TIDMFRES
RNS Number : 9902F
Fresnillo PLC
27 February 2018
Fresnillo plc
Financial results for the year ended 31 December 2017
Fresnillo plc today announced its financial results for the full
year ended 31 December 2017. Octavio Alvídrez, CEO said:
"I am pleased to report another resilient performance, built on
the foundations of our consistent, conservative, sustainable long
term strategy.
We celebrate 10 years as a public company in 2018. Since 2008,
we have paid US$2.5 billion in dividends, never not paid an interim
and final dividend throughout this period and invested over US$4
billion in both existing operations and growing our portfolio of
quality assets. Our IPO target for gold production of 750koz was
reached in 2015, three years ahead of plan, while the 65moz
objective for silver is on track to be achieved in 2018. Our
commitment to delivering shareholder value remains.
In 2017, silver production was a record 58.7 moz following the
first complete year of San Julián (phase I) operating at full
capacity and the start of operations at San Julián (phase II). We
also achieved a solid gold production performance of 911.1 koz,
exceeding our forecast range.
A strong operating performance and relatively stable precious
metals prices have offset some cost inflation and we have delivered
sound financial results. Adjusted revenues were up 9.2% to US$2,230
million, with a 32.0% increase in profit for the year. As a result,
the Board was pleased to recommend a final dividend of 29.8 US
cents per share, bringing the total paid for the year to US$297.7
million.
Core to our organic growth strategy is ensuring we deliver the
potential of our existing assets while expanding our development
pipeline. We made good progress in 2017. Operations at the
Fresnillo mine continue to strengthen, performance has improved
year-on-year and we expect an increase in ore throughput in 2018.
The successful completion of San Julián (phase II) was a
significant milestone and is expected to make a meaningful
contribution to 2018 production now it is operating at full
capacity. Construction of the Pyrites Plant project has continued
and the Dynamic Leaching Plant at Herradura is on track. We expect
to commission both projects in 2018. We also expect to approve the
feasibility study of Juanicipio in the first half of 2018 and begin
construction soon after. Juanicipio is the next major project for
Fresnillo, and we are committed to ensuring that the mine fulfils
its true potential.
It is with deep regret we reported one fatality in 2017. We
continue to make major strides in our safety culture, but this is a
reminder that we must never cease in our efforts to improve our
safety performance.
Cash generation from our mines increased nearly 5% compared to
2016, reflecting the higher volumes of silver and zinc sold. This
was also boosted by higher base metal prices during the year,
partially offset by cost pressures and higher exploration
expenses.
The cash generated from our mines, together with proceeds from
the Silverstream contract and the sale of a non-strategic
exploration project contributed to maintaining a solid financial
position, with US$896.0 million in cash and other liquid funds([1])
as of 31 December 2017. This is despite paying dividends of
US$236.6 million and investing capex of US$604.8 million.
The Board and I are confident in our strategy and the ability of
the management team to execute it. 2018 silver production is
expected to rise to between 67-70 moz, whilst gold is expected to
be in the range of 870-900 koz. Capital expenditure is anticipated
to be approximately US$755 million with exploration expenses in the
region of US$200 million.
We will continue to maintain our disciplined approach to
investment, to support our strategy and deliver shareholder
returns. We will remain focused on efficiency and controlling costs
to underpin projects, continuing to drive performance improvements
at the Fresnillo mine, increasing production at San Julián, and
developing Juanicipio. A strong balance sheet, targeted investment
and operating costs among the lowest in the industry remain the key
differentiating characteristics of our company."
Twelve months to 31 December 2017
$ million unless stated 2017 2016 % change
Silver Production* (kOz) 58,673 50,303 16.6
Gold Production* (Oz) 911,132 935,513 (2.6)
Total Revenue 2,093.3 1,905.5 9.9
Adjusted Revenue** 2,233.2 2,045.0 9.2
Gross Profit 925.4 882.1 4.9
EBITDA 1,060.1 1,032.0 2.7
Profit Before Income Tax 741.5 718.2 3.2
Profit for the year 560.8 425.0 32.0
Basic and Diluted EPS excluding
post-tax Silverstream effects
(USD)*** 0.653 0.453 44.2
* Fresnillo attributable production, plus ounces registered in
production through the Silverstream Contract
** Adjusted Revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
lead and zinc hedging
*** The weighted average number of shares was 736,893,589 for 2017 and 2016
2017 Highlights
Operational excellence continue to deliver healthy returns
-- Adjusted revenue of US$2,233.2 million, 9.2% increase vs.
2016 primarily due to record silver volumes, an increase in zinc
volumes sold and higher base metal prices
-- Gross profit and EBITDA of US$925.4 million and
US$1,060.1million, up 4.9% and 2.7% respectively
-- Profit before taxes of USD$741.5 million, up 3.2%
-- Profit for the year of USD$560.8 million, up 32.0% on 2016
primarily due to the effect of the revaluation of the Mexican
peso/US dollar spot exchange rate on deferred taxes
-- Cost per tonne increased across all mines mainly reflecting
the Group's cost inflation of 6.4%
-- Cash generated by operations before changes in working
capital increased by 4.9% to US$1,073.7 million (2016: US$1,023.3
million)
-- Capital expenditures of US$604.8 million, up 39.3% vs 2016
but below guidance, mainly due to lower capex at pyrites plant
project and Juanicipio
-- Exploration spend of US$141.1 million, up 16.4%
-- Maintained financial flexibility, with year-end cash and
other liquid funds([2]) of US$896.0 million (2016: US$912.0
million), and debt of US$800 million
-- Basic and diluted EPS from continuing operations of US$0.761;
adjusted EPS of US$0.653, up 31.4% and 44.2% respectively
-- 2017 final dividend of US$29.8 cents per share, equivalent to
approximately US$219.6 million, recommended by the Board
Maximising value of existing assets
-- Record annual silver production of 58.7 moz (including
Silverstream) up 16.6% vs. 2016, in line with guidance primarily as
a result of the first complete year of San Julián (phase I)
operating at full capacity and the start-up of operations at San
Julián (phase II)
-- Annual gold production of 911.1 koz exceeded guidance
principally as a result of the full year operations at San Julián
(phase I). Gold production slightly decreased -2.6% vs. 2016 due to
the expected lower reduction of gold inventories and the
anticipated lower ore grade deposited at the leaching pads at
Herradura.
-- Construction of the San Julián mine now finished with the
completion of San Julián Phase II. We expect the mine to achieve
average annual production of 14.2 moz of silver and 49.3 koz of
gold. San Julián Phase II was commissioned on budget, and the
project reached nameplate capacity as expected in Q3, highlighting
our ability to bring new mining projects to fruition.
-- Performance at the Fresnillo mine improved with full year
silver production up 4.1% over 2016, but further actions taken to
ensure a sustained improvement.
Disciplined investment and development of extensive growth
pipeline
-- Construction of the US$155 million Pyrites Plant remains on
track, with commissioning of the leaching plant expected in
2Q18.
-- Construction of the US$110 million second line of the Dynamic
Leaching Plant at Herradura is on track to be commissioned in
2Q18.
-- Progress at the Juanicipio project is on track and we expect
to conclude the updated feasibility study in 1H18.
-- Positive exploration results: Gold and silver resources up
22.7% and 6.9% respectively. Gold reserves remained stable, while
silver reserves showed a decrease of 5.4%, with an increase at
Saucito offset by falls at Fresnillo and Ciénega.
-- 2018 exploration budget of approximately US$200 million
(including capitalised exploration expenses)
Outlook
-- Silver production expected to be in the range of 67 to 70 moz
including the Silverstream, in line with our long term guidance.
Gold production expected to be in the range of 870-900 koz
-- Capital expenditure is anticipated to be approximately US$755 million
Analyst Presentation
Fresnillo plc will be hosting a presentation for analysts and
investors today at 09.00 (GMT) at Bank of America Merrill Lynch
Financial Centre, 2 King Edward St., EC1A 1HQ, London, United
Kingdom.
The presentation will also be available via a live webcast. A
link to the webcast will be made available on Fresnillo's homepage:
www.fresnilloplc.com or can be accessed directly here
(https://edge.media-server.com/m6/p/eh2kneot).
If you are not attending the presentation in person, but wish to
ask questions, you must also join the live conference call as
questions cannot be submitted via the webcast function.
Conference Call:
To access the conference call, please use the following
details:
UK: +44 (0)330 336 9411
US: +1 646 828 8156
Mexico: +52 55 4164 2298
Confirmation code: 3952244
A recording of the conference call will be available for 7 days
following the presentation. The access details for the replay are
as follows:
Replay dial in:
UK: +44 (0)20 7660 0134
US: +1 719 457 0820
Mexico: 001 800 514 5974
Confirmation code: 3952244
For further information, please visit our website:
www.fresnilloplc.com or contact:
Fresnillo plc
London Tel: +44(0)20 7339 2470
Gabriela Mayor, Head of Investor
Relations
Patrick Chambers
Mexico 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), Herradura, Soledad-Dipolos(1,) Noche Buena and San Julián
(phase 1 and II), two development projects - the Pyrites plant, and
second line of DLP at Herradura, and four advanced exploration
projects - Orisyvo, Juanicipio, Las Casas Rosario & Cluster
Cebollitas and Centauro Deep, as well as a number of other
long-term exploration prospects. In total, Fresnillo plc has mining
concessions covering approximately 1.8 million hectares in
Mexico.
Fresnillo plc has a strong and long tradition of mining, a
proven track record of mine development, reserve replacement, and
production costs in the lowest quartile of the cost curve for
silver.
Fresnillo plc's goal is to maintain the Group's position as the
world's largest primary silver company, producing 65 million ounces
of silver per year by 2018, having already surpassed the gold
target of 750,000 ounces.
(1) Operations at Soledad-Dipolos are currently suspended.
CHAIRMAN'S STATEMENT
Ten years of creating value through growth and returns
We end our first decade of operations as we started it - firm in
our commitment to growth and returns, energised by the success of
our strategy and confident about our future prospects.
Although the Group has a history stretching back over a century,
Fresnillo only became a listed company in 2008. Today, as we stand
on the brink of our second decade, we can look back on our
achievements with justifiable pride. Despite a changing market
environment and pressures affecting the mining industry as a whole,
we are delivering on our long-term commitments and continuing to
create value through growth and returns for our stakeholders. Over
the last decade, we have paid close to US$2.5 billion in dividends,
invested over US$4 billion to sustain and expand our operations and
develop new projects, and increased attributable silver and gold
production by over 55% and 245% respectively.
While we remain confident about our future and growth potential,
we do not ignore the challenges faced by the mining industry. These
include lower grades, access to land, environmental demands, social
pressures and growing complexities in the permitting processes,
among others. Managing these pressures requires increased focus and
expertise to avoid excessive delays to projects and to maintain our
social licence to operate.
2017: a year of progress
2017 has again proved the importance of a consistent,
conservative long-term strategy based primarily on organic growth,
developed and implemented by a committed professional team and
fully supported by the Board. This provided the foundation for
another year of record silver production and stable gold
production. The commitment to exploration across precious metals
price cycles continues to be the key to our success, growth and
long-term prospects.
Against a backdrop of relatively stable precious metals prices,
and an upward trend of by-product base metal prices, we have
delivered sound financial results.
The Group generated over US$2,230 million in adjusted revenue in
2017, a rise of 9.2% over the prior year, with a 32.0% increase in
profit for the period. Cash and other liquid funds([3]) at year end
were US$896.0 million versus US$912.0 in 2016 and debt remained at
US$800 million.
Consistent dividend policy
Fresnillo plc's dividend policy is closely aligned with our
focus on creating value through growth and returns, and is based on
paying out 33-50% of profit after tax each year, with certain
adjustments made to exclude non-cash effects in the income
statement. Dividends are paid in the approximate proportions of
one-third as an interim dividend, with the balance as a final
dividend.
Before declaring a dividend, the Board carries out detailed
analysis of the profitability of the business, underlying earnings,
capital requirements, and cash flows. Our aim is to maintain
sufficient flexibility to respond to movements in precious metals
prices and other factors that could impact our business.
We declared an interim dividend of 10.6 US cents per share, with
a final dividend of 29.8 US cents per share, bringing the total for
the year to US$297.7 million.
Meeting our operational goals
At the time of the IPO, we set ourselves two demanding targets
for our first decade of operations. Our target for gold production
of 750koz was reached in 2015, three years ahead of plan, while the
65moz objective for silver is on track to be achieved in 2018.
There were a number of key operational developments during the
year, but here I would like to focus on two in particular. Firstly,
the second phase of our silver-gold San Julián project was
commissioned. This new mine, discovered by our exploration team, is
a cornerstone of our future prospects and opens a promising, remote
district to further growth. Several Board members visited the site
during 2017 and saw at first-hand how the plans of the Board and
management have become reality.
Secondly, despite falling short of our expectations due to
several operational issues, performance at the Fresnillo mine
continued to improve. We have taken a number of corrective steps to
address these issues, including: strengthening our operational
leadership team; improving contractor efficiency; and eliminating
bottlenecks caused by inefficient working practices.
We expect the construction of the new Pyrites Plant to
significantly advance towards commissioning in 2018, improving the
gold and silver recovery from the tailings at both the Fresnillo
and Saucito mines. In addition, we started construction of the
second line at the Dynamic Leaching Plant at Herradura, which will
improve gold recovery, particularly as we encounter increasing
quantities of higher sulphide grade ore. The Board expects to
approve the development of our joint venture with Mag Silver at
Juanicipio in the first half of 2018, and we anticipate the
start-up of production in the first half of 2020. Juanicipio is the
next major project for Fresnillo, and management is committed to
ensuring that the mine fulfils its true potential.
We have a well-established record of replenishing reserves and
resources, and 2017 again saw good progress in this respect.
Exploration results for the year were positive. Overall, our
resource base has expanded significantly. Silver resources have
grown from 2,171 moz in 2016 to 2,320 moz in 2017, while gold
resources remained stable at 38.5 moz. Gold reserves increased by
22.7%, mainly due to the Herradura mine, while silver reserves
showed a decrease of 5.4%, with an increase at Saucito offset by
falls at Fresnillo and Ciénega. Exploration remains a key pillar of
our company as we move towards achieving our 2018 goals and further
success in the years beyond.
Our workforce
Health and safety remain the paramount priority of our Board. I
regret to report that one fatal accident occurred in early 2017.
While the trend of the broader safety indicators continued to
improve, supported by our drive towards a more systematic approach
to incidents, this fatality is unacceptable. One fatality is one
too many, and our sincere condolences and support have been
conveyed to the family of the victim.
We will never sacrifice the health and safety of our people - or
the long-term sustainability of our business - for short-term gain,
financial or otherwise, and strive to implement best-in-class
systems and practices throughout the company. However, it is clear
that there remains much work to do, particularly where contractors
are concerned. Contractor staff do not always display a consistent
focus on safety and lack sufficient training due to frequent
rotation of personnel. During the year we took decisive steps to
engage them in our health and safety culture. This new approach has
already borne fruit and will be extended in 2018.
The Board's Health, Safety, Environment and Community Relations
(HSECR) Committee continued to review our culture and values as
part of its work and will be monitoring progress in the coming
year. We again increased our HSECR activities during 2017,
supporting a large number of new and established programmes which
underline our commitment to the wellbeing of our people and their
communities.
Supporting our executive team
The Board plays an active role in setting Group strategy and
supporting the Executive Committee. We regularly review progress
versus plan, ensuring that the business has the required
flexibility to respond to changing market conditions while at the
same time fulfilling our commitment to continuous investment across
price cycles.
During 2017, we again ensured that capital allocation was
balanced by growth, shareholder returns, financial strength and
flexibility, within the context of our commitment to sustainability
and risk management.
Familiarity with the business is key for an effective Board. I
encourage Board members to gain practical knowledge about our
activities, and over the course of the year my colleagues visited a
number of operational sites. For example, six Directors visited San
Julián to gain first-hand understanding of the importance and
challenges of the operation.
Strengthening our corporate governance
The most important function of the Board is to ensure strong and
effective corporate governance. We have continued to identify and,
where appropriate, implement best practice in line with the UK
Corporate Governance Code and evolving stakeholder expectations in
both the UK and Mexico.
I have set out details regarding the major developments in my
introduction to the Corporate Governance section on page x. In
summary, these include:
-- New anti-bribery and corruption legislation in Mexico. The
work we have undertaken over the past few years to ensure
compliance with UK legislation enabled us to accommodate the
requirements of the new Mexican legislation with ease.
-- Continued support for greater gender diversity at Board
level, in line with our commitment to align Fresnillo more closely
with expectations relating to diversity on FTSE100 boards.
-- Evolution of the independent representation on the Board.
-- The continued support of over 99% of our independent
shareholders for our executive remuneration policy.
As we approach the tenth anniversary of our listing on the
London Stock Exchange, I am pleased to report that while our
business model has remained essentially the same, we are also
continuing to learn and evolve - particularly in the areas of
sustainability, the application of IT and corporate governance. For
example, our Code of Conduct was reviewed and benefited from
updates during the year, reflecting our commitment to building and
maintaining an ethical culture across all our operations. Based on
our values of Responsibility, Integrity, Trust and Loyalty, this
culture is the cornerstone of our past achievements and the
platform for our future success. 2017 again saw us complement
regular workshops and master classes with online training in order
to ensure that all our people are aware of the importance we attach
to our values.
Corporate culture is a key agenda item for every Board meeting,
with updates on the cultural programme provided as part of the
CEO's report. These regular bulletins are supported by an annual
presentation by the Head of Sustainability.
Changes to the Board
In May, I was delighted to welcome Dame Judith Macgregor as an
Independent Non-Executive Director. Dame Judith was the British
Ambassador to Mexico from 2009 to 2013 and has been the President
of the Foreign and Commonwealth Office (FCO) Women's Association
since 2006, overseeing a significant increase in the number of FCO
women in senior grades. Dame Judith is the third female appointment
to the Board in the past five years, and is currently one of two
female members. With women continuing to be under-represented on
our Board and in our workforce, during the year we developed a new
policy which aims to encapsulate our commitment to greater
diversity and inclusion.
Outlook for 2018 and beyond
We will continue to maintain our disciplined approach to
investment in order to support the key 'Explore, Develop, Operate
and Sustain' elements of the business model. Our focus will once
again be on efficiency and cost control to underpin projects,
ongoing performance improvements at Fresnillo, increased production
at San Julián, development of Juanicipio and the continued
evaluation of the Orisyvo gold project.
Human capital is key to our ability to create value through
growth and returns. Throughout 2017, our people again showed the
skills and professionalism needed to overcome challenges as well as
the commitment to deliver results. On behalf of the Board and
shareholders I want to express my gratitude for their efforts.
The Board and I reiterate our confidence in the established and
proven strategy and in the capacity of the Executive Committee to
execute it. While volatility in exchange rates or precious metals
prices may present short-term challenges, we anticipate further
growth and returns over the longer term.
Alberto Baillères
Non-executive Chairman
CHIEF EXECUTIVE'S STATEMENT
Consistent strategy, consistent performance
I am delighted to report that 2017 was another good year for
Fresnillo. Once again, we have managed our costs, expanded our
exploration pipeline and achieved our production guidelines - all
of which have combined to enable us to continue our track record of
creating value through growth and returns.
At the time of our IPO in 2008, we made a commitment to double
production by 2018. After nine years - a period that has seen a
global financial crisis as well as volatile prices for precious
metals - we are well on the way to confirming this remarkable
achievement.
Our success bears testament to the expertise, commitment and
sheer hard work of our people, without whom none of this would have
been possible. But it is also a tribute to the original vision of
the Board and the strength of a strategy that is both effective and
consistent. When times are challenging, it can be tempting to
switch strategy to address short-term trends, for example by making
substantial cutbacks to areas such as exploration. Indeed, this is
something that we have seen many of our peers do over the last
decade. At Fresnillo, however, our strategy has remained constant
from our first day of operation - and this consistency has been the
platform for what has been a successful record of growth and
returns.
Record silver production
Silver production from our mines reached a record level of 54.2
moz, due to phase I at San Julián operating at full capacity for
the entire year and the start of operations of phase II at the same
mine. Production at the Fresnillo mine also increased year-on-year,
albeit at a slower pace than anticipated. We are continuing to
implement several improvement measures at the mine, including
enhanced equipment maintenance, the installation of a vertical
conveyor to reduce truck haulage and increased supervision to
improve the efficiency of our contractors. These measures, together
with the hiring of two new contractors, will help us maintain
development rates at the Fresnillo mine and improve them in the
long run.
As expected, gold production slightly decreased due to the
reduction in inventories at Herradura in 2016 not being repeated to
the same extent in 2017, and a slower speed of recovery at Noche
Buena due to a longer leaching process.
Zinc production increased as a result of the positive
contribution from San Julián and increased volumes produced at the
Fresnillo mine due to the higher ore grades.
Delivering results across price cycles
Fresnillo's operations are designed to deliver results across
price cycles. They did so during the years when prices were falling
- and they have done so again over the last 12 months, when prices
for silver and gold have been largely stable. At the same time, the
year saw a significant increase in prices for base metals, which
are by-products of our silver and gold production processes, and
this upward trend made a positive contribution towards our overall
financial performance.
Our proven ability to perform in all price environments is
important, given the unpredictable nature of prices. This ability
is based on an effective strategy teamed with high quality
execution. Operational excellence, targeted investment and
disciplined cash management, as well as sustainable business
practices, are the hallmarks of our decade-long reputation for
achievement.
Maximising the potential of existing operations
Maximising the potential of existing operations is the first
pillar of our strategy, and we recorded a number of key
achievements during the year. Firstly, we continued the turnaround
at our flagship Fresnillo mine, which has a history that can be
traced back to the 16th Century. While the mine remains very
productive, it is nonetheless a mature operation - and there is an
inevitable downward trend in grade as the workable veins narrow and
weaken. Put simply, we have to invest in infrastructure in order to
maintain high rates of production as we go deeper and incur the
increased costs associated with greater haulage distances.
I am pleased to say that despite issues with maintenance and
contractors, performance at Fresnillo has improved year-on-year,
with an upturn in production from 15.9 moz in 2016 to 16.5 moz in
2017
At Saucito, the relatively small investments made in previous
years have consolidated the mine's position as the world's largest
silver producing mine allowing throughput to increase by a third,
albeit reducing recoveries in the short term.
We also maximised the efficiency of the Dynamic Leaching Plant
at San Julián, where the drive and skills of our people have seen
us consistently achieve 3,500 and at times over 3,800 tonnes per
day from a process that has a nominal design capacity of 3,000
tonnes per day.
In last year's letter I referred to a comprehensive review of
how IT can be the springboard for improved efficiency. This
initiative made significant progress in 2017, with several projects
now in place and delivering results. Among others, these include:
Ventilation Plus, which is now providing ventilation on demand at
San Julián and is being deployed at Saucito, Fresnillo and Ciénega;
Track Plus, which enables our teams to know the precise locations
of every resource across a mine, and which is in operation at San
Julián and Saucito; and ProxAlarm, which improves safety by
preventing collisions and other incidents involving vehicles and is
in operation at all mines.
Delivering growth through development projects
The construction of the San Julián silver and gold mine has been
a hugely important project for Fresnillo. We identified the need
for this project at the time of the IPO and it finally came to
fruition in 2017, with the completion of phase II. The flotation
plant was commissioned in July and we expect the mine to achieve an
average annual production of 14.2 moz of silver and 49.3 koz of
gold. Located on the Chihuahua / Durango border, we believe that
San Julián has the potential to become established as an entirely
new mining district.
In addition, construction of the Pyrites Plant has continued as
planned. This development project will strengthen the Company's
production profile by extracting additional quantities of silver
and gold from the historical and ongoing tailings at the Fresnillo
and Saucito mines.
Construction of the second line at the Dynamic Leaching Plant at
Herradura also continued during the year, with commissioning
expected in the first half of 2018. This plant will enable
sulphides occurring deeper in the pit to be processed more
efficiently.
Extending the growth pipeline
Our ability to fuel the pipeline has been one of our most
notable success stories over the years. While some of our peers
have neglected their exploration activities, our strategy has been
to actively expand ours - and the talented team of over 100
Fresnillo geologists has enabled us to make great strides in our
resources. From just over 1boz of silver in 2008, our resources had
more than doubled to 2.3boz by the end of 2017, supported by around
1.8m hectares of exploration mining concessions in Mexico. At the
same time, our gold resources have increased from 12moz in 2008 to
38.5moz at the end of 2017.
We have made good progress in Peru, where 350,000 hectares of
concession land have given Fresnillo the largest exploration
portfolio in the country. We have identified significant
opportunities at Pilarica and expect this to become our first
operational mine outside Mexico in the medium term. We are also set
to begin exploration in Chile, following three years of scouting
the territory, and have begun a project to evaluate opportunities
in Argentina, which shares some of Chile's geological
potential.
Advancing and enhancing the sustainability of our operations
The last of our four strategic pillars, sustainability, lies at
the heart of everything we do at Fresnillo - and nothing is more
important to the sustainability of our company than the health and
safety of our employees and contractors. Although the trend from
2011 to 2017 is in the right direction, we can never be complacent,
and sadly we have to report that we experienced one fatality during
the year.
We continued to strengthen our health and safety programmes in
2017, focusing on engaging contractors as well as our own people.
Around 70% of our workforce of 16,000 are contractors, and we are
working hard to align them fully with our health and safety culture
and expectations. A new approach piloted at Saucito and
subsequently adopted at both Fresnillo and Ciénega is already
strengthening our safety culture. Under this new approach, which we
plan to roll out across our other operations in the coming months,
our people are encouraged to report each incident within a fixed
time frame, no matter how minor and with a full description. Our
safety team then analyses the incident and identifies its root
cause, enabling us to more systematically put measures in place to
prevent any reoccurrence.
Our promise to create value through growth and returns is not
confined to our financial investors, and we were pleased to be
included in the FTSE4 Good index in 2017. We work hard to ensure
that the communities close to our operations also see a return on
their investment of time, skills and commitments. Initiatives such
as the Week of Health, Silver saves Lives and a wide range of
educational programmes have proved very successful in improving the
lives and prospects of those who depend on us or are impacted by
our operations.
Our next set of objectives
It is cause of great satisfaction to the management team that we
are on track to achieve our original production goals by the end of
the next financial year.
We are currently in the process of finalising our next set of
objectives, and these will be announced as part of our interim
results presentation in August 2018. A proven strategy applied with
consistency has been the foundation for our success to date and a
key differentiating factor between ourselves and our peers.
Despite our relative youth as a standalone company, our history
as a mining group stretches back 130 years - and we drew on all the
experience gathered across those decades to identify and establish
the principles that shaped our strategy. The business model is
sound, the balance sheet robust, and the ability to deliver results
across all price cycles has been ably demonstrated.
As we move into our second decade, we will continue to monitor
opportunities to complement organic growth with accretive mergers
and acquisitions. However, we recognise that this can be a
challenge. Most operations we evaluate from geological and
financial perspectives fall short of the rigorous criteria and
expectations we apply to Fresnillo operations.
Outlook
While we are forecasting that all our operations will perform at
their maximum levels, we nonetheless anticipate a challenging year
in 2018. Inflationary pressures are likely to increase and it is
unclear whether precious metals prices have already bottomed out,
or may drift lower. In addition, 2018 is an election year in Mexico
and this will doubtless bring an unwelcome degree of volatility to
exchange rates.
However, that said, our people have worked successfully in
similar market environments before and will undoubtedly do so
again. We expect continued growth through exploration and
development, together with increased production at San Julián,
further improvements in performance at Fresnillo, completion of the
new Dynamic Leaching Plant at Herradura and the commissioning of
the new Pyrites Plant at Saucito.
