TIDMFRES
RNS Number : 3037U
Fresnillo PLC
28 July 2020
Fresnillo plc
21 Upper Brook Street
London W1K 7PY
United Kingdom
www.fresnilloplc.com
28 July 2020
Fresnillo plc interim results
for the six months to 30 June 2020
Click on, or paste the following link into your web browser, to
view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
Octavio Alvídrez, Chief Executive Officer, commented:
"Our purpose is to contribute to the wellbeing of people,
through the sustainable mining of silver and gold - and this has
guided all our decisions throughout the COVID-19 pandemic. Our
commitment to prioritise the wellbeing of our workforce and
communities at all times meant that we acted promptly and rapidly
adapted our activities and operations to protect health. COVID-19
has presented a challenge to Fresnillo in the first half. However,
we have come together as a company and I am proud of the way we
have adapted to this new environment. Above all, it has shown that
our purpose is not just a set of words, but directly reflects how
we act as a business.
Our extensive engagement with stakeholders, together with the
high level of trust this has forged with our workforce and the
government, has meant that we have been able to minimise the
pandemic's impact on our operations. Production at our underground
mines remains broadly in line with plan, despite a reduction in the
number of workers on site. The impact on our open pit gold mines
has been greater, as mining activities had to cease for around six
weeks, although processing continued. However, mining has now
re-started and activities are ramping up. I am also pleased our
development projects continued to make progress.
The combination of higher commodity prices and lower costs has
resulted in a significant rise in profitability during the first
half. Our performance improvement initiatives we have set out in
previous reports are having a positive impact. We remain committed
to delivering a sustainable improvement in our operating
performance and maintaining the momentum in the improvement plan
into the second half.
We will continue to work closely with our stakeholders and
believe that these partnerships will remain key to our ability to
respond to whatever future challenges COVID-19 will present to our
industry and our country.
We look ahead to the second half with our commitment to our
people being the highest priority, and a continued determination to
generate the greatest value from our mine portfolio for the benefit
of all our stakeholders."
First half highlights
Contributing to the wellbeing of people during the COVID-19
pandemic
-- We promptly engaged with all our key stakeholders at the
onset of the pandemic, allowing us to rapidly focus on the health
of our workforce and to support local communities
-- We further developed health protocols at the beginning of the
pandemic and have implemented rigorous preventive measures at our
mines
-- 20,000 COVID-19 tests have been purchased to trace suspected
cases, and we have carried out nearly 5,300 random tests across our
operations and projects to date
-- We promptly identified the vulnerable members of the
workforce and encouraged them to stay at home, on full pay
-- We have worked closely with the authorities and local
communities to contribute food, medical and protective equipment
and means of sanitisation, as well as to support online education
programmes and to invest in mental health initiatives
Financial highlights (1H20/1H19 comparisons)
-- Gross profit of US$321.2m, up 56.3%, including a US$65.1
million benefit from the positive impact of the reassessment of the
recoverable gold inventories on the leaching pads at Herradura
-- Operating profit and EBITDA([1]) of US$216.9m and US$469.9m,
up 232.1% and 52.6%, respectively
-- Profit before income tax of US$127.9m, up 136.6%, including
the adverse effect of the silverstream valuation of -US$31.8m
(non-cash item), and foreign exchange losses of -US$41.0m.
-- Profit for the period of US$56.5m, down 20.3%, virtually all
as a result of the adverse effect of the 21.9% devaluation of the
MXN vs USD on deferred taxes (non-cash item)
-- Basic and diluted EPS from continuing operations of US$8.8 cents per share, down 7.4%
-- Adjusted EPS([2]) of US$11.8 cents per share, up 40.5%
-- Cash generated from operations, before changes in working capital, of US$456.2m, up 44.3%
-- Free cash flow of US$242.6m in 1H20 (-US$80.7m in 1H19).
-- Strong balance sheet with cash and other liquid funds([3]) as
at 30 June 2020 of US$514.7m (31 December 2019: $336.6m); net
debt/EBITDA of 0.34x([4]) (31 December 2019: 0.69)
-- Interim dividend of US$16.9m (2.3 US cents per share)
Operational highlights (1H20/1H19 comparisons)
As disclosed in the 2Q20 production report on 22 July 2020:
-- Production at our underground mines was relatively unaffected
by COVID-19 in 2Q20; six weeks suspension of mining activities at
the Herradura district.
-- Silver production of 26.8 moz ( including Silverstream), down
2.7%, and gold production of 381.3 koz, down 11.8%
-- Ongoing tests at the Herradura leaching pads have resulted in
an increase of 119.3 koz of gold in inventory as of 1 January 2020
with a US$65.1 million favourable effect on the income
statement
-- Construction of Juanicipio slowed in 2Q20 due to certain
COVID-related work restrictions but remains on track to be
concluded by mid 2021 as the critical path remained unaffected and
mine development continued
-- Construction of the pyrites plant (phase II) at Fresnillo
continued to progress, with commissioning expected in 2H20. A
possible delay in final inspections by the authority as a result of
COVID-19, could defer start-up of commercial production from 3Q20
to 4Q20.
-- Optimisation of the Fresnillo flotation plant to cope with
higher content of lead and zinc advanced according to plan and is
expected to be concluded by 2H20. However commercial production is
expected in 2021 as connection of the current and new flotation
circuits has been postponed to year end to prioritise operational
continuity in 2020.
-- The programme to control costs and further operational
measures to increase productivity continued to be implemented in
1H20
-- 2020 exploration budget has been revised and reduced to
US$120m (US$135m previously), reflecting limited ability to explore
certain prospects due to travel restrictions related to COVID-19;
while capex has been reduced to US$525m (US$655m previously),
reflecting the deferral of some expenditures to 2021, particularly
at Juanicipio and San Julián
Highlights for 1H20
US$ million unless H1 20 H1 19 % change
stated
Silver production
(koz) * 26,819 27,557 -2.7
-------- -------- ---------
Gold production (oz) 381,319 432,417 -11.8
-------- -------- ---------
Total revenues 1,054.2 1,002.0 5.2
-------- -------- ---------
Adjusted revenues(1) 1,125.1 1,069.0 5.3
-------- -------- ---------
Cost of Sales 733.0 796.5 -8.0
-------- -------- ---------
Exploration expenses 50.7 84.0 -39.6
-------- -------- ---------
EBITDA(2) 469.9 307.9 52.6
-------- -------- ---------
Profit for the period 56.5 70.9 -20.3
-------- -------- ---------
Cash generated by
operations before
changes in working
capital 456.2 316.1 44.3
-------- -------- ---------
Basic and Diluted
EPS (US$)(3) 0.088 0.095 -7.4
-------- -------- ---------
Basic and Diluted
EPS, excluding post-tax
Silverstream revaluation
effects (US$) 0.118 0.084 40.5
-------- -------- ---------
Dividend per ordinary
share (US$) 0.023 0.026 -11.5
-------- -------- ---------
* Silver production includes volumes realised under the
Silverstream contract
(1) Adjusted revenues are the revenues shown in the income
statement adjusted to add back treatment and refining costs and the
effects of gold, lead and zinc hedging. The Company considers this
is a useful additional measure to help understand underlying
factors driving revenue in terms of volumes sold and realised
prices
(2) Earnings before interest, taxes, depreciation and
amortisation (EBITDA) is calculated as gross profit plus
depreciation less administrative, selling and exploration
expenses
(3) The weighted average number of shares for H1 2020 and H1
2019 was 736.9m. See Note 8 in the Interim Consolidated Financial
Statements.
COVID-19 - Key Priorities
As the development and availability of a vaccine remains
uncertain, we are conscious that we may have to learn to live with
COVID-19 for some time to come. In addition to the existing
measures to protect our workforce, we are introducing new
initiatives as more information becomes available and as we learn
from our and others' experiences. For example, we are investing in
the mental health of our people and their families, providing
health webinars to local communities and donating medical and
protective equipment to health authorities.
This is a summary of the initiatives we have put in place with
our stakeholders:
Stakeholder What issues matter Actions of the company
to our stakeholders
Our workforce
* Unionised, * Health * Vulnerable members of the workforce (including our
contractors) were promptly identified and requested
to stay at home, remaining on full pay
* Non-Unionised * Job security
* Workplace social distancing, access control and
* Contractors sanitisation measures were implemented in our
operations, accommodation and transportation
facilities
* Testing and contact tracing have been implemented to
identify those needing to self-quarantine
* Daily monitoring of the health of confirmed cases is
monitored daily, together with psychological support
* Working from home was adopted by our corporate
offices
---------------------------------------------------- -----------------------------------------------------------
Communities
* Health * Communication of preventive measures
* Unemployment * Maintaining our commitment to local procurement and
employment
* Local procurement
* Support for the most vulnerable population by
providing food, masks and means of sanitisation
* Support to the most vulnerable
* Sharing our COVID19 tests with communities in remote
locations
* Going online with our education programmes
---------------------------------------------------- -----------------------------------------------------------
Governments
& Regulators * Health practices in the workplace * Collaborating with the Mining Ministry of Mexico to
develop national workplace COVID19 guidance
* Economic recovery
* Engaging authorities to recognise mining as an
essential activity that ensures global continuity of
* Medical and protection equipment supplies supply of minerals and supports local economies
* Support to the most vulnerable * Donation of medical and protective equipment to
health authorities, including ventilators.
* Providing land on a temporary basis to increase
hospital capacity in the city of Fresnillo
* Partnering to provide donations and logistics to
deliver food to the most vulnerable in our local
communities
---------------------------------------------------- -----------------------------------------------------------
Contractors
and suppliers * Collapsed demand * Our payment and supply terms have remained unchanged
* Liquidity * Providing guidance to enable contractors and
suppliers to implement health protocols
* Managing the work environment
---------------------------------------------------- -----------------------------------------------------------
Commentary on the Group's results
Operating results
First half silver production (including Silverstream) decreased
2.7% vs. 1H19, mainly due to the expected lower ore grade at
Saucito and, to a lesser extent, a lower contribution from the
Silverstream, a lower volume of ore processed at San Julián Veins
and a lower ore grade at the pyrites plant, mitigated by a higher
ore grade at Fresnillo and Herradura.
First half gold production decreased 11.8% vs. 1H19, due to a
lower volume of ore processed at Herradura and Noche Buena
primarily as a result of a six week suspension of mining activities
related to COVID-19 restrictions, mitigated by the ability to
process inventories on the leaching pads and stockpiled material
through the dynamic leaching plants (DLPs).
First half by-product lead and zinc production increased 19.6%
and 16.4% vs. 1H19, mainly due to higher ore grades at Fresnillo,
Saucito and Ciénega.
The Group continues to implement the "I care, we care" programme
and, despite improvements in Total Recordable and Lost Time Injury
Frequency Rates in 1H20, there remain areas for improvement as we
continue to mature our safety culture.
Financial results
Total revenues increased 5.3% to US$1,125 million in 1H20,
mainly due to higher gold and silver prices and, to a lesser
extent, higher volumes of zinc and lead sold. This was partially
offset by lower volumes of gold and silver sold and the decrease in
zinc and lead prices.
The average realised gold price increased 27.0%, from US$1,320.7
per ounce in 1H19 to US$1,676.8 per ounce in 1H20, while the
average realised silver price increased 10.1% from US$15.3 per
ounce in 1H19 to US$16.8 per ounce in 1H20.
Adjusted production costs([5]) decreased by 10.6% to US$506.6
million in 1H20. The US$59.8 million decrease resulted mainly from:
i) the 12.7% devaluation of the Mexican peso against the US dollar
(-US$34.6 million); and ii) lower volumes of ore deposited at
Herradura and Noche Buena (-US$50.9 million). These favourable
impacts were partly offset by the increase in development (US$25.7
million).
Additionally, t he variation in the change in work in progress
had a positive effect of US$24.2 million compared with 1H19. This
resulted from the re-assessment of the gold content on the old
leaching pads at Herradura with an estimated positive effect of
US$65.1 million. This was partially offset by the net effect of the
reduction of inventories at Herradura and Noche Buena during the
pandemic.
However, depreciation rose 4.7% compared with 1H19, primarily
due to the increased depletion factors resulting from the decreased
reserve base.
The lower adjusted production costs and positive effect of the
variation in change in work in progress at Herradura, net of the
increase in depreciation, resulted in an 8.0% decrease in cost of
sales compared with 1H19.
The increase in total revenues together with the decrease in
cost of sales resulted in a 56.3% increase in gross profit to
US$321.2 million in 1H20.
Administrative expenses decreased 4.0%, mainly due to a decrease
in non-recurring corporate services provided by Servicios
Industriales Peñoles S.A.B. de C.V. and the favourable effect of
the devaluation of the Mexican peso vs. the US dollar.
Exploration expenses decreased 39.6% over 1H19 due to the lower
budget allocated and, to a lesser extent, a decrease in exploration
investment as some activities were postponed due to COVID-19 travel
restrictions.
The increase in gross profit, combined with the lower
administrative and exploration expenses, resulted in a 52.6%
increase in EBITDA, with EBITDA margin increasing from 30.7% in
1H19 to 44.6% in 1H20. Similarly, profit from continuing operations
increased from US$65.3 million in 1H19 to US$216.9 million in
1H20.
During the period, there was a negative revaluation of the
Silverstream contract of US$31.8 million, primarily due to a
decrease in silver reserves at the Sabinas mine, which resulted in
changes to the mine plan, and an increase in the risk adjusted
discount rate; mitigated by the unwinding of the discount and a
higher forward price of silver. This compared negatively to the
US$11.4 million positive revaluation recognised in 1H20.
Net finance costs of US$16.2 million in 1H20 compared favourably
with the US$27.8 million recorded in 1H19. The 1H20 net finance
costs principally reflected the interest on the US$800 million
principal amount of 5.5% Senior Notes, mitigated by the
inflationary adjustments on recoverable VAT and interest gained on
the short term deposits.
We recorded a foreign exchange loss of US$41.0 million in the
income statement. This was as a result of the 21.9% devaluation of
the Mexican peso against the US dollar in the six months ended 30
June 2020 on: i) the realised transactions during the period
related to accounts receivable paid in Mexican pesos (mainly
recoverable VAT); and ii) the value of peso-denominated net
monetary assets. This compared negatively to the US$5.1 million
foreign exchange gain recognised in 1H19.
As a result of the increase in profit from continuing
operations, partly offset by the adverse effects mentioned above,
profit from continuing operations before income tax increased
136.6% from US$54.1 million in 1H19 to US$127.9 million in
1H20.
Income tax for the period was US$62.0 million (-US$4.0 million
in 1H19). The effective tax rate, excluding the special mining
rights, was 48.5%, which was above the 30% statutory tax rate. This
was mainly due to the devaluation of the Mexican peso, which had a
significant impact on the tax value of assets and liabilities
denominated in Mexican pesos .
Net profit for the period decreased 20.3% from US$70.9 million
to US$56.5 million in 1H20.
Cash flow generated by operations, before changes in working
capital, increased by 44.3% to US$456.2 million.
Capital expenditure totalled US$182.0 million, a decrease of
26.7% compared to 1H19, reflecting a slower rate of deploying
capital related to the COVID-19 disruption. Investments during the
period included construction of the Juanicipio mine, as well as the
ongoing construction of the pyrites plant (phase II) and the
optimisation of the beneficiation plant, both at Fresnillo.
Other uses of funds during the period were income tax, special
mining rights and profit sharing paid of US$71.0 million (US$140.8
million in 1H19) and dividends paid of US$87.7 million (US$123.1
million in 1H19).
Cash and other liquid funds as at 30 June 2020 totalled US$514.7
million, a 42.1% increase compared to the US$362.1 million in cash
and other liquid assets at the end of June 2019 and a 52.9%
increase over the year-end total of US$336.6 million. Taking into
account the cash and other liquid funds of US$514.7 million and the
US$800.6 million amortised cost of the Senior Notes, Fresnillo
plc's net debt was US$285.9 million as at 30 June 2020, compared
with a net debt position of US$438.5 million for the corresponding
period in the previous year. Considering these variations, the
balance sheet at 30 June 2020 remains strong, with a net debt /
EBITDA ratio of 0.34([6]) x
Interim Dividend
The Board of Directors has declared an interim dividend of 2.3
US cents per share totalling US$16.9 million to be paid on 16
September 2020 to shareholders on the register on 7 August 2020.
This decision was made after a comprehensive review of the
Company's and Group's financial situation, as well as the Parent's
distributable earnings, ensuring that the Group is well placed to
meet its current and future financial requirements, including its
development and exploration projects.
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. It is
expected that the 2020 interim dividend will be paid out of the
remaining balance of the retained earnings generated before
2014.
Growth
Our progress on development projects in 1H20 varied, depending
on the protocols in place and the decisions made to prioritise the
health of our workforce. Despite the adversity cause by the
pandemic, we continue to make progress on our key projects, the
pyrites plant and the optimisation of the beneficiation plant, both
at Fresnillo, and the commissioning of Juanicipio.
The completion of the pyrites plant at Fresnillo is anticipated
in 2H20. However, we understand that the final inspections by the
authority could be delayed by the pandemic, and this could defer
start-up of commercial production from 3Q20 to 4Q20.
The second phase of the optimisation of the beneficiation plant,
which consists of installing additional flotation cells to cope
with higher base metal grades at depth in the Fresnillo mine, is on
target for completion in 2H20. However, as the connection of the
new flotation circuit requires a few days stoppage of the existing
beneficiation plant, we decided to postpone this activity until the
end of the year]. This will help avoid unnecessary interruptions to
the normal operation of the plant.
Silver production for 2020 will not be materially affected as a
result of the events and decisions described above, as these
projects were expected to only marginally contribute to the Group's
total silver production this year. Both facilities are expected to
be fully operational in 1Q21.
Construction of the Juanicipio project progressed as planned,
mainly due to activities during the first months of the year.
However, at the beginning of the second quarter, we decided to halt
both the construction of the beneficiation plant and surface
exploration. This was because the contractor's shift patterns and
working practices in these areas were not compatible with the new
strict social distancing measures we needed to introduce - and we
were not prepared to put the health of the workforce at risk.
Mine development continued as planned and we anticipate that the
first production stope will be fully prepared by the end of 3Q20,
with development ore expected to be processed through the Fresnillo
plant in the coming weeks at an average rate of 16,000 tonnes per
month. The overall development timetable for this project currently
remains unchanged.
Outlook
As stated in our production report of 22 July, we have revised
our consolidated production guidance. T otal gold production
guidance was decreased to 785-815 thousand ounces (815-900 thousand
ounces previously) mainly due to the COVID-19 operational
restrictions at the Herradura district in the second quarter. Total
silver production guidance (including Silverstream) remains within
the range of 51-56 million ounces.
Exploration expenses are expected to be reduced to around US$120
million (US$135 million previously), reflecting our limited ability
to explore certain prospects due to travel restrictions related to
COVID-19 guidelines. Similarly, capex is anticipated to reduce to
US$525 million, mainly as a result of the deferral of expenditures
at the Juanicipio project and San Julián .
This year has been a watershed for many industries worldwide and
we reaffirm our solidarity with the millions of people that have
been affected, particularly in Mexico. We will continue playing our
part in supporting all our stakeholders. From ensuring effective
preventive and social distancing measures to launching a digital
learning community for local children unable to attend school, we
will do everything we can to minimise the impact of the virus.
Please see the Sustainability section later in this report for more
details.
There is no doubt that this health crisis will continue
re-shaping our daily lives in the upcoming months, but we remain
confident that the Company's strong fundamentals and financial
flexibility will give us the opportunity to continue working
towards achieving our purpose....contributing to the wellbeing of
people, through the sustainable mining of silver and gold.
