TIDMFRES
RNS Number : 9555D
Fresnillo PLC
08 March 2022
Fresnillo plc
Financial results for the year ended 31 December 2021
Fresnillo plc today announced its financial results for the full
year ended 31 December 2021.
Octavio Alvídrez, CEO said:
"The continued impact of the pandemic, combined with the new
Mexican labour reform, have presented Fresnillo with operational
challenges during the year. More recently, we were all devastated
to report the passing of Alberto Baillères, our Honorary Chairman.
Don Alberto was a remarkable man. We will miss his guidance,
compassion, encouragement and faith.
Despite the challenges, we delivered a creditable performance. S
ilver production of 53.1 moz (including Silverstream), was
marginally below guidance, but flat vs. FY20. Gold production of
751.2 koz, was however ahead of guidance, down 2.4% vs. FY20.
We reported US$2,847.9 million in adjusted revenue, an increase
of 9.2%, primarily due to better prices for precious metals. Gross
profit rose year-on-year by 6.5% to US$936.9 million. We maintained
our strong financial position as cash and other liquid funds
increased from US$1,070.4 million in 2020 to US$1,235.3 million in
2021. We declared an interim dividend of 9.90 US cents per share,
with a final dividend of 24.0 US cents per share, bringing the
total for the year to 33.9 US cents per share, in line with our
consistent dividend policy.
Regrettably, a fourth wave of Covid-19 has reached Mexico and we
began to see the impact of this in terms of staff absenteeism from
the 2(nd) week of December and accelerated throughout the first few
weeks of the year. The safety and well-being of our people is our
priority. Covid protocols remain in place, but we are relieved to
see the omicron variant presents a lesser health risk. Nonetheless,
we are seeing greater levels of absenteeism which in turn is having
an impact across our business.
The labour reform in Mexico restricting the ability to
subcontract labour came into effect from 1(st) September 2021
resulting in the requirement to internalise a high proportion of
our contractor workforce. Subsequent contractor uptake has varied,
with underground mines more affected resulting in an increased
number of vacancies and a higher workforce turnover. This has
affected equipment availability and utilisation rates. The actions
we announced to address this challenge will continue, including
recruitment campaigns, training and investment in new equipment.
These campaigns are proving effective. We expect to have completed
the staffing process in the Fresnillo District and Ciénega in the
third quarter, while our open pit mines, which have seen a lesser
impact, should be fully staffed during 1Q22.
We made good progress on our development projects. The new
Juanicipio mine was completed at the end of 2021, as planned.
However, approval to complete the tie-in to the national power grid
was not granted by Comisión Federal de Electricidad (CFE), the
state-owned electrical company, before year end as expected. The
mill commissioning timeline was therefore extended by approximately
six months. Juanicipio will be an increasingly major influence in
our operations, on average producing 11.7 moz silver and 43.5 koz
gold a year for the life of mine. Similar covid-related delays
related to energy inspection and new requirements also affected the
start-up of the new Pyrites Plant at the Fresnillo mine.
Our longer term growth pipeline remains strong. The increased
exploration budget for 2021 supported an intensive programme across
all our operations, with the aim of increasing the resource base,
converting inferred resources into indicated, and improving the
confidence of the grade distribution in our reserves.
We are making steady progress with our next development projects
at Rodeo and Orisyvo, where we expect to commence production
towards the end of 2024 and 2025 respectively, subject to Board
approval.
We are committed to playing our part in fighting climate change
by mitigating our environmental impact wherever possible. We have
completed our project to install dual fuel engines that run on both
Liquid Natural Gas (LNG) and diesel as planned. In 2021, 49.7% of
our electricity consumption came from renewable sources and we are
focused on achieving our target of using wind power to provide 75%
of our electricity by 2030.
Looking ahead we remain alert to potential on-going challenges
that are outside our control, not least possible further regulatory
reform, inflationary pressures and of course the threat of new
covid variants. Lower production and recovery rates at Herradura
and the continuing workforce shortages at Saucito caused by the new
labour reform - as well as the impact of recent geotechnical
instability in the Saucito area - are also likely to add to the
pressures we may face in 2022. In addition, the extension to the
timeline for the tie-in to the national grid of both the Juanicipio
plant and the Pyrites Plant mean that we now expect lower
contributions than previously anticipated from these operations
during 2022.
However, we expect our exploration pipeline to continue making
good progress, particularly at the Rodeo Orysivo and Guanajuato
projects. Precious metals prices also established what looks to be
a realistic floor towards the end of the year and our view is that
a period of higher prices is the most likely outcome. We therefore
look forward to 2022 with determination and confidence"
Financial Highlights - 12 months to 31 December 2021
$ million unless stated 2021 2020 % change
Silver Production* (kOz) 53,095 53,050 0.1
Gold Production* (Oz) 751,203 769,618 (2.4)
Total Revenue 2,703.1 2,430.1 11.2
Adjusted Revenue** 2,847.9 2,608.1 9.2
Gross Profit 936.9 879.4 6.5
EBITDA 1,206.3 1,169.1 3.2
Profit Before Income Tax 611.5 551.3 10.9
Profit for the year 438.5 375.6 16.8
Basic and Diluted EPS excluding
post-tax Silverstream effects
(USD)*** 0.572 0.440 30.0
* 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 2021 and 2020. See note 17 in the consolidated
financial statements.
2021 Highlights
Strong financial results, supported by high precious metals
prices and a robust operational performance
-- Adjusted revenue increased 9.2% over 2020 primarily due to a higher silver price.
-- Revenue increased 11.2% year-on-year to US$2,703.1 million
due to the higher adjusted revenue combined with lower treatment
and refining charges.
-- Adjusted production costs increased mainly as a result of a
9.6% cost inflation combined with the 5.6% average revaluation of
the Mexican peso vs. US dollar.
-- Gross profit and EBITDA increased to US$936.9 million and
US$1,206.3 million, a 6.5% and 3.2% increase over 2020.
-- US$1,235.3 million in cash and other liquid funds(1) as of 31
December 2021 notwithstanding paying dividends of US$245.6 million,
investing US$592.1 million in capex and spending US$130.3 million
on exploration expenses to underpin our future growth.
-- Net cash was US$67.5 million as at 31 December 2021. This
compares to the net debt position of US$97.4 million as at 31
December 2020.
-- Final dividend of 24.0 US cents per Ordinary Share. This is
in addition to the interim dividend of 9.90 US cents per share
amounting to US$73.0 million. This final dividend is higher than
the previous year due to the higher profit in 2021, and remains in
line with the Group's dividend policy.
Maintaining focus on operational improvement, addressing
challenges of Labour Reform and Covid-19
-- To support the wellbeing of our people and their communities,
we continued to engage extensively and play our part as a large
employer and supportive neighbour. We maintained our investment in
local healthcare including contributing testing equipment and
vaccines - as well as in the provision of employment opportunities
and education programmes.
-- Actions to mitigate the impact of new labour reforms include
new recruitment campaigns, training and investment in new
equipment, to date proving effective. We expect to complete the
staffing process in the Fresnillo District and Ciénega in the 3Q
2022. Our open pit mines, which have experienced less of an impact,
should be fully staffed during the first quarter of the year.
-- Infrastructure projects continued to progress:
o The deepening of the San Carlos shaft at Fresnillo remains on
track for completion in 2022.
o At Saucito, we continued with the project to deepen the
Jarillas shaft to 1,000 metres with completion in 2025; this will
reduce haulage costs by providing access to deeper levels of the
mine where almost half of the reserves are located.
Progressing new development projects and investing in long term
future
-- Juanicipio plant construction was completed towards the end
of 2021, as planned though the tie-in to the national power grid
was not granted by Comisión Federal de Electricidad (CFE), the
state-owned electrical company, before year end as expected. The
mill commissioning timeline was therefore extended by approximately
six months to comply with new requirements from Centro Nacional de
Control de Energía. (CENACE), the state regulator. Juanicipio is
set to be an increasingly major influence in our operations later
this year, with annual silver and gold production expected to
average 11.7 moz and 43.5 koz respectively over the life of
mine.
-- New Pyrites Plant at the Fresnillo mine was also completed on
time. Similar grid tie-in delays impacted the start-up of the
plant. When fully operational, we anticipate that it will produce
an average of 3.5 moz of silver and 13 koz of gold per year,
including production from Saucito.
-- US$30 million plant optimisation project to improve the
recovery of lead and zinc from the lower levels of the Fresnillo
mine was commissioned as planned. The flotation circuit was
connected on schedule early in the year and we are now seeing an
improved quality of concentrates, better recovery rates and greater
control of impurities.
-- The increased exploration budget for 2021 supported an
intensive programme across all our operations, aiming at increasing
the resource base, converting inferred resources into indicated,
and improving the confidence of the grade distribution in our
reserves.
o Silver resources stood at 2.3 boz, a slight increase of 1.2%
over 2020 mainly as a result of the exploration efforts at
Fresnillo and San Julián Veins. Gold resources remained stable at
39.0 moz.
o Silver reserves decreased 9.0% to 419.8 moz mainly due to
depletion at Fresnillo, Saucito and San Julián (DOB). Gold reserves
decreased by 7.7% to 7.8 moz primarily due to more stringent
geotechnical and cost considerations at Herradura and depletion at
Noche Buena.
o Exploration continued in Peru and Chile, where we developed
new drill targets and restructured our organisation and reporting
procedures in order to speed up and streamline our activities.
-- Advanced exploration projects at Rodeo and Orisyvo continued
to make good progress. We currently expect to commence production
at Rodeo and Orisyvo towards the end of 2024 and 2025 respectively,
subject to Board approval.
Cautious 2022 outlook, confidence in longer term prospects
-- Lower production and recovery rates at Herradura and the
continuing workforce shortages at Saucito caused by the new labour
reform - as well as the impact of seismicity in the Saucito area,
will impact 2022, as will the extension to the timeline for the
tie-in to the national grid of both the Juanicipio plant and the
Pyrites Plant.
-- Given this context, our 2022 attributable silver production
remains in the range of 50.5 to 56.5 moz (including Silverstream)
while our attributable gold production continues to be in the range
of 600 to 650 koz.
-- Further, Fresnillo remains positive about the outlook for
precious metals prices which will support the financial performance
of the business.
-- Some uncertainty remains including over inflationary
pressures and potential for new regulatory change in Mexico.
-- However, our proven ability to deliver development projects
on time and budget, combined with our extensive medium term
pipeline provide basis for considerable confidence in the long term
future.
Analyst Presentation
Fresnillo plc will be hosting a webcast presentation for
analysts and investors today at 9:00am (GMT).
Registration and access will be provided on the homepage of
Fresnillo's website and directly via this link:
https://kvgo.com/IJLO/Fresnillo-FY21-Preliminary-Results
For those unable to access the webcast, a conference line will
also be provided:
UK: +44 (0) 33 0551 0200
US: 1 866 966 5335
MX: 00 1 866 966 8830
Password: Quote "Fresnillo" when prompted by the operator
Questions may be submitted via the conference dial-in.
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 Las Casas Rosario &
Cluster Cebollitas), Herradura, Soledad-Dipolos(1) , Noche Buena
and San Julián (Veins and Disseminated Ore Body), two development
projects - the Pyrites Plant at Fresnillo and Juanicipio, both of
which have been completed but approvals to operate are pending, and
three advanced exploration projects - Orisyvo, Rodeo and
Guanajuato, 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
Living up to our Purpose, building up our resilience
This last year has again seen our Purpose come to the fore -
supporting our people through the continuing challenge of Covid-19,
as well as the new labour reform, and enabling them to maintain
satisfactory levels of production. As we move into 2022, we are
continuing to adjust to the labour reform and invest in
infrastructure that will make Fresnillo a more resilient
business.
I am pleased to present my first Annual Report statement as
Chairman of Fresnillo. Having been a member of the Board since
2012, I know that I have the support of a committed Board and
management team executing a proven long-term strategy. Under my
Chairmanship, continuity will be the watchword: we will remain
loyal to our core principles, ensuring we always behave in a way
that is faithful to our Purpose and contributes to the wellbeing of
all stakeholders - including shareholders, our workforce, local
communities, suppliers, government authorities and the
environment.
Before turning to our performance for 2021, I would like to pay
personal tribute to my father Alberto Baillères, who sadly passed
away on 2 February 2022, having stepped down as Chairman in April
2021. He chaired Fresnillo with distinction since our listing in
London, though his leadership of the Group extended over half a
century. The Board and I believe that the best way to honour his
memory is to preserve and build on his legacy of responsibility,
integrity and respect - these are not only the values of Fresnillo
but also the principles by which my father lived his professional
and personal life.
Delivering on our promises
As we anticipated, the pandemic again disrupted our activities
in 2021, although not to the same extent as the previous year. The
introduction of new labour legislation added to the challenges we
faced and caused additional disruption during the year, primarily
at our underground mines. This meant that silver production fell
marginally below guidance, while higher production at Herradura
helped us to exceed our guidance for gold production.
We achieved US$2,703.1 million in total revenue and US$2,847.9
million in adjusted revenue during the year. This represented an
increase of 11.2% and 9.2% respectively, primarily due to better
prices for silver. Gross profit rose year-on-year by 6.1% to
US$936.9 million, primarily driven by higher prices. Cash and other
liquid funds increased from US$1,070.4 million to US$1,235.3
million, reflecting the increased cash generated by the mines.
Our approach is to remain steady, constant and focused on the
long term through all the various cycles that may impact our
business. Our strategy is well established, and 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 goal 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 $9.90 US cents per share,
with a final dividend of 24.0 US cents per share, bringing the
total for the year to 33.9 US cents per share.
Living up to our Purpose
Once again, our Purpose has been at the heart of how we think
and act, and it has supported our people and their communities
through what were at times difficult and demanding days.
Our Purpose is to contribute to the wellbeing of people through
the sustainable mining of silver and gold.
Thanks in large part to the protocols we introduced in our mines
and to the testing and vaccination programme that we continued to
support for our people and their communities, we have managed to
loosen the grip of the pandemic. We have built on the extensive and
unprecedented experience we gained in the previous year, working
with the municipal and federal authorities to enable our people to
continue working through the third and fourth waves of Covid-19,
albeit with some inevitable restrictions.
During my many visits to our operating units, it has been
particularly pleasing to see that our people increasingly engage
with our Purpose. They were of course familiar with the words, but
since the onset of the pandemic they have witnessed the actions
behind those words. Our Purpose is not an empty corporate promise
but a way of thinking and acting that guides everything we do and
every decision we take, from stope to Boardroom - with the health
and safety of our people always our overriding priority.
Building up our resilience
Our experience with the pandemic has underlined the need for our
business, our people and our communities to be resilient to many
factors that could affect us. During 2021 we focused on building up
our resilience across four key areas.
For example, we continued to build greater production resilience
through the development of our new mine at Juanicipio, which we
expect to produce an annual average of 11.7 MOZ silver and 43.5 KOZ
gold when fully operational. Following co nstruction of the
Juanicipio plant on schedule, we expected to be granted approval
for connection to the national power grid by the end of the year.
Unfortunately, this was delayed and as a result we have extended
the commissioning timeline by approximately six months to comply
with new requirements from the authorities. Future Group production
will also be underpinned by the start-up of the new Pyrites plant
at Fresnillo. In addition, we continued to invest in efficiency
improvements at the Fresnillo mine through a series of
infrastructure investments.
Our exploration activities have continued to deliver a more
resilient pipeline, with the increased budget for 2021 supporting
extensive brownfield activities in the Fresnillo and San Julián
Districts, as well as good progress at Guanajuato.
Across the business, the support of our workforce has been vital
to our past successes and future plans. We rely on our people for
their skills and commitment and do everything we can to provide
them with rewarding careers. During 2021, one of our greatest
challenges was to continue to benefit from a trained and supportive
workforce in the face of major legislative change. Mexico's new
labour reform law came into effect in September, restricting our
ability to subcontract labour. Our response was to work hard to
retain as many of our contractors' people as possible, bringing
them in-house to join our unionised employees. This was a demanding
and somewhat disruptive process, and I would like to thank
everybody involved for their perseverance and patience. Ultimately,
we believe that although the move away from outsourcing may be a
challenge in the short term, in the medium and long term it will
lead to a more cohesive and resilient workforce. The Chief
Executive comments further on labour reform in his statement.
During the year, we also supported greater resilience in the
communities where our people live, by maintaining our commitment to
investment in local healthcare - including providing Covid-19
testing equipment and vaccines - employment, education programmes,
capacity building, training and support for local
entrepreneurs.
Board activities
The Board met regularly through the year and discussed a wide
range of matters, from how the Company was supporting vaccination
programmes in remote communities to the impact of the new labour
reforms.
One of our most important tasks is to maintain oversight of
Fresnillo's culture, and we received regular updates on how our
Purpose and values continued to be the beacons that guide our
actions. During 2021, we were pleased to see our teams develop a
five-hour online training module to promote diversity, equality and
inclusion. We comply with the ethnic diversity targets set for
FTSE100 Boards and continue to make good progress in developing an
inclusive culture. This includes promoting the participation of
women in our workforce, with the total percentage of women
increasing to 11.0% in 2021 from 9.7% in the previous year. Our
Board composition during 2021 meant that we were one of the most
gender progressive companies in Mexico according to both the 50/50
Women on Boards Gender Diversity Index and the Women Corporate
Directors Foundation.
Workforce engagement was again a key agenda item for the Board.
Bringing workers' voices into the Boardroom enables us to
incorporate their perspective into our strategic discussions and
decision making. Our Designated Non-Executive Director (NED) for
workforce engagement held two online meetings with unionised and
non-unionised employees during the year, gaining valuable insight
into strategically important topics such as health, safety,
Covid-19, ethical culture, inclusion, and gender equality.
I provide more details of the Board's activities in my
introduction to the Governance Report on, including how we
supported our people and local communities through the
pandemic.
Board changes
In April 2021, we announced a number of Board changes that took
effect at the AGM in June, including the stepping-down of my father
as Chairman of Fresnillo and my subsequent appointment as his
successor.
The Board was delighted to welcome two new directors at the AGM.
Héctor Rangel joined us as an independent non-executive director -
a position he previously held from April 2008 to January 2009 - and
Eduardo Cepeda as a non-executive director. Both directors have
extensive expertise in finance and the business environment in
Mexico and have already brought valuable insights to the Board.
Héctor is the President of BCP Securities Mexico, a joint
venture with BCP Securities LLC, a US investment bank specialising
in emerging markets. Prior to this role, he was the Chief Executive
Officer of Nacional Financiera S.N.C. and Banco Nacional de
Comercio Exterior and a member of Mexico's cabinet under President
Felipe Calderon. He has wide-ranging corporate and investment
banking expertise having held various executive positions with the
Grupo Financiero Bancomer from 1991 until 2008, including a tenure
as Chairman of the Board. Héctor has also been appointed a member
of the Audit Committee.
Eduardo was President and Senior Country Officer at JP Morgan
based in Mexico City from 1993 to 2019. He was also Chief Executive
Officer of JP Morgan Wealth Management Latin America from 2009 to
2012. As a key participant in the growth and development of JP
Morgan's business in Mexico and Latin America, he has led many
important investment banking transactions, both in the public and
private sectors.
The Board also approved several recommendations from the
Nominations Committee during the year. These included the
appointment of Alberto Tiburcio as Chairman of the Remuneration
Committee, with Charles Jacobs becoming a member of the Nominations
Committee. At the same time, I was honoured to succeed my father as
Chairman of the Nominations Committee, and as a member of the
Remuneration Committee.
Outlook
There is an inevitable degree of caution around expectations for
2022 and beyond, with operational challenges being potentially
worsened by the pandemic - and the knock-on effect on workforce
availability - as well as by the ongoing impact following the
implementation of the new labour law. However, one thing is
certain: we will remain steadfast to our Purpose and will continue
to put the health and safety of our people at the centre of every
decision.
On behalf of the Board, I would like to thank all our people -
from those working in the mines to our executive management team -
for their dedication and expertise during the year. We have
increased production, built up our resilience and equipped
Fresnillo with the strength and attributes to continue delivering
long-term value to all our stakeholders. Together, supported by our
culture and guided by our Purpose, we face the future with
confidence.
Alejandro Baillères
Chairman
Chief Executive's statement
A creditable performance, a more resilient future
Following the most disrupted and unforeseen year in our history,
2021 was an altogether calmer and more predictable period for
Fresnillo. Guided by our Purpose, we continued to focus on the
wellbeing of people while, at the same time, achieving a
respectable operational performance and continuing to position the
Company to meet the challenges of future years.
Although Covid-19 again casted a shadow over the world, the
lessons we learnt during 2020 were instrumental in helping
Fresnillo minimise the pandemic's impact - keeping our people safe,
supporting our efficiency improvement programmes and, ultimately,
enabling us to record a creditable performance. While we remain
vigilant regarding the evolution of the pandemic and its potential
impact on our operations, our teams have adapted well to new
protocols and this helped us deliver silver production marginally
short of guidance, with gold production exceeding expectations.
To support the wellbeing of our people and their communities, we
continued to engage extensively and play our part as a large
employer and supportive neighbour. As a result, we maintained our
investment in local healthcare - for example by contributing
testing equipment and vaccines - as well as in the provision of
employment opportunities and education programmes, including an
initiative to ensure that families in remote communities could
access educational content via the internet while schools were
closed due to the pandemic.
Environment, Social and Governance (ESG) matters sit at the
heart of our Purpose, and in 2021 we further strengthened our
commitment by expanding our ESG team. Our first ESG Compliance
Manager is now in post - and in the coming months we expect to
appoint an Operations Manager based in the mines to provide
feedback directly to our senior management.
Production highlights and price review
With some restrictions necessitated by the pandemic adding to
limited short term disruption as a result of the new labour reforms
discussed below, our production of silver fell marginally below
guidance while production of gold exceeded forecasts.
Total silver production was 53.1 MOz, in line with the previous
year. Higher ore grades at San Julián DOB and, to a lesser extent,
the contribution of development ore from Juanicipio, were offset by
a lower ore grade and volume at Saucito and Fresnillo.
Gold production was down by 2.4% vs. the previous year, to 751.2
KOz. This was primarily due to a lower ore grade at Ciénega, and a
lower ore grade and volume of ore processed at San Julián Veins,
partly mitigated by a greater volume of ore processed and a higher
ore grade at Noche Buena.
Attributable by-product lead production decreased 10.5% to
56,573 tonnes primarily due to a decrease in volume of ore
processed and lower ore grade at Saucito and Fresnillo and a lower
ore grade at Ciénega, while attributable by-product zinc production
decreased 6.9% due to a lower volume of ore processed and ore grade
at Saucito and, to a lesser extent, lower ore grade and recovery
rate at Ciénega.
Precious metals prices began the year on a high, continuing the
trend established in 2020. However, they fell away to an extent
during the second half as the global economic uncertainty created
by the pandemic receded and investors again sought returns in areas
such as equities and crypto currencies. The average realised silver
price was US$24.9 per ounce, an increase of 16.9% over the previous
year, and for gold prices remained relatively flat at US$1,795.0
per ounce. Average prices for zinc and lead increased by 31.7% and
21.6% respectively.
Delivering value through a proven strategy
Our strategy has remained unchanged since our earliest days.
Tried, tested and proven to deliver long-term shareholder value, it
was again the engine room for our performance during 2021. The
strategy consists of four distinct pillars:
Maximising the potential of existing operations
Our ability to drive production was impacted to an extent by
Mexico's new labour reform which restricted our ability to
subcontract labour. The law came into effect on September 1(st)
2021, and led to us having to bring a proportion of our contractor
workforce into the company as employees. Historically, a trained
and motivated contractor workforce has been a key aspect of our way
of working and the reform has necessitated significant work. While
we took steps to prepare following the announcement of the reform
in April, subsequent contractor uptake varied. In particular, our
underground mines in the Fresnillo District and at Ciénega were
more affected due to a higher number of contractor personnel
working on site, and this led to an increased number of staff
vacancies and greater workforce rotation. This in turn affected
equipment availability and utilisation rates.
We continue to take a series of actions to mitigate the impact
of the law, including new recruitment campaigns, training and
investment in new equipment. These actions are proving effective
and we expect to complete the staffing process in the Fresnillo
District and Ciénega in the third quarter of 2022. Our open pit
mines, which have experienced less of an impact, should be fully
staffed during the first quarter of the year. I believe that in the
long term the switch to relying on our own resources instead of
those of contractors will make Fresnillo a more operationally
resilient business.
Home to the Fresnillo and Saucito mines as well as our new mine
at Juanicipio, the Fresnillo district is the foundation for the
Group's silver production, due to its extensive reserves and
resources. As we mine deeper, our challenge is to develop more
metres across a greater number of veins and to focus on
productivity, cost control and technology investment. We made
progress on a number of infrastructure investments during the year,
including a new pumping station and electricity infrastructure.
The deepening of the San Carlos shaft at Fresnillo remains on
track for completion in 2022. It will provide easier and faster
access to 56% of the mine's reserves, enabling us to significantly
reduce haulage costs. At Saucito, we continued with the project to
deepen the Jarillas shaft to 1,000 metres. Again, when completed in
2025, this will reduce haulage costs by providing access to deeper
levels of the mine where almost half of the reserves are
located.