These projects will lead to increased production with associated
costs, though we will continue to seek corresponding efficiencies
from other operations. A strong balance sheet, targeted investment
and operating costs amongst the lowest in the industry, will again
be the defining characteristics of our company. In particular, I
look forward to our project at Juanicipio moving from the
exploration to the development stage, subject to Board approval in
April 2018.
We also expect our new approach to health and safety to be
rolled out to all mines, and this should lead to an improved system
that will benefit all employees and contractors.
In conclusion, I would like to thank our people, communities,
suppliers, clients and shareholders for their continued support
during the last year. Together, we face the future with cautious
confidence.
Octavio Alvídrez
Chief Executive Officer
FINANCIAL REVIEW
The Consolidated Financial Statements of Fresnillo plc are
prepared in accordance with International Financial Reporting
Standards (IFRS), as adopted by the EU. This Financial Review is
intended to convey the main factors affecting performance and to
provide a detailed analysis of the financial results in order to
enhance understanding of the Group's financial statements. All
comparisons refer to 2017 figures compared to 2016, unless
otherwise noted. The financial information and year-on-year
variations are presented in US dollars, except where indicated.
By following strict controls on cash, costs and expenses, while
adhering to our capex budgets, we have maintained a healthy cash
and other liquid funds(14) and low leverage ratio enabling us to
invest in profitable growth and deliver solid returns to
shareholder. The following report presents how we have managed our
Financial capital.
Commentary on financial performance
This has been another year of progress for Fresnillo, as we
continued our long-established reputation for creating value
through growth and returns. Gross profit and EBITDA increased
during the year by 4.9% and 2.7% respectively. We also maintained a
solid financial position, with US$896.0 million in cash and other
liquid funds([4]) as of 31 December 2017 despite paying dividends
of US$236.6 million in accordance with our policy and investing
capex of US$604.8 million to underpin our future growth.
A number of factors contributed to the increase in gross profit
and EBITDA, including the increased contribution of San Julián to
silver and zinc sales, together with higher gold and base metals
prices, which increased Adjusted revenue. These factors were partly
offset by cost pressures, higher depreciation charges and
exploration expenses. These factors, together with the sale of a
non-strategic exploration project and the effect of the revaluation
of the Mexican peso/US dollar spot exchange rate on deferred taxes,
resulted in an increase of 32.0% in Net Profit for the year.
Income statement
2017 2016 Amount Change
US$ million US$ million US$ %
Adjusted revenue(1) 2,233.2 2,045.0 188.2 9.2
Total revenue 2,093.3 1,905.5 187.8 9.9
Cost of sales (1,167.9) (1,023.4) (144.5) 14.1
Gross profit 925.4 882.1 43.3 4.9
Exploration expenses 141.1 121.2 19.9 16.4
Operating profit 709.3 676.5 32.8 4.8
EBITDA(2) 1,060.1 1,032.0 28.1 2.7
Income tax expense including
Mining right 180.7 293.3 (112.6) (38.4)
Profit for the year 560.8 425.0 135.8 32.0
Profit for the year, excluding
post-tax Silverstream effects 481.2 331.5 149.7 45.2
Basic and diluted Earnings
per share (US$/share)(3) 0.761 0.579 0.182 31.4
Basic and diluted Earnings
per share, excluding post-tax
Silverstream effects (US$/share) 0.653 0.453 0.200 44.2
(1) Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
(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 ordinary shares was
736,893,589 for 2017 and 2016. See Note 18 in the Consolidated
Financial Statements.
The Group's financial performance is largely determined by the
quality of our assets, the skills of our personnel and the
execution capabilities of management to achieve our strategic
goals. However, there are a number of macroeconomic variables that
lie beyond our control and which affect financial results. These
include:
Precious metal prices
In 2017, the average realised gold and silver prices remained
broadly stable at US$1,267.4 per ounce (2016: US$1,246.5) and
US$17.0 per ounce (2016: US$17.2), respectively. However, the
average realised lead and zinc prices increased 24.9% and 34.9%
year on year, to US$1.06 and US$1.36 per pound, respectively.
We hedged a portion of our by-product lead and zinc production
but, contrary to previous years, this did not have an effect on
revenue.
MXN/USD exchange rate
The Mexican peso/US dollar spot exchange rate at 31 December
2017 was $19.74 per US dollar, compared to $20.66 per US dollar at
31 December 2016. The 4.5% spot revaluation had a favourable
effect, primarily on deferred income taxes. This positively
compared versus the 20.1% devaluation in 2016, which resulted in a
significant adverse effect on deferred income taxes.
The average spot Mexican peso/US dollar exchange rate devalued
by 1.5%, from $18.66 per US dollar in 2016 to $18.94 per US dollar
in 2017. This resulted in a favourable effect estimated at US$4.7
million on the Group's production costs, as costs denominated in
Mexican pesos (approximately 45% of total costs) were lower when
converted to US dollars.
Cost inflation
In 2017, there was a net increase in the weighted average input
cost over the year, of 6.4%. This inflation included the positive
effect of the 1.5% average devaluation of the Mexican peso against
the US dollar.
Labour
Unionised employees received on average a 5.8% increase in wages
in Mexican pesos, and administrative employees at the mines
received a 4.5% increase; when converted to US dollars, the
weighted average labour inflation was 3.3%.
Energy
Electricity
The Group's weighted average cost of electricity increased by
28.9% from US$5.9 cents per kW in 2016 to US$7.6 cent per kW in
2017. This increase was mainly explained by the higher average
generating cost of the Comisión Federal de Electricidad (CFE), the
national utility, following the increase in the prices of natural
gas and fuel and, to a lesser extent, of imported coal.
Diesel
The weighted average cost of diesel in US dollars increased
22.2% to US$76.5 cents per litre in 2017, compared to US$62.6 cents
per litre in 2016, reflecting the price liberalisation of
fuels.
Operating materials
Year over year
change in unit
price %
Other reagents 31.1
Steel balls for milling 3.0
Lubricants 1.0
Tyres -5.2
Explosives -6.4
Sodium cyanide -17.3
Weighted average of all
operating materials -1.1
Unit prices of the majority of certain operating materials
decreased in US dollar terms. However, this was mostly offset by
the increase in the unit price of other reagents, particularly
those linked to the price of copper and zinc, reflecting the higher
metals prices. As a result, the weighted average unit prices of all
operating materials decreased by 1.1% over the year. There has been
no significant impact on the unit cost of operating materials from
the devaluation of the MXN/US dollar exchange rate as the majority
of these items are dollar denominated.
Contractors
Agreements are signed individually with each contractor company,
and include specific terms and conditions that cover not only
labour, but also operating materials, equipment and maintenance,
amongst others. Contractor costs are mainly denominated in Mexican
pesos and are an important component of our total production costs.
In 2017, increases granted to contractors, whose agreements were
due for review during the period, resulting in a weighted average
increase of 4.9% in US dollars.
Maintenance
Unit prices of spare parts for maintenance remained unchanged on
average in US dollar terms (0.4% increase).
Others
Other cost components include freight, which increased by an
estimated 12.5% in US dollars, offset by a 10.0% decrease in
insurance costs. The remaining components had an average inflation
of 0.8% in US dollars over 2016.
The effects of the above external factors, combined with the
Group's internal variables, are further described below through the
main line items of the income statement.
Revenue
Consolidated revenue (US$ millions)
2017 2016 Amount Change
US$ million US$ million US$ %
Adjusted revenue(1) 2,233.2 2,045.0 188.2 9.2
Gold, lead and zinc
hedging 0.0 1.6 (1.6) (100)
Treatment and refining
charges (139.9) (141.1) 1.2 (0.9)
Total revenue 2,093.3 1,905.5 187.8 9.9
(1) (Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.)
Total revenue of US$2,093.3 million increased by 9.9% over 2016.
This was explained by the 9.2% increase in Adjusted revenue as a
result of the increase in volumes of silver and zinc sold and
higher realised metal prices, except for silver.
Adjusted revenue(1) by metal (US$ millions)
2017 2016 Volume Price Total
Variance Variance US$
-------------------- ---------------------
US$ million % US$ million % %
------------ ------ ------------ -------
Silver 844.7 37.8 724.0 35.4 126.0 (5.4) 120.7 16.7
Gold 1,125.3 50.4 1,133.0 55.4 (26.7) 19.0 (7.7) (0.7)
Lead 101.8 4.6 82.4 4.0 (1.0) 20.5 19.4 23.5
Zinc 161.4 7.2 105.6 5.2 16.6 39.3 55.9 52.8
Total adjusted
revenues 2,233.2 100.0 2,045.0 100.0 114.8 73.4 188.2 9.2
(1 Adjusted) (revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges) (and
gold, lead and zinc hedging.)
The higher volumes of silver and zinc sold, mainly due to the
start-up of San Julián phase II and the first complete year of San
Julián phase I, resulted in a positive impact on revenue of
US$114.8 million, which represented 61.0% of the US$188.2 million
increase in Adjusted revenue. The remaining 39.0%, or US$73.4
million, was explained by the benefit of higher gold, lead and zinc
prices.
As expected, the contribution of San Julián changed the relative
proportion of Adjusted revenue, with silver revenue representing
38% of total Adjusted revenue in 2017 compared to 35% in 2016. Gold
contribution to Adjusted revenue decreased from 55% in 2016 to 50%
in 2017 as a result of the expected decrease in volumes of gold
sold. The contribution of by-product lead and zinc to the Group's
Adjusted revenue increased from 9% in 2016 to 12% in 2017, due to
higher lead and zinc prices and the increased volumes of zinc sold,
primarily from the San Julián and Fresnillo mines.
Herradura remained the main contributor to Adjusted revenue,
reflecting a further decrease in gold inventories during the year.
Saucito continued to be the second largest contributor, although
its contribution declined from 26% in 2016 to 23% in 2017, in line
with a 4.5% decrease in Adjusted revenue. Fresnillo's contribution
remained stable at 19%, notwithstanding the 10.0% increase in total
Group Adjusted revenue. San Julián (phase I and phase II)
contributed 13% to the Group's Adjusted revenue.
The relative contribution to silver Adjusted revenue changed
over the year with San Julián (phase I and II) representing 18.6%,
while the contributions of Saucito, Fresnillo and Ciénega decreased
as expected, reflecting an expanded silver asset base. Similarly,
contribution to gold revenue was modified with the San Julián mine
representing 9.3% of total Adjusted gold revenue.
Adjusted revenue by metal
2017 2016
Gold 50.4% 55.4%
Silver 37.8% 35.4%
Zinc 7.2% 5.2%
Lead 4.6% 4.0%
TOTAL 100% 100%
Adjusted revenue by mine
2017 2016
Herradura 606.8 656.1
Saucito 504.2 528.0
Fresnillo 421.3 382.7
Noche Buena 215.5 225.8
San Julián
(phase I) 202.3 67.4
Ciénega 198.3 185.0
San Julián 84.8 -
(phase II)
TOTAL 2,233.2 2,045.0
Volumes of
metal sold
2017 % participation 2016 % participation % Change
of each mine of each mine
Silver (koz)
Saucito 19,608 39.4 20,386 48.5 (3.8)
Fresnillo 15,145 30.4 14,552 34.6 4.1
San Julián
(phase I) 5,777 11.6 1,945 4.6 197.0
San Julián
(phase II) 3,853 7.7 - - N/A
Ciénega 4,815 9.7 4,482 10.7 7.4
Herradura 570 1.1 646 1.5 (11.8)
Noche Buena 7 0.0 17 0.0 (61.1)
TOTAL SILVER
(koz) 49,775 100 42,028 100 18.4
----------------- ------- ---------------- ------- ---------------- ---------
Gold (koz)
Herradura 501 56.5 549 60.4 (8.7)
Noche Buena 140 15.8 148 16.3 (5.0)
San Julián
(phase I) 81 9.2 30 3.3 169.7
Saucito 64 7.2 78 8.6 (18.4)
Ciénega 67 7.5 67 7.4 0.3
Fresnillo 33 3.8 37 4.1 (9.7)
San Julián
(phase II) 1 0.1 - - N/A
TOTAL GOLD
(koz) 888 100 909 100 (2.3)
----------------- ------- ---------------- ------- ---------------- ---------
Lead (mt)
Fresnillo 18,743 42.8 19,618 44.7 (4.5)
Saucito 16,081 36.7 19,171 43.6 (16.1)
Ciénega 5,828 13.3 5,138 11.7 13.4
San Julián
(phase II) 3,183 7.3 - - N/A
TOTAL LEAD
(mt) 43,834 100 43,927 100 (0.2)
----------------- ------- ---------------- ------- ---------------- ---------
Zinc (mt)
Fresnillo 25,442 46.6 21,828 45.8 16.6
Saucito 16,815 30.8 19,551 41.0 (14.0)
San Julián
(phase II) 6,386 11.7 - - N/A
Ciénega 5,950 10.9 6,259 13.1 (4.9)
TOTAL ZINC
(mt) 54,594 100 47,638 100 14.6
----------------- ------- ---------------- ------- ---------------- ---------
Hedging
In 2017 we entered into a series of derivative contracts to
hedge part of our lead and zinc by-product production through
collar structures. These contracts will start to mature in 2018. As
no hedging structures expired in 2017, there was no effect on
revenue. The chart below illustrates the outstanding hedging
structures as of 31 December 2017.
Concept 2018
---------------------------- ---------------
Zinc* Lead*
---------------------------- ------- ------
Weighted Floor (US$/tonne) 2,591 2,370
---------------------------- ------- ------
Weighted Cap (US$/tonne) 3,716 2,735
---------------------------- ------- ------
Total outstanding volume
(tonne) 21,168 5,760
---------------------------- ------- ------
*Monthly settlements through December 2018
In the second half of 2014, Fresnillo plc initiated a one-off
hedging programme to protect the value of the investment made in
the Penmont acquisition. The hedging programme was executed for a
total volume of 1,559,689 oz of gold with monthly maturities until
December 2019.
The table below illustrates the expired structures and the
outstanding hedged position as of 31 December 2017.
Concept 2017 2016 2015 2014 As of 31 December(*)
2017
------------------------- -------- -------- ---------- ------- ---------------------
Weighted floor (US$/oz) 1,100 1,100 1,100 1,100 1,100
------------------------- -------- -------- ---------- ------- ---------------------
Weighted cap (US$/oz) 1,424 1,438 1,431 1,440 1,423.46
------------------------- -------- -------- ---------- ------- ---------------------
Expired volume (oz) 324,780 220,152 266,760 35,413
------------------------- -------- -------- ---------- -------
Gain recognised in
income -- 48,158 1,023,580 --
------------------------- -------- -------- ---------- ------- ---------------------
Total outstanding
volume (oz) 712,584
------------------------- -------- -------- ---------- ------- ---------------------
*Monthly settlements through December 2019
Fresnillo plc's hedging policy remained unchanged for the
remainder of the portfolio, providing shareholders with full
exposure to gold and silver prices.
Treatment and refining charges
Treatment and refining charges([5]) are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and
zinc concentrate decreased in dollar terms by 18.8% and 17.8%
respectively, compared to 2016. However, this was partly offset by
the 2.0% increase in silver refining charges and the increase in
volumes of zinc concentrates with high silver contents shipped from
Fresnillo and San Julián (phase II) to Met-Mex, as well as the
increased volumes of precipitates sold from San Julián (phase I).
As a result, treatment and refining charges set out in the income
statement decreased by only 0.8% over 2016.
Cost of sales
2017 2016 Amount Change
US$ million US$ million US$ %
Adjusted production
costs(4) 769.2 618.9 150.3 24.3
Depreciation 367.6 346.5 21.1 6.1
Profit Sharing 16.5 14.7 1.8 12.0
Change in work in
progress and others 16.9 60.2 (43.3) (72.0)
Reversal of inventories
write-down and others (2.3) (19.8) 17.5 (88.4)
Hedging 0.0 2.8 (2.8) (100)
Cost of sales 1,167.9 1,023.4 144.5 14.1
(4) (Adjusted production costs is calculated as total production
costs less depreciation, profit sharing and the effects of exchange
rate hedging)
Cost of sales increased 14.1% to US$1,167.9 million in 2017. The
US$144.5 million increase is explained by the following combination
of factors:
-- An increase in Adjusted production costs (US$150.3 million).
This was primarily due to: i) additional Adjusted production costs
associated with the increased production (US$94.7 million); ii)
cost inflation (US$40.2 million); iii) increases in the use of
consumables, services, maintenance and others (US$17.9 million);
and iv) the lower volume of ore processed from development works at
Saucito (US$12.7 million). The increase was partly offset by the
decrease in development works charged to production costs (US$10.5
million) and the positive effect of the 1.5% devaluation of the
average Mexican peso/US dollar spot exchange rate (US$4.7
million).
-- Depreciation (US$21.1 million). This is due to the additional
asset base at San Julián, mitigated by lower depreciation at the
other operating mines.
-- Reversal of inventories write-down in 2016 and others (US$17.5 million).
-- Profit sharing increased slightly by US$1.8 million.
These negative effects were partly offset by:
-- Variation in change in work in progress (-US$43.3 million).
This reflected the further decrease in inventories on the leaching
pads at Herradura, albeit not of the same magnitude as the decrease
in 2016.
-- Mexican peso/US dollar hedging (-US$2.8 million). With the
Mexican peso exchange rate hedging programme suspended, there was
no effect in the income statement in 2017, compared to the US$2.8
million loss recorded in 2016.
Cost per tonne, cash cost per ounce and all-in sustaining cost
(AISC)
Cost per tonne is a key indicator to measure the effects of
mining inflation and cost control performance at each mine. This
indicator is calculated as total production costs, plus ordinary
mining rights, less depreciation, profit sharing and exchange rate
hedging effects, divided by total tonnage processed. We have
included cost per tonne hauled/moved as we believe it is a useful
indicator to thoroughly analyse cost performance for the open pit
mines.
Cost per tonne
-----------------------------------------------------------------
2017 2016 Change
%
----------------- --------------------- ------ ------ -------
Fresnillo US$/tonne milled 47.5 43.9 8.2
Saucito US$/tonne milled 47.6 36.8 29.3
Ciénega US$/tonne milled 66.5 55.5 19.9
San Julián
(phase I) US$/tonne milled 52.1 48.3* 7.9
San Julián US$/tonne milled 31.9* - N/A
(phase II)
Herradura US$/tonne deposited 8.0 7.7 3.9
Herradura US$/tonne hauled 2.6 2.3 13.0
Noche Buena US$/tonne deposited 7.5 7.5 -
Noche Buena US$/tonne hauled 1.7 1.6 6.3
*Indicator may not be representative as it corresponds to the
start-up period, when a significant volume of ore from stock pile
is processed.
Cash cost per ounce, calculated as total cash cost (cost of
sales plus treatment and refining charges, less depreciation) less
revenue from by-products divided by the silver or gold ounces sold,
when compared to the corresponding metal price, is an indicator of
the ability of the mine to cover its production costs.
Cash cost per ounce
2017 2016 Change
%
US$ per silver
Fresnillo ounce 0.7 2.1 (66.2)
US$ per silver
Saucito ounce 1.5 (0.4) N/A
US$ per gold
Ciénega ounce (163.7) (217.2) N/A
San Julián US$ per silver
(phase I) ounce (4.3) (7.8)* N/A
San Julián US$ per silver 3.9* - N/A
(phase II) ounce
US$ per gold
Herradura ounce 492.9 470.7 4.7
US$ per gold
Noche Buena ounce 793.5 765.9 3.6
*Indicator may not be representative as it corresponds to the
start-up period, when a significant volume of ore from stock pile
is processed.
The particular variations in cash cost for each mine are
explained as follows:
Fresnillo: US$0.71/oz (2017) vs. US$2.09/oz (2016), (-66.3%)
The decrease in cash cost per ounce is mainly explained by: the
higher by-product credits per silver ounce, due to the increase in
zinc volumes sold, and higher lead and zinc prices (-US$1.60/oz);
lower treatment and refining charges (-US$0.26/oz); and increase in
ore grade (-US$0.07/oz). This was partly offset by higher cost per
tonne (+US$0.54/oz).
Saucito: US$1.50/oz (2017) vs. -US$0.39/oz (2016), (N/A)
The increase was driven by: the higher cost per tonne
(+US$1.69/oz); the expected lower silver grade (+US$0.53/oz); and
lower by-product credits per ounce of silver resulting from the
decrease in volume of gold sold (+US$0.08/oz). These adverse
effects were partly offset by lower treatment and refining charges
(-US$0.39/oz) and lower profit sharing (-US$0.03/oz).
Ciénega: -US$163.74/oz (2017) vs. -US$217.19/oz (2016),
(-24.6%)
The increase in cash cost was primarily due to: the higher cost
per tonne (+US$225.41/oz); and the expected decrease in gold grade
(+US$23.81/oz). These unfavourable factors were partly offset by
higher by-product credits per ounce of gold, due to the increased
volumes of silver and lead sold, and higher lead and zinc prices
(-US$179.45/oz); lower treatment and refining charges
(-US$13.40/oz); and lower profit sharing (-US$2.92/oz).
Herradura: US$492.86/oz (2016) vs. US$470.72/oz (2016),
(+4.7%)
The increase in cash cost resulted from: the higher cost per
tonne (+US$29.81/oz); the lower gold grade (+US$25.95/oz); higher
profit sharing (+US$0.66/oz); and lower by-product credits per gold
ounce, due to the decreased volume of silver sold at a lower price
(+US$0.61/oz). These adverse effects were offset by: a favourable
inventory valuation effect, as ounces with a higher cost of
production in the current period are mixed with the initial lower
cost of inventory affecting cost of sales (-US$34.76/oz); and lower
treatment and refining charges (-US$0.13/oz).
Noche Buena: US$793.48/oz (2017) vs. US$765.90/oz (2016),
(+3.6%)
The increase in cash cost per ounce was mainly due to: the
favourable effect of the reversal of the write down of gold
inventories on the leaching pads in 2016, which did not occur in
2017 (+US$37.59/oz); and lower by-product credits (+US$2.22/oz).
This was partly offset by the higher ore grade (-US$6.07/oz) and
others (-US$6.17/oz).
San Julián phase I: as operations commenced in August 2016, AISC
for 2016 is not considered representative as it corresponds to the
start-up period, when a significant volume of ore from the stock
pile is processed.
San Julián phase II: as operations commenced in July 2017, there
are no comparable year-on-year figures.
In addition to the traditional cash cost described above, the
Group is reporting all-in sustaining costs (AISC), in accordance
with the guidelines issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus
on-site general, corporate and administrative costs, community
costs related to current operations, capitalised stripping and
underground mine development, sustaining capital expenditures and
remediation expenses.
We consider all-in sustaining costs to be a reasonable indicator
of a mine's ability to generate free cash flow when compared with
the corresponding metal price. We also believe it is a means to
monitor not only current production costs, but also sustaining
costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
All-in sustaining cost
2017 2016 Change
%
US$ per silver
Fresnillo ounce 8.20 7.82 5.0
US$ per silver
Saucito ounce 7.09 4.77 48.6
US$ per gold
Ciénega ounce 691.43 428.00 61.6
San Julián US$ per silver
(phase I) ounce 0.83 (7.06)* (111.7)
San Julián US$ per silver
(phase II) ounce 7.88*
US$ per gold
Herradura ounce 807.66 731.69 10.4
US$ per gold
Noche Buena ounce 870.05 823.04 5.7
*Indicator may not be representative as it corresponds to the
start-up period, when a significant volume of ore from stock pile
is processed.
Fresnillo: Higher, mainly due to higher sustaining capex and an
increase in capitalised mine development, partially offset by a
decrease in cash cost.
Saucito: Higher, as a result of the higher cash cost, an
increase in sustaining capex and higher capitalised mine
development.
Ciénega: Higher, primarily explained by the higher cash cost, an
increase in sustaining capex and higher capitalised mine
development.
Herradura: Higher, mainly due to an increase in capitalised
stripping costs; and to a lesser extent, the higher cash cost
detailed above, partially offset by lower sustaining capex.
Noche Buena: Higher, driven by the higher cash cost detailed
above.
San Julián:
San Julián (phase I): as operations commenced in August 2016,
AISC for 2016 is not considered representative as it corresponds to
the start-up period, when a significant volume of ore from the
stock pile is processed.
San Julián (phase II): as operations commenced in July 2017,
there are no comparable year-on-year figures.
Gross profit
Gross profit, excluding hedging gains and losses, is a key
financial indicator of profitability at each business unit and the
Fresnillo Group as a whole.
Contribution by mine to consolidated gross profit, excluding
hedging gains and losses
2017 2016 Change
US$ % US$ % Amount %
million million
----------------------- --------- ----- --------- ----- ------- -------
Herradura 292.8 32.0 309.3 35.7 (16.5) (5.3)
Saucito 228.2 24.9 269.4 31.1 (41.2) (15.3)
Fresnillo 191.6 20.9 158.6 18.3 33.0 20.8
San Julián 93.1 10.1 26.3 3.0 66.8 254.0
Noche Buena 56.9 6.2 54.1 6.2 2.8 5.2
Ciénega 53.8 5.9 48.2 5.6 5.6 11.6
Total for operating
mines 916.4 100 865.9 100 50.5 5.8
----------------------- --------- ----- --------- ----- ------- -------
MXN/USD exchange rate
hedging (losses) and
gains 0.0 -2.8 2.8 (100)
Metal hedging and
other subsidiaries 9.0 19.0 (10.0) (52.6)
----------------------- --------- ----- --------- ----- ------- -------
Total Fresnillo plc 925.4 882.1 43.3 4.9
----------------------- --------- ----- --------- ----- ------- -------
Total gross profit, net of hedging gains and losses, increased
by 4.9% to US$925.4 million in 2017.
The US$43.3 million increase in gross profit was mainly
explained by: i) the higher profits associated with increased
production of US$142.9 million; ii) the US$72.3 million estimated
benefit of the increase in metal prices; and iii) the US$4.7
million favourable effect of the Mexican peso/US dollar exchange
rate devaluation. These factors were partly offset by: i) the lower
ore grades mainly at Saucito and Herradura, which had an estimated
adverse impact of US$88.1 million; ii) cost inflation estimated at
US$40.2 million; and others of US$48.3 million.
Herradura and Saucito remained the largest contributors to the
Group's consolidated gross profit, albeit with a decrease in their
gross profit when compared to 2016. Gross profit at the Fresnillo
mine increased by 20.8% over 2016, while the mine's contribution to
the Group's total gross profit increased to 20.9%. San Julián was
the fourth largest contributor, providing 10.1% of total gross
profit, while Noche Buena and Ciénega's share of the Group's total
gross profit remained broadly unchanged.
Administrative expenses
Administrative expenses increased 22.9% from US$59.1 million to
US$72.7 million, due mainly to additional administrative personnel
hired to service a larger number of mines and projects and an
increase in services provided by third parties (advisors,
consultants and service providers). Furthermore, increased
administrative services provided by Servicios Industriales Peñoles,
S.A.B de C.V. in relation to San Julián (phase I and phase II) also
contributed to the increase in administrative expenses during the
year.
Exploration expenses
Business unit / project Exploration Exploration Capitalised Capitalised
(US$ millions) expenses expenses expenses expenses
2017 2016 2017 2016
Ciénega 10.8 14.0
Fresnillo 15.8 8.0
Herradura 19.1 13.6
Saucito 11.7 9.6
Noche Buena 6.1 1.3
San Ramón 4.4 4.3
San Julián 8.4 4.4
Orisyvo 1.9 2.2 0.0 0.2
Centauro Deep 2.7 3.2 0.1 1.0
Guanajuato 7.9 3.9 0.8 0.6
Juanicipio 0.0 0.0 2.3 14.6
Others 52.3 56.7 1.0 0.3
TOTAL 141.1 121.2 4.2 16.7
Exploration expenses increased by 16.4% to US$141.1 million in
2017, due to intensified exploration activities, mainly around our
mining districts, and advanced exploration projects. An additional
US$4.2 million was capitalised, mainly relating to exploration
expenses at the Juanicipio project, and to a lesser extent at
Guanajuato. As a result, risk capital invested in exploration
totalled US$145.3 million in 2017, a 5.4% increase over 2016. In
2018, total invested in exploration is expected to be approximately
US$200 million, of which US$8 million is estimated to be
capitalised.
