipeline. Following a decade where
we consistently created value through growth and returns, these
last 12 months have been a valuable time for us to pause, reflect
and prepare ourselves in order to rise to the challenges we are
facing.
How are we going to deliver a performance that will regain the
confidence of our stakeholders? By remaining true to the strategy
that has seen us established as the world's largest silver producer
and Mexico's largest gold producer. This strategy has four pillars,
and here I will outline our progress against each one.
Maximising the potential of existing operations
This is the key focus for 2020 and is central to our commitment
to consolidate our achievements to date. We are committed to
working smarter and more efficiently in order to extract maximum
value from our asset base.
Our efforts during 2019 and for the coming year focus primarily
on the Fresnillo district. The Fresnillo Full Potential (FFP)
project is already helping us to address the structural challenges
posed by deeper operations, narrower veins and greater ore
variability at the Fresnillo and Saucito mines. At the same time,
FFP addresses processing issues that include delayed development
and preparation of mining areas, infrastructure, efficiency and
productivity.
With regard to infrastructure improvements, we commissioned our
new US$22.7m state-of-the-art tunnel boring machine (TBM) in
December 2019, with ramp up in the first quarter of 2020. Designed
specifically for the conditions at the Fresnillo mine and capable
of boring at least 300 metres per month, this is one of the first
TBMs of its kind. Further investments in infrastructure at
Fresnillo include a new pumping station to improve drainage as well
as a new elevator that will cut the travel time of our teams by up
to an hour.
On the surface, we are making good progress on our US$30m plant
optimisation project at the Fresnillo mine, which will help us
manage the higher lead and zinc contents in the deeper areas of the
mine. As planned, we have commenced the expansion of the flotation
plant. On track for completion by mid 2020, this will complement
the additional thickening capacity installed in 2017. Once the mine
is developed and able to sustain a production rate of 9,000 tonnes
per day, we will implement the third element in the plant
optimisation project - the installation of additional vibrating
screens, which will further increase the capacity of the plant.
At Saucito, we are continuing with our US$69.3m project to
deepen the Jarillas shaft to 1,000 metres. Due for completion in
2024, this will enable us to efficiently hoist ore from the deeper
levels of the mine where 42% of the reserves are located.
Technology sits at the heart of initiatives to improve our
processes. For example, we are currently implementing
semi-automatic operations of long hole drills, in order to increase
productivity and equipment utilisation. A total of 15 long hole
stopes are being prepared at Fresnillo, with ten of these set for
completion by the end of Q2 2020. We also introduced a new
communications system in 2019, to improve planning and control
processes at the mine. This system provides management with
real-time data on everything from manpower allocation to equipment
availability - boosting productivity by making sure that we have
the equipment and resources we need, when and where we need
them.
In addition, we have increased our focus on maintenance in order
to improve the availability and reliability of critical
equipment.
We have also addressed the lack of reliability of our geological
models by creating four specialised teams, each headed by senior
operations and exploration specialists and supported by the
executive team. These teams are tasked with: improving sampling and
geological mapping; ensuring greater quality assurance and control,
including at our laboratories; enhancing our geological and
resource modelling processes; and implementing measures such as
full 3D cavity monitoring technology to improve dilution control
and improving the conciliation of reserve estimates and actual
tonnages and grades.
Cost management is a key factor in maximising the potential of
our existing operations. As Fresnillo has matured as a company, we
have realised that our cost control processes have not always kept
pace. We are therefore introducing new initiatives to ensure that
the fundamentals of sound accounting and cost management remain in
place and continue to work effectively. Any developments will take
time to feed through into the financial numbers, but we have
already made a good start and will continue to focus on this
important area through 2020.
Delivering growth through development projects
Situated in the Fresnillo district approximately eight
kilometres from the main Fresnillo shaft, the Juanicipio project
will be a core element in the Group's future production of
silver.
The Board approved the development of Juanicipio early in 2019,
and construction is now well underway with over 25 km of
underground development already completed and processing of
development ore currently expected to commence in mid 2020, ahead
of schedule. A joint project with MAG Silver in which we hold 56%,
the mine is forecast to produce 11.7 moz of silver and 43.5 koz of
gold per year on average, with total indicated and inferred
resources of 275.0 moz of silver and 1.48 moz of gold. With an
initial mine life of 12 years and considerable potential at depth,
Juanicipio's reserves were recognised for the first time in
2019.
Production at the Fresnillo mine will benefit from the new
Pyrites Plant. On track for completion in 2020, this 14,000 tonnes
per day plant will increase the recovery of silver and gold from
the current and historical tailings of Fresnillo. Once operating at
full capacity, and including total production from the Saucito
plant, it is estimated to produce an average of 3.5 moz of silver
and 13 koz of gold every year.
Extending the growth pipeline
Our commitment to exploration across the peaks and troughs of
economic cycles has remained consistent since our IPO 11 years ago
- and while our current priority is to focus on our existing
operations, exploration will continue to be the cornerstone of our
longer-term strategy.
During 2019, our team of 100 experienced geologists again worked
hard to explore new opportunities, both in the areas around our
operations and to a lesser degree in new districts. In total, we
invested some US$170m in these activities in 2019.
The results include the identification of a large number of
targets in the Fresnillo district, as well as at San Julián, aimed
at extending the life of our mines. These are areas where we
already have a deep understanding of the geology, and are confident
in our ability to exploit new opportunities both quickly and
cost-effectively. The projects at Orisyvo and in the Ciénega
district also continue to offer exciting potential. However, we
have decided to slow the pace of these projects to prioritise
current operations, while continuing to de-risk them so we can move
them forward when the time is right.
During the year we continued to carry out further work in Peru
and Chile, where we have a total of four projects showing good
potential. In Peru we are concentrating our efforts on permits and
drilling parametric holes, while in Chile our focus is on
exploration options with well-established local partners.
As the audit of reserves and resources is a lengthy process,
this year for operating mines we brought it forward to 31 May,
compared to December in previous years. The earlier timing of the
audit meant that costs considered in the estimation were taken from
2018, and not from the most recent 2019 cost base.
Silver resources stood at 2.3 boz , a 2.4% increase over 2018
mainly as a result of exploration at San Julián and, to a lesser
extent, Guanajuato. Gold resources remained stable at 39.0 moz .
Silver reserves rose slightly, by 1. 7% to 484 moz as the
recognition of reserves at Juanicipio for the first time was offset
by decreases in all our underground silver mines. Gold reserves
decreased 16.0%, due to the exclusion of reserves at
Soledad-Dipolos and a decrease in reserves at Herradura .
All the Group's reserves are in the probable category because of
a lack of detailed mine plans, and geotechnical and financial
models. A key focus for 2020 will be tackling these issues and
converting resources into reserves.
Advancing and enhancing the sustainability of our operations
We will never compromise the safety of our employees or
contractors. Our priority is that everyone goes home to their
families at the end of their shift.
Safety is a never-ending challenge for the mining industry, and
it is with great sadness that I have to report that despite our
best efforts, we had two fatalities during the year. Although this
is an improvement on the previous year, it is unacceptable. We are
striving to create a working environment that protects all our
people from harm, at all times. For example, our I Care, We Care
programme brings together industry best practices, systems and
behaviours, and was one of primary reasons that the year saw a
reduction in our Lost Time Injury Frequency Rate. Over the last 12
months, the programme has been rolled-out to all employees and
contractors, focusing on engagement and accountability.
While our tailings storage facilities (TSFs) are considerably
smaller than those of other mining companies, we nevertheless
recognise their potential to cause human and environmental harm, as
highlighted by the recent tragedy in Brazil. We have therefore
taken significant steps to ensure the ongoing safety of these
facilities. We have 11 TSFs, each one constructed in line with
local geologic and seismic conditions. Although all dams comply
with Mexican safety requirements, which are similar to standards
set in the USA, Canada and Chile, we have taken the decision to go
beyond such legislation. We have established our own Independent
Tailings Review Panel and appointed independent specialists to
perform dam safety inspections and also review and update our
tailings dam governance system. We expect their findings to be
finalised in 2020.
Although the percentage of our energy consumption met by wind
power decreased slightly in 2019, due to a significant increase in
overall energy use, we remain committed to achieving our long-term
goal for wind power to generate 75% of our electricity consumption.
We are also installing dual fuel engines in haulage trucks,
initially at Herradura. The usage of Liquid Natural Gas has already
led to a 5% fall in greenhouse gas emissions. Both these projects
are excellent examples of how wise investment can benefit the
environment while also cutting costs.
Our social and environmental performance has consistently been
recognised by many organisations. In 2019, among other accolades,
we were placed first in the prestigious Integridad Corporativa
scheme, which ranked 500 large national and international companies
operating in Mexico for their corporate integrity.
Looking ahead
The coming year will see us continue to manage challenges, as we
make progress with the initiatives I have outlined in this
statement.
Production at our underground silver mines in 2020 is expected
to remain at a broadly similar level to 2019, as the anticipated
positive impact of the operating initiatives at the Fresnillo mine
is likely to be partly offset by the lower ore grade we expect at
Saucito.
Gold production is expected to decrease slightly mainly as a
result of lower production at Herradura.
We also anticipate that fixed costs will remain relatively high
during 2020. As a result, our financial performance could
temporarily deteriorate next year in the face of these pressures
before our cost management initiatives have an impact. An
improvement in operational performance is expected to contribute to
lowering the cost per tonne of ore milled as we continue to make
significant investment in efficiency initiatives, while we remain
committed to improved safety.
The broader environment is to a degree characterised by
uncertainty. Trade disagreements, particularly between the US and
China, together with ongoing political and economic issues
elsewhere including Europe, could lead to headwinds for the mining
industry. On the other hand, the greater uncertainty and risk of
conflicts in several points of the world, as well as the
coronavirus, could lead to higher precious metal prices.
Furthermore, there appears to be support for our industry at the
higher levels of the new Government in Mexico and we will continue
to work hard to ensure that mining is supported by all parts of the
federal and state administration.
But while we are striving to rise to the immediate challenges
confronting our business today, we are nevertheless moving forward
with certainty and vigour. Our assets are of high quality and our
pipeline continues to confirm promising prospects. Buoyed by a
clear strategy and supported by a talented and committed team, we
look ahead with confidence.
Octavio Alvídrez
- Chief Executive Officer
Financial review
The consolidated Financial Statements of Fresnillo plc are
prepared in accordance with International Financial Reporting
Standards (IFRS), as adopted by the EU. This Financial Review is
intended to convey the main factors affecting performance and to
provide a detailed analysis of the financial results in order to
enhance understanding of the Group's Financial Statements. All
comparisons refer to 2019 figures compared to 2018, unless
otherwise noted. The financial information and year-on-year
variations are presented in US dollars, except where indicated.
By following strict controls on cash, costs and expenses and
while adhering to our capex budgets, we have maintained a healthy
cash and other liquid funds (1) position and a low leverage ratio.
This has enabled us to invest in the business and deliver returns
to shareholders.
The following report presents how we have managed our financial
resources.
COMMENTARY ON FINANCIAL PERFORMANCE
2019 continued to be a challenging year for the Group. This was
reflected in the financial performance for the year, with gross
profit and EBITDA decreasing from 2018 by 40.9% and 26.3%
respectively and profit margins decreasing accordingly. We
maintained a solid financial position, with US$336.6 million in
cash and other liquid funds (1) as of 31 December 2019
notwithstanding paying dividends of US$142.2 million in accordance
with our policy, investing US$559.3 million in capex and spending
US$157.9 million on exploration to underpin our future growth.
Adjusted revenue increased slightly year-on-year due to higher
gold and silver prices, which were mostly offset by the lower
volumes of gold and silver sold. This slight increase was more than
offset by the increase in adjusted production costs [3] , higher
depreciation and the much smaller positive effect from changes in
inventory in 2019 compared to that in 2018 resulting from the gold
content in the leaching pads at Herradura being re-assessed. As a
result, gross profit and EBITDA decreased 40.9% and 26.3% over
2018.
INCOME STATEMENT
2019 2018 Amount Change
US$ million US$ million US$ million %
----------------------------------------- ------------ ------------ ------------ ------
Adjusted revenue (2) 2,270.2 2,243.4 26.8 1.2
----------------------------------------- ------------ ------------ ------------ ------
Total revenue 2,119.6 2,103.8 15.9 0.8
----------------------------------------- ------------ ------------ ------------ ------
Cost of sales (1,657.9) (1,323.1) (334.9) 25.3
----------------------------------------- ------------ ------------ ------------ ------
Gross profit 461.7 780.7 (319.0) (40.9)
----------------------------------------- ------------ ------------ ------------ ------
Exploration expenses 157.9 172.8 (14.9) (8.6)
----------------------------------------- ------------ ------------ ------------ ------
Operating profit 171.7 506.7 (335.0) (66.1)
----------------------------------------- ------------ ------------ ------------ ------
EBITDA (3) 674.0 915.1 (241.1) (26.3)
----------------------------------------- ------------ ------------ ------------ ------
Income tax expense including mining
rights (27.1) 134.0 (161.1) N/A
----------------------------------------- ------------ ------------ ------------ ------
Profit for the year 205.8 350.0 (144.2) (41.2)
----------------------------------------- ------------ ------------ ------------ ------
Profit for the year, excluding post-tax
Silverstream effects 172.0 339.5 (167.5) (49.3)
----------------------------------------- ------------ ------------ ------------ ------
Basic and diluted earnings per share
(US$/share) (4) 0.277 0.475 (0.198) (41.7)
----------------------------------------- ------------ ------------ ------------ ------
Basic and diluted earnings per share,
excluding post-tax Silverstream effects
(US$/share) 0.231 0.461 (0.230) (49.9)
----------------------------------------- ------------ ------------ ------------ ------
1 Cash and other liquid funds are disclosed in note 30(c) to the financial statements.
2 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
3 Earnings before interest, taxes, depreciation and amortisation
(EBITDA) is calculated as gross profit plus depreciation less
administrative, selling and exploration expenses.
4 The weighted average number of ordinary shares was 736,893,589
for 2019 and 2018. See note 17 in the consolidated financial
statements.
The Group's financial results are largely determined by the
performance at our operations. However, there are other factors
such as a number of macroeconomic variables that lie beyond our
control and which affect financial results. These include:
PRECIOUS METAL PRICES
In 2019, the average realised silver price increased by 3.9%
from US$15.5 per ounce in 2018 to US$16.1 per ounce in 2019, while
the average realised gold price rose 11.7% from US$1,269.1 per
ounce in 2018 to US$1,418.0 per ounce. In contrast, the average
realised lead and zinc by-product prices decreased 9.3% and 10.5%
year-on-year, to US$0.89 and US$1.15 per pound, respectively.
However, the Group was affected by the results of the one-off
five-year gold hedging programme entered into in 2014, and a series
of financial derivatives entered into in 2019 to hedge a portion of
its lead and zinc production, both of which are further described
below.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 31 December
2019 was $18.85 per US dollar, compared to $19.68 per US dollar at
the beginning of the year. The 4.3% spot revaluation had a
favourable effect on: i) the net monetary peso asset position,
which contributed to the US$4.5 million foreign exchange gain; and
ii) taxes and mining rights as the revaluation resulted in a
decrease in related deferred tax liabilities.
The average spot Mexican peso/US dollar exchange rate remained
broadly unchanged at $19.3 per US dollar (2018: $19.2 per US
dollar). As a result, there was an insignificant effect on the
Group's costs denominated in Mexican pesos (approximately 45% of
total costs) when converted to US dollars.
COST INFLATION
In 2019, cost inflation was 3.8%. The main components of our
cost inflation basket are listed below:
LABOUR
Unionised employees received on average a 7.5% increase in wages
in Mexican pesos, and administrative employees at the mines
received a 5.5% increase; when converted to US dollars, the
weighted average labour inflation was 6.5%.
ENERGY
ELECTRICITY
The Group's weighted average cost of electricity increased by
4.1% from 7.1 US cents per kW in 2018 to 7.4 US cents per kW in
2019. This increase was mainly due to the higher average generating
cost of the Comisión Federal de Electricidad (CFE), the national
utility.
DIESEL
The weighted average cost of diesel in US dollars increased 6.7%
to 87.9 US cents per litre in 2019, compared to 82.42 US cents per
litre in 2018.
OPERATING MATERIALS
Year
over
year
change
in unit
price
%
-------------------------------------------- --------
Sodium cyanide 4.4
-------------------------------------------- --------
Steel balls for milling 1.8
-------------------------------------------- --------
Steel for drilling 1.8
-------------------------------------------- --------
Lubricants 1.4
-------------------------------------------- --------
Tyres 0.8
-------------------------------------------- --------
Explosives 0.1
-------------------------------------------- --------
Other reagents (9.7)
-------------------------------------------- --------
Weighted average of all operating materials 1.2
-------------------------------------------- --------
Unit prices of the majority of operating materials remained
broadly stable in US dollar terms, with the exception being sodium
cyanide, which experienced year-on-year inflation of 4.4%. However,
this was partly offset by the decrease in the unit price of other
reagents, such as zinc sulphate. As a result, the weighted average
unit prices of all operating materials increased by 1.2% over the
year. The majority of these items are dollar-denominated.
CONTRACTORS
Agreements are signed individually with each contractor company
and include specific terms and conditions that cover not only
labour, but also operating materials, equipment and maintenance,
amongst others. Contractor costs are mainly denominated in Mexican
pesos and are an important component of our total production costs.
In 2019, increases granted to contractors, whose agreements were
due for review during the period, resulted in a weighted average
increase of 4.7% in US dollars.
MAINTENANCE
Unit prices of spare parts for maintenance increased slightly,
by 1.4% on average in US dollar terms.
OTHER costS
Other cost components include freight and insurance costs, which
increased by an estimated 10.3% and 2.5% in US dollars,
respectively. The remaining cost inflation components experienced
average inflation of 1.1% in US dollars over 2018.
The effects of the above external factors, combined with the
Group's internal variables, are further described below through the
main line items of the income statement.
REVENUE
CONSOLIDATED REVENUE (1) (US$ MILLIONS)
2019 2018 Amount Change
US$ million US$ million US$ million %
------------------------------- ------------ ------------ ------------ ------
Adjusted revenue (1) 2,270.2 2,243.4 26.8 1.2
------------------------------- ------------ ------------ ------------ ------
Gold, lead and zinc hedging (6.0) 1.6 (7.6) N/A
------------------------------- ------------ ------------ ------------ ------
Treatment and refining charges (144.6) (141.2) (3.4) 2.4
------------------------------- ------------ ------------ ------------ ------
Total revenue 2,119.6 2,103.8 15.9 0.8
------------------------------- ------------ ------------ ------------ ------
Adjusted revenue increased by US$26.8 million mainly as a result
of the increase in gold and silver prices. Total revenue remained
broadly unchanged at US$2,119.6 million.
1 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
ADJUSTED REVENUE (1) BY METAL (US$ MILLION)
2019 2018
------------------ ------------------
Volume Price Total
Variance Variance net change
US$ million % US$ million % US$ million US$ million US$ million %
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Silver 766.9 33.8 815.8 36.4 (81.1) 32.2 (48.9) (6.0)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Gold 1,202.8 53.0 1,118.1 49.8 (44.1) 128.8 84.7 7.6
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Lead 102.1 4.5 105.6 4.7 6.6 (10.2) 3.5 (3.3)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Zinc 198.4 8.7 203.9 9.1 16.9 (22.4) (5.5) (2.7)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Total adjusted revenue 2,270.2 100.0 2,243.4 100.0 (101.7) 128.5 26.8 1.2
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
The increase in gold and silver prices, partially offset by the
lower lead and zinc prices, resulted in a positive effect in
Adjusted revenue of US$128.5 million. This was mostly offset by the
US$101.7 million adverse effect of the lower volumes of silver and
gold sold, partially offset by the higher lead and zinc sales
volumes. Silver volumes sold were impacted by the lower production
at each of the silver underground mines, while the volumes of gold
sold were affected by the expected lower production from the Noche
Buena mine and the lower grade at San Julián veins.
ADJUSTED REVENUE BY METAL
2019 2018
------- ------ ------
Gold 53.0% 49.9%
------- ------ ------
Silver 33.8% 36.3%
------- ------ ------
Zinc 8.7% 9.1%
------- ------ ------
Lead 4.5% 4.7%
------- ------ ------
Total 100.0% 100.0%
------- ------ ------
Herradura continued to be the greatest contributor to Adjusted
revenue, representing 30.6% due to the slight increase of 1.8% in
volume of gold sold at a higher price. Saucito's contribution
remained broadly stable at 21.7% in 2019 (2018: 21.9%), while
Fresnillo contributed a lesser share of Adjusted revenue but
remained the third most important, contributing 15.9%. The
contribution to the Group's Adjusted revenue from the San Julián
mine decreased from 16.4% in 2018 to 15.0% in 2019, reflecting the
lower volumes of gold and silver sold. As expected, Noche Buena's
contribution continued to decrease from 9.4% in 2018 to 7.8% in
2019, reflecting the gradual depletion of the mine as it approaches
the end of its mine life. Ciénega's contribution to the Group's
Adjusted revenue increased slightly, from 8.3% in 2018 to 9.0% in
2019 as a result of the higher gold and silver prices and the
increase in lead and zinc volumes sold.
The contribution by metal and by mine to Adjusted revenues is
expected to change further in the future, as new projects are
incorporated into the Group's operations and as precious metal
prices fluctuate.
1 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
ADJUSTED REVENUE(1) BY MINE
2019 2018
---------------------------------------- ------- ----- ------- -----
Herradura 693.9 30.6% 608.2 27.1%
---------------------------------------- ------- ----- ------- -----
Saucito 493.4 21.7% 492.0 21.9%
---------------------------------------- ------- ----- ------- -----
Fresnillo 361.7 15.9% 378.3 16.9%
---------------------------------------- ------- ----- ------- -----
Ciénega 204.7 9.0% 187.1 8.3%
---------------------------------------- ------- ----- ------- -----
San Julián (Disseminated Ore Body)
(DOB) 184.5 8.1% 187.4 8.4%
---------------------------------------- ------- ----- ------- -----
Noche Buena 176.7 7.8% 211.4 9.4%
---------------------------------------- ------- ----- ------- -----
San Julián (Veins) 155.3 6.9% 179.1 8.0%
---------------------------------------- ------- ----- ------- -----
Total 2,270.2 100% 2,243.4 100%
---------------------------------------- ------- ----- ------- -----
VOLUMES OF METAL SOLD
% participation % participation
of each of each
2019 mine 2018 mine % change
------------------------- ------ --------------- ------ --------------- --------
Silver (koz)
------------------------- ------ --------------- ------ --------------- --------
Saucito 15,923 33.6 17,968 34.2 (11.4)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 11,778 24.8 13,890 26.4 (15.2)
------------------------- ------ --------------- ------ --------------- --------
San Julián (Veins) 4,215 8.9 5,255 10.0 (19.8)
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 7,368 15.5 7,806 14.9 (5.6)
------------------------- ------ --------------- ------ --------------- --------
Ciénega 5,330 11.2 5,459 10.4 (2.4)
------------------------- ------ --------------- ------ --------------- --------
Herradura 1,573 3.3 1,503 2.9 4.7
------------------------- ------ --------------- ------ --------------- --------
Noche Buena 23 0.0 7 0.0 228.6
------------------------- ------ --------------- ------ --------------- --------
Pyrites plant at Saucito 1,212 2.6 653 1.2 85.6
------------------------- ------ --------------- ------ --------------- --------
Total silver (koz) 47,422 100 52,541 100 (9.7)
------------------------- ------ --------------- ------ --------------- --------
Gold (koz)
------------------------- ------ --------------- ------ --------------- --------
Herradura 496 58.5 460 52.2 7.8
------------------------- ------ --------------- ------ --------------- --------
Noche Buena 105 12.4 167 18.9 (37.1)
------------------------- ------ --------------- ------ --------------- --------
San Julián (Veins) 62 7.3 77 8.7 (19.5)
------------------------- ------ --------------- ------ --------------- --------
Saucito 72 8.5 74 8.4 (2.7)
------------------------- ------ --------------- ------ --------------- --------
Ciénega 62 7.3 63 7.1 (1.6)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 46 5.4 37 4.2 24.3
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 1 0.1 1 0.1 0.0
------------------------- ------ --------------- ------ --------------- --------
Pyrites plant at Saucito 4 0.5 3 0.3 33.3
------------------------- ------ --------------- ------ --------------- --------
Total gold (koz) 848 100 882 100 (3.9)
------------------------- ------ --------------- ------ --------------- --------
Lead (t)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 19,544 39.8 18,097 37.2 8.0
------------------------- ------ --------------- ------ --------------- --------
Saucito 19,719 40.2 20,362 41.9 (3.2)
------------------------- ------ --------------- ------ --------------- --------
Ciénega 4,385 8.9 4,385 9.0 0.0
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 5,405 11.0 5,770 11.9 (6.3)
------------------------- ------ --------------- ------ --------------- --------
Total lead (t) 49,053 100 48,614 100 0.9
------------------------- ------ --------------- ------ --------------- --------
Zinc (t)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 26,350 33.5 26,248 36.3 0.4
------------------------- ------ --------------- ------ --------------- --------
Saucito 25,622 32.6 22,599 31.3 13.4
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 19,034 24.2 18,538 25.6 2.7
------------------------- ------ --------------- ------ --------------- --------
Ciénega 7,590 9.7 4,887 6.8 55.3
------------------------- ------ --------------- ------ --------------- --------
Total zinc (t) 78,596 100 72,272 100 8.8
------------------------- ------ --------------- ------ --------------- --------
Hedging
In 2019, a loss of US$6.0 million was recognised in the income
statement as a result of the hedging of gold, lead and zinc. This
compared unfavourably to the US$1.6 million gain registered in
2018. The following paragraphs outline our hedging activities and
explain the background to the 2019 loss.
In the second half of 2014, Fresnillo plc initiated a five-year
one-off hedging programme to protect the value of the investment
made in the acquisition of Newmont's minority stake (44%) in
Penmont. The hedging programme was executed for a total volume of
1,559,689 ounces of gold with monthly settlements until December
2019.
The table below illustrates the expiry of the derivatives over
the last five years of the hedging programme.
Concept 2019 2018 2017 2016 2015
------------------------ ------- ------- ------- ------- -------
Weighted floor (US$/oz) 1,100 1,100 1,100 1,100 1,100
------------------------ ------- ------- ------- ------- -------
Weighted cap (US$/oz) 1,424 1,423 1,424 1,438 1,431
------------------------ ------- ------- ------- ------- -------
Expired volume (oz) 346,152 366,432 324,780 220,152 266,760
------------------------ ------- ------- ------- ------- -------
(Loss)/gain recognised
in income (9.85) - - 0.05 1.02
------------------------ ------- ------- ------- ------- -------
Fresnillo plc's hedging policy remained unchanged for the
remainder of the portfolio, providing shareholders with full
exposure to gold and silver prices.
We hedged a portion of our by-product zinc production in the
first half of 2019 with maturities throughout the year, while in
the last quarter of 2019 we hedged a portion of our by-product lead
production with maturities in 2020. The table below illustrates the
expired hedging volume, the results in 2019 and the outstanding
balance for 2020.
As of 31 December
2019
-------------------
Concept Zinc Lead
--------------------------------- ---------- -------
Weighted floor (US$/tonne) 2,636 2,094
--------------------------------- ---------- -------
Weighted cap (US$/tonne) 3,085 2,290
--------------------------------- ---------- -------
Expired volume (tonne) 18,592 0
--------------------------------- ---------- -------
Gain (US$ dollars) 3.9 0
--------------------------------- ---------- -------
Total outstanding volume (tonne) 0 8,760
--------------------------------- ---------- -------
TREATMENT AND REFINING CHARGES
Treatment and refining charges (1) are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and
zinc concentrate increased in dollar terms by 4.0% and 51.7%,
respectively, compared to 2018, while silver refining charges
declined by 17.0% over the year as a result of the lower mine
supply of lead concentrates. The significant rise in the treatment
charge per tonne of zinc is explained by the increase in mine
supply, which is surpassing the limited worldwide smelting
capacity. The increase in treatment charges per tonne of lead and
zinc and reduction in silver charges, combined with the higher
volumes of zinc concentrates shipped from our mines to Met-Mex,
resulted in a 2.4% increase in treatment and refining charges set
out in the income statement in absolute terms when compared to
2018.
1 Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
COST OF SALES
2019 2018 Amount Change
Concept US$ million US$ million US$ million %
-------------------------------------- ------------ ------------ ------------ ------
Adjusted production costs (2) 1,173.0 952.0 221.0 23.2
-------------------------------------- ------------ ------------ ------------ ------
Depreciation 489.5 411.8 77.8 18.9
-------------------------------------- ------------ ------------ ------------ ------
Profit sharing 9,1 12.5 (3.4) (27.4)
-------------------------------------- ------------ ------------ ------------ ------
Change in work in progress and others (11.1) (53.6) 42.5 (79.3)
-------------------------------------- ------------ ------------ ------------ ------
Others (2.6) 0.4 (3.0) N/A
-------------------------------------- ------------ ------------ ------------ ------
Cost of sales 1,657.9 1,323.1 334.8 25.3
-------------------------------------- ------------ ------------ ------------ ------
2 Adjusted production costs is calculated as total production
costs less depreciation and profit sharing. The Company considers
this a useful additional measure to help understand underlying
factors driving production costs in terms of the different stages
involved in the mining and plant processes, including efficiencies
and inefficiencies as the case may be and other factors outside the
Company's control such as cost inflation or changes in accounting
criteria.
Cost of sales increased 25.3% to US$1,657.9 million in 2019. The
US$334.8 million increase is explained by the following combination
of factors:
-- An increase in Adjusted production costs (+US$221.1 million).