Delivering growth through development projects
Our new mine at Juanicipio was completed towards the end of
2021, as planned. Unfortunately, approval to complete the tie-in to
the national power grid was not granted by Comisión Federal de
Electricidad (CFE), the state-owned electrical company, before year
end as expected. The mill commissioning timeline was therefore
extended by approximately six months to comply with new
requirements from Centro Nacional de Control de Energía. ( CENACE),
In the meantime, we are continuing pre-commissioning testing before
ramping up operations once the required permits have been
granted.
From 2022 onwards, Juanicipio will be an increasingly major
influence in our operations, with silver and gold production
expected to reach annual averages of 11.7 MOz and 43.5 KOz
respectively. During 2021, development ore from Juanicipio was
processed in the Fresnillo processing plant, with 1.8 MOz of silver
and 3.7 KOz of gold produced during the period.
Delays related to energy inspection and certification, together
with issues caused by the pandemic, also affected the start-up of
the new Pyrites Plant at the Fresnillo mine. Although completed
late in 2020, connection to the national power grid was
unexpectedly delayed by similar circumstances to those we
experienced at Juanicipio. The result was again an extension of six
months to the commissioning timeline in order to comply with new
requirements. Once the Pyrites Plant is fully operational, we
anticipate that it will produce an average of 3.5 MOz of silver and
13 KOz of gold per year, including production from Saucito.
The US$30 million plant optimisation project to improve recovery
of lead and zinc from the lower levels at Fresnillo continued as
planned. The flotation circuit was connected on schedule early in
the year and we are now seeing an improved quality of concentrates,
better recovery rates and greater control of impurities. Originally
planned for this coming year, the installation of vibrating screens
to improve milling capacity at the plant continues to be an option.
However, we are not yet totally satisfied that doing so will create
the right balance between throughput and recovery, and other
courses of action remain under consideration.
Extending the growth pipeline
The increased exploration budget for 2021 supported an intensive
programme across all our operations, with the aim of increasing the
resource base, converting inferred resources into indicated, and
improving the confidence of the grade distribution in our reserves.
In total, our exploration teams drilled 835,396 metres, around 91%
of which was in brownfield sites, notably in the Fresnillo and San
Julián districts. We obtained good results that have increased both
inferred and indicated resources at these sites. The remaining 9%
involved activities on greenfield projects in Guanajuato in Mexico
and at the Capricornio and Condoriaco projects in Chile. We also
intensified our geological mapping and geochemical sampling
activities in the Fresnillo, Herradura and San Julián districts, as
well as in Guanajuato.
Our advanced exploration projects at Rodeo and Orisyvo continued
to make good progress. We engaged local communities to acquire
access to land at Rodeo, which holds inferred and indicated
resources amounting to 13.8 MOz of silver and 1.3 MOz of gold.
Although negotiations have been subject to delay, we nevertheless
expect to finalise them in 2022. At Orisyvo, we carried out
conceptual work - including detailed metallurgy testing which has
enabled us to update the feasibility study - and have prepared a
6,000-metre drilling programme to confirm the geotechnical model.
The key to further progress is again access to land, and we have
started discussions with the owners. We currently expect to
commence production at Orisyvo towards the end of 2025.
Exploration continued in Peru and Chile, where we developed new
drill targets and restructured our organisation and reporting
procedures in order to speed and streamline our activities. We also
participated in a number of the new arrangements for awarding
concessions that are currently being pursued by the Peruvian
government.
With inflationary pressures likely to compress our margins and
the labour reform challenges of this year set to continue, we have
reduced the exploration budget for 2022. Nevertheless, I am
confident that the skills of our exploration teams and the
outstanding geologies of both our brownfield and greenfield sites
will continue to ensure that we increase or maintain our reserves
and resources.
Silver resources stood at 2.3 Boz, a slight increase of 1.2%
over 2020 mainly as a result of the exploration efforts at
Fresnillo and San Julián Veins. Gold resources remained stable at
39.0 MOz. Silver reserves decreased 8.2% to 419.8 MOz mainly due to
depletion at Fresnillo, Saucito and San Julián (DOB). Gold reserves
decreased by 7.1% to 7.8 MOz primarily due to more stringent
geotechnical and cost considerations at Herradura and depletion at
Noche Buena.
Advancing and enhancing the sustainability of our operations
The safety of our people is always our top priority, and we
continued to roll out the 'I Care, We Care' programme across the
business. This has helped us achieve a significant reduction in
incidents over recent years, including in 2021 when we saw the
Total Recordable frequency rate improve from 13.9 injuries per one
million hours worked to 10.4 and the Lost Time Injury rate from 6.2
to 5.8. However, we were deeply saddened that in August one of our
employees experienced a fatal accident at the Fresnillo mine. We
worked with the relevant authorities to carry out a full
independent investigation and are continuing to provide support to
the employee's family and colleagues. We are committed to following
up on this incident and to complying with measures derived from the
Root Cause Analysis (RCA) process in order to avoid similar
accidents in the future. This incident is a timely reminder that no
matter how hard we may work to reduce the likelihood of incidents,
safety is a never-ending challenge that requires diligence and the
correct observance of protocols at all times.
We have continued to build greater resilience into our portfolio
of Tailings Storage Facilities (TSFs) and are committed to
implementing sector-specific standards and best practices that
follow the guidelines of the International Council of Mining and
Metals (ICMM), the International Commission on Large Dams (ICOLD),
the Canadian Dam Association (CDA) and the Mining Association of
Canada (MAC). Our Independent Tailings Review Panel provides
holistic guidance and recommendations for the safe design,
construction and operation of our TSFs. We also have Master
Services Agreements in place with a number of consultancies and,
through them, have named our Engineers of Record. In addition, we
have implemented satellite monitoring of our units and have
reinforced surveillance and instrumental monitoring of our
structures to enable improved decision-making during construction
and operation. We fully understand community concerns around TSFs
and will continue to invest in their safety in the short, medium
and long term.
As the COP26 conference again underlined, climate change is
engaging and energising governments and organisations across the
world - and we are committed to playing our part by mitigating our
environmental impact wherever possible. We will complete our
project to install dual fuel engines that run on both Liquid
Natural Gas (LNG) and diesel in 2022 as planned, and during the
last year we invested in infrastructure to ensure we have the
appropriate LNG storage capacity at Herradura. We anticipate seeing
the first environmental and cost benefits next year, as both our
diesel consumption and CO(2) footprint decrease. In addition, we
remain committed to achieving our target of using wind power to
provide 75% of our electricity by 2030, assuming that Mexico's
energy policy allows us to do so.
We continue to analyze our Energy Strategy in order to pursue a
decarbonisation pathway that will be operationally and
technologically viable. We are committed to playing our role in
mitigating climate change and have improved our TCFD disclosures
year on year. During the year ahead, we aim to carry out a thorough
review of our current operations to gain insights that will allow
us to ramp up our actions from disclosure to action and set
emission reduction targets.
The hard work and commitment of our people towards ESG was again
recognised by a broad group of authorities and our peers. For
example, we were proud to be recognised as one of the World's Most
Ethical Companies by Ethisphere, for the second successive year. We
have also been members of the FTSE4Good Index since 2017.
Looking ahead
A degree of uncertainty surrounds the coming 12 months, driven
to a significant extent by issues that are beyond our control.
Inflationary pressures, the impacts of various laws and the
attitude of the Government in Mexico to mining all have the
potential to influence our progress. Part of a broad range of
issues that are currently affecting many industries in Mexico, the
exploration, concessions and permitting processes for mining are no
longer as efficient and dynamic as in the past, and these could
present difficulties. Furthermore, there is a latent risk that
power self-supply contracts could be annulled along with the
Wholesale Electricity Market (MEM), hampering our ability to
increase the role of renewables in our energy portfolio and
potentially increasing operating costs.
Lower production and recovery rates at Herradura and the
continuing workforce shortages at Saucito caused by the new labour
reform - as well as the impact of recent geotechnical instability
in the Saucito area - are also likely to add to the pressures we
may face in 2022. In addition, the extension to the timeline for
the tie-in to the national grid of both the Juanicipio plant and
the Pyrites Plant mean that we now expect lower contributions than
previously anticipated from these operations during 2022.
On the upside, we expect our exploration pipeline to continue
making good progress, particularly at the Rodeo and Orisyvo
projects as well as at Guanajuato and across the Fresnillo
district. Precious metals prices also established what looks to be
a realistic floor towards the end of the year. Although prices in
2022 will as always be influenced by economic conditions in China,
the US and the EU, as well as other variables, our view is that a
period of higher prices is the most likely outcome.
I would like to thank the Board and all our people for their
support over the last 12 months. This has been another challenging
period for a variety of reasons, and Fresnillo would not have been
able to deliver such a good set of results in difficult
circumstances without their expertise, cooperation and willingness
to always go the extra mile for our business.
To conclude, on behalf of all my colleagues at Fresnillo, I
would like to offer my sincere condolences following the death of
Mr Alberto Baillères. His leadership, vision and direction were
largely responsible for making our Company the force it is today,
and our thoughts are with his family at this difficult time. He
will be greatly missed.
Octavio Alvídrez
Chief Executive Officer
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 2021 figures compared to 2020, unless otherwise noted. The
financial information and year-on-year variations are presented in
US dollars, except where indicated.
The following report presents how we have managed our financial
resources.
COMMENTARY ON FINANCIAL PERFORMANCE
In 2021, the Group achieved a satisfactory financial performance
which was supported by higher metals prices, and partly offset by
cost inflation, the adverse effect of the revaluation of the
Mexican peso vs. the US dollar and Company-specific challenges. In
particular, Adjusted revenue increased 9.2% over 2020 primarily due
to a higher silver price, while revenue increased 11.2%
year-on-year to US$2,703.1 million due to the higher adjusted
revenue combined with lower treatment and refining charges.
Adjusted production costs (2) increased mainly as a result of 9.6%
cost inflation combined with the 5.6% average revaluation of the
Mexican peso vs. US dollar. These increases were amplified by the
higher volumes of ore processed at Herradura and Noche Buena and
the increase in waste material moved at Herradura following the
lifting of Covid-19 operational restrictions in 1H20, and by
increased consumption of operating materials, higher maintenance
costs and additional personnel required to comply with the labour
reform. Additionally, costs from processing development ore at
Juanicipio further increased adjusted production costs. As a
result, gross profit and EBITDA increased to US$936.9 million and
US$1,206.3 million, a 6.5% and 3.2% increase over 2020
respectively.
We maintained our strong financial position, with US$1,235.3
million in cash and other liquid funds(1) as of 31 December 2021
notwithstanding paying dividends of US$245.6 million in accordance
with our policy, investing US$592.1 million in capex and spending
US$130.3 million on exploration expenses to underpin our future
growth.
INCOME STATEMENT
2021 US$ million 2020 US$ million Amount Change US$ million Change %
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Adjusted revenue [1] 2,847.9 2,608.1 239.8 9.2
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Total revenue 2,703.1 2,430.1 273.0 11.2
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Cost of sales (1,766.2) (1,550.7) (215.5) 13.9
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Gross profit 936.9 879.4 57.5 6.5
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Exploration expenses 130.3 107.3 23.0 21.4
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Operating profit 666.7 649.7 17.0 2.6
--------------------------------------------- ---------------- ---------------- ------------------------- --------
EBITDA [2] 1,206.3 1,169.1 37.2 3.2
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Income tax expense including special mining
rights 173.1 175.6 (2.5) (1.4)
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Profit for the period 438.5 375.6 62.9 16.7
--------------------------------------------- ---------------- ----------------
Profit for the period, excluding post-tax
Silverstream effects 438.8 325.9 112.9 34.6
--------------------------------------------- ---------------- ---------------- ------------------------- --------
Basic and diluted earnings per share
(US$/share) (5) 0.572 0.508 0.064 12.6
--------------------------------------------- ---------------- ----------------
Basic and diluted earnings per share,
excluding post-tax Silverstream effects
(US$/share) 0.572 0.440 0.132 30.0
--------------------------------------------- ---------------- ---------------- ------------------------- --------
The Group's financial results are largely determined by the
performance of our operations. However, other factors, such as a
number of macroeconomic variables, lie beyond our control and
affect financial results. These include:
METALS PRICES
The average realised silver price increased 16.9% from US$21.3
per ounce in 2020 to US$24.9 per ounce in 2021, while the average
realised gold price remained flat year-on-year at US$1,795.0 per
ounce in 2021 (up 0.1%). Furthermore, the average realised lead and
zinc by-product prices increased 21.6% and 31.7% over the previous
year, to US$1.00 and US$1.39 per pound, respectively.
MX$/US$ EXCHANGE RATE
The Mexican peso/US dollar spot exchange rate at 31 December
2021 was $20.58 per US dollar, compared to the exchange rate at 31
December 2020 of $19.95 per US dollar. The 3.2% spot devaluation
had an adverse effect on taxes and mining rights as it resulted in
an increase in related deferred tax liabilities. It also affected
the net monetary peso asset position, which contributed to the
US$1.9 million foreign exchange loss recognised in the income
statement.
The average spot Mexican peso/US dollar exchange rate
appreciated by 5.6% from $21.49 per US dollar in 2020 to $20.28 per
US dollar in 2021. As a result, there was an adverse effect of
US$36.0 million on the Group's costs denominated in Mexican pesos
(approximately 45% of total costs) when converted to US
dollars.
COST INFLATION
In 2021, cost inflation was 9.6 %. 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 non-unionised employees received on average
a 4.0% increase in wages in Mexican pesos; when converted to US
dollars, this resulted in a weighted average labour inflation of
12.0%.
Energy
Electricity
The weighted average cost of electricity in US dollars increased
12.6% from US$7.77 cents per kw in 2020 to US$8.74 cents per kw in
2021, due to the higher average generating cost of the Comisión
Federal de Electricidad (CFE), the national utility.
Diesel
The weighted average cost of diesel in US dollars increased
21.8% to 87.9 US cents per litre in 2021, compared to 72.2 US cents
per litre in 2020. This was primarily due to the global economic
recovery following the sharp slowdown in trade in 1H20 due to the
Covid-19 pandemic.
Operating materials
Year over year change in unit price %
-------------------------------------------- -------------------------------------
Steel balls for milling 11.9
-------------------------------------------- -------------------------------------
Sodium cyanide 9.8
-------------------------------------------- -------------------------------------
Other reagents 8.0
-------------------------------------------- -------------------------------------
Lubricants 5.7
-------------------------------------------- -------------------------------------
Steel for drilling 5.2
-------------------------------------------- -------------------------------------
Explosives 2.8
-------------------------------------------- -------------------------------------
Tyres 0.8
-------------------------------------------- -------------------------------------
Weighted average of all operating materials 6.2
-------------------------------------------- -------------------------------------
Unit prices of the majority of our key operating materials
increased in US dollar terms. This was primarily driven by higher
demand for some of these products as global mining activity
recovered following the adverse impact of Covid-19, while several
mines and projects worldwide also continued to ramp up production.
As a result, the weighted average unit prices of all operating
materials increased year-on-year by 6.2%.
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 2021, 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 increase of
approximately 9.5% in US dollars, after considering the revaluation
of the Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 4.5% on
average in US dollar terms.
Other costs
Other cost components include freight which increased by an
estimated 7.0% in US dollars, while insurance costs increased by
15.3% in US dollars mainly due to higher market premiums as a
result of Covid-19 claims. The remaining cost inflation components
experienced average deflation of 0.3% in US dollars over 2020.
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)
2021 2020 Amount
US$ million US$ million US$ million Change %
------------------------------- ------------ ------------ ------------ --------
Adjusted revenue ([3]) 2,847.9 2,608.1 239.8 9.2
------------------------------- ------------ ------------ ------------ --------
Metals prices hedging (1.4) 2.4 (3.7) N/A
------------------------------- ------------ ------------ ------------ --------
Treatment and refining charges (143.5) (180.4) 36.9 (20.5)
------------------------------- ------------ ------------ ------------ --------
Total revenue 2,703.1 2,430.1 273.0 11.2
------------------------------- ------------ ------------ ------------ --------
Adjusted revenue increased by US$239.8 million mainly as a
result of the higher silver, lead and zinc prices and increased
volumes of silver sold. Treatment and refining charges decreased
20.5% as explained below. As a result, total revenue rose to
US$2,703.1 million, an 11.2% increase against 2020.
ADJUSTED REVENUE [4] BY METAL
2021 2020
------------------ ------------------
Price Total net
Volume Variance Variance change
US$ million % US$ million % US$ million US$ million US$ million %
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ -----
Gold 1,305.2 45.8 1,327.9 50.9 (24.6) 1.9 (22.7) (1.7)
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ -----
Silver 1,163.9 40.9 970.5 37.2 27.7 165.8 193.4 19.9
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ -----
Lead 117.4 4.1 104.9 4.0 (9.3) 21.8 12.5 11.9
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ -----
Zinc 261.3 9.2 204.7 7.9 (7.3) 63.9 56.6 27.7
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ -----
Total adjusted revenue 2,847.9 100.0 2,608.1 100.0 (13.6) 253.4 239.8 9.2
----------------------- ----------- ----- ----------- ----- --------------- ------------ ------------ -----
The higher silver, zinc and lead prices resulted in a positive
effect on Adjusted revenue of US$253.4 million. This was partially
offset by the US$13.6 million adverse effect of the lower volumes
of gold, lead and zinc sold, mitigated by higher silver sales
volumes. The lower gold volumes sold were primarily due to a lower
ore grade at Ciénega and Herradura, and a lower ore grade and
volume of ore processed at San Julián Veins, while the higher
silver volumes resulted from the higher ore grade at San Julián DOB
and the contribution of development ore from Juanicipio (for
further details, see 2021 Operational Review).
Changes in the contribution by metal were the result of the
relative changes in metals prices and volumes produced. The
contribution of gold to total adjusted revenues decreased from
50.9% in 2020 to 45.8% in 2021, while that for silver increased
from 37.2% in 2020 to 40.9% in 2021.
ADJUSTED REVENUE BY Mine
Herradura continued to be the greatest contributor to Adjusted
revenue, representing 27.1% (2020: 30.0%). Saucito's contribution
reduced to 21.0% in 2021 (2020: 22.8%) driven by the lower volumes
of silver sold, mitigated by the higher silver price and increased
volumes of gold sold. Fresnillo remained the third most important
contributor to Adjusted revenue, with its share increasing to 16.1%
(2020: 15.6%). San Julián's contribution to the Group's Adjusted
revenue increased to 18.8% in 2021 (2020: 15.6%) primarily due to
the increase in volumes of silver sold as a result of the higher
silver ore grade at the DOB. Ciénega's contribution to the Group's
Adjusted revenue decreased to 8.0% (2020: 9.6%) as a result of the
lower gold and silver volumes sold, mitigated by the higher silver
price. Noche Buena's contribution to Adjusted revenue remained
stable at 6.0% in 2021 (5.8% in 2020).
The contribution by metal and by mine to Adjusted revenues is
expected to change further in the future, as new projects are
incorporated into the Group's operations and as precious metals
prices fluctuate.
ADJUSTED REVENUE 4 BY MINE
2021 2020
------------------- -------------------
(US$ million) % (US$ million)%
------------------------ ------------- ---- ------------- ---
Herradura 770.8 27.1 778.9 29.9
------------------------ ------------- ---- ------------- ----
Saucito 597.7 21.0 593.6 22.8
------------------------ ------------- ---- ------------- ----
Fresnillo 459.5 16.1 407.2 15.6
------------------------ ------------- ---- ------------- ----
San Julián (DOB) 344.5 12.1 218.0 8.3
------------------------ ------------- ---- ------------- ----
Ciénega 227.8 8.0 248.3 9.6
------------------------ ------------- ---- ------------- ----
San Julián (Veins) 192.5 6.7 191.2 7.3
------------------------ ------------- ---- ------------- ----
Noche Buena 169.9 6.0 152.6 5.8
------------------------ ------------- ---- ------------- ----
Juanicipio 85.2 3.0 18.3 0.7
------------------------ ------------- ---- ------------- ----
Total 2,847.9 100 2,608.1 100
------------------------ ------------- ---- ------------- ----
VOLUMES OF METAL SOLD
% contribution % contribution
2021 of each mine 2020 of each mine % change
--------------------------- ------- -------------- ------- -------------- --------
Silver (koz)
--------------------------- ------- -------------- ------- -------------- --------
Saucito 11,446 24.4 14,133 31.0 (19.0)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 11,082 23.7 11,664 25.6 (5.0)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 10,813 23.1 7,594 16.7 42.4
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 4,907 10.5 5,246 11.5 (6.5)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (Veins) 4,077 8.7 3,907 8.6 4.4
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 2,932 6.3 794 1.7 269.3
--------------------------- ------- -------------- ------- -------------- --------
Herradura 932 2.0 1,300 2.9 (28.3)
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Saucito 601 1.3 944 2.1 (36.3)
--------------------------- ------- -------------- ------- -------------- --------
Noche Buena 14 0.0 25 0.1 (44.0)
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Fresnillo 3 0.0 0 0.0 NA
--------------------------- ------- -------------- ------- -------------- --------
Total silver (koz) 46,807 45,607 2.6
--------------------------- ------- -------------- ------- -------------- --------
Gold (oz)
--------------------------- ------- -------------- ------- -------------- --------
Herradura 416,310 57.2 429,093 57.9 (3.0)
--------------------------- ------- -------------- ------- -------------- --------
Saucito 81,304 11.2 75,096 10.1 8.3
--------------------------- ------- -------------- ------- -------------- --------
Noche Buena 94,237 13.0 77,494 10.5 21.6
--------------------------- ------- -------------- ------- -------------- --------
San Julián (Veins) 50,794 7.0 60,672 8.2 (16.3)
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 45,352 6.2 60,077 8.1 (24.5)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 28,834 4.0 32,637 4.4 (11.7)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 5,908 0.8 0.0 0.0 NA
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Saucito 2,260 0.3 3,396 0.5 (33.5)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 2,130 0.3 1,397 0.2 52.5
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Fresnillo 8 0.0 0 0.0 NA
--------------------------- ------- -------------- ------- -------------- --------
Total gold (oz) 727,137 740,891 (1.9)
--------------------------- ------- -------------- ------- -------------- --------
Lead (t)
--------------------------- ------- -------------- ------- -------------- --------
Saucito 22,878 43.0 26,093 45.1 (12.3)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 17,353 32.6 19,446 33.6 (10.8)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 8,270 15.5 6,464 11.2 27.9
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 3,626 6.8 5,634 9.7 (38.9)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 1,067 2.0 0.0 0.0 NA
--------------------------- ------- -------------- ------- -------------- --------
Total lead (t) 53,194 57,801 (8.0)
--------------------------- ------- -------------- ------- -------------- --------
Zinc (t)
--------------------------- ------- -------------- ------- -------------- --------
Saucito 31,911 37.4% 34,654 39.4 (7.9)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 29,532 34.6% 28,256 32.1 4.5
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 16,928 19.9% 17,028 19.4 (0.6)
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 5,393 6.3% 7,832 8.9 (31.1)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 1,511 1.8% 0.0 0.0 NA
--------------------------- ------- -------------- ------- -------------- --------
Total zinc (t) 85,275 87,996 (3.1)
--------------------------- ------- -------------- ------- -------------- --------
HEDGING
In 2021 we entered into a hedging programme executed for a total
volume of 1,800,000 ounces of silver with monthly settlements
throughout 2021 until February 2022. Similar to last year's
transaction, this was structured as a collar with an average floor
price of US$22 per ounce, and an average price ceiling of US$50.33
per ounce.
Additionally, a portion of our by-product zinc production during
2021 and the first quarter of 2022 was hedged using a similar
financial structure to that of silver.
The table below illustrates the expired structures, their
results and the outstanding volume as of 31 December 2021.
Concept As of 31 December As of 31 December
2021 2021
Silver(1) Zinc(2)
------------------ ------------------
Weighted Floor 20.60 usd/oz 2,491 usd/tonne
------------------ ------------------
Weighted Cap 49.79 usd/oz 3,130 usd/tonne
------------------ ------------------
Expired volume 5,748,000 oz 16,960 tonne
------------------ ------------------
Profit/Loss (US$ dollars) 0 (1,351,186)
------------------ ------------------
Total outstanding volume 300,000 oz 5,960 tonne
------------------ ------------------
(1) Monthly settlements until February 2022
(2) Monthly settlements until April 2022
TREATMENT AND REFINING CHARGES
Treatment and refining charges [5] are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and
zinc concentrate decreased in dollar terms by 14.6% and 39.6%
respectively. Furthermore, silver refining charges remained flat
over the year. The decrease in treatment charges per tonne of lead
and zinc, combined with the lower volumes of lead and zinc
concentrates shipped from our mines to Met-Mex, resulted in a 20.5%
decrease in treatment and refining charges set out in the income
statement in absolute terms when compared to 2020.