EBITDA
2017 2016 Amount Change
US$ million US$ million %
Gross Profit 925.4 882.1 43.3 4.9
+ Depreciation 367.6 346.5 21.1 6.1
- Administrative
expenses (72.7) (59.1) (13.5) 22.8
- Exploration expenses (141.1) (121.2) (19.9) 16.4
- Selling expenses (19.1) (16.3) (2.8) 17.4
EBITDA 1,060.1 1,032.0 28.0 2.7
EBITDA margin 50.6 54.2
EBITDA is a gauge of the Group's financial performance and a key
indicator to measure debt capacity. It is calculated as gross
profit plus depreciation, less administrative, selling and
exploration expenses. In 2017, EBITDA increased 2.7% to US$1,060.1
million mainly due to the higher revenue. This was partly offset by
the higher adjusted production costs, exploration and
administrative expenses. However, EBITDA margin expressed as a
percentage of revenue decreased, from 54.2% in 2016 to 50.6% in
2017.
Other income and expenses
In 2017, other income and expenses of US$16.8 million was
recognised in the income statement, mainly resulting from the sale
of non-strategic mining claims to Argonaut Gold Inc around its
Castillo mine. This compares favourably against the US$9.0 million
expense recorded in 2016, which included disposals of fixed assets,
remediation works and costs incurred in the maintenance of closed
mines.
Silverstream effects
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The revaluation of the
Silverstream contract generated a US$70.3 million non-cash gain
mainly as a result of converting resources into reserves at Sabinas
and the higher forward price of silver. In addition, a US$43.3
million non-cash gain was generated by: the unwinding of the
discounted values; and the difference between payments (volume and
price) actually received and accrued in 2017 and payments estimated
in the valuation model as at 31 December 2016. The total effect
recorded in the 2017 income statement was a gain of US$113.7
million, which adversely compares to the US$133.5 million gain
registered in 2016.
Since the IPO, cumulative cash received has been US$593.0
million, while total non-cash revaluation gains of US$797.4 million
have been taken to the income statement. The Group expects that
further unrealised gains or losses will be taken to the income
statement in accordance with silver price cyclicality or changes in
the variables considered in valuing this contract. Further
information related to the Silverstream contract is provided in the
Balance Sheet section below and in notes 14 and 30 to the
Consolidated Financial Statements.
Finance costs and income
Finance costs and income in 2017 rose by 3.6%, from US$32.2
million to US$34.0 million, mainly due to the decrease in borrowing
costs capitalised in 2017 compared to 2016.
In addition, a US$41.1 million non-cash finance loss was
generated by the mark-to-market time value of the outstanding gold
hedging programme which was put in place to protect the investment
made in the acquisition of the 44% stake of Newmont in Penmont in
2014.
Foreign exchange
A foreign exchange loss of US$6.4 million was recorded as a
result of the realised transactions in the year and the positive
effect of the 4.5% spot revaluation of the Mexican peso against the
US dollar on the value of peso-denominated net monetary assets.
This compared favourably against the US$18.4 million foreign
exchange loss recognised in 2016.
We also enter into certain exchange rate derivative instruments
as part of a programme to manage our exposure to foreign exchange
risk associated with the purchase of equipment denominated in Euro
(EUR), Swedish Krona (SEK) and Canadian Dollar (CAD). At the end of
the year, the total EUR, SEK and CAD outstanding net forward
position was EUR 8.79 million, CAD 0.76 million and SEK 32.06
million with maturity dates from March through September 2018. The
volume that expired in 2017 was EUR 9.23 million with a weighted
average strike of 1.1368 USD/EUR, and SEK 15.31 million with a
weighted average strike of 8.43 SEK/USD, which has generated a gain
of US$6,532 and US$55,119 respectively, both being recorded in the
income statement.
Taxation
Corporate income tax expense decreased from US$260.0 million in
2016 to US$153.5 million in 2017, despite the 3.2% increase in
profit before income tax. This decrease resulted mainly from the
effect of the 4.5% revaluation of the Mexican peso/US dollar spot
exchange rate in 2017 versus the 20.1% devaluation in 2016 on the
tax value of assets and liabilities; together with the impact of
the higher inflation rate (6.7% in 2017 vs 3.4% in 2016) on the
inflationary uplift of the tax base of assets and liabilities.
The effective tax rate, excluding the special mining rights, was
20.7%, which was below the 30% statutory tax rate. This was mainly
due to the tax credit related to the special tax on diesel, the
inflationary uplift of the assets, liabilities and tax losses, and
the revaluation of the Mexican peso against the US dollar, which
impacted the carrying amount of assets and liabilities (denominated
in US dollars) and their tax bases (denominated in Mexican pesos)
(see Note 10 to the Financial Statements). Including the effect of
the special mining rights, the effective tax rate was 24.4% in
2017.
Profit for the year
Profit for the year increased from US$425 million to US$560.8
million, while profit attributable to equity shareholders of the
Group increased to US$560.6 million, up from US$427.0 million in
2016.
Excluding the effects of the Silverstream Contract, profit for
the year increased from US$331.5 million to US$481.2 million.
Similarly, profit attributable to equity shareholders of the Group,
excluding the Silverstream effects, increased to US$481.0 million,
up from US$333.5 million.
Cash flow
A summary of the key items from the cash flow statement is set
out below:
2017 2016 Amount Change
US$ million US$ million US$ %
Cash generated by operations
before changes in working capital 1,073.7 1,023.3 50.4 4.9
(Increase)/decrease in working
capital (2.9) (10.6) 7.7 72.6
Taxes and employee profit sharing
paid (309.3) (114.8) (194.5) 169.4
Net cash from operating activities 761.5 898.0 136.5 (15.2)
Silverstream Contract 43.3 47.6 (4.2) (8.9)
Purchase of property, plant
& equipment (604.8) (434.1) (170.7) 39.3
Dividends paid to shareholders
of the Company (236.6) (88.2) (148.3) 168.2
Net interest (paid) (21.0) (21.1) 0.1 (0.5)
Net increase in cash during
the period after foreign exchange
differences (16.0) 411.8 (427.8) N/A
Cash and other liquid funds
at 31 December* 896.0 912.0 (16.0) (1.7)
* Cash and other liquid funds are disclosed in Note 31(c) to the
financial statements.
Cash generated by operations before changes in working capital
increased by 4.9% to US$1,073.7 million, mainly as a result of the
higher profits generated in the year. Working capital increased
US$2.9 million mainly due to an increase in trade and other
receivables resulting from the higher volumes sold and the higher
gold, lead and zinc prices (US$44.4 million); and an increase in
prepayments and other assets (US$0.7 million). This increase in
working capital was partly offset by a decrease in inventories
(US$5.7 million) and an increase in trade and other payables
(US$36.4 million).
Taxes and employee profit sharing paid increased 169.4% over
2016 to US$309.3 million.
As a result of the above factors, net cash from operating
activities decreased 15.2% from US$898.0 million in 2016 to
US$761.5 million in 2017.
Other sources of cash were the proceeds of the Silverstream
Contract of US$43.3 million, proceeds from the sale of
non-strategic assets of US$26.1 million and capital contributions
from minority shareholders in subsidiaries of US$18.9 million.
The above funds were mainly used to purchase property, plant and
equipment for a total of US$604.8 million, a 39.3% increase over
2016. Capital expenditures for 2017 are further described
below:
Purchase of property, plant and equipment
2017
US$ million
Fresnillo mine 111.7 Mine development and purchase of in-mine
equipment and installation of a new
zinc thickener and vertical conveyor
band
Saucito mine 133.7 Development, replacement of in-mine
equipment, construction of the Pyrites
Plant and deepening of the Jarillas
shaft
Herradura mine 153.2 Stripping activities, sustaining capex
and construction of second line of
DLP
San Julián 79.1 Completion of San Julián phase
II
Ciénega mine 46.5 Development, replacement of in-mine
equipment, construction of tailings
dam and purchase of land
Noche Buena 18.7 Mining works and sustaining capex
Juanicipio project 34.1 Exploration expenditure and construction
of ramps
Other 27.7
Total purchase
of property, plant
and equip. 604.8
Dividends paid to shareholders of the Group in 2017 totalled
US$236.6 million, a 168.2% increase from 2016, in line with our
dividend policy that includes a consideration of profits generated
in the period. The 2017 payment included the final 2016 dividend of
US$158.4 million and the 2017 interim dividend paid in September of
US$78.2 million.
Net interest of US$21.0 million was paid, mainly reflecting the
interest paid in relation with the issuance of the US$800 million
principal amount of 5.500% Senior Notes.
The sources and uses of funds described above resulted in a
decrease in net cash of US$16.0 million (net decrease in cash and
cash equivalents), which combined with the US$912.0 million balance
at the beginning of the year resulted in cash, cash equivalents and
short-term investments of US$896.0 million at the end of 2017.
Balance sheet
Fresnillo plc continued to maintain a solid financial position
with cash and other liquid funds([6]) of US$896.0 million as of 31
December 2017. This represented a 1.7% decrease versus December
2016, as explained above.
Inventories decreased 2.1% to US$271.1 million mainly as a
result of the further decrease in inventories of gold deposited on
the leaching pads at Herradura.
Trade and other receivables increased 40.3% to US$402.1 million
as a result of the increase in income tax recoverable, higher metal
volumes sold which increased receivables, and an increase in value
added tax receivable.
The change in the value of the Silverstream derivative from
US$467.5 million at the beginning of the year to US$538.9 million
as of 31 December 2017 reflects proceeds of US$42.3 million
corresponding to 2017, (US$37.4 million in cash and US$4.9 million
in receivables) and the Silverstream revaluation effect in the
income statement of US$113.7 million.
The net book value of property, plant and equipment was
US$2,448.6 million at year end, representing a 12.3% increase over
2016. The US$268.4 million increase was mainly due to: the larger
asset base following the commissioning of San Julián; capitalised
development works; construction of the Pyrites Plant and the second
DLP line; purchase of additional in-mine equipment; and the
construction of leaching pads at Herradura and Noche Buena.
The Group's total equity was US$3,066.6 million as of 31
December 2017, a 12.9% increase over 2016. This was mainly
explained by the increase in retained earnings, reflecting the 2016
profit, lower dividends paid during the year, and the net
unrealised gains on cash flow hedges.
Dividends
Based on the Group's 2017 performance, the Directors have
recommended a final dividend of 29.8 US cents per Ordinary Share,
which will be paid on 4(th) June 2018 to shareholders on the
register on 27th April 2018. The dividend will be paid in UK pounds
sterling unless shareholders elect to be paid in US dollars. This
is in addition to the interim dividend of 10.6 US cents per share
totalling U$78.1 million.
RISK MANAGEMENT FRAMEWORK
Our approach to risk management is based on a framework that
effectively embeds a culture of risk awareness across the Group.
This framework enables us to identify, assess, prioritise and
manage risks in order to deliver the value creation objectives
defined in our business model.
Risk management system
Our risk management system is based on risk identification,
assessment, prioritisation, mitigation and monitoring processes,
which are continually evaluated, improved and enhanced in line with
best practice.
In addition to our established risk management activities, our
executives, operations managers, the controllership group, HSECR
managers and exploration managers regularly engage in strengthening
the effectiveness of our current controls. This supports the Board
in its responsibilities of monitoring and reviewing risk management
and the internal control systems.
2017 risk assessment
As part of our 2017 risk assessment exercise, a team of 142
people worked together to evaluate 108 risks across all our
operations, advanced projects, exploration offices, and support and
corporate areas. We identified and subsequently added a new risk
during the year which reflected the specific circumstances related
to the "Increase in the frequency of the reviews by the tax
authorities with special focus on the mining industry".
We narrowed down our 108 risks into major risks which are
monitored by executive management and the Audit Committee. We then
further consolidated these into 12 principal risks which are
closely monitored by the Board of Directors. This new risk is
grouped within the "Potential actions by the Government" principal
risk.
As part of our bottom-up process, each business unit head
determined the perceived level of risk for their individual unit.
Executive management then reviewed and challenged each perceived
risk level, and compared it to Fresnillo plc's risk universe as a
whole. The results of this exercise were used as an additional
input to identify the Group's principal risks. We conducted the
same risk analysis on advanced projects, detailing the specific
risks faced by each project according to their unique
characteristics and conditions. The risk heat map for each business
unit and development project is included in the Review of
Operations.
In 2017, cyber security risk was elevated to a principal risk
due to its increased relevance within the mining industry. As the
mining industry continues to go through a digital transformation,
with greater reliance on automated operational systems, more
sophisticated and coordinated attacks are being launched by a broad
range of groups looking to exploit vulnerabilities.
Statement of Directors' responsibilities
The Directors are responsible for preparing the annual report
and the Group and parent company financial statements in accordance
with applicable United Kingdom law and those International
Financial Reporting Standards (IFRS) adopted by the European
Union.
The Directors are required to prepare financial statements for
each financial year which present a true and fair view of the
financial position of the Company and of the Group and the
financial performance and cash flows of the Company and of the
Group for that period. In preparing those financial statements, the
Directors are required to:
-- select suitable accounting policies in accordance with IAS 8:
'Accounting Policies, Changes in Accounting Estimates and Errors'
and then apply them consistently;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Company and of the Group's financial position and
financial performance;
-- state that the Company and the Group has complied with IFRS,
subject to any material departures disclosed and explained in the
financial statements; and
-- prepare the accounts on a going concern basis unless, having
assessed the ability of the Company and the Group to continue as a
going concern, management either intends to liquidate the entity or
to cease trading, or have no realistic alternative but to do
so.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and enable them
to ensure that the financial statements comply with the Companies
Acts 2006 and Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable UK law and regulations the Directors are
responsible for the preparation of a Directors' report, Directors'
remuneration report and corporate governance report that comply
with that law and regulations. In addition the Directors are
responsible for the maintenance and integrity of the corporate and
financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Neither the Company nor the Directors accept any liability to
any person in relation to the annual financial report except to the
extent that such liability could arise under English law.
Accordingly, any liability to a person who has demonstrated
reliance on any untrue or misleading statement or omission shall be
determined in accordance with section 90A and schedule 10A of the
Financial Services and Markets Act 2000.
In accordance with provision C.1.1 of the UK Corporate
Governance Code, the Directors consider that the Annual Report and
Accounts, taken as a whole, is fair, balanced and understandable
and provides information to enable shareholders to assess the
Company's performance, business model and strategy.
Responsibility statement of the Directors in respect of the
annual report and accounts
I confirm on behalf of the Board that to the best of its
knowledge:
a) the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the assets,
liabilities, financial position and profit and loss of the Company
and the undertakings included in the consolidation taken as a
whole; and
b) the management report (encompassed within the 'Overview',
'Strategic report', 'Performance' and 'Governance' sections)
includes a fair review of the development and performance of the
business, and the position of the Company and the undertakings
included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they
face.
Signed for and on behalf of the Board
Charles Jacobs
Senior Independent Director
26 February 2018
Consolidated Income Statement
Year ended 31 December
Year ended 31 December Year ended 31 December
2017 2016
------------------- ----- ------------------------------------------- -------------------------------------------
Notes US$ thousands US$ thousands
------------------- ----- ------------------------------------------- -------------------------------------------
Pre-Silverstream Silverstream Pre-Silverstream Silverstream
revaluation revaluation revaluation revaluation
effect effect Total effect effect Total
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Continuing
operations:
Revenues 4 2,093,308 2,093,308 1,905,503 1,905,503
Cost of sales 5 (1,167,903) (1,167,903) (1,023,388) (1,023,388)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Gross profit 925,405 925,405 882,115 882,115
Administrative
expenses (72,710) (72,710) (59,157) (59,157)
Exploration
expenses 6 (141,108) (141,108) (121,182) (121,182)
Selling expenses (19,110) (19,110) (16,277) (16,277)
Other operating
income 8 28,203 28,203 1,398 1,398
Other operating
expenses 8 (11,371) (11,371) (10,442) (10,442)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
net
finance costs and
income
tax 709,309 709,309 676,455 676,455
Finance income 9 14,576 14,576 6,958 6,958
Finance costs 9 (89,653) (89,653) (80,323) (80,323)
Revaluation effects
of
Silverstream
contract 14 - 113,656 113,656 - 133,528 133,528
Foreign exchange
loss (6,399) (6,399) (18,378) (18,378)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
income
tax 627,833 113,656 741,489 584,712 133,528 718,240
Corporate income
tax 10 (119,365) (34,097) (153,462) (219,808) (40,058) (259,866)
Special mining
right 10 (27,220) (27,220) (33,412) (33,412)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Income tax expense 10 (146,585) (34,097) (180,682) (253,220) (40,058) (293,278)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit for the year
from
continuing
operations 481,248 79,559 560,807 331,492 93,470 424,962
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Attributable to:
Equity shareholders
of
the Company 481,019 79,559 560,578 333,516 93,470 426,986
Non-controlling
interest 229 229 (2,024) (2,024)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
481,248 79,559 560,807 331,492 93,470 424,962
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Earnings per share:
(US$)
Basic and diluted
earnings
per Ordinary Share
from
continuing
operations 11 - 0.761 - 0.579
Adjusted earnings
per
share: (US$)
Adjusted basic and
diluted
earnings per
Ordinary
Share from
continuing
operations 11 0.653 - 0.453 -
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31
December
-------------------------------------------------------- ----- ------------------------------
2017 2016
Notes US$ thousands US$ thousands
-------------------------------------------------------- ----- -------------- --------------
Profit for the year 560,807 424,962
Other comprehensive income/(expense)
Items that may be reclassified subsequently to
profit or loss:
Losses on cash flow hedges recycled to income statement - 1,184
Income tax effect 10 - (355)
Changes in the fair value of cash flow hedges - (52,918)
Income tax effect 10 - 15,875
-------------------------------------------------------- ----- -------------- --------------
Net effect of cash flow hedges - (36,214)
Changes in the fair value of available-for-sale
financial assets 13 8,808 44,729
Income tax effect 13 (2,642) (13,418)
Impairment of available-for-sale financial assets
taken to income during the year 36 -
Income tax effect 10 (11) -
-------------------------------------------------------- ----- -------------- --------------
Net effect of available-for-sale financial assets 6,191 31,311
Foreign currency translation 118 3
-------------------------------------------------------- ----- -------------- --------------
Net other comprehensive income/(expense) that may
be reclassified subsequently to profit or loss: 6,309 (4,900)
-------------------------------------------------------- ----- -------------- --------------
Items that will not be reclassified to profit or
loss:
Remeasurement gains on defined benefit plans 22 933 2,443
Income tax effect 10 (148) (388)
Net other comprehensive income that will not be
reclassified to profit or loss 785 2,055
-------------------------------------------------------- ----- -------------- --------------
Other comprehensive income/(expense), net of tax 7,094 (2,845)
-------------------------------------------------------- ----- -------------- --------------
Total comprehensive income for the year, net of
tax 567,901 422,117
-------------------------------------------------------- ----- -------------- --------------
Attributable to:
Equity shareholders of the Company 567,672 424,141
Non-controlling interests 229 (2,024)
-------------------------------------------------------- ----- -------------- --------------
567,901 422,117
-------------------------------------------------------- ----- -------------- --------------
Consolidated Balance Sheet
As at 31 December
As at 31 December
-------------------------------------------------- ----- ------------------------------
2017 2016
Notes US$ thousands US$ thousands
-------------------------------------------------- ----- -------------- --------------
ASSETS
Non-current assets
Property, plant and equipment 12 2,448,596 2,180,217
Available-for-sale financial assets 13 144,856 116,171
Silverstream contract 14 506,569 438,811
Derivative financial instruments 30 - 16,532
Deferred tax asset 10 48,950 20,023
Inventories 15 91,620 89,351
Other receivables 16 129 990
Other assets 3,389 3,385
-------------------------------------------------- ----- -------------- --------------
3,244,109 2,865,480
-------------------------------------------------- ----- -------------- --------------
Current assets
Inventories 15 179,485 187,499
Trade and other receivables 16 342,506 286,678
Income tax recoverable 59,588 -
Prepayments 3,543 2,839
Derivative financial instruments 30 382 6,618
Silverstream contract 14 32,318 28,718
Short-term investments 17 - 200,000
Cash and cash equivalents 17 876,034 711,954
-------------------------------------------------- ----- -------------- --------------
1,493,856 1,424,306
-------------------------------------------------- ----- -------------- --------------
Total assets 4,737,965 4,289,786
-------------------------------------------------- ----- -------------- --------------
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders
of the Company
Share capital 18 368,546 368,546
Share premium 18 1,153,817 1,153,817
Capital reserve 18 (526,910) (526,910)
Available-for-sale financial assets reserve 18 53,799 47,608
Foreign currency translation reserve 18 (610) (728)
Retained earnings 18 1,962,708 1,637,888
-------------------------------------------------- ----- -------------- --------------
3,011,350 2,680,221
Non-controlling interests 55,245 36,147
-------------------------------------------------- ----- -------------- --------------
Total equity 3,066,595 2,716,368
-------------------------------------------------- ----- -------------- --------------
Non-current liabilities
Interest-bearing loans 20 799,046 798,027
Derivative financial instruments 30 14,224 16
Provision for mine closure cost 21 184,775 149,109
Provision for pensions and other post-employment
benefit plans 22 9,217 9,095
Deferred tax liability 10 491,677 463,050
-------------------------------------------------- ----- -------------- --------------
1,498,939 1,419,297
-------------------------------------------------- ----- -------------- --------------
Consolidated Balance Sheet
As at 31 December
As at 31 December
--------------------------------- ----- ------------------------------
2017 2016
Notes US$ thousands US$ thousands
--------------------------------- ----- -------------- --------------
Current liabilities
Trade and other payables 23 134,949 121,633
Income tax payable 18,328 18,842
Derivative financial instruments 30 4,992 630
Employee profit sharing 14,162 13,016
--------------------------------- ----- -------------- --------------
172,431 154,121
--------------------------------- ----- -------------- --------------
Total liabilities 1,671,370 1,573,418
--------------------------------- ----- -------------- --------------
Total equity and liabilities 4,737,965 4,289,786
--------------------------------- ----- -------------- --------------
These financial statements were approved by the Board of
Directors on 26 February 2018 and signed on its behalf by:
Mr Arturo Fernandez
Non-executive Director
26 February 2018
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
----------------------------------------------------- ----- ------------------------------
2017 2016
Notes US$ thousands US$ thousands
----------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 29 761,471 897,958
----------------------------------------------------- ----- -------------- --------------
Cash flows from investing activities
Purchase of property, plant and equipment (604,751) (434,050)
Proceeds from the sale of property, plant and
equipment and other assets 8 26,078 277
Repayments of loans granted to contractors 925 2,626
Short-term investments 17 200,000 (81,282)
Silverstream contract 14 43,349 47,565
Purchase of available-for-sale financial assets (19,877) -
Interest received 14,535 6,958
Net cash used in investing activities (339,741) (457,906)
----------------------------------------------------- ----- -------------- --------------
Cash flows from financing activities
Dividends paid to shareholders of the Company 19 (236,560) (88,219)
Capital contribution 18,869 7,361
Interest paid(1) 20 (35,503) (28,028)
----------------------------------------------------- ----- -------------- --------------
Net cash used in financing activities (253,194) (108,886)
----------------------------------------------------- ----- -------------- --------------
Net increase in cash and cash equivalents during
the year 168,536 331,166
Effect of exchange rate on cash and cash equivalents (4,456) (632)
Cash and cash equivalents at 1 January 711,954 381,420
----------------------------------------------------- ----- -------------- --------------
Cash and cash equivalents at 31 December 17 876,034 711,954
----------------------------------------------------- ----- -------------- --------------
1 Total interest paid during the year ended 31 December 2017
less amounts capitalised totalling US$11.4 million (31 December
2016: US$18.2 million) which were included within the caption
Purchase of property, plant and equipment.
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders of the
Company
----------------------------------------------------------------------------------------------
Available-for-sale Foreign
financial currency
Share Share Capital Hedging assets translation Retained Non-controlling Total
Notes capital premium reserve reserve reserve reserve earnings Total interests equity
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
US$ thousands
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- -------------------------------------
Balance at
1 January
2016 368,546 1,153,817 (526,910) 36,214 16,297 (731) 1,296,906 2,344,139 30,202 2,374,341
Profit/(loss)
for the year - - - - - - 426,986 426,986 (2,024) 424,962
Other
comprehensive
income, net
of tax - - - (36,214) 31,311 3 2,055 (2,845) - (2,845)
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the year - - - (36,214) 31,311 3 429,041 424,141 (2,024) 422,117
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Capital
contribution - - - - - - - - 7,969 7,969
Dividends
declared and
paid 19 - - - - - - (88,059) (88,059) - (88,059)
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Balance at
31 December
2016 368,546 1,153,817 (526,910) - 47,608 (728) 1,637,888 2,680,221 36,147 2,716,368
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Profit/(loss)
for the year - - - - - - 560,578 560,578 229 560,807
Other
comprehensive
income, net
of tax - - - - 6,191 118 785 7,094 - 7,094
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the year - - - - 6,191 118 561,363 567,672 229 567,901
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Capital
contribution - - - - - - - - 18,869 18,869
Dividends
declared and
paid 19 - - - - - - (236,543) (236,543) - (236,543)
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
Balance at
31 December
2017 368,546 1,153,817 (526,910) - 53,799 (610) 1,962,708 3,011,350 55,245 3,066,595
-------------- ----- ------- --------- --------- -------- ------------------ ----------- --------- --------- --------------- ---------
1. Corporate information
Fresnillo plc. ("the Company") is a public limited company and
registered in England and Wales with registered number 6344120 and
is the holding company for the Fresnillo subsidiaries detailed in
note 5 of the Parent Company accounts ('the Group').
Industrias Peñoles S.A.B. de C.V. ('Peñoles') currently owns 75
percent of the shares of the Company and the ultimate controlling
party of the Company is the Baillères family, whose beneficial
interest is held through Peñoles. The registered address of Peñoles
is Calzada Legaria 549, Mexico City 11250. Copies of Peñoles'
accounts can be obtained from www.penoles.com.mx. Further
information on related party balances and transactions with
Peñoles' group companies is disclosed in note 27.
The consolidated financial statements of the Group for the year
ended 31 December 2017 were authorised for issue by the Board of
Directors of Fresnillo plc on 26 February 2018.
The Group's principal business is the mining and beneficiation
of non-ferrous minerals, and the sale of related production. The
primary contents of this production are silver, gold, lead and
zinc. Further information about the Group operating mines and its
principal activities is disclosed in note 3.
The auditor's report on those financial statements was
unqualified and did not contain a statement under section 498 of
the Companies Act 2006.
The audited financial statements will be delivered to the
Registrar of Companies in due course. The financial information
contained in this document does not constitute statutory accounts
as defined in section 435 of the Companies Act 2006
2. Significant accounting policies
(a) Basis of preparation and consolidation, and statement of
compliance
Basis of preparation and statement of compliance
The Group's consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union as they apply to the
financial statements of the Group for the years ended 31 December
2017 and 2016, and in accordance with the provisions of the
Companies Act 2006.
The consolidated financial statements have been prepared on a
historical cost basis, except for derivative financial instruments,
available-for-sale financial assets and defined benefit pension
scheme assets which have been measured at fair value.
The consolidated financial statements are presented in dollars
of the United States of America (US dollars or US$) and all values
are rounded to the nearest thousand ($000) except when otherwise
indicated.
Basis of consolidation
The consolidated financial statements set out the Group's
financial position as of 31 December 2017 and 2016, and the results
of operations and cash flows for the years then ended.
