TIDMFRES
RNS Number : 8358Q
Fresnillo PLC
02 March 2021
Fresnillo plc
Financial results for the year ended 31 December 2020
Fresnillo plc today announced its financial results for the full
year ended 31 December 2020.
Octavio Alvídrez, CEO said:
"Against a backdrop of the significant challenge presented by
Covid-19, we have prioritised the wellbeing of our people and
communities while delivering a robust financial and operating
performance. By engaging with all our stakeholders, we have been
able to keep people safe and minimise the impact of the pandemic on
our business. Even in the face of such an unprecedented challenge,
I am pleased to report that we have largely stabilised production,
a key priority. We remain committed to achieving our operational
objectives and delivering our development projects.
Total silver production remained broadly stable and within our
guidance at 53.1 million ounces. The marginally lower production
compared to 2019 was due to the Covid-19 preventive measures and a
lower ore grade at Saucito, mitigated by a higher grade at San
Julián Disseminated Ore Body and the processing of development ore
from our new Juanicipio mine for the first time. Mining operations
at the Herradura and Noche Buena open pit gold mines were impacted
by Covid-19 operational restrictions affecting the volumes of ore
deposited, which combined with reduced workforce levels, resulted
in gold production decreasing by 12.1% to 769.6 koz, within our
revised guidance.
Fresnillo reported a strong financial performance with
US$2,608.1 million in Adjusted Revenue in 2020, an increase of
14.9% on 2019 due mainly to better precious metals prices. Gross
profit rose by 90.5% to US$879.4 million, driven by a combination
of higher prices and lower costs. We declared an interim dividend
of 2.3 US cents per share, with a final dividend of 23.5 US cents
per share, bringing the total for the year to 25.8 US cents per
share.
We took action to secure the stability and financial health of
Fresnillo by taking advantage of the favourable conditions to
restructure our debt. We also hedged a portion of our silver
production for 2021, capitalising on unique market conditions,
where spreads presented an opportunity to limit downside risk while
retaining a significant upside exposure to future silver price
increases.
Maximising the potential of existing operations was our key
strategic focus for 2020. Although there remains more to do, we are
now working smarter and with greater efficiency. Our operational
improvements would have been more pronounced but for the preventive
measures we introduced to counter the pandemic.
We have continued to progress our development projects. We
concluded the first production stope at Juanicipio on schedule in
3Q 2020. Commissioning of the plant has been delayed to 4Q 2021 due
to Covid-19 related delays with a ramp up in production to 40%-50%
of the nameplate capacity by the end of the year. Juanicipio will
be a major factor in the Group's future silver production. At the
Fresnillo mine, we completed the construction of the new Pyrites
Plant on schedule early in the fourth quarter. The start of
operations has been deferred mainly due to a delay in final
inspections by the authorities as a result of Covid-19 restrictions
on travel and other regulatory delays. The Fresnillo flotation
plant optimisation project to cope with higher content of lead and
zinc was also completed on time and on budget during 4Q20 with the
connection of this new circuit to the beneficiation plant carried
out in the first months of 2021.
Our exploration teams continue to identify and develop potential
projects for our pipeline in Mexico, including at Rodeo, which we
expect to become our next open pit gold mine, as well as in Peru
and Chile. We aim to present the Rodeo project for Board approval
in mid-2022. Work continues to complete the final metallurgical
testing and other activities to continue advancing the feasibility
study of the much larger Orisyvo project.
We have made further strides in advancing the safety and
sustainability of our operations.
Our 'I Care, We Care' programme is now on its third year,it has
now been rolled out across the business and is a central aspect of
all operational activity. Although our safety record has improved
significantly over the last three years, I regret to confirm one
fatal accident in the year. This incident ended a period of 16
months without a fatality at any of our operations and highlights
the need for constant vigilance and renewed efforts to improve
safety.
The independent audit into our 11 tailings storage facilities
(TSFs) was completed and I am pleased to confirm they all remain in
a stable condition. We have identified areas of improvement and,
with the help of independent third party advisors, we will make
targeted investments to achieve even higher safety standards. We
remain committed to reducing our greenhouse gas emissions,
improving our energy efficiency, and integrating clean energy
sources into our electricity mix. We recognise the importance of
complying with the Task Force on Climate-Related Financial
Disclosure (TCFD) and will continue making progress on assessing
the carbon footprint of our Strategic Plan.
We were pleased to announce the appointment of Tomás Iturriaga
who joined as Chief Operating Officer, following André Sougarret's
decision to return to Chile. We also welcomed Guillermo Gastélum as
Vice President Exploration, following David Giles' decision to
retire. I would like to thank David for his significant
contribution to Fresnillo over many years
Looking ahead, silver volumes will rise by steadily increasing
production at Juanicipio, and the multiple ongoing operational
improvement programmes to increase production at Fresnillo. Lower
ore grade at Ciénega, together with a reduced activity at Noche
Buena following a change to the mining sequence and the fewer
available areas as the mine approaches its planned closure, as well
as slightly lower volumes at Herradura, are likely to lead to
reduced gold production. However, the longer-term prospects for
gold are good, supported by the potential new mines at Rodeo and
Orisyvo.
We remain optimistic for the outlook for precious metals prices,
though we are firmly committed to our continuing efficiency,
productivity and cost reduction initiatives. Given the ongoing
pandemic there is a relatively high degree of unpredictability
about the year ahead, so we are cautious. However, we have proven
our ability to adapt to changing circumstances and longer-term, I
am confident in our future and excited about the opportunities.
Fresnillo is in a good position, supported by a sound strategy,
strong balance sheet, a positive culture and an experienced
management team. Production has largely stabilised as expected, and
the pipeline of new mines and projects - together with a series of
improvement programmes - provides us with solid grounds for
optimism."
Financial Highlights - 12 months to 31 December 2020
$ million unless stated 2020 2019 % change
Silver Production* (kOz) 53,050 54,614 (2.9)
Gold Production* (Oz) 769,618 875,913 (12.1)
Total Revenue 2,430.1 2,119.6 14.6
Adjusted Revenue** 2,608.1 2,270.2 14.9
Gross Profit 879.4 461.7 90.5
EBITDA 1,169.1 674.0 73.4
Profit Before Income Tax 551.3 178.8 208.4
Profit for the year 375.6 205.8 82.5
Basic and Diluted EPS excluding
post-tax Silverstream effects
(USD)*** 0.440 0.231 90.5
* Fresnillo attributable production, plus ounces registered in
production through the Silverstream Contract
** Adjusted Revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
lead and zinc hedging
*** The weighted average number of ordinary shares was
736,893,589 for 2020 and 2019. See note 17 in the consolidated
financial statements.
2020 Highlights
Rapid and united response to the threat of Covid-19,
highlighting the commitment to support our workforce and local
communities in line with our overall Purpose
-- Management and the workforce collaborated to introduce a wide
range of preventive measures to protect our people, including
social distancing at work as well as during transportation to and
from our sites, the strict use of PPE and the installation of
sanitization stations.
-- All vulnerable colleagues (including contractors), asked to remain at home on full pay.
-- Extensive testing - 30,000 rapid test kits acquired, self
isolation and tracing tactics implemented.
-- Direct partnership with local communities, through donation
of testing kits, hospital equipment, medical supplies including
ventilators to local health authorities, in addition to food, masks
and anti-bacterial gels to vulnerable people in and around our
communities.
-- We continued to make sure that our employment and procurement
processes put the needs of local communities first. This included
maintaining our payment terms and providing help to enable
contractors and suppliers to implement health protocols.
-- In the city of Fresnillo, we made some of our land available
for a facility that increased the capacity of the local
hospital.
-- Worked closely with the Mexican Mining Chamber and Mining
Authorities to develop national workplace guidance for our industry
- and that collaboration was central to the Government's
reclassification of mining as an essential industry, enabling us to
ramp up our open pit operations in May 2020.
-- Piloted a virus awareness programme in collaboration with the
Smithsonian Museum and Innovec aimed at encouraging children to
understand the dangers and then use their 'pester power' to pass
the message on to their parents and other relatives.
Strong financial performance in 2020, supported by high precious
metals prices and a robust operational performance despite
Covid-19
-- Adjusted revenue increased 14.9% year-on-year due to higher
gold and silver prices, which were partially offset by the lower
volumes of gold and silver sold.
-- Adjusted production costs decreased by 8.0% primarily as a
result of lower volume of ore processed at Herradura and Noche
Buena due to Covid-19 operational restrictions and the favourable
effect of the devaluation of the Mexican peso vs. US dollar.
-- Cost of sales was further benefitted by the positive effect
from changes in inventory in 2020 compared to that in 2019
resulting from the reassessment of gold content in the leaching
pads at Herradura.
-- Gross profit and EBITDA rose to US$879.4 million and
US$1,169.1 million, a 90.5% and 73.4% increase over 2019.
-- Restructured the Company's debt, buying back US$482.1 million
from the US$800 million Senior Notes at 5.5% due in 2023 and
issuing new US$850 million Senior Notes at 4.25% due in 2050.
-- Locked-in prices for 7% of 2021's silver production with an
average floor price of US$20 per ounce, and with an average price
ceiling of approximately US$50 per ounce.
-- We improved our already strong financial position, with
US$1,070.4 million in cash and other liquid funds as of 31 December
2020 notwithstanding paying dividends of US$104.7 million in
accordance with our policy and despite the pandemic, investing
US$412.3 million in capex and spending US$107.3 million on
exploration expenses to underpin our future growth.
-- Recommended a final dividend of 23.5 US cents per share,
which is equivalent to US$173.2 million. We anticipate that
dividend payments relating to 2020 and future years will attract
the withholding obligation.
Maintaining focus on operational improvement and delivering our
development projects
-- The Fresnillo Full Potential (FFP) project to exploit the
great potential that exists at our Fresnillo and Saucito mines is
on track: in 2020 we refined our mine planning operations, enhanced
the certainty of our geological models and took action to stabilise
production, focusing on controlling dilution and enhancing our
blasting and drilling techniques to manage the deeper operations
and narrower veins at both mines.
-- Our US$22.7 million tunnel boring machine (TBM) began
operations in the Fresnillo mine - advancing over 1,300 metres by
the end of December - working alongside the manufacturer, further
improvements are expected in 2021. Investment in new technology is
ongoing.
-- The deepening of the San Carlos Shaft advanced well and once
fully operational in 2022, will transport ore more efficiently and
directly to the surface - reducing the haulage costs while
decreasing our environmental footprint. Started in June 2016, this
project has extended the shaft from 550m down to 990m, helping to
provide access to 56% of the mine's reserves.
-- At Saucito, we continued to deepen the Jarillas shaft to 1000
metres, which will help to provide access to deeper levels of the
mine where almost half of the reserves are located. Due to be
completed in 2024, this will also allow us to transport ore to the
surface more efficiently and quickly than is possible using access
ramps.
-- The first production stope at Juanicipio concluded on
schedule in 3Q 2020. Commissioning is now expected in 4Q 2021, due
mainly to Covid-19 related delays. A joint project with MAG Silver
in which we hold a 56% share, the mine is forecast to produce 11.7
moz of silver and 43.5 koz of gold per year on average over the
life of the mine once fully operational.
-- The new Pyrites Plant at the Fresnillo mine was completed on
schedule early in Q4 - the start of operations has been deferred
mainly due to a delay in final inspections by the authorities as a
result of Covid-19 restrictions on travel and other regulatory
delays. Once it becomes fully operational, and including production
from the Saucito plant, we anticipate that it will produce an
average of 3.5 moz of silver and 13 koz of gold per year.
-- Further actions are enhancing productivity at Fresnillo,
including the US$30 million plant optimisation project at Fresnillo
to cope with higher content of lead and zinc from lower levels of
the mine ongoing. The new flotation circuit was completed in the
second half of 2020 as anticipated. T he connection of this new
circuit to the beneficiation plant is expected to be undertaken in
early 2021.
-- Exploration budget for 2021 increased: the potential mine at
Rodeo is on track to come before the Board for approval in
mid-2022. We are increasingly confident that Orisyvo will join our
portfolio of operational mines in the coming years.
-- Silver resources stood at 2.3 boz, a 1.6% increase over 2019
mainly as a result of exploration at Saucito. Gold resources
remained stable 38.9 moz.
-- Silver reserves decreased 5.5% to 457.5 moz mainly due to
depletion and higher cut-off grades at Fresnillo, and an updated
mine production plan at San Julián which incorporates new
geotechnical criteria, mitigated by the increase at Saucito.
-- Gold reserves decreased 8.8% to 8,438 koz primarily due to
more stringent geotechnical and cost considerations at Herradura
and depletion at Noche Buena.
Cautious 2021 outlook, confidence in longer term prospects
-- Fresnillo remains cautious for 2021 due to the continued impact of the pandemic in Mexico.
-- In 2021, Fresnillo expects attributable production in the
range of 53.5 to 59.5 moz of silver (including Silverstream) and
675 to 725 koz of gold.
-- Silver volumes expected to benefit from increasing production
at Juanicipio, while the multiple ongoing operational programmes
are forecast to increase production at Fresnillo.
-- Lower ore grade at Ciénega, together with reduced activity at
Noche Buena in line with the mine closure plan, as well as slightly
lower volumes at Herradura, are likely to lead to reduced gold
production. However, the longer-term prospects for gold are good,
supported by the potential new mines at Rodeo and Orisyvo.
Changes to the Board
Pursuant to rule 9.6.11 (3) of the UK Listing Rules, the Company
announces as follows:
Ms. Georgina Kessel has been appointed a member of the Audit
Committee and Ms. Guadalupe de la Vega has been appointed a member
of the Remuneration Committee; in both cases, with immediate
effect. There are no other matters to disclose under the Listing
Rules.
Analyst Presentation
Fresnillo plc will be hosting a webcast presentation for
analysts and investors today at 15.00 (GMT). A link to the webcast
will be made available on Fresnillo's homepage:
www.fresnilloplc.com or can be accessed directly here
https://kvgo.com/IJLO/Fresnillo_FY20_Preliminary_Results
Questions may be submitted via the webcast.
Conference Call:
Mexico Toll-Free: 00 1 866 966 8830
UK-Wide: +44 (0) 33 0551 0200
UK Toll-Free: 0808 109 0700
New York New York: +1 212 999 6659
USA Toll-Free: 1 866 966 5335
Password: Fresnillo
For further information, please visit our website:
www.fresnilloplc.com or contact:
Fresnillo plc
London Office Tel: +44(0)20 7339 2470
Gabriela Mayor, Head of Investor
Relations
Patrick Chambers
Mexico City Office Tel: +52 55 52 79 3206
Ana Belém Zárate
Powerscourt Tel: +44(0)7793 858 211
Peter Ogden
About Fresnillo plc
Fresnillo plc is the world's largest primary silver producer and
Mexico's largest gold producer, listed on the London and Mexican
Stock Exchanges under the symbol FRES.
Fresnillo plc has seven operating mines, all of them in Mexico -
Fresnillo, Saucito, Ciénega (including the San Ramón satellite mine
Las Casas Rosario & Cluster Cebollitas), Herradura,
Soledad-Dipolos(1) , Noche Buena and San Julián (Veins and
Disseminated Ore Body), three development projects - the Pyrites
Plant at Fresnillo, the optimisation of the beneficiation plant
also at Fresnillo and Juanicipio, and six advanced exploration
projects - Orisyvo, Centauro great potential and Centauro Deep,
Guanajuato, Rodeo and Tajitos as well as a number of other long
term exploration prospects.
Fresnillo plc has mining concessions and exploration projects in
Mexico, Peru and Chile. Fresnillo plc has a strong and long
tradition of exploring, mining, a proven track record of mine
development, reserve replacement, and production costs in the
lowest quartile of the cost curve for silver. Fresnillo plc's goal
is to maintain the Group's position as the world's largest primary
silver company and Mexico's largest gold producer.
(1) Operations at Soledad-Dipolos are currently suspended.
Chairman's statement
Supporting our people, living up to our purpose
This has been the most challenging and demanding year in the
existence of Fresnillo. Covid-19 has posed new and difficult
questions around how we all think and work. It has seen us embrace
new behavioural norms that would have been unthinkable almost a
year ago and, sadly, it has destroyed lives and livelihoods across
the world.
During these dark and challenging days, the Fresnillo Purpose
has come to the fore as a beacon for our behaviour and a guide to
how we could best navigate the pandemic. When we first articulated
our Purpose in 2019, it was important to us that it was not just a
set of words to shape our future, but something that sprang
directly from how we have always operated as a business.
Our Purpose is to contribute to the wellbeing of people through
the sustainable mining of silver and gold.
By living up to our Purpose and holding fast to our culture and
values throughout the pandemic, we have been able to protect and
support our people, maintain production close to the expected
levels and continue to contribute to the wellbeing of our
stakeholders - including shareholders, local communities,
suppliers, the government authorities and the environment. Although
our production was affected by the closing of the mines at the
beginning of the pandemic, we have maintained production close to
the expected levels.
A positive performance in difficult circumstances
Despite the disruption caused by Covid-19 and the measures we
introduced to mitigate its effect, production of silver from our
underground mines generally remained within expected ranges. Gold
production was lower than anticipated, largely due to the six
weeks' interruption of mining at our open pit operations, as
initially mandated by the authorities.
In spite of these difficult circumstances, the Company achieved
US$2,430.1 million in total revenue and US$2,608.1 million in
adjusted revenue during the year. This represented an increase of
14.6% and 14.9% respectively, primarily due to better prices for
precious metals. Gross profit rose year-on-year by 90.5% to
US$879.4 million, driven by a combination of higher prices and
lower costs. Cash and other liquid funds increased from US$336.6
million to US$1,070.4 million, reflecting the increased cash
generated by the mines and the restructuring of the debt. You will
find further details on our financial performance on pages
[x-x].
Our dividend policy remains unchanged. We aim to pay out 33-50%
of profit after tax each year, while making certain adjustments to
exclude non-cash effects in the income statement. Dividends are
paid in the approximate ratio of one-third as an interim dividend
and two-thirds as a final dividend. Before declaring a dividend,
the Board carries out a detailed analysis of the profitability of
the business, underlying earnings, capital requirements and cash
flow. Our aim is to maintain enough flexibility to be able to react
to movements in precious metals prices and seize attractive
business opportunities.
We declared an interim dividend of 2.3 US cents per share, with
a final dividend of 23.5 US cents per share, bringing the total for
the year to 25.8 US cents per share.
Our future financial performance should benefit from two actions
taken during the year to ensure the stability and financial health
of Fresnillo. Firstly, while we do not usually hedge silver and
gold prices, unique market conditions presented an opportunity to
limit downside risk while retaining significant upside exposure to
future silver price increases. We have therefore locked-in 7% of
2021 silver production with an average floor price of US$20 per
ounce, and with an average price ceiling of approximately US$50 per
ounce.
The second action involved buying back a portion of the
outstanding debt that was due to mature in 2023. With economic
conditions indicating that this was a good time to return to the
market, we bought back just under US$450m of outstanding debt and
then placed US$850m of new debt due to mature in 2050. This new
debt is in the form of a 30-year bond with an annual interest rate
of 4.25% - a lower rate of interest than the 5.50% of the original
bond set to expire in 2023. Going forward, this will have the
effect of reducing our annual financing costs and lowering the
balloon payment due in three years' time while also injecting cash
into the business and underpinning the Company's financial
future.
Putting people and communities first
While the pandemic posed challenges for our operations, it also
provided an opportunity to demonstrate our firm commitment to
support our workforce and their families, our communities, the
authorities and the country in difficult times.
We always put the health of our people at the front and centre
of every action - and the decisions we made at the onset of the
pandemic were no different. It was very pleasing to see the rapid
and united response to the threat of Covid-19 at all our
facilities, as management and the workforce collaborated to
introduce a wide range of preventive measures to protect our people
throughout the working day. These included social distancing at
work as well as during transportation to and from our sites, the
strict use of PPE and the installation of sanitisation stations.
Our corporate office teams were required to work from home.
We quickly identified vulnerable members of the workforce -
including contractors - and asked them to stay at home on full pay.
We believe that testing is one of the most effective ways to
control the spread of the virus, and we imported 30,000 tests
capable of providing faster results than those generally available
in Mexico at the time. When people tested positive, we instructed
them to self-isolate and traced their contacts, who we also
tested.
Fresnillo is an integral part of many communities - and this
year, perhaps more than any other, the partnership between us has
been absolutely central to the health and wellbeing of local
people. We shared our Covid-19 tests with communities in remote
locations, and donated medical and preventive equipment, including
ventilators, to local health authorities. We also donated food,
masks and anti-bacterial gels to vulnerable people, and continued
to make sure that our employment and procurement processes put the
needs of local communities first - and that included maintaining
our payment terms and providing help to enable contractors and
suppliers to implement health protocols. In addition, in the city
of Fresnillo, we made some of our land available for a facility
that increased the capacity of the local hospital.
Communication and partnership played important roles in our
efforts to manage the virus, not only at our sites and in local
communities, but also with the authorities. We worked closely with
the Mining Ministry of Mexico to develop national workplace
guidance for our industry - and that collaboration was central to
the Government's reclassification of mining as an essential
industry, enabling us to reopen our open pit operations in May
2020.
As the year came towards its end and a second wave gathered
momentum, we redoubled our efforts to support our people -
especially in their communities, which is where the bulk of
transmission appears to take place. For example, we piloted a virus
awareness programme aimed at encouraging children to understand the
dangers and then use their 'pester power' to pass the message on to
their parents and other relatives.
Preparing the ground for further success
As the Chief Executive explains in his statement, the Fresnillo
Full Potential plan is starting to have an impact on production at
the Fresnillo mine. The impact would have been greater still
without the restrictions imposed by the pandemic, but progress to
date gives us cause for cautious optimism regarding future
performance.
Although the Covid-19 pandemic continues to pose risks and
uncertainties, silver production in the months and years ahead will
grow with the start-up of the Juanicipio mine, which is on track to
be operational in Q4 of 2021. Ore produced during the mine
development phase is currently being processed in the flotation
plant at Fresnillo. Future production will also be increased when
the recently-completed Pyrites Flotation Plant at Fresnillo is
operational. Although we have made preparations to start-up
commercial production, the inspection that is required to be
carried out by the authorities in order to grant the energy permit
has been delayed due to Covid-19 restrictions on travel. We
anticipate that this inspection will take place in the third
quarter of 2021.
Our exploration teams continue to identify and develop potential
projects for our pipeline, including at Rodeo, which we expect to
become the next open pit gold mine. The aim is to present the Rodeo
project for Board approval in mid-2022. Meanwhile, work continues
to complete the feasibility study of Orisyvo, a significantly
larger and more complex gold project than Rodeo.
With concern for the impacts of climate change continuing to
increase, the Board took steps to review and where possible
intensify sustainable practices in all of our operations, becoming
a registered supporter of the Task Force on Climate-related
Financial Disclosures during the year. In line with our commitment
to reduce our greenhouse gas emissions, the HSECR Committee
evaluated whether our energy strategy was sufficiently flexible to
enable us to adopt a decarbonisation pathway compatible with the
well-below two-degree scenario of the Paris Agreement.
Board activities
Following our approval of the Company's Purpose at the end of
2019, the Board's focus for the year was on ensuring that we lived
up to the promises made in our Purpose - and I believe that the
events of the last year have proved both its validity and
value.
In my introduction to the Governance Report on page [x], I
describe the Board's activities in more detail, including how we
worked with our Executive Committee and our colleagues elsewhere in
the BAL Group to ensure that our workforce and their communities
were as safe as possible. This necessitated regular engagement with
employees as well as Government, as we sought to introduce
processes and purchase equipment that enabled our mines to operate
safely.
During the year, an independent legal firm provided external
facilitation for our 2020 Board and Committee effectiveness
reviews, which this year included an assessment of how the Board
performed during the pandemic. While there is always room for
improvement, I was pleased that the review's findings were once
again positive. We provide details of the review on page [x].
Changes to the Board
It was with profound sadness that in November we learnt of the
death of Luis Robles, who served as an Independent Non-Executive
Director since May 2019. I was privileged to know Luis personally
and to work alongside him - he brought a great wealth of knowledge,
experience and energy to our meetings and to our Company, and will
be sorely missed by all at Fresnillo.
I was delighted that Guadalupe De la Vega was elected as an
Independent Non-executive Director of the Company at the 2020
Annual General Meeting. Guadalupe is a Managing Director and CEO of
Almacenes Distribuidores de la Frontera, which owns and operates a
chain of convenience stores, gas stations, and medium format
supermarkets in the north of Mexico. We will benefit from her
strong commitment to communities. She has been involved in
promoting economic and community development as part of the task
force for Juarez Social and Economic Recovery Plan, working with
the Government to help realign major infrastructure assets along
with education in order to improve the region's
competitiveness.
Guadalupe's presence at Board meetings further strengthens our
belief that the Board has the appropriate balance of skills,
experience and gender to oversee the performance of the executive
and the development of long-term strategy. Her appointment ensures
that Fresnillo complies with the Hampton-Alexander requirement that
at least 33% of Board members should be women. With racial
inequality and ethnic diversity coming into greater focus, it was
pleasing to see the Parker Review report that Fresnillo plc met the
ethnicity target for FTSE100 companies in 2020.
Jaime Lomelín retired as a Director during the year, having
served on the Board since the IPO, initially as our Chief Executive
Officer and since 2012 as a Non-executive Director. I am grateful
to him for his wise counsel over many years, and am delighted that
he will continue to act as an adviser, ensuring that we will still
benefit from his valuable experience and knowledge.
In addition, Georgina Kessel has been appointed as a member of
the Audit Committee from 1 March 2021, with Guadalupe De la Vega
becoming a member of the Remuneration Committee on the same
date.
We said farewell to two members of our Executive Committee
during the year. Our Chief Executive Office André Sougarret
returned to his native Chile while David Giles retired from his
role as Vice President, Exploration, and I thank them both for the
expertise and experience they brought to our Company. On behalf of
the Board, I would like to welcome their successors to Fresnillo,
Tomàs Iturriaga and Guillermo Gastélum respectively.
Outlook
As I write, a significant degree of uncertainty remains over
how, when and if the virus will develop and present further
challenges, as well as over the efficacy and availability of a
vaccine. However, as this extraordinary event unfolds, one thing is
certain - guided by our Purpose and underpinned by our culture, we
will continue to work tirelessly to protect the wellbeing of our
people and all our stakeholders. On behalf of the Board, I would
like to thank management and particularly our operational teams at
the mines who have worked so hard to deliver satisfactory
production results in the face of extremely challenging
conditions.
The Group is in a strong position, supported by a sound
strategy, a positive culture and an expert executive team.
Production has stabilised as expected, and the pipeline of new
mines and projects - together with a series of improvement
programmes - provides us with solid grounds for optimism.
Alberto Baillères
Chairman
Chief Executive's statement
Managing the challenge of the pandemic, regaining the confidence
of our stakeholders
The last year has been a time of great change for Fresnillo.
Against a background of the significant challenges presented by
Covid-19, we have put the principles of our Purpose into action,
focused on the wellbeing of people and delivered a more than
respectable performance.
By engaging with our stakeholders - the mining authorities,
suppliers and local communities as well as our people - we have
been able to minimise the pandemic's impact on our operations. The
result is that regardless of the many new ways of working that our
teams have had to adopt, we have largely stabilised production,
which was identified as a key priority at the end of last year. We
remain committed towards achieving our operational objectives and
delivering our projects in order to regain the confidence of our
investors.
I would like to welcome Tomás Iturriaga to the Executive
Committee following his appointment as Chief Operating Officer,
while also placing on record my thanks to André Sougarret for his
contribution to our recent operational improvements. I look forward
to working closely with Tomás in the years to come, as we bring
forward new actions to further maximise the potential of our
existing operations.
I would also like to thank David Giles for his significant
contribution to Fresnillo over many years and wish him well in his
retirement, while at the same time congratulating Guillermo
Gastélum on his appointment. He brings with him proven technical
skills, a deep understanding of our operations and considerable
experience, all of which will contribute to the further
strengthening of our pipeline of exploration projects and
prospects.
Production highlights and price review
Production of silver remained broadly in line with our
expectations, despite the difficulties generated by Covid-19, and
although gold production fell due to a temporary suspension of
mining activities, it ended the year more strongly.
As expected, total silver production remained stable and within
our guidance at 53.1 million ounces. The lower production was due
to a combination of fewer workers on-site due to the Covid-19
preventive measures we implemented, and a lower ore grade processed
at Saucito. These factors were mitigated by a higher grade at San
Julián Disseminated Ore Body and the processing of development ore
from our new Juanicipio mine for the first time.
Mining activities at our Herradura and Noche Buena open pit gold
mines in the north of Mexico were suspended for around six weeks at
the start of the pandemic. Concerns about the virus spreading from
Arizona across the border and into the State of Sonora forced the
State government to impose tougher restrictions at the onset of the
pandemic, and these impacted our operations at Penmont. Although we
continued to process ore during this period, the lack of new
material being deposited on the leaching pads affected the recovery
cycle and meant that once full activities restarted, production
inevitably lagged behind expectations. Combined with reduced
workforce levels for the remainder of the year, this resulted in
gold production for the year decreasing by 12.1% to 769.6 thousand
ounces, although still within our revised guidance.
Our by-product lead and zinc production both increased
year-on-year, driven by higher ore grades at Saucito.
Please find more details on production at each of our mines on
[pages x-x].
Following a positive performance in the previous year, precious
metals prices again rose during 2020, with the average realised
silver price reaching US$21.3 per ounce and that for gold hitting
US$1,792.4 per ounce, an increase of 32.3% and 26.4% respectively.
Average realised prices for zinc and lead decreased by 7.8% and
7.9% respectively.
Times change, but a sound strategy endures
Stability, consistency and a long-term perspective have always
characterised Fresnillo, and our proven strategy once again
anchored our performance during 2020. The strategy comprises four
distinct pillars and I am pleased to report that we made good
progress with each of them.
Maximising the potential of existing operations
As I outlined in last year's statement, this was our key focus
for 2020. Although there remains more to do, we are now working
smarter and with greater efficiency. In fact, our operational
improvements would have been more pronounced still but for the
preventive measures we introduced to counter the virus. For
example, our new Covid-19 safety initiatives meant that only a
limited number of people could work together in some of our mines,
and this inevitably led to lower development rates.
The Fresnillo Full Potential (FFP) project aims to exploit the
great potential that exists at our Fresnillo and Saucito mines, and
in the surrounding area. Over the last 12 months, we have refined
our mine planning operations, enhanced the certainty of our
geological models and taken actions to stabilise production -
focusing on controlling dilution and enhancing our blasting and
drilling techniques to manage the deeper operations and narrower
veins at both mines.
Our US$22.7 million tunnel boring machine (TBM) began operations
in the Fresnillo mine early in the year, as planned. Although the
TBM had successfully bored over 1,300 metres by the end of
December, we are working with the manufacturer and crew to improve
performance - and we are confident that further improvements will
be achieved in 2021. In particular, we aim to continue development
in the western areas of the mine, which offer good potential.
As we go deeper into the earth, we have continued to work on a
new, large capacity pumping station to replace a number of smaller
ones and improve drainage, and also completed a new elevator that
has reduced travel time for our underground teams. In addition, we
have advanced the deepening of the San Carlos Shaft. Started in
June 2016, this project has extended the shaft from 550m down to
990m, and once it is fully operational in 2022, it is expected to
provide access to 56% of the mine's reserves and reducing the
haulage costs.
Our investment in technology has begun to pay dividends. In
addition to progress with the TBM, we continued to integrate
semi-automatic drilling rigs into the Fresnillo mine. These rigs,
which can be programmed to continue drilling during shift changes,
completed 15 long hole stopes by the end of the year, as
planned.
At Saucito, we are continuing to deepen the Jarillas shaft to
1000 metres, helping to provide access to deeper levels of the mine
where almost half of the reserves are located. Due to be completed
in 2024, this will also allow us to transport ore to the surface
more quickly than is possible using access ramps.
Delivering growth through development projects
Despite the challenges presented by the pandemic, we concluded
the first production stope at Juanicipio on schedule in mid-2020,
with development ore being processed eight kilometres away at the
Fresnillo plant during the third quarter. However, commissioning of
the plant is now not expected until 4Q 2021, several months later
than anticipated due to delayed infrastructure contracts, as well
as Covid-19 preventive measures and the brief stoppage of work
earlier in the year. Juanicipio will be a major factor in the
Group's future silver production. A joint project with MAG Silver
in which we hold a 56% share, the mine is forecast to produce 11.7
moz of silver and 43.5 koz of gold per year on average.
At the Fresnillo mine, we completed the new Pyrites Plant on
schedule early in the fourth quarter - although start-up will not
be possible until the inspection and subsequent certification of
the energy supplies by the authorities are finalised, which are
expected no earlier than the third quarter of 2021. Once fully
operational, and including production from the Saucito plant, we
anticipate that it will produce an average of 3.5 moz of silver and
13 koz of gold per year.
In addition, further actions are enhancing productivity at
Fresnillo, including the US$30 million plant optimisation project
to improve the recovery of lead and zinc from lower levels of the
mine. The new flotation circuit was completed in the second half of
2020 as anticipated, although we decided to postpone connection to
the beneficiation plant until the first months of 2021 in order to
minimise disruption by taking advantage of planned monthly
maintenance stoppages. Once the Fresnillo mine has been
sufficiently developed and is able to sustainably maintain a higher
plant run rate, we will install the third and final stage of this
project - the addition of vibrating screens to the plant - to
increase the milling capacity to 9,000 tonnes per day. This is
expected to take place in 2022.
Extending the growth pipeline
The identification and development of new mines such as
Juanicipio are essential to the long-term strategy of the Group.
