TIDMFRES
RNS Number : 1136R
Fresnillo PLC
26 February 2019
Fresnillo plc
Financial results for the year ended 31 December 2018
Fresnillo plc today announced its financial results for the full
year ended 31 December 2018. Octavio Alvídrez, CEO said:
"Since we listed on the London Stock Exchange in 2008, we have
successfully built a track record of creating value through growth
and returns. We have remained committed to our stated strategy,
investing in our business, growing production and delivering
returns to our shareholders in what has been a volatile time for
the wider mining sector.
2018 was however a more challenging year for Fresnillo.
We achieved record annual silver production of 61.8 moz and a
very strong gold performance of 923 koz in 2018. Gold production
surpassed the expectations we had at the beginning of the year.
Despite the year on year increase in silver production, we reported
lower silver production than anticipated and were disappointed not
to meet our long-term silver target of 65 moz. This was mainly due
to lower than expected ore grades at the Fresnillo and Saucito
mines combined with some operational issues.
We are taking action to address this, not least by intensifying
our infill drilling programmes, controlling dilution and further
investment in equipment and infrastructure. The flotation plant to
process historical and ongoing tailings at the Fresnillo mine is
progressing and is expected to improve overall recoveries once
completed. We have also invested in innovative technology to
improve productivity with a new state-of-the-art tunnelling machine
due to be commissioned in 2019.
A more challenging operating environment was also reflected in
the financial performance for the year, with gross profit and
EBITDA decreasing by 15.6% and 13.7% respectively, though margins
remained strong. This decrease in gross profit was driven by the
higher stripping ratio at Herradura, as well as higher depreciation
and increased cost inflation across the Group, amongst other
factors. These adverse factors were mitigated by the reassessment
of inventories at Herradura as well as the higher production at San
Julián (Disseminated Ore Body) following its first full year in
operation.
We maintained a solid financial position, with US$560.8 million
in cash and other liquid funds notwithstanding paying dividends of
US$298.1 million, investing US$668.7 million in capex and spending
US$172.8 million in exploration. The Board has recommended a final
dividend of US$16.7 cents per share, bringing the total paid for
the year to US$201.9 million.
Core to our organic growth strategy is ensuring we deliver on
the potential of our existing assets while expanding our
development pipeline.
I fully expect to be able to make a further positive
announcement on our Juanicipio development project in due course.
This joint venture project is expected to further contribute to
silver and gold production, delivering high returns for our
business while generating additional employment in the area. With
first production anticipated in the second half of 2020, Juanicipio
reaffirms the world-class status of the Fresnillo district and
underlines the extent of the resources that have already been
discovered there, as well as those that await discovery in the
future.
We have also progressed our other development projects. The
first stage of the new Pyrites plant has now been commissioned. The
plant will make an important contribution to production by
extracting additional quantities of gold and silver from the
historical and ongoing tailings at the Fresnillo and Saucito mines.
We were also pleased to commission the second line at the Dynamic
Leaching Plant (DLP) at Herradura during the year.
Another point of difference for Fresnillo is our commitment to
maintaining a strong exploration pipeline. We continued to make
good progress at Orisyvo and Guanajuato, while the project at Rodeo
is showing positive signs. At the end of 2018, our silver resources
stood at 2.2 boz, down by 5.0% over the previous year, with our
exploration mining concessions amounting to 1.8 million hectares in
Mexico. Our gold resources increased by 1.5% during the year to
39.1 moz. In 2018 we also progressed our international pipeline,
with exploration prospects in Chile and Peru.
The safety of our employees and contractors is the absolute
priority for the Board. So it is with deep regret I confirm five
fatalities during the year and one more at the beginning of 2019.
We must do better. The safety of our workforce is at the top of our
HSECR agenda for 2019, and we will renew our efforts to align
employees and contractors alike with our safety culture.
Looking ahead, I expect 2019 to be another challenging year. We
face a number of headwinds, including lower prices for precious
metals and higher inflation. I also expect to see higher
depreciation costs as a result of the investments we have made in
recent years into the operations, while we continue to expect to
work through operational issues and lower grades at certain mines
during the year. All this has resulted in us slightly lowering our
silver production guidance for 2019.
Our strategic goals remain unchanged, and we are committed to
maintaining our position as the world's largest primary silver
company and a leading gold producer in Mexico. Our model is proven,
our people are skilled, experienced and dedicated, and a track
record of creating value through growth and returns will continue
to be our defining characteristic."
Twelve months to 31 December 2018
$ million unless stated 2018 2017 % change
Silver Production* (kOz) 61,804 58,673 5.3
Gold Production* (Oz) 922,527 911,132 1.3
Total Revenue 2,103.8 2,093.3 0.5
Adjusted Revenue** 2,243.4 2,233.2 0.5
Gross Profit 780.7 925.4 (15.6)
EBITDA 915.1 1,060.1 (13.7)
Profit Before Income Tax 483.9 741.5 (34.7)
Profit for the year 350.0 560.8 (37.6)
Basic and Diluted EPS excluding
post-tax Silverstream effects
(USD)*** 0.475 0.653 (37.6)
* 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 2018 and 2017
2018 Highlights
Challenging operational environment impacted financial
performance
-- Adjusted revenue of US$2,243.4 million, 0.5% increase vs.
2017 primarily due to record silver, lead and zinc volumes sold
offset by lower prices.
-- Higher adjusted production costs, up 23.8%, mainly driven by
the higher stripping ratio at Herradura, cost inflation and
additional costs associated with higher volumes produced.
-- Gross profit of US$780.7 million down 15.6% respectively
mainly due to lower prices, higher adjusted production costs and
increased depreciation. Healthy profit margin maintained
(37.1%).
-- Exploration spend of US$172.8 million, up 22.5%.
-- Profit from continuing operations of US$506.7 million, down
28.6% as a result of lower gross profit and higher exploration and
administrative expenses.
-- Profit for the year of USD$350.0 million, down 37.6% on 2017
mainly due to the lower profit from continuing operations and the
US$22.5 million Silverstream revaluation loss recognised in 2018,
compared to the US$70.3 million gain in 2017.
-- Cash generated by operations before changes in working
capital decreased by 13.3% to US$930.7 million (2017: US$1,073.9
million).
-- Capital expenditures of US$668.7 million, up 10.6% vs 2017
but below guidance, mainly due to the delay in the start of the
construction of the Juanicipio project.
-- Maintained financial flexibility, with year-end cash and
other liquid funds[1] of US$560.8 million (2017: US$896.1
million).
-- Basic and diluted EPS from continuing operations of US$0.475;
adjusted EPS of US$0.461, down 37.6% and 29.4% respectively.
-- 2018 final dividend of US$16.7 cents per share, equivalent to
approximately US$123.1 million, recommended by the Board
Delivering on the potential of existing assets while expanding
development pipeline
-- Commissioned the leaching plant at Saucito in 2Q18, the first
phase of this US$155 million Pyrites Plant project in the Fresnillo
district.
-- Construction of the US$110 million second line of the Dynamic
Leaching Plant at Herradura completed in 2018, albeit minor delays
due to a longer testing period.
-- Juanicipio project continued to advance and Board approval is expected in due course.
-- Gold resources increased 1.5% mainly due to positive results
at Centauro Deep; silver resources down 5.0% as a result of lower
ore grade and tonnage at Saucito. Gold reserves declined 6.0% due
to depletion at Noche Buena, Herradura and San Julián, while silver
reserves decreased 5.1% mainly due to San Julián (Veins) and
Saucito.
-- 2018 exploration budget of approximately US$140 million
(including capitalised exploration expenses)
Board change
-- In view of the demands of his recent appointment as Chairman
of BBVA Bancomer, Mr Jaime Serra Puche resigned from the Board on
25th February 2019. The Nominations Committee has begun a search
for a new independent non-executive director of the Company.
Outlook
-- Silver production expected to be in the range of 58 to 61 moz
including the Silverstream. Gold production expected to be in the
range of 910-930 koz
-- Capital expenditure is anticipated to be approximately US$710 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/jyrt7fps
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: 0800 376 7425
US: + 1 866 869 2321
Mexico: 01 800 801 7884
Confirmation code: 4661517
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:
Replay dial in:
UK: 0808 238 0667
US: 1(917) 677-7532
Mexico: +44(0) 3333009785
Confirmation code: 4661517
For further information, please visit our website:
www.fresnilloplc.com or contact:
Fresnillo plc
London
Gabriela Mayor, Head of Investor Tel: +44(0)20 7339 2470
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 I and II), one development project - the Pyrites Plant at
Fresnillo, 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 and 700 thousands
hectares in Peru.
Fresnillo plc has a strong and long tradition of exploring,
mining, a proven track record of mine development, reserve
replacement, and production costs in the lowest quartile of the
cost curve for silver.
Fresnillo plc's goal is to maintain the Group's position as the
world's largest primary silver company and Mexico's largest gold
producer.
(1) Operations at Soledad-Dipolos are currently suspended.
CHAIRMAN'S STATEMENT
Celebrating the last ten years, while preparing ourselves for
the future
During its first ten years as a plc, Fresnillo has achieved
remarkable success. The company has positioned itself as one of the
most profitable on the London Stock Exchange (LSE), generating
significant benefits for shareholders, local communities and Mexico
in general.
Major achievements and milestones over this period include: an
80% increase in silver production and a 230% increase in
attributable gold production; four new mining operations and a
strong project pipeline based on successful exploration efforts; a
149% growth in employment; investments of over US$135 million in
health, safety and training; direct payments of close to US$32
million to support local communities, including primary education
of over 8,000 children in 66 schools; more than US$2.3 billion paid
in taxes; US$5.0 billion invested in new and existing operations;
and over US$2.8 billion of dividends paid to shareholders. Through
the support of our workforce and local communities, as well as the
introduction of new technologies to improve working conditions,
safety and environmental impacts, we are recognised around the
globe as a leading and respected public limited company.
It has been a privilege for me to lead the development of
Fresnillo from its initial establishment as a LSE listed company to
the present day. During those ten years, we have enjoyed high
levels of growth and generated high returns consistently across
price cycles and through a wide range of economic conditions. At
the same time, we have learnt from the challenges encountered along
the way, including the shortfall in production at our flagship
Fresnillo mine and the delay of a couple of projects, which in turn
has made us narrowly miss our long-term silver target of 65 moz
despite considerable investments in successful new mines. On the
positive side, we surpassed our long-term gold target in 2015 and
have continued to build on that achievement over the last three
years.
The Board and I continue to place the utmost importance on
providing safe and healthy working conditions for our workforce. We
are extremely saddened about the five fatalities during the year,
as well as a further one in early 2019, and our thoughts are with
the families and friends of those concerned. Our response has been
to further strengthen our procedures and controls, with the ongoing
support of an experienced engineer in charge of safety, health and
community issues.
As you will read in the Chief Executive Officer's statement and
throughout this report, we are carefully considering the demands
and challenges of the coming years and we will invest in
initiatives that will enable us to continue to grow and achieve
good returns.
Achieving year-on-year growth by remaining true to our
principles
Proven and practical, our strategy remained untouched during
2018. The focus on disciplined organic growth and on our four
strategic pillars of exploration, development, operations and
sustainability, enabled us once again to deliver year-on-year
growth, despite silver production failing to meet our guidance and
long-term target.
The Group generated over US$2.1 billion in adjusted revenue for
the year, flat year on year. Profit during the year decreased,
while cash and other liquid funds were US$560.8 million at the year
end, a decrease of US$335.2 million over 2017. Debt remained
unchanged at US$800 million.
Operational highlights
In summary, gold production had to be revised upwards twice
during the year, driven by a better than expected performance in
Noche Buena and Saucito. Although silver production was up
year-on-year, it failed to reach our targets, despite guidance
being lowered twice during the period. This was due to continuing
challenges at our main underground silver mines. Production at the
Fresnillo and Saucito mines was affected by shortcomings in our
geological models and poor contractor performance. The geological
models at both mines are being revised and in-fill drilling has
been increased, while new contractors have been appointed at
Fresnillo. At San Julián, although both phases have been operating
above nameplate capacity, production was temporarily impacted by
water shortages caused by exceptionally dry weather. This limited
access to certain production areas included in the mining plan, and
led to the need to process lower grade development ore from the
existing stockpiles.
Having been part of Mexico's 500 years of mining history,
Fresnillo is clearly here for the long term. The key aspects of our
longevity are careful planning, extensive development and
preparation, not only for the months ahead but also for the many
decades to come. As outlined by the Chief Executive Officer,
further investments in infrastructure and technology are set to
improve the rate of development and construction of the mining
infrastructure to underpin production in future years.
At the same time, the investments made in recent years are
beginning to bear fruit, including two major projects commissioned
during 2018. The new Pyrite plant - to improve gold and silver
recoveries at Fresnillo and Saucito - and the second line of the
Dynamic Leaching Plant at Herradura have not been without
challenges, but are now contributing to production.
The feasibility study for the Juanicipio project, a joint
venture with Mag Silver, was completed in 2018 and the formal
approval of the project is expected in due course. We are confident
that Juanicipio will become a key project, maintaining our track
record of high growth and returns.
San Julián and Juanicipio are proof that our consistent
commitment to exploration through the cycles of our industry pays
clear long-term dividends for our stakeholders. Although this
year's results were mixed, the last ten years have seen a
substantial increase in reserves and resources.
During 2018, silver and gold reserves decreased 5.1% and 6.0%
respectively. Following the 2018 drilling programmes, total silver
resources reduced from 2.3 to 2.2 Boz, while total gold resources
increased from 38.5 to 39.1 Moz. Our exploration mining concessions
amount to 1.8 million hectares in Mexico, 655,000 hectares in Peru,
and 10,000 hectares in two exploration options in Chile.
A committed and talented workforce...
A great company is built by great people, and I'm proud to say
that our committed teams - from those working in mines and projects
to their colleagues in offices across Mexico, South America and the
UK- have again demonstrated their experience, dedication and
talent. On behalf of the Board, I would like to thank them
sincerely for these efforts.
In common with our industry peers as well as businesses
operating in many other sectors, we face significant challenges in
ensuring that we have the right calibre of people in the right jobs
at the right time. To this end, during 2018 we increased the number
and scope of partnerships with leading universities and the top
earth science institutions in Mexico to develop new training
programmes tailored to our requirements. As a result, we have
provided 194 students with first hand practical experience during
the year, and 173 are now in full time training.
...led by a skilled and experienced executive team
Our Chief Executive Officer Octavio Alvídrez continues to lead
the executive management team with distinction, supported by Chief
Financial Officer Mario Arreguín and Vice President of Exploration
David Giles.
Our Chief Operating Officer, Roberto Díaz, retired at the
beginning of 2019, following eight years of service during which
our operations made significant progress and major projects were
successfully implemented. On behalf of the Board, I thank Roberto
for his outstanding contribution and I am pleased to announce that
he has agreed to continue to work with us as an advisor on special
projects.
We have recently made three senior appointments, two of which
are completely new roles for Fresnillo. Together, these
appointments will underpin our commitment to improving our safety
record and preparing the Group for the future. Firstly, I would
like to welcome Andre Sougarret, as new Chief Operating Officer. He
brings great mining experience and knowledge to Fresnillo following
a notable career in the mining industry, previously holding
important positions in Codelco and as Executive Vice President at
Empresa National de Mineria in Chile. At the same time, we have
appointed a new Chief Projects Officer who is responsible for
development projects, freeing up Andre to focus more on the
operations side of the business. Finally, and as mentioned earlier,
our top team has also been supplemented by the appointment of a
permanent specialist advisor who has responsibility for addressing
our health and safety record, which was unacceptable during
2018.
Board activities
The Board supports the executive team by playing an active role
in defining the strategy, reviewing progress versus plan and making
sure that the business has sufficient flexibility to respond to
ever-changing market conditions. As a Group, we work hard to ensure
that capital allocation is balanced by growth, shareholder returns,
financial strength and flexibility, while maintaining our
commitment to sustainability and risk management.
The Board's duties include ensuring the highest standards of
corporate governance, as befits a constituent of the FTSE100 Index.
We are currently considering the implications of the new version of
the UK Corporate Governance Code, which will take effect from 1
January 2019.
During the first half of 2018, our Senior Independent Director
Charles Jacobs engaged with institutional investors and others
regarding Board composition and membership.
Board members also maintain oversight of our corporate culture,
and at Board meetings we receive regular reports from the CEO on
our Ethics programme and how our values of Responsibility,
Integrity, Trust and Loyalty continue to guide our actions. In
addition, our Head of Sustainability provides an annual
presentation that gives us greater depth and detail about this
matter.
Our culture is well-established and ingrained in all areas of
operations. During the year we continued to conduct master classes
and deliver online training modules in order to ensure that all our
people, whether long-time employees or recent ones, understand the
importance that we place on the Group's values. However, we
recognise that there remains work to do. Our recent safety record
is unacceptable and we are therefore bringing additional focus and
resources to drive improvement.
Changes to the Board
Guy Wilson retired from the Board at the 2018 AGM, following ten
years of service. Guy was instrumental in establishing and then
overseeing the work of the Audit Committee and I thank him
unreservedly for his tireless work, constant support and good
humour. He has been replaced as Chairman of the Audit Committee by
Alberto Tiburcio, who joined the Board and Audit Committee in 2016,
bringing with him extensive experience in audit and financial
reporting.
During the year, the Board was strengthened by the appointment
of Georgina Kessel as an Independent Non-executive Director. Ms
Kessel worked in the Mexican government where she served as
Secretary of State of the Ministry of Energy from 2006 to 2011. She
also chaired the Governing Board of the Federal Electricity
Commission and has been president and member of the Board of
Directors of Petróleos Mexicanos (PEMEX). She is currently an
independent director of Scotiabank and Iberdrola and is a partner
at Spectron. The Board now has three female members, demonstrating
our continued commitment to gender diversity which sits alongside
our insistence that all Board members should also have relevant
work experience.
In view of the demands of his recent appointment as Chairman of
BBVA Bancomer, Mr Jaime Serra Puche resigned from the Board on
25(th) February 2019. The Nominations Committee has begun a search
for a new independent non-executive director of the Company. My
Board colleagues and I have greatly valued Jaime Serra Puche's
contributions to the Fresnillo board meetings over the past five
years. His political insight has been particularly valued and we
have been grateful to have someone of his calibre and experience on
our Board. We will miss his input greatly but wish him well for the
future.
Continuing our dividend policy
Our dividend policy is well-established, consistent and closely
aligned with our commitment to create value through growth and
returns. In short, each year we aim to pay out 33-50% of profit
after tax, while making certain adjustments to exclude non-cash
effects in the income statement. We pay dividends in the
approximate ratio of one-third as an interim dividend and
two-thirds as a final dividend.
Before declaring a dividend, the Board carries out a detailed
analysis of the profitability of the business, underlying earnings,
capital requirements and cash flows. Our aim is to maintain enough
flexibility to be able to react to movements in precious metals
prices and seize attractive business opportunities.
We declared an interim dividend of 10.7 US cents per share, with
a final dividend of 16.7 US cents per share, bringing the total for
the year to 27.4 US cents per share.
Outlook
In the short term, we are likely to experience a lower rate of
growth, as we consolidate the progress made since our IPO and
implement the necessary investments and initiatives that will
advance our pipeline and underpin our future long-term growth.
Political and economic factors, both in Mexico and across the
globe, could also impact our performance. For example, the buoyancy
of the US domestic economy is attracting some investment that would
otherwise have been directed towards our sector, while the China-US
trade war as well as issues in South America and Europe are
generating an unwelcome degree of uncertainty. In Mexico, we have a
new administration and although we are yet to see any firm
indication of direction, we are already working closely with the
Government.
The Board and I believe that the developments currently
underway, and those that will be introduced or extended during
2019, will position us well for the years ahead. In the coming
months and to comply with the 2018 UK Corporate Governance Code, we
will continue to work towards defining our Company Purpose. This
will be a succinct expression of what Fresnillo is and what we
stand for - and it will further focus the minds of all our people
on our culture and the things we truly value, such as safety.
We have now established a long track record for delivering
growth and returns, and our commitment to keeping that reputation
remains undimmed. Fresnillo faces the future with confidence.
Alberto Baillères
Non-executive Chairman
Chief Executive's statement
CHIEF EXECUTIVE'S STATEMENT
Consolidating our growth, advancing our pipeline
Since the IPO in 2008, we have recorded an excellent set of
achievements and over that period built a track record of creating
value through growth and returns. Now is the time to consolidate
our position while also making sure we continue to fuel our
pipeline in order to deliver further growth in the years ahead.
Although it was disappointing not to reach our long-term silver
target of 65 moz, we nevertheless look back with pride on the
achievements of the last decade, including the fact that we reached
our long-term goal for gold three years ahead of target.
We have delivered on the vast majority of the plans we laid out
at the time of the IPO, in both financial and non-financial terms.
We are now firmly established as the world's largest silver
producer, Mexico's largest gold producer and a company that has
earned the respect of its employees and local communities as well
as of its shareholders.
Now, in the early months of our second decade, it is time to
continue to prepare Fresnillo for the many challenges and
opportunities that lie ahead.
Consistency, consistency, consistency
Our strategy has remained the same throughout the last ten
years, and this will continue to be the case. While other miners
may change their stance depending on which way the economic wind is
blowing, at Fresnillo we understand that consistent performance can
only be delivered by remaining true to a conservative, long-term
strategy.
This strategy has and will continue to achieve results across
the various price cycles of precious metals. Although Fresnillo plc
has only been in existence for a decade, our history stretches back
over 125 years. The knowledge and experience gathered over that
period is part of Fresnillo's DNA - and it ensures that we always
take a long-term view, executing our strategy with consistency in
order to manage fluctuations in prices.
Production highlights and price review
In 2008, we set ourselves the target to double annual silver
production to 65 moz and to achieve gold production of 750,000
ounces in the decade to the end of 2018. We successfully reached
the gold target in 2015 and although we have fallen just short of
that ambitious goal, for silver, this period of consolidation will
improve our efficiency, strengthen our operational base and ensure
that we continue to deliver growth in the years and decades to
come.
Silver production did not quite reach the levels we forecast at
the start of the year, following lower than expected ore grades at
the Fresnillo and Saucito mines, as well as lower throughput at
Fresnillo.
Notwithstanding, silver production from our mines increased 7.1%
to 58.1 million ounces in 2018 driven mainly by the first full year
of production at the San Julián Disseminated ore body and the
contribution from the first phase of the new Pyrites plant at
Saucito, which more than offset the lower production at the
Fresnillo and Saucito mines.
We achieved better than anticipated results for gold in 2018,
with production increasing slightly by 1.3% to 922,527 ounces. This
reflected a good performance at Saucito, the start-up of the
Pyrites plant and higher gold production at Fresnillo.
During the year, average realised silver prices decreased by
8.3%, with those for gold remaining broadly flat (up 0.1%). At the
same time, average prices for zinc and lead, which are by-products
of our silver and gold operations, decreased by 5.7% and 7.4%
respectively and this had an impact on our financial
performance.
Consolidating growth, maximising potential
The first pillar of our strategy is to maximise the potential of
our existing operations, and during the year we were pleased to
launch a series of operational excellence initiatives that will
provide the platform for further growth in the years to come.
At the Fresnillo mine, for example, we have invested in
innovative technology to improve productivity. Costing US$22.7
million and capable of boring at least 300 metres per month, a new
state-of-the-art tunnelling machine is due to be commissioned in
2H19. Together with the vertical conveyor, which was commissioned
towards the end of 2017, and the installation of new vibrating
screens which have already proved their value at Saucito, the
tunnelling machine will support our drive to extract greater value
from the long-established Fresnillo mine.
Meanwhile, at San Julián we have addressed the low water
availability that limited production during the early months of
2018. In the short term this involved digging wells, but in line
with our commitment to always taking a long-term view, we have
since successfully concluded consultations with the indigenous
population regarding the construction of a new water reservoir
which will ensure sufficient water to support greater production at
San Julián.
IT is another example of how we are using innovation and new
ways of working to improve production while lowering costs. For
example, during 2018, we launched or rolled-out a wide range of
projects that are already beginning to transform productivity.
Delivering growth through development projects
I fully expect to be able to make a positive announcement on our
Juanicipio development project in due course, following a highly
detailed technical evaluation that demonstrated its long-term
viability. Eight kilometres from the Fresnillo mine, Juanicipio is
expected to contribute to both silver and gold production,
delivering high returns for our business while generating
additional employment in the area. With first production
anticipated in 2H20, Juanicipio reaffirms the world-class status of
the Fresnillo district and underlines the wealth of resources that
have already been discovered there, as well as those that await
discovery in the future.
In addition, the first stage of the new Pyrites plant has now
been completed and commissioned on budget, with only minor delays.
While the ramp up did not accelerate as expected due to issues with
the vertical mills, which have now been resolved, the plant will
make an important contribution to production by extracting
additional quantities of gold and silver from the historical and
ongoing tailings at the Fresnillo and Saucito mines. Stage two is
now underway and is expected to be concluded in 2H20.
We were also pleased to commission the second line at the
Dynamic Leaching Plant (DLP) at Herradura during the year. The
testing period took longer than expected and despite production
coming from the plant during the year, commercial production did
not commence until 2019. Now complete, the DLP is processing an
extra 8,000 tonnes per day of high grade ore from the pit, taking
the daily throughput for the two DLP plants to 16,000 tonnes. Also
at Herradura, tests of the leaching pads led to an increase of 98.9
thousand ounces of gold in inventory.
Extending the growth pipeline
Our approach towards exploration is one of the qualities that
sets us apart from our peers. Where they may choose to cut back on
exploration in order to meet short-term price challenges, our
commitment remains unequivocal and unchanging, regardless of the
prevailing economic climate. Rather than opting to boost our
pipeline through acquisition, we remain determined to fuel ours
organically - drawing on the skills of more than 100 talented
geologists to explore opportunities and build our resource
base.
Among the year's most significant exploration developments, we
continued to make good progress at Orisyvo and Guanajuato, while
the project at Rodeo is showing good potential. At the end of 2018,
our silver resources stood at 2.2 boz, down by 5.0% over the
previous year, with our exploration mining concessions amounting to
1.8 million hectares in Mexico. Our gold resources increased by
1.5% during the year to 39.1 moz.
Furthermore, 2018 saw us take decisive steps in the
internationalisation of our Company, with drilling now expected to
take place at two projects in Chile that show good potential. We
are also working hard to gain the necessary permits in Peru and
continuing to scout projects in Argentina.
Advancing and enhancing the sustainability of our operations
The safety of our employees and contractors is our highest
priority, and we continually monitor our performance and introduce
new initiatives to address any gaps or failings in our processes.
So it was both deeply saddening and totally unacceptable that we
experienced five fatalities during the year and one more in early
2019. While we acknowledge that contractor safety is a particular
challenge for our industry, this performance is clearly
unacceptable. The safety of all of our employees and contractors is
at the top of our HSECR agenda for 2019, and we will renew our
efforts to align employees and contractors alike with our
commitment to safety.
As I highlighted in last year's report, we began to roll out a
new safety programme during 2018, following encouraging results
from the pilot phase at our Fresnillo and Saucito mines. Known as I
Care, We Care, this programme builds on and strengthens our
existing processes. The key aspect of I Care, We Care is that it
encourages people to fully report every incident, no matter how
minor, so that our safety team can identify its root cause, develop
risk awareness and put measures in place to prevent reoccurrence.
The roll out is expected to be completed in 2019.
In terms of environmental sustainability, we passed an important
milestone in 2018. Over 60% of the electricity we consume is now
provided by wind power - and we aim to increase this to 75% by the
second half of 2019. The resultant decrease in our carbon emissions
will also be supported by an initiative to convert a number of
trucks in our fleet from diesel to Liquid Natural Gas, which will
benefit the environment while also reducing our costs.
Our strong environmental, social and governance practices have
again been recognised by external organisations. Not only did we
retain our place in the FTSE4Good Index, but we also joined the
STOXX Global ESG Leaders index for the first time. In addition, we
received or retained a large number of national and international
awards and certifications including:
-- An Ethics and Values award from the Confederation of
Industrial Chambers (Concamin) in Mexico
-- The Social Responsibility Award from the Federal Attorney for
Environmental Protection (Profepa) in Mexico
-- A Profepa Award for Environmental Excellence at Saucito and Herradura
-- Clean Industry national certification from Profepa
-- International certifications including; the Cyanide Code at
Herradura and Noche Buena; ISO 14,001 (Environment); and OHSAS
18,001 (Safety and Environment)
The year ahead
We anticipate that 2019 will be a more challenging year than
2018, with a number of industry variables potentially working
against us. While the volatility of precious metals prices is
likely to reduce, the prices themselves may reduce, for example,
and we could see headwinds from higher inflation and possibly a
worsening of the US$-Peso exchange rate. The significant
investments we have made in recent years will inevitably lead to
greater depreciation costs and these will in turn impact our
financial performance. In addition, silver and gold production may
temporarily reduce, as we invest time and resources in
consolidating our past achievements and preparing the ground for
greater growth in future years, while also focusing on improved
safety.
None of these possible developments are unusual or present us
with issues we have not faced before. Change is part of the
business cycle. We will continue to stand firm behind our strategy
in the clear knowledge that it has guided us through a wide range
of market and political conditions in the past, and will do so
again in the future.
While we face short-term pressures, the long-term fundamentals
remain sound. Our model is proven, our people are skilled,
experienced and dedicated, and a track record of creating value
through growth and returns will continue to be our defining
characteristic.
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 2018 figures compared to 2017, unless
otherwise noted. The financial information and year-on-year
variations are presented in US dollars, except where indicated.
By following strict controls on cash, costs and expenses and
while adhering to our capex budgets, we have maintained a healthy
cash and other liquid funds (1) position and a low leverage ratio.
This has enabled us to invest in profitable growth and deliver
solid returns to shareholders.
The following report presents how we have managed our financial
resources.
Commentary on financial performance
2018 was a year of challenges and opportunities for the Group.