Analyst Presentation
Management will host a webcast for analysts and investors today
at 3pm UK / 9am Mexico. Registration and access will be provided on
the homepage of Fresnillo's website and directly via this link:
https://kvgo.com/IJLO/Fresnillo_HY_2020_Interim_Results
Questions may be submitted via the webcast.
For those unable to access the webcast, a conference line will
also be provided:
UK: 0808 109 0700
US: 1 866 966 5335
MX: 00 1 866 966 8830
INTL: +44 (0) 20 3003 2666
P/W: Fresnillo Half Year Results
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, 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.
FORWARD LOOKING STATEMENTS
Information contained in this announcement may include
'forward-looking statements'. All statements other than statements
of historical facts included herein, including, without limitation,
those regarding the Fresnillo Group's intentions, beliefs or
current expectations concerning, amongst other things, the
Fresnillo Group's results of operations, financial position,
liquidity, prospects, growth, strategies and the silver and gold
industries are forward-looking statements. Such forward-looking
statements involve risk and uncertainty because they relate to
future events and circumstances. Forward-looking statements are not
guarantees of future performance and the actual results of the
Fresnillo Group's operations, financial position and liquidity, and
the development of the markets and the industry in which the
Fresnillo Group operates, may differ materially from those
described in, or suggested by, the forward-looking statements
contained in this document. In addition, even if the results of
operations, financial position and liquidity, and the development
of the markets and the industry in which the Fresnillo Group
operates are consistent with the forward-looking statements
contained in this document, those results or developments may not
be indicative of results or developments in subsequent periods. A
number of factors could cause results and developments to differ
materially from those expressed or implied by the forward-looking
statements including, without limitation, general economic and
business conditions, industry trends, competition, commodity
prices, changes in regulation, currency fluctuations (including the
US dollar and Mexican Peso exchanges rates), the Fresnillo Group's
ability to recover its reserves or develop new reserves, including
its ability to convert its resources into reserves and its mineral
potential into resources or reserves, changes in its business
strategy and political and economic uncertainty.
1H20 Operational Review
Production
Production H1 2020 H1 2019 % change
Silver (koz) 25,491 26,009 -2.0
-------- -------- ---------
Silverstream prod'n
(koz) 1,328 1,548 -14.2
-------- -------- ---------
Total Silver prod'n
(koz) 26,819 27,557 -2.7
-------- -------- ---------
Gold (oz) 381,319 432,417 -11.8
-------- -------- ---------
Lead (t) 30,085 25,164 19.6
-------- -------- ---------
Zinc (t) 49,381 42,406 16.4
-------- -------- ---------
First half silver production of 26.8 moz (including
Silverstream), down 2.7% vs. 1H19 due to the expected lower ore
grade at Saucito, and to a lesser extent, a lower contribution from
the Silverstream, a lower volume of ore processed at San Julián
Veins and a lower ore grade at the pyrites plant, mitigated by a
higher ore grade at Fresnillo and Herradura.
First half Silverstream production decreased 14.2% vs. 1H19 due
to a decrease in ore throughput and the expected lower ore grade
resulting from narrower veins, which were partially compensated for
by a higher recovery rate.
First half gold production decreased 11.8% vs. 1H19 due to a
lower volume of ore processed at Herradura and Noche Buena
primarily as a result of COVID-19 related restrictions, mitigated
by the ability to continue processing inventories both, on the
leaching pads and the dynamic leaching plants (DLP's).
First half by-product lead production increased 19.6% vs. 1H19
due to higher ore grades at Fresnillo, Saucito and Ciénega.
First half by-product zinc production increased 16.4% vs. 1H19
due to higher ore grades at Fresnillo, Saucito and Ciénega, offset
by a lower ore grade at San Julián (DOB).
Fresnillo mine production
H1 2020 H1 2019 % change
Ore Processed (t) 1,194,905 1,194,199 0.1
---------- ---------- ---------
Production
---------- ---------- ---------
Silver (koz) 6,756 6,407 5.5
---------- ---------- ---------
Gold (oz) 19,609 24,935 -21.4
---------- ---------- ---------
Lead (t) 11,477 8,769 30.9
---------- ---------- ---------
Zinc (t) 17,737 11,957 48.3
---------- ---------- ---------
Ore Grades
---------- ---------- ---------
Silver (g/t) 196 187 4.9
---------- ---------- ---------
Gold (g/t) 0.72 0.86 -16.7
---------- ---------- ---------
Lead (%) 1.14 0.85 33.4
---------- ---------- ---------
Zinc (%) 2.12 1.46 45.0
---------- ---------- ---------
First half silver production increased 5.5% vs. 1H19 due to the
higher ore grade resulting from a combination of incremental
improvements achieved following the implementation of our action
plan, as set out at the end of last year and further described
below.
Our performance improvement plan, as set out in the Capital
Markets Day in December 2019, continues to be implemented, focusing
on controlling dilution, enhancing the blasting and drilling
techniques to cope with the narrower veins, in conjunction with the
use of more efficient and accurate topographic scanners. All the
long haul drilling stopes have now been scanned. Further,
intiatives to increase efficiency and reduce downtime were
advanced, with the use of five semi-automatic drilling machines now
operating and beginning to see improvements month on month.
Development rates remained at a similar level vs. 1Q20, with an
average of 3,183m per month in 2Q20 (1Q20: 3,200m per month),
despite a reduction in the number of contractors and employees on
site while they self isolated in accordance with COVID-19
guidelines. During the first half, development rates increased 6.3%
(3,190m per month) vs. 1H19 (3,000m per month) as a result of the
ramp up of the tunnel boring machine and the new contractor hired
at the end of 2019. With these measures and assuming that the
impact of COVID-19 pandemic on our operations does not worsen, we
remain confident of achieving our expected development rates of
3,400m per month by the end of 2020.
First half by-product gold production decreased 21.4% vs. 1H19
due to a lower ore grade and to a lesser extent, lower recovery
rate.
The silver ore grade for 2020 continues to be in the range of
185-200 g/t, while the gold ore grade is estimated to remain around
0.7 g/t.
Saucito mine production
H1 2020 H1 2019 % change
Ore Processed (t) 1,385,385 1,327,673 4.3
---------- ---------- ---------
Production
---------- ---------- ---------
Silver (koz) 8,141 8,840 -7.9
---------- ---------- ---------
Gold (oz) 41,574 36,716 13.2
---------- ---------- ---------
Lead (t) 11,972 10,439 14.7
---------- ---------- ---------
Zinc (t) 17,744 15,052 17.9
---------- ---------- ---------
Ore Grades
---------- ---------- ---------
Silver (g/t) 210 243 -13.3
---------- ---------- ---------
Gold (g/t) 1.21 1.14 6.0
---------- ---------- ---------
Lead (%) 1.02 0.93 9.5
---------- ---------- ---------
Zinc (%) 1.84 1.64 12.3
---------- ---------- ---------
In line with our expectations, first half silver production
decreased 7.9% vs. 1H19 as a result of the gradual depletion of
higher ore grade areas at the Jarillas vein. This decline was
mitigated by a higher volume of ore processed.
First half by-product gold production increased 13.2% vs. 1H19
due to a higher ore grade, volume of ore processed and recovery
rate.
The silver ore grade for 2020 continues to be in the range of
200-220 g/t, while the gold ore grade is estimated to remain around
0.95 g/t.
PYRITES PLANT (PHASE I)
H1 2020 H1 2019 % change
Ore Processed (t) 80,502 87,005 -7.5
-------- -------- ---------
Production
-------- -------- ---------
Silver (koz) 505 638 -20.8
-------- -------- ---------
Gold (oz) 1,795 2,315 -22.5
-------- -------- ---------
Ore Grades
-------- -------- ---------
Silver (g/t) 252 305 -17.3
-------- -------- ---------
Gold (g/t) 2.11 2.31 -8.7
-------- -------- ---------
First half silver production decreased 20.8% vs. 1H19 due to a
lower ore grade and volume of iron concentrates processed,
mitigated by a higher recovery rate.
Similarly, first half gold production decreased 22.5% vs. 1H19
as a result of a lower ore grade, recovery rate and volume of iron
concentrates processed.
We continue to expect this plant to recover around 1 moz silver
and 3 koz gold from the Saucito tailings during 2020.
Ciénega mine production
H1 2020 H1 2019 % change
Ore Processed (t) 657,893 650,107 1.2
-------- -------- ---------
Productio n
-------- -------- ---------
Gold (oz) 32,374 29,757 8.8
-------- -------- ---------
Silver (koz) 2,969 2,920 1.7
-------- -------- ---------
Lead (t) 3,237 2,335 38.6
-------- -------- ---------
Zinc (t) 4,909 3,842 27.8
-------- -------- ---------
Ore Grades
-------- -------- ---------
Gold (g/t) 1.65 1.55 6.4
-------- -------- ---------
Silver (g/t) 163 163 -0.1
-------- -------- ---------
Lead (%) 0.75 0.56 32.3
-------- -------- ---------
Zinc (%) 1.24 1.00 24.2
-------- -------- ---------
First half gold production increased 8.8% vs. 1H19 primarily due
to the higher ore grade while first half silver production remained
flat vs. 1H19. This resulted from the higher proportion of material
extracted from the Eastern zone of the district with higher gold
content but lower silver content.
The gold and silver ore grades for 2020 are expected to remain
at around 1.65-1.75 g/t and 155-165 g/t respectively.
San Julián mine production
H1 2020 H1 2019 % change
Ore Processed Veins (t) 621,973 661,680 -6.0
---------- ---------- ---------
Ore Processed DOB (t) 1,101,489 1,107,875 -0.6
---------- ---------- ---------
Total production at San Julián
---------- ---------- ---------
Gold (oz) 31,535 36,443 -13.5
---------- ---------- ---------
Silver (koz) 6,277 6,542 -4.1
---------- ---------- ---------
Production Veins
---------- ---------- ---------
Gold (oz) 30,242 35,299 -14.3
---------- ---------- ---------
Silver (koz) 2,121 2,330 -9.0
---------- ---------- ---------
Production DOB
---------- ---------- ---------
Gold (oz) 1,293 1,143 13.1
---------- ---------- ---------
Silver (koz) 4,156 4,212 -1.3
---------- ---------- ---------
Lead (t) 3,400 3,621 -6.1
---------- ---------- ---------
Zinc (t) 8,991 11,555 -22.2
---------- ---------- ---------
Ore Grades Veins
---------- ---------- ---------
Gold (g/t) 1.58 1.74 -9.2
---------- ---------- ---------
Silver (g/t) 115.37 119.69 -3.6
---------- ---------- ---------
Ore Grades DOB
---------- ---------- ---------
Gold (g/t) 0.08 0.08 1.5
---------- ---------- ---------
Silver (g/t) 136.93 137.00 -0.0
---------- ---------- ---------
Lead (%) 0.39 0.44 -9.7
---------- ---------- ---------
Zinc (%) 1.10 1.40 -21.0
---------- ---------- ---------
San Julián Veins
First half gold and silver production decreased 14.3% and 9.0%
vs. 1H19 respectively due to lower ore grades driven by the
depletion of high ore grade areas at San Julián and Shalom, and the
lower volumes of ore processed following the depletion of the
stockpile in 2H19, which resulted from the development activities
in 2019.
We continue to expect the 2020 silver and gold ore grades to
remain flat year on year, averaging 110-120 g/t and 1.6-1.7 g/t,
respectively.
San Julián Disseminated Ore Body
First half silver production decreased 1.3% vs. 1H19 due to a
marginally lower volume of ore processed and recovery rate.
The silver ore grade for 2020 is expected to remain within a
range of 140-150 g/t.
Herradura mine production
H1 2020 H1 2019 % change
Ore Processed (t) 8,130,282 11,161,864 -27.2
----------- ----------- ---------
Total Volume Hauled (t) 52,783,600 61,233,200 -13.8
----------- ----------- ---------
Production
----------- ----------- ---------
Gold (oz) 205,746 236,866 -13.1
----------- ----------- ---------
Silver (koz) 824 634 30.0
----------- ----------- ---------
Ore Grades
----------- ----------- ---------
Gold (g/t) 0.82 0.82 -0.9
----------- ----------- ---------
Silver (g/t) 3.82 2.70 41.6
----------- ----------- ---------
First half gold production decreased 13.1% vs. 1H19 driven by
the lower volume of ore deposited during the COVID-19 operational
restrictions. This adverse effect was mitigated by: i) the
reduction of gold inventories from 72koz at the end of 2019 to
47koz at the end of 1H20; ii) the increased recovery rate due to an
increase in leaching proportional to the level of deposits, which
resulted in the improved overall speed of recovery at the 13th
leaching pad following its commissioning in mid-2019; and iii)
access gained to a high ore grade area of the pit in 2Q20.
Since mid-June, operations have ramped up, albeit with strict
safety protocols limiting productivity gains.
The gold ore grade is expected to remain around 0.75-0.80 g/t
during 2020.
Following the analysis conducted during 2018 as a result of the
construction of an access road through a number of old leaching
pads, the mine has continued carrying out assays to refine
estimated grade and recovery of the ore in inventories. As a result
of the information obtained, there was an update to the estimate of
the recoverable remaining gold content in the inventories at the
old leaching pads resulting in an increase of 119.3 thousand ounces
of gold as at 1st January 2020.
Noche Buena mine production
H1 2020 H1 2019 % change
Ore Processed (t) 3,330,054 6,575,328 -49.4
----------- ----------- ---------
Total Volume Hauled (t) 15,717,399 26,115,609 -39.8
----------- ----------- ---------
Production
----------- ----------- ---------
Gold (oz) 48,686 65,386 -25.5
----------- ----------- ---------
Silver (koz) 19 29 -35.2
----------- ----------- ---------
Ore Grades
----------- ----------- ---------
Gold (g/t) 0.54 0.53 1.2
----------- ----------- ---------
Silver (g/t) 0.38 0.22 73.0
----------- ----------- ---------
First half gold production decreased 25.5% vs. 1H19 driven by
the lower volume of ore deposited, for reasons explain above, in
addition to the expected depletion of the gold production as the
mine approaches closure. This were mitigated by the higher speed of
recovery due to increased irrigation on the pads in addition to the
installation of the carbon in columns in 2019, which are now
operational and incorporated to the process.
The expected gold ore grade has been marginally revised down to
the range of 0.50-0.55 g/t in 2020
Growth Projects
After reviewing the potential impacts of COVID-19 in the
following months, the Group has revised its expected capital
expenditure and decreased it to US$525 million (US$655 million
previously) for the full year, reflecting the deferral of some
expenditure to 2021, particularly at Juanicipio and San Julián,
albeit an expected increase in the rate of capital deployment at
our different mines and projects during the 2H20.
Pyrites Plant at Fresnillo
Construction of the Pyrites plant (phase II) in the Fresnillo
district advanced and remains on track and on budget. As a direct
result of COVID-19 related disruption, there could be a possible
delay in final inspections by the authority, which could defer
start-up of commercial production from 3Q20 to 4Q20.
The Pyrites Plant is expected to improve overall recoveries of
gold and silver, and to therefore maximise production in the
Fresnillo district. This project was divided into two phases, the
first phase consisted of the iron flotation circuit and pyrites
leaching plant at the Saucito mine, which was commissioned
mid-2018. The second phase, a 14,000 tpd tailings flotation plant
at the Fresnillo mine, is under construction and advancing as
mentioned above. Production is expected to total an average of 3.5
moz of silver and 13 koz of gold per year once both phases are
operating at full capacity. The second phase of the Pyrites Plant
project will process the ongoing and historical tailings from the
Fresnillo mine to produce a pyrites concentrate. This will be sent
to a filtration plant and then on to the leaching plant at Saucito
for the final part of the process to produce the precipitates.
Optimisation of the beneficiation plant at the Fresnillo
mine
The main objective of this project is to increase processing
capabilities at the Fresnillo beneficiation plant to cope with the
higher lead and zinc grades currently being mined at the deeper
levels of the mine. A three-stage project, the first phase was
completed in 2017 and comprised the installation of an additional
zinc thickener. This year, construction of the second phase, the
installation of flotation cells, is progressing according to plan
and is due to be concluded in 2H 2020. However, as the connection
of the new flotation circuit requires a few days stoppage of the
existing beneficiation plant, we decided to postpone this activity
until the end of the year. This will help avoid unnecessary
interruptions to the normal operation of the plant.
The third and final stage, increasing the plant capacity to
9,000 tpd from its current capacity of 8,000 tpd through the use of
vibrating screens, will only be undertaken when the mine is able to
sustain a consistent level of development, sufficient to support
this higher level of processing capacity.
Juanicipio
During the first half of the year, the pace of progress at
Juanicipio slowed due to COVID-19 restrictions. This resulted from
our decision to halt both the construction of the beneficiation
plant and surface exploration as contractor's shift patterns and
working practices in these areas were not compatible with the new
strict social distancing measures we needed to introduce - and we
were not prepared to put the health of the workforce at risk.
Nevertheless, the overall development timetable currently remains
unchanged with the Juanicipio processing plant expected to be
commissioned mid-2021 as the critical path of the project was
unaffected by the pandemic. Mine development continued, and we
expect the first production stope to be fully prepared by the end
of 3Q20, with development ore expected to be processed through the
Fresnillo plant in the coming weeks at an average rate of 16,000
tonnes per month .
Juanicipio is expected to contribute a total average annual
production of 11.7 moz silver and 43.5 koz gold, with an initial
life of mine of 12 years.
Below we provide an update on other projects which are expected
to contribute to our medium and long term growth. These projects
have not yet been approved by the Board and are subject to ongoing
internal review. However, certain minor works and exploration
activities might be in progress in preparation for Board approval
and as such, are included within the 2020 approved capex and
exploration budget.
Advanced exploration projects
Ciénega Optimisation project
The exploration campaign, albeit being positive, has not
resulted in the expected increase in reserves. As a result, we have
decided to continue operating the Ciénega mine at its current 4,000
tpd capacity and evaluate this project in the future if the reserve
base is increased.
Orisyvo
Exploration and additional metallurgy testing continued during
the period, with a drilling programme of 7,700 metres. This
information will be used to design a new recovery estimation that
will be used to update the preliminary economic assessment. This
project is now expected to commence production in 2H23, following
an estimated investment of US$430 million.
Centauro pit expansion and Centauro underground
During the first half of the year, drilling activities
continued. However, additional exploration will be conducted prior
to reevaluating this project again in the future.
Guanajuato
Guanajuato is a large historic silver-gold mining district. The
Fresnillo holdings are comprised of three areas of interest: the
Gigante-Opulencia systems in the north, the Las Torres-Peregrina
targets in the centre of the district and La Joya-Cerro Blanco in
the south. In 1H20, exploration continued with 11,915 metres being
drilled.
At the end of May 2019, indicated and inferred resources at this
project totalled 1.4 million ounces of gold and circa 89 million
ounces of silver([7]) .
Rodeo
This gold-silver project is located in Durango. Negotiations to
acquire land and engage with the surrounding communities continued.
Indicated and inferred resources amounted to 1.2 million ounces of
gold and 11 million ounces of silver as of 31st of May 2019(4)
.
Exploration
During the first half of 2020, 264,000 metres of drilling were
completed at our operating mines, as part of the 440,000 metre 2020
programme to convert resources into reserves and direct mine
development. Additionally, 77,000 metres of exploration drilling
were carried out, as part of the 228,000 metre 2020 programme at
new projects.
Presently, eight areas are in drilling. Interesting results were
obtained at Fresnillo, Guanajuato and Supaypacha (Peru), that
identified new mineralised zones and merit following up; at the San
Julián district, drilling successfully converted resources to
reserves on the south vein system. Mapping, sampling and
geophysical surveys were carried out in the San Julián and Ciénega
districts to define additional targets. Negotiations with
communities to obtain access permits to drill continue at several
project areas in Mexico and Peru.