COST OF SALES
2021 2020 Amount
Concept US$ million US$ million US$ million Change %
------------------------------------------------------------------ ------------ ------------ ------------ --------
Adjusted production costs ([6]) 1,255.1 1,079.1 176.0 16.3
------------------------------------------------------------------ ------------ ------------ ------------ --------
Depreciation 528.2 505.4 22.8 4.5
------------------------------------------------------------------ ------------ ------------ ------------ --------
Profit sharing 15.6 18.7 (3.1) 16.6
------------------------------------------------------------------ ------------ ------------ ------------ --------
Hedging (3.8) (4.1) 0.3 (7.7)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Change in work in progress (29.6) (66.4) 36.8 (55.4)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Unproductive costs including inventory reversal and unabsorbed
production costs ([7]) 0.8 18.0 (17.2) (95.6)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cost of sales 1,766.2 1,550.7 215.5 13.9
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cost of sales increased 13.9% to US$1,766.2 million in 2021. The
US$215.5 million increase is due to a combination of the following
factors:
-- An increase in Adjusted production costs (+US$176.0 million).
This was primarily due to: i) cost inflation, excluding the Mexican
peso vs. US dollar revaluation effect (US$66.2 million); ii) the
adverse effect of the 5.6% revaluation of the Mexican peso vs. US
dollar average exchange rate (US$36.0 million) [8] ; iii) a higher
volume of material moved at Herradura and Noche Buena following the
lifting of Covid-19 operational restrictions in 1H20 (US$51.8
million); iv) increased development and infrastructure works at our
underground mines, maintenance, personnel, consumption of operating
materials (US$41.2 million); v) costs from the start-up of
operations at Juanicipio (US$14.0 million); and vi) higher
stripping ratio at Herradura (US$12.1 million). These adverse
effects were mitigated by a decreased volume of ore processed at
our underground mines (-US$43.5 million) and others (-US$1.8
million).
-- The variation in the change in work in progress had a
negative effect of US$36.8 million versus 2020. This resulted
mainly from the recognition of a smaller favourable effect from the
reassessment of recoverable gold inventories at the leaching pads
in 2021 compared to that recognised in 2020, together with the
increase in the cost per ounce in the last quarter of the year at
Herradura: US$29.6 million in 2021 vs. US$66.4 million in 2020.
-- Depreciation (+US$22.8 million). This is mainly due to higher
depreciation at Noche Buena as it approaches the end of its mine
life and increased amortisation of capitalised mining works and
increased depletion factors at Fresnillo and San Julián.
-- Profit sharing (-US$3.1 million).
-- Mexican peso/US dollar hedging (+US$0.3 million). As part of
our programme to manage our exposure to foreign exchange risk
associated with costs incurred in Mexican pesos, we entered into a
combination of put and call options structured at zero cost
(collars) in 2021. These derivatives finally expired in March 2021
and they generated a positive result of US$3.8 million during the
first quarter of 2021. As of 31 December 2021, there was no further
outstanding position.
These negative effects were mitigated by:
-- The variation in unproductive costs, which had a favourable
effect of US$17.2 million. In 2021, US$0.8 million was registered
as unproductive costs related to fixed production cost (labour cost
and depreciation) incurred in Minera San Julián due to a shortfall
in electricity; in 2020 US$18.0 million was registered in relation
to costs incurred during the partial stoppages at Herradura and
Noche Buena as a result of the Covid-19 measures imposed by the
state government.
COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST
(AISC)
Cost per tonne is a key indicator to measure the effects of
changes in production costs and cost control performance at each
mine. This indicator is calculated as total production costs, plus
ordinary mining rights, less depreciation, profit sharing and
exchange rate hedging effects, divided by total tonnage processed.
We have included cost per tonne hauled/moved as we believe it is a
useful indicator to thoroughly analyse cost performance for the
open pit mines.
Cost per tonne 2021 2020 % change
------------------------ -------------------- ---- ---- --------
Fresnillo US$/tonne milled 84.7 69.9 21.2
------------------------ -------------------- ---- ---- --------
Saucito US$/tonne milled 89.8 72.0 24.7
------------------------ -------------------- ---- ---- --------
San Julián (Veins) US$/tonne milled 81.5 71.8 13.4
------------------------ -------------------- ---- ---- --------
San Julián (DOB) US$/tonne milled 39.2 39.0 0.5
------------------------ -------------------- ---- ---- --------
Ciénega US$/tonne milled 86.1 76.7 12.2
------------------------ -------------------- ---- ---- --------
Herradura US$/tonne deposited 21.7 18.3 18.6
------------------------ -------------------- ---- ---- --------
Herradura US$/tonne hauled 3.5 3.3 6.1
------------------------ -------------------- ---- ---- --------
Noche Buena US$/tonne deposited 11.0 10.8 1.9
------------------------ -------------------- ---- ---- --------
Noche Buena US$/tonne hauled 3.8 3.3 13.2
------------------------ -------------------- ---- ---- --------
Fresnillo: Cost per tonne increased 21.2% to US$84.7 in 2021,
with the adverse effect of the revaluation of the Mexican peso vs.
the US dollar together with cost inflation of 9.83% at this mine
accounting for approximately half of the increase. The remaining
increase was primarily driven by: i) additional costs associated
with maintenance to the vertical conveyor; ii) increased use of
explosives, due to the use of electronic initiators to improve the
precision and safety of explosive charges; iii) increase in the
consumption of reagents due to smaller particles of zinc contained
in the mineral; and iv) increase in personnel costs in preparation
for the start of operations at the Pyrites Plant and the new labour
reform. Additionally, the lower volume of ore fed to the mills
(-5.2%) also had a negative effect.
Saucito: Cost per tonne increased 24.7% to US$89.8, with the
adverse effect of the revaluation of the Mexican peso vs. the US
dollar and cost inflation of 9.85% at this mine accounting for
approximately half of the increase. The remaining increase was
primarily driven by: i) electrical maintenance and repairs to
rectify damage to the pumping equipment caused by two floods during
the year, and mechanical corrective maintenance to the flotation
plant; ii) increase in personnel in preparation for the labour
reform; iii) increase in contractors due to higher volume of waste
hauled and supportive works such as anchoring and shotcreting to
mitigate risks caused by increased seismicity in operating areas,
and increased development. Additionally the lower volume of ore fed
to the mill (-12.0%) had a negative effect.
San Julián (veins): Cost per tonne increased 13.5% to US$81.5,
with the adverse effect of the revaluation of the Mexican peso vs.
the US dollar and cost inflation of 7.68% at this mine accounting
for almost two thirds of the increase. The remaining increase was
driven by higher contractor costs.
San Julián (DOB): Cost per tonne remained stable at US$39.2 per
tonne, mainly due to the adverse effect of the revaluation of the
Mexican peso vs. the US dollar, and cost inflation of 7.68% at this
mine, which together represented approximately 85% of the total
adverse effect. Additionally, the 7.1% decrease in volumes of ore
processed further impacted cost per tonne. These adverse effects
were practically offset by the decrease in the use of contractors
for supporting works.
Ciénega: Cost per tonne increased 12.3% to US$86.1, driven by
the adverse effect of the revaluation of the Mexican peso vs. the
US dollar and cost inflation of 7.84% at this mine, which together
represented approximately 80% of the increase. The remaining 20%
was primarily the result of higher contractor costs due to an
increase in mine development. Additionally, the 2.7% decrease in
volume of ore processed further impacted cost per tonne.
Herradura: Cost per tonne of ore deposited increased 18.6%, with
the adverse effect of the revaluation of the Mexican peso vs. the
US dollar and cost inflation of 10.17% at this mine accounting for
approximately half of the increase. The remaining increase was
primarily driven by: i) the increase of the stripping ratio from
4.5:1 in 2020 to 5.1:1 in 2021; and ii) the adverse effect of
recognising unproductive costs within cost of sales but excluded
from adjusted production costs during the temporary suspension of
mining activities at the beginning of the Covid-19 pandemic in
1H20. This was mitigated by efficiencies gained through lower
consumption of diesel, explosives and reagents per tonne processed
and the 2.6% increase in the volume of ore processed.
Noche Buena: Cost per tonne increased marginally 1.9% to US$11.0
in 2021, due to: i) the adverse effect of the revaluation of the
Mexican peso vs. the US dollar, and cost inflation of 9.87% at this
mine; ii) increase in the use of contractors; and iii) the adverse
effect of recognising unproductive costs from the suspension of
mining activities at the beginning of the Covid-19 pandemic within
cost of sales but excluded from adjusted production costs in 2020.
Most of this increase was offset by a lower stripping ratio and
increased volumes of ore processed.
Cash cost per ounce 2021 2020 % change
------------------------ --------------------- ------- ------- --------
Fresnillo US$ per silver ounce 5.4 5.9 (8.3)
------------------------ --------------------- ------- ------- --------
Saucito US$ per silver ounce (0.8) 0.8 N/A
------------------------ --------------------- ------- ------- --------
San Julián (Veins) US$ per silver ounce 1.8 (6.0) N/A
------------------------ --------------------- ------- ------- --------
San Julián (DOB) US$ per silver ounce 4.8 7.0 (31.4)
------------------------ --------------------- ------- ------- --------
Ciénega US$ per gold ounce (523.1) (276.2) (89.4)
------------------------ --------------------- ------- ------- --------
Herradura US$ per gold ounce 900.4 727.9 23.7
------------------------ --------------------- ------- ------- --------
Noche Buena US$ per gold ounce 1,029.5 1,158.5 (11.1)
------------------------ --------------------- ------- ------- --------
Cash cost per ounce, calculated as total cash cost (cost of
sales plus treatment and refining charges, less depreciation) less
revenue from by-products divided by the silver or gold ounces sold,
when compared to the corresponding metal price, is an indicator of
the ability of the mine to generate competitive profit margins.
Fresnillo: Cash cost per silver ounce decreased to US$5.4 (2020:
US$5.9) principally due to higher by-product credits and lower
treatment and refining charges, partly offset by a higher cost per
tonne. Margin per ounce increased 26.0% to US$19.4. Expressed as a
percentage of the silver price, it increased to 78.1% (2020:
72.3%).
Saucito: Cash cost per silver ounce decreased to -US$0.9 per
ounce (2020: US$0.8 per silver ounce) mainly as a result of higher
gold, lead and zinc by-product credits per silver ounce. This was
partially offset by an increase in cost per tonne and a lower
silver ore grade. Margin per ounce increased to US$25.8 in 2021
(2020: US$20.5). Expressed as a percentage of the silver price, it
increased from 96.2% to 103.6%.
San Julián (veins): Cash cost per ounce of silver increased
mainly due to lower gold by-product credits and higher cost per
tonne; mitigated by a higher silver ore grade. Margin per ounce
decreased to US$23.0 (2020: US$27.3), while margin expressed as a
percentage of the silver price decreased from 128.2% in 2020 to
92.6% in 2021.
San Julián (DOB): Cash cost decreased 31.4% to US$4.8 per ounce
of silver driven by a higher silver ore grade and lower treatment
and refining charges, partially offset by the higher cost per tonne
and increased special mining rights.
Ciénega: The decrease in cash cost per gold ounce from -US$276.2
per ounce in 2020 to -US$523.1 per ounce in 2021 was primarily due
to an increase in silver by-product credits. This was partly offset
by a lower gold ore grade and higher cost per tonne. Margin per
ounce increased to US$2,318.1 in 2021 (2020: US$2,068.6). Expressed
as a percentage of the gold price, the margin increased to 129.1%
(2020: 115.4%).
Herradura: Cash cost per gold ounce increased to US$900.4 per
ounce of gold mainly as a result of: i) a lower ore grade; ii)
higher cost per tonne. These adverse effects were mitigated by the
favourable effect of the variation of change in inventories and the
lower mining rights. Margin per ounce and margin expressed as a
percentage of the gold price decreased to US$894.6 and 49.8%,
respectively.
Noche Buena: Cash cost per gold ounce decreased by 11.1% to
US$1,029.5, mainly due to a higher gold ore grade and reduced
mining rights. Margin per ounce increased to US$765.4 in 2021
(2020: US$633.9). Expressed as a percentage of the gold price, it
increased from 35.4% to 42.6% in 2021.
In addition to the traditional cash cost, the Group is reporting
All-In Sustaining Cost (AISC) in accordance with the guidelines
issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus
on-site general, corporate and administrative costs, community
costs related to current operations, capitalised stripping and
underground mine development, sustaining capital expenditures and
remediation expenses.
We consider AISC to be a reasonable indicator of a mine's
ability to generate free cash flow when compared with the
corresponding metal price. We also believe it is a means to monitor
not only current production costs, but also sustaining costs as it
includes mine development costs incurred to prepare the mine for
future production, as well as sustaining capex.
ALL-IN SUSTAINING COST (AISC)
AISC 2021 2020 % change
------------------------ --------------------- -------- -------- --------
Fresnillo US$ per silver ounce 16.34 12.92 26.5
------------------------ --------------------- -------- -------- --------
Saucito US$ per silver ounce 9.53 6.94 37.3
------------------------ --------------------- -------- -------- --------
San Julián (Veins) US$ per silver ounce 14.04 5.04 178.4
------------------------ --------------------- -------- -------- --------
San Julián (DOB) US$ per silver ounce 6.34 8.85 (28.3)
------------------------ --------------------- -------- -------- --------
Ciénega US$ per gold ounce 656.11 618.32 6.1
------------------------ --------------------- -------- -------- --------
Herradura US$ per gold ounce 1,100.20 881.92 24.8
------------------------ --------------------- -------- -------- --------
Noche Buena US$ per gold ounce 1,122.21 1,502.92 (25.3)
------------------------ --------------------- -------- -------- --------
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.
Fresnillo: All-in sustaining cost increased 26.5% over 2020 to
US$16.3, explained by a higher sustaining capex in absolute terms
and per ounce (-5.0% silver ounces sold).
Saucito: All-in sustaining cost increased to US$9.5 per ounce
due to higher sustaining capex related to higher sustaining capex
in absolute terms and per ounce (-20.1% silver ounces sold),
mitigated by lower cash cost.
San Julián (veins): All in sustaining cost increased to US$14.0
per ounce due to higher sustaining capex and capitalised mine
development.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.
San Julián (DOB): The 29.2% decrease in all in sustaining cost
was mainly driven by the lower cash cost.
Ciénega: The US$37.8 per ounce increase in all in sustaining
cost was primarily driven by the higher sustaining capex, mitigated
by the lower cash cost.
Herradura: All-in sustaining cost increased to US$1,100.2 per
ounce mainly due to the higher cash cost and increased capitalised
stripping.
Noche Buena: The US$380.7 per ounce decrease to US$1,122.2 per
ounce in all-in sustaining cost was the result of lower capitalised
stripping and sustaining capex.
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 6.5% from US$879.4 million in 2020 to US$936.9 million
in 2021.
The US$57.5 million increase in gross profit was mainly due to:
i) the favourable effect of higher average realised silver, lead
and zinc prices (US$253.4 million); ii) the positive effect from
processing development ore from Juanicipio (US$53.5 million); and
iii) lower treatment and refining charges (US$36.9 million); and
iv) others (US$23.0 million). These positive effects were partially
offset by: i) cost inflation, including the effect of the
revaluation of the Mexican peso (-US$102.2 million); ii) the
smaller favourable effect from the reassessment of recoverable gold
inventories at the leaching pads in 2021 compared to the one
recorded in 2020 (-US$58.0 million); iii) an increase in cost
related to development, infrastructure, maintenance and increased
workforce, mainly at Saucito, and Fresnillo (-US$41.2 million); iv)
the adverse effect of lower volumes processed at the underground
mines, net of the positive impact from the higher volume of ore
processed at the open pit mines (-US$40.9 million); v) higher
volume moved at Herradura due to continuous operations in 2021 vs.
the disruption in 2020 due to the Covid-19 pandemic (-US$32.1
million); vi) higher depreciation (-US$22.8 million); and vii)
higher stripping at Herradura (-US$12.1 million).
Herradura remained the largest contributor to the Group's
consolidated gross profit despite recording a decrease in its
percentage share from 43.4% in 2020 to 30.7% in 2021. Saucito
remained the second largest contributor to consolidated gross
profit, albeit decreasing its participation to 22.7% in 2021 as a
result of its relative weighting. The higher silver grade at San
Julián (DOB), together with the higher silver, lead and zinc
prices, resulted in a US$171.5 million gross profit in 2021,
increasing its contribution from 8.4% in 2020 to 18.7% in 2021. San
Julián replaced Fresnillo as the third largest contributor to
consolidated gross profit despite an increase in Fresnillo's
percentage share from 12.7% in 2020 to 14.7% in 2021. Ciénega's
share of the Group's total gross profit decreased to 4.6% in 2021,
while Noche Buena's contribution continued to decrease as it
approaches the end of its mine life. Notwithstanding, Noche Buena
generated an EBITDA and cash flow from operating activities of
US$66.6 million and US$75.2 million, respectively, recording a
US$24.7 million gross profit.
CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING
HEDGING GAINS AND LOSSES
2021 2020 Change
----------------- ----------------- -------------------
US$ million % US$ million % US$ million %
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Herradura 281.1 30.6 372.3 43.4 (91.2) (24.5)
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Saucito 208.7 22.7 200.2 23.4 8.5 4.2
------------------------------------- ----------- ---- ----------- ---- ----------- ------
San Julián 173.1 18.8 71.9 8.4 101.2 140.8
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Fresnillo 136.7 14.9 109.1 12.7 27.6 25.3
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Juanicipio 53.5 5.8 0.0 0.0 53.5 N/A
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Ciénega 42.5 4.6 64.4 7.5 (21.9) (34.0)
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Noche Buena 23.5 2.6 39.0 4.6 (15.5) (39.7)
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Total for operating mines 919.1 100 856.9 100 62.2 7.3
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Metal hedging and other subsidiaries 17.8 22.5 (4.7) (20.9)
------------------------------------- ----------- ---- ----------- ---- ----------- ------
Total Fresnillo plc 936.9 879.4 57.5 6.5
------------------------------------- ----------- ---- ----------- ---- ----------- ------
ADMINISTRATIVE AND CORPORATE EXPENSES
Administrative and corporate expenses increased 10.8% from
US$93.4 million in 2020 to US$103.5 million in 2021, due to an
increase in fees paid to advisors (legal, labour, tax and
technical), the increase in non-recurring corporate services
provided by Servicios Industriales Peñoles S.A.B. de C.V. and the
adverse effect of the revaluation of the Mexican peso vs. the US
dollar.
EXPLORATION EXPENSES
Business unit/project (US$ Exploration Capitalised
million) Exploration expenses 2021 expenses 2020 Capitalised expenses 2021 expenses 2020
-------------------------------- ------------------------- -------------- ------------------------- --------------
Ciénega 6.4 5.6 - -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Fresnillo 6.1 6.4 - -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Herradura 6.1 11.5 - -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Saucito 15.0 11.0 - -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Noche Buena 1.0 0.9 - -
-------------------------------- ------------------------- -------------- ------------------------- --------------
San Julián 22.6 16.5 - -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Orisyvo 5.2 3.6 0.1 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Centauro Deep 0.2 0.1 - 3.3
-------------------------------- ------------------------- -------------- ------------------------- --------------
Guanajuato 8.1 4.3 1.0
-------------------------------- ------------------------- -------------- ------------------------- --------------
Juanicipio 0.0 - 8.1 4.8
-------------------------------- ------------------------- -------------- ------------------------- --------------
Valles (Herradura) 5.1 0.0 -
-------------------------------- ------------------------- -------------- ------------------------- --------------
Others 54.5 47.4 0.6 0.4
-------------------------------- ------------------------- -------------- ------------------------- --------------
Total 130.3 107.3 9.8 8.5
-------------------------------- ------------------------- -------------- ------------------------- --------------
As expected, exploration expenses increased by 21.4% from
US$107.3 million in 2020 to US$130.3 million in 2021, in line with
our strategy to focus exploration on specific targets, mainly at
the Fresnillo and San Julián districts. The year-on-year increase
of US$23.0 million was due to our intensified exploration
activities aimed at increasing the resource base, converting
resources into reserves and improving the confidence of the grade
distribution in reserves. An additional US$9.8 million was
capitalised, mainly relating to exploration expenses at the
Juanicipio project. As a result, risk capital invested in
exploration totalled US$140.1 million in 2021, compared to US$115.8
million in 2020(of which US$8.5 million was capitalised) This
represents a year-on-year increase of 21.0%.
EBITDA
2021 2020 Amount
US$ million US$ million US$ million Change %
---------------------------------------------------- ------------ ------------ ------------ --------
Profit from continuing operations before income tax 611.5 551.3 60.2 10.9
---------------------------------------------------- ------------ ------------ ------------ --------
- Finance income (8.9) (12.2) 3.3 (27.0)
---------------------------------------------------- ------------ ------------ ------------ --------
+ Finance costs 61.8 141.3 (79.5) (56.3)
---------------------------------------------------- ------------ ------------ ------------ --------
- Revaluation effects of Silverstream contract 0.4 (71.0) 71.4 N/A
---------------------------------------------------- ------------ ------------ ------------ --------
- Foreign exchange loss, net 1.9 40.3 (38.4) (95.3)
---------------------------------------------------- ------------ ------------ ------------ --------
- Other operating income (11.9) (10.0) (1.9) 19.0
---------------------------------------------------- ------------ ------------ ------------ --------
+ Other operating expense 23.3 14.8 8.5 57.4
---------------------------------------------------- ------------ ------------ ------------ --------
+ Depreciation 528.2 505.4 22.8 4.5
---------------------------------------------------- ------------ ------------ ------------ --------
+ Depreciation included in unproductive costs - 9.2
---------------------------------------------------- ------------ ------------ ------------ --------
EBITDA 1,206.3 1,169.1 37.2 3.2
---------------------------------------------------- ------------ ------------ ------------ --------
EBITDA margin 44.6 48.1
---------------------------------------------------- ------------ ------------ ------------ --------
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 the net Silverstream effects and other operating income plus
other operating expenses and depreciation. In 2021, EBITDA
increased 3.2% to US$1,206.3 million primarily driven by the higher
gross profit, partly offset by higher exploration and
administrative expenses. As a result, EBITDA margin expressed as a
percentage of revenue decreased, from 48.1% in 2020 to 44.6% in
2021.
OTHER OPERATING INCOME AND EXPENSE
In 2021, a net loss of US$11.3 million was recognised in the
income statement mainly as a result of maintenance costs of closed
mines and remediation works at both a tailings facility at
Fresnillo and at Saucito, following the presence of high
temperature water in an underground production area.
SILVERSTREAM EFFECTS
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The net Silverstream
effect recorded in the 2021 income statement was a small loss of
US$0.4 million (US$43.0 million amortisation profit and US$43.4
million revaluation loss), which compared negatively to the net
gain of US$71.0 million registered in 2020. The negative
revaluation was mainly driven by the decrease in the forward silver
price curve, increase in the LIBOR reference rate; and a decrease
in the production plan following an update to the Sabinas silver
resource; partially mitigated by higher inflation expectations and
amortisation effects.
Since the IPO, cumulative cash received has been US$736.3
million vs. US$350 million initially paid in 2007. The Group
expects that further unrealised gains or losses related to the
valuation of the Silverstream 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.
NET FINANCE COSTS
Net finance costs of US$52.9 million compared favourably to the
US$129.1 million recorded in 2020. The US$76.2 million decrease was
primarily due to payments made in 2020, which did not apply in
2021, in relation to: 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; and ii) US$24.9 million in interest and surcharges,
which resulted from the 2020 tax amendment agreed with the Mexican
Tax Administration Service.
The 2021 net finance costs mainly reflected: i) interest paid on
the outstanding US$317.9 million from the US$800 million of 5.500%
Senior Notes due 2023, and ii) interest paid on the US$850 million
principal amount of 4.250% Senior Notes due 2050. 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 2021, the Group capitalised US$8.4 million of
borrowing costs (2020: US$8.8 million).
FOREIGN EXCHANGE
A foreign exchange loss of US$1.9 million was recorded as a
result of the 3.2% devaluation of the Mexican peso against the US
dollar over the period. This compared favourably to the US$40.3
million loss in 2020.
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). As of 31
December 2021, the total EUR and SEK outstanding net forward
position was EUR 25.7 million and SEK 5.1 million with maturity
dates through September 2022. Volumes that expired during 2021 were
EUR 16.3 million with a weighted average strike of 1.2012 USD/EUR
and SEK 25.36 million with a weighted average strike of 8.5703
SEK/USD, which have generated a marginal loss in the period of
-US$0.7 million.
TAXATION
Income tax expense for the period was US$156.5 million, which
was similar to that of US$140.6 million in 2020. The effective tax
rate, excluding the special mining rights, was 25.6%, which was
below the 30% statutory tax rate. The reason for the lower
effective tax rate was the significant permanent differences
between the tax and the accounting treatment related mainly to: i)
the inflation rate which impacted the inflationary uplift of the
tax base for assets and liabilities (-US$49.4 million); ii) the
border zone tax benefit which benefited the Herradura and Noche
Buena operations (-US$10.1 million); and iii) special mining right
taxable for corporate income tax (-US$5.0 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$32.1 million); and ii) deferred tax assets not
recognised (US$6.5 million).