This was also reflected in the financial performance for the year,
with gross profit and EBITDA decreasing over 2017 by 15.6% and
13.7% respectively, while we nevertheless delivered healthy profit
margins. We maintained a solid financial position, with US$560.8
million in cash and other liquid funds (1) as of 31 December 2018
notwithstanding paying dividends of US$298.1 million in accordance
with our policy, investing US$668.7 million in capex and spending
US$172.8 million in exploration to underpin our future growth.
Adjusted revenue slightly increased year-on-year due to the
increased volumes of silver, lead and zinc sold, primarily from the
San Julián (Disseminated Ore Body), offset by lower prices. This
increase, together with the positive effect of the re-assessment of
gold content in the leaching pads and the higher ore grade at
Herradura, was more than offset by the higher stripping ratio at
Herradura and higher depreciation. As a result gross profit
decreased 15.6% over 2017 and, together with the higher exploration
expenses, this contributed to the 13.7% decline in EBITDA.
Income statement
2018 2017 Amount Change
US$ million US$ million US$ million %
----------------------------------------------------- ------------ ------------ ------------ ------
Adjusted revenue (2) 2,243.4 2,233.2 10.2 0.5
----------------------------------------------------- ------------ ------------ ------------ ------
Total revenue 2,103.8 2,093.3 10.5 0.5
----------------------------------------------------- ------------ ------------ ------------ ------
Cost of sales (1,323.1) (1,167.9) (155.2) 13.3
----------------------------------------------------- ------------ ------------ ------------ ------
Gross profit 780.7 925.4 (144.7) (15.6)
----------------------------------------------------- ------------ ------------ ------------ ------
Exploration expenses 172.8 141.1 31.7 22.5
----------------------------------------------------- ------------ ------------ ------------ ------
Operating profit 506.7 709.3 (202.6) (28.6)
----------------------------------------------------- ------------ ------------ ------------ ------
EBITDA (3) 915.1 1,060.1 (145.0) (13.7)
----------------------------------------------------- ------------ ------------ ------------ ------
Income tax expense including mining rights 134.0 180.7 (46.7) (25.8)
----------------------------------------------------- ------------ ------------ ------------ ------
Profit for the year 350.0 560.8 (210.8) (37.6)
----------------------------------------------------- ------------ ------------ ------------ ------
Profit for the year, excluding post-tax Silverstream
effects 339.5 481.2 (141.7) (29.4)
----------------------------------------------------- ------------ ------------ ------------ ------
Basic and diluted earnings per share (US$/share)
(4) 0.475 0.761 (0.286) (37.6)
----------------------------------------------------- ------------ ------------ ------------ ------
Basic and diluted earnings per share, excluding
post-tax Silverstream effects (US$/share) 0.461 0.653 (0.192) (29.4)
----------------------------------------------------- ------------ ------------ ------------ ------
1 Cash and other liquid funds are disclosed in note 30(c) to the financial statements.
2 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
3 Earnings before interest, taxes, depreciation and amortisation
(EBITDA) is calculated as gross profit plus depreciation less
administrative, selling and exploration expenses.
4 The weighted average number of ordinary shares was 736,893,589
for 2018 and 2017. See note 17 in the consolidated financial
statements.
The Group's financial performance is largely determined by the
quality of our assets, the skills of our people 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 2018, the average realised silver price decreased by 8.3%
from US$16.9 per ounce in 2017 to US$15.5 per ounce in 2018. In
addition, average realised lead and zinc prices decreased 7.4% and
5.7% year-on-year, to US$0.99 and US$1.28 per pound, respectively.
The average realised gold price remained broadly stable at
US$1,269.1 per ounce (2017: US$1,267.4).
Hedging
In the second half of 2014, Fresnillo plc initiated a one-off
hedging programme to protect the value of the investment made in
the Penmont acquisition. The hedging programme was executed for a
total volume of 1,559,689 ounces of gold with monthly settlements
until December 2019.
The table below illustrates the expired structures and the
outstanding hedged position as of 31st December 2018.
Concept 2018 2017 2016 2015 2014 As of December
31(st) 2018*
-------- -------
Weighted floor (US$/oz) 1,100 1,100 1,100 1,100 1,100 1,100
-------- -------- -------- ---------- ------- ---------------
Weighted cap (US$/oz) 1,423 1,424 1,438 1,431 1,440 1,424
-------- -------- -------- ---------- ------- ---------------
Expired volume (oz) 366,432 324,780 220,152 266,760 35,413
-------- -------- -------- ---------- -------
Gain recognised in
income -- -- 48,158 1,023,580 --
-------- -------- -------- ---------- ------- ---------------
Total outstanding
volume (oz) 346,152
-------- -------- -------- ---------- -------
*Monthly settlements through December 2019
Fresnillo plc's hedging policy remained unchanged for the
remainder of the portfolio, providing shareholders with full
exposure to gold and silver prices.
MX$/US$ exchange rate
The average spot Mexican peso/US dollar exchange rate devalued
by 1.6%, from $18.94 per US dollar in 2017 to $19.24 per US dollar
in 2018. This resulted in a favourable effect estimated at US$6.7
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.
Hedging
As previously reported, in 2016 Fresnillo plc decided to suspend
its Mexican peso exchange rate hedging programme to hedge payment
of certain peso denominated production costs. However, the Group
has continued to enter into certain exchange rate derivative
instruments as part of a programme to manage its exposure to
foreign exchange risk associated with the purchase of equipment
denominated in Euro (EUR), Swedish krona (SEK) and Canadian dollar
(CAD). The aggregate effect on income in the year was a loss of
US$321,873 (See foreign exchange section below).
Cost INflation
In 2018, there was a cost inflation of 2.6% net of the 1.6%
average devaluation of the Mexican peso against the US dollar. The
main components of our cost inflation basket are listed below:
Labour
Unionised employees received on average a 7.0% increase in wages
in Mexican pesos, and administrative employees at the mines
received a 5.5% increase; when converted to US dollars, the
weighted average labour inflation was 4.5%.
Energy
Electricity
The Group's weighted average cost of electricity decreased by
6.4% from US$7.6 cents per kW in 2017 to US$7.1 cents per kW in
2018. This decrease was mainly due to the lower average generating
cost of the Comisión Federal de Electricidad (CFE), the national
utility.
Diesel
The weighted average cost of diesel in US dollars increased 7.7%
to US$82.4 cents per litre in 2018, compared to US$76.5 cents per
litre in 2017.
Operating materials
Year
over
year
change
in unit
price
%
-------------------------------------------- --------
Steel balls for milling 5.5
-------------------------------------------- --------
Other reagents 5.2
-------------------------------------------- --------
Sodium cyanide 1.1
-------------------------------------------- --------
Lubricants 0.9
-------------------------------------------- --------
Explosives 0.2
-------------------------------------------- --------
Tyres (0.6)
-------------------------------------------- --------
Steel for drilling (1.1)
-------------------------------------------- --------
Weighted average of all operating materials 1.4
-------------------------------------------- --------
Unit prices of the majority of operating materials remained
broadly stable in US dollar terms, with the exception being the
steel balls for milling and other reagents, which experienced
year-on-year inflation of over 5%. However, this was partly offset
by the decrease in the unit price of tyres and steel for drilling.
As a result, the weighted average unit prices of all operating
materials increased by 1.4% over the year. There has been no
significant impact on the unit cost of operating materials from the
devaluation of the MXN peso/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 2018, increases granted to contractors, whose agreements were
due for review during the period, resulted in a weighted average
increase of 2.9% in US dollars.
Maintenance
Unit prices of spare parts for maintenance remained broadly
unchanged on average in US dollar terms (0.7% increase).
Others
Other cost components include freight, which increased by an
estimated 7.7% in US dollars, partially offset by a 2.7% decrease
in insurance costs. The remaining cost inflation components
experienced average inflation of 1.8% in US dollars over 2017.
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)
2018 2017 Amount Change
US$ million US$ million US$ million %
------------------------------- ------------ ------------ ------------ ------
Adjusted revenue (1) 2,243.4 2,233.2 10.2 0.5
------------------------------- ------------ ------------ ------------ ------
Gold, lead and zinc hedging 1.6 0.0 1.6 100
------------------------------- ------------ ------------ ------------ ------
Treatment and refining charges (141.2) (139.9) (1.3) 0.9
------------------------------- ------------ ------------ ------------ ------
Total revenue 2,103.8 2,093.3 10.5 0.5
------------------------------- ------------ ------------ ------------ ------
Adjusted revenue increased by US$10.5 million as a result of the
increase in volumes of silver, lead and zinc sold, partially offset
by the lower prices of these same metals. Total revenue remained
broadly unchanged at US$2,103.8 million.
Adjusted revenue (1) by metal (US$ million)
2018 2017
------------------ ------------------ ------------ ------------ ------------ -----
Volume Price
Variance Variance Total
US$ million % US$ million % US$ million US$ million US$ million %
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Silver 815.5 36.3 844.7 37.8 51.8 (81.0) (29.2) (3.5)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Gold 1,118.5 49.9 1,125.3 50.4 (8.2) 1.4 (6.8) (0.6)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Lead 105.6 4.7 101.8 4.6 11.7 (7.9) 3.8 3.7
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Zinc 203.9 9.1 161.4 7.2 53.1 (10.6) 42.5 26.3
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
Total adjusted revenue 2,243.4 100.0 2,233.2 100.0 108.3 (98.2) 10.2 0.5
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ -----
The higher volumes of silver sold resulted from the first
complete year of San Julián (Disseminated Ore Body) and the
increased production at Herradura and Ciénega, while the higher
sales of lead and zinc were mainly driven by the contribution of
San Julián (Disseminated Ore Body) and the increased volumes of
base metals at depth in the Saucito mine. These favourable effects,
net of the lower volume of gold sold, resulted in a positive impact
on revenue of US$108.3 million. This was offset by a US$98.2
million negative effect primarily resulting from the lower silver,
lead and zinc prices.
The contribution of gold to Adjusted revenue decreased slightly
from 50.4% in 2017 to 49.9% in 2018, reflecting the expected lower
volumes of gold produced and sold, while silver's contribution to
Adjusted revenue decreased to 36.3% as the increased volumes of
silver sold were more than offset by the lower price. As expected,
the higher content of base metals at certain mines is changing the
relative proportion of Adjusted revenue, with zinc increasing its
contribution from 7.2% in 2017 to 9.1% in 2018, and lead
representing 4.7%.
Herradura remained the main contributor to Adjusted revenue,
primarily due to the higher volumes of silver sold during the year.
Saucito's and Fresnillo's contribution declined from 22.6% and
18.9% in 2017to 21.9% and 16.9% respectively in 2018, reflecting
the decrease in silver ore grade and a lower silver price. The San
Julián mine continued to increase its contribution to the Group's
Adjusted revenue from 12.9% in 2017 to 16.4% in 2018. Noche Buena's
contribution decreased to 9.4%, in line with the 1.9% decline in
its Adjusted revenue, while Ciénega maintained its contribution to
the Group's Adjusted revenue at 8.3%.
The relative contribution to Adjusted silver revenue continued
to change in 2018 with the San Julián mine representing 24.8%
(2017: 18.6%), and the contributions of Saucito and Fresnillo
decreasing as expected due to an expanded silver asset base.
The start-up of San Julián (Disseminated Ore Body) also affected
the relative contribution to zinc adjusted revenues. This new mine
represented 25.7% of total zinc Adjusted revenues in 2018, helping
to increase zinc's relative contribution to the Group's Adjusted
revenues.
The contribution by metal and by mine to Adjusted revenues is
expected to change further in the future, as new projects are
incorporated into the Group's operations and as precious metal
prices fluctuate.
Adjusted revenue by metal
2018 2017
------- ----- -----
Gold 49.9% 50.4%
------- ----- -----
Silver 36.3% 37.8%
------- ----- -----
Zinc 9.1% 7.2%
------- ----- -----
Lead 4.7% 4.6%
------- ----- -----
TOTAL 100% 100%
------- ----- -----
1 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
Adjusted revenue by mine
2018 2017
------------------------------ ------- ----- ------- -----
Herradura 608.2 27.1% 606.8 27.2%
------------------------------ ------- ----- ------- -----
Saucito 492.0 21.9% 504.2 22.6%
------------------------------ ------- ----- ------- -----
Fresnillo 378.3 16.9% 421.3 18.9%
------------------------------ ------- ----- ------- -----
Noche Buena 211.4 9.4% 215.5 9.6%
------------------------------ ------- ----- ------- -----
San Julián (Disseminated
Ore Body) 187.4 8.4% 84.8 3.8%
------------------------------ ------- ----- ------- -----
Ciénega 187.1 8.3% 198.3 8.9%
------------------------------ ------- ----- ------- -----
San Julián (Veins) 179.1 8.0% 202.3 9.1%
------------------------------ ------- ----- ------- -----
TOTAL 2.243.4 100% 2,045.0 100%
------------------------------ ------- ----- ------- -----
Volumes of metal sold
% participation % participation
of each of each
2018 mine 2017 mine % change
------------------------------ ------ --------------- ------ --------------- --------
Silver (koz)
------------------------------ ------ --------------- ------ --------------- --------
Saucito 17,968 34.6 19,608 39.4 (8.4)
------------------------------ ------ --------------- ------ --------------- --------
Fresnillo 13,890 26.8 15,145 30.4 (8.3)
------------------------------ ------ --------------- ------ --------------- --------
San Julián (Veins) 5,255 10.1 5,777 11.6 (9.0)
------------------------------ ------ --------------- ------ --------------- --------
San Julián (Disseminated
Ore Body) 7,806 15.0 3,853 7.7 102.6
------------------------------ ------ --------------- ------ --------------- --------
Ciénega 5,459 10.5 4,815 9.7 13.4
------------------------------ ------ --------------- ------ --------------- --------
Herradura 1,503 2.9 570 1.1 163.7
------------------------------ ------ --------------- ------ --------------- --------
Noche Buena 7 0.0 7 0.0 -
------------------------------ ------ --------------- ------ --------------- --------
TOTAL SILVER (koz) 51,888 100 49,775 100 4.2
------------------------------ ------ --------------- ------ --------------- --------
Gold (koz)
------------------------------ ------ --------------- ------ --------------- --------
Herradura 460 52.3 471 53.0 (2.3)
------------------------------ ------ --------------- ------ --------------- --------
Noche Buena 167 19.0 170 19.1 (1.8)
------------------------------ ------ --------------- ------ --------------- --------
San Julián (Veins) 77 8.8 81 9.2 (4.9)
------------------------------ ------ --------------- ------ --------------- --------
Saucito 74 8.4 64 7.2 15.6
------------------------------ ------ --------------- ------ --------------- --------
Ciénega 63 7.2 67 7.5 (6.0)
------------------------------ ------ --------------- ------ --------------- --------
Fresnillo 37 4.2 33 3.8 12.1
------------------------------ ------ --------------- ------ --------------- --------
San Julián (Disseminated
Ore Body) 1 0.1 1 0.1 -
------------------------------ ------ --------------- ------ --------------- --------
TOTAL GOLD (koz) 879 100 888 100 (1.0)
------------------------------ ------ --------------- ------ --------------- --------
Lead (t)
------------------------------ ------ --------------- ------ --------------- --------
Fresnillo 18,097 37.2 18,743 42.8 (3.4)
------------------------------ ------ --------------- ------ --------------- --------
Saucito 20,362 41.9 16,081 36.7 26.6
------------------------------ ------ --------------- ------ --------------- --------
Ciénega 4,385 9.0 5,828 13.3 (24.7)
------------------------------ ------ --------------- ------ --------------- --------
San Julián (Disseminated
Ore Body) 5,770 11.9 3,183 7.3 81.3
------------------------------ ------ --------------- ------ --------------- --------
TOTAL LEAD (t) 48,614 100 43,834 100 10.9
------------------------------ ------ --------------- ------ --------------- --------
Zinc (t)
------------------------------ ------ --------------- ------ --------------- --------
Fresnillo 26,248 36.3 25,442 46.6 3.2
------------------------------ ------ --------------- ------ --------------- --------
Saucito 22,599 31.3 16,815 30.8 34.4
------------------------------ ------ --------------- ------ --------------- --------
San Julián (Disseminated
Ore Body) 18,538 25.6 6,386 11.7 190.3
------------------------------ ------ --------------- ------ --------------- --------
Ciénega 4,887 6.8 5,950 10.9 (17.9)
------------------------------ ------ --------------- ------ --------------- --------
TOTAL ZINC (t) 72,272 100 54,594 100 32.4
------------------------------ ------ --------------- ------ --------------- --------
Hedging
In 2018 we entered into a series of derivative contracts to
hedge part of our lead and zinc by-product production through
collar structures. The chart below illustrates the expired hedging
structures, their impact on income in 2018 and the outstanding
hedged position as of December 31st.
Concept As of December
31(st) 2018
Zinc Lead
-------- --------
Weighted Floor (US$/tonne) 2,591 2,370
-------- --------
Weighted Cap (US$/tonne) 3,716 2,735
-------- --------
Expired volume (ton) 21,168 5,760
-------- --------
Gain/Loss (US$ dollars) 602,101 980,141
-------- --------
Total outstanding volume
(tonne) 0 0
-------- --------
Treatment and refining charges
Treatment and refining charges (3) are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and
zinc concentrate decreased in dollar terms by 13.3% and 7.5%,
respectively, compared to 2017, while silver refining charges
declined by 7.4% over the year. This lower charge per tonne was
offset by the increase in volumes of lead and zinc concentrates
with high silver contents mainly shipped from Saucito and San
Julián (Disseminated Ore Body) to Met-Mex, as well as the volumes
of precipitates sold from the Pyrites plant. As a result, treatment
and refining charges set out in the income statement in absolute
terms increased by only 0.9% over 2017.
Cost of sales
2018 US$ 2017 US$ Amount Change
Concept million million US$ million %
-------------------------------------- -------- -------- ------------ ------
Adjusted production costs (4) 952.0 769.2 182.8 23.8
-------------------------------------- -------- -------- ------------ ------
Depreciation 411.8 367.6 44.2 12.0
-------------------------------------- -------- -------- ------------ ------
Profit sharing 12.5 16.5 (4.0) (24.1)
-------------------------------------- -------- -------- ------------ ------
Change in work in progress and others (53.6) 16.9 (70.4) N/A
-------------------------------------- -------- -------- ------------ ------
Others 0.4 (2.3) 2.7 N/A
-------------------------------------- -------- -------- ------------ ------
Cost of sales 1,323.1 1,167.9 155.2 13.3
-------------------------------------- -------- -------- ------------ ------
3 Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
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 13.3% to US$1,323.1 million in 2018. The
US$155.2 million increase is explained by the following combination
of factors:
-- An increase in Adjusted production costs (+US$182.8 million).
This was primarily due to: i) higher stripping costs at Herradura
(+US$82.6 million); ii) additional Adjusted production costs
associated with the first complete year of operations at San Julián
(Disseminated Ore Body) (+US$49.6 million); iii) the decrease in
volume of ore processed from development works at Saucito, the
costs of which were capitalised (+US$31.2 million); iv) cost
inflation (+US$26.4 million); v) the reassessment in the year of
the number of mining components at Herradura from two to one,
effective from July 2019, which increased stripping costs expensed
(+US$21.9 million). The increase was partly offset by the lower
volume of ore processed mainly at Herradura (-US$19.6 million); and
the favourable effect of the devaluation of the Mexican peso vs US
dollar and others (-US$9.3 million).
-- Depreciation (+US$44.2 million). This is mainly due to the
full year of operation at San Julián and the increased depreciation
at the Saucito mine resulting from the start up of the Pyrites
plant and the amortisation of capitalised mining works.
These negative effects were partly offset by:
-- The increase in change in work in progress (-US$70.4
million). Change in work in progress was -US$53.6 million in 2018
as a result of the re-assessment of the gold content in the
leaching pads at Herradura (see notes 2c and 5 in the financial
information). This compared favourably to the US$16.9 million costs
recorded in 2017 as a result of the decrease in inventories in the
leaching pads at Herradura.
-- Others -US$1.3 million.
Cost per tonne, cash cost per ounce and all-in sustaining cost
(AISC)
Cost per tonne is a key indicator to measure the effects of
mining inflation and cost control performance at each mine. This
indicator is calculated as total production costs, plus ordinary
mining rights, less depreciation, profit sharing and exchange rate
hedging effects, divided by total tonnage processed. We have
included cost per tonne hauled/moved as we believe it is a useful
indicator to thoroughly analyse cost performance for the open pit
mines.
Change
Cost per tonne 2018 2017 %
------------------------------ -------------------- ---- ---- ------
Fresnillo US$/tonne milled 49.4 47.5 4.1
------------------------------ -------------------- ---- ---- ------
Saucito US$/tonne milled 60.1 47.6 26.1
------------------------------ -------------------- ---- ---- ------
Ciénega US$/tonne milled 70.8 66.5 6.5
------------------------------ -------------------- ---- ---- ------
San Julián (Veins) US$/tonne milled 57.4 52.1 10.1
------------------------------ -------------------- ---- ---- ------
San Julián (Disseminated
Ore Body)(5) US$/tonne milled 36.2 31.9 13.6
------------------------------ -------------------- ---- ---- ------
Herradura US$/tonne deposited 13.2 8.0 65.8
------------------------------ -------------------- ---- ---- ------
Herradura US$/tonne hauled 3.1 2.6 17.0
------------------------------ -------------------- ---- ---- ------
Noche Buena US$/tonne deposited 6.8 7.5 (9.4)
------------------------------ -------------------- ---- ---- ------
Noche Buena US$/tonne hauled 2.1 1.7 24.2
------------------------------ -------------------- ---- ---- ------
(5) 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
Cost per tonne increased 4.1% to US$49.4 in 2018 mainly due to:
i) cost inflation for this mine of 2.53% (largely related to
contractors, personnel and operating materials); and ii) a greater
number of contractors for maintenance to solve the problem related
to equipment availability.
Saucito
Cost per tonne increased 26.2% to US$60.1, mainly due to: i)
lower volume of ore processed from development work; ii) increased
in the number of contractors for development works; and iii) higher
consumption of reagents. Cost inflation at this mine was 2.45%.
Ciénega
Cost per tonne at Ciénega increased 6.5% to US$70.8 mainly due
to the increase in contractors for development and civil works.
Cost inflation at this mine was 1.57%.
Herradura
Cost per tonne of ore deposited increased 65.8% to US$13.2
mainly due to: i) higher stripping charged to production costs; ii)
the change in criteria from two to one component; and iii)
inefficiencies due to lower volume deposited (-14.9%). Cost
inflation at this mine was 4.0% (largely related to the increase in
the price of diesel).
Noche Buena
Cost per tonne at this mine decreased 9.4% to US$6.8 in 2018 as
a result of shorter distances to haul mineral from the pit to the
leaching pads, despite the fact that cost inflation at this mine
was 2.54% (mainly related to the unit price of diesel).
San Julián (Veins)
Cost per tonne at San Julián (Veins) rose 10.1% mainly due to
the increase in the number of contractors for mining works.
Cash cost per ounce, calculated as total cash cost (cost of
sales plus treatment and refining charges, less depreciation) less
revenue from by-products divided by the silver or gold ounces sold,
when compared to the corresponding metal price, is an indicator of
the ability of the mine to cover its production costs.
Change
Cash cost per ounce 2018 2017 %
------------------------------ --------------------- ----- ------- ------
Fresnillo US$ per silver ounce 0.5 0.7 (35.2)
------------------------------ --------------------- ----- ------- ------
Saucito US$ per silver ounce 1.0 1.5 (35.6)
------------------------------ --------------------- ----- ------- ------
Ciénega US$ per gold ounce 25.9 (163.7) N/A
------------------------------ --------------------- ----- ------- ------
San Julián (Veins) US$ per silver ounce (3.6) (4.3) (15.4)
------------------------------ --------------------- ----- ------- ------
San Julián (Disseminated
Ore Body)(6) US$ per silver ounce 5.7 3.9 45.1
------------------------------ --------------------- ----- ------- ------
Herradura US$ per gold ounce 504.0 492.9 2.3
------------------------------ --------------------- ----- ------- ------
Noche Buena US$ per gold ounce 735.4 793.5 (7.3)
------------------------------ --------------------- ----- ------- ------
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$0.46/oz (2018) versus US$0.71/oz (2017),
(-35.2%)
Cash cost per ounce decreased, principally due to higher
by-product credits (-US$0.97/oz) and lower treatment charges
(-US$0.24/oz), partially offset by the lower silver ore grade
(+US$0.71/oz) and the higher cost per tonne (+US$0.28/oz).
Saucito: US$0.97/oz (2018) versus US$1.50/oz (2017),
(-35.6%)
The decrease was driven by the higher by-product credits per
ounce of silver resulting from the increased volume of gold sold
(-US$2.29/oz), partially offset by the higher cost per tonne
(+US$1.21/oz) and the lower silver grade (+US$0.55/oz).
Ciénega: US$25.88/oz (2018) versus -US$163.74/oz (2017),
(N/A)
The increase in cash cost was primarily due to: the expected
decrease in gold grade (+US$115.01/oz), the higher cost per tonne
(+US$42.32/oz) and higher treatment and refining charges
(+US$6.78/oz). These unfavourable factors were mitigated by higher
by-product credits per gold ounce due to the lower volume of gold
produced (-US$19.26/oz); and others (-US$3.96/oz).]
Herradura: US$504.00/oz (2018) versus US$492.86/oz (2017),
(+2.3%)
The increase in cash cost resulted from the higher cost per
tonne (+US$261.13/oz) and the change from two mining components to
one during the year (+US$60.68/oz); mitigated by the higher gold
grade (-US$247.39/oz); a favourable inventory valuation effect due
to the increase in gold inventories on the leaching pads
(-US$34.32/oz); and higher by-product credits per gold ounce due to
the increased volume of silver sold, albeit at a lower price
(-US$29.75/oz).
Noche Buena: US$735.41/oz (2018) versus US$793.48/oz (2017),
(-7.3%)
The decrease in cash cost per ounce was mainly due to the lower
cost per tonne (-69.41/oz).
San Julián VEINS: -US$3.64/oz (2018) versus -US$4.30/oz (2017),
(+15.4%)
The increase in cash cost was explained mainly by the lower
silver ore grade (+US$1.29/oz) and higher cost per tonne
(+US$0.04/oz), mitigated by lower by-product credits due to the
decline in volume of gold sold (-0.67/oz).
San Julián DISSEMINATED ORE BODY: As operations commenced in
July 2017, there are no comparable year-on-year figures.
In addition to the traditional cash cost described above, the
Group is reporting all-in sustaining costs (AISC), in accordance
with the guidelines issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus
on-site general, corporate and administrative costs, community
costs related to current operations, capitalised stripping and
underground mine development, sustaining capital expenditures and
remediation expenses.
We consider all-in sustaining costs to be a reasonable indicator
of a mine's ability to generate free cash flow when compared with
the corresponding metal price. We also believe it is a means to
monitor not only current production costs, but also sustaining
costs as it includes mine development costs incurred to prepare the
mine for future production, as well as sustaining capex.
All-in sustaining cost
All-in sustaining cost Change
per ounce 2018 2017 %
------------------------------ --------------------- -------- ------ ------
Fresnillo US$ per silver ounce 8.92 8.20 8.7
------------------------------ --------------------- -------- ------ ------
Saucito US$ per silver ounce 8.64 7.09 21.9
------------------------------ --------------------- -------- ------ ------
Ciénega US$ per gold ounce 1,413.87 691.43 104.5
------------------------------ --------------------- -------- ------ ------
San Julián (Veins) US$ per silver ounce 5.05 0.83 N/A
------------------------------ --------------------- -------- ------ ------
San Julián (Disseminated
Ore Body)(1) US$ per silver ounce 10.01 7.88 26.9
------------------------------ --------------------- -------- ------ ------
Herradura US$ per gold ounce 806.73 807.66 (0.1)
------------------------------ --------------------- -------- ------ ------
Noche Buena US$ per gold ounce 1,029.68 870.05 18.3
------------------------------ --------------------- -------- ------ ------
1 Indicator may not be representative as it corresponds to the
start-up period, when a significant volume of ore from stock pile
was processed.
Fresnillo: Higher, mainly due to capitalised mine development
mitigated by lower sustaining capex.
Saucito: Higher, as a result of higher capitalised mine
development and an increase in sustaining capex.
Ciénega: Higher, primarily due to an increase in sustaining
capex, higher capitalised mine development and a higher cash
cost.
Herradura: Broadly stable, mainly due to the decrease in
capitalised stripping costs following the reassessment of the
number of mining components from two to one; offset by higher cash
cost detailed above.
Noche Buena: Higher, driven by the higher capitalised stripping,
mitigated by the lower cash cost detailed above.
San Julián:
San Julián (Veins): Higher, mainly due to increased sustaining
capex and higher capitalised mine development.
San Julián (Disseminated Ore Body): 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.
Total gross profit, net of hedging gains and losses, decreased
by 15.6% to US$780.7 million in 2018.
The US$144.7 million decrease in gross profit was mainly
explained by: i) lower silver, lead and zinc prices (-US$97.7
million); ii) the higher stripping ratio at Herradura (-US$82.6
million); iii) the 17.5% decrease in volume of ore deposited at the
Herradura heap leach (-US$64.8 million); iv) higher depreciation
(-US$44.2 million); v) the decrease in volume of ore processed from
development at Saucito, the costs of which were capitalised
(-US$31.2 million); vi) cost inflation (-US$26.4 million); vii) the
adverse effect of recognising the entirety of the stripping in the
income statement in 2H 2019 following the change from two
components to one at Herradura, as opposed to partially
capitalising it (-US$21.8 million); viii) lower production at San
Julián (Veins) (-US$19.5 million); and ix) others (-US$7.0
million). These factors were partly mitigated by: i) the
re-assessment of gold inventories in the leaching pads at Herradura
(+US$94.4 million); ii) the higher ore grade from the inventory and
improved speed of recovery at Herradura (+US$68.4 million); iii)
increased production at San Julián (Disseminated Ore Body)
resulting from its first complete year of operations (+US$67.1
million); and iv) the higher recovery rate at Saucito (+US$20.7
million).
