TIDMFRES
RNS Number : 1269S
Fresnillo PLC
07 March 2023
Fresnillo plc
Financial results for the year ended 31 December 2022
Fresnillo plc today announced its financial results for the full
year ended 31 December 2022.
Octavio Alvídrez, CEO said:
"Fresnillo delivered a resilient operating performance in 2022,
with our people rising to meet a number of external challenges and
deliver on our production guidance. Our financial results were
impacted by industry pressures included volatile precious metal
prices and higher cost inflation, while our workforce continued to
feel the impact of the pandemic and caused delays to our
development programme, and more specific to Mexico, the labour
reform which limited the use of contractors requiring us to train
new employees. Despite these, gold and silver production was in
line with guidance and we have made solid progress on our strategy,
both maximising the potential of our current mines, while also
continuing to explore on our considerable growth pipeline. Our new
Juanicipio mine is now being commissioned and we expect to achieve
grid connection of the new pyrites plant phase II in the second
quarter. We achieved much in 2022, and I would like to thank all my
colleagues for their diligence. We are announcing a final dividend
for 2022 of 13.3 US cents per share to shareholders, in line with
our policy. Looking ahead, we are confident in our existing
operations, and excited about our growth pipeline. We are the
largest silver producer in the world, have high quality assets, a
consistent strategy, a very strong balance sheet, a vibrant
culture, talented personnel and an experienced management team.
Fresnillo's future is bright."
Financial Highlights - 12 months to 31 December 2022
$ million unless stated 2022 2021 % change
Silver Production* (kOz) 53,740 53,095 1.2
Gold Production* (Oz) 635,926 751,203 (15.3)
Total Revenue 2,433.0 2,703.1 (10.0)
Adjusted Revenue** 2,597.2 2,847.9 (8.8)
Gross Profit 536.0 936.9 (42.8)
EBITDA 751.1 1,206.3 (37.7)
Profit Before Income Tax 248.6 611.5 (59.4)
Profit for the year 308.3 438.5 (29.7)
Basic and Diluted EPS excluding
post-tax Silverstream effects
(USD)*** 0.351 0.572 (38.6)
* Fresnillo attributable production, plus ounces registered in
production through the Silverstream Contract.
** Adjusted Revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
lead and zinc hedging.
*** The weighted average number of ordinary shares was
736,893,589 for 2022 and 2021. See note 18 in the consolidated
financial statements.
2022 Highlights
Resilient operating performance in line with guidance
-- Full year attributable silver production of 53.7 moz
(including Silverstream), in line with guidance, slightly above
FY21, with initial production from Juanicipio and increased volumes
of ore processed at Fresnillo, offset by the lower ore grade at San
Julián (DOB).
-- Full year attributable gold production of 635.9 koz, in line
with guidance, down 15.3% vs. FY21, primarily due to a lower
recovery rate as higher volumes of sulphide ore are processed and
lower ore grade at Herradura, and a decrease in the volume of ore
processed and lower ore grades at Noche Buena, Saucito and
Ciénega.
-- Full year attributable by-product lead production decreased
6.4% vs. FY21 due to a decrease in the volume of ore processed and
lower ore grade at Saucito and decreased ore grade at San Julián
(DOB), mitigated by increased ore throughput and higher ore grade
at Fresnillo and increased contribution from Juanicipio
Challenging operational and economic environment impacted
financial results
-- Adjusted revenue decreased 8.8% over 2021 primarily due to
the lower volumes of gold sold and the decrease in silver price,
mitigated by the increase in silver production and higher zinc
price.
-- Revenue decreased 10.0% year-on-year to US$2,433.0 million
due to the lower adjusted revenue combined with higher treatment
and refining charges.
-- Adjusted production costs to US$1,445.8 million, up 15.2%
over 2021 mainly due to cost inflation in US dollar, costs from the
start-up of operations at Juanicipio and increase in the use of
infrastructure contractors, maintenance, operating materials and
diesel; mitigated by lower stripping to cost at Herradura and a
decrease in volume of ore processed at Saucito, Ciénega, San Julián
(Veins).
-- Gross profit and EBITDA decreased to US$536.0 million and
US$751.1 million, a 42.8% and 37.7% decrease over 2021.
-- Exploration spend of US$165.8 million, up 27.2% in line with
our strategy to intensify exploration activities in specific
targets.
-- Profit from continuing operations of US$283.6 million, down
57.5% as a result of lower gross profit and higher exploration
expenses.
-- Profit for the year attributable to equity shareholders of
the Group of US$271.9 million, down 35.4% on 2021 mainly due to the
lower profit from continuing operations, mitigated by the US$18.8
million Silverstream revaluation gain compared to US$0.4 million
loss registered in 2021 and tax income for the period of US$67.4
million, which compared favourably to the US$156.5 million tax
expense in 2021 (See Financial Review section).
-- US$969.1 million in cash and other liquid funds(1) as of 31
December 2022 notwithstanding paying dividends of US$202.0 million
and investing US$592.1 million in capex.
-- Net debt was US$198.7 million as at 31 December 2022. This
compares to the net cash position of US$67.5 million as at 31
December 2021.
-- Final dividend of 13.3 US cents per share, amounting to
US$98.0 million. This is in addition to the interim dividend of
3.40 US cents per share amounting to US$25.1 million.
-- This brings the total dividend for the year to 16.7 US cents
per share, in line with the Group's dividend policy.
Maintaining focus on operational improvement and addressing
challenges of the labour reform
-- Intensive recruitment and training campaigns were completed,
albeit with some impacts to productivity and development during the
year, and our mines are well staffed for 2023.
-- Invested in new equipment to replace what was provided by
contractors prior to the labour reform.
-- Infrastructure projects continued to progress:
o The new pumping station was commissioned at the beginning of
the year at Fresnillo, enabling us to increase pumping capacity and
ensuring access to development and production areas.
o The works to deepen the San Carlos shaft were concluded.
However, modifications to the shaft infrastructure to improve its
functionality once in operation were approved and implemented, thus
delaying its commissioning to 2Q23.
o At Saucito, we continued with the project to deepen the
Jarillas shaft to 1,000 metres with completion expected 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 and advancing
project pipeline
-- The tie in of the Juanicipio flotation plant to the national
grid was concluded by end of 2022, with commissioning starting
immediately afterwards.
-- Due to the prioritisation of the connection at Juanicipio,
the tie in of the Pyrites plant at Fresnillo was delayed and start
up is now expected in 2Q23.
-- Land access discussions continued at Rodeo and we are now in
the process of developing a scoping study.
-- Several PFS level studies advanced as scheduled at Orisyvo,
together with additional land acquisition and a strengthened
community engagement plan. 6,000-metre drilling programme completed
during the year and we are currently preparing the geotechnical
model.
-- Expect to commence drilling at the Pilarica silver and the
Supaypacha gold-copper projects in Peru, following delays caused by
challenges with land access, and we anticipate posting resources at
Capricornio in Chile during 2023.
-- Silver resources decreased 5.0% to 2,203.9 moz primarily due
to mining depletion, higher costs and cut-off grades and a more
conservative approach to resource estimation in Fresnillo, Saucito
and Ciénega, balanced in part by positive exploration results at
the Guanajuato exploration project. Silver reserves decreased 5.6%
to 396.1 moz mainly from mining depletion and higher costs and
cut-off grades at Fresnillo and Saucito, and depletion at San
Julián (DOB), partly offset by increased reserves from exploration
at San Julián veins.
-- Gold resources remained stable at 39.1 moz. Gold reserves
increased 4.4% to 8.2 moz mostly as a result of resource model
improvements at Herradura, balanced in part by mining depletion at
Noche Buena.
Advancing and enhancing the sustainability of our operations
-- Our goal remains Zero Harm, supported by the 'I Care, We
Care' programme that focuses on leadership, accountability, safety
culture, high potential incident management, engineering systems
and lessons learnt.
-- Core safety KPIs again saw a reduction in incidents, continuing our long-term trend.
-- Continued to implement best practice governance and
engineering to manage our Tailings Storage Facilities (TSF).
Reviews of our facilities by the Independent Tailings Review Panel
have continued: TSF at Juanicipio became our first facility to
fully meet Canadian Dam Association (CDA), Mining Association of
Canada (MAC), International Commission on Large Dams (ICOLD) and
International Council on Mining and Metals (ICMM) principles from
the earliest days of its development, design and construction.
-- Initiated our Women for Women Mentorship Programme with a
first generation of mentors and mentees to foster female
talent.
-- Conducted thorough evaluations of technical and environmental
factors in Noche Buena as part of its closure plan.
2023 outlook and longer term prospects
-- Attributable silver production expected to be in the range of
57.0 to 64.0 moz (including Silverstream).
-- Attributable gold production expected to be in the range of 590 to 640 koz.
-- Capital expenditure is anticipated to be approximately US$630
million as we continue to invest in mining works and sustaining
capex, including replacing equipment from contractors, while
exploration expenses are expected to be c. US$175 million.
-- Global macroeconomic and geopolitical factors likely to continue impacting our business:
o Precious metals prices are expected to continue to be volatile
and influenced by Government policies.
o Inflationary pressures are expected to continue affecting our
costs
-- We have undertaken a full scale appraisal of costs resulting
in dozens of initiatives to reduce non-essential costs,
including:
o Optimisation of staffing plans, including rationalisation of
contractor roles, to increase productivity and improve
efficiency
o An assessment in 2023 across all mines to confirm the optimal
development rate
o At Fresnillo:
-- New pumping station commissioned which improves extraction
efficiency
-- Deepening of the San Carlos shaft leading to reduced haulage
costs
o At Saucito:
-- Modifications to mine plan resulting in improved logistics
within the mine
o At Herradura:
-- Optimisation of slopes leading to lower stripping and haulage
costs
-- Installation of duel fuel systems on trucks to reduce diesel
consumption
-- Modifications to mine plan resulting in improved logistics
within the mine
-- Our proven ability to deliver development projects, the
investments we are making into personnel and infrastructure, along
with our extensive medium-term pipeline provide a base for
considerable confidence in the long-term future of the
business.
Analyst Presentation
Fresnillo plc will be hosting a webcast presentation for
analysts and investors today at 9:00am (GMT). A link to the webcast
will be made available on Fresnillo's homepage:
www.fresnilloplc.com or can be accessed directly here
https://kvgo.com/IJLO/Fresnillo_FY22_Preliminary_Results
Questions may be submitted via the webcast.
For those unable to access the webcast, a conference line will
also be provided:
Conference Call Dial-in;
Mexico: 00 1 866 966 8830
UK-Wide: +44 (0) 33 0551 0200
UK Toll-Free: 0808 109 0700
USA Local: +1 786 697 3501
USA Toll-Free: 866 580 3963
Password: Fresnillo
For further information, please visit our website:
www.fresnilloplc.com or contact:
Fresnillo plc
London Office Tel: +44(0)20 7339 2470
Gabriela Mayor, Head of Investor
Relations
Mark Mochalski
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 eight operating mines, all of them in Mexico -
Fresnillo, Saucito, Juanicipio, Ciénega, Herradura,
Soledad-Dipolos(1) , Noche Buena and San Julián (Veins and
Disseminated Ore Body), one development project - the Pyrites Plant
at Fresnillo, which has been completed and is awaiting tie-in of
the plant to the national electricity grid, and four advanced
exploration projects - Orisyvo, Rodeo, Guanajuato and Tajitos as
well as a number of other long term exploration prospects.
Fresnillo plc has mining concessions and exploration projects in
Mexico, Peru and Chile.
Fresnillo plc has a strong and long tradition of exploring,
mining, a proven track record of mine development, reserve
replacement, and production costs in the lowest quartile of the
cost curve for silver.
Fresnillo plc's goal is to maintain the Group's position as the
world's largest primary silver company and Mexico's largest gold
producer.
(1) Operations at Soledad-Dipolos are currently suspended.
Chairman's statement
Alejandro Baillères
Steady progress in challenging times
In common with organisations across the world, this was a
challenging year for Fresnillo that saw us battle against a number
of factors that were to a large extent beyond our immediate
control, including high volatility in metals prices and
inflationary pressures, among others. While some of these
challenges were global in nature, others were more specifically
related to the mining sector in Mexico.
Against this backdrop, Fresnillo plc's operational performance
was in line with our expectations. As our Chief Executive reports
in his statement, we have made steady progress during the year.
Thanks to the support and engagement of all our stakeholders, we
are a resilient and responsible business, and we are committed to
deliver returns to shareholders while also laying foundations for
future prosperity.
Reaching our targets
Silver production was broadly stable on the previous year while
gold was down, both in line with our guidance.
We achieved US$2,597.2 million in adjusted revenue during the
year. This represented a decrease of 8.8%, primarily due to the
decrease in the volume of gold produced and lower prices for
silver. Gross profit decreased year-on-year by 42.8% to US$536.0
million, primarily driven by the decrease in the volume of gold
sold, lower silver prices, the adverse effect of cost inflation,
and the increased consumption of operating materials, maintenance
and contractors, which significantly impacted cost of sales. Cash
and other liquid funds decreased from US$1,235.3 million to
US$969.1 million as the use of funds, primarily the investment in
capital expenditure and dividend payments, was higher than the cash
generated by the mines.
We recognise that we live in uncertain times and will always
approach each challenge with an open mind, tailoring our response
to meet the circumstances we encounter - always with optimal
outcomes for our stakeholders at the forefront of our minds.
However, in one key aspect of our business we remain steadfastly
constant: we will never forsake long-term prosperity for short-term
gain. 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.
For 2022, we declared an interim dividend of 3.40 US cents per
share, with a final dividend of 13.30 US cents per share, bringing
the total for the year to 16.70 US cents per share.
Navigating global challenges...
In terms of the macro challenges that faced so many businesses
during 2022, we continued to be impacted by Covid-19 with a fourth
and then a fifth wave reaching Mexico. Although absenteeism
understandably rose for a period, the impact on our operations was
limited. Guided by our Purpose - to contribute to the wellbeing of
people through the sustainable mining of silver and gold - we
continued to protect the health and safety of our teams. We worked
with the authorities to implement strict protocols to help prevent
the spread of the virus and facilitated vaccinations for our people
and their communities. These measures are now permanent features of
our operations. At the year end, the vast majority of our workforce
had been fully vaccinated with two doses and almost half had
received their booster.
Covid-19 and commercial tensions between the US and China meant
that we also faced supply chain issues during the year, and these
affected the timely delivery of equipment and spare parts. In
addition, we saw inflation begin to impact the business, with
increases in operating materials, contractor costs and other
inputs, especially in the second half of the year.
...as well as those closer to home
Turning to the mining industry in Mexico, a number of specific
challenges have placed additional stresses on our Group in recent
times.
Firstly, the new labour legislation - which restricts our
ability to subcontract labour - continued to disrupt our
activities, although not to the same extent as in the prior year.
This legislation created great pressure on our workforce, which had
historically comprised a high percentage of contractor personnel,
and meant that we had to adjust our business model and recruit more
people into our in-house workforce, especially difficult in a hot
labour market. The recruitment initiatives which our management
teams have been implementing have borne fruit, and all our mines
are now either fully staffed or very close to it.
Secondly, we experienced significant delays in completing the
tie-ins to the national power grid for both our new mine at
Juanicipio and the new Pyrites Plant at the Fresnillo mine. Both
these development projects were expected to be operational early in
2022, bringing valuable income and jobs to local communities.
However, additional requirements and cautionary measures from the
authorities meant that Juanicipio was not able to commence
operations until the first quarter in 2023, with the start up of
operations at the Pyrites Plant now expected to follow in the
second quarter of the year.
With similar results, we have also continued to be impacted by
delays to permitting processes, which have increased in both
complexity and timescale. Our exploration teams work hard to
identify potentially profitable mines that are therefore able, in
turn, to bring prosperity to local communities, including many in
poor and remote regions, and unforeseen delays in obtaining permits
can have a negative knock-on effect.
Since 2018, we have sourced an average of over 50% of
electricity from wind power. However, we have been frustrated in
some of our attempts to play our part in mitigating climate change.
Our goal is for wind power to provide 75% of our electricity by
2030, but our ability to reach that target requires the support of
Mexico's energy policy. Furthermore, although we have now completed
our investment in the facilities to enable our Herradura haulage
fleet to run on dual fuel (diesel and LNG) engines, which will
further cut our carbon emissions, approval from the authorities to
use certain infrastructure was delayed but has now been
approved.
What these issues demonstrate is that a closer and more
proactive working relationship with the Government in Mexico and
its various departments - and their equivalents in Peru and Chile -
would bring great benefits to all parties involved. I know that we
are all striving to achieve the same things for our country: strong
growth, economic stability, high quality jobs and support for local
communities. During the coming months we will redouble our efforts
to engage with governments and other authorities in a spirit of
trust and mutual respect in order to help identify a smooth path
ahead that achieves all our diverse objectives.
Board activities
The Board met regularly throughout the year and discussed a
range of matters, including the ongoing impacts of the labour
reform, Covid-19, inflation and supply chain issues. A significant
degree of Board focus was directed towards the delays in
commissioning experienced at Juanicipio. This new mine will be an
important asset for Fresnillo in the years to come and it was very
pleasing to see the efforts of the entire Fresnillo team eventually
rewarded when the tie-in to the grid was finally approved in
December 2022.
The Board also conducted strategy discussions on the course of
the company as well as on both the Diversity Programme and the
Sustainability Strategy. In 2022 the Group successfully increased
the participation of women in the workforce, in line with our
Purpose and our values. We regard the increasing participation and
inclusion of women as the first step in our journey to making
diversity a competitive advantage. The 'Women for Women Mentoring
Programme' is now in place, and we are actively developing
leadership and support networks. One of the programme's key
outcomes will be the appointment of more women to superintendent
positions across our operations.
Turning to the Sustainability Strategy, through the HSECR
Committee the Board has continued to develop a programme and
structures for monitoring and responding to tails dams potential
risks as well as a climate-related risks and opportunities and our
TCFD obligations in particular. Although it was disappointing that
Fresnillo was excluded from the FTSE4Good Index in 2022, we remain
totally committed to decreasing carbon emissions and setting
science-based targets in the future subject to Mexican energy
policy. The steps we are taking require heavy investment and time
to yield results - but we are confident that we are heading in the
right direction and will look to return to the FTSE4Good Index as
soon as that is possible.
Following last year's Board Evaluation Review, the Board
introduced an additional working session which specifically focused
on the Company's Risk Framework - including assessment processes,
appetite and tolerance - as well as the long-term Strategic Plan
covering the years to 2037.
Board changes
There were no changes to the Board this year, with all of the
Directors being re-elected at the 2022 AGM.
Outlook
Once again, our Purpose will be the corporate and ethical
compass that directs all our actions and ensures that we contribute
to the wellbeing of all our stakeholders - shareholders and our
people as well as local communities, the environment and society at
large.
While challenges will remain and global macro issues such as
probable economic recession will continue to play a major role in
our financial performance and bring with them a degree of
uncertainty, I am confident that we will maintain the steady
progress of the last 12 months. We have managed the fallout from
the labour reform well and, although nothing is certain, Covid-19
appears finally to be in retreat across the world. Our new mine at
Juanicipio is set to make an important contribution to silver
production in the months and years ahead and we expect a number of
other exciting projects to progress through our pipeline and become
productive operations.
On behalf of the Board, I would like to place on record our
gratitude to all those who have helped shape what has ultimately
been a year of progress - our management teams, our workforce and
their communities, and the many suppliers and partners who work so
hard to support us. By continuing to work together, we will be able
to look ahead to future growth and prosperity, investing in Mexico,
Perú and Chile and their people to deliver on the huge potential of
Fresnillo and the opportunities these countries offer.
Alejandro Baillères
Chairman
Chief Executive's statement
Octavio Alvídrez
Addressing our challenges, achieving our goals
Despite challenges, our mines performed to plan in 2022.
Fresnillo has again proved to be a resilient business with the
ability to adapt in the face of volatile external factors, and our
ambitions for long-term growth remain solidly in place and
achievable.
The Fresnillo Purpose was pivotal in our response to the
challenges we faced during the year. Our relentless focus on the
wellbeing of people touches every aspect of how we operate, from
protecting the health and safety of the teams working in our mines
- and the environment - to how we engage with stakeholders and
negotiate with communities for access to land for exploration
activities.
In particular, our Purpose guided all our efforts to address the
impact of the recent labour reform and the Covid-19 pandemic. Our
approach towards our people sits at the heart of what makes
Fresnillo a responsible business and an employer of choice - and we
worked hard to give our teams the help and support they and their
communities needed.
In 2022, this support again included the provision of
vaccinations and healthcare, educational opportunities and jobs, as
well as comprehensive induction programmes and attractive benefits
packages to help employees make the transition from being
contractors to being part of our unionised workforce, in line with
new requirements necessitated by the labour reform.
Production highlights and price review
Silver production was broadly comparable to last year, while
gold production reduced. Both of these results were as expected and
in line with our guidance.
Total silver production was stable at 53.7 moz (53.1 moz in
2021), with increased contribution from Juanicipio and continued
improvement in volumes processed at Fresnillo partially offset by
the lower ore throughput and expected grade variability at San
Julián Disseminated Ore Body (DOB).
As anticipated, gold production decreased by 15.3% to 635.9 koz.
This was primarily due to a decrease in the recovery rate and lower
ore grade at Herradura, the expected decrease in production at
Noche Buena as the mine approaches the end of its life, and a lower
volume of ore processed and ore grade at Saucito and Ciénega.
Attributable by-product lead production decreased 6.4% to 52,950
tonnes primarily due to a decrease in volume of ore processed and
lower ore grade at Saucito and decreased ore grade at San Julián
(DOB). Attributable by-product zinc production remained broadly
stable at 99,153 tonnes.
The gradual reduction in precious metals prices that
characterised the second half of 2021 was briefly reversed in the
first quarter of the year, as geopolitical tensions in Russia and
Ukraine temporarily drove up prices. However, with central banks
continuing to increase interest rates to control inflation and the
US dollar becoming stronger, precious metals prices again embarked
on a downward trend for most of the rest of the year, as investors
sought returns elsewhere. Over the course of 2022, the average
realised silver price was US$21.7 per ounce, a decrease of 12.76%,
while the gold price remained flat at US$1,799.3 per ounce. The
average price for zinc increased by 15.9%, whereas that for lead
decreased by 3.7%.