The effective tax rate in 2020 was 25.5% 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/deductible 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).
Mining rights in 2021 were US$16.6 million compared to US$35.0
million charged in 2020.
PROFIT FOR THE PERIOD
Profit for the period increased from US$375.6 million in 2020 to
US$438.5 million in 2021, a 16.8% 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$325.9 million to US$438.8 million, a
34.6% increase.
CASH FLOW
A summary of the key items from the cash flow statement is set
out below:
2021 2020 Amount
US$ million US$ million US$ million Change %
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cash generated by operations before changes in working capital 1,208.3 1,168.7 39.5 3.4
------------------------------------------------------------------ ------------ ------------ ------------ --------
Decrease/(increase) in working capital 58.0 (129.8) 187.8 N/A
------------------------------------------------------------------ ------------ ------------ ------------ --------
Taxes and employee profit sharing paid (371.1) (121.3) (249.9) 206.0
------------------------------------------------------------------ ------------ ------------ ------------ --------
Net cash from operating activities 895.1 917.7 (22.5) (2.5)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Proceeds from the layback agreement 25.0 0.0 25.0 100.0
------------------------------------------------------------------ ------------ ------------ ------------ --------
Silverstream contract 49.0 33.7 15.3 45.3
------------------------------------------------------------------ ------------ ------------ ------------ --------
Debt Restructuring 0.0 350.0 (350.0) N/A
------------------------------------------------------------------ ------------ ------------ ------------ --------
Purchase of property, plant and equipment (592.1) (412.3) (179.7) 43.6
------------------------------------------------------------------ ------------ ------------ ------------ --------
Dividends paid to shareholders of the Company (245.6) (104.7) (140.9) 134.6
------------------------------------------------------------------ ------------ ------------ ------------ --------
Transaction costs senior notes 0.0 (64.7) 64.7 N/A
------------------------------------------------------------------ ------------ ------------ ------------ --------
Financial expenses and foreign exchange effects (39.9) (44.1) 4.3 (9.7)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Net increase in cash during the period after foreign exchange
differences 164.9 733.8 (569.0) (77.5)
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cash and other liquid funds at 31 December [9] 1,235.3 1,070.4 164.9 15.4
------------------------------------------------------------------ ------------ ------------ ------------ --------
Cash generated by operations before changes in working capital
increased by 3.4% to US$1,208.3 million, mainly as a result of the
higher profits generated in the year. Working capital decreased
US$58.0 million, mainly due to: i) a US$85.6 million decrease in
accounts receivable due to: a) decrease in trade receivables from
related parties (US$61.8 million); b) VAT recovered (US$30.0
million); c) MXP/USD exchange rate effect (-US$7.9 million); and
others d) US$1.7 million); and ii) a US$19.2 million increase in
accounts payable. This was partly offset by: i) an increase in ore
inventories of US$44.6 million; and ii) a US$2.2 million increase
in prepayments.
Taxes and employee profit sharing paid increased 206.0% over
2020 to US$371.1 million mainly due to: i) an increase in
provisional tax payments resulting from the higher profit factor
determined to calculate the estimated taxable income; ii) higher
final income tax paid in March 2021, net of provisional taxes paid
(corresponding to the 2020 tax fiscal year); iii) an increase in
mining rights; and iv) higher profit sharing paid.
As a result of the above factors, net cash from operating
activities decreased 2.5% from US$917.7 million in 2020 to US$895.1
million in 2021.
The Group received other sources of cash, including: i) capital
contribution and note payable by minority shareholders in
subsidiaries of US$73.6 million; and ii) the proceeds of the
Silverstream contract of US$49.0 million.
Furthermore, in December 2020, the Group entered into multiple
contracts with Orla Mining Ltd., granting Orla the right to expand
the Camino Rojo oxide pit onto Fresnillo's mineral concession. The
effectiveness of the agreement was subject to the approval of the
Mexican Federal Competition Commission (COFECE), which was granted
in February 2021, at which time, a payment of US$25.0 million was
made to Fresnillo plc (See note 2 to the consolidated financial
statements).
Main uses of funds were:
i) the purchase of property, plant and equipment for a total of
US$592.1 million, a 43.6% increase over 2020. Capital expenditures
for 2021 are described below:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
2021
US$ million
------------------------------------------------ ------------ ----------------------------------------------------
Fresnillo mine 108.3 Mine development and mining works, purchase of
in-mine equipment, deepening of the San Carlos
shaft and tailings dam.
------------------------------------------------ ------------ ----------------------------------------------------
Saucito mine 101.2 Mine development, purchase of in-mine equipment,
deepening of the Jarillas shaft and tailings
dam.
------------------------------------------------ ------------ ----------------------------------------------------
Herradura mine 54.4 Stripping, construction of leaching pad, sustaining
capex and purchase of equipment for dynamic
leaching plants.
------------------------------------------------ ------------ ----------------------------------------------------
Ciénega mine 45.4 Mining works, purchase of in-mine equipment and
construction of tailings dam.
------------------------------------------------ ------------ ----------------------------------------------------
San Julián Veins and DOB 40.9 Mining works and purchase of in-mine equipment.
------------------------------------------------ ------------ ----------------------------------------------------
Noche Buena mine 0.4 Sustaining capex
------------------------------------------------ ------------ ----------------------------------------------------
Juanicipio project 214.3 Mine development and construction of beneficiation
plant
------------------------------------------------ ------------ ----------------------------------------------------
Other 27.2 Minera Bermejal.
------------------------------------------------ ------------ ----------------------------------------------------
Total purchase of property, plant and equipment 592.1
------------------------------------------------ ------------ ----------------------------------------------------
ii) Dividends paid to shareholders of the Group in 2021 totalled
US$245.6 million, a 134.6% increase over 2020, in line with our
dividend policy which includes a consideration of profits generated
in the year. The 2021 payment included the 2020 final dividend of
23.5 cents per share paid in June 2021, totalling US$172.6 million,
and the 2021 interim dividend paid in September of US$73.0
million.
iii) Financial expenses and foreign exchange effects of US$39.9
million decreased US$4.3 million vs. 2020. Financial expenses in
2021 included: i) interest paid on the outstanding US$317.9 million
from the US$800 million 5.500% Senior Notes due 2023, and ii)
interest paid on the 4.250% Senior Notes due 2050. In 2020,
financial expenses reflected 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$164.9 million (net increase in cash and
other liquid assets), which combined with the US$1,070.4 million
balance at the beginning of the year resulted in cash and other
liquid assets of US$1,235.3 million at the end of December
2021.
BALANCE SHEET
Fresnillo plc continued to maintain a solid financial position
during the period with cash and other liquid funds ([10]) of
US$1,235.3 million as of 31 December 2021, increasing 15.4% versus
31 December 2020. Taking into account the cash and other liquid
funds of US$1,235.3 million and the US$1,167.8 million outstanding
Senior Notes, Fresnillo plc's net cash was US$67.5 million as of 31
December 2021. This compares to the net debt position of US$97.4
million as of 31 December 2020. Considering these variations, the
balance sheet at 31 December 2021 remains strong, with a net debt /
EBITDA ratio of -0.06x ([11])
Inventories increased 10.1% to US$487.8 million mainly due to
the increase of the inventories of gold content in ore on leaching
pads valued at cost.
Trade and other receivables decreased 15.0% to US$436.1 million
as a result of reduced receivables to Met-Mex and a decrease in
value added tax receivables.
The change in the value of the Silverstream derivative from
US$576.1 million at the end of 2020 to US$529.5 million as of 31
December 2021 reflects proceeds of US$46.2 million corresponding to
2021 (US$49.0 million in cash and -US$2.8 million in accounts
receivables) and the Silverstream effect in the income statement of
-US$0.4 million.
The net book value of property, plant and equipment was
US$2,799.1 million at 31 December 2021, representing a 3.4%
increase over 31 December 2020. The US$90.9 million increase was
mainly due to construction of leaching pads, capitalised
development works and the purchase of in-mine equipment.
The Group's total equity was US$3,802.7 million as of 31
December 2021, a 5.2% increase over 31 December 2020. This was
mainly explained by the increase in retained earnings, reflecting
the 2021 profit.
DIVIDS
Based on the Group's 2021 performance, the Directors have
recommended a final dividend of 24.0 US cents per Ordinary Share,
which will be paid on 27 May 2022 to shareholders on the register
on 29 April 2022. 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 9.90 US cents per share
amounting to US$73.0 million. This final dividend is higher than
the previous year due to the higher profit in 2021, and remains in
line with the Group's dividend policy.
As previously disclosed, 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 applied. Dividend
payments relating to 2021 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
-- We operate in a complex global environment, where
opportunities come with corresponding risks. Taking and managing
risk responsibly is essential to running our business safely,
effectively and in a way that creates value for all our
stakeholders. Risk management is one of our management team's core
responsibilities and is central to our decision-making process.
Our approach
Effective risk management enables us to manage both the threats
and the opportunities associated with our strategy and operations.
Our risk management process helps us identify, evaluate, plan,
communicate, and manage material risks that have the potential to
impact our business objectives. While risk management is a key
accountability and performance criterion for our leaders, all
employees have responsibility for identifying and managing risks.
Our risk management framework reflects the importance of risk
awareness across Fresnillo plc. It enables us to identify, assess,
prioritise and manage risks in order to deliver the value creation
objectives defined in our business model.
Our Board oversees our principal risks and associated management
responses, while the Audit Committee monitors the effectiveness of
risk management and internal controls. Our risk management system
comprises six core elements - one of which is our risk management
framework, which sets out clear roles and responsibilities,
standards and procedures. We also have three lines of defence to
verify that risks are being effectively managed in line with our
policy, standards and procedures, including across core business
processes such as finance, health and safety, social performance,
environment and major hazards.
The COVID-19 pandemic is an unprecedented challenge for
everybody, worldwide. We have implemented risk techniques and
processes to identify new risks associated with the pandemic, while
also analysing its impact on all our risks. The changes to working
practices that we have introduced in response to COVID-19 have
created opportunities to accelerate digital transformation and
enhance safety and productivity.
-- Every aspect of our risk management framework exists to
challenge and evaluate the status of our risk profile in the
pursuit of our business objectives. We challenge this status
through three lines of defence that support leaders in critically
reviewing and validating their own operating assumptions.
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 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 and 2021. Due to the
uncertainty around the pandemic, all strategic decisions of the
Company were analysed using risk scenarios modelling their
potential impacts. In addition five new processes were implemented:
(I) a monthly 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, cost increase and
projects, and (V) collaboration with government, the sector, health
experts and communities to ensure that we followed best
practice.
Three lines of defence Responsibilities Accountability
to
1(st) . - Unit leaders including mine, Identifying, managing, verifying Management
exploration and project personnel. and monitoring risks and controls.
Also, leaders of corporate and support
areas.
--------------------------------------- ---------------------
2(nd) . - Corporate level oversight Overseeing risks and the effectiveness Management
functions include the risk management of controls, advising on capability
team, the HSECR team, the project oversight and ensuring compliance with our
function and the Executive Committee. policies, standards and procedures.
--------------------------------------- ---------------------
3(rd) . - Group Internal Audit. Providing independent verification Board and committees
that risks are being managed and
internal controls are being operated
effectively
--------------------------------------- ---------------------
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, Health, Safety,
Security, Environment and Community Relations (HSECR)
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 five-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
2021 we carried out activities to: (I) identify new emerging risks
in light of COVID-19 and climate change; II) re-assess the emerging
risks identified in 2020; (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. This year's emerging risk assessment determined
the two most exposed emerging risks to be: "Water Crisis" and
"Technological Disruption" and identified two new emerging risks:
"Transition to a low-carbon future" and "Increasing societal and
investor expectations".
Relevant emerging risks are discussed below:
Emerging Risk Description Impact Mitigations Actions Time Scale
1 Water crisis. Lack of sufficient Water is critical to Strict control and > 5
(Linked to Climate water mining processes. monitoring Years
Change Principal resources to meet Without of water concessions
Risk) water this natural is maintained and
consumption demands resource, actions
in we cannot extract are envisaged to
a region. gold ensure
and silver. water for the
following
years.
======================== ======================= ======================= ======================= ============
2 Technological Failure to identify, Obsolete or outdated Technological > 5
disruption. invest in, or adopt mining processes advances Years
technological impact in the mining
and operational productivity and industry
productivity efficiency are constantly
innovations that levels and impact monitored
significantly sales (particularly in mine
replace or optimise a and profits. operations) in order
process through new to adopt the most
systems appropriate
with recognisably best practices and
superior new
attributes. technology.
======================== ======================= ======================= ======================= ============
3 Risk of narco states. Countries whose The safety of We maintain constant < 5
(Linked to Security government employees, communication with Years
Principal Risk) institutions are contractors and government
significantly communities authorities and the
influenced by the near mines is National Guard to
power threatened coordinate
and wealth of drug by the presence of security and
trafficking, drug cartels that citizenship
and whose leaders increase protection
simultaneously high-impact crimes. operations.
hold positions as
government
officials and members
of the illegal
narcotic
drug trafficking
networks,
protected by their
legal
powers.
======================== ======================= ======================= ======================= ============
4 Infectious diseases. The regional or Another virus such Much was learned from < 5
global as SARS-CoV-2 the COVID-19 pandemic Years
spread of a new coronavirus about providing care
disease (COVID-19) may affect for employees' health
(bacteria or virus) the health of and health prevention
against employees measures. We have
which most people do and stop the embedded
not have immunity. Company's those learnings in
activities. our
business as usual
activities.
======================== ======================= ======================= ======================= ============
5 Transition to a The transition to a Key areas of We have introduced > 5
low-carbon low-carbon uncertainty new Years
future. future is a include future sources of
(Linked to Climate "transition climate information
Change Principal risk" according to change regulation and to help us identify
Risk) the policies, the the impacts of
TCFD and presents development climate
challenges of low-carbon change. These include
and opportunities for technology industry reports and
our portfolio in the solutions and the guides, energy
short and long term. pace scenarios,
It is considered of transition across and Global
within our value chains, in Circulation
the climate change particular the Models (GCM) under
principal decarbonisation several
risk mitigation pathways across the Representative
strategy. steel sector. Concentration
However, we consider Pathways (RCP). We
this risk to be an have
emerging used a well-below
risk due to the speed two-degree
of potential new decarbonisation
climate pathway
change regulations to evaluate the
and flexibility
the obstacles that of the energy
government strategy.
may place in the way
of supporting
investment
in clean energy.
======================== ======================= ======================= ======================= ============
6 Increasing societal We continued to see The increasing focus We respond to < 5
and investor increasing on ESG has the investor Years
expectations. expectations and potential and societal requests
focus to shape the future and comments and
on social equality, of the mining promote
fairness industry, action plans to meet
and sustainability. supply cost their expectations.
Financial structures, A number of
institutions are also demand for global initiatives
placing greater commodities demonstrate our
emphasis and capital markets. progress.
on environmental, While this presents For example, our ESG
social us with opportunities performance was
and governance (ESG) for portfolio and recognised
considerations when product by our inclusion in
making differentiation, it the FTSE4Good Index.
investment decisions. has the potential to We were also listed
impact how we among the world's
operate. most
ethical companies by
Ethisphere and placed
second in the
Corporate
Integrity Ranking in
Mexico.
======================== ======================= ======================= ======================= ============
2021 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 (120) 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 120 risks into major risks
which are monitored by executive management and the Audit
Committee. We then further consolidated these into 13 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 13 Principal Risks rather than incorporate a new
risk.
During the first half of 2021, the risk team focused its efforts
on identifying and assessing emerging risks, business continuity
risks and climate change risks according to the TCFD criteria. In
the second half of the year, we conducted fraud, compliance and
internal control risk assessments.
Overview of the 2021 risk assessment exercise:
Analysis Survey Trend comparison and Added value
Risk identified and review
assessed
20 business workshops 350 colleagues in 15 International 200 colleagues were
(Director and manager operations, exploration, Institutions trained
level) projects, corporate specialising in risks in basic risk topics.
and support areas were consulted.
30 interviews with of Peñoles, 150 colleagues were
risk owners including Internal 10 risks scenarios were trained
(managers and leaders Audit. built by mining industry in advanced risk topics.
at units) risk specialists.
100 colleagues were
10 workshops SSMARC 20 gold and silver mines trained
team. (10 in Mexico and 10 in climate change risks
in the world) were and
5 critical processes consulted TCFD framework.
mapped and reviewed regarding their risks.
for impact and likelihood. 3 new processes of
6 consulting firms' identifying
5 risk analysis risk reports (including risks were included in
methodologies Marsh, EY, PWC, KPMG response
used: ISO-31000, and Deloitte) were to the COVID-19 pandemic.
ISO-22301, Markov, reviewed.
Bow-Tie & FMEA Model. 3 new topics were included
3 risk experts were in the risk analysis:
interviewed. climate
change, fraud and
compliance
risks.
--------------------------- ----------------------------- ----------------------------
As a result of the 2021 annual risk assessment, the most exposed
risks were determined to be:
-- The risk of "Potential actions by the government", is
assessed as the main risk for the Company, exacerbated by recent
decisions of the current government, such as: (a) the restriction
on the granting of new mining concessions; (b) the increase in
audits and tax requirements; (c) the labour reform that prohibits
outsourcing, leading to complications in the relationship with
contractors; (d) delays and complications in obtaining permits,
licences and authorisations; (e) the implementation of policies
that support the emission of carbon into the atmosphere and reduce
the development of renewable energies; (f) energy law reform that
would reduce electricity supply options for end-users and allocate
valuable resources to maintain obsolete and costly generation
technologies, with significant environmental and social impacts;
and (g) the United States-Mexico-Canada Agreement (USMCA or TMEC)
with its new labour provisions.
-- The "Security" risk, arising from the accelerated increase in
organised crime in the vicinity of the mining units, particularly
in Fresnillo (with the highest perception of insecurity in the
country), Saucito, Juanicipio and Penmont; the increase in
high-impact crimes (homicide, kidnapping and extortion) in the
regions where we operate, especially in Zacatecas, Guanajuato and
Sonora; and the sale and consumption of drugs inside the mines.
Threats of theft of dore, minerals, concentrates and assets from
mines and projects have also increased.
-- While gold and silver prices have remained strong despite the
effects of the COVID-19 pandemic, the economic crisis in the world,
and especially in Mexico, is a high risk that has a negative impact
on the supply chain of critical operating inputs, operating costs
and contractor availability. For this reason, the risk of "Impact
of metal prices and global macroeconomic developments" remains
within the main risks.
-- The risk of "Access to land" has increased in recent years as
it has become increasingly difficult to negotiate the price of
land. Landowners demand more money and benefits for access to land.
At the same time, the Federal Government continues its policy of
not granting new mining concessions and may decide to withdraw
mining concessions that are not used or operated. In addition, the
prevailing insecurity in the regions where our mining interests are
located may not allow the necessary work to be carried out to
demonstrate the minimum investments required by law, which could
lead to the cancellation of the concession.
-- The risk "Licence to operate" is one of the main risks that
have increased in probability of occurrence and impact, as
communities near mines and projects increasingly demand more
benefits. The environmental impact of mines is an issue of concern
to communities near our operations and they are increasingly
demanding more information and mitigating actions. Activism by
mining advocacy groups and other organisations increases the risk
of social conflict, fuelling public perception against mining.
Finally, insecurity and access to water are the issues that most
concern people and community leaders in the regions where we
operate.
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 Security
and Risk of Narco State, Climate Change and Water Crisis as well as
Cyber security and Technological disruption.
1
POTENTIAL ACTIONS BY THE GOVERNMENT (political, legal and
regulatory)
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 * Change in tax regulations.
concessions could potentially affect
the granting of new concessions
in Mexico. * Increase in the frequency of the reviews by the tax
The Federal Government wants to authorities with special focus on the mining
discourage the generation of energy industry.
based on clean sources and encourage
that from fuel oil and coal.
* Inability to obtain necessary water concessions
because of government control or private interests.
* Failures/delays in obtaining the required
environmental permits.
------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* The Federal Government reported that the delivery of * The Federal Government promotes investment in coal
concessions to mining companies would be reviewed and rather than renewable or clean energy. This has led
that no more concessions would be granted during this to increased difficulty in operating on clean energy.
six-year term (ending in 2024).
* The Federal Government implementation of policies
* Labour Reform prohibiting outsourcing, mainly leading that support the use of coal will lead to more
to complications in the relationship with greenhouse gases being released into the atmosphere
contractors. and reduce the development of renewable energies.
* New taxes and discrepancies in the criteria used in * The Federal Government recently purchased a refinery
audits carried out by the tax authority. to produce gasoline and diesel in Houston, USA. This
acquisition reinforces the strategy of encouraging
the consumption of fossil fuels derived from coal and
* Increase in the frequency of the reviews by the tax fails to promote the use of clean or green energies.
authorities with special focus on the mining
industry.
* The Federal Government is promoting a reform of the
Energy Law to limit access to private investment and
* Potential adverse actions resulting from a change in strengthen the government-owned Federal Electricity
government in the states of Zacatecas, Sonora and Commission (Comisión Federal de Electricidad).
Chihuahua. If this reform is approved, there is a risk that
there will not be enough electricity to operate the
mines.
* The United States-Mexico-Canada Agreement (USMCA or
TMEC) with its new labour provisions.
* A Federal Government initiative aims to discontinue
the Mining Fund (Financial support that the
* Given that the population does not systematically government provides to communities near the mine for
follow COVID-19 prevention measures; that health social development). This would have an impact on
authorities may not effectively implement the mining development in the country.
COVID-19 vaccination programme; that there are people
who do not want to be vaccinated; that there are new
variants of the virus such as Delta and Omicron, we * In addition, Mexico's corruption perception remains
could experience a reduction in the number of people high. The country's score in the International
available to work in the mines, which would Transparency 2021 Corruption Perception Index was
materially affect our productivity. 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 with all levels * We are committed to maintaining community dialogue
of Government. throughout the life of a mining project, from the
first exploration to the eventual closure, with the
aim of creating long-term relationships and value,
while ensuring operational continuity.
* Increased monitoring of the processes being
implemented at the Ministry of Labour and Economy.
* We seek to maintain full compliance with the
* We remain alert to the changes proposed by the requirements of the tax authority.
authorities, including energy and mining tax
initiatives, so that we can respond in a timely and
relevant manner.
* In doing so, we continue to cooperate with any
ongoing tax inspections.
* In relation to the new labour law prohibiting
outsourcing, changes to the relationship with
contractors have been implemented and staff * We maintain a register and control of vaccinated
structures have been adapted to comply with the law. staff and encourage all staff to be vaccinated as
soon as possible.
* We continue to collaborate with other members of the
mining community through the Mexican Mining Chamber * Follow-up and timely compliance with all suggestions
to lobby against any new harmful taxes, royalties or of the Health Authorities.
regulations. We also support industry lobbying
efforts to improve the general public's understanding
of the mining industry.
* We continue to comply with all applicable
environmental regulations and are fully committed to
operating sustainably.
---------------------------------------------------------------
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 because of a new wave of mass royalties, the banning of mining activities in
infections, mainly in Sonora and protected areas and legal precedents. The indicator
Zacatecas. 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 2021: Very high (1)
2020: Very high (1)
--------------------------------
2
SECURITY
RISK DESCRIPTION
We face the risk of theft of gold According to information from the
doré and silver concentrates Secretariat of Security and Citizen
as well as of items including equipment, Protection, the National Guard and
tools and materials. These thefts the Attorney General's Office of
can take place inside the mines the Republic, the presence of organised
or during transportation. crime and high-impact crimes (homicide,
Our employees, contractors and suppliers kidnapping and extortion) increased
face the risk of theft, kidnapping, in 2021, in the states where our
extortion or damage due to insecurity business units and projects are
in some of the regions where we located, such as Zacatecas, Guanajuato,
operate. and Sonora.
The influence and dispute of territories The main risks we face are:
by drug cartels, other criminal * High-impact robberies.
elements and general anarchy in
some of the regions where we operate,
combined with our exploration activities * Theft of assets such as minerals, equipment,
and projects in certain areas of instruments, inputs, etc.
drug deposit, transfer or cultivation,
makes working in these areas a particular
risk to us. * Consumption and sale of toxic substances in our
The Federal Government created the mining units.
Secretariat of Citizen Security
and Protection as part of the comprehensive
strategy to reduce insecurity. It * Homicide.
also created the National Guard,
mostly comprising military personnel,
with the aim of combating organised * Kidnappings.
crime and drug cartels. Unfortunately,
state or local police in most states
are unprepared and ill-equipped * Extortions.
to combat organised crime, have
low wages and are sometimes infiltrated
by crime. * Vandalism.
----------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* A severe increased presence of organised crime in the * The Mexican state of Zacatecas is notorious for high
vicinity of the mining units particularly in levels of perceived insecurity and high rates of
Fresnillo, Saucito and Juanicipio. high-impact crime in 2021. There are records of
several vehicle thefts from company employees and
organised crime checkpoints on the roads near
* A severe increase in the number of high impact crimes Fresnillo and Saucito mines.