While we have concentrated on improving the efficiency of our
existing mines in recent months, exploration activities have
continued to take place - not only in Mexico but also in South
America - and we have increased the exploration budget for 2021,
following the planned decrease for 2020 which was made more
pronounced by uncertainty surrounding the pandemic.
Two new gold projects have moved closer to reality over the last
year. The potential mine at Rodeo is on track to come before the
Board for approval in mid-2022. We are currently consulting with
local communities on the permitting process, while our exploration
teams are working hard to move inferred resources into the
indicated category. Although Rodeo will be a relatively small mine
with an initial operational life of around seven to ten years, it
offers a number of advantages. Capex is expected to be low, for
example, because we intend to repurpose existing mining equipment
from Noche Buena, as that mine nears its end of life.
Developing the potentially much larger mine at Orisyvo will
require more capex and work, with the building of roads and
infrastructure adding to the challenges posed by gaining access to
land. However, this latter issue was partially resolved during the
year as our team identified a new, viable location for
infrastructure that is a better option for all stakeholders in the
area. We are now increasingly confident that Orisyvo will join our
portfolio of operational mines in the next few years.
In line with our commitment to reduce our carbon footprint, we
have included the Rodeo, Orisyvo and Guanajuato exploration
projects in our Energy Strategy.
We continued to undertake exploration activities in Peru and
Chile during the year and see great potential in the areas where we
have concessions.
Silver resources stood at 2.3 boz, a 1.6% increase over 2019
mainly as a result of the exploration efforts at Saucito. Gold
resources remained stable at 38.9 moz.
Silver reserves decreased 5.5% to 457.4 moz mainly due to
depletion and higher cut-off grades at Fresnillo and an updated
mine production plan at San Julián which incorporates new
geotechnical criteria, mitigated by an increase at Saucito. Gold
reserves decreased by 8.8% to 8.4 moz primarily due to more
stringent geotechnical and cost considerations at Herradura, which
resulted in a smaller pit shell, and depletion at Noche Buena.
Advancing and enhancing the sustainability of our operations
Although our safety record has improved significantly over the
last decade, the need for constant vigilance and renewed effort was
underlined during the year. Sadly, one of our colleagues was the
victim of a fatal accident. This incident in August 2020 ended a
period of 16 months without a fatality at any of our operations.
Our 'I Care, We Care' programme has now been rolled out across the
business and is a central aspect of all new development projects
and operations, and we continue to target a steady improvement in
all health and safety metrics.
We received the independent report on our 11 tailings storage
facilities (TSFs) during the year, as I anticipated in last year's
statement. The report has provided us with valuable information -
and while our TSFs remain in good condition, we have nevertheless
introduced new measures at specific facilities, notably in the
Fresnillo district where some of the original infrastructure dates
back to the 1940s.
Our commitment to green energy is unchanged. The project to
install dual fuel engines that run on both diesel and Liquid
Natural Gas (LNG) is on track, despite Covid-19 presenting the
supplier with considerable challenges. However, the percentage of
our energy consumption met by wind power decreased to 48%, due to a
delay in the connection of the Las Mesas wind energy project. We
provide more detail on these and other programmes on pages
[x-x].
We remain committed to reducing our greenhouse gas emissions,
improving our energy efficiency and integrating clean energy
sources into our electricity mix. We recognise the importance of
complying with the Task Force on Climate-Related Financial
Disclosure (TCFD) and will continue making progress on assessing
the carbon footprint of our Strategic Plan, measuring our
performance and analysing scenarios to identify impacts, risks and
opportunities.
One of the Company's Principal Decisions of 2020 was to evaluate
the Energy Strategy with the aim of setting decarbonisation targets
and assessing its resilience to the Transition Risks of Climate
Change. This process involved forecasting our energy demand in the
years to 2030 and took into account the impact of the LNG and wind
power projects already under way. The evaluation concluded that it
is technologically viable to support a decarbonisation pathway in
the 2021-2030 period.
At Fresnillo, we have a long track record of being respected by
our peers and the authorities for our social and environmental
performance, and this continued during 2020. We ensure that our
social programmes are based on the UN Global Compact - and we were
again recognised as one of the World's Most Ethical Companies by
Ethisphere, and also retained our membership of the FTSE4Good
index. In Mexico, our team was proud to win the Ethics and Values
Award from the Mexican Council of Industrial Chambers, and to be
commended for our standards of corporate integrity by Integridad
Corporativa 500.
Looking ahead
Looking at silver volumes, our next wave of growth will be
buoyed by steadily increasing production at Juanicipio, while the
multiple ongoing operational programmes are forecast to increase
production at Fresnillo. Lower ore grade at Ciénega and reduced
activity at Noche Buena in line with the mine closure plan, as well
as slightly lower volumes at Herradura, are likely to lead to
reduced gold production. However, the longer-term prospects for
gold are good, supported by the potential new mines at Rodeo and
Orisyvo.
Precious metals prices are likely to remain strong for 2021,
supported by low interest rates and given the global macroeconomic
and geopolitical backdrop. However, our aim is and always has been
to perform well in times of low prices as well as high - and our
cost reduction initiatives and operational improvements are
targeted firmly at increasing margins regardless of the prices of
precious metals.
Due to the pandemic there is a relatively high degree of
unpredictability about the year ahead, and I must strike a note of
caution. Unless and until a vaccine is readily available, we
recognise that any further outbreaks of the virus could impose
further restrictions on our production, margins and
profitability.
Finally, I would like to thank the entire Fresnillo workforce,
including our contractors, for their hard work, understanding and
expertise during these difficult months. We have adapted to
conditions that nobody could have anticipated or made plans for,
and we have emerged as a stronger, more united business - together
I believe we can look forward to the future with confidence.
Octavio Alvídrez
Chief Executive Office
FINANCIAL REVIEW
The consolidated Financial Statements of Fresnillo plc are
prepared in accordance with International Financial Reporting
Standards adopted pursuant to Regulation (EC) No 1606/2002 as it
applies in the European Union. 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 2020 figures compared to 2019, 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 we have
improved our already healthy cash and other liquid funds (1)
position, while maintaining a low leverage ratio. This has been
enhanced through the closing of our US$850 million senior notes
offering, part of which we used to prepay a portion of our US$800
million senior notes due in 2023 and has enabled us to continue
investing in the business and delivering returns to
shareholders.
The following report presents how we have managed our financial
resources.
COMMENTARY ON FINANCIAL PERFORMANCE
Supported by high precious metals prices and a respectable
operational performance despite the Covid-19 pandemic, the Group
achieved strong financial results in 2020. Adjusted revenue
increased 14.9% over 2019 due to higher gold and silver prices,
which were partially offset by the lower volumes of gold and silver
sold. Revenue increased 14.6% year-on-year. Adjusted production
costs (2) decreased mainly as a result of lower volumes processed
at Herradura and Noche Buena due to Covid-19 operational
restrictions and the favourable effect of the devaluation of the
Mexican peso vs. US dollar. This decrease was amplified by the
positive effect from changes in inventory in 2020 compared to that
in 2019 resulting from the gold content in the leaching pads at
Herradura being reassessed, and by lower exploration costs. As a
result, gross profit and EBITDA increased to US$879.4 million and
US$1,169.1 million, a 90.5% and 73.4% increase over 2019.
In the second half of 2020, Fresnillo plc bought back US$482.1
million of the US$800 million Senior Notes at 5.5% due in 2023.
Despite the payment of a US$60.8 million premium for the early
repayment of these notes, the Company considered it a good
opportunity to restructure its debt, taking advantage of the
favourable conditions prevailing in the market at that point in
time. The aggregate amount paid by the Company to holders whose
Tender Securities were accepted for purchase, including an early
repayment premium, was approximately US$543.0 million. In addition,
Fresnillo plc issued new US$850 million Senior Notes at 4.25% due
in 2050. This provided the funds to pay existing bond holders who
chose to sell their 2023 bonds, while at the same time ensuring the
stability and financial health of the Company both in the short and
long term.
We improved our already strong financial position, with
US$1,070.4 million in cash and other liquid funds (1) as of 31
December 2020 notwithstanding paying dividends of US$104.7 million
in accordance with our policy and despite the pandemic, investing
US$412.3 million in capex and spending US$107.3 million on
exploration expenses to underpin our future growth.
INCOME STATEMENT
2020 US$ million 2019 US$ million Amount US$ million Change %
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Adjusted revenue (3) 2,608.1 2,270.2 337.9 14.9
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Total revenue 2,430.1 2,119.6 310.5 14.6
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Cost of sales (1,550.7) (1,657.9) 107.2 (6.5)
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Gross profit 879.4 461.7 417.7 90.5
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Exploration expenses 107.3 157.9 (50.6) (32.0)
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Operating profit 649.7 171.7 478.0 278.3
---------------------------------------------------- ---------------- ---------------- ------------------ --------
EBITDA (4) 1,169.1 674.0 495.1 73.4
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Income tax expense including special mining rights 175.6 (27.1) 202.7 N/A
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Profit for the year 375.6 205.8 169.8 82.5
---------------------------------------------------- ---------------- ----------------
Profit for the year, excluding post-tax Silverstream
effects 325.9 172.0 153.9 89.5
---------------------------------------------------- ---------------- ---------------- ------------------ --------
Basic and diluted earnings per share (US$/share) (5) 0.508 0.277 0.231 83.4
---------------------------------------------------- ---------------- ----------------
Basic and diluted earnings per share, excluding
post-tax Silverstream effects (US$/share) 0.440 0.231 0.209 90.5
---------------------------------------------------- ---------------- ---------------- ------------------ --------
1 Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
2 Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and
unproductive costs. The Company considers this a useful additional
measure to help understand underlying factors driving production
costs in terms of the different stages involved in the mining and
plant processes, including efficiencies and inefficiencies as the
case may be and other factors outside the Company's control such as
cost inflation or changes in accounting criteria.
3 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
4 Earnings before interest, taxes, depreciation and amortisation
(EBITDA) is calculated as gross profit plus depreciation less
administrative, selling and exploration expenses.
5 The weighted average number of ordinary shares was 736,893,589
for 2020 and 2019. See note 17 in the consolidated financial
statements.
The Group's financial results are largely determined by the
performance of our operations. However, there are other factors
such as a number of macroeconomic variables, that lie beyond our
control and which affect financial results. These include:
PRECIOUS METALS PRICES
During the year, the average realised silver price increased by
32.3%, from US$16.1 per ounce in 2019 to US$21.3 per ounce in 2020,
while the average realised gold price rose 26.4% from US$1,418.0
per ounce in 2019 to US$1,792.4 per ounce in 2020. In contrast, the
average realised lead and zinc by-product prices decreased 7.9% and
7.8% year-on-year, to US$0.82 and US$1.06 per pound,
respectively.
However, the Group benefited from a favourable but relatively
minor effect as a result of a series of financial derivatives
entered into in 2019 to hedge a portion of lead production, as
described in the Hedging section on page X.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 31 December
2020 was $19.95 per US dollar, compared to $18.85 per US dollar at
the beginning of the year. The 5.9% spot devaluation had an adverse
effect on: i) the net monetary peso asset position, which
contributed to the US$40.3 million foreign exchange loss; and ii)
taxes and mining rights as the devaluation resulted in an increase
in related deferred tax liabilities.
The average spot Mexican peso/US dollar exchange rate increased
11.6% to $21.5 per US dollar (2019: $19.3 per US dollar). As a
result, there was a favourable effect of US$66.6 million on the
Group's costs denominated in Mexican pesos (approximately 45% of
total costs) when converted to US dollars.
COST deFLATION
In 2020, cost deflation was 5.5%. The main components of our
cost inflation basket are listed below:
Labour
Unionised employees received on average a 6.5% increase in wages
in Mexican pesos, while administrative employees did not receive an
increase as a measure to preserve cash during the onset of
Covid-19; when converted to US dollars, this resulted in a weighted
average labour deflation of 6.0%.
Energy
Electricity
The Group's weighted average cost of electricity increased by
4.7% from 7.4 US cents per kW in 2019 to 7.8 US cents per kW in
2020. This increase was mainly due to the higher average generating
cost of the Comisión Federal de Electricidad (CFE), the national
utility.
Diesel
The weighted average cost of diesel in US dollars decreased
18.0% to 72.2 US cents per litre in 2020, compared to 87.9 US cents
per litre in 2019. This resulted mainly from the decrease in the
demand for oil as economic activity slowed sharply across the globe
during the pandemic.
Operating materials
Year over year change in unit price %
-------------------------------------------- -------------------------------------
Other reagents (9.3)
-------------------------------------------- -------------------------------------
Steel balls for milling (4.2)
-------------------------------------------- -------------------------------------
Steel for drilling (4.0)
-------------------------------------------- -------------------------------------
Sodium cyanide (3.5)
-------------------------------------------- -------------------------------------
Lubricants (2.6)
-------------------------------------------- -------------------------------------
Explosives (2.5)
-------------------------------------------- -------------------------------------
Tyres 0.2
-------------------------------------------- -------------------------------------
Weighted average of all operating materials (2.4)
-------------------------------------------- -------------------------------------
Unit prices of most operating materials decreased in US dollar
terms, which resulted in a year-on-year deflation of 2.4%. This
reflected the lower demand for some of these products as global
mining activity was impacted by Covid-19 and several mines and
projects worldwide reduced or halted operations. 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 2020, increases per unit (i.e. per metre developed/ per tonne
hauled) granted to contractors, whose agreements were due for
review during the period, resulted in a weighted average decrease
of 6.0% in US dollars, after considering the devaluation of the
Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance decreased by 5.3% on
average in US dollar terms.
Other costs
Other cost components include freight which decreased by an
estimated 7.5% in US dollars, while insurance costs increased by
16.2% in US dollars due to higher market premiums for some of the
risks covered, such as the risk to tailings dams and the start-up
of new operations. The remaining cost inflation components
experienced average deflation of 5.1% in US dollars over 2019.
The effects of the above external factors, combined with the
Group's internal variables, are further described below through the
main line items of the income statement.
REVENUE
CONSOLIDATED REVENUE (1)
2020 2019 Amount
US$ million US$ million US$ million Change %
------------------------------- ------------ ------------ ------------ --------
Adjusted revenue (1) 2,608.1 2,270.2 337.9 14.9
------------------------------- ------------ ------------ ------------ --------
Gold, lead and zinc hedging 2.4 (6.0) 8.4 N/A
------------------------------- ------------ ------------ ------------ --------
Treatment and refining charges (180.4) (144.6) (35.8) 24.8
------------------------------- ------------ ------------ ------------ --------
Total revenue 2,430.1 2,119.6 310.5 14.6
------------------------------- ------------ ------------ ------------ --------
Adjusted revenue increased by US$337.9 million mainly as a
result of the increase in gold and silver prices. This positive
effect was partially offset by the higher treatment and refining
charges. As a result, total revenue rose to US$2,430.1 million, a
14.6% increase against 2019.
ADJUSTED REVENUE (1) BY METAL
2020 2019
------------------ ------------------
Price Total net
Volume Variance Variance change
US$ million % US$ million % US$ million US$ million US$ million %
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ ----
Silver 970.5 37.2 766.9 33.8 (34.0) 237.6 203.6 26.5
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ ----
Gold 1,327.9 50.9 1,202.8 53.0 (172.3) 297.4 125.1 10.4
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ ----
Lead 104.9 4.0 102.1 4.5 11.3 (8.5) 2.9 2.7
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ ----
Zinc 204.7 7.9 198.4 8.7 22.8 (16.5) 6.3 3.2
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ ----
Total adjusted revenue 2,608.1 100.0 2,270.2 100.0 (172.2) 510.1 337.9 14.9
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ ----
The increase in gold and silver prices, partially offset by the
lower lead and zinc prices, resulted in a positive effect on
Adjusted revenue of US$510.1 million. This was partially offset by
the US$172.2 million adverse effect of the lower volumes of silver
and gold sold, mitigated by the higher lead and zinc sales volumes.
Gold volumes sold were impacted by the lower production at our open
pit operations due to the temporary suspension and subsequent
mitigating actions implemented in response to the Covid-19
pandemic, while the volumes of silver sold were primarily affected
by the expected lower silver grade from the Saucito mine.
ADJUSTED REVENUE BY Mine
Herradura continued to be the greatest contributor to Adjusted
revenue, representing 30.0% primarily due to the higher gold price,
mitigated by the lower volume of gold sold. Saucito's contribution
increased to 22.8% in 2020 (2019: 21.7%) mainly as a result of the
increased gold, lead and zinc volumes sold. Fresnillo remained the
third most important contributor to Adjusted revenue, increasing
its share to 16.3% (2019: 15.9%). The contribution to the Group's
Adjusted revenue from the San Julián mine remained broadly stable
at 15.6% in 2020 (2019: 15.0%). Similarly, Ciénega's contribution
to the Group's Adjusted revenue remained broadly unchanged at 9.5%
(2019: 9.0%) as a result of the higher gold and silver prices,
which partly offset the lower gold and silver volumes sold. As
expected, Noche Buena's contribution continued to decrease from
7.8% in 2019 to 5.8% in 2020, primarily reflecting the gradual
depletion of the mine as it approaches the end of its life and the
minor land slip.
The contribution by metal and by mine to Adjusted revenues is
expected to change further in the future, as new projects are
incorporated into the Group's operations and as precious metals
prices fluctuate.
1 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
gold, lead and zinc hedging.
ADJUSTED REVENUE(1) BY MINE
2020 2019
------------------- -------------------
(US$ million) % (US$ million) %
---------------------------------------------- ------------- ---- ------------- ----
Herradura 778.9 29.9 693.9 30.6
---------------------------------------------- ------------- ---- ------------- ----
Saucito 593.6 22.8 493.4 21.7
---------------------------------------------- ------------- ---- ------------- ----
Fresnillo 407.2 15.6 361.7 15.9
---------------------------------------------- ------------- ---- ------------- ----
Ciénega 248.3 9.6 204.7 9.0
---------------------------------------------- ------------- ---- ------------- ----
San Julián (DOB) (Disseminated Ore Body) 218.0 8.3 184.5 8.1
---------------------------------------------- ------------- ---- ------------- ----
San Julián (Veins) 191.2 7.3 155.3 6.9
---------------------------------------------- ------------- ---- ------------- ----
Noche Buena 152.6 5.8 176.7 7.8
---------------------------------------------- ------------- ---- ------------- ----
Juanicipio 18.3 0.7 0.0 0.0
---------------------------------------------- ------------- ---- ------------- ----
Total 2,608.1 100 2,270.2 100
---------------------------------------------- ------------- ---- ------------- ----
VOLUMES OF METAL SOLD
% participation % participation
2020 of each mine 2019 of each mine % change
------------------------- ------ --------------- ------ --------------- --------
Silver (koz)
------------------------- ------ --------------- ------ --------------- --------
Saucito 14,133 31.0 15,923 33.6 (11.2)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 11,664 25.5 11,778 24.8 (1.0)
------------------------- ------ --------------- ------ --------------- --------
San Julián (Veins) 3,907 8.6 4,215 8.9 (7.3)
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 7,594 16.7 7,368 15.5 3.1
------------------------- ------ --------------- ------ --------------- --------
Ciénega 5,246 11.5 5,330 11.2 (1.6)
------------------------- ------ --------------- ------ --------------- --------
Herradura 1,300 2.8 1,573 3.3 (17.4)
------------------------- ------ --------------- ------ --------------- --------
Juanicipio 794 1.7 0 0.0 100
------------------------- ------ --------------- ------ --------------- --------
Noche Buena 25 0.1 23 0.0 8.7
------------------------- ------ --------------- ------ --------------- --------
Pyrites Plant at Saucito 944 2.1 1,212 2.6 (22.1)
------------------------- ------ --------------- ------ --------------- --------
Total silver (koz) 45,607 100 47,422 100 (3.8)
------------------------- ------ --------------- ------ --------------- --------
Gold (koz)
------------------------- ------ --------------- ------ --------------- --------
Herradura 429 57.9 496 58.5 (13.5)
------------------------- ------ --------------- ------ --------------- --------
Noche Buena 78 10.5 105 12.4 (25.7)
------------------------- ------ --------------- ------ --------------- --------
San Julián (Veins) 61 8.2 62 7.3 (1.6)
------------------------- ------ --------------- ------ --------------- --------
Saucito 75 10.1 72 8.5 4.2
------------------------- ------ --------------- ------ --------------- --------
Ciénega 60 8.1 62 7.3 (3.2)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 32 4.3 46 5.4 (30.4)
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 1 0.1 1 0.1 0.0
------------------------- ------ --------------- ------ --------------- --------
Juanicipio 2 0.3 0.0 0.0 100
------------------------- ------ --------------- ------ --------------- --------
Pyrites Plant at Saucito 3 0.4 4 0.5 (25.0)
------------------------- ------ --------------- ------ --------------- --------
Total gold (koz) 741 100 848 100 (12.6)
------------------------- ------ --------------- ------ --------------- --------
Lead (t)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 19,375 33.5 19,544 39.8 0.3
------------------------- ------ --------------- ------ --------------- --------
Saucito 26,093 45.1 19,719 40.2 32.3
------------------------- ------ --------------- ------ --------------- --------
Ciénega 5,634 9.7 4,385 8.9 28.5
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 6,464 11.2 5,405 11.0 19.6
------------------------- ------ --------------- ------ --------------- --------
Juanicipio 234 0.4 0.0 0.0 100
------------------------- ------ --------------- ------ --------------- --------
Total lead (t) 57,801 100 49,053 100 17.8
------------------------- ------ --------------- ------ --------------- --------
Zinc (t)
------------------------- ------ --------------- ------ --------------- --------
Fresnillo 28,038 31.9 26,350 33.5 8.1
------------------------- ------ --------------- ------ --------------- --------
Saucito 34,654 39.4 25,622 32.6 35.3
------------------------- ------ --------------- ------ --------------- --------
San Julián (DOB) 17,028 19.3 19,034 24.2 (10.5)
------------------------- ------ --------------- ------ --------------- --------
Ciénega 7,832 8.9 7,590 9.7 3.2
------------------------- ------ --------------- ------ --------------- --------
Juanicipio 444 0.5 0.0 0.0 100
------------------------- ------ --------------- ------ --------------- --------
Total zinc (t) 87,996 100 78,596 100 (11.2)
------------------------- ------ --------------- ------ --------------- --------
HEDGING
In the third quarter of 2020, we hedged a portion of our silver
production for 2021, capitalising on the unique market conditions,
where volatility and skeweness presented an opportunity to limit
downside risk while retaining a significant upside exposure to
future silver price increase. The transaction was structured as a
collar with an average floor price of US$20 per ounce, and with an
average price ceiling of US$49.56 per ounce. The hedging programme
was executed for a total volume of 4,248,000 ounces of silver with
monthly settlements throughout 2021.
Our precious metals hedging policy has changed slightly to give
the Company the ability to hedge up to 20% of the expected annual
silver and gold production over the next 12 months, as determined
at the time of entering the hedge.
Additionally, in the last quarter of 2019 we hedged a portion of
our by-product lead production for 2020. The table below
illustrates the expired hedging volume and the results for
2020.
As of 31 December 2020
-----------------------
Concept Lead
--------------------------------- ----------------------
Weighted floor (US$/tonne) 1,759
---------------------------------- ----------------------
Weighted cap (US$/tonne) 2,026
---------------------------------- ----------------------
Expired volume (tonne) 8,760
---------------------------------- ----------------------
Gain (US$ million) 1.3
---------------------------------- ----------------------
Total outstanding volume (tonne) 0
---------------------------------- ----------------------
TREATMENT AND REFINING CHARGES
Treatment and refining charges (1) are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and
zinc concentrate increased in dollar terms by 51.0% and 18.4%,
respectively as benchmarks were set far more weighted towards the
market conditions in December 2019 and January 2020, before markets
turned as a result of the onset of Covid-19. Furthermore, silver
refining charges increased by 9.0% over the year. The increase in
treatment charges per tonne of lead and zinc and silver refining
charges, combined with the higher volumes of lead and zinc
concentrates shipped from our mines to Met-Mex, resulted in a 24.8%
increase in treatment and refining charges set out in the income
statement in absolute terms when compared to 2019.
COST OF SALES
2020 2019 Amount
Concept US$ million US$ million US$ million Change %
--------------------------------------------------------- ------------ ------------ ------------ --------
Adjusted production costs (2) 1,079.1 1,173.0 (93.9) (8.0)
--------------------------------------------------------- ------------ ------------ ------------ --------
Depreciation 505.4 489.5 15.9 3.2
--------------------------------------------------------- ------------ ------------ ------------ --------
Profit sharing 18.7 9.1 9.6 105.5
--------------------------------------------------------- ------------ ------------ ------------ --------
Hedging (4.1) 0.0 (4.1) N/A
--------------------------------------------------------- ------------ ------------ ------------ --------
Change in inventories (66.4) (11.1) (55.2) >100
--------------------------------------------------------- ------------ ------------ ------------ --------
Unproductive costs including unabsorbed production costs 18.0 (2.6) 20.6 N/A
--------------------------------------------------------- ------------ ------------ ------------ --------
Cost of sales 1,550.7 1,657.9 (107.2) (6.5)
--------------------------------------------------------- ------------ ------------ ------------ --------
1 Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
2 Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and
unproductive costs. The Company considers this a useful additional
measure to help understand underlying factors driving production
costs in terms of the different stages involved in the mining and
plant processes, including efficiencies and inefficiencies as the
case may be and other factors outside the Company's control such as
cost inflation or changes in accounting criteria.
Cost of sales decreased 6.5% to US$1,550.7 million in 2020. The
US$107.2 million decrease is explained by the following combination
of factors:
-- A decrease in Adjusted production costs (-US$93.9 million).
This was primarily due to: i) a lower volume of ore processed at
Herradura and Noche Buena due to Covid-19 operational restrictions
(-US$79.4 million) which can further be broken down into two
factors: a) variable costs that were not incurred (-US$71.1
million), and b) fixed costs that were incurred and reclassified as
unproductive costs [1] (-US$8.3 million); and ii) the favourable
effect of the devaluation of the Mexican peso vs. US dollar
(-US$66.6 million). These positive effects were partly offset by
increased development works and maintenance, mainly at Fresnillo,
Saucito and San Julián (Veins and DOB) (+US$49.4 million).
-- The variation in the change in work in progress had a
positive effect of US$55.2 million year-on-year. This resulted
mainly from the re-assessment of the gold content on the leaching
pads at Herradura (see notes 2c and 5 to the financial statements).
This was partially offset by the net effect of the reduction of
inventories at Noche Buena resulting from processing gold
inventories during the operational restrictions at the onset of the
pandemic, without being able to deposit on the leaching pads.
-- Mexican peso/US dollar hedging (-US$4.1 million). As part of
our programme to manage our exposure to foreign exchange risk
associated with costs incurred in Mexican pesos, during the first
quarter of the year we entered into a combination of put and call
options structured at zero cost (collars). These derivatives were
used to hedge US$150.1 million of costs denominated in Mexican
pesos with average floor and cap exchange rates of $22.33 and
$32.82 per US dollar respectively, which have generated a positive
result of US$4.1 million. The total outstanding position using
collar structures as of 31 December 2020 was US$37.53 million with
monthly maturities until March 2021, with average floor and cap
exchange rates of $22.33 and $32.82 per US dollar respectively.
These instruments guarantee a minimum exchange rate should the
market fall below the floor exchange rate.
These positive effects were partly offset by year-on-year
increases in:
-- US$18.0 million in unproductive costs, which is mainly
related to costs incurred during the partial stoppages at Herradura
and Noche Buena due to the COVID-19 measures imposed by the state
government.
-- Depreciation (+US$15.8 million). This is mainly due to
increased amortisation of capitalised mining works and increased
depletion factors at the underground mines, partly mitigated by the
lower depreciation at Herradura and Noche Buena as some equipment
was not in use as a result of the preventive measures related to
Covid-19. The reduced amount in depreciation was reclassified as
unproductive costs.
-- Profit sharing (+US$9.6 million).
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST
(AISC)
Cost per tonne is a key indicator to measure the effects of
changes in production costs and cost control performance at each
mine. This indicator is calculated as total production costs, plus
ordinary mining rights, less depreciation, profit sharing and
exchange rate hedging effects, divided by total tonnage processed.
We have included cost per tonne hauled/moved as we believe it is a
useful indicator to thoroughly analyse cost performance for the
open pit mines.
Cost per tonne 2020 2019 % change
------------------------ -------------------- ---- ---- --------
Fresnillo US$/tonne milled 69.9 62.7 11.5
------------------------ -------------------- ---- ---- --------
Saucito US$/tonne milled 72.0 67.8 6.2
------------------------ -------------------- ---- ---- --------
Ciénega US$/tonne milled 76.7 78.3 (2.0)
------------------------ -------------------- ---- ---- --------
San Julián (Veins) US$/tonne milled 71.8 72.0 (0.3)
------------------------ -------------------- ---- ---- --------
San Julián (DOB) US$/tonne milled 39.0 39.1 (0.3)
------------------------ -------------------- ---- ---- --------
Herradura US$/tonne deposited 18.3 18.1 1.0
------------------------ -------------------- ---- ---- --------
Herradura US$/tonne hauled 3.3 3.3 0.0
------------------------ -------------------- ---- ---- --------
Noche Buena US$/tonne deposited 10.8 9.8 10.0
------------------------ -------------------- ---- ---- --------
Noche Buena US$/tonne hauled 3.3 2.5 32.0
------------------------ -------------------- ---- ---- --------
Fresnillo: Cost per tonne increased 11.5% to US$69.9 in 2020,
mainly due to an increase in development costs. Additionally, cost
deflation for this mine was 4.5% mainly due to the favourable
effect of the devaluation of the Mexican peso vs. US dollar on
contractors and labour.
Saucito: Cost per tonne increased 6.2% to US$72.0, mainly due to
an increase in development cost, mitigated by the favourable effect
of the devaluation of the Mexican peso and the decrease in
consumption of operating materials at the pyrites plant; cost
deflation for this mine was 4.3% primarily due to contractors,
maintenance, operating materials and labour.
San Julián Veins: C ost per tonne remained stable at $71.8,
mainly due to the increase in development costs, offset by the
favourable effect of the devaluation of the Mexican peso vs. US
dollar.
San Julián (DOB): Cost per tonne remained stable at $39.0,
mainly due to the increase in development costs, offset by the
positive effect of the devaluation of the Mexican peso vs. the US
dollar.
Ciénega: Cost per tonne decreased 2.0% to US$76.7 mainly due to
the positive effect of the devaluation of the Mexican peso vs. US
dollar partly offset by increased consumption of electricity and
spare parts for maintenance.
Herradura: Cost per tonne of ore deposited remained stable at
$18.3, primarily due to an increase in the stripping ratio and
inefficiencies caused by lower economies of scale as a result of
the decrease in volume of ore processed and waste material hauled
related to the COVID-19 disruptions, offset by the devaluation of
the Mexican peso vs. the US dollar, fixed costs that were incurred
and reclassified as unproductive costs and the lower unit price of
diesel.
Noche Buena: Cost per tonne at this mine increased 10.2% to
US$10.8 in 2020, primarily as a result of the lower economies of
scale achieved from the decrease in volume of ore processed and
waste material hauled as a result of COVID-19 disruptions and the
expected lower production as the mine approaches closure, mitigated
by the devaluation of the Mexican peso vs. the US dollar, fixed
costs that were incurred and reclassified as unproductive costs and
the lower unit price of diesel.
Cash cost per ounce, calculated as total cash cost (cost of
sales plus treatment and refining charges, less depreciation) less
revenue from by-products divided by the silver or gold ounces sold,
when compared to the corresponding metal price, is an indicator of
the ability of the mine to generate competitive profit margins.
Cash cost per ounce 2020 2019 % change
------------------------ --------------------- ------- ----- --------
Fresnillo US$ per silver ounce 5.9 2.3 156.5
------------------------ --------------------- ------- ----- --------
Saucito US$ per silver ounce 0.8 2.3 (65.2)
------------------------ --------------------- ------- ----- --------
Ciénega US$ per gold ounce (276.2) (0.2) N/A
------------------------ --------------------- ------- ----- --------
San Julián (Veins) US$ per silver ounce (6.0) 0.8 N/A
------------------------ --------------------- ------- ----- --------
San Julián (DOB) US$ per silver ounce 7.0 7.0 0.0
------------------------ --------------------- ------- ----- --------
Herradura US$ per gold ounce 727.9 818.6 (11.1)
------------------------ --------------------- ------- ----- --------
Noche Buena US$ per gold ounce 1,158.5 847.8 36.6
------------------------ --------------------- ------- ----- --------
Fresnillo: Cash cost per silver ounce increased to US$5.9 (2019:
US$2.3) principally due to higher cost per tonne, higher treatment
and refining charges, increased special mining rights and lower
by-product credits, partially mitigated by the higher silver ore
grade. Margin per ounce increased 11.6% to US$15.4. Expressed as a
percentage of silver price, it decreased to 72.3% (2019:
85.7%).
Saucito: Cash cost per silver ounce decreased to US$0.8 per
ounce (2019: US$2.3 per silver ounce) mainly as a result of higher
gold, lead and zinc by-product credits per silver ounce. This was
partially offset by higher treatment and refining charges per
silver ounce, an increase in special mining rights, a lower silver
ore grade and an increase in cost per tonne. Margin per ounce
increased to US$20.5 in 2020 (2019: US$13.8). Expressed as a
percentage of silver price, it increased from 85.7% to 96.2%.
San Julián Veins: Cash cost decreased mainly due to higher gold
by-product credits, partly offset by the lower silver grade and
increased special mining rights. Margin per ounce increased to
US$27.3 (2019: US$15.3), while margin expressed as a percentage of
the silver price increased from 95.0% in 2019 to 128.2% in
2020.
San Julián (DOB): Cash cost remained at US$7.0 per ounce as the
lower cost per tonne and higher silver ore grade were offset by the
lower by-product credits.