Some exploration activities were postponed due to COVID-19
related travel restrictions in the areas in which they are located.
Exploration teams are working out in selected areas of the
favourable silver-gold belts in Mexico, Peru and Chile.
In the first six months, US$50.7 million of exploration expenses
were recorded in the income statement, a decrease of 33.3% over
1H19.
Total risk capital expected to be invested in exploration for
the full year 2020 has been adjusted to approximately US$120
million (US$135 million previously).
Related party transactions
Details of related party transactions that have taken place in
the first six months of the current financial year are detailed in
note 16 of the interim consolidated financial statements.
Health and safety, human resources, environment and community
relations report
At the time of preparing this document, the coronavirus outbreak
remains a threat to lives and livelihoods. The steps we have taken
to protect our workforce and communities are grounded in our values
and inspired by our corporate purpose. The trust that we have built
during the last 12 years with authorities, contractors and
suppliers has been fundamental to our ability to respond decisively
to the social and economic challenges of the pandemic. The HSECR
Committee met twice to review the company's approach and
performance.
Figure 1:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
Our Purpose, Values and Culture
Contributing to the wellbeing of people, through the sustainable
mining of silver and gold has been our source of inspiration and
commitment to do the right thing during the coronavirus outbreak.
As soon as the outbreak began, we engaged with the Mexican
authorities in order to maintain operations, and implemented
decisive measures to protect our workforce and support our
communities. For example, we enabled the most vulnerable members of
our workforce to stay at home on full pay, regardless of their
status as employees or contractors. We also implemented rigorous
preventive measures in our workplaces as well as a number of
initiatives to support the health authorities and protect
vulnerable people in our local communities.
Our moral compass is based on our longstanding values:
Trust Build Trust by engaging our workforce, communities
and authorities on the issues that matter to them
Responsibility Manage responsibly our operations and projects
and be accountable for our impacts
---------------------------------------------------
Integrity Act ethically and make decisions according to
our values
---------------------------------------------------
Loyalty Build long term relationships with our workforce
and communities based on reciprocity
---------------------------------------------------
Our "step-up ethics" and the "I care, we care" programmes have
embedded winning behaviours in our culture making it easier to
align our actions to our purpose during the COVID-19 crisis.
Our workforce
We seek to attract, develop and retain the best people, and
engage them over the long term. We are committed to eliminating
unsafe workplace conditions and behaviours, and to keeping our
people healthy. We continue to work hard to develop an
organisational culture based on trust, and to embed ethics and
integrity into that culture in order to create a fair and
respectful workplace.
We collaborate with leading educational institutions in Mexico
to attract young talent in geology, metallurgy and mining
engineering, offering students internships of varying lengths. In
2020, we have offered internship opportunities of various lengths
for 75 students, of which 38% are women. In addition, we recruit
graduates from our pool of interns through the 'Engineers in
Training' programme. In 2020 we recruited 21 engineers in training,
among them 33% are women. We have met our talent needs with
internal promotions (76%) and experienced recruits for leadership
positions (24%).
We continue with our talent development programme. This year we
have achieved 90% success rate regarding the development and
training plan for senior managers and engineers, and 98% regarding
unionised employees. The average training hours during the first
semester of 2020 is 40 for non-unionised employees and 32 for
unionised employees. We have reviewed 50% of our position profiles
for non-unionised employees equivalent to 702 people and identified
among of them, 63% as high-potential employees. We have begun our
succession plans for critical leadership positions.
In the first half of 2020, our workforce totalled 18,485 (18,889
in 2019([8]) ), of which 4,155 were unionised employees, 1,355 were
non-unionised employees and the remainder were contractors.
We continue to make progress in developing an inclusive culture
and increasing the participation of women in our workforce.
Voluntary labour turnover decreased in 1H20 to 3.63% (5.71% in
2019(7) ), however total turnover remained broadly the same at
10.42% (10.31% in 2019(7) ).
Figure 2:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
*Comparative figures relate to full years 2016-2019
Workforce Engagement during COVID-19
During these challenging times we have been collaborating with
the Mexican authorities and our industry peers to implement
best-practice approaches to protecting the health of the workforce.
These engagement efforts resulted in the Mexican Mining Ministry
issuing guidance([9]) to help shape the response of the industry to
the COVID-19 crisis. The guidance focuses on protecting the most
vulnerable people in the workforce, mitigating the impacts on small
and medium-sized enterprises (SMEs) and collaborating with our
local communities.
We have taken steps to protect employees and contractors in our
mining operations from the impacts of COVID-19:
-- Protecting the vulnerable workforce : We identified 876
members of our workforce as vulnerable, based on factors such as
their age, chronic diseases (diabetes, high blood pressure, etc.),
and whether they were pregnant or breastfeeding. We offered these
employees the option to stay at home in order to protect their
health, on full pay.
-- Raising awareness and education : We launched a creative
communication campaign to educate our workforce on preventive
measures, to raise awareness and combat misinformation.
-- Social Distancing in the workplace : All our facilities have
adopted key preventive measures. In common areas such as entrances,
dining rooms, dressing rooms, shafts, boardrooms and meeting rooms,
floor markings facilitate compliance with social distancing. We
also ensure social distancing during the transportation of
personnel and provide appropriate protective equipment.
-- Hygiene and sanitisation : To minimise risk, we have
implemented disinfection measures, notably the use of
anti-bacterial gel, facemasks and the discontinuation of the use of
digital fingerprint controls. A daily sanitisation programme has
been implemented for work areas and transportation.
-- Access control: We have introduced check-up points where we
monitor body temperature and ask personnel about any symptoms or
contacts with people suspected to have the disease. For our
workforce in remote locations, monitoring takes place before
transportation and also once they arrive at the mine site.
-- Testing, monitoring and contagion traceability: We have
acquired, and promote the responsible use of, COVID-19 tests and
conduct contagion traceability for any suspected cases. On a daily
basis, we monitor the progress of any individuals who need to go
into quarantine, and also offer psychological care and emotional
support. We have applied 2,019 random tests across our operations
and projects, with 225 people requested to self-quarantine as a
preventive measure.
Figure 3:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
Safety
Our goal is to instil a safety culture based on caring for our
people. We continue to make progress with the implementation of the
'I Care, We Care' programme that integrates best practices,
systems, programmes and behaviours. Although our Total Recordable
and Lost Time Injury Frequency Rates improved with respect to 2019
from 18.67 (2019) to 15.88 (1H20) and 7.63 (2019) to 6.89 (1H20)
respectively, we recognise that there is a long road ahead until
our safety culture matures.
Figure 4:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
Figure 5:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
*Comparative figures relate to full years 2016-2019
Environment
Our Independent Tailings Review Panel (ITRP) has been
successfully operating in 2020, providing guidance and
recommendations for the safe design, construction and operation of
our Tailings Storage Facilities (TSF). While site visits were
conducted in the early part of the year, these were replaced by
remote reviews following the outbreak.
Community Relations
Our communities are our strategic partners. We have collaborated
with our communities in new and creative ways to respond to the
COVID-19 pandemic:
-- Communicating preventive measures: We work closely with the
authorities to communicate official information and share
recommendations to reduce the risk of infection.
-- Making donations to the Health Sector: We have donated
ventilators and protective equipment such as suits, gloves,
facemasks, anti-bacterial gel and eye protection. We have provided
land in the Fresnillo district on a temporary basis in order to
enable the capacity of the Social Security Institute (IMSS)
Hospital to be increased.
-- Supporting the most vulnerable: We have also partnered with
local authorities and food banks to donate food, sanitising kits
and protective equipment to the poor and elderly, in order to make
staying at home a little easier and more comfortable.
-- Reinventing how we collaborate: Our robotics teams in local
communities have turned their skills to the production of acetate
masks and other protective equipment for community hospitals.
Mothers from our communities in San Julián also partnered with us
to manufacture protective equipment. Our reading programme Picando
Letras launched a YouTube channel and continued to provide training
to teachers and parents. Our shared objective is to support
children's education during the coronavirus outbreak. Picando
Letras became our first programme to bring together communities at
all our operations and projects into a single digital
community.
Small and medium-sized contractors and suppliers
Our approach is helping to preserve our business relations with
small and medium-sized enterprises (SMEs). Our payment and supply
terms have remained unchanged to mitigate the negative impact of
the coronavirus outbreak on our value chain.
Our Environment, Social and Governance (ESG) performance was
recognised by the inclusion of Fresnillo plc in the FTSE4Good Index
and Ethisphere's world most ethical companies.
Figure 6:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
Financial Review
The interim consolidated financial statements of Fresnillo plc
for the first halves of 2020 and 2019 have been prepared in
accordance with IAS 34 "Interim Financial Reporting" as adopted by
the European Union. Management recommends reading this section in
conjunction with the Interim Financial Statements and their
accompanying Notes.
Income Statement
Income Statement Key Line Items
Six months ended 30 June
(in millions of US$)
H1 2020 H1 2019 % change
Adjusted revenues(1) 1,125.1 1,069.0 5.3
-------- -------- ---------
Lead and zinc hedging 1.5 0.1 N/A
-------- -------- ---------
Treatment & refining
charges -72.4 -67.1 7.9
-------- -------- ---------
Total revenues 1,054.2 1,002.0 5.2
-------- -------- ---------
Cost of sales 733.0 796.5 -8.0
-------- -------- ---------
Gross Profit 321.2 205.5 56.3
-------- -------- ---------
Exploration expenses 50.7 84.0 -39.6
-------- -------- ---------
EBITDA (2) 469.9 307.9 52.6
-------- -------- ---------
Profit before income
tax 127.9 54.1 136.6
-------- -------- ---------
Special mining
right 9.4 -12.9 N/A
-------- -------- ---------
Income tax expense 62.0 -4.0 N/A
-------- -------- ---------
Profit for the
period 56.5 70.9 -20.3
-------- -------- ---------
Profit for the
period, excluding
post-tax Silverstream
revaluation effects 78.8 62.9 25.3
-------- -------- ---------
Attributable profit 64.5 70.2 -8.0
-------- -------- ---------
Attributable profit,
excluding post-tax
Silverstream revaluation
effects 86.8 62.2 39.5
-------- -------- ---------
Basic and diluted
earnings per share
(US$/share) (3) 0.088 0.095 -7.4
-------- -------- ---------
Basic and diluted
Earnings per share,
excluding post-tax
Silverstream revaluation
effects (US$/share) 0.118 0.084 40.5
-------- -------- ---------
(1) Adjusted revenues is the revenue shown in the income
statement adjusted to add back treatment and refining costs and the
effects of gold, lead and zinc hedging. The Company considers this
is a useful additional measure to help understand underlying
factors driving revenue in terms of volumes sold and realised
prices.
(2) Earnings before interest, taxes, depreciation and
amortisation (EBITDA) is calculated as gross profit plus
depreciation less administrative, selling and exploration
expenses.
(3) The weighted average number of shares for H1 2020 and H1
2019 was 736.9m. See Note 8 in the Consolidated Financial
Statements.
Fresnillo plc's financial results rely on the Group's asset
quality, skilled personnel and management's execution capabilities.
However, there are a number of macroeconomic variables affecting
the financial results which are beyond the Group's control. A
description of these variables is provided below.
Metal prices
The average realised gold price increased 27.0%, from US$1,320.7
per ounce in 1H19 to US$1,676.8 per ounce in 1H20, whilst the
average realised silver price increased 10.1% from US$15.3 per
ounce in 1H19 to US$16.8 per ounce in 1H20.
The average realised lead price decreased by 10.6% to US$0.78
per pound in 1H20, whilst the average zinc price decreased 27.0% on
1H19 to US$0.91 per pound.
Foreign exchange rates
The Mexican peso/US dollar spot exchange rate at 30 June 2020
was $22.97 per US dollar, compared to the exchange rate at 31
December 2019 of $18.85 per US dollar. The 21.9% spot devaluation
had a negative effect on the net monetary peso asset position,
which contributed to the US$40.0 million foreign exchange loss
recognised in the income statement, as well as the accounts
receivable denominated in Mexican pesos, which were collected
during the period (mainly recoverable VAT).
The average spot Mexican peso/US dollar exchange rate devalued
by 12.7% from $19.17 per US dollar in 1H19 to $21.61 per US dollar
in 1H20. The positive effect of the devaluation of the Mexican peso
vs. the US dollar on adjusted production costs is expected to
continue into 2H20, should the exchange rate remain at similar
levels throughout the following six months.
Cost Deflation
There was a net decrease in the weighted average input cost over
the half, of 6.1%. This deflation reflected, amongst other factors,
the favourable effect of the 12.7% average devaluation of the
Mexican peso against the US dollar. Excluding this positive effect,
the resulting cost inflation for 1H20 was 0.1%.
Labour
Personnel cost decreased by a net 8.5% in US dollar terms
considering the 12.7% average devaluation of the Mexican peso vs.
the US dollar. Wages to unionised employees have not been
negotiated this year due to the COVID-19 gathering restrictions but
annual increases are expected to be negotiated in the following
months.
Deflation of key operating materials in US$ terms
Unit prices of the majority key operating materials decreased in
US dollar terms. As a result, the weighted average unit prices of
all operating materials over the half decreased by 2.8%.
Key operating materials 1H20 VS 1H19
Reagents -10.3%
-------------
Sodium cyanide -5.3%
-------------
Steel balls for milling -4.0%
-------------
Steel for drilling -3.8%
-------------
Explosives -1.6%
-------------
Lubricants 3.2%
-------------
Tires 0.2%
-------------
Weighted average of all
operating materials -2.8%
Electricity
The weighted average cost of electricity in US dollars increased
2.3% from US$7.28 cents per kw in 1H19 to US$7.45 cents per kw in
the same period of 2020, reflecting an increase in consumption of
electricity generated by the government-owned utility company,
which is charged at a higher average generating cost, and to a
lesser extent, to a higher unit price of energy supplied by
Peñoles' thermoelectric plant and wind farm.
Diesel
The weighted average cost of diesel in US dollars decreased by
18.7% from US$88.0 cents per litre in 1H19 to US$71.5 cents per
litre in 1H20.
Contractors
Contractor costs are an important component of the Group's total
costs and include costs incurred by contractors relating to
operating materials, equipment and labour. The weighted average
decrease in contractor unit costs in US dollar terms was 6.7% when
compared to 1H19.
Maintenance
Maintenance decreased by approximately 5.5% in US dollars in
1H20, reflecting the favourable effect of the devaluation of the
Mexican peso vs. US dollar on the wages of maintenance personnel,
which are denominated, in their majority, in Mexican pesos.
Excluding this effect, maintenance would have increased by 1.8% as
a result of a 1.1% increase in the unit prices of spare parts in US
dollars and increases in fees paid to some maintenance
contractors.
Others
Other cost line items included a -10.7% decrease in freight and
an average deflation of -3.1% for the remaining components over
1H20, whereas there was a 4.0% increase in insurance premium per US
dollar insured unit.
Total revenues
Consolidated Revenues
(US$ millions)
H1 2020 H1 2019 Amount %Change
Adjusted revenues(1) 1,125.1 1,069.0 56.1 5.3
-------- -------- ------- --------
Hedging 1.5 0.1 1.4 N/A
-------- -------- ------- --------
Treatment and refining
charges -72.4 -67.1 -5.3 -7.9
-------- -------- ------- --------
Total revenues 1,054.2 1,002.0 52.2 5.2
-------- -------- ------- --------
(1) Adjusted revenues is the revenue shown in the income
statement adjusted to add back treatment and refining costs and the
effects of gold, lead and zinc hedging. The Company considers this
is a useful additional measure to help understand underlying
factors driving revenue in terms of volumes sold and realised
prices.
Adjusted revenues of US$1,125.1 million increased 5.3% over
1H19. This was mainly explained by the higher gold and silver
prices resulting in a positive impact of US$175.9 million and to a
lesser extent, higher volumes of zinc and lead sold, resulting in a
favourable impact of US$18.3 million. These effects were partially
offset by lower volumes of gold and silver sold, estimated at
US$104.0 million and a US$34.2 million impact from the decrease in
zinc and lead prices.
Adjusted revenues(1) by metal
(US$ millions)
H1 % H1 % Volume Price Total %
2020 2019 Variance Variance
Gold 611.9 54.4 556.8 52.1 (84.9) 140.0 55.1 9.9
-------- ------ -------- ------ ---------- ---------- ------- ------
Silver 383.0 34.0 366.1 34.2 (19.1) 35.9 16.9 4.6
-------- ------ -------- ------ ---------- ---------- ------- ------
Lead 47.4 4.2 45.3 4.2 7.3 (5.2) 2.1 4.6
-------- ------ -------- ------ ---------- ---------- ------- ------
Zinc 82.9 7.4 100.8 9.5 11.0 (29.0) (18.0) -17.8
-------- ------ -------- ------ ---------- ---------- ------- ------
Total
revenues 1,125.1 100.0 1,069.0 100.0 (85.7) 141.8 56.1 5.3
-------- ------ -------- ------ ---------- ---------- ------- ------
(1) Adjusted revenues is the revenue shown in the income
statement adjusted to add back treatment and refining costs and the
effects of gold, lead and zinc hedging. The Company considers this
is a useful additional measure to help understand underlying
factors driving revenue in terms of volumes sold and realised
prices
Changes in the contribution by metal were the result of the
relative changes in metal prices and volumes produced. Gold was the
only metal that increased its contribution to total adjusted
revenues, rising from 52.1% in 1H19 to 54.4% in 1H20. Lead and
silver's contributions to adjusted revenue remained at similar
levels to those observed in 1H19, while contribution of zinc to the
total adjusted revenues decreased from 9.5% in 1H19 to 7.4% in
1H20.
Herradura continued to be the largest contributor, representing
31.1% of the Group's total adjusted revenue. Saucito's contribution
to total adjusted revenues decreased from 22.9% in 1H19 to 21.1% in
1H20, reflecting the lower volume of silver sold, mitigated by a
higher price. Conversely, Fresnillo's contribution to total
adjusted revenues increased to 16.1% in 1H20 (15.0% in 1H19) as a
result of higher volumes of silver, lead and zinc sold. Ciénega's
contribution to total adjusted revenues increased from 8.5% in 1H19
to 9.7% in 1H20, mainly resulting from the higher volumes of gold
sold at a higher price. San Julián's (DOB) contributions to total
adjusted revenues decreased from 8.2% in 1H19 to 7.2% in 1H20
mainly as a result of the decrease in volume of zinc sold at a
lower price. Noche Buena's represented 7.2% of the Group's adjusted
revenues, down from 8.1%, reflecting the lower gold production.
Saucito's contribution to the Group's silver adjusted revenues
decreased from 37.7% in 1H19 to 32.9% in 1H20 reflecting the 17.2%
decrease in silver volumes sold. In contrast, Fresnillo's
contributions to silver adjusted revenues increased to 27.2% in
1H20 as shown in the table below.
Noche Buena's contribution to the Group's gold adjusted revenues
decreased half on half due to the 26.8% decrease in gold volumes
sold.
Fresnillo became the largest contributor to zinc adjusted
revenues increasing its participation from 26.8% in 1H19 to 36.8%
in 1H20. Conversely, Saucito's contribution to adjusted revenues
decreased from 38.6% in 1H19 to 35.2% in 1H20, driven by the lower
zinc price.
The contribution by metal and by mine to adjusted revenues is
expected to change further over future periods as new projects are
incorporated into the Group's operations and as precious metal
prices fluctuate.