This was primarily due to: i) an increase in development works
mainly at Fresnillo, San Julián veins and Saucito (+US$56.9
million); ii) additional maintenance, operating materials and
contractors associated with longer haulage distances, narrower
veins, better equipment availability and the infill drilling
programme mainly at Herradura, Ciénega and San Julián DOB (+US$46.2
million); iii) higher stripping costs expensed at Herradura
following the reassessment of the number of mining components from
two to one effective from 2H 2018 (+US$46.1 million); iv) cost
inflation of 3.8% (+US$35.4 million); v) the additional adjusted
production costs associated with the first complete year of
operations at the Pyrites Plant at Saucito and the second line of
the Dynamic Leaching Plant at Herradura (+US$33.4 million); and vi)
other costs (+US$3.1 million).
-- Depreciation (+US$77.8 million). This is mainly due to the
increased depletion factors, the full year of operation at the
Pyrites plant and the second line of the dynamic leaching plant and
the amortisation of capitalised mining works.
-- The decrease in the change in work in progress of US$42.5
million (of which -US$85.6 million related to the reassessment of
gold contents in the leaching pads at Herradura and US$43.1 million
were explained by the variation of change in inventories excluding
the latter effect). Change in work in progress was -US$11.1 million
in 2019 mainly as a result of the increase in unit cost at
Herradura and Noche Buena, together with an increase in the volume
of inventories at the dynamic leaching plants. This compared
negatively to the -US$53.6 million registered in 2018 mainly as a
result of the re-assessment of the gold content in the leaching
pads at Herradura (see notes (2c) and (5) in the notes to the
financial statements).
These negative effects were partly offset by year-on-year
decrease in:
-- Profit sharing (-US$3.4 million) and others (-US$3.0 million).
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST
(AISC)
Cost per tonne is a key indicator to measure the effects of
changes in production costs and cost control performance at each
mine. This indicator is calculated as total production costs, plus
ordinary mining rights, less depreciation, profit sharing and
exchange rate hedging effects, divided by total tonnage processed.
We have included cost per tonne hauled/moved as we believe it is a
useful indicator to thoroughly analyse cost performance for the
open pit mines.
Change
Cost per tonne 2019 2018 %
------------------------ -------------------- ---- ---- ------
Fresnillo US$/tonne milled 62.7 49.4 27.0
------------------------ -------------------- ---- ---- ------
Saucito US$/tonne milled 67.8 60.1 12.8
------------------------ -------------------- ---- ---- ------
Ciénega US$/tonne milled 78.3 70.8 10.5
------------------------ -------------------- ---- ---- ------
San Julián (Veins) US$/tonne milled 72.0 57.4 25.5
------------------------ -------------------- ---- ---- ------
San Julián (DOB) US$/tonne milled 39.1 36.2 8.0
------------------------ -------------------- ---- ---- ------
Herradura US$/tonne deposited 18.1 13.2 37.0
------------------------ -------------------- ---- ---- ------
Herradura US$/tonne hauled 3.3 3.1 7.8
------------------------ -------------------- ---- ---- ------
Noche Buena US$/tonne deposited 9.8 6.8 45.2
------------------------ -------------------- ---- ---- ------
Noche Buena US$/tonne hauled 2.5 2.1 18.6
------------------------ -------------------- ---- ---- ------
Cash cost per ounce, calculated as total cash cost (cost of
sales plus treatment and refining charges, less depreciation) less
revenue from by-products divided by the silver or gold ounces sold,
when compared to the corresponding metal price, is an indicator of
the ability of the mine to generate competitive profit margins.
Fresnillo: Mainly due to an increase in development works and
maintenance activities, together with increased consumption of
operating materials. Additionally, cost inflation for this mine was
4% mainly due to contractors and labour.
Saucito: Mainly due to the full year of operations of the new
pyrites plant following its commissioning at the end of 1H 2018;
cost inflation for this mine was 4.1% primarily due to contractors,
operating materials and labour.
Ciénega: Primarily due to increased contractor, operating
materials and labour costs.
San Julián (Veins): Mainly due to the increase in
development.
San Julián (DOB): Mainly due to the increased consumption of
operating materials to improve stability in certain areas.
Herradura: Mainly due to the increase in maintenance and higher
consumption of operating materials associated with longer haulage
distances and the increased stripping costs expensed following the
reassessment of the number of mining components from two to one.
Additionally, cost inflation for this mine was 3.2% mainly due to
diesel, maintenance and labour
Noche Buena: Primarily as a result of lower economies of scale
due to the decrease in volume of ore processed, winding down as it
approaches it nears end of mine life.
Change
Cash cost per ounce (3) 2019 2018 %
------------------------ --------------------- ----- ----- ------
Fresnillo US$ per silver ounce 2.3 0.5 360.0
------------------------ --------------------- ----- ----- ------
Saucito US$ per silver ounce 2.3 1.0 130.0
------------------------ --------------------- ----- ----- ------
Ciénega US$ per gold ounce -0.2 25.9 N/A
------------------------ --------------------- ----- ----- ------
San Julián (Veins) US$ per silver ounce 0.8 (3.6) N/A
------------------------ --------------------- ----- ----- ------
San Julián (DOB) US$ per silver ounce 7.0 5.7 23.6
------------------------ --------------------- ----- ----- ------
Herradura US$ per gold ounce 818.6 504.0 62.4
------------------------ --------------------- ----- ----- ------
Noche Buena US$ per gold ounce 847.8 735.4 15.3
------------------------ --------------------- ----- ----- ------
Fresnillo: Principally due to lower silver ore grade, higher
cost per tonne and higher treatment charges, partially mitigated by
the higher by product credits.
Saucito: Mainly as a result of the higher cost per tonne , the
lower silver grade and the higher treatment charges, partially
mitigated by the increase in by-product credits per ounce of silver
resulting from the higher price of gold and increased volume of
zinc sold.
Ciénega: Primarily due to the higher by-product credits per gold
ounce due to the increase in silver price and increased base metal
contents sold. This was partially offset by the higher cost per
tonne; the decrease in silver grade and higher treatment and
refining charges.
San Julián (Veins): Mainly due to the lower ore grade and higher
cost per tonne, mitigated by higher by-product credits per ounce of
silver.
San Julián (DOB): Mainly explained by the lower ore grade
achieved and higher treatment and refining charges resulting from
the increase in volumes of lead and zinc concentrates send to
Met-Mex.
Herradura: A result of the higher cost per tonne and the
reassessment of the number of mining components from two to
one.
Noche Buena: Due to higher cost per tonne.
In addition to the traditional cash cost, the Group is reporting
all-in sustaining costs (AISC), in accordance with the guidelines
issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus
on-site general, corporate and administrative costs, community
costs related to current operations, capitalised stripping and
underground mine development, sustaining capital expenditures and
remediation expenses.
We consider all-in sustaining costs to be a reasonable indicator
of a mine's ability to generate free cash flow when compared with
the corresponding metal price. We also believe it is a means to
monitor not only current production costs, but also sustaining
costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
ALL-IN SUSTAINING COST
All-in sustaining cost Change
per ounce 2019 2018 %
------------------------ --------------------- -------- -------- ------
Fresnillo US$ per silver ounce 13.54 8.92 51.8
------------------------ --------------------- -------- -------- ------
Saucito US$ per silver ounce 10.97 8.64 27.0
------------------------ --------------------- -------- -------- ------
Ciénega US$ per gold ounce 1,212.14 1,413.87 (14.3)
------------------------ --------------------- -------- -------- ------
San Julián (Veins) US$ per silver ounce 14.79 5.05 192.9
------------------------ --------------------- -------- -------- ------
San Julián (DOB) US$ per silver ounce 10.79 10.01 7.8
------------------------ --------------------- -------- -------- ------
Herradura US$ per gold ounce 962.99 806.73 19.4
------------------------ --------------------- -------- -------- ------
Noche Buena US$ per gold ounce 922.86 1,029.68 (10.4)
------------------------ --------------------- -------- -------- ------
Fresnillo: The US$4.6 per ounce increase was explained by higher
capitalised mine development per ounce, an increase in sustaining
capex per ounce and the higher cash cost.
Saucito: Mainly due to higher capitalised mine developments per
ounce and increase in cash cost, mitigated by lower sustaining
capex per ounce.
Ciénega: Primarily driven by lower sustaining capex per ounce
and the factors benefiting cash cost.
San Julián (Veins): Due to higher capitalised mine development
per ounce, increased sustaining cost per ounce and the factors
affecting cash cost.
San Julián (DOB): Driven by the higher sustaining capex per
ounce and the increase in cash cost, mitigated by a decrease in
capitalised mine development per ounce.
Herradura: Mainly due to the higher cash costs, mitigated by the
decrease in capitalised stripping per ounce and lower sustaining
capex per ounce.
Noche Buena: Result of the lower capitalised stripping per
ounce, partly offset by the higher cash cost.
GROSS PROFIT
Gross profit, excluding hedging gains and losses, is a key
financial indicator of profitability at each business unit and the
Fresnillo Group as a whole.
Total gross profit, net of hedging gains and losses, decreased
by 40.9% to US$461.7 million in 2019.
The US$319.0 million decrease in gross profit was mainly
explained by: i) the much smaller positive effect from changes in
inventory in 2019 compared to that in 2018 (-US$96.1 million, of
which -US$85.6 million was explained by the variation of change in
work in progress resulting from the reassessment of gold contents
in the leaching pads and -US$10.5 million resulted from the imputed
impact on revenues); ii) the lower silver ore grades at the silver
underground mines, mitigated by higher grades at Herradura and
Noche Buena, (-US$80.1 million); iii) higher depreciation (-US$77.8
million); iv) the decrease in volume of ore processed, mainly at
Noche Buena (-US$62.2 million); iv) the increased development works
(-US$56.9 million); v) the additional costs incurred due to
increased requirements for maintenance, operating materials and
contractors, associated with longer haulage distances, narrower
veins, better equipment availability and tighter infill drilling
(-US$46.1 million); vi) the increased stripping costs expensed
following the reassessment of the number of mining components from
two to one at Herradura (-US$46.1 million); vii) cost inflation
(-US$35.4 million); and viii) others (-US$8.4 million). These
adverse factors were partly mitigated by: i) the higher average
realised gold and silver prices (+US$128.5 million); ii) the
variation of change in inventories excluding the effect of the 2018
reassessment of gold contents in the leaching pads at Herradura
(+US$43.1 million); and iii) increased gross profit at pyrites
plant and second line of the dynamic leaching plant resulting from
its first complete year of operations (+US$18.5 million).
With the exception of Ciénega, gross profit decreased
year-on-year at all mines. Herradura and Saucito remained the
largest contributors to the Group's consolidated gross profit, with
both recording small increases in their percentage share. In
contrast, the lower ore grades at San Julián, together with the
increased production costs and depreciation, resulted in a gross
loss in 2019. Fresnillo and Noche Buena's share of the Group's
total gross profit remained steady at 18.8% and 7.4% respectively,
while Ciénega's contribution increased slightly to 7.3%.
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING
HEDGING GAINS AND LOSSES
Change
---------------------
2019 2018 Amount
US$ million % US$ million % US$ million %
------------------------ ------------ ----- ------------ ---- ------------ -------
Herradura 183.2 38.9 278.4 36.2 (95.2) (34.2)
------------------------ ------------ ----- ------------ ---- ------------ -------
Saucito 131.2 27.9 177.8 23.1 (46.6) (26.2)
------------------------ ------------ ----- ------------ ---- ------------ -------
Fresnillo 88.7 18.9 144.9 18.9 (56.2) (38.8)
------------------------ ------------ ----- ------------ ---- ------------ -------
Noche Buena 40.2 8.5 67.2 8.7 (27.0) (40.2)
------------------------ ------------ ----- ------------ ---- ------------ -------
Ciénega 34.5 7.3 31.9 4.2 2.6 8.2
------------------------ ------------ ----- ------------ ---- ------------ -------
San Julián (7.3) (1.5) 68.4 8.9 (75.7) (110.7)
------------------------ ------------ ----- ------------ ---- ------------ -------
Total for operating
mines 470.5 100 768.6 100 (298.1) (38.8)
------------------------ ------------ ----- ------------ ---- ------------ -------
Metal hedging and other
subsidiaries (8.8) 12.1 (20.9) N/A
------------------------ ------------ ----- ------------ ---- ------------ -------
Total Fresnillo plc 461.7 780.7 319.0 (40.9)
------------------------ ------------ ----- ------------ ---- ------------ -------
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses increased 15.7% from
US$83.3 million in 2018 to US$96.4 million, mainly due to an
increase in advisory services provided by consultants (legal,
safety, taxes, geological, amongst others), and increased corporate
services provided by Servicios Industriales Peñoles, S.A.B de C.V.,
in relation to new operations, namely the pyrites plant and the
second line of the dynamic leaching plant, and approved development
projects.
EXPLORATION EXPENSES
Exploration Exploration Capitalised Capitalised
expenses expenses expenses expenses
Business unit/project (US$ millions) 2019 2018 2019 2018
------------------------------------- ----------- ----------- ----------- -----------
Ciénega 7.3 9.9 - -
------------------------------------- ----------- ----------- ----------- -----------
Fresnillo 14.0 15.6 - -
------------------------------------- ----------- ----------- ----------- -----------
Herradura 14.4 14.9 - -
------------------------------------- ----------- ----------- ----------- -----------
Saucito 14.9 16.3 - -
------------------------------------- ----------- ----------- ----------- -----------
Noche Buena 0.4 2.0 - -
------------------------------------- ----------- ----------- ----------- -----------
San Ramón 2.0 2.4 - -
------------------------------------- ----------- ----------- ----------- -----------
San Julián 17.6 12.2 - -
------------------------------------- ----------- ----------- ----------- -----------
Orisyvo 2.0 5.2 - -
------------------------------------- ----------- ----------- ----------- -----------
Centauro Deep 0.5 5.4 1.7 1.7
------------------------------------- ----------- ----------- ----------- -----------
Guanajuato 19.4 16.9 2.8 1.1
------------------------------------- ----------- ----------- ----------- -----------
Juanicipio 0.0 0.0 5.4 4.8
------------------------------------- ----------- ----------- ----------- -----------
Others 65.4 72.0 2.3 0.8
------------------------------------- ----------- ----------- ----------- -----------
Total 157.9 172.8 12.2 8.4
------------------------------------- ----------- ----------- ----------- -----------
Exploration expenses decreased as planned by 8.6% from US$172.8
million in 2018 to US$157.9 million in 2019, in line with the
strategy to focus exploration at specific targets, including our
current operating districts and advanced exploration projects. An
additional US$12.2 million was capitalised, mainly relating to
exploration expenses at the Juanicipio project, Guanajuato and
Centauro Deep. As a result, risk capital invested in exploration
totalled US$170.1 million in 2019, a 6.1% decrease over 2018. In
2020, total invested in exploration is expected to be approximately
US$150 million, of which US$15 million is expected to be
capitalised.
EBITDA
2019 2018 Amount
US$ million US$ million US$ million Change%
------------------------------- ------------ ------------ ------------ -------
Gross profit 461.7 780.7 (319.0) (40.9)
------------------------------- ------------ ------------ ------------ -------
+ Depreciation 489.5 411.8 77.8 18.9
------------------------------- ------------ ------------ ------------ -------
* Administrative expenses (96.4) (83.3) (13.1) 15.7
------------------------------- ------------ ------------ ------------ -------
* Exploration expenses (157.9) (172.8) 14.9 (8.6)
------------------------------- ------------ ------------ ------------ -------
* Selling expenses (22.9) (21.2) (1.6) 7.6
------------------------------- ------------ ------------ ------------ -------
EBITDA 674.0 915.1 (241.1) (26.3)
------------------------------- ------------ ------------ ------------ -------
EBITDA margin 31.8 43.5
------------------------------- ------------ ------------ ------------ -------
EBITDA is a gauge of the Group's financial performance and a key
indicator to measure debt capacity. It is calculated as gross
profit plus depreciation, less administrative, selling and
exploration expenses. In 2019, EBITDA decreased 26.3% to US$674.0
million mainly due to the lower gross profit. As a result, EBITDA
margin expressed as a percentage of revenue decreased, from 43.5%
in 2018 to 31.8% in 2019.
OTHER OPERATING INCOME AND EXPENSE
In 2019, a net loss of US$12.8 million was recognised in the
income statement mainly as a result of the disposal of assets,
environmental activities and donations. This compared unfavourably
to the US$3.3 million net gain recognised in 2018 mainly as a
result of the partial reimbursement for an insurance claim at
Saucito.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The total revaluation
effect recorded in the 2019 income statement was a gain of US$48.3
million. This includes: i) a positive non-cash revaluation effect
of US$6.7 million mainly as a result of the market update of
certain variables such as the forward price of silver and the
discount rate used; partially offset by the updating of the Sabinas
production plan, which included a new estimate of reserves and
resources; and ii) a US$41.6 million non-cash gain mainly generated
by the unwinding of the discounted values. The total revaluation
effect recorded in 2018 was a US$15.0 million gain.
Since the IPO, cumulative cash received has been US$653.6
million. The Group expects that further unrealised gains or losses
will be taken to the income statement in accordance with silver
price cyclicality or changes in the variables considered in valuing
this contract. Further information related to the Silverstream
contract is provided in the balance sheet section and in notes 13
and 29 to the consolidated financial statements.
FINANCE COSTS
Net finance costs of US$46.5 million compared unfavourably to
the US$26.9 million recorded in 2018. The 2019 net finance costs
mainly reflected: i) the interest on the US$800 million principal
amount of 5.5% Senior Notes, net of interest received and
capitalised; and ii) US$15.7 million in interest and surcharges,
which resulted from aligning the tax treatment of mining works
across the Group's underground mines to the agreement reached
between SAT, Prodecon and Fresnillo plc relating to years 2014 to
2018, which was paid in 2019 (the voluntary tax amendment).
Detailed information is provided in note [X] to the financial
statements. A portion of the interests from the Senior Notes are
capitalised, hence not included in finance costs. The amounts
capitalised in 2019 and 2018 were similar so the year on year
impact was immaterial.
FOREIGN EXCHANGE
A foreign exchange gain of US$5.1 million was recorded as a
result of the realised transactions in the year and the 4.3%
revaluation of the Mexican peso against the US dollar over the year
on the value of peso-denominated net monetary assets. This compared
positively against the US$8.1 million foreign exchange loss
recognised in 2018.
The Group enters into certain exchange rate derivative
instruments to manage its exposure to foreign exchange risk. The
aggregate effect on income in the year was a loss of US$776,661,
which compared negatively to the loss of US$321,873 registered in
2018.
TAXATION
A corporate income tax credit of US$8.0 million arose in the
current year which compared favourably to the US$120.6 million
charge in 2018. The effective tax rate, excluding the special
mining rights, was -4.5% (24.9% in 2018). The reason for the
negative tax rate was the significant permanent differences between
the tax and accounting bases, together with the low level of profit
before income tax. The permanent differences were mainly related
to: i) the revaluation of the Mexican peso which had an important
impact on the tax value of assets and liabilities that are
denominated in Mexican pesos (US$37.1 million); ii) the inflation
rate which impacted the inflationary uplift of the tax base for
assets and liabilities (US$17.1 million); iii) the tax credit
related to the special tax on diesel (US$10.0 million); iv) a new
border zone tax benefit which benefited the Herradura and Noche
Buena operations (US$6.4 million); and v) the effect recorded in
the year in respect of the voluntary tax amendment relating to the
tax treatment for mining works at underground mines for the years
2014 to 2018 (US$5.1 million).
A mining rights credit of US$19.1 million arose in 2019 compared
to a US$13.3 million charge in 2018. The main reason for the
negative mining rights was the effect that the voluntary tax
amendment relating to the tax treatment for mining works for the
years 2014 to 2018 had on the deferred mining rights.
PROFIT FOR THE YEAR
Profit for the year decreased from US$350.0 million to US$205.8
million in 2019, a 41.2% decline year-on-year as a result of the
factors described above.
Excluding the effects of the Silverstream contract, profit for
the year decreased from US$339.5 million to US$172.0 million.
CASH FLOW
A summary of the key items from the cash flow statement is set
out below:
2019 2018 Amount Change
US$ million US$ million US$ million %
------------------------------------------- ------------ ------------ ------------ ------
Cash generated by operations before
changes in working capital 685.5 930.7 (245.2) (26.3)
------------------------------------------- ------------ ------------ ------------ ------
(Increase)/decrease in working capital (56.6) (127.9) 71.3 (55.7)
------------------------------------------- ------------ ------------ ------------ ------
Taxes and employee profit sharing paid (193.0) (214.4) 21.4 (10.0)
------------------------------------------- ------------ ------------ ------------ ------
Net cash from operating activities 435.9 588.4 (152.5) (25.9)
------------------------------------------- ------------ ------------ ------------ ------
Silverstream contract 24.3 36.3 (12.0) (33.1)
------------------------------------------- ------------ ------------ ------------ ------
Purchase of property, plant & equipment (559.3) (668.7) 109.4 (16.4)
------------------------------------------- ------------ ------------ ------------ ------
Dividends paid to shareholders of the
Company (142.2) (298.1) 155.9 (52.3)
------------------------------------------- ------------ ------------ ------------ ------
Net interest (paid) (32.9) (15.7) (17.2) 109.6
------------------------------------------- ------------ ------------ ------------ ------
Net increase in cash during the period
after foreign exchange differences (224.2) (335.2) 111.0 (33.1)
------------------------------------------- ------------ ------------ ------------ ------
Cash and other liquid funds at 31 December
(1) 336.6 560.8 (224.2) (40.0)
------------------------------------------- ------------ ------------ ------------ ------
1 Cash and other liquid funds are disclosed in note 30(c) to the financial statements.
Cash generated by operations before changes in working capital
decreased by 26.3% to US$685.5 million, mainly as a result of the
lower profits generated in the year. Working capital increased
US$56.6 million mainly due to: i) higher trade and other
receivables resulting from higher precious metals prices and an
increase in VAT receivables (US$39.2 million); ii) increased ore
inventories in the leaching pads at Herradura and Noche Buena
(US$28.7 million); and iii) an increase in prepayments and other
assets (US$3.3 million). This increase in working capital was
partly offset by an increase in trade and other payables (US$14.6
million).
Taxes and employee profit sharing paid decreased 10.0% over 2018
to US$193.0 million. This included a US$39.7 million cash payment
of income tax and special mining rights related to the amendment in
the treatment of mining works across the underground mines. For
further details, please see note 10 to the financial statements.
The main reason for the 10% decrease was that the Group was able to
recover US$45.7 million of income tax receivables.
As a result of the above factors, net cash from operating
activities decreased 25.9% from US$588.4 million in 2018 to
US$435.9 million in 2019.
Other sources of cash were the proceeds of the Silverstream
contract of US$24.3 million and capital contributions from minority
shareholders in subsidiaries of US$53.3 million.
Main uses of funds were:
i) purchase property, plant and equipment for a total of
US$559.3 million, a 16.4% decrease over 2018. Capital expenditures
for 2019 are further described below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
2019 US$
million
---------------------------- -------- ------------------------------------------
Fresnillo mine 172.8 Mine development and purchase
of in-mine equipment, including
a tunnel boring machine, deepening
of the San Carlos shaft and the
construction of the second phase
of the Pyrites plant and the optimisation
of the beneficiation plant.
---------------------------- -------- ------------------------------------------
Saucito mine 126.4 Development, replacement of in-mine
equipment and deepening of the
Jarillas shaft.
---------------------------- -------- ------------------------------------------
Herradura mine 37.5 Sustaining capex, construction
of leaching pad and land acquisition.
---------------------------- -------- ------------------------------------------
San Julián veins and 65.3 Mine development, construction
DOB of a tailings dam and water reservoir
and purchase of in-mine equipment.
---------------------------- -------- ------------------------------------------
Ciénega mine 58.2 Development, replacement of in-mine
equipment and construction of
a tailings dam.
---------------------------- -------- ------------------------------------------
Noche Buena mine 5.7 Implementation of the Carbon in
Column process, construction of
leaching pad and anti-collision
system
---------------------------- -------- ------------------------------------------
Juanicipio project 86.2 C onstruction of ramps and exploration
expenditure
---------------------------- -------- ------------------------------------------
Other 7.2
---------------------------- -------- ------------------------------------------
Total purchase of property,
plant and equipment 559.3
---------------------------- -------- ------------------------------------------
ii) Dividends paid to shareholders of the Group in 2019 totalled
US$142.2 million, a 52.3% decrease over 2018, in line with our
dividend policy which includes a consideration of profits generated
in the year. The 2019 payment included the final 2018 dividend of
US$123.1 million and the 2019 interim dividend paid in September of
US$19.2 million.
iii) Net finance expenses of US$32.9 million, mainly reflecting
the interest paid in relation with the issuance of the US$800
million principal amount of 5.500% Senior Notes, and the interest
and surcharges which resulted from the voluntary tax amendment.
The sources and uses of funds described above resulted in a
decrease in net cash of US$224.2 million (net decrease in cash and
other liquid assets), which combined with the US$560.8 million
balance at the beginning of the year resulted in cash and other
liquid assets of US$336.6 million at the end of 2019.
BALANCE SHEET
Fresnillo plc continued to maintain a solid financial position
with cash and other liquid funds (1) of US$336.6 million as of 31
December 2019, albeit decreasing 40.0% versus December 2018, as
explained above.
Inventories increased 8.6% to US$363.7 million mainly as a
result of the increase in inventories of gold on the leaching pads
at Herradura.
Trade and other receivables increased 12.1% to US$517.8 million
mainly as a result of an increase in value added tax recoverable
[and the higher precious metals prices, which increased the
accounts receivables with Met-Mex]. The increase in value added tax
recoverable resulted mainly from the additional review procedures
set out by the Mexican tax authorities to validate and authorise
reimbursement of balances to taxpayers, thus resulting in delays in
reimbursements. Management is actively working to ensure that
requirements have been met in order to reduce the time to recover
VAT receivable balances.
The change in the value of the Silverstream derivative from
US$519.1 million at the beginning of the year to US$541.3 million
as of 31 December 2019 reflects proceeds of US$26.2 million
corresponding to 2019 (US$20.9 million in cash and US$5.3 million
in receivables) and the Silverstream revaluation effect in the
income statement of US$48.4 million.
The net book value of property, plant and equipment was
US$2,813.4 million at year end, representing a 4.0% increase over
2018. The US$108.1 million increase was mainly due to the
advancement of development projects; capitalised development works;
purchase of additional in-mine equipment; and the construction of
leaching pads at Herradura and Noche Buena.
The Group's total equity was US$3,278.7 million as of 31
December 2019, a 4.8% increase over 2018. This was mainly explained
by the increase in retained earnings, reflecting the 2018 profit
and the net unrealised gains on cash flow hedges.
1 Cash and other liquid funds are disclosed in note 30(c) to the financial statements.
DIVIDS
Based on the Group's 2019 performance, the Directors have
recommended a final dividend of 11.9 US cents per Ordinary Share,
which will be paid on 2 June 2020 to shareholders on the register
on 24 April 2020. The dividend will be paid in UK pounds sterling
unless shareholders elect to be paid in US dollars. This is in
addition to the interim dividend of 2.6 US cents per share
amounting to US$19.2 million. This final dividend is lower than the
previous year due to the lower profit in 2019, and remains in line
with the Group's dividend policy.
The corporate income tax reform introduced in Mexico in 2014
created a withholding tax obligation of 10% relating to the payment
of dividends, including to foreign nationals.
Historically the Company has been making dividend payments out
of retained earnings generated before the tax reform came into
force and no withholding tax has therefore been applicable. We
expect that dividend payments relating to 2019 and future years
will attract the withholding obligation. However, foreign
shareholders may be able to recover such tax depending on their tax
residence and the existence of double taxation agreements.
MANAGING OUR RISKS AND OPPORTUNITIES
Our risk management process aims to strike a balance between
mitigating and monitoring our risks, and maximising the potential
reward. We have a structured internal risk management process in
place to identify risks while simultaneously taking into account
the views and interests of our stakeholders.
Our risk management framework reflects the importance of risk
awareness across the Group. The framework enables us to identify,
assess, prioritise and manage risks in order to deliver the value
creation objectives defined in our business model.
Risk management system
Our risk management system is based on risk identification,
assessment, prioritisation, mitigation and monitoring processes,
which are continually evaluated, improved and enhanced in line with
best practice.
In addition to our established risk management activities, our
executives - including operations managers, the controllership
group, HSECR and exploration managers - regularly engage in
strengthening the effectiveness of our current controls. This
supports the executives and the Board in each of their
responsibilities.
The 2018 UK Corporate Governance Code covers emerging risks for
the first time, and this has required the Board to carry out a
robust assessment of the Company's emerging risks, disclose
procedures to identify them and also explain how these are being
managed.
Within the system's identification phase, we capture emerging
risks that could arise as a result of new developments that have a
chance of impacting Fresnillo, either at a macro or operational
level. To strengthen our emerging risks management framework,
during the last quarter of 2019 and early 2020 we carried out
activities to: (1) define the emerging risk concept for Fresnillo;
(2) deploy effective monitoring mechanisms; (3) carry out horizon
scanning to consider disruptive scenarios, and; (4) implement
mitigating control actions and enhance our risk awareness culture.
This process involved workshops, surveys and meetings with the
Executive Committee, business unit leaders, support and corporate
areas, as well as suppliers, contractors and customers. We also
consulted third party information from global risk reports,
academic publications, risk consulting experts and industry
benchmarks.
We define emerging risks as new manifestations of risk that
cannot yet be fully assessed, risks that are known to some degree
but are not likely to materialise or have an impact for several
years, or risks that we are not aware of but that could, due to
emerging macro trends in the mid or long term, have significant
implications for our ability to achieve our strategic goals.
An example of an emerging risk is a water crisis, which we
define as the lack of sufficient available water resources to meet
the consumption demanded by a region. Such an outcome could involve
water stress, water shortage or loss of a water source. This risk
could represent a long-term threat to our business, given society's
increasing demand for sustainable working practices.