(homicide, kidnapping, extortion) in the regions
where our mining units are located.
* The Mexican State of Sonora is notorious for being
under constant attack from organised crime gangs.
* Increased consumption and sale of drugs at the mining Several attacks have taken place recently
units, particularly Saucito. jeopardising the continuity of mining operations and
the physical integrity of workers employed by
Herradura and Noche Buena mines.
* Theft of concentrates and assets in mining units
and/or during transfer.
* Theft of material, equipment, tools and spare parts
from mines and projects.
* Roadblocks or blockages on the roads and/or highways
near the mining units.
-----------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
* Our property security teams closely monitor the * We continue to invest in community programmes,
security situation, maintaining clear internal infrastructure improvements and government
communications and coordinating work in areas of initiatives to support the development of legal local
greater insecurity. communities and discourage criminal acts.
* Management is fully committed to protecting our * We have increased the number of anti-doping tests
workforce. conducted at the start of the day in the mining
units.
* We have adopted the following practices to manage our
security risks and prevent and address potential * Frequent inspections are carried out inside the mines
incidents: to verify that drugs are not consumed and sold.
* We maintain close relations with authorities at the * Drug consumption prevention campaigns are carried out
federal, state and local levels, including army camps ,
located near most of our operations. focused on employees.
* Regular interactions and meetings with the National
Guard.
* We continue to implement greater technological and
physical security at our operations, such as the use
of a remote monitoring process in Herradura, Noche
Buena and San Julián. In the Saucito and
Fresnillo mines, in addition to the remote monitoring
service, we have also built new local operating and
command centres for each business unit. At the
Juanicipio development project, we have the necessary
infrastructure to provide security services during
the mine construction process. Juanicipio also
benefits from a local command and operation centre,
as well as the remote monitoring service.
* Increase in logistical controls in order to reduce
the potential for theft of mineral concentrate. These
controls include the use of real-time tracking
technology; surveillance cameras to identify
alterations in the transported material; protection
and support services on distribution routes;
reduction in the number of authorised stops in order
to optimise delivery times and minimise exposure of
trucks transporting ore concentrates or doré.
--------------------------------------------------------------
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The COVID-19 pandemic has had
a negative impact on the security * Total number of security incidents affecting our
risk. High-impact crimes did workforce (thefts, kidnapping, extortion, etc.).
not decrease - in fact they
increased in some regions such
as 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 2021: Very high (2)
2020: Very high (3)
--------------------------------
3
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 2021, the
were negatively impacted by the dollar exchange rate was around 20.8 pesos, due to
confinement and disruptions to supply the socioeconomic impact of the COVID-19 pandemic. At
chains. Globally, economies almost the end of the year the dollar exchange rate was 20.5
stopped completely for more than pesos.
five months in 2020.
During 2021, we saw increases in
operating costs and greater inflationary * General inflation in Mexico. This was 7.4% in terms
pressures, together with a shortage of Mexican peso for 2021. The specific inflation for
of critical inputs and equipment. the Company was 9.5% in U.S. dollars.
We expect this to continue during
2022.
This situation could create an adverse * A decrease in the price of our by-products. In 2021,
impact on our operations, costs, the average prices for lead and zinc increased by
sales and profits, and potentially 20.9% and 32.7%, respectively, compared to the
on the economic viability of projects, previous year.
including as a result of:
* A possible decrease in precious metals prices, wh
ich
is the main driver of risk.
------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* The impact of the pandemic on supply chains has been * Increased operating costs due to higher prices for
global, prolonged, and comprised a series of major critical inputs such as steel, cyanide, copper,
shocks to companies' logistical systems. diesel, haulage equipment, oxygen and truck tyres.
* Disruptions in the value chain of critical inputs for * In terms of inflation, we experienced an increase in
our operations such as spare parts (primarily two of our main energy inputs compared to the
delivered by land transport from the US and maritime previous year, with diesel (US percentage per litre)
transport from China and Europe). Disruptions also increasing by 21% and kWh (US percentage per kWh) by
include reduced availability of maintenance 12%.
teams/contractors to resolve issues, as well as
travel restrictions leading to officials not being
able to travel and inspect projects, resulting in * Appearance of Omicron variant of COVID-19 cases. Som
delays. e
countries have re-introduced lockdown measures and
there is a possibility that Mexico will follow suit.
-----------------------------------------------------------
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 maximise the extension
those associated with project-related of the average life of our debt
capex and a hedging policy for profile, on 29 September 2020
precious metals. 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)
Stable 2021: High (3)
2020: Very high (2)
--------------------------------
4
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. investments required by law, leading to the possible
cancellation of the concession.
* It is becoming increasingly difficult to negotiate
land prices, with landowners demanding more money and
benefits for access to land.
------------------------------------------------------------
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 2021, after disinvesting
certain areas of mining interest, * Close collaboration with our land negotiation teams,
we maintained 1.439 million hectares which include specialists hired directly by Fresnillo
of mining concessions granted. A and also provided by Peñoles as part of the
further 238,090 hectares is in the service agreement.
process of being granted. In total,
we have 1.678 million hectares,
representing a year-on-year decrease As part of an ongoing review of
of 2,000 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 2021, insecurity problems -- Percentage of land required
in our exploration and operations for advanced exploration projects
areas have increased. In addition, that are under occupation or
the government suspended activities, agreements other than total
which caused delays to the ownership (generally and per
land-regularisation processes. project).
-- 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)
Increasing 2021: High (4)
2020: High (7)
--------------------------------
5
LICENCE TO OPERATE (community relations)
RISK DESCRIPTION
At both a local and global level, We monitor the following risks:
the mining industry's stakeholders * Negative perception of the Company's social and
have high expectations relating environmental performance.
to social and environmental performance.
These expectations go beyond the
responsible management of negative * Failure to identify and address legitimate concerns
impacts to include continuous engagement and expectations of the community and of society at
and contribution to stakeholder large.
development.
Failure to adequately address these
expectations increases the risk * Insufficient or ineffective engagement and
of opposition to mining projects communication.
and operations. Negative sentiment
towards mining or specifically towards
Fresnillo plc could have an impact * Failure to contribute purposefully to community
on our reputation and acceptability development.
in the regions where we have a presence.
-----------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Higher expectations and scrutiny of social and * Insecurity and access to water are the issues of
environmental performance. greatest concern to people and community leaders in
the regions where we have a presence.
* Rising expectations on shared benefits regarding land
agreements. * The environmental impact of a mine is also an issue
that can concern communities close to our operations.
* Perceived competition on access to natural resources,
notably water.
* Significant reduction in government spending on
community infrastructure, development programmes and
services.
* Anti-mining activism fuelling opposition to mining.
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
--COVID-19 Response: Collaboration v
with Health Authorities to support
the logistics of vaccination centres
in the regions where we operate.
Campaigns to raise awareness of
preventive measures such as the
use of masks. Rapid testing support
for remote communities. Collaboration
with parents and school authorities
on the safe return to classes.
--Community Engagement: Our strategy,
which embraces all phases of the
mining lifecycle, is based on purposeful
engagement to address concerns and
expectations. Key activities include:
-Organising formal and informal
meetings to enable stakeholder identification
and engagement planning.
-Carrying out social baseline studies
that include human rights and due
diligence regarding indigenous peoples,
and perception studies that support
our Social Management plans and
help us manage impacts, risks and
opportunities.
-Operating a grievance mechanism
to address stakeholder concerns.
-Monitoring public opinion within
local and international media.
-Collaborating with peers to adopt
best practices in social performance.
-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 social licence * Number of local actions by non-governmental
to operate in some regions, organisations (NGOs) or other local social groups
mainly as a result of nearby against mining, by region.
communities being worried about
contracting the virus from
contractors and suppliers visiting * Number of actions by NGOs or other local social
the area. groups against mining in the Americas.
COVID-19 has increased social
expectations regarding corporate
citizenship. The response of * Number of media mentions related to demonstrations
the mining industry to COVID-19 against the mining industry.
will shape relationships with
stakeholders and perceptions
of the industry over the coming
years.
-----------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: High (5)
2020: Medium (10)
--------------------------------
6
HUMAN RESOURCES (attract and retain skilled people)
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 In addition, it is difficult to
of cases of contagion across the hire the employees of contractors
Company has been detected. This working for the company.
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
* Unfortunately, not everyone follows measures to * There was a significant increase in staff turnover
prevent COVID-19 and that increases the risk of during 2021.
contagion.
* Talent retention became more difficult this year.
* Workers in the mining sector have been particularly
affected by the pandemic, given the employment
architecture of the industry, which can feature * At some mines we have a lack of specialised personnel
remote fly in-fly out or drive in-drive out to cover working hours.
operations, congested underground working conditions,
and workers residing in mine-site compounds or
neighbouring communities. These conditions make some * In certain regions where we operate there are not
COVID-19 preventative measures difficult to implement, enough candidates with the necessary skills to
which makes mineworkers vulnerable to both acquiring operate the mining equipment.
and spreading the virus.
* With the new labour law prohibiting outsourcing, we
had to hire staff from contractors, and this caused
added complications.
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our employee performance management In partnership with the University
system is designed to attract of Arizona, we developed a
and retain key employees by five-hour online training module
creating suitable reward and on Diversity, Equality and
remuneration structures and Inclusion for our executives,
providing personal development managers and high potential
opportunities. We have a talent talent. Management and leadership
management system to identify skills development programmes
and develop internal candidates were conducted with 40 superintendents,
for key management positions, 76 counsellors and 74 facilitators.
as well as identify suitable
external candidates where appropriate. In order to keep our staff
updated and trained, 83% of
We aim for continuous improvement, employees and 98% of unionised
driven by opportunities for staff have received training
training, development and personal this year. In 2021, 216 employees
growth; in short, we focus on participated in institutional
fair recruitment, fair pay and development programmes, which
benefits and gender equality. means that 59% of staff with
In the trusted staff structure, more than two years of service
18% are women as are 34% of have participated at least
new joiners, while 18% of the once. Of this 59%, 12% are
female population were promoted women (18% of employees are
during the year. female). 502 courses and studies
were conducted through external
Recruitment: We have evaluated training, benefiting 383 employees.
our recruitment requirements 83% of our leaders have participated
for key positions, and our goal in institutional development
is to meet them through internal programmes focused on leadership.
training and promotion, as well
as by recruitment through: Performance: The virtual internship
-- Our close relationships with programme continued this year
universities that offer earth in conjunction with Peñoles,
science programmes. We have with courses in mining, geology,
programmes dedicated to identifying metallurgy and topography.
potential performance-based In total there were 572 students
candidates who can be hired and 36 teachers (42.27% men
as trainees and/or employees and 57.73% women).
at graduation. During the year, We have continued our performance
we hosted 42 students from different assessment process, reinforcing
Earth Science professions at formal feedback. We promote
our mining units to support the certification of key technical
their training, and 87 engineers skills for operational personnel
took part in our training programme. and have implemented a programme
-- CETLAR (Centre for Technical to develop administrative and
Studies of Peñoles), which leadership skills for the required
trains mechanical and electrical positions. We develop our high-potential
technicians. Ten of the 12 2021 intermediate managers through
graduates were hired as full-time the Leaders with Vision programme.
employees.
Pandemic: The safety of our
Retention: Our goal is to be workforce is protected with
the employer of choice, and sanitary protocols in each
we recognise that to be a profitable mining unit in accordance with
and sustainable company, we the recommendations of the
need to generate value for our Sanitary Authority.
employees and their families.
We do this by providing a healthy, A series of security measures
safe, productive and team-oriented have been applied:
work environment that not only -Use of sanitary measures within
encourages our people to reach mining units,
their potential, but also supports -Constant health monitoring
process improvements. 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 2021: High (6)
2020: High (4)
--------------------------------
7
PROJECTS (PERFORMANCE RISK)
RISK DESCRIPTION
The pursuit of advanced exploration Other important risks:
and project development opportunities * Failure to effectively manage our development
is essential to achieving our strategic projects could result in delays to the start of
goals. However, this carries certain production and cost overruns.
risks:
* Economic viability: the impact of the cost of capital
to develop and maintain the mine; future metal * Projects that cannot be delivered on time, on budget
prices; and operating costs throughout the mine's and according to planned specifications.
life cycle.
* Geotechnical conditions of the ore body / poor rock
* Access to land: a significant failure or delay in quality.
land acquisition has a very high impact on our
projects.
* High costs making it difficult to justify the
project.
* Uncertainties associated with the development and
operation of new mines and expansion projects:
includes fluctuations in the degree of ore and * Delay in the development of the project due to lack
recovery; unforeseen complexities in the mining or delay of critical equipment, supplies and spare
process; poor quality of the ore; unexpected presence parts.
of groundwater or lack of water; lack of community
support; and inability or difficulty in obtaining and
maintaining the required building and operating * Disruptions in the supply chain for construction
permits. materials and equipment.
* Delivery risk: Projects can exceed the budget in
terms of cost and time; they cannot be built The following risks relate specifically
according to the required specifications or there may to the Juanicipio project:
be a delay during construction; and major mining * Regularising electricity consumption with CFE.
teams cannot be delivered on time.
* Delays in the design and obtaining permits related to
the tailing dams.
* Obtaining building permits with CONAGUA.
* Lack of qualified labour.
* Lack of specialised contractors.
* Low contractor productivity.
-----------------------------------------------------------------
FACTORS CONTRIBUTING TO RISK
* In some regions there are no specialised contractors * We have identified the following threats to project
or contractors with the technology to develop the development:
projects.
* 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 2021 included:
required for the overall infrastructure * Continuing the construction of the Juanicipio
(including roads, energy, water, project.
general services, housing) and the
infrastructure required for the
mine and plant. * Continuing the construction of the third tailings dam
-- Financial: we analyse the risk at La Ciénega.
in relation to the return on the
proposed capital investments; set
the expected internal rates of return * Constructing the 14th leaching pad at La Herradura.
(IRR) per project as thresholds
for approving the allocation of
capital based on the current value * Constructing the carbon-in-column process at La
of expected cash flows of invested Herradura.
capital; and perform stochastic
and probabilistic analyses.
-- Qualitative: we consider the
alignment of investment with our
Strategic Plan and business model;
identify synergies with other investments
and operating assets; and consider
the implications for safety and
the environment, the safety of facilities,
people, resources and community
relations.
The management of our projects is
based on the PMBOK standard of the
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 led to delays in approvals, * Earned value (rate of financial advancement rate vs.
for example at the Juanicipio mine physical advancement).
and Pyrites Plant.
The contractors failed to meet commitments,
leading to disruptions in the supply * Percentage of required land acquired
of critical inputs such as cement,
fuels and spare parts.
* Percentage of major equipment ordered and received
according to plan.
* Percentage of mine development completed.
------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
2 Medium
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Stable 2021: High (7)
2020: High (6)
--------------------------------
8
UNION RELATIONS (labour relations)
RISK DESCRIPTION
Our highly skilled unionised workforce and experienced management
team are critical to sustaining our current operations, executing
development projects and achieving long-term growth without
major disruption.
We run the risk of an outside union seeking to destabilise
the current union.
National union politics could adversely affect us, as could
pressure from other mining unions seeking to take over Fresnillo's
labour 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 mine's workforce will be
gives the employee the freedom of choice. This has reduced. There is also a risk that this conflict
led to a complex, rarefied work environment at the 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 NAF
TA)
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 labour relations We started 2021 by conducting five
was formed to meet the demands of Regional Labour Update Forums with
dissident workers. company leaders and unions in Sonora,
Our strategy is to integrate unionised Coahuila and Zacatecas with 500
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 the participation
national level. of 906 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)
Decreasing 2021: High (8)
2020: High (5)
--------------------------------
9
CYBERSECURITY
RISK DESCRIPTION
Information is one of our most valuable 1. Corruption of data - Critical
assets and we work hard to protect data where any unauthorized modification
it. We fully recognise the importance can have adverse impacts.
of the confidentiality, continuity, 2. Unauthorised access - Cybersecurity
integrity and security of our data and privacy incidents due to incorrect
and systems. access permissions or system abuse,
As a mining company, we can be under exploit or misuse.
threat of cyber attacks from a broad 3. Breach and data theft - Disclosure
set of groups, from "hacktivists" of critical and sensitive company
and hostile regimes, to organised data by an internal or external
criminals. Their objectives range source.
from taking advantage of mining's 4. Business disruption - Disrupting
role in regional and global supply key applications or systems for
chains, to impacting national economies. a period of time.
Some threat actors also focus on 5. Lack of cybersecurity ownership
finding unprotected, misconfigured - Failure to assign responsibility
and unpatched systems and exploit for implementing and adopting cybersecurity
them, due to the industry's heavy practices on a daily basis.
reliance on technology and automated 6. Non-compliance - Cybersecurity
systems that supports operations. 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 -
environment monitoring and workshops Breach of availability, integrity
with business units, operations, or confidentiality of data which
and IT. These risks comprise Peñoles/Fresnillo impacts health and safety.
overall cybersecurity and privacy 8. Halt or loss of operations -
risk profile: Cybersecurity and privacy incidents
which result in loss of operating
licence or closure of operations.
---------------------------------------------
FACTORS CONTRIBUTING TO RISK
* Cyber risks have increased significantly in recent * An increased reliance on cloud systems and
years owing in part to the COVID-19 pandemic and the infrastructure can make IT defences less robust and
proliferation of new digital technologies, the may bypass security controls
increasing degree of connectivity and a material
increase in monetisation of cybercrime.
* Access to hacking tools and training is readily
available and heavily automated. Without proper
punishment for perpetrators globally, attackers can
* Theft of information through social engineering and easily launch sophisticated attacks with little risk.
"phishing" campaigns (fraudulent attempts to obtain
sensitive information or data, such as usernames or
passwords, by appearing to be a trustworthy entity i * There is a global lack of regulation regarding
n cybersecurity and e-crime that could deter criminals.
an electronic communication).
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our information security management
model is designed with defensive * The U.S. National Institute of Standards and
structural controls to prevent and Technology (NIST CSF) Cybersecurity Framework that
mitigate the effects of computer describes how companies can assess and improve their
risks. It employs a set of rules ability to prevent, detect, and respond to
and procedures, including a Disaster cyberattacks.
Recovery Plan, to restore critical
IT functions in the event of an
attack.
* Information Control Objectives and Technologies to
Our systems are continuously monitored Others (COBIT), which was created by ISACA, the
by cybersecurity experts at a Security international professional association for IT
Operations Center (SOC). Incident management and governance, to provide an
response plans are in place and implementable set of IT-related controls, processes
tested periodically to ensure we and facilitators.
can respond quickly and effectively.
Our systems are regularly audited
to identify any potential threats Our approach is also based on the
to the operations and additional MITRE ATT&CK(TM) which is used as
systems have been put in place to the basis for the development of
protect our assets and data. specific threat models and methodologies
in the private sector, government
We have implemented a training and and in the cybersecurity products
awareness programme, which is designed and services community.
to increase awareness of cyber risk
and ensure that employees take the We also monitor the environment
appropriate actions. for relevant alerts and act proactively
to assess our readiness, reinforcing
We have invested in global IT security our capabilities as needed.
platforms and Managed Security Services
Providers (MSSPs) in order to proactively A governance model, continuous risk
monitor and manage our cyber risks. monitoring, information security
We conduct routine third-party penetration policies, awareness-raising campaigns
test to independently confirm the and training forms the basis of
security of our IT systems and we our IT/OT operational guarantee.
seek to enhance the monitoring of
our operational technology platforms. Our plan for 2022 is to focus our
efforts on incorporating key indicators
Since 2020, a fully staffed cybersecurity around cyber risk reduction in the
office has been in place to improve cybersecurity dashboard, implementing
our cybersecurity position. Its and maturing controls in line with
main objective is to identify and the threat landscape and emphasising
manage cybersecurity risks and align the importance of individual responsibility
them with our business mission and to each employee, in order for them
strategy, as well as monitor the to stay vigilant and alert to cyber
supporting processes. Aligned to threats.
best practices and standards, its
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
the accelerated digital transformation, Company.
increased "phishing" attacks and
a reduction in the robustness of
IT defences due to remote working. * 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)
Stable 2021: High (9)
2020: Medium (8)
--------------------------------
10
SAFETY
RISK DESCRIPTION
It is an inherent risk in our industry Our workforce faces risks such as
that incidents due to unsafe acts fire, explosion, electrocution and
or conditions could lead to injuries carbon monoxide poisoning, as well
or fatalities. as risks specific to each mine site
Safety and health incidents could and development project.
result in harm to our employees, These include rockfalls caused by
contractors and local communities. geological conditions, cyanide contamination,
Ensuring their safety and wellbeing explosion, becoming trapped, electrocution,
is our ethical obligation and first insect bites, falls, heavy or light
priority, and is one of our core equipment collisions involving machinery
values. or personnel and accidents occurring
Our operations and projects are while personnel are being transported.
inherently hazardous, with the potential
to cause illness or injury, damage
to the environment, and disruption
to communities. Major hazards include
process safety, underground mining,
surface mining and tailings and
water storage.
-----------------------------------------------
FACTORS CONTRIBUTING TO RISK
* We are saddened to report that one fatality was * Frequent transportation of our people to remote
recorded during 2021, and also that we experienced a business units is an ongoing feature of our
significant increase in the accident rate related to: operations. In many cases, these units have poor
accessibility by road. Failure to comply with safety
programmes, measures and audits or with the findings
of inspections, continues to be a safety risk.
-Rockfall/terrain failure
-Loss of vehicle/equipment control
-Team-vehicle-person interaction * Our people not being sensitive to the latent risks of
-Transport of staff our operations.
-Contact with electric power
-Fire
-Becoming trapped * Omissions and failures to follow security protocols.
-Contact with hazardous substances
------------------------------------------------------------
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Nothing is more important than the safety and wellbeing of
our employees, contractors and communities. We believe all
incidents are preventable, so we concentrate on identifying,
understanding, managing and, where possible, removing the
hazard or removing people from the hazardous area.
We constantly seek to improve our safety and health risk
management procedures, with focus on the early identification
of risks and the prevention of fatalities.
Unfortunately, we suffered a fatal accident during the second
half of this year, which means that even with the extraordinary
efforts we are making, we have failed to achieve our goal
of zero fatalities. Additionally, we recorded 363 high potential
incidents (24% more than 2020)
At Fresnillo plc, the safety of our staff is an essential
value and a way of life. We tirelessly seek to improve our
performance, strengthening our preventive culture, raising
awareness of the risks generated by our operational activities
and establishing controls and mechanisms to eliminate fatalities.
During the year, we continued to implement support measures
to strengthen, address and prevent the causes of accidents,
injuries and fatalities. These include:
* Strengthening safety objectives, including
establishing proactive performance indicators that
allow us to anticipate events.
* Encouraging managers to own security risks to
operations, so that this is a fundamental part of
daily activities and that management can be held
accountable according to performance and results.
* Regularly reviewing and auditing Health, Safety,
Environmental and Sustainable (HSE&S) processes,
training and controls to promote and improve
effectiveness at managed and (where practicable)
non-managed operations.
* Monitoring monthly HSE&S performance at the Group
level and sharing learnings from HSE&S incident
investigations.
* Continuing the implementation of the "I Care, We
Care" programme in all our operations, including
strengthening the programme's five lines of action.
* In 2021, the Chief Executive Officer launched a
strategy to intensify the "I Care, We Care"
programme. This strategy focuses on critical risks,
controls and processes in order to prevent high
potential accidents.
* Assigning Critical Risk Control Protocols to an owner
for follow-up in line with their area of influence.
* Strengthening incident investigations with a special
focus on high-potential ones.
* Increasing the focus on high-potential incidents
(HPI).
* Strengthening the cross-functional communication of
lessons learnt, in order to reduce the reoccurrence
of similar accidents.
* Enhancing hazard identification and risk assessment.
* Confirming the continuous monitoring of security
management as the highest priority of the SSMARC
committee. The committee oversees all accident
investigations, ensuring appropriate measures are
taken to improve safety systems and practices.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
The COVID-19 pandemic did not -- Accident rate
significantly affect this risk. -- Days lost rate
-- Accident frequency
----------------------------
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Increasing 2021: Medium (10)
2020: Medium (11)
--------------------------------
11
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
* Cyanide management risk. SO(2) , 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
* Ensuring the stability of our tailings storage area.
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 * Implications of future regulations for our tailings
to management.
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.
* Tailings dam failures that could cause landslides or
collapses.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Our operations are inherently hazardous. We seek to achieve
operational excellence to ensure that our employees and contractors
go home safe and healthy, and that there are no adverse impacts
on the communities and the environment where we operate.
Our environmental management system ensures compliance with
national and international regulations and best practices,
provides transparency and supports initiatives that reduce
our environmental footprint. We are a company responsible
for its activities and the fulfilment of the environmental
commitments made.
Our environmental management system, together with our investment
in preventive measures and training, are key factors that
reduce the risk of large environmental incidents.