As reflected in the table below, Herradura remained the largest
contributor to the Group's consolidated gross profit, although
there was a slight decrease in its gross profit when compared to
2017. Gross profit at Saucito and Fresnillo declined by 22.1% and
24.5% over 2017 respectively, decreasing its contribution to the
consolidated gross profit. San Julián remained the fourth largest
contributor. Gross profit at Noche Buena increased 18.1% year on
year, providing 8.7% of total gross profit, while Ciénega's share
of the Group's total gross profit decreased to 4.1%.
Contribution by mine to consolidated gross profit, excluding
hedging gains and losses
Change
--------------------
2018 2017 Amount
US$ million % US$ million % US$ million %
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Herradura 278.4 36.2 292.8 32.0 (14.4) (4.9)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Saucito 177.8 23.1 228.2 24.9 (50.4) (22.1)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Fresnillo 144.9 18.9 191.6 20.9 (46.7) (24.4)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
San Julián 68.4 8.9 93.1 10.1 (24.7) (26.5)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Noche Buena 67.2 8.7 56.9 6.2 10.3 18.1
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Ciénega 31.9 4.2 53.8 5.9 (21.9) (40.7)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Total for operating mines 768.6 100 916.4 100 (147.8) (16.1)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Metal hedging and other subsidiaries 12.1 9.0 3.1 34.4
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Total Fresnillo plc 780.7 925.4 144.7 (15.6)
------------------------------------- ------------ ---- ------------ ---- ------------ ------
Administrative and corporate expenses
Administrative expenses increased 21.0% from US$42.3 million to
US$51.2 million, due mainly to an increase in services provided by
consultants (legal, safety, taxes, geological, indigenous community
consultation, amongst other).
Corporate expenses increased 5.7% over 2017 to US$32.1 million
mainly as a result of increased corporate services provided by
Servicios Industriales Peñoles, S.A.B de C.V., due to a larger
number of mines and projects, and to a lesser extent, a 2.0% cost
inflation.
Exploration expenses
Exploration Exploration Capitalised Capitalised
expenses expenses expenses expenses
Business unit/project (US$ millions) 2018 2017 2018 2017
------------------------------------- ----------- ----------- ----------- -----------
Ciénega 9.9 10.8 - -
------------------------------------- ----------- ----------- ----------- -----------
Fresnillo 15.6 15.8 - -
------------------------------------- ----------- ----------- ----------- -----------
Herradura 14.9 19.1 - -
------------------------------------- ----------- ----------- ----------- -----------
Saucito 16.3 11.7 - -
------------------------------------- ----------- ----------- ----------- -----------
Noche Buena 2.0 6.1 - -
------------------------------------- ----------- ----------- ----------- -----------
San Ramón 2.4 4.4 - -
------------------------------------- ----------- ----------- ----------- -----------
San Julián 12.2 8.4 - -
------------------------------------- ----------- ----------- ----------- -----------
Orisyvo 5.2 1.9 - -
------------------------------------- ----------- ----------- ----------- -----------
Centauro Deep 5.4 2.7 1.7 0.1
------------------------------------- ----------- ----------- ----------- -----------
Guanajuato 16.9 7.9 1.1 0.8
------------------------------------- ----------- ----------- ----------- -----------
Juanicipio 0.0 0.0 4.8 2.3
------------------------------------- ----------- ----------- ----------- -----------
Others 72.0 52.3 0.8 1.0
------------------------------------- ----------- ----------- ----------- -----------
TOTAL 172.8 141.1 8.4 4.2
------------------------------------- ----------- ----------- ----------- -----------
Exploration expenses increased as planned by 22.5% from US$141.1
million in 2017 to US$172.8 in 2018, due to intensified exploration
activities, mainly around our mining districts and advanced
exploration projects. An additional US$8.4 million was capitalised,
mainly relating to exploration expenses at the Juanicipio project,
Centauro Deep and Guanajuato. As a result, risk capital invested in
exploration totalled US$181.2 million in 2018, a 24.7% increase
over 2017. In 2019, total invested in exploration is expected to be
approximately US$140 million, of which US$10 million is expected to
be capitalised.
EBITDA
2018 2017 Amount Change
US$ million US$ million US$ million %
------------------------------- ------------ ------------ ------------ ------
Gross profit 780.7 925.4 (144.7) (15.6)
------------------------------- ------------ ------------ ------------ ------
+ Depreciation 411.8 367.6 44.2 12.0
------------------------------- ------------ ------------ ------------ ------
* Administrative expenses (83.3) (72.7) (10.6) 14.6
------------------------------- ------------ ------------ ------------ ------
* Exploration expenses (172.8) (141.1) (31.7) 22.5
------------------------------- ------------ ------------ ------------ ------
* Selling expenses (21.2) (19.1) (2.1) 11.1
------------------------------- ------------ ------------ ------------ ------
EBITDA 915.1 1,060.1 (145.0) (13.7)
------------------------------- ------------ ------------ ------------ ------
EBITDA margin 43.5 50.6
------------------------------- ------------ ------------ ------------ ------
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 2018, EBITDA decreased 13.7% to US$915.1
million mainly due to the lower gross profit. As a result, EBITDA
margin expressed as a percentage of revenue decreased, from 50.6%
in 2017 to 43.5% in 2018.
Other OPERATING INCOME AND EXPENSE
In 2018, a net gain of US$3.3 million was recognised in the
income statement. This compared unfavourably to the US$16.8 million
net gain recognised in 2017 mainly as a result of the sale of
non-strategic mining claims to Argonaut Gold Inc.
Silverstream effects
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The total revaluation
effect recorded in the 2018 income statement was a gain of US$15.0
million. This includes negative non-cash revaluation effects of
US$22.5 million mainly as a result of the lower forward price of
silver and a higher discount rate used, mitigated by the updating
of the Sabinas production plan, which resulted from the updated
estimate of reserves and resources. This was more than offset by a
US$37.5 million non-cash gain mainly generated by the unwinding of
the discounted values. In 2017, a US$113.7 million gain was
registered mainly as a result of converting resources into reserves
at the Sabinas mine.
Since the IPO, cumulative cash received has been US$629.3
million. The Group expects that further unrealised gains or losses
will be taken to the income statement in accordance with silver
price cyclicality or changes in the variables considered in valuing
this contract. Further information related to the Silverstream
contract is provided in the balance sheet section and in notes 13
and 29 to the consolidated financial statements.
Finance costs
Finance costs reflected the interest on the US$800 million
principal amount of 5.5% Senior Notes, net of interest received. In
2018 finance costs decreased 21.8%, from US$34.0 million to US$29.6
million, mainly due to the decrease in borrowing costs capitalised
in 2018 compared to 2017.
In 2018, following the adoption of IFRS 9, Financial
Instruments, the effects of the mark-to market time value of the
outstanding gold hedging programme are recognised in other
comprehensive income, rather than in income as in 2017 (see note 2c
in the financial information). This caused a favourable effect as a
US$41.1 million loss was recognised in 2017.
Foreign exchange
A foreign exchange loss of US$8.1 million was recorded as a
result of the realised transactions in the year. This compared
negatively against the US$6.4 million foreign exchange loss
recognised in 2017.
The Group enters into certain exchange rate derivative
instruments as part of a programme to manage its exposure to
foreign exchange risk associated with the purchase of equipment
denominated in Euro (EUR), Swedish krona (SEK) and Canadian dollar
(CAD). At the end of 2018, the total EUR, SEK and CAD outstanding
net forward position was EUR 12.67 million, CAD 0.0 and SEK 13.29
million with maturity dates from March through September 2019.
Volumes that expired during 2018 were EUR 26.41 million with a
weighted average strike of 1.2024 USD/EUR, CAD 1.10 million with a
weighted average strike of 1.2847 CAD/USD and SEK 69.70 million
with a weighted average strike of 8.5762 SEK/USD. The aggregate
effect on income in the year was a loss of US$321,873.
Taxation
Corporate income tax expense decreased 21.4% from US$153.5
million in 2017 to US$120.6 million in 2018, reflecting the decline
in profit before income tax.
The effective tax rate, excluding the special mining rights, was
24.9%, which was below the 30% statutory tax rate. This was mainly
due to the inflationary uplift of the tax base of assets and
liabilities, together with the tax credit related to the special
tax on diesel. Including the effect of the special mining rights,
the effective tax rate was 27.7% in 2018.
The effective tax rate in 2017 was lower (20.7% in 2017 vs 24.9%
in 2018) mainly because in 2017 there was a 4.5% revaluation of the
Mexican peso which had an important impact on the tax value of
assets and liabilities that are denominated in Mexican pesos;
together with a higher inflation rate which impacted the
inflationary uplift of the tax base of assets and liabilities (See
note 10 to the financial statements).
Profit for the year
Profit for the year decreased from US$560.8 million to US$350.0
million in 2018, a 37.6% decline year on year as a result of the
factors decribed above.
Excluding the effects of the Silverstream Contract, profit for
the year decreased from US$481.2 million to US$339.5 million.
Cash flow
A summary of the key items from the cash flow statement is set
out below:
2018 2017 Amount Change
US$ million US$ million US$ million %
------------------------------------------- ------------ ------------ ------------ ------
Cash generated by operations before
changes in working capital 930.7 1,073.7 (143.0) (13.3)
------------------------------------------- ------------ ------------ ------------ ------
(Increase)/Decrease in working capital (127.9) (2.9) (125.0) >100
------------------------------------------- ------------ ------------ ------------ ------
Taxes and employee profit sharing paid (214.4) (309.3) 94.9 (30.7)
------------------------------------------- ------------ ------------ ------------ ------
Net cash from operating activities 588.4 761.5 (173.2) (22.7)
------------------------------------------- ------------ ------------ ------------ ------
Silverstream contract 36.3 43.3 (7.0) (16.3)
------------------------------------------- ------------ ------------ ------------ ------
Purchase of property, plant & equipment (668.7) (604.8) (63.9) 10.6
------------------------------------------- ------------ ------------ ------------ ------
Dividends paid to shareholders of the
Company (298.1) (236.6) (61.5) 26.0
------------------------------------------- ------------ ------------ ------------ ------
Net interest (paid) (15.7) (21.0) 5.3 (25.2)
------------------------------------------- ------------ ------------ ------------ ------
Net increase in cash during the period
after foreign exchange differences (335.2) (16.0) (319.4) >100
------------------------------------------- ------------ ------------ ------------ ------
Cash and other liquid funds at 31 December
(1) 560.8 896.0 (335.3) (37.4)
------------------------------------------- ------------ ------------ ------------ ------
1 Cash and other liquid funds are disclosed in note 31(c) to the financial statements.
Cash generated by operations before changes in working capital
decreased by 13.3% to US$930.7 million, mainly as a result of the
lower profits generated in the year. Working capital increased
US$127.9 million mainly due to increased ore inventories in the
leaching pads at Herradura (US$63.9 million); higher trade and
other receivables resulting from an increase in VAT receivables
(US$60.4 million); and an increase in prepayments and other assets
(US$11.8 million). This increase in working capital was partly
offset by an increase in trade and other payables (US$8.2
million).
Taxes and employee profit sharing paid decreased 30.7% over 2017
to US$214.4 million.
As a result of the above factors, net cash from operating
activities decreased 22.7% from US$761.5 million in 2017 to
US$588.4 million in 2018.
Other sources of cash were the proceeds of the Silverstream
Contract of US$36.3 million and capital contributions from minority
shareholders in subsidiaries of US$23.6 million.
The above funds were mainly used to purchase property, plant and
equipment for a total of US$668.7 million, a 10.6% increase over
2017. Capital expenditures for 2018 are further described
below:
Purchase of property, plant and equipment
2018
US$ million
---------------------------- ------------ ------------------------------------------
Mine development and purchase
of in-mine equipment, deepening
of the San Carlos shaft and the
construction of the second phase
Fresnillo mine 121.1 of the Pyrites plant
---------------------------- ------------ ------------------------------------------
Development, replacement of in-mine
equipment, construction of the
Pyrites plant and deepening of
Saucito mine 148.4 the Jarillas shaft
---------------------------- ------------ ------------------------------------------
Stripping activities, sustaining
capex, construction of second line
Herradura mine 116.0 of the DLP and land acquisition
---------------------------- ------------ ------------------------------------------
Mine development, purchase of
in-mine equipment and construction
San Julián 83.1 of the third tailing dam
---------------------------- ------------ ------------------------------------------
Development, replacement of in-mine
equipment, construction of tailings
dam and installation of high compact
Ciénega mine 72.9 thickener
---------------------------- ------------ ------------------------------------------
Noche Buena 50.2 Mining works and sustaining capex
---------------------------- ------------ ------------------------------------------
Exploration expenditure and construction
Juanicipio project 46.9 of ramps
---------------------------- ------------ ------------------------------------------
Other 30.1
---------------------------- ------------ ------------------------------------------
Total purchase of property,
plant and equipment 668.7
---------------------------- ------------ ------------------------------------------
Dividends paid to shareholders of the Group in 2018 totalled
US$298.1 million, a 26.0% increase over 2017, in line with our
dividend policy which includes a consideration of profits generated
in the period. The 2018 payment included the final 2017 dividend of
US$219.4 million and the 2018 interim dividend paid in September of
US$78.8 million.
Net interest of US$15.7 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$335.2 million (net decrease in cash and
other liquid assets), which combined with the US$896.0 million
balance at the beginning of the year resulted in cash and other
liquid assets of US$560.8 million at the end of 2018.
Balance sheet
Fresnillo plc continued to maintain a solid financial position
with cash and other liquid funds (1) of US$560.8 million as of 31
December 2018, albeit decreasing 37.4% versus December 2017, as
explained above.
Inventories increased 23.6% to US$335.0 million mainly as a
result of the increase in inventories of gold on the leaching pads
at Herradura.
Trade and other receivables increased 14.9% to US$462.0 million
mainly as a result of the increase in value added tax
recoverable.
The change in the value of the Silverstream derivative from
US$538.9 million at the beginning of the year to US$519.1 million
as of 31 December 2018 reflects proceeds of US$34.8 million
corresponding to 2018 (US$31.4 million in cash and US$3.4 million
in receivables) and the Silverstream revaluation effect in the
income statement of US$15.0 million.
The net book value of property, plant and equipment was
US$2,693.1 million at year end, representing a 10.0% increase over
2017. The US$244.5 million increase was mainly due to the
advancement in the development projects; capitalised development
works; purchase of additional in-mine equipment; and the
construction of leaching pads at Herradura and Noche Buena.
The Group's total equity was US$3,128.3 million as of 31
December 2018, a 2.0% increase over 2017. This was mainly explained
by the increase in retained earnings, reflecting the 2017 profit
and the net unrealised gains on cash flow hedges.
Dividends
Based on the Group's 2018 performance, the Directors have
recommended a final dividend of US$16.7 cents per Ordinary Share,
which will be paid on 24 May 2019 to shareholders on the register
on 26 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 US$10.7 cents per share
amounting to US$78.8 million.
The corporate income tax reform introduced in Mexico in 2014
created a withholding tax obligation of 10% relating to the payment
of dividends, including to foreign nationals.
Historically the Company has been making dividend payments out
of retained earnings generated before the tax reform came into
force and no withholding tax has therefore been applicable. We
expect that dividend payments relating to 2019 and future years
will attract the withholding obligation. However, foreign
shareholders may be able to recover such tax depending on their tax
residence and the existence of double taxation agreements.
RISK MANAGEMENT FRAMEWORK
Our risk management framework is based on our belief in the
importance 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, including operations managers, the controllership
group, HSECR managers and exploration managers regularly engage in
strengthening the effectiveness of our current controls. This
supports the executives and the Board in each of their
responsibilities.
Within the identification phase of our risk management system,
the company also captures emerging risks that could arise as a
result of new developments that have a chance of impacting
Fresnillo, either at a macro or operational level. Examples of
these are new requirements imposed by changes to regulation,
including stricter environmental rules, the commissioning of a new
project and the use of state of the art underground technology,
amongst others.
2018 risk assessment
During our 2018 risk assessment exercise, a team of 135 people
evaluated 109 risks across all our operations, advanced projects,
exploration offices, and support and corporate areas.
We narrowed down our 109 risks into major risks which are
monitored by executive management and the Audit Committee. We then
further consolidated these into 12 principal risks which are
closely monitored by the Board of Directors.
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.
Response / mitigation to our risks
Impact of metal prices and global macroeconomic developments
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Macroeconomic events Our hedging policy High for metal prices,
could create an adverse remains Medium for all other
impact on our sales guided by the principle macroeconomic
and profits, and potentially of providing shareholders developments
the economic viability with full exposure to
of projects. These events gold and silver prices. RISK RATING (relative
include: However, following position)
* A decrease in precious metal prices, which is the shareholder 2018: Very high (1)
primary driver for this risk. The average realised approval for the 2017: Very high (1)
price for gold remained flat year on year (+0.1% vs acquisition Change in risk level:
2017) while silver experienced an 8.3% decrease. of 44% of Penmont (and <-
associated companies)
in 2014, we initiated
* Revaluation of the Mexican peso. In 2018, the peso a specific hedging DESCRIPTION OF RISK
was devalued by 1.6% versus the average spot exchange programme LEVEL
rate of the US dollar. to protect the value According to the majority
of the investment made of silver and gold
in the acquisition, financial
* General inflation in Mexico. This was 4.9% in Mexican using a collar structure analysts, the volatility
peso terms during 2018. The specific inflation to allow partial of metal prices is
affecting the Company was 2.6% in US dollar terms. continued expected
exposure to gold prices. to continue to reduce.
The volume associated Medium term projections
* A decrease in the price of our by-products. In 2018, with this phased hedging are likely to favour
the average realised prices for lead and zinc programme was strictly stronger and more stable
decreased 7.4% and 5.7% respectively, over the limited to up to 44% prices due to the
previous year. of production associated unpredictable
with the acquired Penmont global conditions which
assets and will not include: the view that
be extended to other US economic growth will
assets in the Group. slow, and that the
LINK TO STRATEGY The initial total volume Chinese
* Mines in operation hedged was 1,559,689 economy is likely to
oz of which 1,213,537 suffer from the negative
oz have expired as at effects of any trade
* Development projects the end of 2018 (366,432 war. In summary, the
oz expired in 2018) macroeconomic backdrop
with no corresponding is likely to favour
* Growth pipeline cash impact in 2018. a rotation back to safe
haven assets.
We are not precluded
from entering into
KEY RISK INDICATORS derivatives
* Gross profit sensitivity to % change in precious to minimise our exposure
metals price and to the Mexican peso/US dollar to changes in the prices
exchange rate of lead and zinc
by-products.
In 2017, the Group hedged
* EBITDA sensitivity to % change in metals price and to a portion of our
Mexican peso/US dollar exchange rate by-product
lead and zinc production
with maturities starting
in 2018. The combined
profit during 2018 was
US$ 1.6 million
Furthermore, we have
hedging policies in
place for foreign
exchange
risk, including those
associated with capex
related to projects.
In 2018, we entered
into a number of foreign
exchange forward
contracts
denominated in Euros,
Swedish Kronor and
Canadian
Dollars.
In terms of inflation,
we experienced an
increase
in one of our main energy
inputs over the previous
year, with the average
cost of diesel (USC$/lt.)
rising by 7.7%. On the
other hand, the weighted
average KWH (USC$)
decreased
by 6.4%. We will continue
to identify and maintain
efficiency initiatives
to reduce our energy
consumption.
Potential actions by the government, e.g. implementation of more
stringent regulations for obtaining permits, etc.
----------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Following the change Following an initial Low
in administration in legal injunction and
2018, actions by the a ruling in our favour, RISK RATING
new Government may have the Supreme Court has (relative
an adverse impact on allowed the Zacatecas position)
us. This could include state the right to impose 2018: Very high
more stringent regulations an "environmental tax". (2)
relating to the environment Notwithstanding this 2017: Very high
or explosives, more development, the methodology (3)
challenging processes presented for the calculation Change in risk
for obtaining permits, of such an "environmental level:
more onerous tax compliance tax" is yet to be discussed Note: In the
obligations for ourselves and approved. Considering map, the
and our contractors, the initial methodology, perceived level
as well as more frequent we estimate that the of risk
reviews by tax. potential net impact remains very
of these new taxes on high, with
On 1 January 2017, a our income statement the change in
new state law (the "State would be in the range rating
Law") came into effect of US$ 5-8 million annually. during 2018
in the state of Zacatecas We look forward to the being due
in northern Mexico. court resolving the to the change
It includes a new set calculation methodology. of
of "environmental taxes" We continue to collaborate administration.
relating to the following with other members of The change in
activities undertaken the mining community rating
within the state: via the Mexican Mining though was only
i. Extraction of materials Chamber to lobby against marginal
other than minerals this and any other new as the possible
referenced in Article detrimental taxes, royalties, impact
4 of the Mexican Mining or regulations. We also and likelihood
Law (gold, silver, lead, support the industry's of a
zinc, etc.) from the lobbying efforts to change in
soil and sub-soil through improve the general government
open-pit processes; public's understanding was anticipated
ii. Emissions of certain of the Mining Law. and
substances into the We remain compliant had already
atmosphere; with all applicable been captured
iii. Deposit of contaminants environmental regulations within the risk
into the soil and water; and are fully committed rating
and to operating in a sustainable last year.
iv. Storage of waste way. We are committed
in public or private to holding community DESCRIPTION OF
landfills. dialogue over the lifetime RISK
of a mine project, from LEVEL
The right of indigenous the earliest exploration We continue to
communities to be consulted to eventual closure, perceive
and to grant their prior aiming to create long-term this risk level
and informed consent relationships and value, as very
regarding mining concessions while ensuring operational high due to the
may affect the granting continuity. pressure
of new concessions in We seek to maintain that the
Mexico. full compliance with Government
tax authority requirements. or Government
In doing so we continue officials
LINK TO STRATEGY to cooperate with any (in either
* Mines in operation ongoing tax inspections. case, both
Although Mexico's Mining at the federal
Law does not yet incorporate and local
* Development projects indigenous consultation, levels) could
it remains an ongoing exert
issue. Some local state over the mining
* Growth pipeline governments have begun industry.
to legislate on this Evidence of
matter as a prior requirement this influence
* Sustainable development for mining projects on our industry
to proceed in specific can
areas where indigenous be seen in the
populations may be present. increase
KEY RISK INDICATORS We will continue working in the
* Number of media mentions related to mining together with the authorities. frequency of
regulations. These could include the menti We have extensive engagement the reviews by
on of tax, programmes with communities the tax
royalties, the banning of mining activitie that may be impacted authorities,
s in by our mining activities. the legislation
protected areas and legal precedents. The At the San Julián issued in 2017
indicator mine, for example, we requiring
also provides detail on the media itself, have recently worked management to
such as in conjunction with ensure
speaker profile and political alignment. the Federal Government that
to successfully conclude contractors are
an indigenous consultation compliant with
for the construction their
of a water reservoir. own tax
obligations,
the imposition
of the
environmental
taxes
contained in
the new
State Law in
Zacatecas
and the
indigenous
consultation
to obtain
mining
concessions.
In addition it
is evident
in the
continued
perceived
level of
corruption
across Mexico,
which
remains
high([2]) and
worsened versus
the
previous year.
As a
result, delays
in obtaining
permits for
certain
operations
and/or projects
remain a risk.
Mexico has a
new
administration
and although we
are
yet to see any
firm
indication of
direction,
we remain
confident
in the long
term view
both of our
Company
and the mining
sector
more generally
in Mexico.
We will work
with the
new Government
alongside
trade bodies
and the
Mexican Mining
Chamber.
Our aim will be
to defend
the industry
and its
interests,
while also
continuing to
highlight
the significant
positive
impact the
mining industry
makes to
infrastructure,
education and
health
in remote
communities
as well across
Mexico
more generally.
Access to land
----------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Failure or significant Successful land access Medium
delays in accessing plays a key role in
the surface land above the management of our RISK RATING
our mineral concessions mining rights, focusing (relative
and other land of interest on areas of interest position)
is a permanent risk or strategic value. 2018: Very high
to our strategy, and At the end of 2018, (2)
has a potentially high after adding required 2017: Very high
impact on our objectives. areas and divesting (2)
Possible barriers to areas of less interest, Change in risk
land access include: we held 1.8 million level:
* Rising expectations of land owners. hectares of mining concessions,
which represents no
change year on year. DESCRIPTION OF
* Refusal to acknowledge prior land acquisition terms Other initiatives include: RISK
and conditions by members of a community. * Careful advanced planning for land requirements and LEVEL
acquisitions by anticipating any issues with a The mining
potential land purchase before intensive exploration. industry
* Influence of multiple special interests in land In certain areas of interest, we negotiate leasing or continues to
negotiations. occupation agreements with purchase options, in face legal
compliance with legal and regulatory requirements. challenges in
regard
* Conflicts in land boundaries with an often arduous to access to
resolution process. * The fostering of strong community relations through land by
investment in community programmes and individuals and
infrastructure. Such investments totalled US$3.1 local
* Succession issues among land owners resulting in a million in 2018 communities who
lack of clarity about the legal entitlement to may
possess and sell land. seek to
* Always seeking tri-party cooperation between the disregard
Government, community and ourselves in securing previous
* Litigation risk i.e. increased activism by agrarian access to land. land
communities and/or judicial authorities. agreements.
This
* Early involvement of our community relations and has been a
* Presence of indigenous communities in the proximity negotiation teams during the negotiation and consistent
of land that is of interest, where prior and informed acquisition processes, including the exploration challenge in
consultation and consent of such communities may be stage. recent
required. years.
In addition, in
* Working with our land negotiation teams, which areas
Furthermore, insecurity comprise specialists hired directly by Fresnillo and close to land
in our exploration and also provided by Peñoles as part of the service of interest,
operational areas as agreement. prior and
well as potential actions informed
by the government increase consultation
the complexity of land and consent of
access risk. As part of an ongoing indigenous
As the issue with the review of the legal communities may
Ejido El Bajio is not status of our land rights, be required
yet resolved, operations we identified certain on a
at Soledad & Dipolos areas of opportunity case-by-case
remain suspended. and continue to implement basis.
measures to manage this The outcome is
LINK TO STRATEGY risk on a case-by-case that
* Mines in operation basis. Such measures despite our
include, whenever possible, many strategic
negotiating with agrarian actions, the
* Development projects communities for the perceived
outright purchase of level of this
land. We use mechanisms risk remains
* Growth pipeline provided under agrarian very high.
law and also utilise
other legal mechanisms
under mining law which
KEY RISK INDICATORS afford added protection
* Percentage of land required for advanced exploration for land occupation.
projects which is under occupation or other These activities form
agreements other than full property ownership part of our ongoing
(overall and by project) drive to reduce exposure
to risk regarding surface
land.
* Total US$ and percentage of project budget spent on
HSECR activities, including community relations (at
projects and exploration sites)
Security
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Our people, contractors We closely monitor the security Low
and suppliers face situation, maintaining clear internal
the risk of kidnapping, communications and coordinating RISK RATING
extortion or harm work in areas of higher insecurity. (relative
due to insecurity We have adopted the following position)
conditions in some practices to manage our security 2018: Very high
of the regions where risks and prevent and deal with (4)
we operate. We face possible incidents: 2017: Very high
the risk of restricted * We maintain close relations with authorities at (4)
access to operations/projects federal, state and local levels, including army Change in risk
and theft of assets. encampments located near the majority of our level:
operations.
The influence of drug
cartels, other criminal DESCRIPTION OF
elements and general * We have completed the implementation of increased RISK
lawlessness in some technological and physical security of our Merrill LEVEL
of the regions where Crowe plants at Herradura and Noche Buena, including We have continued
we operate, combined the use of a remote monitoring process, also in use to experience a
with our exploration at the San Julián mine. At the Saucito and high
and project activities Fresnillo mines, this programme is 90% and 40% level of security
in certain areas of complete, respectively; implementation at these two incidents, both in
transfer or cultivation mines has taken longer than expected due to the frequency and
of drugs, makes working extent of the new arrangements and the increased severity,
in these areas a particular scope (remote monitoring). However, we expect to however our
risk for us. complete full implementation of our higher internal operations
For example, activities standard requirements across all business units were not
at the San Nicolás during 2019. materially
del Oro prospect were impacted. The
suspended because perceived
of the level of insecurity * During 2018, we replaced the majority of our security level of risk has
in the state of Guerrero. contractors, all of which now meet our operational therefore remained
standards and reinforce our security strategies. very high. In the
regions and
LINK TO STRATEGY projects
* Mines in operation * We have maintained our logistics controls in order to where we operate,
reduce the probability of theft of mineral we did not observe
concentrate. These controls include: the use of an improvement in
* Development projects real-time tracking technology; surveillance cameras; the crime rate
tests to identify alterations in transported during
material; guard services; control checkpoints in a 2018.
* Growth pipeline "safe corridor"; and reduced number of authorised
stops in order to optimise delivery times and Following the
minimise the exposure of convoys. change
* Sustainable development of administration,
we have yet to see
* We continue to invest in community programmes, evidence of the
infrastructure improvements, and government new
KEY RISK INDICATORS initiatives to support the development of lawful national security
* Total number of security incidents affecting our local communities and discourage criminal acts. strategy. We
workforce (thefts, kidnapping, extortion, etc.) expect
this to include
* We suspend access to areas with an unacceptably high the
* Number of sites affected and work days lost, by level of insecurity. creation of a
region and type of site. National
Guard, led by the
* Both internally and among our contractors, we military.
* Number of media mentions related to security issues continue to promote the reporting of criminal acts to
affecting the mining industry where we operate. the authorities. We refer to The
Global
Peace Index([3])
ranking,
which indicates a
higher likelihood
of violent
demonstrations
and political
instability.
This index uses
three
broad themes:
level
of safety and
security
in society; the
extent
of ongoing
domestic
or international
conflict;
and the degree of
militarisation.
Mexico
ranks 140 of 163
countries
worldwide (from
best
to worst), as a
country
with a low state
of
peace, and has
fallen
two places in the
ranking. In
addition,
we also use the
Mexico
Peace Index(2)
ranking
as a reference.