Barring more uncertainty impacting confidence, I expect precious
metals prices have now established a realistic floor and the coming
months are likely to see prices react positively.
Consistent and resilient strategy
Since our IPO in 2008, Fresnillo has remained true to the same
strategy. Based on four strategic pillars and now proven across
more than a decade, this strategy has steered our Company through
good times as well as more challenging conditions. Below, I report
on how we have performed against each of the pillars.
Maximising the potential of existing operations
The availability of a trained, experienced workforce continued
to challenge our production ambitions during 2022, although our
efforts to mitigate its impact have proved increasingly
successful.
Following the new labour reform introduced by the Mexican
Government in 2021, which restricted our ability to use
contractors, we have worked hard to recruit, train and retain
employees in our in-house workforce. We have achieved almost all of
the goals we identified at the start of the year and all our
operations now benefit from a stable workforce. By the year end, we
had completed the staffing process in the Fresnillo District, San
Julián and Ciénega. Overall, our mines are now being worked by
close to a full complement of unionised teams.
The restrictions on outsourcing also continued to reduce the
availability of equipment, some of which had historically been
provided by contractors. In response, we rapidly invested in
significant amounts of new equipment, but unfortunately some of
these orders have been affected by global supply chain bottlenecks
and the subsequent delays in deliveries have impacted
production.
Ultimately, and despite the short-term challenges it has
brought, the switch from relying on contractors and their equipment
to working with our own people and resources will be positive. It
will give us greater stability and control over our operations and
help us to build a more aligned culture and resilient business.
Although we will always be vigilant and carefully monitor any
outbreaks, no matter how minor, the Covid-19 pandemic appears to be
increasingly under control. We experienced a fourth and then a
fifth wave during 2022, but supported by our Purpose we were able
to keep absenteeism and illness to a minimum and production at our
mines was largely unaffected. We continue to follow strict
protocols, as advised by the authorities, and have encouraged and
supported vaccination of our workforce and communities,
collaborating with health authorities to make vaccines available in
the remote locations where we operate. Close to 81% of our
workforce have been fully vaccinated with two doses, and 41% have
received the booster. We will continue to implement testing
campaigns across our operations, development and exploration
projects and corporate offices.
Alongside our work to manage Covid-19 and the fallout from the
labour reform, our investments in infrastructure have also helped
us to maximise the potential of our existing operations. For
example, we are set to enjoy the benefits of the deepened San
Carlos shaft at our Fresnillo mine. When complete, the shaft will
provide easier and faster access to more than half of the mine's
reserves - reducing haulage times and costs, and resulting in lower
emissions due to fewer trucks working in the mine. The new pumping
station commissioned at the beginning of the year at Fresnillo
enabled us to increase pumping capacity and ensured access to
development and production areas.
Delivering growth through development projects
Everybody associated with Fresnillo was delighted to see our new
mine at Juanicipio finally tied-in to the national power grid in
December 2022. Although the mine was completed on target in late
2021, we experienced delays due to additional testing requirements
by the Centro Nacional de Control de Energía (CENACE). Safety is of
course always our top priority, and while the delays were
unexpected, we fully support the prudent approach taken by the
electricity regulator.
Commissioning began immediately after the tie-in and Juanicipio
will make a material contribution to our performance from 2023
onwards. We expect silver and gold production to reach annual
averages of 11.7 moz and 43.5 koz respectively. During 2022, ore
from Juanicipio continued to be processed through the Fresnillo and
Saucito flotation plants.
At phase II of the Pyrites Plant at Fresnillo, we experienced
delays in the tie-in to the grid. As we prioritised the process at
Juanicipio, the timetable for the tie-in of the Pyrites Plant was
extended by a few weeks. We currently expect operations to commence
in the second quarter of 2023 and anticipate that the plant will
produce an average of 3.5 moz of silver and 14 koz of gold per
year, including production from Saucito.
The potential project to install vibrating screens to improve
milling capacity at the Fresnillo mine remains under consideration.
The new flotation circuit is already improving the recovery of lead
and zinc from the lower levels at Fresnillo, and we will
re-evaluate the merits of the vibrating screens once production at
the mine reaches at least 8,000 tons per day.
Extending the growth pipeline
As the successful development of Juanicipio demonstrates, our
exploration teams have a track record of strengthening our asset
portfolio across the price cycles of precious metals. While the
exploration budget for 2022 was reduced marginally from the
previous year in response to compressed margins and the labour
reform challenges, we nevertheless continued to make good progress
on advanced and priority early-stage projects in Mexico, Peru and
Chile. In total, we drilled 955,798 metres across the portfolio
with our teams of geologists carrying out an intensive field-based
programme at several promising prospective sites.
At Rodeo, we continued negotiations to acquire the right to
access land, and we hope to conclude these by mid year. We
successfully negotiated rights for 2.8 million cubic meters of
water and are now developing a scoping study. Located in the state
of Durango, this gold-silver project has inferred resources
amounting to 1.3 moz of gold and 13.8 moz of silver and potential
for further growth.
The gold project at Orisyvo continued advancing and several
activities are progressing even faster than at Rodeo, with some
development works expected to start in 2023. We concluded
negotiations regarding land access for the construction of the
tailings dam, water dam and industrial area in 2022, and will
initially fund developments via risk capex as the pre-feasibility
and feasibility stages continue. We carried out a 2,049-metre
drilling programme during the year and are currently preparing the
geotechnical model. We also continued exploration activities at the
silver-gold Guanajuato project, drilling a total of over 66,000
metres with encouraging results.
In Peru, we are looking forward to drilling commencing at the
Pilarica silver and the Supaypacha gold-copper projects, following
delays caused by challenges with land access, and we anticipate
posting resources at Capricornio in Chile during 2023.
Silver resources decreased 5.0% to 2,203.9 moz primarily due to
mining depletion, higher costs and cut-off grades and a more
conservative approach to resource estimation in Fresnillo, Saucito
and Ciénega, balanced in part by positive exploration results at
the Guanajuato exploration project; gold resources remained stable
at 39.1 moz. Silver reserves decreased 5.6% to 396.1 moz mainly
from mining depletion and higher costs and cut-off grades at
Fresnillo and Saucito, and depletion at San Julián (DOB), partly
offset by increased reserves from exploration at San Julián veins.
Gold reserves increased 4.4% to 8.2 moz mostly as a result of
resource model improvements at Herradura, balanced in part by
mining depletion at Noche Buena.
For 2023, the exploration budget will remain broadly in line
with that for 2022.
Advancing and enhancing the sustainability of our operations
Our goal is zero harm. This ambition is supported by the
comprehensive 'I Care, We Care' programme that focuses on
leadership, accountability, safety culture, high potential incident
management, engineering systems and lessons learnt. In 2022 we
focused our efforts on implementing critical controls and visible
leadership practices across our mining operations.
Our core safety KPIs saw a slight reduction in incidents,
continuing our long-term trend. The Total Recordable frequency rate
improved from 10.4 injuries per one million hours worked to 10.3,
with the Lost Time Injury rate falling from 5.8 to 5.4. However,
none of this success can overshadow the sadness and regret that we
experienced at the loss of a colleague's life early in 2022, which
was a sober reminder of the work ahead. We must never relax or
become complacent as we pursue zero harm.
During the last 12 months, we continued to implement best
practice governance and engineering to manage our Tailings Storage
Facilities (TSF). Our aim is to ensure that our standards match
global best practice, and we are now moving from implementing
short-term solutions that meet immediate needs to long-term answers
that match the life of our mines and will protect the future safety
of local communities. As this approach embraces the building of new
and larger TSFs where appropriate, we recognise the requirement for
higher capex although this will stabilise over time.
Reviews of our facilities by the Independent Tailings Review
Panel have continued, with virtual and in-person site visits
providing recommendations that guide our implementation plans. We
are developing our Emergency and Response Plans and maturing our
Tailings Management System, which includes a dashboard to monitor
key indicators for every level of involvement and responsibility.
Among the year's key achievements, the TSF at Juanicipio became our
first facility to fully meet Canadian Dam Association (CDA), Mining
Association of Canada (MAC), International Commission on Large Dams
(ICOLD) and International Council on Mining and Metals (ICMM)
principles from the earliest days of its development, design and
construction.
We continue to mature our capabilities to disclose
climate-related financial information, joining the TCFD Consortium
in Mexico during the year in order to share best practices and
participating in the Financial Reporting Council's (FRC) Lab
Net-zero Disclosures research project. We launched a Climate
Modelling project with the University of Arizona to generate future
climate projections under different scenarios, and this will
support the development of our adaptation strategy.
However, it was disappointing that two of our key climate change
mitigation initiatives failed to make the progress we had expected.
The project to install dual fuel engines that run on both Liquid
Natural Gas and diesel was completed as planned but start-up was
delayed as we awaited official permits from the Government, which
have since been received. Furthermore, our long-term goal for 75%
of our electricity consumption to be provided by wind power by 2030
may be impacted by the Government's energy reforms. We are working
with the authorities to gain clarity around this issue, which we
believe can make important contributions to Mexico's drive to
combat climate change.
Our commitment to our Purpose underlines the importance of
deeply integrating responsible business practices into our business
model while understanding the factors that affect stakeholders at
all critical decision-making levels. It was disappointing to be
omitted from the FTSE4Good Index after being included in it for
four successive years. However, we acknowledge that we need to move
faster and go further in setting targets to reduce emissions at a
time when expectations around this topic are increasing. We are
redoubling our efforts to identify and assess decarbonisation
pathways, whether through new technologies or energy
efficiencies.
Looking ahead
Global macroeconomic and geopolitical factors that all
businesses faced during 2022 are likely to continue impacting our
prospects. Despite the best efforts of our partners, the commercial
tensions between the US and China and post-Covid issues will
constrict supply chains and lead to delivery delays for mining
equipment and spare parts. If major economies enter or remain in
recession, then we expect to see a negative impact on demand.
Meanwhile, although a slowdown in rising interest rates may lift
prices for precious metals, inflationary pressures will continue
affecting our costs.
Challenges that are more native to Mexico - such as delays in
permits and the granting of concessions as well as political issues
including energy reform - will also impact the business, and here I
echo the thoughts of our Chairman. We will work with regional and
national government departments, and with all relevant local
authorities, to ease any bureaucratic delays that may prevent us
making further good progress. Our Purpose is to support the
wellbeing of people - and that includes bringing prosperity and
valuable jobs to local communities, as well as paying our taxes to
support the ambitions of the Government.
Our business is rich with potential. We have stabilised
operations at our existing mines and look forward to the Juanicipio
mine increasing our total production in 2023 and beyond. At the
same time, we expect to increase resources at several projects that
are moving along our pipeline. Indeed, we anticipate some of these
projects to make their way into our operational portfolio in the
next two to three years.
Finally, I wish to thank the Board and our people for their
continued support during 2022. I believe we have worked together
well and made good progress in what have at times been challenging
circumstances. While some of those challenges will continue, we are
committed to working through them and to fulfil the potential of
our portfolio and pipeline. Our prospects are bright.
- Octavio Alvídrez
Chief Executive Officer
Financial review
The consolidated Financial Statements of Fresnillo plc are
prepared in accordance with UK-adopted international accounting
standards. 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 2022 figures
compared to 2021, 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 2022, the Group's financial performance reflected the
operational challenges faced at the mines, alongside the
inflationary pressures across the cost base.
In particular, Adjusted revenue(1) decreased 8.8% over 2021
primarily due to the decrease in volumes of gold sold and the lower
silver price, while revenue decreased 10.0% year-on-year to
US$2,433.0 million due to the lower adjusted revenue combined with
higher treatment and refining charges.
Adjusted production costs (2) increased 15.2% over 2021,
primarily driven by 8.4% cost inflation, the additional costs from
the start-up of operations at Juanicipio and the increase in the
use of infrastructure contractors, higher personnel costs following
the internalisation process, increased maintenance and an increase
in consumption of operating materials and diesel due to longer
haulage distances at some of our mines.
As a result, gross profit and EBITDA(3) decreased to US$536.0
million and US$751.1 million, a 42.8% and 37.7% decrease over 2021
respectively.
We maintained our strong financial position, with US$969.1
million in cash and other liquid funds(1) as of 31 December 2022
notwithstanding paying dividends of US$202.0 million in accordance
with our policy, investing US$592.1 million in capex and spending
US$165.8 million on exploration expenses.
Income Statement
Amount
2022 US$ 2021 US$ Change Change
million million US$ million %
------------------------------------------ --------- --------- ------------ ------
Adjusted revenue(1) 2,597.2 2,847.9 (250.7) (8.8)
------------------------------------------ --------- --------- ------------ ------
Total revenue 2,433.0 2,703.1 (270.1) (10.0)
------------------------------------------ --------- --------- ------------ ------
Cost of sales (1,897.0) (1,766.2) (130.8) 7.4
------------------------------------------ --------- --------- ------------ ------
Gross profit 536.0 936.9 (400.9) (42.8)
------------------------------------------ --------- --------- ------------ ------
Exploration expenses 165.8 130.3 35.5 27.2
------------------------------------------ --------- --------- ------------ ------
Operating profit 283.6 666.7 (383.1) (57.5)
------------------------------------------ --------- --------- ------------ ------
EBITDA(3) 751.1 1,206.3 (455.2) (37.7)
------------------------------------------ --------- --------- ------------ ------
Income tax expense including special
mining rights (59.7) 173.1 (232.8) N/A
------------------------------------------ --------- --------- ------------ ------
Profit for the period 308.3 438.5 (130.2) (29.7)
------------------------------------------ --------- --------- ------------ ------
Profit for the period, excluding post-tax
Silverstream effects 295.1 438.8 (143.7) (32.7)
------------------------------------------ --------- --------- ------------ ------
Basic and diluted earnings per share
(US$/share) (4) 0.369 0.572 (0.203) (35.5)
------------------------------------------ --------- --------- ------------ ------
Basic and diluted earnings per share,
excluding post-tax Silverstream effects
(US$/share) 0.351 0.572 0.221 (38.6)
------------------------------------------ --------- --------- ------------ ------
1 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
metals prices hedging.
2 Adjusted production costs are calculated as cost of sales less
depreciation, profit sharing, hedging, change in inventories and
unproductive costs. The Company considers this a useful additional
measure to help understand underlying factors driving production
costs in terms of the different stages involved in the mining and
plant processes, including efficiencies and inefficiencies as the
case may be and other factors outside the Company's control such as
cost inflation or changes in accounting criteria.
3 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.
4 The weighted average number of Ordinary Shares was 736,893,589
for 2022 and 2021. See Note 18 to the consolidated financial
statements.
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 decreased 12.6% from US$24.9
per ounce in 2021 to US$21.7 per ounce in 2022, while the average
realised gold price remained flat year-on-year at US$1,799.3 per
ounce in 2022 (up 0.2%). The average realised lead by-product price
decreased 3.8% to US$0.96 per pound, while the zinc by-product
price increased 9.5% over the previous year to US$1.52 per
pound.
MX$/US$ exchange rate
The Mexican peso/US dollar spot exchange rate at 31 December
2022 was $19.36 per US dollar, compared to the exchange rate at 31
December 2021 of $20.58 per US dollar. The 5.9% spot revaluation
had a favourable effect on taxes and mining rights.
The average spot Mexican peso/US dollar exchange rate remained
relatively unchanged at $20.13 per US dollar in 2022 ($20.28 per US
dollar in 2021), thus having an immaterial effect on the Group's
costs denominated in Mexican pesos (approximately 45% of total
costs) when converted to US dollars.
Cost inflation
In 2022, cost inflation was 8.4%. The main components of our
cost inflation basket are listed below:
Labour
Unionised workers received on average a 6.8% increase in wages
in Mexican pesos, while non-unionised employees received on average
a 5.5% increase in wages in Mexican pesos; when converted to US
dollars, this resulted in a weighted average labour inflation of
7.9%.
Energy
Electricity
The weighted average cost of electricity in US dollars increased
5.9% from US$8.74 cents per kW in 2021 to US$9.26 cents per kW in
2022, 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 4.0%
to 91.4 US cents per litre in 2022, compared to 87.9 US cents per
litre in 2021. This was primarily due to the increase in global oil
prices and the gradual lifting of the Mexican Government's fuel tax
relief that subsidised the cost of diesel and gasoline in
Mexico.
Operating materials
Year over
year change
in unit
price %
-------------------------------------------- ------------
Sodium cyanide 48.9
-------------------------------------------- ------------
Explosives 39.6
-------------------------------------------- ------------
Other reagents 20.8
-------------------------------------------- ------------
Steel balls for milling 16.9
-------------------------------------------- ------------
Lubricants 16.1
-------------------------------------------- ------------
Steel for drilling 13.2
-------------------------------------------- ------------
Tyres 2.2
-------------------------------------------- ------------
Weighted average of all operating materials 19.8
-------------------------------------------- ------------
Unit prices of our key operating materials increased by
significantly in US dollar terms reflecting global inflationary
pressures and supply disruptions resulting from the zero-Covid
policy in China and the invasion of Ukraine by Russia. As a result,
the weighted average unit prices of all operating materials
increased year-on-year by 19.8%.
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 2022, 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 4.9% in US dollars, after considering the revaluation
of the Mexican peso vs. US dollar.
Maintenance
Unit prices of spare parts for maintenance increased by 3.4% on
average in US dollar terms.
Other costs
Other cost components include freight which increased by an
estimated 13.6% in US dollars, while insurance costs increased by
8.8% in US dollars mainly due to higher market premiums. The
remaining cost inflation components experienced average deflation
of 12.0% in US dollars over 2021.
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
2022 US$ 2021 US$ Amount Change
million million US$ million %
------------------------------- -------- -------- ------------ ------
Adjusted revenue(1) 2,597.2 2,847.9 (250.7) (8.8)
------------------------------- -------- -------- ------------ ------
Metals prices hedging (3.8) (1.4) (2.4) 179.0
------------------------------- -------- -------- ------------ ------
Treatment and refining charges (160.5) (143.5) (17.0) 11.8
------------------------------- -------- -------- ------------ ------
Total revenue 2,433.0 2,703.1 (270.1) (10.0)
------------------------------- -------- -------- ------------ ------
Adjusted revenue decreased by US$250.7 million primarily driven
by the lower volumes of gold sold and the lower silver price.
Treatment and refining charges increased 11.8% as explained below.
As a result, total revenue decreased to US$2,433.0 million, a 10.0%
decrease against 2021.
Adjusted revenue(1) by metal
2022 2021
------------------ ------------------
Volume Price Total
Variance Variance net change
US$ million % US$ million % US$ million US$ million US$ million %
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ ------
Gold 1,114.2 42.9 1,305.2 45.8 (194.0) 2.9 (191.1) (14.6)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ ------
Silver 1,089.2 41.9 1,163.9 40.9 77.8 (152.5) (74.7) (6.4)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ ------
Lead 106.6 4.1 117.4 4.1 (6.5) (4.4) (10.8) (9.2)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ ------
Zinc 287.2 11.1 261.3 9.2 1.0 24.9 25.9 9.9
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ ------
Total adjusted revenue 2,597.2 100.0 2,847.9 100.0 (121.7) (129.0) (250.7) (8.8)
----------------------- ----------- ----- ----------- ----- ------------ ------------ ------------ ------
The decrease in volumes of gold sold were primarily due to the
lower recovery rate and decrease in ore grade at Herradura and
lower volumes of ore processed and ore grades at Noche Buena,
Saucito and Ciénega. This adverse effect was mitigated by the
higher volumes of silver sold driven by the increase in silver
production from Juanicipio and the higher ore throughput at
Fresnillo (for further detail, see Review of Operations). The total
sale volume effect (lower gold and lead mitigated by higher silver
and zinc volumes sold), resulted in an adverse impact on adjusted
revenues of US$121.7 million, representing 48.5% of the total
variation. The remaining 51.5% of the decrease in adjusted revenues
was primarily explained by the lower silver price, miigated by the
higher price of zinc.
Changes in the contribution by metal were the result of the
relative changes in metals prices and volumes produced. The
contribution of gold to total adjusted revenues decreased from
45.8% in 2021 to 42.9% in 2022, while that for silver increased
from 40.9% in 2021 to 41.9% in 2022.
Adjusted revenue by mine
Despite the 17.6% decrease in Adjusted revenues at Herradura, it
continued to be the greatest contributor to the Group's Adjusted
revenue, representing 24.4% (2021: 27.1%). Saucito's contribution
reduced to 18.7% in 2022 (2021: 21.0%) primarily driven by the
decrease in volumes of all metals sold and the lower silver price.
Fresnillo remained the third most important contributor to Adjusted
revenue, with its share increasing to 18.3% (2021: 16.1%). San
Julián's contribution to the Group's Adjusted revenue decreased to
16.0% in 2022 (2021: 18.8%) primarily due to the lower volumes of
silver and gold sold. Ciénega's contribution to the Group's
Adjusted revenue decreased to 6.9% (2021: 8.0%) as a result of the
lower volumes of all metals sold. Noche Buena's contribution to
Adjusted revenue decreased slightly to 5.5% in 2022 (6.0% in
2021).
The contribution by metal and by mine to Adjusted revenues is
expected to change further in the future, as new projects are
incorporated into the Group's operations and as precious metals
prices fluctuate.
2022 2021
------------------- -------------------
(US$ million) % (US$ million) %
------------------------ ------------- ---- ------------- ----
Herradura 634.9 24.4 770.8 27.1
------------------------ ------------- ---- ------------- ----
Saucito 485.9 18.7 597.7 21.0
------------------------ ------------- ---- ------------- ----
Fresnillo 475.8 18.3 459.5 16.1
------------------------ ------------- ---- ------------- ----
Juanicipio 259.0 10.0 85.2 3.0
------------------------ ------------- ---- ------------- ----
San Julián (DOB) 242.5 9.3 344.5 12.1
------------------------ ------------- ---- ------------- ----
Ciénega 180.3 6.9 227.8 8.0
------------------------ ------------- ---- ------------- ----
San Julián (Veins) 175.1 6.7 192.5 6.7
------------------------ ------------- ---- ------------- ----
Noche Buena 143.8 5.5 169.9 6.0
------------------------ ------------- ---- ------------- ----
Total 2,597.2 100 2,847.9 100
------------------------ ------------- ---- ------------- ----
1 Adjusted revenue is revenue as disclosed in the income
statement adjusted to exclude treatment and refining charges and
metals prices hedging.