Ciénega: The decrease in cash cost was primarily due to an
increase in silver by-product credits and lower cost per tonne,
partly offset by increased special mining rights, higher treatment
and refining charges and lower gold ore grade. Margin per ounce
increased to US$2,068.6 in 2020 (2019: US$1,418.2). Expressed as a
percentage of gold prices, the margin increased to 115.4% (2019:
100.0%).
Herradura: Cash cost per gold ounce decreased to US$727.9, as a
result of the favourable effect of the reassessment of recoverable
gold inventories at the leaching pads, resulting in a lower cost
per ounce. This was partially offset by increased special mining
rights, lower ore grades and higher profit sharing. Margin per
ounce and margin expressed as a percentage of gold prices increased
to US$1,064.5 and 59.4%, respectively.
Noche Buena: Cash cost per gold ounce increased by 36.6% to
US$1,158.5, mainly due to a lower gold ore grade, a higher cost per
tonne and increased special mining rights. Margin per ounce
increased to US$633.9, while margin expressed as a percentage of
the gold price declined from 40.2% in 2019 to 35.4% in 2020.
In addition to the traditional cash cost, the Group is reporting
All-In Sustaining Cost (AISC) in accordance with the guidelines
issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus
on-site general, corporate and administrative costs, community
costs related to current operations, capitalised stripping and
underground mine development, sustaining capital expenditures and
remediation expenses.
We consider AISC to be a reasonable indicator of a mine's
ability to generate free cash flow when compared with the
corresponding metal price. We also believe it is a means to monitor
not only current production costs, but also sustaining costs as it
includes mine development costs incurred to prepare the mine for
future production, as well as sustaining capex.
ALL-IN SUSTAINING COST (AISC)
AISC 2020 2019 % change
------------------------ --------------------- -------- -------- --------
Fresnillo US$ per silver ounce 12.92 13.54 (4.6)
------------------------ --------------------- -------- -------- --------
Saucito US$ per silver ounce 6.94 10.97 (36.7)
------------------------ --------------------- -------- -------- --------
Ciénega US$ per gold ounce 618.32 1,212.14 (49.0)
------------------------ --------------------- -------- -------- --------
San Julián (Veins) US$ per silver ounce 5.04 14.79 (65.9)
------------------------ --------------------- -------- -------- --------
San Julián (DOB) US$ per silver ounce 8.85 10.79 (18.0)
------------------------ --------------------- -------- -------- --------
Herradura US$ per gold ounce 881.92 962.99 (8.4)
------------------------ --------------------- -------- -------- --------
Noche Buena US$ per gold ounce 1,502.92 922.86 62.8
------------------------ --------------------- -------- -------- --------
Fresnillo: All-in sustaining cost decreased 4.4% over 2019 to
US$12.9, explained by lower capitalised development per ounce and a
lower sustaining capex per ounce.
Saucito: All-in sustaining cost decreased to US$6.9 per ounce
mainly due to mainly as a result of lower sustaining capex per
ounce and lower cash cost.
San Julián Veins: All in sustaining cost at San Julián veins
decreased due to a lower sustaining capital expenditure per ounce
and a decrease in cash cost.
San Julián DOB: The US$1.9 decrease in all in sustaining cost
was driven by a lower sustaining capital expenditure per ounce.
Ciénega: The US$593.8 per ounce decrease in all in sustaining
cost was primarily driven by the lower capitalised development,
decreased sustaining capital expenditure per ounce and lower cash
cost.
Herradura: All-in sustaining cost decreased by US$81.1 per ounce
mainly due to the lower cash cost and a lower capitalised
stripping.
Noche Buena: The US$580.0 per ounce increase in all-in
sustaining cost was the result of the capitalised stripping and
higher cash cost.
GROSS PROFIT
Gross profit, excluding hedging gains and losses, is a key
financial indicator of profitability at each business unit and the
Fresnillo Group as a whole.
Total gross profit, including hedging gains and losses,
increased by 90.5% from US$461.7 million in 2019 to US$879.4
million in 2020.
The US$417.7 million increase in gross profit was mainly
explained by: i) the favourable effect of higher average realised
gold and silver prices (US$510.1 million); ii) the positive effect
from the gold content in the leaching pads at Herradura being
reassessed (US$91.3 million); iii) the favourable effect of the
devaluation of the Mexican peso vs. US dollar (US$66.6 million);
and iv) the favourable results from the lead and exchange rate
hedging this year vs. a loss incurred in 2019 (US$12.5 million).
These positive factors were partly offset by: i) the increase in
cost related to maintenance and development works at Fresnillo,
Saucito and San Julián (veins and DOB) (-US$49.4 million); ii)
lower ore grades at Herradura DLP, San Julián (veins) and Ciénega
(-US$47.2 million); iii) lower volumes of ore processed at
Herradura and Noche Buena following Covid-19 operational
restrictions (-US$45.7 million); iv) the variation of change in
inventories excluding the effect of the 2020 reassessment of gold
contents in the leaching pads at Herradura (-US$36.0 million); v)
higher treatment and refining charges (-US$35.8 million); vi)
increase in unproductive costs as a result of the Covid-19 measures
(-US$20.6 million); vii) higher depreciation (-US$15.9 million);
viii) higher profit sharing (-US$9.7 million) and others (-US$2.5
million).
With the exception of Noche Buena, gross profit increased
year-on-year at all mines. Herradura remained the largest
contributor to the Group's consolidated gross profit, recording an
increase in its percentage share from 38.9% in 2019 to 43.4% in
2020. Gross profit at Saucito and Fresnillo experienced double
digit increases; however, their percentage shares decreased to
23.4% and 12.7% in 2020 respectively as a result of their relative
weighting. The higher grades at San Julián (DOB) together with the
higher precious metals prices resulted in a US$71.9 million gross
profit, which represented 8.4% of the Group's total gross profit.
Ciénega's share of the Group's total gross profit remained steady
at 7.5%, while Noche Buena's contribution continued to decrease,
falling to 4.6%.
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING
HEDGING GAINS AND LOSSES
2020 2019 Change
----------------- ------------------ ------------------
US$ million % US$ million % US$ million %
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Herradura 372.3 43.4 183.2 38.9 189.1 102.9
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Saucito 200.2 23.4 131.2 27.9 69.0 52.6
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Fresnillo 109.1 12.7 88.7 18.9 20.4 40.2
------------------------------------- ----------- ---- ----------- ----- ----------- -----
San Julián 71.9 8.4 (7.3) (1.5) 79.2 N/A
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Ciénega 64.4 7.5 34.5 7.3 29.5 86.7
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Noche Buena 39.0 4.6 40.2 8.5 (1.2) (3.0)
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Total for operating mines 856.9 100 470.5 100 386.4 82.1
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Metal hedging and other subsidiaries 22.5 (8.8) 31.3 N/A
------------------------------------- ----------- ---- ----------- ----- ----------- -----
Total Fresnillo plc 879.4 461.7 417.7 90.5
------------------------------------- ----------- ---- ----------- ----- ----------- -----
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses decreased 3.1% from
US$96.4 million in 2019 to US$93.4 million in 2020, due to the
decrease in non-recurring
corporate services provided by Servicios Industriales Peñoles
S.A.B. de C.V. and the favourable effect of the devaluation of the
Mexican peso vs. the US dollar.
EXPLORATION EXPENSES
Business unit/project (US$ Exploration Capitalised
million) Exploration expenses 2020 expenses 2019 Capitalised expenses 2020 expenses 2019
-------------------------------- ------------------------- -------------- ------------------------- --------------
Ciénega 5.6 7.3 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Fresnillo 6.4 14.0 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Herradura 11.5 14.4 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Saucito 11.0 14.9 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Noche Buena 0.9 0.4 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
San Julián 16.5 17.6 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Orisyvo 3.6 2.0 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Centauro Deep 0.1 0.5 3.3 1.7
-------------------------------- ------------------------- -------------- ------------------------- --------------
Guanajuato 4.3 19.4 2.8
-------------------------------- ------------------------- -------------- ------------------------- --------------
Juanicipio - - 4.8 5.4
-------------------------------- ------------------------- -------------- ------------------------- --------------
San Ramón 0.0 2.0 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Others 47.4 65.4 0.4 2.3
-------------------------------- ------------------------- -------------- ------------------------- --------------
Total 107.3 157.9 8.5 12.2
-------------------------------- ------------------------- -------------- ------------------------- --------------
Exploration expenses decreased by 32.0% from US$157.9 million in
2019 to US$107.3 million in 2020, in line with the strategy to
focus exploration on specific targets, including our current
operating districts and advanced exploration projects. The decrease
of US$50.6 million seen year-on-year was in part a response in
order to improve the financial stability of the Group during
heightened financial uncertainty early in the year resulting from
the Covid-19 pandemic. In addition, we suspended exploration
activities for a period of time to mitigate any adverse impact from
the pandemic. An additional US$8.5 million was capitalised, mainly
relating to exploration expenses at the Juanicipio project and
Centauro Deep. As a result, risk capital invested in exploration
totalled US$115.8 million in 2020, while in 2019 US$12.2 million
was capitalised, totalling US$170.1 million in risk capital
invested in exploration, a 31.9% decrease over 2019. In 2021, total
invested in exploration is expected to be within the range of
US$175-US$180 million, of which approximately US$15 million is
expected to be capitalised.
EBITDA
2020 2019 Amount
US$ million US$ million US$ million Change %
---------------------------------------------------- ------------ ------------ ------------ --------
Profit from continuing operations before income tax 551.3 178.7 372.6 108.5
---------------------------------------------------- ------------ ------------ ------------ --------
- Finance income (12.2) (24.2) 12.0 49.6
---------------------------------------------------- ------------ ------------ ------------ --------
+ Finance costs 141.3 70.7 70.6 99.9
---------------------------------------------------- ------------ ------------ ------------ --------
- Revaluation effects of Silverstream contract (71.0) (48.4) 22.6 46.7
---------------------------------------------------- ------------ ------------ ------------ --------
- Foreign exchange gain (loss), net 40.3 (5.1) 45.4 N/A
---------------------------------------------------- ------------ ------------ ------------ --------
- Other operating income (10.0) (9.8) (0.2) 2.0
---------------------------------------------------- ------------ ------------ ------------ --------
+ Other operating expense 14.8 22.6 (7.8) (34.5)
---------------------------------------------------- ------------ ------------ ------------ --------
+ Depreciation 505.4 489.5 15.9 3.2
---------------------------------------------------- ------------ ------------ ------------ --------
+ Depreciation in unproductive costs 9.2 0 9.2 100
---------------------------------------------------- ------------ ------------ ------------ --------
EBITDA 1,169.1 674.0 495.1 73.4
---------------------------------------------------- ------------ ------------ ------------ --------
EBITDA margin 48.1 31.8
---------------------------------------------------- ------------ ------------ ------------ --------
EBITDA is a gauge of the Group's financial performance and a key
indicator to measure debt capacity. It is calculated as profit for
the year from continuing operations before income tax, less finance
income, plus finance costs, less foreign exchange gain / (loss),
less revaluation effects of the Silverstream contract and other
operating income plus other operating expenses and depreciation. In
2020, EBITDA increased 73.4% to US$1,169.1 million primarily driven
by the higher gross profit and, to a lesser extent, lower
exploration expenses. As a result, EBITDA margin expressed as a
percentage of revenue increased, from 31.8% in 2019 to 48.1% in
2020.
OTHER OPERATING INCOME AND EXPENSE
In 2020, a net loss of US$4.8 million was recognised in the
income statement mainly as a result of costs incurred in the
maintenance of closed mines. This compared favourably to the
US$12.8 million net loss recognised in 2019, mainly as a result of
the disposal of assets, environmental activities and donations.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The total revaluation
effect recorded in the 2020 income statement was a gain of US$71.0
million. This includes: i) a positive non-cash revaluation effect
of US$23.9 million mainly as a result of the market update of
certain variables such as the forward price of silver and the
decrease in the LIBOR rate, partially offset by the variation of
the country risk premium, these last two variables are used to
determine the discount rate; and ii) a US$47.1 million gain mainly
generated by the unwinding of the discounted values (a portion of
this amount is cash). The total revaluation effect recorded in 2019
was a US$48.3 million gain.
Since the IPO, cumulative cash received has been US$687.3
million vs. US$350 million initially paid. 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 in notes 13 and 29 to the consolidated
financial statements.
FINANCE COSTS
Net finance costs of US$129.1 million compared unfavourably to
the US$46.5 million recorded in 2019. The US$82.6 million increase
was primarily driven by the one-off restructuring of the Company's
debt in October 2020. The 2020 net finance costs mainly reflected:
i) the US$60.8 million premium paid on early redemption of 60.2% of
the existing US$800 million principal senior notes due 2023; ii)
the interest on the US$800 million principal amount of 5.5% Senior
Notes, net of interest received and capitalised, together with the
accrued interest payable as a result of the issuance of US$850
million principal amount of 4.250% Senior Notes due 2050, all of
which totalled US$43.7 million; iii) US$24.9 million in interest
and surcharges, which resulted from the 2020 tax amendment agreed
with the Mexican Tax Administration Service (Servicio de
Administración Tributaria "SAT") covering the period from 2013 to
2019. Detailed information is provided in note 9 to the
consolidated financial statements. A portion of the interest from
the Senior Notes is capitalised, hence not included in finance
costs. During the year ended 31 December 2020, the Group
capitalised US$8.8 million of borrowing costs (2019: US$6.1
million).
FOREIGN EXCHANGE
A foreign exchange loss of US$40.3 million was recorded as a
result of the 5.9% devaluation of the Mexican peso against the US
dollar over the year on: i) the realised transactions during the
period related to accounts receivable paid in Mexican pesos (mainly
recoverable VAT); and ii) the value of peso-denominated net
monetary assets. This compares negatively to the US$5.1 million
foreign exchange gain recognised in 2019.
The Group also 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) and Swedish krona (SEK) which have
generated a marginal result in the year of -US$0.15 million.
TAXATION
Income tax expense for the period was US$140.6 million, which
compared unfavourably vs. (US$8.0) million (tax credit) in 2019.
The effective tax rate, excluding the special mining rights, was
25.5%, which was below the 30% statutory tax rate. This was mainly
due to: i) the border zone tax benefit which benefited the
Herradura and Noche Buena operations (-US$35.8 million); ii) the
inflation rate which impacted the inflationary uplift of the tax
base for assets and liabilities (-US$23.0 million); iii)
taxable/deductable foreign exchange effects for Mexican tax
purposes (-US$16.9 million); and iv) special mining right taxable
for corporate income tax (-US$10.5 million). These factors were
partially offset by: i) the devaluation of the Mexican peso which
had an important impact on the tax value of assets and liabilities
(US$55.1 million); and ii) deferred tax assets not recognised
(US$4.9 million).
The effective tax rate in 2019 was -4.5%. The reason for the
negative tax rate in 2019 was the significant permanent differences
between the tax
and accounting treatment, together with the low level of profit
before income tax. The permanent differences were mainly related
to: i) the revaluation of the Mexican peso which had an important
impact on the tax value of assets and liabilities that are
denominated in Mexican pesos (US$37.1 million); ii) the inflation
rate which impacted the inflationary uplift of the tax base for
assets and liabilities (US$17.1 million); iii) the tax credit
related to the special tax on diesel (US$10.0 million); iv) a new
border zone tax benefit which benefited the Herradura and Noche
Buena operations (US$6.4 million); and v) the effect recorded in
the year in respect of the voluntary tax amendment relating to the
tax treatment for mining works at underground mines for the years
2014 to 2018 (US$5.1 million).
Mining rights for the year were US$35.0 million compared to a
credit of US$19.1 million charged in 2019. The main reason for the
negative mining rights in 2019 was the effect of the 2019 voluntary
tax amendment relating to the tax treatment for mining works for
the years 2014 to 2018 on the deferred mining rights. (See note 10
to the Financial Statements)
PROFIT FOR THE YEAR
Profit for the year increased from US$205.8 million in 2019 to
US$375.6 million in 2020, a 82.5% increase year-on-year as a result
of the factors described above.
Excluding the effects of the Silverstream contract, profit for
the year increased from US$172.0 million to US$325.9 million, a
89.5% increase.
CASH FLOW
A summary of the key items from the cash flow statement is set
out below:
2020 2019 Amount
US$ million US$ million US$ million Change %
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cash generated by operations before changes in working capital 1,168.7 685.5 483.2 70.5
------------------------------------------------------------------ ------------ ------------ ------------ --------
(Increase)/decrease in working capital (129.8) (56.6) (73.1) (129.2)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Taxes and employee profit sharing paid (121.3) (193.0) 71.7 37.1
------------------------------------------------------------------ ------------ ------------ ------------ --------
Net cash from operating activities 917.7 435.9 481.8 110.5
------------------------------------------------------------------ ------------ ------------ ------------ --------
Silverstream contract 33.7 24.3 9.4 38.7
------------------------------------------------------------------ ------------ ------------ ------------ --------
Debt Restructuring 350.0 0.0 350.0 100
------------------------------------------------------------------ ------------ ------------ ------------ --------
Purchase of property, plant and equipment (412.3) (559.3) 146.9 (26.3)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Dividends paid to shareholders of the Company (104.7) (142.2) 37.5 (26.4)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Transaction costs senior notes (64.7) 0.0 (64.7) 100
------------------------------------------------------------------ ------------ ------------ ------------ --------
Financial expenses and foreign exchange effects (44.1) (32.9) (11.3) (34.3)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Net increase in cash during the period after foreign exchange
differences 733.8 (224.2) 958.0 N/A
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cash and other liquid funds at 31 December (1) 1,070.4 336.6 733.8 218.0
------------------------------------------------------------------ ------------ ------------ ------------ --------
1 Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
Cash generated by operations before changes in working capital
increased by 70.5% to US$1,168.7 million, mainly as a result of the
higher profits generated in the year. Working capital increased
US$129.8 million, mainly due to: i) a US$79.5 million increase in
ore inventories primarily generated by the reassessment of gold
content at the Herradura leaching pads; and ii) a US$61.6 million
increase in trade and other receivables resulting mainly from the
increase in precious metals prices.
Taxes and employee profit sharing paid decreased 37.1% over 2019
to US$121.3 million mainly due to: i) a decrease in provisional tax
payments resulting from the lower profit factor determined to
calculate the estimated taxable income; ii) lower income tax paid
in 2020 (corresponding to the 2019 tax fiscal year); iii) lower
income tax and mining rights resulting from tax amendments; and iv)
the recovery of excess higher income tax paid.
As a result of the above factors, net cash from operating
activities increased 110.5% from US$435.9 million in 2019 to
US$917.7 million in 2020.
In addition to cash generated from operations, the Group
received other sources of cash, of which the most significant were:
i) proceeds from the new bond due in 2050 net of early redemption
of 2023 bonds (US$350.0 million); ii) note payable by minority
shareholders in subsidiaries of US$63.8 million and; iii) the
proceeds of the Silverstream contract of US$33.7 million.
Main uses of funds were:
i) the purchase of property, plant and equipment for a total of
US$412.3 million, a 26.3% decrease over 2019. Capital expenditures
for 2020 are described below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
2020
US$ million
------------------------------------------------ ------------ ----------------------------------------------------
Fresnillo mine 92.6 Mine development and mining works, construction of
the Pyrites Flotation Plant and the optimisation
of the current beneficiation plant, purchase of
in-mine equipment and deepening of the San
Carlos shaft.
------------------------------------------------ ------------ ----------------------------------------------------
Saucito mine 73.4 Mine development, purchase of in-mine equipment and
deepening of the Jarillas shaft.
------------------------------------------------ ------------ ----------------------------------------------------
San Julián Veins and DOB 36.3 Mining works and purchase of in-mine equipment and
land.
------------------------------------------------ ------------ ----------------------------------------------------
Ciénega mine 35.1 Mining works, purchase of in-mine equipment and
construction of tailings dam.
------------------------------------------------ ------------ ----------------------------------------------------
Herradura mine 30.2 Purchase of equipment for dynamic leaching plants,
land acquisition and construction of leaching
pad.
------------------------------------------------ ------------ ----------------------------------------------------
Noche Buena mine 19.7 Implementation of Carbon in Column process,
construction of leaching pad and anti-collision
system.
------------------------------------------------ ------------ ----------------------------------------------------
Juanicipio project 104.3 Mine development and construction of beneficiation
plant.
------------------------------------------------ ------------ ----------------------------------------------------
Other 20.7 Minera Bermejal.
------------------------------------------------ ------------ ----------------------------------------------------
Total purchase of property, plant and equipment 412.3
------------------------------------------------ ------------ ----------------------------------------------------
ii) Dividends paid to shareholders of the Group in 2020 totalled
US$104.7 million, a 26.4% decrease over 2019, in line with our
dividend policy which includes a consideration of profits generated
in the year. The 2020 payment included the final 2019 dividend of
US$87.7 million paid in June and the 2020 interim dividend paid in
September of US$16.9 million.
iii) Premium paid on early retirement of 2023 bonds and
transaction costs related to the new 2050 bond, totalling US$64.7
million.
iv) Financial expenses and foreign exchange effects of US$44.1
million increased US$11.3 million year-on-year, mainly reflecting:
i) the interest paid in relation to the US$800 million Senior Notes
due 2023 before the tender offer in October 2020, ii) the interest
paid on the remaining US$317.9 million of outstanding debt
following the tender offer.
The sources and uses of funds described above resulted in an
increase in net cash of US$733.8 million (net increase in cash and
other liquid assets), which combined with the US$336.6 million
balance at the beginning of the year resulted in cash and other
liquid assets of US$1,070.4 million at the end of 2020.
BALANCE SHEET
Fresnillo plc improved its already solid financial position
during the year with cash and other liquid funds [2] of US$1,070.4
million as of 31 December 2020, increasing 218.0% versus December
2019, as explained above. Taking into account the cash and other
liquid funds of US$1,070.4 million and the US$1,167.8 million
amortised cost of the Senior Notes, Fresnillo plc's net debt was
US$97.4 million as at 31 December 2020. This compares to the net
debt position of US$463.4 million as at 31 December 2019.
Considering these variations, the balance sheet at 31 December 2020
remains strong, with a net debt / EBITDA ratio of 0.8x [3]
Inventories increased 21.8% to US$443.2 million, mainly as a
result of the reassessment of gold content in inventories on the
leaching pads at Herradura.
Trade and other receivables remained broadly unchanged at
US$512.9 million.
The change in the value of the Silverstream derivative from
US$541.3 million at the beginning of the year to US$576.1 million
as of 31 December 2020 reflects proceeds of US$36.1 million
corresponding to 2020 (US$33.7 million in cash and US$2.4 million
from the increase in accounts receivables) and the Silverstream
revaluation effect in the income statement of US$71.0 million.
The net book value of property, plant and equipment was
US$2,708.2 million at year end, representing a 3.7% decrease over
2019. The US$105.2 million decrease was mainly due to increased
depreciation.
The Group's total equity was US$3,614.6 million as of 31
December 2020, a 10.2% increase over 2019. This was mainly
explained by the increase in retained earnings, reflecting the 2020
profit.
DIVIDS
Based on the Group's 2020 performance, the Directors have
recommended a final dividend of 23.5 US cents per Ordinary Share,
which will be paid on 1 June 2021 to shareholders on the register
on 23 April 2021. The dividend will be paid in UK pounds sterling
unless shareholders elect to be paid in US dollars. This is in
addition to the interim dividend of 2.3 US cents per share
amounting to US$16.9 million. This final dividend is higher than
the previous year due to the higher profit in 2020, and remains in
line with the Group's dividend policy.
The corporate income tax reform introduced in Mexico in 2014
created a withholding tax obligation of 10% relating to the payment
of dividends, including to foreign nationals.
Historically the Company has been making dividend payments out
of retained earnings generated before the tax reform came into
force and no withholding tax has therefore been applicable. We
expect that dividend payments relating to 2020 and future years
will attract the withholding obligation. However, foreign
shareholders may be able to recover such tax depending on their tax
residence and the existence of double taxation agreements.
MANAGING OUR RISKS AND OPPORTUNITIES
At Fresnillo plc, creating shareholder value is the reward for
taking and accepting risk responsibly. Our risk management process
aims to strike a balance between mitigating and monitoring our
risks and maximising the potential reward. We have a structured
internal risk management process that identifies risks while
simultaneously taking into account the views and interests of our
stakeholders.
Effective risk management is an essential part of our culture
and strategy. Accurate and timely identification, assessment and
management of key risks give us a clear understanding of the
actions required throughout the organisation in order to achieve
our objectives. Risk can manifest as opportunities or threats that
can affect our business performance.
Our risk management framework reflects the importance of risk
awareness across the Company. The framework enables us to identify,
assess, prioritise and manage risks in order to deliver the value
creation objectives defined in our business model.
The COVID-19 pandemic is an unprecedented challenge for all. We
implemented risk techniques and processes to identify new risks and
analysed the impact of the pandemic on all risks in the Company.
Changes enacted to respond to COVID-19 have created opportunities
to accelerate digital transformation and enhance safety and
productivity.
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 and projects managers, the
controllership group, HSECR and exploration managers - regularly
engage in strengthening the effectiveness of our current controls.
These actions support the executives and the Board in each of their
responsibilities.
The Company's risk profile has been developed based on the most
significant risks in our business profiles. All of our principal
risks were reviewed at least twice during the year, including
through Key Risk Indicators (KRIs), which were developed last year
to help embed the risk appetite framework in the business and
enhance the monitoring and mitigation of risks.
The global COVID-19 pandemic posed new challenges for the Risk
Department and the Executive Committee in 2020. Due to the
uncertainty around the pandemic, all strategic decisions of the
Company were analysed using risk scenarios modelling their
potential impacts. In addition, from the beginning of the pandemic,
five new processes were implemented: (I) a weekly procedure for
evaluating and mitigating principal risks; (II) a process to
identify and analyse the impact of the pandemic in all the
Company's risks including projects, with a main focus on the health
and safety of employees and identification of new risks; (III)
dashboards were constructed for each business unit to monitor
mitigation actions and risk level; (IV) impact and probability
scenarios were conducted for risks related to the supply chain of
critical inputs for operations and projects, and (V) collaboration
with government, the sector, health experts and communities to
ensure leading practices were followed.
Emerging Risks
The 2018 UK Corporate Governance Code covers emerging risks and
requires the Board to carry out a robust assessment of the
Company's emerging risks, disclose procedures to identify them and
also explain how these are being managed.
This requirement has been adopted and embedded within the
Company's risk management reporting process and, in parallel with
the day-to-day management of risk, within each business unit and
project. The risk control and assessment processes in mines,
exploration offices and projects were adapted to pay particular
attention to emerging risks. At each location, SSMARC's
risk-responsible staff monitor local information and analyses
related to Fresnillo plc's emerging risks. This monitoring process
involves building scenarios for three, five and ten years for each
emerging risk and quarterly performance indicators that assess
probability and impact.
Fresnillo plc defines an emerging risk as a new manifestation of
risk that cannot yet be fully assessed, a risk that is known to
some degree but is not likely to materialise or have an impact for
several years or a risk that the company is not aware of but that
could, due to emerging macro trends in the mid or long-term future,
have significant implications for the achievement of the
organisation's strategic plan. Furthermore, Fresnillo plc considers
emerging risks in the context of longer-term impact and
shorter-term risk velocity. The Company has therefore defined
emerging risks as those risks captured on a risk register that: (I)
are likely to be of significant scale beyond a three--year
timeframe; or (II) have the velocity to significantly increase in
severity within the three-year period.
To strengthen our emerging risks management framework, during
2020 we carried out activities to: (I) identify new emerging risks
in light of COVID-19; II) re-assess emerging risks identified in
2019; (III) deploy effective monitoring mechanisms; (IV) carry out
horizon scanning to consider disruptive scenarios, and; (V)
implement mitigating control actions and enhance our risk awareness
culture. This process involved workshops, surveys and meetings with
the Executive Committee, business unit leaders, support and
corporate areas, as well as suppliers, contractors and customers.
We also consulted third party information from global risk reports,
academic publications, risk consulting experts and industry
benchmarks.
Our risk management standards promote communication of
up-to-date information on the Company and industry risks, trends
and emerging risks. The events early in 2020 relating to the
Covid-19 pandemic resulted in a re-assessment of our emerging risks
and their impact on our operations. This year's emerging risk
assessment determined the two most exposed emerging risks to be:
"Water Crisis" and "Technological Disruption" and identified a new
emerging risk: "Extreme Heatwaves". Most importantly, the
assessment indicated that "Climate Change" had moved from an
emerging risk to a principal risk.
Relevant emerging risks are discussed below:
Emerging Risk Fresnillo Description Impact Controls Time Scale
plc
1 Water crisis. Lack of sufficient Water is critical Strict control and > 3
water resources to to mining processes. monitoring of water Years
meet water consumption Without this natural concessions is
demands in a region. resource, we cannot maintained
extract gold and and actions are
silver. envisaged
to ensure water for
the following years
.
========================= ======================== ======================== ======================== ==========
2 Technological disruption. Failure to identify, Obsolete or outdated Technological advances > 3
invest in, or adopt mining processes in the mining industry Years
technological and impact are constantly
operational productivity and monitored
productivity efficiency (particularly in
innovations that levels and impact mine operations)
significantly replace sales and profits. in order to adopt
or optimise a process the most appropriate
through new systems best practices and
with recognisably new technology.
superior attributes.
========================= ======================== ======================== ======================== ==========
3 Risk of narco states. Countries whose The safety of We maintain constant < 3
government employees, communication with Years
institutions are contractors and government authorities
significantly communities and the National
influenced near mines is Guard to coordinate
by the power and threatened security and
wealth of drug by the presence of citizenship
trafficking, drug cartels that protection operations
and whose leaders increase high-impact .
simultaneously hold crimes.
positions as
government
officials and members
of the illegal
narcotic
drug trafficking
networks, protected
by their legal powers.
========================= ======================== ======================== ======================== ==========
4 Pandemic. The regional or global Another virus such Much was learned < 3
spread of a new as SARS-CoV-2 from the COVID-19 Years
disease coronavirus pandemic about
(bacteria or virus) (COVID-19) may arrive providing
against which most that affects the care for employee
people do not have health health and health
immunity. of employees and stops prevention measures
the Company's .
activities.
========================= ======================== ======================== ======================== ==========
5 Extreme Heatwaves. A heat wave, or Extreme heat can cause Temperatures in the < 3
heatwave, cramps, swelling, regions where we Years
is a period of and fainting. operate are constantly
excessively Heatwaves reviewed and safety
hot weather, which kill more people than protocols have been
may be accompanied other natural implemented in the
by high humidity, disasters face of intense
especially in oceanic such as floods, heatwaves,
climate countries. lightning, especially in Sonora
A heatwave is tornadoes, and and Chihuahua .
considered hurricanes.
extreme weather that Extreme heatwaves
can be a natural could stop operations
disaster, and a danger at open pit mines
because heat and due to the impact
sunlight may overheat both on the workers
the human body. and equipment (e.g.
tyres of trucks).
========================= ======================== ======================== ======================== ==========
6 Radical changes Unexpected The scope of projects Asset insurance and > 3
in economic and transformations may be affected. investment, credit Years
political structures. of the economic, Disruptions and liability
political or social in the supply chain prevention
structure, through of basic inputs for policies are available
radical changes mining processes could and in force .
involving lead to increased
fundamental structural operating costs and
imbalances of the lack of labour.
mainly productive
and distributive
apparatus (e.g.
operations
and transport
infrastructure).
========================= ======================== ======================== ======================== ==========
2020 Risk Assessment
As part of our bottom-up process, each business unit head
determined the perceived level of risk for their individual unit's
risk universe. Executive management then reviewed and challenged
each perceived risk level and compared it to Fresnillo plc's risk
universe (109) as a whole. The results of this exercise were used
as an additional input to define the Company's principal risks. We
conducted the same risk analysis on advanced projects, detailing
the specific risks faced by each project according to their unique
characteristics and conditions.
The Risk Department 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.
Due to the effects caused by the global COVID-19 pandemic, it
was necessary to re-evaluate the Principal and Emerging Risks and
to rethink the order of their relative importance, probability and
impact and re-assess the corresponding mitigation actions. As a
result of this analysis, we recognised the effects of COVID-19 on
Fresnillo's 12 Principal Risks rather than incorporate a new
risk.
Additionally, risks related to compliance and fraud were
reviewed toward the end of 2020. The results of this evaluation
will be considered in the 2021 work plan.
As a result of the 2020 annual risk assessment, the most exposed
risks were determined to be:
-- The risk of "Potential Government Actions" is assessed as the
main risk for the Company, exacerbated by recent decisions of the
current government such as: (a) the dissolution of the
Undersecretariat of Mines of the Secretariat of the Economy; (b)
the implementation of policies that support the emission of coal
into the atmosphere and reduce the development of renewable
energies; (c) the restriction on the granting of new mining
concessions; (d) the elimination of outsourcing of labour law and
(e) the beginning of the United States-Mexico-Canada Agreement
(USMCA or TMEC) with new labour dispositions.
-- While the price of gold and silver has remained strong
despite the COVID-19 pandemic, the economic crisis in the world,
and especially in Mexico, is a high risk that could have an impact
on the supply chain of critical inputs for operation, increased
operating costs and the availability of contractors. For this
reason, the risk of "Impact of metal prices and global
macroeconomic developments" remains within the principal risks.
-- The risk of "Security", resulting from increased high-impact
crimes (homicide, kidnapping and extortion) in the regions where we
have operations, mainly Zacatecas, Guanajuato and Sonora, and
threats of theft of minerals and assets.
It is important to note there we also made the following
additional changes to our principal risks:
-- As extreme weather events make global headlines and
scientists warn about a shifting climate, more investors are
thinking about environmental risks and how they might affect their
portfolios. Climate change has formed part of our strategic
thinking and investment decisions. For this reason, the "Climate
Change" risk has moved from an emerging risk to a principal
risk.