Based on the level of perceived risk due to recent serious
and catastrophic developments in the industry, the Board
decided to increase the severity of this risk in 2018 and
maintained the same level in 2021.
Herradura, Saucito, Fresnillo, Noche Buena, San Julián
and Ciénega each have an integrated certificate of management.
Fresnillo and Saucito have ISO 9001; Herradura and Noche
Buena have GIS ISO 14001 and 45000.
The Executive Committee is well aware of the risks associated
with tailings dams. Therefore, before we construct a reservoir,
we carry out a series of studies to confirm the suitability
of the area. These studies include geotechnical, geological,
geophysical, hydrological and seismic analyses. Before construction
begins, the Ministry of Environment and Natural Resources
(SEMARNAT), through the Federal Office for Environmental
Protection (PROFEPA), conducts several assessment studies
and then continues to periodically review deposits in relation
to the works.
Environmental protection and safety are critical for cyanide
leaching systems. We comply with international best practices
as promoted by the International Cyanide Management Institute
(ICMI) and the Mexican standard NOM-155-SEMARNAT-2007, which
establishes environmental requirements for gold and silver
leaching systems.
Safe management of our tailings facilities has always been
a priority. With increased focus on the issue of tailings
dam safety across the global mining industry, we have taken
the opportunity to renew and increase this focus.
In 2021 we launched a number of initiatives to align our
governance practices with current best practices. These initiatives
included:
-- Updating the inventory of the TSFs and validating the
data log.
-- Initiating a third-party review programme of dam safety
inspections for all TSFs.
-- Establishing an Independent Tailings Review Panel (ITRP)
comprising renowned international experts.
-- Accelerating a review programme by independent experts
for all sites.
-- Reviewing the ITRP and prioritising recommendations arising
from inspections.
The Board and the HSECR Committee continue to keep these
issues under scrutiny. It is important to note that our tailings
dams differ from those involved in high-profile incidents,
such as the 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)
Stable 2021: Medium (11)
2020: Medium (9)
--------------------------------
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
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 licence 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, The most important risk we currently
droughts and extreme rainfall from face is to comply with all the provisions
more frequent and intense hurricanes and requirements of international
in the Pacific. agreements to reduce pollution and
These natural disasters may affect greenhouse gas emissions.
the health & safety of our people, Failure to adapt to the transition
damage access roads and mine's infrastructure, and physical impacts of climate
disrupt operations and affect our change, include:
neighbouring communities. In addition, -government legislation to limit
the rise in temperatures may increase mining activities.
our water demand while the decrease -regulations limiting greenhouse
in annual precipitation exacerbates gas emissions from the mining industry.
water stress in the regions where -acute physical risks such as the
we operate. increased likelihood of extreme
weather events; and
-chronic physical risks such as
changing weather patterns including
rising temperatures and sea levels.
----------------------------------------------
FACTORS CONTRIBUTING TO RISK
* The Federal Government promotes investment in coal * The supply of critical inputs to mining processes,
rather than in renewable or clean energy. This has such as water and energy, is likely to face greater
led to operating on clean energy becoming more constraints.
difficult.
* Employee health and safety will be put at risk by
* The Federal Government's implementation of policies increases in communicable diseases, exposure to
that support the use of coal will lead to more heat-related illnesses and the likelihood of
greenhouse gases being released into the atmosphere accidents related to rising temperatures.
and reduce the development of renewable energies.
* Obtaining and maintaining a social licence to operate
* Current and emerging climate regulations have the will become more difficult in communities where
potential to result in increased cost, to change climate change exacerbates existing vulnerabilities
supply and demand dynamics for our products and and increases direct competition between the company
create legal compliance issues and litigation, all o and the community for resources.
f
which could impact the Group's financial performance
and reputation. Our operations also face risk due to * Increased physical and non-physical risks will make
the physical impacts of climate change, including project financing more difficult to secure.
extreme weather.
* Global warming and its effects such as droughts,
* Warming temperatures will increase water scarcity in hurricanes, winter storms, heavy rains, can cause
some locations, inhibiting water-dependent operation stoppages in unit operations.
s,
complicating site rehabilitation and bringing
companies into direct competition with communities
for water resources.
------------------------------------------------------------
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 are considering the recommendations of the Task
Force on Climate-related Financial Disclosures (TCFD)
regarding: Governance, Strategy, Risk Management and
Metrics and targets. * To gain a general understanding, we use the outcomes
of scenarios built by the Mexican Government Reports,
using the Global Circulation Models (GCMs) and
different Representative Concentration Pathways
* We recognise the importance of maturing our approach (RCPs).
to integrating physical climate change risks and
adaptation into financial planning and
decision-making processes. We are committed to
enhancing our understanding of the site-level impacts * In addition, we use Aqueduct, a tool developed by the
and vulnerabilities to refine our adaptation World Resources Institute (WRI), to better understand
measures. 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 * We are implementing a series of controls to manage
such as environmental incidents, access to water, the threat of extreme weather, including structural
health & safety of our people, government regulations integrity programmes across all critical assets,
, emergency response plans and flood management plans.
and social licence to operate. The Head of These controls keep our people safe and help our
Sustainability and the Head of Risks support the operations return to normal capacity as quickly as
process to refine the identification and risk possible.
assessment of physical and transitional risks.
* We are increasing the supply of the materials
essential to building a low-carbon economy.
* We are setting targets to reduce our emissions (on an
absolute and intensity basis) over the short, medium
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)
Stable 2021: Medium (12)
2020: Medium (12)
--------------------------------
13
EXPLORATION (New ore resources)
RISK DESCRIPTION
We are highly dependent on the success of the exploration
programme to meet our strategic value-creation targets and
our long-term production and reserves goals.
In addition to the growing level of insecurity and more challenging
access to land detailed in previous risks, other risks that
may impact prospecting and converting inferred resources
include: the lack of a robust portfolio of prospects in our
pipeline with sufficient potential in terms of indicated
and inferred resources; and insufficient concession coverage
in target areas.
We also risk the loss of purchase opportunities due to slow
decision making.
As our production escalates and more mines approach the end
of their lives, replenishing our reserves becomes increasingly
challenging.
FACTORS CONTRIBUTING TO RISK
We perceive this risk level as increasing in likelihood and
impact.
This is mainly due to the following:
* Delays in procedures regarding access to land.
* Restrictions of new mining concessions.
* Geological sampling falling below standard.
* Reserves not being replenished.
Maintaining a reasonable investment in exploration, even
when metals prices are low, has been our policy through the
years. While continuous investment has always been a hallmark
of our exploration strategy, replenishing exploited reserves
and increasing our total amount of resources could be a challenge
in the future.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
During 2021, we invested a total of US$140.1 million in exploration
activities. Our objectives for 2022 include a budgeted risk
capital investment in exploration of approximately US$180
million.
The approximate spending split is 55% for operating mines
(reserves and resources) and 45% for the Exploration Division;
which in turn applies a balanced, priority-based process
to allocate the budget.
For reference, the mines division uses approximately 60%
of its budget for resource conversion and ore grade certainty,
and 40% for step-out and expansion drilling. Furthermore,
the Exploration Division budget for 2022 will allocate 26%
to brownfield targets, 19% to development projects, 20% to
advanced projects and 34% to early exploration stages including
regional prospecting work.
Our exploration strategy also includes:
* A focus on increasing regional exploration drilling
programmes to intensify efforts in the districts with
high potential.
* For local exploration, aggressive drilling programmes
to upgrade the resources category and convert
inferred resources into reserves.
* A team of highly trained and motivated geologists,
including both employees and long-term contractors.
* Advisory technical reviews by international
third-party experts and routine use of up-to-date and
integrated GIS databases, cutting edge geophysical
and geochemical techniques (including drone
technology), large to small scale hyperspectral
methods, remote sensing imagery and analytical
software for identifying favourable regions to be
field-checked by the team.
* A commitment to maintain a pipeline of drill-ready
high priority projects.
COVID-19 PANDEMIC IMPACT KEY RISK INDICATORS
* The pandemic has halted exploration work in some * Drill programmes completed (overall and by project).
areas and has led to a shortage of contractors.
* Change in the number of ounces in reserves and
resources.
* Rate of conversion from resources to reserves.
------------------------------------------------------------
LINK TO STRATEGY RISK APPETITE
1 Medium
--------------
CHANGE IN HEAT MAP RISK RATING (RELATIVE POSITION)
Return to Principal Risk 2021: Medium (13)
--------------------------------
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 regulations.
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. The Directors have elected to prepare the
Group and parent company financial statements in accordance with
the UK-adopted International Financial Reporting Standards
('IFRSs') in conformity with the Companies Act 2006.
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;
-- make judgements and accounting estimates that are reasonable
and prudent;
-- 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 IFRSs 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 whether UK-adopted international accounting standards
have been followed, 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 unless it is appropriate to presume that the Company
and/ or the Group will not continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's and
Group's transactions and 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 Act 2006. 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 Strategic Report, Directors'
Report, Directors' Remuneration Report and Corporate Governance
Statement 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.
Directors' Responsibility Statement under the UK Corporate
Governance Code
In accordance with Provision 27 of the 2018 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 necessary 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
Each of the Directors confirm that to the best of their
knowledge:
a) the consolidated financial statements, prepared in accordance
with UK-adopted international accounting standards 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 annual report (including the Strategic 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.
For and on behalf of the Board
Alberto Tiburcio
Independent Director
7 March 2022
Consolidated Income Statement
Year ended 31 December
Year ended 31 December Year ended 31 December
2021 2020
------------------- ----- ------------------------------------------- -------------------------------------------
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 2,703,095 2,703,095 2,430,055 2,430,055
Cost of sales 5 (1,766,170) (1,766,170) (1,550,689) (1,550,689)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Gross profit 936,925 936,925 879,366 879,366
Administrative
expenses (103,534) (103,534) (93,407) (93,407)
Exploration
expenses 6 (130,291) (130,291) (107,328) (107,328)
Selling expenses (25,035) (25,035) (24,106) (24,106)
Other operating
income 8 11,914 11,914 9,997 9,997
Other operating
expenses 8 (23,246) (23,246) (14,839) (14,839)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
net
finance costs and
income
tax 666,733 666,733 649,683 649,683
Finance income 9 8,874 8,874 12,249 12,249
Finance costs 9 (61,750) (61,750) (141,319) (141,319)
Revaluation effects
of
Silverstream
contract 13 (416) (416) 70,961 70,961
Foreign exchange
loss (1,909) (1,909) (40,321) (40,321)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
income
tax 611,948 (416) 611,532 480,292 70,961 551,253
Corporate income
tax 10 (156,598) 125 (156,473) (119,349) (21,288) (140,637)
Special mining
right 10 (16,563) (16,563) (35,037) (35,037)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Income tax 10 (173,161) 125 (173,036) (154,386) (21,288) (175,674)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit for the year
from
continuing
operations 438,787 (291) 438,496 325,906 49,673 375,579
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Attributable to:
Equity shareholders
of
the Company 421,500 (291) 421,209 324,451 49,673 374,124
Non-controlling
interest 17,287 17,287 1,455 1,455
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
438,787 (291) 438,496 325,906 49,673 375,579
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Earnings per share:
(US$)
Basic and diluted
earnings
per Ordinary Share
from
continuing
operations 11 0.572 - 0.507
Adjusted earnings
per
share: (US$)
Adjusted basic and
diluted
earnings per
Ordinary
Share from
continuing
operations 11 0.572 0.440 -
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
---------------------------------------------------- ----- ------------------------------
2021 2020
Notes US$ thousands US$ thousands
---------------------------------------------------- ----- -------------- --------------
Profit for the year 438,496 375,579
Other comprehensive income/(expense)
Items that may be reclassified subsequently
to profit or loss:
(Gain)/loss on cash flow hedges recycled to
income statement(1) (2,476) 4,335
Changes in the fair value of cost of hedges (5,396) 220
Total effect of cash flow hedges (7,872) 4,555
Foreign currency translation (653) (1,217)
Income tax effect on items that may be reclassified
subsequently to profit or loss: 10 2,362 (1,366)
---------------------------------------------------- ----- -------------- --------------
Net other comprehensive income that may be
reclassified subsequently to profit or loss: (6,163) 1,972
---------------------------------------------------- ----- -------------- --------------
Items that will not be reclassified to profit
or loss:
---------------------------------------------------- ----- -------------- --------------
Changes in the fair value of cash flow hedges (994) 304
Total effect of cash flow hedges (994) 304
Changes in the fair value of equity investments
at FVOCI (48,051) 89,552
Remeasurement gains on defined benefit plans 21 5,710 147
Income tax effect on items that will not be
reclassified to profit or loss 10 13,805 (26,980)
Net other comprehensive (loss)/income that
will not be reclassified to profit or loss (29,530) 63,023
---------------------------------------------------- ----- -------------- --------------
Other comprehensive (loss)/income, net of
tax (35,693) 64,995
---------------------------------------------------- ----- -------------- --------------
Total comprehensive income for the year, net
of tax 402,803 440,574
---------------------------------------------------- ----- -------------- --------------
Attributable to:
Equity shareholders of the Company 386,060 439,130
Non-controlling interests 16,743 1,444
---------------------------------------------------- ----- -------------- --------------
402,803 440,574
---------------------------------------------------- ----- -------------- --------------
1 The amounts recognised in hedging reserve and cost of hedging
reserve at 31 December 2020 have been amended to reflect the nature
of the components of the valuation of certain derivatives at that
date.
Consolidated Balance Sheet
As at 31 December
As at 31 December
-------------------------------------------------- ----- ------------------------------
2021 2020
Notes US$ thousands US$ thousands
-------------------------------------------------- ----- -------------- --------------
ASSETS
Non-current assets
Property, plant and equipment 12 2,799,075 2,708,195
Equity instruments at fair value through other
comprehensive income (FVOCI) 29 164,525 212,576
Silverstream contract 13 494,392 534,697
Deferred tax asset 10 67,300 120,676
Inventories 14 91,620 91,620
Other receivables 15 58,548 -
Other assets 3,587 3,429
-------------------------------------------------- ----- -------------- --------------
3,679,047 3,671,193
-------------------------------------------------- ----- -------------- --------------
Current assets
Inventories 14 396,184 351,587
Trade and other receivables 15 401,424 512,927
Prepayments 20,282 18,207
Derivative financial instruments 29 96 6,290
Silverstream contract 13 35,152 41,443
Cash and cash equivalents 16 1,235,282 1,070,415
-------------------------------------------------- ----- -------------- --------------
2,088,420 2,000,869
-------------------------------------------------- ----- -------------- --------------
Total assets 5,767,467 5,672,062
-------------------------------------------------- ----- -------------- --------------
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(1) 17 (2,042) 3,292
Cost of hedging reserve(1) 17 (38) 1,072
Fair value reserve of financial assets at FVOCI 17 83,784 117,420
Foreign currency translation reserve 17 (2,120) (1,467)
Retained earnings 17 2,543,087 2,363,275
-------------------------------------------------- ----- -------------- --------------
3,618,124 3,479,045
Non-controlling interests 184,548 135,559
-------------------------------------------------- ----- -------------- --------------
Total equity 3,802,672 3,614,604
-------------------------------------------------- ----- -------------- --------------
1 The amounts recognised in hedging reserve and cost of hedging
reserve at 31 December 2020 have been amended to reflect the nature
of the components of the valuation of certain derivatives at that
date.
Consolidated Balance Sheet
As at 31 December
As at 31 December
------------------------------------------------- ----- ------------------------------
2021 2020
Notes US$ thousands US$ thousands
------------------------------------------------- ----- -------------- --------------
Non-current liabilities
Interest-bearing loans 19 1,157,545 1,156,670
Lease liabilities 24 6,146 7,697
Provision for mine closure cost 20 256,956 244,808
Pensions and other post-employment benefit plans 21 6,506 11,977
Deferred tax liability 10 68,745 295,595
------------------------------------------------- ----- -------------- --------------
1,495,898 1,716,747
------------------------------------------------- ----- -------------- --------------
Current liabilities
Trade and other payables 22 378,235 225,208
Income tax payable 62,287 88,066
Derivative financial instruments 29 3,885 -
Lease liabilities 24 4,681 5,048
Provision for mine closure cost 20 3,351 880
Employee profit sharing 16,458 21,509
--------------------------------- --------- ---------
468,897 340,711
--------------------------------- --------- ---------
Total liabilities 1,964,795 2,057,458
--------------------------------- --------- ---------
Total equity and liabilities 5,767,467 5,672,062
--------------------------------- --------- ---------
These financial statements were approved by the Board of
Directors on 8 March 2022 and signed on its behalf by:
Mr Juan Bordes
Non-executive Director
8 March 2022
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
----------------------------------------------------- ----- ------------------------------
2021 2020
Notes US$ thousands US$ thousands
----------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 28 895,141 917,685
----------------------------------------------------- ----- -------------- --------------
Cash flows from investing activities
Purchase of property, plant and equipment 3 (592,052) (412,326)
Proceeds from the sale of property, plant and
equipment and other assets 6,042 266
Proceeds from Silverstream contract 13 48,986 33,710
Proceeds from the Layback Agreement 2 (c) 25,000 -
Interest received 10,459 12,249
Net cash used in investing activities (501,565) (366,101)
----------------------------------------------------- ----- -------------- --------------
Cash flows from financing activities
Proceeds from Note payable(1) 41,665 63,669
24
Principal element of lease payments (a) (5,971) (5,780)
Dividends paid to shareholders of the Company(2) (245,561) (104,686)
Capital contribution(3) 31,885 53
Proceeds from the issuance of interest-bearing
loans 19 - 828,325
Repayment of interest-bearing loans 19 - (542,956)
Interest paid(4) 19 (49,334) (59,891)
----------------------------------------------------- ----- -------------- --------------
Net cash generated (used in)/from financing
activities (227,316) 178,734
----------------------------------------------------- ----- -------------- --------------
Net increase in cash and cash equivalents during
the year 166,260 730,318
Effect of exchange rate on cash and cash equivalents (1,393) 3,521
Cash and cash equivalents at 1 January 1,070,415 336,576
----------------------------------------------------- ----- -------------- --------------
Cash and cash equivalents at 31 December 16 1,235,282 1,070,415
----------------------------------------------------- ----- -------------- --------------
(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 (note 18).
(3) (Corresponds to capital contributions provided by Minera los
Lagartos, S.A. de C.V. which holds a non-controlling interest in
the Juanicipio project.)
(4) Total interest paid during the year ended 31 December 2021
less amounts capitalised totalling US$8.4 million (2020: US$8.8
million) which were included within the caption Purchase of
property, plant and equipment (note 12).
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders
of the Company
------- -------------------- --------------------------------------------------------------------
Fair
value
reserve
of Foreign
Cost financial currency
Share Share Capital Hedging of hedging assets translation Retained Non-controlling Total
Notes capital premium reserve reserve(1) reserve(1) at FVOCI reserve earnings Total interests equity
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
US$ thousands
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- -------------------------------------
Balance at 1
January 2020 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 - - - 3,259 154 62,686 (1,217) 124 65,006 (11) 64,995
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - 3,259 154 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) 3,292 1,072 117,420 (1,467) 2,363,275 3,479,045 135,559 3,614,604
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
Profit for the
year - - - - - - - 421,209 421,209 17,287 438,496
Other
comprehensive
income, net
of
tax - - - (4,535) (1,110) (33,636) (653) 4,785 (35,149) (544) (35,693)
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - (4,535) (1,110) (33,636) (653) 425,994 386,060 16,743 402,803
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
Hedging loss
transferred
to
the carrying
value of PPE
purchased
during
the year - - - (799) - - - - (799) 361 (438)
Capital
contribution - - - - - - - - - 31,885 31,885
Dividends
declared
and paid 18 - - - - - - - (246,182) (246,182) - (246,182)
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
Balance at 31
December 2021 368,546 1,153,817 (526,910) (2,042) (38) 83,784 (2,120) 2,543,087 3,618,124 184,548 3,802,672
-------------- ----- ------- --------- --------- ---------- ---------- --------- ----------- --------- --------- --------------- ---------
1 The amounts recognised in hedging reserve and cost of hedging
reserve at 31 December 2020 have been amended to reflect the nature
of the components of the valuation of certain derivatives at that
date.
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 2021 were authorised for issue by the Board of
Directors of Fresnillo plc on 8 March 2022.
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 UK-adopted international accounting standards
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 2021 and 2020, 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 2020.
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,
financial position or performance of the Group. The Group has not
early adopted any standard, interpretation or amendment that was
issued but is not yet effective.
(c) Significant accounting judgements, 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
2021 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.This expectation considers different scenarios, including but
not limited to the different legal proceedings that Minera Penmont
has presented in order to regain access to the lands, which
proceedings are pending final resolution. 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 2021 or 31 December 2020.
Layback Agreement:
In December 2020, the Group entered into multiple contracts 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 Fresnillo's
"Guachichil D1" mineral concession. Based on the terms of the
contracts, the Group will transfer the legal rights to access and
mine the mineral concession to Orla.
Due to the fact that the contracts were negotiated together, the
Group has considered the layback contracts as a single agreement
(Layback Agreement) for the purpose of determining the accounting
implications of the transaction. The Group determined that the
transaction should be accounted for as the sale of a single
intangible asset. As such, it is relevant to consider the point at
which control transfers in accordance with the requirements of IFRS
15 regarding when a performance obligation is satisfied and in
light of the continuing performance obligations on the part of the
Group.
The effectiveness of the agreement was subject to the approval
of the Mexican Federal Competition Commission (COFECE), which was
granted in February 2021. The consideration includes three
payments: US$25.0 million that was paid upon the approval of
COFECE, US$15.0 million that will be paid no later than 1 December
2022, US$22.8 million no later than 1 December 2023. The future
amounts due bear interest at an annual rate of 5%. Upon
notification of approval by COFECE, the Group recognised the fair
value of consideration set out in the contract (US$67.2 million,
being the cash flows set out above discounted at the risk-free
rate).
As set out in the Layback Agreement, as at 31 December 2021 the
Group continues to provide support to Orla in respect of other
negotiations relevant to their acquisition of the rights to access
from the local ejido, thus the Company has recognised the total
value of the agreement as deferred income. Based on the expected
time of complete the transfer of control of the asset, the Company
the deferred income is classified as current.
The ongoing support does not affect the Group's contractual
right to the future payments set out above. The amount receivable
as at 31 December 2021 amounts to US$40.6 million, of which US$16.7
million is current and US$23.9 million is non-current.
Juanicipio project:
During 2021 Juanicipio has turned from construction to
commissioning activities and continues processing mineralised
material from development through plants at Fresnillo and Saucito
Juanicipio has extended its commissioning period mainly derived
from delays in key services such as the power to the plant
facilities. As of 31 December 2021, the Group has evaluated the
status of Juanicipio for accounting implications and has concluded
it continues in a development stage.
Climate change:
In the climate disclosure in the Strategic Report, the Group's
set out its assessment of climate risks and opportunities (CROs).
The Group recognises that there may be potential financial
statement implications in the future in respect of the mitigation
and adaptation measures to the physical and transition risks. The
potential effect of climate change would be in respect of assets
and liabilities that are measured based on an estimate of future
cash flows. The group specifically considered the effect of climate
change on the valuation of property, plant and equipment, deferred
tax assets, the Silverstream contract, and the provision for mine
closure cost. The Group does not have any assets or liabilities for
which measurement is directly linked to climate change performance
(for example: Sustainability-Linked Bonds).
The main ways in which climate has affected the preparation of
the financial statements are:
-- The Group has already made certain climate-related strategic
decisions, such as to focus on decarbonisation and to increase wind
energy. Where decisions have been approved by the Board, the
effects were considered in the preparation of these financial
statements by way of inclusion in future cash flow projections
underpinning the estimation of the recoverable amount of property,
plant and equipment and deferred tax assets, as relevant.
-- As described in Note 13, the costs inherent in the
Silverstream contract are determined based on the provisions of
that contract. This reduces the exposure of the valuation of the
asset to the effect of any cost implications related to CROs.
-- Further information about the potential effect of CROs on the
provision for mine closure cost is set out in Note 20.
The Group's strategy consists of mitigation and adaptation
measures. To mitigate the impacts by and on climate change the
company relies on renewable electricity, fuel replacement and
efficiency opportunities to reduce the carbon footprint. The
approach to adaptation measures is based on climate models to
produce actionable information for the design, construction,
operation and closure of its mining assets, considering climate
change. Future changes to the Group's climate change strategy or
global decarbonisation signposts may impact the Group's significant
judgements and key estimates and result in material changes to
financial results and the carrying values of certain assets and
liabilities in future reporting periods. However, as at the balance
sheet date the Group believes there is no material impact on
balance sheet carrying values of assets or liabilities. Although
this is an estimate, it is not considered a critical estimate.
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. Any potential future adjustment would be applicable from
the point of re-estimation and would not by itself change the value
of inventory and as such no sensitivity included.