Gold Adjusted revenues by mine
H1 20 H1 19
Herradura 54.9% 55.2%
------ ------
Noche Buena 13.2% 15.6%
------ ------
Saucito 10.4% 8.7%
------ ------
San Julián
Veins 8.3% 8.4%
------ ------
Ciénega
(and San Ramón) 8.3% 6.7%
------ ------
Fresnillo 4.7% 5.3%
------ ------
San Julián
DOB 0.2% 0.1%
------ ------
TOTAL 100% 100%
------ ------
Silver Adjusted revenues by mine
H1 20 H1 19
Saucito 32.9% 37.7%
------ ------
Fresnillo 27.2% 24.2%
------ ------
San Julián
DOB 15.5% 14.7%
------ ------
Ciénega
(and San Ramón) 11.7% 11.2%
------ ------
San Julián
Veins 9.0% 9.5%
------ ------
Herradura 3.5% 2.7%
------ ------
Noche Buena 0.1% 0.0%
------ ------
TOTAL 100% 100%
------ ------
Total adjusted revenues by mine
H1 20 H1 19
Herradura 31.1% 29.7%
------ ------
Saucito 21.1% 22.9%
------ ------
Fresnillo 16.1% 15.0%
------ ------
Ciénega 9.7% 8.5%
------ ------
San Julián
DOB 7.2% 8.2%
------ ------
Noche Buena 7.2% 8.1%
------ ------
San Julián
Veins 7.6% 7.6%
------ ------
TOTAL 100% 100%
------ ------
Volumes of metal in products sold
Six months ended 30 June
H1 20 H1 19 % change
SILVER (kOz)
-------- -------- ---------
Fresnillo 6,234 5,825 7.0
-------- -------- ---------
Ciénega 2,668 2,695 -1.0
-------- -------- ---------
Herradura 808 652 24.0
-------- -------- ---------
Saucito 8,387 8,387 -9.6
-------- -------- ---------
Pyrites plant 654 654 N/A
-------- -------- ---------
Noche Buena 13 4 194
-------- -------- ---------
San Julián
Veins 2,017 2,275 -9.0
-------- -------- ---------
San Julián
DOB 3,527 3,555 -0.8
-------- -------- ---------
Total Silver (kOz) 22,806 24,040 -5.1
-------- -------- ---------
GOLD (Oz)
-------- -------- ---------
Fresnillo 16,984 22,325 -23.9
-------- -------- ---------
Ciénega 29,954 28,112 6.6
-------- -------- ---------
Herradura 201,820 233,625 -13.6
-------- -------- ---------
Saucito 34,177 34,177 -1.5
-------- -------- ---------
Pyrites plant 2,467 2,467 N/A
-------- -------- ---------
Noche Buena 47,789 65,318 -26.8
-------- -------- ---------
San Julián
(phase I) 30,013 35,069 -14.4
-------- -------- ---------
San Julián
(phase II) 579 379 52.7
-------- -------- ---------
Total Gold (Oz) 364,879 421,472 -13.4
-------- -------- ---------
LEAD (MT)
-------- -------- ---------
Fresnillo 10,659 7,921 34.6
-------- -------- ---------
Ciénega 2,968 2,107 40.9
-------- -------- ---------
Saucito 10,783 10,168 6.0
-------- -------- ---------
San Julián
(phase II) 3,207 3,393 -5.5
-------- -------- ---------
Total Lead (MT) 27,615 23,590 17.1
-------- -------- ---------
ZINC (MT)
-------- -------- ---------
Fresnillo 15,199 9,890 53.7
-------- -------- ---------
Ciénega 4,123 3,158 30.6
-------- -------- ---------
Saucito 14,585 14,099 3.4
-------- -------- ---------
San Julián
(phase II) 7,493 9,617 -22.1
-------- -------- ---------
Total Zinc (MT) 41,400 36,764 12.6
-------- -------- ---------
HEDGING
Fresnillo plc's hedging policy remains guided by the principle
of providing shareholders with full exposure to gold and silver
prices.
In the last quarter of 2019, a portion of our by-product lead
production for 2020 was hedged. The table below illustrates the
expired hedging volume, the results in the first half of 2020 and
the outstanding balance for the rest of the year.
Concept As of June 30(th)
2020*
------------------
Lead
------------------
Weighted Floor (US$/tonne) 2,094
---------------------------- ------------------
Weighted Cap (US$/tonne) 2,290
---------------------------- ------------------
Expired volume (ton) 4,380
---------------------------- ------------------
Profit/Loss (US$ dollars) 1,469,016
---------------------------- ------------------
Total outstanding volume
(tonne) 4,380
---------------------------- ------------------
Treatment and Refining charges
Similar to previous years, the 2020 treatment and refining
charges (TRCs) per tonne and per ounce are currently being
negotiated with Met-Mex in accordance with international benchmarks
and will apply retrospectively from January 2020. We expect these
negotiations to conclude by October 2020. Treatment and refining
charges in these Interim Financial Statements were assumed to be
the same as those which were negotiated for the full year 2019,
consistent with the approach taken in 1H19.
Treatment charges per tonne of lead and zinc concentrate for the
first half of 2020 increased 4.0% and 51.7% respectively, while
silver refining charges decreased 17.0% compared to 1H19. 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 volumes of
lead and zinc concentrates shipped to Met-Mex further increased
treatment and refining charges in absolute terms, which rose by
US$5.3 million half on half.
Cost of sales
Change
H1 20 H1 19 Amount %
------ ------ ------- ------
Adjusted production
costs(4) 506.6 566.4 -59.8 -10.6
------ ------ ------- ------
Depreciation and amortisation 251.7 240.5 11.2 4.7
------ ------ ------- ------
Change in work in progress -38.3 -14.0 - 24.3 172.6
------ ------ ------- ------
Profit Sharing 7.8 4.3 3.5 81.5
------ ------ ------- ------
Unproductive cost 5.2 -0.7 5.9 N/A
------ ------ ------- ------
Hedging (MXN/USD exchange
rate) -0.1 0.0 -0.1 N/A
------ ------ ------- ------
Cost of Sales 733.0 796.5 -63.5 -8.0
------ ------ ------- ------
(4 Adjusted production cost is calculated as total production
costs less depreciation, profit sharing and the effects of exchange
rate hedging.)
Cost of sales of US$733.0 million decreased by 8.0% over 1H19 as
a result of the following combination of factors:
-- Adjusted production costs decreased by 10.6% to US$506.6
million in 1H20. The US$59.8 million decrease was mainly related
to: i) the 12.7% average devaluation of Mexican peso against the US
dollar (-US$34.6 million) and ii) lower volumes of ore deposited at
Herradura and Noche Buena (-US$50.9 million).
The above decreases were partly offset by an increase in
development (US$25.7 million).
-- Depreciation increased by US$11.2 million mainly due to the
increased depletion factors due to the decreased reserve base.
-- The variation in the change in work in progress had a
positive effect of US$24.2 million half on half. This resulted from
the re-assessment of the gold content on the leaching pads at
Herradura with an estimated positive effect of US$65.1 million (see
notes 2c and 5 to the financial statements). This was partially
offset by the net effect of the reduction of inventories at
Herradura and Noche Buena during the pandemic and the increase in
inventories at the underground mines, mainly at Saucito.
-- The US$5.2 million in unproductive costs is mainly related to
costs incurred during the partial stoppage at Herradura and Noche
Buena due to the COVID-19 measures taken by the state
government.
-- Mexican peso/US dollar hedging gain of US$0.1 million in
1H20. Considering the exchange rate reached maximum levels in mid
March, we decided to hedge part of our exposure to foreign exchange
risk associated with costs incurred in Mexican pesos. In the first
quarter of the year, we entered into a combination of put and call
options structured at zero cost (collars). These derivatives were
used to hedge US$150.1 million of costs denominated in Mexican
pesos with average floor and cap exchange rates of $22.33 and
$32.82 per US dollar respectively, which have generated a positive
result of US$0.1 million. The total outstanding position using
collar structures as of 30th June 2020 was US$112.59 million with
monthly maturities throughout 2020 until March 2021 with average
floor and cap exchange rates of $22.33 and $32.82 per US dollar
respectively. These instruments guarantee a minimum exchange rate
should the market fall below the floor exchange rate. Between the
floor and cap exchange rates the Group sells US dollars at the
market rate, and when the Mexican peso per US dollar exchange rate
goes above the cap rate, the Company must sell US dollars at the
contract rate.
Cost per tonne and cash cost per ounce
Cost per tonne is a key indicator to measure the effects of
mining inflation and cost control performance at each mine. This
indicator is calculated as total production costs, plus ordinary
mining rights less depreciation, employee profit sharing and
exchange rate hedging effects, divided by total tonnage
processed.
COST PER TONNE
%
--------------------- ------ ------ -------
H1 20 H1 19 Change
--------------------- ------ ------ -------
Fresnillo US$/TONNE MILLED 65.60 58.87 11.4
--------------------- ------ ------ -------
Saucito US$/TONNE MILLED 70.34 65.96 6.6
--------------------- ------ ------ -------
Ciénega US$/TONNE MILLED 72.98 79.46 -8.2
--------------------- ------ ------ -------
San Julián
Veins US$/TONNE MILLED 70.03 66.54 5.2
--------------------- ------ ------ -------
San Julián
DOB US$/TONNE MILLED 37.89 38.98 -2.8
--------------------- ------ ------ -------
Herradura US$/TONNE DEPOSITED 18.54 18.02 2.9
--------------------- ------ ------ -------
Noche Buena US$/TONNE DEPOSITED 13.74 9.32 47.5
--------------------- ------ ------ -------
Costs per tonne across the Group were positively impacted by the
12.7% average devaluation of the Mexican peso vs. US dollar half on
half. Additional factors affecting cost per tonne at each mine are
described below:
Fresnillo
Cost per tonne milled increased 11.4% half on half principally
due to an increase in development, mitigated by the favourable
effect of the devaluation of the Mexican peso vs. US dollar.
Saucito
Cost per tonne milled increased 6.6% half on half primarily due
to an increase in development at the mine, mitigated by the
favourable effect of the devaluation of the Mexican peso and the
lower volume processed at the pyrites plant.
Ciénega
Cost per tonne milled decreased 8.2% mainly due to the positive
effect of the devaluation of the Mexican peso vs. US dollar and a
decrease in the number of contractors due to the initiatives to
increase productivity and reduce costs.
San Julián Veins
Cost per tonne milled increased 5.2% mainly as a result of an
increase in development, mitigated by the favourable effect of the
devaluation of the Mexican peso vs. US dollar .
San Julián Disseminated Ore Body
Cost per tonne milled decreased 2.8% mainly as a result of the
positive effect of the devaluation of the Mexican peso vs. the US
dollar.
Herradura
Cost per tonne increased 2.9% primarily due to lower economies
of scale as a result of the decrease in volume of ore processed and
waste material hauled related to the COVID-19 disruptions,
mitigated by the decrease in the unit price of diesel and the
devaluation of the Mexican peso vs. the US dollar.
Noche Buena
Cost per tonne increased by 47.5% mainly driven by the lower
economies of scale achieved from the decrease in volume of ore
processed and waste material hauled as a result of COVID-19
disruptions, mitigated by the lower unit price of diesel and the
devaluation of the Mexican peso vs. the US dollar.
CASH COST PER OUNCE
Cash cost is a key indicator which measures the ability of the
mine to generate competitive profit margins. Cash cost per ounce is
calculated as total cash cost (cost of sales plus treatment and
refining charges and mining rights less depreciation) less revenues
from by-products divided by the silver or gold ounces sold.
H1 20 H1 19 % Change
US$ per silver
Fresnillo ounce 4.86 3.12 56.0
---------------- --------- ------- ---------
US$ per silver
Saucito ounce 1.19 2.36 -49.7
---------------- --------- ------- ---------
US$ per gold
Ciénega ounce -84.59 176.85 N/A
---------------- --------- ------- ---------
San Julián US$ per silver
Veins ounce -2.67 0.58 N/A
---------------- --------- ------- ---------
San Julián US$ per silver
DOB ounce 8.65 6.03 43.5
---------------- --------- ------- ---------
US$ per gold
Herradura ounce 573.04 770.28 -25.6
---------------- --------- ------- ---------
US$ per gold
Noche Buena ounce 1,100.81 821.91 33.9
---------------- --------- ------- ---------
Consolidated
---------------- --------- ------- ---------
US$ per equiv.
gold ounce 729.87 683.45 6.8
---------------------------------- --------- ------- ---------
US$ per equiv.
silver ounce 7.31 7.88 -7.3
---------------------------------- --------- ------- ---------
Fresnillo : US$4.86/oz (1H20) vs US$3.12/oz (1H19), (US$1.74/oz;
56.0%)
The increase in cash cost per ounce was primarily driven by a
higher cost per tonne and an increase in treatment and refining
charges. This was mitigated by the higher silver ore grade and the
increased lead and zinc by-product credits.
Saucito : US$1.19/oz (1H20) vs US$2.36/oz (1H19), (-US$1.17/oz;
-49.7%)
Cash cost per ounce decreased primarily due to higher gold and
lead by-product credits per silver ounce. This was partially offset
by a lower silver ore grade and higher treatment and refining
charges per silver ounce.
Ciénega: -US$84.59/oz (1H20) vs US$176.85/oz (1H19),
(-US$261.44/oz; N/A)
The decrease in cash cost was mainly due to a lower cost per
tonne, higher gold ore grade and an increase in silver and lead
by-product credits. This was partly offset by a higher treatment
and refining charge.
San Julián Veins: - US$2.67/oz (1H20) vs US$0.58/oz (1H19),
(-US$3.25/oz; N/A)
Cash cost per ounce decreased mainly due to the higher gold
by-product credits, partly offset by the lower silver grade.
San Julián (DOB) US8.65/oz (1H20) vs US$6.03/oz (1H19),
(US$2.62/oz; 43.5%)
The increase in cash cost was mainly explained by the lower zinc
and lead by-product credits, mitigated by lower cost per tonne
.
Herradura: US$573.04/oz (1H20) vs US$770.28/oz (1H19),
(-US$197.24/oz; -25.6%)
The lower cash cost per gold ounce was primarily driven by the
favourable effect of the reassessment of recoverable gold
inventories at the leaching pads, resulting in a lower cost per
ounce; partly offset by a higher cost per tonne and, to a lesser
extent, an increase in silver by-product credits and higher speed
of recovery.
Noche Buena: US$1,100.81/oz (1H20) vs US$821.91/oz (1H19),
(US$278.90/oz; 33.9%)
The increase in cash cost was mainly explained by the higher
cost per tonne.
All in sustaining cost
H1 20 H1 19 Change %
US$ per silver
Fresnillo ounce 11.14 12.46 -10.6
US$ per silver
Saucito ounce 6.07 10.02 -39.4
Ciénega US$ per gold ounce 613.93 1,533.84 -60.0
San Julián US$ per silver
Veins ounce 5.19 10.85 -52.2
San Julián US$ per silver
DOB ounce 10.10 9.49 6.4
Herradura US$ per gold ounce 664.74 925.37 -28.2
Noche Buena US$ per gold ounce 1,148.11 906.56 26.6
Consolidated
US$ per equiv.
gold ounce 963.82 1,025.85 -6.0
US$ per equiv.
silver ounce 9.65 11.83 -18.4
-------------------------------------- --------- --------- ---------
All-in sustaining costs are 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.
All-in sustaining costs are affected by ad hoc expenses recorded
in each particular period, and therefore may significantly vary
period on period.
The changes in all-in sustaining costs at each mine are
explained below:
Fresnillo: All-in sustaining cost decreased 10.6% over 1H19. The
US$1.32 per ounce decrease was mainly explained by lower sustaining
capex per ounce, partly offset by higher cash cost.
Saucito: All-in sustaining cost decreased US$3.95 per ounce
mainly as a result of lower sustaining capex per ounce and lower
cash cost.
Ciénega: The US$919.88 per ounce decrease was driven by the
decreased sustaining capital expenditure per ounce and lower cash
cost.
San Julián Veins: The US$5.66 per ounce decrease in all in
sustaining cost was driven by a lower sustaining cost per ounce and
a decrease in cash cost.
San Julián Disseminated Ore Body : The all in sustaining cost
increased US$0.61 per ounce half on half due to higher cash cost,
mitigated by a lower sustaining capital expenditure per ounce.
Herradura: All-in sustaining cost decreased by US$260.63 per
ounce due to the lower cash cost and a lower sustaining capital
expenditure per ounce.
Noche Buena: The US$241.55 per ounce increase in all-in
sustaining cost was mainly the result of a higher cash cost.
Gross profit
Total gross profit, excluding hedging gains and losses,
increased by 56.3% to US$321.2 million in 1H20. The US$115.7
million increase resulted from:
i) The net favourable effect of the higher metal prices estimated at US$141.8 million;
ii) The re-assessment of gold inventories in the leaching pads
at Herradura with a positive effect of US$65.1 million; and
iii) The favourable effect of the devaluation of the MX$/US$
exchange rate amounting to US$34.6 million.
These effects were partly offset by:
i) Lower gold production at Herradura and Noche Buena following
the COVID-19 operational restrictions, with a net impact of US$85.8
million (including the negative effect of the variation of change
in inventories at these two mines due to the decrease in
inventories, excluding the reassessment of the gold
inventories);
ii) An increase in development works of US$25.6 million at our underground mines;
iii) Higher depreciation of US$11.2 million; and
iv) Other adverse effects estimated at US$3.1 million.
On a per mine basis, Herradura's contribution to the
consolidated gross profit increased from 37.7% in 1H19 to 56.0% in
1H20 mainly reflecting the higher revenues due to the increase in
gold price, the favourable effect of the reassessment of
recoverable gold inventories and the lower adjusted production cost
as explained above. Conversely, Saucito's contribution to the
Group's gross profit decreased to 18.5% in 1H20 due to the decrease
in gross profit as a result of the expected lower silver
production. Fresnillo's share of the Group's consolidated gross
profit decreased from 17.3% to 11.3% in 1H20 due to its relative
weighting, despite generating a similar level of gross profit to
the one achieved in 1H19. Similarly, Noche Buena's contribution to
the Group's consolidated gross profit decreased to 6.3% in 1H20 as
a result to its relative weighting, albeit an increase in its gross
profit as a result of the lower cost of sales. Ciénega's
participation to the consolidated gross profit increased to 7.1% as
a result of the US$14.7 million increase in gross profit mainly due
to the increase in gold, silver and lead revenues.
(US$ millions) Change
H1 20 % H1 19 % Amount %
------ ----- ------ ------ ------- ------
Herradura 179.3 56.0 78.2 37.7 101.1 129.3
------ ----- ------ ------ ------- ------
Saucito 59.1 18.5 67.0 32.5 -7.9 -11.8
------ ----- ------ ------ ------- ------
Fresnillo 36.2 11.3 35.7 17.3 0.5 1.4
------ ----- ------ ------ ------- ------
Noche Buena 20.0 6.3 17.4 8.3 2.6 14.9
------ ----- ------ ------ ------- ------
Ciénega 22.8 7.1 8.1 3.9 14.7 181.5
------ ----- ------ ------ ------- ------
San Julián 2.5 0.8 0.5 0.3 2.0 400.0
------ ----- ------ ------ ------- ------
Total for operating
mines 319.9 100% 206.9 100% 113.0 54.6
------ ----- ------ ------ ------- ------
MXN/USD exchange
rate hedging
(losses) 0.1 0.0 0.1 N/A
------ ----- ------ ------ ------- ------
Metal hedging 1.5 0.1 1.4 N/A
------ ----- ------ ------ ------- ------
Other subsidiaries -0.3 -1.4 1.1 -78.6
--------------------- ------ ----- ------ ------ ------- ------
Total Fresnillo
plc 321.2 205.5 115.7 56.3
------ ----- ------ ------ ------- ------
Administrative expenses
Administrative and corporate expenses decreased by US$1.8
million to US$41.8 million in 1H20. The 4.0% decrease was mainly
explained by the decrease in non-recurring corporate services
provided by Servicios Industriales Peñoles S.A.B. de C.V. and the
favourable effect of the devaluation of the Mexican peso vs. the US
dollar.