This
is a comprehensive
index of the
following
indicators:
homicides;
violent crimes;
weapons
crimes; organised
crime; and
detention
without a
sentence.
The index ranks
states
from 1 to 5, where
1 represents the
most
peaceful.
Zacatecas
(3.3 on the index)
tends to rank
among
the less peaceful
states in Mexico,
while Chihuahua
(2.9),
Sonora (2.2) and
Durango
(2.0) are located
in the medium
range.
Public perception against mining
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Across the world, Communities are our strategic Low
public opinion is partners. To win and
wary of the potential maintain their trust, RISK RATING
adverse social and we must show understanding (relative
environmental consequences and effective engagement, position)
of mining operations. and be accountable for 2018: High
This sentiment is our impact. Our well-established (5)
manifested through programme for community 2017: High
increased regulatory engagement includes: (5)
obligations for mining * Increase our understanding and accountability: Change in
companies and increased heat map:
social activism by
communities and other * Monitoring public opinion within local and
grassroots organisations. international media. DESCRIPTION
OF RISK
LINK TO STRATEGY CHANGE
* Mines in operation * Holding continuous dialogue with our key local We have
stakeholders through formal and informal meetings. maintained
our social
* Development projects licence
* Carrying out social baseline, human rights and to operate
perception studies to better understand our positive in our communities.
* Growth pipeline and negative impacts. From the 2017 perception Continuing
studies carried out at each mine unit by a to maintain
specialised third party, social programmes were and protect
* Sustainable development developed to address their main concerns. this licence
demands
strong collaboration
* Operating a grievance mechanism to address with the
KEY RISK INDICATORS stakeholder concerns. local community
* Number of local actions by non-governmental and stakeholders.
organisations (NGOs) or other local social groups
against mining, by region * Purposeful and aspirational engagement with local There are
communities: multiple
examples
* Number of actions by NGOs or other local social of how years
groups against mining in the Americas * Maintaining a Social Investment Portfolio to create of protests
long term value, aligned with the UN Global Goals fo and demands
r have led
* Number of media mentions related to demonstrations sustainable development. We have identified four to the cancellation
against the mining industry pillars where we can make a real difference: of projects
Education, Water, Health and Capacity building. not only
in the mining
industry,
* Partnering with NGOs in these four pillars of social but also
investment: Education (IBBY, INNOVEC & First in Mexico
Robotics), Water (Captar AC), Health (National in general.
University Foundation) and Capacity Building Objections
(ProEmpleo). are not
only from
local communities,
* Engaging with municipal authorities to invest the but also
resources of the Mining Tax Fund in infrastructure from local
projects that benefit our neighbour communities. and international
NGOs as
well as
* Collaborating with peers in the international and regulators
Mexican mining community to promote the benefits of working
the mining industry and responsible mining practices to meet
. high expectations
and pressure
from governments.
We continue
to perceive
this complex
issue as
a high risk.
Safety
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
It is an inherent risk Regrettably, we suffered Low
in our industry that five fatal accidents
incidents due to unsafe during 2018, three of RISK RATING
acts or conditions could them in the last quarter (relative
lead to injuries or of the year, meaning position)
fatalities. that we were very far 2018: High (6)
from achieving our goal 2017: High (6)
Our people face risks of zero fatalities. Change in risk
such as fire, explosion, Management has continued level:
electrocution and carbon to take serious actions ->
monoxide poisoning, to address and prevent
as well as risks specific the root causes of fatal
to each mine site and accidents and strengthened DESCRIPTION OF RISK
development project. our safety initiatives. LEVEL
These include rock falls These include: Safety is
caused by geological * The continuing roll out of the ..I care, we care" continually
conditions, cyanide programme at our different mines to improve safety monitored by the
contamination, and heavy performance and develop competences in our Board,
or light equipment collisions supervisors. The programme aims to develop risk which has always
involving machinery competency by educating leaders, supervisors and the given
or personnel. workforce. It fosters coaching and positive it the highest
incentives and a comprehensive review and enhancement priority.
LINK TO STRATEGY of our Critical Control Risk Protocols and Emergency The Board oversees
* Sustainable development Response Teams. all
accident
investigations,
* The appointment of a permanent specialist advisor in ensuring that the
KEY RISK INDICATORS our top team who is in charge of safety, health and appropriate
* Accident rate community issues and has the responsibility for actions are taken to
addressing our unacceptable safety record. improve safety
systems
* Days lost rate and practices.
* The Total Recordable Injury Frequency Rate decreased
to 20.47 in 2018 (vs. 23.22 in 2017) while the Lost As a result of the
* Accident frequency: Time Injury Frequency Rate increased to 8.64 (vs. unacceptable
8.14 in 2017). safety record in
2018,
* Without lost time the Board and the
* We continue to deliver training for both employees management
and contractors. Personnel received an average of 94 team have decided to
* With lost time hours of training in 2018. 45 of these 94 hours increase the
involved HSECR training. likelihood
of this risk.
* Fatalities
Union relations
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
The risk of union action Our strategy is to Low
or a deterioration in integrate
union relations at some unionised personnel RISK RATING (relative
sites may be possible. into each BU team. We position)
Internal union politics achieve this by clearly 2018: Medium high (7)
could impact us negatively, assigned responsibilities 2017: Medium low (8)
as could pressure from and programmes for Change in risk level:
other mining unions maintaining
that want to take over close relationships
the Fresnillo labour with unions at mine DESCRIPTION OF RISK
contracts. sites and at national LEVEL
level. We maintain close During 2018, we continued
LINK TO STRATEGY communication with union to build on our good
* Mines in operation leaders at various levels relations with unions
of the organisation at national and local
in order to: raise levels, however recent
* Development projects awareness developments have led
about the economic us to increase our perceived
situation level of risk driven
the industry is facing; by the potential changes
KEY RISK INDICATORS share our production to labour laws which
* Union members level of satisfaction results; and to encourage might impact the way
union participation labour unions operate.
in our initiatives At the time of this
* Number of media mentions related to mining union regarding report's publication,
developments safety and other the contractual revisions
operational of our mines were held
improvements. These in a smooth manner without
initiatives include setbacks. Our executive
the safety guardians management and the Board
programme, alliances recognise the importance
for obtaining of union relations and
certifications, follow any developments
integration of high with interest.
productivity teams and
family integration
activities.
During the year, we
held six leadership
workshops which were
attended by 162 key
union leaders at our
business units, in order
to improve their leadership
abilities at the local
union committees.
We are proactive and
timely in our responses
to the needs of the
unions, and experienced
no labour-related work
stoppages in 2018. If
required, we engage
experienced legal counsel,
both internal and external,
to support us on labour
issues. We will continue
to closely monitor union
and labour developments.
Exploration
---------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK
We are highly dependent During 2018, we invested APPETITE
on the success of the a total of US$181.2million Medium
exploration programme in exploration activities.
to meet our strategic Our objectives for 2019 RISK RATING
value-creation targets include a budgeted risk (relative
and our long-term production capital investment in position)
and reserves goals. exploration of approximately 2018: Medium
In addition to the growing US$140 million. The (8)
level of insecurity approximate spending 2017: Medium
and access to land detailed split is 43% for operating (9)
in previous risks, other mines, 19% for exploration Change in
risks that may impact projects, 25% for prospects risk level:
prospecting and converting and regional prospecting ->
inferred resources include: and 13% for mining rights.
the lack of a robust DESCRIPTION
portfolio of prospects Our exploration strategy OF RISK
in our pipeline with also includes: LEVEL
sufficient potential * A focus on increasing regional exploration drilling Maintaining
in terms of indicated programmes to intensify efforts in the districts with a reasonable
and inferred resources; high potential. investment
and insufficient concession in
coverage in target areas. exploration,
We also risk the loss * For local exploration, aggressive in-field even when
of purchase opportunities exploration to upgrade the resources category and metal prices
due to insufficient convert inferred resources into reserves. are low, has
speed in decision making. been our
As our production escalates policy
and more mines approach * A team of highly trained and motivated geologists, through the
the end of their lives, both employees and long-term contractors. years.
replenishing our reserves While
becomes increasingly continuous
challenging. * Advisory technical reviews by international third investment
party experts, up-to-date and integrated GIS has always
LINK TO STRATEGY databases, drone technology, remote sensing imagery been a
* Growth pipeline and software for identifying favourable metallogenic hallmark
belts and districts to be field-checked by the team. of our
exploration
strategy,
KEY RISK INDICATORS * Drill-ready high priority projects. replenishing
* Drill programmes completed (overall and by project) exploited
reserves and
increasing
* Change in the number of ounces in reserves and our total
resources amount of
resources
could be a
* Rate of conversion from resources to reserves challenge in
the future.
During 2018
we saw a
decrease in
our total
silver
resources,
especially
at our
mining
operations.
Additionally
, we are
addressing
certain
issues
with the
geological
model at the
Fresnillo
and Saucito
mines.
Projects (performance risk)
----------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
The pursuit of advanced Our investment evaluation Medium
exploration and project process determines how
development opportunities to best direct available RISK RATING
are core to meeting capital using technical, (relative
our strategic goals. financial and qualitative position)
However, they carry criteria. 2018: Medium (9)
certain risks: * Technical: we assess the resource estimate and 2017: Medium (7)
* Economic viability: the impact of capital cost to confirmed resources, the metallurgy of the mineral Change in risk
develop and maintain the mine; future metal prices; bodies, the investment required in general level:
and operating costs through the mine's life cycle. infrastructure (e.g. roads, power, general services, =
housing) and the infrastructure required for the mine
and plant.
* Uncertainties associated with developing and
operating new mines and expansion projects: DESCRIPTION OF
fluctuations in ore grade and recovery; unforeseen * Financial: we look at risk relative to return for RISK
complexities in the mining process; poor rock proposed investments of capital. We set expected LEVEL
quality; unexpected presence of underground water or internal rates of return (IRR) per project as Our investment
lack thereof; lack of community support; and thresholds for approving the allocation of capital governance
inability to obtain and maintain required operating based on the present value of expected cash flows process and system
permits. from the invested capital and undertake stochastic of
and probabilistic analysis. capital project
controls
* Delivery risk: projects may go over budget in terms remain in place,
of cost and time; they may not be constructed in * Qualitative: the alignment of the investment with our safeguarding
accordance with the required specifications or there strategic plan and business model; synergies with our ability to
may be a delay during construction; and major mining other investments and operating assets; and the deliver
equipment may not be delivered on time. implications for safety, security, people, resourcing growth through
and community relations. development
projects. During
2018,
LINK TO STRATEGY We closely monitor project we commissioned
* Development projects controls to ensure that the
we deliver approved 2nd Dynamic
projects on time, on Leaching
budget and in line with Plant, with some
KEY RISK INDICATORS the defined specifications. delays
* Earned value (rate of financial advancement rate vs. The executive management due to the testing
physical advancement) team and Board of Directors period
are regularly updated taking longer than
on progress. Each advanced expected.
* Percentage of major equipment ordered and received exploration project We anticipate
according to plan and major capital development construction
project has a risk register of Juanicipio
containing the identified commencing
* Percentage of completion of mine development and assessed risks specific in 2019. Several
to the project. factors
have led us to
The project development perceive
pipeline in 2018 included: a lower level of
* Completion of the first stage of the Pyrites Plant risk
project (leaching plant at Saucito). for Juanicipio
compared
to San
* The Centauro Extension, including a second line of Julián,
the dynamic leaching plant, at Herradura. these include a
lower
level of
* The conclusion of a feasibility study, at Juanicipio, investment,
and the start of discussions regarding construction easier access to
and operations agreements. Approval of the project is infrastructure
anticipated in due course. and the site's
proximity
to current
operations.
Cyber security
---------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK
We recognise the importance During 2018 we developed APPETITE
of the confidentiality, a set of initiatives Low
continuity, integrity under our "Cyber Security
and security of our Programme & Threat Assessment" RISK RATING
data and production project, supported by (relative
systems. external advisors. The position)
As a mining company, objective of the programme 2018:
we may be under threat is to identify the cybersecurity Medium (10)
of cyber attacks from risks to which our Company 2017:
a broad set of attacker is exposed to and align Medium (10)
groups, from "hacktivists" them to our mission
and hostile regimes and business strategy.
to organised criminals. In line with best practice, Change in
Their goals include our approach is based risk level:
a desire to take advantage on two key frameworks:
of the role that mining * The US National Institute of Standards and Technology
plays in regional and Cyber security Framework (NIST CSF) which outlines
global supply chains how companies can assess and improve their ability to DESCRIPTION
as well as in national prevent, detect and respond to cyber attacks. OF RISK
economies. Certain groups LEVEL
may also attempt to As cyber
exploit vulnerabilities * Control Objectives for Information and Related security is
created by the industry's Technologies (COBIT), which was created by ISACA, the an
heavy reliance on operational international professional association for IT increasing
automated systems. In management and governance, to provide an threat
our case, this could implementable set of IT-related controls, processes to the
include initiatives and enablers. industry,
such as Operations Technology the
and Information Technology. Audit
Committee
LINK TO STRATEGY Our approach will also continues
* Mines in operation be based on the MITRE to monitor
ATT&CK(TM) which is and oversee
used as a foundation this risk.
* Development projects for the development Our plan
of specific threat models for 2019 is
and methodologies in to focus
the private sector, our efforts
KEY RISK INDICATORS in government, and in on risk
* Total number of cyber security incidents affecting the cybersecurity product mitigation
our Company. and service community. projects
A governance model, designed to
continuous risk assessment protect
* Number of media mentions related to cyber security and Information Security information
issues affecting the mining industry. policies will form the and key
basis for our TI/TO assets,
operational assurance according
which will support the to
digital transformation the risk
of Fresnillo in the appetite
coming years. set
by
management.
Environmental incidents
----------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Environmental incidents Our environmental management Low
are an inherent risk system ensures compliance
in our industry. These with Mexican regulations, RISK RATING (relative
incidents include the provides transparency, position)
possible overflow or and supports initiatives 2018: Medium Low (11)
collapse of tailing that reduce our 2017: Low (12)
deposits, cyanide spills environmental Change in risk level:
and dust emissions, footprint.
any of which could have
a high impact on our Four of our five mining
people, communities units are certified DESCRIPTION OF RISK
and business. under ISO 14001 and LEVEL
have Clean Industry Our environmental management
LINK TO STRATEGY certification; Our San system, together with
* Sustainable development Julián mine is our investment in
currently in the process preventative
of obtaining both. measures and training,
are key factors which
KEY RISK INDICATORS Our leaching operations reduce the risk of major
* Number of BUs with ISO 14001:2004 certification in Herradura and Noche environmental incidents.
Buena operate in compliance Based on the perceived
with the Cyanide Code level of risk due to
* Number of BUs with Clean Industry certification issued by the International severe and catastrophic
Cyanide Management industry recent developments,
Institute. the Board has decided
* Number of BUs with International Cyanide Code The recent disaster to increase the severity
certification in Brazil has led to of this risk.
increased focus on the
issue of tailings dam
* Number of environmental permits for all advanced safety across the global
exploration projects (according to schedule) mining industry, and
motivated us to review
our controls to mitigate
this risk.
Our controls include
carrying out a number
of studies to confirm
that an area is suitable
prior to the construction
of a dam. These studies
include geotechnical,
geological, geophysical,
hydrological and seismic
analysis. Prior to
construction,
the CNA (National Commission
for Water) undertakes
various studies and
continues to periodically
review dams in relation
to environmental impacts,
on an ongoing basis.
Evidence that the Company
continues to comply
with all the CNA's
parameters
is the fact that all
permits are still held
by Fresnillo plc. In
addition, management
run thorough internal
and third party reviews
for all tailing dams
within the group.
Furthermore,
management continues
to take actions to mitigate
this risk, for example
by engaging a third
party to conduct a design
stability assessment
before a tailings dam
is approved for an increase
in capacity, and to
carry out regular tests
throughout the lifetime
of the dam.
We rigorously adhere
to the requirements
established by each
project's environmental
permit (Environmental
Impact Statement issued
by the Ministry of
Environment,
SEMARNAT). We also continue
to support contractors
in their efforts to
integrate environmental
management systems.
Human Resources
------------------------------------------------------------------------------------------------------------------------------------------
RISK DESCRIPTION RESPONSE / MITIGATION RISK APPETITE
Our people are critical Recruitment: we have Medium
to delivering our objectives. assessed our hiring
We face risks in selecting, requirements for key RISK RATING
recruiting, training positions for 2019, (relative
and retaining the people and aim to meet them position)
we need. by internal training 2018: Low (12)
and promotion, and by 2017: Low (11)
A lack of reliable contractors recruitment through: Change in risk
with sufficient infrastructure, * Our close relationships with universities offering level:
machinery, performance earth sciences programmes. We have dedicated
track record and skilled programmes to identify potential candidates based on
people is also a risk performance who may be hired as interns and/or DESCRIPTION OF
that could impact our employees on graduation. We received 137 professiona RISK
ability to develop and l LEVEL
construct mining works. practitioners, 57 trainees and scholarships and 173 We aim to
engineers in our coaching programme. carefully
LINK TO STRATEGY align our human
* Mines in operation resources
* CETEF (Centre for Technical Studies Fresnillo) which with our
teaches specific mining operational skills. All 10 operational
* Development projects graduates hired in 2018 joined as full-time and growth
employees. requirements.
We believe that
* Growth pipeline we have
* CETLAR (the Peñoles Centre for Technical currently
Studies) which trains mechanics and electrical achieved this
* Sustainable development technicians. All eight graduates were hired as alignment, due
full-time employees in 2018 across Fresnillo's to the
business units. success of
activities
KEY RISK INDICATORS including our
* Number of positions filled by area of specialty, for During 2018 we contracted ongoing
vacancies and new positions 83 experienced personnel university
to fulfil our requirements. recruitment
Retention: Our aim is and employee
* Employee turnover rate to be the employer of retention
choice, and we recognise strategies.
that in order to be
* Average hours of training and professional a profitable and sustainable Contractor
development per employee company, we have to resourcing
generate value for our continues to be
employees and their a major
* Number of contractor personnel relative to unionised families. We do this challenge. We
personnel per BU by providing a healthy, maintain
safe, productive and a broad base of
team-oriented working contractors
environment that not in order to
only encourages our provide
people to fulfil their us with
potential but also supports operational
process improvements. flexibility,
Our focus is on continuous and aim
improvement, driven to
by training, development professionalise
and personal growth them
opportunities; in summary to the same
our focus is on fair level as
hiring, fair remuneration our own
and benefits and gender employees.
equality. We again received
the Great Place to Work
award, among companies
with more than 5,000
employees. During 2018,
143 employees were promoted
(13% of our structure
at a professional level)
and 58 transfers took
place between business
units. As we explain
in the Corporate Governance
section, we are currently
considering how best
to enable employee engagement
at Board level, which
we believe will support
improved retention rates.
Performance: We have
continued our performance
evaluation process,
reinforcing formal feedback.
We promote the certification
of key technical skills
for operational personnel,
and the administrative
and leadership skills
development programme
for required positions.
We develop our high
potential middle managers
through the Leaders
with Vision programme.
Contractors: We have
long-term drilling and
mining contracts. We
invest significantly
in training contractors,
particularly on safety
and environmental requirements.
We have supported the
enrolment of 80 of our
contractor companies
into the self-management
Programme on Health
and Safety at Work (PASST),
promoted by the Mexican
Secretariat of Labour
and Social Welfare (STPS).
Of these companies,
55% have been certified,
45% are in the process
of being certified.
Statement of Directors' responsibilities
The Directors are responsible for preparing the annual report
and the Group and parent company financial statements in accordance
with applicable United Kingdom law and those International
Financial Reporting Standards (IFRS) adopted by the European
Union.
The Directors are required to prepare financial statements for
each financial year which present a true and fair view of the
financial position of the Company and of the Group and the
financial performance and cash flows of the Company and of the
Group for that period. In preparing those financial statements, the
Directors are required to:
-- select suitable accounting policies in accordance with IAS 8:
'Accounting Policies, Changes in Accounting Estimates and Errors'
and then apply them consistently;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Company and of the Group's financial position and
financial performance;
-- state that the Company and the Group has complied with IFRS,
subject to any material departures disclosed and explained in the
financial statements; and
-- prepare the accounts on a going concern basis unless, having
assessed the ability of the Company and the Group to continue as a
going concern, management either intends to liquidate the entity or
to cease trading, or have no realistic alternative but to do
so.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and enable them
to ensure that the financial statements comply with the Companies
Acts 2006 and Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable UK law and regulations the Directors are
responsible for the preparation of a Directors' report, Directors'
remuneration report and corporate governance report that comply
with that law and regulations. In addition the Directors are
responsible for the maintenance and integrity of the corporate and
financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Neither the Company nor the Directors accept any liability to
any person in relation to the annual financial report except to the
extent that such liability could arise under English law.
Accordingly, any liability to a person who has demonstrated
reliance on any untrue or misleading statement or omission shall be
determined in accordance with section 90A and schedule 10A of the
Financial Services and Markets Act 2000.
In accordance with provision C.1.1 of the UK Corporate
Governance Code, the Directors consider that the Annual Report and
Accounts, taken as a whole, is fair, balanced and understandable
and provides information to enable shareholders to assess the
Company's performance, business model and strategy.
Responsibility statement of the Directors in respect of the
annual report and accounts
I confirm on behalf of the Board that to the best of its
knowledge:
a) the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union, give a true and fair view of the assets,
liabilities, financial position and profit and loss of the Company
and the undertakings included in the consolidation taken as a
whole; and
b) the management report (encompassed within the 'Overview',
'Strategic report', 'Performance' and 'Governance' sections)
includes a fair review of the development and performance of the
business, and the position of the Company and the undertakings
included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they
face.
Signed for and on behalf of the Board
Charles Jacobs
Senior Independent Director
25 February 2019
Consolidated Income Statement
Year ended 31 December
x Year ended 31 December Year ended 31 December
2018 2017
----------------- ------ ---------------------------------------------- ----------------------------------------------
Notes US$ thousands US$ thousands
----------------- ------ ---------------------------------------------- ----------------------------------------------
Pre-Silverstream Silverstream Total Pre-Silverstream Silverstream Total
revaluation revaluation revaluation revaluation
effect effect effect effect
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Continuing
operations:
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Revenues 4 2,103,785 2,103,785 2,093,308 2,093,308
Cost of sales 5 (1,323,057) (1,323,057) (1,167,903) (1,167,903)
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Gross profit 780,728 780,728 925,405 925,405
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Administrative
expenses (83,339) (83,339) (72,710) (72,710)
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Exploration
expenses 6 (172,799) (172,799) (141,108) (141,108)
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Selling expenses (21,237) (21,237) (19,110) (19,110)
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Other operating
income 8 11,703 11,703 28,203 28,203
Other operating
expenses 8 (8,360) (8,360) (11,371) (11,371)
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Profit from
continuing
operations
before net
finance costs
and income
tax 506,696 506,696 709,309 709,309
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Finance income 9 20,372 20,372 14,576 14,576
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Finance costs 9 (50,010) (50,010) (89,653) (89,653)
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Revaluation
effects
of Silverstream
contract 13 14,956 14,956 - 113,656 113,656
Foreign exchange
loss (8,084) (8,084) (6,399) (6,399)
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Profit from
continuing
operations
before income
tax 468,974 14,956 483,930 627,833 113,656 741,489
Corporate income
tax 10 (116,162) (4,487) (120,649) (119,365) (34,097) (153,462)
Special mining
right 10 (13,315) (13,315) (27,220) (27,220)
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Income tax
expense 10 (129,477) (4,487) (133,964) (146,585) (34,097) (180,682)
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Profit for the
year
from continuing
operations 339,497 10,469 349,966 481,248 79,559 560,807
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Attributable to:
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Equity
shareholders
of the Company 339,377 10,469 349,846 481,019 79,559 560,578
Non-controlling
interest 120 120 229 229
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
339,497 10,469 349,966 481,248 79,559 560,807
----------------- ------ ----------------- ------------- ------------ ----------------- ------------- ------------
Earnings per
share:
(US$)
Basic and
diluted
earnings
per Ordinary
Share from
continuing
operations 11 0.475 - 0.761
Adjusted
earnings per
share: (US$)
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Adjusted basic
and diluted
earnings per
Ordinary
Share from
continuing
operations 11 0.461 0.653 -
------ ----------------- ------------- ------------ ----------------- ------------- ------------
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31
December
---------------------------------------------------------- ------ ------------------------
Notes 2018 2017
US$ US$
thousands thousands
---------------------------------------------------------- ------ ----------- -----------
Profit for the year 349,966 560,807
------ -----------
Other comprehensive income/(expense)
------ -----------
Items that may be reclassified subsequently to
profit or loss:
------ -----------
Gain on cash flow hedges recycled to income statement 1,582 -
------ -----------
Loss on cost of hedge recycled to income statement (269) -
------ -----------
Changes in the fair value of cost of hedges 14,353 -
Total effect of cash flow hedges 15,666 -
------ -----------
Changes in the fair value of available-for-sale
financial assets - 8,808
Impairment of available-for-sale financial assets
taken to income during the year - 36
Total effect of available-for-sale financial assets - 8,844
Foreign currency translation (185) 118
Income tax effect on items that may be reclassified
subsequently to profit or loss: (4,699) (2,653)
------ ----------- -----------
Net other comprehensive income that may be reclassified
subsequently to profit or loss: 10,782 6,309
------ ----------- -----------
Items that will not be reclassified to profit
or loss:
------ ----------- -----------
Changes in the fair value of cash flow hedges - -
Losses on cash flow hedges recycled to other assets (233) -
Changes in the fair value of cash flow hedges (58) -
Total effect of cash flow hedges (291) -
------ -----------
Changes in the fair value of equity investments (46,579) -
at FVOCI
Remeasurement gains on defined benefit plans 21 2,610 933
Income tax effect on items that will not be reclassified
to profit or loss 10 19,999 (148)
Net other comprehensive (expense)/income that
will not be reclassified to profit or loss (24,261) 785
------ ----------- -----------
Other comprehensive (expense)/income, net of tax (13,479) 7,094
---------------------------------------------------------- ------ ----------- -----------
Total comprehensive income for the year, net of
tax 336,487 567,901
---------------------------------------------------------- ------ ----------- -----------
Attributable to:
------ -----------
Equity shareholders of the Company 336,377 567,672
Non-controlling interests 110 229
---------------------------------------------------------- ------ ----------- -----------
336,487 567,901
---------------------------------------------------------- ------ ----------- -----------
Consolidated Statement of Cash Flows
Year ended 31 December
As at 31 December
--------------------------------------------------- ------ --------------------------------
Notes Wouldn2018 2017
US$ thousands US$ thousands
--------------------------------------------------- ------ --------------- ---------------
ASSETS
------ --------------- ---------------
Non-current assets
------ --------------- ---------------
Property, plant and equipment 12 2,693,104 2,448,596
------ --------------- ---------------
2(b),
Equity instruments at FVOCI 29 78,219 -
------ --------------- ---------------
Available-for-sale financial assets 2(b) - 144,856
------ --------------- ---------------
Silverstream contract 13 498,274 506,569
------ --------------- ---------------
Derivative financial instruments 29 20 -
------ --------------- ---------------
Deferred tax asset 10 88,883 48,950
------ --------------- ---------------
Inventories 14 91,620 91,620
Other receivables 15 - 129
Other assets 3,199 3,389
--------------------------------------------------- ------ --------------- ---------------
3,453,319 3,244,109
--------------------------------------------------- ------ --------------- ---------------
Current assets
------ --------------- ---------------
Inventories 14 243,404 179,485
------ --------------- ---------------
Trade and other receivables 15 411,157 342,506
------ --------------- ---------------
Income tax recoverable 50,871 59,588
------ --------------- ---------------
Prepayments 15,488 3,543
------ --------------- ---------------
Derivative financial instruments 29 294 382
------ --------------- ---------------
Silverstream contract 13 20,819 32,318
Cash and cash equivalents 16 560,785 876,034
--------------------------------------------------- ------ --------------- ---------------
1,302,818 1,493,856
--------------------------------------------------- ------ --------------- ---------------
Total assets 4,756,137 4,737,965
--------------------------------------------------- ------ --------------- ---------------
EQUITY AND LIABILITIES
------ --------------- ---------------
Capital and reserves attributable to shareholders
of the Company
------ --------------- ---------------
Share capital 17 368,546 368,546
------ --------------- ---------------
Share premium 17 1,153,817 1,153,817
------ --------------- ---------------
Capital reserve 17 (526,910) (526,910)
------ --------------- ---------------
Hedging reserve 17 (229) -
------ --------------- ---------------
Cost of hedging reserve 17 (2,374) -
------ --------------- ---------------
Available-for-sale financial assets reserve 17 - 53,799
------ --------------- ---------------
Fair value reserve of financial assets at FVOCI 17 23,370 -
Foreign currency translation reserve 17 (795) (610)
Retained earnings 17 2,033,860 1,962,708
--------------------------------------------------- ------ --------------- ---------------
3,049,285 3,011,350
Non-controlling interests 78,968 55,245
--------------------------------------------------- ------ --------------- ---------------
Total equity 3,128,253 3,066,595
--------------------------------------------------- ------ --------------- ---------------
As at 31 December
-------------------------------------------------- ------ --------------------------------
Notes 2018 2017
US$ thousands US$ thousands
-------------------------------------------------- ------ --------------- ---------------
Non-current liabilities
------ --------------- ---------------
Interest-bearing loans 19 800,127 799,046
------ --------------- ---------------
Derivative financial instruments 29 - 14,224
------ --------------- ---------------
Provision for mine closure cost 20 189,842 184,775
------ --------------- ---------------
Provision for pensions and other post-employment
benefit plans 21 6,393 9,217
------ --------------- ---------------
Deferred tax liability 10 470,925 491,677
-------------------------------------------------- ------ --------------- ---------------
1,467,287 1,498,939
-------------------------------------------------- ------ --------------- ---------------
Current liabilities
Trade and other payables 22 133,140 134,949
--- ---------- ----------
Income tax payable 10,960 18,328
--- ---------- ----------
Derivative financial instruments 29 3,807 4,992
--- ---------- ----------
Employee profit sharing 12,690 14,162
---------------------------------- --- ---------- ----------
160,597 172,431
---------------------------------- --- ---------- ----------
Total liabilities 1,627,884 1,671,370
---------------------------------- --- ---------- ----------
Total equity and liabilities 4,756,137 4,737,965
---------------------------------- --- ---------- ----------
These financial statements were approved by the Board of
Directors on 25 February 2019 and signed on its behalf by:
Mr Arturo Fernandez
Non-executive Director
25 February 2019
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
------------------------------------------------------ ------ ----------------------------
Notes 2018 2017
US$ thousands US$
thousands
------------------------------------------------------ ------ --------------- -----------
Net cash from operating activities 28 588,359 761,471
------------------------------------------------------ ------ --------------- -----------
Cash flows from investing activities
------ --------------- -----------
Purchase of property, plant and equipment (668,669) (604,751)
------ --------------- -----------
Proceeds from the sale of property, plant
and equipment and other assets 8 78 26,078
------ --------------- -----------
Repayments of loans granted to contractors 1,327 925
------ --------------- -----------
Short-term investments - 200,000
------ --------------- -----------
Silverstream contract 13 36,303 43,349
------ --------------- -----------
Purchase of available-for-sale financial assets - (19,877)
------ --------------- -----------
Proceeds from the sale of debt investments 20,087 -
------ --------------- -----------
Interest received 19,520 14,535
Net cash used in investing activities (591,354) (339,741)
------ --------------- -----------
Cash flows from financing activities
------ --------------- -----------
Dividends paid to shareholders of the Company 18 (298,068) (236,560)
------ --------------- -----------
Capital contribution 23,613 18,869
------ --------------- -----------
Interest paid(1) 19 (35,177) (35,503)
------------------------------------------------------ ------ --------------- -----------
Net cash used in financing activities (309,632) (253,194)
------------------------------------------------------ ------ --------------- -----------
Net (decrease)/increase in cash and cash equivalents
during the year (312,627) 168,536
------ --------------- -----------
Effect of exchange rate on cash and cash equivalents (2,622) (4,456)
Cash and cash equivalents at 1 January 876,034 711,954
------------------------------------------------------ ------ --------------- -----------
Cash and cash equivalents at 31 December 16 560,785 876,034
------------------------------------------------------ ------ --------------- -----------
1 Total interest paid during the year ended 31 December 2018
less amounts capitalised totalling US$11.1 million (31 December
2017: US$11.4 million) which were included within the caption
Purchase of property, plant and equipment.