-- To be consistent with the principal risks of the mining
industry and to fully monitor the Company's risks in relation to
the "Licence to Operate", we have integrated public perception
against mining and relations with the communities close to the
mines, explorations and projects into a single principal risk.
-- Due to the importance of the management of tailings dams to
our company and the resulting mitigation actions that were carried
out during 2020, the name Environmental Incidents Risk was included
with the word tailings, so that this principal risk remains as
"Tailings and Environmental Incidents".
OUR PRINCIPAL RISKS AND INTERDEPENCIES
We continue to consider risks both individually and collectively
in order to fully understand our risk landscape. By analysing the
correlation between Principal and Emerging Risks, we can identify
those that have the potential to cause, impact, or increase another
risk and ensure that these are weighted appropriately.
In performing this exercise, we have considered COVID-19 which
could lead to a long-term global recession and other operating
constraints that may have a knock-on effect on several of our
principal risks.
Our analysis highlights the strong relationship between
Cybersecurity and Disruption Technology, Climate Change and Extreme
Heatwaves as well as Security and Risk of Narco State.
1
POTENTIAL ACTIONS BY THE GOVERNMENT, E.G. IMPLEMENTATION OF MORE
STRINGENT REGULATIONS FOR OBTAINING PERMITS, ETC.
RISK DESCRIPTION
Regulatory actions can have an adverse We paid special attention to the
impact on the Company. This could following aspects:
include stricter environmental regulations, * Government actions that negatively impact the mining
forms of procurement or explosives, industry.
more challenging permit processes,
more onerous tax compliance obligations
for us and our contractors, as well * Regulatory changes to mining rights and adverse
as more frequent reviews by tax fiscal changes.
authorities.
The right of indigenous communities
to be consulted regarding mining * Increase in the frequency of the reviews by the tax
concessions could potentially affect authorities with special focus on the mining
the granting of new concessions industry.
in Mexico.
The federal government wants to
discourage the generation of energy * Inability to obtain necessary water concessions
based on clean sources, and encourage because of government control or private interests.
that from fuel oil and coal.
* Failures/delays in obtaining the required
environmental permits.
------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* An effective strategy by health authorities for the * The federal government promotes investment in coal
implementation of the COVID-19 vaccine may not be rather than renewable or clean energy. This has led
implemented. to increased difficulty in operating on clean energy.
* In September, the position of Undersecretary of * A Federal Government initiative aims to discontinue
Mining at the Ministry of Economy was cancelled due the Mining Fund (Financial support that the
to austerity measures by the Government of Mexico. government provides to communities near the mine for
This government decision will complicate social development). This would have an impact on
communication and on-the-go procedures such as mining development in the country.
permits, licences, concessions, etc.
* The beginning of the United States-Mexico-Canada
* The Federal Government reported that the delivery of Agreement (USMCA or TMEC) with new labour
concessions to mining companies would be reviewed and dispositions
that no more concessions would be granted during this
six-year term (ending in 2024).
* In addition, Mexico's corruption perception remains
high. The country's score in International
* The Secretary of Labour is promoting an initiative Transparency 2020 Corruption Perception Index was
that aims to significantly reduce outsourcing. relatively unchanged, despite a higher ranking. As a
result, delay in obtaining permits for certain
operations and/or projects remains a risk.
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Commitment and constant communication We continue to comply with all applicable
with all levels of Government. environmental regulations and are
Increased monitoring of the processes fully committed to operating sustainably.
being implemented at the Ministry We are committed to maintaining
of Economy. community dialogue throughout the
Follow-up and timely compliance life of a mining project, from the
with all suggestions of the Health first exploration to the eventual
Authorities. closure, with the aim of creating
We remain attentive to the changes long-term relationships and value,
proposed by the authorities, including while ensuring operational continuity.
mining tax initiatives, so that We seek to maintain full compliance
we can respond in a timely and relevant with the requirements of the tax
manner. authority.
We continue to collaborate with In doing so, we continue to cooperate
other members of the mining community with any ongoing tax inspections.
through the Mexican Mining Chamber
to lobby against any new harmful
taxes, royalties or regulations.
We also support industry lobbying
efforts to improve the general public's
understanding of the mining industry.
-------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The Federal or State Government
orders another total or partial * Number of media mentions related to mining
stoppage of operations in mining regulations. These could include the mention of tax,
units for a wave of mass contagions, royalties, the banning of mining activities in
mainly in Sonora and Zacatecas. protected areas and legal precedents. The indicator
also provides details about the media itself, such as
the speaker profile and political alignment.
-------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: Very high (1)
2019: Very high (2)
--------------------------------
2
IMPACT OF METALS PRICES AND GLOBAL MACROECONOMIC
DEVELOPMENTS
RISK DESCRIPTION
With the COVID-19 pandemic, economies
across the world, including in Mexico, * Revaluation of the Mexican peso. In March 2020, the
were negatively impacted by the dollar exchange rate exceeded 25 pesos, due to the
confinement and disruptions to supply socioeconomic impact of the COVID-19 pandemic and the
chains. Globally, economies almost US presidential election. At the end of the year the
stopped completely for more than dollar exchange rate was 19 pesos.
five months.
This situation could create an adverse
impact on our operations, costs, * General inflation in Mexico. This was 3.15% in terms
sales and profits, and potentially of Mexican peso for 2020. The specific inflation for
on the economic viability of projects, the Company was 5.49% in U.S. dollars.
including as a result of:
* A possible decrease in precious metals prices, which
is the main driver of risk. The average price of gold * A decrease in the price of our by-products. In 2020,
increased year-on-year (+26.4% compared to 2020), the average prices for lead and zinc decreased by
while the average price of silver increased by 31.6%. 7.9% and 7.8%, respectively, compared to the previous
year.
------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Severe economic crisis in Mexico in 2020: reduction * A severe international economic slowdown, including
in economic growth of -18.7%, 833,100 jobs lost and negative economic growth forecasts for Mexico.
3.15% inflation.
* Reappearance of COVID-19 cases in Europe and the
* Of the G20 nations, Mexico has the second lowest Americas. Some countries have re-introduced lockdown
investment in fiscal programmes to mitigate the measures and there is a possibility that Mexico will
impact of the pandemic. follow suit.
* In terms of inflation, we experienced an increase in * Disruptions in the value chain of critical inputs for
two of our main energy inputs compared to the our operations such as cement, spare parts, fuels,
previous year, with diesel (US percentage per litre) and cyanide.
increasing by 18% and kWh (US percentage per kWh) by
4.7%.
* Uncertainty about the impact of the elections of
governors in the states of Zacatecas, Chihuahua and
Sonora in 2021.
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
We monitor price movements and Maintain long-term optionality
market dynamics using primarily by ensuring our pipeline of
third-party analysis and forecasts opportunities is continuously
in order to support our financial replenished.
projections and cash management Improve debt profile and reduce
strategies. Prices will continue annual interest bill.
to influence budget considerations Execute operational excellence
in areas such as exploration initiatives to counter inflation
and the timing of certain capital and improve margins. Enhance
expenditures. cost competitiveness by improving
We have hedging policies for the quality of the portfolio.
exchange rate risk, including In order to maximize the extension
those associated with project-related of the average life of our debt
capex and a policy precious profile, on 29 September 2020
metals hedging. Fresnillo plc successfully priced
We focus on cost, efficiencies a US$850 M 30-year bond (Coupon
and capital discipline to deliver 4.25%) in the international
competitive all-in sustaining market, coupled with an "Any
cost. and All tender offer" for Fresnillo's
5.50% senior unsecured USD notes
due 2023, which was tendered
by US$481.7 M (60%), significantly
reducing the short-term refinancing
risks and improving the liquidity
and solvency capabilities of
the company.
---------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The price of gold and silver rose
rapidly as investors took refuge * Profit sensitivity to percentage change in precious
in these metals. metals prices and the Mexican peso/US dollar exchange
Unfortunately, the supply chains rate.
of our mining operations suffered
disruptions and delays in supplying
critical inputs such as cement, * EBITDA sensitivity to percentage change in metal
cyanide and spare parts. prices and the Mexican peso/US dollar exchange rate.
-------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 High for metal prices
Medium for all macroeconomic developments
-------------------------------------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Decreasing 2020: Very high (2)
2019: Very high (1)
--------------------------------
3
SECURITY
RISK DESCRIPTION
Our employees, contractors and suppliers According to information from the
face the risk of theft, kidnapping, Secretariat of Security and Citizen
extortion or damage due to insecurity Protection, the National Guard and
in some of the regions where we the Attorney General's Office of
operate. the Republic, the presence of organised
The influence and dispute of territories crime and high-impact crimes (homicide,
by drug cartels, other criminal kidnapping and extortion) increased
elements and general anarchy in in 2020, in the states where our
some of the regions where we operate, business units and projects are
combined with our exploration activities located, such as Zacatecas, Guanajuato,
and projects in certain areas of Sonora, Chihuahua and Durango.
drug deposit, transfer or cultivation, The main risks we face are:
makes working in these areas a particular * High-impact robberies.
risk to us.
The Federal Government created the
Secretariat of Citizen Security * Theft of assets such as minerals, equipment,
and Protection as part of the comprehensive instruments, inputs, etc.
strategy to reduce insecurity. It
also created the National Guard,
mostly comprising military personnel, * Homicide.
with the aim of combating organised
crime and drug cartels. Unfortunately,
state or local police in most states * Kidnappings.
are unprepared and ill-equipped
to combat organised crime, have
low wages and are sometimes infiltrated * Extortions.
by crime.
* Vandalism.
-------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Increased presence of organised crime in the vicinity * On March 23, two armoured trucks operated by SEPSA,
of the mining units. a
money-in-transit carrier, transporting 60 kilograms
of gold and 398 kilograms of silver worth $2.73
* Increase in the number of high impact crimes million USD from "Minera Penmont" was attacked by an
(homicide, kidnapping, extortion) in the regions of armed group and the precious metals were stolen.
the mining units.
* Lead concentrates were stolen from the Cienega mine
* Consumption and sale of drugs at the mining units. on 22 and 23 May. The transport was intercepted on
the way out of the mine by heavily armed members of
organised crime gangs.
* Roadblocks or blockages on the roads and/or highways
near the mining units.
* The Mexican State of Sonora is notorious for being
under constant attack from organised crime gangs.
Several attacks have taken place recently
jeopardising the continuity of mining operations and
the physical integrity of workers employed by "Minera
Penmont".
-----------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
We closely monitor the security
situation, maintaining clear internal * We have maintained our logistics controls in order to
communications and coordinating reduce the potential for mineral concentrate theft.
work in areas of greater insecurity. These controls include: the use of real-time tracking
We have adopted the following practices technology; surveillance cameras; tests to identify
to manage our security risks and alterations in the transported material; on-call
prevent and address potential incidents: services; control checkpoints in a 'safe broker'; and
* We maintain close relations with authorities at the fewer authorised stops in order to optimise delivery
federal, state and local levels, including army cam times and minimise the exposure of convoys.
ps
located near most of our operations. We also
communicate with the newly created National Guard. * We continue to invest in community programs,
infrastructure improvements and government
initiatives to support the development of legal local
* We continue to implement greater technological and communities and discourage criminal acts.
physical security at our operations, such as the us
e
of a remote monitoring process in Herradura, Noche * We have increased the number of anti-doping tests
Buena and San Julián. In the Saucito and conducted at the start of the day in the mining
Fresnillo mines, in addition to the remote monitori units.
ng
service, we have also built new local operating and
command centres for each business unit. At the * Frequent inspections are carried out inside the mines
Juanicipio development project, we have the necessa to verify that drugs are not consumed and sold.
ry
infrastructure to provide security services during
the mine construction process. Juanicipio also * Drug consumption prevention campaigns are carried out
benefits from a local command and operation centre, ,
as well as the remote monitoring service. focused on employees.
Management is fully committed to
protecting our workforce.
------------------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The COVID-19 pandemic has had negative
impact on the security risk. High-impact * Total number of security incidents affecting our
crimes did not decrease - in fact workforce (thefts, kidnapping, extortion, etc.).
they increased in some regions such
as Guanajuato and Zacatecas.
* Number of sites affected, and work days lost, by
region and type of site.
* Number of media mentions related to safety issues
affecting the mining industry where we operate.
---------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: Very high (3)
2019: Very high (4)
--------------------------------
4
HUMAN RESOURCES
RISK DESCRIPTION
Fresnillo plc's most valuable asset Our people are critical to meeting
is its workforce. our goals. We face multiple risks
The COVID-19 pandemic has several in the processes of selection, recruitment,
health risks for employees. The training and retention of talented
way that mining works (especially people with technical skills and
underground), where there are several experience.
workers in one place, further increases Obtaining qualified labour in the
the possibility of contagion. Due mining sector has become a major
to the complex nature of mining risk. More and more people trained
operations and the remote locations and experienced in mining processes
in which they are often located, are required. Unfortunately, there
it is difficult to implement health are not enough candidates with the
measures and carry medical prevention required profiles.
equipment. Digital and technological innovation
Close working conditions at mine has the potential to generate substantial
sites are placing workers in the improvements in the productivity,
frontline in terms of health and safety and environmental management
safety risks, prompting us to quarantine of the Company. However, to achieve
workers when national lockdown regulations this, in addition to demanding significant
did not force us to do so. investment, different skillsets
Faced with the risk of contagion will be required in the workforce.
from the COVID-19 pandemic threat, There is a risk that our workforce
we implemented several strategies will either be unable to transform
to protect and preserve the health as needed or will be resistant to
of employees and contractors in change and unwilling to accept the
all business units. The close cooperation impact of automation or to acquire
between our human resources function new technological skills.
and our medical team has been fundamental The lack of reliable contractors
to the application of timely tests with sufficient infrastructure,
and the care of infected personnel. machinery, performance history and
However, the risk of contagion continues trained people is also a risk that
and increased in the months of September could affect our ability to develop
to December, mainly in the Fresnillo and build mining works.
District, where the highest number
of cases of contagion across the
Company has been detected. This
situation is likely to be exacerbated
when the new strains of the virus
reach Mexico.
Until such a time that the vaccine
is broadly available, and the population
becomes immune to COVID-19, this
will remain a very high risk to
the Fresnillo plc workforce and
in general to all humanity.
---------------------------------------------
FACTORS CONTRIBUTING TO RISK
* A resurgence of cases in the months of September to * At some mines we have a lack of specialised personnel
December in Mexico maintained the level of risk as to cover working hours.
very high.
* In certain of the regions where we operate there are
* Unfortunately, the population does not follow the not enough candidates with the necessary skills to
measures to prevent COVID-19 and that increases the operate the mining equipment.
risk of contagion.
* The Secretary of Labour is suggesting changes to the
* Workers in the mining sector have been particularly law aimed at eliminating the outsourcing of
affected by the pandemic, given the employment personnel. Should this legislation be passed it would
architecture of the industry, which can feature complicate our relationship with the contractors who
remote fly in-fly out or drive in-drive out support our mining operations and projects.
operations, congested underground working conditions,
and workers residing in mine-site compounds or
neighbouring communities. These conditions make some
COVID-19 preventative measures difficult to implement,
which makes mineworkers vulnerable to both acquiring
and spreading the virus.
-----------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our Employee Performance Management Our focus is continuous improvement,
System is designed to attract and powered by opportunities for training,
retain key employees by creating development and personal growth;
suitable reward and remuneration in brief, we focus on fair recruitment,
structures and providing personal fair remuneration and benefits and
development opportunities. We have gender equality. In the trusted
a talent management system to identify staff structure, 15.29% of the population
and develop internal candidates is women, of the new income staff
for key management positions, as 17% were women, and 17% of the female
well as identify suitable external population were promoted.
candidates where appropriate. In partnership with the University
Recruitment: We have evaluated of Arizona, we developed a five-hour
our recruitment requirements for online training module on Diversity,
key positions by 2021, and our goal Equality and Inclusion for our executives,
is to meet them through internal managers and high potential talent.
training and promotion, and recruitment Around 300 leaders participated
through: in this training, which covered
-- Our close relationships with the following topics: defining and
universities that offer earth science addressing Fresnillo's strategy
programmes. We have programmes dedicated for diversity, equality and inclusion;
to identifying potential performance-based understanding unconscious bias and
candidates who can be hired as trainees different types of diversity; identifying
and/or employees at graduation. the types of microaggressions; recognising
We welcomed 7 professionals and toxic masculinity; and reviewing
18 engineers to our coaching programme stereotypes, prejudice and discrimination.
during the year. The online training included a variety
-- CETEF (Fresnillo Center for Technical of exercises, case studies and discussions
Studies), which teaches specific In order to keep our staff up to
mining operational skills. The 5 date and trained, 86% of employees
graduates hired in 2020 joined as and 98% of unionized staff have
full-time employees. been trained this year. Staff with
-- CETLAR (Centre for Technical participation in institutional development
Studies of Peñoles), which programmes increased from 37.3%
trains mechanical and electrical to 46.8%. 80.4% of the organization's
technicians. The 12 graduates hired leaders have participated in leadership-focused
in 2020 joined as full-time employees. institutional development programs.
Retention: Our goal is to be the Performance: As a result of the
employer of choice, and we recognise current situation, this year the
that to be a profitable and sustainable internships were 100% virtual, in
company, we need to generate value conjunction with Peñoles courses
for our employees and their families. were taught in mining, geology,
We do this by providing a healthy, metallurgy, topography security
safe, productive and team-oriented and communication. In total there
work environment that not only encourages were 433 students (61.43% men and
our people to reach their potential, 38.57% women).
but also supports process improvements. We have continued our performance
Our focus is continuous improvement, assessment process, reinforcing
driven by opportunities for training, formal feedback. We promote the
development and personal growth; certification of key technical skills
in short, we focus on fair recruitment, for operational personnel and have
fair remuneration and benefits and implemented a programme to develop
gender equality. administrative and leadership skills
for the required positions. We develop
our high-potential intermediate
managers through the Leaders with
Vision programme.
Pandemic: The safety of our workforce
is protected with sanitary protocols
in each mining unit in accordance
with the recommendations of the
Sanitary Authority.
A series of security measures have
been applied:
-Constant health monitoring of employees,
-Temperature control,
-Social distancing,
-Strict hygiene,
-Home office,
-Selective Covid-19 tests.
Support for employees' mental health:
24-hour helpline for all employees,
access to psychological help, support
for families and available medical
advice.
-------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
Undoubtedly the COVID-19 pandemic
is one of the biggest threats facing * Number of positions filled by area of speciality, for
our people. Employee health and vacancies and new positions.
well-being has been affected by
this pandemic and has led to changes
in staff management. * Employee turnover rate.
Homeworking and isolation at the
mines and projects have changed
traditional work dynamics across * Average hours of training and professional
the business. development per employee.
* Number of contractor personnel relative to unionised
personnel per business unit.
* Number of rapid, suspicious and PCR test per business
unit.
* Evolution of confirmed cases in hospital and at home
-------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Medium
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: High (4)
2019: Low (12)
--------------------------------
5
UNION RELATIONS
RISK DESCRIPTION
Potential emergence of a union outside Domestic trade union policy could
the company that seeks to destabilise adversely affect us, as could pressure
the current union. from other mining unions that wanted
to take over Fresnillo's employment
contracts.
----------------------------------------
FACTORS CONTRIBUTING TO RISK
* The Labour Reform published in May 2019 allows the * The risk is that the fighting will continue and
existence of several unions within a company and worsen and eventually the voluntary turnover at the
gives the employee the freedom of choice. This has mine will increase. There is also a risk that this
led to a complex, rarefied work environment at the conflict could spread to other mines.
Fresnillo mine, with violent clashes between the
union and a group of workers seeking to register a
new independent union.
* In addition, the TMEC (new trade agreement between
Mexico, Canada and the United States replacing NAFT
A)
commenced in July, with new labour and trade union
provisions.
--------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Increased communication with trade We are proactive in our interactions
union leaders in mining units to with the union. When appropriate,
monitor the working climate. we hire experienced legal advisors
Meetings have been held with groups to support us on labour issues.
of workers who want to introduce We remain attentive to any developments
new unions to the Company. in labour or trade union issues.
A specialist group in the area of We started 2020 by conducting three
labour relations was formed to meet Regional Labour Update Forums with
the demands of dissident workers. company leaders and unions in Sonora,
Our strategy is to integrate unionised Coahuila and Zacatecas with 219
personnel into each team in the participants.
business unit. We achieve this by From February to the end of the
clearly assigning responsibilities year, we carried out a job training
and through programmes aimed at programme for operational leaders
maintaining close relations with of companies at the level of middle
trade unions in mines and at the management, with a participation
national level. of 659 leaders.
We maintain close communication We conducted a review of the contractual
with trade union leaders at various benefits for union members in our
levels of the organisation in order mines.
to: raise awareness of the economic Our executive leadership and the
situation facing the industry; share Executive Committee recognise the
our production results; and encourage importance of trade union relations
union participation in our security and follow any developments with
initiatives and other operational interest.
improvements.
These initiatives include the Security
Guardians programmes, certification
partnerships, integration of high
productivity equipment, and family
activities.
------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
Although the pandemic did not severely
affect this risk, it did slightly * Union members' level of satisfaction.
complicate the negotiations and
delayed some agreements, but with
no significant impact. Faced with * Number of media mentions related to mining union
the pandemic, the union requested developments.
the Company to take care of all
the sanitary measures recommended
by the health authority so that
the workers could return to the
mining units. Today, the union continues
to support the safety measures that
we adopted.
--------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: High (5)
2019: Medium high (6)
--------------------------------
6
PROJECTS (PERFORMANCE RISK)
RISK DESCRIPTION
Pursuing advanced exploration and
project development opportunities
is essential to achieving our strategic The following risks relate specifically
goals. However, this carries certain to the Juanicipio project:
risks: * Regularising electricity consumption with CFE.
* Economic viability: the impact of the cost of capital
to develop and maintain the mine; future metal
prices; and operating costs throughout the mine's * Delays in the design and obtaining permits related to
life cycle. the tailing dams.
* Access to land: a significant failure or delay in * Obtaining building permits with CONAGUA.
land acquisition has a very high impact on our
projects.
* Lack of qualified labour.
* Uncertainties associated with the development and
operation of new mines and expansion projects: * Low contractor productivity.
includes fluctuations in the degree of ore and
recovery; unforeseen complexities in the mining
process; poor quality of the ore; unexpected presence
of groundwater or lack of water; lack of community For Orisyvo, the following risks
support; and inability or difficulty in obtaining and have been identified:
maintaining the required building and operating * Rockfalls due to vibrations.
permits.
* Contact with articulated heavy equipment and diamond
* Delivery risk: Projects can exceed the budget in sweeping machines.
terms of cost and time; they cannot be built
according to the required specifications or there may
be a delay during construction; and major mining * Electrocution from in-mine or surface electrical
teams cannot be delivered on time. equipment.
Other important risks: * Hit-and-run incidents involving contractor utility
* Failure to effectively manage our development vehicles and heavy equipment.
projects could result in delays to the start of
production and cost overruns.
* Drops in levels and unevenness, both in the mine and
on the surface.
* Projects that cannot be delivered on time, on budget
and according to specifications planned.
* Explosion.
* Geotechnical conditions of the ore body / poor rock
quality.
* High costs making it difficult to justify the
project.
--------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* The paperwork and permits stopped for a few months * We have identified the following threats to project
because government offices were closed due to the development:
pandemic.
* Insufficient resources for project execution.
* Contractor productivity may be lower than anticipated,
causing delays in the programme.
* Change in operational priorities that can affect
projects.
* Increase in the number of high impact crimes
(homicide, kidnapping, extortion) in the regions of
the projects. * Inadequate management structure for project
supervision.
* Lack of efficient and effective contractors.
* Delays in obtaining necessary permits for
construction and operation.
* Lengthy procedures for land acquisition, electricit
y
supply and water.
----------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our investment assessment process The executive management team and
determines how best to manage available the Board of Directors are regularly
capital using technical, financial updated on progress. Each advanced
and qualitative criteria. exploration project and major capital
-- Technical: we evaluate and confirm development project has a risk record
the resource estimate; conduct metallurgical containing the project-specific
research of mineral bodies to optimise identified and assessed risks.
the recovery of economic elements; The project development process
calculate and determine the investment in 2020 included:
required for the overall infrastructure * Continuing the construction of the tailing flotation
(including. roads, energy, water, plant (Pyrites plant project).
general services, housing) and the
infrastructure required for the
mine and plant. * Continuing to ensure the ability of the second stage
-- Financial: we analyse the risk of the Fresnillo flotation plant, to manage a higher
in relation to the return on the base metal content.
proposed capital investments; set
the expected internal rates of return
(IRR) per project as thresholds * Continuing the construction of the Juanicipio
for approving the allocation of project.
capital based on the current value
of expected cash flows of invested
capital; and perform stochastic * Continuing the construction of the third tailing dam
and probabilistic analyses. at La Cienega.
-- Qualitative: we consider the
alignment of investment with our
Strategic Plan and business model; * Constructing stage four of the tailing dam at San
identify synergies with other investments Julian.
and operating assets; and consider
the implications for safety and
the environment, the safety of facilities, * Constructing the 14th leaching pads at La Herradura.
people, resources and community
relations.
The management of our projects is * Constructing the carbon-in-column process at La
based on the PMBOK standard of the Herradura.
Institute of Project Management
(PMI). It allows us to closely monitor
project controls to ensure the delivery
of approved projects on time, within
budget and in accordance with defined
specifications.
----------------------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
COVID-19 affected project development
and delays to getting approvals, * Earned value (rate of financial advancement rate vs.
for example at the Pyrites Plant. physical advancement).
Activities were suspended for three
months, causing delays to priority
projects. The contractors failed * Percentage of required land acquired
to meet commitments, leading to
disruptions in the supply of critical
inputs such as cement, fuels and * Percentage of major equipment ordered and received
spare parts. according to plan.
* Percentage of mine development completed.
------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
2 Medium
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: High (6)
2019: High (8)
--------------------------------
7
ACCESS TO LAND
RISK DESCRIPTION
Significant failure or delay in accessing surface land above
our mining concessions and other lands of interest is a permanent
risk to our strategy and has a potentially high impact on
our objectives.
The biggest risk is failing to gain full control of the lands
where we explore or operate.
Possible barriers to access to land include:
-- Increasing landowner expectations.
-- Refusal to comply with the terms of previous land acquisitions
and conditions regarding local communities.
-- Influence of multiple special interests in land negotiations.
-- Conflicts regarding land boundaries, and a subsequent
resolution process.
-- Succession problems among landowners resulting in a lack
of clarity about the legal right to own and sell land.
-- Risk of litigation, such as increased activism by agrarian
communities and/or judicial authorities.
-- Presence of indigenous communities in proximity to lands
of interest, where prior and informed consultation and consent
of such communities are required.
-- Operations in Soledad & Dipolos remain suspended, as the
problem with the Ejido El Bajío remains unresolved.
FACTORS CONTRIBUTING TO RISK
* The Federal Government may continue its policy of not * Social insecurity prevailing in the regions where our
granting new mining concessions. However, this could mining interests are located may not allow work to be
be mitigated by carefully negotiating concessions carried out necessary to demonstrate the minimum
with mining geological interest already granted to investments required by law, leading to the possible
us. cancellation of the concession.
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Successful access to land plays
a key role in managing our mining * Strategic use of our social investment projects to
rights, focusing on areas of strategic build trust.
interest or value.
At the end of 2020, after disinvesting
certain areas of mining interest, * Close collaboration with our land negotiation teams,
we maintained 1,446,287 hectares which include specialists hired directly by Fresnillo
of mining concessions granted. A and also provided by Peñoles as part of the
further 234,403 hectares is in the service agreement.
process of being granted. In total,
we have 1,680 million hectares,
representing a year-on-year decrease As part of an ongoing review of
of 28,000 hectares. the legal status of our land rights,
Other initiatives include: we identify certain areas of opportunity
* Meticulous analysis of exploration objectives and and continue to implement measures
construction project designs to minimise land to manage this risk on a case-by-case
requirements. basis. Such measures include, wherever
possible, negotiations with agricultural
communities for the direct purchase
* Judicious use of lease or occupation contracts with of land.
purchase options, in compliance with legal and We use mechanisms provided for in
regulatory requirements. agricultural law and also use other
legal mechanisms under mining legislation
that provide greater protection
* Early participation of our community relations teams for land occupation. These activities
during the negotiation and acquisition of socially are part of our ongoing drive to
challenging objectives. reduce risk exposure to surface
land.
-------------------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
During 2020, insecurity problems -- Percentage of land required for
in our exploration and operations advanced exploration projects that
areas have increased. In addition, are under occupation or agreements
the government suspended activities, other than total ownership (generally
which caused delays to the land-regularisation and per project).
processes. -- Total U.S. dollars and percentage
of project budget spent on HSECR
activities, including community
relations (on exploration projects
and sites).
---------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 Medium
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Decreasing 2020: High (7)
2019: Very high (3)
--------------------------------
8
CYBERSECURITY
RISK DESCRIPTION
We recognise the importance of the 2. Unauthorised access - Cybersecurity
confidentiality, continuity, integrity and privacy incidents due to unauthorised
and security of our data and systems. people or incorrect access permissions.
As a mining company, we can be under 3. Breach and data theft - Disclosure
threat of cyberattacks from a broad of critical and sensitive company
set of groups of attackers, from data by an internal or external
"hacktivists" and hostile regimes, source.
to organised criminals. Their objectives 4. Business disruption - Disrupting
include a desire to take advantage key applications or systems for
of mining's role in regional and a period of time.
global supply chains, as well as 5. Lack of cybersecurity ownership
in national economies. - Failure to take responsibility
Some groups may also attempt to for implementing and adopting cybersecurity
exploit vulnerabilities created practices on a daily basis.
by the industry's heavy reliance 6. Non-compliance - Cybersecurity
on automated operating systems. and privacy incidents resulting
The following are the top eight in non-compliance with applicable
cybersecurity and privacy risks regulations, including privacy.
that have been identified through 7. Health and safety incidents -
workshops with business units, operations, Breach of availability, integrity
and IT. These risks comprise Peñoles/Fresnillo or confidentiality of data which
overall cybersecurity and privacy impacts health and safety.
risk profile: 8. Halt or loss of operations -
1. Corruption of data - Critical Cybersecurity and privacy incidents
data where any modification can which result in loss of operating
have adverse impacts . licence or cause delay to operations.
---------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Cyber risks have increased significantly in recent * Using non-secure means of communication with the
years owing in part to the COVID-19 pandemic and the company's networks can lead to viruses, data leaka
proliferation of new digital technologies, the ge,
increasing degree of connectivity and a material information theft, malware and ransomware.
increase in monetisation of cybercrime.
* Theft of information through social engineering and
"phishing" campaigns (fraudulent attempts to obtain
sensitive information or data, such as usernames or
passwords, by appearing to be a trustworthy entity i
n
an electronic communication).
---------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our information security management -- The U.S. National Institute of
model is designed with defensive Standards and Technology (NIST CSF)
structural controls to prevent and Cybersecurity Framework that describes
mitigate the effects of computer how companies can assess and improve
risks. It employs a set of rules their ability to prevent, detect,
and procedures, including a Disaster and respond to cyberattacks.
Recovery Plan, to restore critical -- Information Control Objectives
IT functions in the event of an and Technologies to Others (COBIT),
attack. which was created by ISACA, the
Our systems are regularly audited international professional association
to identify any potential threats for IT management and governance,
to the operations and additional to provide an implementable set
systems have been put in place to of IT-related controls, processes
protect our assets and data. and facilitators.
We have implemented a training and Our approach is also based on the
awareness programme, which is designed MITRE ATT&CK(TM) which is used as
to increase awareness of cyber risk the basis for the development of
and ensure that employees take the specific threat models and methodologies
appropriate actions. in the private sector, government
We have invested in global IT security and in the cybersecurity products
platforms in order to proactively and services community.
monitor and manage our cyber risks. A governance model, continuous risk
We conduct routine third-party penetration assessment, information security
test to independently confirm the policies, awareness-raising campaigns
security of our IT systems and we and training will form the basis
seek to enhance the monitoring of of our IT/OT operational guarantee.
our operational technology platforms. Our plan for 2021 is to focus our
During 2020, we introduced a set efforts on risk mitigation projects
of new initiatives to improve our designed to protect key information
cybersecurity programme, supported and assets, in accordance with the
by external advisors. The main objective risk appetite established by management.
of the programme is to identify
and manage cybersecurity risks and
align them with our business mission
and strategy. In line with best
practices, our approach is based
on two key frameworks:
---------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
With the COVID-19 pandemic, this
risk has increased mainly due to * Total number of cybersecurity incidents affecting our
"phishing" attacks and the increase Company.
in homeworking.
* Number of media mentions related to cybersecurity
issues affecting the mining industry.
--------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: Medium (8)
2019: Medium (10)
--------------------------------
9
TAILINGS AND ENVIRONMENTAL INCIDENTS
RISK DESCRIPTION
Environmental incidents are an inherent
risk in our industry. These incidents * Impact on the environment in the area of influence
include the possible overflow or through erosion/deforestation/forest loss or
collapse of tailings deposits, cyanide disturbance of biodiversity as a result of the
spills and dust emissions, any of operations of the business unit or project
which could have a high impact on activities.
our people, communities and businesses.
We continue to be alert to the following
risks: * An event involving a leak or spill of cyanide or SO2,
* Cyanide management risk. which due to its chemical properties could generate
an event of major consequence on the premises of the
business unit and / or in the nearby area.
* Implications of future regulations for our tailings
management.