We have a number of mitigation activities in place regarding
water stewardship. Examples include: evaluating water risk using
the aqueduct tool from the World Resources Institute (WRI);
carrying out an Environmental Impact Assessment (EIA) of irrigation
and drainage projects to gain knowledge of water resources and
their vulnerability on a local and regional scale; respecting our
water quotas, monitoring our discharges and taking action to ensure
that they adhere to water quality regulations; cooperating with
water authorities and other stakeholders, including communities, to
increase water access; implementing closed water circuits to
eliminate the need to discharge processed water into water streams;
reusing wastewater from municipalities and our own operations and
camps, and; accounting for water use, using the Water Accounting
Framework proposed by the Minerals Council of Australia. From 2020
onwards, emerging risk assessment will be embedded as part of the
principal and individual risk management process.
2019 risk assessment
As part of our bottom-up process, each business unit head
determined the perceived level of risk for their individual unit's
risk universe. Executive management then reviewed and challenged
each perceived risk level, and compared it to Fresnillo plc's risk
universe (109) as a whole. The results of this exercise were used
as an additional input to define the Group's principal risks. We
conducted the same risk analysis on advanced projects, detailing
the specific risks faced by each project according to their unique
characteristics and conditions.
During our 2019 risk assessment exercise, 144 people provided
input to evaluate 109 risks across all our operations, advanced
projects, exploration offices, and support and corporate areas.
The ERM narrowed down our 109 risks into major risks which are
monitored by executive management and the Audit Committee. We then
further consolidated these into 12 principal risks which are
closely monitored by the Board of Directors.
Following this exercise, there were no changes to the principal
risks identified, however the likelihood and potential impact
increased in respect of Safety, Union Relations, Exploration and
Projects.
1.- Impact of metal prices and global macroeconomic developments
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Macroeconomic events Our hedging policy High for metal prices,
could create an adverse remains Medium for all other
impact on our sales guided by the principle macroeconomic
and profits, and potentially of providing shareholders developments
the economic viability with full exposure to
of projects. These events gold and silver prices. RISK RATING (relative
include: However, following the position)
* A decrease in precious metal prices, which is the acquisition of 44% of 2019: Very high (1)
primary driver for the risk . The average realised Penmont (and associated 2018: Very high (1)
price for gold increased year-on-year (+11.7% vs companies), we initiated Change in risk level
2018) while the average realised price of silver rose a specific hedging : No change (=)
by 3.9%. programme
to protect the value
of the investment made DESCRIPTION OF RISK
* Revaluation of the Mexican peso . In 2019, the peso in the acquisition, LEVEL
was devalued by 4.26% versus the average spot using a collar structure We continue to perceive
exchange rate of the US dollar. to allow partial this risk level as very
continued high. According to the
exposure to gold prices. majority of gold and
* General inflation in Mexico . This was 2.8% in The volume associated silver financial
Mexican peso terms during 2019. The specific with this phased hedging analysts,
inflation affecting the Company was 3.8% in US dollar programme was strictly the volatility of metal
terms. limited to up to 44% prices is expected to
of production associated increase. Medium term
with the acquired Penmont projections indicate
* A decrease in the price of our by-products . In 2019, assets and was not stronger and more stable
the average realised prices for lead and zinc extended prices due to
decreased 9.3% and 10.5% respectively, over the to other assets in the unpredictable
previous year. Group. The initial total global conditions which
volume hedged was include increased
1,559,689 geopolitical
oz and by the end of uncertainty, low and
LINK TO STRATEGY (1-2-3) 2019, the final portion in places negative
* Growth pipeline of the programme had yielding
expired (346,152 oz) government bonds, and
with a loss of US$9.8 the perception of a
* Development projects million. Fresnillo plc slowing global economy.
is now fully exposed
to movements in the
* Mines in operation gold and silver prices.
We are not precluded
from entering into
derivatives
KEY RISK INDICATORS to minimise our exposure
* Gross profit sensitivity to the percentage change in to changes in the prices
precious metal prices and to the Mexican peso/US of lead and zinc
dollar exchange rate. by-products.
In 2019, the Group hedged
a portion of its
* EBITDA sensitivity to the percentage change in metal by-product
prices and to Mexican peso/US dollar exchange rate. lead and zinc production.
The combined profit
during 2019 was US$3.9
million.
Furthermore, we have
hedging policies in
place for foreign
exchange
risk, including those
associated with capex
related to projects.
In 2019, we entered
into a number of foreign
exchange forward
contracts
denominated in euros
and Swedish krona.
In terms of inflation,
we experienced an
increase
in two of our main energy
inputs over the previous
year, with diesel
(USC$/lt.)
increasing by 6.7% and
KWH (USC$) by 4.1%.
2.- Potential actions by the government, e.g. implementation of
more stringent regulations for obtaining permits, etc.
-------------------------------------------------------------------------------------------------------------------------------------------------------
Regulatory actions may RESPONSE / MITIGATION RISK APPETITE
have an adverse impact We continue to be alert Low
on the Company. This to the changes that
could include more stringent the authorities propose, RISK RATING
regulations relating including any initiatives (relative
to the environment or that are related to position)
explosives, more challenging mining taxes, so that 2019: Very high
processes for obtaining we are able to respond (2)
permits , more onerous in a timely and relevant 2018: Very high
tax compliance obligations manner. (2)
for ourselves and our Change in risk
contractors, as well For example, regarding level
as more frequent reviews environmental taxes : No changes
by tax authorities . in Zacatecas, In February (=)
2020 the Supreme Court
For example: the State of Mexico issued a final
of Zacatecas created ruling settling Fresnillo's DESCRIPTION OF
environmental taxes legal challenge, in RISK
which appear to be aimed which it determined LEVEL
at the extractive industry. that: We continue to
These taxes were imposed 1. Two of the taxes perceive
on the following activities are unconstitutional: this risk level
undertaken within the (a) tax on extractive as very
State of Zacatecas: activities and (b) tax high. Evidence
* Extractive activities other than those regulated by on deposit of industrial of this
Mexico's Federal Mining Law residues. risks'
2. The other two taxes influence on
were declared constitutional, our industry
* Deposit of industrial residues since the Supreme Court can be
considered that Federal seen in the
jurisdiction is not increase
* Emissions into the air exclusive on these items: in the
(a) emissions into the frequency of
air and (b) discharge the reviews by
* Discharge of industrial residues into the ground and of industrial residues. the tax
water authorities,
We have extensive engagement the legislation
programmes with communities issued relating
that may be impacted to the
We presented a legal by our mining activities. imposition of
challenge against these At the San Julián the
taxes, on the grounds mine, for example, we environmental
that the State of Zacatecas have recently worked taxes contained
was invading exclusive in conjunction with in the
Federal jurisdiction, the Federal Government 2017 State Law
given that the mining and the local indigenous in Zacatecas
industry is regulated community to successfully and the
at a Federal level. conclude an indigenous indigenous
consultation exercise consultation
In addition, the right for the construction to obtain
of indigenous communities of a water reservoir. mining
to be consulted regarding concessions.
mining concessions could We continue to collaborate
potentially affect the with other members of In addition,
granting of new concessions the mining community Mexico's
in Mexico. via the Mexican Mining corruption
Chamber to lobby against perception
LINK TO STRATEGY (1-2-3-4) any new detrimental remains high.
* Growth pipeline taxes, royalties, or The country's
regulations. We also score in
support the industry's International
* Development projects lobbying efforts to Transparency
improve the general 2019 Corruption
public's understanding Perception
* Mines in operation of the mining industry. Index was
relatively
We remain compliant unchanged,
* Sustainable development with all applicable despite the
environmental regulations ranking
and are fully committed been higher [4]
to operating in a sustainable . As
way. We are committed a result,
KEY RISK INDICATORS to holding community delays in
* Number of media mentions related to mining dialogue over the lifetime obtaining
regulations. These could include the mention of tax, of a mine project, from permits for
royalties, the banning of mining activities in the earliest exploration certain
protected areas and legal precedents. The indicator to eventual closure, operations
also provides detail on the media itself, such as aiming to create long-term and/or
speaker profile and political alignment. relationships and value, projects remain
while ensuring operational a risk.
continuity.
We remain
We seek to maintain confident
full compliance with in the
tax authority requirements. long-term
In doing so we continue prospects
to cooperate with any of both our
ongoing tax inspections. Company
and the mining
sector
in Mexico more
generally.
We will
continue
working
with Government
alongside
trade bodies
and the
Mexican Mining
Chamber.
Our aim is to
continue
to highlight
the significant
positive impact
the
mining industry
makes
to
infrastructure,
education
and health in
remote
communities as
well
across Mexico
more generally.
3.- Access to land
-------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Failure or significant Successful land access Medium
delays in accessing plays a key role in
the surface land above the management of our RISK RATING
our mineral concessions mining rights, focusing (relative
and other land of interest on areas of interest position)
is a permanent risk or strategic value. 2019: Very high
to our strategy, and At the end of 2019, (3)
has a potentially high after adding required 2018: Very high
impact on our objectives. areas and divesting (3)
Possible barriers to areas of less interest, Change in risk
land access include: we held 1.7 million level
* ising expectations of land owners. hectares of mining concessions, : No changes
which represents no (=)
change year-on-year.
* Refusal to acknowledge prior land acquisition terms Other initiatives include:
and conditions by members of a community. DESCRIPTION OF
* Meticulous analysis of exploration targets and RISK
construction project designs to minimise land LEVEL
* Influence of multiple special interests in land requirements. Despite our
negotiations. strategic
actions, we
* Judicious use of leasing or occupation agreements continue
* Conflicts in land boundaries with an often arduous with purchase options, in compliance with legal and to perceive
resolution process. regulatory requirements. this risk
level as very
high.
* Succession issues among land owners resulting in a * Early involvement of our community relations teams The mining
lack of clarity about the legal entitlement to during the negotiation and acquisition processes of industry
possess and sell land. socially challenging targets. continues to
face legal
challenges in
* Litigation risk i.e. increased activism by agrarian * Strategic use of our social investment projects to regard
communities and/or judicial authorities. build trust. to access to
land by
individuals and
* Presence of indigenous communities in proximity to * Working closely with our land negotiation teams, local
land that is of interest, where prior and informed which comprise specialists hired directly by communities who
consultation and consent of such communities may be Fresnillo and also provided by Peñoles as part may
required. of the service agreement. seek to
disregard
previous
Furthermore, insecurity land
in our exploration and As part of an ongoing agreements.
operational areas as review of the legal This
well as potential actions status of our land rights, has been a
by the Government increase we identified certain consistent
the complexity of land areas of opportunity challenge in
access risk. and continue to implement recent
measures to manage this years.
Operations at Soledad risk on a case-by-case
& Dipolos remain suspended, basis. Such measures
as the issue with the include, whenever possible,
Ejido El Bajio continues negotiating with agrarian
to be unresolved. communities for the
LINK TO STRATEGY (1-2-3) outright purchase of
* Growth pipeline land. We use mechanisms
provided under agrarian
law and also utilise
* Development projects other legal mechanisms
under mining law which
afford added protection
* Mines in operation for land occupation.
These activities form
part of our ongoing
drive to reduce exposure
to risk regarding surface
KEY RISK INDICATORS land.
* Percentage of land required for advanced exploration
projects which is under occupation or other
agreements other than full property ownership
(overall and by project).
* Total US$ and percentage of project budget spent on
HSECR activities, including community relations (at
projects and exploration sites)
4.- Security
-----------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Our people, contractors We closely monitor the Low
and suppliers face the security situation,
risk of kidnapping, maintaining clear internal RISK RATING
extortion or harm due communications and coordinating (relative
to insecurity conditions work in areas of greater position)
in some of the regions insecurity. We have 2019: Very high
where we operate. We adopted the following (4)
face the risk of restricted practices to manage 2018: Very high
access to operations/projects our security risks and (4)
and theft of assets. prevent and deal with Change in risk
possible incidents: level
The influence of drug : No changes (=)
cartels, other criminal * We maintain close relations with authorities at
elements and general federal, state and local levels, including army
lawlessness in some encampments located near the majority of our DESCRIPTION OF
of the regions where operations. We also communicate with the newly RISK
we operate, combined created National Guard. LEVEL
with our exploration We continue to
and project activities perceive
in certain areas of * We continue to implement increased technological and this risk level as
transfer or cultivation physical security at our operations, such as the use very
of drugs, makes working of a remote monitoring process at Herradura, Noche high. We have
in these areas a particular Buena and San Julián. At the Saucito and continued
risk for us. Fresnillo mines, in addition to the remote monitoring to experience a
service we have also constructed new local operation very
LINK TO STRATEGY (1-2-3-4) and command centres for each business unit. At the high level of
* Growth pipeline Juanicipio development project, we have the necessary security
infrastructure in place to provide security services incidents, both in
during the mine construction process. Juanicipio also frequency
* Development projects benefits from a local operation and command centre, and severity.
as well as the remote monitoring service. The
implementation at Ciénega mine has taken longer Following the
* Mines in operation than expected due to changes related to priorities change
and increased scope. However, we are continuing to of administration,
implement measures to increase security across all we
* Sustainable development business units during 2020. have yet to see
evidence
of the new
* We have maintained our logistics controls in order to national
KEY RISK INDICATORS reduce the potential for theft of mineral security strategy.
* Total number of security incidents affecting our concentrate. These controls include: the use of Although
workforce (thefts, kidnapping, extortion, etc.) real-time tracking technology; surveillance cameras; the National Guard
tests to identify alterations in transported began
material; guard services; control checkpoints in a operations during
* Number of sites affected and work days lost, by "safe corridor"; and reduced number of authorised 2019,
region and type of site. stops in order to optimise delivery times and official security
minimise the exposure of convoys. indexes
have not yet
* Number of media mentions related to security issues improved.
affecting the mining industry where we operate. * We continue to invest in community programmes,
infrastructure improvements, and Government We refer to The
initiatives to support the development of lawful Global
local communities and discourage criminal acts. Peace Index ([5])
ranking,
which indicates a
* Both internally and among our contractors, we higher
continue to promote the reporting of criminal acts to likelihood of
the authorities. violent
demonstrations and
political
instability. This
Management is fully index
committed to safeguarding uses three broad
our workforce. For example, themes:
we have suspended work level of safety
at the San Nicolás and
del Oro prospect because security in
of the level of insecurity society;
in the state of Guerrero. the extent of
ongoing
domestic or
international
conflict; and the
degree
of militarisation.
Mexico
ranks 140 of 163
countries
worldwide (from
best
to worst), as a
country
with a low state
of
peace, and
remained
in the same
position
in the ranking
during
2019, despite the
peace
score lowering by
4.8
per cent against
the
previous year. In
addition,
we also use the
Mexico
Peace Index
ranking
as a reference.
This
is a comprehensive
index
of the following
indicators:
homicides; violent
crimes;
weapons crimes;
organised
crime; and
detention
without a
sentence.
The index ranks
states
from 1 to 5, where
1
represents the
most
peaceful.
Chihuahua
(3.6 on the index)
and
Zacatecas (3.3)
tend
to rank among the
less
peaceful states in
Mexico,
while Sonora (2.2)
and
Durango (2.1) are
located
in the medium to
low
range.
5.- Safety
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
It is an inherent risk Regrettably, we suffered Low
in our industry that two fatal accidents
incidents due to unsafe during 2019, both in RISK RATING (relative
acts or conditions could the first half of the position)
lead to injuries or year, meaning that we 2019: Very High (5)
fatalities. were very far from achieving 2018: High (6)
our goal of zero fatalities. Change in risk level
Our workforce face risks In addition, we recorded :
such as fire, explosion, 492 non-incapacitating
electrocution and carbon accidents compared to
monoxide poisoning, 454 during 2018. DESCRIPTION OF RISK
as well as risks specific LEVEL
to each mine site and A key objective is to We perceive this risk
development project. improve the culture as increasing, in
These include rock falls of safety in our mining terms
caused by geological operations, including of likelihood and
conditions, cyanide by generating greater impact.
contamination, and heavy awareness of the risks
or light equipment collisions that can be present. We are seeing an
involving machinery increase
or personnel. Management has continued in the intensity of
to take serious actions extreme weather
LINK TO STRATEGY (4) to address and prevent events,
* Sustainable development the root causes of fatal such as rain, mist,
accidents and strengthened wind, earthquakes and
our safety initiatives. high temperatures, at
These include: our locations.
KEY RISK INDICATORS
* Accident rate * Building safety targets into personal performance Frequent
metrics to incentivise safe behaviour and effective transportation
risk management. of our people to
* Days lost rate remote
business units is an
* The continuing roll out of the ..I care, we care" ongoing feature of our
* Accident frequency programme at our mines to improve safety performance operations. In many
and develop competences in our supervisors. cases, these units
have
poor accessibility by
* Providing leadership workshops. road. Failure to
comply
with safety
* In February 2020, we will launch our "Ejercicio de 4 programmes,
Ojos" programme in the Ciénega, Herradura, measures and audits
Saucito, San Julián and Fresnillo mines. This or with the findings
programme aims to develop risk competencies by of inspections,
educating leaders, supervisors and the workforce. It continues
also fosters coaching and features positive to be a safety risk.
incentives as well as a comprehensive review and
enhancement process.
* The assignment of Critical Control Risk Protocols to
an owner for follow-up in line with their area of
influence.
* The appointment of a permanent specialist advisor to
the Chief Operating Officer, who is in charge of
safety, health and community issues and has the
responsibility for addressing our unacceptable safety
record.
We continue to deliver
training for both employees
and contractors. Personnel
received an average
of 80 hours of training
in 2019. 40 of these
80 hours involved HSECR
training.
Safety is continually
monitored by the Board,
which has always given
it the highest priority.
The Board oversees all
accident investigations,
ensuring that the appropriate
actions are taken to
improve safety systems
and practices.
6 .- Union relations
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
There is a risk of union Our strategy is to Low
action or a deterioration integrate
in union relations at unionised personnel RISK RATING (relative
some sites. Internal into each BU team. We position)
union politics could achieve this by clearly 2019: Medium high (6)
impact us negatively, assigning responsibilities 2018: Medium low (7)
as could pressure from and via programmes aimed Change in risk level
other mining unions at maintaining close :
that want to take over relationships with unions
the Fresnillo labour at mine sites and at
contracts. national level. DESCRIPTION OF RISK
LEVEL
LINK TO STRATEGY (2-3) We maintain close We perceive this risk
* Development projects communication level as increasing
with union leaders at in likelihood and impact.
various levels of the
* Mines in operation organisation in order The New Federal Labour
to: raise awareness Law came into effect
about the economic in January 2020, giving
situation more rights to workers
KEY RISK INDICATORS the industry is facing; to create new trade
* Union members level of satisfaction share our production unions or not to belong
results; and to encourage to any of them. This
union participation could potentially generate
* Number of media mentions related to mining union in our initiatives an environment of labour
developments regarding instability in Fresnillo,
safety and other Saucito, Herradura and
operational Noche Buena.
improvements. These
initiatives include There is currently a
the safety guardians proposed law before
programme, alliances Congress to improve
for obtaining the regulation of
certifications, outsourcing
integration of high in Mexico. The Outsourcing
productivity teams, Law and Regulations
and family activities. project encompasses
regulatory framework,
During 2019, we ran procurement process,
eight leadership workshops transfers of assets,
in our business units employment law, data
to improve management protection and customer
skills in the local remedies. This proposal
trade union committees. could impact the costs
183 key union leaders and work carried out
attended these workshops. by our contractors.
We are proactive in During the year we continued
our interactions with to build on our good
the trade union, and relations with unions
did not experience at national and local
labour-related levels. However, trends
work stoppages in 2019. such as government
If required, we engage discussions
experienced legal counsel regarding further changes
to support us regarding to labour laws have
labour issues. We remain led to us increasing
alert to any developments our perceived level
in labour issues or of risk.
with the trade union.
We carried out a review
of contractual benefits
for union members at
our mines smoothly and
without setbacks.
Our executive management
and the Board recognise
the importance of union
relations and follow
any developments with
interest.
7.- Exploration
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
We are highly dependent During 2019, we invested Medium
on the success of the a total of US$157.9
exploration programme million in exploration RISK RATING (relative
to meet our strategic activities. Our objectives position)
value-creation targets for 2020 include a budgeted 2019: High (7)
and our long-term production risk capital investment 2018: Medium (8)
and reserves goals. in exploration of approximately Change in risk level
US $140 million. :
In addition to the growing
level of insecurity The approximate spending
and access to land detailed split is 60% for operating DESCRIPTION OF RISK
in previous risks, other mines (reserves and LEVEL
risks that may impact resources), 15% mining We perceive this risk
prospecting and converting districts (resources), level as increasing
inferred resources include: 12% development projects, in likelihood and impact.
the lack of a robust 8% main prospects and
portfolio of prospects 5% prospecting. This is mainly due to
in our pipeline with the following:
sufficient potential Our exploration strategy * Delays in procedures regarding access to land.
in terms of indicated also includes:
and inferred resources;
and insufficient concession * A focus on increasing regional exploration drilling * Restrictions of new mining concessions.
coverage in target areas. programmes to intensify efforts in the districts with
high potential.
We also risk the loss * Geological sampling falling below standard.
of purchase opportunities
due to slow decision * For local exploration, aggressive in-field
making. exploration to upgrade the resources category and * Reserves not being replenished.
As our production escalates convert inferred resources into reserves.
and more mines approach
the end of their lives,
replenishing our reserves * A team of highly trained and motivated geologists, Maintaining a reasonable
becomes increasingly including both employees and long-term contractors. investment in exploration,
challenging. even when metal prices
are low, has been our
LINK TO STRATEGY (1) * Advisory technical reviews by international third policy through the years.
* Growth pipeline party experts, up-to-date and integrated GIS While continuous investment
databases, drone technology, remote sensing imagery has always been a hallmark
and software for identifying favourable metallogenic of our exploration strategy,
belts and districts to be field-checked by the team. replenishing exploited
KEY RISK INDICATORS reserves and increasing
* Drill programmes completed (overall and by project). our total amount of
* A commitment to maintain a pipeline of drill-ready resources could be a
high priority projects. challenge in the future.
* Change in the number of ounces in reserves and During 2019 we saw an
resources. increase in our total
gold and silver resources.
* Rate of conversion from resources to reserves.
8.- Projects (performance risk)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Pursuing advanced exploration Our investment evaluation Medium
and project development process determines how
opportunities are essential best to direct available RISK RATING (relative
to meeting our strategic capital using technical, position)
goals. However, they financial and qualitative 2019: High (8)
carry certain risks: criteria. 2018: Medium (9)
Change in risk level
* Economic viability: the impact of capital cost to * Technical: we assess the resource estimate and :
develop and maintain the mine; future metal prices; confirmed resources, the metallurgy of the mineral
and operating costs through the mine's life cycle. bodies, the investment required in general
infrastructure (e.g. roads, power, general services,
housing) and the infrastructure required for the mine
-- Access to land: and plant. DESCRIPTION OF RISK
a failure or significant LEVEL
delay in land acquisition We perceive this risk
has a very high impact * Financial: we look at risk relative to return for level as increasing
on our projects. proposed investments of capital. We set expected in likelihood and impact.
-- Uncertainties associated internal rates of return (IRR) per project as
with developing and thresholds for approving the allocation of capital The increasing number
operating new mines based on the present value of expected cash flows of projects under development
and expansion projects: from the invested capital, and undertake stochastic increases the risk of
including fluctuations and probabilistic analysis. non-completion according
in ore grade and recovery; to budget and timeline.
unforeseen complexities
in the mining process; * Qualitative: we consider the alignment of the We identify the following
poor rock quality; unexpected investment with our strategic plan and business threats in project development:
presence of underground model; synergies with other investments and operating * Insufficient resources for the implementation of
water or lack thereof; assets; and the implications for safety, security, projects.
lack of community support; people, resourcing and community relations.
and inability or difficulty
to obtain and maintain * Change in operational priorities which may impact
required construction projects.
and operating permits. We closely monitor project
* Delivery risk: projects may go over budget in terms controls to ensure that
of cost and time; they may not be constructed in we deliver approved * Inadequate structure in place for the supervision of
accordance with the required specifications or there projects on time, on the projects.
may be a delay during construction; and major mining budget and in line with
equipment may not be delivered on time. the defined specifications.
The executive management * Lack of efficient and effective contractors.
team and Board of Directors
are regularly updated
on progress. Each advanced
LINK TO STRATEGY (2) exploration project During 2019, we commissioned
* Development projects. and major capital development the water dam and the
project has a risk register expansion of the tailings
containing the identified deposit at San Julián;
and assessed risks specific the 13th leaching pad
KEY RISK INDICATORS to the project. at Herradura; and the
* Earned value (rate of financial advancement rate vs. seventh leaching pad
physical advancement). The project development and Carbon-in-Column
pipeline in 2019 included: (activated carbon) project
* Continuing the construction of the tailings flotation in Noche Buena.
* Acquisition percentage of required land. plant (Pyrites project).
At the Juanicipio Project,
we face the following
* Percentage of major equipment ordered and received * Continuing the second stage of the Fresnillo threats:
according to plan. flotation plant to cope with higher base metal * Inability to contract a suitable engineering firm to
contents. design the tailings dam. Engineering firms are
declining bids due to considerable potential
* Percentage of completion of mine development. liabilities.
* Approving and commencing construction of the
Juanicipio project.
* Lack of an accurate model of the current tailings
chemistry. Any change to the anticipated chemistry
* Continuing the construction of the third tailings dam levels could result in re-design and construction
at the Ciénega mine. changes.
* Lack of support from local communities due to low
We are in the process levels of skills leading to fewer opportunities for
of implementing capital employment.
project management,
based on good practices
and in line with the
Project Management Body
of Knowledge (PMBOK)
standard of the Project
Management Institute
(PMI). The aim is to
safeguard our ability
to generate growth through
development projects.
9.- Public perception against mining
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Across the world, public opinion is wary of the Communities are our strategic partners. To win and maintain Low
potential adverse social and environmental their trust, we must show understanding
consequences of mining operations. This sentiment is and effective engagement, and be accountable for our RISK RATING (relative position)
manifested through increased regulatory impact. Our well-established programme 2019: High (9)
obligations for mining companies and increased social for community engagement includes: 2018: High (5)
activism by communities and other grassroots * Increased understanding and accountability: Change in heat map: No changes (=)
organisations.
LINK TO STRATEGY (1-2-3-4) * Monitoring public opinion within local and DESCRIPTION OF RISK CHANGE
* Growth pipeline international media. Over the years we have perceived a persistent
pattern of protests and conflicts leading to
delays and abandonment of projects in the
* Development projects * Holding continuous dialogue with our key local national and international mining sector.
stakeholders through formal and informal meetings. Opposition
not only arises from concerns of local
* Mines in operation communities, but also from national and
* Carrying out social baseline, human rights and international
perception studies to better understand our positive activism. Conflicts and activism fuel the
* Sustainable development and negative impacts. public perception against mining. We continue
to
perceive this complex issue as a high risk.
* Operating a grievance mechanism to address
KEY RISK INDICATORS stakeholder concerns. We have maintained our social licence to
* Number of local actions by non-governmental operate in our communities. Continuing to
organisations (NGOs) or other local social groups maintain
against mining, by region. * Purposeful and aspirational engagement with local and protect this licence demands strong ongoing
communities: collaboration with the local community and
stakeholders.
* Number of actions by NGOs or other local social
groups against mining in the Americas. * Maintaining a Social Investment Portfolio to create
long term value, aligned with the UN Global Goals for
sustainable development. We have identified four
* Number of media mentions related to demonstrations pillars where we can make a real difference:
against the mining industry. Education, Water, Health and Capacity building.
* Partnering with NGOs in these four pillars of social
investment: Education (IBBY, INNOVEC & First
Robotics), Water (Captar AC) and Health (National
University Foundation).
* Collaborating with peers in the international and
Mexican mining community to promote the benefits of
the mining industry and responsible mining practices.
* Communicating our best practices regarding social and
environmental responsibility.
-------------------------------------------------------------------- ----------------------------------------------------------------- -----------------------------------------------------------
10.- Cyber security
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
We recognise the importance During 2019 we introduced Low
of the confidentiality, a set of new initiatives
continuity, integrity to enhance our Cyber RISK RATING (relative
and security of our Security Programme, position)
data and production supported by external 2019: Medium (10)
systems. advisors. The main objective 2018: Medium (10)
As a mining company, of the programme is Change in risk level
we may be under threat to identify and manage : No changes (=)
of cyber attacks from the cyber security risks
a broad set of attacker and align them to our
groups, from "hacktivists" mission and business
and hostile regimes strategy. DESCRIPTION OF RISK
to organised criminals. LEVEL
Their goals include Globally, we continue
a desire to take advantage In line with best practice, to see new cyber security
of the role that mining our approach is based attacks aimed at the
plays in regional and on two key frameworks: industrial sector. These
global supply chains include phishing, ransomware
as well as in national -- The US National Institute and vulnerability exploitation
economies. Certain groups of Standards and Technology campaigns and represent
may also attempt to Cyber Security Framework a continuous threat
exploit vulnerabilities (NIST CSF) which outlines to our Company.
created by the industry's how companies can assess
heavy reliance on automated and improve their ability
operational systems. to prevent, detect and
In our case, this could respond to cyber attacks.
include initiatives
such as Operations Technology -- Control Objectives
and Information Technology for Information and
(OTIT) Integration and Related Technologies
Digital Mine. (COBIT), which was created
by ISACA, the international
LINK TO STRATEGY (2-3) professional association
* Development projects for IT management and
governance, to provide
an implementable set
* Mines in operation of IT-related controls,
processes and enablers.