Exploration expenses
BUSINESS UNIT / PROJECT Exploration Capitalised
(US$ millions) expenses expenses
Ciénega 3.0 -
------------ ------------
Fresnillo 3.3 -
------------ ------------
Herradura 4.0 -
------------ ------------
Saucito 7.4 -
------------ ------------
San Julián 6.6 -
------------ ------------
Centauro Deep 0.0 4.5
------------ ------------
Orisyvo 1.6 -
------------ ------------
Tajitos 0.3 -
------------ ------------
San Antonio 0.2 -
------------ ------------
Pilarica 0.1 -
------------ ------------
Candameña 0.1 -
------------ ------------
Carina 0.3 -
------------ ------------
Guanajuato 2.3 -
------------ ------------
Chile 1.0 -
------------ ------------
Perú 1.3 -
------------ ------------
Juanicipio 0.0 1.8
------------ ------------
Condoriaco 0.9 -
------------ ------------
Others 18.3 -
------------ ------------
TOTAL 50.7 6.3
------------ ------------
Exploration expenses totalled US$50.7 million in 1H20, a 39.6%
decrease over 1H19 partly as a result of a lower budget, with lower
spend at our operating mines, except at Saucito, and projects and
prospects, particularly Guanajuato. a decrease in exploration spent
as some activities were postponed due to COVID-19 travel
restrictions further decreased exploration expenses in 1H20.
Exploration activities were focused on converting resources into
reserves and direct mine development at our operations. An
additional US$6.3 million was capitalised mainly related to
exploration expenses at Juanicipio and Centauro Deep. Thus, risk
capital invested in exploration totalled US$57.1 million. The full
year exploration budget has been reduced to US$120 million]
(including capitalised exploration expenses of US$12 million),
reflecting our limited ability to explore certain prospects due to
travel restrictions related to COVID-19 guidelines .
EBITDA
EBITDA and EBITDA Margin
Six months ended 30 June
(in millions of US$)
H1 2020 H1 2019 % change
Gross Profit 321.2 205.5 56.3
-------- -------- ---------
+ Depreciation and amortisation 251.7 240.5 4.7
--------------------------------- -------- -------- ---------
- Administrative Expenses -41.8 -43.6 4.1
--------------------------------- -------- -------- ---------
- Exploration Expenses -50.7 -84.0 -39.6
-------- -------- ---------
- Selling Expenses -10.5 -10.6 -0.7
-------- -------- ---------
EBITDA 469.9 307.9 52.6
-------- -------- ---------
EBITDA Margin 44.6% 30.7%
--------------------------------- -------- -------- ---------
A key indicator of the Group's financial performance is EBITDA,
which is calculated as gross profit plus depreciation, less
administrative, selling and exploration expenses. This indicator
increased from US$307.9 million in 1H19 to US$469.9 million in 1H20
mainly as a result of the higher gross profit and lower exploration
expenses. The EBITDA margin increased from 30.7% in 1H19 to 44.6%
in 1H20.
Silverstream revaluation effects
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The total effect of the
revaluation of the Silverstream contract recorded in 1H20 was a
US$31.8 million loss, compared to the US$11.4 million gain
registered in 1H19. The negative revaluation was mainly driven by:
i) a decrease in silver reserves at the Sabinas mine, which
resulted in changes to the mine plan; ii) an increase in the risk
adjusted discount rate. These factors were mitigated by the
unwinding of the discount and a higher forward silver price of
silver.
Since the IPO, cumulative cash received from the Silverstream
contract has been US$666.7 million, which compares favourably to
the upfront payment of US$350 million paid on 31 December 2007.
The Group expects that further unrealised gains or losses will
be recorded in the income statement in accordance with the cyclical
behaviour of the silver price or changes in the assumptions used
when valuing this contract and potential structural changes in the
operations at the Sabinas mine. Further information related to the
Silverstream contract is provided in the Balance Sheet section
below and in notes 10 and 18 to the Interim Financial
Statements.
Net finance costs
Net finance costs of US$16.2 million in 1H20 compared favourably
with the US$ 27.8 million recorded in 1H19. The 1H20 net finance
costs principally reflected the interest on the US$800 million
principal amount of 5.5% Senior Notes, mitigated by the
inflationary adjustments] on recoverable VAT and the interest
gained on the short term deposits.
In 1H19, in addition to interest on the senior notes mentioned
above, US$15.7 million of interest and surcharges was recognised,
resulting from aligning the tax treatment of mining works across
the Group's underground mines to the agreement reached between SAT,
Prodecon and Fresnillo plc in November 2018. Detailed information
is provided in note 7 to the Interim Financial Statements.
Foreign exchange
A foreign exchange loss of US$40.0 million was recorded in the
income statement as a result of the 21.9% devaluation of the
Mexican peso against the US dollar in the six months ended 30 June
2020 on: i) the realised transactions during the period related to
accounts receivable paid in Mexican pesos (mainly recoverable VAT);
and ii) the value of peso-denominated net monetary assets . This
compared negatively to the US$5.1 million foreign exchange gain
recognised in 1H19.
The Group also entered into certain exchange rate derivative
instruments as part of a programme to manage its exposure to
foreign exchange risk associated with the purchase of equipment
denominated in Euro (EUR) and Swedish krona (SEK). As of June 30th
2020, the total EUR and SEK outstanding net forward position was
EUR 0.23 million and SEK 7.64 million with maturity dates through
September 2020. Volumes that expired during the first half of 2020
were EUR 6.98 million with a weighted average strike of 1.1520
USD/EUR and SEK 20.94 million with a weighted average strike of
9.3832 SEK/USD, which have generated a loss for the period of
-US$0.20 million.
Taxation
Income tax expense for the period was US$62.0 million, which
compare unfavourably vs. -US$4.0 million (tax credit) in 1H19. The
effective tax rate, excluding the special mining rights, was 48.5%,
which was above the 30% statutory tax rate. This was mainly due to
the devaluation of the Mexican peso, which had an important impact
on the tax value of assets and liabilities denominated in Mexican
pesos.
The effective tax rate in 1H19 was lower (-7.4% in 1H19, vs.
48.5% in 1H20). The reason for the negative tax rate in 1H19 was
the significant permanent differences between the tax and
accounting treatment, together with the low level of profit before
income tax.
Mining rights for 1H20 were US$9.4 million vs. -US$12.9 million
in 1H19. The main reason for the negative mining rights in 1H19 was
the effect that the voluntary amendment to the tax treatment for
mining works for the years 2014-2018 had on the deferred mining
rights.
Profit for the period
Profit for the period was US$56.5 million, which represented a
US$14.4 million decrease half on half as a result of the factors
discussed above.
Excluding the effects of the Silverstream valuation, profit for
the period increased 25.3% to US$78.8 million in 1H20.
Cash Flow
A summary of the key items from the cash flow is set out
below:
Cash Flow Key Items
Six months ended 30 June
(in millions of US$)
H1 20 H1 19 (US $) (%)
Cash generated by operations
before changes in working
capital 456.2 316.1 140.2 44.3
------- ------- ------- ------
(Decrease)/Increase in
working capital -37.3 7.6 -44.9 N/A
------- ------- ------- ------
Taxes and Employee Profit
Sharing paid -71.0 -140.8 69.8 49.6
------- ------- ------- ------
Net cash from operating
activities 422.5 167.7 254.8 152.0
------- ------- ------- ------
Silverstream contract 13.1 12.9 0.2 1.8
------- ------- ------- ------
Purchase of property,
plant & equipment -182.0 -248.4 66.4 -26.7
------- ------- ------- ------
Dividends paid -87.7 -123.1 35.3 28.7
------- ------- ------- ------
Net interest (paid) -10.2 -21.3 11.1 -52.1
------- ------- ------- ------
Net increase (decrease)
in cash and short term
investments during the
period after foreign exchange
differences 178.1 -198.7 376.8 N/A
------- ------- ------- ------
Cash and other liquid
funds at 30 June* 514.7 362.1 152.6 42.1
------- ------- ------- ------
* Cash and other liquid funds are disclosed in note 18(d) to the Financial Statements.
In 1H20, cash generated by operations before changes in working
capital totalled US$456.2 million, a 44.3% increase due to higher
profits generated from the Group's operating mines. Working capital
decreased by US$37.3 million as a result of the net impact of the
following factors:
-- A -US$71.3 million decrease in accounts receivables which
resulted mainly from the recovery of VAT receivables.
-- A decrease in prepayments of -US$2.0 million
-- A US$43.2 million increase in inventories primarily generated
by the reassessment of gold content at the Herradura leaching
pads
-- A US$7.0 million decrease in accounts payable
Taxes and employee profit sharing paid of US$71.0 million
decreased by 49.6% over 1H19 mainly due to a decrease in
provisional tax payments resulting from the lower profit factor
determined to calculate the estimated taxable income.
As a result of the above factors, net cash from operating
activities increased by 152.0% to US$422.5 million.
The Group also received proceeds of US$13.1 million from the
Silverstream Contract.
The Group purchased property plant and equipment for a total of
US$182.0 million, a 26.7% decrease over 1H19. The Group has
reviewed its expected capital expenditures of c. US$655 million for
the full year to US$525 million, a US$145 million decrease, mainly
as a result of deferral of expenditures at the Juanicipio project
and San Julián. However, the Company expects an increase in the
rate of capital deployment at our different mines and projects
during the 2H20. Capital expenditures for 1H20 are further
described below:
Purchase of property, plant and equipment*
(US$ millions)
H1 20
------------------- ------ --------------------------------------
Fresnillo mine 50.2 Mine development and mining
works, construction of the Pyrites
Flotation Plant and the optimisation
of the current beneficiation
plant, purchase of in-mine equipment
and deepening of the San Carlos
shaft.
------ --------------------------------------
Saucito mine 30.3 Mine development, purchase of
in-mine equipment and deepening
of the Jarillas shaft.
------ --------------------------------------
San Julián 17.5 Mining works and purchase of
Veins and DOB in-mine equipment and land.
------ --------------------------------------
Herradura mine 14.9 Purchase of equipment for dynamic
leaching plants, land acquisition
and construction of leaching
pad.
------ --------------------------------------
Ciénega mine 12.3 Mining works, purchase of in-mine
equipment and construction of
tailings dam.
------ --------------------------------------
Noche Buena 1.4 Implementation of Carbon in
Column process, construction
of leaching pad and anti-collision
system
------ --------------------------------------
Juanicipio 40.3 Mine development and contruction
of the beneficiation plant
------ --------------------------------------
Other 15.1 Minera Bermejal
------ --------------------------------------
Total Purchase of
property, plant
and equip. 182.0
------ --------------------------------------
Dividends paid to shareholders in 1H20 totalled US$87.7 million
as a result of the 2019 final dividend of 11.9 US cents per share
paid in June 2020. Other uses of funds included the US$10.2 million
net interest paid in 1H20.
The sources and uses of funds described above resulted in a net
increase of US$178.1 million in cash and other liquid funds, which,
combined with the US$336.6 million balance at the beginning of the
year, resulted in cash and other liquid funds of US$514.7 million
as at 30 June 2020.
Balance Sheet
Fresnillo plc continued to maintain a solid financial position
with cash and other liquid funds of US$514.7 million as of 30 June
2020. This represented a 52.9% increase versus December 2019 and a
42.1% increase compared to the cash and other liquid funds of
US$362.1 million as of 30 June 2019.
Trade and other receivables (including income tax recoverable)
decreased from US$517.8 million as at 31 December 2019 to US$367.6
million as at 30 June 2020 mainly due to the recovery of VAT tax in
the first half of 2020.
Inventories increased 11.9% over the 2019 year-end figure to
US$406.9 million, mainly as a result of the reassessment of gold
inventories on the leaching pads at Herradura.
The change in the value of the Silverstream derivative from
US$541.3 million at the beginning of the year to US$ 497.5 million
as of 30 June 2020 reflects the revaluation effects of a US$31.8
million loss in the Group's income statement, mitigated by proceeds
of US$11.9 million in the period (US$7.9 million in cash generated
in respect of the period and US$ 4.0 million receivable) .
The net book value of property, plant and equipment decreased
4.0% to US$2,700.9 million at 30 June 2020 from US$2,813.4 at 31
December 2019.
Fresnillo plc's total equity for 1H20 was US$3,257.2 million,
flat when compared to the figure at the beginning of the year.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out above in the Operational Review, with further detail in
the Annual Report 2019. The financial position of the Group, its
cash flows and liquidity position are described in the Financial
Review. In addition, the Group's objectives, policies and processes
for managing its capital; its financial risk management objectives;
and its exposures to credit risk and liquidity risk were set out in
the Annual Report 2019. Details of its financial instruments and
hedging activities as at 30 June 2020 are set out in note 18 to the
interim report.
In making their assessment of the Group's ability to manage its
future cash requirements, the Directors have considered the Company
and Group budgets and the cash flow forecasts for the period to 31
December 2021 as at July 2020. In line with previous periods, the
directors reviewed a more conservative cash flow scenario with
silver and gold prices significantly reduced below current
expectations, whilst maintaining current forecasted expenditure,
which resulted in our current cash balances reducing over time to a
more than adequate margin of liquidity towards the end of 2021.
Additionally, in the current period the directors reviewed
scenarios that incorporated an estimated potential impact of
plausible COVID-19 restrictions and regulations on our mining
districts. The impact of COVID-19, and actions being taken are set
out on the Health and safety, human resources, environment and
community relations report.
As mining has been declared an essential activity by the Mexican
government, we consider the risk of a government imposed full
stoppage across all our operations to be low. Furthermore, we have
implemented additional health and safety measures at each of our
mines coupled with extensive targeted and random testing. This has
allowed us to keep infection rates significantly below the Mexican
average. We are therefore confident that we are well prepared to
manage any localised outbreaks at our mines and maintain operations
at planned levels.
However, taking into account risk implications of COVID-19 set
out in the risk section of the interim report, we consider it
plausible that temporary restrictions like those we saw in April
and May at Penmont could be required in response to a deteriorating
health situation at a particular state level.
As the profitability of our operations is most sensitive to
restrictions being imposed in the state of Sonora impacting
operations at Penmont, we have modelled scenarios assuming
restrictions at the Herradura and Noche Buena mines.
The key judgement applied is the likely time period of
restrictions on operations and the time it would take for the
subsequent recover once those restrictions are lifted. The base
scenario assumes restrictions caused by the stringent working
health measures in our open pit mines and the resulting lower
volumes processed at the open pit mines during the first half 2020;
the severe scenario includes an assumption that again impacts the
production for two months of the open pit mines resulting in its
full stoppage for that period. In all scenarios we have also
assumed that our employees remain on full pay for the duration of
the closure and no mitigating actions are required to be
implemented to maintain a comfortable liquidity level to continue
operating in the period assessed.
After reviewing all of the above considerations, the Directors
have a reasonable expectation that management has sufficient
flexibility in potential adverse circumstances to maintain adequate
resources to continue in operational existence for the foreseeable
future. The Directors, therefore, continue to adopt the going
concern basis of accounting in preparing these interim financial
statements
Dividends
The Board of Directors has declared an interim dividend of 2.3
US cents per share totalling US$16.9 million which will be paid on
16 September 2020 to shareholders on the register on 7 August 2020.
This decision was made after a comprehensive review of the Group's
financial situation, assuring that the Group is well placed to meet
its current and future financial requirements, including its
development and exploration projects.
Fresnillo's existing dividend policy, which takes into account
the profitability of the business and underlying earnings of the
Group, as well as its capital requirements and cash flows whilst
maintaining an appropriate level of dividend cover, remains in
place. To reiterate the policy, a total dividend of between 33 and
50 percent of profit after tax is paid out each year in the
approximate proportion of one-third to be paid as an interim
dividend, two-thirds to be paid as a final dividend.
The interim dividend will be paid in UK pounds sterling to
shareholders, unless a shareholder elects to receive dividends in
US dollars. The interim dividend will be paid in UK pounds sterling
with the dividend being converted into UK pounds sterling on or
around 3 August 2020.
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. It is
expected that the 2020 interim dividend will be paid out of the
remaining balance of the retained earnings generated before
2014.
We expect that future dividend payments 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
I. How we manage risk.
As we explained in our 2019 Annual Report, the Company ended
2019 having made good progress in risk management, including
implementing actions that mitigated our most important risks. In
parallel, the Enterprise Risk Management (ERM) team developed a
training programme focused on risk identification and mitigation,
which was rolled out across our personnel to raise awareness of our
risk culture. In the current year, we are continuing to enhance our
risk framework by increasing the use of metrics to more precisely
articulate the risk appetite and tolerance limits within which we
wish to operate.
II. COVID-19 pandemic.
Due to the impact of the global COVID-19 pandemic, we
re-evaluated the Principal Risks set out in the 2019 Annual Report,
to rethink their relative importance, probability and impact and to
re-assess the corresponding mitigation actions.
As a result of this analysis, the Company proposed recognising
the impact of COVID-19 on Fresnillo's existing 12 Principal Risks
rather than introducing a new, standalone risk. This approach was
approved by the Executive Committee and the Board.
The Principal Risks that have been most affected by COVID-19
are: 1) "Potential Government Actions", 2) "Security", 3) "Human
Resources" and 4) "Public perception against mining".
Principle risks exposed Additional risk factors arising from the COVID-19 pandemic
1. Potential Government Actions.
* Total or partial stoppage of mining operations due to
a massive wave of the virus in the states where our
operations are located.
* Possible non-compliance by mining units with the
sanitary requirements requested by the federal
government in order for activities to be resumed.
* Federal, state or municipal government restrictions
on the reopening of activities.
* Imposition of new taxes or levies in response to an
economic crisis that may ensue.
====================================================================
2. Security.
* Increased presence of organised crime in the
vicinities of mining units.
* Increase in the number of high impact crimes
(homicide, kidnapping, extortion) in the regions of
the mining units.
* Consumption and sale of drugs at the mining units.
* Theft of assets in mining units and / or during
transfer.
* Roadblocks or blockages on the roads and / or
highways near the mining units.
====================================================================
3. Human Resources.
* Poor employee health.
* Staff absenteeism due to fear of contagion or medical
incapacity of infected personnel.
* Failure to undertake timely COVID-19 medical tests,
to provide medical supplies to care for infected
personnel or those suspected of being infected, and
to provide protective equipment for medical personnel
attending a potential outbreak.
* Insufficient capacity at the mining units (which
would be the first point of contact) and, later, in
regional hospitals and clinics, to deal with a
massive outbreak.
====================================================================
4. Public perception against
mining. * Social tension due to the pandemic.
* Social licence at risk, with complaints, claims,
blocks and other actions arising from local
communities fearing contagion.
====================================================================
Heat Map.
Figure 7:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
III. Emerging Risks.
Last year, we defined the concept of "Emerging Risk" in
compliance with the UK Corporate Governance Code. The
identification of our emerging risks required the active
participation of the leaders of the business units and projects,
the support and corporate areas, internal audit, customers,
suppliers and contractors, as well as sister companies of the BAL
Group.
In the first half of the year, amid the COVID-19 pandemic, the
Company carried out our first assessment of these seven emerging
risks. This process involved 70 colleagues (44% from mining units
and exploration offices, 49% from support and corporate areas and
7% from project areas). Their input, together with that of the
Executive Committee, enabled us to identify our two most exposed
emerging risks: "Water Crisis" and "Technological Disruption".
As the pandemic continues to generate a high degree of
uncertainty, we will continue to work with business units in order
to identify and mitigate risks, and to train staff. Our risk
programme also includes reviewing operating risks and business
continuity, and identifying opportunities. In October, we will
carry out our annual risk assessment which will include both
Principal and Emerging Risks.