Volumes of metal sold
% contribution % contribution
of each of each
2022 mine 2021 mine % change
--------------------------- ------- -------------- ------- -------------- --------
Silver (koz)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 12,222 24.4 11,082 23.7 10.3
--------------------------- ------- -------------- ------- -------------- --------
Saucito 10,620 21.2 11,446 24.4 (7.2)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 8,697 17.3 2,932 6.3 196.6
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 8,117 16.2 10,813 23.1 (24.9)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (Veins) 4,502 9.0 4,077 8.7 10.4
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 4,344 8.7 4,907 10.5 (11.5)
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Saucito 854 1.7 601 1.3 42.1
--------------------------- ------- -------------- ------- -------------- --------
Herradura 777 1.5 932 2.0 (16.6)
--------------------------- ------- -------------- ------- -------------- --------
Noche Buena 9 0.0 14 0.0 (35.7)
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Fresnillo 0 0.0 3 0.0 (100.0)
--------------------------- ------- -------------- ------- -------------- --------
Total silver (koz) 50,142 46,807 7.1
--------------------------- ------- -------------- ------- -------------- --------
Gold (oz)
--------------------------- ------- -------------- ------- -------------- --------
Herradura 351,156 56.7 416,310 57.2 (15.7)
--------------------------- ------- -------------- ------- -------------- --------
Noche Buena 71,921 11.6 94,237 13.0 (23.7)
--------------------------- ------- -------------- ------- -------------- --------
Saucito 65,689 10.6 81,304 11.2 (19.2)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (Veins) 42,516 6.9 50,794 7.0 (16.3)
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 35,275 5.7 45,352 6.2 (22.2)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 28,277 4.6 28,834 4.0 (1.9)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 20,268 3.3 5,908 0.8 243.1
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Saucito 2,585 0.4 2,260 0.3 14.4
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 1,546 0.2 2,130 0.3 (27.4)
--------------------------- ------- -------------- ------- -------------- --------
Pyrites Plant at Fresnillo 4 0.0 8 0.0 (50.0)
--------------------------- ------- -------------- ------- -------------- --------
Total gold (oz) 619,237 727,137 (14.8)
--------------------------- ------- -------------- ------- -------------- --------
Lead (t)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 19,667 39.2 17,353 32.6 13.3
--------------------------- ------- -------------- ------- -------------- --------
Saucito 16,114 32.1 22,878 43.0 (29.6)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 6,677 13.3 8,270 15.5 (19.3)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 4,487 8.9 1,067 2.0 320.5
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 3,267 6.5 3,626 6.8 (9.9)
--------------------------- ------- -------------- ------- -------------- --------
Total lead (t) 50,212 53,194 (5.6)
--------------------------- ------- -------------- ------- -------------- --------
Zinc (t)
--------------------------- ------- -------------- ------- -------------- --------
Fresnillo 35,890 41.9 29,532 34.6% 21.5
--------------------------- ------- -------------- ------- -------------- --------
Saucito 23,604 27.6 31,911 37.4% (26.0)
--------------------------- ------- -------------- ------- -------------- --------
San Julián (DOB) 14,771 17.3 16,928 19.9% (12.7)
--------------------------- ------- -------------- ------- -------------- --------
Juanicipio 6,758 7.9 1,511 1.8% 347.3
--------------------------- ------- -------------- ------- -------------- --------
Ciénega 4,564 5.3 5,393 6.3% (15.4)
--------------------------- ------- -------------- ------- -------------- --------
Total zinc (t) 85,587 85,275 0.4
--------------------------- ------- -------------- ------- -------------- --------
Hedging
In 2021 we entered into a hedging programme executed for a total
volume of 1,800,000 ounces of silver which had its last monthly
settlement in February 2022. This transaction was structured as a
collar with an average floor price of US$22.0 per ounce, and an
average price ceiling of US$50.3 per ounce.
Additionally, a portion of our by-product zinc production was
hedged from May 2021 through April 2022 using a similar financial
structure to that of silver.
The table below illustrates the expired structures and their
results as of 31 December 2022. There are no outstanding hedging
positions as of 31 December 2022.
As of 31 December As of 31 December
2022 2022
----------------- -----------------
Silver(1) Zinc(2)
-------------------------- ----------------- -----------------
Weighted floor 22 US$/oz 2,491 US$/tonne
-------------------------- ----------------- -----------------
Weighted cap 50.33 US$/oz 3,134 US$/tonne
-------------------------- ----------------- -----------------
Expired volume 300,000 oz 5,960 tonnes
-------------------------- ----------------- -----------------
Profit/Loss (US$ dollars) 0 (3,770,174)
-------------------------- ----------------- -----------------
1 Monthly settlements until February 2022.
2 Monthly settlements until April 2022.
Treatment and refining charges
Treatment and refining charges(3) are reviewed annually using
international benchmarks. Treatment charges per tonne of lead and
zinc concentrate increased in dollar terms by 3.4% and 54.4%
respectively, while silver refining charges remained flat over the
year. The increase in treatment charges per tonne of lead and zinc,
combined with the relatively stable volumes of lead and zinc
concentrates shipped from our mines to Met-Mex, resulted in an
11.8% increase in treatment and refining charges set out in the
income statement in absolute terms when compared to 2021.
Cost of sales
2022 US$ 2021 US$ Amount Change
Concept million million US$ million %
--------------------------------------------- -------- -------- ------------ -------
Adjusted production costs(4) 1,445.8 1,255.1 190.7 15.2
--------------------------------------------- -------- -------- ------------ -------
Depreciation 500.6 528.2 (27.6) (5.2)
--------------------------------------------- -------- -------- ------------ -------
Profit sharing 9.6 15.6 (5.9) (38.2)
--------------------------------------------- -------- -------- ------------ -------
Hedging 0.0 (3.8) 3.8 (100.0)
--------------------------------------------- -------- -------- ------------ -------
Change in work in progress (61.6) (29.6) (32.0) 107.8
--------------------------------------------- -------- -------- ------------ -------
Unproductive costs including inventory
reversal and unabsorbed production costs(5) 2.6 0.8 1.8 >100
--------------------------------------------- -------- -------- ------------ -------
Cost of sales 1,897.0 1,766.2 130.8 7.4
--------------------------------------------- -------- -------- ------------ -------
Cost of sales increased 7.4% to US$1,897.0 million in 2022. The
US$130.8 million increase is due to a combination of the following
factors:
-- An increase in Adjusted production costs (+US$190.7 million).
This was primarily due to: i) cost inflation in US dollars
(US$101.2 million); ii) costs from the start-up of operations at
Juanicipio (US$85.7 million); iii) increase in the use of
infrastructure contractors, maintenance (electric and mechanical),
operating materials and diesel (US$79.4 million); iv) higher volume
of ore processed at Fresnillo and San Julián DOB (US$21.7 million);
and v) others (US$3.7 million). These adverse effects were
mitigated by lower stripping to cost at Herradura (-US$53.5
million); and a decrease in volume of ore processed at Saucito,
Ciénega, San Julián (Veins) (-US$47.5 million).
-- The variation in Mexican peso/US dollar hedging (+US$3.8
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 2022, there was no further outstanding position.
-- The variation in unproductive costs, which had an
unfavourable effect of (+US$1.8 million). In 2022, US$2.6 million
was registered as unproductive costs related to fixed production
cost incurred in activities at the Juanicipio flotation plant; in
2021 US$18.0 million was registered in relation to fixed costs
(labour cost and depreciation) incurred in Minera San Julián due to
a shortfall in electricity.
These negative effects were mitigated by:
-- Depreciation (-US$27.6 million). This is mainly due to lower
depreciation at San Julián and Ciénega due to a lower depletion
factor and at Noche Buena as it approaches the end of its mine life
and the majority of the assets have been fully depreciated.
-- The variation in the change in work in progress had a
favourable effect of US$32.0 million versus 2021. This resulted
mainly from the increase in inventories of ore at Juanicipio and
gold content on the leaching pads at Herradura whereas in 2021 the
positive effect was in relation to the reassessment of recoverable
gold inventories at the leaching pads in 2021 together with the
increase in the cost per ounce in the last quarter of the year at
Herradura.
-- Profit sharing (-US$5.9 million) mainly due to lower profits.
3 Treatment and refining charges include the cost of treatment
and refining as well as the margin charged by the refiner.
4 Adjusted production costs 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.
5 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.
6 Cost inflation would have been 7.9% excluding the effect of
the Mexican peso revaluation (0.8%).
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 2022 2021 % change
------------------------ -------------------- ----- ---- --------
Fresnillo US$/tonne milled 91.5 84.7 8.0
------------------------ -------------------- ----- ---- --------
Saucito US$/tonne milled 119.5 89.8 33.0
------------------------ -------------------- ----- ---- --------
San Julián (Veins) US$/tonne milled 91.0 81.5 11.7
------------------------ -------------------- ----- ---- --------
San Julián (DOB) US$/tonne milled 44.8 39.2 14.2
------------------------ -------------------- ----- ---- --------
Ciénega US$/tonne milled 116.3 86.1 35.1
------------------------ -------------------- ----- ---- --------
Herradura US$/tonne deposited 19.7 21.7 (9.2)
------------------------ -------------------- ----- ---- --------
Herradura US$/tonne hauled 4.7 3.5 34.3
------------------------ -------------------- ----- ---- --------
Noche Buena US$/tonne deposited 13.9 11.0 27.0
------------------------ -------------------- ----- ---- --------
Noche Buena US$/tonne hauled 3.9 3.8 2.6
------------------------ -------------------- ----- ---- --------
Fresnillo: Cost per tonne increased 8.0% to US$91.5 in 2022,
primarily driven by cost inflation and an increase in maintenance
costs, mitigated by the higher volume of ore milled.
Saucito: Cost per tonne increased 33.0% to US$119.5, mainly
driven by an increase in the use of infrastructure contractors and
maintenance, cost inflation, and a decrease in the volume of ore
milled.
San Julián veins: Cost per tonne increased 11.7% to US$91.0,
primarily driven by cost inflation and an increase in the use of
maintenance and consumption of spare parts for repairs.
San Julián (DOB): Cost per tonne increased 14.2% to US$44.8,
mainly driven by cost inflation and increased use of
maintenance.
Ciénega: Cost per tonne increased 35.1% to US$116.3, driven by
an increase in the use of infrastructure contractors and
maintenance, cost inflation and a lower volume of ore milled.
Herradura: Cost per tonne of ore deposited decreased -9.2%
primarily as a result of a decrease in stripping charged to cost.
This was partly offset by an increase in consumption of operating
materials, diesel and maintenance due to longer haulage distances
and cost inflation.
Noche Buena: Cost per tonne increased to US$13.9 in 2022,
primarily driven by a higher stripping charged to cost, cost
inflation and a lower volume of ore processed.
Cash cost per ounce, calculated as total cash cost (cost of
sales plus treatment and refining charges, less depreciation) less
revenue from by-products divided by the silver or gold ounces sold,
when compared to the corresponding metal price, is an indicator of
the ability of the mine to generate competitive profit margins.
Cash cost per ounce 2022 2021 % change
------------------------ --------------------- ------- ------- --------
Fresnillo US$ per silver ounce 5.7 5.4 4.7
------------------------ --------------------- ------- ------- --------
Saucito US$ per silver ounce 4.5 (0.8) N/A
------------------------ --------------------- ------- ------- --------
San Julián (Veins) US$ per silver ounce 7.1 1.8 >100
------------------------ --------------------- ------- ------- --------
San Julián (DOB) US$ per silver ounce 6.9 4.8 42.6
------------------------ --------------------- ------- ------- --------
Ciénega US$ per gold ounce 518.5 (523.1) N/A
------------------------ --------------------- ------- ------- --------
Herradura US$ per gold ounce 1,155.5 900.4 28.3
------------------------ --------------------- ------- ------- --------
Noche Buena US$ per gold ounce 1,269.9 1,029.5 23.3
------------------------ --------------------- ------- ------- --------
Fresnillo: Cash cost per silver ounce increased to US$5.7 (2021:
US$5.4) mainly due to the increase in cost per tonne and the higher
treatment and refining charges, partially offset by lower mining
rights and higher lead and zinc by-product credits.
Saucito: Cash cost per silver ounce increased to US$4.5 per
ounce (2021: -US$0.8 per silver ounce) mainly as a result of a
higher cost per tonne and lower gold, lead and zinc by-product
credits per silver ounce. This was mitigated by a higher silver ore
grade and lower mining rights.
San Julián veins: Cash cost per ounce of silver increased to
US$7.1 per ounce mainly due to the lower gold by-product credits
per silver ounce and a higher cost per tonne, mitigated by a higher
silver ore grade.
San Julián DOB: Cash cost increased to US$6.9 per ounce of
silver driven by a lower silver ore grade, the increase in cost per
tonne and higher treatment and refining charges, mitigated by
higher zinc and lead by-product credits per silver ounce and lower
mining rights.
Ciénega: The increase in cash cost per gold ounce from -US$523.1
in 2021 to US$518.5 in 2022 was primarily due to a higher cost per
tonne, lower gold ore grade and higher treatment and refining
charges. This was mitigated by higher silver, zinc and lead
by-product credits per gold ounce and lower mining rights and
profit sharing.
Herradura: Cash cost per gold ounce increased to US$1,155.5 per
ounce of gold mainly due to the lower gold ore grade, mitigated by
the lower cost per tonne.
Noche Buena: Cash cost per gold ounce increased by 23.4% to
US$1,269.9, mainly due to a higher cost per tonne.
In addition to the traditional cash cost, the Group is reporting
All-In Sustaining Cost (AISC) in accordance with the guidelines
issued by the World Gold Council.
This cost metric is calculated as traditional cash cost plus
on-site general, corporate and administrative costs, community
costs related to current operations, capitalised stripping and
underground mine development, sustaining capital expenditures and
remediation expenses.
We consider AISC to be a reasonable indicator of a mine's
ability to generate free cash flow when compared with the
corresponding metal price. We also believe it is a means to monitor
not only current production costs, but also sustaining costs as it
includes mine development costs incurred to prepare the mine for
future production, as well as sustaining capex.
All-in sustaining cost (AISC)
AISC 2022 2021 % change
------------------------ --------------------- -------- -------- --------
Fresnillo US$ per silver ounce 16.27 16.34 (0.4)
------------------------ --------------------- -------- -------- --------
Saucito US$ per silver ounce 16.8 9.53 76.6
------------------------ --------------------- -------- -------- --------
San Julián (Veins) US$ per silver ounce 21.84 14.04 55.6
------------------------ --------------------- -------- -------- --------
San Julián (DOB) US$ per silver ounce 8.79 6.34 38.6
------------------------ --------------------- -------- -------- --------
Ciénega US$ per gold ounce 2,011.14 656.11 >100
------------------------ --------------------- -------- -------- --------
Herradura US$ per gold ounce 1,527.36 1,100.20 38.8
------------------------ --------------------- -------- -------- --------
Noche Buena US$ per gold ounce 1,359.63 1,122.21 21.2
------------------------ --------------------- -------- -------- --------
Fresnillo: All-in sustaining cost remained stable at US$16.3,
explained by the increase in cash cost.
Saucito: All-in sustaining cost increased 76.8% to US$16.8 per
ounce due to the increase in cash cost and higher capitalised mine
development per ounce.
San Julián veins: All in sustaining cost increased to US$21.8
per ounce due to the increase in cash cost and higher sustaining
capex per ounce.
San Julián DOB: The 38.6% increase in all in sustaining cost was
mainly driven by the increase in cash cost and a higher sustaining
capex.
Ciénega: The US$1,355.0 per ounce increase in all in sustaining
cost was primarily driven by the higher cash cost and a higher
sustaining capex per ounce of gold.
Herradura: All-in sustaining cost increased to US$1,527.4 per
ounce mainly due to increased capitalised stripping and a higher
cash cost.
Noche Buena: The US$237.4 per ounce increase to US$1,359.6 per
ounce in all-in sustaining cost was the result of higher cash
cost.
Gross profit
Gross profit, excluding hedging gains and losses, is a key
financial indicator of profitability at each business unit and the
Fresnillo Group as a whole.
Total gross profit, including hedging gains and losses,
decreased by 42.8% from US$936.9 million in 2021 to US$536.0
million in 2022.
The US$400.9 million decrease in gross profit was mainly due to:
i) the lower silver and lead price (-US$156.8 million); ii) the
lower ore grade and recovery rate at Herradura as higher volumes of
sulphide ore are processed (-US$135.7 million); iii) cost inflation
in US dollars (-$101.2 million); iv) the net effect of the lower
ore grades, excluding Herradura (-US$88.6 million); v) the increase
in the use of infrastructure contractors, maintenance (electric and
mechanical), operating materials and diesel (-US$79.4 million); and
vi) the lower volumes processed at Saucito, Ciénega, San Julián
Veins and Noche Buena (-US$75.3 million).These negative effects
were mitigated by: i) the new Juanicipio operation (US$98.8
million); ii) lower stripping to cost at Herradura (US$53.5
million); iii) others (US$37.6 million); iv) higher zinc and gold
prices (US$27.8 million); and v) the higher volume processed at
Fresnillo and San Julián DOB (US$18.5 million).
On a per mine basis, Herradura remained the largest contributor
to the Group's consolidated gross profit despite recording a 47.7%
decrease in its gross profit. Juanicipio became the second largest
contributor, reflecting the increased volumes of development
material and ore processed at the Fresnillo and Saucito mines.
Fresnillo became the third largest contributor to consolidated
gross profit, increasing its percentage share from 14.9% in 2021 to
19.6% in 2022, while the lower production and higher costs at
Saucito decreased its participation from 22.7% in 2021 to 18.4% in
2022. Similarly, the lower gross profit generated at San Julián
decreased its share of the Group's total gross profit to 11.3% in
2022. The decrease in production volumes, together with the cost
pressures, affected profitability at Ciénega and Noche Buena.
Notwithstanding, both mines generated an EBITDA of US$19.2 million
and US$34.5 million respectively, and cash flow from operating
activities of US$25.4 million and US$40.8 million.
Contribution by mine to consolidated gross profit, excluding
hedging gains and losses
2022 2021 Change
------------------ ----------------- --------------------
US$ million % US$ million % US$ million %
-------------------------- ----------- ----- ----------- ---- ----------- -------
Herradura 147.1 27.5 281.1 30.6 (134.0) (47.7)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Juanicipio 132.8 24.8 53.5 5.8 79.3 148.2
-------------------------- ----------- ----- ----------- ---- ----------- -------
Fresnillo 104.8 19.6 136.7 14.9 (31.9) (23.3)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Saucito 98.5 18.4 208.7 22.7 (110.2) (52.8)
-------------------------- ----------- ----- ----------- ---- ----------- -------
San Julián 60.3 11.3 173.1 18.8 (112.8) (65.2)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Noche Buena 3.3 0.6 23.5 2.6 (20.2) (86.0)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Ciénega (11.3) (2.1) 42.5 4.6 (53.8) (126.6)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Total for operating mines 535.5 100 919.1 100 (383.6) (41.7)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Metal hedging and other
subsidiaries 0.5 17.8 (17.3) (97.2)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Total Fresnillo plc 536.0 936.9 (400.9) (42.8)
-------------------------- ----------- ----- ----------- ---- ----------- -------
Administrative and corporate expenses
Administrative and corporate expenses decreased 9.1% from
US$103.5 million in 2021 to US$94.1 million in 2022, due to the
decrease in fees paid to advisors (legal, labour, tax and
technical).
Exploration expenses
Exploration Exploration Capitalised Capitalised
expenses expenses expenses expenses
Business unit/project (US$ million) 2022 2021 2022 2021
------------------------------------ ----------- ----------- ----------- -----------
Ciénega 7.2 6.4 - -
------------------------------------ ----------- ----------- ----------- -----------
Fresnillo 12.3 6.1 - -
------------------------------------ ----------- ----------- ----------- -----------
Herradura 4.8 6.1 - -
------------------------------------ ----------- ----------- ----------- -----------
Saucito 12.0 15.0 - -
------------------------------------ ----------- ----------- ----------- -----------
Noche Buena 1.4 1.0 - -
------------------------------------ ----------- ----------- ----------- -----------
San Julián 24.6 22.6 - -
------------------------------------ ----------- ----------- ----------- -----------
Orisyvo 4.0 5.2 - 0.1
------------------------------------ ----------- ----------- ----------- -----------
Centauro Deep 0.5 0.2 - -
------------------------------------ ----------- ----------- ----------- -----------
Guanajuato 11.6 8.1 1.0 1.0
------------------------------------ ----------- ----------- ----------- -----------
Juanicipio 11.7 0.0 - 8.1
------------------------------------ ----------- ----------- ----------- -----------
Valles (Herradura) 5.8 5.1 - -
------------------------------------ ----------- ----------- ----------- -----------
Others 69.9 54.5 0.8 0.6
------------------------------------ ----------- ----------- ----------- -----------
Total 165.8 130.3 1.8 9.8
------------------------------------ ----------- ----------- ----------- -----------
As expected, exploration expenses increased by 27.2% from
US$130.3 million in 2021 to US$165.8 million in 2022, 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$35.5 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$1.8 million was
capitalised, mainly relating to exploration expenses at the
Guanajuato project. As a result, risk capital invested in
exploration totalled US$167.6 million in 2022, compared to US$140.1
million in 2021 (of which US$9.8 million was capitalised). This
represents a year-on-year increase of 19.6%.