Our approach is also
KEY RISK INDICATORS based on the MITRE ATT&CK(TM)
* Total number of cyber security incidents affecting which is used as a foundation
our Company. for the development
of specific threat models
and methodologies in
* Number of media mentions related to cyber security the private sector,
issues affecting the mining industry. in government, and in
the cyber security product
and service community.
A governance model,
continuous risk assessment,
information security
policies, awareness
and training campaigns
will form the basis
for our IT/OT operational
assurance.
Our plan for 2020 is
to focus our efforts
on risk mitigation projects
designed to protect
information and key
assets, according to
the risk appetite set
by management.
As our strategy continues
to mature during 2020,
we will support it with
a series of awareness
and training campaigns.
The Audit Committee
continues to monitor
and oversee this risk.
11.- Environmental incidents
-------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Environmental incidents Our environmental management Low
are an inherent risk system ensures compliance
in our industry. These with international regulations RISK RATING
incidents include the and best practice, provides (relative
possible overflow or transparency, and supports position)
collapse of tailing initiatives that reduce 2019: Medium
deposits, cyanide spills our environmental footprint. Low (11)
and dust emissions, 2018: Medium
any of which could have Herradura, Saucito, Low (11)
a high impact on our Fresnillo and Noche Change in
people, communities Buena are certified risk level
and business. under ISO 14001. Ciénega : No changes
and San Julián (=)
LINK TO STRATEGY (4) are working towards
* Sustainable development achieving certification
(ISO 14001 and 45000) DESCRIPTION
during 2020. OF RISK
Juanicipio has been LEVEL
KEY RISK INDICATORS recommended for certification. Our
* Number of BUs with ISO 14001:2004 certification. Additionally, Ciénega, environmental
Herradura, Saucito, management
San Julián, Juanicipio system,
* Number of BUs with Clean Industry certification. and Fresnillo are certified together with
to clean industry standards. our
Our leaching operations investment in
* Number of BUs with International Cyanide Code in Herradura and Noche preventative
certification. Buena comply with the measures and
Cyanide Code issued training,
by the International are key
* Number of environmental permits for all advanced Cyanide Management Institute. factors which
exploration projects (according to schedule). reduce the
Management is very aware risk of major
of the risks associated environmental
with tailings dams. incidents.
Therefore, prior to
the construction of Based on the
a dam, we undertake perceived
a number of studies level of risk
to confirm the suitability due to
of the area. These studies recent severe
include geotechnical, and
geological, geophysical, catastrophic
hydrological and seismic industry
analysis. Before construction developments,
begins, the CNA (National the Board
Commission for Water) decided to
undertakes various studies increase the
and then continues to severity
periodically review of this risk
dams in relation to in 2018
ongoing environmental and
impacts. maintained
the same
Early in 2019 we launched level in
a series of initiatives 2019.
to align our governance The Board and
practices with current HSECR
best practice. These continue to
initiatives included: keep these
* Updating the inventory of Tailings Storage Facilities issues under
(TSFs) and validating the data register. close
scrutiny.
It is
* Starting a programme of third-party reviews beginning important to
with dam safety inspections for all TSFs. note
that our
tailings dams
* Establishing an Independent Tailing Review Panel differ from
(ITRP) consisting of recognised international those
experts. involved
in recent
high profile
* Accelerating a programme of independent expert incidents,
reviews of all sites. such as the
tragedy in
Brazil.
* ITRP reviewing and prioritising recommendations
arising from inspections.
We rigorously adhere
to the requirements
established by each
project's environmental
permit (Environmental
Impact Statement issued
by the Ministry of Environment,
SEMARNAT). We also continue
to support contractors
in their efforts to
integrate environmental
management systems.
12.- Human Resources
------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Our people are critical Recruitment : we have Medium
to delivering our objectives. assessed our hiring
We face risks in selecting, requirements for key RISK RATING
recruiting, training positions for 2020, (relative
and retaining the diverse and aim to meet them position)
and talented people by internal training 2019: Low (12)
we need. and promotion, and by 2018: Low (12)
recruitment through: Change in risk
A lack of reliable contractors * Our close relationships with universities offering level
with sufficient infrastructure, earth sciences programmes. We have dedicated : No changes
machinery, performance programmes to identify potential candidates based on (=)
track record and skilled performance who may be hired as interns and/or
people is also a risk employees on graduation. We welcomed 124 professiona
that could impact our l DESCRIPTION OF
ability to develop and practitioners, 67 trainees and scholarships and 107 RISK
construct mining works. engineers into our coaching programme. LEVEL
We value and
LINK TO STRATEGY (1-2-3-4) respect
* Growth pipeline * CETEF (Centre for Technical Studies Fresnillo) which all people from
teaches specific mining operational skills. All four diverse
graduates hired in 2019 joined as full-time backgrounds. We
* Development projects employees. aspire
to develop an
inclusive
* Mines in operation * CETLAR (the Peñoles Centre for Technical culture where
Studies) which trains mechanics and electrical our people
technicians. All 10 graduates were hired as full-tim feel valued and
* Sustainable development e are
employees in 2019 across Fresnillo's business units. inspired to
contribute
to their
KEY RISK INDICATORS During 2019 we contracted fullest
* Number of positions filled by area of speciality, fo 105 experienced personnel potential.
r to fulfil our requirements.
vacancies and new positions. Retention : Our aim We aim to
is to be the employer carefully
of choice, and we recognise align our human
* Employee turnover rate. that in order to be resources
a profitable and sustainable with our
company, we have to operational
* Average hours of training and professional generate value for our and growth
development per employee. employees and their requirements.
families. We do this We believe that
by providing a healthy, we have
* Number of contractor personnel relative to unionised safe, productive and currently
personnel per BU. team-oriented working achieved this
environment that not alignment, due
only encourages our to the
people to fulfil their success of
potential but also supports activities
process improvements. including our
Our focus is on continuous ongoing
improvement, driven university
by training, development recruitment
and personal growth and employee
opportunities; in summary retention
we concentrate on fair strategies.
hiring, fair remuneration
and benefits and gender Contractor
equality. During 2019, resourcing
94 employees were promoted continues to be
(66% of our structure a major
at a professional level) challenge. We
and 25 transfers took maintain
place between business a broad base of
units. contractors
Performance : We have in order to
continued our performance provide
evaluation process, us with
reinforcing formal feedback. operational
We promote the certification flexibility and
of key technical skills aim
for operational personnel, to
and the administrative professionalise
and leadership skills them
development programme to the same
for required positions. level as
We develop our high our own
potential middle managers employees.
through the Leaders
with Vision programme.
Contractors : We have
long-term drilling and
mining contracts. We
invest significantly
in training contractors,
particularly on safety
and environmental requirements.
We have supported the
enrolment of 70 of our
contractor companies
into the self-management
Programme on Health
and Safety at Work (PASST),
promoted by the Mexican
Secretariat of Labour
and Social Welfare (STPS).
Of these companies,
60% have been certified,
with the remainder in
the process of being
certified.
Statement of Directors' responsibilities
The Directors are responsible for preparing the annual report
and the Group and parent company financial statements in accordance
with applicable United Kingdom law and those International
Financial Reporting Standards (IFRS) adopted by the European
Union.
The Directors are required to prepare financial statements for
each financial year which present a true and fair view of the
financial position of the Company and of the Group and the
financial performance and cash flows of the Company and of the
Group for that period. In preparing those financial statements, the
Directors are required to:
-- select suitable accounting policies in accordance with IAS 8:
'Accounting Policies, Changes in Accounting Estimates and Errors'
and then apply them consistently;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Company and of the Group's financial position and
financial performance;
-- state that the Company and the Group has complied with IFRS,
subject to any material departures disclosed and explained in the
financial statements; and
-- prepare the accounts on a going concern basis unless, having
assessed the ability of the Company and the Group to continue as a
going concern, management either intends to liquidate the entity or
to cease trading, or have no realistic alternative but to do
so.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and enable them
to ensure that the financial statements comply with the Companies
Acts 2006 and Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable UK law and regulations the Directors are
responsible for the preparation of a Directors' report, Directors'
remuneration report and corporate governance report that comply
with that law and regulations. In addition the Directors are
responsible for the maintenance and integrity of the corporate and
financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Neither the Company nor the Directors accept any liability to
any person in relation to the annual financial report except to the
extent that such liability could arise under English law.
Accordingly, any liability to a person who has demonstrated
reliance on any untrue or misleading statement or omission shall be
determined in accordance with section 90A and schedule 10A of the
Financial Services and Markets Act 2000.
In accordance with provision C.1.1 of the UK Corporate
Governance Code, the Directors consider that the Annual Report and
Accounts, taken as a whole, is fair, balanced and understandable
and provides information to enable shareholders to assess the
Company's performance, business model and strategy.
Responsibility statement of the Directors in respect of the
annual report and accounts
I confirm on behalf of the Board that to the best of its
knowledge:
a) the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the assets,
liabilities, financial position and profit and loss of the Company
and the undertakings included in the consolidation taken as a
whole; and
b) the management report (encompassed within the 'Overview',
'Strategic report', 'Performance' and 'Governance' sections)
includes a fair review of the development and performance of the
business, and the position of the Company and the undertakings
included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they
face.
Signed for and on behalf of the Board
Charles Jacobs
Senior Independent Director
2 March 2020
Year ended 31 December Year ended 31 December
2019 2018
------------------- ----- ------------------------------------------- -------------------------------------------
Notes US$ thousands US$ thousands
------------------- ----- ------------------------------------------- -------------------------------------------
Pre-Silverstream Silverstream Pre-Silverstream Silverstream
revaluation revaluation revaluation revaluation
effect effect Total effect effect Total
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Continuing
operations:
Revenues 4 2,119,641 2,119,641 2,103,785 2,103,785
Cost of sales 5 (1,657,932) (1,657,932) (1,323,057) (1,323,057)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Gross profit 461,709 461,709 780,728 780,728
Administrative
expenses (96,436) (96,436) (83,339) (83,339)
Exploration
expenses 6 (157,913) (157,913) (172,799) (172,799)
Selling expenses (22,851) (22,851) (21,237) (21,237)
Other operating
income 8 9,803 9,803 11,703 11,703
Other operating
expenses 8 (22,582) (22,582) (8,360) (8,360)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
net
finance costs and
income
tax 171,730 171,730 506,696 506,696
Finance income 9 24,176 24,176 20,372 20,372
Finance costs 9 (70,670) (70,670) (50,010) (50,010)
Revaluation effects
of
Silverstream
contract 13 48,376 48,376 14,956 14,956
Foreign exchange
gain/(loss) 5,143 5,143 (8,084) (8,084)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
income
tax 130,379 48,376 178,755 468,974 14,956 483,930
Corporate income
tax 10 22,519 (14,513) 8,006 (116,162) (4,487) (120,649)
Special mining
right 10 19,053 19,053 (13,315) (13,315)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Income tax 10 41,572 (14,513) 27,059 (129,477) (4,487) (133,964)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit for the year
from
continuing
operations 171,951 33,863 205,814 339,497 10,469 349,966
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Attributable to:
Equity shareholders
of
the Company 170,134 33,863 203,997 339,377 10,469 349,846
Non-controlling
interest 1,817 1,817 120 120
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
171,951 33,863 205,814 339,497 10,469 349,966
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Earnings per share:
(US$)
Basic and diluted
earnings
per Ordinary Share
from
continuing
operations 11 - 0.277 - 0.475
Adjusted earnings
per
share: (US$)
Adjusted basic and
diluted
earnings per
Ordinary
Share from
continuing
operations 11 0.231 - 0.461 -
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Year ended 31 December
---------------------------------------------------- ----- ------------------------------
2019 2018
Notes US$ thousands US$ thousands
---------------------------------------------------- ----- -------------- --------------
Profit for the year 205,814 349,966
Other comprehensive income/(expense)
Items that may be reclassified subsequently
to profit or loss:
Gain on cash flow hedges recycled to income
statement 5,983 1,582
Loss on cost of hedge recycled to income statement - (269)
Changes in the fair value of cost of hedges (1,280) 14,353
Changes in the fair value of cash flow hedges 1,454 -
Total effect of cash flow hedges 6,157 15,666
Foreign currency translation 545 (185)
Income tax effect on items that may be reclassified
subsequently to profit or loss: 10 (1,847) (4,699)
---------------------------------------------------- ----- -------------- --------------
Net other comprehensive income that may be
reclassified subsequently to profit or loss: 4,855 10,782
---------------------------------------------------- ----- -------------- --------------
Items that will not be reclassified to profit
or loss:
---------------------------------------------------- ----- -------------- --------------
Losses on cash flow hedges recycled to other
assets - (233)
Changes in the fair value of cash flow hedges (236) (58)
Total effect of cash flow hedges (236) (291)
Changes in the fair value of equity investments
at FVOCI 44,805 (46,579)
Remeasurement (losses)/gains on defined benefit
plans 21 (2,342) 2,610
Income tax effect on items that will not be
reclassified to profit or loss 10 (12,998) 19,999
Net other comprehensive income/(expense) that
will not be reclassified to profit or loss 29,229 (24,261)
---------------------------------------------------- ----- -------------- --------------
Other comprehensive income/(expense), net
of tax 34,084 (13,479)
---------------------------------------------------- ----- -------------- --------------
Total comprehensive income for the year, net
of tax 239,898 336,487
---------------------------------------------------- ----- -------------- --------------
Attributable to:
Equity shareholders of the Company 238,140 336,377
Non-controlling interests 1,758 110
---------------------------------------------------- ----- -------------- --------------
239,898 336,487
---------------------------------------------------- ----- -------------- --------------
As at 31 December
-------------------------------------------------- ------- ------------------------------
2019 2018
Notes US$ thousands US$ thousands
-------------------------------------------------- ------- -------------- --------------
ASSETS
Non-current assets
Property, plant and equipment 2(b),12 2,813,417 2,693,104
Equity instruments at FVOCI 29 123,024 78,219
Silverstream contract 13 518,696 498,274
Derivative financial instruments 29 - 20
Deferred tax asset 10 110,770 88,883
Inventories 14 91,620 91,620
Other receivables 15 23,014 -
Other assets 3,622 3,199
-------------------------------------------------- ------- -------------- --------------
3,684,163 3,453,319
-------------------------------------------------- ------- -------------- --------------
Current assets
Inventories 14 272,120 243,404
Trade and other receivables 15 437,642 411,157
Income tax recoverable 57,124 50,871
Prepayments 18,344 15,488
Derivative financial instruments 29 2,623 294
Silverstream contract 13 22,558 20,819
Cash and cash equivalents 16 336,576 560,785
-------------------------------------------------- ------- -------------- --------------
1,146,987 1,302,818
-------------------------------------------------- ------- -------------- --------------
Total assets 4,831,150 4,756,137
-------------------------------------------------- ------- -------------- --------------
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders
of the Company
Share capital 17 368,546 368,546
Share premium 17 1,153,817 1,153,817
Capital reserve 17 (526,910) (526,910)
Hedging reserve 17 139 (229)
Cost of hedging reserve 17 918 (2,374)
Fair value reserve of financial assets at FVOCI 17 54,734 23,370
Foreign currency translation reserve 17 (250) (795)
Retained earnings 17 2,093,666 2,033,860
-------------------------------------------------- ------- -------------- --------------
3,144,660 3,049,285
Non-controlling interests 134,059 78,968
-------------------------------------------------- ------- -------------- --------------
Total equity 3,278,719 3,128,253
-------------------------------------------------- ------- -------------- --------------
As at 31 December
------------------------------------------------- ----- ------------------------------
2019 2018
Notes US$ thousands US$ thousands
------------------------------------------------- ----- -------------- --------------
Non-current liabilities
Interest-bearing loans 19 801,239 800,127
Lease liabilities 24 8,009 -
Provision for mine closure cost 20 231,056 189,842
Pensions and other post-employment benefit plans 21 10,704 6,393
Deferred tax liability 10 321,347 470,925
------------------------------------------------- ----- -------------- --------------
1,372,355 1,467,287
------------------------------------------------- ----- -------------- --------------
Current liabilities
Trade and other payables 22 159,768 133,140
Income tax payable 3,991 10,960
Derivative financial instruments 29 1,789 3,807
Lease liabilities 24 4,535 -
Employee profit sharing 9,993 12,690
--------------------------------- --------- ---------
180,076 160,597
--------------------------------- --------- ---------
Total liabilities 1,552,431 1,627,884
--------------------------------- --------- ---------
Total equity and liabilities 4,831,150 4,756,137
--------------------------------- --------- ---------
These financial statements were approved by the Board of
Directors on XX March 2020 and signed on its behalf by:
Mr Arturo Fernández
Non-executive Director
2 March 2020
Year ended 31 December
----------------------------------------------------- ----- ------------------------------
2019 2018
Notes US$ thousands US$ thousands
----------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 28 435,909 588,359
----------------------------------------------------- ----- -------------- --------------
Cash flows from investing activities
Purchase of property, plant and equipment 3 (559,264) (668,669)
Proceeds from the sale of property, plant and
equipment and other assets 1,309 78
Repayments of loans granted to contractors - 1,327
Silverstream contract 13 24,303 36,303
Proceeds from the sale of debt investments - 20,087
Interest received 24,176 19,520
Net cash used in investing activities (509,476) (591,354)
----------------------------------------------------- ----- -------------- --------------
Cash flows from financing activities
Principal elements of lease payments 2(b) (4,681) -
Dividends paid to shareholders of the Company(1) 18 (142,179) (298,068)
Capital contribution 53,256 23,613
Interest paid(2) 19 (57,069) (35,177)
----------------------------------------------------- ----- -------------- --------------
Net cash used in financing activities (150,673) (309,632)
----------------------------------------------------- ----- -------------- --------------
Net decrease in cash and cash equivalents during
the year (224,240) (312,627)
Effect of exchange rate on cash and cash equivalents 31 (2,622)
Cash and cash equivalents at 1 January 560,785 876,034
----------------------------------------------------- ----- -------------- --------------
Cash and cash equivalents at 31 December 16 336,576 560,785
----------------------------------------------------- ----- -------------- --------------
(1) (Includes the effect of hedging of dividend payments made in
currencies other than US dollar.)
2 Total interest paid during the year ended 31 December 2019
less amounts capitalised totalling US$6.1 million (31 December
2018: US$11.1 million) which were included within the caption
Purchase of property, plant and equipment.
Attributable to the equity holders
of the Company
------- -------------------- -----------------------------------------------------------------------------------
Fair
value
reserve
Cost Available-for-sale of Foreign
of financial financial currency
Share Share Capital Hedging hedging assets assets translation Retained Non-controlling Total
Notes capital premium reserve reserve reserve reserve at FVOCI reserve earnings Total interests equity
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
US$ thousands
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- -------------------------------------
Balance at 1
January
2018 368,546 1,153,817 (526,910) - 53,799 (610) 1,962,708 3,011,350 55,245 3,066,595
Adjustments
for
initial
application
of IFRS 9 (13,376) (53,799) 49,622 17,553 - - -
Profit for the
year - - - - - - - - 349,846 349,846 120 349,966
Other
comprehensive
income, net
of
tax - - - (229) 11,002 - (26,252) (185) 2,195 (13,469) (10) (13,479)
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - (229) 11,002 - (26,252) (185) 352,041 336,377 110 336,487
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Capital
contribution - - - - - - - - - - 23,613 23,613
Dividends
declared
and paid 18 - - - - - - - - (298,442) (298,442) - (298,442)
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Balance at 31
December 2018 368,546 1,153,817 (526,910) (229) (2,374) - 23,370 (795) 2,033,860 3,049,285 78,968 3,128,253
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Profit for the
year - - - - - - - - 203,997 203,997 1,817 205,814
Other
comprehensive
expense, net
of
tax - - - 912 3,292 - 31,364 545 (1,970) 34,143 (59) 34,084
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - 912 3,292 - 31,364 545 202,027 238,140 1,758 239,898
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Hedging gain
(loss)
transferred
to
the carrying
value
of PPE
purchased
during the
year 29(c)) (544) (544) 77 (467)
Capital
contribution - - - - - - - - - - 53,256 53,256
Dividends
declared
and paid 18 - - - - - - - - (142,221) (142,221) - (142,221)
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
Balance at 31
December 2019 368,546 1,153,817 (526,910) 139 918 - 54,734 (250) 2,093,666 3,144,660 134,059 3,278,719
-------------- ------ ------- --------- --------- ------- -------- ------------------ --------- ----------- --------- --------- --------------- ---------
1. Corporate information
Fresnillo plc. ("the Company") is a public limited company and
registered in England and Wales with registered number 6344120 and
is the holding company for the Fresnillo subsidiaries detailed in
note 5 of the Parent Company accounts ('the Group').
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 26.
The consolidated financial statements of the Group for the year
ended 31 December 2019 were authorised for issue by the Board of
Directors of Fresnillo plc on 2 March 2020.
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 operating mines and its
principal activities is disclosed in note 3.
The auditor's report on those financial statements was
unqualified and did not contain a statement under section 498 of
the Companies Act 2006.
The audited financial statements will be delivered to the
Registrar of Companies in due course. The financial information
contained in this document does not constitute statutory accounts
as defined in section 435 of the Companies Act 2006.
2. Significant accounting policies
(a) Basis of preparation and consolidation, and statement of
compliance
Basis of preparation and statement of compliance
The Group's consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union as they apply to the
financial statements of the Group for the years ended 31 December
2019 and 2018, and in accordance with the provisions of the
Companies Act 2006.
The consolidated financial statements have been prepared on a
historical cost basis, except for trade receivables, derivative
financial instruments, equity securities, investment in funds and
defined benefit pension scheme assets which have been measured at
fair value.
The 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 when otherwise
indicated.
Basis of consolidation
The consolidated financial statements set out the Group's
financial position as of 31 December 2019 and 2018, and the results
of operations and cash flows for the years then ended.
Entities that constitute the Group are those enterprises
controlled by the Group regardless of the number of shares owned by
the Group. The Group controls an entity when the Group is exposed
to, or has the right to, variable returns from its involvement with
the entity and has the ability to affect those returns through its
power over the entity. Entities are consolidated from the date on
which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of
the Group. The Group applies the acquisition method to account for
business combinations in accordance with IFRS 3.
All intra-group balances, transactions, income and expenses and
profits and losses, including unrealised profits arising from
intra-group transactions, have been eliminated on consolidation.
Unrealised losses are eliminated in the same way as unrealised
gains except that they are only eliminated to the extent that there
is no evidence of impairment.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Group's equity
therein. The interest of non-controlling shareholders may be
initially measured either at fair value or at the non-controlling
interest's proportionate share of the acquiree's identifiable net
assets. The choice of measurement basis is made on an acquisition
by-acquisition basis. Subsequent to acquisition, non-controlling
interests consist of the amount attributed to such interests at
initial recognition and the non-controlling interest's share of
changes in equity since the date of the combination. Any losses of
a subsidiary are attributed to the non-controlling interests even
if that results in a deficit balance.
Transactions with non-controlling interests that do not result
in loss of control are accounted for as equity transactions - that
is, a transaction with the owners in their capacity as owners. The
difference between fair value of any consideration paid and the
relevant share acquired of the carrying value of net assets of the
subsidiary is recorded in equity. Gains or losses on disposals to
non-controlling interest are also recorded in equity.
(b) Changes in accounting policies and disclosures
The accounting policies adopted in the preparation of the
consolidated financial statements are consistent with those applied
in the preparation of the consolidated financial statements for the
year ended 31 December 2018, except for the following:
New standards, interpretations and amendments (new standards)
adopted by the Group
IFRS 16, Leases
The Group has adopted IFRS 16, Leases from 1 January 2019 but
has not restated comparatives for the 2018 reporting period, as
permitted under the specific transitional provisions in the
standard ("modified retrospective approach"). The adjustments
arising from the new leasing rules are therefore recognised in the
opening balance sheet on 1 January 2019.
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
'operating leases' under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the incremental borrowing rate as
of 1 January 2019. The weighted average lessee's incremental
borrowing rate applied to the lease liabilities on 1 January 2019
was 4.2% for contracts denominated in US dollars and 10.1% for
contracts denominated in Mexican pesos. Contracts in other
currencies are not material.
The resulting lease liability as of 1 January 2019 was
determined as follows:
US$ thousands
-------------------------------------------------------- -------------
Operating lease commitments disclosed as at 31 December
2018 16,130
-------------------------------------------------------- -------------
Discounted using the lessee's incremental borrowing
rate of at the date of initial application 14,181
Less - Short-term leases recognised on a straight-line
basis as expense (146)
Less - Low-value leases recognised on a straight-line
basis as expense (2,552)
Less - Other adjustments (184)
-------------------------------------------------------- -------------
Lease liability recognised as at 1 January 2019 11,299
-------------------------------------------------------- -------------
Less - Current portion 3,758
-------------------------------------------------------- -------------
Non-current portion 7,541
-------------------------------------------------------- -------------
The associated right-of-use assets were measured at the amount
equal to the lease liability, prepaid or accrued lease payments
relating to that lease recognised in the statement of financial
position immediate before the initial application date were nil,
therefore there was no adjustment to retained earnings on adoption.
The right-of-use assets were evaluated for indicators of impairment
in accordance with IAS 36, no indicators were identified.
The recognised right-of-use asset relate to the following types
of assets which are included as part of PPE caption:
US$ thousands
------------------- -------------
Computer equipment 7,749
Buildings 3,550
------------------- -------------
11,299
------------------- -------------
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
the use of a single discount rate to a portfolio of leases with
reasonably similar characteristics;
the accounting for operating leases with a remaining lease term
of less than 12 months as at 1 January 2019 as short-term leases,
and
the use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease.
From 1 January 2019 the Group has amended its accounting policy
to recognised and measure lease contracts, see Note 2 (m).
Other Narrow Scope Amendments
The Group also adopted other amendments to IFRSs' as well as the
interpretation IFRIC 23 "Uncertainty over Income Tax Treatments
(UTP)", which were effective for accounting periods beginning on or
after 1 January 2019. The Group has reassessed its accounting
policy under the implementation guidance of IFRIC 23 and clarified
that detection risk is not considered in respect of recognition or
measurement of uncertain tax positions. The impact of adoption did
not have a material effect on the Group Consolidated Financial
Statements.
Other than the amendment mentioned above, there were no
significant new standards that the Group was required to adopt
effective from 1 January 2019.
Standards, interpretations and amendments issued but not yet
effective
Certain new accounting standards and interpretations have been
published that are not mandatory for 31 December 2019 reporting
periods and have not been early adopted by the group. These
standards are not expected to have a material impact on the entity
in the current or future reporting periods and on foreseeable
future transactions.
The IASB and IFRS Interpretation committee have issued other
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.
(c) Significant accounting judgments, estimates and
assumptions
The preparation of the Group's consolidated financial statements
in conformity with IFRS requires management to make judgements,
estimates and assumptions that affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the
consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. These judgements and
estimates are based on management's best knowledge of the relevant
facts and circumstances, with regard to prior experience, but
actual results may differ from the amounts included in the
consolidated financial statements. Information about such
judgements and estimates is contained in the accounting policies
and/or the notes to the consolidated financial statements.
Judgements
Areas of judgement, apart from those involving estimations, that
have the most significant effect on the amounts recognised in the
consolidated financial statements for the year ended 31 December
2019 are:
Stripping costs, note 2(e):
The Group incurs waste removal costs (stripping costs) during
the development and production phases of its surface mining
operations. During the production phase, stripping costs
(production stripping costs) can be incurred both in relation to
the production of inventory in that period and the creation of
improved access and mining flexibility in relation to ore to be
mined in the future. The former are included as part of the costs
of inventory, while the latter are capitalised as a stripping
activity asset, where certain criteria are met.
Once the Group has identified production stripping for a surface
mining operation, judgment is required in identifying the separate
components of the ore bodies for that operation, to which stripping
costs should be allocated. Generally, a component will be a subset
of the total ore body that is made more accessible as a result of
the stripping activity. In identifying components of the ore body,
the Group works closely with the mining operations personnel to
analyse each of the mine plans since components are usually
identified during the mine planning stage. The Group reassesses the
components of ore bodies in line with the preparation and update of
mine plans which usually depend on newest information of reserves
and resources.
As a result, effective 1 July 2018 the Group changed the
components identified at Centuaro pit and therefore the measurement
of the corresponding stripping costs. During the current year, this
reassessment did not give rise to any changes in the identification
of components.
Contingencies, note 25
By their nature, contingencies will be resolved only when one or
more uncertain future events occur or fail to occur. The assessment
of the existence and potential quantum of contingencies inherently
involves the exercise of significant judgement and the use of
estimates regarding the outcome of future events.
Estimates and assumptions
Significant areas of estimation uncertainty considered by
management in preparing the consolidated financial statements
include:
Estimated recoverable ore reserves and mineral resources, note
2(e):
Ore reserves are estimates of the amount of ore that can be
economically and legally extracted from the Group's mining
properties; mineral resources are an identified mineral occurrence
with reasonable prospects for eventual economic extraction. The
Group estimates its ore reserves and mineral resources based on
information compiled by appropriately qualified persons relating to
the geological and technical data on the size, depth, shape and
grade of the ore body and suitable production techniques and
recovery rates, in conformity with the Joint Ore Reserves Committee
(JORC) code 2012. Such an analysis requires complex geological
judgements to interpret the data. The estimation of recoverable ore
reserves and mineral resources is based upon factors such as
geological assumptions and judgements made in estimating the size
and grade of the ore body, estimates of commodity prices, foreign
exchange rates, future capital requirements and production
costs.
As additional geological information is produced during the
operation of a mine, the economic assumptions used and the
estimates of ore reserves and mineral resources may change. Such
changes may impact the Group's reported balance sheet and income
statement including:
-- The carrying value of property, plant and equipment and
mining properties may be affected due to changes in estimated
future cash flows, which consider both ore reserves and mineral
resources;
-- Depreciation and amortisation charges in the income statement
may change where such charges are determined using the
unit-of-production method based on ore reserves;
-- Stripping costs capitalised in the balance sheet, either as
part of mine properties or inventory, or charged to profit or loss
may change due to changes in stripping ratios;
-- Provisions for mine closure costs may change where changes to
the ore reserve and resources estimates affect expectations about
when such activities will occur;
-- The recognition and carrying value of deferred income tax
assets may change due to changes regarding the existence of such
assets and in estimates of the likely recovery of such assets.