Silverstream, note 13:
The valuation of the Silverstream contract as a derivative
financial instrument requires estimation by management. The term of
the derivative is based on the Sabinas life of mine and the value
of this derivative is determined using a number of estimates,
including the estimated recoverable ore reserves and mineral
resources and future production profile of the Sabinas mine on the
same basis a market participant would consider, the estimated
recoveries of silver from ore mined, estimates of the future price
of silver and the discount rate used to discount future cash flows.
For further detail on the inputs that have a significant effect on
the fair value of this derivative, see note 30. The impact of
changes in silver price assumptions 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 2021, the Group continues to apply measures to safeguard
the health of its employees and their local communities while
continuing to operate safely and responsibly. During 2021
operations have not been suspended, all mines have operated at
normal production capacity. The Group incurred in other production
costs of US$4.7 million (2020: US$4.5 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 2021 and 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 2021 and 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 indicators 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 based on 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
2021 and 2020 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 considering 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 capped to
three months of salary or average of the profit sharing paid the
last three years.
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.
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.
Inventory in transit to the smelter or refinery does not represent
a significant proportion of total revenue at the end of the
reporting period given the distance to the mine units.
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 based on 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 2021, 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;
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 2021 and 2020, 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 2021 and 2020, respectively. Revenues for the year ended
31 December 2021 and 2020 include those derived from contracts with
costumers and other revenues, as showed in note 4.
Year ended 31 December 2021
--------------------------------------------------------------------------------------------------- ---------
Adjustments
Noche San Other and
US$ thousands Fresnillo Herradura Cienega Saucito Buena Julian (4) eliminations Total
---------------- --------- --------- ------- ------- ------- ------- --------- ------------ ---------
Revenues:
Third party(1) 493,582 769,896 215,623 547,294 168,849 509,247 (1,396) 2,703,095
Inter-Segment 147,727 (147,727) -
---------------- --------- --------- ------- ---------------- ------- --------- ------------ ---------
Segment revenues 493,582 769,896 215,623 547,294 168,849 509,247 147,727 (149,123) 2,703,095
Segment
Profit(2) 224,558 285,354 106,498 321,349 77,158 322,734 144,006 (4,800) 1,476,857
Foreign exchange
hedging losses 3,827
Depreciation and
amortisation(3) (528,206)
Employee profit
sharing (15,553)
---------------- --------- --------- ------- ------- ------- ------- --------- ------------
Gross profit as
per the income
statement 936,925
---------------- --------- --------- ------- ------- ------- ------- --------- ------------ ---------
Capital
expenditure(3) 108,335 54,371 45,392 101,160 381 40,922 241,491 - 592,052
---------------- --------- --------- ------- ------- ------- ------- --------- ------------ ---------
1 Total third party revenues include treatment and refining
charges amounting US$143.5 million. Adjustments and eliminations
correspond to hedging gains (note 4).
(2 Segment profit excluding foreign exchange hedging gains,
depreciation and amortisation and employee profit sharing. Segment
profit for Fresnillo and Saucito considers the sales and the
corresponding processing cost of the development ore from
Juanicipio project.)
(3 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine
closure provision. Significant additions include the construction
of) (the leaching) plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).
(4 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V and incidental)
(ore sales from) (Juanicipio development project) (to Fresnillo;
capital expenditure mainly corresponds to Minera Juanicipio S.A de
C.V) (. and Minera Bermejal, S. de R.L. de C.V.)
Year ended 31 December 2020
--------------------------------------------------------------------------------------------------------------
Adjustments
Noche San Other and
US$ thousands Fresnillo Herradura Cienega Saucito Buena Julian (5) 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$9.1 million.)
(4 Capital expenditure represents the cash outflow in respect of
additions to property, plant and equipment, including mine
development, construction of leaching pads, and purchase of mine
equipment, excluding additions relating to changes in the mine
closure provision. Significant additions include the construction
of) (the leaching) plant at Fresnillo and the facilities of the
Juanicipio development project (included in other).
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V and incidental)
(ore sales from) (Juanicipio development project) (to Fresnillo;
capital expenditure mainly corresponds to Minera Juanicipio S.A de
C.V) (. and Minera Bermejal, S. de R.L. de C.V.)
4. Revenues
Revenues reflect the sale of goods, being concentrates, doré,
slag, precipitates and activated carbon of which the primary
contents are silver, gold, lead and zinc.
(a) Revenues by source
Year ended 31
December
------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Revenues from contracts with customers 2,705,720 2,425,098
Revenues from other sources:
Provisional pricing adjustment on products sold (1,274) 2,594
Hedging (loss)/gain on sales (1,351) 2,363
------------------------------------------------- -------------- --------------
2,703,095 2,430,055
------------------------------------------------- -------------- --------------
(b) Revenues by product sold
Year ended 31
December
------------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------------------------- -------------- --------------
Lead concentrates (containing silver, gold, lead and
by-products) 1,157,623 989,072
Doré and slag (containing gold, silver and by-products) 806,289 800,326
Zinc concentrates (containing zinc, silver and by-products) 346,892 236,758
Precipitates (containing gold and silver) 259,835 275,367
Activated carbon (containing gold, silver and by-products) 132,456 128,532
------------------------------------------------------------- -------------- --------------
2,703,095 2,430,055
------------------------------------------------------------- -------------- --------------
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
---------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Silver 1,163,879 970,532
Gold 1,305,277 1,328,000
Zinc 259,987 204,733
Lead 117,448 107,272
---------------------------------------------- -------------- --------------
Value of metal content in products sold 2,846,591 2,610,537
Adjustment for treatment and refining charges (143,496) (180,482)
---------------------------------------------- -------------- --------------
Total revenues (1) (,) 2,703,095 2,430,055
---------------------------------------------- -------------- --------------
1 Includes provisional price adjustments which represent changes
in the fair value of trade receivables resulting in a loss of
US$1.2 million (2020: gain of US$2.6 million) and hedging loss of
US$1.3 million (2020: gain of US$2.3 million). For further detail,
refer to note 2(n).
The average realised prices for the gold and silver content of
products sold, prior to the deduction of treatment and refining
charges, were:
Year ended 31
December
----------- ------------------
2021 2020
US$ per US$ per
ounce ounce
----------- -------- --------
Gold (2) 1,794.96 1,792.44
----------- -------- --------
Silver (2) 24.87 21.28
----------- -------- --------
(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
--------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
--------------------------------------------------- -------------- --------------
Depreciation and amortisation (note 12) 528,206 505,377
Contractors 403,568 357,278
Energy 233,667 189,239
Operating materials 221,773 203,217
Maintenance and repairs 199,264 175,087
Personnel expenses (note 7) 135,758 116,103
Mining concession rights and contributions 20,266 20,409
Surveillance 9,832 7,028
Insurance 9,628 7,141
Freight 8,433 8,037
Other 28,284 18,213
--------------------------------------------------- -------------- --------------
Cost of production 1,798,679 1,607,129
Unabsorbed production costs(1) 956 19,403
Gain on foreign currency hedges (3,827) (4,145)
Change in work in progress and finished goods (ore
inventories) (29,638) (71,698)
1,766,170 1,550,689
--------------------------------------------------- -------------- --------------
1 Corresponds to production cost incurred in Minera San Julian
as a result of a plant stoppage (2020: Minera Penmont as a result
of the operational impact related to COVID-19, see note 2 c). Main
unabsorbed production cost includes US$9.1 million of depreciation
and amortisation and US$3.1 million of Contractors).
6. Exploration expenses
Year ended 31
December
------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------- -------------- --------------
Contractors 89,005 71,279
Mining concession rights and contributions 21,494 21,099
Administrative services 4,614 6,052
Personnel expenses (note 7) 6,425 2,753
Assays 1,651 1,299
Rentals 468 457
Other 6,634 4,389
------------------------------------------- -------------- --------------
130,291 107,328
------------------------------------------- -------------- --------------
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$14.5 million (2020: US$10.4
million) were incurred in the year on projects located in Peru and
Chile.
The following table sets forth liabilities (generally trade
payables) corresponding to exploration activities of the Group
companies engaged only in exploration, principally Exploraciones
Mineras Parreña, S.A. de C.V.
Year ended 31
December
---------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Liabilities related to exploration activities 348 666
---------------------------------------------- -------------- --------------
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
----------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Operating cash out flows related to exploration activities 130,915 106,768
----------------------------------------------------------- -------------- --------------
7. Personnel expenses
Year ended 31
December
----------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
----------------------------------------------- -------------- --------------
Salaries and wages 66,488 54,202
Statutory healthcare and housing contributions 23,771 20,441
Employees' profit sharing 16,662 19,275
Other benefits 18,679 13,233
Bonuses 14,906 12,770
Social security 5,777 3,084
Post-employment benefits 4,300 5,944
Vacations and vacations bonus 3,262 3,420
Training 2,867 3,080
Legal contributions 2,130 2,101
Other 4,028 4,070
----------------------------------------------- -------------- --------------
162,870 141,620
----------------------------------------------- -------------- --------------
(a) Personnel expenses are reflected in the following line
items:
Year ended 31
December
------------------------------ ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------ -------------- --------------
Cost of sales (note 5) 135,758 116,103
Administrative expenses 20,687 22,764
Exploration expenses (note 6) 6,425 2,753
------------------------------ -------------- --------------
162,870 141,620
------------------------------ -------------- --------------
(b) The monthly average number of employees during the year was
as follows:
Year ended 31
December
------------------------- ---------------
2021 2020
No. No.
------------------------- ------- ------
Mining 2,883 2,222
Plant 1,032 926
Exploration 432 403
Maintenance 1,259 1,255
Administration and other 1,062 1,010
------------------------- ------- ------
Total 6,668 5,816
------------------------- ------- ------
8. Other operating income and expenses
Year ended 31
December
-------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Other income:
Insurance recovery - 2,738
Gain on sale of property, plant and equipment and other
assets 5,026 -
Rentals 1,802 1,278
Other 5,086 5,981
-------------------------------------------------------- -------------- --------------
11,914 9,997
-------------------------------------------------------- -------------- --------------
Year ended 31
December
-------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Other expenses:
Loss on sale of property, plant and equipment - 700
Loss on theft of inventory 143 1,477
Maintenance (1) 3,663 3,692
Donations 538 387
Environmental activities(2) 4,813 768
Saucito rehabilitation cost for mine flood 4,803 -
Cost of insurance claims 1,422 1,085
Other 7,864 6,730
-------------------------------------------------------- -------------- --------------
23,246 14,839
-------------------------------------------------------- -------------- --------------
1 Costs relating to the rehabilitation of the facilities of
Compañía Minera las Torres, S.A. de C.V. (a closed mine).
2 During 2021 main activities were related with the evaluation
of improvement in tailing dams in Fresnillo and Cienega (2020:
remediation activities in Cienega mine).
9. Finance income and finance costs
Year ended 31
December
------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Finance income:
Interest on short-term deposits and investments 5,167 4,606
Interest on tax receivables 3,637 7,642
Fair value movement on derivatives - 1
Other 70 -
------------------------------------------------- -------------- --------------
8,874 12,249
------------------------------------------------- -------------- --------------
Year ended 31
December
------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Finance costs:
Interest on interest-bearing loans 48,888 43,542
Premium paid on early notes redemption (note 19) - 60,835
Interest on tax amendments (note 10) - 24,890
Interest on lease liabilities 504 644
Unwinding of discount on provisions 11,522 10,755
Other 836 653
------------------------------------------------- -------------- --------------
61,750 141,319
------------------------------------------------- -------------- --------------
10. Income tax expense
a) Major components of income tax expense:
Year ended 31
December
---------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 268,945 208,370
Amounts under provided in previous years 7,696 (67)
---------------------------------------------------- -------------- --------------
276,641 208,303
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (120,043) (88,954)
Revaluation effects of Silverstream contract (125) 21,288
---------------------------------------------------- -------------- --------------
(120,168) (67,666)
---------------------------------------------------- -------------- --------------
Corporate income tax 156,473 140,637
Special mining right
Current:
Special mining right charge (note 10 (e)) 53,147 24,739
---------------------------------------------------- -------------- --------------
Amounts under provided in previous years 363 6,602
---------------------------------------------------- -------------- --------------
53,510 31,341
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (36,947) 3,696
---------------------------------------------------- -------------- --------------
Special mining right 16,563 35,037
Income tax expense reported in the income statement 173,036 175,674
Year ended 31
December
--------------------------------------------------------- ------------------------------
2021 2020
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 743 1,953
Changes in fair value of cash flow hedges 298 (91)
Changes in the fair value of cost of hedges 1,619 (3,320)
Changes in fair value of equity investments at FVOCI 14,415 (26,866)
Remeasurement losses on defined benefit plans (908) (23)
--------------------------------------------------------- -------------- --------------
Income tax effect reported in other comprehensive income 16,167 (28,347)
--------------------------------------------------------- -------------- --------------
(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
-------------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
-------------------------------------------------------------- -------------- --------------
Accounting profit before income tax 611,533 551,253
-------------------------------------------------------------- -------------- --------------
Tax at the Group's statutory corporate income tax rate
30.0% 183,460 165,376
Expenses not deductible for tax purposes 3,442 2,921
Inflationary uplift of the tax base of assets and liabilities (49,389) (22,972)
Current income tax (over)/underprovided in previous
years 1,569 44
Exchange rate effect on tax value of assets and liabilities
(1) 32,078 55,110
Non-taxable/non-deductible foreign exchange effects 1,892 (16,923)
Inflationary uplift of tax losses (4,165) (1,170)
Inflationary uplift on tax refunds (1,732) (2,077)
Incentive for Northern Border Zone (10,077) (35,810)
Deferred tax asset not recognised 6,465 4,916
Special mining right taxable/(deductible) for corporate
income tax (4,969) (10,488)
Other (2,101) 1,710
-------------------------------------------------------------- -------------- --------------
Corporate income tax at the effective tax rate of 25.5%
(2020: 25.5%) 156,473 140,637
-------------------------------------------------------------- -------------- --------------
Special mining right 16,563 35,037
-------------------------------------------------------------- -------------- --------------
Tax at the effective income tax rate of 28.2% (2020:
31.9%) 173,036 175,674
-------------------------------------------------------------- -------------- --------------
(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
------------------------------------------------------ ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------------------ -------------- --------------
Opening net liability (174,919) (210,577)
Income statement credit arising on corporate income
tax 120,168 67,666
Income statement (charge)/credit arising on special
mining right 36,947 (3,696)
Exchange difference 192 35
Net charge related to items directly charged to other
comprehensive income 16,167 (28,347)
Closing net liability (1,445) (174,919)
------------------------------------------------------ -------------- --------------
The amounts of deferred income tax assets and liabilities as at
31 December 2021 and 2020, considering the nature of the related
temporary differences, are as follows:
Consolidated Consolidated
balance sheet income statement
------------------------------------------------ ------------------------------ ------------------------------
2021 2020 2021 2020
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------------------ -------------- -------------- -------------- --------------
Related party receivables (153,702) (266,986) (113,284) 65,505
Other receivables (3,247) (3,292) (45) (1,083)
Inventories 97,170 231,584 134,414 (46,572)
Prepayments (2,872) (1,833) 1,039 792
Derivative financial instruments including
Silverstream contract (153,111) (170,122) (14,352) 10,422
Property, plant and equipment arising from
corporate income tax (50,155) (116,051) (65,896) (63,066)
Exploration expenses and operating liabilities 110,989 61,099 (49,890) 5,176
Other payables and provisions 78,092 73,706 (4,386) (4,390)
Losses carried forward 90,439 75,043 (15,396) (22,041)
Post-employment benefits 1,034 1,904 (38) (225)
Deductible profit sharing 4,937 6,453 1,516 (3,455)
Special mining right deductible for corporate
income tax 23,692 21,655 (2,037) (3,578)
Equity investments at FVOCI (20,554) (35,944) (975) (157)
Other (9,309) (341) 9,161 (4,994)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability related to corporate
income tax 13,403 (123,125)
Deferred tax credit related to corporate
income tax - (120,169) (67,666)
Related party receivables arising from
special mining right (38,150) (28,781) 9,368 6,263
Inventories arising from special mining
right 21,332 16,896 (4,436) 187
Property plant and equipment arising from
special mining right (19,298) (39,913) (20,615) (2,750)
------------------------------------------------ -------------- -------------- -------------- --------------
Other 21,268 4 (21,264) (4)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (1,445) (174,919)
Deferred tax credit (157,116) (63,970)
------------------------------------------------ -------------- -------------- -------------- --------------
Reflected in the statement of financial
position as follows:
Deferred tax assets 67,300 120,676
Deferred tax liabilities-continuing operations (68,745) (295,595)
------------------------------------------------ -------------- -------------- -------------- --------------
Net deferred tax liability (1,445) (174,919)
------------------------------------------------ -------------- -------------- -------------- --------------
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.
Based on management's internal forecast, a deferred tax asset
has been recognised in respect of tax losses amounting to US$301.5
million (2020: US$248.4 million). If not utilised, US$30.6 million
(2020: US$12.7 million) will expire within five years and US$279.9
million (2020: US$235.7 million) will expire between six and ten
years. Of the total deferred tax asset related to losses, US$35.7
million is covered by the existence of taxable temporary
differences, the remaining US$49.9 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$72.6 million (2020: US$64.6 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 is
expected to reverse in the foreseeable future. The temporary
differences for which a deferred tax liability has not been
recognised aggregate to US$1,056 million (2020: US$1,797
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.
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. For the fiscal year 2021 the
SMR allows as a credit the 50% of 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 2021, the Group
credited US$11.5 million (2020: US$21.3 million) of mining
concession rights against the SMR. Total mining concessions rights
paid during the year were US$22.9 million (2020: US$21.3 million)
and have been recognised in the income statement within cost of
sales and exploration expenses. Mining concessions rights paid in
excess of the SMR cannot be credited to SMR in future fiscal
periods, and therefore no deferred tax asset has been recognised in
relation to the excess. Without regards to credits permitted under
the SMR regime, the current special mining right charge would have
been US$64.6 million (2020: US$46.1 million).
11. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the year attributable to equity shareholders of the Company by the
weighted average number of Ordinary Shares in issue during the
period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2021 and 2020, earnings per share have been
calculated as follows:
Year ended 31
December
--------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Earnings:
Profit from continuing operations attributable to equity
holders of the Company 421,473 374,124
Adjusted profit from continuing operations attributable
to equity holders of the Company 421,764 324,451
--------------------------------------------------------- -------------- --------------
Adjusted profit is profit as disclosed in the Consolidated
Income Statement adjusted to exclude revaluation effects of the
Silverstream contract of US$0.04 million loss (US$0.03 million net
of tax) (2020: US$71.0 million gain (US$49.7 million net of
tax)).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
2021 2020
thousands thousands
------------------------------------------------------- ---------- ----------
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
------------------------------------------------------- ---------- ----------
2021 2020
US$ US$
------------------------------------------------------- ---------- ----------
Earnings per share:
Basic and diluted earnings per share 0.572 0.507
Adjusted basic and diluted earnings per Ordinary Share
from continuing operations 0.572 0.440
------------------------------------------------------- ---------- ----------
12. Property, plant and equipment
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 170,846 845,067 836,379 178,868 677,035 2,708,195
------------------ ---------- -------------- ---------------- --------- ---------------------------- -----------
Year ended 31 December 2021(3)
---------------------- ----------------------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and Equipment costs assets in Progress Total
---------------------- ---------- -------------- ---------------- --------- ------------------------ -----------
US$ thousands
---------------------- ----------------------------------------------------------------------------------------------
Cost
At 1 January 2021 342,021 2,385,252 2,408,327 356,055 677,035 6,168,690
Additions 8,059 154,908 98,192 12,661 351,614 625,434
Disposals (134) (9,555) (151,807) (426) - 161,922
Transfers and other
movements 4,659 110,839 102,580 5,921 (223,999) -
At 31 December 2021 354,605 2,641,444 2,457,292 374,211 804,650 6,632,202
Accumulated
depreciation
At 1 January 2021 (171,175) (1,540,185) (1,571,948) (177,185) - (3,460,493)
Depreciation for the
year(1) (27,489) (199,392) (271,573) (34,965) - (533,419)
Disposals 11 9,066 151,332 376 - 160,785
At 31 December 2021 (198,653) (1,730,511) (1,692,189) (211,774) - (3,833,127)
---------------------- ---------- -------------- ---------------- --------- ------------------------ -----------
Net Book amount at 31
December
2021(4) 155,952 910,933 765,103 162,437 804,650 2,799,075
---------------------- ---------- -------------- ---------------- --------- ------------------------ -----------
1 Depreciation for the year includes US$ $529.4 million (2020:
US$515.9 million) recognised as an expense in the income statement
and US$4.6 million (2020: US$1.7 million), capitalised as part of
construction in progress.
2 From the additions in "other assets" category US$(7.8) million
(2020: US$3.9 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 Property, plant and equipment related to Soledad
& Dipolos at 31 December 2021 is US$35.4 million (2020: US$35.9
million) and reflects capitalised mining works and the amount
recognised in the cost of PP&E related to estimated remediation
and closure activities.
The table below details construction in progress by operating
mine and development projects
Year ended 31
December
---------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 85,926 45,845
Herradura 29,479 55,120
Noche Buena 9,685 10,069
Ciénega 38,976 56,032
Fresnillo 188,146 154,276
San Julián 17,304 20,801
Juanicipio 425,513 320,306
Other(1) 9,621 14,586
---------------- -------------- --------------
804,650 677,035
---------------- -------------- --------------
(1) (Mainly) corresponds to Minera Bermejal, S.A. de C.V. (2020:
Minera Bermejal, S.A. de C.V.).
During the year ended 31 December 2021, the Group capitalised
US$8.4 million of borrowing costs within construction in progress
(2020: US$8.8 million). Borrowing costs were capitalised at the
rate of 5.02% (2020: 5.02%).
Sensitivity analysis
Management considers that the models supporting the carrying
amounts of mining assets are most sensitive to commodity price
assumptions. Management has considered whether a reasonably
possible change in prices could lead to impairment and concluded
that it would not.
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
2021 was $ 5.43 per ounce (2020: $5.37 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 2021 the weighted
average discount rate applied for the purposes of the valuation
model was 7.92% (2020: 7.43%).
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 28
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 2021 total proceeds
received in cash were US$49.0 million (2020: US$33.7 million) of
which, US$4.8 million was in respect of proceeds receivable as at
31 December 2020 (2020: US$7.6 million). Cash received in respect
of the year of US$41.3 million (2020: US$28.4 million) corresponds
to 2.4 million ounces of payable silver (2020: 2.3 million ounces).
As at 31 December 2021, a further US$4.8 million (2020: US$7.6
million) of cash receivable corresponding to 274,237 ounces of
silver is due (2020: 362,295 ounces).
The US$0.4 million unrealised loss recorded in the income
statement (31 Dec 2020: US$71.0 million gain) resulted mainly from
the decrease in the forward silver price curve, increase in the
LIBOR reference rate and an update in a new production mine plan.
These effects were compensated by the amortization effects and
higher inflation forecasts.
A reconciliation of the beginning balance to the ending balance
is shown below:
2021 2020
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Balance at 1 January 576,140 541,254
Cash received in respect of the year (41,338) (28,427)
Cash receivable (4,842) (7,648)
Remeasurement (loss)/gains recognised in profit and
loss (416) 70,961
---------------------------------------------------- -------------- --------------
Balance at 31 December 529,544 576,140
---------------------------------------------------- -------------- --------------
Less - Current portion 35,152 41,443
---------------------------------------------------- -------------- --------------
Non-current portion 494,392 534,697
---------------------------------------------------- -------------- --------------
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
--------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
--------------------------------------------------- -------------- --------------
Finished goods (1) 19,137 28,925
Work in progress (2) 344,805 305,888
Ore stockpile (3) 3,234 414
Operating materials and spare parts 125,824 113,111
--------------------------------------------------- -------------- --------------
493,000 448,338
Allowance for obsolete and slow-moving inventories (5,196) (5,131)
--------------------------------------------------- -------------- --------------
Balance as 31 December 487,804 443,207
--------------------------------------------------- -------------- --------------
Less - Current portion 396,184 351,587
--------------------------------------------------- -------------- --------------
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 in stockspiles that will 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$1,770.3 million (2020: US$1,550.7 million) . During 2021 and
2020, 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$0.1 million (2020: US$0.3 million).
15. Trade and other receivables
Year ended 31
December
--------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Trade receivables from related parties (note 26) 265,473 326,833
Value Added Tax receivable 103,448 167,957
Other receivables from related parties (note 26) 4,886 8,176
Other receivables from contractors 27 1,918
Other receivables 11,478 8,545
Other receivables arising from the Layback Agreement
(note 2 (c)) 16,684 -
--------------------------------------------------------- -------------- --------------
401,996 513,429
Expected credit loss of 'Other receivables' (572) (502)
--------------------------------------------------------- -------------- --------------
Trade and other receivables classified as current assets 401,424 512,927
--------------------------------------------------------- -------------- --------------
Other receivables classified as non-current assets:
Value Added Tax receivable 34,634 -
Other receivables arising from the Layback Agreement
(note 2 (c)) 23,914 -
--------------------------------------------------------- -------------- --------------
58,548 -
--------------------------------------------------------- -------------- --------------
459,972 512,927
--------------------------------------------------------- -------------- --------------
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$315.6 million
(2020: US$339.6 million), and in Mexican pesos US$144.4 million
(2020: US$173.2 million).