* Ensuring the stability of our tailings storage
facilities (TSFs) during their entire lifecycles is
central to our operations. A failure or collapse of
any of our TSFs could result in fatalities, damage
to
the environment, regulatory violations, reputationa
l
damage and the disruption of the quality of life of
neighbouring communities as well as our operations.
------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Design, construction and operation of current
tailings dams under local and national controls,
which do not comply with recommended best practices.
* Historic tailings dams with little or no operation
construction design.
* Little known conditions of the state of some tailings
dams, both current and historical.
* Some historical tailings dams located in rural areas
are now surrounded by facilities or residential areas,
increasing the consequences of failure.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Based on the level of perceived The Executive Committee is well
risk due to recent serious and catastrophic aware of the risks associated with
developments in the industry, the tailings dams. Therefore, before
Board decided to increase the severity we construct a reservoir, we carry
of this risk in 2018 and maintained out a series of studies to confirm
the same level in 2020. the suitability of the area. These
studies include geotechnical, geological,
Our operations are inherently hazardous. geophysical, hydrological and seismic
We seek to achieve operational excellence analyses. Before construction begins,
to ensure that our employees and the Ministry of Environment and
contractors go home safe and healthy, Natural Resources (SEMARNAT), through
and that there are no adverse impacts the Federal Office for Environmental
on the communities and the environment Protection (PROFEPA), conducts several
where we operate. assessment studies and then continues
to periodically review deposits
Our environmental management system in relation to the works.
ensures compliance with national
and international regulations and
best practices, provides transparency Environmental protection and safety
and supports initiatives that reduce are critical for cyanide leaching
our environmental footprint. We systems. We comply with international
are a company responsible for its best practices as promoted by the
activities and the fulfilment of International Cyanide Management
the environmental commitments made. Institute (ICMI) and the Mexican
standard NOM-155SEMARNAT-2007, which
Our environmental management system, establishes environmental requirements
together with our investment in for gold and silver leaching systems.
preventive measures and training,
are key factors that reduce the Safe management of our tailings
risk of large environmental incidents. facilities has always been a priority.
With increased focus on the issue
Herradura, Saucito, Fresnillo and of tailings dam safety across the
Noche Buena each have an integrated global mining industry, we have
certificate of management. The first taken the opportunity to renew and
two have ISO 9001, 14001 and 4500; increase this focus.
Herradura and Noche Buena have SIG
ISO 14001 and 45000; Ciénega In 2020 we launched a number of
and San Julián have worked initiatives to align our governance
this year to achieve certification practices with current best practices.
(ISO 14001 and 45000). Due to the These initiatives included:
pandemic, it has not been possible
to schedule the audits necessary -- Updating the inventory of the
to define progress in Ciénega tailings dams storage facilities
and San Julián. Juanicipio (TSFs) and validating the data log.
is in the process of being certified. -- Initiating a third-party review
programme of dam safety inspections
In addition, Ciénega, Herradura, for all TSFs.
Noche Buena, Saucito, San Julián, -- Establishing an Independent Queue
Juanicipio and Fresnillo are certified Review Panel (ITRP) comprising renowned
according to the standards of the international experts.
Clean Industry; the first two achieved -- Accelerating a review programme
the badge of environmental excellence by independent experts for all sites.
issued by the Environmental Protection -- Reviewing the ITRP and prioritising
Attorney's Office (PROFEPA). Our recommendations arising from inspections.
Herradura and Noche Buena leaching
operations comply with the Cyanide The Board and the HSECR Committee
Code issued by the International continue to keep these issues under
Cyanide Code Institute with the scrutiny. It is important to note
respective certification. that our tailings dams differ from
those involved in recent high-profile
incidents, such as tragedy in Brazil.
-----------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The construction programmes -- Number of business units
for new tailings dams and the with ISO 14001:2004 certification.
expansion of existing ones -- Number of business units
were adjusted, due to the increased with Clean Industry certification.
complexity caused by the pandemic, -- Number of business units
such as the required health with International Cyanide Code
and safety protocols. certification.
-- Number of environmental permits
for all advanced exploration
projects (according to schedule).
------------------------------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2020: Medium (9)
Considering the importance 2019: Medium (11)
of the tailings dams complex
for the company, included this
topic in the name of the risk.
--------------------------------
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
10
LICENCE TO OPERATE
RISK DESCRIPTION
Across the world, public opinion We monitor the following risks:
is wary of the potential adverse * Loss of/threats to our social licence to operate.
social and environmental consequences
of mining operations. This sentiment
can manifest in the form of opposition * Failure to identify and manage local concerns and
of communities to mining operations expectations could negatively impact Fresnillo plc.
and increased regulatory obligations
for mining companies. Media coverage
negative to mining or specifically * Relations with local communities and stakeholders
to Fresnillo could impact the granting affect our reputation and our social licence to
and maintenance of our social licence operate and grow.
in the regions where we have a presence.
* Neighbouring communities may not provide their
support or hinder operations, affecting our social
licence. This could include complaints from
communities regarding operations such as dust,
blasting vibrations, noise, pollution and water use.
* Social behaviours or actions by a group of people
attempting to promote anti-mining sentiment in the
area of influence of the business unit.
------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Activism by anti-mining advocacy groups and other * The environmental impact of the mine is also an issue
grassroots organisations increase the risk of social that can concern communities close to our operations.
conflicts, fuelling the public perception against
mining.
* Insecurity and access to water are the issues of
greatest concern to the populations and community
leaders of the regions where we have a presence .
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
-- COVID-19 Response: We have implemented --Health and Safety performance:
measures to mitigate the health Our goal is to instil a safety culture
risks to our workforce, engage authorities focused on 'caring for our people',
constructively and support our communities. based on shared values across the
Our communication campaigns in the organisation, driven by senior management
media have emphasised our corporate and focused on high potential incidents.
citizenship activities. Our approach to health aims to pre-emptively
-- Community Engagement: We earn identify and manage the risks to
and maintain the trust of communities which our workforce is exposed.
through effective engagement and --Sharing the benefits of mining:
by being accountable for our impacts. In addition to effective stakeholder
Our community strategy, which embraces engagement, sharing the benefits
all phases of the mining lifecycle, of mining plays an important role
aims to build mutual understanding in the wellbeing of people. We create
between our operations and local value in the regions where we operate
communities, ensuring that we engage, in the form of employment, procurement,
develop and grow together. Key monitoring talent development, strategic community
and engagement activities include: investment and the payment of our
-Monitoring public opinion within fair share of taxes:
local and international media. -Maintaining a Social Investment
-Holding continuous dialogue with Portfolio to create long-term value,
our key local stakeholders through aligned with the UN Sustainable
formal and informal meetings. Development Goals. We have identified
-Carrying out social baseline, human four pillars where we can make a
rights and perception studies to real difference: Education, Water,
better understand our positive and Health & Sports and Capacity Building.
negative impacts. -Partnering with non-governmental
-Operating a grievance mechanism organisations (NGOs) in these three
to address stakeholder concerns. pillars of social investment: Education
-Collaborating with peers in the (IBBY, INNOVEC & First Robotics),
international and Mexican mining Water (Captar AC) and Health (National
community to promote the benefits University Foundation).
of the mining industry and responsible
mining practices.
-Communicating our best practices
regarding social and environmental
responsibility.
-- Environmental performance: Optimising
our use of resources, curbing any
negative impact of our activities
and being transparent and accountable
regarding our environmental footprint
are crucial elements of sustainable
mining and help us to be positively
perceived by communities and regulators.
---------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
* The COVID-19 pandemic increased the risk to our * Number of local actions by non-governmental
social licence to operate insome regions, mainly as organisations (NGOs) or other local social groups
a against mining, by region.
result of nearby communities being worried about
contracting the virus from contractors and suppliers
visiting the area. * Number of actions by NGOs or other local social
groups against mining in the Americas.
* COVID-19 has increased the social expectations
regarding the corporate citizenship of companies. Th * Number of media mentions related to demonstrations
e against the mining industry.
response of the mining industry to COVID-19 will
shape the relationships with stakeholders and the
perception of the industry over the next years.
----------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
The "Public perception against mining" 2020: Medium (10)
and "Community Relations" risks
were integrated into this new risk
in order to manage risk globally,
in the context of community relations
and public perception. The aim is
to improve the ways in which we
implement better mitigation and
control actions.
--------------------------------
11
SAFETY
RISK DESCRIPTION
It is an inherent risk in our industry These include rockfalls caused by
that incidents due to unsafe acts geological conditions, cyanide contamination,
or conditions could lead to injuries explosion, becoming trapped, electrocution,
or fatalities. insect bites, falls, heavy or light
Our workforce faces risks such as equipment collisions involving machinery
fire, explosion, electrocution and or personnel and accidents occurring
carbon monoxide poisoning, as well while personnel are being transported.
as risks specific to each mine site
and development project.
-----------------------------------------------
FACTORS CONTRIBUTING TO RISK
During 2020, there was an increase Frequent transportation of our people
in the rate of accidents related to remote business units is an ongoing
to: feature of our operations. In many
cases, these units have poor accessibility
-Rockfall/terrain failure by road. Failure to comply with
-Loss of vehicle/equipment control safety programmes, measures and
-Team-vehicle-person interaction audits or with the findings of inspections,
-Transport of staff continues to be a safety risk.
-Contact with electric power
-Fire
-Becoming trapped
-Contact with hazardous substances
---------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Unfortunately, we suffered a fatal - In 2020, we developed the "Eye
accident during the second half at Risk" programme. Created through
of this year, which means that even teamwork, this aims to develop risk
with the extraordinary efforts we competencies by educating leaders
are making, we have failed to achieve and supervisors. It also encourages
our goal of zero fatalities. Additionally, coaching and immediate feedback,
we recorded 276 high potential incidents as well as a comprehensive process
(13% more than 2019) of continuous review and improvement.
At Fresnillo plc, the safety of - During the last quarter of 2020,
our staff is an essential value the Chief Executive Officer launched
and a way of life. We tirelessly a strategy to intensify the "I Care,
seek to improve our performance, We Care" programme. This strategy
strengthening our preventive culture, focuses on critical risks, controls
raising awareness of the risks generated and processes preventing high potential
by our operational activities and accidents.
establishing controls and mechanisms
to eliminate fatalities. - Assigning Critical Risk Control
Protocols to an owner for follow-up
During the year, we continued to in line with their area of influence.
implement support measures to strengthen,
address and prevent the causes of - Strengthening incident investigations
accidents, injuries and fatalities. with a special focus on high-potential
These include: ones.
- Strengthening safety objectives, - Increasing the focus on high-potential
including establishing proactive incidents (HPI).
performance indicators that allow
us to anticipate events. - Strengthening the cross-functional
communication of lessons learnt,
- Continuing the implementation in order to reduce the reoccurrence
of the "I Care, We Care" programme of similar accidents.
in all our operations, including
strengthening the programme's five - Enhancing hazard identification
lines of action. and risk assessment.
- Encouraging managers to own security - Confirming the continuous monitoring
risks to operations, so that this of security management as the highest
is a fundamental part of daily activities priority of the SSMARC committee.
and that management can be held The committee oversees all accident
accountable according to performance investigations, ensuring appropriate
and results. measures are taken to improve safety
systems and practices.
------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
-- Accident rate
* The COVID-19 pandemic did not significantly affect -- Days lost rate
this risk. -- Accident frequency
----------------------------
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Decreasing 2020: Medium (11)
2019: Very High (5)
--------------------------------
12
CLIMATE CHANGE
RISK DESCRIPTION
The mining industry is highly exposed These chronic risks may intensify
and sensitive to climate change the competition to access water
risk. resources, increasing risks to the
Climate change is a systemic challenge social license to operate. The societal
and will require coordinated actions responses to transition to a low
between nations, between industries carbon economy include more stringent
and by society at large. It demands regulations to reduce emissions,
a long-term perspective to address a transformation of the global energy
both physical climate change and system, changes in behaviour and
low-carbon transition risks and consumption choices and emerging
uncertainties. technologies.
Due to climate change, our operations Adaptation measures are necessary
and projects are expected to face to build the flexibility to respond
acute physical risks from extreme to physical and transitional changes.
events such as high temperatures,
droughts and extreme rainfall from
more frequent and intense hurricanes
in the pacific.
These natural disasters may affect
the health & safety of our people,
damage access roads and mine's infrastructure,
disrupt operations and affect our
neighbouring communities. In addition,
the rise in temperatures may increase
our water demand while the decrease
in annual precipitation exacerbates
water stress in the regions where
we operate.
----------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Current and emerging climate regulations have the * The supply of critical inputs to mining processes,
potential to result in increased cost, to change such as water and energy, is likely to face greater
supply and demand dynamics for our products and constraints.
create legal compliance issues and litigation, all o
f
which could impact the Group's financial performance * Employee health and safety will be put at risk by
and reputation. Our operations also face risk due to increases in communicable diseases, exposure to
the physical impacts of climate change, including heat-related illnesses and the likelihood of
extreme weather. accidents related to rising temperatures.
* Warming temperatures will increase water scarcity in * Obtaining and maintaining a social licence to operate
some locations, inhibiting water-dependent operation will become more difficult in communities where
s, climate change exacerbates existing vulnerabilities
complicating site rehabilitation and bringing and increases direct competition between the company
companies into direct competition with communities and the community for resources.
for water resources.
* Increased physical and non-physical risks will make
project financing more difficult to secure.
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
* Climate change has formed part of our strategic * We use the guides from industry associations (i.e.
thinking and investment decisions for over two ICMM), international scientific reports (i.e. IPCC)
decades. ,
reports from industry peers and reports of the
Mexican Government to identify the physical impacts
of climate change.
* We considering the recommendations of the Task Force
on Climate-related Financial Disclosures (TCFD)
about: Governance, Strategy, Risk Management and
Metrics and targets. * To have a general understanding we use the outcomes
of scenarios built by the Mexican Reports using the
Global Circulation Models (GCM's) using different
Representative Concentration Pathways (RCP's).
* We recognise the importance of maturing our approach
to integrating physical climate change risks and
adaptation into financial planning and
decision-making processes. We are committed to * In addition, we use Aqueduct, a tool developed by t
enhance our understanding of the site level impacts he
and vulnerabilities to refine our adaptation World Resources Institute (WRI), to better
measures. understands water stress under different climate
change scenarios in the 2020-2030 period.
* The pervasive and complex nature of climate change
means that it can act as an amplifier of other risks * Implementing a series of controls to manage the
such as environmental incidents, access to water, threat of extreme weather, including structural
health & safety of our people, government regulation integrity programmes across all critical assets,
s, emergency response plans and flood management plans
and social license to operate. The head of .
Sustainability and the head of Risks, supports the These controls keep our people safe and help our
process to refine the identification and risk operations return to normal capacity as quickly as
assessment of physical and transitional risks. possible.
v * Increasing the supply of the materials essential to
building a low-carbon economy.
* Setting targets to reduce our emissions (on an
absolute and intensity basis) over the short, mediu
m
and long term.
--------------------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
* The COVID-19 crisis and climate change demonstrate * Energy demand/value added
that we live in an interconnected world. We are faced
with global challenges that need coordinated
responses where each actor takes on their role. No * CO2/energy consumption
country can deal with these issues alone.
* Zero-carbon fuel share
--------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Elevate from Emerging Risk 2020: Medium (12)
--------------------------------
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) pursuant to Regulation (EC) No
1606/2002 as it applies in 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
1 March 2021
Consolidated Income Statement
Year ended 31 December
Year ended 31 December Year ended 31 December
2020 2019
------------------- ----- ------------------------------------------- -------------------------------------------
Notes US$ thousands US$ thousands
------------------- ----- ------------------------------------------- -------------------------------------------
Pre-Silverstream Silverstream Pre-Silverstream Silverstream
revaluation revaluation revaluation revaluation
effect effect Total effect effect Total
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Continuing
operations:
Revenues 4 2,430,055 2,430,055 2,119,641 2,119,641
Cost of sales 5 (1,550,689) (1,550,689) (1,657,932) (1,657,932)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Gross profit 879,366 879,366 461,709 461,709
Administrative
expenses (93,407) (93,407) (96,436) (96,436)
Exploration
expenses 6 (107,328) (107,328) (157,913) (157,913)
Selling expenses (24,106) (24,106) (22,851) (22,851)
Other operating
income 8 9,997 9,997 9,803 9,803
Other operating
expenses 8 (14,839) (14,839) (22,582) (22,582)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
net
finance costs and
income
tax 649,683 649,683 171,730 171,730
Finance income 9 12,249 12,249 24,176 24,176
Finance costs 9 (141,319) (141,319) (70,670) (70,670)
Revaluation effects
of
Silverstream
contract 13 70,961 70,961 48,376 48,376
Foreign exchange
(loss)/gain (40,321) (40,321) 5,143 5,143
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
income
tax 480,292 70,961 551,253 130,379 48,376 178,755
Corporate income
tax 10 (119,349) (21,288) (140,637) 22,519 (14,513) 8,006
Special mining
right 10 (35,037) (35,037) 19,053 19,053
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Income tax 10 (154,386) (21,288) (175,674) 41,572 (14,513) 27,059
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit for the year
from
continuing
operations 325,906 49,673 375,579 171,951 33,863 205,814
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Attributable to:
Equity shareholders
of
the Company 324,451 49,673 374,124 170,134 33,863 203,997
Non-controlling
interest 1,455 1,455 1,817 1,817
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
325,906 49,673 375,579 171,951 33,863 205,814
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Earnings per share:
(US$)
Basic and diluted
earnings
per Ordinary Share
from
continuing
operations 11 - 0.5077 - 0.277
Adjusted earnings
per
share: (US$)
Adjusted basic and
diluted
earnings per
Ordinary
Share from
continuing
operations 11 0.4403 - 0.231 -
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
---------------------------------------------------- ----- ------------------------------
2020 2019
Notes US$ thousands US$ thousands
---------------------------------------------------- ----- -------------- --------------
Profit for the year 375,579 205,814
Other comprehensive income/(expense)
Items that may be reclassified subsequently
to profit or loss:
Loss/(gain) on cash flow hedges recycled to
income statement (6,509) 5,983
Changes in the fair value of cost of hedges 11,064 (1,280)
Changes in the fair value of cash flow hedges - 1,454
Total effect of cash flow hedges 4,555 6,157
Foreign currency translation (1,217) 545
Income tax effect on items that may be reclassified
subsequently to profit or loss: 10 (1,366) (1,847)
---------------------------------------------------- ----- -------------- --------------
Net other comprehensive income that may be
reclassified subsequently to profit or loss: 1,972 4,855
---------------------------------------------------- ----- -------------- --------------
Items that will not be reclassified to profit
or loss:
---------------------------------------------------- ----- -------------- --------------
Changes in the fair value of cash flow hedges 304 (236)
Total effect of cash flow hedges 304 (236)
Changes in the fair value of equity investments
at FVOCI 89,552 44,805
Remeasurement gains/(losses) on defined benefit
plans 21 147 (2,342)
Income tax effect on items that will not be
reclassified to profit or loss 10 (26,980) (12,998)
Net other comprehensive income that will not
be reclassified to profit or loss 63,023 29,229
---------------------------------------------------- ----- -------------- --------------
Other comprehensive income, net of tax 64,995 34,084
---------------------------------------------------- ----- -------------- --------------
Total comprehensive income for the year, net
of tax 440,574 239,898
---------------------------------------------------- ----- -------------- --------------
Attributable to:
Equity shareholders of the Company 439,130 238,140
Non-controlling interests 1,444 1,758
---------------------------------------------------- ----- -------------- --------------
440,574 239,898
---------------------------------------------------- ----- -------------- --------------
Consolidated Balance Sheet
As at 31 December
As at 31 December
-------------------------------------------------- ----- ------------------------------
2020 2019
Notes US$ thousands US$ thousands
-------------------------------------------------- ----- -------------- --------------
ASSETS
Non-current assets
Property, plant and equipment 12 2,708,195 2,813,417
Equity instruments at FVOCI 29 212,576 123,024
Silverstream contract 13 534,697 518,696
Deferred tax asset 10 120,676 110,770
Inventories 14 91,620 91,620
Other receivables 15 - 23,014
Other assets 3,429 3,622
-------------------------------------------------- ----- -------------- --------------
3,671,193 3,684,163
-------------------------------------------------- ----- -------------- --------------
Current assets
Inventories 14 351,587 272,120
Trade and other receivables 15 512,927 437,642
Income tax recoverable - 57,124
Prepayments 18,207 18,344
Derivative financial instruments 29 6,290 2,623
Silverstream contract 13 41,443 22,558
Cash and cash equivalents 16 1,070,415 336,576
-------------------------------------------------- ----- -------------- --------------
2,000,869 1,146,987
-------------------------------------------------- ----- -------------- --------------
Total assets 5,672,062 4,831,150
-------------------------------------------------- ----- -------------- --------------
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 (4,300) 139
Cost of hedging reserve 17 8,664 918
Fair value reserve of financial assets at FVOCI 17 117,420 54,734
Foreign currency translation reserve 17 (1,467) (250)
Retained earnings 17 2,363,275 2,093,666
-------------------------------------------------- ----- -------------- --------------
3,479,045 3,144,660
Non-controlling interests 135,559 134,059
-------------------------------------------------- ----- -------------- --------------
Total equity 3,614,604 3,278,719
-------------------------------------------------- ----- -------------- --------------
Consolidated Balance Sheet
As at 31 December
As at 31 December
------------------------------------------------- ----- ------------------------------
2020 2019
Notes US$ thousands US$ thousands
------------------------------------------------- ----- -------------- --------------
Non-current liabilities
Interest-bearing loans 19 1,156,670 801,239
Lease liabilities 24 7,697 8,009
Provision for mine closure cost 20 245,688 231,056
Pensions and other post-employment benefit plans 21 11,977 10,704
Deferred tax liability 10 295,595 321,347
------------------------------------------------- ----- -------------- --------------
1,717,627 1,372,355
------------------------------------------------- ----- -------------- --------------
Current liabilities
Trade and other payables 22 225,208 159,768
Income tax payable 88,066 3,991
Derivative financial instruments 29 - 1,789
Lease liabilities 24 5,048 4,535
Employee profit sharing 21,509 9,993
--------------------------------- --------- ---------
339,831 180,076
--------------------------------- --------- ---------
Total liabilities 2,057,458 1,552,431
--------------------------------- --------- ---------
Total equity and liabilities 5,672,062 4,831,150
--------------------------------- --------- ---------
These financial statements were approved by the Board of
Directors on 1 March 2021 and signed on its behalf by:
Mr Juan Bordes
Non-executive Director
1 March 2021
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
----------------------------------------------------- ----- ------------------------------
2020 2019
Notes US$ thousands US$ thousands
----------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 28 917,685 435,909
----------------------------------------------------- ----- -------------- --------------
Cash flows from investing activities
Purchase of property, plant and equipment 3 (412,326) (559,264)
Proceeds from the sale of property, plant and
equipment and other assets 266 1,309
Proceeds from Silverstream contract 13 33,710 24,303
Interest received 12,249 24,176
Net cash used in investing activities (366,101) (509,476)
----------------------------------------------------- ----- -------------- --------------
Cash flows from financing activities
Proceeds from Note payable(1) 63,669 -
24
Principal element of lease payments (a) (5,780) (4,681)
Dividends paid to shareholders of the Company(2) 18 (104,686) (142,179)
Capital contribution(3) 53 53,256
Proceeds from the issuance of interest-bearing
loans 19 828,325 -
Repayment of interest-bearing loans 19 (542,956) -
Interest paid(4) 19 (59,891) (57,069)
----------------------------------------------------- ----- -------------- --------------
Net cash generated from (used in) financing
activities 178,734 (150,673)
----------------------------------------------------- ----- -------------- --------------
Net increase (decrease) in cash and cash equivalents
during the year 730,318 (224,240)
Effect of exchange rate on cash and cash equivalents 3,521 31
Cash and cash equivalents at 1 January 336,576 560,785
----------------------------------------------------- ----- -------------- --------------
Cash and cash equivalents at 31 December 16 1,070,415 336,576
----------------------------------------------------- ----- -------------- --------------
(1) (Corresponds to a short-term interest-bearing note payable
received from Minera los Lagartos, S.A. de C.V. which holds a
non-controlling interest in Juanicipio project.)
(2) (Includes the effect of hedging of dividend payments made in
currencies other than US dollar.)
(3) (Corresponds to capital contribution from non-controlling
interest.)
(4) Total interest paid during the year ended 31 December 2020
less amounts capitalised totalling US$8.8 million (31 December
2019: US$6.1 million) which were included within the caption
Purchase of property, plant and equipment.
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders
of the Company
------- -------------------- --------------------------------------------------------------
Fair
value
reserve
Cost of Foreign
of financial currency
Share Share Capital Hedging hedging assets translation Retained Non-controlling Total
Notes capital premium reserve reserve reserve at FVOCI reserve earnings Total interests equity
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
US$ thousands
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- -------------------------------------
Balance at 1
January
2019 368,546 1,153,817 (526,910) (229) (2,374) 23,370 (795) 2,033,860 3,049,285 78,968 3,128,253
Profit for the
year - - - - - - - 203,997 203,997 1,817 205,814
Other
comprehensive
income, net
of
tax - - - 912 3,292 31,364 545 (1,970) 34,143 (59) 34,084
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - 912 3,292 31,364 545 202,027 238,140 1,758 239,898
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Hedging loss
transferred
to the
carrying
value of PPE
purchased
during the
year (544) (544) 77 (467)
Capital
contribution - - - - - - - - - 53,256 53,256
Dividends
declared
and paid 18 - - - - - - - (142,221) (142,221) - (142,221)
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Balance at 31
December 2019 368,546 1,153,817 (526,910) 139 918 54,734 (250) 2,093,666 3,144,660 134,059 3,278,719
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Profit for the
year - - - - - 374,124 374,124 1,455 375,579
Other
comprehensive
income, net
of
tax - - - (4,333) 7,746 62,686 (1,217) 124 65,006 (11) 64,995
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - (4,333) 7,746 62,686 (1,217) 374,248 439,130 1,444 440,574
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Hedging loss
transferred
to the
carrying
value of PPE
purchased
during the
year - - - (106) - - - - (106) 3 (103)
Capital
contribution - - - - - - - - - 53 53
Dividends
declared
and paid 18 - - - - - - - (104,639) (104,639) - (104,639)
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Balance at 31
December 2020 368,546 1,153,817 (526,910) 4,300 8,664 117,420 (1,467) 2,363,275 3,479,045 135,559 3,614,604
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
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 2020 were authorised for issue by the Board of
Directors of Fresnillo plc on 1 March 2021.
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 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 pursuant to Regulation (EC) No 1606/2002 as it
applies in the European Union as they apply to the financial
statements of the Group for the years ended 31 December 2020 and
2019, 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 2020 and 2019, 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 it 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 2019.
New standards, interpretations and amendments (new standards)
adopted by the Group
A number of new or amended standards (the Standards) became
applicable for the current reporting period. The adoption of these
Standards did not have any impact on the accounting policies,
financial position or performance of the Group.
Standards, interpretations and amendments issued but not yet
effective
The IASB has issued other amendments resulting from improvements
to IFRSs that management considers do not have any impact on the
accounting policies, financial position or performance of the Group
except for the corresponding to IAS 16 Property, Plant and
Equipment which prohibits the deduction of any proceeds from
selling items produced while bringing that asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management from the cost of an item of property,
plant and equipment. An entity instead recognises the proceeds from
selling such items and related cost of production in profit or
loss. The amendment is effective for annual periods beginning on or
after 1 January 2023. The amendments will apply retrospectively
only to items of property, plant and equipment (PP&E) that are
brought to the location and condition necessary for them to be
capable of operating in the manner intended by management on or
after the beginning of the earliest period presented in the
financial statements in which the Group first applies the
amendments. The items of PP&E within the transition scope, and
therefore the impact of adopting this amendment, are not yet
known.
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
2020 are:
Recognition and classification of assets at Soledad and Dipolos
mine:
In 2009, five members of the El Bajio agrarian community in the
state of Sonora, who claimed rights over certain surface land in
the proximity of the operations of Minera Penmont ('Penmont'),
submitted a legal claim before the Unitarian Agrarian Court
(Tribunal Unitario Agrario) of Hermosillo, Sonora, to have Penmont
vacate an area of this surface land. The land in dispute
encompassed a portion of surface area where part of the operations
of the Soledad & Dipolos mine are located. The litigation
resulted in a definitive court order, with which Penmont complied
by vacating 1,824 hectares of land, resulting in the suspension of
operations at Soledad & Dipolos. Whilst the claim and the
definitive court order did not affect the group's legal title over
the mining concession or the ore currently held in leaching pads
near the mine site, land access at the mine site is required to
further exploit the concession at Soledad & Dipolos.
Penmont is the legal and registered owner of the land where the
leaching pads are located but has not yet been able to gain
physical access to these pads due to opposition by certain local
individuals. The Group has a reasonable expectation that Penmont
will eventually regain access to the Soledad & Dipolos assets
and process the ore content in the Soledad & Dipolos leaching
pads. Therefore, the Group continues to recognise property, plant
& equipment and inventory related to Soledad & Dipolos, as
disclosed in Note 12 and Note 14, respectively. Due to the fact
that it is not yet certain when access may be granted so that the
inventory can be processed, this inventory is classified as a
non-current asset.
As previously reported by the Group, claimants from the El Bajío
community also presented claims against occupation agreements they
entered into with Penmont, covering land parcels other than the
surface land where Soledad & Dipolos is located. Penmont has
had no significant mining operations or specific geological
interest in the affected parcels and these lands are therefore not
considered strategic for Penmont. The Agrarian Court has 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. The case
relating to the claims over these land parcels remains subject to
final conclusion. However, given that Penmont has not conducted
significant mining operations or had specific geological interest
in these land parcels, any contingencies relating to such land
parcels are not considered material by the Group. There are no
material assets recognised in respect of these land parcels at 31
December 2020 or 31 December 2019.
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 the recoverable
amount, 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, the
grade of the ore (based on assay data) and the estimated recovery
percentage (based on metallurgical studies and current
technology).
The grades of ore placed on pads are regularly compared to the
quantities of metal recovered through the leaching process to
evaluate the appropriateness of the estimated recovery
(metallurgical balancing). The Group monitors the results of the
metallurgical balancing process and recovery estimates are refined
based on actual results over time and when new information becomes
available.
In 2017, the Group decided that it would construct a new
leaching pad in a separate area of the Herradura mine with all ore
since July 2019 being deposited on the new pad area.. 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 continues reviewing the metallurgical balancing of the
pads to assess the grade and recovery of the ore in inventories.
The analysis of the operational performance of the pads yielded new
information about the estimated recovery percentage. Based on the
new information the Group updated its estimate of the remaining
gold content in leaching increasing this by 119.3 thousand ounces
of gold as at 1 January 2020.
This change in estimation was incorporated prospectively in
inventory from 1 January 2020. The increase in the number of ounces
reduced the weighted average cost of inventory. Had the estimation
not changed, production cost during the year ended 31 December 2020
would have been US$86.1 million higher, with an offsetting impact
against the work-in-progress inventory balance as of 31 December
2020..
Silverstream, note 13:
The valuation of the Silverstream contract as a derivative
financial instrument requires estimation by management. The term of
the derivative is based on the Sabinas life of mine and the value
of this derivative is determined using a number of estimates,
including the estimated recoverable ore reserves and mineral
resources and future production profile of the Sabinas mine on the
same basis a market participant would consider, the estimated
recoveries of silver from ore mined, estimates of the future price
of silver and the discount rate used to discount future cash flows.
For further detail on the inputs that have a significant effect on
the fair value of this derivative, see note 30. The impact of
changes in silver price assumptions and the discount rate is
included in note 30. Management considers that an appropriate
sensitivity for volumes produced and sold is on the total
recoverable reserve and resource quantities over the contract term
rather than annual production volumes over the mine life. A
reasonably possible change in total recoverable resources and
reserves quantities would not result in a significant change in the
value of the contract.
Income tax, notes 2 (q) and 10:
The recognition of deferred tax assets, including those arising
from un-utilised tax losses, requires 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.
COVID-19
The COVID-19 outbreak developed rapidly in 2020, with a
significant number of infections around the world. The development
and fluidity of the situation precludes any prediction as to the
ultimate impact of COVID-19; however, the Group seeks to obtain the
best possible information to enable the assessment of the risks
involved and implement appropriate measures to respond.
During 2020, the Group has taken a number of measures to
safeguard the health of its employees and their local communities
while continuing to operate safely and responsibly. The Group acted
in compliance with government-ordered restrictions, resulting in
operations being temporarily suspended in Minera Penmont, all other
mines have operated at normal production capacity. The Group
incurred on US$19.4 million on temporary suspension, standby and
other production costs. These costs are associated with placing
Penmont mines in care and the subsequent ramp-up of operations, and
the underutilisation of production capacity to the pre-COVID-19
operating activity. These production costs are presented as
unabsorbed production cost in cost of sales. In addition, the Group
incurred other production costs of US4.5 million resulting from
COVID-19 which include community support, the acquisition of
additional personal protective equipment and other safety measures
and are presented in cost of sales.
During 2020, attempts at containment of COVID-19 have resulted
in decreased economic activity, which has adversely affected the
broader global economy. In the current environment, assumptions
about future commodity prices, exchange rates, and interest rates
are subject to greater variability than normal, which could in the
future affect the valuation of the Group's assets and liabilities,
both financial and non-financial. As at 31 December 2020, there
were no material changes to the valuation of the Group's asset and
liabilities due to COVID-19.
(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 (except mobile equipment) or on a straight-line
basis over the estimated useful life of the individual asset that
are 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 average expected useful lives are as follows:
Years
-------------------------------------------- -----
Buildings 8
Plant and equipment 10
Mining properties and development costs (1) 8
Other assets 4
-------------------------------------------- -----
(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.