Estimate of recoverable ore on leaching pads
In the Group's open pit mines, certain mined ore is placed on
leaching pads where a solution is applied to the surface of the
heap to dissolve the gold and enable extraction. The determination
of the amount of recoverable gold requires estimation with
consideration of the quantities of ore placed on the pads and the
grade of that ore (based on assay data) and the estimated recovery
percentage (based on metallurgical studies and current
technology).
The grades of ore placed on pads are regularly compared to the
quantities of metal recovered through the leaching process to
evaluate the appropriateness of the estimated recovery
(metallurgical balancing). The Group monitors the results of the
metallurgical balancing process and recovery estimates are refined
based on actual results over time and when new information becomes
available. Any potential future adjustment would be applicable from
the point of re-estimation and would not by itself change the value
of inventory and as such no sensitivity included.
Silverstream, note 13:
The valuation of the Silverstream contract as a derivative
financial instrument requires estimation by management. The term of
the derivative is based on the Sabinas life of mine and the value
of this derivative is determined using a number of estimates,
including the estimated recoverable ore reserves and mineral
resources and future production profile of the Sabinas mine on the
same basis a market participant would consider, the estimated
recoveries of silver from ore mined, estimates of the future price
of silver and the discount rate used to discount future cash flows.
For further detail on the inputs that have a significant effect on
the fair value of this derivative, see note 30. The impact of
changes in silver price assumptions, foreign exchange, inflation
and the discount rate is included in note 30. Management considers
that an appropriate sensitivity for volumes produced and sold is on
the total recoverable reserve and resource quantities over the
contract term rather than annual production volumes over the mine
life. A reasonably possible change in total recoverable resources
and reserves quantities does not result in a significant change in
the value of the contract.
Estimation of the mine closure costs, notes 2 (j) and 20:
Significant estimates and assumptions are made in determining
the provision for mine closure cost as there are numerous factors
that will affect the ultimate amounts payable. These factors
include estimates of the extent and costs of rehabilitation
activities, the currency in which the cost will be incurred,
technological changes, regulatory changes, cost increases, mine
life and changes in discount rates. Those uncertainties may result
in future actual expenditure differing from the amounts currently
provided. The provision at the balance sheet date represents
management's best estimate of the present value of the future
closure costs required.
Income tax, notes 2 (q) and 10:
The recognition of deferred tax assets, including those arising
from un-utilised tax losses require management to assess the
likelihood that the Group will generate taxable earnings in future
periods, in order to utilise recognised deferred tax assets.
Estimates of future taxable income are based on forecast cash flows
from operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and taxable
income differ significantly from estimates, the ability of the
Group to realise the net deferred tax assets recorded at the
balance sheet date could be impacted.
(d) Foreign currency translation
The Group's consolidated financial statements are presented in
US dollars, which is the parent company's functional currency. The
functional currency for each entity in the Group is determined by
the currency of the primary economic environment in which it
operates. The determination of functional currency requires
management judgement, particularly where there may be more than one
currency in which transactions are undertaken and which impact the
economic environment in which the entity operates. For all
operating entities, this is US dollars.
Transactions denominated in currencies other than the functional
currency of the entity are translated at the exchange rate ruling
at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are re-translated at the rate of
exchange ruling at the balance sheet date. All differences that
arise are recorded in the income statement. Non-monetary items that
are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a
foreign currency are translated into US dollars using the exchange
rate at the date when the fair value is determined.
For entities with functional currencies other than US dollars as
at the reporting date, assets and liabilities are translated into
the reporting currency of the Group by applying the exchange rate
at the balance sheet date and the income statement is translated at
the average exchange rate for the year. The resulting difference on
exchange is included as a cumulative translation adjustment in
other comprehensive income. On disposal of an entity, the deferred
cumulative amount recognised in other comprehensive income relating
to that operation is recognised in the income statement.
(e) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and impairment, if any. Cost comprises the purchase
price and any costs directly attributable to bringing the asset
into working condition for its intended use. The cost of
self-constructed assets includes the cost of materials, direct
labour and an appropriate proportion of production overheads.
The cost less the residual value of each item of property, plant
and equipment is depreciated over its useful life. Each item's
estimated useful life has been assessed with regard to both its own
physical life limitations and the present assessment of
economically recoverable reserves of the mine property at which the
item is located. Estimates of remaining useful lives are made on a
regular basis for all mine buildings, machinery and equipment, with
annual reassessments for major items. Depreciation is charged to
cost of sales on a unit-of-production (UOP) basis for mine
buildings and installations, plant and equipment used in the mine
production process or on a straight-line basis over the estimated
useful life of the individual asset when not related to the mine
production process. Changes in estimates, which mainly affect
unit-of-production calculations, are accounted for prospectively.
Depreciation commences when assets are available for use. Land is
not depreciated.
The expected useful lives are as follows:
Years
-------------------------------------------- -----
Buildings 6
Plant and equipment 4
Mining properties and development costs (1) 16
Other assets 3
-------------------------------------------- -----
(1 Depreciation of mining properties and development cost are
determined using the unit-of-production method.)
An item of property, plant and equipment is de-recognised upon
disposal or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising at de-recognition of the
asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is included in the
income statement in the year that the asset is de-recognised.
Non-current assets or disposal groups are classified as held for
sale when it is expected that the carrying amount of the asset will
be recovered principally through sale rather than through
continuing use. Assets are not depreciated when classified as held
for sale.
Disposal of assets
Gains or losses from the disposal of assets are recognised in
the income statement when all significant risks and rewards of
ownership are transferred to the customer, usually when title has
been passed.
Mining properties and development costs
Payments for mining concessions are expensed during the
exploration phase of a prospect and capitalised during the
development of the project when incurred.
Purchased rights to ore reserves and mineral resources are
recognised as assets at their cost of acquisition or at fair value
if purchased as part of a business combination.
Mining concessions, when capitalised, are amortised on a
straight-line basis over the period of time in which benefits are
expected to be obtained from that specific concession.
Mine development costs are capitalised as part of property,
plant and equipment. Mine development activities commence once a
feasibility study has been performed for the specific project. When
an exploration prospect has entered into the advanced exploration
phase and sufficient evidence of the probability of the existence
of economically recoverable minerals has been obtained
pre-operative expenses relating to mine preparation works are also
capitalised as a mine development cost.
The initial cost of a mining property comprises its construction
cost, any costs directly attributable to bringing the mining
property into operation, the initial estimate of the provision for
mine closure cost, and, for qualifying assets, borrowing costs. The
Group cease the capitalisation of borrowing cost when the physical
construction of the asset is complete and is ready for its intended
use.
As mine development prior to commercial production is necessary
to bring mining assets into the condition necessary for its
intended use, revenues from metals recovered from ore mined during
such activities are credited to mining properties and development
costs. Upon commencement of production, capitalised expenditure is
depreciated using the unit-of-production method based on the
estimated economically proven and probable reserves to which they
relate.
Mining properties and mine development are stated at cost, less
accumulated depreciation and impairment in value, if any.
Construction in progress
Assets in the course of construction are capitalised as a
separate component of property, plant and equipment. On completion,
the cost of construction is transferred to the appropriate category
of property, plant and equipment. The cost of construction in
progress is not depreciated.
Subsequent expenditures
All subsequent expenditure on property, plant and equipment is
capitalised if it meets the recognition criteria, and the carrying
amount of those parts that are replaced, is de-recognised. All
other expenditure including repairs and maintenance expenditure is
recognised in the income statement as incurred.
Stripping costs
In a surface mine operation, it is necessary to remove
overburden and other waste material in order to gain access to the
ore bodies (stripping activity). During development and
pre-production phases, the stripping activity costs are capitalised
as part of the initial cost of development and construction of the
mine (the stripping activity asset) and charged as depreciation or
depletion to cost of sales, in the income statement, based on the
mine's units of production once commercial operations begin.
Removal of waste material normally continues throughout the life
of a surface mine. At the time that saleable material begins to be
extracted from the surface mine the activity is referred to as
production stripping.
Production stripping cost is capitalised only if the following
criteria is met:
-- It is probable that the future economic benefits (improved
access to an ore body) associated with the stripping activity will
flow to the Group;
-- The Group can identify the component of an ore body for which access has been improved; and
-- The costs relating to the improved access to that component can be measured reliably.
If not all of the criteria are met, the production stripping
costs are charged to the income statement as operating costs as
they are incurred.
Stripping activity costs associated with such development
activities are capitalised into existing mining development assets,
as mining properties and development cost, within property, plant
and equipment, using a measure that considers the volume of waste
extracted compared with expected volume, for a given volume of ore
production. This measure is known as "component stripping ratio",
which is revised annually in accordance with the mine plan. The
amount capitalised is subsequently depreciated over the expected
useful life of the identified component of the ore body related to
the stripping activity asset, by using the units of production
method. The identification of components and the expected useful
lives of those components are evaluated as new information of
reserves and resources is available. Depreciation is recognised as
cost of sales in the income statement.
The capitalised stripping activity asset is carried at cost less
accumulated depletion/depreciation, less impairment, if any. Cost
includes the accumulation of costs directly incurred to perform the
stripping activity that improves access to the identified component
of ore, plus an allocation of directly attributable overhead costs.
The costs associated with incidental operations are excluded from
the cost of the stripping activity asset.
(f) Impairment of non-financial assets
The carrying amounts of non-financial assets are reviewed for
impairment if events or changes in circumstances indicate that the
carrying value may not be recoverable. At each reporting date, an
assessment is made to determine whether there are any indications
of impairment. If there are indicators of impairment, an exercise
is undertaken to determine whether carrying values are in excess of
their recoverable amount. Such reviews are undertaken on an asset
by asset basis, except where such assets do not generate cash flows
independent of those from other assets or groups of assets, and
then the review is undertaken at the cash generating unit
level.
If the carrying amount of an asset or its cash generating unit
exceeds the recoverable amount, a provision is recorded to reflect
the asset at the recoverable amount in the balance sheet.
Impairment losses are recognised in the income statement.
The recoverable amount of an asset
The recoverable amount of an asset is the greater of its value
in use and fair value less costs of disposal. In assessing value in
use, estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to
the asset. The cash flows used to determine the recoverable amount
of mining assets are based on the mine plan for each mine. The mine
plan is determined on the basis of the estimated and economically
proven and probable reserves, as well as certain other resources
that are assessed as highly likely to be converted into reserves.
Fair value less cost of disposal is based on an estimate of the
amount that the Group may obtain in an orderly sale transaction
between market participants. For an asset that does not generate
cash inflows largely independently of those from other assets, or
groups of assets, the recoverable amount is determined for the cash
generating unit to which the asset belongs. The Group's cash
generating units are the smallest identifiable groups of assets
that generate cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Reversal of impairment
An assessment is made each reporting date as to whether there is
any indication that previously recognised impairment losses may no
longer exist or may have decreased. If such an indication exists,
the Group makes an estimate of the recoverable amount. A previously
recognised impairment loss is reversed only if there has been a
change in estimates used to determine the asset's recoverable
amount since the impairment loss was recognised. If that is the
case, the carrying amount of the asset is increased to the
recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognised in previous
years. Such impairment loss reversal is recognised in the income
statement.
(g) Financial assets and liabilities
The Group classifies its financial assets in the following
measurement categories:
-- those to be measured at amortised cost.
-- those to be measured subsequently at fair value through OCI, and.
-- those to be measured subsequently at fair value through profit or loss.
The classification depends on the Group's business model for
managing the financial assets and the contractual terms of the cash
flows.
For assets measured at fair value, gains and losses will either
be recorded in profit or loss or OCI. For investments in equity
instruments that are not held for trading, this will depend on
whether the group has made an irrevocable election at the time of
initial recognition to account for the equity investment at fair
value through other comprehensive income (FVOCI).
The Group reclassifies debt investments when and only when its
business model for managing those assets changes.
Regular way purchases and sales of financial assets are
recognised on trade-date, the date on which the Group commits to
purchase or sell the asset.
At initial recognition, the Group measures a financial asset at
its fair value plus, in the case of a financial asset not at fair
value through profit or loss (FVPL), transaction costs that are
directly attributable to the acquisition of the financial asset.
Transaction costs of financial assets carried at FVPL are expensed
in profit or loss.
Financial assets with embedded derivatives are considered in
their entirety when determining whether their cash flows are solely
payment of principal and interest.
Subsequent measurement of debt instruments depends on the
Group's business model for managing the asset and the cash flow
characteristics of the asset.
Classification
The Group classifies its financial assets in one of the
following categories.
Amortised cost
Assets that are held for collection of contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. Interest income from these
financial assets is included in finance income using the effective
interest rate method. Any gain or loss arising on derecognition is
recognised directly in profit or loss and presented in other
gains/(losses) together with foreign exchange gains and losses.
Impairment losses are presented as separate line item in the
statement of profit or loss.
The Group's financial assets at amortised cost include
receivables (other than trade receivables which are measured at
fair value through profit and loss).
Fair value through other comprehensive income
Assets that are held for collection of contractual cash flows
and for selling the financial assets, where the assets' cash flows
represent solely payments of principal and interest, are measured
at FVOCI. Movements in the carrying amount are taken through OCI,
except for the recognition of impairment gains or losses, interest
income and foreign exchange gains and losses which are recognised
in profit or loss. When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is
reclassified from equity to profit or loss and recognised in other
gains/(losses). Interest income from these financial assets is
included in finance income using the effective interest rate
method. Foreign exchange gains and losses are presented in other
gains/(losses) and impairment expenses are presented as separate
line item in the statement of profit or loss. As at 31 December
2019 and 2018 there were no such instruments.
Equity instruments designated as fair value through other
comprehensive income
Upon initial recognition, the Group can elect to classify
irrevocably its equity investments as equity instruments designated
at fair value through OCI when they meet the definition of equity
under IAS 32 Financial Instruments: Presentation and are not held
for trading. The classification is determined on an
instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to
profit or loss. Dividends are recognised as other income in the
statement of profit or loss when the right of payment has been
established, except when the Group benefits from such proceeds as a
recovery of part of the cost of the financial asset, in which case,
such gains are recorded in OCI. Equity instruments designated at
fair value through OCI are not subject to impairment
assessment.
The Group elected to classify irrevocably its listed equity
investments under this category.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or FVOCI
are measured at FVPL. A gain or loss on a debt investment that is
subsequently measured at FVPL is recognised in profit or loss and
presented net within other gains/(losses) in the period in which it
arises.
Changes in the fair value of financial assets at FVPL are
recognised in other gains/(losses) in the statement of profit or
loss as applicable.
The Group's trade receivables and derivative financial
instruments, including the Silverstream contract, are classified as
fair value through profit or loss.
De-recognition of financial assets
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or have been
transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Impairment of financial assets
The Group assesses on a forward-looking basis the expected
credit losses associated with its debt instruments carried at
amortised cost and FVOCI. The impairment methodology applied
depends on whether there has been a significant increase in credit
risk.
For receivables (other than trade receivables which are measured
at FVPL), the Group applies the simplified approach permitted by
IFRS 9, which requires expected lifetime losses to be recognised
from initial recognition of the receivables.
(h) Inventories
Finished goods, work in progress and ore stockpile inventories
are measured at the lower of cost and net realisable value. Cost is
determined using the weighted average cost method based on cost of
production which excludes borrowing costs.
For this purpose, the costs of production include:
personnel expenses, which include employee profit sharing,
materials and contractor expenses which are directly attributable
to the extraction and processing of ore;
the depreciation of property, plant and equipment used in the
extraction and processing of ore; and
related production overheads (based on normal operating
capacity).
Operating materials and spare parts are valued at the lower of
cost or net realisable value. An allowance for obsolete and
slow-moving inventories is determined by reference to specific
items of stock. A regular review is undertaken by management to
determine the extent of such an allowance.
Net realisable value is the estimated selling price in the
ordinary course of business less any further costs expected to be
incurred to completion and disposal.
(i) Cash and cash equivalents
For the purposes of the balance sheet, cash and cash equivalents
comprise cash at bank, cash on hand and short-term deposits held
with banks that are readily convertible into known amounts of cash
and which are subject to insignificant risk of changes in value.
Short-term deposits earn interest at the respective short-term
deposit rates between one day and three months. For the purposes of
the cash flow statement, cash and cash equivalents as defined above
are shown net of outstanding bank overdrafts.
(j) Provisions
Mine closure cost
A provision for mine closure cost is made in respect of the
estimated future costs of closure, restoration and for
environmental rehabilitation costs (which include the dismantling
and demolition of infrastructure, removal of residual materials and
remediation of disturbed areas) based on a mine closure plan, in
the accounting period when the related environmental disturbance
occurs. The provision is discounted and the unwinding of the
discount is included within finance costs. At the time of
establishing the provision, a corresponding asset is capitalised
where it gives rise to a future economic benefit and is depreciated
over future production from the mine to which it relates. The
provision is reviewed on an annual basis by the Group for changes
in cost estimates, discount rates or life of operations. Changes to
estimated future costs are recognised in the balance sheet by
adjusting the mine closure cost liability and the related asset
originally recognised. If, for mature mines, the revised mine
assets net of mine closure cost provisions exceed the recoverable
value, the portion of the increase is charged directly as an
expense. For closed sites, changes to estimated costs are
recognised immediately in profit or loss.
(k) Employee benefits
The Group operates the following plans:
Defined benefit pension plan
This funded plan is based on each employee's earnings and years
of service. This plan was open to all employees in Mexico until it
was closed to new entrants on 1 July 2007. The plan is denominated
in Mexican Pesos. For members as at 30 June 2007, benefits were
frozen at that date subject to indexation with reference to the
Mexican National Consumer Price Index (NCPI).
The cost of providing benefits under the defined benefit plan is
determined using the projected unit credit actuarial valuation
method and prepared by an external actuarial firm as at each
year-end balance sheet date. The discount rate is the yield on
bonds that have maturity dates approximating the terms of the
Group's obligations and that are denominated in the same currency
in which the benefits are expected to be paid. Actuarial gains or
losses are recognised in OCI and permanently excluded from profit
or loss.
Past service costs are recognised when the plan amendment or
curtailment occurs and when the entity recognises related
restructuring costs or termination benefits.
The defined benefit asset or liability comprises the present
value of the defined benefit obligation less the fair value of plan
assets out of which the obligations are to be settled directly. The
value of any asset is restricted to the present value of any
economic benefits available in the form of refunds from the plan or
reductions in the future contributions to the plan.
Net interest cost is recognised in finance cost and return on
plan assets (other than amounts reflected in net interest cost) is
recognised in OCI and permanently excluded from profit or loss.
Defined contribution pension plan
A defined contribution plan is a post-employment benefit plan
under which the Group pays fixed contributions into a separate
entity and has no legal or constructive obligation to pay further
amounts. Obligations for contributions to defined contribution
pension plans are recognised as an employee benefit expense in
profit or loss when they are due. The contributions are based on
the employee's salary.
This plan started on 1 July 2007 and it is voluntary for all
employees to join this scheme.
Seniority premium for voluntary separation
This unfunded plan corresponds to an additional payment over the
legal seniority premium equivalent to approximately 12 days of
salary per year for those unionised workers who have more than 15
years of service. Non-unionised employees with more than 15 years
of service have the right to a payment equivalent to 12 days for
each year of service. For both cases, the payment is based on the
legal current minimum salary.
The cost of providing benefits for the seniority premium for
voluntary separation is determined using the projected unit credit
actuarial valuation method and prepared by an external actuarial
firm as at each year-end balance sheet date. Actuarial gains or
losses are recognised as income or expense in the period in which
they occur.
Other
Benefits for death and disability are covered through insurance
policies.
Termination payments for involuntary retirement (dismissals) are
charged to the income statement, when incurred.
(l) Employee profit sharing
In accordance with the Mexican legislation, companies in Mexico
are subject to pay for employee profit sharing ('PTU') equivalent
to ten percent of the taxable income of each fiscal year.
PTU is accounted for as employee benefits and is calculated
based on the services rendered by employees during the year,
considering their most recent salaries. The liability is recognised
as it accrues and is charged to the income statement. PTU, paid in
each fiscal year, is considered deductible for income tax
purposes.
(m) Leases
As explained in note 2 (b) above, the Group has changed its
accounting policy for leases where the Group is the lessee.
From 1 January 2019
Group as a lessee
The Group assesses at contract inception whether a contract is,
or contains, a lease. That is, if the contract conveys the right to
control the use of an identified asset for a period of time in
exchange for consideration. From 1 January 2019, leases are
recognised as a right-of-use asset and a corresponding liability at
the date at which the leased asset is available for use by the
Group.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
fixed payments (including in-substance fixed payments), less any
lease incentives receivable variable lease payment that are based
on an index or a rate;
amounts expected to be payable by the lessee under residual
value guarantees;
the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following:
the amount of the initial measurement of lease liability;
any lease payments made at or before the commencement date less
any lease incentives received;
any initial direct costs; and
restoration costs.
Each lease payment is allocated between the liability and
finance cost. The finance cost is charged to profit or loss over
the lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each period.
The right-of-use asset is depreciated over the shorter of the
asset's useful life and the lease term on a straight-line
basis.
The Group is exposed to potential future increases in variable
lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to
lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use
asset.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of 12 months or less. Low-value assets comprise
IT-equipment.
Prior to 1 January 2018
Group as a lessee
Finance leases which transfer to the Group substantially all the
risks and benefits incidental to ownership of the leased item, are
capitalised at the inception of the lease at the fair value of the
leased asset, or if lower, at the present value of the minimum
lease payments. Lease payments are apportioned between the finance
charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the
liability. Finance charges are reflected in the income
statement.
Capitalised leased assets are depreciated over the shorter of
the estimated useful life of the asset and the lease term, if there
is no reasonable certainty that the Group will obtain ownership by
the end of the lease term.
Operating lease payments are recognised as an expense in the
income statement on a straight-line basis over the lease term.
Group as a lessor
Leases where the Group does not transfer substantially all the
risks and benefits of ownership of the asset are classified as
operating leases. Initial direct costs incurred in negotiating an
operating lease are added to the carrying amount of the leased
asset and recognised over the lease term on the same basis as
rental income. Contingent rents are recognised as revenue in the
period in which they are earned.
(n) Revenue from contracts with customers
Revenue is recognised when control of goods or services
transfers to the customer based on the performance obligations
settle in the contracts with customers.
Sale of goods
Revenue associated with the sale of concentrates, precipitates,
doré bars and activated carbon (the products) is recognized when
control of the asset sold is transferred to the customer.
Indicators of control transferring include an unconditional
obligation to pay, legal title, physical possession, transfer of
risk and rewards and customer acceptance. This generally occurs
when the goods are delivered to the customer's smelter or refinery
agreed with the buyer; at which point the buyer controls the
goods.
The revenue is measured at the amount to which the Group expects
to be entitled, being the estimate of the price expected to be
received in the expected month of settlement and the Group's
estimate of metal quantities based on assay data, and a
corresponding trade receivable is recognised. Any future changes
that occur before settlement are embedded within the provisionally
priced trade receivables and are, therefore, within the scope of
IFRS 9 and not within the scope of IFRS 15.
Given the exposure to the commodity price, these provisionally
priced trade receivables will fail the cash flow characteristics
test within IFRS 9 and will be required to be measured at fair
value through profit or loss up from initial recognition and until
the date of settlement. These subsequent changes in fair value are
recognised in revenue but separately from revenue from contracts
with customers.
Refining and treatment charges under the sales contracts are
deducted from revenue from sales of concentrates as these are not
related to a distinct good or service.
(o) Exploration expenses
Exploration activity involves the search for mineral resources,
the determination of technical feasibility and the assessment of
commercial viability of an identified resource.
Exploration expenses are charged to the income statement as
incurred and are recorded in the following captions:
Cost of sales: costs relating to in-mine exploration, that
ensure continuous extraction quality and extend mine life, and
Exploration expenses:
o Costs incurred in geographical proximity to existing mines in
order to replenish or increase reserves, and
o Costs incurred in regional exploration with the objective of
locating new ore deposits in Mexico and Latin America and which are
identified by project. Costs incurred are charged to the income
statement until there is sufficient probability of the existence of
economically recoverable minerals and a feasibility study has been
performed for the specific project.
(p) Selling expenses
The Group recognises in selling expenses a levy in respect of
the Extraordinary Mining Right as sales of gold and silver are
recognised. The Extraordinary Mining Right consists of a 0.5% rate,
applicable to the owners of mining titles. The payment must be
calculated over the total sales of all mining concessions. The
payment of this mining right must be remitted no later than the
last business day of March of the following year and can be
credited against corporate income tax.
The Group also recognises in selling expenses a discovery
premium royalty equivalent to 1% of the value of the mineral
extracted and sold during the year from certain mining titles
granted by the Mexican Geological Survey (SGM) in the San Julian
mine. The premium is settled to SGM on a quarterly basis.
(q) Taxation
Current income tax
Current income tax assets and liabilities for the current and
prior periods are measured at the amount expected to be recovered
from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or
substantively enacted, at the reporting date in the country the
Group operates.
Deferred income tax
Deferred income tax is provided using the liability method on
temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable
temporary differences, except:
where the deferred income tax liability arises from the initial
recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of
transaction, affects neither the accounting profit nor taxable
profit loss; and
in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible
temporary differences, carry forward of unused tax credits and
unused tax losses, to the extent that it is probable that taxable
profit will be available against which the deductible temporary
differences, and the carry forward of unused tax credits and unused
tax losses can be utilised, except:
where the deferred income tax asset relating to deductible
temporary differences arise from the initial recognition of an
asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, deferred income tax assets are recognised only to the
extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be
utilised.
The carrying amount of deferred income tax assets is reviewed at
each balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profit will be available to
allow all or part of the deferred income tax asset to be
utilised.
Unrecognised deferred income tax assets are reassessed at each
balance sheet date and are recognised to the extent that it has
become probable that future taxable profit will allow the deferred
tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the
tax rates that are expected to apply to the year when the asset is
realised or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at the
balance sheet date.
Deferred income tax relating to items recognised directly in
other comprehensive income is recognised in equity and not in the
income statement.
Deferred income tax assets and deferred income tax liabilities
are offset, if a legally enforceable right exists to set off
current tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the
same taxation authority.
Mining Rights
The Special Mining Right is considered an income tax under IFRS
and states that the owners of mining titles and concessions are
subject to pay an annual mining right of 7.5% of the profit derived
from the extractive activities (See note 10 (e)). The Group
recognises deferred tax assets and liabilities on temporary
differences arising in the determination of the Special Mining
Right (See note 10).
Sales tax
Expenses and assets are recognised net of the amount of sales
tax, except:
When the sales tax incurred on a purchase of assets or services
is not recoverable from the taxation authority, in which case, the
sales tax is recognised as part of the cost of acquisition of the
asset or as part of the expense item, as applicable;
When receivables and payables are stated with the amount of
sales tax included.
The net amount of sales tax recoverable from, or payable to, the
taxation authority is included as part of receivables or payables
in the balance sheet.
(r) Derivative financial instruments and hedging
The Group uses derivatives to reduce certain market risks
derived from changes in foreign exchange and commodities price
which impact its financial and business transactions. Hedges are
designed to protect the value of expected production against the
dynamic market conditions.
Such derivative financial instruments are initially recognised
at fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value. Derivatives are
carried as assets when the fair value is positive and as
liabilities when the fair value is negative. The full fair value of
a derivative is classified as non-current asset or liability if the
remaining maturity of the item is more than 12 months.
Any gains or losses arising from changes in fair value on
derivatives during the year that do not qualify for hedge
accounting are taken directly to the income statement.
Derivatives are valued using valuation approaches and
methodologies (such as Black Scholes and Net Present Value)
applicable to the specific type of derivative instrument. The fair
value of forward currency and commodity contracts is calculated by
reference to current forward exchange rates for contracts with
similar maturity profiles, European foreign exchange options are
valued using the Black Scholes model. The Silverstream contract is
valued using a Net Present Value valuation approach.
The documentation includes identification of the hedging
instrument, the hedged item, the nature of the risk being hedged
and how the Group will assess whether the hedging relationship
meets the hedge effectiveness requirements (including the analysis
of sources of hedge ineffectiveness and how the hedge ratio is
determined). A hedging relationship qualifies for hedge accounting
if it meets all of the following effectiveness requirements:
-- There is 'an economic relationship' between the hedged item
and the hedging instrument.
-- The effect of credit risk does not 'dominate the value
changes' that result from that economic relationship.
-- The hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the Group
actually hedges and the quantity of the hedging instrument that the
Group actually uses to hedge that quantity of hedged item.
Hedges which meet the criteria for hedge accounting are
accounted for as follows:
Cash flow hedges
For derivatives that are designated and qualify as cash flow
hedges, the effective portion of changes in the fair value of
derivative instruments are recorded as in other comprehensive
income and are transferred to the income statement when the hedged
transaction affects profit or loss, such as when a forecast sale or
purchase occurs. For gains or losses related to the hedging of
foreign exchange risk these are included, in the line item in which
the hedged costs are reflected. Where the hedged item is the cost
of a non-financial asset or liability, the amounts recognised in
other comprehensive income are transferred to the initial carrying
amount of the non-financial asset or liability. This is not a
reclassification adjustment and will not be recognised in OCI for
the period. The ineffective portion of changes in the fair value of
cash flow hedges is recognised directly as finance costs, in the
income statement of the related period.
If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation as
a hedge is revoked, any cumulative gain or loss recognised directly
in other comprehensive income from the period that the hedge was
effective remains separately in other comprehensive income until
the forecast transaction occurs, when it is recognised in the
income statement. When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was reported in other
comprehensive income is immediately transferred to the income
statement.