Entities that constitute the Group are those enterprises
controlled by the Group regardless of the number of shares owned by
the Group. The Group controls an entity when the Group is exposed
to, or has the right to, variable returns from its involvement with
the entity and has the ability to affect those returns through its
power over the entity. Entities are consolidated from the date on
which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of
the Group. The Group applies the acquisition method to account for
business combinations in accordance with IFRS 3.
All intra-group balances, transactions, income and expenses and
profits and losses, including unrealised profits arising from
intra-group transactions, have been eliminated on consolidation.
Unrealised losses are eliminated in the same way as unrealised
gains except that they are only eliminated to the extent that there
is no evidence of impairment.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Group's equity
therein. The interest of non-controlling shareholders may be
initially measured either at fair value or at the non-controlling
interest's proportionate share of the acquiree's identifiable net
assets. The choice of measurement basis is made on an acquisition
by-acquisition basis. Subsequent to acquisition, non-controlling
interests consist of the amount attributed to such interests at
initial recognition and the non-controlling interest's share of
changes in equity since the date of the combination. Any losses of
a subsidiary are attributed to the non-controlling interests even
if that results in a deficit balance.
Transactions with non-controlling interests that do not result
in loss of control are accounted for as equity transactions - that
is, a transaction with the owners in their capacity as owners. The
difference between fair value of any consideration paid and the
relevant share acquired of the carrying value of net assets of the
subsidiary is recorded in equity. Gains or losses on disposals to
non-controlling interest are also recorded in equity.
(b) Changes in accounting policies and disclosures
The accounting policies applied are consistent with those
applied in the preparation of the consolidated financial statements
for the year ended 31 December 2016. During 2017, there were no
amendments to existing accounting policies.
New standards, interpretations and amendments (new standards)
adopted by the Group
The Group has adopted from 1 January 2017 Amendments to IAS 7.
The amendments require an entity to provide disclosures that enable
users of financial statements to evaluate changes in liabilities
arising from financing activities. The Group also has adopted
Amendments to IAS 12. The amendments clarify the accounting for
deferred tax where an asset is measured at fair value and that fair
value is below the asset's tax base. They also clarify certain
other aspects of accounting for deferred tax assets. These
amendments had no impact in the financial information of the
Group.
Other than the above mentioned amendments there were no
significant new standards that the Group was required to adopt
effective from 1 January 2017.
Standards, interpretations and amendments issued but not yet
effective
The standards and interpretations that are issued, but not yet
effective, up to the date of issuance of the Group's financial
statements are disclosed below. The Group intends to adopt these
standards, as applicable to the Group's financial statements, when
they become effective, except where indicated.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments addresses the classification,
measurement and derecognition of financial assets and financial
liabilities, introduces new rules for hedge accounting and a new
impairment model for financial assets. The Group has decided not to
adopt IFRS 9 until it becomes mandatory on 1 January 2018. The
Group does not expect the new guidance to have a significant impact
on the classification and measurement of its financial assets for
the following reasons:
Classification and measurement
The equity instruments that are currently classified as
available-for-sale financial assets satisfy the conditions for
classification as at fair value through other comprehensive income
(FVOCI). Under IFRS 9, gains and losses accumulated in OCI are not
recycled to the income statement. There are no other significant
changes to the accounting for these assets. Also, embedded
derivatives resulting for the sales of goods as described in note
2(p) will be no longer separated from the host contract. Instead,
the entire receivable will be measured at fair value through profit
or loss. Management does not expect this to result in a significant
impact on the measurement of the receivable.
There will be no impact on the Group's accounting for financial
liabilities, as the new requirements only affect the accounting for
financial liabilities that are designated at fair value through
profit or loss and the Group does not have any such
liabilities.
Derecognition
The derecognition rules have been transferred from IAS 39
Financial Instruments: Recognition and Measurement and have not
been changed.
Hedge accounting
The new hedge accounting rules will align the accounting for
hedging instruments more closely with the Group's risk management
practices. At this stage the Group does not expect to designate any
new hedge relationships except for the derivatives corresponding to
purchase of property, plant and equipment. The Group's existing
hedge relationships qualify as continuing hedges upon the adoption
of IFRS 9. As a consequence, the Group does not expect an impact on
the accounting for its hedging relationships.
IFRS 9 changes the accounting requirements for the time value of
purchased options where only the intrinsic value of such options
has been designated as the hedging instrument. In such cases,
changes in the time value of options are initially recognised in
OCI. Where the hedged item is transaction related, amounts
initially recognised in OCI related to the change in the time value
of options are reclassified to profit or loss or as a basis
adjustment to non-financial assets or liabilities upon maturity of
the hedged item, or, in the case of a hedged item that realises
over time, the amounts initially recognised in OCI are amortised to
profit or loss on a systematic and rational basis over the life of
the hedged item. Under IAS 39, the change in time value of options
is recorded in the income statement. The initial credit adjustment
from retained earnings to hedging reserve as at 1 January 2017
would be US$23.0 million and the adjustment decreasing financial
cost for the year ended 31 December 2017 US$42.1 million.
Impairment
IFRS 9 requires the Group to now use an expected credit loss
model for its trade receivables measured at amortised cost, either
on a 12-month or lifetime basis. Given the short term nature of
these receivables, the Group does not expect these changes will
have a significant impact.
Presentation and disclosure
The new standard also introduces expanded disclosure
requirements and changes in presentation. These are expected to
change the nature and extent of the Group's disclosures about its
financial instruments particularly in the year of the adoption of
the new standard.
IFRS 15 Revenue from Contracts with Customers
The IASB has issued a new standard for the recognition of
revenue arising from contracts with customers. The new revenue
standard will supersede all current revenue recognition
requirements under IFRS.
The new standard is based on the principle that revenue is
recognised when control of a good or service transfers to a
customer. The Group has evaluated recognition and measurement of
revenue based on the five-step model in IFRS 15 and has not
identified any financial impacts, hence no adjustments are expected
to result from the adoption of IFRS 15. The Group has elected to
adopt the new standard from 1 January 2018 applying the modified
retrospective adoption method.
Certain disclosures will change as a result of the requirements
of IFRS 15. The Group expects this to include a breakdown of
revenue from customers and revenue from other sources, including
the movement in the value of embedded derivatives in sales
contracts.
IFRS 16 Leases
IFRS 16 introduces a single lessee accounting model and requires
a lessee to recognise assets and liabilities for all leases with a
term of more than 12 months, unless the underlying asset is of low
value. A lessee is required to recognise a right-of-use asset
representing its right to use the underlying leased asset and a
lease liability representing its obligation to make lease payments.
IFRS 16 substantially carries forward the lessor accounting
requirements in IAS 17. Accordingly, a lessor continues to classify
its leases as operating leases or finance leases, and to account
for those two types of leases differently. These amendments are
effective for annual periods beginning on or after 1 January 2019
and earlier application is permitted. However, as there are several
interactions between IFRS 16 and IFRS 15 Revenue from contracts
with customers, early application is restricted to entities that
also early adopt IFRS 15. The Group has decided to adopt the
standard when it becomes effective.
IFRIC 22 Foreign currency transactions and advance
consideration
IFRIC 22 clarifies which exchange rate to use in reporting
foreign currency transactions when payment is made or received in
advance. The interpretation requires the company to determine a
"date of transaction" for the purposes of selecting an exchange
rate to use on initial recognition of the related asset, expense or
income. In the case that there are multiple payments or receipts in
advance, the entity should determine a date of the transaction for
each flow of advance consideration. IFRIC 22 is applicable for
annual periods beginning on or after 1 January 2018 and earlier
adoption is permitted. The interpretation is not expected to have
any impact in the financial information of the Group.
IFRIC 23 Uncertainty over Income Tax treatments
This Interpretation clarifies how to apply the recognition and
measurement requirements in IAS 12 when there is uncertainty over
income tax treatments. The interpretation is to be applied to the
determination of taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits and tax rates, when there is uncertainty
over income tax treatments. Application of tax law can be complex
and requires judgement to assess risk and estimate outcomes where
the amount of tax payable or recoverable is uncertain. The Group is
working to identify potential uncertainties based on previous
resolutions of tax authorities. IFRIC 23 is applicable for annual
periods beginning on or after 1 January 2019 and earlier adoption
is permitted.
The Group has not early adopted any standard, interpretation or
amendment that was issued but is not yet effective.
(c) Significant accounting judgments, estimates and
assumptions
The preparation of the Group's consolidated financial statements
in conformity with IFRS requires management to make judgements,
estimates and assumptions that affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the
consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. These judgements and
estimates are based on management's best knowledge of the relevant
facts and circumstances, with regard to prior experience, but
actual results may differ from the amounts included in the
consolidated financial statements. Information about such
judgements and estimates is contained in the accounting policies
and/or the notes to the consolidated financial statements.
Judgements
Areas of judgement, apart from those involving estimations, that
have the most significant effect on the amounts recognised in the
consolidated financial statements are:
Determination of functional currency (note 2(d)):
The determination of functional currency requires management
judgement, particularly where there may be more than one currency
in which transactions are undertaken and which impact the economic
environment in which the entity operates.
Evaluation of the status of projects (note 2(e)):
The evaluation of project status impacts the accounting for
costs incurred and requires management judgement. This includes the
assessment of whether there is sufficient evidence of the
probability of the existence of economically recoverable minerals
to justify the commencement of capitalisation of costs, the timing
of the end of the exploration phase and the start of the
development phase and the commencement of the production phase.
These judgements directly impact the treatment of costs incurred
and proceeds from the sale of metals from ore produced.
Stripping costs (note 2(e)):
The Group incurs waste removal costs (stripping costs) during
the development and production phases of its surface mining
operations. During the production phase, stripping costs
(production stripping costs) can be incurred both in relation to
the production of inventory in that period and the creation of
improved access and mining flexibility in relation to ore to be
mined in the future. The former are included as part of the costs
of inventory, while the latter are capitalised as a stripping
activity asset, where certain criteria are met.
Once the Group has identified production stripping for a surface
mining operation, judgment is required in identifying the separate
components of the ore bodies for that operation, to which stripping
costs should be allocated. Generally a component is a specific
volume of the ore body that is made more accessible by the
stripping activity. In identifying components of the ore body, the
Group works closely with the mining operations personnel to analyse
each of the mine plans. The mine plans and, therefore, the
identification of components, will vary between mines for a number
of reasons. These include, but are not limited to, the type of
commodity, the geological characteristics of the ore body, the
geographical location and/or financial considerations. The Group
reassesses the components of ore bodies annually in line with the
preparation of mine plans. In the current year, this reassessment
did not give rise to any changes in the identification of
components.
Once production stripping costs have been identified, judgement
is also required to identify a suitable production measure to be
used to allocate production stripping costs between inventory and
any stripping activity asset(s) for each component. The Group
considers that the ratio of the expected tonnes of waste to be
stripped for an expected tonnes of ore to be mined for a specific
component of the ore body is the most suitable production
measure.
Furthermore, judgements and estimates are also used to apply the
units of production method in determining the depreciable lives of
the stripping activity asset(s).
Qualifying assets (note 2(e)):
All interest-bearing loans are held by the parent company and
were not obtained for any specific asset's acquisition,
construction, or production. Funds from these loans are transferred
to subsidiaries to meet the strategic objectives of the Group or
are otherwise held centrally. Due to this financing structure,
judgement is required in determining whether those borrowings are
attributable to the acquisition, construction or production of a
qualifying asset. Therefore, Management determines whether
borrowings are attributable to an asset or group of assets based on
whether the investment in an operating or development stage project
is classified as contributing to achieving the strategic growth of
the Group.
Contingencies (note 26)
By their nature, contingencies will be resolved only when one or
more uncertain future events occur or fail to occur. The assessment
of the existence and potential quantum of contingencies inherently
involves the exercise of significant judgement and the use of
estimates regarding the outcome of future events.
Estimates and assumptions
Significant areas of estimation uncertainty considered by
management in preparing the consolidated financial statements
include:
Estimated recoverable ore reserves and mineral resources, note
2(e):
Ore reserves are estimates of the amount of ore that can be
economically and legally extracted from the Group's mining
properties; mineral resources are an identified mineral occurrence
with reasonable prospects for eventual economic extraction. The
Group estimates its ore reserves and mineral resources based on
information compiled by appropriately qualified persons relating to
the geological and technical data on the size, depth, shape and
grade of the ore body and suitable production techniques and
recovery rates, in conformity with the Joint Ore Reserves Committee
(JORC) code 2012. Such an analysis requires complex geological
judgements to interpret the data. The estimation of recoverable ore
reserves and mineral resources is based upon factors such as
geological assumptions and judgements made in estimating the size
and grade of the ore body, estimates of commodity prices, foreign
exchange rates, future capital requirements and production
costs.
As additional geological information is produced during the
operation of a mine, the economic assumptions used and the
estimates of ore reserves and mineral resources may change. Such
changes may impact the Group's reported balance sheet and income
statement including:
-- The carrying value of property, plant and equipment and
mining properties may be affected due to changes in estimated
future cash flows, which consider both ore reserves and mineral
resources;
-- Depreciation and amortisation charges in the income statement
may change where such charges are determined using the
unit-of-production method based on ore reserves;
-- Stripping costs capitalised in the balance sheet, either as
part of mine properties or inventory, or charged to profit or loss
may change due to changes in stripping ratios;
-- Provisions for mine closure costs may change where changes to
the ore reserve and resources estimates affect expectations about
when such activities will occur;
-- The recognition and carrying value of deferred income tax
assets may change due to changes regarding the existence of such
assets and in estimates of the likely recovery of such assets.
Determination of useful lives of assets for depreciation and
amortisation purposes, notes 2 (e) and 12:
Estimates are required to be made by management as to the useful
lives of assets. For depreciation calculated under the
unit-of-production method, estimated recoverable reserves are used
in determining the depreciation and/or amortisation of mine
specific assets. The depreciation/amortisation charge is
proportional to the depletion of the estimated remaining life of
mine of production. Estimated useful lives of other assets are
based on the expected usage of the asset. Each item's life, which
is assessed annually, has regard to both its physical life
limitations and to expectations of the use of the asset by the
Group, including with reference to present assessments of
economically recoverable reserves of the mine property at which the
asset is used.
Silverstream, note 14:
The valuation of the Silverstream contract as a derivative
financial instrument requires estimation by management. The term of
the derivative is based on Sabinas life of mine and the value of
this derivative is determined using a number of estimates,
including the estimated recoverable ore reserves and mineral
resources and future production profile of the Sabinas mine, the
estimated recoveries of silver from ore mined, estimates of the
future price of silver and the discount rate used to discount
future cash flows. For further detail on the inputs that have a
significant effect on the fair value of this derivative, see note
30. The impact of changes in silver price assumptions, foreign
exchange, inflation and the discount rate is included in note
31.
Assessment of recoverability of property plant and equipment and
impairment charges, note 2 (f):
The recoverability of an asset requires the use of estimates and
assumptions such as long-term commodity prices, reserves and
resources and the associated production profiles, discount rates,
future capital requirements, exploration potential and operating
performance. Changes in these assumptions will affect the
recoverable amount of the property, plant and equipment.
Estimation of the mine closure costs, notes 2 (l) and 21:
Significant estimates and assumptions are made in determining
the provision for mine closure cost as there are numerous factors
that will affect the ultimate liability payable. These factors
include estimates of the extent and costs of rehabilitation
activities, the currency in which the cost will be incurred,
technological changes, regulatory changes, cost increases, mine
life and changes in discount rates. Those uncertainties may result
in future actual expenditure differing from the amounts currently
provided. The provision at the balance sheet date represents
management's best estimate of the present value of the future
closure costs required.
Income tax, notes 2 (r) and 10:
The recognition of deferred tax assets, including those arising
from un-utilised tax losses require management to assess the
likelihood that the Group will generate taxable earnings in future
periods, in order to utilise recognised deferred tax assets.
Estimates of future taxable income are based on forecast cash flows
from operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and taxable
income differ significantly from estimates, the ability of the
Group to realise the net deferred tax assets recorded at the
balance sheet date could be impacted.
(d) Foreign currency translation
The Group's consolidated financial statements are presented in
US dollars, which is the parent company's functional currency. The
functional currency for each entity in the Group is determined by
the currency of the primary economic environment in which it
operates. For all operating entities, this is US dollars.
Transactions denominated in currencies other than the functional
currency of the entity are translated at the exchange rate ruling
at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are re-translated at the rate of
exchange ruling at the balance sheet date. All differences that
arise are recorded in the income statement. Non-monetary items that
are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a
foreign currency are translated into US dollars using the exchange
rate at the date when the fair value is determined.
For entities with functional currencies other than US dollars as
at the reporting date, assets and liabilities are translated into
the reporting currency of the Group by applying the exchange rate
at the balance sheet date and the income statement is translated at
the average exchange rate for the year. The resulting difference on
exchange is included as a cumulative translation adjustment in
other comprehensive income. On disposal of an entity, the deferred
cumulative amount recognised in other comprehensive income relating
to that operation is recognised in the income statement.
(e) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and impairment, if any. Cost comprises the purchase
price and any costs directly attributable to bringing the asset
into working condition for its intended use. The cost of
self-constructed assets includes the cost of materials, direct
labour and an appropriate proportion of production overheads.
The cost less the residual value of each item of property, plant
and equipment is depreciated over its useful life. Each item's
estimated useful life has been assessed with regard to both its own
physical life limitations and the present assessment of
economically recoverable reserves of the mine property at which the
item is located. Estimates of remaining useful lives are made on a
regular basis for all mine buildings, machinery and equipment, with
annual reassessments for major items. Depreciation is charged to
cost of sales on a unit-of-production (UOP) basis for mine
buildings and installations, plant and equipment used in the mine
production process or on a straight line basis over the estimated
useful life of the individual asset when not related to the mine
production process. Changes in estimates, which mainly affect
unit-of-production calculations, are accounted for prospectively.
Depreciation commences when assets are available for use. Land is
not depreciated.
The expected useful lives are as follows:
Years
------------------------------------------- -----
Buildings 6
Plant and equipment 4
Mining properties and development costs(1) 16
Other assets 3
------------------------------------------- -----
(1 Depreciation of mining properties and development cost are
determined using the unit-of-production method.)
An item of property, plant and equipment is de-recognised upon
disposal or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising at de-recognition of the
asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is included in the
income statement in the year that the asset is de-recognised.
Non-current assets or disposal groups are classified as held for
sale when it is expected that the carrying amount of the asset will
be recovered principally through sale rather than through
continuing use. Assets are not depreciated when classified as held
for sale.
Disposal of assets
Gains or losses from the disposal of assets are recognised in
the income statement when all significant risks and rewards of
ownership are transferred to the customer, usually when title has
been passed.
Mining properties and development costs
Payments for mining concessions are expensed during the
exploration phase of a prospect and capitalised during the
development of the project when incurred.
Purchased rights to ore reserves and mineral resources are
recognised as assets at their cost of acquisition or at fair value
if purchased as part of a business combination.
Mining concessions, when capitalised, are amortised on a
straight line basis over the period of time in which benefits are
expected to be obtained from that specific concession.
Mine development costs are capitalised as part of property,
plant and equipment. Mine development activities commence once a
feasibility study has been performed for the specific project. When
an exploration prospect has entered into the advanced exploration
phase and sufficient evidence of the probability of the existence
of economically recoverable minerals has been obtained
pre-operative expenses relating to mine preparation works are also
capitalised as a mine development cost.
The initial cost of a mining property comprises its construction
cost, any costs directly attributable to bringing the mining
property into operation, the initial estimate of the provision for
mine closure cost, and, for qualifying assets, borrowing costs. The
Group cease the capitalisation of borrowing cost when the physical
construction of the asset is complete and is ready for its intended
use.
Revenues from metals recovered from ore mined in the mine
development phase, prior to commercial production, are credited to
mining properties and development costs. Upon commencement of
production, capitalised expenditure is depreciated using the
unit-of-production method based on the estimated economically
proven and probable reserves to which they relate.
Mining properties and mine development are stated at cost, less
accumulated depreciation and impairment in value, if any.
Construction in progress
Assets in the course of construction are capitalised as a
separate component of property, plant and equipment. On completion,
the cost of construction is transferred to the appropriate category
of property, plant and equipment. The cost of construction in
progress is not depreciated.
Subsequent expenditures
All subsequent expenditure on property, plant and equipment is
capitalised if it meets the recognition criteria, and the carrying
amount of those parts that are replaced, is de-recognised. All
other expenditure including repairs and maintenance expenditure is
recognised in the income statement as incurred.
Stripping costs
In a surface mine operation, it is necessary to remove
overburden and other waste material in order to gain access to the
ore bodies (stripping activity). During development and
pre-production phases, the stripping activity costs are capitalised
as part of the initial cost of development and construction of the
mine (the stripping activity asset) and charged as depreciation or
depletion to cost of sales, in the income statement, based on the
mine's units of production once commercial operations begin.
Removal of waste material normally continues throughout the life
of a surface mine. At the time that saleable material begins to be
extracted from the surface mine the activity is referred to as
production stripping.
Production stripping cost is capitalised only if the following
criteria is met:
-- It is probable that the future economic benefits (improved
access to an ore body) associated with the stripping activity will
flow to the Group;
-- The Group can identify the component of an ore body for which access has been improved; and
-- The costs relating to the improved access to that component can be measured reliably.
If not all of the criteria are met, the production stripping
costs are charged to the income statement as operating costs as
they are incurred.
Stripping activity costs associated with such development
activities are capitalised into existing mining development assets,
as mining properties and development cost, within property, plant
and equipment, using a measure that considers the volume of waste
extracted compared with expected volume, for a given volume of ore
production. This measure is known as "component stripping ratio",
which is revised annually in accordance with the mine plan. The
amount capitalised is subsequently depreciated over the expected
useful life of the identified component of the ore body related to
the stripping activity asset, by using the units of production
method. The identification of components and the expected useful
lives of those components are evaluated annually. Depreciation is
recognised as cost of sales in the income statement.
The capitalised stripping activity asset is carried at cost less
accumulated depletion/depreciation, less impairment, if any. Cost
includes the accumulation of costs directly incurred to perform the
stripping activity that improves access to the identified component
of ore, plus an allocation of directly attributable overhead costs.
The costs associated with incidental operations are excluded from
the cost of the stripping activity asset.
In identifying components of the ore body, the Group works
closely with the mining operations personnel for each mining
operation to analyse each of the mine plans. Generally, a component
will be a subset of the total ore body and a mine may have several
components that are identified based on the mine plan. The mine
plans and therefore the identification of components can vary
between mines for a number of reasons including but not limited to,
the type of commodity, the geological characteristics of the ore
body, the geographical location and/or financial
considerations.
(f) Impairment of non-financial assets
The carrying amounts of non-financial assets are reviewed for
impairment if events or changes in circumstances indicate that the
carrying value may not be recoverable. At each reporting date, an
assessment is made to determine whether there are any indications
of impairment. If there are indicators of impairment, an exercise
is undertaken to determine whether carrying values are in excess of
their recoverable amount. Such reviews are undertaken on an asset
by asset basis, except where such assets do not generate cash flows
independent of those from other assets or groups of assets, and
then the review is undertaken at the cash generating unit
level.
If the carrying amount of an asset or its cash generating unit
exceeds the recoverable amount, a provision is recorded to reflect
the asset at the recoverable amount in the balance sheet.
Impairment losses are recognised in the income statement.
The recoverable amount of an asset
The recoverable amount of an asset is the greater of its value
in use and fair value less costs of disposal. In assessing value in
use, estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to
the asset. Fair value less cost of disposal is based on an estimate
of the amount that the Group may obtain in an orderly sale
transaction between market participants. For an asset that does not
generate cash inflows largely independently of those from other
assets, or groups of assets, the recoverable amount is determined
for the cash generating unit to which the asset belongs. The
Group's cash generating units are the smallest identifiable groups
of assets that generate cash inflows that are largely independent
of the cash inflows from other assets or groups of assets.
Reversal of impairment
An assessment is made each reporting date as to whether there is
any indication that previously recognised impairment losses may no
longer exist or may have decreased. If such an indication exists,
the Group makes an estimate of the recoverable amount. A previously
recognised impairment loss is reversed only if there has been a
change in estimates used to determine the asset's recoverable
amount since the impairment loss was recognised. If that is the
case, the carrying amount of the asset is increased to the
recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognised in previous
years. Such impairment loss reversal is recognised in the income
statement.
(g) Financial assets and liabilities
Financial assets are recognised when the Group becomes party to
contracts that give rise to them and are classified as financial
assets at fair value through profit or loss; held to maturity
investments; available-for-sale financial assets; or loans and
receivables or derivatives designated as hedging instruments, as
appropriate. The Group determines the classification of its
financial assets at initial recognition and re-evaluates this
designation at each balance sheet date. When financial assets are
recognised initially, they are measured at fair value, plus, in the
case of financial assets not at fair value through profit or loss,
directly attributable transaction costs.
The Group recognises financial liabilities on its balance sheet
when, and only when, it becomes a party to the contractual
provisions of the instrument. Financial liabilities are classified
at fair value through profit or loss, loans and borrowings,
payables, or as derivatives designated as hedging instruments in an
effective hedge, as appropriate. All financial liabilities are
initially recognised at the fair value of the consideration
received, including any transaction costs incurred.
Financial assets and liabilities at fair value through profit or
loss
Financial assets and liabilities classified as held-for-trading
and other assets or liabilities designated as fair value through
profit or loss at inception are included in this category.
Financial assets or liabilities are classified as held-for-trading
if they are acquired or incurred for the purpose of selling or
repurchasing in the short term. Derivatives, including separated
embedded derivatives are also classified as held-for-trading unless
they are designated as effective hedging instruments as defined by
IAS 39. Financial assets or liabilities at fair value through
profit or loss are carried in the balance sheet at fair value with
gains or losses arising from changes in fair value, presented as
finance costs or finance income in the income statement.
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market, do not qualify as trading assets and have not been
designated as either fair value through profit and loss or
available-for-sale.
After initial measurement, such assets are subsequently carried
at amortised cost using the effective interest method less any
allowance for impairment. Gains or losses are recognised in income
when the loans and receivables are derecognised or impaired, as
well as through the amortisation process.
Current trade receivables are carried at the original invoice
amount less provision made for impairment of these receivables.
Non-current receivables are stated at amortised cost. Loans and
receivables from contractors are carried at amortised cost.
Loans and borrowings
After initial recognition at fair value, net of directly
attributable transaction costs, interest-bearing loans are
subsequently measured at amortised cost using the effective
interest rate (EIR) method. The EIR amortisation is included as
finance costs in the income statement. Gains and losses are
recognised in profit or loss, in the income statement, when the
liabilities are derecognised as well as through the EIR
amortisation process.
The Group adjusts the carrying amount of the financial liability
to reflect actual and revised estimated cash flows. The carrying
amount is recalculated by computing the present value of estimated
future cash flows at the financial instrument's original effective
interest rate or, when applicable, the revised effective interest
rate. Any adjustment is recognised in profit or loss as income or
expense.
This category generally applies to interest-bearing loans and
borrowings. For more information, refer to note 20.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative
financial assets that are designated as such or are not classified
in any of the preceding categories and are not held to maturity
investments.
Available-for-sale financial assets represent equity investments
that have a quoted market price in an active market; therefore, a
fair value can be reliably measured. After initial measurement,
available-for-sale financial assets are measured at fair value with
mark-to-market unrealised gains or losses recognised as other
comprehensive income in the available-for-sale reserve until the
financial asset is de-recognised.
Financial assets classified as available-for-sale are
de-recognised when they are sold, and all the risks and rewards of
ownership have been transferred. When financial assets are sold,
the accumulated fair value adjustments recognised in other
comprehensive income are included in the income statement within
other operating income or expense.