Ore generated as part of the development stage may be processed
and sold, giving rise to revenue before the commencement of
commercial production. Where such processing is necessary to bring
mining assets into the condition required for their intended use
(for example, in testing the plants at the mining unit in
development), revenues from metals recovered from such activities
are credited to mining properties and development costs. When the
processing does not contribute to brining the mining assets into
the condition required for their intended use (for example, when
the processing of the ore extracted is supported by assets outside
of the development project), the revenue is considered as
incidental and it is recognized in profit or loss. In the latter
case, cost of sales is measured based on expected operating cost
once commercial production has been initiate.
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 are met:
-- It is probable that the future economic benefits (improved
access to an ore body) associated with the stripping activity will
flow to the Group;
-- The Group can identify the component of an ore body for which access has been improved; and
-- The costs relating to the improved access to that component can be measured reliably.
If not all of the criteria are met, the production stripping
costs are charged to the income statement as operating costs as
they are incurred.
Stripping activity costs associated with such development
activities are capitalised into existing mining development assets,
as mining properties and development cost, within property, plant
and equipment, using a measure that considers the volume of waste
extracted compared with expected volume, for a given volume of ore
production. This measure is known as "component stripping ratio",
which is revised annually in accordance with the mine plan. The
amount capitalised is subsequently depreciated over the expected
useful life of the identified component of the ore body related to
the stripping activity asset, by using the units of production
method. The identification of components and the expected useful
lives of those components are evaluated as new information of
reserves and resources is available. Depreciation is recognised as
cost of sales in the income statement.
The capitalised stripping activity asset is carried at cost less
accumulated depletion/depreciation, less impairment, if any. Cost
includes the accumulation of costs directly incurred to perform the
stripping activity that improves access to the identified component
of ore, plus an allocation of directly attributable overhead costs.
The costs associated with incidental operations are excluded from
the cost of the stripping activity asset.
(f) Impairment of non-financial assets
The carrying amounts of non-financial assets are reviewed for
impairment if events or changes in circumstances indicate that the
carrying value may not be recoverable. At each reporting date, an
assessment is made to determine whether there are any indications
of impairment. If there are indicators of impairment, an exercise
is undertaken to determine whether carrying values are in excess of
their recoverable amount. Such reviews are undertaken on an asset
by asset basis, except where such assets do not generate cash flows
independent of those from other assets or groups of assets, and
then the review is undertaken at the cash generating unit
level.
If the carrying amount of an asset or its cash generating unit
exceeds the recoverable amount, a provision is recorded to reflect
the asset at the recoverable amount in the balance sheet.
Impairment losses are recognised in the income statement.
The recoverable amount of an asset
The recoverable amount of an asset is the greater of its value
in use and fair value less costs of disposal. In assessing value in
use, estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to
the asset. The cash flows used to determine the recoverable amount
of mining assets are based on the mine plan for each mine. The mine
plan is determined on the basis of the estimated and economically
proven and probable reserves, as well as certain other resources
that are assessed as highly likely to be converted into reserves.
Fair value less cost of disposal is based on an estimate of the
amount that the Group may obtain in an orderly sale transaction
between market participants. For an asset that does not generate
cash inflows largely independently of those from other assets, or
groups of assets, the recoverable amount is determined for the cash
generating unit to which the asset belongs. The Group's cash
generating units are the smallest identifiable groups of assets
that generate cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Reversal of impairment
An assessment is made each reporting date as to whether there is
any indication that previously recognised impairment losses may no
longer exist or may have decreased. If such an indication exists,
the Group makes an estimate of the recoverable amount. A previously
recognised impairment loss is reversed only if there has been a
change in estimates used to determine the asset's recoverable
amount since the impairment loss was recognised. If that is the
case, the carrying amount of the asset is increased to the
recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognised in previous
years. Such impairment loss reversal is recognised in the income
statement.
(g) Financial assets and liabilities
The Group classifies its financial assets in the following
measurement categories:
-- those to be measured at amortised cost.
-- those to be measured subsequently at fair value through OCI, and.
-- those to be measured subsequently at fair value through profit or loss.
The classification depends on the Group's business model for
managing the financial assets and the contractual terms of the cash
flows.
For assets measured at fair value, gains and losses will either
be recorded in profit or loss or OCI. For investments in equity
instruments that are not held for trading, this will depend on
whether the group has made an irrevocable election at the time of
initial recognition to account for the equity investment at fair
value through other comprehensive income (FVOCI).
The Group reclassifies debt investments when and only when its
business model for managing those assets changes.
Regular way purchases and sales of financial assets are
recognised on trade-date, the date on which the Group commits to
purchase or sell the asset.
At initial recognition, the Group measures a financial asset at
its fair value plus, in the case of a financial asset not at fair
value through profit or loss (FVPL), transaction costs that are
directly attributable to the acquisition of the financial asset.
Transaction costs of financial assets carried at FVPL are expensed
in profit or loss.
Financial assets with embedded derivatives are considered in
their entirety when determining whether their cash flows are solely
payment of principal and interest.
Subsequent measurement of debt instruments depends on the
Group's business model for managing the asset and the cash flow
characteristics of the asset.
Classification
The Group classifies its financial assets in one of the
following categories.
Amortised cost
Assets that are held for collection of contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. Interest income from these
financial assets is included in finance income using the effective
interest rate method. Any gain or loss arising on derecognition is
recognised directly in profit or loss and presented in other
gains/(losses) together with foreign exchange gains and losses.
Impairment losses are presented as separate line item in the
statement of profit or loss.
The Group's financial assets at amortised cost include
receivables (other than trade receivables which are measured at
fair value through profit and loss).
Fair value through other comprehensive income
Assets that are held for collection of contractual cash flows
and for selling the financial assets, where the assets' cash flows
represent solely payments of principal and interest, are measured
at FVOCI. Movements in the carrying amount are taken through OCI,
except for the recognition of impairment gains or losses, interest
income and foreign exchange gains and losses which are recognised
in profit or loss. When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is
reclassified from equity to profit or loss and recognised in other
gains/(losses). Interest income from these financial assets is
included in finance income using the effective interest rate
method. Foreign exchange gains and losses are presented in other
gains/(losses) and impairment expenses are presented as separate
line item in the statement of profit or loss. As at 31 December
2020 and 2019 there were no such instruments.
Equity instruments designated as fair value through other
comprehensive income
Upon initial recognition, the Group can elect to classify
irrevocably its equity investments as equity instruments designated
at fair value through OCI when they meet the definition of equity
under IAS 32 Financial Instruments: Presentation and are not held
for trading. The classification is determined on an
instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to
profit or loss. Dividends are recognised as other income in the
statement of profit or loss when the right of payment has been
established, except when the Group benefits from such proceeds as a
recovery of part of the cost of the financial asset, in which case,
such gains are recorded in OCI. Equity instruments designated at
fair value through OCI are not subject to impairment
assessment.
The Group elected to classify irrevocably its listed equity
investments under this category.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or FVOCI
are measured at FVPL. A gain or loss on a debt investment that is
subsequently measured at FVPL is recognised in profit or loss and
presented net within other gains/(losses) in the period in which it
arises.
Changes in the fair value of financial assets at FVPL are
recognised in other gains/(losses) in the statement of profit or
loss as applicable.
The Group's trade receivables and derivative financial
instruments, including the Silverstream contract, are classified as
fair value through profit or loss.
De-recognition of financial assets
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or have been
transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Impairment of financial assets
The Group assesses on a forward-looking basis the expected
credit losses associated with its debt instruments carried at
amortised cost and FVOCI. The impairment methodology applied
depends on whether there has been a significant increase in credit
risk.
For receivables (other than trade receivables which are measured
at FVPL), the Group applies the simplified approach permitted by
IFRS 9, which requires expected lifetime losses to be recognised
from initial recognition of the receivables.
The Group classifies its financial liabilities as follows:
Financial liabilities are classified, at initial recognition, as
financial liabilities at fair value through profit or loss, loans
and borrowings, payables, or as derivatives designated as hedging
instruments in an effective hedge, as appropriate.
All financial liabilities are recognised initially at fair value
and, in the case of loans and borrowings and payables, net of
directly attributable transaction costs.
The Group's financial liabilities include trade and other
payables and loans and borrowings.
Classification
For purposes of subsequent measurement, financial liabilities
held by the Group are classified as financial liabilities as
amortised cost.
After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortised cost using the EIR method.
Gains and losses are
recognised in profit or loss when the liabilities are
derecognised as well as through the EIR amortisation process.
Amortised cost is calculated by taking into account any discount
or premium on acquisition and fees or costs that are an integral
part of the EIR. The EIR amortisation is included as finance costs
in the statement of profit or loss.
De-recognition of financial liabilities
A financial liability is derecognised when the obligation under
the liability is discharged or cancelled or expires. When an
existing financial liability is replaced by another from the same
lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or
modification is treated as the derecognition of the original
liability and the recognition of a new liability. The difference in
the respective carrying amounts is recognised in the statement of
profit or loss.
(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).
Work in progress inventory comprises ore in leaching pads as
processing is required to extract benefit from the ore. The
recovery of gold is achieved through the heap leaching process. The
leaching process may take months to obtain the expected metal
recovery and mainly depends on the continuity of the leaching
process. When the ore in leaching pads is in active leaching, it is
classified as current. When the leaching process has stopped and
not expected to restart within twelve months, ore in the leaching
pads affected is classified as non-current.
Operating materials and spare parts are valued at the lower of
cost or net realisable value. An allowance for obsolete and
slow-moving inventories is determined by reference to specific
items of stock. A regular review is undertaken by management to
determine the extent of such an allowance.
Net realisable value is the estimated selling price in the
ordinary course of business less any further costs expected to be
incurred to completion and disposal.
(i) Cash and cash equivalents
For the purposes of the balance sheet, cash and cash equivalents
comprise cash at bank, cash on hand and short-term deposits held
with banks that are readily convertible into known amounts of cash
and which are subject to insignificant risk of changes in value.
Short-term deposits earn interest at the respective short-term
deposit rates between one day and three months. For the purposes of
the cash flow statement, cash and cash equivalents as defined above
are shown net of outstanding bank overdrafts.
(j) Provisions
Mine closure cost
A provision for mine closure cost is made in respect of the
estimated future costs of closure, restoration and for
environmental rehabilitation costs (which include the dismantling
and demolition of infrastructure, removal of residual materials and
remediation of disturbed areas) based on a mine closure plan, in
the accounting period when the related environmental disturbance
occurs. The provision is discounted and the unwinding of the
discount is included within finance costs. At the time of
establishing the provision, a corresponding asset is capitalised
where it gives rise to a future economic benefit and is depreciated
over future production from the mine to which it relates. The
provision is reviewed on an annual basis by the Group for changes
in cost estimates, discount rates or life of operations. Changes to
estimated future costs are recognised in the balance sheet by
adjusting the mine closure cost liability and the related asset
originally recognised. If, for mature mines, the revised mine
assets net of mine closure cost provisions exceed the recoverable
value, the portion of the increase is charged directly as an
expense. For closed sites, changes to estimated costs are
recognised immediately in profit or loss.
(k) Employee benefits
The Group operates the following plans its employees based on
Mexico:
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 present value of defined benefit obligations under the plan
is determined using the projected unit credit actuarial valuation
method and prepared by an external actuarial firm as at each
year-end balance sheet date. The discount rate is the yield on
bonds that have maturity dates approximating the terms of the
Group's obligations and that are denominated in the same currency
in which the benefits are expected to be paid. Actuarial gains or
losses are recognised in OCI and permanently excluded from profit
or loss.
Past service costs are recognised when the plan amendment or
curtailment occurs and when the entity recognises related
restructuring costs or termination benefits.
The defined benefit asset or liability comprises the present
value of the defined benefit obligation less the fair value of plan
assets out of which the obligations are to be settled directly. The
value of any asset is restricted to the present value of any
economic benefits available in the form of refunds from the plan or
reductions in the future contributions to the plan.
Net interest cost is recognised in finance cost and return on
plan assets (other than amounts reflected in net interest cost) is
recognised in OCI and permanently excluded from profit or loss.
Defined contribution pension plan
A defined contribution plan is a post-employment benefit plan
under which the Group pays fixed contributions into a separate
entity and has no legal or constructive obligation to pay further
amounts. Obligations for contributions to defined contribution
pension plans are recognised as an employee benefit expense in
profit or loss when they are due. The contributions are based on
the employee's salary.
This plan started on 1 July 2007 and it is voluntary for all
employees to join this scheme.
Seniority premium for voluntary separation
This unfunded plan corresponds to an additional payment over the
legal seniority premium equivalent to approximately 12 days of
salary per year for those unionised workers who have more than 15
years of service. Non-unionised employees with more than 15 years
of service have the right to a payment equivalent to 12 days for
each year of service. For both cases, the payment is based on the
legal current minimum salary.
The cost of providing benefits for the seniority premium for
voluntary separation is determined using the projected unit credit
actuarial valuation method and prepared by an external actuarial
firm as at each year-end balance sheet date. Actuarial gains or
losses are recognised as income or expense in the period in which
they occur.
Other
Benefits for death and disability are covered through insurance
policies.
Termination payments for involuntary retirement (dismissals) are
charged to the income statement, when incurred.
(l) Employee profit sharing
In accordance with the Mexican legislation, companies in Mexico
are subject to pay for employee profit sharing ('PTU') equivalent
to ten percent of the taxable income of each fiscal year.
PTU is accounted for as employee benefits and is calculated
based on the services rendered by employees during the year,
considering their most recent salaries. The liability is recognised
as it accrues and is charged to the income statement. PTU, paid in
each fiscal year, is deductible for income tax purposes.
(m) Leases
Group as a lessee
The Group assesses at contract inception whether a contract is,
or contains, a lease. That is, if the contract conveys the right to
control the use of an identified asset for a period of time in
exchange for consideration. From 1 January 2019, leases are
recognised as a right-of-use asset and a corresponding liability at
the date at which the leased asset is available for use by the
Group.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
- fixed payments (including in-substance fixed payments), less
any lease incentives receivable variable lease payment that are
based on an index or a rate;
- amounts expected to be payable by the lessee under residual value guarantees;
- the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
- payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following:
- the amount of the initial measurement of lease liability;
- any lease payments made at or before the commencement date less any lease incentives received;
- any initial direct costs; and
- restoration costs.
Each lease payment is allocated between the liability and
finance cost. The finance cost is charged to profit or loss over
the lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each period.
The right-of-use asset is depreciated over the shorter of the
asset's useful life and the lease term on a straight-line
basis.
The Group is exposed to potential future increases in variable
lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to
lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use
asset.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of 12 months or less. Low-value assets comprise
IT-equipment.
(n) Revenue from contracts with customers
Revenue is recognised when control of goods or services
transfers to the customer based on the performance obligations
settle in the contracts with customers.
Sale of goods
Revenue associated with the sale of concentrates, precipitates,
doré bars and activated carbon (the products) is recognized when
control of the asset sold is transferred to the customer.
Indicators of control transferring include an unconditional
obligation to pay, legal title, physical possession, transfer of
risk and rewards and customer acceptance. This generally occurs
when the goods are delivered to the customer's smelter or refinery
agreed with the buyer; at which point the buyer controls the
goods.
The revenue is measured at the amount to which the Group expects
to be entitled, being the estimate of the price expected to be
received in the expected month of settlement and the Group's
estimate of metal quantities based on assay data, and a
corresponding trade receivable is recognised. Any future changes
that occur before settlement are embedded within the provisionally
priced trade receivables and are, therefore, within the scope of
IFRS 9 and not within the scope of IFRS 15.
Given the exposure to the commodity price, these provisionally
priced trade receivables will fail the cash flow characteristics
test within IFRS 9 and will be required to be measured at fair
value through profit or loss up from initial recognition and until
the date of settlement. These subsequent changes in fair value are
recognised in revenue but separately from revenue from contracts
with customers.
Refining and treatment charges under the sales contracts are
deducted from revenue from sales of concentrates as these are not
related to a distinct good or service.
(o) Exploration expenses
Exploration activity involves the search for mineral resources,
the determination of technical feasibility and the assessment of
commercial viability of an identified resource.
Exploration expenses are charged to the income statement as
incurred and are recorded in the following captions:
Cost of sales: costs relating to in-mine exploration, that
ensure continuous extraction quality and extend mine life, and
Exploration expenses:
- Costs incurred in geographical proximity to existing mines in
order to replenish or increase reserves, and
- 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 from which time further expenses
are capitalised as exploration costs on balance sheet as Property,
plant and equipment.
(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 as finance
income or finance cost respectively.
Derivatives are valued using valuation approaches and
methodologies (such as Black Scholes and Net Present Value)
applicable to the specific type of derivative instrument. The fair
value of forward currency and commodity contracts is calculated by
reference to current forward exchange rates for contracts with
similar maturity profiles, European foreign exchange options are
valued using the Black Scholes model. The Silverstream contract is
valued using a Net Present Value valuation approach.
The documentation includes identification of the hedging
instrument, the hedged item, the nature of the risk being hedged
and how the Group will assess whether the hedging relationship
meets the hedge effectiveness requirements (including the analysis
of sources of hedge ineffectiveness and how the hedge ratio is
determined). A hedging relationship qualifies for hedge accounting
if it meets all of the following effectiveness requirements:
-- There is 'an economic relationship' between the hedged item
and the hedging instrument.
-- The effect of credit risk does not 'dominate the value
changes' that result from that economic relationship.
-- The hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the Group
actually hedges and the quantity of the hedging instrument that the
Group actually uses to hedge that quantity of hedged item.
Hedges which meet the criteria for hedge accounting are
accounted for as follows:
Cash flow hedges
For derivatives that are designated and qualify as cash flow
hedges, the effective portion of changes in the fair value of
derivative instruments are recorded as in other comprehensive
income and are transferred to the income statement when the hedged
transaction affects profit or loss, such as when a forecast sale or
purchase occurs. For gains or losses related to the hedging of
foreign exchange risk these are included, in the line item in which
the hedged costs are reflected. Where the hedged item is the cost
of a non-financial asset or liability, the amounts recognised in
other comprehensive income are transferred to the initial carrying
amount of the non-financial asset or liability. This is not a
reclassification adjustment and will not be recognised in OCI for
the period. The ineffective portion of changes in the fair value of
cash flow hedges is recognised directly as finance costs, in the
income statement of the related period.
If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation as
a hedge is revoked, any cumulative gain or loss recognised directly
in other comprehensive income from the period that the hedge was
effective remains separately in other comprehensive income until
the forecast transaction occurs, when it is recognised in the
income statement. When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was reported in other
comprehensive income is immediately transferred to the income
statement.
When hedging with options, the Group designates only the
intrinsic value movement of the hedging option within the hedge
relationship. The time value of the option contracts is therefore
excluded from the hedge designation. In such cases, changes in the
time value of options are initially recognised in OCI as a cost of
hedging. Where the hedged item is transaction related, amounts
initially recognised in OCI related to the change in the time value
of options are reclassified to profit or loss or as a basis
adjustment to non-financial assets or liabilities upon maturity of
the hedged item, or, in the case of a hedged item that realises
over time, the amounts initially recognised in OCI are amortised to
profit or loss on a systematic and rational basis over the life of
the hedged item.
When hedging with forward contracts, the forward element is
included in the designation of the financial instrument. Therefore,
there is no cost of hedging in relation to forward contracts.
(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 2020, 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
(closed at the end of 2020);
The Herradura mine, located in the state of Sonora, a surface
gold mine;
The Noche Buena mine, located in state of Sonora, a surface gold
mine; and
The San Julian mine, located on the border of Chihuahua /
Durango states, an underground silver-gold mine.
The operating performance and financial results for each of
these mines are reviewed by management. As the Group's chief
operating decision maker does not review segment assets and
liabilities, the Group has not disclosed this information.
Management monitors the results of its operating segments
separately for the purpose of performance assessment and making
decisions about resource allocation. Segment performance is
evaluated without taking into account certain adjustments included
in Revenue as reported in the consolidated income statement, and
certain costs included within Cost of sales and Gross profit which
are considered to be outside of the control of the operating
management of the mines. The table below provides a reconciliation
from segment profit to Gross profit as per the consolidated income
statement. Other income and expenses included in the consolidated
income statement are not allocated to operating segments.
Transactions between reportable segments are accounted for on an
arm's length basis similar to transactions with third parties.
In 2020 and 2019, 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 2020 and 2019, respectively. Revenues for the year ended
31 December 2020 and 2019 include those derived from contracts with
costumers and other revenues, as showed in note 4.
Year ended 31 December 2020
--------------------------------------------------------------------------------------------------------------------
Noche Other Adjustments
US$ thousands Fresnillo Herradura Cienega Saucito Buena San Julian (5) and eliminations Total
----------------- --------- --------- ------- ------- ------- ---------- ------- ---------------- ---------
Revenues:
Third party(1) 366,245 777,455 230,221 521,817 151,402 380,552 2,363 2,430,055
Inter-Segment 119,412 (119,412) -
----------------- --------- --------- ------- ------- ------------------- ------- ---------------- ---------
Segment revenues 366,245 777,455 230,221 521,817 151,402 380,552 119,412 (117,049) 2,430,055
Segment Profit(2) 191,042 400,540 129,479 325,099 53,661 211,681 101,615 (4,593) 1,408,524
Foreign exchange
hedging gains 4,145
Depreciation and
amortisation(3) (514,572)
Employee profit
sharing (18,731)
----------------- --------- --------- ------- ------- ------- ---------- ------------------------- ---------
Gross profit as
per the income
statement 879,366
----------------- --------- --------- ------- ------- ------- ---------- ------------------------- ---------
Capital
expenditure(4) 92,627 30,182 35,071 73,376 19,674 36,329 125,067 - 412,326
----------------- --------- --------- ------- ------- ------- ---------- ------- ---------------- ---------
1 Total third party revenues include treatment and refining
charges amounting US$180.55 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 Includes depreciation and amortisation included in unabsorbed
production cost amounted US$9.1 million.)
(4 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine
closure provision. Significant additions include the construction
of) (the leaching) plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V and incidental)
(ore sales from) (Juanicipio development project) (to Fresnillo;
capital expenditure mainly corresponds to Minera Juanicipio S.A de
C.V) (. and Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2019
--------------------------------------------------------------------------------------------------------------------
Noche Other Adjustments
US$ thousands Fresnillo Herradura Cienega Saucito Buena San Julian (4) and eliminations Total
----------------- --------- --------- ------- ------- ------- ---------- ------ ----------------- ---------
Revenues:
Third party(1) 316,214 692,444 189,441 439,170 176,291 312,065 (5,984) 2,119,641
Inter-Segment 94,967 (94,967) -
----------------- --------- --------- ------- ------- ------------------- ------ ----------------- ---------
Segment revenues 316,214 692,444 189,441 439,170 176,291 312,065 94,967 (100,951) 2,119,641
Segment Profit(2) 164,570 218,661 84,926 238,133 58,295 128,221 66,547 965 960,318
Depreciation and
amortisation (489,529)
Employee profit
sharing (9,079)
----------------- --------- --------- ------- ------- ------- ---------- ------------------------- ---------
Gross profit as
per the income
statement 461,709
----------------- --------- --------- ------- ------- ------- ---------- ------------------------- ---------
Capital
expenditure(3) 172,846 37,520 58,220 126,384 5,709 65,325 93,260 - 559,264
----------------- --------- --------- ------- ------- ------- ---------- ------ ----------------- ---------
1 Total third party revenues include treatment and refining
charges amounting US$144.6 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2 Segment profit excluding foreign exchange hedging gains,
depreciation and amortisation and employee profit sharing.)
(3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine
closure provision. Significant additions include the construction
of) (the leaching) plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).
(4 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure mainly corresponds to Minera Juanicipio S.A de C.V) (.
and Minera Bermejal, S. de R.L. de C.V.)
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré,
slag, precipitates and activated carbon of which the primary
contents are silver, gold, lead and zinc.
(a) Revenues by source
Year ended 31
December
------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Revenues from contracts with customers 2,425,098 2,125,962
Revenues from other sources:
Provisional pricing adjustment on products sold 2,594 (337)
Hedging gain/(loss) on sales 2,363 (5,984)
------------------------------------------------- -------------- --------------
2,430,055 2,119,641
------------------------------------------------- -------------- --------------
(b) Revenues by product sold
Year ended 31
December
------------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------------------- -------------- --------------
Lead concentrates (containing silver, gold, lead and
by-products) 989,072 812,933
Doré and slag (containing gold, silver and by-products) 800,326 853,589
Zinc concentrates (containing zinc, silver and by-products) 236,758 220,023
Precipitates (containing gold and silver) 275,367 227,796
Activated carbon (containing gold, silver and by-products) 128,532 5,300
------------------------------------------------------------- -------------- --------------
2,430,055 2,119,641
------------------------------------------------------------- -------------- --------------
All concentrates, precipitates, doré, slag and activated carbon
were sold to Peñoles' metallurgical complex, Met-Mex, for smelting
and refining.
(c) Value of metal content in products sold
For products other than refined silver and gold, invoiced
revenues are derived from the value of metal content adjusted by
treatment and refining charges incurred by the metallurgical
complex of the customer. The value of the metal content of the
products sold, before treatment and refining charges is as
follows:
Year ended 31
December
---------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Silver 970,532 776,784
Gold 1,328,000 1,183,116
Zinc 204,733 202,281
Lead 107,272 102,058
---------------------------------------------- -------------- --------------
Value of metal content in products sold 2,610,537 2,264,239
Adjustment for treatment and refining charges (180,482) (144,598)
---------------------------------------------- -------------- --------------
Total revenues (1) (,) 2,430,055 2,119,641
---------------------------------------------- -------------- --------------
1 Includes provisional price adjustments which represent changes
in the fair value of trade receivables resulting in a gain of
US$2.6 million (2019: loss of US$0.3 million) and hedging gain of
US$2.3 million (2019: loss of US$6.0 million). For further detail,
refer to note 2(n).
The average realised prices for the gold and silver content of
products sold, prior to the deduction of treatment and refining
charges, were:
Year ended 31
December
----------- ------------------
2020 2019
US$ per US$ per
ounce ounce
----------- -------- --------
Gold (2) 1,792.44 1,418.0
----------- -------- --------
Silver (2) 21.28 16.1
----------- -------- --------
(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
------------------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------------------------- -------------- --------------
Depreciation and amortisation (note 12) 505,377 489,529
Personnel expenses (note 7) 116,103 110,704
Maintenance and repairs 175,087 189,042
Operating materials 203,217 233,159
Energy 189,239 219,531
Contractors 357,278 363,737
Mining concession rights and contributions 20,409 12,910
Freight 8,037 10,613
Surveillance(1) 7,028 8,491
Insurance 7,141 5,819
Other 18,212 25,503
------------------------------------------------------------------- -------------- --------------
Cost of production 1,607,128 1,669,038
Unabsorbed production costs(2) 19,403 -
Gain on foreign currency hedges (4,145) -
Change in work in progress and finished goods (ore inventories)(3) (71,698) (11,106)
1,550,689 1,657,932
------------------------------------------------------------------- -------------- --------------
(1 Figures corresponding to the year 2019 have been reclassified
from "Other" to be consistent with the presentation in the current
year.)
(2 Corresponds to production cost incurred in Minera Penmont as
a result of the operational impact related to COVID-19, see note 2
c). Main unabsorbed production cost include US$9.1 million of
depreciation and amortisation and US$3.1 million of
Contractors.
3 Refer to note 2 (c) for more detail related to change in work
in progress inventories for the year ended 31 December 2020
following a change in estimation.
6. Exploration expenses
Year ended 31
December
------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------- -------------- --------------
Contractors 71,279 116,207
Mining concession rights and contributions 21,099 22,243
Administrative services 6,052 6,885
Personnel expenses (note 7) 2,753 3,731
Assays 1,299 1,815
Rentals 457 1,135
Other 4,389 5,897
------------------------------------------- -------------- --------------
107,328 157,913
------------------------------------------- -------------- --------------
These exploration expenses were mainly incurred in the operating
mines located in Mexico; the Juanicipio, Guanajuato, Orisyvo and
Centauro Deep projects; and the Mexico Nuevo and Mirador de Cristo
prospects. Exploration expenses of US$10.4 million (2019: US$14.9
million) were incurred in the year on projects located in Peru and
Chile.
The following table sets forth liabilities (generally trade
payables) corresponding to exploration activities of the Group
companies engaged only in exploration, principally Exploraciones
Mineras Parreña, S.A. de C.V.
Year ended 31
December
---------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Liabilities related to exploration activities 666 106
---------------------------------------------- -------------- --------------
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
----------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Operating cash out flows related to exploration activities 106,768 157,919
----------------------------------------------------------- -------------- --------------
7. Personnel expenses
Year ended 31
December
----------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
----------------------------------------------- -------------- --------------
Salaries and wages 54,202 55,156
Employees' profit sharing 19,275 9,578
Bonuses 12,770 13,892
Statutory healthcare and housing contributions 20,441 20,304
Other benefits 13,233 13,622
Post-employment benefits 5,944 5,582
Vacations and vacations bonus 3,420 4,262
Social security 3,084 2,490
Training 3,080 3,210
Legal contributions 2,101 2,476
Other 4,070 5,729
----------------------------------------------- -------------- --------------
141,620 136,301
----------------------------------------------- -------------- --------------
(a) Personnel expenses are reflected in the following line
items:
Year ended 31
December
------------------------------ ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------ -------------- --------------
Cost of sales (note 5) 116,103 110,704
Administrative expenses 22,764 21,866
Exploration expenses (note 6) 2,753 3,731
------------------------------ -------------- --------------
141,620 136,301
------------------------------ -------------- --------------
(b) The monthly average number of employees during the year was
as follows:
Year ended 31
December
------------------------- ---------------
2020 2019
No. No.
------------------------- ------- ------
Mining 2,222 2,334
Plant 926 869
Exploration 403 468
Maintenance 1,255 1,115
Administration and other 1,010 897
------------------------- ------- ------
Total 5,816 5,683
------------------------- ------- ------
8. Other operating income and expenses
Year ended 31
December
---------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Other income:
Insurance recovery (1) 2,738 6,494
Rentals 1,278 829
Other 5,981 2,480
---------------------------------------------- -------------- --------------
9,997 9,803
---------------------------------------------- -------------- --------------
Year ended 31
December
---------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Other expenses:
Loss on sale of property, plant and equipment 700 4,866
Loss on theft of inventory 1,477 4,935
Maintenance (2) 3,692 1,423
Donations 387 1,137
Environmental activities 768 2,641
Real property transfer tax - 1,156
Consumption tax expensed - 853
Other 7,815 5,571
---------------------------------------------- -------------- --------------
14,839 22,582
---------------------------------------------- -------------- --------------
1 Corresponds to the insurance claim relating to the theft of
doré at Minera Penmont less its corresponding production cost
(2019: Insurance claim corresponding the theft of doré at Minera
Penmont less its corresponding production cost).
2 Costs relating to the rehabilitation of the facilities of
Compañía Minera las Torres, S.A. de C.V. (a closed mine).
9. Finance income and finance costs
Year ended 31
December
------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Finance income:
Interest on short-term deposits and investments 4,606 11,356
Interest on tax receivables 7,642 12,814
Fair value movement on derivatives 1 -
Other - 6
------------------------------------------------- -------------- --------------
12,249 24,176
------------------------------------------------- -------------- --------------
Year ended 31
December
------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Finance costs:
Interest on interest-bearing loans 43,542 41,263
Premium paid on early notes redemption (Note 19) 60,835 -
Interest on tax amendments (Note 10) 24,890 16,224
Interest on lease liabilities 644 642
Unwinding of discount on provisions 10,755 11,809
Other 653 732
------------------------------------------------- -------------- --------------
141,319 70,670
------------------------------------------------- -------------- --------------
10. Income tax expense
a) Major components of income tax expense:
Year ended 31
December
---------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 208,370 112,002
Amounts under provided in previous years (67) 36,509
---------------------------------------------------- -------------- --------------
208,303 148,511
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (88,954) (171,030)
Revaluation effects of Silverstream contract 21,288 14,513
---------------------------------------------------- -------------- --------------
(67,666) (156,517)
---------------------------------------------------- -------------- --------------
Corporate income tax 140,637 (8,006)
Special mining right
Current:
Special mining right charge (note 10 (e)) 24,739 3,880
---------------------------------------------------- -------------- --------------
Amounts under provided in previous years 6,602 6,663
---------------------------------------------------- -------------- --------------
31,341 10,543
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences 3,696 (29,596)
---------------------------------------------------- -------------- --------------
Special mining right 35,037 (19,053)
Income tax expense reported in the income statement 175,674 (27,059)
Year ended 31
December
--------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Consolidated statement of comprehensive income:
Deferred income tax (charge)/credit related to items
recognised directly in other comprehensive income:
Gain on cash flow hedges recycled to income statement 1,953 (1,795)
Changes in fair value of cash flow hedges (91) (436)
Changes in the fair value of cost of hedges (3,320) 384
Changes in fair value of equity investments at FVOCI (26,866) (13,441)
Remeasurement losses on defined benefit plans (23) 372
--------------------------------------------------------- -------------- --------------
Income tax effect reported in other comprehensive income (28,347) (14,845)
--------------------------------------------------------- -------------- --------------
In light of guidance issued by the Mexican Tax Administration
Service (Servicio de Administración Tributaria or "SAT") relating
to certain mining investments and following conversations held by
the Company with the SAT regarding its income tax audits for the
year 2013 at Minera Saucito and Minera Fresnillo, the Group decided
to voluntarily amend the income tax treatment of: (i) the
inter-company sale/purchase of mining concessions; (ii) mining
works disbursements; and (iii) the deduction of mining works
disbursements for the determination of the Special Mining Rights.
None of these were explicitly dealt with in Mexican tax law
previously.