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders
of the Company
-------- ---------------------- ------------------------------------------------------------------------------------------
Notes Share Share Capital Hedging Cost Available-for-sale Fair Foreign Retained Total Non-controlling Total
capital premium reserve reserve of financial value currency earnings interests equity
hedging assets reserve translation
reserve reserve of reserve
financial
assets
at
FVOCI
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
US$ thousands
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ----------------------------------------
Balance at 1
January 2017 368,546 1,153,817 (526,910) - 47,608 (728) 1,637,888 2,680,221 36,147 2,716,368
------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
Profit 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 18 - - - - - - (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
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
Adjustments
for initial
application
of IFRS 9 2(b) (13,376) (53,799) 49,622 17,553 - - -
Profit for the
year - - - - - - - - 349,846 349,846 120 349,966
Other
comprehensive
expense, net
of tax - - - (229) 11,002 - (26,252) (185) 2,195 (13,469) (10) (13,479)
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
Total
comprehensive
income for
the
year - - - (229) 11,002 - (26,252) (185) 352,041 336,377 110 336,487
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
Capital
contribution - - - - - - - - - - 23,613 23,613
Dividends
declared
and paid 18 - - - - - - - - (298,442) (298,442) - (298,442)
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
Balance at 31
December 2018 368,546 1,153,817 (526,910) (229) (2,374) - 23,370 (795) 2,033,860 3,049,285 78,968 3,128,253
--------------- ------ -------- ---------- ---------- -------- --------- ------------------- ---------- ------------ ---------- ---------- ---------------- ----------
1. Corporate information
Fresnillo plc. ("the Company") is a public limited company and
registered in England and Wales with registered number 6344120 and
is the holding company for the Fresnillo subsidiaries detailed in
note 5 of the Parent Company accounts ('the Group').
Industrias Peñoles S.A.B. de C.V. ('Peñoles') currently owns 75
percent of the shares of the Company and the ultimate controlling
party of the Company is the Baillères family, whose beneficial
interest is held through Peñoles. The registered address of Peñoles
is Calzada Legaria 549, Mexico City 11250. Copies of Peñoles'
accounts can be obtained from www.penoles.com.mx. Further
information on related party balances and transactions with
Peñoles' group companies is disclosed in note 26.
The consolidated financial statements of the Group for the year
ended 31 December 2018 were authorised for issue by the Board of
Directors of Fresnillo plc on 25 February 2019.
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
2018 and 2017, and in accordance with the provisions of the
Companies Act 2006.
The consolidated financial statements have been prepared on a
historical cost basis, except for trade receivables, derivative
financial instruments, equity securities, investment in funds and
defined benefit pension scheme assets which have been measured at
fair value.
The consolidated financial statements are presented in dollars
of the United States of America (US dollars or US$) and all values
are rounded to the nearest thousand ($000) except when otherwise
indicated.
Basis of consolidation
The consolidated financial statements set out the Group's
financial position as of 31 December 2018 and 2017, and the results
of operations and cash flows for the years then ended.
Entities that constitute the Group are those enterprises
controlled by the Group regardless of the number of shares owned by
the Group. The Group controls an entity when the Group is exposed
to, or has the right to, variable returns from its involvement with
the entity and has the ability to affect those returns through its
power over the entity. Entities are consolidated from the date on
which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of
the Group. The Group applies the acquisition method to account for
business combinations in accordance with IFRS 3.
All intra-group balances, transactions, income and expenses and
profits and losses, including unrealised profits arising from
intra-group transactions, have been eliminated on consolidation.
Unrealised losses are eliminated in the same way as unrealised
gains except that they are only eliminated to the extent that there
is no evidence of impairment.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Group's equity
therein. The interest of non-controlling shareholders may be
initially measured either at fair value or at the non-controlling
interest's proportionate share of the acquiree's identifiable net
assets. The choice of measurement basis is made on an acquisition
by-acquisition basis. Subsequent to acquisition, non-controlling
interests consist of the amount attributed to such interests at
initial recognition and the non-controlling interest's share of
changes in equity since the date of the combination. Any losses of
a subsidiary are attributed to the non-controlling interests even
if that results in a deficit balance.
Transactions with non-controlling interests that do not result
in loss of control are accounted for as equity transactions - that
is, a transaction with the owners in their capacity as owners. The
difference between fair value of any consideration paid and the
relevant share acquired of the carrying value of net assets of the
subsidiary is recorded in equity. Gains or losses on disposals to
non-controlling interest are also recorded in equity.
(b) Changes in accounting policies and disclosures
The accounting policies adopted in the preparation of the
consolidated financial statements are consistent with those applied
in the preparation of the consolidated financial statements for the
year ended 31 December 2017, except for the following:
New standards, interpretations and amendments (new standards)
adopted by the Group
Financial instruments
On January 1, 2018, the Company adopted IFRS 9, Financial
Instruments which replaced IAS 39, Financial Instruments:
Recognition and Measurement using the modified retrospective
approach, hence, the Group does not restate prior periods.
Differences between previous carrying amounts using accounting
policies as disclosed in the 2017 ARA and those determined under
IFRS 9 at the date of initial application have been included in
opening retained earnings.
IFRS 9 provides a revised model for classification and
measurement of financial instruments; a single, forward-looking
expected loss impairment model; and changes to hedge
accounting.
The classification and measurement model for financial assets in
IFRS 9 is based on the Group's business models for managing its
financial assets and whether the contractual cash flows represent
solely payments for principal and interest. Generally, equity
instruments are classified and measured as fair value through
profit or loss (FVPL). However, in respect of equity instruments
that the Group intends to hold for the foreseeable future, IFRS 9
permits the Group to irrevocably elect upon initial recognition or
transition to classify those assets as fair value through other
comprehensive income (FVOCI). Changes in the fair value of equity
instruments elected to be classified as FVOCI are not reclassified
to profit or loss in future periods. Most of the requirements in
IAS 39 for classification and measurement of financial liabilities
were carried forward in IFRS 9.
Long-term financial assets
The adoption of IFRS 9 resulted in certain changes to the
classification of financial assets previously classified as
available-for-sale financial assets (AFS). The Company designated
its investments in quoted equity investments as FVOCI and
classified investments in funds as FVPL:
1 January 2018 31 December 2017
(in thousands of US dollars)
Available-for-sale financial assets - 144,856
Debt instruments at fair value through profit or loss
19,877 -
Equity instruments at fair value through other comprehensive
income
124,979 -
144,856 144,856
Upon transition, the balance in the AFS reserve relating to
investments in funds was reclassified from accumulated other
comprehensive income (OCI) to retained earnings in the amount of
US$53.8 million. In addition, the amounts previously recognised in
retained earnings related to historical impairment of AFS that are
now classified as FVOCI have been reclassified to the FVOCI reserve
in the amount of US$6.0 million.
Trade receivables
Under IFRS 9, embedded derivatives are no longer separated from
their host contracts. Instead, where embedded derivatives are
present, the entire host contract is classified as fair value
through profit or loss. For the Group, this change affects the
trade receivables that include provisional pricing adjustments.
However, it did not result in any change in the carrying amount of
those trade receivables.
Impairment
The adoption of the new "expected credit loss" impairment model
under IFRS 9, as opposed to an incurred credit loss model under IAS
39, had a negligible impact on the carrying amounts of the Group's
financial assets on the transition date given the Group transacts
exclusively with organisations with strong credit ratings, has had
a negligible historical level of counterparty default and only has
a short term period of exposure to credit risk.
Hedging
The new general hedge accounting requirements retain the three
types of hedge accounting mechanisms previously available under IAS
39. Under IFRS 9, however, greater flexibility has been introduced
to the types of transactions eligible for hedge accounting,
specifically broadening the types of instruments that qualify for
hedging instruments and the types of risk components of
non-financial items that are eligible for hedge accounting. In
addition, the effectiveness test has been replaced with the
principle of an "economic relationship" and retrospective
assessment of hedge effectiveness is no longer required. Enhanced
disclosure requirements about an entity's risk management
activities have also been introduced.
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 as a cost of hedging. Where the hedged item is transaction
related, amounts initially recognised in OCI related to the change
in the time value of options are reclassified to profit or loss or
as a basis adjustment to non-financial assets or liabilities upon
maturity of the hedged item, or, in the case of a hedged item that
realises over time, the amounts initially recognised in OCI are
amortised to profit or loss on a systematic and rational basis over
the life of the hedged item. Under IAS 39, the change in time value
of options was recorded in the income statement. As at 1 January
2018, the adjustment to reflect the changes in accounting for the
time value of such options increased retained earnings and
decreased the cost of hedging reserve by US$19.1 million (US$13.4
million net of tax).
Revenue recognition
On January 1, 2018, the Group adopted IFRS 15, Revenue from
Contracts with Customers which supersedes IAS 18, Revenue. IFRS 15
establishes a single five-step model framework for determining the
nature, amount, timing and uncertainty of revenue and cash flows
arising from a contract with a customer. IFRS 15 requires entities
to recognize revenue when control of goods or services transfers to
the customer whereas the previous standard, IAS 18, required
entities to recognize revenue when the risks and rewards of the
goods or services transfer to the customer. The Company concluded
there is no change in the timing of revenue recognition of its
doré, precipitates and concentrate sales under IFRS 15 compared to
the previous standard as the point of transfer of risks and rewards
of goods and services and transfer of control occur at the same
time. Therefore, no adjustment was required to the Group's
financial statements.
Revenue associated with the sale of concentrates, precipitates
and doré bars is recognized when control of the asset sold is
transferred to the customer. Indicators of control transferring
include an unconditional obligation to pay, legal title, physical
possession, transfer of risk and rewards and customer acceptance.
This generally occurs when the goods are delivered to the
customer's smelter or refinery agreed with the buyer; at which
point the buyer controls the goods.
The Group's sales contracts, in general, provide for a
provisional payment based upon provisional assays and quoted metal
prices. Revenues are recorded under these contracts at the time
control passes to the buyer and measured at the fair value of the
consideration receivable based on forward market prices set on
specified quotational periods applied to the Group's best estimate
of contained metal quantities.
At each reporting date, provisionally priced metal is marked to
market based on the forward selling price for the quotational
period stipulated in the contract, changes in fair value of
provisionally priced metal is recognised in revenue adjusting the
value of sales. The transaction price can be measured reliably as
an active and freely traded commodity market such as the London
Metals Exchange exists for silver, gold, zinc and lead and the
value of product sold by the Company is directly linked to the form
in which it is traded on that market. Variations between the price
recorded at the date when control is transferred to the buyer and
the actual final price set under the smelting contracts are caused
by changes in metal prices resulting in the receivable being
recorded at FVPL.
Final settlement is based on quantities adjusted as required
following the inspection of the product by the customer as well as
applicable commodity prices. IFRS 15 requires that variable
consideration should only be recognized to the extent that it is
highly probable that a significant reversal in the amount of
cumulative revenue recognized will not occur. The Group concluded
that the adjustments relating to the final assay results for the
quantity and quality of concentrate sold are not significant and do
not constrain the recognition of revenue.
Refining and treatment charges under the sales contracts
continue to be deducted from revenue from sales of concentrates as
these are not related to a distinct good or service.
Other Narrow Scope Amendments
The Group has adopted IFRIC 22 - Foreign Currency Transactions
and Advance Considerations, which did not have a material impact on
the Group's consolidated financial statements.
Other than the amendment mentioned above, there were no
significant new standards that the Group was required to adopt
effective from 1 January 2018.
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 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. The Group has elected to
adopt the new standard from 1 January 2019 applying the simplified
transition approach and will not restate comparative amounts for
the year prior to first adoption. Right-of-use assets will be
measured at the amount of the lease liability on adoption. The
Group has set up a project team which has reviewed all of the
Group's leasing arrangements over the last year in light of the new
lease accounting rules in IFRS 16. As at the reporting date, the
Group has non-cancellable operating lease commitments of $16.1
million, see note 24. Of these commitments, approximately $0.2
million relate to short-term leases and $2.7 million to low value
leases which will both be recognised on a straight-line basis as
expense in profit or loss.
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
evaluated potential uncertain tax positions under the requirements
of the Interpretation and has not identified any impact on the
Group's financial statements. IFRIC 23 is applicable for annual
periods beginning on or after 1 January 2019.
The IASB and IFRS Interpretation committee have issued other
amendments resulting from improvements to IFRSs that management
considers do not have any impact on the accounting policies,
financial position or performance of the Group. The Group has not
early adopted any standard, interpretation or amendment that was
issued but is not yet effective.
(c) Significant accounting judgments, estimates and
assumptions
The preparation of the Group's consolidated financial statements
in conformity with IFRS requires management to make judgements,
estimates and assumptions that affect the reported amounts of
assets, liabilities and contingent liabilities at the date of the
consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. These judgements and
estimates are based on management's best knowledge of the relevant
facts and circumstances, with regard to prior experience, but
actual results may differ from the amounts included in the
consolidated financial statements. Information about such
judgements and estimates is contained in the accounting policies
and/or the notes to the consolidated financial statements.
Judgements
Areas of judgement, apart from those involving estimations, that
have the most significant effect on the amounts recognised in the
consolidated financial statements for the year ended 31 December
2018 are:
- Stripping costs, note 2(e):
The Group incurs waste removal costs (stripping costs) during
the development and production phases of its surface mining
operations. During the production phase, stripping costs
(production stripping costs) can be incurred both in relation to
the production of inventory in that period and the creation of
improved access and mining flexibility in relation to ore to be
mined in the future. The former are included as part of the costs
of inventory, while the latter are capitalised as a stripping
activity asset, where certain criteria are met.
Once the Group has identified production stripping for a surface
mining operation, judgment is required in identifying the separate
components of the ore bodies for that operation, to which stripping
costs should be allocated. Generally, a component will be a subset
of the total ore body that is made more accessible as a result of
the stripping activity. In identifying components of the ore body,
the Group works closely with the mining operations personnel to
analyse each of the mine plans since components are usually
identified during the mine planning stage. The Group reassesses the
components of ore bodies in line with the preparation and update of
mine plans which usually depend on newest information of reserves
and resources.
In the current year, this reassessment did not give rise to any
changes in the identification of components except for those
existing at Centauro pit at Herradura mine.
Following the results of reserves and resources studies in the
prior year, significant additional gold reserves were identified at
Centauro pit. The mining operations worked on assessing the impact
of these new reserves on the design of the mine and proposed a new
mine plan which was approved in July 2018.The new design
significantly expands the size of the Centauro pit and results in
areas which were previously going to be mined as two separate
components being accessed and mined as a single component. Based on
the new mine plan, effective 1 July 2018 the Group has changed the
components identified at Centuaro pit and therefore the measurement
of the corresponding stripping costs.
This change was incorporated prospectively from 1 July 2018. Had
the determination of components not changed, capitalised stripping
cost during the six-month period ended 31 December 2018 would have
been US$28.6 million higher, with an offsetting impact against the
work-in-progress inventory balance as of 31 December 2018.
- Contingencies, note 25
By their nature, contingencies will be resolved only when one or
more uncertain future events occur or fail to occur. The assessment
of the existence and potential quantum of contingencies inherently
involves the exercise of significant judgement and the use of
estimates regarding the outcome of future events.
Estimates and assumptions
Significant areas of estimation uncertainty considered by
management in preparing the consolidated financial statements
include:
- Estimated recoverable ore reserves and mineral resources, note 2(e):
Ore reserves are estimates of the amount of ore that can be
economically and legally extracted from the Group's mining
properties; mineral resources are an identified mineral occurrence
with reasonable prospects for eventual economic extraction. The
Group estimates its ore reserves and mineral resources based on
information compiled by appropriately qualified persons relating to
the geological and technical data on the size, depth, shape and
grade of the ore body and suitable production techniques and
recovery rates, in conformity with the Joint Ore Reserves Committee
(JORC) code 2012. Such an analysis requires complex geological
judgements to interpret the data. The estimation of recoverable ore
reserves and mineral resources is based upon factors such as
geological assumptions and judgements made in estimating the size
and grade of the ore body, estimates of commodity prices, foreign
exchange rates, future capital requirements and production
costs.
As additional geological information is produced during the
operation of a mine, the economic assumptions used and the
estimates of ore reserves and mineral resources may change. Such
changes may impact the Group's reported balance sheet and income
statement including:
-- The carrying value of property, plant and equipment and
mining properties may be affected due to changes in estimated
future cash flows, which consider both ore reserves and mineral
resources;
-- Depreciation and amortisation charges in the income statement
may change where such charges are determined using the
unit-of-production method based on ore reserves;
-- Stripping costs capitalised in the balance sheet, either as
part of mine properties or inventory, or charged to profit or loss
may change due to changes in stripping ratios;
-- Provisions for mine closure costs may change where changes to
the ore reserve and resources estimates affect expectations about
when such activities will occur;
-- The recognition and carrying value of deferred income tax
assets may change due to changes regarding the existence of such
assets and in estimates of the likely recovery of such assets.
- Estimate of recoverable ore on leaching pads
In the Group's open pit mines, certain mined ore is placed on
leaching pads where a solution is applied to the surface of the
heap to dissolve the gold and enable extraction. The determination
of the amount of recoverable gold requires estimation with
consideration of the quantities of ore placed on the pads and the
grade of that ore (based on assay data) and the estimated recovery
percentage (based on metallurgical studies and current
technology).
The grades of ore placed on pads are regularly compared to the
quantities of metal recovered through the leaching process to
evaluate the appropriateness of the estimated recovery
(metallurgical balancing). The Group monitors the results of the
metallurgical balancing process and recovery estimates are refined
based on actual results over time and when new information becomes
available.
In 2017, the Group decided that it would construct a new
leaching pad in a separate area of the Herradura mine. To reduce
the hauling distance from the pit to the new pad, the Group
constructed an access route through certain existing leaching pads,
removing and redepositing the ore in the process. These works
allowed the Group to perform assays and verify certain
characteristics of the ore, including the humidity of the ore
deposited and the grade of gold in solution. The Group finalised
the evaluation of those assays during first half of 2018.
As a result of this new information, the Group updated its
estimate of the remaining gold content in leaching pads resulting
in an increase of 98.9 thousand ounces of gold as at 1 January
2018. This represents 1.7% of the total gold content deposited from
the inception of the mine to 31 December 2017.
This change in estimation was incorporated prospectively in
inventory from 1 January 2018. The increase in the number of ounces
reduced the weighted average cost of inventory. Had the estimation
not changed, production cost during the year ended 31 December 2018
would have been US$71.9 million higher, with an offsetting impact
against the work-in-progress inventory balance as of 31 December
2018.
- Silverstream, note 13:
The valuation of the Silverstream contract as a derivative
financial instrument requires estimation by management. The term of
the derivative is based on the Sabinas life of mine and the value
of this derivative is determined using a number of estimates,
including the estimated recoverable ore reserves and mineral
resources and future production profile of the Sabinas mine, 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.
- Estimation of the mine closure costs, notes 2 (j) and 19:
Significant estimates and assumptions are made in determining
the provision for mine closure cost as there are numerous factors
that will affect the ultimate amounts payable. These factors
include estimates of the extent and costs of rehabilitation
activities, the currency in which the cost will be incurred,
technological changes, regulatory changes, cost increases, mine
life and changes in discount rates. Those uncertainties may result
in future actual expenditure differing from the amounts currently
provided. The provision at the balance sheet date represents
management's best estimate of the present value of the future
closure costs required.
- Income tax, notes 2 (q) and 10:
The recognition of deferred tax assets, including those arising
from un-utilised tax losses require management to assess the
likelihood that the Group will generate taxable earnings in future
periods, in order to utilise recognised deferred tax assets.
Estimates of future taxable income are based on forecast cash flows
from operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and taxable
income differ significantly from estimates, the ability of the
Group to realise the net deferred tax assets recorded at the
balance sheet date could be impacted.
(d) Foreign currency translation
The Group's consolidated financial statements are presented in
US dollars, which is the parent company's functional currency. The
functional currency for each entity in the Group is determined by
the currency of the primary economic environment in which it
operates. The determination of functional currency requires
management judgement, particularly where there may be more than one
currency in which transactions are undertaken and which impact the
economic environment in which the entity operates. For all
operating entities, this is US dollars.
Transactions denominated in currencies other than the functional
currency of the entity are translated at the exchange rate ruling
at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are re-translated at the rate of
exchange ruling at the balance sheet date. All differences that
arise are recorded in the income statement. Non-monetary items that
are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a
foreign currency are translated into US dollars using the exchange
rate at the date when the fair value is determined.
For entities with functional currencies other than US dollars as
at the reporting date, assets and liabilities are translated into
the reporting currency of the Group by applying the exchange rate
at the balance sheet date and the income statement is translated at
the average exchange rate for the year. The resulting difference on
exchange is included as a cumulative translation adjustment in
other comprehensive income. On disposal of an entity, the deferred
cumulative amount recognised in other comprehensive income relating
to that operation is recognised in the income statement.
(e) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and impairment, if any. Cost comprises the purchase
price and any costs directly attributable to bringing the asset
into working condition for its intended use. The cost of
self-constructed assets includes the cost of materials, direct
labour and an appropriate proportion of production overheads.
The cost less the residual value of each item of property, plant
and equipment is depreciated over its useful life. Each item's
estimated useful life has been assessed with regard to both its own
physical life limitations and the present assessment of
economically recoverable reserves of the mine property at which the
item is located. Estimates of remaining useful lives are made on a
regular basis for all mine buildings, machinery and equipment, with
annual reassessments for major items. Depreciation is charged to
cost of sales on a unit-of-production (UOP) basis for mine
buildings and installations, plant and equipment used in the mine
production process or on a straight-line basis over the estimated
useful life of the individual asset when not related to the mine
production process. Changes in estimates, which mainly affect
unit-of-production calculations, are accounted for prospectively.
Depreciation commences when assets are available for use. Land is
not depreciated.
The expected useful lives are as follows:
Years
-------------------------------------------- ------
Buildings 6
------
Plant and equipment 4
------
Mining properties and development costs(1) 16
Other assets 3
-------------------------------------------- ------
(1 Depreciation of mining properties and development cost are
determined using the unit-of-production method.)
An item of property, plant and equipment is de-recognised upon
disposal or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising at de-recognition of the
asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is included in the
income statement in the year that the asset is de-recognised.
Non-current assets or disposal groups are classified as held for
sale when it is expected that the carrying amount of the asset will
be recovered principally through sale rather than through
continuing use. Assets are not depreciated when classified as held
for sale.
Disposal of assets
Gains or losses from the disposal of assets are recognised in
the income statement when all significant risks and rewards of
ownership are transferred to the customer, usually when title has
been passed.
Mining properties and development costs
Payments for mining concessions are expensed during the
exploration phase of a prospect and capitalised during the
development of the project when incurred.
Purchased rights to ore reserves and mineral resources are
recognised as assets at their cost of acquisition or at fair value
if purchased as part of a business combination.
Mining concessions, when capitalised, are amortised on a
straight-line basis over the period of time in which benefits are
expected to be obtained from that specific concession.
Mine development costs are capitalised as part of property,
plant and equipment. Mine development activities commence once a
feasibility study has been performed for the specific project. When
an exploration prospect has entered into the advanced exploration
phase and sufficient evidence of the probability of the existence
of economically recoverable minerals has been obtained
pre-operative expenses relating to mine preparation works are also
capitalised as a mine development cost.
The initial cost of a mining property comprises its construction
cost, any costs directly attributable to bringing the mining
property into operation, the initial estimate of the provision for
mine closure cost, and, for qualifying assets, borrowing costs. The
Group cease the capitalisation of borrowing cost when the physical
construction of the asset is complete and is ready for its intended
use.
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 as new information of
reserves and resources is available. Depreciation is recognised as
cost of sales in the income statement.
The capitalised stripping activity asset is carried at cost less
accumulated depletion/depreciation, less impairment, if any. Cost
includes the accumulation of costs directly incurred to perform the
stripping activity that improves access to the identified component
of ore, plus an allocation of directly attributable overhead costs.
The costs associated with incidental operations are excluded from
the cost of the stripping activity asset.
(f) Impairment of non-financial assets
The carrying amounts of non-financial assets are reviewed for
impairment if events or changes in circumstances indicate that the
carrying value may not be recoverable. At each reporting date, an
assessment is made to determine whether there are any indications
of impairment. If there are indicators of impairment, an exercise
is undertaken to determine whether carrying values are in excess of
their recoverable amount. Such reviews are undertaken on an asset
by asset basis, except where such assets do not generate cash flows
independent of those from other assets or groups of assets, and
then the review is undertaken at the cash generating unit
level.
If the carrying amount of an asset or its cash generating unit
exceeds the recoverable amount, a provision is recorded to reflect
the asset at the recoverable amount in the balance sheet.
Impairment losses are recognised in the income statement.
The recoverable amount of an asset
The recoverable amount of an asset is the greater of its value
in use and fair value less costs of disposal. In assessing value in
use, estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to
the asset. 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
From 1 January 2018, the Group classifies its financial assets
in the following measurement categories:
-- those to be measured at amortised cost.
-- those to be measured subsequently at fair value through OCI, and.
-- those to be measured subsequently at fair value through profit or loss.
The classification depends on the Group's business model for
managing the financial assets and the contractual terms of the cash
flows.
For assets measured at fair value, gains and losses will either
be recorded in profit or loss or OCI. For investments in equity
instruments that are not held for trading, this will depend on
whether the group has made an irrevocable election at the time of
initial recognition to account for the equity investment at fair
value through other comprehensive income (FVOCI).
The group reclassifies debt investments when and only when its
business model for managing those assets changes.
Regular way purchases and sales of financial assets are
recognised on trade-date, the date on which the Group commits to
purchase or sell the asset.
At initial recognition, the Group measures a financial asset at
its fair value plus, in the case of a financial asset not at fair
value through profit or loss (FVPL), transaction costs that are
directly attributable to the acquisition of the financial asset.
Transaction costs of financial assets carried at FVPL are expensed
in profit or loss.
Financial assets with embedded derivatives are considered in
their entirety when determining whether their cash flows are solely
payment of principal and interest.
Subsequent measurement of debt instruments depends on the
Group's business model for managing the asset and the cash flow
characteristics of the asset. There are three measurement
categories into which the Group classifies its debt
instruments:
Amortised cost
Assets that are held for collection of contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. Interest income from these
financial assets is included in finance income using the effective
interest rate method. Any gain or loss arising on derecognition is
recognised directly in profit or loss and presented in other
gains/(losses) together with foreign exchange gains and losses.
Impairment losses are presented as separate line item in the
statement of profit or loss.
The Group's financial assets at amortised cost include
receivables (other than trade receivables which are measured at
fair value through profit and loss).
Fair value through other comprehensive income
Assets that are held for collection of contractual cash flows
and for selling the financial assets, where the assets' cash flows
represent solely payments of principal and interest, are measured
at FVOCI. Movements in the carrying amount are taken through OCI,
except for the recognition of impairment gains or losses, interest
income and foreign exchange gains and losses which are recognised
in profit or loss. When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is
reclassified from equity to profit or loss and recognised in other
gains/(losses). Interest income from these financial assets is
included in finance income using the effective interest rate
method. Foreign exchange gains and losses are presented in other
gains/(losses) and impairment expenses are presented as separate
line item in the statement of profit or loss.
At transition to IFRS 9, the Group had certain financial asset
that were accounted for as debt instruments at fair value through
other comprehensive income; however, at the reporting date, no such
assets existed.