Appendix to interim announcement. Principal and emerging risks
and uncertainties.
a. Principal risks.
Below, we describe the changes in risk level for each of the 12
Principal Risks compared to the levels in the 2019 ARA, main
changes observed in 2020 but before COVID-19 and further impacts as
a direct result of the pandemic :
ARA'19 COVID-19 Jun'20 Principal Risk Changes before the impact Impact of COVID-19
effect Risks Rating of
COVID-19
2 1 Potential Very -In 2019, no new concessions -- Total or partial
Government high were granted for mining by stoppage of
Actions the mining operations due to a
federal government, while massive
the wave of the virus in the
mining sector registered states
declines where our operations are
in investment and located.
production. -- Possible non-compliance
-In January 2020, the by mining
federal units with the sanitary
government reviewed some requirements
operating requested by the federal
mining concessions, although government
none so far from Fresnillo in order for activities to
plc. be resumed.
- Possible increase in tax -- Federal, state or
audits municipal government
compared to previous years. restrictions on the
reopening of
activities.
-- Imposition of new taxes
or levies
in response to an economic
crisis
that may ensue.
======== ====== =================== ======= ============================== ==============================
1 = 2 Impact of Very - At the beginning of the - At the beginning of the
metal prices high year pandemic,
and global there was strong market uncertainty
macroeconomic international increased. However,
developments uncertainty in the stock this has since stabilised
markets and experts
(mainly due to the tensions consider it moderate and
between Iran and the United within
States) a normal range.
-There was a severe -Mexico anticipates
international experiencing
economic slowdown, while the worst economic crisis
economic since
growth forecasts were the Second World War, with
negative a drop
for Mexico . in GDP forecasted of up to
8%.
======== ====== =================== ======= ============================== ==============================
4 3 Security Very - Increased presence of - Increase in the actions
(Physical) high organised or threats
crime in the regions where of organised crime and / or
we drug
operate mining units. trafficking in the regions
-Indications of buying and where
selling we operate mining units.
drugs in the mines. -Actions by the authorities
-Theft of assets. to counter
drug trafficking, such as
roadblocks
near the mining units.
-Increase in asset thefts
(notably
at Penmont and
Ciénega).
======== ====== =================== ======= ============================== ==============================
12 4 Human Resources Very -- Poor employee health.
high -- Staff absenteeism due to
fear
of contagion or medical
incapacity
of infected personnel.
-- Failure to undertake
timely COVID-19
medical tests, to provide
medical
supplies to care for
infected personnel
or those suspected of being
infected,
and to provide protective
equipment
for medical personnel
attending
a potential outbreak.
-- Insufficient capacity at
the
mining units (which would
be the
first point of contact)
and, later,
in regional hospitals and
clinics,
to deal with a massive
outbreak.
======== ====== =================== ======= ============================== ==============================
9 5 Public perception Very -- Social tension due to
against mining high the pandemic.
-- Social licence at risk,
with
complaints, claims, blocks
and other
actions arising from local
communities
fearing contagion.
======== ====== =================== ======= ============================== ==============================
- Suspension of government
procedures
Access to - Procedural delays in obtaining and procedures for granting permits
3 6 land High permits and concessions. and concessions.
10 7 Cyber security High - Disruption in the Newtrax - Insecure communication across
system. our networks can make our systems
susceptible to the exploits of
hackers
and others, leading to viruses,
data leaks, information theft,
Malware
and Ransomware.
================= ====== ======================================= =======================================
8 8 Projects High - Insufficient contractors in -Significant delay in project
Juanicipio. execution.
-The productivity of contractors
may decrease, which will cause
delays.
-Lack of contractors available for
projects due to increased
infections.
================= ====== ======================================= =======================================
- Maintenance of critical areas
- Increased personnel transfer, in the mines might not be carried
Safety compounded by poor access to out as a result of total or partial
5 = 9 (Industrial) Medium roads. stoppage of operations.
================= ====== ======================================= =======================================
6 10 Union Relations Medium - Labour Reform published on - Differences of opinion arise
May 1, 2019 (Unions). between
the trade union sections, with
- The reform to article 15 A factions
of the Federal Labour Law trying to establish new trade unions.
(Outsourcing).
================= ====== ======================================= =======================================
11 11 Environmental Medium - Monitor the tailings management - Due to a lack of personnel, there
accidents system. is an increased risk of incidents
during transportation of iron
concentrate
from the Fresnillo tailings plant
to the leaching plant.
================= ====== ======================================= =======================================
- Failure to complete the exploration
- Failure to obtain volumes programme locally or an inability
and grades of the quality estimated to carry out the drilling programme
7 12 Exploration Medium in the exploration programmes. for each project in terms of metres.
================= ====== ======================================= =======================================
Figure 8:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
Severe increase Moderate increase = No increase at
(In observation) the moment
b. Our 12 Principal Risk and interdependencies.
We continue to consider risks both individually and collectively
in order to fully understand our risk landscape. By analysing the
correlation between Principal and Emerging Risks, we can identify
those that have the potential to cause, impact, or increase another
risk and ensure that these are weighted appropriately. In
performing this exercise we have considered COVID-19, which could
lead to a long-term global recession and other operating
constraints that may have a knock-on effect on several of our
principal risks. Our analysis highlights the strong relationship
between Cybersecurity and Disruption to Technology as well as
Security and Risk of Narco State([10]) .
Figure 9:
http://www.rns-pdf.londonstockexchange.com/rns/3037U_1-2020-7-28.pdf
INDEPENT REVIEW REPORT TO FRESNILLO PLC
Introduction
We have been engaged by the Company to review the interim
condensed set of financial statements in the half-yearly financial
report for the six months ended 30 June 2020 which comprises the
interim consolidated income statement, the interim consolidated
statement of comprehensive income, the interim consolidated balance
sheet, the interim consolidated cash flow statement, the interim
consolidated statement of changes in equity and the related Notes 1
to 18. We have read the other information contained in the half
yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the interim condensed consolidated set of financial
statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
(UK and Ireland) 2410 "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in Note 2a, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The interim condensed consolidated set of financial
statements included in this half-yearly financial report has been
prepared in accordance with International Accounting Standard 34,
"Interim Financial Reporting", as adopted by the European
Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the interim condensed consolidated set of financial statements in
the half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the interim condensed consolidated set of
financial statements in the half-yearly financial report for the
six months ended 30 June 2020 is not prepared, in all material
respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
Ernst & Young LLP
London
27 July 2020
Interim Consolidated Income Statement
Notes For the six months ended 30 June
2020 (Unaudited) 2019 (Unaudited)
(in thousands of US dollars)
| Pre-Silverstream Silverstream Total Pre- Silverstream Total
revaluation revaluation Silverstream revaluation
effect effect revaluation effect
effect
Continuing
operations:
Revenues 4 1,054,183 1,054,183 1,001,965 1,001,965
Cost of sales 5 (732,999) (732,999) (796,453) (796,453)
Gross profit 321,184 321,184 205,512 205,512
Administrative
expenses (41,751) (41,751) (43,506) (43,506)
Exploration
expenses (50,737) (50,737) (84,045) (84,045)
Selling expenses (10,486) (10,486) (10,561) (10,561)
Other operating
income 5,719 5,719 904 904
Other operating
expenses (7,052) (7,052) (3,005) (3,005)
Profit from
continuing
operations
before
net finance
costs
and income tax 216,867 216,867 65,299 65,299
Finance income 6 9,494 9,494 15,630 15,630
Finance costs 6 (25,652) (25,652) (43,442) (43,442)
Revaluation
effects
of Silverstream
contract 10 (31,824) (31,824) 11,431 11,431
Foreign exchange
(loss)/gain (41,014) (41,014) 5,136 5,136
Profit from
continuing
operations
before
income tax 159,695 (31,824) 127,881 42,623 11,431 54,054
Corporate income
tax 7 (71,502) 9,547 (61,955) 7,439 (3,429) 4,010
Special mining
right 7 (9,425) (9,425) 12,850 12,850
Income tax
(expense)/credit 7 (80,927) 9,547 (71,380) 20,289 (3,429) 16,860
Profit for the
period
from continuing
operations 78,778 (22,277) 56,501 62,912 8,002 70,914
Attributable to:
Equity
shareholders
of the Company 86,802 (22,277) 64,525 62,163 8,002 70,165
Non-controlling
interests (8,024) (8,024) 749 749
78,778 (22,277) 56,501 62,912 8,002 70,914
Earnings per
share:
(US$)
Basic and diluted
earnings per
ordinary
share from
continuing
operations 8 - 0.088 - 0.095
Adjusted earnings
per share: (US$)
Adjusted basic
and
diluted earnings
per ordinary
share
from continuing
operations 8 0.118 - 0.084 -
Interim Consolidated Statement of Comprehensive Income
For the six months ended
30 June
2020 2019
(Unaudited) (Unaudited)
(in thousands of US dollars)
Profit for the period 56,501 70,914
Other comprehensive income
Items that may be reclassified
subsequently to profit or loss:
Changes in the fair value of cash
flow hedges 1,396 836
Gain on cost of hedging recycled
to income statement (1,556) (79)
Changes in the fair value of cost
of hedging 2,064 (618)
Total effect of cash flow hedges 1,904 139
Foreign currency translation (1,526) 368
Income tax effect on items that
may be reclassified subsequently
to profit or loss (571) (41)
Net other comprehensive (loss)/income
that may be reclassified subsequently
to profit or loss (193) 466
Items that will not be reclassified
to profit or loss:
Loss on cash flow hedges recycled
to other assets - (347)
Changes in the fair value of cash
flow hedges 172 (18)
Total effect of cash flow hedges 172 (365)
Changes in the fair value of equity
investments at FVOCI 20,100 30,801
Income tax effect on items that
will not be reclassified to profit
or loss (6,082) (9,131)
Net other comprehensive profit
that will not be reclassified
to profit or loss 14,190 21,305
Other comprehensive income, net
of tax 13,997 21,771
Total comprehensive income, net
of tax 70,498 92,685
Attributable to:
Equity shareholders of the Company 78,534 91,942
Non-controlling interests (8,036) 743
70,498 92,685
.
Interim Consolidated Balance Sheet
Notes
As of 30 June As of 31 December
2020 2019
(Unaudited) (Audited)
(in thousands of US
dollars)
ASSETS
Non-current assets
Property, plant and equipment 9 2,700,901 2,813,417
Equity instruments at FVOCI 18 143,124 123,024
Silverstream contract 10,18 472,657 518,696
Deferred tax asset 101,423 110,770
Inventories 11 91,620 91,620
Other receivables 12 - 23,014
Other assets 2,916 3,622
3,512,641 3,684,163
Current assets
Inventories 11 315,274 272,120
Trade and other receivables 12 365,947 437,642
Income tax recoverable 1,605 57,124
Prepayments 17,053 18,344
Derivative financial instruments 18 3,666 2,623
Silverstream contract 10,18 24,874 22,558
Cash and cash equivalents 13 514,659 336,576
1,243,078 1,146,987
Total assets 4,755,719 4,831,150
EQUITY AND LIABILITIES
Capital and reserves attributable
to shareholders of the Company
Share capital 368,546 368,546
Share premium 1,153,817 1,153,817
Capital reserve (526,910) (526,910)
Hedging reserve 1,105 139
Cost of hedging reserve 1,274 918
Fair value reserve of financial assets
at FVOCI 68,804 54,734
Foreign currency translation reserve (1,776) (250)
Retained earnings 2,070,501 2,093,666
3,135,361 3,144,660
Non-controlling interests 126,053 134,059
Total equity 3,261,414 3,278,719
Non-current liabilities
Interest-bearing loans 801,772 801,239
Lease liabilities 7,683 8,009
Provision for mine closure cost 209,104 231,056
Provision for pensions and other post-employment
benefit plans 9,567 10,704
Deferred tax liability 273,331 321,347
1,301,457 1,372,355
Current liabilities
Trade and other payables 170,017 159,768
Income tax payable 9,177 3,991
Derivative financial instruments 18 8 1,789
Lease liabilities 5,176 4,535
Employee profit sharing 8,470 9,993
192,848 180,076
Total liabilities 1,494,305 1,552,431
Total equity and liabilities 4,755,719 4,831,150
Interim Consolidated Statement of Cash Flows
Notes For the six months ended
30 June
2020 2019
(Unaudited) (Unaudited)
(in thousands of US
dollars)
Net cash from operating activities 17 422,518 167,696
Cash flows from investing activities
Purchase of property, plant and
equipment (181,958) (248,352)
Proceeds from the sale of property,
plant and equipment 144 210
Silverstream contract 10 13,135 12,899
Interest received 9,493 15,630
Net cash used in investing activities (159,186) (219,613)
Cash flows from financing activities
Proceeds from notes payable 23,145 -
Principal elements of lease payment 1 (2,796) (2,530)
Dividends paid to shareholders of
the Company 14 (87,737) (123,057)
Capital contribution 27 15,301
Interest paid(1) (19,723) (36,931)
Net cash used in financing activities (87,084) (147,217)
Net increase (decrease) in cash
and cash equivalents during the
period 176,248 (199,134)
Effect of exchange rate on cash
and cash equivalents 1,835 409
Cash and cash equivalents at 1 January 13 336,576 560,785
Cash and cash equivalents at 30
June 13 514,659 362,060
(1) Total interest paid during the six months ended 30 June 2020
less amounts capitalised totalling US$4.4 million (30 June 2019:
US$2.6 million) which is included within the caption Purchase of
property, plant and equipment.
(2) Corresponds to a short-term interest-bearing note payable
received from Minera los Lagartos, S.A. de C.V. which holds a
non-controlling interest in Juanicipio project. As of 30 June 2020,
the balance amounted US$23.3 million and is presented within trade
and other payables in the balance sheet.
Interim Consolidated Statement of Changes in Equity
Fair
value
reserve Total
of attributable
financial Foreign to
Cost of assets currency shareholders
Share Share Capital Hedging hedging at translation Retained of the Non-controlling Total
Notes capital premium reserve Reserve reserve FVOCI reserve earnings Company interests equity
(in thousands of US dollars)
Balance at 1
January
2019
(Audited) 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
period - - - - - - - 70,165 70,165 749 70,914
Other
comprehensive
income, net
of tax - - - 336 (488) 21,561 368 - 21,777 (6) 21,771
Total
comprehensive
income for
the period - - - 336 (488) 21,561 368 70,165 91,942 743 92,685
Capital
contribution - - - - - - - - - 15,301 15,301
Dividends paid 14 - - - - - - - (123,061) (123,061) - (123,061)
Balance at 30
June
2019
(Unaudited) 368,546 1,153,817 (526,910) 107 (2,862) 44,931 (427) 1,980,964 3,018,166 95,012 3,113,178
Balance at 1
January
2020
(Audited) 368,546 1,153,817 (526,910) 139 918 54,734 (250) 2,093,666 3,144,660 134,059 3,278,719
Profit for the
period - - - - - - - 64,525 64,525 (8,024) 56,501
Other
comprehensive
income, net
of tax - - - 1,109 356 14,070 (1,526) - 14,009 (12) 13,997
Total
comprehensive
income for
the period - - - 1,109 356 14,070 (1,526) 64,525 78,534 (8,036) 70,498
Hedging loss
transferred
to the
carrying
value
of PPE
purchased
during
the period 18(c) - - - (143) - - - - (143) 3 (140)
Capital
contribution - - - - - - - - - 27 27
Dividends paid 14 - - - - - - - (87,690) (87,690) - (87,690)
Balance at 30
June
2020
(Unaudited) 368,546 1,153,817 (526,910) 1,105 1,274 68,804 (1,776) 2,070,501 3,135,361 126,053 3,261,414
Notes to the Interim Condensed Consolidated Financial
Statements
1 Corporate Information
Fresnillo plc ("the Company") is a public limited company
registered in England and Wales with the registered number
6344120.
Industrias Peñoles S.A.B. de C.V. ("Peñoles") currently owns 75
percent of the shares of the Company and the ultimate controlling
party of the Company is the Baillères family, whose beneficial
interest is held through Peñoles. The registered address of Peñoles
is Calzada Legaria 549, Mexico City 11250. Copies of Peñoles'
accounts can be obtained from www.penoles.com.mx. Further
information on related party balances and transactions with Peñoles
group companies is disclosed in Note 16.
The interim condensed consolidated financial statements of the
Group for the six months ended 30 June 2020 ("interim consolidated
financial statements") were authorised for issue by the Board of
Directors of Fresnillo plc on XX July 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's operating mines and its
principal activities is disclosed in Note 3.
2 Significant accounting policies
(a) Basis of preparation and statement of compliance
The interim consolidated financial statements of the Group for
the six months ended 30 June 2020 have been prepared in accordance
with IAS 34 Interim Financial Reporting as adopted by the European
Union (EU). They do not include all the information required for
full annual financial statements for the Group, and therefore,
should be read in conjunction with the Group's annual consolidated
financial statements for the year ended 31 December 2019 as
published in the Annual Report 2019.
These interim consolidated financial statements do not
constitute statutory accounts as defined in section 435 of the
Companies Act 2006. A copy of the statutory accounts for the year
ended 31 December 2019 has been delivered to the Register of
Companies. The auditor's report in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 in relation to those accounts was
unqualified, did not include a reference to any matters to which
the auditor drew attention by way of emphasis without qualifying
the report and did not contain a statement under section 498(2) or
section 498(3) of the UK Companies Act 2006.
The interim consolidated financial statements have been prepared
on a historical cost basis, except for trade receivables,
derivative financial instruments, equity securities and defined
benefit pension scheme assets which have been measured at fair
value.
The interim consolidated financial statements are presented in
dollars of the United States of America (US dollars or US$) and all
values are rounded to the nearest thousand ($000) except where
otherwise indicated.
The impact of seasonality or cyclicality on operations is not
considered significant on the interim consolidated financial
statements.
(b) Basis of consolidation
The interim consolidated financial statements set out the
Group's financial position as of 30 June 2020 and 31 December 2019,
and its operations and cash flows for the six-month periods ended
30 June 2020 and 30 June 2019.
The basis of consolidation adopted in the preparation of the
interim consolidated financial statements is consistent with that
applied in the preparation of the consolidated financial statements
for the year ended 31 December 2019.
(c) Changes in accounting policies and presentation
The accounting policies adopted in the preparation of the
interim consolidated financial statements are consistent with those
applied in the preparation of the consolidated financial statements
for the year ended 31 December 2019.
New standards, amendments and interpretations as adopted by the
Group
A number of new or amended standards became applicable for the
current reporting period. The Group did not have to change its
accounting policies or make retrospective adjustments as a result
of adopting these standards.
Impact of standards issued but not yet applied by the Group
The IASB has 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.
Significant accounting judgments, estimates and assumptions
Significant accounting judgments, estimates and assumptions are
consistent with those disclosed in the consolidated financial
statements for the year ended 31 December 2019 except as set out
below.
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, the
grade of the 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.
In 2017, the Group decided that it would construct a new
leaching pad in a separate area of the Herradura mine. To reduce
the hauling distance from the pit to the new pad, the Group
constructed an access route through certain existing leaching pads,
removing and redepositing the ore in the process. These works
allowed the Group to perform assays and verify certain
characteristics of the ore, including the humidity of the ore
deposited and the grade of gold in solution. The Group monitors the
metallurgical balances foregoing with the analysis performed during
2018 as a result of constructing a new leaching pad in a separate
area of the Herradura mine, the Group has continued reviewing the
metallurgical balance of the pads to confirm the grade and recovery
of the ore in inventories. For operating strategies, s ince July
2019, all new ore extracted has been deposited on the new pad
area.
Based on the new information the Group updated its estimate of
the remaining gold content in leaching increasing this by 119.3
thousand ounces of gold as at 1 January 2020.