EBITDA
2022 US$ 2021 US$ Amount Change
million million US$ million %
---------------------------------------------------- -------- -------- ------------ ------
Profit from continuing operations before
income tax 248.6 611.5 (363.0) (59.4)
---------------------------------------------------- -------- -------- ------------ ------
* Finance income (26.5) (8.9) (17.6) >100
---------------------------------------------------- -------- -------- ------------ ------
+ Finance costs 81.6 61.8 19.8 32.0
---------------------------------------------------- -------- -------- ------------ ------
* Revaluation effects of Silverstream contract (18.8) 0.4 (19.2) N/A
---------------------------------------------------- -------- -------- ------------ ------
* Foreign exchange loss, net (1.4) 1.9 (3.3) N/A
---------------------------------------------------- -------- -------- ------------ ------
* Other operating income (71.9) (11.9) (60.0) >100
---------------------------------------------------- -------- -------- ------------ ------
+ Other operating expense 38.8 23.3 15.5 66.5
---------------------------------------------------- -------- -------- ------------ ------
+ Depreciation 500.6 528.2 (27.6) (5.2)
---------------------------------------------------- -------- -------- ------------ ------
EBITDA 751.1 1,206.3 (455.2) (37.7)
---------------------------------------------------- -------- -------- ------------ ------
EBITDA margin 30.9 44.6 - -
---------------------------------------------------- -------- -------- ------------ ------
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 2022, EBITDA decreased
37.7% to US$751.1 million primarily driven by the lower gross
profit and higher exploration expenses. As a result, EBITDA margin
expressed as a percentage of revenue decreased, from 44.6% in 2021
to 30.9% in 2022.
Other operating income and expense
In 2022, a net gain of US$33.1 million was recognised in the
income statement mainly as a result of the recognition of the
layback agreement granting Orla the right to expand the Camino Rojo
pit onto Fresnillo's mining concession.
Silverstream effects
The Silverstream contract is accounted for as a derivative
financial instrument carried at fair value. The net Silverstream
effect recorded in the 2022 income statement was a gain of US$18.8
million (US$40.0 million amortisation profit and US$21.2 million
revaluation loss), which compared positively to the net loss of
US$0.4 million registered in 2021. The negative revaluation was
mainly driven by the increase in the SOFR reference rate and the
lower forward silver price curve, partly mitigated by an increase
in the production plan following an update to the Sabinas silver
reserves and a higher inflation forecast.
Since the IPO, cumulative cash received has been US$769.7
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 14 and 30 to the consolidated financial
statements.
Net finance costs
Net finance costs of US$55.2 million compared favourably to the
US$52.9 million recorded in 2021. The US$2.3 million increase was
primarily due to the voluntary amendments applied from 2014 to 2021
to the income tax and mining right's treatment of the stripping
costs and the deduction of exploration expenses. In addition, the
2022 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 10 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 2022, the Group capitalised US$8.5 million of
borrowing costs (2021: US$8.4 million).
Foreign exchange
A foreign exchange gain of US$1.4 million was recorded in 2022,
which compared favourably to the US$1.9 million loss in 2021.
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). As of December 31st 2022, the total EUR
outstanding net forward position was EUR 12.72 million with
maturity dates through December 2023. Volumes that expired during
the second half of 2022 were EUR 20.47 million with a weighted
average strike of 1.0758 USD/EUR, which have generated a marginal
result in the period of -US$2.4 million.
Taxation
Tax income for the period was US$67.4 million, which compared
favourably to the US$156.5 million tax expense in 2021. The
effective tax rate, excluding the special mining rights, was
-27.1%, which was below the 30% statutory tax rate. The reasons for
the unusual positive effective tax rate was the significant
permanent differences between the tax and the accounting treatment
related mainly to: i) the effect of the 5.9% revaluation of the
Mexican peso/US dollar spot exchange rate in 2022 versus the 2.0%
devaluation in 2021 on the tax value of assets and liabilities
(-US$72.9 million); ii) the inflation rate (Mexican Consumer Price
Index), which impacted the inflationary uplift of the tax base for
assets and liabilities (-US$62.7 million); and ii) the benefit from
the lower border zone tax which applied to Herradura and Noche
Buena operations (-US$17.5 million) vs. the US$74.6 million which
resulted from applying the 30% statutory tax rate.
The reason for the lower effective tax rate in 2021 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).
Mining rights in 2022 were US$7.7 million compared to US$16.6
million charged in 2021. The effective tax rate, including mining
rights, was -24.0% in 2022.
Profit for the period
Profit for the period decreased from US$438.5 million in 2021 to
US$308.3 million in 2022, a 29.7% decrease year-on-year as a result
of the factors described above.
Excluding the effects of the Silverstream contract, profit for
the year decreased from US$438.8 million to US$295.1 million, a
32.7% decrease.
Profit due to non-controlling interests was US$36.4 million
reflecting the profit generated at Juanicipio, where MAG Silver
owns 44% of the outstanding shares. Accordingly, profit
attributable to equity shareholders of the Group was US$271.9
million.
Cash flow
A summary of the key items from the cash flow statement is set
out below:
2022 US$ 2021 US$ Amount Change
million million US$ million %
----------------------------------------------- -------- -------- ------------ ------
Cash generated by operations before changes
in working capital 743.1 1,208.3 (465.2) (38.5)
----------------------------------------------- -------- -------- ------------ ------
(Increase)/decrease in working capital (66.1) 58.0 (124.1) N/A
----------------------------------------------- -------- -------- ------------ ------
Taxes and employee profit sharing paid (174.7) (371.1) 196.4 52.9
----------------------------------------------- -------- -------- ------------ ------
Net cash from operating activities 502.2 895.1 (393.0) (43.9)
----------------------------------------------- -------- -------- ------------ ------
Silverstream contract 33.4 49.0 (15.6) (31.9)
----------------------------------------------- -------- -------- ------------ ------
Capital contributions and loans by minority
shareholders 18.3 73.6 (55.4) (75.2)
----------------------------------------------- -------- -------- ------------ ------
Proceeds from the layback agreement 15.0 25.0 (10.0) (40.0)
----------------------------------------------- -------- -------- ------------ ------
Purchase of property, plant and equipment (592.1) (592.1) 0.0 0.0
----------------------------------------------- -------- -------- ------------ ------
Dividends paid to shareholders of the
Company (202.0) (245.6) 43.6 17.8
----------------------------------------------- -------- -------- ------------ ------
Financial expenses and foreign exchange
effects (36.5) (39.9) 3.4 8.5
----------------------------------------------- -------- -------- ------------ ------
Net (decrease)/increase in cash during
the period after foreign exchange differences (266.2) 164.9 (431.1) N/A
----------------------------------------------- -------- -------- ------------ ------
Cash and other liquid funds at 31 December
(1) 969.1 1,235.3 (266.2) (21.6)
----------------------------------------------- -------- -------- ------------ ------
1 Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
Cash generated by operations before changes in working capital
decreased by 38.5% to US$743.1 million, mainly as a result of the
lower profits generated in the year. Working capital increased
US$66.1 million, mainly due to: i) an increase in ore inventories
of US$99.6 million; and ii) a US$14.1 million increase in
prepayments mainly to contractors. This was partly offset by: i) a
US$51.8 million increase in accounts payable (mainly suppliers);
and ii) a US$7.2 million decrease in accounts receivable.
Taxes and employee profit sharing paid decreased 52.9% over 2021
to US$174.7 million mainly due to: i) a decrease in provisional tax
payments resulting from the lower profit factor determined to
calculate the estimated taxable income and lower revenue; and ii)
lower final income tax paid in 2022, net of provisional taxes paid,
corresponding to the 2021 tax fiscal year.
As a result of the above factors, net cash from operating
activities decreased 43.9% from US$895.1 million in 2021 to
US$502.2 million in 2022.
The Group received other sources of cash, including: i) the
proceeds of the Silverstream contract of US$33.4 million; ii) the
capital contribution and note payable by minority shareholders in
subsidiaries of US$18.3 million; and iii) proceeds from the layback
agreement granting Orla the right to expand the Camino Rojo oxide
pit onto Fresnillo's mineral concession of US$15.0 million (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$592.1 million. Capital expenditures for 2022 are described
below:
Purchase of property, plant and equipment
2022 US$
million
---------------------------- -------- --------------------------------------
Saucito mine Mine development, purchase of
in-mine equipment, deepening of
the Jarillas shaft and tailings
118.0 dam.
---------------------------- -------- --------------------------------------
Fresnillo mine Mine development and mining works,
purchase of in-mine equipment,
deepening of the San Carlos shaft
106.6 and tailings dam.
---------------------------- -------- --------------------------------------
Herradura mine Stripping, construction of leaching
pad, sustaining capex, infrastructure
for fuel station, carbon in column
105.3 project.
---------------------------- -------- --------------------------------------
San Julián Veins and Mining works, tailings dam and
DOB 64.5 purchase of in-mine equipment.
---------------------------- -------- --------------------------------------
Ciénega mine Mining works, purchase of in-mine
equipment and construction of
47.0 tailings dam.
---------------------------- -------- --------------------------------------
Noche Buena mine 0.4 Sustaining capex.
---------------------------- -------- --------------------------------------
Mine development and construction
Juanicipio mine 149.6 of beneficiation plant.
---------------------------- -------- --------------------------------------
Other 0.7 Minera Bermejal.
---------------------------- -------- --------------------------------------
Total purchase of property,
plant and equipment 592.1
---------------------------- -------- --------------------------------------
ii) Dividends paid to shareholders of the Group in 2022 totalled
US$202.0 million, a 17.8% decrease over 2021, in line with our
dividend policy which includes a consideration of profits generated
in the year. The 2022 payment included the 2021 final dividend of
24.0 cents per share paid in May 2022, totalling US$176.9 million,
and the 2022 interim dividend paid in September of US$25.1
million.
iii) Financial expenses and foreign exchange effects of US$36.5
million, an increase of 8.5% vs. 2021, mainly as a result of the
interests paid in relation to the voluntary amendment to the income
tax and mining right's treatment of the stripping costs and the
deduction of exploration expenses. In addition, financial expenses
in 2022 and 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.
The sources and uses of funds described above resulted in a
decrease in net cash of US$266.2 million (net decrease in cash and
other liquid assets), which combined with the US$1,235.3 million
balance at the beginning of the year resulted in cash and other
liquid assets of US$969.1 million at the end of December 2022.
Balance sheet
Fresnillo plc continued to maintain a solid financial position
during the period with cash and other liquid funds(1) of US$969.1
million as of 31 December 2022, despite decreasing 21.6% versus 31
December 2021. Taking into account the cash and other liquid funds
of US$969.1 million and the US$1,167.8 million outstanding Senior
Notes, Fresnillo plc's net debt was US$198.7 million as of 31
December 2022. This compares to the net cash position of US$67.5
million as of 31 December 2021. Considering these variations, the
balance sheet at 31 December 2022 remains strong, with a net
debt/EBITDA ratio of 0.26x(2) .
Inventories increased 20.4% to US$587.4 million mainly due to
the increase of inventories of gold content to be processed at the
dynamic leaching plants at Herradura, the built up of inventory at
Juanicipio, and increased inventories of operating materials and
spare parts.
Trade and other receivables increased 0.8% to US$404.5 million
as a result of an increase in receivables to Met-Mex and other
receivables arising from the layback agreement with Orla; partly
offset by a decrease in value added tax receivables.
The change in the value of the Silverstream derivative from
US$529.5 million at the end of 2021 to US$511.5 million as of 31
December 2022 reflects proceeds of US$36.8 million corresponding to
2022 (US$28.5 million in cash and US$8.3 million in accounts
receivables) and the Silverstream effect in the income statement of
US$18.8 million.
The net book value of property, plant and equipment was
US$2,862.6 million at 31 December 2022, representing a 2.3%
increase over 31 December 2021. The US$63.5 million increase was
mainly due to capitalised development works, construction of
leaching pads and the purchase of in-mine equipment.
The Group's total equity was US$3,916.9 million as of 31
December 2021, a 3.0% increase over 31 December 2021. This was
mainly explained by the increase in retained earnings, reflecting
the 2022 profit.
1 Cash and other liquid funds are disclosed in note 30(c) to the
consolidated financial statements.
2 Net debt is calculated as debt at 31 December 2022 less Cash
and other liquid funds at 31 December 2022 divided by the EBITDA
generated in the last 12 months.
Dividends
Based on the Group's 2022 performance, the Directors have
recommended a final dividend of 13.3 US cents per Ordinary Share,
which will be paid on 26 May 2023 to shareholders on the register
on 28 April 2023. 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 3.4 US cents per share
amounting to US$25.1 million. This final dividend is lower than the
previous year due to the decrease in profits in 2022, and remains
in line with the Group's dividend policy.
As previously disclosed in previous reports, 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. 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.
-- The global post-pandemic aftershock, geopolitical
instability, digital transformation and climate change have
catapulted risk management to centre stage. Many of us have learned
new and vital lessons about effective risk management over the last
year, so that preparing for disruption is one of our highest
priorities.
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 to 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 to deliver the value
creation objectives defined in our business model.
Timely risk monitoring is at the core of our management
practices, helping to deliver on our strategy and our commitments
to stakeholders, including colleagues, communities, and the planet.
We are focused on conducting our business responsibly, safely, and
legally, while making risk-informed decisions when responding to
opportunities or threats that present themselves. With the
leadership of the Board and the Executive Committee and guided by
our risk appetite on a risk-by-risk basis, we understand,
prioritise, and manage our risks. Our risk management framework,
which we further enhanced during the year, enables us to undertake
this exercise with structure and rigour.
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 post-pandemic impact of COVID-19 and the Russia-Ukraine war
pose unprecedented challenges for everybody, worldwide. We have
implemented risk techniques and processes to identify new risks
associated with these events, while also analysing their 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.
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.
A complete view of our risk universe starts with the analysis of
our business, the external environment in which we operate, the
regulatory landscape and our internal operations. This includes the
impacts on and of our strategy, initiatives, governance, and
processes. In addition to our established risk management
activities, our executives - including operations and project
managers, the controllership group, Health, Safety, Security,
Environment and Community Relations (HSECR) team 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, geopolitical instability and
climate change posed new challenges for the risk department and the
Executive Committee. Due to the uncertainty around these topics,
all strategic decisions by the Company were analysed using risk
scenarios modelling their potential impacts. In addition, we
continue to use five key processes to better manage our risks: (i)
a monthly procedure for evaluating and mitigating principal risks;
(ii) a process to identify and analyse the impact of the pandemic
and geopolitical instability 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 for each business
unit to monitor mitigation actions and risk level; (iv) impact and
probability scenarios which were conducted for risks related to the
supply chain of critical inputs for operations, cost increases and
projects, and (v) collaboration with government, the mining sector,
health experts and communities to ensure that we followed best
practice.
It is important to recognise that the Board, the Audit
Committee, the HSECRC Committee and the Executive Committee
periodically use working sessions to review the evolution of
principal and emerging risks, as well as the appetite for each
risk. At these working sessions, the views and suggestions of Board
members are heard, and adjustments are made according to the
factors influencing each risk. In addition, the HSECRC Committee
now meets before every Board meeting to review the effectiveness of
our risk management and internal control systems, with particular
attention paid to safety, climate, tailings dams and environmental
risks.
To better assess and control our risks, as well as to analyse
the relationship between them, Fresnillo plc has seven risk
categories, which have the following risk rating:
Risk
Rating
Very High Medium Low Very
high low
RISK GOVERNANCE BASIS
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.
as well as leaders of corporate and
support areas.
--------------------------------------- ---------------------
2(nd) . - Corporate level oversight Overseeing risks and the effectiveness Management and
functions involve the risk management of controls, advising on capability Baluarte Minero*
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
--------------------------------------- ---------------------
*(A virtual structure that coordinates and provides technical
and administrative services to the mining, metallurgical and
chemical businesses of Peñoles)
-- Understanding and mitigating our risks is critical to our
future success. We are therefore committed to an effective, robust
system of risk identification, and an effective response to such
risks, in order to support the achievement of our objectives.
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 our 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 have been adapted to pay attention to emerging risks. At
each location, Health, Safety, Security, Environment and Community
Relations risk-responsible staff monitor local information and
analyses related to these 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 our strategic
plan. Furthermore, we consider emerging risks in the context of
longer-term impact and shorter-term risk velocity. We have
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 five-year period.
As the pandemic is now becoming more endemic with varying
pathways to recovery across different countries, the longer-term
impact of how we adapt to this new normal is still uncertain. This
includes the productivity of a hybrid workforce environment, the
impacts of tighter labour markets, and supply chain disruptions.
The recent disruptions caused by the post-pandemic demand surge and
the inability of supply chains to keep up, have highlighted the
complexity and vulnerability of the global supply chain
infrastructure.
Supply chain disruptions can also be caused by a number of
principal risk events - as described in our principal risks and
uncertainties section - such as natural disasters and geopolitical
tensions. Inflationary pressures may also affect the
competitiveness of suppliers, leading to supplier market
contraction further impacting supply chain resilience. Severe
supply chain disruptions have the potential to impact not only
inbound and outbound flows of our feedstock, services and products,
but also the delivery of our sustaining and growth projects.
In the longer term, as the world transitions to a low-carbon
future and consumer demand for sustainable goods flows through the
value chain, the supply-demand dynamics of commodities are expected
to shift. This will lead to increasing demand for sources and
solutions with low CO2 emissions, and a lower social and
environmental footprint, in addition to a growing demand for
transparent, sustainable and circular value chains.
To strengthen our emerging risks management framework, during
2022 we carried out activities to: (i) identify new emerging risks
in light of COVID-19, geopolitical instability and climate change;
(ii) re-assess the emerging risks identified in 2021; (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 Board,
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 stress and
drought" and "Transition to a low-carbon future" and identified
three new emerging risks: "Geopolitical instability", "Replacement
on depletion of ore reserves" and "Future of the workforce".
Relevant emerging risks are discussed below:
Emerging Risk Description Impact Mitigations Actions Time Scale
1 Geopolitical instability Current global Disruptions in the Inventory control in < 1
(Linked to Global geopolitical supply chain of the mining units to Years
macroeconomic development tensions, such as the critical plan purchases in a
Principal Risk) war between Russia operating inputs such timely manner and
and Ukraine, the as cyanide, ammonia, maintain
problems spare parts, equipment sufficient stock to
between Taiwan and parts, etc. and rising guarantee operations.
China, as well as U.S. prices of key inputs Strict control of
and Chinese tariff such as steel, diesel, operating
matters, may affect cement, etc. costs to avoid
our operations and increases.
projects.
========================= ======================== ======================== ======================== ==========
2 Water stress and drought Lack of sufficient Water is critical to Strict control and > 5
(Linked to Climate water resources to mining processes. monitoring Years
Change Principal Risk) meet the water Without of water concessions
consumption this natural resource, are maintained and
demand in a region we cannot extract gold actions
and strong heatwaves and silver. are envisaged to
in desert regions. ensure
water for the
following
years.
========================= ======================== ======================== ======================== ==========
3 Transition to a The transition to a Key areas of We have introduced new > 5
low-carbon low-carbon future is uncertainty sources of information Years
future a "transition risk" include future climate to help us identify
(Linked to Climate according to the TCFD change regulation and the impacts of climate
Change Principal Risk) and presents policies, the change. These include
challenges development industry reports and
and opportunities for of low-carbon guides, energy
our portfolio in the technology scenarios,
short and long term. solutions and the pace and Global Circulation
It is considered of transition across Models (GCM) under
within our value chains, in several
the climate change particular the Representative
principal risk decarbonisation Concentration
mitigation pathways across the Pathways (RCP). We
strategy. However, steel sector. have
we consider this risk used a well-below
to be an emerging risk two-degree
due to the speed of decarbonisation
potential new climate pathway
change regulations to evaluate the
and the obstacles that flexibility
government may place of the energy
in the way of strategy.
supporting
investment in clean
energy.
========================= ======================== ======================== ======================== ==========
4 Technological disruption Failure to identify, Obsolete or outdated Technological advances > 5
(Linked to Cybersecurity invest in, or adopt mining processes in the mining industry Years
Principal Risk) technological and impact are constantly
operational productivity and monitored
productivity efficiency (particularly in mine
innovations levels and impact operations) in order
that significantly sales to adopt the most
replace or optimise and profits. appropriate
a process through new best practices and new
systems with technology.
recognisably
superior attributes.
========================= ======================== ======================== ======================== ==========
5 Pandemics and infectious The regional or global Another virus such Mine and project < 1
diseases spread of a new as SARS-CoV-2 personnel Years
disease coronavirus are continuously
(bacteria or virus) (COVID-19) may affect monitored
against which most the health of by the medical team
people do not have employees and receive medical
immunity. and stop the Company's examinations to ensure
activities. that there are no
outbreaks
of contagion.
========================= ======================== ======================== ======================== ==========
6 Increasing societal We continued to see The increasing focus We always respond to < 3
and investor expectations increasing on ESG has the investor and societal Years
expectations potential requests and comments
and focus on social to shape the future and promote action
equality, fairness of the mining plans
and sustainability. industry, to meet their
Financial institutions supply cost expectations.
are also placing structures, A number of
greater demand for global initiatives
emphasis on commodities demonstrate our
environmental, and capital markets. progress.
social and governance While this presents We were also placed
(ESG) considerations us with opportunities first in the Corporate
when making investment for portfolio and Integrity Ranking in
decisions. product Mexico.
differentiation, it
has the potential to
impact how we operate.
========================= ======================== ======================== ======================== ==========
7 Replacement on depletion The inability to By not replacing ore There are very > 5
of ore reserves replace reserves with new interesting Years
(Linked to Exploration depletion of ore discoveries, exploration projects
Principal Risk) reserves the company's such as Orisyvo,
in key business units production Rodeo,
through exploration, capacity and Guanajuato that could
projects or eventually replace the mineral
acquisitions. its operation would reserves that are
be diminished. currently
being exploited. There
are also several
exploration
camps that explore new
territories every day
in search of minerals
in Mexico, Peru and
Chile.
========================= ======================== ======================== ======================== ==========
8 Future of the workforce Create a culture of A lack of talent in The Human Resources < 3
(Linked to Human talent under an some areas of the department has a Years
Resources inclusive, mines highly
Principal Risk) empowered and and projects such as specialised training
confident planning, maintenance, programme in the
culture and career safety, etc. is strategic
path to generate a expected. areas of the
future-ready There is a need to operation.
workforce. develop personnel to It also has a training
fill these positions programme for
in the future. developing
Otherwise, personnel focused on
we will not have filling vacant
people positions.
prepared to operate
the mines.
========================= ======================== ======================== ======================== ==========
-- From risk management to strategic resilience.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties outlined in this section
reflect the risks that could materially affect (negatively or
positively) our performance, future prospects or reputation.