Balances corresponding to Value Added Tax receivables and
US$10.4 million within Other receivables (2020: US$8.5 million) are
not financial assets.
As of 31 December for each year presented, except for '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 2021 is US$0.6
million (2020: US$0.5 million). Trade receivables from related
partied and other receivables for related parties are classified as
financial assets at FVTPL and therefore not considered in the
expected credit loss analysis. In determining the recoverability of
receivables, the Group performs a risk analysis considering the
type and age of the outstanding receivable and the credit
worthiness of the counterparty, see note 30(b).
16. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its
operations and in order to achieve its treasury objectives.
As at 31 December
-------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
-------------------------- -------------- --------------
Cash at bank and on hand 2,834 1,955
Short-term deposits 1,232,448 1,068,460
-------------------------- -------------- --------------
Cash and cash equivalents 1,235,282 1,070,415
-------------------------- -------------- --------------
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
--------------------------------------- --------------------------- ---------------------------
2021 2020
--------------------------------------- --------------------------- ---------------------------
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 2020 736,893,589 $368,545,586 50,000 GBP50,000
At 31 December 2020 736,893,589 $368, 545,586 50,000 GBP50,000
At 31 December 2021 736,893,589 $368, 545,586 50,000 GBP50,000
-------------------- ----------- ------------- ------- ----------
As at 31 December 2021 and 2020, 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 2021 and 2020 are as follows:
US cents
per
Ordinary Amount
Share US$ thousands
------------------------------------------------------- --------- --------------
Year ended 31 December 2021
Final dividend for 2020 declared and paid during the
year(1) 23.50 173,170
Interim dividend for 2021 declared and paid during the
year(2) 9.90 72,952
33.40 246,122
------------------------------------------------------- --------- --------------
Year ended 31 December 2020
Final dividend for 2019 declared and paid during the
year(3) 11.90 87,690
Interim dividend for 2020 declared and paid during the
year(4) 2.30 16,949
------------------------------------------------------- --------- --------------
14.20 104,639
------------------------------------------------------- --------- --------------
(1 This dividend was approved by the Shareholders on 24 June
2021 and paid on 28 June 2021)
(2 This dividend was approved by the Board of Directors on 3
August 2020 and paid 15 September 2021)
(3 This dividend was approved by the Shareholders on 26 May 2020
and paid on 2 June 2020.)
(4 This dividend was approved by the Board of Directors on 27
July 2020 and paid 16 September 2020)
A reconciliation between dividend declared, dividends affected
to retained earnings and dividend presented in the cash flow
statements is as follows:
Year ended 31
December
------------------------------------------ ------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------ -------------- --------------
Dividends declared 246,122 104,639
Foreign exchange effect 59 -
------------------------------------------- -------------- --------------
Dividends recognised in retained earnings 246,181 104,639
------------------------------------------- -------------- --------------
Foreign exchange and hedging effect (620) 47
------------------------------------------- -------------- --------------
Dividends paid 245,561 104,686
------------------------------------------- -------------- --------------
The directors have proposed a final dividend of US$24 cents per
share, which is subject to approval at the annual general meeting
and is not recognised as a liability as at 31 December 2021.
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$850,000,000 aggregate principal amount of 4.250% Senior Notes
due 2050. The proceeds were partially used to finance the
repurchase mentioned above.
Movements in the year in the debt recognised in the balance
sheet are as follows:
As at 31 December
------------------------------------------------ --------------------------------
2021 2020
US$ thousands US$ thousands
------------------------------------------------ --------------- ---------------
Opening balance 1,156,670 801,239
Issuance of 4.250% senior notes due 2050(1) - 828,325
Repayments of 5.500% senior notes due 2023 - (482,121)
Accrued interest 56,384 48,873
Interest paid (2) (56,370) (43,144)
Amortisation of discount and transaction costs 861 3,498
------------------------------------------------ --------------- ---------------
Closing balance 1,157,545 1,156,670
------------------------------------------------ --------------- ---------------
(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
risk-adjusted 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; the effects of climate change,
and the discount, foreign exchange and inflation rates applied.
Closure provisions are typically based on conceptual level studies
that are refreshed at least every three years. As these studies are
renewed, they incorporate greater consideration of forecast climate
conditions at closure.
The Group has performed separate calculations of the provision
by currency, discounting at corresponding rates. As at 31 December
2021, the discount rates used in the calculation of the parts of
the provision that relate to Mexican pesos range from 6.39% to
8.33% (2020: range from 4.35% to 8.12%). The range for the current
year parts that relate to US dollars range from 0.57% to 1.40%
(2020: range from 0.07% to 1.16%).
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 2021 (3 to 24
years from 31 December 2020). As at 31 December 2021 the weighted
average term of the provision is 12 years (2020: 12 years).
As at 31 December
----------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
----------------------------------- -------------- --------------
Opening balance 245,688 231,056
Increase to existing provision 17,078 8,351
Effect of changes in discount rate (7,821) 3,896
Unwinding of discount rate 11,622 10,801
Payments (879) (817)
Foreign exchange (5,381) (7,599)
----------------------------------- -------------- --------------
Closing balance 260,307 245,688
----------------------------------- -------------- --------------
Less - Current portion (note 22) 3,351 880
----------------------------------- -------------- --------------
Non-current portion 256,956 244,808
----------------------------------- -------------- --------------
The provision is sensitive to changes in discount rates. Changes
in market rates and risks not considered in the risk-adjusted cost
estimates could change the discount rate. To illustrate the
sensitivity of the provision to discounting, if the discount rate
at 31 December 2021 decreased by 50 basis points then the provision
would be US$43.4 million higher, of which approximately US$43.3
million would be capitalised within "Property, plant and equipment"
at operating sites and US$0.1 million would be charged to the
income statement for non-operating sites. If the discount rate
increased by 50 basis points then the provision would be US$27.2
million lower, of which approximately US$27.1 million would result
in a decrease within "Property, plant and equipment" at operating
sites and US$0.1 million would be credited to the income statement
for non-operating sites.
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
2021 cost Interest Exchange year paid interest assumptions assumptions adjustments exchange in OCI by employer transfer 2021
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
US$ thousands
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (31,358) (1,249) (1,906) 1,572 (1,583) 841 3,946 3,946 2,481 (25,673)
Fair value
of plan
assets 19,381 1,167 (616) 1,283 (841) 1,744 1,744 732 (2,400) 19,167
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Net benefit
liability (11,977) (517) (739) 956 (300) - 1,744 3,946 5,690 81 (6,506)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
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)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ----------- -------- --------- ------------- --------- --------
Of the total defined benefit obligation, US$9.6 million (2020:
US$9.6 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions
to the plan for the next annual reporting period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown
below:
As at 31 December
-------------------------------------------------------- -------------------
2021 2020
% %
-------------------------------------------------------- --------- --------
Discount rate 7.99 7.09
Future salary increases (National Consumer Price Index) 5.00 5.00
-------------------------------------------------------- --------- --------
The life expectancy of current and future pensioners, men and
women aged 65 and older will live on average for a further 24.08
and 27.05 years respectively (2020: 23.4 years for men and 26.9 for
women). The weighted average duration of the defined benefit
obligation is 12.1 years (2020: 12.5 years).
The fair values of the plan assets were as follows:
As at 31 December
--------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
--------------------------- -------------- --------------
State owned companies 3,180 3,756
Mutual funds (fixed rates) 15,987 15,625
--------------------------- -------------- --------------
19,167 19,381
--------------------------- -------------- --------------
As at 31 December 2021 and 2020, 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 2021 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) (1,079) 1,174 157 (156) 208
--------------------------------- ---------- --------- --------- --------- ---------------
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
-------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Trade payables 130,187 86,838
Note payable(1) 107,918 64,425
Other payables to related parties (note 26) 30,930 19,629
Accrued expenses 22,319 16,368
Layback Agreement (note 2 (c)) 67,182 -
Other taxes and contributions 19,699 37,948
-------------------------------------------- -------------- --------------
378,235 225,208
-------------------------------------------- -------------- --------------
(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. During 2021
Juanicipios's shareholders agreed to extend the maturity of the
notes bases on expected cash flows and repayment intention.)
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
---------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 49,127 30,922
Herradura 21,258 23,635
Noche Buena 213 373
Ciénega 15,710 9,304
Fresnillo 43,541 25,256
San Julián 6,379 3,051
Juanicipio 103,100 189,128
Other 970 2,909
---------------- -------------- --------------
240,298 284,579
---------------- -------------- --------------
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
2021 2020
US$ thousands US$ thousands
----------------------- -------------- --------------
IT equipment 8,406 9,779
Buildings 2,421 2,966
----------------------- -------------- --------------
Total lease liability 10,827 12,745
----------------------- -------------- --------------
Less - Current portion 4,681 5,048
----------------------- -------------- --------------
Non-current portion 6,146 7,697
----------------------- -------------- --------------
The total cash outflow for leases for the year ended 31 December
2021, except short term and low value leases,
amount US$6.5 million (2020: US$5.8 million).
The table below details right-of-use assets included as property
plant and equipment in note 12
Year ended 31 December
2021
Computer
Building equipment Total
------------------------------------ -------- ---------- -------------
US$ thousands
------------------------------------ -------- ---------- -------------
Cost
At 1 January 2021 4,001 17,527 21,528
Additions 331 2,889 3,220
At 31 December 2021 4,332 20,416 24,748
Accumulated depreciation
At 1 January 2021 (1,059) (8,056) (9,115)
Depreciation for the year (727) (4,375) (5,102)
At 31 December 2021 (1,786) (12,431) (14,217)
------------------------------------ -------- ---------- -------------
Net book amount at 31 December 2021 2,546 7,985 10,531
------------------------------------ -------- ---------- -------------
Amounts recognized in profit and loss for the year, additional
to depreciation of right-of-use assets, included US$0.5 million
(2020: US$0.6 million) relating to interest expense, US$0.7 million
(2020: US$0.7million) relating to short-term leases and
US$3.3million (2020: $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 2021, 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, S de
R.L. de C.V. for the year 2014. On 3 February 2021, the SAT
delivered its findings to which the company responded. The findings
relate to the tax treatments of capitalised stripping cost and
exploration expenditure. The company responded to the SAT and
initiated a procedure with the Mexican Taxpayer Ombudsman
(PRODECON) to procure a Conclusive Agreement with SAT in respect of
these findings. The process is ongoing.
- On 11 February 2021, SAT initiated an audit of the income tax
and mining rights computations of Desarrollos Mineros Fresne, S de
R.L. de C.V. for the year 2015. The findings are similar to the
2014 Tax Audit Findings, and relate to the tax treatments of
capitalised stripping cost, exploration expenditure, and in-period
deduction of certain ore extraction services as an expense. On 8
February 2022, the SAT delivered its findings to which the company
responded. It is expected that the company will initiate a
procedure with PRODECON to procure a Conclusive Agreement with SAT
in respect of these findings.
Due to the current stage of the Conclusive Agreement regarding
2014 and the audit procedures for 2015, it is not possible to
anticipate whether the tax authorities are going to assess a
deficiency to Desarrollos Mineros Fresne, S de R.L. de C.V. 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$13.6 million in respect of the insurance claim, however
this does not constitute a final settlement and management
continues to pursue a higher insurance payment. Due to the fact
that negotiations are on-going and there is uncertainty regarding
the timing and amount involved in reaching a final settlement with
the insurer, it is currently not practicable to determine the total
amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances;
however, there is no certainty that this interest will be realised
until the underlying balance is recovered. Due to that uncertainty,
it is also not practicable to estimate the amount of interest
income earned but not recovered to date.
26. Related party balances and transactions
The Group had the following related party transactions during
the years ended 31 December 2021 and 2020 and balances as at 31
December 2021 and 2020.
Related parties are those entities owned or controlled by the
ultimate controlling party, as well as those who have a minority
participation in Group companies and key management personnel of
the Group.
(a) Related party balances
Accounts receivable Accounts payable
--------------------------------------------- ---------------------- -----------------
As at 31 December As at 31 December
--------------------------------------------- ---------------------- ----------------- ----------
2021 2020 2021 2020
US$ US$ US$ US$
thousands thousands thousands thousands
--------------------------------------------- ---------- ---------- ----------------- ----------
Trade:
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 265,473 326,833 298 170
Other :
Industrias Peñoles, S.A.B. de C.V. 4,842 7,648 - -
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 6 397 - -
Servicios Administrativos Peñoles, S.A.
de C.V. - - 4,519 3,156
Servicios Especializados Peñoles, S.A.
de C.V. - - 179 2,652
Fuentes de Energía Peñoles, S.A.
de C.V. - - 5,220 568
Termoeléctrica Peñoles, S. de R.L.
de C.V. - - 2,154 2,662
Eólica de Coahuila S.A. de C.V. - - 13,589 7,342
Minera Capela, S.A. de C.V. 714 -
Other 38 131 4,257 3,079
--------------------------------------------- ---------- ---------- ----------------- ----------
Sub-total 270,359 335,009 30,930 19,629
Less-current portion 270,359 335,009 30,930 19,629
--------------------------------------------- ---------- ---------- ----------------- ----------
Non-current portion - - - -
--------------------------------------------- ---------- ---------- ----------------- ----------
Related party accounts receivable and payable will be settled in
cash.
Other balances with related parties:
Year ended 31
December
---------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------------------------------- -------------- --------------
Silverstream contract:
---------------------------------------- -------------- --------------
Industrias Peñoles, S.A.B. de C.V. 529,544 576,140
---------------------------------------- -------------- --------------
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
---------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,704,447 2,427,692
---------------------------------------------------- -------------- --------------
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 23 2,761
---------------------------------------------------- -------------- --------------
Other income 2,708 3,618
---------------------------------------------------- -------------- --------------
Total income 2,707,178 2,434,071
---------------------------------------------------- -------------- --------------
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$143.5 million (2020: US$180.5 million). During 2021
and 2020 there were no sales credited to development projects.
Year ended 31
December
----------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Expenses:
Administrative services:
Servicios Administrativos Peñoles, S.A. de C.V.
(2) 35,654 33,031
Servicios Especializados Peñoles, S.A. de C.V.
(3) 19,105 17,932
54,759 50,963
----------------------------------------------------- -------------- --------------
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 19,597 17,616
Fuentes de Energía Peñoles, S.A. de C.V. 5,019 5,051
Eólica de Coahuila S.A. de C.V. 39,423 36,090
----------------------------------------------------- -------------- --------------
64,039 58,757
Operating materials and spare parts:
Wideco Inc 5,465 5,362
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 10,579 7,389
----------------------------------------------------- -------------- --------------
16,044 12,751
----------------------------------------------------- -------------- --------------
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 10,029 6,476
----------------------------------------------------- -------------- --------------
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 16,422 12,278
----------------------------------------------------- -------------- --------------
Other expenses: 7,441 3,351
----------------------------------------------------- -------------- --------------
Total expenses 168,734 144,576
----------------------------------------------------- -------------- --------------
2 Includes US$3.1 million (2020: US$5.1 million) corresponding
to expenses reimbursed.
3 Includes US$2.6 million (2020: US$3.0 million) relating to
engineering costs that were capitalised.
In 2020, the Group paid US$16.1 million to Industrias Peñoles,
S.A.B de C.V. related to the settlement of amounts due to the SAT
arising from the voluntary tax amendment mentioned in Note 10 (a)
in respect of the fiscal year 2013. This payment was made as
settlement of the adjustment in respect of 2013 was done in
accordance with the tax consolidation regime that was applicable in
that year.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of
Directors and the Executive Committee.
Year ended 31
December
----------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Salaries and bonuses 3,142 3,092
Post-employment benefits 192 146
Other benefits 337 370
----------------------------------------------------- -------------- --------------
Total compensation paid in respect of key management
personnel 3,671 3,608
----------------------------------------------------- -------------- --------------
Year ended 31
December
-------------------------------------------------------- ------------------------------
2021 2020
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Accumulated accrued defined benefit pension entitlement 4,138 5,005
-------------------------------------------------------- -------------- --------------
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 2021 and 2020 are as follows:
Year ended
31 December
------------------------------------------------------- ------------------------------
2021 2020
Class of services US$ thousands US$ thousands
------------------------------------------------------- -------------- --------------
Fees payable to the Group's auditor for the audit of
the Group's annual accounts 1,413 1,439
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 382 242
Audit-related assurance services 497 521
Other assurance services - 309
Total 2,292 2,511
------------------------------------------------------- -------------- --------------
28. Notes to the consolidated statement of cash flows
2021 2020
Notes US$ thousands US$ thousands
--------------------------------------------------------- ----- -------------- --------------
Reconciliation of profit for the year to net cash
generated from operating activities
Profit for the year 438,496 375,579
Adjustments to reconcile profit for the period to
net cash inflows from operating activities:
Depreciation and amortisation 12 529,390 515,909
Employee profit sharing 7 16,662 19,275
Deferred income tax expense/(credit) 10 (157,116) (63,970)
Current income tax expense 10 330,151 239,644
(Gain)/loss on the sale of property, plant and equipment
and other assets 8 (5,041) 667
Net finance costs 52,863 129,066
Foreign exchange loss 1,306 22,342
Difference between pension contributions paid and
amounts recognised in the income statement 625 1,243
Non cash movement on derivatives 531 (56)
Changes in fair value of Silverstream 13 416 (70,961)
Working capital adjustments
Decrease/(Increase) in trade and other receivables 85,580 (61,561)
(Increase)/decrease in prepayments and other assets (2,233) 331
Increase in inventories (44,596) (79,467)
Decrease in trade and other payables 19,252 10,933
--------------------------------------------------------- ----- -------------- --------------
Cash generated from operations 1,266,287 1,038,974
Income tax paid(1) (349,840) (114,170)
Employee profit sharing paid (21,306) (7,119)
--------------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 895,141 917,685
--------------------------------------------------------- ----- -------------- --------------
(1) Income tax paid includes US$321.8 million corresponding to
corporate income tax (020: US$103.6 million) and US$28.0
corresponding to special mining right (2020: US$10.6 million), for
further information refer to note 10.
29. Financial instruments
(a) Fair value category
As at 31 December 2021
--------------------------------------------------------------------------------------
US$ 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) 41,217 - - 270,315
Equity instruments at FVOCI - 164,525 - -
Silverstream contract (note
13) - - - 529,544
Derivative financial instruments - - 96 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Interest-bearing loans (note
19) - 1,157,545 - -
Trade and other payables
(note 22) - 161,117 - -
Note payable (note 22) - 107,918 - -
Derivative financial instruments - 3,885 -
---------------------------------- --------- ---------- ------------- ----------
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) - 1,157,545 - -
Trade and other payables
(note 22) - 106,467 - -
Note payable (note 22) - 64,425 - -
---------------------------------- --------- ---------- ------------- ----------
(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
------------------------------------- ------------------------------ ----------------- --------------
2021 2020 2021 2020
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------- -------------- -------------- ----------------- --------------
Financial assets:
Trade and other receivables 41,217 1,944 41,217 1,944
Financial liabilities:
Interest-bearing loans (1) (note 19) 1,157,545 1,156,210 1,237,689 1,297,770
Trade and other payables 161,117 106,467 161,117 106,467
Note payable (note 22) 107,918 64,425 107,918 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 2021
---------------------------------------------------------------------------------------------------
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 - - 270,315 270,315
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 66 - 66
Option and forward foreign
exchange contracts - 30 - 30
Silverstream contract - - 529,544 529,544
Other financial assets:
Equity instruments at FVOCI 164,525 - - 164,525
----------------------------------- -------------- -------------- -------------- --------------
164,525 96 799,859 964,480
---------------------------------- -------------- -------------- -------------- --------------
Financial liabilities:
Derivative financial instruments:
Option commodity contracts
(note 29 (c)) - 2,987 - 2,987
Option and forward foreign
exchange contracts - 898 - 898
- 3,885 - 3,885
---------------------------------- -------------- -------------- -------------- --------------
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
---------------------------------- -------------- -------------- -------------- --------------
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:
2021 2020
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Balance at 1 January: 326,834 206,982
Sales 3,247,864 5,352,029
Cash collection (3,307,951) (5,234,771)
Changes in fair value (3,695) 21,165
Realised embedded derivatives during the year 2,421 (18,571)
---------------------------------------------- -------------- --------------
Balance at 31 December 265,473 326,834
---------------------------------------------- -------------- --------------
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 several 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 2021, approximately 89.8% of the investments correspond to
9,314,877 shares (2020: 9,314,877 shares) of Mag Silver, Corp. for
an amount of US$146.1 million (2020: US$199.5 million) and 7.3% of
Endeavor, Inc. represented by 2,800,000 (2020: 2,800,000 shares)
shares for an amount of US$11.9 million (2020: US$14.1 million).
These equity investments are listed on the Canadian Stock Exchange.
The prices per share as 31 December 2021 were US$15.69 (2020:
US$20.47) and US$4.23 (2020: US$5.05 ), 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
----------------------- -------------- --------------- --------------
2021 10% 2,123 1,251
(5%) (1,229) (1,587)
----------------------- -------------- --------------- --------------
2020 20% 2,792 30,056
(15%) (668) (12,378)
----------------------- -------------- --------------- --------------
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
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2021 10% 15% 25% 15% 40,688 (4,861)
(10%) (15%) (15%) (15%) (36,638) 2,707
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2020 20% 45% 25% 15% 88,037 (7,989)
(20%) (45%) (20%) (15%) (86,165) 22,697
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
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
----------------------- ----------- ---------------
2021 15% 104,419
(15%) (104,419)
----------------------- ----------- ---------------
2020 45% 338,484
(45%) (338,494)
----------------------- ----------- ---------------
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
----------------------- ------------ ---------------
2021 25 3,088
- -
----------------------- ------------ ---------------
2020 25 2,676
(20) (2,141)
----------------------- ------------ ---------------
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
----------------------- ------------ ---------------
2021 25% (13,219)
- -
----------------------- ------------ ---------------
2020 25 (14,689)
(20) 12,239
----------------------- ------------ ---------------
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
----------------------- ----------- --------------- --------------
2021 25% - 40,707
(45%) - (73,272)
----------------------- ----------- --------------- --------------
2020 70% - 148,803
(40%) - (85,031)
----------------------- ----------- --------------- --------------
(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
2021 and 2020. 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
several 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 2021, 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 2021, being US$529.5 million (2020: US$576.1 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using
projected cash flows from operations and by monitoring the maturity
of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments.
US$ thousands
--------------------------------- ---------------------------------------- ---------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- ---------
As at 31 December 2021
Interest-bearing loans (note 19) 56,370 412,236 75,973 1,761,672 2,306,251
Trade and other payables 122,794 - - - 122,794
Note payable (note 22) 107,918 - - - 107,918
Lease liabilities (note 24) 4,681 4,905 661 580 10,827
Derivative financial instruments
- liabilities 3,885 - - - 3,885
--------------------------------- ------- --------- --------- --------- ---------
US$ thousands
--------------------------------- ---------------------------------------- ---------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- ---------
As at 31 December 2020
Interest-bearing loans (note 19) 56,370 430,620 75,973 1,799,658 2,362,621
Trade and other payables 106,467 - - - 106,467
Note payable (note 22) 64,425 - - - 64,425
Lease liabilities (note 24) 5,048 5,933 907 857 12,745
Derivative financial instruments - - - - -
- liabilities
--------------------------------- ------- --------- --------- --------- ---------
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 2021
Inflows 48,602 - - - 48,602
Outflows (51,588) - - - (51,588)
----------------------- -------- --------- --------- --------- --------
Net (2,986) - - - (2,986)
----------------------- -------- --------- --------- --------- --------
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
----------------------- -------- --------- --------- --------- --------
The above liquidity tables include expected inflows and outflows
from currency option contracts which the Group expects to be
exercised during 2022 as at 31 December 2021 and during 2021 as at
31 December 2020, 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 2021 and 2020 consisted of only cash and cash
equivalents.
[1] Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
metals prices hedging.
[2] Earnings before interest, taxes, depreciation and
amortisation (EBITDA) 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.
[3] Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
metals prices hedging.
[4] Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
metals prices hedging.
[5] Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
[6] 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.
[7] Unproductive costs primarily include unabsorbed production
costs such as fixed production cost (labour cost and depreciation)
incurred in Minera San Julián due to a shortfall in electricity and
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.
[8] Cost inflation of 9.55% (including the effect of the Mexican
peso revaluation) had an adverse effect of US$102.2 million (the
sum of i and ii).
[9] Cash and other liquid funds are disclosed in note 30(c) to
the consolidated financial statements.
[10] Cash and other liquid funds are disclosed in note 30(c) to
the consolidated financial statements.
[11] Net debt is calculated as debt at 31 December 2021 less
Cash and other liquid funds at 31 December 2021 divided by the
EBITDA generated in the last 12 months.
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