When hedging with options, the Group designates only the
intrinsic value movement of the hedging option within the hedge
relationship. The time value of the option contracts is therefore
excluded from the hedge designation. In such cases, changes in the
time value of options are initially recognised in OCI as a cost of
hedging. Where the hedged item is transaction related, amounts
initially recognised in OCI related to the 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.
(s) Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of an asset that necessarily takes 12 or
more months to get ready for its intended use or sale (a qualifying
asset) are capitalised as part of the cost of the respective asset.
Borrowing costs consist of interest and other costs that an entity
incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the
amount capitalised represents the actual borrowing costs incurred.
Where surplus funds are available for a short term from funds
borrowed specifically to finance a project, the income generated
from the temporary investment of such amounts is also capitalised
and deducted from the total capitalised borrowing cost. Where the
funds used to finance a project form part of general borrowings,
the amount capitalised is calculated using a weighted average of
rates applicable to relevant general borrowings of the Group during
the period.
All other borrowing costs are recognised in the income statement
in the period in which they are incurred.
(t) Fair value measurement
The Group measures financial instruments at fair value at each
balance sheet date. Fair values of financial instruments measured
at amortised cost are disclosed in notes 29 and 30.
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:
In the principal market for the asset or liability, or
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 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. Further
information on fair values is described in note 29.
(u) Dividend distribution
Dividends payable to the Company's shareholders are recognised
as a liability when these are approved by the Company's
shareholders or Board as appropriate. Dividends payable to minority
shareholders are recognised as a liability when these are approved
by the Company's subsidiaries.
3. Segment reporting
For management purposes, the Group is organised into operating
segments based on producing mines.
At 31 December 2019, the Group has seven reportable operating
segments 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 Ciénega 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;
The Noche Buena mine, located in state of Sonora, a surface gold
mine; and
The San Julian mine, located on the border of Chihuahua /
Durango states, an underground silver-gold mine.
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.
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 consolidated income statement, 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 consolidated income
statement. Other income and expenses included in the 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.
In 2019 and 2018, substantially all revenue was derived from
customers based in Mexico.
Operating segments
The following tables present revenue and profit information
regarding the Group's operating segments for the year ended 31
December 2019 and 2018, respectively. Revenues for the year ended
31 December 2019 and 2018 include those derived from contracts with
costumers and other revenues, as showed in note 4.
Year ended 31 December 2019
--------------------------------------------------------------------------------------------------------------------
Soledad- Adjustments
Dipolos Noche San Other and
US$ thousands Fresnillo Herradura Cienega (4) Saucito Buena Julian (5) eliminations Total
---------------- --------- --------- ------- -------- ------- ------- ------- ------ ------------ ---------
Revenues:
Third party(1) 316,214 692,444 189,441 - 439,170 176,291 312,065 (5,984) 2,119,641
Inter-Segment 94,967 (94,967) -
---------------- --------- --------- ------- -------- ------- ------- ------- ------ ------------ ---------
Segment revenues 316,214 692,444 189,441 - 439,170 176,291 312,065 94,967 (100,951) 2,119,641
Segment
Profit(2) 164,570 218,661 84,926 - 238,133 58,295 128,221 66,547 965 960,318
Depreciation and
amortisation (489,529)
Employee profit
sharing (9,079)
---------------- --------- --------- ------- -------- ------- ------- ------- ------ ------------ ---------
Gross profit as
per the income
statement 461,709
---------------- --------- --------- ------- -------- ------- ------- ------- ------ ------------ ---------
Capital
expenditure(3) 172,846 37,520 58,220 - 126,384 5,709 65,325 93,260 - 559,264
---------------- --------- --------- ------- -------- ------- ------- ------- ------ ------------ ---------
1 Total third party revenues include treatment and refining
charges amounting US$144.6 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2 Segment profit excluding foreign exchange hedging gains,
depreciation and amortisation and employee profit sharing.)
(3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine
closure provision. Significant additions include the construction
of) (the leaching) plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).
(4 During) (2019) , this segment did not operate due to the
Bajio conflict (note 25).
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure mainly corresponds to Minera Juanicipio S.A de C.V) (.
and Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2018
--------------- --------- -----------------------------------------------------------------------------------------------
Adjustments
Soledad-Dipolos Noche San Other and
US$ thousands Fresnillo Herradura Cienega (4) Saucito Buena Julian (5) eliminations Total
--------------- --------- --------- ------- --------------- ------- ------- ------- ------ ------------ ---------
Revenues:
Third party(1) 333,009 607,073 172,922 - 436,491 210,994 341,714 1,582 2,103,785
Inter-Segment 85,101 (85,101) -
--------------- --------- --------- ------- --------------- ------- ------- ------- ------ ------------ ---------
Segment
revenues 333,009 607,073 172,922 - 436,491 210,994 341,714 85,101 (83,519) 2,103,785
Segment
Profit(2) 211,530 322,985 79,154 - 274,505 85,903 176,518 65,690 (11,281) 1,205,004
Depreciation
and
amortisation (411,764)
Employee profit
sharing (12,512)
--------------- --------- --------- ------- --------------- ------- ------- ------- ------ ------------ ---------
Gross profit as
per the income
statement 780,728
--------------- --------- --------- ------- --------------- ------- ------- ------- ------ ------------ ---------
Capital
expenditure(3) 121,146 116,002 72,895 - 148,440 50,209 83,129 76,848 - 668,669
--------------- --------- --------- ------- --------------- ------- ------- ------- ------ ------------ ---------
1 Total third party revenues include treatment and refining
charges amounting US$141.2 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2 Segment profit excluding foreign exchange hedging gains,
depreciation and amortisation and employee profit sharing.)
(3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, purchase of mine
equipment and capitalised stripping activity, excluding additions
relating to changes in the mine closure provision. Significant
additions include the construction of) (facilities at San Julian
phase II, the) (second) (dynamic leaching) (plant at Herradura and
the construction of the pyrites plant at Saucito.)
(4 During) (2018) , this segment did not operate due to the
Bajio conflict (note 25).
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure mainly corresponds to Minera Juanicipio S.A de C.V) (.
and Minera Bermejal, S. de R.L. de C.V.)
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré,
slag, precipitates and activated carbon of which the primary
contents are silver, gold, lead and zinc.
(a) Revenues by source
Year ended 31
December
------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Revenues from contracts with customers 2,125,962 2,102,694
Revenues from other sources:
Provisional pricing adjustment on products sold (337) (491)
Hedging (loss)/gain on sales (5,984) 1,582
------------------------------------------------- -------------- --------------
2,119,641 2,103,785
------------------------------------------------- -------------- --------------
(b) Revenues by product sold
Year ended 31
December
------------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------------------- -------------- --------------
Lead concentrates (containing silver, gold, lead and
by-products) 812,933 804,882
Doré and slag (containing gold, silver and by-products) 853,589 818,067
Zinc concentrates (containing zinc, silver and by-products) 220,023 249,182
Precipitates (containing gold and silver) 227,796 231,654
Activated carbon (containing gold, silver and by-products) 5,300 -
------------------------------------------------------------- -------------- --------------
2,119,641 2,103,785
------------------------------------------------------------- -------------- --------------
All concentrates, precipitates, doré, slag and activated carbon
were sold to Peñoles' metallurgical complex, Met-Mex, for smelting
and refining.
(c) 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:
Year ended 31
December
---------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Silver 776,784 815,837
Gold 1,183,116 1,118,087
Zinc 202,281 204,499
Lead 102,058 106,536
---------------------------------------------- -------------- --------------
Value of metal content in products sold 2,264,239 2,244,959
Adjustment for treatment and refining charges (144,598) (141,174)
---------------------------------------------- -------------- --------------
Total revenues (1) (,) 2,119,641 2,103,785
---------------------------------------------- -------------- --------------
1 Includes provisional price adjustments which represent changes
in the fair value of trade receivables resulting in a loss of
US$0.3 million (2018: loss of US$0.5 million) and hedging loss of
US$6.0 million (2018: gain of US$1.6 million). For further detail,
refer to note 2(n).
The average realised prices for the gold and silver content of
products sold, prior to the deduction of treatment and refining
charges, were:
Year ended 31
December
----------- ------------------
2019 2018
US$ per US$ per
ounce ounce
----------- -------- --------
Gold (2) 1,418.0 1,269.1
----------- -------- --------
Silver (2) 16.1 15.5
----------- -------- --------
(2 For the purpose of the calculation, revenue by content of
products sold does not include the results from hedging.)
5. Cost of sales
Year ended 31
December
---------------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------------------------- -------------- --------------
Depreciation and amortisation (note 12) 489,529 411,764
Personnel expenses (note 7) 110,704 94,653
Maintenance and repairs 189,042 150,021
Operating materials 233,159 191,954
Energy 219,531 176,333
Contractors 363,737 291,970
Freight 10,613 11,633
Insurance 5,819 4,956
Mining concession rights and contributions 12,910 13,271
Other 33,994 29,680
---------------------------------------------------------------- -------------- --------------
Cost of production 1,669,038 1,376,235
Change in work in progress and finished goods (ore inventories) (11,106) (53,178)
1,657,932 1,323,057
---------------------------------------------------------------- -------------- --------------
6. Exploration expenses
Year ended 31
December
------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------- -------------- --------------
Contractors 116,207 127,734
Mining concession rights and contributions 22,243 23,441
Administrative services 6,885 6,734
Personnel expenses (note 7) 3,731 4,137
Assays 1,815 3,615
Rentals 1,135 1,378
Other 5,897 5,760
------------------------------------------- -------------- --------------
157,913 172,799
------------------------------------------- -------------- --------------
These exploration expenses were mainly incurred in areas of the
Fresnillo, Herradura, La Ciénega, Saucito and San Julian mines,
Juanicipio development project and Guanajuato, San Javier, Valles,
Centauro Deep and Carina projects. In addition, exploration
expenses of US$14.9 million (2018: US$6.3 million) were incurred in
the year on projects located in Peru and Chile.
The following table sets forth liabilities (generally trade
payables) corresponding to exploration activities of the Group
companies engaged only in exploration, principally Exploraciones
Mineras Parreña, S.A. de C.V.
Year ended 31
December
---------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Liabilities related to exploration activities 106 112
---------------------------------------------- -------------- --------------
The liabilities related to exploration activities recognised by
the Group operating companies are not included since it is not
possible to separate the liabilities related to exploration
activities of these companies from their operating liabilities.
Cash flows relating to exploration activities are as
follows:
Year ended 31
December
----------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Operating cash out flows related to exploration activities 157,919 174,634
----------------------------------------------------------- -------------- --------------
7. Personnel expenses
Year ended 31
December
----------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
----------------------------------------------- -------------- --------------
Salaries and wages 55,156 46,542
Employees' profit sharing 9,578 13,003
Bonuses 13,892 12,367
Statutory healthcare and housing contributions 20,304 17,976
Other benefits 13,622 10,682
Vacations and vacations bonus 4,262 2,870
Social security 2,490 2,369
Post-employment benefits 5,582 4,026
Legal contributions 2,476 2,190
Training 3,210 3,033
Other 5,729 7,404
----------------------------------------------- -------------- --------------
136,301 122,462
----------------------------------------------- -------------- --------------
(a) Personnel expenses are reflected in the following line
items:
Year ended 31
December
------------------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------ -------------- --------------
Cost of sales (note 5) 110,704 94,653
Administrative expenses 21,866 23,672
Exploration expenses (note 6) 3,731 4,137
------------------------------ -------------- --------------
136,301 122,462
------------------------------ -------------- --------------
(b) The monthly average number of employees during the year was
as follows:
Year ended 31
December
------------------------- ---------------
2019 2018
No. No.
------------------------- ------- ------
Mining 2,334 2,236
Plant 869 752
Exploration 468 480
Maintenance 1,115 1,035
Administration and other 897 658
------------------------- ------- ------
Total 5,683 5,161
------------------------- ------- ------
8. Other operating income and expenses
Year ended 31
December
---------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Other income:
Insurance recovery (1) 6,494 9,245
Rentals 829 -
Other 2,480 2,458
---------------------------------------------- -------------- --------------
9,803 11,703
---------------------------------------------- -------------- --------------
Year ended 31
December
---------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Other expenses:
Loss on sale of property, plant and equipment 4,866 999
Loss on theft of inventory 4,935 -
Maintenance (2) 1,423 1,278
Donations 1,137 1,313
Environmental activities 2,641 1,216
Real property transfer tax 1,156 -
Consumption tax expensed 853 655
Other 5,571 2,899
---------------------------------------------- -------------- --------------
22,582 8,360
---------------------------------------------- -------------- --------------
1 Corresponds to the insurance claim relating to the theft of
doré at Minera Penmont less its corresponding production cost
(2018: Insurance claim corresponding the flood at the Saucito mine)
see Note 25 for further detail.
2 Costs relating to the rehabilitation of the facilities of
Compañía Minera las Torres, S.A. de C.V. (a closed mine).
9. Finance income and finance costs
Year ended 31
December
------------------------------------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------ -------------- --------------
Finance income:
Interest on short-term deposits and investments 11,356 15,584
Interest on tax receivables 12,814 1,670
Other 6 3,118
------------------------------------------------ -------------- --------------
24,176 20,372
------------------------------------------------ -------------- --------------
Year ended 31
December
------------------------------------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------ -------------- --------------
Finance costs:
Interest on interest-bearing loans 41,263 36,258
Interest for lease liabilities 642 -
Fair value movement on derivatives - 274
Unwinding of discount on provisions 11,809 10,044
Other(1) 16,956 3,434
------------------------------------------------ -------------- --------------
70,670 50,010
------------------------------------------------ -------------- --------------
(1 Includes US$15.7 million of interest and surcharges incurred
as a result of the amendment to tax positions described in note
10.)
10. Income tax expense
a) Major components of income tax expense:
Year ended 31
December
---------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 112,002 156,715
Amounts under provided in previous years 36,509 11,774
---------------------------------------------------- -------------- --------------
148,511 168,489
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (171,030) (52,327)
Revaluation effects of Silverstream contract 14,513 4,487
---------------------------------------------------- -------------- --------------
(156,517) (47,840)
---------------------------------------------------- -------------- --------------
Corporate income tax (8,006) 120,649
Special mining right
Current:
Special mining right charge (note 10 e)) 3,880 10,860
---------------------------------------------------- -------------- --------------
Amounts under provided in previous years 6,663 -
---------------------------------------------------- -------------- --------------
10,543 10,860
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (29,596) 2,455
---------------------------------------------------- -------------- --------------
Special mining right (19,053) 13,315
Income tax expense reported in the income statement (27,059) 133,964
Year ended 31
December
--------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Consolidated statement of comprehensive income:
Deferred income tax (charge)/credit related to items
recognised directly in other comprehensive income:
Gain on cash flow hedges recycled to income statement (1,795) (388)
Changes in fair value of cash flow hedges (436) (4,224)
Changes in the fair value of cost of hedges 384 -
Changes in fair value of equity investments at FVOCI (13,441) 20,327
Remeasurement losses on defined benefit plans 372 (415)
--------------------------------------------------------- -------------- --------------
Income tax effect reported in other comprehensive income (14,845) 15,300
--------------------------------------------------------- -------------- --------------
In 2017 the Mexican tax authorities ("SAT") opened a routine
audit into the 2014 tax returns of two underground mining
subsidiaries of Fresnillo plc ("Fresnillo" or the "Company"),
relating primarily to the tax treatment of mining works, which is
not explicitly dealt with in the Mexican income tax law.
Subsequently, in 2018, the Company and SAT agreed on the tax
treatment deemed most appropriate to mining works disbursements for
the year of the audit resulting in a tax amendment removing the
in-year deduction for mining works, which was documented through an
agreement executed between SAT, PRODECON (Mexico's tax ombudsman)
and the Company on 30 November 2018 (the "Conclusive Agreement").
Following further analysis in 2019, the deductions for those mining
works were reinstated as amortisable deductions over 8 years.
Fresnillo determined it to be in the Company's best interests to
align its tax treatment across its underground mining operations
subsidiaries with the Conclusive Agreements. Accordingly, on 28
June 2019, Fresnillo elected to amend the tax treatment of mining
works across all its underground mines in operation,
retrospectively, for the years 2014 to 2018.
The amendment resulted in an increase in the current corporate
income tax charge of US$38.5 million and current special mining
right charge of US$6.8 million; this effect was offset by a
decrease in deferred corporate income tax of US$39.5 million and
deferred special mining right of US$12.3 million. After considering
the effect of recoverable tax-related balances arising during the
amendment period, the amount payable upon amendment in respect of
corporate income tax and special mining right was US$32.9 million
and US$6.8 million, respectively. The amendment also resulted in
US$15.7 million of interest and surcharges, presented in finance
costs. Of the total amount payable of US$55.3 million, US$22.2
million was offset against corporate income tax and VAT receivables
that existed at the date of the amendment and the remaining US$33.1
million was paid in cash.
(b) Reconciliation of the income tax expense at the Group's
statutory income rate to income tax expense at the Group's
effective income tax rate:
Year ended 31
December
-------------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
-------------------------------------------------------------- -------------- --------------
Accounting profit before income tax 178,756 483,930
-------------------------------------------------------------- -------------- --------------
Tax at the Group's statutory corporate income tax rate
30.0% 53,627 145,179
Expenses not deductible for tax purposes 2,934 2,454
Inflationary uplift of the tax base of assets and liabilities (17,229) (16,599)
Current income tax (over)/underprovided in previous
years (275) (4,807)
Effect of conclusive agreement (5,084) -
Exchange rate effect on tax value of assets and liabilities
(1) (37,101) (778)
Non-taxable/non-deductible foreign exchange effects 3,982 1,255
Inflationary uplift of tax losses (1,439) (2,909)
Inflationary uplift on tax refunds (3,867) -
Incentive for Northern Border Zone (6,417) -
IEPS tax credit (note 10 (e)) (9,975) (7,012)
Deferred tax asset not recognised 6,688 6,571
Special mining right taxable/(deductible) for corporate
income tax 5,718 (3,992)
Other 432 1,287
-------------------------------------------------------------- -------------- --------------
Corporate income tax at the effective tax rate of (4.5)%
(2018: 24.9%) (8,006) 120,649
-------------------------------------------------------------- -------------- --------------
Special mining right (19,053) 13,315
-------------------------------------------------------------- -------------- --------------
Tax at the effective income tax rate of (15.1)% (2018:
27.6%) (27,059) 133,964
-------------------------------------------------------------- -------------- --------------
(1 Mainly derived from the tax value of property, plant and
equipment.)
The most significant items reducing the effect of effective tax
rate are inflation effects, exchange rate and the IEPS tax credit.
The future effects of inflation and exchange rate will depend on
future market conditions. According to the recent tax reform
enacted, IEPS tax credit will not be applicable for future
years.
(c) Movements in deferred income tax liabilities and assets:
Year ended 31
December
------------------------------------------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------------ -------------- --------------
Opening net liability (382,042) (442,727)
Income statement credit arising on corporate income
tax 156,518 47,840
Income statement credit/(charge) arising on special
mining right 29,596 (2,455)
Exchange difference 196 -
Net (charge)/credit related to items directly charged
to other comprehensive income (14,845) 15,300
Closing net liability (210,577) (382,042)
------------------------------------------------------ -------------- --------------
The amounts of deferred income tax assets and liabilities as at
31 December 2019 and 2018, considering the nature of the related
temporary differences, are as follows:
Consolidated Consolidated
balance sheet income statement
------------------------------------------------ ------------------------------ ------------------------------
2019 2018 2019 2018
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------------------ -------------- -------------- -------------- --------------
Related party receivables (201,481) (220,131) (18,650) (1,320)
Other receivables (4,375) 1,315 5,690 (3,486)
Inventories 185,012 188,119 3,107 (25,277)
Prepayments (1,041) (1,035) 6 137
Derivative financial instruments including
Silverstream contract (158,243) (150,205) 6,262 (1,942)
Property, plant and equipment arising from
corporate income tax (179,117) (330,722) (151,605) (11,052)
Exploration expenses and operating liabilities 66,275 50,691 (15,584) (6,570)
Other payables and provisions 69,317 57,303 (12,014) (1,924)
Losses carried forward 53,002 67,059 14,057 1,154
Post-employment benefits 1,702 1,016 (315) 34
Deductible profit sharing 2,998 3,807 809 442
Special mining right deductible for corporate
income tax 18,077 29,321 11,244 1,340
Equity investments at FVOCI (9,236) 3,510 (695) -
Other (5,369) (4,396) 1,171 624
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability related to corporate
income tax (162,479) (304,348)
Deferred tax credit related to corporate
income tax - - (156,517) (47,840)
Related party receivables arising from
special mining right (22,518) (20,161) 2,357 (1,218)
Inventories arising from special mining
right 17,083 13,746 (3,337) (2,639)
Property plant and equipment arising from
special mining right (42,663) (71,279) (28,616) 6,312
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (210,577) (382,042)
Deferred tax credit (186,113) (45,385)
------------------------------------------------ -------------- -------------- -------------- --------------
Reflected in the statement of financial
position as follows:
Deferred tax assets 110,770 88,883
Deferred tax liabilities-continuing operations (321,347) (470,925)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (210,577) (382,042)
------------------------------------------------ -------------- -------------- -------------- --------------
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets and
liabilities relate to the same fiscal authority.
On the basis of management's internal forecast, a deferred tax
asset has been recognised in respect of tax losses amounting to US$
176.7 million (2018: US$223.5 million). If not utilised, US$21.2
million (2018: US$37.6 million) will expire within five years and
US$155.5 million (2018: US$185.9 million) will expire between six
and ten years.
The Group has further tax losses and other similar attributes
carried forward of US$59.7 million (2018: US$42.2 million) on which
no deferred tax is recognised due to insufficient certainty
regarding the availability of appropriate future taxable profits.
Based on the applicable tax legislation the tax losses are not
subject to expire.
(d) Unrecognised deferred tax on investments in subsidiaries
The Group has not recognised all of the deferred tax liability
in respect of distributable reserves of its subsidiaries because it
controls them and only part of the temporary differences are
expected to reverse in the foreseeable future. The temporary
differences for which a deferred tax liability has not been
recognised aggregate to US$1,619 million (2018: US$1,430
million).
(e) Corporate Income Tax ('Impuesto Sobre la Renta' or 'ISR')
and Special Mining Right ("SMR")
The Group's principal operating subsidiaries are Mexican
residents for taxation purposes. The rate of current corporate
income tax is 30%.
During 2019 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 could be applied against the annual
corporate income tax. The credit is calculated on an
entity-by-entity basis. During the year ended 31 December 2019, the
Group applied a credit of US$9.9 million in respect of the year
(2018: US$14.9 million , which was offset by an adjustment in
respect of prior years of US$7.8 million). As the IEPS deduction is
itself taxable, the benefit is recognised at 70% of the IEPS
calculated during the year. The net amount applied by the Group is
presented in the reconciliation of the effective tax rate in note
10(b).
On December 31, 2018, the Decree of tax incentives for the
northern border region of Mexico was published in the Official
Gazette, which provides a reduction of income tax by a third and
also a reduction of 50% of the value added tax rate, for taxpayers
that produce income from business activities carried out within the
northern border region. These tax incentives are applicable since
January 1st, 2019 and will remain in force until December 31,2020.
Some of the Group companies which produce income from business
activities carried out within Caborca, Sonora, which is considered
for purposes of the Decree as northern border region, applied for
this Decree tax incentives before the Mexican tax authorities, and
were granted authorization for income tax and value added tax
purposes.
The special mining right "SMR " states that the owners of mining
titles and concessions are subject to pay an annual mining right of
7.5% of the profit derived from the extractive activities and is
considered as income tax under IFRS. The SMR allows as a credit the
payment of mining concessions rights up to the amount of SMR
payable within the same legal entity. The 7.5% tax applies to a
base of income before interest, annual inflation adjustment, taxes
paid on the regular activity, depreciation and amortization, as
defined by the new ISR. This SMR can be credited against the
corporate income tax of the same fiscal year and its payment must
be remitted no later than the last business day of March of the
following year.
During the fiscal year ended 31 December 2019, the Group
credited US$14.7 million (2018: US$17.3 million) of mining
concession rights against the SMR. Total mining concessions rights
paid during the year were US$21.1 million (2018: US$22.2 million)
and have been recognised in the income statement within cost of
sales and exploration expenses. Mining concessions rights paid in
excess of the SMR cannot be credited to SMR in future fiscal
periods, and therefore no deferred tax asset has been recognised in
relation to the excess. Without regards to credits permitted under
the SMR regime, the current special mining right credit would have
been US$18.6 million (2018: US$28.1 million).
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the year attributable to equity shareholders of the Company by the
weighted average number of Ordinary Shares in issue during the
period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2019 and 2018, earnings per share have been
calculated as follows:
Year ended 31
December
--------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Earnings:
Profit from continuing operations attributable to equity
holders of the Company 203,997 349,846
Adjusted profit from continuing operations attributable
to equity holders of the Company 170,134 339,377
--------------------------------------------------------- -------------- --------------
Adjusted profit is profit as disclosed in the Consolidated
Income Statement adjusted to exclude revaluation effects of the
Silverstream contract of US$48.4 million gain (US$33.9 million net
of tax) (2018: US$14.9 million gain (US$10.4 million net of
tax)).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
2019 2018
thousands thousands
------------------------------------------------------- ---------- ----------
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
------------------------------------------------------- ---------- ----------
2019 2018
US$ US$
------------------------------------------------------- ---------- ----------
Earnings per share:
Basic and diluted earnings per share 0.277 0.475
Adjusted basic and diluted earnings per Ordinary Share
from continuing operations 0.231 0.461
------------------------------------------------------- ---------- ----------
12. Property, plant and equipment
Year ended 31 December 2018
------------------------------- ----------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
US$ thousands
------------------------------- ----------------------------------------------------------------------------------
Cost
At 1 January 2018 261,805 1,817,591 1,909,385 255,465 471,055 4,715,301
Additions 1,928 76,424 69 546(2) 586,840 665,807
Disposals - (9,768) (2,386) (1,749) - (13,903)
Transfers and other movements 19,566 248,356 269,336 22,469 (559,727) -
At 31 December 2018 283,299 2,132,603 2,176,404 276,731 498,168 5,367,205
Accumulated depreciation
At 1 January 2018 (112,048) (1,051,459) (997,913) (105,285) - (2,266,705)
Depreciation for the year(1) (24,130) (166,204) (208,807) (20,878) - (420,019)
Disposals - 9,159 1,881 1,583 - 12,623
At 31 December 2018 (136,178) (1,208,504) (1,204,839) (124,580) - (2,674,101)
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Net Book amount at 31 December
2018 147,121 924,099 971,565 152,151 498,168 2,693,104
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Year ended 31 December 2019(3)
------------------------------- ----------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
US$ thousands
------------------------------- ----------------------------------------------------------------------------------
Cost
At 31 December 2018 283,299 2,132,603 2,176,404 276,731 498,168 5,367,205
Effect of adoption IFRS 16
(Note 2(b)) 3,550 - - 7,749 - 11,299
At 1 January 2019 286,849 2,132,603 2,176,404 284,480 498,168 5,378,504
Additions 1,209 25,219 2,623 40,786(2) 536,374 606,211
Disposals (106) (52,979) (51,123) (4,675) - (108,883)
Transfers and other movements 35,616 166,267 193,945 8,938 (404,766) -
At 31 December 2019 323,568 2,271,110 2,321,849 329,529 629,776 5,875,832
Accumulated depreciation
At 1 January 2019 (136,178) (1,208,504) (1,204,839) (124,580) - (2,674,101)
Depreciation for the year(1) (26,219) (184,616) (253,044) (27,119) - (490,998)
Disposals 69 47,311 51,102 4,202 - 102,684
At 31 December 2019 (162,328) (1,345,809) (1,406,781) (147,497) - (3,062,415)
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Net Book amount at 31 December
2019 161,240 925,301 915,068 182,032 629,776 2,813,417
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
1 Depreciation for the year includes US$490.7 million (2018:
US$411.8 million) recognised as an expense in the income statement
and US$0.3 million (2018: US$8.3 million), capitalised as part of
construction in progress.
2 From the additions in "other assets" category US$29.4 million
(2018: US$(4.5) million) corresponds to the reassessment of mine
closure rehabilitations costs, see note 20.
(3 Figures include Right-of-use assets as described in Note
24)
The table below details construction in progress by operating
mine and development projects
Year ended 31
December
---------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 75,346 88,916
Herradura 53,388 70,536
Noche Buena 10,682 20,834
Ciénega 57,214 47,838
Fresnillo 141,166 48,671
San Julián 41,158 64,236
Juanicipio 231,105 151,092
Other(1) 19,717 6,045
---------------- -------------- --------------
629,776 498,168
---------------- -------------- --------------
1 Manly corresponds to Minera Bermejal, S.A. de C.V. (2018:
Minera Bermejal, S.A. de C.V.).
During the year ended 31 December 2019, the Group capitalised
US$6.1 million of borrowing costs within construction in progress
(2018: US$11.1). Borrowing costs were capitalised at the rate of
5.78% (2018: 5.78%).