This change in estimation was incorporated prospectively in
inventory from 1 January 2020. The increase in the number of ounces
reduced the weighted average cost of inventory. Had the estimation
not changed, production cost during the six-month period ended 30
June 2020 would have been US$65.1 million higher, with an
offsetting impact against the work-in-progress inventory balance as
of 30 June 2020.
Additionally, as discussed in next section, the Group has
evaluated the impact of the COVID-19 pandemic implications in the
evaluation of critical judgements as of 30 June 2020. No situations
arise that suggested a change is needed.
(d) Effect of COVID-19
The COVID-19 outbreak has developed rapidly in 2020, with a
significant number of infections around the world. The rapid
development and fluidity of the situation precludes any prediction
as to the ultimate impact of COVID-19; however, the Group seeks to
obtain the best possible information to enable the assessment of
the risks involved and implement appropriate measures to
respond.
During the second quarter of 2020, the Group has taken a number
of measures to safeguard the health of its employees and their
local communities while continuing to operate safely and
responsibly. Total costs of $1.6 million relating to COVID-19
safety measures were expensed during the six-month period ended 30
June 2020.. The Group acted in compliance with government-ordered
restrictions, resulting in operations temporarily suspended in
Minera Penmont during the period of mid-April to late-May. All
other mines operate at normal production capacity. During the
lockdown period Minera Penmont incurred in certain fixed costs that
Management decided not to consider as production cost and are
presented as unabsorbed production cost in note 5.
During of 2020, attempts at containment of COVID-19 have
resulted in decreased economic activity, which has adversely
affected the broader global economy. In the current environment,
assumptions about future commodity prices, exchange rates, and
interest rates are subject to greater variability than normal,
which could in the future affect the valuation of the Group's
assets and liabilities, both financial and non-financial. As at 30
June 2020, there were no material changes to the valuation of the
Group's asset and liabilities due to COVID-19.
(e) Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out above in the Operational Review, with further detail in
the Annual Report 2019. The financial position of the Group, its
cash flows and liquidity position are described in the Financial
Review. In addition, the Group's objectives, policies and processes
for managing its capital; its financial risk management objectives;
and its exposures to credit risk and liquidity risk were set out in
the Annual Report 2019. Details of its financial instruments and
hedging activities as at 30 June 2020 are set out in note 18.
In making their assessment of the Group's ability to manage its
future cash requirements, the Directors have considered the Company
and Group budgets and the cash flow forecasts for the period to 31
December 2021 as at July 2020. In line with previous periods, the
directors reviewed a more conservative cash flow scenario with
silver and gold prices significantly reduced below current
expectations, whilst maintaining current forecasted expenditure,
which resulted in our current cash balances reducing over time to a
more than adequate margin of liquidity towards the end of 2021.
Additionally, in the current period the directors reviewed
scenarios that incorporated an estimated potential impact of
plausible Covid-19 restrictions and regulations on our mining
districts. The impact of Covid-19, and actions being taken are set
out in the Health and safety, human resources, environment and
community relations update.
As mining has been declared an essential activity by the Mexican
government, we consider the risk of a government imposed full
stoppage across all our operations to be low. Furthermore, we have
implemented additional health and safety measures at each of our
mines coupled with extensive targeted and random testing. This has
allowed us to keep infection rates significantly below the Mexican
average. We are therefore confident that we are well prepared to
manage any localised outbreaks at our mines and maintain operations
at planned levels.
However, taking into account risk implications of COVID-19 set
out in the risk section of the interim report, we consider it
plausible that temporary restrictions like those we saw in April
and May at Penmont can be required in response to a deteriorating
health situation at a particular state level.
As the profitability of our operations is most sensitive to
restrictions being imposed in the state of Sonora impacting
operations at Penmont, we have modelled scenarios assuming
restrictions at the Herradura and Noche Buena mines.
The key judgement applied is the likely time period of
restrictions on operations and the time it would take for the
subsequent recovery once those restrictions are lifted. The base
scenario assumes restrictions caused by the stringent working
health measures in our open pit mines and the resulting lower
volumes processed at the open pit mines during the first half 2020;
the severe scenario includes an assumption that again impacts the
production for two months of the open pit mines resulting in its
full stoppage for that period. In all scenarios we have also
assumed that our employees remain on full pay for the duration of
the closure and no mitigating actions are required to be
implemented to maintain a comfortable liquidity level to continue
operating in the period assessed.
After reviewing all of the above considerations, the Directors
have a reasonable expectation that management has sufficient
flexibility in potential adverse circumstances to maintain adequate
resources to continue in operational existence for the foreseeable
future. The Directors, therefore, continue to adopt the going
concern basis of accounting in preparing these interim financial
statements."
3 Segment reporting
For management purposes, the Group is organised into operating
segments based on producing mines.
At 30 June 2020 the Group has seven reportable operating
segments represented by seven producing mines as follows:
- The Fresnillo mine, located in the State of Zacatecas, an underground silver mine;
- The Saucito mine, located in the State of Zacatecas, an
underground silver mine;
- The Cienega mine, located in the State of Durango, an
underground gold mine; including the San Ramon satellite mine;
- The Herradura mine, located in the State of Sonora, a surface
gold mine;
- The Soledad-Dipolos mine, located in the State of Sonora, a
surface gold mine;
- The Noche Buena mine, located in the State of Sonora, a
surface gold mine; and
- The San Julian mine, located on the border of Chihuahua /
Durango states, an underground silver-gold 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.
In the six months ended 30 June 2020 and 2019, all revenue was
derived from customers based in Mexico.
Management monitors the results of its operating segments
separately for the purpose of performance assessment and making
decisions about resource allocation. Segment performance is
evaluated without taking into account certain adjustments included
in revenue as reported in the interim consolidated income
statements, and certain costs included within cost of sales and
gross profit which are considered to be outside of the control of
the operating management of the mines. The table below provides a
reconciliation from segment profit to gross profit as per the
interim consolidated income statement. Other income and expenses
included in the interim consolidated income statement are not
allocated to operating segments. Transactions between reportable
segments are accounted for on an arm's length basis similar to
transactions with third parties.
Operating segments
The following tables present revenue and profit information
regarding the Group's operating segments for the six months ended
30 June 2020 and 2019, respectively. Revenues for the six months
ended 30 June 2020 and 30 June 2019 include those derived from
contracts with costumers and other revenues, as showed in note
4.
Six months ended 30 June 2020
-------------------------------------------------------------------------------------------------------------------------------------------
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos Saucito Noche San Other(5) Adjustments Total
(4) Buena Julian and
eliminations
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Revenues:
Third party(1) 156,496 348,711 101,109 - 211,463 80,347 154,588 1,469 1,054,183
Inter-Segment - - - - - - - 86,395 (86,395) -
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Segment
revenues 156,496 348,711 101,109 - 211,463 80,347 154,588 86,395 (84,926) 1,054,183
Segment
profit(2) 75,973 192,671 54,289 - 118,590 24,898 70,045 45,092 (828) 580,730
Depreciation
and
amortisation (251,707)
Employee
profit sharing (7,839)
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Gross profit
as per the
income
statement 321,184
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Capital
expenditure(3) 50,203 14,941 12,273 30,293 1,358 17,531 55,359 181,958
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
(1) Total third party revenues include treatment and refining
charges amounting US$72.4 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2) Segment profit excluding depreciation and amortisation and
employee profit sharing.
(3) Capital expenditure represents the cash outflow in respect
of additions to property, plant and equipment.
(4) During 2020, this segment did not operate due to the Bajio
conflict (note 15).
(5) Other inter-segment revenue corresponds to leasing services
provided by Minera Bermejal, S.A. de C.V; capital expenditure
corresponds to Minera Juanicipio S.A de C.V.
Six months ended 30 June 2019
-----------------------------------------------------------------------------------------------------------------------------------------
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos Saucito Noche San Other(5) Adjustments Total
(4) Buena Julian and
eliminations
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Revenues:
Third party(1) 140,988 316,762 83,987 - 217,484 86,497 156,168 - 79 1,001,965
Inter-Segment - - - - - - - 47,356 (47,356) -
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Segment
revenues 140,988 316,762 83,987 - 217,484 86,497 156,168 47,356 (47,277) 1,001,965
Segment
profit(2) 72,013 95,887 33,005 - 118,300 26,810 66,332 36,937 1,027 450,311
Depreciation
and
amortisation (240,480)
Employee
profit sharing (4,319)
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Gross profit
as per the
income
statement 205,512
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
Capital
expenditure(3) 70,424 21,838 31,921 - 60,941 2,978 29,354 30,896 - 248,352
---------------- ---------- ---------- -------- ---------------- -------- ------- -------- --------- ------------- ------------
(1) Total third party revenues include treatment and refining
charges amounting US$67.0 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2) Segment profit excluding depreciation and amortisation and
employee profit sharing.
(3) Capital expenditure represents the cash outflow in respect
of additions to property, plant and equipment.
(4) During 2019, this segment did not operate due to the Bajio
conflict (note 15).
(5) Other inter-segment revenue corresponds to leasing services
provided by Minera Bermejal, S.A. de C.V; capital expenditure
corresponds to Minera Juanicipio S.A de C.V.
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
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Revenues from contracts with customers 1,051,796 1,004,571
Revenues from other sources
Provisional pricing adjustment on products
sold 918 (2,685)
Hedging gain on sales 1,469 79
1,054,183 1,001,965
(b) Revenues by product sold
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Lead concentrates (containing silver, gold,
lead and by-products) 408,017 366,790
Doré and slag (containing gold, silver
and by-products) 367,359 403,259
Zinc concentrates (containing zinc, silver
and by-products) 94,414 117,602
Precipitates (containing gold and silver) 122,694 114,314
Activated carbon (containing gold, silver and
by-products) 61,699 -
1,054,183 1,001,965
All lead and zinc concentrates, precipitates, doré and slag,
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:
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Silver 382,961 366,099
Gold 611,961 556,766
Zinc 82,869 100,922
Lead 48,844 45,263
Value of metal content in products sold 1,126,635 1,069,050
Adjustment for treatment and refining charges (72,452) (67,085)
Total revenues(1) 1,054,183 1,001,965
(1) Includes provisional price adjustments which represent
changes in the fair value of trade receivables resulting in a gain
of US$1.0 million (2019: loss of US$2.7 million) and hedging gain
of US$1.47 million (2019: gain of US$0.08 million).
The average realised prices for the gold and silver content of
products sold prior to the deduction of treatment and refining
charges, were:
Six months ended 30 June
2020 2019
(in US dollars per ounce)
Gold(2) 1,676.80 1,320.74
Silver(2) 16.79 15.25
(2) For the purpose of the calculation, revenue by content of
products sold does not include the results from hedging.
5 Cost of sales
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Depreciation and amortisation (Note 9) 251,707 240,480
Personnel expenses(1) 55,351 52,394
Maintenance and repairs 83,520 90,329
Operating materials 97,145 118,380
Energy 89,667 108,231
Contractors 169,115 168,274
Mining concession rights and contributions 5,102 6,243
Freight 3,788 5,184
Surveillance 3,206 3,448
Insurance 2,991 2,984
Other 3,645 14,545
Cost of production 765,237 810,492
Unabsorbed production costs(2) 6,122 -
Gain on foreign currency hedges (87) -
Change in work in progress and finished goods
(ore inventories) (3) (38,273) (14,039)
Cost of sales 732,999 796,453
(1) Personnel expenses include employees' profit sharing of
US$7.8 million for the six months ended 30 June 2020 (six months
ended 30 June 2019: US$4.3 million).
(2) Corresponds to fixed production cost (labour cost and
depreciation) incurred in Minera Penmont during the lockdown period
related to COVID-19.
(3) Refer to note 2 (c) for more detail related to change in
work in progress inventories for the six months ended 30 June 2020
following a change in estimation.
6 Finance income and finance costs
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Finance income:
Interest on short term deposits and investments 2,709 7,171
Interest on tax receivables 6,784 8,455
Other 1 4
9,494 15,630
Finance costs:
Interest on interest-bearing loans 19,409 20,482
Interest for lease liabilities 341 322
Unwinding of discount on provisions 5,363 5,924
Other(1) 539 16,714
25,652 43,442
(1) 2019 includes US$15.7 million of interest and surcharges as
a result of the amendment to tax positions described in note 7.
7 Income tax expense
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Current corporate income tax:
Income tax charge(1) 117,156 49,827
Amounts (over)/under provided in previous periods(3) (8,425) 34,002
108,731 83,829
Deferred corporate income tax:
Origination and reversal of temporary differences (37,229) (91,268)
Revaluation effects of Silverstream contract (9,547) 3,429
(46,776) (87,839)
Corporate income tax 61,955 (4,010)
Current special mining right:
Special mining right charge(2,3) 7,899 9,360
7,899 9,360
Deferred special mining right:
Origination and reversal of temporary differences 1,526 (22,210)
Special mining right 9,425 (12,850)
Income tax expense as reported in the income
statement 71,380 (16,860)
(1) Until 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
Group's own corporate income tax. The credit is calculated on an
entity-by-entity basis. During the six months period ended 30 June
2019 the Group recognized a credit of US$8.1 million in respect of
the period. As the IEPS deduction was itself taxable, the benefit
was recognised at 70% of the IEPS calculated during the period.
(2) The special mining right allows the deduction of payments
for mining concession rights up to the amount of the special mining
right payable within the same legal entity. In the six months ended
30 June 2020, the Group credited US$7.9 million (2019: US$6.2
million) of mining concession rights against the special mining
right. Prior to credits permitted under the special mining right
regime, the current special mining right charge would have been
US$16.8 million (2019: US$8.8).
The total mining concession rights paid during the six-month
period were US$11.3 million (2019: US$10.7 million) and have been
recognised in the income statement within cost of sales and
exploration expenses. Mining concessions rights paid in excess of
the special mining right cannot be credited to special mining
rights in future fiscal periods, and therefore, no deferred tax
asset has been recognised in relation to the excess.
(3) 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. For more
information of this amendment refer to note 10 in the 2019 Annual
Report.
The amendment resulted in an increase in the current corporate
income tax of US$38.5 million and current special mining right 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, 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.
The effective tax rate for corporate income tax for the six
months ended 30 June 2020 is 48.45% (six months ended 30 June 2019:
(7.42)%) and 55.82% including the special mining right (six months
ended 30 June 2019: (31.19)%). The main factors that increase the
effective tax rate for corporate income tax below 30% are the of
foreign exchange effect on tax value of assets and liabilities net
of the deductible effect of foreign exchange loss of the
period.
In addition to the effect of the voluntary tax amendment, the
origination and reversal of temporary differences principally
reflect reductions in provisional sales and the effect of movements
in property, plant and equipment in the period.
8 Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the period attributable to equity shareholders of the Company by
the weighted average number of ordinary shares in issue during the
period.
The Company has no dilutive potential ordinary shares.
For the six months ended 30 June 2020 and 30 June 2019, earnings
per share have been calculated as follows:
Six months ended 30
June
2020 2019
(in thousands of US
dollars)
Earnings:
Profit from continuing operations attributable
to equity holders of the Company 64,525 70,165
Adjusted profit from continuing operations
attributable to equity holders of the Company 86,802 62,163
Adjusted profit is profit as disclosed in the Interim
Consolidated Income Statement adjusted to exclude revaluation
effects of the Silverstream contract of US$31.8 million loss
(US$22.2 million net of tax) (2019: US$11.4 million gain and US$8.0
million net of tax).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
Six months ended 30
June
2020 2019
Number of shares:
Weighted average number of ordinary shares
in issue ('000) 736,894 736,894
Six months ended 30
June
2020 2019
Earnings per share:
Basic and diluted earnings per ordinary share 0.088 0.095
from continuing operations (US$)
Adjusted basic and diluted earnings per ordinary 0.118 0.084
share from continuing operations (US$)
9 Property, plant and equipment
The changes in property, plant and equipment, including
right-of-use assets, during the six months ended 30 June 2020 are
principally additions of US$142.6 million (six months ended 30 June
2019: US$245.3 million) and depreciation and amortisation of
US$252.4 million, of which US$1.4 million was capitalised as a part
of the cost of other fixed assets (six months ended 30 June 2019:
US$241.1 million, of which US$0.10 million was capitalised).
Significant additions include the development of Juanicipio project
as well as plant equipment, the construction of the pyrites plant
in the Fresnillo district and mine development in underground and
open pit mines.
As of 30 June 2020, the Group has contractual commitments
related to the construction and acquisition of property, plant and
equipment of US$180.9 million (30 June 2019: US$250.0 million).
10 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 period ended 30 June
was $5.37 per ounce (30 June 2019: $5.31 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 30 June 2020 the weighted
average rate applied for the purposes of the valuation model
calculated with reference to annual undiscounted cash flow was
7.08% (30 June 2019: 6.65%).
In the six months ended 30 June 2020, c ash received in respect
of the period of US$7.8 million (six months ended 30 June 2019:
US$9.5 million) corresponds to 1.19 million ounces of payable
silver (six months ended 30 June 2019: 1.3 million ounces). As at
30 June 2020, a further US$4.0 million (30 June 2019: US$3.7
million) of cash corresponding to 324,569 ounces of silver is due
(30 June 2019: 374,432 ounces).
A reconciliation of the beginning balance to the ending balance
is shown below.
2020 2019
(in thousands of US
dollars)
Balance at 1 January: 541,254 519,093
Cash received in respect of the period (7,851) (9,528)
Cash receivable (4,048) (3,710)
Remeasurement (loss)/gain recognised in profit
or loss (31,824) 11,431
Balance at 30 June 497,531 517,286
Less - Current portion 24,874 20,303
Non-current portion 472,657 496,983
The US$31.8 million unrealised loss recorded in the income
statement (30 June 2019: US$11.4 million gain) resulted mainly from
the increase in the discount rate as a high uncertainty in the
financial markets prevail, the updating of the Sabinas Reserves and
Resources, inflation and exchange rate forecasts which were
partially compensated by the unwinding of the discount and the
increase in the forward silver price curve. See note 18 for further
information on the inputs that have a significant effect on the
fair value of this derivative.
11 Inventories
As at 30 As at 31
June December
2020 2019
(in thousands of US
dollars)
Finished goods(1) 19,008 13,719
Work in progress(2) 285,860 251,074
Operating materials and spare parts 107,181 103,740
Inventories at lower of cost and net realisable
value 412,049 368,533
Allowance for obsolete and slow-moving inventories (5,155) (4,793)
Balance at lower of cost and net realisable
value 406,894 363,740
Less - Current portion 315,274 272,120
Non-current portion(3) 91,620 91,620
(1) Finished goods include metals contained in concentrates and
doré bars, and concentrates on hand or in transit to a smelter or
refinery.
(2) Work in progress includes metals contained in ores on
leaching pads. Refer to note 2 (c) for more detail related to
change in work in progress inventories for the six months ended 30
June 2020 following a change in estimation.
(3) The non-current inventories are expected to be processed
more than 12 months from the reporting date.
12 Trade and other receivables
As at 30 June As at 31 December
2020 2019
(in thousands of US dollars)
Trade and other receivables from related
parties (Note 16)(1) 218,592 206,982
Value added tax receivable 130,996 205,232
Other receivables from related parties
(Note 16) 4,135 7,988
Other receivable from contractors 1,706 2,418
Other receivables 11,156 15,791
366,585 438,411
Provision for credit impairment of other
receivables (638) (769)
365,947 437,642
Other receivables classified as non-current
assets:
Value added tax receivable - 23,014
- 23,014
365,947 460,656
(1) Trade receivables from related parties are valued at fair
value based on forward market prices.
13 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
As at 30 June December
2020 2019
( in thousands of US
dollars )
Cash at bank and on hand 1,490 3,347
Short-term deposits 513,169 333,229
Cash and cash equivalents 514,659 336,576
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.