As part of our bottom-up process, each business unit head
determined the level of perceived risk for their individual unit's
risk universe, and each risk owner assessed its impact and
likelihood. Executive management then reviewed and challenged each
level of perceived risk and compared it to the risk universe of
Fresnillo plc (130) as a whole. The results of this exercise were
used as an additional input to define and assess the Company's
principal risks. We conducted the same risk analysis on our
advanced projects, detailing the specific risks faced by each
project based on its unique characteristics and conditions.
We maintain a risk register through a robust assessment of the
potential principal risks that could affect the Company's
performance. This register is used to ensure that principal risks
are identified in a thorough and systematic way and that agreed
definitions of risk are used.
We are aware that not all risks can be completely eliminated and
that exposure to some risks is necessary in the pursuit of our
corporate objectives. Mining is, by its nature, a long-term
business and as part of the principal risks update and evaluation
process we identify new or emerging risks which could impact the
Company's sustainability in the long run, even if there is limited
information available at the time of the evaluation.
Due to the effects caused by the global post-pandemic impacts of
COVID-19, the Russia-Ukraine war, climate change, the effects of
global inflation and the security and environmental situations near
our operations, it was necessary to reassess the principal risks
and reorder their materiality, likelihood and impact, as well as
reassess related mitigation actions. During the first half of 2022,
the risk team focused its efforts on identifying and assessing
emerging risks, business continuity risks, safety risks and climate
change risks against TCFD criteria. In the second half, we
conducted assessments of fraud, compliance, human resources,
security and internal control risks, and Board members also took
part in a working session to review principal and emerging risks as
well as risk appetite.
Overview of the 2022 risk assessment exercise:
Analysis Survey Trend comparison and Added value
Risk identified and review
assessed
60 business workshops 360 colleagues in 15 International 300 colleagues were
(Director and manager operations, institutions trained
level) exploration, projects, specialising in risks in basic risk topics.
corporate and support were consulted.
40 interviews with areas of Peñoles, 250 colleagues were
risk owners including Internal Audit. 20 risks scenarios were trained
(managers and leaders built by mining industry in advanced risk topics.
at units) risk specialists.
100 colleagues were
25 workshops delivered 25 gold and silver mines trained
to the SSMARC team. (15 in Mexico and 10 in climate change risks
elsewhere in the world) and TCFD framework.
20 critical processes were consulted regarding
mapped and reviewed their risks. 4 specific topics were
for impact and likelihood. included in the risk
8 consulting firms' analysis: geopolitical
8 risk analysis risk reports (including instability, fraud and
methodologies Marsh, Zurich, EY, PWC, compliance, climate change
used: ISO-31000, KPMG and Deloitte) were and TCFD risks.
ISO-22301, Markov, reviewed.
Bow-Tie, FMEA Model, 3 new topics were included
Monte Carlo, RACI 6 risk experts were in the risk analysis:
Matrix, Cause and interviewed. security, water scarcity
consequence analysis. and management, physical
resilience to natural
disasters and extreme
weather.
---------------------------- ---------------------------- ----------------------------
As a result of the annual risk assessment for the year 2022, the
following main results were determined:
-- Due to the importance of these risks to the Company, and in
order to better analyse and have more detail on the speed of the
risks in terms of probability, it is necessary to separate two
principal risks: "Impact of metal prices and global macroeconomic
developments" and "Tailings and environmental incidents".
-- In relation to the risk "Global macroeconomic developments",
this is mainly due to the increased risk of continued global and
Mexican inflation in 2023, possible economic recessions, disruption
of supply of critical inputs (steel, diesel, cyanide, cement, spare
parts, equipment, etc.) and increased operating costs. It is
essential to analyse this risk in detail.
-- With regard to "Tailings dams", this is the result of the
hard work carried out by Baluarte Minero and Fresnillo plc's
operations to increase safety and comply with the highest
international TSF standards. In order to comply with these
standards, it is necessary to periodically assess the risks of
TSFs.
-- 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 relationships 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, Saucito, Juanicipio and Penmont (with the highest
perception of insecurity in the country); 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.
-- The "Human Resources" risk has increased severely, due to the
resignation of talent in key positions at the mines and the lack of
candidates to fill important positions within the operating
process.
-- The "Cybersecurity" risk has increased mainly due to the
increase in remote home office activities, and a sophisticated
adversary able to exploit stolen credentials and identities to
amplify ransomware and "big game hunting" attacks.
-- During the months of September and October, the "Fraud" risk
assessment was carried out, identifying risks and areas of
opportunity in the following processes: 1. Payroll (employees and
unionised), 2. Award of contracts for supplies and services, 3.
Administration of contracts for supplies and services, 4. Theft of
finished products during transportation, 5. Theft of unit assets
(wiring, spare parts, consumables, etc.) and 6. Attack on the
technological repositories of critical company information. In all
cases, internal controls and timely follow-up and prevention
actions have been increased. Early detection actions were also
reinforced. The internal audit area considered these results in its
annual programme 2023.
-- During 2022 we worked together with the ESG Department to
analyse and assses the "Climate Change" risk, and the critical
risks and oportunities that make up the "Task Force on
Climate-related Financial Disclosures" (TCFD), assessing the
potential impacts and creating risk materialisation scenarios,
which are related to the financial viability statement. Regarding
physical risks we consider: "Changes in frequency and magnitude of
extreme events such as rainfall, droughts and heatwaves affecting
our operations and neighbouring communities" and "Increase in
average temperatures, reduction in annual precipitation and
associated water stress". Regarding transitional risks we consider:
"Emerging regulations such as local or transborder carbon taxes,
cap and trade systems or increasing requirements from current
emissions regulations", "Changes in the regulatory framework of
renewables" and "Increase in energy prices".
-- This year, Fresnillo plc's "individual risks" increased from
120 to 130 risks, as a result of the analysis of water scarcity and
management, fraud, climate change and cybersecurity risks.
RISK APPETITE
We define risk appetite as 'the nature and extent of risk
Fresnillo plc is willing to accept in relation to the pursuit of
its objectives'. We look at risk appetite from the context of
severity of the consequences should the risk materialise, any
relevant internal or external factors influencing the risk, and the
status of management actions to mitigate or control the risk. A
scale is used to help determine the limit of appetite for each
risk, recognising that risk appetite will change over time. If a
risk exceeds appetite, it will threaten the achievement of
objectives and may require a change to strategy.
Risks that are approaching the limit of the Group's risk
appetite may require management actions to be accelerated or
enhanced to ensure the risks remain within appetite levels. For
catastrophic and operational risks, our risk appetite for
exceptions or deficiencies in the status of our controls that have
safety implications is very low. Our internal audit programme
evaluates these controls with technical experts at operations and
the results of that audit work will determine the risk appetite
evaluation, along with the management response to any issues
identified.
OUR RISK MATRIX
Current assessment of principal risks / As of February 2023
A consistent assessment of the probability and impact of risk
occurrence is fundamental to establishing, prioritising and
managing the risk profile of the Company. In common with many
organisations and reflecting good practice, Fresnillo plc uses a
probability and impact matrix for this purpose.
Our principal risks, in the table below, note the
interconnectivity of our Strategic, Economic, and Operational risks
within an Enviromental, Social and Governance (ESG) framework.
Risk Velocity: Strategic - risks arising from uncertainties that may impact
High: Impact within 6 months our ability to achieve our strategic objectives.
of risk occurring Economic - risks that directly impact financial performance
Medium: Impact between 6 and realisation of future economic benefits.
and 12 months of risk occurring Operational - risks arising from our business that have the
Low: Impact after more than potential to impact people, environment, community and operational
12 months of risk occurring performance including our supply chain.
Environment - risks arising from our business that have the
potential to impact air, land, water, ecosystems and human
health.
(V) Risks that were considered Social - risks arising from our business that have the potential
for the viability assessment to impact on society, including health and safety.
Governance - risks arising from our workplace culture, business
conduct and governance.
ESG - Environmental + Social + Governance.
OUR RISK HEAT MAP
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 the current
geopolitical landscape and the post-pandemic effect of COVID-19,
which could lead to a long-term global recession, as well as other
operational constraints that could impact several of our principal
risks.
Our analysis highlights the strong relationships between climate
change risks and the water stress, between cybersecurity risk and
technological disruption, and between exploration risk and
replacement on depletion of ore reserves.
1
POTENTIAL ACTIONS BY THE GOVERNMENT (political, legal and
regulatory)
RISK DESCRIPTION
Regulatory measures or policies issued by the government,
at all three levels: Federal, State and Municipal, may have
an adverse impact on the operation of the Company. This could
include: new stricter environmental regulations or guidelines,
environmental taxes, new forms of labour and union contracting,
longer and more complicated permitting and licensing processes,
more complex and time-consuming arrangements for accessing
explosives, more complex or onerous tax compliance obligations
for us and our contractors, as well as more frequent reviews
by tax, environmental and social security authorities.
The current federal government has expressed a negative sentiment
towards the mining industry and particularly open-pit mining,
which is why it has decided not to grant any more mining
concessions during the current government term that ends
in 2024, and is likely to review in detail the status of
the concessions that have already been granted, seeking to
remove those that are not being exploited or worked. On the
other hand, it promotes the right of indigenous and Afro-Mexican
communities to be consulted prior to the granting of mining
concessions, which could potentially affect the granting
of new concessions in Mexico.
In May 2022, a reform to the Mining Law was approved to reserve
the exploration, exploitation, benefit and use of lithium
to the State. The aim is for this mineral to be used for
the benefit of national development; although gold and silver
are not mentioned specifically, other minerals declared as
"strategic by the state" are mentioned, and at some point,
precious metals could be considered under this heading. This
would directly and seriously affect the concessions currently
exploited by the Company.
Another risk for 2023 is the possible presentation of a comprehensive
reform initiative to the Mining Law via the Senate, in which
sensitive matters affecting the mining sector will be discussed,
such as transparency of information, consultation with indigenous
peoples and communities, modification of the concession regime
in terms of its validity and grounds for cancellation, among
others.
The federal government, by investing in a new petrochemical
refinery in "Dos Bocas", Tabasco, and buying an oil refinery
in "Deer Park", Texas, indicates that its energy policy promotes
fuel oil and coal, which discourages the generation of energy
based on clean sources. This complicates attention to and
compliance with international climate change goals and standards.
We paid special attention to the following aspects:
- Government actions that negatively impact the mining industry.
- Regulatory changes to mining rights and adverse tax changes.
- Changes in tax regulations.
- Increased frequency of reviews by tax authorities with
special attention to the mining industry.
- Inability to obtain necessary water concessions due to
government control or private interests.
- Failures/delays in obtaining necessary environmental permits.
- Disputes arising from the US-Mexico-Canada Trade Agreement
(USMCA or TMEC).
FACTORS CONTRIBUTING TO RISK
* Change of head of the Mexican Economy Minister, who
is the federal government's authority on mining
matters. Tatiana Clouthier left the post and was
succeeded by Raquel Buenrostro . This change is
perceived as negative for the mining industry, as
Buenrostro has expressed her dissatisfaction with
mining companies for not paying taxes and polluting.
* The federal government reported that it would review
the granting of concessions to mining companies and
that no more concessions would be granted during this
six-year term (which ends in 2024). It is therefore
possible that it will withdraw unexploited gold and
silver concessions.
* Labour reform that prohibits subcontracting, which
mainly generates complications in relationships with
contractors.
* New taxes and discrepancies in the criteria used in
audits carried out by the tax authority.
* Increased frequency of audits by tax authorities with
a special focus on the mining industry.
* The federal government promotes investment in coal
instead of renewable or clean energy. This has made
it more difficult to operate with clean energy.
* The federal government's implementation of policies
that support the use of coal will result in more
greenhouse gases being released into the atmosphere
and reduce the development of renewable energy.
* The United States and Canada requested dispute
settlement consultations with Mexico under the North
American Free Trade Agreement (T-MEC or USMCA) over
Mexico's energy policies that they consider
discriminatory and say harm international companies
and cross-border supplies.
* Since 2020, the so-called Mining Fund, whose main
objective was to distribute resources to communities
neighbouring the mines, according to the royalties
paid by companies under the Federal Law of Rights,
has been closed. Since then, although companies
continue to pay these royalties, they do not
necessarily translate into investments for the
communities neighbouring the mines .
* In addition, the perception of corruption in Mexico
remains high. The country's score in Transparency
International's Corruption Perceptions Index 2022
remained relatively unchanged, despite a higher
ranking. As a result, delays in obtaining permits for
certain operations and/or projects remain a risk.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Engagement and constant communication with all levels
of government.
2. Increased monitoring of the processes being implemented
at the Ministry of Labour and Economy.
3. We remain alert to the changes proposed by the authorities,
including fiscal initiatives on energy and mining, so that
we are able to respond in a timely and relevant manner. Daily
monitoring, follow-up and attention to issues before the
Congress of the Union that may affect the mining industry.
4. In relation to the new labour law prohibiting subcontracting,
changes have been implemented in the relationships with contractors
and personnel structures have been adapted to comply with
the law.
5. We continue to collaborate with other members of the mining
community through the Mexican Chamber of Mines to lobby against
any new harmful taxes, royalties or regulations. We also
support industry lobbying efforts to improve the general
public's understanding of the mining industry.
6. We continue to comply with all applicable environmental
regulations and are fully committed to sustainable activity.
7. We are committed to maintaining dialogue with the community
throughout the life of a mining project, from initial exploration
to eventual closure, with the objective of building long-term
relationships and value, while ensuring operational continuity.
8. We seek to maintain full compliance with tax authority
requirements and we continue to cooperate with any ongoing
tax inspections.
9. We maintain a register and control of vaccinated staff
and encourage all staff to be vaccinated as soon as possible.
10. Follow-up and timely compliance with all suggestions
from the health authorities.
KEY RISK INDICATORS
* Number of media mentions related to mining
regulations. These could include the mention of tax,
royalties, the banning of mining activities in
protected areas and legal precedents. The indicator
also provides details about the media itself, such as
the speaker profile and political alignment.
* Monitoring and control of the activities and
initiatives carried out by the Ministry of Economy
and the Presidency of the Republic.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: Very high (1)
2021: Very high (1)
--------------------------------
2
SECURITY
RISK DESCRIPTION
We face the risk of theft of gold doré and silver concentrates
as well as of items including equipment, tools and materials.
These thefts can take place inside the mines or during transportation.
Our employees, contractors and suppliers face the risk of
theft, kidnapping, extortion or damage due to insecurity
in some of the regions where we operate.
The influence and dispute of territories by drug cartels,
other criminal elements and general anarchy in some of the
regions where we operate, combined with our exploration activities
and projects in certain areas of drug deposit, transfer or
cultivation, makes working in these areas a risk to us.
The Federal Government created the Secretariat of Citizen
Security and Protection as part of the comprehensive strategy
to reduce insecurity. It also created the National Guard,
mostly comprising military personnel, with the aim of combating
organised crime and drug cartels. Unfortunately, state or
local police in most states are unprepared and ill-equipped
to combat organised crime, have low wages and are sometimes
infiltrated by criminal elements.
According to information from the Secretariat of Security
and Citizen Protection, the National Guard and the Attorney
General's Office of the Republic, the presence of organised
crime and high-impact crimes (homicide, kidnapping and extortion)
increased in 2022, in the states where our business units
and projects are located, such as Zacatecas, Guanajuato,
and Sonora.
The main risks we face are:
* High-impact robberies.
* Theft of assets such as minerals, equipment,
instruments, inputs, etc.
* Consumption and sale of toxic substances in our
mining units.
* Homicide.
* Kidnappings.
* Extortions.
* Vandalism.
FACTORS CONTRIBUTING TO RISK
* A severe increased presence of organised crime in the
vicinity of the mining units particularly in
Fresnillo, Saucito and Juanicipio.
* A severe increase in the number of high impact crimes
(homicide, kidnapping, extortion) in the regions
where our mining units and projects are located.
* Increased consumption and sale of drugs at the mining
units, particularly Saucito.
* 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.
* The Mexican state of Zacatecas is notorious for high
levels of perceived insecurity and high rates of
high-impact crime in 2022. There are records of
several vehicle thefts from company employees and
organised crime checkpoints on the roads near
Fresnillo and Saucito mines.
* The Mexican State of Sonora is notorious for being
under constant attack from organised crime gangs.
Several attacks have taken place recently
jeopardising the continuity of mining operations and
the physical integrity of workers employed by
Herradura and Noche Buena mines.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Our property security teams closely monitor the security
situation, maintaining clear internal communications and
coordinating work in areas of greater insecurity.
2. Management is fully committed to protecting our workforce.
3. We have adopted the following practices to manage our
security risks and prevent and address potential incidents:
a. We maintain close relations with authorities at the federal,
state and local levels, including army camps located near
most of our operations.
b. Regular interactions and meetings with the National Guard.
c. 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.
d. 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.
4. We continue to invest in community programmes, infrastructure
improvements and government initiatives to support the development
of legal local communities and discourage criminal acts.
5. We have increased the number of anti-doping tests conducted
at the start of the day in the mining units.
6. Frequent inspections are carried out inside the mines
to verify that drugs are not consumed and sold.
7. Drug consumption prevention campaigns are carried out,
focused on employees.
KEY RISK INDICATORS
* Total number of security incidents affecting our
workforce (thefts, kidnapping, extortion, etc.).
* 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
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: Very high (2)
2021: Very high (2)
--------------------------------
3
GLOBAL MACROECONOMIC DEVELOPMENTS (energy and supply chain
disruptions, inflation, productivity and cost)
RISK DESCRIPTION
Geopolitical tensions have the potential to impact our key
markets, operations and investments.
Increased trade tensions may undermine rule-based trading
systems and lead to trade actions (increased tariffs, retaliations,
and sanctions) potentially impacting our operations or investments.
Disruption or restrictions to the supply of any of our key
strategic inputs, such as electricity, water, fuel, sulphuric
acid or mining equipment, could negatively impact production.
As a result of post-pandemic COVID-19 and the Russia-Ukraine
war, economies around the world, including Mexico, were negatively
affected by lockdowns and disruptions in supply chains. Globally,
economies almost came to a complete halt for more than five
months during 2020 and some months of 2021. During 2022,
we saw significant increases in critical inputs and operating
costs and higher inflationary pressures, along with a shortage
of critical inputs and equipment. We expect this to continue
through 2023.
This situation could create an adverse impact on our operations,
costs, sales and earnings, and potentially on the economic
viability of projects.
In macroeconomic terms we have the following results:
* The Mexican peso performed strongly during 2022 and
is one of the strongest emerging currencies. On
average during 2022 it traded at 20 pesos per US
dollar. At the end of the year the dollar exchange
rate was 19.5 pesos.
* General inflation in Mexico was 7.8% in mexican peso
terms for 2022. Company-specific inflation was 8.4%
in dollar terms.
* Economic growth for Mexico during 2022 was 4.3%.
FACTORS CONTRIBUTING TO RISK
* The unnerving combination of war, inflation, energy
scarcity, and climate change wasn't what anyone
expected as life was just beginning to move forward
from the COVID-19 pandemic.
* Inflation has become a major concern for the global
economy, two years into the pandemic. Price rises are
reaching record highs in Europe and the United States
and may be countered by monetary policy. In Latin
America, central banks have been acting quickly and
forcefully since last year, raising interest rates.
* The impact of post-pandemic COVID-19 and the
Russia-Ukraine war on supply chains has been global,
prolonged, and resulted in a series of major shocks
to companies' logistical systems.
* Disruptions in the value chain of critical inputs for
our operations such as spare parts (primarily
delivered by land transport from the US and maritime
transport from China and Europe).
* Disruptions also include reduced availability of
maintenance teams/contractors to resolve issues, as
well as travel restrictions leading to officials not
being able to travel and inspect projects, resulting
in delays.
* Increased operating costs due to higher prices for
critical inputs such as steel, cyanide, copper,
diesel, haulage equipment, oxygen and truck tyres.
* Analysts surveyed by Banco de Mexico estimate that
Mexico's GDP growth will decelerate from 3.0% to 0.9%
from 2022 to 2023.
* In terms of inflation, we experienced an increase in
two of our main energy inputs compared to the
previous year, with diesel (US percentage per litre)
increasing by 4.3% and kWh (US percentage per kWh) by
5.9%
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. In order to maintain our security of supply, contingency
plans are in place to address any short-term disruptions
to strategic resources. We negotiate early with suppliers
of key inputs to ensure continuity. Certain key supplies
are purchased from several sources to mitigate potential
disruption arising from exposure to a single supplier.
2. We execute operational excellence initiatives to counter
inflation and improve margins, and also enhance cost competitiveness
by improving the quality of the portfolio.
3. We maintain a rigorous, risk-based supplier management
framework to ensure that we engage solely with reputable
product and service providers and keep in place the necessary
controls to ensure the traceability of all supplies (including
avoiding any conduct related to modern slavery).
4. To achieve cost competitiveness, we endeavour to buy the
highest possible proportion of our key inputs, such as fuel
and tyres, on as variable a price basis as possible and to
link costs to underlying commodity indices where this option
exists.
5. We are committed to incorporating sustainable technological
and innovative solutions, such as using sea water and renewable
power when economically viable, to mitigate exposure to potentially
scarce resources.
KEY RISK INDICATORS
* Percentage of compliance by suppliers and
contractors.
* Increase in the price of critical inputs for the
operation.
* Increased cost of operation.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (3)
New Principal Risk. In 2021
this risk was considered alongside
the metals prices risk. It has
now been deemed to be a separate
Principal risk, due to the increase
in its importance.
--------------------------------
4
IMPACT OF METALS PRICES (commodity prices and exchange
rates)
RISK DESCRIPTION
The volatility in the price of gold and silver is high and
unpredictable. There is an inherent risk when investing or
planning for the future price of these precious metals.
Our results are heavily dependent on commodity prices - principally
gold and silver. The prices of these commodities are strongly
influenced by a variety of external factors, including world
economic growth, inventory balances, industry demand and
supply, possible substitution, etc.
FACTORS CONTRIBUTING TO RISK
* The risk is further exacerbated when there are macro
economic and geopolitical factors that directly
affect the price of commodities, both positively and
negatively, such as post pandemic COVID-19, the war
between Ukraine and Russia, and generalised inflation
around the world.