Sensitivity analysis
As at 31 December 2019 and 2018, the carrying amount of mining
assets was fully supported by the higher of value in use and fair
value less cost of disposal (FVLCD) computation of their
recoverable amount. Value in use and FVLCD was determined based on
the net present value of the future estimated cash flows expected
to be generated from the continued use of the CGUs. For both
valuation approaches management used long term price assumptions of
US$1,370/ounce and US$18.7/ounce (2018: US$1,310/ounce and
US$19.25/ounce) for gold and silver, respectively. Management
considers that the models supporting the carrying amounts are most
sensitive to commodity price assumptions and have therefore
performed a sensitivity analysis for those CGUs, where a reasonable
possible change in prices could lead to impairment. Management has
considered a low sensitivity by decreasing gold and silver prices
by 5% (2018: gold and silver 5%) and a high sensitivity by
decreasing gold and silver prices by 10% and 15% respectively
(2018: gold and silver 10% and 15% respectively). As at 31 December
2019 the analysis resulted in an impairment on Herradura of
US$356.4 million (2018: 302.7 million) under high sensitivity;
US$127.4 million (2018: US$72.3 million) under low sensitivity and
San Julian US$121.6 million (2018: US$159.3 million) under high
sensitivity; US$109.7 million (2018: US$45.4 million) under low
sensitivity.
Management also has performed a sensitivity analysis for those
subsidiaries where cumulative impairment may be affected by a
reasonably possible change in production plans. In the current
year, management has considered a decrease in ore grade of 5%. The
sensitivity resulted in an additional impairment on Minera San
Julian, S.A. de C.V. of US$45.1 million (2018: nil).
13. Silverstream contract
On 31 December 2007, the Group entered into an agreement with
Peñoles through which it is entitled to receive the proceeds
received by the Peñoles Group in respect of the refined silver sold
from the Sabinas Mine ('Sabinas'), a base metals mine owned and
operated by the Peñoles Group, for an upfront payment of US$350
million. In addition, a per ounce cash payment of $2.00 in years
one to five and $5.00 thereafter (subject to an inflationary
adjustment that commenced from 31 December 2013) is payable to
Peñoles. The cash payment per ounce for the year ended 31 December
2019 was $5.31 per ounce (2018: $5.26 per ounce). Under the
contract, the Group has the option to receive a net cash settlement
from Peñoles attributable to the silver produced and sold from
Sabinas, to take delivery of an equivalent amount of refined silver
or to receive settlement in the form of both cash and silver. If,
by 31 December 2032, the amount of silver produced by Sabinas is
less than 60 million ounces, a further payment is due from Peñoles
of US$1 per ounce of shortfall. At 31 December 2019 the weighted
average rate applied for the purposes of the valuation model was
6.57% (2018: 7.33%).
The Silverstream contract represents a derivative financial
instrument which has been recorded at FVPL and classified within
non-current and current assets as appropriate. The term of the
derivative is based on Sabinas life of mine which is currently 35
years. Changes in the contract's fair value, other than those
represented by the realisation of the asset through the receipt of
either cash or refined silver, are charged or credited to the
income statement. In the year ended 31 December 2019 total proceeds
received in cash were US$24.3 million (2018: US$36.3 million) of
which, US$3.4 million was in respect of proceeds receivable as at
31 December 2018 (2017: US$4.9 million). Cash received in respect
of the year of US$20.9 million (2018: US$31.4 million) corresponds
to 2.3 million ounces of payable silver (2018: 3.4 million ounces).
As at 31 December 2019, a further US$5.2 million (2018: US$3.4
million) of cash receivable corresponding to 414,963 ounces of
silver is due (2018: 335,914 ounces).
The US$48.4 million unrealised gain recorded in the income
statement (31 December 2018: US$15.0 million gain) resulted mainly
from the decrease in the LIBOR reference rate, the unwinding of the
discount and the increase in the forward silver price curve which
were partially offset by the updating of the Sabinas Reserves and
Resources, inflation and exchange rate forecasts.
A reconciliation of the beginning balance to the ending balance
is shown below:
2019 2018
US$ thousands US$ thousands
-------------------------------------------------- -------------- --------------
Balance at 1 January 519,093 538,887
Cash received in respect of the year (20,932) (31,379)
Cash receivable (5,283) (3,371)
Remeasurement gains recognised in profit and loss 48,376 14,956
-------------------------------------------------- -------------- --------------
Balance at 31 December 541,254 519,093
-------------------------------------------------- -------------- --------------
Less - Current portion 22,558 20,819
-------------------------------------------------- -------------- --------------
Non-current portion 518,696 498,274
-------------------------------------------------- -------------- --------------
See note 29 for further information on the inputs that have a
significant effect on the fair value of this derivative, see note
30 for further information relating to market and credit risks
associated with the Silverstream asset.
14. Inventories
As at 31 December
----------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Finished goods (1) 12,154 15,052
Work in progress (2) 252,639 235,094
Ore stockpile (3) - 3,799
Operating materials and spare parts 103,740 87,180
----------------------------------------------------------- -------------- --------------
368,533 341,125
Allowance for obsolete and slow-moving inventories (4,793) (6,101)
----------------------------------------------------------- -------------- --------------
Balance as 31 December at lower of cost and net realisable
value 363,740 335,024
----------------------------------------------------------- -------------- --------------
Less - Current portion 272,120 243,404
----------------------------------------------------------- -------------- --------------
Non-current portion (4) 91,620 91,620
----------------------------------------------------------- -------------- --------------
(1 Finished goods include metals contained in concentrates and
doré barson hand or in transit to a smelter or refinery.)
2 Work in progress includes metals contained in ores on leaching
pads (note 2(c)).
(3 Ore stockpile includes ore mineral obtained during the
development phase at San Julián.)
(4 The non-current inventories are expected to be processed more
than 12 months from the reporting date.)
Concentrates are a product containing sulphides with variable
content of precious and base metals and are sold to smelters and/or
refineries. Doré is an alloy containing a variable mixture of gold
and silver that is delivered in bar form to refineries, activated
carbon is a product containing variable mixture of gold and silver
that is delivered in small particles. The content once processed by
the smelter and refinery is sold to customers in the form of
refined products.
The amount of inventories recognised as an expense in the year
was US$1,657.3 million (2018: US$1,323.1 million) before changes to
the net realisable value of inventory. During 2019 and 2018, there
was no adjustment to net realisable value allowance against
work-in-progress inventory. The adjustment to the allowance for
obsolete and slow-moving inventory recognised as an expense was
US$1.3 million (2018: US$0.8 million).
15. Trade and other receivables
Year ended 31
December
--------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Trade and other receivables from related parties (note
26) 206,982 213,292
Value Added Tax receivable 205,232 182,290
Other receivables from related parties (note 26) 7,988 3,371
Other receivables from contractors 2,418 2,755
Other receivables 15,791 10,306
--------------------------------------------------------- -------------- --------------
438,411 412,014
Provision for impairment of 'other receivables' (769) (857)
--------------------------------------------------------- -------------- --------------
Trade and other receivables classified as current assets 437,642 411,157
--------------------------------------------------------- -------------- --------------
Other receivables classified as non-current assets:
Value Added Tax receivable 23,014 -
--------------------------------------------------------- -------------- --------------
23,014 -
--------------------------------------------------------- -------------- --------------
460,656 411,157
--------------------------------------------------------- -------------- --------------
Trade receivables are shown net of any corresponding advances,
are non-interest bearing and generally have payment terms of 46 to
60 days.
The total receivables denominated in US$ were US$219.6 million
(2018: US$223.1 million), and in Mexican pesos US$241.0 million
(2018: US$187.2 million).
As of 31 December for each year presented, with the exception of
'other receivables' in the table above, all trade and other
receivables were neither past due nor credit-impaired. The amount
past due and considered as credit-impaired as of 31 December 2019
is US$0.8 million (2018: US$0.9 million). In determining the
recoverability of receivables, the Group performs a risk analysis
considering the type and age of the outstanding receivable and the
credit worthiness of the counterparty, see note 30(b).
16. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its
operations and in order to achieve its treasury objectives.
As at 31 December
-------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
-------------------------- -------------- --------------
Cash at bank and on hand 3,347 2,125
Short-term deposits 333,229 558,660
-------------------------- -------------- --------------
Cash and cash equivalents 336,576 560,785
-------------------------- -------------- --------------
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 three 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.
17. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
--------------------------------------- --------------------------- ---------------------------
2019 2018
--------------------------------------- --------------------------- ---------------------------
Class of share Number Amount Number Amount
--------------------------------------- ------------- ------------ ------------- ------------
Ordinary Shares each of US$0.50 1,000,000,000 $500,000,000 1,000,000,000 $500,000,000
Sterling Deferred Ordinary Shares each
of GBP1.00 50,000 GBP50,000 50,000 GBP50,000
--------------------------------------- ------------- ------------ ------------- ------------
Issued share capital of the Company is as follows:
Sterling Deferred
Ordinary Shares Ordinary Shares
-------------------- -------------------------- -------------------
Number US$ Number GBP
-------------------- ----------- ------------- ------- ----------
At 1 January 2018 736,893,589 $368,545,586 50,000 GBP50,000
At 31 December 2018 736,893,589 $368, 545,586 50,000 GBP50,000
At 31 December 2019 736,893,589 $368, 545,586 50,000 GBP50,000
-------------------- ----------- ------------- ------- ----------
As at 31 December 2019 and 2018, all issued shares with a par
value of US$0.50 each are fully paid. The rights and obligations
attached to these shares are governed by law and the Company's
Articles of Association. Ordinary shareholders are entitled to
receive notice and to attend and speak at any general meeting of
the Company. There are no restrictions on the transfer of the
Ordinary shares.
The Sterling Deferred Ordinary Shares only entitle the
shareholder on winding up or on a return of capital to payment of
the amount paid up after repayment to Ordinary Shareholders. The
Sterling Deferred Ordinary Shares do not entitle the holder to
payment of any dividend, or to receive notice or to attend and
speak at any general meeting of the Company. The Company may also
at its option redeem the Sterling Deferred Ordinary Shares at a
price of GBP1.00 or, as custodian, purchase or cancel the Sterling
Deferred Ordinary Shares or require the holder to transfer the
Sterling Deferred Ordinary Shares. Except at the option of the
Company, the Sterling Deferred Ordinary Shares are not
transferrable.
Reserves
Share premium
This reserve records the consideration premium for shares issued
at a value that exceeds their nominal value.
Capital reserve
The capital reserve arose as a consequence of the Pre-IPO
Reorganisation as a result of using the pooling of interest
method.
Hedging reserve
This reserve records the portion of the gain or loss on a
hedging instrument in a cash flow hedge that is determined to be an
effective hedge, net of tax. When the hedged transaction occurs,
the gain or the loss is transferred out of equity to the income
statement or the value of other assets.
Cost of hedging reserve
The changes in the time value of option contracts are
accumulated in the costs of hedging reserve. These deferred costs
of hedging are either reclassified to profit or loss or recognised
as a basis adjustment to non-financial assets or liabilities upon
maturity of the hedged item, or, in the case of a hedge item that
realises over time, amortised on a systematic and rational basis
over the life of the hedged item.
Fair value reserve of financial assets at FVOCI
The Group has elected to recognise changes in the fair value of
certain investments in equity securities in OCI, as explained in
note 2(g). These changes are accumulated within the FVOCI reserve
within equity. The Group transfers amounts from this reserve to
retained earnings when the relevant equity securities are
derecognised.
Foreign currency translation reserve
The foreign currency translation reserve is used to record
exchange differences arising from the translation of the financial
information of entities with a functional currency different to
that of the presentational currency of the Group.
Retained earnings/accumulated losses
This reserve records the accumulated results of the Group, less
any distributions and dividends paid.
18. Dividends declared and paid
The dividends declared and paid during the years ended 31
December 2019 and 2018 are as follows:
US cents
per
Ordinary Amount
Share US$ thousands
------------------------------------------------------- --------- --------------
Year ended 31 December 2019
Final dividend for 2018 declared and paid during the
year(1) 16.70 123,061
Interim dividend for 2019 declared and paid during the
year(2) 2.60 19,160
19.30 142,221
------------------------------------------------------- --------- --------------
Year ended 31 December 2018
Final dividend for 2017 declared and paid during the
year (3) 29.8 219,594
Interim dividend for 2018 declared and paid during the
year(4) 10.7 78,848
------------------------------------------------------- --------- --------------
40.5 298,442
------------------------------------------------------- --------- --------------
(1 This dividend was approved by the Board of Directors on 21
May 2019 and paid on 24 May 2019.)
(2 This dividend was approved by the Board of Directors on 24
July 2019 and paid on 6 September 2019.)
(3 This dividend was approved by the Board of Directors on 30
May 2018 and paid on 4 June 2018.)
(4 This dividend was approved by the Board of Directors on 3
September 2018 and paid on 7 September 2018.)
The directors have proposed a final dividend of US$11.9 cents
per share, which is subject to approval at the annual general
meeting and is not recognised as a liability as at 31 December
2019.
Following the year end, the Directors became aware that certain
dividends paid between 2011 and 2019 had been made otherwise than
in accordance with the Companies Act 2006, section 838, because
interim accounts had not been filed at Companies House prior to
payment. It is important to note that the Company has had
sufficient distributable profits at the time each relevant dividend
was paid and therefore did not pay out by way of dividends more
income than it had, and no payments were made out of capital.
Relevant dividends were the Interim Dividends in 2011, 2012, 2013
2018 and 2019, the 2013 Extraordinary Dividend and the 2018 Final
Dividend. A resolution will be proposed at the annual general
meeting to be held on 29 May 2020 to authorise the appropriation of
distributable profits to the payment of the relevant dividends and
to remove any right that the Company may have had to claim from
shareholders or Directors or former Directors for repayment of
these amounts by entering into deeds of release in relation to any
such claims. This will, if passed, constitute a related party
transaction under IAS 24. The overall effect of the resolution is
to return the parties so far as possible to the position they would
have been in had the relevant dividends been made in full
compliance with the Act.
19. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800
million aggregate principal amount of 5.500% Senior Notes due 2023
(the "Notes").
Movements in the year in the debt recognised in the balance
sheet are as follows:
As at 31 December
------------------------------------------------ --------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------ --------------- ---------------
Opening balance 800,127 799,046
Accrued interest 46,267 46,267
Interest paid (1) (46,267) (46,267)
Amortisation of discount and transaction costs 1,112 1,081
------------------------------------------------ --------------- ---------------
Closing balance 801,239 800,127
------------------------------------------------ --------------- ---------------
(1 Accrued interest is payable semi-annually on 13 May and 13
November.)
The Group has the following restrictions derived from the
issuance of the Notes:
Change of control:
Should the rating of the senior notes be downgraded as a result
of a change of control (defined as the sale or transfer of 35% or
more of the common shares; the transfer of all or substantially all
the assets of the Group; starting a dissolution or liquidation
process; or the loss of the majority in the board of directors) the
Group is obligated to repurchase the notes at an equivalent price
of 101% of their nominal value plus the interest earnt at the
repurchase date, if requested to do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property
that may have a material impact on business performance (key
assets). Nevertheless, the Group may pledge the aforementioned
properties provided that the repayment of the Notes keeps the same
level of priority as the pledge on those assets.
20. Provision for mine closure cost
The provision represents the discounted values of the estimated
cost to decommission and rehabilitate the mines at the estimated
date of depletion of mine deposits. Uncertainties in estimating
these costs include potential changes in regulatory requirements,
decommissioning, dismantling and reclamation alternatives, timing,
and the discount, foreign exchange and inflation rates applied.
The Group has performed separate calculations of the provision
by currency, discounting at corresponding rates. As at 31 December
2019, the discount rates used in the calculation of the parts of
the provision that relate to Mexican pesos range from 6.83% to
7.47% (2018: range of 7.12% to 8.55%). The range for the current
year parts that relate to US dollars range from 1.43% to 1.82%
(2018: range of 2.05% to 2.70%).
Mexican regulations regarding the decommissioning and
rehabilitation of mines are limited and less developed in
comparison to regulations in many other jurisdictions. It is the
Group's intention to rehabilitate the mines beyond the requirements
of Mexican law, and estimated costs reflect this level of expense.
The Group intends to fully rehabilitate the affected areas at the
end of the life of the mines.
The provision is expected to become payable at the end of the
production life of each mine, based on the reserves and resources,
which ranges from 2 to 29 years from 31 December 2019 (3 to 25
years from 31 December 2018). As at 31 December 2019 the weighted
average term of the provision is 13 years (2018:12 years)
As at 31 December
------------------------------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------ -------------- --------------
Opening balance 189,842 184,775
(Decrease)/increase to existing provision (4,215) 9,758
Effect of changes in discount rate 27,961 (14,279)
Unwinding of discount rate 11,848 10,065
Payments (24) (545)
Foreign exchange 5,644 68
------------------------------------------ -------------- --------------
Closing balance 231,056 189,842
------------------------------------------ -------------- --------------
21. Pensions and other post-employment benefit plans
The Group has a defined contribution plan and a defined benefit
plan.
The defined contribution plan was established as from 1 July
2007 and consists of periodic contributions made by each
non-unionised worker and contributions made by the Group to the
fund matching workers' contributions, capped at 8% of the
employee's annual salary.
The defined benefit plan provides pension benefits based on each
worker's earnings and years of services provided by personnel hired
through 30 June 2007 as well as statutory seniority premiums for
both unionised and non-unionised workers.
The overall investment policy and strategy for the Group's
defined benefit plan is guided by the objective of achieving an
investment return which, together with contributions, ensures that
there will be sufficient assets to pay pension benefits and
statutory seniority premiums for non-unionised workers as they fall
due while also mitigating the various risks of the plan. However,
the portion of the plan related to statutory seniority premiums for
unionised workers is not funded. The investment strategies for the
plan are generally managed under local laws and regulations. The
actual asset allocation is determined by current and expected
economic and market conditions and in consideration of specific
asset class risk in the risk profile. Within this framework, the
Group ensures that the trustees consider how the asset investment
strategy correlates with the maturity profile of the plan
liabilities and the respective potential impact on the funded
status of the plan, including potential short-term liquidity
requirements.
Death and disability benefits are covered through insurance
policies.
The following tables provide information relating to changes in
the defined benefit obligation and the fair value of plan
assets:
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
---------------------------------------- ----------------------------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes increase at
1 recognised included in in Sub-total due to 31
January Service Net Foreign in the Benefits in net demographic financial Experience Foreign included Contributions personnel December
2019 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2019
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (25,721) (975) (1,857) (1,183) (4,015) 708 - - (2,562) 46 - (2,516) - 250 (31,294)
Fair value
of plan
assets 19,328 1,334 866 2,200 (708) 174 - - - - 174 - (404) 20,590
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (6,393) (975) (523) (317) (1,815) - 174 - (2,562) 46 (2,342) - (154) (10,704)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
---------------------------------------- ----------------------------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes increase at
1 recognised included in in Sub-total due to 31
January Service Net Foreign in the Benefits in net demographic financial Experience Foreign included Contributions personnel December
2018 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2018
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (27,327) (62) (1,791) 5 (1,848) 884 - - 1,749 821 - 2,570 - - (25,721)
Fair value
of plan
assets 18,110 - 1,110 27 1,137 (630) 40 - - - - 40 614 57 19,328
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (9,217) (62) (681) 32 (711) 254 40 - 1,749 821 - 2,610 614 57 (6,393)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Of the total defined benefit obligation, US$9.2 million (2018:
US$7.4 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions
to the plan for the next annual reporting period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown
below:
As at 31 December
------------------------------- -------------------
2019 2018
% %
------------------------------- --------- --------
Discount rate 7.24 8.42
Future salary increases (NCPI) 5.00 5.15
------------------------------- --------- --------
The life expectancy of current and future pensioners, men and
women aged 65 and older will live on average for a further 23.2 and
26.7 years respectively (2018: 23.1 years for men and 26.6 for
women). The weighted average duration of the defined benefit
obligation is 11.3 years (2018: 10.8 years).
The fair values of the plan assets were as follows:
As at 31 December
--------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
--------------------------- -------------- --------------
Government debt 61 351
State owned companies 4,907 5,132
Mutual funds (fixed rates) 15,622 13,845
--------------------------- -------------- --------------
20,590 19,328
--------------------------- -------------- --------------
As at 31 December 2019 and 2018, all the funds were invested in
quoted debt instruments.
The pension plan has not invested in any of the Group's own
financial instruments nor in properties or assets used by the
Group.
A quantitative sensitivity analysis for significant assumptions
as at 31 December 2019 is as shown below:
Future salary
increases Life expectancy
Assumptions Discount rate (NCPI) of pensioners
-------------------------------- --------------------- -------------------- ---------------
0.5% 0.5% 0.5% 0.5% + 1
Sensitivity Level Increase Decrease increase decrease Increase
-------------------------------- ---------- --------- --------- --------- ---------------
(Decrease)/increase to the
net defined benefit obligation
(US$ thousands) (1,619) 1,780 189 (184) 509
--------------------------------- ---------- --------- --------- --------- ---------------
The sensitivity analysis above has been determined based on a
method that extrapolates the impact on net defined benefit
obligation as a result of reasonable changes in key assumptions
occurring at the end of the reporting period. The pension plan is
not sensitive to future changes in salaries other than in respect
of inflation.
22. Trade and other payables
As at 31 December
-------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Trade payables 107,222 91,734
Other payables to related parties (note 26) 17,899 12,321
Accrued expenses 18,410 13,163
Other taxes and contributions 16,237 15,922
-------------------------------------------- -------------- --------------
159,768 133,140
-------------------------------------------- -------------- --------------
Trade payables are mainly for the acquisition of materials,
supplies and contractor services. These payables do not accrue
interest and no guarantees have been granted. The fair value of
trade and other payables approximate their book values.
The Group's exposure to currency and liquidity risk related to
trade and other payables is disclosed in note 30.
23. Commitments
A summary of capital expenditure commitments by operating mine
and development project is as follows:
As at 31 December
------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------ -------------- --------------
Saucito 36,743 52,288
Herradura 9,864 17,701
Noche Buena 252 3,346
Ciénega 6,743 13,779
Fresnillo 58,109 90,181
San Julián 5,516 8,781
Minera Juanicipio 84,609 142,111
------------------ -------------- --------------
201,836 328,187
------------------ -------------- --------------
24. Leases
(a) The Group as lessee
The Group leases various offices, buildings and IT equipment.
The resulting lease liability is as follows:
As at
----------------------- ------------------------------
31 December 1 January
2019 2019
US$ thousands US$ thousands
----------------------- -------------- --------------
IT equipment 9,514 7,749
Buildings 3,030 3,550
----------------------- -------------- --------------
Total lease liability 12,544 11,299
----------------------- -------------- --------------
Less - Current portion 4,535 3,758
----------------------- -------------- --------------
Non-current portion 8,009 7,541
----------------------- -------------- --------------
The maturity analysis of the liability is as follow:
As at
============================================ ==============================
31 December 1 January
2019 2019
US$ thousands US$ thousands
============================================ ============== ==============
Within one year 4,535 3,758
After one year but not more than five years 7,125 6,450
More than five years 884 1,091
============================================= ============== ==============
12,544 11,299
============================================ ============== ==============
The total cash outflow for leases for the year ended 31 December
2019 amount US$4.7 million.
The table below details right-of-use assets included as property
plant and equipment, see note 12
Year ended 31 December
2019
Computer
Building equipment Total
------------------------------------ -------- ---------- -------------
US$ thousands
------------------------------------ -------- ---------- -------------
Cost
At 1 January 2019 3,550 7,749 11,299
Additions 69 5,516 5,585
Disposals (39) (18) (57)
At 31 December 2019 3,580 13,247 16,827
Accumulated depreciation
At 1 January 2019
Depreciation for the year (697) (3,969) (4,666)
Disposals 11 1 12
At 31 December 2019 (686) (3,968) (4,654)
------------------------------------ -------- ---------- -------------
Net Book amount at 31 December 2019 2,894 9,279 12,173
------------------------------------ -------- ---------- -------------
Amounts recognized in profit and loss for the year, additional
to depreciation of right-of-use assets, included US$642.3 relating
to interest expense, US$1,177.99 relating to short-term leases and
US$2,590.91 relating to low-value assets.
(b) The Group as a lessor
Operating leases, in which the Group is the lessor, relate to
mobile equipment owned by the Group with lease terms of between 12
to 36 months. All operating lease contracts contain market review
clauses in the event that the lessee exercises its option to renew.
The lessee does not have an option to purchase the equipment at the
expiry of the lease period. The Group's leases as a lessor are not
material.
25. Contingencies
As of 31 December 2019, the Group has the following
contingencies:
- The Group is subject to various laws and regulations which, if
not observed, could give rise to penalties.
- Tax periods remain open to review by the Mexican tax
authorities (SAT, by its Spanish acronym) in respect of income
taxes for five years following the date of the filing of corporate
income tax returns, during which time the authorities have the
right to raise additional tax assessments including penalties and
interest. Under certain circumstances, the reviews may cover longer
periods. As such, there is a risk that transactions, and in
particular related party transactions, that have not been
challenged in the past by the authorities, may be challenged by
them in the future.
- With regards to tax audits, the status of material on-going inspections is as follows:
- With respect to Minera Penmont's 2012 and 2013 tax
inspections, on 11 July 2018 the Company filed before tax
authorities a substance administrative appeal against the tax
assessment, and on 3 September 2018, it filed additional
documentation before tax authorities and is waiting for its
response.
- In connection with Minera Fresnillo and Minera Mexicana La
Ciénega (The Companies) income tax audits for the year 2014, a
Conclusive Agreement was executed on February 19th, 2019 between
the SAT, the Companies and the Mexican Taxpayers Ombudsman
(PRODECON per its Spanish acronym). According to article 69-H of
the Mexican Tax Code, settlements reached and executed by taxpayers
and the authority may not be challenged in any way. Such
settlements shall only be effective between the parties; and they
shall not constitute a precedent in any case.
- On March 22nd and June 21st, 2019, SAT initiated income tax
audits for the year 2013 at Minera Saucito and Minera Fresnillo,
respectively. The company has fully responded to the SAT's request
of information and documentation. In February 2020, the SAT
communicated its initial findings to the Company. These are being
analysed and the company has commenced the process of preparing its
response.
- On February 5th, 2020 SAT initiated a Profit Sharing audit and
an Income Tax audit for the year 2014 at Minera Mexicana La Ciénega
and Metalúrgica Reyna, respectively. On February 13th, 2020 SAT
initiated Income Tax audits for the year 2014 at Desarrollos
Mineros Fresne and Minera Saucito. The company is in the process of
preparing its response to the SAT's request of information and
documentation.
- It is not practical to determine the amount of any potential
claims or the likelihood of any unfavourable outcome arising from
these or any future inspections that may be initiated. However,
management believes that its interpretation of the relevant
legislation is appropriate and that the Group has complied with all
regulations and paid or accrued all taxes and withholdings that are
applicable.
- On 8 May 2008, the Company and Peñoles entered into the
Separation Agreement (the 'Separation Agreement'). This agreement
relates to the separation of the Group and the Peñoles Group and
governs certain aspects of the relationship between the Fresnillo
Group and the Peñoles Group following the initial public offering
in May 2008 ('Admission'). The Separation Agreement provides for
cross-indemnities between the Company and Peñoles so that, in the
case of Peñoles, it is held harmless against losses, claims and
liabilities (including tax liabilities) properly attributable to
the precious metals business of the Group and, in the case of the
Company, it is held harmless by Peñoles against losses, claims and
liabilities which are not properly attributable to the precious
metals business. Save for any liability arising in connection with
tax, the aggregate liability of either party under the indemnities
shall not exceed US$250 million in aggregate.
- In regard to the ejido El Bajio matter previously reported by the Company:
- In 2009 five members of the El Bajio agrarian community in the
state of Sonora, who claimed rights over certain surface land in
the proximity of the operations of Minera Penmont ("Penmont"),
submitted a legal claim before the Unitarian Agrarian Court
(Tribunal Unitario Agrario) of Hermosillo, Sonora, to have Penmont
vacate an area of this surface land. The land in dispute
encompassed a portion of surface area where part of the operations
of the Soledad-Dipolos mine are located. The litigation resulted in
a definitive court order, with which Penmont complied by vacating
1,824 hectares of land, resulting in the suspension of operations
at Soledad-Dipolos.
- The Agrarian Court noted in that same year that certain
remediation activities were necessary to comply with the relevant
regulatory requirements. Remediation activities in this respect are
pending as the agrarian members have not yet permitted Penmont
physical access to the lands. A Federal court has issued a final
ruling denying the claimant's allegations that the land should be
remediated to the same state it held prior to Penmont's occupation.
Penmont has already presented a conceptual mine closure and
remediation plan before the Agrarian Court in respect of the
approximately 300 hectares where Penmont conducted mining
activities.
- 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 nor has
specific geological interest in these land parcels, any contingency
relating to such land parcels is not considered material by the
Company. The case relating to the claims over these land parcels
remains subject to finalisation.
- Various claims and counterclaims have been made between the
relevant parties in the El Bajio matter. There remains uncertainty
as to the finalisation and ultimate outcome of these legal
proceedings.
- As previously reported, the State of Zacatecas issued a law in
2017 to impose environmental taxes on activities such as (i)
extraction of materials other than those regulated by the Federal
Mining Law; (ii) emissions into the air; (iii) discharges of
industrial residues into the ground and water, and (iv) deposit of
industrial residues.
The Company challenged the legality of such taxes and in 2017
obtained an injunction from a Federal court. The State of Zacatecas
appealed this ruling. The Supreme Court of Mexico has issued a
final ruling settling the Company's legal challenge, in which the
Court determined that:
1. Two of the taxes are unconstitutional: (a) tax on extractive
activities and (b) tax on the deposit of industrial residues.
2. The other two taxes were declared constitutional: (a)
emissions into the air and (b) discharge of industrial residues
into the ground and water.
It is estimated that the annual cost for the Company of
complying with the two taxes is not material at this time.
- In 2011, flooding occurred in the Saucito mine, following
which the Group filed an insurance claim in respect of the damage
caused (and in respect of business interruption). This insurance
claim was rejected by the insurance provider. In early 2018, after
the matter was taken to mutually agreed arbitration, the insurance
claim was declared valid; however, there is disagreement about the
appropriate amount to be paid. In October 2018 the Group received
US$13.6 million in respect of the insurance claim, however this
does not constitute a final settlement and management continues to
pursue a higher insurance payment. Due to the fact that
negotiations are on-going and there is uncertainty regarding the
timing and amount involved in reaching a final settlement with the
insurer, it is currently not practicable to determine the total
amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances;
however, there is no certainty that this interest will be realised
until the underlying balance is recovered. Due to that uncertainty,
it is also not practicable to estimate the amount of interest
income earned to date.