Equity instruments designated as fair value through other
comprehensive income
Upon initial recognition, the Group can elect to classify
irrevocably its equity investments as equity instruments designated
at fair value through OCI when they meet the definition of equity
under IAS 32 Financial Instruments: Presentation and are not held
for trading. The classification is determined on an
instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to
profit or loss. Dividends are recognised as other income in the
statement of profit or loss when the right of payment has been
established, except when the Group benefits from such proceeds as a
recovery of part of the cost of the financial asset, in which case,
such gains are recorded in OCI. Equity instruments designated at
fair value through OCI are not subject to impairment
assessment.
The Group elected to classify irrevocably its listed equity
investments under this category.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or FVOCI
are measured at FVPL. A gain or loss on a debt investment that is
subsequently measured at FVPL is recognised in profit or loss and
presented net within other gains/(losses) in the period in which it
arises.
Changes in the fair value of financial assets at FVPL are
recognised in other gains/(losses) in the statement of profit or
loss as applicable.
The Group's trade receivables and derivative financial
instruments, including the Silverstream contract, are classified as
fair value through profit or loss.
De-recognition of financial assets
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or have been
transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Impairment of financial assets
From 1 January 2018, the Group assesses on a forward looking
basis the expected credit losses associated with its debt
instruments carried at amortised cost and FVOCI. The impairment
methodology applied depends on whether there has been a significant
increase in credit risk.
For receivables (other than trade receivables which are measured
at FVPL), the Group applies the simplified approach permitted by
IFRS 9, which requires expected lifetime losses to be recognised
from initial recognition of the receivables.
(h) Inventories
Finished goods, work in progress and ore stockpile inventories
are measured at the lower of cost and net realisable value. Cost is
determined using the weighted average cost method based on cost of
production which excludes borrowing costs.
For this purpose, the costs of production include:
- personnel expenses, which include employee profit sharing,
materials and contractor expenses which are directly attributable
to the extraction and processing of ore;
- the depreciation of property, plant and equipment used in the
extraction and processing of ore; and
- related production overheads (based on normal operating capacity).
Operating materials and spare parts are valued at the lower of
cost or net realisable value. An allowance for obsolete and
slow-moving inventories is determined by reference to specific
items of stock. A regular review is undertaken by management to
determine the extent of such an allowance.
Net realisable value is the estimated selling price in the
ordinary course of business less any further costs expected to be
incurred to completion and disposal.
(i) Cash and cash equivalents
For the purposes of the balance sheet, cash and cash equivalents
comprise cash at bank, cash on hand and short-term deposits held
with banks that are readily convertible into known amounts of cash
and which are subject to insignificant risk of changes in value.
Short-term deposits earn interest at the respective short-term
deposit rates between one day and four months. For the purposes of
the cash flow statement, cash and cash equivalents as defined above
are shown net of outstanding bank overdrafts.
(j) Provisions
Mine closure cost
A provision for mine closure cost is made in respect of the
estimated future costs of closure, restoration and for
environmental rehabilitation costs (which include the dismantling
and demolition of infrastructure, removal of residual materials and
remediation of disturbed areas) based on a mine closure plan, in
the accounting period when the related environmental disturbance
occurs. The provision is discounted and the unwinding of the
discount is included within finance costs. At the time of
establishing the provision, a corresponding asset is capitalised
where it gives rise to a future economic benefit and is depreciated
over future production from the mine to which it relates. The
provision is reviewed on an annual basis by the Group for changes
in cost estimates, discount rates or life of operations. Changes to
estimated future costs are recognised in the balance sheet by
adjusting the mine closure cost liability and the related asset
originally recognised. If, for mature mines, the revised mine
assets net of mine closure cost provisions exceed the recoverable
value, the portion of the increase is charged directly as an
expense. For closed sites, changes to estimated costs are
recognised immediately in profit or loss.
(k) Employee benefits
The Group operates the following plans:
Defined benefit pension plan
This funded plan is based on each employee's earnings and years
of service. This plan was open to all employees in Mexico until it
was closed to new entrants on 1 July 2007. The plan is denominated
in Mexican Pesos. For members as at 30 June 2007, benefits were
frozen at that date subject to indexation with reference to the
Mexican National Consumer Price Index (NCPI).
The cost of providing benefits under the defined benefit plan is
determined using the projected unit credit actuarial valuation
method and prepared by an external actuarial firm as at each
year-end balance sheet date. The discount rate is the yield on
bonds that have maturity dates approximating the terms of the
Group's obligations and that are denominated in the same currency
in which the benefits are expected to be paid. Actuarial gains or
losses are recognised in OCI and permanently excluded from profit
or loss.
Past service costs are recognised 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.
(l) Employee profit sharing
In accordance with the Mexican legislation, companies in Mexico
are subject to pay for employee profit sharing ('PTU') equivalent
to ten percent of the taxable income of each fiscal year.
PTU is accounted for as employee benefits and is calculated
based on the services rendered by employees during the year,
considering their most recent salaries. The liability is recognised
as it accrues and is charged to the income statement. PTU, paid in
each fiscal year, is considered deductible for income tax
purposes.
(m) Leases
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.
(n) Revenue from contracts with customers
Revenue is recognised when control of goods or services
transfers to the customer based on the performance obligations
settle in the contracts with customers.
Sale of goods
Revenue associated with the sale of concentrates, precipitates
and doré bars is recognized when control of the asset sold is
transferred to the customer. Indicators of control transferring
include an unconditional obligation to pay, legal title, physical
possession, transfer of risk and rewards and customer acceptance.
This generally occurs when the goods are delivered to the
customer's smelter or refinery agreed with the buyer; at which
point the buyer controls the goods.
The Group's sales contracts, in general, provide for a
provisional payment based upon provisional assays and quoted metal
prices. Revenues are recorded under these contracts at the time
control passes to the buyer and measured at the fair value of the
consideration receivable based on forward market prices set on
specified quotational periods applied to the Group's best estimate
of contained metal quantities.
Final settlement is based on quantities adjusted as required
following the inspection of the product by the customer as well as
applicable commodity prices. IFRS 15 requires that variable
consideration should only be recognised to the extent that it is
highly probable that a significant reversal in the amount of
cumulative revenue recognized will not occur. As the adjustments
relating to the final assay results for the quantity and quality of
concentrate sold are not significant, they do not constrain the
recognition of revenue.
Refining and treatment charges under the sales contracts are
deducted from revenue from sales of concentrates as these are not
related to a distinct good or service.
(o) Exploration expenses
Exploration activity involves the search for mineral resources,
the determination of technical feasibility and the assessment of
commercial viability of an identified resource.
Exploration expenses are charged to the income statement as
incurred and are recorded in the following captions:
- Cost of sales: costs relating to in-mine exploration, that
ensure continuous extraction quality and extend mine life, and
- Exploration expenses:
o Costs incurred in geographical proximity to existing mines in
order to replenish or increase reserves, and
o Costs incurred in regional exploration with the objective of
locating new ore deposits in Mexico and Latin America and which are
identified by project. Costs incurred are charged to the income
statement until there is sufficient probability of the existence of
economically recoverable minerals and a feasibility study has been
performed for the specific project.
(p) Selling expenses
The Group recognises in selling expenses a levy in respect of
the Extraordinary Mining Right as sales of gold and silver are
recognised. The Extraordinary Mining Right consists of a 0.5% rate,
applicable to the owners of mining titles. The payment must be
calculated over the total sales of all mining concessions. The
payment of this mining right must be remitted no later than the
last business day of March of the following year and can be
credited against corporate income tax.
The Group also recognises in selling expenses a discovery
premium royalty equivalent to 1% of the value of the mineral
extracted and sold during the year from certain mining titles
granted by the Mexican Geological Survey (SGM) in the San Julian
mine. The premium is settled to SGM on a quarterly basis.
(q) Taxation
Current income tax
Current income tax assets and liabilities for the current and
prior periods are measured at the amount expected to be recovered
from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or
substantively enacted, at the reporting date in the country the
Group operates.
Deferred income tax
Deferred income tax is provided using the liability method on
temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable
temporary differences, except:
- where the deferred income tax liability arises from the
initial recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of
transaction, affects neither the accounting profit nor taxable
profit loss; and
- in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible
temporary differences, carry forward of unused tax credits and
unused tax losses, to the extent that it is probable that taxable
profit will be available against which the deductible temporary
differences, and the carry forward of unused tax credits and unused
tax losses can be utilised, except:
- where the deferred income tax asset relating to deductible
temporary differences arise from the initial recognition of an
asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss; and
- in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, deferred income tax assets are recognised only to the
extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be
utilised.
The carrying amount of deferred income tax assets is reviewed at
each balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profit will be available to
allow all or part of the deferred income tax asset to be
utilised.
Unrecognised deferred income tax assets are reassessed at each
balance sheet date and are recognised to the extent that it has
become probable that future taxable profit will allow the deferred
tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the
tax rates that are expected to apply to the year when the asset is
realised or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at the
balance sheet date.
Deferred income tax relating to items recognised directly in
other comprehensive income is recognised in equity and not in the
income statement.
Deferred income tax assets and deferred income tax liabilities
are offset, if a legally enforceable right exists to set off
current tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the
same taxation authority.
Mining Rights
The Special Mining Right is considered an income tax under IFRS
and states that the owners of mining titles and concessions are
subject to pay an annual mining right of 7.5% of the profit derived
from the extractive activities (See note 10 (e)). The Group
recognises deferred tax assets and liabilities on temporary
differences arising in the determination of the Special Mining
Right (See note 10).
Sales tax
Expenses and assets are recognised net of the amount of sales
tax, except:
- When the sales tax incurred on a purchase of assets or
services is not recoverable from the taxation authority, in which
case, the sales tax is recognised as part of the cost of
acquisition of the asset or as part of the expense item, as
applicable;
- When receivables and payables are stated with the amount of sales tax included.
The net amount of sales tax recoverable from, or payable to, the
taxation authority is included as part of receivables or payables
in the balance sheet.
(r) Derivative financial instruments and hedging
The Group uses derivatives to reduce certain market risks
derived from changes in foreign exchange and commodities price
which impact its financial and business transactions. Hedges are
designed to protect the value of expected production against the
dynamic market conditions.
Such derivative financial instruments are initially recognised
at fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value. Derivatives are
carried as assets when the fair value is positive and as
liabilities when the fair value is negative. The full fair value of
a derivative is classified as non-current asset or liability if the
remaining maturity of the item is more than 12 months.
Any gains or losses arising from changes in fair value on
derivatives during the year that do not qualify for hedge
accounting are taken directly to the income statement.
Derivatives are valued using valuation approaches and
methodologies (such as Black Scholes and Net Present Value)
applicable to the specific type of derivative instrument. The fair
value of forward currency and commodity contracts is calculated by
reference to current forward exchange rates for contracts with
similar maturity profiles, European foreign exchange options are
valued using the Black Scholes model. The Silverstream contract is
valued using a Net Present Value valuation approach.
Beginning 1 January 2018, the documentation includes
identification of the hedging instrument, the hedged item, the
nature of the risk being hedged and how the Group will assess
whether the hedging relationship meets the hedge effectiveness
requirements (including the analysis of sources of hedge
ineffectiveness and how the hedge ratio is determined). A hedging
relationship qualifies for hedge accounting if it meets all of the
following effectiveness requirements:
-- There is 'an economic relationship' between the hedged item
and the hedging instrument.
-- The effect of credit risk does not 'dominate the value
changes' that result from that economic relationship.
-- The hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the Group
actually hedges and the quantity of the hedging instrument that the
Group actually uses to hedge that quantity of hedged item.
Hedges which meet the criteria for hedge accounting are
accounted for as follows:
Cash flow hedges
For derivatives that are designated and qualify as cash flow
hedges, the effective portion of changes in the fair value of
derivative instruments are recorded as in other comprehensive
income and are transferred to the income statement when the hedged
transaction affects profit or loss, such as when a forecast sale or
purchase occurs. For gains or losses related to the hedging of
foreign exchange risk these are included, in the line item in which
the hedged costs are reflected. Where the hedged item is the cost
of a non-financial asset or liability, the amounts recognised in
other comprehensive income are transferred to the initial carrying
amount of the non-financial asset or liability. This is not a
reclassification adjustment and will not be recognised in OCI for
the period. The ineffective portion of changes in the fair value of
cash flow hedges is recognised directly as finance costs, in the
income statement of the related period.
If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation as
a hedge is revoked, any cumulative gain or loss recognised directly
in other comprehensive income from the period that the hedge was
effective remains separately in other comprehensive income until
the forecast transaction occurs, when it is recognised in the
income statement. When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was reported in other
comprehensive income is immediately transferred to the income
statement.
When hedging with options, the Group designates only the
intrinsic value movement of the hedging option within the hedge
relationship. The time value of the option contracts is therefore
excluded from the hedge designation. In such cases, changes in the
time value of options are initially recognised in OCI as a cost of
hedging. Where the hedged item is transaction related, amounts
initially recognised in OCI related to the change in the time value
of options are reclassified to profit or loss or as a basis
adjustment to non-financial assets or liabilities upon maturity of
the hedged item, or, in the case of a hedged item that realises
over time, the amounts initially recognised in OCI are amortised to
profit or loss on a systematic and rational basis over the life of
the hedged item.
(s) Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of an asset that necessarily takes 12 or
more months to get ready for its intended use or sale (a qualifying
asset) are capitalised as part of the cost of the respective asset.
Borrowing costs consist of interest and other costs that an entity
incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the
amount capitalised represents the actual borrowing costs incurred.
Where surplus funds are available for a short term from funds
borrowed specifically to finance a project, the income generated
from the temporary investment of such amounts is also capitalised
and deducted from the total capitalised borrowing cost. Where the
funds used to finance a project form part of general borrowings,
the amount capitalised is calculated using a weighted average of
rates applicable to relevant general borrowings of the Group during
the period.
All other borrowing costs are recognised in the income statement
in the period in which they are incurred.
(t) Fair value measurement
The Group measures financial instruments at fair value at each
balance sheet date. Fair values of financial instruments measured
at amortised cost are disclosed in notes 29 and 30.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
- In the principal market for the asset or liability, or
- In the absence of a principal market, in the most advantageous
market for the asset or liability
The principal or the most advantageous market must be accessible
to the Group.
The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset
in its highest and best use.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy, described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole:
Level 1 - Quoted (unadjusted) market prices in active markets
for identical assets or liabilities
Level 2 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable
Level 3 - Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable
For assets and liabilities that are recognised in the financial
statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by
re-assessing categorisation (based on the lowest level input that
is significant to the fair value measurement as a whole) at the end
of each reporting period.
For the purpose of fair value disclosures, the Group has
determined classes of assets and liabilities on the basis of the
nature, characteristics and risks of the asset or liability and the
level of the fair value hierarchy as explained above. Further
information on fair values is described in note 29.
(u) Dividend distribution
Dividends payable to the Company's shareholders are recognised
as a liability when these are approved by the Company's
shareholders or Board as appropriate. Dividends payable to minority
shareholders are recognised as a liability when these are approved
by the Company's subsidiaries.
3. Segment reporting
For management purposes, the Group is organised into operating
segments based on producing mines.
At 31 December 2018, 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.
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 2018 and 2017, 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 2018 and 2017, respectively. Revenues for the year ended
31 December 2018 include those derived from contracts with
costumers and other revenues, as showed in note 4.
Year ended 31 December 2018
-----------------------------------------------------------------------------------------------------------------------------------
US$ thousands Fresnillo Herradura Cienega Soledad- Saucito Noche San Other(5) Adjustments Total
Dipolos(4) Buena Julian and
eliminations
----------------- ---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Revenues:
---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Third party(1) 333,009 607,073 172,922 - 436,491 210,994 341,714 1,582 2,103,785
Inter-Segment 85,101 (85,101) -
----------------- ---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Segment revenues 333,009 607,073 172,922 - 436,491 210,994 341,714 85,101 (83,519) 2,103,785
---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Segment
Profit(2) 211,530 322,985 79,154 - 274,505 85,903 176,518 65,690 (11,281) 1,205,004
---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Depreciation
and
amortisation (411,764)
Employee profit
sharing (12,512)
----------------- ---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Gross profit
as per the
income
statement 780,728
----------------- ---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
Capital
expenditure(3) 121,146 116,002 72,895 - 148,440 50,209 83,129 76,848 - 668,669
----------------- ---------- ---------- -------- ----------- -------- -------- -------- --------- ------------- ----------
1 Total third party revenues include treatment and refining
charges amounting US$141.2 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2 Segment profit excluding foreign exchange hedging gains,
depreciation and amortisation and employee profit sharing.)
(3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, purchase of mine
equipment and capitalised stripping activity, excluding additions
relating to changes in the mine closure provision. Significant
additions the construction of) (facilities at San Julian phase II,
the) (second) (dynamic leaching) (plant at Herradura and the
construction of the pyrites plant at Saucito.)
(4 During) (2018) , this segment did not operate due to the
Bajio conflict (note 25).
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure mainly corresponds to Minera Juanicipio S.A de C.V) (.
and Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2017
---------------- ---------- -------------------------------------------------------------------------------------------------------------
US$ thousands Fresnillo Herradura Cienega Soledad-Dipolos(4) Saucito Noche San Other(5) Adjustments Total
Buena Julian and
eliminations
---------------- ---------- ---------- -------- ------------------- -------- -------- -------- --------- ------------- ----------
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$139.9 million.)
(2 Segment profit excluding depreciation and amortisation and
employee profit sharing. During 2017 there were no foreign exchange
hedging losses included in Gross profit.)
(3) (Capital expenditure represents the cash outflow in respect
of additions to property, plant and equipment, including mine
development, construction of leaching pads, purchase of mine
equipment and capitalised stripping activity, excluding additions
relating to changes in the mine closure provision. Significant
additions the construction of) (facilities at San Julian phase II,
the) (second) (dynamic leaching) (plant at Herradura and the
construction of the pyrites plant at Saucito.)
(4) (During) (2017) , this segment did not operate due to the
Bajio conflict (note 25). Segment profit is derived from the
changes in the net realisable value allowance against inventory
(note 14).
(5) (Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure corresponds to Minera Juanicipio S.A de C.V) (.)
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré,
slag and precipitates of which the primary contents are silver,
gold, lead and zinc.
(a) Revenues by source
Year ended
31 December
-------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
-------------------------------------------------- ----------- -----------
Revenues from contracts with customers 2,102,694 2,084,048
-----------
Revenues from other sources:
-----------
Provisional pricing adjustment on products sold (491) 9,260
Hedging gain on sales 1,582 -
-------------------------------------------------- ----------- -----------
2,103,785 2,093,308
-------------------------------------------------- ----------- -----------
(b) Revenues by product sold
Year ended
31 December
-------------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
-------------------------------------------------------------- ----------- -----------
Lead concentrates (containing silver, gold, lead and
by-products) 804,882 832,039
-----------
Doré and slag (containing gold, silver and by-products) 818,067 820,821
-----------
Zinc concentrates (containing zinc, silver and by-products) 249,182 195,837
Precipitates (containing gold and silver) 231,654 244,611
-------------------------------------------------------------- ----------- -----------
2,103,785 2,093,308
-------------------------------------------------------------- ----------- -----------
All lead concentrates, precipitates, doré and slag, were sold to
Peñoles' metallurgical complex, Met-Mex, for smelting and
refining.
(c) Value of metal content in products sold
For products other than refined silver and gold, invoiced
revenues are derived from the value of metal content adjusted by
treatment and refining charges incurred by the metallurgical
complex of the customer. The value of the metal content of the
products sold, before treatment and refining charges is as
follows:
Year ended
31 December
----------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
----------------------------------------------- ----------- -----------
Silver 815,837 844,815
-----------
Gold 1,118,087 1,125,290
-----------
Zinc 204,499 161,305
Lead 106,536 101,826
----------------------------------------------- ----------- -----------
Value of metal content in products sold 2,244,959 2,233,236
Adjustment for treatment and refining charges (141,174) (139,928)
----------------------------------------------- ----------- -----------
Total revenues(1) (,) 2,103,785 2,093,308
----------------------------------------------- ----------- -----------
1 Includes provisional price adjustments which represent changes
in the fair value of trade receivables resulting in a loss of
US$0.5 million (2017: gain of US$9.2 million (due to changes in the
fair value of embedded derivatives arising on provisional pricing
in sales contracts ) and hedging gain of US$1.6 million (2017:
nil). For further detail, refer to note 2(n).
The average realised prices for the gold and silver content of
products sold, prior to the deduction of treatment and refining
charges, were:
Year ended
31 December
----------- ---------------------
2018 2017
US$ US$
per per ounce
ounce
----------- -------- -----------
Gold(2) 1,269.1 1,267.4
----------- -------- -----------
Silver(2) 15.5 16.9
----------- -------- -----------
(2 For the purpose of the calculation, revenue by content of
products sold does not include the results from hedging.)
5. Cost of sales
Year ended
31 December
------------------------------------------------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------------------ ----------- -----------
Depreciation and amortisation (notes 2 (e) and 12) 411,764 367,609
----------- -----------
Personnel expenses (note 7) 94,653 89,629
----------- -----------
Maintenance and repairs 150,021 115,670
----------- -----------
Operating materials 191,954 153,221
----------- -----------
Energy 176,333 144,298
----------- -----------
Contractors 291,970 233,909
----------- -----------
Freight 11,633 10,545
----------- -----------
Insurance 4,956 4,786
----------- -----------
Mining concession rights and contributions 13,271 11,589
Other 29,680 22,043
Cost of production 1,376,235 1,153,299
Change in work in progress and finished goods (ore
inventories) (1) (53,178) 16,873
Change in net realisable value allowance against inventory
(note 14) - (2,269)
------------------------------------------------------------ ----------- -----------
1,323,057 1,167,903
------------------------------------------------------------ ----------- -----------
1 Refer to note 2 (c) for more detail related to change in work
in progress inventories for the year ended 31 December 2018
following a change in estimations.
6. Exploration expenses
Year ended
31 December
-------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
-------------------------------------------- ----------- -----------
Contractors 127,734 105,778
Administrative services 6,734 6,818
Mining concession rights and contributions 23,441 15,056
Personnel expenses (note 7) 4,137 4,260
----------- -----------
Assays 3,615 2,850
----------- -----------
Rentals 1,378 2,329
----------- -----------
Other 5,760 4,017
-------------------------------------------- ----------- -----------
172,799 141,108
-------------------------------------------- ----------- -----------
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,
San Javier and Carina projects. In addition, exploration expenses
of US$6.3 million (2017: US$8.3 million) were incurred in the year
on projects located in Peru and Chile.
The following table sets forth liabilities (generally trade
payables) corresponding to exploration activities of the Group
companies engaged only in exploration, principally Exploraciones
Mineras Parreña, S.A. de C.V.
Year ended
31 December
----------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
----------------------------------------------- ----------- -----------
Liabilities related to exploration activities 112 1,947
----------------------------------------------- ----------- -----------
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
------------------------------------------------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------------------ ----------- -----------
Operating cash out flows related to exploration activities 174,634 140,804
------------------------------------------------------------ ----------- -----------
7. Personnel expenses
Year ended
31 December
------------------------------------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------ ----------- -----------
Salaries and wages 46,542 39,448
Employees' profit sharing 13,003 17,150
Bonuses 12,367 12,112
Statutory healthcare and housing contributions 17,976 16,057
----------- -----------
Other benefits 10,682 8,704
----------- -----------
Vacations and vacations bonus 2,870 2,636
----------- -----------
Social security 2,369 1,862
----------- -----------
Post-employment benefits(1) 4,026 4,224
----------- -----------
Legal contributions 2,190 1,608
----------- -----------
Training 3,033 3,834
----------- -----------
Other 7,404 8,852
------------------------------------------------ ----------- -----------
122,462 116,487
------------------------------------------------ ----------- -----------
1 Post- employment benefits include US$0.6 million associated to
benefits corresponding to the defined contribution plan (2017:
US$0.4 million).
(a) Personnel expenses are reflected in the following line
items:
Year ended
31 December
------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------- ----------- -----------
Cost of sales (note 5) 94,653 89,629
Administrative expenses 23,672 20,109
Exploration expenses (note 6) 4,137 6,749
------------------------------- ----------- -----------
122,462 116,487
------------------------------- ----------- -----------
(b) The monthly average number of employees during the year was
as follows:
Year ended
31 December
-------------------------- ---------------
2018 2017
No. No.
-------------------------- ------- ------
Mining 2,236 1,994
Plant concentration 752 602
Exploration 480 501
Maintenance 1,035 865
Administration and other 658 936
-------------------------- ------- ------
Total 5,161 4,898
-------------------------- ------- ------
8. Other operating income and expenses
Year ended
31 December
-------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
-------------------------------------------------- ----------- -----------
Other income:
Gain on sale of property, plant and equipment(1) - 25,333
Insurance recovery(2) 9,245 -
Other 2,458 2,870
-------------------------------------------------- ----------- -----------
11,703 28,203
-------------------------------------------------- ----------- -----------
Year ended
31 December
-------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
-------------------------------------------------- ----------- -----------
Other expenses:
Rentals 184 229
Maintenance(3) 1,278 1,858
Donations 1,313 2,540
Environmental activities 1,216 1,790
Loss on sale of property, plant and equipment 999 -
Consumption tax expensed 655 1,031
Impairment available-for-sale financial assets - 36
Other 2,715 3,887
-------------------------------------------------- ----------- -----------
8,360 11,371
-------------------------------------------------- ----------- -----------
(1 Mainly corresponds to a sale of a 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$24.8 million.)
(2 Corresponds to a partial reimbursement for the insurance
claim relating to Saucito's flood see Note 26 for further
detail.)
3 Costs relating to the rehabilitation of the facilities of
Compañía Minera las Torres, S.A. de C.V. (a closed mine).
9. Finance income and finance costs
Year ended
31 December
------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------- ----------- -----------
Finance income:
Interest on short-term deposits and investments 15,584 11,368
Other 4,788 3,208
------------------------------------------------- ----------- -----------
20,372 14,576
------------------------------------------------- ----------- -----------
Year ended
31 December
------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------- ----------- -----------
Finance costs:
Interest on interest-bearing loans 36,258 35,808
Fair value movement on derivatives(1) 274 41,389
Unwinding of discount on provisions 10,044 11,703
Other 3,434 753
------------------------------------------------- ----------- -----------
50,010 89,653
------------------------------------------------- ----------- -----------
1 The 2017 figure principally relates to the time value
associated with gold commodity options (see note 29 for further
detail). During 2018 this effect was recognised within other
comprehensive income (see note 2 (b)).
10. Income tax expense
a) Major components of income tax expense:
Year ended
31 December
----------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
----------------------------------------------------- ----------- -----------
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 156,715 155,692
Amounts under provided in previous years 11,774 8,676
----------------------------------------------------- ----------- -----------
168,489 164,368
----------------------------------------------------- ----------- -----------
Deferred:
Origination and reversal of temporary differences (52,327) (45,003)
Revaluation effects of Silverstream contract 4,487 34,097
----------------------------------------------------- ----------- -----------
(47,840) (10,906)
----------- -----------
Corporate income tax 120,649 153,462
Special mining right
Current:
Special mining right charge(1) 10,860 19,415
----------- -----------
10,860 19,415
----------------------------------------------------- ----------- -----------
Deferred:
Origination and reversal of temporary differences 2,455 7,805
----------- -----------
Special mining right 13,315 27,220
----------- -----------
Income tax expense reported in the income statement 133,964 180,682
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 2018, the Group credited US$17.3 million (2017: US$15.7
million) of mining concession rights against the SMR. Total mining
concessions rights paid during the year were US$22.2 million (2017:
US$16.3 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$28.1 million (2017: US$35.1 million).
Year ended
31 December
---------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
---------------------------------------------------------- ----------- -----------
Consolidated statement of comprehensive income:
Deferred income tax credit/(charge) related to items
recognised directly in other comprehensive income:
Gain on cash flow hedges recycled to income statement (388) -
Changes in fair value of cash flow hedges (4,224) -
Changes in fair value of available-for-sale financial
assets 20,327 (2,653)
Remeasurement losses on defined benefit plans (415) (148)
----------- -----------
Income tax effect reported in other comprehensive income 15,300 (2,801)
----------- -----------
(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
---------------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
---------------------------------------------------------------- ----------- -----------
Accounting profit before income tax 483,930 741,489
---------------------------------------------------------------- ----------- -----------
Tax at the Group's statutory corporate income tax rate
30.0% 145,179 222,446
Expenses not deductible for tax purposes 2,454 2,562
Inflationary uplift of the tax base of assets and liabilities (16,599) (20,011)
Current income tax (over)/underprovided in previous
years (4,807) 472
Exchange rate effect on tax value of assets and liabilities(1) (778) (9,934)
Non-taxable/non-deductible foreign exchange losses 1,255 (4,242)
Inflationary uplift of tax losses (2,909) (5,084)
IEPS tax credit (note 10 (e)) (7,012) (26,181)
Deferred tax asset not recognised 6,571 4,461
Special mining right deductible for corporate income
tax (3,992) (8,165)
Other 1,287 (2,862)
---------------------------------------------------------------- ----------- -----------
Corporate income tax at the effective tax rate of 24.9%
(2017: 20.7%) 120,649 153,462
---------------------------------------------------------------- ----------- -----------
Special mining right 13,315 27,220
----------- -----------
Tax at the effective income tax rate of 27.6% (2017:
24.4%) 133,964 180,682
----------- -----------
(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
--------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
--------------------------------------------------------- ----------- -----------
Opening net liability (442,727) (443,027)
Income statement credit arising on corporate income
tax 47,840 10,906
Income statement charge arising on special mining right (2,455) (7,805)
Exchange difference - -
Net credit/(charge) related to items directly charged
to other comprehensive income 15,300 (2,801)
Closing net liability (382,042) (442,727)
--------------------------------------------------------- ----------- -----------
The amounts of deferred income tax assets and liabilities as at
31 December 2018 and 2017, considering the nature of the related
temporary differences, are as follows:
Consolidated Consolidated
balance sheet income statement
------------------------------------------------ ---------------------------- ------------------------
2018 2017 2018 2017
US$ US$ thousands US$ US$
thousands thousands thousands
------------------------------------------------ ----------- --------------- ----------- -----------
Related party receivables (220,131) (221,451) (1,320) 22,270
Other receivables 1,315 (2,171) (3,486) (1,554)
Inventories 188,119 162,842 (25,277) 271
Prepayments (1,035) (898) 137 (923)
Derivative financial instruments including
Silverstream contract (150,205) (147,535) (1,942) 12,551
----------- --------------- ----------- -----------
Property, plant and equipment arising
from corporate income tax (330,722) (341,774) (11,052) (9,551)
Exploration expenses and operating liabilities 50,691 44,121 (6,570) (19,818)
Other payables and provisions 57,303 55,379 (1,924) (10,646)
Losses carried forward 67,059 68,213 1,154 (1,870)
Post-employment benefits 1,016 1,465 34 220
Deductible profit sharing 3,807 4,249 442 (344)
Special mining right deductible for corporate
income tax 29,321 30,661 1,340 (1,561)
Equity investments at FVOCI 3,510 - - -
Available-for-sale financial assets (16,818) - 2,643
Other (4,396) (3,772) 624 (2,594)
------------------------------------------------ ----------- --------------- ----------- -----------
Net deferred tax liability related to
corporate income tax (304,348) (367,489)
Deferred tax credit related to corporate
income tax - - (47,840) (10,906)
Related party receivables arising from
special mining right (20,161) (21,379) (1,218) 2,616
Inventories arising from special mining
right 13,746 11,107 (2,639) (2,831)
Property plant and equipment arising
from special mining right (71,279) (64,966) 6,312 8,020
----------- --------------- ----------- -----------
Net deferred tax liability (382,042) (442,727)
Deferred tax credit (45,385) (3,101)
----------- --------------- ----------- -----------
Reflected in the statement of financial
position as follows:
Deferred tax assets 88,883 48,950
Deferred tax liabilities-continuing operations (470,925) (491,677)
------------------------------------------------ ----------- --------------- ----------- -----------
Net deferred tax liability (382,042) (442,727)
------------------------------------------------ ----------- --------------- ----------- -----------
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$223.5 million (2017: US$227.4 million). If not utilised, US$37.6
million (2017: US$13.7 million) will expire within five years and
US$185.9 million (2017: US$213.6 million) will expire between six
and ten years.