De-recognition of financial assets and liabilities
A financial asset or liability is generally de-recognised when
the contract that gives rise to it is settled, sold, cancelled or
expires.
Where an existing financial liability is replaced by another
from the same lender on substantially different terms, or the terms
of an existing liability are substantially modified, such an
exchange or modification is treated as a de-recognition of the
original liability and the recognition of a new liability, such
that the difference in the respective carrying amounts together
with any costs or fees incurred are recognised in profit or
loss.
The difference between the carrying amount of a financial
liability (or part of a financial liability) extinguished or
transferred to another party and the consideration paid, including
any non-cash assets transferred or liabilities assumed, is
recognised in the income statement.
(h) Impairment of financial assets
The Group assesses at each balance sheet date whether there is
objective evidence that a financial asset or group of financial
assets is impaired.
Assets carried at amortised cost
If there is objective evidence that an impairment loss on loans
and receivables carried at amortised cost has been incurred, the
amount of the loss is measured as the difference between the
asset's carrying amount and the present value of estimated future
cash flows (excluding future expected credit losses that have not
been incurred) discounted at the financial asset's original
effective interest rate (i.e., the effective interest rate computed
at initial recognition). The carrying amount of the asset is
reduced through use of an allowance account. The amount of the loss
is recognised in profit or loss.
The Group first assesses whether objective evidence of
impairment exists individually for financial assets that are
individually significant, and individually or collectively for
financial assets that are not individually significant. If it is
determined that no objective evidence of impairment exists for an
individually assessed financial asset, whether significant or not,
the asset is included in a group of financial assets with similar
credit risk characteristics and that group of financial assets is
collectively assessed for impairment. Assets that are individually
assessed for impairment and for which an impairment loss is or
continues to be recognised are not included in a collective
assessment of impairment.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed. Any subsequent reversal of
an impairment loss is recognised in the income statement, to the
extent that the carrying value of the asset does not exceed its
amortised cost at the reversal date.
In relation to trade receivables, a provision for impairment is
made when there is objective evidence (such as the probability of
insolvency or significant financial difficulties of the debtor)
that the Group will not be able to collect all of the amounts due
under the original terms of the invoice. The carrying amount of the
receivable is reduced through use of an allowance account. Impaired
receivables are de recognised when they are assessed as
uncollectible.
Available-for-sale financial assets
If an available-for-sale financial asset is impaired, an amount
comprising the difference between its cost (net of any principal
payment and amortisation) and its current fair value, less any
impairment loss previously recognised in the income statement, is
transferred from equity to the income statement. In assessing
whether there is an impairment, the Group considers whether a
decline in fair value is either significant or prolonged, by
considering the size of the decline in this value, the historic
volatility in changes in fair value and the duration of the
sustained decline. Reversals in respect of equity instruments
classified as available-for-sale are not recognised in the income
statement.
(i) Inventories
Finished goods, work in progress and ore stockpile inventories
are measured at the lower of cost and net realisable value. Cost is
determined using the weighted average cost method based on cost of
production which excludes borrowing costs.
For this purpose, the costs of production include:
personnel expenses, which include employee profit sharing,
materials and contractor expenses which are directly attributable
to the extraction and processing of ore;
the depreciation of property, plant and equipment used in the
extraction and processing of ore; and
related production overheads (based on normal operating
capacity).
Operating materials and spare parts are valued at the lower of
cost or net realisable value. An allowance for obsolete and
slow-moving inventories is determined by reference to specific
items of stock. A regular review is undertaken by management to
determine the extent of such an allowance.
Net realisable value is the estimated selling price in the
ordinary course of business less any further costs expected to be
incurred to completion and disposal.
(j) Short-term investments
Where the Group invests in short-term instruments which are
either not readily convertible into known amounts of cash or are
subject to risk of changes in value that are not insignificant,
these instruments are classified as short-term investments.
Short-term investments are classified as loans and receivables.
(k) Cash and cash equivalents
For the purposes of the balance sheet, cash and cash equivalents
comprise cash at bank, cash on hand and short-term deposits held
with banks that are readily convertible into known amounts of cash
and which are subject to insignificant risk of changes in value.
Short-term deposits earn interest at the respective short-term
deposit rates between one day and four months. For the purposes of
the cash flow statement, cash and cash equivalents as defined above
are shown net of outstanding bank overdrafts.
(l) Provisions
Mine closure cost
A provision for mine closure cost is made in respect of the
estimated future costs of closure, restoration and for
environmental rehabilitation costs (which include the dismantling
and demolition of infrastructure, removal of residual materials and
remediation of disturbed areas) based on a mine closure plan, in
the accounting period when the related environmental disturbance
occurs. The provision is discounted and the unwinding of the
discount is included within finance costs. At the time of
establishing the provision, a corresponding asset is capitalised
where it gives rise to a future economic benefit and is depreciated
over future production from the mine to which it relates. The
provision is reviewed on an annual basis by the Group for changes
in cost estimates, discount rates or life of operations. Changes to
estimated future costs are recognised in the balance sheet by
adjusting the mine closure cost liability and the related asset
originally recognised. If, for mature mines, the revised mine
assets net of mine closure cost provisions exceed the recoverable
value, the portion of the increase is charged directly as an
expense. For closed sites, changes to estimated costs are
recognised immediately in profit or loss.
(m) Employee benefits
The Group operates the following plans:
Defined benefit pension plan
This funded plan is based on each employee's earnings and years
of service. This plan was open to all employees in Mexico until it
was closed to new entrants on 1 July 2007. The plan is denominated
in Mexican Pesos. For members as at 30 June 2007, benefits were
frozen at that date subject to indexation with reference to the
Mexican National Consumer Price Index (NCPI).
The cost of providing benefits under the defined benefit plan is
determined using the projected unit credit actuarial valuation
method and prepared by an external actuarial firm as at each
year-end balance sheet date. The discount rate is the yield on
bonds that have maturity dates approximating the terms of the
Group's obligations and that are denominated in the same currency
in which the benefits are expected to be paid. Actuarial gains or
losses are recognised in OCI and permanently excluded from profit
or loss.
Past service costs are recognised as an expense on a straight
line basis over the average period until the benefits become
vested. If the benefits have already vested following the
introduction of, or changes to, a pension plan, the past service
cost is recognised immediately.
The defined benefit asset or liability comprises the present
value of the defined benefit obligation less the fair value of plan
assets out of which the obligations are to be settled directly. The
value of any asset is restricted to the present value of any
economic benefits available in the form of refunds from the plan or
reductions in the future contributions to the plan.
Net interest cost is recognised in finance cost and return on
plan assets (other than amounts reflected in net interest cost) is
recognised in OCI and permanently excluded from profit or loss.
Defined contribution pension plan
A defined contribution plan is a post-employment benefit plan
under which the Group pays fixed contributions into a separate
entity and has no legal or constructive obligation to pay further
amounts. Obligations for contributions to defined contribution
pension plans are recognised as an employee benefit expense in
profit or loss when they are due. The contributions are based on
the employee's salary.
This plan started on 1 July 2007 and it is voluntary for all
employees to join this scheme.
Seniority premium for voluntary separation
This unfunded plan corresponds to an additional payment over the
legal seniority premium equivalent to approximately 12 days of
salary per year for those unionised workers who have more than 15
years of service. Non-unionised employees with more than 15 years
of service have the right to a payment equivalent to 12 days for
each year of service. For both cases, the payment is based on the
legal current minimum salary.
The cost of providing benefits for the seniority premium for
voluntary separation is determined using the projected unit credit
actuarial valuation method and prepared by an external actuarial
firm as at each year-end balance sheet date. Actuarial gains or
losses are recognised as income or expense in the period in which
they occur.
Other
Benefits for death and disability are covered through insurance
policies.
Termination payments for involuntary retirement (dismissals) are
charged to the income statement, when incurred.
(n) Employee profit sharing
In accordance with the Mexican legislation, companies in Mexico
are subject to pay for employee profit sharing ('PTU') equivalent
to ten percent of the taxable income of each fiscal year.
PTU is accounted for as employee benefits and is calculated
based on the services rendered by employees during the year,
considering their most recent salaries. The liability is recognised
as it accrues and is charged to the income statement. PTU, paid in
each fiscal year, is considered deductible for income tax
purposes.
(o) Leases
The determination of whether an arrangement is, or contains a
lease is based on the substance of the arrangement at inception
date including whether the fulfilment of the arrangement is
dependent on the use of a specific asset or assets or the
arrangement conveys a right to use the asset. A reassessment is
made after inception of the lease only if one of the following
applies:
a) There is a change in contractual terms, other than a renewal
or extension of the arrangement;
b) A renewal option is exercised or extension granted, unless
the term of the renewal or extension was initially included in the
lease term;
c) There is a change in the determination of whether fulfilment
is dependent on a specified asset; or
d) There is a substantial change to the asset.
Group as a lessee
Finance leases which transfer to the Group substantially all the
risks and benefits incidental to ownership of the leased item, are
capitalised at the inception of the lease at the fair value of the
leased asset, or if lower, at the present value of the minimum
lease payments. Lease payments are apportioned between the finance
charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the
liability. Finance charges are reflected in the income
statement.
Capitalised leased assets are depreciated over the shorter of
the estimated useful life of the asset and the lease term, if there
is no reasonable certainty that the Group will obtain ownership by
the end of the lease term.
Operating lease payments are recognised as an expense in the
income statement on a straight line basis over the lease term.
Group as a lessor
Leases where the Group does not transfer substantially all the
risks and benefits of ownership of the asset are classified as
operating leases. Initial direct costs incurred in negotiating an
operating lease are added to the carrying amount of the leased
asset and recognised over the lease term on the same basis as
rental income. Contingent rents are recognised as revenue in the
period in which they are earned.
Where a reassessment is made, lease accounting commences or
ceases from the date when the change in circumstances gave rise to
the reassessment for scenarios a), c) or d) and at the date of
renewal or extension period for scenario b) above.
For arrangements entered into prior to 1 January 2005, the date
of inception is deemed to be 1 January 2007, in accordance with the
transitional requirements of IFRIC 4.
(p) Revenue recognition
Revenue is recognised to the extent that it is probable that
economic benefits will flow to the Group and the revenue can be
reliably measured. Revenue is measured at the fair value of
consideration received excluding discounts, rebates, and other
sales taxes.
Sale of goods
Revenue is recognised in the income statement when all
significant risks and rewards of ownership are transferred to the
customer, usually when title has been passed. Revenue excludes any
applicable sales taxes.
The Group recognises revenue on a provisional basis at the time
concentrates, precipitates and doré bars are delivered to the
customer's smelter or refinery, using the Group's best estimate of
contained metal. Revenue is subject to adjustment once the analysis
of the product samples is completed, contract conditions have been
fulfilled and final settlement terms are agreed. Any subsequent
adjustments to the initial estimate of metal content are recorded
in revenue once they have been determined.
In addition, sales of concentrates and precipitates throughout
each calendar month, as well as doré bars that are delivered after
the 20th day of each month, are 'provisionally priced' subject to a
final adjustment based on the average price for the month following
the delivery to the customer, based on the market price at the
relevant quotation point stipulated in the contract. Doré bars that
are delivered in the first 20 days of each month are finally priced
in the month of delivery.
For sales of goods that are subject to provisional pricing,
revenue is initially recognised when the conditions set out above
have been met using the provisional price. The price exposure is
considered to be an embedded derivative and hence separated from
the sales contract. At each reporting date, the provisionally
priced metal is revalued based on the forward selling price for the
quotation period stipulated in the contract until the quotation
period ends. The selling price of the metals can be reliably
measured as these are actively traded on international exchanges.
The revaluing of provisionally priced contracts is recorded as an
adjustment to revenue.
The customer deducts treatment and refining charges before
settlement. Therefore, the fair value of consideration received for
the sale of goods is net of those charges.
The Group recognises in selling expenses a levy in respect of
the Extraordinary Mining Right as sales of gold and silver are
recognised.The Extraordinary Mining Right consists of a 0.5% rate,
applicable to the owners of mining titles. The payment must be
calculated over the total sales of all mining concessions. The
payment of this mining right must be remitted no later than the
last business day of March of the following year and can be
credited against corporate income tax.
The Group also recognises in selling expenses a discovery
premium royalty equivalent to 1% of the value of the mineral
extracted and sold during the year from certain mining titles
granted by the Mexican Geological Survey (SGM) in the San Julian
mine. The premium is settled to SGM on a quarterly basis.
Other income
Other income is recognised in the income statement when all
significant risks and rewards of ownership are transferred to the
customer, usually when title has been passed.
(q) Exploration expenses
Exploration activity involves the search for mineral resources,
the determination of technical feasibility and the assessment of
commercial viability of an identified resource.
Exploration expenses are charged to the income statement as
incurred and are recorded in the following captions:
Cost of sales: costs relating to in-mine exploration, that
ensure continuous extraction quality and extend mine life, and
Exploration expenses:
o Costs incurred in geographical proximity to existing mines in
order to replenish or increase reserves, and
o Costs incurred in regional exploration with the objective of
locating new ore deposits in Mexico and Latin America and which are
identified by project. Costs incurred are charged to the income
statement until there is sufficient probability of the existence of
economically recoverable minerals and a feasibility study has been
performed for the specific project.
(r) Taxation
Current income tax
Current income tax assets and liabilities for the current and
prior periods are measured at the amount expected to be recovered
from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or
substantively enacted, at the reporting date in the country the
Group operates.
Deferred income tax
Deferred income tax is provided using the liability method on
temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable
temporary differences, except:
where the deferred income tax liability arises from the initial
recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of
transaction, affects neither the accounting profit nor taxable
profit loss; and
in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible
temporary differences, carry forward of unused tax credits and
unused tax losses, to the extent that it is probable that taxable
profit will be available against which the deductible temporary
differences, and the carry forward of unused tax credits and unused
tax losses can be utilised, except:
where the deferred income tax asset relating to deductible
temporary differences arise from the initial recognition of an
asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, deferred income tax assets are recognised only to the
extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be
utilised.
The carrying amount of deferred income tax assets is reviewed at
each balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profit will be available to
allow all or part of the deferred income tax asset to be
utilised.
Unrecognised deferred income tax assets are reassessed at each
balance sheet date and are recognised to the extent that it has
become probable that future taxable profit will allow the deferred
tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the
tax rates that are expected to apply to the year when the asset is
realised or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at the
balance sheet date.
Deferred income tax relating to items recognised directly in
other comprehensive income is recognised in equity and not in the
income statement.
Deferred income tax assets and deferred income tax liabilities
are offset, if a legally enforceable right exists to set off
current tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the
same taxation authority.
Mining Rights
The Special Mining Right is considered an income tax under IFRS
and states that the owners of mining titles and concessions are
subject to pay an annual mining right of 7.5% of the profit derived
from the extractive activities. The Group recognises deferred tax
assets and liabilities on temporary differences arising in the
determination of the Special Mining Right (See note 10).
Sales tax
Expenses and assets are recognised net of the amount of sales
tax, except:
When the sales tax incurred on a purchase of assets or services
is not recoverable from the taxation authority, in which case, the
sales tax is recognised as part of the cost of acquisition of the
asset or as part of the expense item, as applicable;
When receivables and payables are stated with the amount of
sales tax included.
The net amount of sales tax recoverable from, or payable to, the
taxation authority is included as part of receivables or payables
in the balance sheet.
(s) Derivative financial instruments and hedging
The Group uses derivatives to reduce certain market risks
derived from changes in foreign exchange and commodities price
which impact its financial and business transactions. Hedges are
designed to protect the value of expected production against the
dynamic market conditions.
Such derivative financial instruments are initially recognised
at fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value. Derivatives are
carried as assets when the fair value is positive and as
liabilities when the fair value is negative. The full fair value of
a derivative is classified as non-current asset or liability if the
remaining maturity of the item is more than 12 months.
Any gains or losses arising from changes in fair value on
derivatives during the year that do not qualify for hedge
accounting are taken directly to the income statement.
Derivatives are valued using valuation approaches and
methodologies (such as Black Scholes and Net Present Value)
applicable to the specific type of derivative instrument. The fair
value of forward currency and commodity contracts is calculated by
reference to current forward exchange rates for contracts with
similar maturity profiles, European foreign exchange options are
valued using the Black Scholes model. The Silverstream contract is
valued using a Net Present Value valuation approach.
At the inception of a hedge relationship, the Group formally
designates and documents the hedge relationship to which the Group
wishes to apply hedge accounting and the risk management objective
and strategy for the undertaken hedge. The documentation includes
identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the entity
will assess the hedging instrument's effectiveness in offsetting
the exposure to changes in the hedged item's fair value or cash
flows attributable to the hedged risk. Such hedges are expected to
be highly effective in achieving offsetting changes in fair value
or cash flows and are assessed on an ongoing basis to determine
that they actually have been highly effective throughout the
financial reporting periods for which they were designated.
Hedges which meet the strict criteria for hedge accounting are
accounted for as follows:
Cash flow hedges
For derivatives that are designated and qualify as cash flow
hedges, the effective portion of changes in the fair value of
derivative instruments are recorded as in other comprehensive
income and are transferred to the income statement when the hedged
transaction affects profit or loss, such as when a forecast sale or
purchase occurs. For gains or losses related to the hedging of
foreign exchange risk these are included, in the line item in which
the hedged costs are reflected. Where the hedged item is the cost
of a non-financial asset or liability, the amounts recognised in
other comprehensive income are transferred to the initial carrying
amount of the non-financial asset or liability. The ineffective
portion of changes in the fair value of cash flow hedges is
recognised directly as finance costs, in the income statement of
the related period.
If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation as
a hedge is revoked, any cumulative gain or loss recognised directly
in other comprehensive income from the period that the hedge was
effective remains separately in other comprehensive income until
the forecast transaction occurs, when it is recognised in the
income statement. When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was reported in other
comprehensive income is immediately transferred to the income
statement.
When hedging with options, the Group designates only the
intrinsic value movement of the hedging option within the hedge
relationship. The time value of the option contracts is therefore
excluded from the hedge designation. Changes in fair value of time
value is recognised in the income statement in finance costs.
Embedded derivatives
Contracts are assessed for the existence of embedded derivatives
at the date that the Group first becomes party to the contract,
with reassessment only if there is a change to the contract that
significantly modifies the cash flows. Embedded derivatives which
are not clearly and closely related to the underlying asset,
liability or transaction are separated and accounted for as
stand-alone derivatives.
(t) Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of an asset that necessarily takes 12 or
more months to get ready for its intended use or sale (a qualifying
asset) are capitalised as part of the cost of the respective asset.
Borrowing costs consist of interest and other costs that an entity
incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the
amount capitalised represents the actual borrowing costs incurred.
Where surplus funds are available for a short term from funds
borrowed specifically to finance a project, the income generated
from the temporary investment of such amounts is also capitalised
and deducted from the total capitalised borrowing cost. Where the
funds used to finance a project form part of general borrowings,
the amount capitalised is calculated using a weighted average of
rates applicable to relevant general borrowings of the Group during
the period.
All other borrowing costs are recognised in the income statement
in the period in which they are incurred.
(u) Fair value measurement
The Group measures financial instruments at fair value at each
balance sheet date. Fair values of financial instruments measured
at amortised cost are disclosed in notes 30 and 31.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
In the principal market for the asset or liability, or
In the absence of a principal market, in the most advantageous
market for the asset or liability
The principal or the most advantageous market must be accessible
to the Group.
The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset
in its highest and best use.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy, described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole:
Level 1 - Quoted (unadjusted) market prices in active markets
for identical assets or liabilities
Level 2 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable
Level 3 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable
For assets and liabilities that are recognised in the financial
statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by
re-assessing categorisation (based on the lowest level input that
is significant to the fair value measurement as a whole) at the end
of each reporting period.
For the purpose of fair value disclosures, the Group has
determined classes of assets and liabilities on the basis of the
nature, characteristics and risks of the asset or liability and the
level of the fair value hierarchy as explained above. Further
information on fair values is described in note 30.
(v) Dividend distribution
Dividends payable to the Company's shareholders are recognised
as a liability when these are approved by the Company's
shareholders or Board as appropriate. Dividends payable to minority
shareholders are recognised as a liability when these are approved
by the Company's subsidiaries.
3. Segment reporting
For management purposes, the Group is organised into operating
segments based on producing mines.
At 31 December 2017, the Group has seven reportable operating
segments as follows:
The Fresnillo mine, located in the state of Zacatecas, an
underground silver mine;
The Saucito mine, located in the state of Zacatecas, an
underground silver mine;
The Ciénega mine, located in the state of Durango, an
underground gold mine; including the San Ramon satellite mine;
The Herradura mine, located in the state of Sonora, a surface
gold mine;
The Soledad-Dipolos mine, located in the state of Sonora, a
surface gold mine; and
The Noche Buena mine, located in state of Sonora, a surface gold
mine.
The San Julian mine, located on the border of Chihuahua /
Durango states, an underground silver-gold mine. Phase one of San
Julian mine commenced commercial production in the third quarter of
2016 and phase two in the third quarter of 2017.
The operating performance and financial results for each of
these mines are reviewed by management. As the Group's chief
operating decision maker does not review segment assets and
liabilities, the Group has not disclosed this information.
Management monitors the results of its operating segments
separately for the purpose of performance assessment and making
decisions about resource allocation. Segment performance is
evaluated without taking into account certain adjustments included
in Revenue as reported in the consolidated income statement, and
certain costs included within Cost of sales and Gross profit which
are considered to be outside of the control of the operating
management of the mines. The table below provides a reconciliation
from segment profit to Gross profit as per the consolidated income
statement. Other income and expenses included in the consolidated
income statement are not allocated to operating segments.
Transactions between reportable segments are accounted for on an
arm's length basis similar to transactions with third parties.
In 2017 and 2016, substantially all revenue was derived from
customers based in Mexico.
Operating segments
The following tables present revenue and profit information
regarding the Group's operating segments for the year ended 31
December 2017 and 2016, respectively:
Year ended 31 December 2017
------ -----------------------------------------------------------------------------------------------------------------------
Adjustments
Soledad- Noche San and
US$ thousands Fresnillo Herradura Cienega Dipolos(4) Saucito Buena Julian Other(5) eliminations Total
---------------------- --------- --------- ------- ---------- ------- ------- ------- -------- ------------ ---------
Revenues:
Third party(1) 368,286 605,823 183,689 - 446,008 214,998 274,504 - - 2,093,308
Inter-Segment 79,907 (79,907) -
---------------------- --------- --------- ------- ---------- ------- ------- ------- -------- ------------ ---------
Segment revenues 368,286 605,823 183,689 - 446,008 214,998 274,504 79,907 (79,907) 2,093,308
Segment Profit(2) 252,249 355,570 97,098 2,269 315,196 75,496 174,712 59,878 (22,966) 1,309,502
Depreciation and
amortisation (367,609)
Employee profit
sharing (16,488)
---------------------- --------- --------- ------- ---------- ------- ------- ------- -------- ------------ ---------
Gross profit as
per the income
statement 925,405
---------------------- --------- --------- ------- ---------- ------- ------- ------- -------- ------------ ---------
Capital expenditure(3) 111,724 153,200 46,461 - 133,679 18,748 79,069 61,870 - 604,751
---------------------- --------- --------- ------- ---------- ------- ------- ------- -------- ------------ ---------
(1 Total third party revenues include treatment and refining
charges amounting US$139.9 million.)
(2 Segment profit excluding depreciation and amortisation and
employee profit sharing. During 2017 there were no foreign exchange
hedging losses included in Gross profit.)
(3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, purchase of mine
equipment and capitalised stripping activity, excluding additions
relating to changes in the mine closure provision. Significant
additions the construction of) (facilities at San Julian phase II,
the) (second) (dynamic leaching) (plant at Herradura and the
construction of the pyrites plant at Saucito.)
(4 During) (2017) , this segment did not operate due to the
Bajio conflict (note 26). Segment profit is derived from the
changes in the net realisable value allowance against inventory
(note 15).
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure corresponds to Minera Juanicipio S.A de C.V) (.)
Year ended 31 December 2016
--------------- --------- ------------------------------------------------------------------------------------------------------
Adjustments
Noche San and
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos(4) Saucito Buena Julian(5) Other(6) eliminations Total
--------------- --------- --------- ------- ------------------ ------- ------- --------- -------- ------------ ---------
Revenues:
Third party(1) 327,957 655,025 169,530 - 459,590 225,374 66,441 - 1,586 1,905,503
Inter-Segment 77,385 (77,385) -
--------------- --------- --------- ------- ------------------ ------- ------- --------- -------- ------------ ---------
Segment
revenues 327,957 655,025 169,530 - 459,590 225,374 66,441 77,385 (75,799) 1,905,503
Segment
Profit(2) 224,163 369,896 100,105 12,977 363,780 83,852 45,833 63,379 (17,854) 1,246,131
Foreign
exchange
hedging losses (2,770)
Depreciation
and
amortisation (346,502)
Employee profit
sharing (14,744)
--------------- --------- --------- ------- ------------------ ------- ------- --------- -------- ------------ ---------
Gross profit as
per the income
statement 882,115
--------------- --------- --------- ------- ------------------ ------- ------- --------- -------- ------------ ---------
Capital
expenditure(3) 52,794 78,825 32,745 - 102,398 8,620 144,468 14,200 - 434,050
--------------- --------- --------- ------- ------------------ ------- ------- --------- -------- ------------ ---------
(1 Total third party revenues include treatment and refining
charges amounting US$141.1 million.)
(2 Segment profit excluding foreign exchange hedging losses,
depreciation and amortisation and employee profit sharing.)
3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, purchase of mine
equipment and capitalised stripping activity, excluding additions
relating to changes in the mine closure provision. Significant
additions include the construction of second beneficiation plant
(Merrill Crowe) at Herradura and the expansion of the flotation
plant and the construction of the pyrites plant at Saucito.
4 During 2016, this segment did not operate due to the Bajio
conflict (note 26). Segment profit is derived from the changes in
the net realisable value allowance against inventory (note 15).
(5 Due to its size this segment was presented within Other in
the financial statements for the year ended as at 31 December
2016.)
(6 Other includes inter-segment revenue corresponds to leasing
services provided by Minera Bermejal, S.A. de C.V.; capital
expenditure corresponds to Minera Juanicipio S.A de C.V. The
presentation of capital expenditure has been changed by presenting
San Julian separately to be consistent with the presentation in the
2017 table above.)
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré,
slag and precipitates of which the primary contents are silver,
gold, lead and zinc.
(a) Revenues by product sold
Year ended 31
December
------------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------------------- -------------- --------------
Lead concentrates (containing silver, gold, lead and
by-products) 832,039 792,770
Doré and slag (containing gold, silver and by-products) 820,821 880,447
Zinc concentrates (containing zinc, silver and by-products) 195,837 120,889
Precipitates (containing gold and silver) 244,611 111,397
------------------------------------------------------------- -------------- --------------
2,093,308 1,905,503
------------------------------------------------------------- -------------- --------------
Substantially all lead concentrates, precipitates, doré and
slag, were sold to Peñoles' metallurgical complex, Met-Mex, for
smelting and refining.
(b) Value of metal content in products sold
For products other than refined silver and gold, invoiced
revenues are derived from the value of metal content adjusted by
treatment and refining charges incurred by the metallurgical
complex of the customer. The value of the metal content of the
products sold, before treatment and refining charges is as
follows:
Year ended 31
December
---------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Silver 844,815 724,024
Gold 1,125,290 1,133,067
Zinc 161,305 106,461
Lead 101,826 83,070
---------------------------------------------- -------------- --------------
Value of metal content in products sold 2,233,236 2,046,622
Adjustment for treatment and refining charges (139,928) (141,119)
---------------------------------------------- -------------- --------------
Total revenues(1) (,) 2,093,308 1,905,503
---------------------------------------------- -------------- --------------
1 Includes provisional price adjustments which represent changes
in the fair value of embedded derivatives resulting in a gain of
US$9.2 million (2016: loss of US$(2.2) million). During 2017 there
were no hedging transactions impacting revenues (2016: gain of US$
1.6 million). For further detail, refer to note 2(p).