* Lately, the attraction of investing not only in gold
and silver, but also in other financial instruments
such as cryptocurrencies, has increased. This could
lead to investors reducing their investment
activities in precious metals.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. We consider exposure to commodity price fluctuations an
integral part of our business and our usual policy is to
sell our products at prevailing market prices.
2. We monitor the commodity markets closely to determine
the effect of price fluctuations on earnings, capital expenditure
and cash flows. Very occasionally, when we feel it is appropriate,
we use derivative instruments to manage our exposure to commodity
price fluctuations. We run our business plans through various
commodity price scenarios and develop contingency plans as
required.
3. We have hedging policies for exchange rate risk, including
those associated with project-related capex and a hedging
policy for precious metals.
4. We focus on cost efficiencies and capital discipline to
deliver competitive all-in sustaining cost.
5. We work to improve debt profile and reduce annual interest
bill.
6. We maintain long-term optionality by ensuring our pipeline
of opportunities is continuously replenished.
7. Security, liquidity and return represent the order of
priorities for our investment strategy. We maintain a strong
and flexible balance sheet, consistently returning capital
to shareholders while leaving sufficient funds to progress
our short-, medium- and long-term growth plans and maintain
the financial flexibility to take advantage of opportunities
as they may arise.
8. We have a risk-averse investment strategy, managing our
liquidity by maintaining adequate cash reserves and financing
facilities through the periodic review of forecast and actual
cash flows. We choose to hold surplus cash in demand or term
deposits or highly liquid investments.
9. In order to maximize the extension of the average life
of our debt profile, on 29 September 2020 Fresnillo plc successfully
priced a US$850 million 30-year bond (Coupon 4.25%) in the
international market, coupled with an "Any 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.
KEY RISK INDICATORS
* Profit sensitivity to percentage change in precious
metals prices and the Mexican peso/US dollar exchange
rate.
* EBITDA sensitivity to percentage change in metal
prices and the Mexican peso/US dollar exchange rate.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 High
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (4)
New Principal Risk. In 2021
this risk was considered alongside
the global macroeconomic developments
risk. It has now been deemed
to be a separate Principal risk,
due to the increase in its importance.
--------------------------------
5
HUMAN RESOURCES (attract and retain requisite skilled
people/talent crisis)
RISK DESCRIPTION
Fresnillo plc's most valuable asset is its workforce.
Our ability to achieve our business strategy depends on attracting,
developing and retaining a wide range of internal and external
skilled and experienced people.
Managing talent and maintaining a high-quality labour force
in a fast-changing technological and cultural environment
is a key priority for us. Any failures in this respect could
have a negative impact on the performance of the existing
operations and prospects for future growth.
The COVID-19 pandemic has several health risks for employees,
with our workers in the mines on the frontline in terms of
health and safety risks. The way that mining works (especially
underground), where there are several workers in one place,
increases the possibility of contagion. Due to the complex
nature of mining operations and the remote locations in which
they are often located, it is difficult to implement health
measures and carry medical prevention equipment. At times,
we have had no option but to quarantine workers, even when
national lockdown regulations did not force us to do so.
Our people are critical to meeting our goals. We face multiple
risks in the processes of selection, recruitment, training
and retention of talented people with technical skills and
experience.
Obtaining qualified labour in the mining sector has become
a major risk, and our industry requires more and more people
trained and experienced in mining processes. Unfortunately,
there are not enough candidates with the required profiles.
Digital and technological innovation has the potential to
generate substantial improvements in the productivity, safety
and environmental management of the Company. However, to
achieve this, in addition to demanding significant investment,
different skillsets will be required in the workforce.
There is a risk that our workforce will either be unable
to transform as needed or will be resistant to change and
unwilling to accept the impact of automation or to acquire
new technological skills.
The lack of reliable contractors with sufficient infrastructure,
machinery, performance history and trained people is also
a risk that could affect our ability to develop and build
mining works.
In addition, it is difficult to hire the employees of contractors
working for the company.
.
FACTORS CONTRIBUTING TO RISK
* Business interruption or underperformance may arise
from a lack of access to capability. Tight labour
markets are leading to heightened competition for
diverse talent and critical skills, such as digital,
climate and energy.
* Changing societal expectations are placing pressure
on our corporate and employer brand - who we are and
what we stand for.
* There was a significant increase in staff turnover
during 2022.
* Talent retention also became more difficult this
year.
* At some mines we have a lack of specialised personnel
to cover working hours.
* In certain regions where we operate there are not
enough candidates with the necessary skills to
operate the mining equipment.
* With the new labour law prohibiting outsourcing, we
had to hire staff from contractors, and this caused
added complications.
* Unfortunately, not everyone follows measures to
prevent COVID-19 and that increases the risk of
contagion.
* Workers in the mining sector have been particularly
affected by the pandemic, given the employment
architecture of the industry, which can feature
remote fly in-fly out or drive in-drive out
operations, congested underground working conditions,
and workers residing in mine-site compounds or
neighbouring communities. These conditions make some
COVID-19 preventative measures difficult to implement,
which makes mineworkers vulnerable to both acquiring
and spreading the virus.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. We develop the talents of our employees through training
and career development, invest in initiatives to widen the
talent pool and are committed to our diversity and inclusion
policy. Through these actions we aim to increase employee
retention, as well as the number of women, people with disabilities
and employees with international experience in the workplace.
2. Our employee performance management system is designed
to attract and retain key employees by creating suitable
reward and remuneration structures and providing personal
development opportunities. We have a talent management system
to identify and develop internal candidates for key management
positions, as well as identify suitable external candidates
where appropriate.
3. We aim for continuous improvement, driven by opportunities
for training, development and personal growth; in short,
we focus on fair recruitment, fair pay and benefits and gender
equality. In the trusted staff structure, 19.87% are women
as are 28.81% of new joiners, while 21.40% of the female
population were promoted during the year.
4. Recruitment: We have evaluated our recruitment requirements
for key positions, and our goal is to meet them through internal
training and promotion, as well as by recruitment through:
-- Our close relationships with universities that offer earth
science programmes. We have programmes dedicated to identifying
potential performance-based candidates who can be hired as
trainees and/or employees at graduation. During the year,
we hosted 16 students from different Earth Science professions
at our mining units to support their training, and 104 engineers
took part in our training programme.
-- CETLAR (Centre for Technical Studies of Peñoles),
which trains mechanical and electrical technicians. The 7
graduates of 2022 were hired as full-time employees.
5. Retention: Our goal is to be the employer of choice, and
we recognise that to be a profitable and sustainable company,
we need to generate value for our employees and their families.
We do this by providing a healthy, safe, productive and team-oriented
work environment that not only encourages our people to reach
their potential, but also supports process improvements.
Management and leadership skills development programmes were
conducted during 2022 with 30 superintendents, 129 advisors
and 69 facilitators.
In order to keep our staff updated and trained, 88% of employees
and 99% of unionised staff have received training this year.
In 2022, 232 employees participated in institutional development
programmes, which means that 45% of staff with more than
two years of service have participated at least once. Of
this 45%, 10.4% are women. 702 courses and studies were conducted
through external training, benefiting 520 employees. 77.3%
of our leaders have participated in institutional development
programmes focused on leadership.
6. Performance: The virtual internship programme continued
this year in conjunction with Peñoles, with courses
in mining, geology, metallurgy and topography. In total there
were 698 students (57.02% men and 42.98% women).
We have continued our performance assessment process, reinforcing
formal feedback. We promote the certification of key technical
skills for operational personnel and have implemented a programme
to develop administrative and leadership skills for the required
positions. We develop our high-potential intermediate managers
through the Leaders with Vision programme.
7. Pandemic: The safety of our workforce is protected with
sanitary protocols in each mining unit in accordance with
the recommendations of the Sanitary Authority.
A range of security measures has been implemented:
-Use of sanitary measures within mining units,
-Constant health monitoring of employees,
-Temperature control,
-Social distancing,
-Strict hygiene,
-Home office,
-Selective Covid-19 tests.
Support for employees' mental health: 24-hour helpline for
all employees, access to psychological help, support for
families and available medical advice.
KEY RISK INDICATORS
* Number of positions filled by area of speciality, for
vacancies and new positions.
* Employee turnover rate.
* Average hours of training and professional
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
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (5)
2021: High (6)
--------------------------------
6
CYBERSECURITY
RISK DESCRIPTION
Information is one of our most valuable assets and we work
hard to protect it. We fully recognise the importance of
the confidentiality, continuity, integrity and security of
our data and systems.
As a mining company, we can be under threat of cyber attacks
from a broad set of groups, from "hacktivists" and hostile
regimes to organised criminals. Their objectives range from
taking advantage of mining's role in regional and global
supply chains, to impacting national economies.
Some threat actors also focus on finding unprotected, misconfigured
and unpatched systems and exploit them, due to the industry's
heavy reliance on technology and automated systems that support
operations.
The following are the top eight cybersecurity and privacy
risks that have been identified through environment monitoring
and workshops with business units, operations, and IT. These
risks comprise Peñoles/Fresnillo overall cybersecurity
and privacy risk profile:
-Corruption of data - Critical data where any unauthorised
modification can have adverse impacts.
-Unauthorised access - Cybersecurity and privacy incidents
due to incorrect access permissions or system abuse, exploitation
or misuse.
-Breach and data theft - Disclosure of critical and sensitive
company data by an internal or external source.
-Business disruption - Disrupting key applications or systems
for a period of time.
-Lack of cybersecurity ownership - Failure to assign responsibility
for implementing and adopting cybersecurity practices on
a daily basis.
-Non-compliance - Cybersecurity and privacy incidents resulting
in non-compliance with applicable regulations, including
privacy.
-Health and safety incidents - Breach of availability, integrity
or confidentiality of data which impacts health and safety.
-Halt or loss of operations - 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
years owing in part to the COVID-19 pandemic and the
proliferation of new digital technologies, the
increasing degree of connectivity and a material
increase in the monetisation of cybercrime.
* Theft of information through social engineering and
"phishing" campaigns (fraudulent attempts to obtain
sensitive information or data, such as usernames or
passwords, by appearing to be a trustworthy entity in
an electronic communication).
* An increased reliance on cloud systems and
infrastructure can make IT defences less robust and
may bypass security controls
* Access to hacking tools and training is readily
available and heavily automated. Without proper
punishment for perpetrators globally, attackers can
easily launch sophisticated attacks with little risk.
* There is a global lack of regulation regarding
cybersecurity and e-crime that could deter criminals.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Our information security management model is designed
with defensive structural controls to prevent and mitigate
the effects of computer risks. It employs a set of rules
and procedures, including a Disaster Recovery Plan, to restore
critical IT functions in the event of an attack.
2. Our systems are continuously monitored by cybersecurity
experts at a Security Operations Centre (SOC). Incident response
plans are in place and tested periodically to ensure we can
respond quickly and effectively.
3. Our systems are regularly audited to identify any potential
threats to the operations and additional systems have been
put in place to protect our assets and data.
4. We have implemented a training and awareness programme,
which is designed to increase awareness of cyber risk and
ensure that employees take the appropriate actions.
5. We have invested in global IT security platforms and Managed
Security Services Providers (MSSPs) in order to proactively
monitor and manage our cyber risks. We conduct routine third-party
penetration tests to independently confirm the security of
our IT systems and we seek to enhance the monitoring of our
operational technology platforms.
6. Since 2020, a fully staffed cybersecurity office has been
in place to improve our cybersecurity position. Its main
objective is to identify and manage cybersecurity risks and
align them with our business mission and strategy, as well
as monitor the supporting processes. Aligned to best practices
and standards, its approach is based on two key frameworks:
a. The U.S. National Institute of Standards and Technology
(NIST CSF) Cybersecurity Framework that describes how companies
can assess and improve their ability to prevent, detect,
and respond to cyberattacks.
b. Information Control Objectives and Technologies to Others
(COBIT), which was created by ISACA, the international professional
association for IT management and governance, to provide
an implementable set of IT-related controls, processes and
facilitators.
7. Our approach is also based on the MITRE ATT&CK(TM) which
is used as the basis for the development of specific threat
models and methodologies in the private sector, government
and in the cybersecurity products and services community.
8. We also monitor the environment for relevant alerts and
act proactively to assess our readiness, reinforcing our
capabilities as needed.
9. A governance model, continuous risk monitoring, information
security policies, awareness-raising campaigns and training
form the basis for our IT/OT operational guarantee.
10. Our plan for 2023 is to focus our efforts on incorporating
key indicators around cyber risk reduction in the cybersecurity
dashboard, implementing and maturing controls in line with
the threat landscape and emphasising the importance of individual
responsibility to each employee, in order for them to stay
vigilant and alert to cyber threats.
KEY RISK INDICATORS
* Total number of cybersecurity incidents affecting our
Company.
* Number of media mentions related to cybersecurity
issues affecting the mining industry.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2022: High (6)
2021: High (9)
--------------------------------
7
PROJECTS (performance risk)
RISK DESCRIPTION
The pursuit of advanced exploration and project development
opportunities is essential to achieving our strategic goals.
However, this carries certain risks:
* Economic viability: the impact of the cost of capital
to develop and maintain the mine; future metals
prices; and operating costs throughout the mine's
life cycle.
* Access to land: a significant failure or delay in
land acquisition has a very high impact on our
projects.
* Uncertainties associated with the development and
operation of new mines and expansion projects:
includes fluctuations in the degree of ore and
recovery; unforeseen complexities in the mining
process; poor quality of the ore; unexpected presence
of groundwater or lack of water; lack of community
support; and inability or difficulty in obtaining and
maintaining the required building and operating
permits.
* Delivery risk: Projects can exceed the budget in
terms of cost and time; they cannot be built
according to the required specifications or there may
be a delay during construction; and major mining
teams cannot be delivered on time.
Other important risks:
* Failure to effectively manage our development
projects could result in delays to the start of
production and cost overruns.
* Projects that cannot be delivered on time, on budget
and according to planned specifications.
* Geotechnical conditions of the ore body / poor rock
quality.
* High costs making it difficult to justify the
project.
* Delay in the development of the project due to lack
or delay of critical equipment, supplies and spare
parts.
* Disruptions in the supply chain for construction
materials and equipment.
The following risks relate specifically to prospective projects
in Chile and Peru:
* Government instability, especially in Peru.
* Potential actions by the government (political, legal
and regulatory).
* Security.
* Licence to operate (community relations)
* Access to water (national regulation and geographic
complications).
* Environmental compliance.
* Competition for land (threat from green power
generation companies, for example thermosolar).
* Informal mining.
* Industrial safety compliance (National Geological and
Mining Service SERNAGEOMIN).
* Increased mining taxes and fees.
FACTORS CONTRIBUTING TO RISK
* Uncontrolled increases in the costs of critical
inputs directly affect the progress of projects and
affect the planning of each project.
* In some regions there are no specialised contractors
or contractors with the technology to develop the
projects.
* Contractor productivity may be lower than anticipated,
causing delays in the programme.
* Increase in the number of high impact crimes
(homicide, kidnapping, extortion) in the regions of
the projects.
* We have identified the following threats to project
development:
* Insufficient resources for project execution.
* Changes in operational priorities that can affect
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, electricity
supply and water.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Our investment assessment process determines how best
to manage available capital using technical, financial and
qualitative criteria.
-- Technical: we evaluate and confirm the resource estimate;
conduct metallurgical research of mineral bodies to optimise
the recovery of economic elements; calculate and determine
the investment required for the overall infrastructure (including
roads, energy, water, general services, housing) and the
infrastructure required for the mine and plant.
-- Financial: we analyse the risk in relation to the return
on the proposed capital investments; set the expected internal
rates of return (IRR) per project as thresholds for approving
the allocation of capital based on the current value of expected
cash flows of invested 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.
2. 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.
3. The executive management team and the Board of Directors
are regularly updated on progress. Each advanced exploration
project and major capital development project has a risk
record containing the project-specific identified and assessed
risks.
The project development process in 2022 included:
* Orisyvo, Rodeo, Guanajuato, and Tajitos.
* Fresnillo - San Carlos mega pumping station ramp.
Tailings flotation plant. Adequacy of Pyrites plant,
2nd phase. Fresnillo south and power substation
reinforcement. Installation of the 30 MW power
transformer.
* Proaño/Fresnillo - Over-elevation of the San
Carlos tailings dam.
* Saucito - Deepening of Jarillas ramp and continuing
the construction of the tailings dam, Cell 4B.
* La Ciénega - Continuing the construction of the
third tailings dam.
* San Julián - Constructing stage four of the
tailings dam.
* La Herradura - Fuel station and c onstructing the
carbon-in-column process.
KEY RISK INDICATORS
* Earned value (rate of financial advancement vs.
physical advancement).
* Percentage of required land acquired
* Percentage of major equipment ordered and received
according to plan.
* Percentage of mine development completed.
LINK TO STRATEGY RISK APPETITE
2 Medium
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: High (7)
2021: High (7)
--------------------------------
8
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 the
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
granting new mining concessions. However, this could
be mitigated by carefully negotiating concessions
with mining geological interest already granted.
* It is becoming increasingly difficult to negotiate
land prices, with landowners demanding more money and
benefits for access to land.
* Social insecurity prevailing 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, leading to the
possible cancellation of the concession.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Successful access to land plays a key role in managing
our mining rights, focusing on areas of strategic interest
or value.
2. At the end of 2022, we have 270,268 hectares in the process
of being granted and 1,415,960 hectares of mining concessions
granted. In total, we have 1,686,228 hectares in the control
of Fresnillo plc. This represents an increase of 8,307 hectares
compared to 2021.
3. Other initiatives include:
* Meticulous analysis of exploration objectives and
construction project designs to minimise land
requirements.
* Judicious use of lease or occupation contracts with
purchase options, in compliance with legal and
regulatory requirements.
* Early participation of our community relations teams
during the negotiation and acquisition of socially
challenging objectives.
* Strategic use of our social investment projects to
build trust.
* Close collaboration with our land negotiation teams,
which include specialists hired directly by Fresnillo
and also provided by Peñoles as part of the
service agreement.
4. As part of an ongoing review of the legal status of our
land rights, we identify certain areas of opportunity and
continue to implement measures to manage this risk on a case-by-case
basis. Such measures include, wherever possible, negotiations
with agricultural communities for the direct purchase of
land.
5. We use mechanisms provided for in agricultural law and
also use other legal mechanisms under mining legislation
that provide greater protection for land occupation. These
activities are part of our ongoing drive to reduce risk exposure
to surface land.
KEY RISK INDICATORS
-- Percentage of land required for advanced exploration projects
that are under occupation or agreements other than total
ownership (generally and per 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
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (8)
2021: High (4)
--------------------------------
9
LICENCE TO OPERATE (community relations)
RISK DESCRIPTION
At both a local and global level, the mining industry's stakeholders
have high expectations relating to social and environmental
performance. These expectations go beyond the responsible
management of negative impacts to include continuous engagement
and contribution to stakeholder development.
Failure to adequately address these expectations increases
the risk of opposition to mining projects and operations.
Negative sentiment towards mining or specifically towards
Fresnillo plc could have an impact on our reputation and
acceptability in the regions where we have a presence.
We monitor the following risks:
* Negative perception of the Company's social and
environmental performance.
* Failure to identify and address legitimate concerns
and expectations of the community and of society at
large.
* Insufficient or ineffective engagement and
communication.
* Failure to contribute purposefully to community
development.
FACTORS CONTRIBUTING TO RISK
* Higher expectations and scrutiny of social and
environmental performance.
* Rising expectations on shared benefits regarding land
agreements.
* 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.
* Insecurity and access to water are the issues of
greatest concern to people and community leaders in
the regions where we have a presence.
* The environmental impact of a mine is also an issue
that can concern communities close to our operations.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
Efficient risk management allows us to detect threats such
as social opportunities, associated with our operation. This
process helps us identify, assess, plan for, communicate
and manage significant risks that could potentially impact
our social license.
The risk identification mechanism includes social studies,
complaints and claims process, deployment of social programs,
as well as meetings with key stakeholders and media monitoring.
For this, we implement a process of evaluation of detected
risks, we work on them through specialized workshops, risk
management and action plans for each one, through committees
that prevent their materialization.
The social risks that are classified as High Risk are escalated
for their administration in RED teams, which allow finding
specific solutions with the areas and personnel that have
the decision-making level to offer concrete and timely actions.
Likewise, constant and direct contact is maintained with
the leaders of each business unit, discussing the risks that,
in their field of action, they exercise and manage mitigation
alternatives.
Governance in complaints is improved every year. They are
received, evaluated and managed, involving those directly
responsible, while keeping dissatisfied actors informed about
the status of each case, until satisfactory closing agreements
are reached.
An internet listening module was implemented, which makes
it possible to capture concerns from the community, whose
cases can even remain anonymous, thus expanding coverage
in sectors where technology makes it easier to find questions
about the organization and offer care in the same way that
cases presented in person.
1. COVID-19 Response: Collaboration 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.
2. 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.
3. 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.
4. Health and Safety performance: Our goal is to instil a
safety culture focused on 'caring for our people', based
on shared values across the organisation, driven by senior
management and focused on high potential incidents. Our approach
to health aims to pre-emptively identify and manage the risks
to which our workforce is exposed.
5. Sharing the benefits of mining: In addition to effective
stakeholder engagement, sharing the benefits of mining also
plays an important role in supporting our social acceptability.
Employment, procurement, talent development and the payment
of our fair share of taxes contribute to regional development.
Our Social Investment portfolio focuses on Education, Water,
Health & Sports and Capacity Building to support our communities,
in collaboration with non-governmental organisations (NGOs).
For our education focus, we work with ENSAMBLE ALEJANDÍA,
INNOVEC and First Robotics; for Water, with Captar AC Y FORMAC;
and for Health with the National University Foundation y
FutbolMas; para Desarrollo de Capacidades, con Proempleo
y CEDO.
6. Responsible approach to managing the impacts of the reform
to regulate subcontracting: Our response to the New Labour
Legislation in Mexico has ensured compliance with the reform.
Extending job offers to the qualified workforce has also
mitigated the negative impacts of the reform on local people
and communities.