The Group has further tax losses and other similar attributes
carried forward of US$42.2 million (2017: US$37.4 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$1,430 million (2017: US$1,723
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 2018, the Group applied a credit of US$14.9
million in respect of the year (2017: US$23.2 million), which was
offset by an adjustment in respect of prior years of US$7.8 million
(2017: nil). Additionally, as at 31 December 2017 the Group
recognised a deferred tax asset US$2.9 million in respect of the
IEPS incurred in 2017 and expected to be applied during 2018. As
the IEPS deduction is itself taxable, the deferred tax asset is
recognised at 70% of the IEPS carried forward. The net amount
applied by the Group is presented in the reconciliation of the
effective tax rate in note 10(b).
The SMR states that the owners of mining titles and concessions
are subject to pay an annual mining right of 7.5% of the profit
derived from the extractive activities and is considered as income
tax under IFRS. The SMR allows as a credit the payment of mining
concessions rights up to the amount of SMR payable. The 7.5% tax
applies to a base of income before interest, annual inflation
adjustment, taxes paid on the regular activity, depreciation and
amortization, as defined by the new ISR. This SMR can be credited
against the corporate income tax of the same fiscal year and its
payment must be remitted no later than the last business day of
March of the following year.
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the year attributable to equity shareholders of the Company by the
weighted average number of Ordinary Shares in issue during the
period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2018 and 2017, earnings per share have been
calculated as follows:
Year ended
31 December
---------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
---------------------------------------------------------- ----------- -----------
Earnings:
Profit from continuing operations attributable to equity
holders of the Company 349,846 560,578
Adjusted profit from continuing operations attributable
to equity holders of the Company 339,377 481,019
---------------------------------------------------------- ----------- -----------
Adjusted profit is profit as disclosed in the Consolidated
Income Statement adjusted to exclude revaluation effects of the
Silverstream contract of US$14.9 million gain (US$10.4 million net
of tax) (2017: US$113.6 million gain (US$79.5 million net of
tax)).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
2018 2017
thousands thousands
-------------------------------------------------------- ----------- -----------
Number of shares:
Weighted average number of Ordinary Shares in issue 736,984 736,894
-------------------------------------------------------- ----------- -----------
2018 2017
US$ US$
-------------------------------------------------------- ----------- -----------
Earnings per share:
Basic and diluted earnings per share 0.475 0.761
Adjusted basic and diluted earnings per Ordinary Share
from continuing operations 0.461 0.653
-------------------------------------------------------- ----------- -----------
12. Property, plant and equipment
Year ended 31 December 2017
---------------------------- ----------------------------------------------------------------------------------------
Land Plant Mining Other Construction Total
and and Equipment properties assets in Progress
buildings and development
costs
---------------------------- ----------- --------------- ----------------- ---------- ------------- ------------
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
---------------------------- ----------- --------------- ----------------- ---------- ------------- ------------
Year ended 31 December 2018
------------------------------- -------------------------------------------------------------------------------------
Land Plant and Mining Other Construction Total
and Equipment properties assets in Progress
buildings and development
costs
------------------------------- ----------- ------------ ----------------- ---------- ------------- ------------
US$ thousands
------------------------------- -------------------------------------------------------------------------------------
Cost
At 1 January 2018 261,805 1,817,591 1,909,385 255,465 471,055 4,715,301
Additions 1,928 76,424 69 546 586,840 665,807
Disposals - (9,768) (2,386) (1,749) (13,903)
Transfers and other movements 19,566 248,356 269,336 22,469 (559,727) -
----------- ------------ ---------- ------------
At 31 December 2018 283,299 2,132,603 2,176,404 276,731 498,168 5,367,205
Accumulated depreciation
At 1 January 2018 (112,048) (1,051,459) (997,913) (105,285) (2,266,705)
Depreciation for the year(1) (24,130) (166,204) (208,807) (20,878) (420,019)
Disposals - 9,159 1,881 1,583 12,623
At 31 December 2018 (136,178) (1,208,504) (1,204,839) (124,580) (2,674,101)
------------------------------- ----------- ------------ ----------------- ---------- ------------- ------------
Net Book amount at 31 December
2018 147,121 924,099 971,565 152,151 498,168 2,693,104
------------------------------- ----------- ------------ ----------------- ---------- ------------- ------------
1 Depreciation for the year includes US$411.8 million (2017:
US$367.7 million) recognised as an expense in cost of sales in the
income statement and US$8.3 million (2017: US$13.3 million),
capitalised as part of construction in progress.
2 From the additions in "other assets" category US$(4.5) million
(2017: US$24.1 million) corresponds to the reassessment of mine
closure rehabilitations costs, see note 20.
The table below details construction in progress by operating
mine
Year ended
31 December
----------------- ------------------------
2018 2017
US$ US$
thousands thousands
----------------- ----------- -----------
Saucito 88,916 101,885
Herradura 70,536 98,401
Noche Buena 20,834 12,028
Ciénega 47,838 29,039
Fresnillo 48,671 30,641
San Julián 64,236 53,383
Other(1) 157,137 145,678
----------------- ----------- -----------
498,168 471,055
----------------- ----------- -----------
1 Manly corresponds to Juanicipio development project (2017:
Juanicipio development project and Minera Bermejal, S.A. de
C.V.).
During the year ended 31 December 2018, the Group capitalised
US$11.1 million of borrowing costs within construction in progress
(2017: US$11.4). Borrowing costs were capitalised at the rate of
5.78% (2017: 5.78%).
Sensitivity analysis
As at 31 December 2018 and 2017, the carrying amount of mining
assets was fully supported by the higher of value in use and fair
value less cost of disposal (FVLCD) computation of their
recoverable amount. Value in use and FVLCD was determined based on
the net present value of the future estimated cash flows expected
to be generated from the continued use of the CGUs. For both
valuation approaches management used long term price assumptions of
US$1,310/ounce and US$19.25/ounce (2017: US$1,300/ounce and
US$19/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% (2017: gold and silver 5%) and a high sensitivity by
decreasing gold and silver prices by 10% and 15% respectively
(2017: gold and silver 10%). As at 31 December 2018 the analysis
resulted in an impairment on Herradura of US$302.7 million under
high sensitivity; US$72.3 million under low sensitivity and San
Julian US$159.3 million under high sensitivity; US$45.4 million
under low sensitivity (2017: nil for Herradura and San Julian).
13. Silverstream contract
On 31 December 2007, the Group entered into an agreement with
Peñoles through which it is entitled to receive the proceeds
received by the Peñoles Group in respect of the refined silver sold
from the Sabinas Mine ('Sabinas'), a base metals mine owned and
operated by the Peñoles Group, for an upfront payment of US$350
million. In addition, a per ounce cash payment of $2.00 in years
one to five and $5.00 thereafter (subject to an inflationary
adjustment that commenced from 31 December 2013) is payable to
Peñoles. The cash payment per ounce for the year ended 31 December
2018 was $5.26 per ounce (2017: $5.20 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 FVPL and classified within
non-current and current assets as appropriate. The term of the
derivative is based on Sabinas life of mine which is currently 35
years. Changes in the contract's fair value, other than those
represented by the realisation of the asset through the receipt of
either cash or refined silver, are charged or credited to the
income statement. In the year ended 31 December 2018 total proceeds
received in cash were US$36.3 million (2017: US$43.3 million) of
which, US$4.9 million was in respect of proceeds receivable as at
31 December 2017 (2016: US$5.9 million). Cash received in respect
of the year of US$31.3 million (2017: US$37.3 million) corresponds
to 3.4 million ounces of payable silver (2017: 3.6 million ounces).
As at 31 December 2018, a further US$3.4 million (2017: US$4.9
million) of cash receivable corresponding to 335,914 ounces of
silver is due (2017: 422,375 ounces)
The US$15.0 million unrealised gain recorded in the income
statement (31 December 2017: US$113.6 million gain) resulted mainly
from the unwinding of the discount and the updating of the Sabinas
long term mine plan, which were partially compensated by the
increase in the LIBOR reference rate and the decrease in the
forward silver price.
A reconciliation of the beginning balance to the ending balance
is shown below:
2018 2017
US$ US$
thousands thousands
--------------------------------------------------- ----------- -----------
Balance at 1 January: 538,887 467,529
Cash received in respect of the year (31,379) (37,373)
Cash receivable (3,371) (4,925)
Remeasurement gains recognised in profit and loss 14,956 113,656
--------------------------------------------------- ----------- -----------
Balance at 31 December 519,093 538,887
--------------------------------------------------- ----------- -----------
Less - Current portion 20,819 32,318
--------------------------------------------------- ----------- -----------
Non-current portion 498,274 506,569
--------------------------------------------------- ----------- -----------
See note 29 for further information on the inputs that have a
significant effect on the fair value of this derivative, see note
30 for further information relating to market and credit risks
associated with the Silverstream asset.
14. Inventories
As at 31 December
------------------------------------------------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------------------ ----------- -----------
Finished goods(1) 15,052 10,957
Work in progress(2) 235,094 175,016
Ore stockpile(3) 3,799 15,115
Operating materials and spare parts 87,180 75,331
------------------------------------------------------------ ----------- -----------
341,125 276,419
Allowance for obsolete and slow-moving inventories (6,101) (5,314)
------------------------------------------------------------ ----------- -----------
Balance as 31 December at lower of cost and net realisable
value 335,024 271,105
------------------------------------------------------------ ----------- -----------
Less - Current portion 243,404 179,485
------------------------------------------------------------ ----------- -----------
Non-current portion(4) 91,620 91,620
------------------------------------------------------------ ----------- -----------
(1 Finished goods include metals contained in concentrates and
doré bars, and concentrates on hand or in transit to a smelter or
refinery.)
2 Work in progress includes metals contained in ores on leaching
pads (note 2(c)).
(3 Ore stockpile includes ore mineral obtained during the
development phase at San Julián.)
(4 The non-current inventories are expected to be processed more
than 12 months from the reporting date.)
Concentrates are a product containing sulphides with variable
content of precious and base metals and are sold to smelters and/or
refineries. Doré is an alloy containing a variable mixture of gold
and silver that is delivered in bar form to refineries. 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$1,323.1 million (2017: US$1,170.1 million) before changes to
the net realisable value of inventory. During the year there was no
adjustment to net realisable value allowance against
work-in-progress inventory (2017: US$2.2 million decrease). The
adjustment to the allowance for obsolete and slow-moving inventory
recognised as an expense was US$0.8 million (2017: US$1.04
million).
15. Trade and other receivables
Year ended
31 December
---------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
---------------------------------------------------------- ----------- -----------
Trade and other receivables from related parties (note
26)(1) 213,292 226,134
Value Added Tax receivable 182,290 85,979
Other receivables from related parties (note 26) 3,371 4,925
Other receivables from contractors 2,755 21,292
Other receivables 10,306 4,612
---------------------------------------------------------- ----------- -----------
412,014 342,942
Provision for impairment of 'other receivables' (857) (436)
---------------------------------------------------------- ----------- -----------
Trade and other receivables classified as current assets 411,157 342,506
Other receivables classified as non-current assets:
Loans granted to contractors - 129
- 129
----------- -----------
411,157 342,635
---------------------------------------------------------- ----------- -----------
(1 As of 31 December 2017 trade receivables from related parties
includes the fair value of embedded derivatives arising due to
provisional pricing in sales contracts of US$6.5 million.)
Trade receivables are shown net of any corresponding advances,
are non-interest bearing and generally have payment terms of 46 to
60 days.
The total receivables denominated in US$ were US$223.1 million
(2017: US$242.3million), and in Mexican pesos US$187.2 million
(2017: US$100.3 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 2018 is US$0.9 million
(2017: US$0.4 million). In determining the recoverability of
receivables, the Group performs a risk analysis considering the
type and age of the outstanding receivable and the credit
worthiness of the counterparty, see note 30(b).
16. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its
operations and in order to achieve its treasury objectives.
As at 31 December
--------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
--------------------------- ----------- -----------
Cash at bank and on hand 2,125 4,265
Short-term deposits 558,660 871,769
--------------------------- ----------- -----------
Cash and cash equivalents 560,785 876,034
--------------------------- ----------- -----------
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.
17. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
----------------------------------- ----------------------------- -----------------------------
2018 2017
----------------------------------- ----------------------------- -----------------------------
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 $500,000,000
Sterling Deferred Ordinary Shares
each of GBP1.00 50,000 GBP50,000 50,000 GBP50,000
----------------------------------- -------------- ------------- -------------- -------------
Issued share capital of the Company is as follows:
Ordinary Shares Sterling Deferred
Ordinary Shares
Number US$ Number GBP
------------ ------------- -------- ----------
At 1 January 2017 736,893,589 $368,545,586 50,000 GBP50,000
$368,
At 31 December 2017 736,893,589 545,586 50,000 GBP50,000
$368,
At 31 December 2018 736,893,589 545,586 50,000 GBP50,000
--------------------- ------------ ------------- -------- ----------
As at 31 December 2018 and 2017, all issued shares with a par
value of US$0.50 each are fully paid. The rights and obligations
attached to these shares are governed by law and the Company's
Articles of Association. Ordinary shareholders are entitled to
receive notice and to attend and speak at any general meeting of
the Company. There are no restrictions on the transfer of the
Ordinary shares.
The Sterling Deferred Ordinary Shares only entitle the
shareholder on winding up or on a return of capital to payment of
the amount paid up after repayment to Ordinary Shareholders. The
Sterling Deferred Ordinary Shares do not entitle the holder to
payment of any dividend, or to receive notice or to attend and
speak at any general meeting of the Company. The Company may also
at its option redeem the Sterling Deferred Ordinary Shares at a
price of GBP1.00 or, as custodian, purchase or cancel the Sterling
Deferred Ordinary Shares or require the holder to transfer the
Sterling Deferred Ordinary Shares. Except at the option of the
Company, the Sterling Deferred Ordinary Shares are not
transferrable.
Reserves
Share premium
This reserve records the consideration premium for shares issued
at a value that exceeds their nominal value.
Capital reserve
The capital reserve arose as a consequence of the Pre-IPO
Reorganisation as a result of using the pooling of interest
method.
Hedging reserve
This reserve records the portion of the gain or loss on a
hedging instrument in a cash flow hedge that is determined to be an
effective hedge, net of tax. When the hedged transaction occurs,
the gain or the loss is transferred out of equity to the income
statement or the value of other assets.
Cost of hedging reserve
The changes in the time value of option contracts are
accumulated in the costs of hedging reserve. These deferred costs
of hedging are either reclassified to profit or loss or recognised
as a basis adjustment to non-financial assets or liabilities upon
maturity of the hedged item, or, in the case of a hedge item that
realises over time, amortised on a systematic and rational basis
over the life of the hedged item.
Available-for-sale financial assets reserve
As at 31 December 2017 this reserve recorded fair value changes
on available-for-sale investments, net of tax. On disposal or on
impairment, the cumulative changes in fair value were recycled to
the income statement. These assets were reclassified upon adoption
of IFRS-9, for further detail see note 2 (b).
Fair value reserve of financial assets at FVOCI
The Group has elected to recognise changes in the fair value of
certain investments in equity securities in OCI, as explained in
note 2(b). These changes are accumulated within the FVOCI reserve
within equity. The Group transfers amounts from this reserve to
retained earnings when the relevant equity securities are
derecognised.
Foreign currency translation reserve
The foreign currency translation reserve is used to record
exchange differences arising from the translation of the financial
information of entities with a functional currency different to
that of the presentational currency of the Group.
Retained earnings/accumulated losses
This reserve records the accumulated results of the Group, less
any distributions and dividends paid.
18. Dividends declared and paid
The dividends declared and paid during the years ended 31
December 2018 and 2017 are as follows:
US cents Amount
per US$
Ordinary thousands
Share
------------------------------------------------------ ---------- -----------
Year ended 31 December 2018
Final dividend for 2017 declared and paid during the
year(1) 29.8 219,594
Interim dividend for 2018 declared and paid during
the year(2) 10.7 78,848
40.5 298,442
---------- -----------
Year ended 31 December 2017
Final dividend for 2016 declared and paid during the
year(3) 21.5 158,432
Interim dividend for 2017 declared and paid during
the year(4) 10.6 78,111
------------------------------------------------------ ---------- -----------
32.1 236,543
------------------------------------------------------ ---------- -----------
(1 This dividend was approved by the Board of Directors on 30
May 2018 and paid on 4 June 2018.)
(2 This dividend was approved by the Board of Directors on 3
September 2018 and paid on 7 September 2018.)
(3 This dividend was approved by the Board of Directors on 23
May 2017 and paid on 26 May 2017.)
(4 This dividend was approved by the Board of Directors on 31
July 2017 and paid on 8 September 2017.)
19. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800
million aggregate principal amount of 5.500% Senior Notes due 2023
(the "Notes").
Movements in the year in the debt recognised in the balance
sheet are as follows:
As at 31 December
------------------------------------------------ --------------------------------
2018 2017
US$ thousands US$ thousands
------------------------------------------------ --------------- ---------------
Opening balance 799,046 798,027
Accrued interest 46,267 46,267
Interest paid(1) (46,267) (46,267)
Amortisation of discount and transaction costs 1,081 1,019
------------------------------------------------ --------------- ---------------
Closing balance 800,127 799,046
------------------------------------------------ --------------- ---------------
(1 Accrued interest is payable semi-annually on 13 May and 13
November.)
The Group has the following restrictions derived from the
issuance of the Notes:
Change of control:
Should the rating of the senior notes be downgraded as a result
of a change of control (defined as the sale or transfer of 35% or
more of the common shares; the transfer of all or substantially all
the assets of the Group; starting a dissolution or liquidation
process; or the loss of the majority in the board of directors) the
Group is obligated to repurchase the notes at an equivalent price
of 101% of their nominal value plus the interest earnt at the
repurchase date, if requested to do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property
that may have a material impact on business performance (key
assets). Nevertheless, the Group may pledge the aforementioned
properties provided that the repayment of the Notes keeps the same
level of priority as the pledge on those assets.
20. Provision for mine closure cost
The provision represents the discounted values of the estimated
cost to decommission and rehabilitate the mines at the estimated
date of depletion of mine deposits. Uncertainties in estimating
these costs include potential changes in regulatory requirements,
decommissioning, dismantling, reclamation alternatives, timing, and
the discount, foreign exchange and inflation rates applied.
The Group has performed separate calculations of the provision
by currency, discounting at corresponding rates. As at 31 December
2018, the discount rates used in the calculation of the parts of
the provision that relate to Mexican pesos range from 7.12% to
8.55% (2017: range of 6.27% to 7.97%). The range for the current
year parts that relate to US dollars range from 2.05% to 2.70%
(2017: range of 1.37% to 2.22%).
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 25 years from 31 December 2018 (3 to 27
years from 31 December 2017). As at 31 December 2018 the weighted
average term of the provision is 12 years (2017:13 years)
As at 31 December
------------------------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------ ----------- -----------
Opening balance 184,775 149,109
Increase to existing provision 9,758 1,024
Effect of change in estimation - 19,678
Effect of changes in discount rate (14,279) (281)
Unwinding of discount 10,065 11,729
Payments (545) (131)
Foreign exchange 68 3,647
------------------------------------ ----------- -----------
Closing balance 189,842 184,775
------------------------------------ ----------- -----------
21. Pensions and other post-employment benefit plans
The Group has a defined contribution plan and a defined benefit
plan.
The defined contribution plan was established as from 1 July
2007 and consists of periodic contributions made by each
non-unionised worker and contributions made by the Group to the
fund matching workers' contributions, capped at 8% of the
employee's annual salary.
The defined benefit plan provides pension benefits based on each
worker's earnings and years of services provided by personnel hired
through 30 June 2007 as well as statutory seniority premiums for
both unionised and non-unionised workers.
The overall investment policy and strategy for the Group's
defined benefit plan is guided by the objective of achieving an
investment return which, together with contributions, ensures that
there will be sufficient assets to pay pension benefits and
statutory seniority premiums for non-unionised workers as they fall
due while also mitigating the various risks of the plan. However,
the portion of the plan related to statutory seniority premiums for
unionised workers is not funded. The investment strategies for the
plan are generally managed under local laws and regulations. The
actual asset allocation is determined by current and expected
economic and market conditions and in consideration of specific
asset class risk in the risk profile. Within this framework, the
Group ensures that the trustees consider how the asset investment
strategy correlates with the maturity profile of the plan
liabilities and the respective potential impact on the funded
status of the plan, including potential short-term liquidity
requirements.
Death and disability benefits are covered through insurance
policies.
The following tables provide information relating to changes in
the defined benefit obligation and the fair value of plan
assets:
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
Balance Net Foreign Sub-total Benefits Return Actuarial Actuarial Experience Foreign Sub-total Contributions Defined Balance
at Service Interest Exchange recognised paid on plan changes changes adjustments exchange included by employer benefit at
1 cost in assets arising arising in increase 31
January the (excluding from from OCI due December
2017 year amounts changes changes to 2018
included in in personnel
in net demographic financial transfer
interest assumptions assumptions
--------- --------- --------- --------- ----------- --------- ----------- ------------ ------------ ------------ --------- ---------- -------------- ---------- ---------
US$ thousands
Defined
benefit
obligation (27,327) (62) (1,791) 5 (1,848) 884 - - 1,749 821 - 2,570 - - (25,721)
Fair value
of plan
assets 18,110 - 1,110 27 1,137 (630) 40 - - - - 40 614 57 19,328
Net benefit
liability (9,217) (62) (681) 32 (711) 254 40 - 1,749 821 - 2,610 614 57 (6,393)
--------- --------- --------- --------- ----------- --------- ----------- ------------ ------------ ------------ --------- ---------- -------------- ---------- ---------
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
Balance Net Foreign Sub-total Benefits Return Actuarial Actuarial Experience Foreign Sub-total Contributions Defined Balance
at Service Interest Exchange recognised paid on plan changes changes adjustments exchange included by employer benefit at
1 cost in assets arising arising in increase 31
January the (excluding from from OCI due December
2016 year amounts changes changes to 2017
included in in personnel
in net demographic financial transfer
interest assumptions assumptions
--------- --------- --------- --------- ----------- --------- ----------- ------------ ------------ ------------ --------- ---------- -------------- ---------- ---------
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)
--------- --------- --------- --------- ----------- --------- ----------- ------------ ------------ ------------ --------- ---------- -------------- ---------- ---------
Of the total defined benefit obligation, US$7.4 million (2017:
US$7.5 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions
to the plan for the next annual reporting period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown
below:
As at 31 December
-------------------------------- --------------------
2018 2017
% %
-------------------------------- --------- ---------
Discount rate 8.42 7.67
Future salary increases (NCPI) 5.15 5.0
-------------------------------- --------- ---------
The life expectancy of current and future pensioners, men and
women aged 65 and older will live on average for a further 23.1 and
26.6 years respectively (2017: 23.1 years for men and 26.3 for
women). The weighted average duration of the defined benefit
obligation is 10.8 years (2017: 11 years).
The fair values of the plan assets were as follows:
As at 31 December
---------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
---------------------------- ----------- -----------
Government debt 351 556
State owned companies 5,132 4,559
Mutual funds (fixed rates) 13,845 12,995
---------------------------- ----------- -----------
19,328 18,110
---------------------------- ----------- -----------
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 2018 is as shown below:
Assumptions Discount rate Future salary Life
increases expectancy
(NCPI) of pensioners
----------------------------- ----------------------- ---------------------- ---------------
Sensitivity Level 0.5% 0.5% 0.5% + 1
0.5% Decrease increase decrease Increase
Increase
----------------------------- ----------- ---------- ---------- ---------- ---------------
(Decrease)/increase to
the net defined benefit
obligation (US$ thousands) (1,256) 1,374 179 (173) 76
------------------------------ ----------- ---------- ---------- ---------- ---------------
The sensitivity analysis above has been determined based on a
method that extrapolates the impact on net defined benefit
obligation as a result of reasonable changes in key assumptions
occurring at the end of the reporting period. The pension plan is
not sensitive to future changes in salaries other than in respect
of inflation.
22. Trade and other payables
As at 31 December
--------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
--------------------------------------------- ----------- -----------
Trade payables 91,734 93,664
Other payables to related parties (note 26) 12,321 9,057
Accrued expenses 13,163 18,600
Other taxes and contributions 15,922 13,628
--------------------------------------------- ----------- -----------
133,140 134,949
--------------------------------------------- ----------- -----------
Trade payables are mainly for the acquisition of materials,
supplies and contractor services. These payables do not accrue
interest and no guarantees have been granted. The fair value of
trade and other payables approximate their book values.
The Group's exposure to currency and liquidity risk related to
trade and other payables is disclosed in note 30.
23. Commitments
A summary of capital expenditure commitments by operating mine
is as follows:
As at 31 December
----------------- ------------------------
2018 2017
US$ US$
thousands thousands
----------------- ----------- -----------
Saucito 52,288 64,511
Herradura 17,701 28,813
Noche Buena 3,346 1,643
Ciénega 13,779 16,688
Fresnillo 90,181 19,570
San Julián 8,781 27,403
Other(1) 142,111 83,729
----------------- ----------- -----------
328,187 242,357
----------------- ----------- -----------
(1 Other includes commitments of) (Minera Juanicipio, S.A. de
C.V.) (2017: Minera Bermejal, S. de R.L. de C.V. and Minera
Juanicipio, S.A. de C.V.)
24. Operating leases
(a) Operating leases as lessor
Future minimum rentals receivable under non-cancellable
operating leases are as follows:
As at 31 December
============================================= =================================
2018 2017
US$ thousands US$ thousands
============================================= ================ ===============
Within one year - 491
--------------- ---------------
After one year but not more than five years - 108
============================================== =============== ===============
- 599
============================================================== ===============
(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(1) :
As at 31 December
--------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
--------------------------------------------- ----------- -----------
Within one year 6,374 3,424
After one year but not more than five years 9,756 2,926
--------------------------------------------- ----------- -----------
16,130 6,350
--------------------------------------------- ----------- -----------
As at 31 December
--------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
--------------------------------------------- ----------- -----------
Minimum lease payments expensed in the year 7,193 4,916
--------------------------------------------- ----------- -----------
(1 During the Group's IFRS 16 implementation activities, a
limited number of highly certain extensions to operating lease
commitments were identified. The 2017 commitments have been
restated to reflect those judgements in a consistent manner.)
25. Contingencies
As of 31 December 2018, 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.
- Other than discussed below, tax inspections that had been
initiated by the SAT in previous years, were either closed or
resolved through a Conclusive Agreement in 2018 or in early 2019.
According to article 69-H of the Mexican Tax Code, settlements
reached and executed by taxpayers and the authority may not be
challenged in any way. Such settlements shall only be effective
between the parties; and they shall not constitute a precedent in
any case.
- With respect to Minera Penmont's 2012 and 2013 tax
inspections, on July 11th, 2018 the Company filed before tax
authorities a substance administrative appeal against the tax
assessment, and on September 3th 2018, it filed additional
documentation before tax authorities and is waiting for its
response.
- On 22 October 2018 we were notified of the SAT's findings in
respect of Minera Penmont's 2015 & 2016 tax inspections. The
Company considers it completed the provision of all documentation
required to demonstrate that the tax deductions which are being
challenged, are appropriate and is waiting for the SAT's
response.
- On 1 February 2019 we were notified that the SAT will conduct
an inspection of Minera Saucito's 2013 tax certificate.
- It is not practical to determine the amount of any potential
claims or the likelihood of any unfavourable outcome arising from
these or any future inspections that may be initiated. However,
management believes that its interpretation of the relevant
legislation is appropriate and that the Group has complied with all
regulations and paid or accrued all taxes and withholdings that are
applicable.