The average realised prices for the gold and silver content of
products sold, prior to the deduction of treatment and refining
charges, were:
Year ended 31
December
---------- ------------------
2017 2016
US$ per US$ per
ounce ounce
---------- -------- --------
Gold(2) 1,267.4 1,246.5
---------- -------- --------
Silver(2) 16.9 17.2
---------- -------- --------
(2 Realised prices do not include the results of hedging.)
5. Cost of sales
Year ended 31
December
---------------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------------------------------------------------------- -------------- --------------
Depreciation and amortisation (notes 2 (e) and 12) 367,609 346,502
Personnel expenses (note 7) 89,629 80,360
Maintenance and repairs 115,670 90,650
Operating materials 153,221 131,786
Energy 144,298 117,995
Contractors 233,909 174,167
Freight 10,545 7,921
Insurance 4,786 4,990
Mining concession rights and contributions 11,589 10,347
Other 22,043 14,721
---------------------------------------------------------------- -------------- --------------
Cost of production 1,153,299 979,439
Losses on foreign currency hedges - 2,770
Change in work in progress and finished goods (ore inventories) 16,873 61,488
Change in net realisable value allowance against inventory
(note 15) (2,269) (20,309)
---------------------------------------------------------------- -------------- --------------
1,167,903 1,023,388
---------------------------------------------------------------- -------------- --------------
6. Exploration expenses
Year ended 31
December
------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------- -------------- --------------
Contractors 105,778 88,822
Administrative services 6,818 6,243
Mining concession rights and contributions 13,872 14,027
Personnel expenses (note 7) 6,749 5,521
Assays 2,850 2,982
Rentals 2,329 1,524
Other 2,712 2,063
------------------------------------------- -------------- --------------
141,108 121,182
------------------------------------------- -------------- --------------
These exploration expenses were mainly incurred in areas of the
Fresnillo, Herradura, La Ciénega, Saucito and San Julian mines, the
San Ramon satellite mine and Orysivo, Guanajuato, Centauro Deep and
Valles projects. In addition, exploration expenses of US$8.3
million (2016: US$7.9 million) were incurred in the year on
projects located in Peru.
The following table sets forth liabilities (generally trade
payables) corresponding to exploration activities of the Group
companies engaged only in exploration, principally Exploraciones
Mineras Parreña, S.A. de C.V.
Year ended 31
December
---------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Liabilities related to exploration activities 1,947 1,643
---------------------------------------------- -------------- --------------
The liabilities related to exploration activities recognised by
the Group operating companies are not included since it is not
possible to separate the liabilities related to exploration
activities of these companies from their operating liabilities.
Cash flows relating to exploration activities are as
follows:
Year ended 31
December
----------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Operating cash out flows related to exploration activities 140,804 120,457
----------------------------------------------------------- -------------- --------------
7. Personnel expenses
Year ended 31
December
----------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
----------------------------------------------- -------------- --------------
Employees' profit sharing 17,150 15,145
Salaries and wages 39,448 36,296
Bonuses 12,112 10,233
Statutory healthcare and housing contributions 14,258 12,979
Other benefits 8,704 8,035
Vacations and vacations bonus 2,636 1,634
Social security 7,112 4,459
Post-employment benefits(1) 4,224 3,567
Other 10,843 8,686
----------------------------------------------- -------------- --------------
116,487 101,034
----------------------------------------------- -------------- --------------
(1 Post- employment benefits include) (US$0.4) million
associated to benefits corresponding to the defined contribution
plan (2016: US$1.5 million).
(a) Personnel expenses are reflected in the following line
items:
Year ended 31
December
------------------------------ ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------ -------------- --------------
Cost of sales (note 5) 89,629 80,360
Administrative expenses 20,109 15,153
Exploration expenses (note 6) 6,749 5,521
------------------------------ -------------- --------------
116,487 101,034
------------------------------ -------------- --------------
(b) The monthly average number of employees during the year was
as follows:
Year ended 31
December
------------------------- ---------------
2017 2016
No. No.
------------------------- ------- ------
Mining 1,994 1,881
Plant concentration 602 550
Exploration 501 454
Maintenance 865 894
Administration and other 936 791
------------------------- ------- ------
Total 4,898 4,570
------------------------- ------- ------
8. Other operating income and expenses
Year ended 31
December
------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Other income:
Gain on sale of property, plant and equipment(1) 25,333 -
Rentals - 3
Selling of scrap 1,444 610
Other 1,426 785
------------------------------------------------- -------------- --------------
28,203 1,398
------------------------------------------------- -------------- --------------
Year ended 31
December
------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Other expenses:
Rentals 229 -
Maintenance(2) 1,858 926
Donations 2,540 317
Environmental activities 1,790 1,005
Loss on sale of property, plant and equipment - 1,103
Consumption tax expensed 1,031 940
Write-off of property, plant and equipment - 3,005
Impairment available-for-sale financial assets 36 -
Other 3,887 3,146
------------------------------------------------- -------------- --------------
11,371 10,442
------------------------------------------------- -------------- --------------
(1 Mainly corresponds to the sale of certain mining concession
from the Fresnillo district to a third party for a consideration of
US$26.0 million, resulting in a gain of US$24.8 million.)
2 Costs relating to the rehabilitation of the facilities of
Compañía Minera las Torres, S.A. de C.V. (closed mine).
9. Finance income and finance costs
Year ended 31
December
------------------------------------------------ ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------ -------------- --------------
Finance income:
Interest on short-term deposits and investments 11,368 4,542
Other 3,208 2,416
------------------------------------------------ -------------- --------------
14,576 6,958
------------------------------------------------ -------------- --------------
Year ended 31
December
------------------------------------------------ ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------ -------------- --------------
Finance costs:
Interest on interest-bearing loans 35,808 29,006
Fair value movement on derivatives(1) 41,389 40,294
Unwinding of discount on provisions 11,703 10,476
Other 753 547
------------------------------------------------ -------------- --------------
89,653 80,323
------------------------------------------------ -------------- --------------
1 Principally relates to the time value associated with gold
commodity options (see note 30 for further detail).
10. Income tax expense
a) Major components of income tax expense:
Year ended 31
December
---------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 155,692 167,873
Amounts under/(over) provided in previous years 8,676 (1,646)
---------------------------------------------------- -------------- --------------
164,368 166,227
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (45,003) 53,581
Revaluation effects of Silverstream contract 34,097 40,058
---------------------------------------------------- -------------- --------------
(10,906) 93,639
---------------------------------------------------- -------------- --------------
Corporate income tax 153,462 259,866
Special mining right
Current:
Special mining right charge(1) 19,415 24,502
---------------------------------------------------- -------------- --------------
19,415 24,502
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences 7,805 8,910
---------------------------------------------------- -------------- --------------
Special mining right 27,220 33,412
Income tax expense reported in the income statement 180,682 293,278
1. The special mining right "SMR" allows the deduction of
payments of mining concessions rights up to the amount of SMR
payable within the same legal entity. During the fiscal year ended
31 December 2017, the Group credited US$15.7 million (2016: US$12.4
million) of mining concession rights against the SMR. Total mining
concessions rights paid during the year were US$16.3 million (2016:
US$15.4 million) and have been recognised in the income statement
within cost of sales and exploration expenses. Mining concessions
rights paid in excess of the SMR cannot be credited to SMR in
future fiscal periods, and therefore no deferred tax asset has been
recognised in relation to the excess. Without regards to credits
permitted under the SMR regime, the current special mining right
charge would have been US$35.1 million (2016: US$36.9 million).
Year ended 31
December
--------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Consolidated statement of comprehensive income:
Deferred income tax credit/(charge) related to items
recognised directly in other comprehensive income:
Losses on cash flow hedges recycled to income statement - (355)
Changes in fair value of cash flow hedges - 15,875
Changes in fair value of available-for-sale financial
assets (2,653) (13,418)
Remeasurement losses on defined benefit plans (148) (388)
--------------------------------------------------------- -------------- --------------
Income tax effect reported in other comprehensive income (2,801) 1,714
--------------------------------------------------------- -------------- --------------
(b) Reconciliation of the income tax expense at the Group's
statutory income rate to income tax expense at the Group's
effective income tax rate:
Year ended 31
December
--------------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
--------------------------------------------------------------- -------------- --------------
Accounting profit before income tax 741,489 718,240
--------------------------------------------------------------- -------------- --------------
Tax at the Group's statutory corporate income tax rate
30.0% 222,446 215,472
Expenses not deductible for tax purposes 2,562 2,016
Inflationary uplift of the tax base of assets and liabilities (20,011) (8,933)
Current income tax (over)/underprovided in previous
years 472 (1,303)
Exchange rate effect on tax value of assets and liabilities(1) (9,934) 90,035
Non-taxable/non-deductible foreign exchange losses (4,242) (2,157)
Inflationary uplift of tax losses (5,084) (2,891)
IEPS tax credit (note 10 (e)) (26,181) (24,020)
Deferred tax asset not recognised 4,461 3,360
Special mining right deductible for corporate income
tax (8,165) (10,024)
Other (2,862) (1,689)
--------------------------------------------------------------- -------------- --------------
Corporate income tax at the effective tax rate of 20.7%
(2016: 36.2%) 153,462 259,866
--------------------------------------------------------------- -------------- --------------
Special mining right 27,220 33,412
--------------------------------------------------------------- -------------- --------------
Tax at the effective income tax rate of 24.4% (2016:
40.8%) 180,682 293,278
--------------------------------------------------------------- -------------- --------------
(1 Mainly derived from the tax value of property, plant and
equipment.)
(c) Movements in deferred income tax liabilities and assets:
Year ended 31
December
-------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Opening net liability (443,027) (342,195)
Income statement credit/(charge) arising on corporate
income tax 10,906 (93,639)
Income statement charge arising on special mining right (7,805) (8,910)
Exchange difference - 3
Net (charge)/ credit related to items directly charged
to other comprehensive income (2,801) 1,714
Closing net liability (442,727) (443,027)
-------------------------------------------------------- -------------- --------------
The amounts of deferred income tax assets and liabilities as at
31 December 2017 and 2016, considering the nature of the related
temporary differences, are as follows:
Consolidated Consolidated
balance sheet income statement
------------------------------------------------ ------------------------------ ------------------------------
2017 2016 2017 2016
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------------------ -------------- -------------- -------------- --------------
Related party receivables (221,451) (199,181) 22,270 72,799
Other receivables (2,171) (3,725) (1,554) 3,256
Inventories 162,842 163,113 271 (43,868)
Prepayments (898) (1,803) (923) (10,727)
Derivative financial instruments including
Silverstream contract (147,535) (134,984) 12,551 4,469
Property, plant and equipment arising from
corporate income tax (341,774) (351,325) (9,551) 36,358
Exploration expenses and operating liabilities 44,121 24,303 (19,818) 4,083
Other payables and provisions 55,379 44,733 (10,646) 13,910
Losses carried forward 68,213 66,343 (1,870) 22,250
Post-employment benefits 1,465 1,685 220 364
Deductible profit sharing 4,249 3,905 (344) (226)
Special mining right deductible for corporate
income tax 30,661 29,100 (1,561) (8,034)
Available-for-sale financial assets (16,818) (14,175) 2,643 13,419
Other (3,772) (3,581) (2,594) (14,414)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability related to corporate
income tax (367,489) (375,592)
Deferred tax credit related to corporate
income tax - - (10,906) 93,639
Related party receivables arising from
special mining right (21,379) (18,764) 2,616 3,557
Inventories arising from special mining
right 11,107 8,274 (2,831) 1,341
Property plant and equipment arising from
special mining right (64,966) (56,945) 8,020 4,012
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (442,727) (443,027)
Deferred tax (credit)/charge (3,101) 102,549
------------------------------------------------ -------------- -------------- -------------- --------------
Reflected in the statement of financial
position as follows:
Deferred tax assets 48,950 20,023
Deferred tax liabilities-continuing operations (491,677) (463,050)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (442,727) (443,027)
------------------------------------------------ -------------- -------------- -------------- --------------
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets and
liabilities relate to the same fiscal authority.
On the basis of management's internal forecast, a deferred tax
asset has been recognised in respect of tax losses amounting to
US$227.4 million (2016: US$221.1 million). If not utilised, US$13.7
million (2016: US$10.7 million) will expire within five years and
US$213.6 million (2016: US$210.4 million) will expire between six
and ten years.
The Group has further tax losses and other similar attributes
carried forward of US$37.4 million (2016: US$29.1 million) on which
no deferred tax is recognised due to insufficient certainty
regarding the availability of appropriate future taxable
profits.
(d) Unrecognised deferred tax on investments in subsidiaries
The Group has not recognised all of the deferred tax liability
in respect of distributable reserves of its subsidiaries because it
controls them and only part of the temporary differences are
expected to reverse in the foreseeable future. The temporary
differences for which a deferred tax liability has not been
recognised aggregate to US$1,723 million (2016: US$1,949
million).
(e) Corporate Income Tax ('Impuesto Sobre la Renta' or 'ISR')
and Special Mining Right ("SMR")
The Group's principal operating subsidiaries are Mexican
residents for taxation purposes. The rate of current corporate
income tax is 30%.
During 2016 the Mexican Internal Revenue Law granted to
taxpayers a credit in respect of an excise tax (Special Tax on
Production and Services, or IEPS for its acronym in Spanish) paid
when purchasing diesel used for general machinery and certain
mining vehicles. The credit can be applied against either the
Group's own corporate income tax or the income tax withheld from
third parties. The credit is calculated on an entity-by-entity
basis and expires one year after the purchase of the diesel. In the
year ended 31 December 2017, the Group applied a credit of US$23.2
million (2016: US$19.1 million) in respect of the year and
recognised a deferred tax asset of US$2.9 million (2016: US$4.8
million) in respect of the IEPS incurred in 2017 and expected to be
applied during 2018. As the IEPS deduction is itself taxable, the
deferred tax asset is recognised at 70% of the IEPS carried
forward. The net amount applied by the Group is presented in the
reconciliation of the effective tax rate in note 10(b).
The SMR states that the owners of mining titles and concessions
are subject to pay an annual mining right of 7.5% of the profit
derived from the extractive activities and is considered as income
tax under IFRS. The SMR allows as a credit the payment of mining
concessions rights up to the amount of SMR payable The 7.5% tax
apply to a base of income before interest, annual inflation
adjustment, taxes paid on the regular activity, depreciation and
amortization, as defined by the new ISR. This SMR can be credited
against the corporate income tax of the same fiscal year and its
payment must be remitted no later than the last business day of
March of the following year.
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the year attributable to equity shareholders of the Company by the
weighted average number of Ordinary Shares in issue during the
period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2017 and 2016, earnings per share have been
calculated as follows:
Year ended 31
December
--------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Earnings:
Profit from continuing operations attributable to equity
holders of the Company 560,578 426,986
Adjusted profit from continuing operations attributable
to equity holders of the Company 481,019 333,516
--------------------------------------------------------- -------------- --------------
Adjusted profit is profit as disclosed in the Consolidated
Income Statement adjusted to exclude revaluation effects of the
Silverstream contract of US$113.6 million gain (US$79.5 million net
of tax) (2016: US$133.5 million gain (US$93.5 million net of
tax)).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
2017 2016
thousands thousands
------------------------------------------------------- ---------- ----------
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
------------------------------------------------------- ---------- ----------
2017 2016
US$ US$
------------------------------------------------------- ---------- ----------
Earnings per share:
Basic and diluted earnings per share 0.761 0.579
Adjusted basic and diluted earnings per Ordinary Share
from continuing operations 0.653 0.453
------------------------------------------------------- ---------- ----------
12. Property, plant and equipment
Year ended 31 December 2016
------------------------------- ------------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
------------------------------- ---------- -------------- ---------------- ----------- ------------ -----------
US$ thousands
------------------------------- ------------------------------------------------------------------------------------
Cost
At 1 January 2016 173,201 1,447,939 1,289,406 217,979 561,623 3,690,148
Additions 459 11,423 4,168 (50,304)(2) 441,649 407,395
Disposals - (12,409) (4,206) (161) - (16,776)
Transfers and other movements 70,315 188,633 218,648 26,391 (503,987) -
At 31 December 2016 243,975 1,635,586 1,508,016 193,905 499,285 4,080,767
Accumulated depreciation
At 1 January 2016 (74,170) (725,762) (678,417) (73,211) - (1,551,560)
Depreciation for the year(1) (16,412) (177,744) (148,223) (18,961) - (361,340)
Write-off of property, plant
and equipment (4) (2,909) - (92) - (3,005)
Disposals - 11,048 4,206 101 - 15,355
At 31 December 2016 (90,586) (895,367) (822,434) (92,163) - (1,900,550)
------------------------------- ---------- -------------- ---------------- ----------- ------------ -----------
Net Book amount at 31 December
2016 153,389 740,219 685,582 101,742 499,285 2,180,217
------------------------------- ---------- -------------- ---------------- ----------- ------------ -----------
Year ended 31 December 2017
------------------------------- ----------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
US$ thousands
------------------------------- ----------------------------------------------------------------------------------
Cost
At 1 January 2017 243,975 1,635,586 1,508,016 193,905 499,285 4,080,767
Additions 3,079 5,464 46,558 27,187(2) 567,856 650,144
Disposals (9,584) (4,415) (1,611) - (15,610)
Transfers and other movements 14,751 186,125 359,226 35,984 (596,086) -
At 31 December 2017 261,805 1,817,591 1,909,385 255,465 471,055 4,715,301
Accumulated depreciation
At 1 January 2017 (90,586) (895,367) (822,434) (92,163) - (1,900,550)
Depreciation for the year(1) (21,462) (165,502) (179,891) (14,061) (380,916)
Disposals 9,410 4,412 939 14,761
At 31 December 2017 (112,048) (1,051,459) (997,913) (105,285) - 2,266,705
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Net Book amount at 31 December
2017 149,757 766,132 911,472 150,180 471,055 2,448,596
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
1 Depreciation for the year includes US$367.7 million (2016:
US$346.5 million) recognised as an expense in the cost of sales in
the income statement and US$13.3 million (2016: US$14.8 million),
capitalised as part of construction in progress.
2 From the additions in "other assets category US$24.1 million
(2016: US$(54.9) million) corresponds to the reassessment of mine
closure rehabilitations costs, see note 21.
The table below details construction in progress by operating
mine
Year ended 31
December
---------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 101,885 45,197
Herradura 98,401 37,740
Noche Buena 12,028 15,985
Ciénega 29,039 17,348
Fresnillo 30,641 32,703
San Julián 53,383 270,154
Other(1) 145,678 80,158
---------------- -------------- --------------
471,055 499,285
---------------- -------------- --------------
1 Manly corresponds to Juanicipio development project and Minera
Bermejal, S.A. de C.V. (2016: Juanicipio development project).
During the year ended 31 December 2017, the Group capitalised
US$11.4 million of borrowing costs within construction in progress
(2016: US$18.2). Borrowing costs were capitalised at the rate of
5.78% (2016: 5.78%).
Sensitivity analysis
As at 31 December 2017 and 2016, the carrying amount of mining
assets was fully supported by the higher of value in use and fair
value less cost of disposal (FVLCD) computation of their
recoverable amount. Value in use and FVLCD was determined based on
the net present value of the future estimated cash flows expected
to be generated from the continued use of the CGUs. For both
valuation approaches management used price assumptions of
US$1,300/ounce and US$19/ounce (2016: US$1,250/ounce and
US$18/ounce) for gold and silver, respectively. Management
considers that the models supporting the carrying amounts are most
sensitive to commodity price assumptions and have therefore
performed a sensitivity analysis for those CGUs, where a reasonable
possible change in prices could lead to impairment. Management has
considered a low sensitivity by decreasing gold and silver prices
by 5% (2016: gold and silver 10%) and a high sensitivity by
decreasing gold and silver prices by 10% (2016: gold 15% and silver
20%). As at 31 December 2017 no impairment resulted in those CGU
tested (2016: San Julian US$84.3 million under high sensitivity;
US$ nil under low sensitivity and Herradura US$109.6 million under
high sensitivity; US$ nil under low sensitivity).
13. Available-for-sale financial assets
Year ended 31
December
--------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
--------------------------------------------------- -------------- --------------
Beginning balance 116,171 71,442
Purchase of available-for-sale financial assets(1) 19,877 -
Fair value change 8,808 44,729
--------------------------------------------------- -------------- --------------
Ending balance 144,856 116,171
--------------------------------------------------- -------------- --------------
Of which relates to investments in funds 19,877 -
--------------------------------------------------- -------------- --------------
(1 Corresponds to the Company's investment in an investment fund
held to obtain a financial return.)
At 31 December 2017, several investments in quoted shares were
valued below the cost paid by the Group. This decrease has
continued throughout the past 12-month period, which is considered
to be prolonged, therefore an impairment of US$0.04 million was
recognised as other expenses in the income statement. During 2016
no impairment arose on the investment in quoted shares.
The fair value of the available-for-sale financial assets is
determined by reference to published price quotations in an active
market.
14. Silverstream contract
On 31 December 2007, the Group entered into an agreement with
Peñoles through which it is entitled to receive the proceeds
received by the Peñoles Group in respect of the refined silver sold
from the Sabinas Mine ('Sabinas'), a base metals mine owned and
operated by the Peñoles Group, for an upfront payment of US$350
million. In addition, a per ounce cash payment of $2.00 in years
one to five and $5.00 thereafter (subject to an inflationary
adjustment that commenced from 31 December 2013) is payable to
Peñoles. The cash payment per ounce for the year ended 31 December
2017 was $5.20 per ounce (2016: $5.15 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.
The Silverstream contract represents a derivative financial
instrument which has been recorded at fair value and classified
within non-current and current assets as appropriate. The term of
the derivative is based on Sabinas life of mine which is currently
38 years. Changes in the contract's fair value, other than those
represented by the realisation of the asset through the receipt of
either cash or refined silver, are charged or credited to the
income statement. In the year ended 31 December 2017 total proceeds
received in cash were US$43.3 million (2016: US$47.5 million) of
which, US$5.9 million was in respect of proceeds receivable as at
31 December 2016 (2015: US$2.8 million). Cash received in respect
of the year of US$37.3 million (2016: US$44.8 million) corresponds
to 3.6 million ounces of payable silver (2016: 3.8 million ounces).
As at 31 December 2017, a further US$4.9 million (2016: US$5.9
million) of cash receivable corresponding to 422,375 ounces of
silver is due (2016: 538,756 ounces).
The US$113.6 million unrealised gain recorded in the income
statement (2016: US$133.5 million gain) resulted from the updating
of assumptions used to value the Silverstream contract. The most
significant of these were the increase in the Sabinas mine silver
reserves and resources, the unwinding of the discount, an increase
in the forward price of silver, and the difference between the
payments already received during the year ended 31 December 2017
and payments estimated in the valuation model as of 31 December
2016.
A reconciliation of the beginning balance to the ending balance
is shown below:
2017 2016
US$ thousands US$ thousands
-------------------------------------------------- -------------- --------------
Balance at 1 January: 467,529 384,771
Cash received in respect of the year (37,373) (44,796)
Cash receivable (4,925) (5,974)
Remeasurement gains recognised in profit and loss 113,656 133,528
-------------------------------------------------- -------------- --------------
Balance at 31 December 538,887 467,529
-------------------------------------------------- -------------- --------------
Less - Current portion 32,318 28,718
-------------------------------------------------- -------------- --------------
Non-current portion 506,569 438,811
-------------------------------------------------- -------------- --------------
See note 30 for further information on the inputs that have a
significant effect on the fair value of this derivative, see note
31 for further information relating to market and credit risks
associated with the Silverstream asset.
15. Inventories
As at 31 December
----------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Finished goods(1) 10,957 5,736
Work in progress(2) 175,016 189,047
Ore stockpile(3) 15,115 18,253
Operating materials and spare parts 75,331 70,348
----------------------------------------------------------- -------------- --------------
276,419 283,384
Accumulated write-down of work in progress inventory(4) - (2,269)
Allowance for obsolete and slow-moving inventories (5,314) (4,265)
----------------------------------------------------------- -------------- --------------
Balance as 31 December at lower of cost and net realisable
value 271,105 276,850
----------------------------------------------------------- -------------- --------------
Less - Current portion 179,485 187,499
----------------------------------------------------------- -------------- --------------
Non-current portion(5) 91,620 89,351
----------------------------------------------------------- -------------- --------------
(1 Finished goods include metals contained in concentrates and
doré bars, and concentrates on hand or in transit to a smelter or
refinery.)
(2 Work in progress includes metals contained in ores on
leaching pads.)
(3 Ore stockpile includes ore mineral obtained during the
development phase at San Julián.)
(4 Corresponds to ore inventory of the Soledad-Dipolos mine
resulting from net realisable value calculations.)
(5 The non-current inventories are expected to be processed more
than 12 months from the reporting date.)
Concentrates are a product containing sulphides with variable
content of precious and base metals and are sold to smelters and/or
refineries. Doré is an alloy containing a variable mixture of gold
and silver that is delivered in bar form to refineries. This
content once processed by the smelter and refinery is sold to
customers in the form of refined products.
The amount of inventories recognised as an expense in the year
was US$1,170.1 million (2016: US$1,042.4 million) before changes to
the net realisable value of inventory. The adjustment to the net
realisable value allowance against work-in-progress inventory
decreased US$2.2 million during the year (2016: US$20.3 million
decrease). The adjustment to the allowance for obsolete and
slow-moving inventory recognised as an expense was US$1.04 million
(2016: US$0.7 million).
16. Trade and other receivables
Year ended 31
December
--------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Trade and other receivables from related parties (note
27)(1) 226,134 189,619
Value Added Tax receivable 85,979 70,426
Advances and other receivables from contractors 19,832 14,651
Other receivables from related parties (note 27) 4,925 5,973
Loans granted to contractors 1,403 1,401
Other receivables arising on the sale of fixed assets 57 386
Other receivables 4,612 4,693
--------------------------------------------------------- -------------- --------------
342,942 287,149
Provision for impairment of 'other receivables' (436) (471)
--------------------------------------------------------- -------------- --------------
Trade and other receivables classified as current assets 342,506 286,678
Other receivables classified as non-current assets:
Loans granted to contractors 129 990
129 990
--------------------------------------------------------- -------------- --------------
342,635 287,668
--------------------------------------------------------- -------------- --------------
1 Trade receivables from related parties includes the fair value
of embedded derivatives arising due to provisional pricing in sales
contracts of US$6.5 million as at 31 December 2017 (2016: US$(2.8)
million).
Trade receivables are shown net of any corresponding advances,
are non-interest bearing and generally have payment terms of 46 to
60 days.
Loans granted to contractors bear interest of between LIBOR plus
1.5% to LIBOR plus 3% and mature over two years.
The total receivables denominated in US$ were US$242.3 million
(2016: US$206.8 million), and in pesos US$100.3 million (2016:
US$80.9 million).
As of 31 December for each year presented, with the exception of
'other receivables' in the table above, all trade and other
receivables were neither past due nor impaired. The amount past due
and considered as impaired as of 31 December 2017 is US$0.4 million
(2016: US$0.5 million).
In determining the recoverability of receivables, the Group
performs a risk analysis considering the type and age of the
outstanding receivable and the credit worthiness of the
counterparty, see note 31(b).
17. Cash and cash equivalents and short term investments
The Group considers cash and cash equivalents and short term
investments when planning its operations and in order to achieve
its treasury objectives.