KEY RISK INDICATORS
* Number of local actions by non-governmental
organisations (NGOs) or other local social groups
against mining, by region.
* Number of actions by NGOs or other local social
groups against mining in the Americas.
* Number of media mentions related to demonstrations
against the mining industry.
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (9)
2021: High (5)
--------------------------------
10
SAFETY
RISK DESCRIPTION
Our operations and projects are 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.
Our workforce faces risks such as fire, explosion, electrocution
and carbon monoxide poisoning, as well as risks specific
to each mine site and development project.
These include rockfalls caused by geological conditions,
cyanide contamination, explosion, becoming trapped, electrocution,
insect bites, falls, heavy or light equipment collisions
involving machinery or personnel and accidents occurring
while personnel are being transported.
A poor safety record or serious accidents could have a long-term
impact on morale and on our reputation and productivity.
FACTORS CONTRIBUTING TO RISK
* We are saddened to report that one fatality was
recorded during 2022, and also that we experienced a
significant increase in the accident rate related to:
-Rockfall/terrain failure
-Loss of vehicle/equipment control
-Team-vehicle-person interaction
-Transport of staff
-Contact with electric power
-Fire
-Becoming trapped
-Contact with hazardous substances
* During 2022 we had 373 high potential incidents, 3%
more than 2021.
* Frequent transportation of our people to remote
business units is an ongoing feature of our
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.
* Our people not being sensitive to the latent risks of
our operations.
* Omissions and failures to follow security protocols.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. 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.
3. Our Safety and Occupational Health Strategy is based on
four pillars:
a. Safety and health risk management: workers at all levels
are able to identify hazards and controls, so that all jobs
are carried out safely.
b. Leadership: all employees and contractors are health and
safety leaders and we demonstrate our commitment through
each individual's responsible behaviour.
c. Contractor management: our contractors are an integral
part of our safety team and culture, and we work together
to improve.
d. Reporting, research and learning from our accidents: we
share good practices and learn from our mistakes.
4. The Strategy strives to achieve our four main goals of:
zero fatalities, zero occupational illnesses, the development
of a resilient culture and the automation of hazardous processes.
5. Critical controls and verification tools are regularly
strengthened through the verification programme and regular
audits of critical controls for potentially high-risk activities.
6. 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.
7. During the year, we continued to implement support measures
to strengthen, address and prevent the causes of accidents,
injuries and fatalities. These included:
* Strengthening safety objectives, including
establishing proactive performance indicators that
allow us to anticipate events.
* Encouraging managers to own security risks to
operations, ensuring 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 2022, 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.
KEY RISK INDICATORS
-- Accident rate
-- Days lost rate
-- Accident frequency
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: Medium (10)
2021: Medium (10)
--------------------------------
11
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 allows the existence of several
unions within a company and gives freedom of choice
to the employee. This has led to a complex, rarefied
work environment at the Fresnillo mine, with violent
clashes between the union and a group of workers
seeking to register a new independent union.
* The risk is that the fighting will continue and
worsen and eventually the mine's workforce will be
reduced. There is also a risk that this conflict
could spread to other mines.
* In addition, the TMEC (new trade agreement between
Mexico, Canada and the United States replacing NAFTA)
with new labour and trade union provisions.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. We maintain good relations with our employees and unions,
founded on trust, regular dialogue and good working conditions.
We are committed to safety, nondiscrimination, diversity
and inclusion, and compliance with Mexico's strict labour
regulations.
2. There are long-term labour agreements (usually three years)
in place with all the unions at our operations, helping to
ensure labour stability.
3. We seek to identify and address labour issues that may
arise throughout the period covered by the labour agreements
and to anticipate any potential issues in good time. Employees
of our contractor companies are an important part of our
workforce and under Mexican law fulfil the same duties and
are subject to the same responsibilities as our own employees.
We treat contractors as strategic associates and build long-term,
mutually beneficial relationships with them.
4. We maintain constructive relationships with our employees
and their unions through regular communication and consultation.
Union representatives are regularly involved in discussions
about the future of the workforce.
5. Increased communication with trade union leaders in mining
units to monitor the working environment.
6. Meetings have been held with groups of workers who want
to introduce new unions to the Company.
7. Our strategy is to integrate unionised personnel into
each team in the business unit. We achieve this by clearly
assigning responsibilities and through programmes aimed at
maintaining close relations with trade unions in mines and
at the national level.
8. We maintain close communication with trade union leaders
at various levels of the organisation in order to: raise
awareness of the economic situation facing the industry;
share our production results; and encourage union participation
in our security initiatives and other operational improvements.
9. These initiatives include the Security Guardians programmes,
certification partnerships, integration of high productivity
equipment, and family activities.
10. We are proactive in our interactions with unions. When
appropriate, we hire experienced legal advisors to support
us on labour issues. We remain attentive to any developments
in labour or trade union issues.
11. We conducted a review of the contractual benefits for
union members in our mines.
12. Our executive leadership and the Executive Committee
recognise the importance of trade union relations and follow
any developments with interest.
KEY RISK INDICATORS
* Union members' level of satisfaction.
* Number of media mentions related to mining union
developments.
LINK TO STRATEGY RISK APPETITE
2 - 3 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (11)
2021: High (8)
--------------------------------
12
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.
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 on new mining concessions.
* 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 2022, we invested a total of US$167.6 million in exploration
activities. Our objectives for 2023 include a budgeted risk
capital investment in exploration of approximately US$175.0
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 2023 will allocate 26%
to brownfield targets, 40% 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.
KEY RISK INDICATORS
* Drill programmes completed (overall and by project).
* Change in the number of ounces in reserves and
resources.
* Rate of conversion from resources to reserves.
LINK TO STRATEGY RISK APPETITE
1 Medium
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Increasing 2021: Medium (13)
2022: Medium (12)
--------------------------------
13
TAILINGS DAMS (overflow or collapse of tailings deposits)
RISK DESCRIPTION
Ensuring the stability of our tailings storage facilities
(TSFs) during their entire lifecycles is central to our operations.
A failure or collapse of any of our TSFs could result in
fatalities, damage to the environment, regulatory violations,
reputational damage and disruption to the quality of life
of neighbouring communities as well as our operations.
Implications of future regulations for our tailing's management.
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
We manage our TSFs in a manner that allows the effectiveness
of their design, operation and closure to be monitored at
the highest levels of the Company.
Catastrophic failures of TSFs are unacceptable and their
potential for failure is evaluated and addressed throughout
the life of each facility. Our TSFs are constantly monitored
and all relevant information is provided to the authorities,
regulating bodies and the communities that could be affected.
We manage our TSFs using data, modelling, and construction
and operating methods validated and recorded by qualified
technical teams and reviewed by independent international
experts, whose recommendations we implement in order to strengthen
the control environment. Risk management includes timely
risk identification, control definition and verification.
Controls are based on the consequences of the potential failure
of the tailings facilities.
The Global Industry Standard on Tailings Management (GISTM)
was published in 2020 and we have committed to adopting this
standard at all our operations. We launched a new tailings
policy during the year, based on the GISTM, reinforcing our
commitment to the safety and health of our workforce, communities
and the environment.
In accordance with this new standard, we have updated our
risk assessment methods with a focus on more detailed risk
identification, failure modes and controls in order to avoid
catastrophic failures.
Our tailings policy ensures the stability of our TSFs throughout
their lifecycles, managing any potential or actual impact
on the environment with sound governance and open communication
with stakeholders.
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.
In 2022 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's findings 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 .
KEY RISK INDICATORS
* Percentage of TSFs that comply with international
design and construction standards.
* Findings of the Independent Tailings Review Panel
(ITRP)
* Dam safety inspections and dam safety reviews.
* Storage capacity versus levels of operation
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (13
2021: Medium (11)
--------------------------------
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
14
ENVIRONMENTAL INCIDENTS
RISK DESCRIPTION
Environmental incidents are an inherent risk in our industry.
These incidents include the possible overflow or collapse
of tailings deposits, cyanide spills and dust emissions,
any of which could have a high impact on our people, communities
and businesses.
An operating incident that damages the environment could
affect both our relationship with local stakeholders and
our reputation, reducing the social value we generate.
We operate in challenging environments, including forests
and agricultural areas in Chihuahua and Durango, and the
Sonora Desert, where water scarcity is a key problem.
Environmental issues directly related to climate change are
considered under our specific Climate Change principal risk
below.
We continue to be alert to the following risks:
* Cyanide management risk.
* Impact on the environment in the area of influence
through erosion/deforestation/forest loss or
disturbance of biodiversity as a result of the
operations of the business unit or project
activities.
* An event involving a leak or spill of cyanide or
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
area.
FACTORS CONTRIBUTING TO RISK
* We have strengthened the regulatory risk pillar of
the environmental management model, incorporating
monthly updates of environmental regulations.
Furthermore, we now regularly monitor the
Environmental Authority inspection processes to
assure compliance with our environmental commitments
and action plans.
* Failure to manage our major hazards or mass passenger
transport could result in a catastrophic event or
other long-term damage.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. 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.
2. 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 recognise that we are responsible
for our activities and for delivering on our environmental
commitments.
3. Our environmental management system, together with our
investment in preventive measures and training, are key factors
that reduce the risk of large environmental incidents.
4. We have a comprehensive approach to incident prevention.
Relevant risks are assessed, monitored and controlled in
order to achieve our goal of zero incidents with significant
environmental impact. We work to raise awareness among employees
and contractors, providing training to promote operational
excellence. The potential environmental impact of a project
is a key consideration when assessing its viability, and
we encourage the integration of innovative technology in
the project design to mitigate such impacts.
5. We prioritise the efficient use of natural renewable resources
by using sea water, favouring the use of renewable power
sources, achieving higher rates of reuse and recovery of
water through the use of thickened tailings technology and
reducing greenhouse gas emissions.
6. We recognise that environmental sustainability is key
to our ability to generate social value and we perform regular
risk assessments in order to identify potential impacts and
develop preventive and mitigating strategies.
7. Each site maintains updated environmental emergency preparedness
and detailed closure plans with appropriate financial provisions
to ensure physical and chemical stability once operations
have ceased.
8. Fresnillo and Saucito are ISO 9001 certified; Fresnillo,
Saucito, Herradura and Noche Buena are ISO 14001 and ISO
45011 certified.
9. In addition, Fresnillo, Saucito and Juanicipio are certified
according to the standards of the Clean Industry; the first
two achieved the badge of environmental excellence issued
by the Environmental Protection Attorney's Office (PROFEPA).
Our Herradura leaching operation complies with the Cyanide
Code issued by the International Cyanide Code Institute with
the respective certification.
1. 10. 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-155SEMARNAT-2007,
which establishes environmental requirements for gold and
silver leaching systems.
2. 11. 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.
KEY RISK INDICATORS
-- Number of business units with ISO 9001, 14001, 45001 Certification.
-- Number of business units with Clean Industry Certification.
-- Number of business units with International Cyanide Code
Certification.
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Decreasing 2022: Medium (14)
2021: Medium (11)
--------------------------------
LINK TO STRATEGY RISK APPETITE
4 Low
--------------
15
CLIMATE CHANGE
RISK DESCRIPTION
The mining industry is highly exposed and sensitive to climate
change risk.
Climate change is a systemic challenge and will require coordinated
actions between nations, between industries and by society
at large. It demands a long-term perspective to address both
physical climate change and low-carbon transition risks and
uncertainties.
Due to climate change, our operations and projects are expected
to face acute physical risks from extreme events such as
high temperatures, droughts and extreme rainfall from more
frequent and intense hurricanes in the Pacific.
These natural disasters may affect the health & safety of
our people, damage access roads and mine infrastructure,
disrupt operations and affect our neighbouring communities.
In addition, the rise in temperatures may increase our water
demand while the decrease in annual precipitation exacerbates
water stress in the regions where we operate.
These chronic risks may intensify the competition to access
water resources, increasing risks to the social licence to
operate. The societal responses to transition to a low carbon
economy include more stringent regulations to reduce emissions,
a transformation of the global energy system, changes in
behaviour and consumption choices and emerging technologies.
Adaptation measures are necessary to build the flexibility
to respond to physical and transitional changes.
One of the most important risk we currently face relates
to compliance with all the provisions and requirements of
international agreements to reduce pollution and greenhouse
gas emissions.
Failure to adapt to the transition and physical impacts of
climate change, include:
-government legislation to limit mining activities.
-regulations limiting greenhouse gas emissions from the mining
industry.
-acute physical risks such as the 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
rather than in renewable or clean energy. This has
led to operating on clean energy becoming more
difficult.
* The Federal Government's implementation of policies
that support the use of coal will lead to more
greenhouse gases being released into the atmosphere
and reduce the development of renewable energies.
* Current and emerging climate regulations have the
potential to result in increased cost, to change
supply and demand dynamics for our products and
create legal compliance issues and litigation, all of
which could impact the Group's financial performance
and reputation. Our operations also face risk due to
the physical impacts of climate change, including
extreme weather.
* Warming temperatures will increase water scarcity in
some locations, inhibiting water-dependent operations,
complicating site rehabilitation and bringing
companies into direct competition with communities
for water resources.
* The supply of critical inputs to mining processes,
such as water and energy, is likely to face greater
constraints.
* Employee health and safety will be put at risk by
increases in communicable diseases, exposure to
heat-related illnesses and the likelihood of
accidents related to rising temperatures.
* Obtaining and maintaining a social licence to operate
will become more difficult in communities where
climate change exacerbates existing vulnerabilities
and increases direct competition between the company
and the community for resources.
* Increased physical and non-physical risks will make
project financing more difficult to secure.
* Global warming and its effects such as droughts,
hurricanes, winter storms and heavy rains, can cause
stoppages in operations.
CONTROLS, MITIGATING ACTIONS AND OUTLOOK
1. Climate change has formed part of our strategic thinking
and investment decisions for over two decades.
2. We are considering the recommendations of the Task Force
on Climate-related Financial Disclosures (TCFD) regarding:
Governance, Strategy, Risk Management and Metrics and targets.
3. We recognise the importance of maturing our approach to
integrating physical climate change risks and adaptation
into financial planning and decision-making processes. We
are committed to enhancing our understanding of the site-level
impacts and vulnerabilities to refine our adaptation measures.
4. The pervasive and complex nature of climate change means
that it can amplify other risks such as environmental incidents,
access to water, health & safety of our people, government
regulations, and social licence to operate. The Head of Sustainability
and the Head of Risks support the process to refine the identification
and risk assessment of physical and transitional risks.
5. We use the guides from industry associations (i.e. ICMM),
international scientific reports (i.e. IPCC), reports from
industry peers and reports of the Mexican Government to identify
the physical impacts of climate change.
6. 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 (RCPs).
7. In addition, we use Aqueduct, a tool developed by the
World Resources Institute (WRI), to better understand water
stress under different climate change scenarios in the 2020-2030
period.
8. We are implementing a series of controls to manage the
threat of extreme weather, including structural integrity
programmes across all critical assets, emergency response
plans and flood management plans. These controls keep our
people safe and help our operations return to normal capacity
as quickly as possible.
9. We are increasing the supply of the materials essential
to building a low-carbon economy.
10. We are setting targets to reduce our emissions (on an
absolute and intensity basis) over the short, medium and
long term.
KEY RISK INDICATORS
* Energy demand/value added
* CO2/energy consumption
* Zero-carbon fuel share
LINK TO STRATEGY RISK APPETITE
1 - 2 - 3 - 4 Low
--------------
BEHAVIOUR RISK RATING (RELATIVE POSITION)
Stable 2022: Medium (15)
2021: Medium (12)
--------------------------------
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in accordance
with applicable United Kingdom law and 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 Accounting Standards ('IFRSs').
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 position, 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 Non-Executive Director
6 March 2023
Consolidated Income Statement
Year ended 31 December
Year ended 31 December Year ended 31 December
2022 2021
------------------- ----- ------------------------------------------- -------------------------------------------
Notes US$ thousands US$ thousands
------------------- ----- ------------------------------------------- -------------------------------------------
Pre-Silverstream Silverstream Pre-Silverstream Silverstream
revaluation revaluation revaluation revaluation
effect effect Total effect effect Total
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Continuing
operations:
Revenues 5 2,432,990 2,432,990 2,703,095 2,703,095
Cost of sales 6 (1,896,970) (1,896,970) (1,766,170) (1,766,170)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Gross profit 536,020 536,020 936,925 936,925
Administrative
expenses (94,123) (94,123) (103,534) (103,534)
Exploration
expenses 7 (165,790) (165,790) (130,291) (130,291)
Selling expenses (25,619) (25,619) (25,035) (25,035)
Other operating
income 9 71,860 71,860 11,914 11,914
Other operating
expenses 9 (38,755) (38,755) (23,246) (23,246)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
net
finance costs and
income
tax 283,593 283,593 666,733 666,733
Finance income 10 26,460 26,460 8,874 8,874
Finance costs 10 (81,621) (81,621) (61,750) (61,750)
Revaluation effects
of
Silverstream
contract 14 - 18,785 18,785 - (416) (416)
Foreign exchange
gain/(loss) 1,354 1,354 (1,909) (1,909)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit from
continuing
operations before
income
tax 229,786 18,785 248,571 611,948 (416) 611,532
Corporate income
tax 11 73,009 (5,635) 67,374 (156,598) 125 (156,473)
Special mining
right 11 (7,654) (7,654) (16,563) (16,563)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Income tax 11 65,355 (5,635) 59,720 (173,161) 125 (173,036)
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Profit for the year
from
continuing
operations 295,141 13,150 308,291 438,787 (291) 438,496
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Attributable to:
Equity shareholders
of
the Company 258,747 13,150 271,897 421,500 (291) 421,209
Non-controlling
interest 36,394 36,394 17,287 17,287
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
295,141 13,150 308,291 438,787 (291) 438,496
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Earnings per share:
(US$)
Basic and diluted
earnings
per Ordinary Share
from
continuing
operations 12 0.369 0.572
Adjusted earnings
per
share: (US$)
Adjusted basic and
diluted
earnings per
Ordinary
Share from
continuing
operations 12 0.351 0.572
------------------- ----- ---------------- ------------ ----------- ---------------- ------------ -----------
Consolidated Statement of Comprehensive Income
Year ended 31 December
Year ended 31 December
---------------------------------------------------- ----- ------------------------------
2022 2021
Notes US$ thousands US$ thousands
---------------------------------------------------- ----- -------------- --------------
Profit for the year 308,291 438,496
Other comprehensive income/(expense)
Items that may be reclassified subsequently
to profit or loss:
Loss/(gain) on cash flow hedges recycled to
income statement 3,770 (2,476)
Changes in the fair value of cost of hedges (1,380) (5,396)
Total effect of cash flow hedges 2,390 (7,872)
Foreign currency translation 234 (653)
Income tax effect on items that may be reclassified
subsequently to profit or loss: 11 (717) 2,362
---------------------------------------------------- ----- -------------- --------------
Net other comprehensive income/(loss) that
may be reclassified subsequently to profit
or loss: 1,907 (6,163)
---------------------------------------------------- ----- -------------- --------------
Items that will not be reclassified to profit
or loss:
---------------------------------------------------- ----- -------------- --------------
Losses recycled to the value of other assets (4,120) -
Changes in the fair value of cash flow hedges 4,733 (994)
Total effect of cash flow hedges 613 (994)
Changes in the fair value of equity investments
at FVOCI (5,712) (48,051)
Remeasurement (loss)/gains on defined benefit
plans 22 (712) 5,710
Income tax effect on items that will not be
reclassified to profit or loss 11 1,644 13,805
Net other comprehensive loss that will not
be reclassified to profit or loss (4,167) (29,530)
---------------------------------------------------- ----- -------------- --------------
Other comprehensive income/(loss), net of
tax (2,260) (35,693)
---------------------------------------------------- ----- -------------- --------------
Total comprehensive income for the year,
net of tax 306,031 402,803
---------------------------------------------------- ----- -------------- --------------
Attributable to:
Equity shareholders of the Company 271,618 386,060
Non-controlling interests 34,413 16,743
---------------------------------------------------- ----- -------------- --------------
306,031 402,803
---------------------------------------------------- ----- -------------- --------------
.
Consolidated Balance Sheet
As at 31 December
As at 31 December
-------------------------------------------------- ----- ------------------------------
2022 2021
Notes US$ thousands US$ thousands
-------------------------------------------------- ----- -------------- --------------
ASSETS
Non-current assets
Property, plant and equipment 13 2,862,564 2,799,075
Equity instruments at fair value through other
comprehensive income (FVOCI) 30 158,813 164,525
Silverstream contract 14 475,256 494,392
Deferred tax asset 11 343,688 67,300
Inventories 15 91,620 91,620
Other receivables 16 38,458 58,548
Other assets 3,700 3,587
-------------------------------------------------- ----- -------------- --------------
3,974,099 3,679,047
-------------------------------------------------- ----- -------------- --------------
Current assets
Inventories 15 495,744 396,184
Trade and other receivables 16 404,499 401,424
Prepayments 34,429 20,282
Derivative financial instruments 30 231 96
Silverstream contract 14 36,218 35,152
Cash and cash equivalents 17 969,060 1,235,282
-------------------------------------------------- ----- -------------- --------------
1,940,181 2,088,420
-------------------------------------------------- ----- -------------- --------------
Total assets 5,914,280 5,767,467
-------------------------------------------------- ----- -------------- --------------
EQUITY AND LIABILITIES
Capital and reserves attributable to shareholders
of the Company
Share capital 18 368,546 368,546
Share premium 18 1,153,817 1,153,817
Capital reserve 18 (526,910) (526,910)
Hedging reserve 18 (91) (2,042)
Cost of hedging reserve 18 - (38)
Fair value reserve of financial assets at FVOCI 18 79,786 83,784
Foreign currency translation reserve 18 (1,886) (2,120)
Retained earnings 18 2,612,469 2,543,087
-------------------------------------------------- ----- -------------- --------------
3,685,731 3,618,124
Non-controlling interests 231,206 184,548
-------------------------------------------------- ----- -------------- --------------
Total equity 3,916,937 3,802,672
-------------------------------------------------- ----- -------------- --------------
As at 31 December
------------------------------------------------- ----- ------------------------------
2022 2021
Notes US$ thousands US$ thousands
------------------------------------------------- ----- -------------- --------------
Non-current liabilities
Interest-bearing loans 20 840,678 1,157,545
Notes payable 30 95,853 -
Lease liabilities 25 9,920 6,146
Provision for mine closure cost 21 242,380 256,956
Pensions and other post-employment benefit plans 22 9,462 6,506
Deferred tax liability 11 111,120 68,745
------------------------------------------------- ----- -------------- --------------
1,309,413 1,495,898
------------------------------------------------- ----- -------------- --------------
Current liabilities
Trade and other payables (1) 23 258,867 270,317
Interest-bearing loans 20 317,879 -
Notes payable(1) 30 9,109 107,918
Income tax payable 81,235 62,287
Derivative financial instruments 30 487 3,885
Lease liabilities 25 5,209 4,681
Provision for mine closure cost 21 4,827 3,351
Employee profit sharing 10,317 16,458
--------------------------------- --------- ---------
687,930 468,897
--------------------------------- --------- ---------
Total liabilities 1,997,343 1,964,795
--------------------------------- --------- ---------
Total equity and liabilities 5,914,280 5,767,467
--------------------------------- --------- ---------
(1 The amounts recognised in Notes payable as at 31 December
2021 has been presented separately from Trade and other payables to
better reflect the nature of the balance.)