- On 8 May 2008, the Company and Peñoles entered into the
Separation Agreement (the 'Separation Agreement'). This agreement
relates to the separation of the Group and the Peñoles Group and
governs certain aspects of the relationship between the Fresnillo
Group and the Peñoles Group following the initial public offering
in May 2008 ('Admission'). The Separation Agreement provides for
cross-indemnities between the Company and Peñoles so that, in the
case of Peñoles, it is held harmless against losses, claims and
liabilities (including tax liabilities) properly attributable to
the precious metals business of the Group and, in the case of the
Company, it is held harmless by Peñoles against losses, claims and
liabilities which are not properly attributable to the precious
metals business. Save for any liability arising in connection with
tax, the aggregate liability of either party under the indemnities
shall not exceed US$250 million in aggregate.
- 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 2018 and going forward.
- 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 its 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 nor has
specific geological interest in these land parcels, any contingency
relating to such land parcels is not considered material by the
Company. The case relating to the claims over these land parcels
remains subject to finalisation.
- Various claims and counterclaims have been made between the
relevant parties in the El Bajio matter. There remains significant
uncertainty as to the finalisation and ultimate outcome of these
legal proceedings.
- In 2011, flooding occurred in the Saucito mine, following
which the Group filed an insurance claim in respect of the damage
caused (and in respect of business interruption). In early 2018,
the insurance provider notified the Group that the claim had been
accepted; however, there is disagreement about the appropriate
amount to be paid. In October the Group received US$13.6 million in
respect of the insurance claim, however this does not constitute a
final settlement and management continues to pursue a higher
insurance reimbursement. Due to the fact that negotiations are
on-going and there is uncertainty regarding the timing of reaching
an agreement with the insurer, the amount expected to be recovered
is currently not practicable to determine.
- On 11 February 2019, the Supreme Court of Mexico issued a
ruling regarding a specific constitutional issue presented by the
former administration of the Federal Government, who challenged the
ability of the State of Zacatecas to impose environmental taxes on
aspects such as (i) extraction of rocks; (ii) emissions into the
air; (iii) discharges of industrial residues, and (iv) disposal of
industrial waste.
The ruling of the Supreme Court establishes that, from a
constitutional point of view, there is no express limitation
granting the Mexican State at a Federal level the sole power to
impose such taxes; therefore, the State of Zacatecas has a joint
right to create these taxes. Notwithstanding the foregoing, the
Court did not exhaust the analysis of the legality of each
particular tax created by the State of Zacatecas.
The Company had previously challenged the legality of such taxes
and in 2017 obtained an injunction from a Federal court. The State
of Zacatecas has appealed this ruling and the final result is
pending.
26. Related party balances and transactions
The Group had the following related party transactions during
the years ended 31 December 2018 and 2017 and balances as at 31
December 2018 and 2017.
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
-------------------------------------------- ------------------------ ----------- -----------
2018 2017 2018 2017
US$ US$ US$ US$
thousands thousands thousands thousands
-------------------------------------------- ----------- ----------- ----------- -----------
Trade:
----------- ----------- -----------
Metalúrgica Met-Mex Peñoles,
S.A. de C.V. 213,202 225,741 408 397
Other:
Industrias Peñoles, S.A.B. de C.V. 3,371 4,925 - -
Servicios Administrativos Peñoles,
S.A. de C.V. - - 3,249 2,434
Servicios Especializados Peñoles,
S.A. de C.V. - - 1,556 1,786
Fuentes de Energía Peñoles, S.A. - - 1,138 -
de C.V.
Termoeléctrica Peñoles, S. de
R.L. de C.V. - - 988 1,650
Eólica de Coahuila S.A. de C.V. - - 3,459 1,926
Other 90 392 1,523 864
-------------------------------------------- ----------- ----------- ----------- -----------
Sub-total 216,663 231,058 12,321 9,057
Less-current portion 216,663 231,058 12,321 9,057
-------------------------------------------- ----------- ----------- ----------- -----------
Non-current portion - - - -
-------------------------------------------- ----------- ----------- ----------- -----------
Related party accounts receivable and payable will be settled in
cash.
Other balances with related parties:
Year ended
31 December
----------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
----------------------------------------- ----------- -----------
Silverstream contract:
----------------------------------------- ----------- -----------
Industrias Peñoles, S.A.B. de C.V. 519,093 538,887
----------------------------------------- ----------- -----------
The Silverstream contract can be settled in either silver or
cash. Details of the Silverstream contract are provided in note
13.
(b) Principal transactions with affiliates, including Industrias
Peñoles S.A.B de C.V., the Company's parent, are as follows:
Year ended
31 December
------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------ ----------- -----------
Income:
Sales:(1)
Metalúrgica
Met-Mex
Peñoles,
S.A.
de
C.V. 2,119,758 2,101,579
------------------ ----------- -----------
Insurance
recovery
Grupo 13,652 -
Nacional
Provincial,
S.A.
B.
de
C.V.(2)
------------------ ----------- -----------
Other income 4,419 3,173
------------------ ----------- -----------
Total income 2,137,829 2,104,752
------------------ ----------- -----------
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$141.2 million (2017: US$139.9 million) and include sales
credited to development projects of US$17.6 million (2017: US$8.3
million).
(2 Includes a time value element of US$ 3.1 million which has
been recognised in finance income within the income statement.)
Year ended
31 December
--------------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
--------------------------------------------------------- ----------- -----------
Expenses:
Administrative services(2) :
Servicios Administrativos Peñoles, S.A. de C.V.(3) 28,625 26,323
Servicios Especializados Peñoles, S.A. de C.V. 15,830 18,239
44,455 44,562
----------- -----------
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 17,383 20,415
Fuerza Eólica del Istmo S.A. de C.V. 2,187 1,678
Fuentes de Energía Peñoles, S.A. de C.V. 3,872 -
Eólica de Coahuila S.A. de C.V. 34,147 13,666
--------------------------------------------------------- ----------- -----------
57,589 35,759
Operating materials and spare parts:
Wideco Inc 5,783 4,534
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 8,329 6,420
--------------------------------------------------------- ----------- -----------
14,112 10,954
--------------------------------------------------------- ----------- -----------
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 9,733 8,406
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 8,603 8,157
--------------------------------------------------------- ----------- -----------
Other expenses: 2,561 3,795
--------------------------------------------------------- ----------- -----------
Total expenses 137,053 111,633
--------------------------------------------------------- ----------- -----------
2 Includes US$1.7 million (2017: US$6.4 million) corresponding
to expenses reimbursed.
3 Includes US$4.2 million (2017: US$7.5 million) relating to
engineering costs that were capitalised.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of
Directors and the Executive Committee.
Year ended
31 December
------------------------------------------------------ ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------------ ----------- -----------
Salaries and bonuses 3,260 3,385
Post-employment benefits 245 235
Other benefits 249 373
------------------------------------------------------ ----------- -----------
Total compensation paid in respect of key management
personnel 3,754 3,993
------------------------------------------------------ ----------- -----------
Year ended
31 December
------------------------------------------------- ------------------------
2018 2017
US$ US$
thousands thousands
------------------------------------------------- ----------- -----------
Accumulated accrued defined pension entitlement 4,001 4,433
------------------------------------------------- ----------- -----------
This compensation includes amounts paid to directors disclosed
in the Directors' Remuneration Report.
The accumulated accrued defined pension entitlement represents
benefits accrued at the time the benefits were frozen. There are no
further benefits accruing under the defined benefit scheme in
respect of current services.
27. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31
December 2018 and 2017 are as follows:
Year ended
31 December
-------------------------------------------------------- ------------------------
Class of services 2018 2017
US$ US$
thousands thousands
-------------------------------------------------------- ----------- -----------
Fees payable to the Group's auditor for the audit
of the Group's annual accounts 1,306 1,214
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 176 226
Audit-related assurance services 347 308
Tax compliance services 4 19
Total 1,833 1,767
----------- -----------
28. Notes to the consolidated statement of cash flows
Notes 2018 2017
US$ US$
thousands thousands
--------------------------------------------------- ------ ----------- -----------
Reconciliation of profit for the year to net cash
generated from operating activities
Profit for the year 349,966 560,807
Adjustments to reconcile profit for the period
to net cash inflows from operating activities:
Depreciation and amortisation 5 411,764 367,609
Employee profit sharing 7 13,003 17,150
Deferred income tax 10 (45,385) (3,101)
Current income tax expense 10 179,349 183,783
Loss/(gain) on the sale of property, plant and
equipment and other assets 8 999 (25,333)
Impairment of available-for-sale financial assets 8 - 36
Net finance costs 27,433 33,674
Foreign exchange loss 8,382 11,434
Difference between pension contributions paid and
amounts recognised in the income statement 62 (58)
Non cash movement on derivatives 34 41,389
Changes in fair value of Silverstream 14 (14,956) (113,656)
Working capital adjustments
(Increase) in trade and other receivables (60,384) (44,381)
(Increase) in prepayments and other assets (11,753) (708)
(Increase)/decrease in inventories (63,918) 5,745
Increase in trade and other payables 8,174 36,426
--------------------------------------------------- ------ ----------- -----------
Cash generated from operations 802,770 1,070,816
Income tax paid (200,088) (292,063)
Employee profit sharing paid (14,323) (17,282)
--------------------------------------------------- ------ ----------- -----------
Net cash from operating activities 588,359 761,471
--------------------------------------------------- ------ ----------- -----------
29. Financial instruments
(a) Fair value category
As at 31 December 2018
------------------------------------------------------------------------------------------
US$ thousands
------------------------------------------------------------------------------------------
Financial assets: Amortized Fair Fair value Fair value
cost value (hedging through
through instruments) profit
OCI or loss
---------------------------------- ---------- ---------- -------------- -----------
Trade and other receivables
(note 15) 1,986 - - 216,573
Equity instruments at FVOCI - 78,219 - -
Silverstream contract (note
13) - - - 519,093
Derivative financial instruments - 314 -
Financial liabilities: Amortized Fair value Fair value
cost (hedging through
instruments) profit
or loss
---------- ---------- -------------- -----------
Interest-bearing loans 800,127 - -
(note 19)
Trade and other payables 97,169 - -
(note 22)
Derivative financial instruments - 3,807 -
As at 31 December 2017
-------------------------------------------------------------------------------------------------------
US$ thousands
-------------------------------------------------------------------------------------------------------
Financial assets: At fair Available-for-sale Loans At fair
value investments and value through
through at fair receivables OCI (cash
profit value flow hedges)
or loss through
OCI
---------------------------------- --------- ------------------- -------------- ------------------
Trade and other receivables(1) - - 236,859 -
(note 15)
Available-for-sale financial - 144,856 - -
assets
Silverstream contract (note 538,887 - - -
13)
Embedded derivatives within 6,511 - - -
sales contracts(1) (note
4)
Derivative financial instruments 311 - - 71
Financial liabilities: At fair At amortised At fair
value Cost value through
through OCI (cash
profit flow hedges)
or loss
--------- ------------------- -------------- ------------------
Interest-bearing loans - 799,046 -
(note 19)
Trade and other payables - 102,721 -
(note 22)
Derivative financial instruments 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.)
(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
--------------------------------------------- ------------------------ ------------------ -----------
2018 2017 2018 2017
US$ US$ US$ US$
thousands thousands thousands thousands
--------------------------------------------- ----------- ----------- ------------------ -----------
Financial assets:
----------- ------------------ -----------
Trade receivables 216,573 236,859 216,573 236,859
----------- ------------------ -----------
Equity instruments at FVOCI 78,219 - 78,219 -
Available-for-sale financial assets - 144,856 - 144,856
Silverstream contract (note 13) 519,093 538,887 519,093 538,887
Embedded derivatives within sales contracts - 6,511 - 6,511
Derivative financial instruments 74 382 74 382
Financial liabilities:
Interest-bearing loans(1) (note 19) 800,127 799,046 817,936 878,864
Derivative financial instruments 3,807 19,216 3,807 19,216
(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 2018
Fair value measure using
Quoted Significant Significant Total
prices observable unobservable US$
in active Level Level thousands
markets 2 3
Level US$ US$
1 thousands thousands
US$
thousands
----------------------------------- ----------- ------------ -------------- -----------
Financial assets:
----------- --------------
Trade receivables - - 216,573 216,573
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 240 - 240
Option and forward foreign
exchange contracts - 74 - 74
Silverstream contract - - 519,093 519,093
Other financial assets:
Equity instruments at FVOCI 78,219 - - 78,219
78,219 314 735,666 814,199
----------------------------------- ----------- ------------ -------------- -----------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 3,660 - 3,660
Option and forward foreign
exchange contracts - 147 - 147
------------------------------------ ----------- ------------ -------------- -----------
- 3,807 - 3,807
----------------------------------- ----------- ------------ -------------- -----------
As of 31 December 2017
--------------------------------------------------------------------------------------------------------
Fair value measure using
Quoted prices Significant Significant Total
in observable unobservable US$
active markets Level Level thousands
Level 1 2 3
US$ thousands US$ US$
thousands thousands
----------------- ------------ -------------- -----------
Financial assets:
---------------- --------------
Derivative financial instruments:
Embedded derivatives within
sales contracts - - 6,511 6,511
Option commodity contracts
(note 29 (c)) - 71 - 71
Option and forward foreign
exchange contracts - 311 - 311
Silverstream contract - - 538,887 538,887
Financial investments available-for-sale:
Quoted investments 144,856 - - 144,856
144,856 382 545,398 690,636
------------------------------------------ ---------------- ------------ -------------- -------------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 19,179 - 19,179
Option and forward foreign
exchange contracts - 37 - 37
------------------------------------------- ---------------- ------------ -------------- -------------
- 19,216 - 19,216
------------------------------------------ ---------------- ------------ -------------- -------------
There have been no significant transfers between Level 1 and
Level 2 of the fair value hierarchy, and no transfers into and out
of Level 3 fair value measurements.
A reconciliation of the opening balance to the closing balance
for Level 3 financial instruments other than Silverstream (which is
disclosed in note 13) is shown below(1) :
2018 2017
US$ US$
thousands thousands
------------------------------------------------ ----------- -----------
Balance at 1 January: 225,741 (2,750)
Net change in trade receivable from goods sold (12,048) -
Changes in fair value (4,016) 15,068
Realised embedded derivatives during the year 3,525 (5,807)
------------------------------------------------ ----------- -----------
Balance at 31 December 213,202 6,511
------------------------------------------------ ----------- -----------
1 Balance as at 31 December 2017 corresponds to the embedded
derivative included in trade receivable for sales subject to
provisional pricing; from 1 January 2018 onwards as a result of the
adoption of IFRS 9 as explained in note 2 (b) the balance
corresponds the whole trade receivable for sales subject to
provisional pricing.
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 13. The sensitivity of the valuation to the inputs
relating to market risks, being the price of silver, foreign
exchange rates, inflation and the discount rate is disclosed in
note 30.
Equity investments:
The fair value of equity investments is derived from quoted
market prices in active markets (Level 1).
Interest-bearing loans
The fair value of the Group's interest-bearing loan, is derived
from quoted market prices in active markets (Level 1).
Trade receivables:
Sales of concentrates, precipitates 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
(n)). This price exposure is considered to be an embedded
derivative and therefore the entire related trade receivable is
measured at fair value.
At each reporting date, the provisionally priced metal content
is revalued based on the forward selling price for the quotational
period stipulated in the relevant sales contract. The selling price
of metals can be reliably measured as these metals are actively
traded on international exchanges but the estimated metal content
is a non-observable input to this valuation.
(c) Derivative financial instruments
The Group enters into certain option contracts to manage its
exposure to commodity price risk as described in note 2 (r).
The Group sells gold as the primary product of the Group's
open-pit mines. Upon the acquisition of the remaining 46% interest
in the Penmont mines in 2014, the Group entered into commodity
option contracts to protect the value of future sales related to
that previous non-controlling interest over a period of five years.
The Group also sells lead and zinc as a by-product in certain of
its mines. Except in relation to the acquisition of the remaining
in interest in the Penmont mines described above, the Group's risk
management strategy is to not hedge primary metal prices and hedge
by-product metals in certain market conditions. The Group monitors
metal price volatility in order to determine when to enter into new
hedging contracts related to by-products. New contracts were
entered into in 2017 but not in 2018. These contracts are expected
to reduce the volatility attributable to metals price fluctuations.
Hedging the price volatility of forecast metals sales is in
accordance with the risk management strategy outlined by the Board
of Directors.
There is an economic relationship between the hedged items and
the hedging instruments as the terms of the commodity option
contracts match the terms of the expected highly probable forecast
sales (i.e., notional amount and expected payment date). The Group
has established a hedge ratio of 1:1 for the hedging relationships
as the underlying risks of the commodity option contracts are
identical to the hedged risk components. To test the hedge
effectiveness, the Group uses the hypothetical derivative method
and compares the changes in the fair value of the hedging
instruments against the changes in fair value of the hedged items
attributable to the hedged risks.
Due to the terms of the Group's hedge relationships, the change
in the fair value of both the hedging instrument and hedged items
equalled the amounts recognised in other comprehensive income in
the following paragraphs. The amounts recycled to the income
statement in respect of these contracts are recognised in revenue;
ineffectiveness is recognised in finance cost.
Gold option contracts
As at 31 December 2018, the outstanding collar derivative
instruments mature over the period from 31 January 2019 to 30
December 2019 and hedge cash proceeds for the sales of gold
production amounting 346,152 ounces (2017: 712,584 ounces) with a
floor price of US$1,100:1 ounce, a range of capped prices from
US$1,375 to US$1,495:1 ounce (2017: US$1,375 to US$1,495:1 ounce)
and weighted average capped price of US$1,424:1 ounce (2017:
US$1,423 :1 ounce). The fair value of the put options as at 31
December 2018 was an asset of US$0.9 million (2017: US$3.7
million), and the fair value of the call options at 31 December
2018 was a liability of US$4.6 million (2017:US$21.8 million). In
2018 the changes in the fair value of the option contracts
corresponding to the time value amounted to US$14.4 million and was
recorded in other comprehensive income; in 2017 fair value amounted
of US$41.1 million was recorded in the income statement.
Lead option contracts
As at 31 December 2018 there were no outstanding options related
to lead contracts. As at 31 December 2017, lead collar derivative
instruments hedge lead production amounting 21,168 tonnes with a
floor price of US$2,370:1 tonne, a range of capped prices from
US$2,730 to US$2,740:1 tonne and weighted average cap price of
US$2,735:1 tonne. The fair value of the put options at 31 December
2017 was an asset of US$0.5 million, and the fair value of the call
options at 31 December 2017 was a liability of US$0.5 million. The
gain recycled to the income statement in the period was US$1.0
million (2017: nil).
Zinc option contracts
As at 31 December 2018 there were no outstanding options related
to zinc contracts. As at 31 December 2017, zinc collar derivative
instruments hedge lead production amounting 5,760 tonnes with a
range of floor prices of US$2,500 to 2,756:1 tonne and weighted
average floor price of US$2,591:1 tonne, a range of capped prices
from US$3,650 to US$3,800:1 tonne and weighted average cap price of
US$3,716:1 tonne. The fair value of the put options at 31 December
2017 was an asset of US$0.5 million, and the fair value of the call
options at 31 December 2017 was a liability of US$1.5 million. The
gain recycled to the income statement in the period was US$0.6
million (2017: nil).
30. Financial risk management
Overview
The Group's principal financial assets and liabilities, other
than derivatives, comprise trade receivables, cash, equity
instruments at FVOCI, interest-bearing loans and trade
payables.
The Group has exposure to the following risks from its use of
financial instruments:
- Market risk, including foreign currency, commodity price,
interest rate, inflation rate and equity price risks
- Credit risk
- Liquidity risk
This note presents information about the Group's exposure to
each of the above risks and the Group's objectives, policies and
processes for assessing and managing risk. Further quantitative
disclosures are included throughout the financial statements.
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The Group's risk management policies are established to identify
and analyse the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to limits.
Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and
obligations.
The Fresnillo Audit Committee has responsibility for overseeing
how management monitors compliance with the Group's risk management
policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the Group.
The Audit Committee is assisted in its oversight role by Internal
Audit, which undertakes both regular and ad hoc reviews of risk
management controls and procedures, the results of which are
reported to the Audit Committee.
(a) Market risk
Market risk is the risk that changes in market factors, such as
foreign exchange rates, commodity prices or interest rates will
affect the Group's income or the value of its financial
instruments.
The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while
optimising the return on risk.
In the following tables, the effect on equity excludes the
changes in retained earnings as a direct result of changes in
profit before tax.
Foreign currency risk
The Group has financial instruments that are denominated in
Mexican peso, euro and Swedish krona which are exposed to foreign
currency risk. Transactions in currencies other than the US dollar
include the purchase of services, fixed assets, spare parts and the
payment of dividends. As a result, the Group has financial assets
and liabilities denominated in currencies other than functional
currency, and holds cash and cash equivalents in Mexican Peso.
In order to manage the Group's exposure to foreign currency risk
on expenditure denominated in currencies other than the US dollar,
the Group has entered into certain forward and option derivative
contracts with maturity dates from 2018 (see note 29 for additional
detail).
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in the US dollar exchange rate compared
to the Mexican peso, reflecting the impact on the Group's profit
before tax and equity, with all other variables held constant. It
is assumed that the same percentage change in exchange rates is
applied to all applicable periods for the purposes of calculating
the sensitivity with relation to derivative financial
instruments.
Year ended 31 December Strengthening/ Effect
(weakening) on
of US profit
dollar before
tax:
increase/
(decrease)
US$
thousands
------------------------ --------------- ------------
2018 10% (380)
(10%) 464
------------------------ --------------- ------------
2017 20% (3,783)
(10%) 1,365
------------------------ --------------- ------------
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.
Year ended 31 December Strengthening/ Effect
(weakening) on profit
of before
US dollar tax:
increase/
(decrease)
US$
thousands
------------------------ --------------- ------------
2018 10% 19
(10%) 20
------------------------ --------------- ------------
2017 10% (335)
(10%) 500
------------------------ --------------- ------------
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.
Year ended 31 December Strengthening/ Effect
(weakening) on
of US profit
dollar before
tax:
increase/
(decrease)
US$
thousands
------------------------ --------------- ------------
2018 10% 53
(10%) 52
------------------------ --------------- ------------
2017 10% 1058
(10%) (1,056)
------------------------ --------------- ------------
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.
Year ended 31 December Strengthening/ Effect
(weakening) on profit
of before
US dollar tax:
increase/
(decrease)
US$
thousands
------------------------ --------------- ------------
2018 10% (46)
(10%) 56
------------------------ --------------- ------------
2017 20% (781)
(10%) 521
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.
Year ended 31 December Increase/(decrease) in commodity prices Effect on Effect on equity:
profit before tax: increase/
increase/ (decrease)
(decrease) US$ thousands
US$ thousands
------------------------ ---------------------------------------------- ------------------------ ------------------
Gold Silver Zinc Lead
------------------------ ---------- ------------ --------- --------- ------------------------ ------------------
2018 10% 15% 25% 20% 22,330 (14,910)
(10%) (15%) (20%) (15%) (21,204) 8,703
------------------------ ---------- ------------ --------- --------- ------------------------ ------------------
2017 10% 10% 20% 15% 83,433 (19,164)
(10%) (10%) (20%) (15%) 5,105 1,818
------------------------ ---------- ------------ --------- --------- ------------------------ ------------------
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.
Year ended 31 December Increase/ Effect
(decrease) on profit
in before
silver tax:
price increase/
(decrease)
US$
thousands
------------------------ ------------ ------------
2018 15% 106,879
(15%) (106,879)
------------------------ ------------ ------------
2017 10% 72,779
(10%) (72,779)
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.
Year ended 31 December Basis Effect
point on profit
increase/ before
(decrease) tax:
in interest increase/
rate (decrease)
US$
thousands
------------------------ ------------- ------------
2018 75 4,206
(75) (4,206)
------------------------ ------------- ------------
2017 90 7,898
(50) (4,388)
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.
Year ended 31 December Basis Effect
point on profit
increase/ before
(decrease) tax:
in interest increase/
rate (decrease)
US$
thousands
------------------------ ------------- ------------
2018 75 (47,151)
(75) 54,775
------------------------ ------------- ------------
2017 90 (58,798)
(50) 37,935
------------------------ ------------- ------------
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.
Year ended 31 December Basis Effect
point on profit
(increase/ before
(decrease) tax:
in inflation increase/
rate (decrease)
US$
thousands
------------------------ -------------- ------------
2018 100 56
(100) (51)
------------------------ -------------- ------------
2017 100 88
(100) (83)
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:
Year ended 31 December Increase/ Effect Effect
(decrease) on on equity:
in equity profit increase/
price before (decrease)
tax: US$
increase/ thousands
(decrease)
(US$
thousands)
------------------------ ------------ ------------ ------------
2018 40% - 31,288
(40%) - (31,288)
------------------------ ------------ ------------ ------------
2017 40% - 28,972
(65%) - (65,408)
------------------------ ------------ ------------ ------------
(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 26, the counterparties to a significant proportion of these
financial assets are related parties. At each balance sheet date,
the Group's financial assets were neither 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 2018 and 2017. 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 2018, the
Group had concentrations of credit risk as 19 percent of surplus
funds were deposited with one financial institution of which the
total investment was held in short term Mexican government
paper.
The maximum credit exposure at the reporting date of each
category of financial asset above is the carrying value as detailed
in the relevant notes. See note 16 for the maximum credit exposure
to cash and cash equivalents, note 27 for related party balances
with Met-Mex and note 29 for equity instruments at FVOCI. The
maximum credit exposure with relation to the Silverstream contract
is the value of the derivative as at 31 December 2018, being
US$519.1 million (2017: US$538.9 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using
projected cash flows from operations and by monitoring the maturity
of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments.
US$ thousands
---------------------------------- ------------------------------------ ----------
Within 2-3 3-5 > 5 Total
1 year years years years
---------------------------------- -------- ------- ------- -------- ----------
As at 31 December 2018
Interest-bearing loans (note
19) 46,267 92,534 92,534 800,000 1,031,335
Trade and other payables 97,169 97,169
Derivative financial instruments
- liabilities 3,807 3,807
---------------------------------- -------- ------- ------- -------- ----------
US$ thousands
---------------------------------- ------------------------------------ ----------
Within 2-3 3-5 > 5 Total
1 year years years years
---------------------------------- -------- ------- ------- -------- ----------
As at 31 December 2017
-------- ------- ------- -------- ----------
Interest-bearing loans (note
19) 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
-------- ------- ------- -------- ----------
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 2-3 3-5 > 5 Total
1 year years years years
------------------------ --------- -------- ------- ------- -----------
As at 31 December 2018
Inflows 12,608 4,310 16,918
Outflows (12,688) (4,290) (16,977)
--------- -------- ------- ------- ---------
Net (80) 20 (60)
--------- -------- ------- ------- ---------
US$ thousands
------------------------ ------------------------------------ ---------
Within 2-3 3-5 > 5 Total
1 year years years years
------------------------ --------- ------- ------- ------- ---------
As at 31 December 2017
Inflows 15,174 - - - 15,174
Outflows (14,884) - - - (14,884)
--------- ------- ------- ------- ---------
Net 290 - - - 290
--------- ------- ------- ------- ---------
The above liquidity tables include expected inflows and outflows
from currency option contracts which the Group expects to be
exercised during 2019 as at 31 December 2018 and during 2018 as at
31 December 2017, 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:
2018 2017
US$ US$
thousands thousands
----------------------------------------------- ----------- -----------
Cash and cash equivalents (note 16) 560,785 876,034
Available-for-sale financial instruments held
in funds - 19,877
------------------------------------------------ ----------- -----------
Cash and other liquid assets position 560,785 895,911
------------------------------------------------ ----------- -----------
Consolidated Income Statement
Year ended 31 December
Year ended 31
December
---------------------------------------------------------- ------ ------------------------
Notes 2018 2017
US$ US$
thousands thousands
---------------------------------------------------------- ------ ----------- -----------
Profit for the year 349,966 560,807
------ -----------
Other comprehensive income/(expense)
------ -----------
Items that may be reclassified subsequently to
profit or loss:
------ -----------
Gain on cash flow hedges recycled to income statement 1,582 -
------ -----------
Loss on cost of hedge recycled to income statement (269) -
------ -----------
Changes in the fair value of cost of hedges 14,353 -
Total effect of cash flow hedges 15,666 -
------ -----------
Changes in the fair value of available-for-sale
financial assets - 8,808
Impairment of available-for-sale financial assets
taken to income during the year - 36
Total effect of available-for-sale financial assets - 8,844
Foreign currency translation (185) 118
Income tax effect on items that may be reclassified
subsequently to profit or loss: (4,699) (2,653)
------ ----------- -----------
Net other comprehensive income that may be reclassified
subsequently to profit or loss: 10,782 6,309
------ ----------- -----------
Items that will not be reclassified to profit
or loss:
------ ----------- -----------
Changes in the fair value of cash flow hedges - -
Losses on cash flow hedges recycled to other assets (233) -
Changes in the fair value of cash flow hedges (58) -
Total effect of cash flow hedges (291) -
------ -----------
Changes in the fair value of equity investments (46,579) -
at FVOCI
Remeasurement gains on defined benefit plans 21 2,610 933
Income tax effect on items that will not be reclassified
to profit or loss 10 19,999 (148)
Net other comprehensive (expense)/income that
will not be reclassified to profit or loss (24,261) 785
------ ----------- -----------
Other comprehensive (expense)/income, net of tax (13,479) 7,094
---------------------------------------------------------- ------ ----------- -----------
Total comprehensive income for the year, net of
tax 336,487 567,901
---------------------------------------------------------- ------ ----------- -----------
Attributable to:
------ -----------
Equity shareholders of the Company 336,377 567,672
Non-controlling interests 110 229
---------------------------------------------------------- ------ ----------- -----------
336,487 567,901
---------------------------------------------------------- ------ ----------- -----------
[1] Cash and other liquid funds are disclosed in Note 30 (c) to
the financial statements
([2]) Corruption Perception Index 2018, issued by Transparency
International ranks Mexico as 138th of 180 countries by perceived
levels of public sector corruption.
([3]) Global Peace Index 2018 and Mexico Peace Index 2018
prepared by the Institute for Economics & Peace,
http://economicsandpenace.org/
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KMGZZDVVGLZG
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February 26, 2019 02:02 ET (07:02 GMT)
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