As at 31 December
-------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------- -------------- --------------
Cash at bank and on hand 4,265 2,592
Short-term deposits 871,769 709,362
-------------------------- -------------- --------------
Cash and cash equivalents 876,034 711,954
-------------------------- -------------- --------------
Cash at bank earns interest at floating rates based on daily
bank deposits. Short-term deposits are made for varying periods of
between one day and four months, depending on the immediate cash
requirements of the Group, and earn interest at the respective
short-term deposit rates. Short-term deposits can be withdrawn at
short notice without any penalty or loss in value.
As at 31 December
----------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
----------------------- -------------- --------------
Short-term investments - 200,000
----------------------- -------------- --------------
Short-term investments are made for fixed periods no longer than
four months and earn interest at fixed rates without an option for
early withdrawal. As at 31 December 2017 there were no short-term
investments (31 December 2016: US$200,000 held in fixed-term bank
deposits).
18. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
--------------------------------------- --------------------------- ---------------------------
2017 2016
--------------------------------------- --------------------------- ---------------------------
Class of share Number Amount Number Amount
--------------------------------------- ------------- ------------ ------------- ------------
Ordinary Shares each of US$0.50 1,000,000,000 $500,000,000 1,000,000,000 $500,000,000
Sterling Deferred Ordinary Shares each
of GBP1.00 50,000 GBP50,000 50,000 GBP50,000
--------------------------------------- ------------- ------------ ------------- ------------
Issued share capital of the Company is as follows:
Sterling Deferred
Ordinary Shares Ordinary Shares
-------------------- -------------------------- -------------------
Number US$ Number GBP
-------------------- ----------- ------------- ------- ----------
At 1 January 2016 736,893,589 $368,545,586 50,000 GBP50,000
At 31 December 2016 736,893,589 $368, 545,586 50,000 GBP50,000
At 31 December 2017 736,893,589 $368, 545,586 50,000 GBP50,000
-------------------- ----------- ------------- ------- ----------
As at 31 December 2017 and 2016, all issued shares with a par
value of US$0.50 each are fully paid. The rights and obligations
attached to these shares are governed by law and the Company's
Articles of Association. Ordinary shareholders are entitled to
receive notice and to attend and speak at any general meeting of
the Company. There are no restrictions on the transfer of the
Ordinary shares.
The Sterling Deferred Ordinary Shares only entitle the
shareholder on winding up or on a return of capital to payment of
the amount paid up after repayment to Ordinary Shareholders. The
Sterling Deferred Ordinary Shares do not entitle the holder to
payment of any dividend, or to receive notice or to attend and
speak at any general meeting of the Company. The Company may also
at its option redeem the Sterling Deferred Ordinary Shares at a
price of GBP1.00 or, as custodian, purchase or cancel the Sterling
Deferred Ordinary Shares or require the holder to transfer the
Sterling Deferred Ordinary Shares. Except at the option of the
Company, the Sterling Deferred Ordinary Shares are not
transferrable.
Reserves
Share premium
This reserve records the consideration premium for shares issued
at a value that exceeds their nominal value.
Capital reserve
The capital reserve arose as a consequence of the Pre-IPO
Reorganisation as a result of using the pooling of interest
method.
Hedging reserve
This reserve records the portion of the gain or loss on a
hedging instrument in a cash flow hedge that is determined to be an
effective hedge, net of tax. When the hedged transaction occurs,
the gain or the loss is transferred out of equity to the income
statement or the value of other assets.
Available-for-sale financial assets reserve
This reserve records fair value changes on available-for-sale
investments, net of tax. On disposal or on impairment, the
cumulative changes in fair value are recycled to the income
statement.
Foreign currency translation reserve
The foreign currency translation reserve is used to record
exchange differences arising from the translation of the financial
information of entities with a functional currency different to
that of the presentational currency of the Group.
Retained earnings/accumulated losses
This reserve records the accumulated results of the Group, less
any distributions and dividends paid.
19. Dividends declared and paid
The dividends declared and paid during the years ended 31
December 2017 and 2016 are as follows:
US cents
per
Ordinary Amount
Share US$ thousands
------------------------------------------------------- --------- --------------
Year ended 31 December 2017
Final dividend for 2016 declared and paid during the
year(1) 21.5 158,432
Interim dividend for 2017 declared and paid during the
year(2) 10.6 78,111
32.1 236,543
------------------------------------------------------- --------- --------------
Year ended 31 December 2016
Final dividend for 2015 declared and paid during the
year(3) 3.3 24,686
Interim dividend for 2016 declared and paid during the
year(4) 8.6 63,373
------------------------------------------------------- --------- --------------
11.9 88,059
------------------------------------------------------- --------- --------------
(1 This dividend was approved by the Board of Directors on 23
May 2017 and paid on 26 May 2017.)
(2 This dividend was approved by the Board of Directors on 31
July 2017 and paid on 8 September 2017.)
(3 This dividend was approved by the Board of Directors on 3 May
2016 and paid on 9 May 2016.)
(4 This dividend was approved by the Board of Directors on 1
August 2016 and paid on 9 September 2016.)
20. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800
million aggregate principal amount of 5.500% Senior Notes due 2023
(the "notes").
Movements in the year in the debt recognised in the balance
sheet are as follows:
As at 31 December
------------------------------------------------ --------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------ --------------- ---------------
Opening balance 798,027 797,032
Accrued interest 46,267 46,267
Interest paid(1) (46,267) (46,267)
Amortisation of discount and transaction costs 1,019 995
------------------------------------------------ --------------- ---------------
Closing balance 799,046 798,027
------------------------------------------------ --------------- ---------------
(1 Accrued interest is payable semi-annually on 13 May and 13
November.)
The Group has the following restrictions derived from the
issuance of the senior notes (the Notes):
Change of control:
Should the rating of the senior notes be downgraded as a result
of a change of control (defined as the sale or transfer of 35% or
more of the common shares; the transfer of all or substantially all
the assets of the Group; starting a dissolution or liquidation
process; or the loss of the majority in the board of directors) the
Group is obligated to repurchase the notes at an equivalent price
of 101% of their nominal value plus the interest earnt at the
repurchase date, if requested to do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property
that may have a material impact on business performance (key
assets). Nevertheless, the Group may pledge the aforementioned
properties provided that the repayment of the Notes keeps the same
level of priority as the pledge on those assets.
21. Provision for mine closure cost
The provision represents the discounted values of the estimated
cost to decommission and rehabilitate the mines at the estimated
date of depletion of mine deposits. Uncertainties in estimating
these costs include potential changes in regulatory requirements,
decommissioning, dismantling, reclamation alternatives, timing, and
the discount, foreign exchange and inflation rates applied.
During the year, the Group refined its estimation of costs by
further analysing the currency in which costs will be incurred. The
Group has performed separate calculations of the provision by
currency, discounting at corresponding rates. As at 31 December
2017, the discount rates used in the calculation of the parts of
the provision that relate to Mexican pesos range from 6.27% to
7.97% (2016: range of 6.61% to 7.74%). The range for the current
year parts that relate to US dollars range from 1.37% to 2.22%
(2016: not applicable).
Mexican regulations regarding the decommissioning and
rehabilitation of mines are limited and less developed in
comparison to regulations in many other jurisdictions. It is the
Group's intention to rehabilitate the mines beyond the requirements
of Mexican law, and estimated costs reflect this level of expense.
The Group intends to fully rehabilitate the affected areas at the
end of the life of the mines.
The provision is expected to become payable at the end of the
production life of each mine, based on the reserves and resources,
which ranges from 3 to 27 years from 31 December 2017 (3 to 27
years from 31 December 2016).
As at 31 December
------------------------------------------ ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------ -------------- --------------
Opening balance 149,109 195,476
Increase/(decrease) to existing provision 1,024 (21,745)
Effect of change in estimation 19,678 -
Effect of changes in discount rate (281) (13,570)
Unwinding of discount 11,729 10,476
Payments (131) (472)
Foreign exchange 3,647 (21,056)
------------------------------------------ -------------- --------------
Closing balance 184,775 149,109
------------------------------------------ -------------- --------------
22. Pensions and other post-employment benefit plans
The Group has a defined contribution plan and a defined benefit
plan.
The defined contribution plan was established as from 1 July
2007 and consists of periodic contributions made by each
non-unionised worker and contributions made by the Group to the
fund matching workers' contributions, capped at 8% of the
employee's annual salary.
The defined benefit plan provides pension benefits based on each
worker's earnings and years of services provided by personnel hired
through 30 June 2007 as well as statutory seniority premiums for
both unionised and non-unionised workers.
The overall investment policy and strategy for the Group's
defined benefit plan is guided by the objective of achieving an
investment return which, together with contributions, ensures that
there will be sufficient assets to pay pension benefits and
statutory seniority premiums for non-unionised workers as they fall
due while also mitigating the various risks of the plan. However,
the portion of the plan related to statutory seniority premiums for
unionised workers is not funded. The investment strategies for the
plan are generally managed under local laws and regulations. The
actual asset allocation is determined by current and expected
economic and market conditions and in consideration of specific
asset class risk in the risk profile. Within this framework, the
Group ensures that the trustees consider how the asset investment
strategy correlates with the maturity profile of the plan
liabilities and the respective potential impact on the funded
status of the plan, including potential short term liquidity
requirements.
Death and disability benefits are covered through insurance
policies.
The following tables provide information relating to changes in
the defined benefit obligation and the fair value of plan
assets:
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
---------------------------------------- ----------------------------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
(excluding from from benefit Balance
Balance Sub-total amounts changes changes increase at
at recognised included in in Sub-total due to 31
1 January Service Net Foreign in the Benefits in net demographic financial Experience Foreign included Contributions personnel December
2017 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2017
----------- -------------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (25,377) (956) (1,729) (1,146) (3,831) 883 - - 515 498 - 1,013 - (15) (27,327)
Fair value
of plan
assets 16,282 - 1,031 731 1,762 (413) (80) - - - - (80) 422 137 18,110
----------- -------------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (9,095) (956) (698) (415) (2,069) 470 (80) - 515 498 - 933 422 122 (9,217)
----------- -------------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
---------------------------------------- ----------------------------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes increase at
1 recognised included in in Sub-total due to 31
January Service Net Foreign in the Benefits in net demographic financial Experience Foreign included Contributions personnel December
2016 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2016
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (32,165) (649) (1,803) 5,573 3,121 816 - (744) 2,636 1,103 - 2,995 - (144) (25,377)
Fair value
of plan
assets 17,631 - 927 (3,003) (2,076) (432) (552) - - - - (552) 1,570 141 16,282
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (14,534) (649) (876) 2,570 1,045 384 (552) (744) 2,636 1,103 - 2,443 1,570 (3) (9,095)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Of the total defined benefit obligation, US$7.5 million (2016:
US$6.7 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions
to the plan for the next annual reporting period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown
below:
As at 31 December
------------------------------- -------------------
2017 2016
% %
------------------------------- --------- --------
Discount rate 7.67 7.52
Future salary increases (NCPI) 5.0 5.0
------------------------------- --------- --------
The life expectancy of current and future pensioners, men and
women aged 65 and older will live on average for a further 23.1 and
26.3 years respectively (2016: 22.3 years for men and 25.5 for
women). The weighted average duration of the defined benefit
obligation is 11 years (2016: 12.1 years).
The fair values of the plan assets were as follows:
As at 31 December
--------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
--------------------------- -------------- --------------
Government debt 556 746
State owned companies 4,559 3,914
Mutual funds (fixed rates) 12,995 11,622
--------------------------- -------------- --------------
18,110 16,282
--------------------------- -------------- --------------
The pension plan has not invested in any of the Group's own
financial instruments nor in properties or assets used by the
Group.
A quantitative sensitivity analysis for significant assumptions
as at 31 December 2017 is as shown below:
Future salary
increases Life expectancy
Assumptions Discount rate (NCPI) of pensioners
-------------------------------- --------------------- -------------------- ---------------
0.5% 0.5% 0.5% 0.5% + 1
Sensitivity Level Increase Decrease increase decrease Increase
-------------------------------- ---------- --------- --------- --------- ---------------
(Decrease)/increase to the
net defined benefit obligation
(US$ thousands) (1,381) 1,516 164 (158) 440
--------------------------------- ---------- --------- --------- --------- ---------------
The sensitivity analysis above has been determined based on a
method that extrapolates the impact on net defined benefit
obligation as a result of reasonable changes in key assumptions
occurring at the end of the reporting period. The pension plan is
not sensitive to future changes in salaries other than in respect
of inflation.
23. Trade and other payables
As at 31 December
-------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Trade payables 93,664 68,216
Other payables to related parties (note 27) 9,057 3,173
Accrued expenses 18,600 16,797
Other taxes and contributions 13,628 33,447
-------------------------------------------- -------------- --------------
134,949 121,633
-------------------------------------------- -------------- --------------
Trade payables are mainly for the acquisition of materials,
supplies and contractor services. These payables do not accrue
interest and no guarantees have been granted. The fair value of
trade and other payables approximate their book values.
The Group's exposure to currency and liquidity risk related to
trade and other payables is disclosed in note 31.
24. Commitments
A summary of capital expenditure commitments by operating mine
is as follows:
As at 31 December
---------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 64,511 32,933
Herradura 28,813 29,544
Noche Buena 1,643 3,677
Ciénega 16,688 6,454
Fresnillo 19,570 12,079
San Julián 27,403 39,895
Other(1) 83,729 20,133
---------------- -------------- --------------
242,357 144,715
---------------- -------------- --------------
(1 Other includes commitments of) (Minera Bermejal, S. de R.L.
de C.V. and Minera Juanicipio, S.A. de C.V.) (2016: Minera
Bermejal, S. de R.L. de C.V. and Minera Juanicipio, S.A. de
C.V.)
25. Operating leases
(a) Operating leases as lessor
Future minimum rentals receivable under non-cancellable
operating leases are as follows:
As at 31 December
============================================ ==============================
2017 2016
US$ thousands US$ thousands
============================================ ============== ==============
Within one year 491 1,095
After one year but not more than five years 108 1,875
============================================= ============== ==============
599 2,970
============================================ ============== ==============
(b) Operating leases as lessee
The Group has financial commitments in respect of
non-cancellable operating leases for land, offices and equipment.
These leases have renewal terms at the option of the lessee with
future lease payments based on market prices at the time of
renewal. There are no restrictions placed upon the Group by
entering into these leases.
The Group has put in place several arrangements to finance mine
equipment through loans and the sale of mine equipment to
contractors. In both cases, contractors are obligated to use these
assets in rendering services to the Group as part of the mining
work contract, during the term of financing or credit, which ranges
from two to six years. The Group considers that the related mining
work contracts contain embedded operating leases.
The future minimum rental commitments under these leases are as
follows:
As at 31 December
-------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Within one year 3,424 6,790
After one year but not more than five years 1,538 3,399
-------------------------------------------- -------------- --------------
4,962 10,189
-------------------------------------------- -------------- --------------
As at 31 December
-------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Minimum lease payments expensed in the year 4,916 4,142
-------------------------------------------- -------------- --------------
26. Contingencies
As of 31 December 2017, the Group has the following
contingencies:
- The Group is subject to various laws and regulations which, if
not observed, could give rise to penalties.
- Tax periods remain open to review by the Mexican tax
authorities (SAT, by its Spanish acronym) in respect of income
taxes for five years following the date of the filing of corporate
income tax returns, during which time the authorities have the
right to raise additional tax assessments including penalties and
interest. Under certain circumstances, the reviews may cover longer
periods.
As such, there is a risk that transactions, and in particular
related party transactions, that have not been challenged in the
past by the authorities, may be challenged by them in the
future.
- There are currently a number of ongoing tax inspections that
have been initiated by the SAT. No findings or claims have been
communicated to the Company in respect of these, other than
relating to Penmont as discussed below. 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.
- With regards to Penmont tax audits, which commenced during
2015, the Company considers it completed the provision of all
documentation required in order to demonstrate that all the
2012-2013 non-taxable income and tax deductions which are being
challenged, are appropriate. Penmont formally filed a writ before
the Mexican Taxpayers Ombudsman (PRODECON per its Spanish acronym)
requesting a conclusive agreement in the matter. SAT's first,
second and third response to the request detailed that, while the
documentation provided was sufficient to demonstrate that all of
non-taxable income and the majority of the tax deductions are
correct, there are still two tax deductions to be approved. In this
sense, discussion with the SAT continue, and as long as the
conclusive agreement is still in progress, the current auditing
process is suspended and the tax authorities cannot determine a tax
deficiency until PRODECON issues the final agreement under the
terms agreed between Penmont and the SAT.
- On 8 May 2008, the Company and Peñoles entered into the
Separation Agreement (the 'Separation Agreement'). This agreement
relates to the separation of the Group and the Peñoles Group and
governs certain aspects of the relationship between the Fresnillo
Group and the Peñoles Group following the initial public offering
in May 2008 ('Admission'). The Separation Agreement provides for
cross-indemnities between the Company and Peñoles so that, in the
case of Peñoles, it is held harmless against losses, claims and
liabilities (including tax liabilities) properly attributable to
the precious metals business of the Group and, in the case of the
Company, it is held harmless by Peñoles against losses, claims and
liabilities which are not properly attributable to the precious
metals business. Save for any liability arising in connection with
tax, the aggregate liability of either party under the indemnities
shall not exceed US$250 million in aggregate.
- Peñoles has agreed to indemnify the Fresnillo Group in
relation to (i) any tax charge, subject to certain exceptions, the
Company may incur as a result of the Pre-IPO Reorganisation
(including as a result of a transaction following Admission of a
member of the Fresnillo Group, provided that Peñoles has confirmed
that the proposed transaction will not give rise to a tax charge,
or as a result of a transaction of a member of the Peñoles Group on
or after Admission), the Global Offer or Admission and (ii) certain
tax aspects of certain other pre-Admission transactions. Peñoles'
liability under these indemnities and in respect of general tax
liabilities arising pre Admission which are not properly
attributable to the precious metals business of the Fresnillo Group
shall not exceed US$500 million. If a member of the Fresnillo Group
forming part of Peñoles' tax consolidation pays an intra-group
dividend in excess of its net income tax account ('Cuenta de
Utilidad Fiscal Neta' o 'CUFIN') account after Admission and is
relieved of tax as a result of the consolidation, it is required to
pay Peñoles an amount in respect of that tax.
- On 30 November 2012, the Mexican government enacted a new
federal labour law. During 2014 management implemented certain
actions as a part of an ongoing process in order to manage the
exposure resulting from the issuance of the new labour law
including any potential impacts on the operations and financial
position of the Group, however management does not expect any
potential contingency or significant effect on the Group's
financial statements as at 31 December 2017 and going forward.
- New income tax and VAT legislation in respect of contractors
came into effect on 1 January 2017, requiring management to ensure
that contractors are compliant with their own tax obligations,
including employment tax. This has created a new obligation for
Fresnillo to obtain and retain sufficient evidence of contractors'
fiscal compliance in order to deduct costs related to the
contractors for income tax purposes and to recover input VAT. In
late 2017, the 2018 Federal Revenue Law clarified that if the
online portal (established by the tax authorities to facilitate
compliance) is used in 2018, it would be sufficient to discharge
any 2017 compliance obligations. Management considers that it is
well progressed in meeting its obligations for 2017 and does not
consider that any significant economic exposure will arise as a
result of this new legislation with respect to the current
year.
- In regard to the ejido El Bajio matter previously reported by the Company:
- In 2009 five members of the El Bajio agrarian community in the
state of Sonora, who claimed rights over certain surface land in
the proximity of the operations of Minera Penmont ("Penmont"),
submitted a legal claim before the Unitarian Agrarian Court
(Tribunal Unitario Agrario) of Hermosillo, Sonora, to have Penmont
vacate an area of this surface land. The land in dispute
encompassed a portion of surface area where part of the operations
of the Soledad-Dipolos mine are located. The litigation resulted in
a definitive court order, pursuant to which Penmont was ordered to
vacate 1,824 hectares of land. The disputed land was returned in
July 2013, resulting in the suspension of operations at
Soledad-Dipolos.
- The Agrarian Court noted in that same year that certain
remediation activities were necessary to comply with the relevant
regulatory requirements and requested the guidance of the Federal
Environmental Agency (SEMARNAT) in this respect. The Agrarian Court
further issued a procedural order in execution of his ruling
determining, amongst other aspects, that Penmont must remediate the
lands to the state they were in before Penmont's occupation.
- In the opinion of the Company, this procedural order was
excessive since this level of remediation was not part of the
original agrarian ruling and also because the procedural order
appeared not to consider the fact that Penmont conducted its
activities pursuant to valid mining concessions and environmental
impact permits. In December 2016, the Agrarian Court issued a
subsequent procedural order in which the Court recognised that
Penmont complied with the agrarian ruling by having returned the
land in dispute and, furthermore, that remediation activities are
to be conducted in accordance with Federal environmental guidelines
and regulations, as supervised by the competent Federal
authorities. Remediation activities in this respect are pending as
the agrarian members have not yet permitted Penmont physical access
to the lands. Penmont has already presented a conceptual mine
closure and remediation plan before the Agrarian Court in respect
of the approximately 300 hectares where Penmont conducted mining
activities. The agrarian community Ejido El Bajio appealed this
procedural order from the Agrarian Court and a Federal District
Court denied this appeal. The agrarian community has presented in
the month of August 2017 a further and last recourse against this
ruling by the Federal District Court and the final result is
pending.
- In addition, and as also previously reported by the Company,
claimants in the El Bajio matter presented other claims against
occupation agreements they entered into with Penmont, covering land
parcels separate from the land described above. Penmont has no
significant mining operations or specific geological interest in
the affected parcels and these lands are therefore not considered
strategic for Penmont. As previously reported, the Agrarian Court
issued rulings declaring such occupation agreements over those land
parcels to be null and void and that Penmont must remediate such
lands to the state that they were in before Penmont's occupation as
well as returning any minerals extracted from this area. Given that
Penmont has not conducted significant mining operations or has
specific geological interest in these land parcels, any contingency
relating to such land parcels is not considered material by the
Company. The case relating to the claims over these land parcels
remains subject to finalisation.
- Various claims and counterclaims have been made between the
relevant parties in the El Bajio matter. There remains significant
uncertainty as to the finalisation and ultimate outcome of these
legal proceedings.
27. Related party balances and transactions
The Group had the following related party transactions during
the years ended 31 December 2017 and 2016 and balances as at 31
December 2017 and 2016.
Related parties are those entities owned or controlled by the
ultimate controlling party, as well as those who have a minority
participation in Group companies and key management personnel of
the Group.
(a) Related party balances
Accounts receivable Accounts payable
--------------------------------------------- ---------------------- ------------------------
As at 31 December As at 31 December
--------------------------------------------- ---------------------- ------------------------
2017 2016 2017 2016
US$ US$ US$ US$
thousands thousands thousands thousands
--------------------------------------------- ---------- ---------- ------------ ------------
Trade:
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 225,741 189,584 397 301
Other:
Industrias Peñoles, S.A.B. de C.V. 4,925 5,974 - -
Servicios Administrativos Peñoles, S.A.
de C.V. - - 2,434 1,612
Servicios Especializados Peñoles, S.A.
de C.V. - - 1,786 36
Termoeléctrica Peñoles, S. de R.L.
de C.V. - - 1,650 908
Eólica de Coahuila S.A. de C.V. - - 1,926 -
Other 392 34 864 316
--------------------------------------------- ---------- ---------- ------------ ------------
Sub-total 231,058 195,592 9,057 3,173
Less-current portion 231,058 195,592 9,057 3,173
--------------------------------------------- ---------- ---------- ------------ ------------
Non-current portion - - - -
--------------------------------------------- ---------- ---------- ------------ ------------
Related party accounts receivable and payable will be settled in
cash.
Other balances with related parties:
Year ended 31
December
---------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------------------------------- -------------- --------------
Silverstream contract:
---------------------------------------- -------------- --------------
Industrias Peñoles, S.A.B. de C.V. 538,887 467,529
---------------------------------------- -------------- --------------
The Silverstream contract can be settled in either silver or
cash. Details of the Silverstream contract are provided in note
14.
(b) Principal transactions with affiliates, including Industrias
Peñoles S.A.B de C.V., the Company's parent, are as follows:
Year ended 31
December
---------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,101,579 1,905,503
---------------------------------------------------- -------------- --------------
Other income 3,173 2,381
---------------------------------------------------- -------------- --------------
Total income 2,104,752 1,907,884
---------------------------------------------------- -------------- --------------
1 Figures do not include hedging gains as the derivative
transactions are not undertaken with related parties. Figures are
net of the adjustment for treatment and refining charges of
US$139.9 million (2016: US$141.1million) and include sales credited
to development projects of US$8.3 million (2016: US$1.6
million).
Year ended 31
December
-------------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Expenses:
Administrative services(2) :
Servicios Administrativos Peñoles, S.A. de C.V.(3) 26,323 24,309
Servicios Especializados Peñoles, S.A. de C.V. 18,239 16,015
44,562 40,324
-------------------------------------------------------- -------------- --------------
Energy:
Termoelectrica Peñoles, S. de R.L. de C.V. 20,415 16,011
Fuerza Eólica del Istmo S.A. de C.V. 1,678 1,794
Eólica de Coahuila S.A. de C.V. 13,666 -
-------------------------------------------------------- -------------- --------------
35,759 17,805
Operating materials and spare parts:
Wideco Inc 4,534 5,254
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 6,420 3,140
-------------------------------------------------------- -------------- --------------
10,954 8,394
-------------------------------------------------------- -------------- --------------
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 8,406 8,268
-------------------------------------------------------- -------------- --------------
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 8,157 7,155
-------------------------------------------------------- -------------- --------------
Other expenses: 3,795 2,085
-------------------------------------------------------- -------------- --------------
Total expenses 111,633 84,031
-------------------------------------------------------- -------------- --------------
2 Includes US$6.4 million (2016: US$4.7 million) corresponding
to expenses reimbursed.
3 Includes US$7.5 million (2016: US$9.5 million) relating to
engineering costs that were capitalised.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of
Directors and the Executive Committee who receive remuneration.
Year ended 31
December
----------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Salaries and bonuses 2,689 2,416
Post-employment benefits 235 208
Other benefits 373 345
----------------------------------------------------- -------------- --------------
Total compensation paid in respect of key management
personnel 3,297 2,969
----------------------------------------------------- -------------- --------------
Year ended 31
December
------------------------------------------------ ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------------------ -------------- --------------
Accumulated accrued defined pension entitlement 4,433 4,237
------------------------------------------------ -------------- --------------
This compensation includes amounts paid to directors disclosed
in the Directors' Remuneration Report.
The accumulated accrued defined pension entitlement represents
benefits accrued at the time the benefits were frozen. There are no
further benefits accruing under the defined benefit scheme in
respect of current services.
28. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31
December 2017 and 2016 are as follows:
Year ended
31 December
------------------------------------------------------- ------------------------------
2017 2016
Class of services US$ thousands US$ thousands
------------------------------------------------------- -------------- --------------
Fees payable to the Group's auditor for the audit of
the Group's annual accounts 1,187 1,149
Fees payable to the Group's auditor and its associates
for other services as follows:
The audit of the Company's subsidiaries pursuant to
legislation 226 222
Audit-related assurance services 308 350
Tax compliance services 19 21
Other non-audit services 27 -
Total 1,767 1,742
------------------------------------------------------- -------------- --------------
29. Notes to the consolidated statement of cash flows
2017 2016
Notes US$ thousands US$ thousands
--------------------------------------------------------- ----- -------------- --------------
Reconciliation of profit for the year to net cash
generated from operating activities
Profit for the year 560,807 424,962
Adjustments to reconcile profit for the period to
net cash inflows from operating activities:
Depreciation and amortisation 5 367,609 346,502
Employee profit sharing 7 17,150 15,145
Deferred income tax 10 (3,101) 102,549
Current income tax expense 10 183,783 190,729
(Gain)/loss on the sale of property, plant and equipment
and other assets 8 (25,333) 1,103
Other losses - 981
Write-off of property, plant and equipment - 3,005
Impairment of available-for-sale financial assets 8 36 -
Net finance costs 33,674 33,019
Foreign exchange loss/(gain) 11,434 (539)
Difference between pension contributions paid and
amounts recognised in the income statement (58) (944)
Non cash movement on derivatives 41,389 40,345
Changes in fair value of Silverstream 14 (113,656) (133,528)
Working capital adjustments
(Increase) in trade and other receivables (44,381) (39,526)
(Increase)/decrease in prepayments and other assets (708) 113
Decrease in inventories 5,745 23,725
Increase in trade and other payables 36,426 5,133
--------------------------------------------------------- ----- -------------- --------------
Cash generated from operations 1,070,816 1,012,774
Income tax paid (292,063) (102,255)
Employee profit sharing paid (17,282) (12,561)
--------------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 761,471 897,958
--------------------------------------------------------- ----- -------------- --------------
30. Financial instruments
(a) Fair value category
As at 31 December 2017
----------------------------------------------------------------------------------------------------------
US$ thousands
----------------------------------------------------------------------------------------------------------
Available-for-sale
investments
at fair At fair
At fair value value Loans value through
through profit through and OCI (cash
Financial assets: or loss OCI receivables flow hedges)
--------------------------------- --------------- ------------------- ------------- ---------------
Trade and other receivables(1)
(note 16) - - 236,859 -
Available-for-sale financial
assets (note 13) - 144,856 - -
Silverstream contract (note
14) 538,887 - - -
Embedded derivatives within
sales contracts(1) (note
4) 6,511 - - -
Derivative financial instruments
(note 30(c)) 311 - - 71
At fair
value At fair
through value through
profit At amortised OCI (cash
Financial liabilities: or loss Cost flow hedges)
--------------------------------- --------------- ------------------- ------------- ---------------
Interest-bearing loans (note
20) - 799,046 -
Trade and other payables
(note 23) - 102,721 -
Derivative financial instruments
(note 30(c)) 37 - 19,179
---------------------------------- --------------- ------------------- ------------- ---------------
(1 Trade and other receivables and embedded derivative within
sales contracts are presented net in Trade and other receivables in
the balance sheet.)
As at 31 December 2016
---------------------------------------------------------------------------------------------------------
US$ thousands
---------------------------------------------------------------------------------------------------------
Available-for-sale
investments
at fair At fair
At fair value value Loans value through
through profit through and OCI (cash
Financial assets: or loss OCI receivables flow hedges)
--------------------------------- --------------- ------------------ ------------- -----------------
Trade and other receivables(1)
(note 16) - - 213,750 -
Available-for-sale financial
assets (note 13) - 116,171 - -
Silverstream contract (note
14) 467,529 - - -
Derivative financial instruments
(note 30(c)) 145 - - 23,005
At fair
value At fair
through value through
profit At amortised OCI (cash
Financial liabilities: or loss Cost flow hedges)
--------------------------------- --------------- ------------------ ------------- -----------------
Interest-bearing loans (note
20) - 798,027 -
Trade and other payables
(note 23) - 70,442 -
Embedded derivatives within
sales contracts(1) (note
4) 2,750 - -
Derivative financial instruments
(note 30(c)) - - 646
---------------------------------- --------------- ------------------ ------------- -----------------
(1 Trade and other receivables and embedded derivative within
sales contracts are presented net in Trade and other receivables in
the balance sheet.)
(b) Fair value measurement
The fair value of financial assets and liabilities, together
with the carrying amounts shown in the balance sheet are as
follows:
As at 31 December
-------------------------------------------- ------------------------------ ------------------------------
Carrying amount Fair value
-------------------------------------------- ------------------------------ ------------------------------
2017 2016 2017 2016
US$ thousands US$ thousands US$ thousands US$ thousands
-------------------------------------------- -------------- -------------- -------------- ----------------
Financial assets:
Available-for-sale financial assets 144,856 116,171 144,856 116,171
Silverstream contract (note 14) 538,887 467,529 538,887 467,529
Embedded derivatives within sales contracts 6,511 - 6,511 -
Derivative financial instruments 382 23,150 382 23,150
Financial liabilities:
Interest-bearing loans(1) (note 20) 799,046 798,027 878,864 840,904
Embedded derivatives within sales contracts - 2,750 - 2,750
Derivative financial instruments 19,216 646 19,216 646
-------------------------------------------- -------------- -------------- -------------- ----------------
(1 Interest-bearing loans are categorised in Level 1 of the fair
value hierarchy.)
The financial assets and liabilities measured at fair value are
categorised into the fair value hierarchy as at 31 December as
follows:
As of 31 December 2017
-----------------------------------------------------------------------------------------------------------
Fair value measure using
Quoted
prices
in active Significant Significant
markets observable unobservable
Level Level Level
1 2 3 Total
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------------ -------------- -------------- -------------- --------------
Financial assets:
Derivative financial instruments:
Embedded derivatives within
sales contracts - - 6,511 6,511
Options commodity contracts - 71 - 71
Options and forward foreign
exchange contracts - 311 - 311
Silverstream contract - - 538,887 538,887
------------------------------------------- -------------- -------------- -------------- --------------
- 382 538,887 539,269
------------------------------------------ -------------- -------------- -------------- --------------
Financial investments available-for-sale:
Quoted investments 144,856 - - 144,856
------------------------------------------- -------------- -------------- -------------- --------------
144,856 382 145,238
------------------------------------------ -------------- -------------- -------------- --------------
Financial liabilities:
Derivative financial instruments:
Options commodity contracts - 19,179 - 19,179
Options and forward foreign
exchange contracts - 37 - 37
------------------------------------------- -------------- -------------- -------------- --------------
- 19,216 6,511 25,727
------------------------------------------ -------------- -------------- -------------- --------------
As of 31 December 2016
----------------------------------------------------------------------------------------------------
Fair value measure using
Significant
Quoted prices Significant unobservable
in observable Level
active markets Level 3
Level 1 2 US$ Total
US$ thousands US$ thousands thousands US$ thousands
--------------------------------- ------------------ -------------- ------------- --------------
Financial assets:
Derivative financial instruments:
Options commodity contracts - 23,005 - 23,005
Option and forward foreign exchange
contracts - 145 - 145
Silverstream contract - - 467,529 467,529
------------------------------------------- -------- -------------- ------------- --------------
- 23,150 467,529 490,679
------------------------------------------ -------- -------------- ------------- --------------
Financial investments
available-for-sale:
Quoted investments 116,171 - - 116,171
------------------------------------------- -------- -------------- ------------- --------------
116,171 23,150 467,529 606,850
------------------------------------------ -------- -------------- ------------- --------------
Financial liabilities:
Derivative financial instruments:
Embedded derivatives within sales
contracts - - 2,750 2,750
Options commodity contracts - 66 - 66
Options and forward foreign exchange
contracts - 580 - 580
------------------------------------------- -------- -------------- ------------- --------------
- 646 2,750 3,396
------------------------------------------ -------- -------------- ------------- --------------
There have been no significant transfers between Level 1 and
Level 2 of the fair value hierarchy, and no transfers into and out
of Level 3 fair value measurements.
A reconciliation of the opening balance to the closing balance
for Level 3 financial instruments other than Silverstream (which is
disclosed in note 14) is shown below:
2017 2016
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Balance at 1 January: (2,750) (532)
Changes in fair value 15,068 (1,718)
Realised embedded derivatives during the year (5,807) (500)
---------------------------------------------- -------------- --------------
Balance at 31 December 6,511 (2,750)
---------------------------------------------- -------------- --------------
The fair value of the financial assets and liabilities is
included at the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following valuation techniques were used to estimate the
fair values:
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The foreign currency forward
(Level 2) contracts are measured based on observable spot exchange
rates, the yield curves of the respective currencies as well as the
currency basis spreads between the respective currencies. The
foreign currency option contracts are valued using the Black
Scholes model, the significant inputs to which include observable
spot exchange rates, interest rates and the volatility of the
currency.
Option commodity contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The option commodity (Level 2)
contracts are measured based on observable spot commodity prices,
the yield curves of the respective commodity as well as the
commodity basis spreads between the respective commodities. The
option contracts are valued using the Black Scholes model, the
significant inputs to which include observable spot commodities
price, interest rates and the volatility of the commodity.
Silverstream contract
The fair value of the Silverstream contract is determined using
a valuation model including unobservable inputs (Level 3). This
derivative has a term of over 20 years and the valuation model
utilises a number of inputs that are not based on observable market
data due to the nature of these inputs and/or the duration of the
contract. Inputs that have a significant effect on the recorded
fair value are the volume of silver that will be produced and sold
from the Sabinas mine over the contract life, the future price of
silver, future foreign exchange rates between the Mexican peso and
US dollar, future inflation and the discount rate used to discount
future cash flows.
The estimate of the volume of silver that will be produced and
sold from the Sabinas mine requires estimates of the recoverable
silver reserves and resources, the related production profile based
on the Sabinas mine plan and the expected recovery of silver from
ore mined. The estimation of these inputs is subject to a range of
operating assumptions and may change over time. Estimates of
reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided
to the Company. The production profile and estimated payable silver
that will be recovered from ore mined is based on the 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 is not significantly sensitive to a
reasonable change in future exchange rates, however, it is to a
reasonable change in future silver price, future inflation and the
discount rate used to discount future cash flows.
For further information relating to the Silverstream contract
see note 14. The sensitivity of the valuation to the inputs
relating to market risks, being the price of silver, foreign
exchange rates, inflation and the discount rate is disclosed in
note 31.
Quoted investments:
The fair value of available-for-sale financial assets is derived
from quoted market prices in active markets. (Level 1)
Interest-bearing loans
The fair value of the Group's interest-bearing loan, is derived
from quoted market prices in active markets. (Level 1)
Embedded derivatives within sales contracts:
Sales of concentrates, precipitates and doré bars are
'provisionally priced' and revenue is initially recognised using
this provisional price and the Group's best estimate of the
contained metal. Revenue is subject to final price and metal
content adjustments subsequent to the date of delivery (see note 2
(p)). This price exposure is considered to be an embedded
derivative and is separated from the sales contract.
At each reporting date, the provisionally priced metal content
is revalued based on the forward selling price for the quotational
period stipulated in the relevant sales contract. The selling price
of metals can be reliably measured as these metals are actively
traded on international exchanges but the estimated metal content
is a non-observable input to this valuation (Level 3).
At 31 December 2017 the fair value of embedded derivatives
within sales contracts was US$6.5 million (2016: US$(2.7) million).
The revaluation effects of embedded derivatives arising from these
sales contracts are recorded as an adjustment to revenues.
(c) Derivative financial instruments
The Group enters into certain forward and option contracts in
order to manage its exposure to foreign exchange risk associated
with costs incurred in Mexican pesos and other currencies. The
Group also enters into option contracts to manage its exposure to
commodity price risk as described in note 2 (s).
The following tables summarise the fair value of derivative
financial instruments held as of 31 December 2017 and 2016.
Financial assets As at 31 December
-------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
-------------------------------- -------------- --------------
Currency contracts
Forward contracts:
Euro 193 145
Swedish krona 104 -
Canadian dollar 14 -
Commodity contracts
Option Contracts(1) :
Gold - 23,005
Lead 71 -
Total derivative related assets 382 23,150
-------------------------------- -------------- --------------
Less - Current portion 382 6,618
-------------------------------- -------------- --------------
Non-current portion(2) - 16,532
-------------------------------- -------------- --------------
Financial liabilities As at 31 December
------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
------------------------------------- -------------- --------------
Currency contracts
Forward contracts:
Euro 12 570
Canadian dollar - 10
Swedish krona 25 -
Commodity contracts
Option Contracts(1) :
Gold 18,096 16
Lead - 2
Zinc 1,083 48
------------------------------------- -------------- --------------
Total derivative related liabilities 19,216 646
------------------------------------- -------------- --------------
Less - Current portion 4,992 630
------------------------------------- -------------- --------------
Non-current portion(2) 14,224 16
------------------------------------- -------------- --------------
(1 Option contracts operate as zero cost collars.)
(2 Non-current portion corresponds to Gold option contracts that
mature in a period over one year from the reporting date until 30
December 2019.)
The following table summarises the movements in deferred gains
or losses on foreign exchange and price commodity derivative
instruments qualifying for hedge accounting, net of tax effects,
recorded in other comprehensive income for the year:
As at 31 December
----------------------------------------------------- ------------------------------
2017 2016
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Beginning balance - 36,214
Gains recycled to revenue during the year - (1,586)
Losses recycled to cost of sales during the year - 2,770
Unrealised losses before tax arising during the year - (52,918)
Deferred tax effect recorded in other comprehensive
income during the year - 15,520
----------------------------------------------------- -------------- --------------
Ending balance - -
----------------------------------------------------- -------------- --------------
During the year ended 31 December 2017 all the contracted
hedging position were out of the money and therefore all the
mark-to-market valuation has been taken to income within financial
income/(expense).
31. Financial risk management
Overview
The Group's principal financial assets and liabilities, other
than derivatives, comprise trade receivables, cash,
available-for-sale financial assets, interest-bearing loans and
trade payables.
The Group has exposure to the following risks from its use of
financial instruments:
Market risk, including foreign currency, commodity price,
interest rate, inflation rate and equity price risks
Credit risk
Liquidity risk
This note presents information about the Group's exposure to
each of the above risks and the Group's objectives, policies and
processes for assessing and managing risk. Further quantitative
disclosures are included throughout the financial statements.
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The Group's risk management policies are established to identify
and analyse the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to limits.
Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and
obligations.
The Fresnillo Audit Committee has responsibility for overseeing
how management monitors compliance with the Group's risk management
policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the Group.
The Audit Committee is assisted in its oversight role by Internal
Audit, which undertakes both regular and ad hoc reviews of risk
management controls and procedures, the results of which are
reported to the Audit Committee.
(a) Market risk
Market risk is the risk that changes in market factors, such as
foreign exchange rates, commodity prices or interest rates will
affect the Group's income or the value of its financial
instruments.
The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while
optimising the return on risk.
In the following tables, the effect on equity excludes the
changes in retained earnings as a direct result of changes in
profit before tax.
Foreign currency risk
The Group has financial instruments that are denominated in
Mexican peso, euro and Swedish krona which are exposed to foreign
currency risk. Transactions in currencies other than the US dollar
include the purchase of services, fixed assets, spare parts and the
payment of dividends. As a result, the Group has financial assets
and liabilities denominated in currencies other than functional
currency, and holds cash and cash equivalents in Mexican Peso.
In order to manage the Group's exposure to foreign currency risk
on expenditure denominated in currencies other than the US dollar,
the Group has entered into certain forward and option derivative
contracts with maturity dates from 2018 (see note 30 for additional
detail).
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in the US dollar exchange rate compared
to the Mexican peso, reflecting the impact on the Group's profit
before tax and equity, with all other variables held constant. It
is assumed that the same percentage change in exchange rates is
applied to all applicable periods for the purposes of calculating
the sensitivity with relation to derivative financial
instruments.
Effect
on
profit
Strengthening/ before
(weakening) tax: increase/
of US (decrease)
Year ended 31 December dollar US$ thousands
----------------------- -------------- ---------------
2017 20% -
(10%) -
----------------------- -------------- ---------------
2016 15% 78
(10%) (67)
----------------------- -------------- ---------------
The following table demonstrates the sensitivity of financial
assets and financial liabilities to a reasonably possible change in
the US dollar exchange rate compared to the Swedish krona on the
Group's profit before tax and equity, with all other variables held
constant. It is assumed that the same percentage change in exchange
rates is applied to all applicable periods.
Effect
on profit
Strengthening/ before
(weakening) tax: increase/
of (decrease)
Year ended 31 December US dollar US$ thousands
----------------------- -------------- ---------------
2017 10% (3,783)
(10%) 1,365
----------------------- -------------- ---------------
2016 10% (63)
(10%) 94
----------------------- -------------- ---------------
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in the US dollar exchange rate compared
to the euro on the Group's profit before tax and equity, with all
other variables held constant. It is assumed that the same
percentage change in exchange rates is applied to all applicable
periods.
Effect
on
profit
Strengthening/ before
(weakening) tax: increase/
of US (decrease)
Year ended 31 December dollar US$ thousands
----------------------- -------------- ---------------
2017 10% 1058
(10%) (1,056)
----------------------- -------------- ---------------
2016 5% 459
(10%) (1,024)
----------------------- -------------- ---------------
Foreign currency risk - Silverstream
Future foreign exchange rates are one of the inputs to the
Silverstream valuation model. The following table demonstrates the
sensitivity of the Silverstream contract valuation to a reasonably
possible change in the Mexican peso as compared to the US dollar,
with all other inputs to the Silverstream valuation model held
constant. It is assumed that the same percentage change in exchange
rates is applied to all applicable periods in the valuation
model.
Effect
on profit
before
Strengthening/ tax:
(weakening) increase/
of (decrease)
Year ended 31 December US dollar US$ thousands
----------------------- -------------- --------------
2017 20% (781)
(10%) 521
----------------------- -------------- --------------
2016 15% (1,436)
(10%) 1,223
----------------------- -------------- --------------
Commodity risk
The Group has exposure to changes in metals prices (specifically
silver, gold, lead and zinc) which have a significant effect on the
Group's results. These prices are subject to global economic
conditions and industry-related cycles.
The Group uses derivative instruments to hedge against an
element of gold, zinc and lead price.
The table below reflects the aggregate sensitivity of financial
assets and liabilities (excluding Silverstream) to a reasonably
possible change in commodities prices, reflecting the impact on the
Group's profit before tax with all other variables held
constant.
The sensitivity shown in the table below relates to changes in
fair value of commodity derivatives financial instruments contracts
and embedded derivatives in sales.
Increase/(decrease) in commodity prices
----------------------- --------------------------------------------- --------------------------- -----------------
Effect on
profit before tax: Effect on equity:
increase/ increase/
(decrease) (decrease)
Year ended 31 December Gold Silver Zinc Lead US$ thousands US$ thousands
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2017 10% 10% 20% 15% 83,433 (19,164)
(10%) (10%) (20%) (15%) 5,105 1,818
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2016 10% 25% 40% 40% (28,516) -
(15%) (20%) (30%) (15%) (36,031) 120,715
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
Commodity price risk - Silverstream
Future silver price is one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract valuation to a reasonably possible
change in future silver prices, with all other inputs to the
Silverstream valuation model held constant. It is assumed that the
same percentage change in silver price is applied to all applicable
periods in the valuation model. There is no impact on the Group's
equity, other than the equivalent change in retained earnings.
Effect
Increase/ on profit
(decrease) before
in tax: increase/
silver (decrease)
Year ended 31 December price US$ thousands
----------------------- ----------- ---------------
2017 10% 72,779
(10%) (72,779)
----------------------- ----------- ---------------
2016 25% 157,406
(20%) (125,925)
----------------------- ----------- ---------------
Interest rate risk
The Group is exposed to interest rate risk from the possibility
that changes in interest rates will affect future cash flows or the
fair values of its financial instruments, principally relating to
the cash balances and the Silverstream contract held at the balance
sheet date. Interest-bearing loans are at a fixed rate, therefore
the possibility of a change in interest rate only impacts its fair
value but not its carrying amount. Therefore, interest-bearing
loans and loans from related parties are excluded from the table
below.
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in interest rate applied to a full year
from the balance sheet date. There is no impact on the Group's
equity other than the equivalent change in retained earnings.
Basis Effect
point on profit
increase/ before
(decrease) tax: increase/
in interest (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------ ---------------
2017 90 7,898
(50) (4,388)
----------------------- ------------ ---------------
2016 65 5,943
(20) (1,829)
----------------------- ------------ ---------------
The sensitivity shown in the table above primarily relates to
the full year of interest on cash balances held as at the year
end.
Interest rate risk - Silverstream
Future interest rates are one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract valuation to a reasonably possible
change in interest rates, with all other inputs to the Silverstream
valuation model held constant. It is assumed that the same change
in interest rate is applied to all applicable periods in the
valuation model. There is no impact on the Group's equity, other
than the equivalent change in retained earnings.
Basis Effect
point on profit
increase/ before
(decrease) tax: increase/
in interest (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------ ---------------
2017 90 (58,798)
(50) 37,935
----------------------- ------------ ---------------
2016 65 (35,908)
(20) 12,051
----------------------- ------------ ---------------
Inflation rate risk
Inflation rate risk-Silverstream
Future inflation rates are one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract to a reasonably possible change in the
inflation rate, with all other inputs to the Silverstream valuation
model held constant. It is assumed that the same change in
inflation is applied to all applicable periods in the valuation
model. There is no impact on the Group's equity, other than the
equivalent change in retained earnings.
Basis Effect
point on profit
(increase/ before
(decrease) tax: increase/
in inflation (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------- ---------------
2017 100 88
(100) (83)
----------------------- ------------- ---------------
2016 100 190
(100) (188)
----------------------- ------------- ---------------
Equity price risk
The Group has exposure to changes in the price of equity
instruments that it holds as available-for-sale financial
assets.
The following table demonstrates the sensitivity of
available-for-sale financial assets to a reasonably possible change
in market price of these equity instruments, reflecting the effect
on the Group's profit before tax and equity:
Effect
on
profit
before Effect
Increase/ tax: increase/ on equity:
(decrease) (decrease) increase/
in equity (US$ (decrease)
Year ended 31 December price thousands) US$ thousands
----------------------- ----------- --------------- --------------
2017 40% - 28,972
(65%) - (65,408)
----------------------- ----------- --------------- --------------
2016 100% - 116,171
(50%) - (58,086)
----------------------- ----------- --------------- --------------
(b) Credit risk
Exposure to credit risk arises as a result of transactions in
the Group's ordinary course of business and is applicable to all
financial assets and derivative financial instruments. The
financial assets are trade and other receivables, cash and cash
equivalents, short-term investments, the Silverstream contract and
available-for-sale financial assets.
The Group's policies are aimed at minimising losses as a result
of counterparties' failure to honour their obligations. Individual
exposures are monitored with customers subject to credit limits to
ensure that the Group's exposure to bad debts is not significant.
The Group's exposure to credit risk is influenced mainly by the
individual characteristics of each counter party. The Group's
financial assets are with counterparties with what the Group
considers to have an appropriate credit rating. As disclosed in
note 27, the counterparties to a significant proportion of these
financial assets are related parties. At each balance sheet date,
the Group's financial assets were neither impaired nor past due,
other than 'Other receivables' as disclosed in note 16. The Group's
policies are aimed at minimising losses from foreign currency
hedging contracts. The Company's foreign currency hedging contracts
are entered into with large financial institutions with strong
credit ratings.
The Group has a high concentration of trade receivables with one
counterparty Met-Mex Peñoles, the Group's primary customer
throughout 2017 and 2016. A further concentration of credit risk
arises from the Silverstream contract. Both Met-Mex and the
counterparty to the Silverstream contract are subsidiaries in the
Peñoles group which currently owns 75 per cent of the shares of the
Company and is considered by management to be of appropriate credit
rating.
The Group's surplus funds are managed by Servicios
Administrativos Fresnillo, S.A. de C.V., which manages cash and
cash equivalents, including short-term investments investing in a
number of financial institutions. Accordingly, on an ongoing basis
the Group deposits surplus funds with a range of financial
institutions, depending on market conditions. In order to minimise
exposure to credit risk, the Group only deposits surplus funds with
financial institutions with a credit rating of MX-1 (Moody's) and
mxA-1+ (Standard and Poor's) and above. As at 31 December 2017, the
Group had concentrations of credit risk as 23 percent of surplus
funds were deposited with one financial institution of which 17
percent was held in short term Mexican government paper.
The maximum credit exposure at the reporting date of each
category of financial asset above is the carrying value as detailed
in the relevant notes. See note 13 for the maximum credit exposure
to available-for-sale financial assets, note 17 for short-term
investments and cash and cash equivalents and note 27 for related
party balances with Met-Mex. The maximum credit exposure with
relation to the Silverstream contract is the value of the
derivative as at 31 December 2017, being US$538.9 million (2016:
US$467.5 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using
projected cash flows from operations and by monitoring the maturity
of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments.
US$ thousands
---------------------------------- ---------------------------------------------------
Within
1 year 2-3 years 3-5 years > 5 years Total
---------------------------------- ------- --------- --------- --------- -----------
As at 31 December 2017
Interest-bearing loans (note 20) 46,267 92,534 92,534 846,267 1,077,602
Trade and other payables 102,311 - - - 102,311
Derivative financial instruments
- liabilities 4,992 14,224 - - 19,216
Embedded derivatives within sales
contracts - liability 6,511 - - - 6,511
---------------------------------- ------- --------- --------- --------- -----------
US$ thousands
---------------------------------- ---------------------------------------------------
Within
1 year 2-3 years 3-5 years > 5 years Total
---------------------------------- ------- --------- --------- --------- -----------
As at 31 December 2016
Interest-bearing loans (note 20) 46,267 92,534 92,534 892,534 1,123,869
Trade and other payables 71,389 - - - 71,389
Derivative financial instruments
- liabilities 630 16 - - 646
Embedded derivatives within sales
contracts - liability 2,750 - - - 2,750
---------------------------------- ------- --------- --------- --------- -----------
The payments disclosed for financial derivative instruments in
the above table are the gross undiscounted cash flows. However,
those amounts may be settled gross or net. The following table
shows the corresponding estimated inflows based on the contractual
terms:
US$ thousands
----------------------- ---------------------------------------------------
Within
1 year 2-3 years 3-5 years > 5 years Total
----------------------- -------- --------- --------- --------- ----------
As at 31 December 2017
Inflows 15,174 - - - 15,174
Outflows (14,884) - - - (14,884)
----------------------- -------- --------- --------- --------- --------
Net 290 - - - 290
----------------------- -------- --------- --------- --------- --------
US$ thousands
------------------------------- ---------------------------------------------------
Within
1 year 2-3 years 3-5 years > 5 years Total
------------------------------- -------- --------- --------- --------- ----------
As at 31 December 2016
Inflows 10,932 - - - 10,932
Outflows (11,229) - - - (11,229)
------------------------------- -------- --------- --------- --------- ----------
Net (297) - - - (297)
------------------------------- -------- --------- --------- --------- ----------
The above liquidity tables include expected inflows and outflows
from currency option contracts which the Group expects to be
exercised during 2018 as at 31 December 2017 and during 2017 as at
31 December 2016, either by the Group or counterparty.
Management considers that the Group has adequate current assets
and forecast cash from operations to manage liquidity risks arising
from current liabilities and non-current liabilities.
Capital management
The primary objective of the Group's capital management is to
ensure that it maintains a strong credit rating and healthy capital
ratios that support its business and maximise shareholder value.
Management considers capital to consist of equity and certain
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 available-for-sale
financial assets. 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.
In managing its capital, the Group considers its cash and other
liquid asset position, as set out below:
2017 2016
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Cash and cash equivalents (note 17) 876,034 711,954
Short-term investments (note 17) - 200,000
Available-for-sale financial instruments held
in funds (note 13) 19,877 -
----------------------------------------------- -------------- --------------
Cash and other liquid assets position 895,911 911,954
----------------------------------------------- -------------- --------------
[1] Cash and other liquid funds are disclosed in Note 31 (c) to
the financial statements
[2] Cash and other liquid funds are disclosed in Note 31 (c) to
the financial statements
[3] Cash and other liquid funds are disclosed in Note 31(c) to
the Financial Statements.
[4] Cash and other liquid funds are disclosed in Note 31(c) to
the financial statements.
([5]) Treatment and refining charges include the cost of
treatment and refining as well as the margin charged by the
refiner.
[6] Cash and other liquid funds are disclosed in Note 31(c) to
the financial statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GMGZZMNNGRZG
(END) Dow Jones Newswires
February 27, 2018 02:02 ET (07:02 GMT)
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