14 Dividends paid
Dividends declared by the Company are as follows:
Per share Amounts
US Cents $Million
------------------------------------------- ---------- ----------
Six months ended 30 June 2020
Total dividends paid during the period(1) 11.9 87.7
Six months ended 30 June 2019
Total dividends paid during the period(2) 16.7 123.1
------------------------------------------- ---------- ----------
(1) Final dividend for 2020 approved at the Annual General
Meeting on 26 May 2020 and paid on 2 June 2020.
(2) Final dividend for 2019 approved at the Annual General
Meeting on 21 May 2019 and paid on 24 May 2019.
The 2019 accounts referred to a technical breach of the
Companies Act 2006 (the 'Act') which the Directors became aware of
during 2019 whereby certain dividends paid between 2011 and 2019
(the 'Historic Dividends') had been made without having filed
interim accounts in accordance with the Act. The relevant interim
accounts have now been filed with the Registrar of Companies and
these show that the Company had sufficient distributable reserves
at the point at which each of the Historic Dividends was paid. The
2019 Directors' Report states that it was nevertheless the
intention of the Directors, as a matter of prudency, to put a
resolution (the 'Resolution') to the annual general meeting held on
29 May 2020 (the '2020 AGM') to regularise the position. The
Resolution, if passed, would have constituted a related party
transaction under IAS 24 and the UK Listing Rules and so the
Company would have been required to issue a detailed circular to
shareholders in compliance with the related party transaction
requirements set out in the UK Listing Rules in order to put the
Resolution to the 2020 AGM.
Given the unprecedented impact of the COVID-19 pandemic since
the approval of the 2019 Annual Report, and in light of the
significant additional work required in connection with the
preparation of a related party transaction circular in compliance
with the requirements of the UK Listing Rules, the Company
concluded not to put the Resolution before the 2020 AGM. This
decision will have no effect on the monies received pursuant to the
Historic Dividends and will not adversely impact shareholders or
the Company. Nevertheless, the Directors keep the matter under
review.
15 Contingencies
The contingencies in the Group's annual consolidated financial
statements for the year ended 31 December 2019 as published in the
2019 Annual Report, are still applicable as of 30 June 2020, with
the followings updates:
- With regards to tax audits, we summarise the status of on-going inspections:
- 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.
- 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 fully responded to the SAT's request of
information and documentation. On March 6th and 10th 2020, the SAT
notified to Minera Fresnillo and Minera Saucito, respectively, its
Audit Report which contains its tax findings. On April 6th and 8th,
2020, Minera Fresnillo and Minera Saucito respectively, fully
responded to the SAT's Audit Report, and are waiting for 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 companies fully responded to
the SAT's request of information and documentation and are waiting
for its response.
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.
16 Related party balances and transactions
The Group had the following related party transactions during
the six months ended 30 June 2020 and 30 June 2019 and balances as
at 30 June 2020 and 31 December 2019.
Related parties are those entities owned or controlled by the
ultimate controlling party, as well as those who have a minority
participation in Group companies and key management personnel of
the Group.
(a) Related party accounts receivable and payable
Accounts receivable Accounts payable
As at 30 As at As at As at 31
June 2020 31 December 30 June December
2019 2020 2019
(in thousands of US dollars)
Trade:
Metalúrgica Met-Mex Peñoles,
S.A. de C.V. 218,592 206,982 53 409
Other:
Industrias Peñoles, S.A.B.
de C.V. 4,048 5,283 - -
Metalúrgica Met-Mex Peñoles, 2,662 - -
S.A. de C.V.
Servicios Administrativos Peñoles,
S.A de C.V. - - 2,744 3,535
Servicios Especializados Peñoles,
S.A. de C.V. - - 1,440 4,095
Fuentes de Energía Peñoles,
S.A. de C.V. - - 2,192 1,735
Termoeléctrica Peñoles,
S. de R.L. de C.V. - - 1,883 1,168
Eólica de Coahuila S.A.
de C.V. - - 3,364 4,772
Other 87 43 1,439 2,185
222,727 214,970 13,115 17,899
Related party accounts receivable and payable will be settled in
cash.
Other balances due from related parties:
As at 31
As at 30 June December
2020 2019
(in thousands of US dollars)
Silverstream contract :
Industrias Peñoles, S.A.B. de C.V. 497,531 541,254
The Silverstream contract can be settled in either silver or
cash. Details of the Silverstream contract are provided in note
10.
(b) Principal transactions with affiliates are as follows:
Six months ended 30 June
2020 2019
(in thousands of US dollars)
Income :
Sales (1) :
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 1,052,714 1,001,995
Other income 1,428 3,222
Total income 1,054,142 1,005,217
(1) Figures are net of treatment and refining charges of US$72.4
million (June 2019: US$67.1 million). During 2020 there are no
sales credited to development projects (June 2019: 0.1)
Six months ended 30 June
2020 2019
(in thousands of US dollars)
Expenses :
Administrative Services:
Servicios Administrativos Peñoles,
S.A. de C.V.(2) 16,347 17,540
Servicios Especializados Peñoles, S.A.
de C.V. (2) 8,225 8,977
24,572 26,517
Energy:
Fuentes de Energía Peñoles, S.A.
de C.V. 1,752 2,314
Termoeléctrica Peñoles, S. de
R.L. de C.V. 8,588 7,478
Eólica de Coahuila, S.A. de C.V. 18,233 24,475
28,573 34,267
Operating materials and spare parts:
Wideco Inc 2,378 3,286
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 3,126 4,524
5,504 7,810
Equipment repairs and administrative services:
Serviminas, S.A. de C.V. 1,949 4,857
Insurance premiums:
Grupo Nacional Provincial, S.A.B. de C.V. 2,923 1,719
Other expenses 943 1,142
Total expenses 64,464 76,312
(2) Based on the Service Agreement with Servicios
Administrativos Peñoles, S.A. de C.V., ("SAPSA") and Servicios
Especializados Peñoles, S.A. de C.V. ("SEPSA"), both wholly owned
Peñoles' subsidiaries, the companies provided administrative
services during the six months ended 30 June 2020 for a total
amount of US$24.6 million (US$26.5 million for the six months ended
30 June 2019). Of the total amount of these services, US$23.4
million (US$24.3 million for the six months ended 30 June 2019)
were recognised in administrative expenses and US$1.2 million
(US$2.2 million for six months ended 30 June 2019) 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 who receive remuneration.
Six months ended 30 June
2020 2019
(in thousands of US dollars)
Salaries and bonuses 1,627 2,197
Post-employment pension 129 141
Other benefits 127 143
Total compensation paid to key management
personnel 1,883 2,481
17 Notes to the consolidated statement cash flows
Notes Six months ended 30 June
2020 2019
(in thousands of US dollars)
Reconciliation of profit for the
period to net cash generated from
operating activities
Profit for the period 56,501 70,914
Adjustments to reconcile profit
for the period to net cash inflows
from operating activities:
Depreciation and amortisation 9 252,411 241,074
Employee profit sharing 8,002 4,563
Deferred income tax expense 7 (45,250) (110,049)
Current income tax expense 7 116,630 93,189
(Gain)/loss on the sale of property,
plant and equipment (109) 127
Net finance costs 16,158 27,804
Foreign exchange loss/(gain) 19,819 (506)
Difference between pension contributions
paid and amounts recognised in
the income statement 517 477
Non cash movement on derivatives (259) (79)
Changes in fair value of Silverstream 10 31,824 (11,431)
Working capital adjustments
Decrease in trade and other receivables 71,323 15,730
Decrease/(increase) in prepayments
and other assets 1,996 (7,741)
Increase in inventories (43,154) (25,918)
Increase in trade and other payables 7,139 10,377
Cash generated from operations 493,548 308,531
Income tax paid(1) (63,984) (127,986)
Employee profit sharing paid (7,046) (12,849)
Net cash from operating activities 422,518 167,696
(1) Income tax paid includes US$61.4 million corresponding to
corporate income tax (June 2019: US$111.2 million) and US$2.2
corresponding to special mining right (June 2019: US$17.9 million),
for further information refer to note 7.
18 Financial instruments
a. Classification
As at 30 June 2020
US$ thousands
-------------------------------------------------------------------------------------------
Financial assets: Amortized Fair value Fair value Fair value
cost through (hedging through
OCI instruments) profit or
loss
----------------------------------- ---------- ----------- -------------- -----------
Trade and other receivables
(Note 12(1) ) 1,155 - - 222,640
Equity instruments at FVOCI - 143,124 - -
Silverstream contract (Note
10) - - - 497,531
Derivative financial instruments - - 3,666 -
----------------------------------- ---------- ----------- -------------- -----------
Financial liabilities: Amortised Fair value Fair value
Cost (hedging through
instruments) profit or
loss
----------------------------------- ---------- ----------- -------------- -----------
Interest-bearing loans 801,772 - -
Trade and other payables 118,329 - -
Lease liabilities 12,859 - -
Derivative financial instruments - 8 -
----------------------------------- ---------- ----------- -------------- -----------
(1 Relates to trade and other receivables from related parties
and contractors, net of the provision for impairment)
As at 31 December 2019
US$ thousands
----------------------------------------------------------------------------
Financial assets: Amortized Fair value Fair value Fair value
Cost through (hedging through
OCI instruments) profit or
loss
----------------------------------- ---------- ----------- -------------- -----------
Trade and other receivables
(Note 12(1) ) 4,353 - - 212,265
Equity instruments at FVOCI - 123,024 - -
Silverstream contract - - - 541,253
Derivative financial instruments - - 2,623 -
----------------------------------- ---------- ----------- -------------- -----------
Financial liabilities: Amortised Fair value Fair value
Cost (hedging through
instruments) profit or
loss
----------------------------------- ---------- ----------- -------------- -----------
Interest-bearing loans 801,239 - -
Trade and other payables 117,358 - -
Lease liabilities 12,544 - -
Derivative financial instruments - 1,789 -
----------------------------------- ---------- ----------- -------------- -----------
(1 Relates to trade and other receivables from related parties
and contractors, net of the provision for impairment)
b. Fair value measurement
Fair value hierarchy
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either: a) in
the principal market for the asset or liability, or b) in the
absence of a principal market, in the most advantageous market for
the asset or liability. The principal or the most advantageous
market must be accessible to the Group.
The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset
in its highest and best use.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or
disclosed in the interim consolidated financial statements are
categorised within the fair value hierarchy, described as follows,
based on the lowest level input that is significant to the fair
value measurement as a whole:
Level 1 - Quoted (unadjusted) market prices in active markets
for identical assets or liabilities
Level 2 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable
Level 3 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable
For assets and liabilities that are recognised in the financial
statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by
re-assessing categorisation (based on the lowest level input that
is significant to the fair value measurement as a whole) at the end
of each reporting period.
For the purpose of fair value disclosures, the Group has
determined classes of assets and liabilities on the basis of the
nature, characteristics and risks of the asset or liability and the
level of the fair value hierarchy as explained above.
The value of financial assets and liabilities other than those
measured at fair value are as follows:
Carrying amount Fair value
----------------------------- ------------------------------ ---------------------------
30 June 31 December 30 June 31 December
2020 2019 2020 2019
US$ thousands
----------------------------- ---------------------------------------------------------
Financial assets:
Trade and other receivables 1,155 4,353 1,155 4,353
Financial liabilities:
Interest-bearing loans(1) 801,772 801,239 865,360 870,208
Trade and other payables 113,098 125,121 113,098 125,121
----------------------------- ---------------- ------------ ----------- ------------
(1) Interest-bearing loans are categorised in Level 1 of the
fair value hierarchy.
The carrying amounts of all other financial instruments are
measured at fair value.
The financial assets and liabilities measured at fair value are
categorised into the fair value hierarchy as follows:
As of 30 June 2020
Fair value measure using
-------------------------------------------------------------------------------------------
Quoted prices Significant Significant Total
in active observable unobservable
markets (Level 2) (Level 3)
(Level 1)
US$ thousands
----------------------------------- ------------------------------------------------------
Financial assets:
Trade receivables (Note
12) - - 222,640 222,640
Derivative financial instruments:
Option commodity contracts - 1,692 - 1,692
Option and forward foreign
exchange contracts - 1,974 - 1,974
Silverstream contract (Note
10) - - 497,531 497,531
Other financial assets:
Equity instruments at
FVOCI 143,124 - - 143,124
----------------------------------- -------------- ------------ -------------- --------
143,124 3,666 720,170 866,961
----------------------------------- -------------- ------------ -------------- --------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts - - - -
Option and forward foreign
exchange contracts - 8 - 8
- 8 - 8
----------------------------------- -------------- ------------ -------------- --------
As of 31 December 2019
Fair value measure using
-------------------------------------------------------------------------------------------
Quoted prices Significant Significant Total
in active observable unobservable
markets (Level 2) (Level 3)
(Level 1)
US$ thousands
----------------------------------- ------------------------------------------------------
Financial assets:
Trade receivables (Note
12) 212,265 212,265
Derivative financial instruments:
Option commodity contracts - 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:
Options commodity contracts - 1,529 - 1,529
Option and forward foreign
exchange contracts - 260 - 260
----------------------------------- -------------- ------------ -------------- --------
- 1,789 1,789
----------------------------------- -------------- ------------ -------------- --------
There have been no significant transfers between Level 1 and
Level 2 of the fair value hierarchy, and no transfers into or out
of Level 3 fair value measurements.
A reconciliation of the opening balance to the closing balance
for Level 3 financial instruments other than Silverstream (which is
disclosed in Note 10) is shown below:
2020 2019
US$ thousands
-------------------------------------------------- --------------------------
Balance at 1 January 206,982 213,202
-------------------------------------------------- ------------ ------------
Sales 2,346,142 2,542,501
Cash collection (2,335,450) (2,560,613)
Changes in fair value(1) 11,324 5,299
Realised embedded derivatives during the year(1) (10,406) (7,985)
-------------------------------------------------- ------------ ------------
Balance at 30 June 218,592 192,404
-------------------------------------------------- ------------ ------------
(1 Changes in fair value and realised embedded derivatives
during the year are recognised in revenues.)
Valuation techniques
The following valuation techniques were used to estimate the
fair values:
Option commodity contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The Level 2 option commodity
contracts are measured based on observable spot commodity prices,
the yield curves of the respective commodity as well as the
commodity basis spreads between the respective commodities. The
option contracts are valued using the Black-Scholes model, the
significant inputs to which include observable spot commodities
price, interest rates and the volatility of the commodity.
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The Level 2 foreign currency
forward contracts are measured based on observable spot exchange
rates, the yield curves of the respective currencies as well as the
currency basis spreads between the respective currencies. The
foreign currency option contracts are valued using the
Black-Scholes model, the significant inputs to which include
observable spot exchange rates, interest rates and the volatility
of the currency.
Silverstream contract (see note 10)
The fair value of the Silverstream contract is determined using
a valuation model. The term of the derivative, which is based on
Sabinas life of mine is currently 34 years and the valuation model
utilises a number of inputs that are not based on observable market
data due to the nature of these inputs and/or the duration of the
contract. Inputs that have a significant effect on the recorded
fair value are the volume of silver that will be produced and sold
from the Sabinas mine over the contract life, the future price of
silver, future foreign exchange rates between the Mexican peso and
US dollar, future inflation and the discount rate used to discount
future cash flows.
The estimate of the volume of silver that will be produced and
sold from the Sabinas mine requires estimates of the recoverable
silver reserves and resources, the related production profile based
on the Sabinas mine plan and the expected recovery of silver from
ore mined. The estimation of these inputs is subject to a range of
operating assumptions and may change over time. Estimates of
reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided
to the Company. The production profile and estimated payable silver
that will be recovered from ore mined is based on the latest plan
and estimates, also provided to the Company by Peñoles. The inputs
assume no interruption in production over the life of the
Silverstream contract and production levels which are consistent
with those achieved in recent years.
Management regularly assesses a range of reasonably possible
alternatives for those significant unobservable inputs described
above, and determines their impact on the total fair value. The
significant unobservable inputs are not interrelated. The fair
value of the Silverstream contract is not significantly sensitive
to a reasonable change in future inflation, however, it is to a
reasonable change in future silver price, future exchange rate and
the discount rate used to discount future cash flows.
The following table demonstrates the sensitivity of the
Silverstream contract valuation to reasonably possible changes in
those inputs. There are no changes to equity other than those
derived from the changes in profit before tax.
Effect on
Increase/ profit before
30 June 2020 (decrease) tax: increase/
(decrease)
US$ thousands
-------------------------------------------------- ------------- ----------------
Silver price 15% 101,555
(25%) (169,259)
-------------------------------------------------- ------------- ----------------
Foreign exchange rate: strengthening/(weakening)
of the US dollar 20% (86)
--------------------------------------------------
(15%) 91
-------------------------------------------------- ------------- ----------------
25 basis
Interest rate point (14,649)
(25 basis
point) 15,365
-------------------------------------------------- ------------- ----------------
Effect on
Increase/ profit before
31 December 2019 (decrease) tax: increase/
(decrease)
US$ thousands
-------------------------------------------------- ------------- ----------------
Silver price 20% 146,873
(15%) (110,155)
-------------------------------------------------- ------------- ----------------
Foreign exchange rate: strengthening/(weakening)
of the US dollar 5% (40)
--------------------------------------------------
(5%) 44
-------------------------------------------------- ------------- ----------------
50 basis
Interest rate point (32,969)
(50 basis
point) 36,322
-------------------------------------------------- ------------- ----------------
Equity investments
The fair value of equity investments is derived from quoted
market prices in active markets.
Interest-bearing loans
The fair value of the Group's interest-bearing loan is derived
from quoted market prices in active markets.
Receivables from provisional sales
Sales of concentrates, precipitates and doré bars are
'provisionally priced' and revenue is initially recognised using
this provisional price and the Group's best estimate of the
contained metal. Revenue is subject to final price and metal
content adjustments subsequent to the date of delivery. This price
exposure is considered to be an embedded derivative and 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.
c. 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, including loans from related parties, as
disclosed in the balance sheet, excluding net unrealised gains or
losses on revaluation of cash flow hedges and debt instruments. 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 as at 30 June 2020 and 2019 consisted of only cash and
cash equivalents.
[1] Earnings before interest, taxes, depreciation and
amortisation (EBITDA) is calculated as gross profit plus
depreciation less administrative, selling and exploration
expenses
[2] Prior to Silverstream valuation effects.
[3] Cash and other liquid funds are disclosed in note 18(d) to
the Financial Statements
[4] Net debt (Debt at 30 June 2020 - Cash and other liquid funds
at 30 June 2020) divided by the EBITDA generated in the last 12
months
[5] Adjusted production cost is calculated as total production
costs less depreciation, profit sharing and the effects of exchange
rate hedging.
[6] Net debt (Debt at 30 June 2020 - Cash and other liquid funds
at 30 June 2020) divided by the EBITDA generated in the last 12
months
[7] This is the latest reserve and resource estimate and an
update will be given with the Preliminary Results in early
2021.
[8] Comparative figures relate to the full year 2019
[9] Guía de mejores prácticas de operación minero-metalúrgica:
Contingencia sanitaria 2020 SARS-CoV2 (Covid-19) by the Mexican
Mining Ministry.
[10] Countries whose government institutions are significantly
influenced by the power and wealth of drug trafficking, and whose
leaders simultaneously hold positions as government officials and
members of the illegal narcotic drug trafficking networks,
protected by their legal powers.
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
IR EALXPADNEEEA
(END) Dow Jones Newswires
July 28, 2020 02:00 ET (06:00 GMT)
Fresnillo (LSE:FRES)
Historical Stock Chart
From Mar 2024 to Apr 2024
Fresnillo (LSE:FRES)
Historical Stock Chart
From Apr 2023 to Apr 2024