These amendments were applied from 2013 to 2019 for all its
underground operations and resulted in an increase in the current
corporate income tax charge of US$29.2 million and current special
mining right charge of US$8.4 million; this effect was offset by a
decrease in deferred corporate income tax of US$29.2 million. The
amendment also resulted in US$25.0 million of interest and
surcharges, presented in finance costs and US$1.2 million of
penalties presented in other expenses].
(b) Reconciliation of the income tax expense at the Group's
statutory income rate to income tax expense at the Group's
effective income tax rate:
Year ended 31
December
-------------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
-------------------------------------------------------------- -------------- --------------
Accounting profit before income tax 551,253 178,756
-------------------------------------------------------------- -------------- --------------
Tax at the Group's statutory corporate income tax rate
30.0% 165,376 53,627
Expenses not deductible for tax purposes 2,921 2,934
Inflationary uplift of the tax base of assets and liabilities (22,972) (17,229)
Current income tax (over)/underprovided in previous
years 44 (275)
Effect of conclusive agreement - (5,084)
Exchange rate effect on tax value of assets and liabilities
(1) 55,110 (37,101)
Non-taxable/non-deductible foreign exchange effects (16,923) 3,982
Inflationary uplift of tax losses (1,170) (1,439)
Inflationary uplift on tax refunds (2,077) (3,867)
Incentive for Northern Border Zone (35,810) (6,417)
IEPS tax credit (note 10 (e)) - (9,975)
Deferred tax asset not recognised 4,916 6,688
Special mining right taxable/(deductible) for corporate
income tax (10,488) 5,718
Other 1,710 432
-------------------------------------------------------------- -------------- --------------
Corporate income tax at the effective tax rate of 25.5%
(2019: (4.5)%) 140,637 (8,006)
-------------------------------------------------------------- -------------- --------------
Special mining right 35,037 (19,053)
-------------------------------------------------------------- -------------- --------------
Tax at the effective income tax rate of 31.9% (2019:
(15.1)%) 175,674 (27,059)
-------------------------------------------------------------- -------------- --------------
(1 Mainly derived from the tax value of property, plant and
equipment.)
The most significant items reducing the effect of effective tax
rate are inflation effects, exchange rate and the incentive for
Norther Border Zone. The future effects of inflation and exchange
rate will depend on future market conditions.
(c) Movements in deferred income tax liabilities and assets:
Year ended 31
December
------------------------------------------------------ ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------------ -------------- --------------
Opening net liability (210,577) (382,042)
Income statement credit arising on corporate income
tax 67,666 156,518
Income statement (charge)/credit arising on special
mining right (3,696) 29,596
Exchange difference 35 196
Net charge related to items directly charged to other
comprehensive income (28,347) (14,845)
Closing net liability (174,919) (210,577)
------------------------------------------------------ -------------- --------------
The amounts of deferred income tax assets and liabilities as at
31 December 2020 and 2019, considering the nature of the related
temporary differences, are as follows:
Consolidated Consolidated
balance sheet income statement
------------------------------------------------ ------------------------------ ------------------------------
2020 2019 2020 2019
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------------------ -------------- -------------- -------------- --------------
Related party receivables (266,986) (201,481) 65,505 (18,650)
Other receivables (3,292) (4,375) (1,083) 5,690
Inventories 231,584 185,012 (46,572) 3,107
Prepayments (1,833) (1,041) 792 6
Derivative financial instruments including
Silverstream contract (170,122) (158,243) 10,422 6,262
Property, plant and equipment arising from
corporate income tax (116,051) (179,117) (63,066) (151,605)
Exploration expenses and operating liabilities 61,099 66,275 5,176 (15,584)
Other payables and provisions 73,706 69,317 (4,390) (12,014)
Losses carried forward 75,043 53,002 (22,041) 14,057
Post-employment benefits 1,904 1,702 (225) (315)
Deductible profit sharing 6,453 2,998 (3,455) 809
Special mining right deductible for corporate
income tax 21,655 18,077 (3,578) 11,244
Equity investments at FVOCI (35,944) (9,236) (157) (695)
Other (341) (5,369) (4,994) 1,171
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability related to corporate
income tax (123,125) (162,479)
Deferred tax credit related to corporate
income tax - - (67,666) (156,517)
Related party receivables arising from
special mining right (28,781) (22,518) 6,263 2,357
Inventories arising from special mining
right 16,896 17,083 187 (3,337)
Property plant and equipment arising from
special mining right (39,913) (42,663) (2,750) (28,616)
------------------------------------------------ -------------- -------------- -------------- --------------
Other 4 - (4) -
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (174,919) (210,577)
Deferred tax credit (63,970) (186,113)
------------------------------------------------ -------------- -------------- -------------- --------------
Reflected in the statement of financial
position as follows:
Deferred tax assets 120,676 110,770
Deferred tax liabilities-continuing operations (295,595) (321,347)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (174,919) (210,577)
------------------------------------------------ -------------- -------------- -------------- --------------
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$248.4 million (2019: US$176.7 million). If not utilised, US$12.7
million (2019: US$21.2 million) will expire within five years and
US$235.7 million (2019: US$155.5 million) will expire between six
and ten years. At entity level deferred tax asset amounting to
US31.2 million is cover by a deferred tax liability position, the
remaining US$43.3 million corresponds to Fresnillo plc which
maintained a deferred net asset position. The Group has conducted a
feasible tax planning that will allow applied the tax losses before
its expiration.
The Group has further tax losses and other similar attributes
carried forward of US$64.6 million (2019: US$59.7 million) on which
no deferred tax is recognised due to insufficient certainty
regarding the availability of appropriate future taxable profits.
Based on the applicable tax legislation the tax losses are not
subject to expire.
(d) Unrecognised deferred tax on investments in subsidiaries
The Group has not recognised all of the deferred tax liability
in respect of distributable reserves of its subsidiaries because it
controls them and only part of the temporary differences are
expected to reverse in the foreseeable future. The temporary
differences for which a deferred tax liability has not been
recognised aggregate to US$1,797 million (2019: US$1,619
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%.
On 30 December 2018, the Decree of tax incentives for the
northern border region of Mexico was published in the Official
Gazette, which provided a reduction of income tax by a third and
also a reduction of 50% of the value added tax rate, for taxpayers
that produce income from business activities carried out within the
northern border region. The tax incentives were applicable since 1
January 2019 and remain in force until 31 December 2020. On 30
December 2020 and extension of the Decree was published in the
Official Gazette which remain in force until 31 December 2024. Some
of the Group companies which produce income from business
activities carried out within Caborca, Sonora, which is considered
for purposes of the Decree as northern border region, applied for
this Decree tax incentives before the Mexican tax authorities, and
were granted authorization for income tax and value added tax
purposes.
Until 2019 the Mexican Internal Revenue Law granted to taxpayers
a credit in respect of an excise tax (Special Tax on Production and
Services, or IEPS for its acronym in Spanish) paid when purchasing
diesel used for general machinery and certain mining vehicles. The
credit could be applied against the annual corporate income tax.
The credit was calculated on an entity-by-entity basis. During the
year ended 31 December 2019, the Group applied a credit of US$9.9
million in respect of the year. As the IEPS deduction was itself
taxable, the benefit was recognised at 70% of the IEPS calculated
during the year. The net amount applied by the Group is presented
in the reconciliation of the effective tax rate in note 10(b).
The special mining right "SMR " states that the owners of mining
titles and concessions are subject to pay an annual mining right of
7.5% of the profit derived from the extractive activities and is
considered as income tax under IFRS. The SMR allows as a credit the
payment of mining concessions rights up to the amount of SMR
payable within the same legal entity. The 7.5% tax applies to a
base of income before interest, annual inflation adjustment, taxes
paid on the regular activity, depreciation and amortization, as
defined by the new ISR. This SMR can be credited against the
corporate income tax of the same fiscal year and its payment must
be remitted no later than the last business day of March of the
following year.
During the fiscal year ended 31 December 2020, the Group
credited US$21.3 million (2019: US$14.7 million) of mining
concession rights against the SMR. Total mining concessions rights
paid during the year were US$21.3 million (2019: US$21.1 million)
and have been recognised in the income statement within cost of
sales and exploration expenses. Mining concessions rights paid in
excess of the SMR cannot be credited to SMR in future fiscal
periods, and therefore no deferred tax asset has been recognised in
relation to the excess. Without regards to credits permitted under
the SMR regime, the current special mining right credit would have
been US$46.1 million (2019: US$18.6 million).
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the year attributable to equity shareholders of the Company by the
weighted average number of Ordinary Shares in issue during the
period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2020 and 2019, earnings per share have been
calculated as follows:
Year ended 31
December
--------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Earnings:
Profit from continuing operations attributable to equity
holders of the Company 374,124 203,997
Adjusted profit from continuing operations attributable
to equity holders of the Company 324,451 170,134
--------------------------------------------------------- -------------- --------------
Adjusted profit is profit as disclosed in the Consolidated
Income Statement adjusted to exclude revaluation effects of the
Silverstream contract of US$71.0 million gain (US$49.7 million net
of tax) (2019: US$48.4 million gain (US$33.9 million net of
tax)).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
2020 2019
thousands thousands
------------------------------------------------------- ---------- ----------
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
------------------------------------------------------- ---------- ----------
2020 2019
US$ US$
------------------------------------------------------- ---------- ----------
Earnings per share:
Basic and diluted earnings per share 0.507 0.277
Adjusted basic and diluted earnings per Ordinary Share
from continuing operations 0.440 0.231
------------------------------------------------------- ---------- ----------
12. Property, plant and equipment
Year ended 31 December 2019(3)
------------------------------- ----------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
US$ thousands
------------------------------- ----------------------------------------------------------------------------------
Cost
At 31 December 2018 283,299 2,132,603 2,176,404 276,731 498,168 5,367,205
Effect of adoption IFRS 16 3,550 - - 7,749 - 11,299
At 1 January 2019 286,849 2,132,603 2,176,404 284,480 498,168 5,378,504
Additions 1,209 25,219 2,623 40,786(2) 536,374 606,211
Disposals (106) (52,979) (51,123) (4,675) - (108,883)
Transfers and other movements 35,616 166,267 193,945 8,938 (404,766) -
At 31 December 2019 323,568 2,271,110 2,321,849 329,529 629,776 5,875,832
Accumulated depreciation
At 1 January 2019 (136,178) (1,208,504) (1,204,839) (124,580) - (2,674,101)
Depreciation for the year(1) (26,219) (184,616) (253,044) (27,119) - (490,998)
Disposals 69 47,311 51,102 4,202 - 102,684
At 31 December 2019 (162,328) (1,345,809) (1,406,781) (147,497) - (3,062,415)
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Net Book amount at 31 December
2019 161,240 925,301 915,068 182,032 629,776 2,813,417
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Year ended 31 December 2020(3)
------------------------------- ----------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
US$ thousands
------------------------------- ----------------------------------------------------------------------------------
Cost
At 1 January 2020 323,568 2,271,110 2,321,849 329,529 629,776 5,875,832
Additions 1,930 20,409 3,709 12,910(2) 377,137 416,095
Disposals (1,015) (27,690) (91,266) (3,268) - (123,239)
Transfers and other movements 17,538 122,096 173,362 16,882 (329,878) -
At 31 December 2020 342,021 2,385,925 2,407,654 356,053 677,035 6,168,688
Accumulated depreciation
At 1 January 2020 (162,328) (1,345,809) (1,406,781) (147,497) - (3,062,415)
Depreciation for the year(1) (9,234) (221,497) (256,181) (30,741) - (517,653)
Disposals 387 26,448 91,687 1,053 - 119,575
At 31 December 2020 (171,175) (1,540,858) (1,571,275) (177,185) - (3,460,493)
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
Net Book amount at 31 December
2020(4) 170,846 845,067 836,379 178,868 677,035 2,708,195
------------------------------- ---------- -------------- ---------------- --------- ------------ -----------
1 Depreciation for the year includes US$515.9 million (2019:
US$490.7 million) recognised as an expense in the income statement
and US$1.7 million (2019: US$0.3 million), capitalised as part of
construction in progress.
2 From the additions in "other assets" category US$3.9 million
(2019: US$29.4 million) corresponds to the reassessment of mine
closure rehabilitations costs, see note 20.
(3 Figures include Right-of-use assets as described in Note
24)
4 The amount of PP&E related to Soledad & Dipolos at 31
December 2020 is US$35.9 million (2019: US$37.2 million) and
reflects capitalised mining works and the amount recognised in the
cost of PP&E related to estimated remediation and closure
activities.
The table below details construction in progress by operating
mine and development projects
Year ended 31
December
---------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 45,845 75,346
Herradura 55,120 53,388
Noche Buena 10,069 10,682
Ciénega 56,032 57,214
Fresnillo 154,276 141,166
San Julián 20,801 41,158
Juanicipio 320,306 231,105
Other(1) 14,586 19,717
---------------- -------------- --------------
677,035 629,776
---------------- -------------- --------------
(1) (Mainly) corresponds to Minera Bermejal, S.A. de C.V. (2019:
Minera Bermejal, S.A. de C.V.).
During the year ended 31 December 2020, the Group capitalised
US$8.8 million of borrowing costs within construction in progress
(2019: US$6.1 million). Borrowing costs were capitalised at the
rate of 5.02% (2019: 5.78%).
Sensitivity analysis
As at 31 December 2020 and 2019, 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$1,580/ounce and US$20.2/ounce (2019: US$1,370/ounce and
US$18.7/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 reasonably
possible change in prices could lead to impairment. Management has
considered a low sensitivity by decreasing gold and silver prices
by 10% and 25% respectively (2019: gold and silver 5%) and a high
sensitivity by decreasing gold and silver prices by 20% and 45%
respectively (2019: gold and silver 10% and 15% respectively). As
at 31 December 2020 the analysis resulted in an impairment on
Herradura of US$43.2 million (2019:US$356.4 million) under high
sensitivity; US$nil (2019: US$127.4 million) under low sensitivity;
San Julian US$401.0 million (2019: US$121.6 million) under high
sensitivity; US$199.8 million (2019: US$109.7 million) under low
sensitivity; Cienega US$129.1 million (2019: US$nil) under high
sensitivity; US$nil (2019: US$nil) under low sensitivity; Fresnillo
US$77.6 million (2019: US$nil) under high sensitivity; US$nil
(2019: US$nil) under low sensitivity and Noche Buena US$23.7
million (2019: US$nil) under high sensitivity; US$8.6 million
(2019: US$nil) under low sensitivity.
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
2020 was $5.37 per ounce (2019: $5.31 per ounce). Under the
contract, the Group has the option to receive a net cash settlement
from Peñoles attributable to the silver produced and sold from
Sabinas, to take delivery of an equivalent amount of refined silver
or to receive settlement in the form of both cash and silver. If,
by 31 December 2032, the amount of silver produced by Sabinas is
less than 60 million ounces, a further payment is due from Peñoles
of US$1 per ounce of shortfall. At 31 December 2020 the weighted
average rate applied for the purposes of the valuation model was
7.43% (2019: 6.57%).
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 34
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 2020 total proceeds
received in cash were US$33.7 million (2019: US$24.3 million) of
which, US5.2 million was in respect of proceeds receivable as at 31
December 2019 (2018: US$3.3 million). Cash received in respect of
the year of US$28.4 million (2019: US$20.9 million) corresponds to
2.3 million ounces of payable silver (2019: 2.3 million ounces). As
at 31 December 2020, a further US$7.6 million (2019: US$5.2
million) of cash receivable corresponding to 362,295 ounces of
silver is due (2019: 414,963 ounces).
The US$71.0 million unrealised gain recorded in the income
statement (31 December 2019: US$48.4 million gain) resulted mainly
from the decrease in the LIBOR reference rate, the unwinding of the
discount and the increase in the forward silver price curve which
were partially offset by the updating of the Sabinas Reserves and
Resources, inflation and exchange rate forecasts.
A reconciliation of the beginning balance to the ending balance
is shown below:
2020 2019
US$ thousands US$ thousands
-------------------------------------------------- -------------- --------------
Balance at 1 January 541,254 519,093
Cash received in respect of the year (28,427) (20,932)
Cash receivable (7,648) (5,283)
Remeasurement gains recognised in profit and loss 70,961 48,376
-------------------------------------------------- -------------- --------------
Balance at 31 December 576,140 541,254
-------------------------------------------------- -------------- --------------
Less - Current portion 41,443 22,558
-------------------------------------------------- -------------- --------------
Non-current portion 534,697 518,696
-------------------------------------------------- -------------- --------------
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
----------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Finished goods (1) 28,925 12,154
Work in progress (2) 305,888 252,639
Ore stockpile (3) 414 -
Operating materials and spare parts 113,111 103,740
----------------------------------------------------------- -------------- --------------
448,338 368,533
Allowance for obsolete and slow-moving inventories (5,131) (4,793)
----------------------------------------------------------- -------------- --------------
Balance as 31 December at lower of cost and net realisable
value 443,207 363,740
----------------------------------------------------------- -------------- --------------
Less - Current portion 351,587 272,120
----------------------------------------------------------- -------------- --------------
Non-current portion (4) 91,620 91,620
----------------------------------------------------------- -------------- --------------
(1 Finished goods include metals contained in concentrates and
doré bars on hand or in transit to a smelter or refinery.)
2 Work in progress includes metals contained in ores on leaching
pads and stoked to be processed in dynamic leaching plants (note
2(c)).
(3 Ore stockpile includes ore mineral obtained during the
development phase at Juanicipio.)
(4 Non-current inventories relate to ore in leaching pads where
the leaching process has stopped and is not expected to restart
within twelve months.)
Concentrates are a product containing sulphides with variable
content of precious and base metals and are sold to smelters and/or
refineries. Doré is an alloy containing a variable mixture of gold
and silver that is delivered in bar form to refineries, activated
carbon is a product containing variable mixture of gold and silver
that is delivered in small particles. The content once processed by
the smelter and refinery is sold to customers in the form of
refined products.
The amount of inventories recognised as an expense in the year
was US$1,550.7 million (2019: US$1,657.3 million) before changes to
the net realisable value of inventory. During 2020 and 2019, there
was no adjustment to net realisable value allowance against
work-in-progress inventory. The adjustment to the allowance for
obsolete and slow-moving inventory recognised as an expense was
US$0.3 million (2019: US$1.3 million).
15. Trade and other receivables
Year ended 31
December
--------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Trade receivables from related parties (note 26) 326,833 206,982
Value Added Tax receivable 167,957 205,232
Other receivables from related parties (note 26) 8,176 7,988
Other receivables from contractors 1,918 2,418
Other receivables 8,545 15,791
--------------------------------------------------------- -------------- --------------
513,429 438,411
Expected credit loss of 'Other receivables' (502) (769)
--------------------------------------------------------- -------------- --------------
Trade and other receivables classified as current assets 512,927 437,642
--------------------------------------------------------- -------------- --------------
Other receivables classified as non-current assets:
Value Added Tax receivable - 23,014
--------------------------------------------------------- -------------- --------------
- 23,014
--------------------------------------------------------- -------------- --------------
512,927 460,656
--------------------------------------------------------- -------------- --------------
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$339.6million
(2019: US$219.6 million), and in Mexican pesos US$173.2 million
(2019: US$241.0 million).
Balances corresponding to Value Added Tax receivables and US$8.5
million within Other receivables (2019:US$15.8) are not financial
assets.
As of 31 December for each year presented, with the exception of
'other receivables' in the table above, all trade and other
receivables were neither past due nor credit-impaired. The amount
past due and considered as credit-impaired as of 31 December 2020
is US$0.5 million (2019: US$0.8 million). Trade receivables from
related partied and other receivables for related parties are
classified as financial assets at FVTPL and therefore not
considered in the expected credit loss analysis. In determining the
recoverability of receivables, the Group performs a risk analysis
considering the type and age of the outstanding receivable and the
credit worthiness of the counterparty, see note 30(b).
16. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its
operations and in order to achieve its treasury objectives.
As at 31 December
-------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
-------------------------- -------------- --------------
Cash at bank and on hand 1,955 3,347
Short-term deposits 1,068,460 333,229
-------------------------- -------------- --------------
Cash and cash equivalents 1,070,415 336,576
-------------------------- -------------- --------------
Cash at bank earns interest at floating rates based on daily
bank deposits. Short-term deposits are made for varying periods of
between one day and three months, depending on the immediate cash
requirements of the Group, and earn interest at the respective
short-term deposit rates. Short-term deposits can be withdrawn at
short notice without any penalty or loss in value.
17. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
--------------------------------------- --------------------------- ---------------------------
2020 2019
--------------------------------------- --------------------------- ---------------------------
Class of share Number Amount Number Amount
--------------------------------------- ------------- ------------ ------------- ------------
Ordinary Shares each of US$0.50 1,000,000,000 $500,000,000 1,000,000,000 $500,000,000
Sterling Deferred Ordinary Shares each
of GBP1.00 50,000 GBP50,000 50,000 GBP50,000
--------------------------------------- ------------- ------------ ------------- ------------
Issued share capital of the Company is as follows:
Sterling Deferred
Ordinary Shares Ordinary Shares
-------------------- -------------------------- -------------------
Number US$ Number GBP
-------------------- ----------- ------------- ------- ----------
At 1 January 2019 736,893,589 $368,545,586 50,000 GBP50,000
At 31 December 2019 736,893,589 $368, 545,586 50,000 GBP50,000
At 31 December 2020 736,893,589 $368, 545,586 50,000 GBP50,000
-------------------- ----------- ------------- ------- ----------
As at 31 December 2020 and 2019, all issued shares with a par
value of US$0.50 each are fully paid. The rights and obligations
attached to these shares are governed by law and the Company's
Articles of Association. Ordinary shareholders are entitled to
receive notice and to attend and speak at any general meeting of
the Company. There are no restrictions on the transfer of the
Ordinary shares.
The Sterling Deferred Ordinary Shares only entitle the
shareholder on winding up or on a return of capital to payment of
the amount paid up after repayment to Ordinary Shareholders. The
Sterling Deferred Ordinary Shares do not entitle the holder to
payment of any dividend, or to receive notice or to attend and
speak at any general meeting of the Company. The Company may also
at its option redeem the Sterling Deferred Ordinary Shares at a
price of GBP1.00 or, as custodian, purchase or cancel the Sterling
Deferred Ordinary Shares or require the holder to transfer the
Sterling Deferred Ordinary Shares. Except at the option of the
Company, the Sterling Deferred Ordinary Shares are not
transferrable.
Reserves
Share premium
This reserve records the consideration premium for shares issued
at a value that exceeds their nominal value.
Capital reserve
The capital reserve arose as a consequence of the Pre-IPO
Reorganisation as a result of using the pooling of interest
method.
Hedging reserve
This reserve records the portion of the gain or loss on a
hedging instrument in a cash flow hedge that is determined to be an
effective hedge, net of tax. When the hedged transaction occurs,
the gain or the loss is transferred out of equity to the income
statement or the value of other assets.
Cost of hedging reserve
The changes in the time value of option contracts are
accumulated in the costs of hedging reserve. These deferred costs
of hedging are either reclassified to profit or loss or recognised
as a basis adjustment to non-financial assets or liabilities upon
maturity of the hedged item, or, in the case of a hedge item that
realises over time, amortised on a systematic and rational basis
over the life of the hedged item.
Fair value reserve of financial assets at FVOCI
The Group has elected to recognise changes in the fair value of
certain investments in equity securities in OCI, as explained in
note 2(g). These changes are accumulated within the FVOCI reserve
within equity. The Group transfers amounts from this reserve to
retained earnings when the relevant equity securities are
derecognised.
Foreign currency translation reserve
The foreign currency translation reserve is used to record
exchange differences arising from the translation of the financial
information of entities with a functional currency different to
that of the presentational currency of the Group.
Retained earnings/accumulated losses
This reserve records the accumulated results of the Group, less
any distributions and dividends paid.
18. Dividends declared and paid
The dividends declared and paid during the years ended 31
December 2020 and 2019 are as follows:
US cents
per
Ordinary Amount
Share US$ thousands
------------------------------------------------------- --------- --------------
Year ended 31 December 2020
Final dividend for 2019 declared and paid during the
year(1) 11.90 87,690
Interim dividend for 2020 declared and paid during the
year(2) 2.30 16,949
14.20 104,639
------------------------------------------------------- --------- --------------
Year ended 31 December 2019
Final dividend for 2018 declared and paid during the
year(3) 16.70 123,061
Interim dividend for 2019 declared and paid during the
year(4) 2.60 19,160
------------------------------------------------------- --------- --------------
19.30 142,221
------------------------------------------------------- --------- --------------
(1 This dividend was approved by the Shareholders on 26 May 2020
and paid on 2 June 2020.)
(2 This dividend was approved by the Board of Directors on 27
July 2020 and paid 16 September 2020)
(3 This dividend was approved by the Shareholders on 21 May 2019
and paid on 24 May 2019.)
(4 This dividend was approved by the Board of Directors on 24
July 2019 and paid on 6 September 2019.)
The directors have proposed a final dividend of US$23.5 cents
per share, which is subject to approval at the annual general
meeting and is not recognised as a liability as at 31 December
2020. Dividends paid from the profits generated from 1 January 2014
to residents in Mexico and to non-resident shareholders may be
subject to an additional tax of up to 10%, which will be withheld
by the Group.
In late 2019, the Directors became aware of a technical breach
of the Companies Act 2006 (the Act) whereby certain dividends paid
between 2011 and 2019 (the 'Historic Dividends') had been made
without having filed interim accounts in accordance with the Act.
The relevant interim accounts have now been filed with the
Registrar of Companies and these show that the Company had
sufficient distributable reserves at the point at which each of the
Historic Dividends was paid. It is the intention of the Directors,
as a matter of prudency, to put forward a resolution to
shareholders in due course to regularise the position. This
decision will have no effect on the monies received pursuant to
these dividends and will not adversely impact shareholders or the
Company. Nevertheless, the Directors will keep the matter under
review.
19. Interest-bearing loans
Senior Notes
On 29 September 2020, the Group repurchased certain of its
5.500% Senior Notes due 2023 that had a carrying value of US$482.1
million for consideration of US$543.0 million. Additional accrued
interest at the date of the repurchase included in the settlement
amounted US$10.8 million. The premium paid on purchase of these
notes of US$60.9 million was recognised in financial expenses. The
settlement occurred on 2 October 2020.
On 2 October 2020, the Group completed its offering of
US$850,000,000 aggregate principal amount of4.250% Senior Notes due
2050. The proceeds were partially used to finance the repurchase
mentioned above.
Movements in the year in the debt recognised in the balance
sheet are as follows:
As at 31 December
------------------------------------------------ --------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------------ --------------- ---------------
Opening balance 801,239 800,127
Issuance of 4.250% senior notes due 2050(1) 828,325 -
Repayments of 5.500% senior notes due 2023 (482,121) -
Accrued interest 48,873 46,267
Interest paid (2) (43,144) (46,267)
Amortisation of discount and transaction costs 3,498 1,112
------------------------------------------------ --------------- ---------------
Closing balance 1,156,670 801,239
------------------------------------------------ --------------- ---------------
(1 Balance is net of unamortized discounts and capitalized
transaction costs of $21.7 million.)
(2 Accrued interest is payable semi-annually on 13 May and 13
November for 5.500 senior notes and 2 April and 2 October for
4.250% senior notes.)
The Group has the following restrictions derived from the
issuance of all outstanding Senior Notes:
Change of control:
Should the rating of the senior notes be downgraded as a result
of a change of control (defined as the sale or transfer of 35% or
more of the common shares; the transfer of all or substantially all
the assets of the Group; starting a dissolution or liquidation
process; or the loss of the majority in the board of directors) the
Group is obligated to repurchase the notes at an equivalent price
of 101% of their nominal value plus the interest earnt at the
repurchase date, if requested to do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property
that may have a material impact on business performance (key
assets). Nevertheless, the Group may pledge the aforementioned
properties provided that the repayment of the Notes keeps the same
level of priority as the pledge on those assets.
20. Provision for mine closure cost
The provision represents the discounted values of the estimated
cost to decommission and rehabilitate the mines at the estimated
date of depletion of mine deposits. Uncertainties in estimating
these costs include potential changes in regulatory requirements,
decommissioning, dismantling and reclamation alternatives, timing,
and the discount, foreign exchange and inflation rates applied.
The Group has performed separate calculations of the provision
by currency, discounting at corresponding rates. As at 31 December
2020, the discount rates used in the calculation of the parts of
the provision that relate to Mexican pesos range from 4.35% to
8.12% (2019: range of 6.83% to 7.47%). The range for the current
year parts that relate to US dollars range from 0.07% to 1.16%
(2019: range of 1.43% to 1.82%).
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 lives 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 24 years from 31 December 2020 (2 to 29
years from 31 December 2019). As at 31 December 2020 the weighted
average term of the provision is 12 years (2019: 13 years)
As at 31 December
------------------------------------------ ------------------------------
2020 2019
US$ thousands US$ thousands
------------------------------------------ -------------- --------------
Opening balance 231,056 189,842
Increase (decrease) to existing provision 8,351 (4,215)
Effect of changes in discount rate 3,896 27,961
Unwinding of discount rate 10,801 11,848
Payments (817) (24)
Foreign exchange (7,599) 5,644
------------------------------------------ -------------- --------------
Closing balance 245,688 231,056
------------------------------------------ -------------- --------------
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 Mexican
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
up to 30 June 2007 as well as statutory seniority premiums for both
unionised and non-unionised workers.
The overall investment policy and strategy for the Group's
defined benefit plan is guided by the objective of achieving an
investment return which, together with contributions, ensures that
there will be sufficient assets to pay pension benefits and
statutory seniority premiums for non-unionised workers as they fall
due while also mitigating the various risks of the plan. However,
the portion of the plan related to statutory seniority premiums for
unionised workers is not funded. The investment strategies for the
plan are generally managed under local laws and regulations. The
actual asset allocation is determined by current and expected
economic and market conditions and in consideration of specific
asset class risk in the risk profile. Within this framework, the
Group ensures that the trustees consider how the asset investment
strategy correlates with the maturity profile of the plan
liabilities and the respective potential impact on the funded
status of the plan, including potential short-term liquidity
requirements.
Death and disability benefits are covered through insurance
policies.
The following tables provide information relating to changes in
the defined benefit obligation and the fair value of plan
assets:
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
---------------------------------------- ----------------------------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes increase at
1 recognised included in in Sub-total due to 31
January Service Net Foreign in the Benefits in net demographic financial Experience Foreign included Contributions personnel December
2020 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2020
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (31,294) (1,211) (1,738) 1,595 (1,354) 985 - - (487) 976 - 489 - (184) (31,358)
Fair value
of plan
assets 20,590 1,089 (1,123) (34) (985) (342) - - - - (342) - 152 19,381
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (10,704) (1,211) (649) 472 (1,388) - (342) - (487) 976 - 147 - (32) (11,977)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Pension cost charge Remeasurement gains/(losses) in
to income statement OCI
---------------------------------------- ----------------------------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes increase at
1 recognised included in in Sub-total due to 31
January Service Net Foreign in the Benefits in net demographic financial Experience Foreign included Contributions personnel December
2019 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2019
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (25,721) (975) (1,857) (1,183) (4,015) 708 - - (2,562) 46 - (2,516) - 250 (31,294)
Fair value
of plan
assets 19,328 1,334 866 2,200 (708) 174 - - - - 174 - (404) 20,590
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (6,393) (975) (523) (317) (1,815) - 174 - (2,562) 46 (2,342) - (154) (10,704)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Of the total defined benefit obligation, US$9.6 million (2019:
US$9.2 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions
to the plan for the next annual reporting period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown
below:
As at 31 December
------------------------------- -------------------
2020 2019
% %
------------------------------- --------- --------
Discount rate 7.09 7.24
Future salary increases (NCPI) 5.00 5.00
------------------------------- --------- --------
The life expectancy of current and future pensioners, men and
women aged 65 and older will live on average for a further 23.4 and
26.9 years respectively (2019: 23.2 years for men and 26.7 for
women). The weighted average duration of the defined benefit
obligation is 12.5 years (2019: 11.3 years).
The fair values of the plan assets were as follows:
As at 31 December
--------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
--------------------------- -------------- --------------
Government debt - 61
State owned companies 3,756 4,907
Mutual funds (fixed rates) 15,625 15,622
--------------------------- -------------- --------------
19,381 20,590
--------------------------- -------------- --------------
As at 31 December 2020 and 2019, all the funds were invested in
quoted debt instruments.
The pension plan has not invested in any of the Group's own
financial instruments nor in properties or assets used by the
Group.
A quantitative sensitivity analysis for significant assumptions
as at 31 December 2020 is as shown below:
Future salary
increases Life expectancy
Assumptions Discount rate (NCPI) of pensioners
-------------------------------- --------------------- -------------------- ---------------
0.5% 0.5% 0.5% 0.5% + 1
Sensitivity Level Increase Decrease increase decrease Increase
-------------------------------- ---------- --------- --------- --------- ---------------
(Decrease)/increase to the
net defined benefit obligation
(US$ thousands) (1,261) 1,900 (512) (852) 522
--------------------------------- ---------- --------- --------- --------- ---------------
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
-------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Trade payables 86,838 107,222
Note payable(1) 64,425 -
Other payables to related parties (note 26) 19,629 17,899
Accrued expenses 16,368 18,410
Other taxes and contributions 37,948 16,237
-------------------------------------------- -------------- --------------
225,208 159,768
-------------------------------------------- -------------- --------------
(1) (Corresponds to a short-term interest-bearing note payable
received from Minera los Lagartos, S.A. de C.V. which holds a
non-controlling interest in Juanicipio project)
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.
Balances corresponding to Accrued expenses and Other tax and
contributions are not financial liabilities.
The Group's exposure to currency and liquidity risk related to
trade and other payables is disclosed in note 30.