26. Related party balances and transactions
The Group had the following related party transactions during
the years ended 31 December 2019 and 2018 and balances as at 31
December 2019 and 2018.
Related parties are those entities owned or controlled by the
ultimate controlling party, as well as those who have a minority
participation in Group companies and key management personnel of
the Group.
(a) Related party balances
Accounts receivable Accounts payable
--------------------------------------------- ---------------------- -----------------
As at 31 December As at 31 December
--------------------------------------------- ---------------------- ----------------- ----------
2019 2018 2019 2018
US$ US$ US$ US$
thousands thousands thousands thousands
--------------------------------------------- ---------- ---------- ----------------- ----------
Trade:
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 206,982 213,202 409 408
Other :
Industrias Peñoles, S.A.B. de C.V. 5,283 3,371 - -
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 2,662 -
Servicios Administrativos Peñoles, S.A.
de C.V. - - 3,535 3,249
Servicios Especializados Peñoles, S.A.
de C.V. - - 4,095 1,556
Fuentes de Energía Peñoles, S.A.
de C.V. - - 1,735 1,138
Termoeléctrica Peñoles, S. de R.L.
de C.V. - - 1,168 988
Eólica de Coahuila S.A. de C.V. - - 4,772 3,459
Other 43 90 2,185 1,523
--------------------------------------------- ---------- ---------- ----------------- ----------
Sub-total 214,970 216,663 17,899 12,321
Less-current portion 214,970 216,663 17,899 12,321
--------------------------------------------- ---------- ---------- ----------------- ----------
Non-current portion - - - -
--------------------------------------------- ---------- ---------- ----------------- ----------
Related party accounts receivable and payable will be settled in
cash.
Other balances with related parties:
Year ended 31
December
---------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------- -------------- --------------
Silverstream contract:
---------------------------------------- -------------- --------------
Industrias Peñoles, S.A.B. de C.V. 541,254 519,093
---------------------------------------- -------------- --------------
The Silverstream contract can be settled in either silver or
cash. Details of the Silverstream contract are provided in note
13.
(b) Principal transactions with affiliates, including Industrias
Peñoles S.A.B de C.V., the Company's parent, are as follows:
Year ended 31
December
---------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,125,733 2,119,758
---------------------------------------------------- -------------- --------------
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 6,503 13,652
---------------------------------------------------- -------------- --------------
Other income 7,008 4,419
---------------------------------------------------- -------------- --------------
Total income 2,139,244 2,137,829
---------------------------------------------------- -------------- --------------
1 Figures do not include the effects of hedging as the
derivative transactions are not undertaken with related parties.
Figures are net of the adjustment for treatment and refining
charges of US$144.6 million (2018: US$141.2 million) and include
sales credited to development projects of US$0.1 million (2018:
US$17.6 million).
Year ended 31
December
-------------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Expenses:
Administrative services(2) :
Servicios Administrativos Peñoles, S.A. de C.V.(3) 33,107 28,625
Servicios Especializados Peñoles, S.A. de C.V. 19,744 15,830
52,851 44,455
-------------------------------------------------------- -------------- --------------
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 15,305 17,383
Fuerza Eólica del Istmo S.A. de C.V. - 2,187
Fuentes de Energía Peñoles, S.A. de C.V. 4,971 3,872
Eólica de Coahuila S.A. de C.V. 41,572 34,147
-------------------------------------------------------- -------------- --------------
61,848 57,589
Operating materials and spare parts:
Wideco Inc 7,699 5,783
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 9,502 8,329
-------------------------------------------------------- -------------- --------------
17,201 14,112
-------------------------------------------------------- -------------- --------------
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 10,012 9,733
-------------------------------------------------------- -------------- --------------
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 9,067 8,603
-------------------------------------------------------- -------------- --------------
Other expenses: 4,014 2,561
-------------------------------------------------------- -------------- --------------
Total expenses 154,993 137,053
-------------------------------------------------------- -------------- --------------
2 Includes US$8.1 million (2018: US$1.7 million) corresponding
to expenses reimbursed.
3 Includes US$3.2 million (2018: US$4.2 million) relating to
engineering costs that were capitalised.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of
Directors and the Executive Committee.
Year ended 31
December
----------------------------------------------------- ------------------------------
2019 2018
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Salaries and bonuses 3,568 3,260
Post-employment benefits 242 245
Other benefits 296 249
----------------------------------------------------- -------------- --------------
Total compensation paid in respect of key management
personnel 4,106 3,754
----------------------------------------------------- -------------- --------------
Year ended 31
December
------------------------------------------------ ------------------------------
2019 2018
US$ thousands US$ thousands
------------------------------------------------ -------------- --------------
Accumulated accrued defined pension entitlement 4,753 4,001
------------------------------------------------ -------------- --------------
This compensation includes amounts paid to directors disclosed
in the Directors' Remuneration Report.
The accumulated accrued defined pension entitlement represents
benefits accrued at the time the benefits were frozen. There are no
further benefits accruing under the defined benefit scheme in
respect of current services.
27. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31
December 2019 and 2018 are as follows:
Year ended
31 December
------------------------------------------------------- ------------------------------
2019 2018
Class of services US$ thousands US$ thousands
------------------------------------------------------- -------------- --------------
Fees payable to the Group's auditor for the audit of
the Group's annual accounts 1,443 1,306
Fees payable to the Group's auditor and its associates
for other services as follows:
The audit of the Company's subsidiaries pursuant to
legislation 157 176
Audit-related assurance services 437 347
Tax compliance services 10 4
Total 2,047 1,833
------------------------------------------------------- -------------- --------------
28. Notes to the consolidated statement of cash flows
2019 2018
Notes US$ thousands US$ thousands
-------------------------------------------------- ----- -------------- --------------
Reconciliation of profit for the year to net cash
generated from operating activities
Profit for the year 205,814 349,966
Adjustments to reconcile profit for the period to
net cash inflows from operating activities:
Depreciation and amortisation 12 490,678 411,764
Employee profit sharing 7 9,578 13,003
Deferred income tax credit 10 (186,113) (45,385)
Current income tax expense 10 159,054 179,349
Loss on the sale of property, plant and equipment
and other assets 8 4,866 999
Net finance costs 46,286 27,433
Foreign exchange loss 1,894 8,382
Difference between pension contributions paid and
amounts recognised in the income statement 1,129 62
Non cash movement on derivatives 687 34
Changes in fair value of Silverstream 13 (48,376) (14,956)
Working capital adjustments
(Increase) in trade and other receivables (39,257) (60,384)
(Increase) in prepayments and other assets (3,283) (11,753)
Increase in inventories (28,717) (63,918)
Increase in trade and other payables 14,635 8,174
-------------------------------------------------- ----- -------------- --------------
Cash generated from operations 628,875 802,770
Income tax paid(1) (180,059) (200,088)
Employee profit sharing paid (12,907) (14,323)
-------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 435,909 588,359
-------------------------------------------------- ----- -------------- --------------
(1) Income tax paid includes US$162.2 million corresponding to
corporate income tax (31 December 2018: US$180.4 million) and
US$17.9 corresponding to special mining right (31 December 2018:
US$19.7 million), for further information refer to note 10.
29. Financial instruments
(a) Fair value category
As at 31 December 2019
--------------------------------------------------------------------------------------
US$ thousands
--------------------------------------------------------------------------------------
Fair value
Fair value Fair value through
Amortized through (hedging profit or
Financial assets: cost OCI instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Trade and other receivables
(note 15) 4,353 - - 212,265
Equity instruments at FVOCI - 123,024 - -
Silverstream contract (note
13) - - - 541,253
Derivative financial instruments - 2,623 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Interest-bearing loans (note
19) 801,239 - -
Trade and other payables
(note 22) 117,358 - -
Derivative financial instruments - 1,789 -
---------------------------------- --------- ---------- ------------- ----------
As at 31 December 2018
--------------------------------------------------------------------------------------
US$ thousands
--------------------------------------------------------------------------------------
Fair value
Fair value Fair value through
Amortized through (hedging profit or
Financial assets: cost OCI instruments) loss
--------------------------------- --------- ---------- ------------- ------------
Trade and other receivables
(note 15) 1,986 - - 216,573
Equity instruments at FVOCI - 78,219 - -
Silverstream contract (note
13) - - - 519,093
Derivative financial instruments - 314 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ------------
Interest-bearing loans (note
19) 800,127 - -
Trade and other payables
(note 22) 97,169 - -
Derivative financial instruments - 3,807 -
---------------------------------- --------- ---------- ------------- ------------
(1 Trade and other receivables and embedded derivative within
sales contracts are presented net in Trade and other receivables in
the balance sheet.)
(b) Fair value measurement
The value of financial assets and liabilities other than those
measured at fair value are as follows:
As at 31 December
------------------------------------- ------------------------------ -----------------
Carrying amount Fair value
------------------------------------- ------------------------------ ----------------- --------------
2019 2018 2019 2018
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------- -------------- -------------- ----------------- --------------
Financial assets:
Trade and other receivables 4,353 1,986 4,353 1,986
Financial liabilities:
Interest-bearing loans (1) (note 19) 801,239 800,127 870,208 817,936
Trade and other payables 1,789 97,169 1,789 97,169
------------------------------------- -------------- -------------- ----------------- --------------
(1 Interest-bearing loans are categorised in Level 1 of the fair
value hierarchy.)
The financial assets and liabilities measured at fair value are
categorised into the fair value hierarchy as at 31 December as
follows:
As of 31 December 2019
---------------------------------------------------------------------------------------------------
Fair value measure using
Quoted
prices
in active Significant Significant
markets observable unobservable
Level Level Level
1 2 3 Total
US$ thousands US$ thousands US$ thousands US$ thousands
---------------------------------- -------------- -------------- -------------- --------------
Financial assets:
Trade receivables - - 212,265 212,265
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 2,537 - 2,537
Option and forward foreign
exchange contracts - 86 - 86
Silverstream contract - - 541,253 541,253
Other financial assets:
Equity instruments at FVOCI 123,024 - - 123,024
----------------------------------- -------------- -------------- -------------- --------------
123,024 2,623 753,518 879,165
---------------------------------- -------------- -------------- -------------- --------------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 1,529 - 1,529
Option and forward foreign
exchange contracts - 260 - 260
----------------------------------- -------------- -------------- -------------- --------------
- 1,789 - 1,789
---------------------------------- -------------- -------------- -------------- --------------
As of 31 December 2018
--------------------------------------------------------------------------------------------------------
Fair value measure using
Significant
Quoted prices Significant unobservable
in observable Level
active markets Level 3
Level 1 2 US$ Total
US$ thousands US$ thousands thousands US$ thousands
--------------------------------- ---------------- -------------- ------------- --------------
Financial assets:
Trade receivables - - 216,573 216,573
Derivative financial instruments:
Option commodity contracts (note
29 (c)) - 240 - 240
Option and forward foreign
exchange
contracts - 74 - 74
Silverstream contract - - 519,093 519,093
Other financial assets:
Equity instruments at FVOCI 78,219 - - 78,219
---------------------------------- --------------- --------------- -------------- ---------------
78,219 314 735,666 814,199
--------------------------------- --------------- --------------- -------------- ---------------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts (note
29 (c)) - 3,660 - 3,660
Option and forward foreign
exchange
contracts - 147 - 147
---------------------------------- --------------- --------------- -------------- ---------------
- 3,807 - 3,807
--------------------------------- --------------- --------------- -------------- ---------------
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 13) is shown below:
2019 2018
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Balance at 1 January: 213,202 225,741
Sales 4,949,494 5,659,205
Cash collection (4,955,376) (5,671,253)
Changes in fair value 15,996 (4,016)
Realised embedded derivatives during the year (16,334) 3,525
---------------------------------------------- -------------- --------------
Balance at 31 December 206,982 213,202
---------------------------------------------- -------------- --------------
The fair value of financial assets and liabilities is included
at reflects the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following valuation techniques were used to estimate the
fair values:
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The foreign currency forward
(Level 2) contracts are measured based on observable spot exchange
rates, the yield curves of the respective currencies as well as the
currency basis spreads between the respective currencies. The
foreign currency option contracts are valued using the Black
Scholes model, the significant inputs to which include observable
spot exchange rates, interest rates and the volatility of the
currency.
Option commodity contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The option commodity (Level 2)
contracts are measured based on observable spot commodity prices,
the yield curves of the respective commodity as well as the
commodity basis spreads between the respective commodities. The
option contracts are valued using the Black Scholes model, the
significant inputs to which include observable spot commodities
price, interest rates and the volatility of the commodity.
Silverstream contract
The fair value of the Silverstream contract is determined using
a valuation model including unobservable inputs (Level 3). This
derivative has a term of over 20 years and the valuation model
utilises a number of inputs that are not based on observable market
data due to the nature of these inputs and/or the duration of the
contract. Inputs that have a significant effect on the recorded
fair value are the volume of silver that will be produced and sold
from the Sabinas mine over the contract life, the future price of
silver, future foreign exchange rates between the Mexican peso and
US dollar, future inflation and the discount rate used to discount
future cash flows.
The estimate of the volume of silver that will be produced and
sold from the Sabinas mine requires estimates of the recoverable
silver reserves and resources, the related production profile based
on the Sabinas mine plan and the expected recovery of silver from
ore mined. The estimation of these inputs is subject to a range of
operating assumptions and may change over time. Estimates of
reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided
to the Company. The production profile and estimated payable silver
that will be recovered from ore mined is based on the operational
mine plan, with certain amendments to reflect a basis that a market
participant would consider, that is provided to the Company by
Peñoles. The inputs assume no interruption in production over the
life of the Silverstream contract and production levels which are
consistent with those achieved in recent years.
Management regularly assesses a range of reasonably possible
alternatives for those significant unobservable inputs described
above, and determines their impact on the total fair value. The
significant unobservable inputs are not interrelated. The fair
value of the Silverstream is not significantly sensitive to a
reasonable change in future exchange rates, however, it is to a
reasonable change in future silver price, future inflation and the
discount rate used to discount future cash flows.
For further information relating to the Silverstream contract
see note 13. The sensitivity of the valuation to the inputs
relating to market risks, being the price of silver, foreign
exchange rates, inflation and the discount rate is disclosed in
note 30.
Equity investments:
The fair value of equity investments is derived from quoted
market prices in active markets (Level 1).
Interest-bearing loans
The fair value of the Group's interest-bearing loan is derived
from quoted market prices in active markets (Level 1).
Trade receivables:
Sales of concentrates, precipitates doré bars and activated
carbon 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
(see note 2 (n)). This price exposure is considered to be an
embedded derivative and therefore the entire related trade
receivable is measured at fair value.
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.
30. Financial risk management
Overview
The Group's principal financial assets and liabilities, other
than derivatives, comprise trade receivables, cash, equity
instruments at FVOCI, interest-bearing loans and trade
payables.
The Group has exposure to the following risks from its use of
financial instruments:
Market risk, including foreign currency, commodity price,
interest rate, inflation rate and equity price risks
Credit risk
Liquidity risk
This note presents information about the Group's exposure to
each of the above risks and the Group's objectives, policies and
processes for assessing and managing risk. Further quantitative
disclosures are included throughout the financial statements.
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The Group's risk management policies are established to identify
and analyse the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to limits.
Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and
obligations.
The Fresnillo Audit Committee has responsibility for overseeing
how management monitors compliance with the Group's risk management
policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the Group.
The Audit Committee is assisted in its oversight role by Internal
Audit, which undertakes both regular and ad hoc reviews of risk
management controls and procedures, the results of which are
reported to the Audit Committee.
(a) Market risk
Market risk is the risk that changes in market factors, such as
foreign exchange rates, commodity prices or interest rates will
affect the Group's income or the value of its financial
instruments.
The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while
optimising the return on risk.
In the following tables, the effect on equity excludes the
changes in retained earnings as a direct result of changes in
profit before tax.
Foreign currency risk
The Group has financial instruments that are denominated in
Mexican peso, euro and Swedish krona which are exposed to foreign
currency risk. Transactions in currencies other than the US dollar
include the purchase of services, fixed assets, spare parts and the
payment of dividends. As a result, the Group has financial assets
and liabilities denominated in currencies other than functional
currency, and holds cash and cash equivalents in Mexican Peso.
In order to manage the Group's exposure to foreign currency risk
on expenditure denominated in currencies other than the US dollar,
the Group has entered into certain forward and option derivative
contracts with maturity dates from 2018 (see note 29 for additional
detail).
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in the US dollar exchange rate compared
to the Mexican peso, reflecting the impact on the Group's profit
before tax and equity, with all other variables held constant. It
is assumed that the same percentage change in exchange rates is
applied to all applicable periods for the purposes of calculating
the sensitivity with relation to derivative financial
instruments.
Effect
on
profit Effect
Strengthening/ before on equity:
(weakening) tax: increase/ increase/
of US (decrease) (decrease)
Year ended 31 December dollar US$ thousands US$ thousands
----------------------- -------------- --------------- --------------
2019 5% 694 2,295
(5%) (767) (1,939)
----------------------- -------------- --------------- --------------
2018 10% (380) -
(10%) 464 -
----------------------- -------------- --------------- --------------
The following table demonstrates the sensitivity of financial
assets and financial liabilities to a reasonably possible change in
the US dollar exchange rate compared to the Swedish krona on the
Group's profit before tax and equity, with all other variables held
constant. It is assumed that the same percentage change in exchange
rates is applied to all applicable periods.
Effect
on profit
Strengthening/ before
(weakening) tax: increase/
of (decrease)
Year ended 31 December US dollar US$ thousands
----------------------- -------------- ---------------
2019 10% -
(10%) -
----------------------- -------------- ---------------
2018 10% 19
(10%) 20
----------------------- -------------- ---------------
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in the US dollar exchange rate compared
to the euro on the Group's profit before tax and equity, with all
other variables held constant. It is assumed that the same
percentage change in exchange rates is applied to all applicable
periods.
Effect
on
profit
Strengthening/ before
(weakening) tax: increase/
of US (decrease)
Year ended 31 December dollar US$ thousands
----------------------- -------------- ---------------
2019 5% -
(5%) (1)
----------------------- -------------- ---------------
2018 10% 53
(10%) 52
----------------------- -------------- ---------------
Foreign currency risk - Silverstream
Future foreign exchange rates are one of the inputs to the
Silverstream valuation model. The following table demonstrates the
sensitivity of the Silverstream contract valuation to a reasonably
possible change in the Mexican peso as compared to the US dollar,
with all other inputs to the Silverstream valuation model held
constant. It is assumed that the same percentage change in exchange
rates is applied to all applicable periods in the valuation
model.
Effect
on profit
before
Strengthening/ tax:
(weakening) increase/
of (decrease)
Year ended 31 December US dollar US$ thousands
----------------------- -------------- --------------
2019 5% (40)
(5%) 44
----------------------- -------------- --------------
2018 10% (46)
(10%) 56
----------------------- -------------- --------------
Commodity risk
The Group has exposure to changes in metals prices (specifically
silver, gold, lead and zinc) which have a significant effect on the
Group's results. These prices are subject to global economic
conditions and industry-related cycles.
The Group uses derivative instruments to hedge against an
element of gold, zinc and lead price.
The table below reflects the aggregate sensitivity of financial
assets and liabilities (excluding Silverstream) to a reasonably
possible change in commodities prices, reflecting the impact on the
Group's profit before tax with all other variables held
constant.
The sensitivity shown in the table below relates to changes in
fair value of commodity derivatives financial instruments contracts
and embedded derivatives in sales.
Increase/(decrease) in commodity prices
----------------------- --------------------------------------------- --------------------------- -----------------
Effect on
profit before tax: Effect on equity:
increase/ increase/
(decrease) (decrease)
Year ended 31 December Gold Silver Zinc Lead US$ thousands US$ thousands
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2019 15% 20% 15% 15% 28,367 (1,939)
(10%) (15%) (15%) (15%) (21,218) 2,295
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2018 10% 15% 25% 20% 22,330 (14,910)
(10%) (15%) (20%) (15%) (21,204) 8,703
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
Commodity price risk - Silverstream
Future silver price is one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract valuation to a reasonably possible
change in future silver prices, with all other inputs to the
Silverstream valuation model held constant. It is assumed that the
same percentage change in silver price is applied to all applicable
periods in the valuation model. There is no impact on the Group's
equity, other than the equivalent change in retained earnings.
Effect
Increase/ on profit
(decrease) before
in tax: increase/
silver (decrease)
Year ended 31 December price US$ thousands
----------------------- ----------- ---------------
2019 20% 146,873
(15%) (110,155)
----------------------- ----------- ---------------
2018 15% 106,879
(15%) (106,879)
----------------------- ----------- ---------------
Interest rate risk
The Group is exposed to interest rate risk from the possibility
that changes in interest rates will affect future cash flows or the
fair values of its financial instruments, principally relating to
the cash balances and the Silverstream contract held at the balance
sheet date. Interest-bearing loans are at a fixed rate, therefore
the possibility of a change in interest rate only impacts its fair
value but not its carrying amount. Therefore, interest-bearing
loans and loans from related parties are excluded from the table
below.
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in interest rate applied to a full year
from the balance sheet date. There is no impact on the Group's
equity other than the equivalent change in retained earnings.
Basis Effect
point on profit
increase/ before
(decrease) tax: increase/
in interest (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------ ---------------
2019 50 1,683
(50) (1,683)
----------------------- ------------ ---------------
2018 75 4,206
(75) (4,206)
----------------------- ------------ ---------------
The sensitivity shown in the table above primarily relates to
the full year of interest on cash balances held as at the year
end.
Interest rate risk - Silverstream
Future interest rates are one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract valuation to a reasonably possible
change in interest rates, with all other inputs to the Silverstream
valuation model held constant. It is assumed that the same change
in interest rate is applied to all applicable periods in the
valuation model. There is no impact on the Group's equity, other
than the equivalent change in retained earnings.
Basis Effect
point on profit
increase/ before
(decrease) tax: increase/
in interest (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------ ---------------
2019 50 (32,969)
(50) 36,322
----------------------- ------------ ---------------
2018 75 (47,151)
(75) 54,775
----------------------- ------------ ---------------
Inflation rate risk
Inflation rate risk-Silverstream
Future inflation rates are one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract to a reasonably possible change in the
inflation rate, with all other inputs to the Silverstream valuation
model held constant. It is assumed that the same change in
inflation is applied to all applicable periods in the valuation
model. There is no impact on the Group's equity, other than the
equivalent change in retained earnings.
Basis Effect
point on profit
(increase/ before
(decrease) tax: increase/
in inflation (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------- ---------------
2019 100 96
(100) (87)
----------------------- ------------- ---------------
2018 100 56
(100) (51)
----------------------- ------------- ---------------
Equity price risk
The Group has exposure to changes in the price of equity
instruments that it holds as equity investments at FVOCI.
The following table demonstrates the sensitivity of equity
investments at FVOCI to a reasonably possible change in market
price of these equity instruments, reflecting the effect on the
Group's profit before tax and equity:
Effect
on
profit
before Effect
Increase/ tax: increase/ on equity:
(decrease) (decrease) increase/
in equity (US$ (decrease)
Year ended 31 December price thousands) US$ thousands
----------------------- ----------- --------------- --------------
2019 70% - 86,116
(25%) - (30,756)
----------------------- ----------- --------------- --------------
2018 40% - 31,288
(40%) - (31,288)
----------------------- ----------- --------------- --------------
(b) Credit risk
Exposure to credit risk arises as a result of transactions in
the Group's ordinary course of business and is applicable to trade
and other receivables, cash and cash equivalents, the Silverstream
contract and derivative financial instruments.
The Group's policies are aimed at minimising losses as a result
of counterparties' failure to honour their obligations. Individual
exposures are monitored with customers subject to credit limits to
ensure that the Group's exposure to bad debts is not significant.
The Group's exposure to credit risk is influenced mainly by the
individual characteristics of each counter party. The Group's
financial assets are with counterparties with what the Group
considers to have an appropriate credit rating. As disclosed in
note 26, the counterparties to a significant proportion of these
financial assets are related parties. At each balance sheet date,
the Group's financial assets were neither credit-impaired nor past
due, other than 'Other receivables' as disclosed in note 15. The
Group's policies are aimed at minimising losses from foreign
currency hedging contracts. The Company's foreign currency hedging
contracts are entered into with large financial institutions with
strong credit ratings.
The Group has a high concentration of trade receivables with one
counterparty Met-Mex Peñoles, the Group's sole customer throughout
2019 and 2018. A further concentration of credit risk arises from
the Silverstream contract. Both Met-Mex and the counterparty to the
Silverstream contract are subsidiaries in the Peñoles group which
currently owns 75 per cent of the shares of the Company and is
considered by management to be of appropriate credit rating.
The Group's surplus funds are managed by Servicios
Administrativos Fresnillo, S.A. de C.V., which manages cash and
cash equivalents, including short-term investments investing in a
number of financial institutions. Accordingly, on an ongoing basis
the Group deposits surplus funds with a range of financial
institutions, depending on market conditions. In order to minimise
exposure to credit risk, the Group only deposits surplus funds with
financial institutions with a credit rating of MX-1 (Moody's) and
mxA-1+ (Standard and Poor's) and above. As at 31 December 2019, the
Group had concentrations of credit risk as 22 percent of surplus
funds were deposited with one financial institution of which the
total investment was held in short term Mexican government
paper.
The maximum credit exposure at the reporting date of each
category of financial asset above is the carrying value as detailed
in the relevant notes. See note 16 for the maximum credit exposure
to cash and cash equivalents and note 26 for related party trade
and other receivables. The maximum credit exposure with relation to
the Silverstream contract is the value of the derivative as at 31
December 2019, being US$541.2 million (2018: US$519.1 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using
projected cash flows from operations and by monitoring the maturity
of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments.
US$ thousands
--------------------------------- ---------------------------------------- -------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- -------
As at 31 December 2019
Interest-bearing loans (note 19) 46,267 92,534 846,267 - 985,068
Trade and other payables 125,121 - - - 125,121
Derivative financial instruments
- liabilities 1,789 - - - 1,789
--------------------------------- ------- --------- --------- --------- -------
US$ thousands
--------------------------------- ---------------------------------------- ---------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- ---------
As at 31 December 2018
Interest-bearing loans (note 19) 46,267 92,534 92,534 800,000 1,031,335
Trade and other payables 97,169 - - - 97,169
Derivative financial instruments
- liabilities 3,807 - - - 3,807
--------------------------------- ------- --------- --------- --------- ---------
The payments disclosed for financial derivative instruments in
the above table are the gross undiscounted cash flows. However,
those amounts may be settled gross or net. The following table
shows the corresponding estimated inflows based on the contractual
terms:
US$ thousands
----------------------- ---------------------------------------------------
Within
1 year 2-3 years 3-5 years > 5 years Total
----------------------- -------- --------- --------- --------- ----------
As at 31 December 2019
Inflows 22,186 - - - 22,186
Outflows (20,898) - - - (20,898)
----------------------- -------- --------- --------- --------- --------
Net 1,287 - - - 1,287
----------------------- -------- --------- --------- --------- --------
US$ thousands
----------------------- ----------------------------------------- --------
Within
1 year 2-3 years 3-5 years > 5 years Total
----------------------- -------- --------- --------- --------- --------
As at 31 December 2018
Inflows 12,608 4,310 - - 16,918
Outflows (12,688) (4,290) - - (16,977)
----------------------- -------- --------- --------- --------- --------
Net (80) 20 - - (60)
----------------------- -------- --------- --------- --------- --------
The above liquidity tables include expected inflows and outflows
from currency option contracts which the Group expects to be
exercised during 2020 as at 31 December 2019 and during 2019 as at
31 December 2018, either by the Group or counterparty.
Management considers that the Group has adequate current assets
and forecast cash from operations to manage liquidity risks arising
from current liabilities and non-current liabilities.
Capital management
The primary objective of the Group's capital management is to
ensure that it maintains a strong credit rating and healthy capital
ratios that support its business and maximise shareholder value.
Management considers capital to consist of equity and
interest-bearing loans, as disclosed in the balance sheet,
excluding net unrealised gains or losses on revaluation of cash
flow hedges and Equity instruments at FVOCI. In order to ensure an
appropriate return for shareholder's capital invested in the Group
management thoroughly evaluates all material projects and potential
acquisitions and approves them at its Executive Committee before
submission to the Board for ultimate approval, where applicable.
The Group's dividend policy is based on the profitability of the
business and underlying growth in earnings of the Group, as well as
its capital requirements and cash flows, including cash flows from
the Silverstream.
One of the Group's metrics of capital is cash and other liquid
assets which in 2019 and 2018 consisted of only cash and cash
equivalents.
[1] Cash and other liquid funds are disclosed in note 30(c) to
the financial statements.
[2] Cash and other liquid funds are disclosed in note 30(c) to
the financial statements.
[3] Adjusted production costs is calculated as total production
costs less depreciation and profit sharing. The Company considers
this a useful additional measure to help understand underlying
factors driving production costs in terms of the different stages
involved in the mining and plant processes, including efficiencies
and inefficiencies as the case may be and other factors outside the
Company's control such as cost inflation or changes in accounting
criteria.
[4] Corruption Perception Index 2019 issued by Transparency
International ranks Mexico as 130(th) of 180 (2018: 138(th) of 180)
countries by perceived levels of public sector corruption. [The
score achieved was 29/100 in 2019 vs. 28/100 in 2018.]
([5]) Global Peace Index 2019 and Mexico Peace Index 2019
prepared by the Institute for Economics & Peace.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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