23. Commitments
A summary of capital expenditure commitments by operating mine
and development project is as follows:
As at 31 December
---------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 30,922 36,743
Herradura 23,635 9,864
Noche Buena 373 252
Ciénega 9,304 6,743
Fresnillo 25,256 58,109
San Julián 3,051 5,516
Juanicipio 192,038 84,609
---------------- -------------- --------------
284,579 201,836
---------------- -------------- --------------
24. Leases
(a) The Group as lessee
The Group leases various offices, buildings and IT equipment.
The resulting lease liability is as follows:
As at
----------------------- ------------------------------
31 December 31 December
2020 2019
US$ thousands US$ thousands
----------------------- -------------- --------------
IT equipment 9,779 9,514
Buildings 2,966 3,030
----------------------- -------------- --------------
Total lease liability 12,745 12,544
----------------------- -------------- --------------
Less - Current portion 5,048 4,535
----------------------- -------------- --------------
Non-current portion 7,697 8,009
----------------------- -------------- --------------
The total cash outflow for leases for the year ended 31 December
2020, except short term and low value leases,
amount US$5.8 million (2019: US$4.7 million).
The table below details right-of-use assets included as property
plant and equipment, see note 12
Year ended 31 December
2020
Computer
Building equipment Total
------------------------------------ -------- ---------- -------------
US$ thousands
------------------------------------ -------- ---------- -------------
Cost
At 1 January 2020 3,580 13,247 16,827
Additions 1,436 7,256 8,692
Disposals (1,015) (2,976) (3,991)
At 31 December 2020 4,001 17,527 21,528
Accumulated depreciation
At 1 January 2020 (686) (3,968) (4,654)
Depreciation for the year (743) (4,979) (5,722)
Disposals 370 891 1,261
At 31 December 2020 (1,059) (8,056) (9,115)
------------------------------------ -------- ---------- -------------
Net Book amount at 31 December 2020 2,942 9,471 12,413
------------------------------------ -------- ---------- -------------
Amounts recognized in profit and loss for the year, additional
to depreciation of right-of-use assets, included US$0.6 million
relating to interest expense, US$0.7million relating to short-term
leases and US$2.9 million relating to low-value assets.
(b) The Group as a lessor
Operating leases, in which the Group is the lessor, relate to
mobile equipment owned by the Group with lease terms of between 12
to 36 months. All operating lease contracts contain market review
clauses in the event that the lessee exercises its option to renew.
The lessee does not have an option to purchase the equipment at the
expiry of the lease period. The Group's leases as a lessor are not
material.
25. Contingencies
As of 31 December 2019, the Group has the following
contingencies:
- The Group is subject to various laws and regulations which, if
not observed, could give rise to penalties.
- Tax periods remain open to review by the Mexican tax
authorities (SAT, by its Spanish acronym) in respect of income
taxes for five years following the date of the filing of corporate
income tax returns, during which time the authorities have the
right to raise additional tax assessments including penalties and
interest. Under certain circumstances, the reviews may cover longer
periods. As such, there is a risk that transactions, and in
particular related party transactions, that have not been
challenged in the past by the authorities, may be challenged by
them in the future.
- Certain of the Group's income tax returns are currently being
reviewed by the SAT. The status of the material on-going
inspections is as follows:
- On 13 February 2020, SAT initiated an audit of the income tax
and mining rights computations of Desarrollos Mineros Fresne for
the year 2014. On 3 February 2021, the SAT delivered its findings
to which the company will respond no later than 4 March 2021. The
findings relate to the tax treatments of capitalised stripping cost
and exploration expenditure.
- During the year, the Group amended the tax treatment for
income tax purposes in respect of mining works and mining
concessions as described in Note 10(c). This amendment resulted in
the closure of the previously reported income tax audits for the
year 2013 at Minera Saucito and Minera Fresnillo.
- It is not practical to determine the amount of any potential
claims or the likelihood of any unfavourable outcome arising from
these or any future inspections that may be initiated. However,
management believes that its interpretation of the relevant
legislation is appropriate and that the Group has complied with all
regulations and paid or accrued all taxes and withholdings that are
applicable.
- On 8 May 2008, the Company and Peñoles entered into the
Separation Agreement (the 'Separation Agreement'). This agreement
relates to the separation of the Group and the Peñoles Group and
governs certain aspects of the relationship between the Fresnillo
Group and the Peñoles Group following the initial public offering
in May 2008 ('Admission'). The Separation Agreement provides for
cross-indemnities between the Company and Peñoles so that, in the
case of Peñoles, it is held harmless against losses, claims and
liabilities (including tax liabilities) properly attributable to
the precious metals business of the Group and, in the case of the
Company, it is held harmless by Peñoles against losses, claims and
liabilities which are not properly attributable to the precious
metals business. Save for any liability arising in connection with
tax, the aggregate liability of either party under the indemnities
shall not exceed US$250 million in aggregate.
- In 2011, flooding occurred in the Saucito mine, following
which the Group filed an insurance claim in respect of the damage
caused (and in respect of business interruption). This insurance
claim was rejected by the insurance provider. In early 2018, after
the matter had been taken to mutually agreed arbitration, the
insurance claim was declared valid; however, there is disagreement
about the appropriate amount to be paid. In October 2018 the Group
received US$13.6 million in respect of the insurance claim, however
this does not constitute a final settlement and management
continues to pursue a higher insurance payment. Due to the fact
that negotiations are on-going and there is uncertainty regarding
the timing and amount involved in reaching a final settlement with
the insurer, it is currently not practicable to determine the total
amount expected to be recovered.
- In December 2020, the Group (directly and/or through one or
more of its subsidiaries, herein referred to as "Fresnillo")
entered into an agreement with Orla Mining Ltd. and its Mexican
Subsidiary, Minera Camino Rojo, S.A. de C.V. (together herein
referred to as "Orla"), granting Orla the right to expand the
Camino Rojo oxide pit onto 21.8 hectares of Fresnillo's 782
hectares "Guachichil D1" mineral concession, located immediately to
the north of Orla's property for total consideration of US$62.8
million. This agreement allows Orla to access oxide and
transitional heap leachable mineral resources on Orla's property at
depth and grants Orla the right to mine from Fresnillo's mineral
concession and recover for Orla's account all oxide and
transitional material amenable to heap leaching that are within the
expanded open pit. The effectiveness of the agreement with Orla was
subject to approval of the Mexican Federal Competition Commission
(COFECE), which was granted in February 2021, at which time the
first payment in respect of this agreement amounting to US$25.0
million was received from Orla. Due to the fact that approval by
COFECE was uncertain as at 31 December 2020, no amounts related to
this agreement were recorded in the balance sheet as at that date
or in the income statement for the year then ended.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances;
however, there is no certainty that this interest will be realised
until the underlying balance is recovered. Due to that uncertainty,
it is also not practicable to estimate the amount of interest
income earned but not recovered to date.
26. Related party balances and transactions
The Group had the following related party transactions during
the years ended 31 December 2020 and 2019 and balances as at 31
December 2020 and 2019.
Related parties are those entities owned or controlled by the
ultimate controlling party, as well as those who have a minority
participation in Group companies and key management personnel of
the Group.
(a) Related party balances
Accounts receivable Accounts payable
--------------------------------------------- ---------------------- -----------------
As at 31 December As at 31 December
--------------------------------------------- ---------------------- ----------------- ----------
2020 2019 2020 2019
US$ US$ US$ US$
thousands thousands thousands thousands
--------------------------------------------- ---------- ---------- ----------------- ----------
Trade:
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 326,833 206,982 170 409
Other :
Industrias Peñoles, S.A.B. de C.V. 7,648 5,283 - -
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 397 2,662 - -
Servicios Administrativos Peñoles, S.A.
de C.V. - - 3,156 3,535
Servicios Especializados Peñoles, S.A.
de C.V. - - 2,652 4,095
Fuentes de Energía Peñoles, S.A.
de C.V. - - 568 1,735
Termoeléctrica Peñoles, S. de R.L.
de C.V. - - 2,662 1,168
Eólica de Coahuila S.A. de C.V. - - 7,342 4,772
Other 131 43 3,079 2,185
--------------------------------------------- ---------- ---------- ----------------- ----------
Sub-total 335,009 214,970 19,629 17,899
Less-current portion 335,009 214,970 19,629 17,899
--------------------------------------------- ---------- ---------- ----------------- ----------
Non-current portion - - - -
--------------------------------------------- ---------- ---------- ----------------- ----------
Related party accounts receivable and payable will be settled in
cash.
Other balances with related parties:
Year ended 31
December
---------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------- -------------- --------------
Silverstream contract:
---------------------------------------- -------------- --------------
Industrias Peñoles, S.A.B. de C.V. 576,140 541,254
---------------------------------------- -------------- --------------
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
---------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,427,692 2,125,733
---------------------------------------------------- -------------- --------------
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 2,761 6,503
---------------------------------------------------- -------------- --------------
Other income 3,618 7,008
---------------------------------------------------- -------------- --------------
Total income 2,434,071 2,139,244
---------------------------------------------------- -------------- --------------
1 Figures do not include the effects of hedging as the
derivative transactions are not undertaken with related parties.
Figures are net of the adjustment for treatment and refining
charges of US$180.5 million (2019: US$144.6 million). During 2020
there were no sales credited to development projects (2019: US$0.1
million).
Year ended 31
December
----------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Expenses:
Administrative services:
Servicios Administrativos Peñoles, S.A. de C.V.
(2) 33,031 33,107
Servicios Especializados Peñoles, S.A. de C.V.
(3) 17,932 19,744
50,963 52,851
----------------------------------------------------- -------------- --------------
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 17,616 15,305
Fuentes de Energía Peñoles, S.A. de C.V. 5,051 4,971
Eólica de Coahuila S.A. de C.V. 36,090 41,572
----------------------------------------------------- -------------- --------------
58,757 61,848
Operating materials and spare parts:
Wideco Inc 5,362 7,699
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 7,389 9,502
----------------------------------------------------- -------------- --------------
12,751 17,201
----------------------------------------------------- -------------- --------------
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 6,476 10,012
----------------------------------------------------- -------------- --------------
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 12,278 9,067
----------------------------------------------------- -------------- --------------
Other expenses: 3,351 4,014
----------------------------------------------------- -------------- --------------
Total expenses 144,576 154,993
----------------------------------------------------- -------------- --------------
2 Includes US$5.1 million (2019: US$8.1 million) corresponding
to expenses reimbursed.
3 Includes US$3 million (2019: US$3.2 million) relating to
engineering costs that were capitalised.
In 2020, the Group paid US$16.1 million to Industrias Peñoles,
S.A.B de C.V. related to the settlement of amounts due to the SAT
arising from the voluntary tax amendment mentioned in Note 10 (a)
in respect of the fiscal year 2013. This payment was made as
settlement of the adjustment in respect of 2013 was done in
accordance with the tax consolidation regime that was applicable in
that year.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of
Directors and the Executive Committee.
Year ended 31
December
----------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Salaries and bonuses 3,092 3,568
Post-employment benefits 146 242
Other benefits 370 296
----------------------------------------------------- -------------- --------------
Total compensation paid in respect of key management
personnel 3,608 4,106
----------------------------------------------------- -------------- --------------
Year ended 31
December
-------------------------------------------------------- ------------------------------
2020 2019
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Accumulated accrued defined benefit pension entitlement 5,005 4,753
-------------------------------------------------------- -------------- --------------
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 2020 and 2019 are as follows:
Year ended
31 December
------------------------------------------------------- ------------------------------
2020 2019
Class of services US$ thousands US$ thousands
------------------------------------------------------- -------------- --------------
Fees payable to the Group's auditor for the audit of
the Group's annual accounts 1,439 1,443
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 242 157
Audit-related assurance services 521 437
Other assurance services 309 -
Tax compliance services - 10
Total 2,511 2,047
------------------------------------------------------- -------------- --------------
28. Notes to the consolidated statement of cash flows
2020 2019
Notes US$ thousands US$ thousands
---------------------------------------------------- ----- -------------- --------------
Reconciliation of profit for the year to net cash
generated from operating activities
Profit for the year 375,579 205,814
Adjustments to reconcile profit for the period to
net cash inflows from operating activities:
Depreciation and amortisation 12 515,909 490,678
Employee profit sharing 7 19,275 9,578
Deferred income tax expense/(credit) 10 (63,970) (186,113)
Current income tax expense 10 239,644 159,054
Loss on the sale of property, plant and equipment
and other assets 8 667 4,866
Net finance costs 129,066 46,286
Foreign exchange loss 22,342 1,894
Difference between pension contributions paid and
amounts recognised in the income statement 1,243 1,129
Non cash movement on derivatives (56) 687
Changes in fair value of Silverstream 13 (70,961) (48,376)
Working capital adjustments
Increase in trade and other receivables (61,561) (39,257)
Decrease/(increase) in prepayments and other assets 331 (3,283)
Increase in inventories (79,467) (28,717)
Decrease in trade and other payables 10,933 14,635
---------------------------------------------------- ----- -------------- --------------
Cash generated from operations 1,038,974 628,875
Income tax paid(1) (114,170) (180,059)
Employee profit sharing paid (7,119) (12,907)
---------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 917,685 435,909
---------------------------------------------------- ----- -------------- --------------
(1) Income tax paid includes US$103.6 million corresponding to
corporate income tax (31 December 2019: US$162.2 million) and
US$10.6 corresponding to special mining right (31 December 2019:
US$17.9 million), for further information refer to note 10.
29. Financial instruments
(a) Fair value category
As at 31 December 2020
--------------------------------------------------------------------------------------
US$ thousands
--------------------------------------------------------------------------------------
Fair value
Fair value Fair value through
Amortized through (hedging profit or
Financial assets: cost OCI instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Trade and other receivables
(note 15) 1,944 - - 334,482
Equity instruments at FVOCI - 212,576 - -
Silverstream contract (note
13) - - - 576,140
Derivative financial instruments - - 6,290 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Interest-bearing loans (note
19) 1,156,210 - -
Trade and other payables
(note 22) 106,467 - -
---------------------------------- --------- ---------- ------------- ----------
Short-term loans (note 22) 64,425 - -
---------------------------------- --------- ---------- ------------- ----------
As at 31 December 2019
--------------------------------------------------------------------------------------
US$ thousands
--------------------------------------------------------------------------------------
Fair value
Fair value Fair value through
Amortized through (hedging profit or
Financial assets: cost OCI instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Trade and other receivables
(note 15) 4,353 - - 212,265
Equity instruments at FVOCI - 123,024 - -
Silverstream contract (note
13) - - - 541,253
Derivative financial instruments - 2,623 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Interest-bearing loans (note
19) 801,239 - -
Trade and other payables
(note 22) 125,121 - -
Derivative financial instruments - 1,789 -
---------------------------------- --------- ---------- ------------- ----------
(1 Trade and other receivables and embedded derivative within
sales contracts are presented net in Trade and other receivables in
the balance sheet.)
(b) Fair value measurement
The value of financial assets and liabilities other than those
measured at fair value are as follows:
As at 31 December
------------------------------------- ------------------------------ -----------------
Carrying amount Fair value
------------------------------------- ------------------------------ ----------------- --------------
2020 2019 2020 2019
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------- -------------- -------------- ----------------- --------------
Financial assets:
Trade and other receivables 1,944 4,353 1,944 4,353
Financial liabilities:
Interest-bearing loans (1) (note 19) 1,156,210 801,239 1,297,770 870,208
Trade and other payables 106,467 125,121 106,467 125,121
------------------------------------- -------------- -------------- ----------------- --------------
Short-term loans 64,425 - 64,425 -
------------------------------------- -------------- -------------- ----------------- --------------
(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 2020
---------------------------------------------------------------------------------------------------
Fair value measure using
Quoted
prices
in active Significant Significant
markets observable unobservable
Level Level Level
1 2 3 Total
US$ thousands US$ thousands US$ thousands US$ thousands
---------------------------------- -------------- -------------- -------------- --------------
Financial assets:
Trade receivables - - 334,482 334,482
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 1,666 - 1,666
Option and forward foreign
exchange contracts - 4,624 - 4,624
Silverstream contract - - 576,140 576,140
Other financial assets:
Equity instruments at FVOCI 212,576 - - 212,576
----------------------------------- -------------- -------------- -------------- --------------
212,576 6,290 910,622 1,129,488
---------------------------------- -------------- -------------- -------------- --------------
As of 31 December 2019
---------------------------------------------------------------------------------------------------
Fair value measure using
Quoted
prices
in active Significant Significant
markets observable unobservable
Level Level Level
1 2 3 Total
US$ thousands US$ thousands US$ thousands US$ thousands
---------------------------------- -------------- -------------- -------------- --------------
Financial assets:
Trade receivables - - 212,265 212,265
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 2,537 - 2,537
Option and forward foreign
exchange contracts - 86 - 86
Silverstream contract - - 541,253 541,253
Other financial assets:
Equity instruments at FVOCI 123,024 - - 123,024
----------------------------------- -------------- -------------- -------------- --------------
123,024 2,623 753,518 879,165
---------------------------------- -------------- -------------- -------------- --------------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 1,529 - 1,529
Option and forward foreign
exchange contracts - 260 - 260
----------------------------------- -------------- -------------- -------------- --------------
- 1,789 - 1,789
---------------------------------- -------------- -------------- -------------- --------------
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:
2020 2019
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Balance at 1 January: 206,982 213,202
Sales 5,352,029 4,949,494
Cash collection (5,234,771) (4,955,376)
Changes in fair value 21,165 15,996
Realised embedded derivatives during the year (18,571) (16,334)
---------------------------------------------- -------------- --------------
Balance at 31 December 326,834 206,982
---------------------------------------------- -------------- --------------
The fair value of financial assets and liabilities is included
at reflects the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following valuation techniques were used to estimate the
fair values:
Option and forward foreign exchange contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The foreign currency forward
(Level 2) contracts are measured based on observable spot exchange
rates, the yield curves of the respective currencies as well as the
currency basis spreads between the respective currencies. The
foreign currency option contracts are valued using the Black
Scholes model, the significant inputs to which include observable
spot exchange rates, interest rates and the volatility of the
currency.
Option commodity contracts
The Group enters into derivative financial instruments with
various counterparties, principally financial institutions with
investment grade credit ratings. The option commodity (Level 2)
contracts are measured based on observable spot commodity prices,
the yield curves of the respective commodity as well as the
commodity basis spreads between the respective commodities. The
option contracts are valued using the Black Scholes model, the
significant inputs to which include observable spot commodities
price, interest rates and the volatility of the commodity.
Silverstream contract
The fair value of the Silverstream contract is determined using
a valuation model including unobservable inputs (Level 3). This
derivative has a term of over 20 years and the valuation model
utilises a number of inputs that are not based on observable market
data due to the nature of these inputs and/or the duration of the
contract. Inputs that have a significant effect on the recorded
fair value are the volume of silver that will be produced and sold
from the Sabinas mine over the contract life, the future price of
silver, future foreign exchange rates between the Mexican peso and
US dollar, future inflation and the discount rate used to discount
future cash flows.
The estimate of the volume of silver that will be produced and
sold from the Sabinas mine requires estimates of the recoverable
silver reserves and resources, the related production profile based
on the Sabinas mine plan and the expected recovery of silver from
ore mined. The estimation of these inputs is subject to a range of
operating assumptions and may change over time. Estimates of
reserves and resources are updated annually by Peñoles, the
operator and sole interest holder in the Sabinas mine and provided
to the Company. The production profile and estimated payable silver
that will be recovered from ore mined is based on the operational
mine plan, with certain amendments to reflect a basis that a market
participant would consider, that is provided to the Company by
Peñoles. The inputs assume no interruption in production over the
life of the Silverstream contract and production levels which are
consistent with those achieved in recent years.
Management regularly assesses a range of reasonably possible
alternatives for those significant unobservable inputs described
above, and determines their impact on the total fair value. The
significant unobservable inputs are not interrelated. The fair
value of the Silverstream is not significantly sensitive to a
reasonable change in future exchange rates, however, it is to a
reasonable change in future silver price, future inflation and the
discount rate used to discount future cash flows.
For further information relating to the Silverstream contract
see note 13. The sensitivity of the valuation to the inputs
relating to market risks, being the price of silver, foreign
exchange rates, inflation and the discount rate is disclosed in
note 30.
Equity investments:
The fair value of equity investments is derived from quoted
market prices in active markets (Level 1). These investments were
irrevocably designated at fair value through OCI as the Group
considers these investments to be strategic in nature. As of 31
December 2020, approximately 86% of the investments correspond to
9,746,193 shares (2019: 9,746,193 shares) of Mag Silver, Corp. for
an amount of US$199.5 million (2019: US$114.4 million) and 6% of
Endeavor, Inc. represented by 2,800,000 (2019: 2,800,000 shares)
shares for an amount of US$14.1 million (2019: US$6.7 million).
These equity investments are listed on the Canadian Stock Exchange.
The prices per share as 31 December 2020 were US$20.47 (2019:
US$11.74) and US$5.05 (2019: US$2.40 ), respectively.
Interest-bearing loans
The fair value of the Group's interest-bearing loan is derived
from quoted market prices in active markets (Level 1).
Trade receivables:
Sales of concentrates, precipitates doré bars and activated
carbon are 'provisionally priced' and revenue is initially
recognised using this provisional price and the Group's best
estimate of the contained metal. Revenue is subject to final price
and metal content adjustments subsequent to the date of delivery
(see note 2 (n)). This price exposure is considered to be an
embedded derivative and therefore the entire related trade
receivable is measured at fair value.
At each reporting date, the provisionally priced metal content
is revalued based on the forward selling price for the quotational
period stipulated in the relevant sales contract. The selling price
of metals can be reliably measured as these metals are actively
traded on international exchanges but the estimated metal content
is a non-observable input to this valuation.
30. Financial risk management
Overview
The Group's principal financial assets and liabilities, other
than derivatives, comprise trade receivables, cash, equity
instruments at FVOCI, interest-bearing loans and trade
payables.
The Group has exposure to the following risks from its use of
financial instruments:
- Market risk, including foreign currency, commodity price,
interest rate, inflation rate and equity price risks
- Credit risk
- Liquidity risk
This note presents information about the Group's exposure to
each of the above risks and the Group's objectives, policies and
processes for assessing and managing risk. Further quantitative
disclosures are included throughout the financial statements.
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The Group's risk management policies are established to identify
and analyse the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to limits.
Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and
obligations.
The Fresnillo Audit Committee has responsibility for overseeing
how management monitors compliance with the Group's risk management
policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the Group.
The Audit Committee is assisted in its oversight role by Internal
Audit, which undertakes both regular and ad hoc reviews of risk
management controls and procedures, the results of which are
reported to the Audit Committee.
(a) Market risk
Market risk is the risk that changes in market factors, such as
foreign exchange rates, commodity prices or interest rates will
affect the Group's income or the value of its financial
instruments.
The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while
optimising the return on risk.
In the following tables, the effect on equity excludes the
changes in retained earnings as a direct result of changes in
profit before tax.
Foreign currency risk
The Group has financial instruments that are denominated in
Mexican peso and other foreign currencies 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.
The following table demonstrates the sensitivity of cash and
cash equivalents, trade and other receivables, trade and other
payables and derivatives financial instruments (excluding
Silverstream) to a reasonably possible change in the US dollar
exchange rate compared to the Mexican peso, reflecting the impact
on the Group's profit before tax and equity, with all other
variables held constant. It is assumed that the same percentage
change in exchange rates is applied to all applicable periods for
the purposes of calculating the sensitivity with relation to
derivative financial instruments.
Effect
on
profit Effect
Strengthening/ before on equity:
(weakening) tax: increase/ increase/
of US (decrease) (decrease)
Year ended 31 December dollar US$ thousands US$ thousands
----------------------- -------------- --------------- --------------
2020 20% 2,792 30,056
(15%) (668) (12,378)
----------------------- -------------- --------------- --------------
2019 5% 694 2,295
(5%) (767) (1,939)
----------------------- -------------- --------------- --------------
The effects on profit before tax and equity of reasonably
possible changes to the US dollar exchange rate compared to the
Mexican peso on the Silverstream contract are not material. The
Group's exposure to reasonably possible changes in other currencies
is not material.
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
(excluding Silverstream) and embedded derivatives in sales.
Increase/(decrease) in commodity prices
----------------------- --------------------------------------------- --------------------------- -----------------
Effect on
profit before tax: Effect on equity:
increase/ increase/
(decrease) (decrease)
Year ended 31 December Gold Silver Zinc Lead US$ thousands US$ thousands
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2020 20% 45% 25% 15% 88,037 (7,989)
(20%) (45%) (20%) (15%) (86,165) 22,697
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2019 15% 20% 15% 15% 28,367 (1,939)
(10%) (15%) (15%) (15%) (21,218) 2,295
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
Commodity price risk - Silverstream
Future silver price is one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract valuation to a reasonably possible
change in future silver prices, with all other inputs to the
Silverstream valuation model held constant. It is assumed that the
same percentage change in silver price is applied to all applicable
periods in the valuation model. There is no impact on the Group's
equity, other than the equivalent change in retained earnings.
Effect
Increase/ on profit
(decrease) before
in tax: increase/
silver (decrease)
Year ended 31 December price US$ thousands
----------------------- ----------- ---------------
2020 45% 338,484
(45%) (338,494)
----------------------- ----------- ---------------
2019 20% 146,873
(15%) (110,155)
----------------------- ----------- ---------------
Interest rate risk
The Group is exposed to interest rate risk from the possibility
that changes in interest rates will affect future cash flows or the
fair values of its financial instruments, principally relating to
the cash balances and the Silverstream contract held at the balance
sheet date. Interest-bearing loans are at a fixed rate, therefore
the possibility of a change in interest rate only impacts its fair
value but not its carrying amount. Therefore, interest-bearing
loans and loans from related parties are excluded from the table
below.
The following table demonstrates the sensitivity of financial
assets and financial liabilities (excluding Silverstream) to a
reasonably possible change in interest rate applied to a full year
from the balance sheet date. There is no impact on the Group's
equity other than the equivalent change in retained earnings.
Basis Effect
point on profit
increase/ before
(decrease) tax: increase/
in interest (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------ ---------------
2020 25 2,676
(20) (2,141)
----------------------- ------------ ---------------
2019 50 1,683
(50) (1,683)
----------------------- ------------ ---------------
The sensitivity shown in the table above primarily relates to
the full year of interest on cash balances held as at the year
end.
Interest rate risk - Silverstream
Future interest rates are one of the inputs to the Silverstream
valuation model. The following table demonstrates the sensitivity
of the Silverstream contract valuation to a reasonably possible
change in interest rates, with all other inputs to the Silverstream
valuation model held constant. It is assumed that the same change
in interest rate is applied to all applicable periods in the
valuation model. There is no impact on the Group's equity, other
than the equivalent change in retained earnings.
Basis Effect
point on profit
increase/ before
(decrease) tax: increase/
in interest (decrease)
Year ended 31 December rate US$ thousands
----------------------- ------------ ---------------
2020 25 (14,689)
(20) 12,239
----------------------- ------------ ---------------
2019 50 (32,969)
(50) 36,322
----------------------- ------------ ---------------
Equity price risk
The Group has exposure to changes in the price of equity
instruments that it holds as equity investments at FVOCI.
The following table demonstrates the sensitivity of equity
investments at FVOCI to a reasonably possible change in market
price of these equity instruments, reflecting the effect on the
Group's profit before tax and equity:
Effect
on
profit
before Effect
Increase/ tax: increase/ on equity:
(decrease) (decrease) increase/
in equity (US$ (decrease)
Year ended 31 December price thousands) US$ thousands
----------------------- ----------- --------------- --------------
2020 70% - 148,803
(40%) - (85,031)
----------------------- ----------- --------------- --------------
2019 70% - 86,116
(25%) - (30,756)
----------------------- ----------- --------------- --------------
(b) Credit risk
Exposure to credit risk arises as a result of transactions in
the Group's ordinary course of business and is applicable to trade
and other receivables, cash and cash equivalents, the Silverstream
contract and derivative financial instruments.
The Group's policies are aimed at minimising losses as a result
of counterparties' failure to honour their obligations. Individual
exposures are monitored with customers subject to credit limits to
ensure that the Group's exposure to bad debts is not significant.
The Group's exposure to credit risk is influenced mainly by the
individual characteristics of each counter party. The Group's
financial assets are with counterparties with what the Group
considers to have an appropriate credit rating. As disclosed in
note 26, the counterparties to a significant proportion of these
financial assets are related parties. At each balance sheet date,
the Group's financial assets were neither credit-impaired nor past
due, other than 'Other receivables' as disclosed in note 15. The
Group's policies are aimed at minimising losses from foreign
currency hedging contracts. The Company's foreign currency hedging
contracts are entered into with large financial institutions with
strong credit ratings.
The Group has a high concentration of trade receivables with one
counterparty Met-Mex Peñoles, the Group's sole customer throughout
2020 and 2019. A further concentration of credit risk arises from
the Silverstream contract. Both Met-Mex and the counterparty to the
Silverstream contract are subsidiaries in the Peñoles group which
currently owns 75 per cent of the shares of the Company and is
considered by management to be of appropriate credit rating.
The Group's surplus funds are managed by Servicios
Administrativos Fresnillo, S.A. de C.V., which manages cash and
cash equivalents, including short-term investments investing in a
number of financial institutions. Accordingly, on an ongoing basis
the Group deposits surplus funds with a range of financial
institutions, depending on market conditions. In order to minimise
exposure to credit risk, the Group only deposits surplus funds with
financial institutions with a credit rating of MX-1 (Moody's) and
mxA-1+ (Standard and Poor's) and above. As at 31 December 2019, the
Group had concentrations of credit risk as 22 percent of surplus
funds were deposited with one financial institution of which the
total investment was held in short term Mexican government
paper.
The maximum credit exposure at the reporting date of each
category of financial asset above is the carrying value as detailed
in the relevant notes. See note 16 for the maximum credit exposure
to cash and cash equivalents and note 26 for related party trade
and other receivables. The maximum credit exposure with relation to
the Silverstream contract is the value of the derivative as at 31
December 2020, being US$576.1 million (2019: US$541.2 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using
projected cash flows from operations and by monitoring the maturity
of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments.
US$ thousands
--------------------------------- ---------------------------------------- ---------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- ---------
As at 31 December 2020
Interest-bearing loans (note 19) 53,608 425,096 72,250 1,753,125 2,304,079
Trade and other payables 170,899 - - - 170,899
Lease liabilities (Note 24) 5,520 6,444 1,614 680 14,258
Derivative financial instruments - - - - -
- liabilities
--------------------------------- ------- --------- --------- --------- ---------
US$ thousands
--------------------------------- ---------------------------------------- -------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- -------
As at 31 December 2019
Interest-bearing loans (note 19) 46,267 92,534 846,267 - 985,068
Trade and other payables 125,121 - - - 125,121
Lease liabilities (Note 24) 4,977 6,258 1,999 1,006 14,240
Derivative financial instruments
- liabilities 1,789 - - - 1,789
--------------------------------- ------- --------- --------- --------- -------
The payments disclosed for financial derivative instruments in
the above table are the gross undiscounted cash flows. However,
those amounts may be settled gross or net. The following table
shows the corresponding estimated inflows based on the contractual
terms:
US$ thousands
----------------------- ---------------------------------------------------
Within
1 year 2-3 years 3-5 years > 5 years Total
----------------------- -------- --------- --------- --------- ----------
As at 31 December 2020
Inflows 45,343 45,343
Outflows (40,768) (40,768)
----------------------- -------- --------- --------- --------- --------
Net 4,575 4,575
----------------------- -------- --------- --------- --------- --------
US$ thousands
----------------------- ----------------------------------------- --------
Within
1 year 2-3 years 3-5 years > 5 years Total
----------------------- -------- --------- --------- --------- --------
As at 31 December 2019
Inflows 22,186 - - - 22,186
Outflows (20,898) - - - (20,898)
----------------------- -------- --------- --------- --------- --------
Net 1,288 - - - 1,288
----------------------- -------- --------- --------- --------- --------
The above liquidity tables include expected inflows and outflows
from currency option contracts which the Group expects to be
exercised during 2021 as at 31 December 2020 and during 2020 as at
31 December 2019, either by the Group or counterparty.
Management considers that the Group has adequate current assets
and forecast cash from operations to manage liquidity risks arising
from current liabilities and non-current liabilities.
Capital management
The primary objective of the Group's capital management is to
ensure that it maintains a strong credit rating and healthy capital
ratios that support its business and maximise shareholder value.
Management considers capital to consist of equity and
interest-bearing loans, as disclosed in the balance sheet,
excluding net unrealised gains or losses on revaluation of cash
flow hedges and Equity instruments at FVOCI. In order to ensure an
appropriate return for shareholder's capital invested in the Group
management thoroughly evaluates all material projects and potential
acquisitions and approves them at its Executive Committee before
submission to the Board for ultimate approval, where applicable.
The Group's dividend policy is based on the profitability of the
business and underlying growth in earnings of the Group, as well as
its capital requirements and cash flows, including cash flows from
the Silverstream.
One of the Group's metrics of capital is cash and other liquid
assets which in 2020 and 2019 consisted of only cash and cash
equivalents.
[1] Unproductive costs primarily include unabsorbed production
costs such as fixed costs incurred in Minera Penmont during the
temporary suspension of mining activities at the beginning of the
COVID-19 pandemic and other costs related to the subsequent ramp-up
of operations and the underutilisation of production capacity once
mining activity was resumed. Unproductive costs are recognised
within cost of sales but excluded from adjusted production
costs.
[2] Cash and other liquid funds are disclosed in note 30(c) to
the consolidated financial statements.
[3] Net debt (Debt at 31 December 2020 - Cash and other liquid
funds at 31 December 2020) divided by the EBITDA generated in the
last 12 months.
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