These financial statements were approved by the Board of
Directors on 6 March 2023 and signed on its behalf by:
Mr Juan Bordes
Non-executive Director
6 March 2023
Consolidated Statement of Cash Flows
Year ended 31 December
Year ended 31 December
------------------------------------------ ------ --------------------------
2021
2022 US$
Notes US$ thousands thousands
------------------------------------------ ------ -------------- ----------
Net cash from operating activities 29 502,185 895,141
------------------------------------------ ------ -------------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment 3 (592,129) (592,052)
Proceeds from the sale of property,
plant and equipment and other assets 1,357 6,042
Proceeds from Silverstream contract 14 33,355 48,986
Proceeds from the Layback Agreement 2 (c) 15,000 25,000
Interest received 28,235 10,459
Net cash used in investing activities (514,182) (501,565)
------------------------------------------ ------ -------------- ----------
Cash flows from financing activities
Proceeds from notes payable 30 8,140 41,665
Payment of notes payable 30 (10,008) -
Principal element of lease payments 25 (a) (5,125) (5,971)
Dividends paid to shareholders of the
Company(1) (201,950) (245,561)
Capital contribution(2) 10,143 31,885
Interest paid(3) (55,308) (49,334)
------------------------------------------ ------ -------------- ----------
Net cash used in financing activities (254,108) (227,316)
------------------------------------------ ------ -------------- ----------
Net (decrease)/increase in cash and
cash equivalents during the year (266,105) 166,260
Effect of exchange rate on cash and
cash equivalents (117) (1,393)
Cash and cash equivalents at 1 January 1,235,282 1,070,415
------------------------------------------ ------ -------------- ----------
Cash and cash equivalents at 31 December 17 969,060 1,235,282
------------------------------------------ ------ -------------- ----------
(1) Includes the effect of hedging of dividend payments made in
currencies other than US dollar (note 19).
(2) (Corresponds to capital contributions provided by Minera los
Lagartos, S.A. de C.V.)
(3) The amount corresponds to the interest paid during the year
ended 31 December 2022 related to senior notes and notes payable
less amounts capitalised totalling US$8.5 million (2021: US$8.4
million) which were included within Purchase of property, plant and
equipment (note 13).
Consolidated Statement of Changes in Equity
Year ended 31 December
Attributable to the equity holders
of the Company
------- -------------------- --------------------------------------------------------------
Fair
value
reserve
of Foreign
Cost of financial currency
Share Share Capital Hedging hedging assets translation Retained Non-controlling Total
Notes capital premium reserve reserve reserve at FVOCI reserve earnings Total interests equity
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
US$ thousands
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- -------------------------------------
Balance at
1 January
2021 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 19 - - - - - - - (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
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Profit for the
year - - - - - - - 271,897 271,897 36,394 308,291
Other
comprehensive
income, net
of tax - - - 1,169 38 (3,998) 234 (606) (3,163) (1,981) (5,144)
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Total
comprehensive
income for
the
year - - - 1,169 38 (3,998) 234 271,291 268,734 34,413 303,147
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Hedging loss
transferred
to the
carrying
value of PPE
purchased
during
the year - - - 782 - - - - 782 2,102 2,884
Capital
contribution - - - - - - - - - 10,143 10,143
Dividends
declared
and paid 19 - - - - - - - (201,909) (201,909) - (201,909)
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
Balance at
31 December
2022 368,546 1,153,817 (526,910) (91) - 79,786 (1,886) 2,612,469 3,685,731 231,206 3,916,937
-------------- ----- ------- --------- --------- ------- ------- --------- ----------- --------- --------- --------------- ---------
1. Corporate information
Fresnillo plc. ("the Company") is a public limited company and
registered in England and Wales with registered number 6344120 and
is the holding company for the Fresnillo subsidiaries detailed in
note 5 of the Parent Company accounts ('the Group').
Industrias Peñoles S.A.B. de C.V. ('Peñoles') currently owns 75
percent of the shares of the Company and the ultimate controlling
party of the Company is the Baillères family, whose beneficial
interest is held through Peñoles. The registered address of Peñoles
is Calzada Legaria 549, Mexico City 11250. Copies of Peñoles'
accounts can be obtained from www.penoles.com.mx. Further
information on related party balances and transactions with
Peñoles' group companies is disclosed in note 27.
The consolidated financial statements of the Group for the year
ended 31 December 2022 were authorised for issue by the Board of
Directors of Fresnillo plc on 6 March 2023.
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. During 2022 and 2021 all the production were sold to Peñoles'
metallurgical complex, Met-Mex, for smelting and refining. Further
information about the Group operating mines and its principal
activities is disclosed in note 3.
The financial information for the year ended 31 December 2022
and 2021 contained in this document does not constitute statutory
accounts as defined in section 435 of the Companies Act 2006. The
financial information for the years ended 31 December 2022 and 2021
have been extracted from the consolidated financial statements of
Fresnillo plc for the year ended 31 December 2022 which have been
approved by the directors on 6 March 2023 and will be delivered to
the Registrar of Companies in due course. The auditor's report on
those financial statements was unqualified and did not contain a
statement under section 498 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 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 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 ($000) except when otherwise
indicated.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out above. The financial position of the Group, its cash
flows and liquidity position are described in the Financial Review.
In addition, note 31 to the financial statements includes the
Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its
financial instruments; and its exposures to credit risk and
liquidity risk.
In making their assessment of the Group's ability to manage its
future cash requirements, the Directors have considered the Company
and Group budgets and the cash flow forecasts for the period to 31
December 2024 (being the going concern assessment period). The
Directors have also considered the cash position as of 31 December
2022 (US$ 969.1 million) and the net current asset position
(US$1,252.3 million), which includes the debt repayment due in 2023
(US$317.9 million), as described in the financial review. In
addition, they reviewed a more conservative cash flow scenario with
reduced silver and gold prices of US$20.0 and US$1,718 respectively
throughout this period, whilst maintaining current budgeted
expenditure and only considering projects approved by the Executive
Committee. This resulted in our current cash and cash equivalents
balances reducing over time but maintaining sufficient liquidity
throughout the period.
The Directors have further calculated prices (US$18.5 and
US$1,574 for silver and gold respectively), which should they
prevail to the end of 2024 would result in cash balances decreasing
to minimal levels by the end of 2024, without applying
mitigations.
Should metal prices remain below the stressed prices above for
an extended period, management have identified specific elements of
capital and exploration expenditures which could be deferred
without adversely affecting production profiles throughout the
period. Finally, management could amend the mining plans to
concentrate on production with a higher margin in order to
accelerate cash generation without affecting the integrity of the
mine plans.
Previously, the Directors reviewed scenarios that incorporated
an estimated potential impact of government-imposed stoppages due
to Covid-19 restrictions. The Directors reassessed the situation in
the current year, considering in particular the fact mining was
declared an essential activity by the Federal Government and there
have been no further stoppages at any of our mines. Furthermore, as
previously reported, we have implemented additional health and
safety measures at each of our mines [coupled with extensive
targeted and random testing]. The Directors concluded that the risk
of government-imposed stoppages was low and therefore disclosure of
a specific Covid scenario is no longer relevant.
After reviewing all of the above considerations, the Directors
have a reasonable expectation that management have sufficient
flexibility in adverse circumstances to maintain adequate resources
to continue in operational existence for the foreseeable future.
The Directors, therefore, continue to adopt the going concern basis
of accounting in preparing the annual financial statements.
Basis of consolidation
The consolidated financial statements set out the Group's
financial position as of 31 December 2022 and 2021, 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 2021, except for the adoption of some
amendment as follow:
- Proceeds deducted from the cost of Property, plant and
equipment
Amendments to IAS 16, 'Property, plant and equipment' prohibit a
company from deducting from the cost of property, plant and
equipment amounts received from selling items produced while the
company is preparing the asset for its intended use. Instead, a
company will recognise such sales proceeds and related cost in
profit or loss. This resulted in a change to the Group's accounting
policies.
Ore generated as part of the development stage may be processed
and sold, giving rise to revenue before the commencement of
commercial production. Prior to 1 January 2022, where such
processing was 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 were credited to mining properties and
development costs. From 1 January 2022, such revenue is recognised
in profit or loss and cost of sales is measured based on operating
cost once commercial production has been initiated. The adoption of
this amendment did not have any impact on the financial position or
performance of the Group as there were no sales from ore processed
by plants in their testing period in the years where the amendment
is applicable.
New standards, interpretations and amendments (new standards)
adopted by the Group
Other than above, a number of new or amended standards became
applicable for the current reporting period. The Group did not have
to change its accounting policies or make retrospective adjustments
as a result of adopting these standards.
Standards, interpretations and amendments issued but not yet
effective
The IASB has issued other amendments resulting from improvements
to IFRSs that management considers do not have any impact on the
accounting policies, financial position or performance of the
Group. 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
2022 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.
In addition to, but separate from, the lands mentioned above,
Penmont is the legal and registered owner of the land where the
Soledad & Dipolos leaching pads are located but has not yet
been able to gain physical access to these pads due to opposition
by certain local individuals. This land was purchased by Penmont
from the Federal Government of Mexico in accordance with due legal
process. 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 potential negotiation scenarios and the different legal
proceedings that Penmont has presented in order to regain access to
the lands, as well as other ongoing proceedings including claims by
members of the agrarian community requesting the cancellation of
Penmont's property deed over this area, which claims Penmont
believes are without merit. All such proceedings are pending final
resolution. Therefore, the Group continues to recognise property,
plant & equipment and inventory related to Soledad &
Dipolos, as disclosed in note 13 and note 15, 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.
Furthermore, 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 2022 or 31 December 2021.
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 was paid in November 2022, and US$22.8
million that will be paid no later than 1 December 2023. The future
amounts 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 the Group had continued 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 had recognised the total value of the agreement as
deferred income. In December 2022 the Group successfully concluded
with the support to Orla with respect to the negotiations relevant
to the acquisition of the rights to access. Thus, the Company
considers all the obligations established in the Layback Agreement
to have been completed and has recognised the total value of the
agreement in profit or loss as other income.
Juanicipio project:
The Group assesses the stage of each mine under
development/construction to determine when a mine moves into the
production phase, this being when the mine is substantially
complete and ready for its intended use. The criteria used to
assess the start date are determined based on the nature of each
mine project, considering its complexity, location and other
relevant factors.
The criteria to assess this date considers the level of capital
expenditure compared with the estimated construction cost, the
availability of ore reserves to sustain ongoing extraction, the
extraction of ore from production areas, and the production
feasibility considering the operating resources available.
When the production phase is considered to have commenced, all
related costs are transferred from "Construction in progress" to
the relevant class of "Property, plant and equipment". At this
stage, the capitalisation of development costs ceases, depreciation
commences, and additional costs are either recognised as costs of
inventories or expenses, except for those that qualify for
capitalisation relating to mining asset additions or improvements,
underground mine development or mineable reserve development.
During 2021 the Group finalised the construction of the
Juanicipio project. As of 1 January 2022 , the mine started
commercial production, while the plant commissioning activities
were postponed due to delays in the connection of the plant to the
national electricity grid. Consequently, the Group assessed the
production start date for the mine and the plant separately . As a
result, the Group determined that the Juanicipio mine started
operations from 1 January 2022 . During 2022 the activities
necessary to connect the plant to the national electricity grid
continued and in December were concluded satisfactorily. The Group
has determined that as of 31 December 2022, the plant facilities
are substantially complete and the commissioning process has begun.
As at 31 December 2022 the plant's assets US$228.3 million are
presented within Property plant and equipment and its depreciation
will commence once production takes place. The costs incurred as a
part of the testing of equipment prior to the connection to the
power grid including employees training has been considered as
unabsorbed production cost as presented in note 6.
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 14, 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 21.
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. In addition, societal expectations are driving government
action that may impose further requirements and cost on companies
in the future. Future changes to the Group's climate change
strategy, global decarbonisation signposts and regulation 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,
refer to note 13;
-- 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, refer to note
13;
-- 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, refer to note
13;
-- Provisions for mine closure costs may change where changes to
the ore reserve and resources estimates affect expectations about
when such activities will occur, refer to note 21;
-- 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,
refer to note 11.
Estimate of recoverable ore on leaching pads, (note 15)
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 14):
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, and the impact of changes in key
assumptions are included in note 14.
Income tax, notes 2 (q) and 11:
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
During 2022, the Group continued to apply measures to safeguard
the health of its employees and their local communities while
continuing to operate safely and responsibly. During 2022
operations have not been suspended, all mines have operated at
normal production capacity. The Group incurred other production
costs of US$2.7 million (2021: US$4.7 million) related to COVID-19
measures which include community support, the acquisition of
additional personal protective equipment and other safety measures.
These are presented in cost of sales.
During 2022 and 2021, 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 2022, there were no material changes to the valuation of
the Group's asset and liabilities as a result of 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 recognised in profit or loss.
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
Financial assets
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.
Purchases or sales of financial assets that require delivery of
assets within a time frame established by regulation or convention
in the market place (regular way trades) are recognised on the
trade date, i.e., the date that 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 holds the following financial assets:
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).
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.
Financial liabilities
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, loans and borrowings and derivative financial
instruments.
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.
(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 for 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 within 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 in 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.
Variable lease payments that are not linked to price changes due
to changes in a market rate or the value of an index and are linked
to future performance or use of an underlying asset are not
included in the measurement of the lease liability. Such cost are
recognized in profit and loss as incurred.
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, doré, slag,
precipitates 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.
Sales contracts with our customer establish that for products
other than refined silver and gold, refining and treatment charges
are deducted from revenue from sales of products. Refining and
treatment charges represent an element of the cost that will be
incurred by our customer in processing the products further to
extract the metal content for onward sale to its customers.
(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 11 (e)). The Group
recognises deferred tax assets and liabilities on temporary
differences arising in the determination of the Special Mining
Right (See note 11).
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. 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 is 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 30 and 30 (b).
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 30.
(u) Dividend distribution
Dividends on the Company's ordinary shares are recognised when
they have been appropriately authorised and are no longer at the
Company's discretion. Accordingly, interim dividends are recognised
when they are paid and final dividends are recognised when they are
declared following approval by shareholders at the Company's Annual
General Meeting.
3. Segment reporting
For management purposes, the Group is organised into operating
segments based on producing mines.
At 31 December 2022, 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;
The San Julian mine, located on the border of Chihuahua /
Durango states, an underground silver-gold mine, and
The Juanicipio mine, in the State of Zacatecas, an underground
silver mine.(1)
(1) (The Juanicipio mine is now considered as a segment due to
the commencement of its operations and its contribution to the
Group's revenues and segment profit. Accordingly, the comparative
segment information has been restated to reflect this change.)
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 2022 and 2021, 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 2022 and 2021, respectively. Revenues for the year ended
31 December 2022 and 2021 include those derived from contracts with
costumers and other revenues, as showed in note 5.
Year ended 31 December 2022
----------------------------------------------------------------------------------------------------------------------------
Adjustments
Noche San Other and
US$ thousands Fresnillo Herradura Cienega Saucito Buena Julian Juanicipio(4) (5) eliminations Total
--------------- --------- --------- ------- ------- ------- ------- ------------- --------- ------------ ---------
Revenues:
Third party(1) 503,759 634,438 169,504 594,250 142,733 392,084 (3,778) 2,432,990
Inter-segment 215,736 148,362 (364,098) -
--------------- --------- --------- ---------------- ------- ------- ------------- --------- ------------ ---------
Segment
revenues 503,759 634,438 169,504 594,250 142,733 392,084 215,736 148,362 (367,876) 2,432,990
Segment
profit(2) 197,043 127,919 39,551 197,791 44,436 190,842 154,544 106,275 (12,203) 1,046,198
Depreciation
and
amortisation (500,569)
Employee profit
sharing (9,609)
--------------- --------- --------- ------- ------- ------- ------- ------------- --------- ------------
Gross profit
as per the
income
statement 536,020
--------------- --------- --------- ------- ------- ------- ------- ------------- --------- ------------ ---------
Capital
expenditure(3) 106,579 105,322 47,019 117,989 424 64,490 149,629 677 - 592,129
--------------- --------- --------- ------- ------- ------- ------- ------------- --------- ------------ ---------
1 Adjustments and eliminations correspond to hedging loss (note
5).
(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 ore from Juanicipio.)
(3 Capital expenditure represents the cash outflow including
interest capitalised in respect of additions to property, plant and
equipment, such as mine development, construction of leaching pads,
and purchase of mine equipment, excluding additions relating to
changes in the mine closure provision. Significant additions
include stripping cost at Herradura mine and purchase of mobile
equipment at Juanicipio and Saucito mines.)
(4 The ore production of Juanicipio mine has been processed
through Fresnillo and Saucito facilities.)
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure mainly corresponds to) (Minera Bermejal, S. de R.L. de
C.V.)
Year ended 31 December 2021
----------------------------------------------------------------------------------------------------------------------------
Adjustments
Noche San Other and
US$ thousands Fresnillo Herradura Cienega Saucito Buena Julian Juanicipio(4) (5) 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 75,393 72,334 (147,727) -
--------------- --------- --------- ---------------- ------- ------- ------------- --------------------- ---------
Segment
revenues 493,582 769,896 215,623 547,294 168,849 509,247 75,393 72,334 (149,123) 2,703,095
Segment
profit(2) 224,558 285,354 106,498 321,349 77,158 322,734 60,473 83,533 (4,800) 1,476,857
Foreign
exchange
hedging losses 3,827
Depreciation
and
amortisation (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 Adjustments and eliminations correspond to hedging loss (note
5).
(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 ore from Juanicipio.)
(3 Capital expenditure represents the cash outflow) (including
interest capitalised) (in respect of additions to property, plant
and equipment, such as 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 mine.)
(4 The ore production of Juanicipio mine has been processed
through Fresnillo and Saucito facilities.)
(5 Other inter-segment) (revenue corresponds to) (leasing
services provided by Minera Bermejal, S.A. de C.V) (; capital
expenditure mainly corresponds to) (Minera Bermejal, S. de R.L. de
C.V.)
4. Group information
The list of the Company's subsidiaries included in the
consolidated financial statements and its principal activities are
shown in Note 5 on the Parent Company's separate financial
statements.
(a) Material partly-owned subsidiaries
The table below shows the detail of non-wholly owned
subsidiaries of the Group that have non-controlling interests:
Portion of Profit (loss)
ownership interest allocated to Accumulated
held by non-controlling non-controlling non-controlling
interest interest interest
----------------------------------------- -------------------------- -------------------- --------------------
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
Minera Juanicipio, S. A. de C.V. 44% 44% 31,398 15,621 160,046 128,742
Equipos Chaparral, S. A. de C.V. 44% 44% 5,105 249 69,561 54,122
Other subsidiaries with non-controlling
interests not considered to be material - - (109) 1,417 1,599 1,684
----------------------------------------- ------------ ------------ --------- --------- --------- ---------
Set out below is the summarised financial information for each
subsidiary that has non-controlling interests that are material to
the Group. Figures are presented in thousands of US dollars unless
otherwise indicated.
Summarised income statement for the year ended 31 December 2022
and 2021
Minera Juanicipio, Equipos Chaparral,
S. A. de C.V. S. A. de C.V.
---------------------------------------------- -------------------- --------------------
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
---------------------------------------------- --------- --------- --------- ---------
Revenue 215,736 75,393 - -
Profit before income tax 100,635 56,706 5,390 146
Income tax (charge)/credit (29,277) (21,205) 6,212 421
---------------------------------------------- --------- --------- --------- ---------
Profit for the year for continuing operations 71,358 35,501 11,602 567
Other comprehensive (loss)/income (248) (38) 31 455
---------------------------------------------- --------- --------- --------- ---------
Total comprehensive income 71,110 35,463 11,633 1,022
---------------------------------------------- --------- --------- --------- ---------
Attributable to non-controlling interests ,31,288 15,604 5,119 449
Dividends paid to non-controlling interests - - - -
---------------------------------------------- --------- --------- --------- ---------
Summarised statement of financial position as at 31 December
2022 and 2021
Minera Juanicipio, Equipos Chaparral,
S. A. de C.V. S. A. de C.V.
--------------------------------------- -------------------- --------------------
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
--------------------------------------- --------- --------- --------- ---------
Current
Assets 77,596 90,086 13,226 35,911
Liabilities 80,984 284,340 31,299 44,651
--------------------------------------- --------- --------- --------- ---------
Total current net assets/(liabilities) (3,388) (194,254) (18,073) (8,740)
--------------------------------------- --------- --------- --------- ---------
Non-current
Assets 630,418 486,849 202,263 131,745
Liabilities 263,290 - 26,097 -
--------------------------------------- --------- --------- --------- ---------
Total non-current net assets 367,128 486,849 176,166 131,745
--------------------------------------- --------- --------- --------- ---------
Net assets 363,740 292,595 158,093 123,005
--------------------------------------- --------- --------- --------- ---------
Attributable to:
Equity holders of parent 203,694 163,853 88,532 68,883
Non-controlling interest 160,046 128,742 69,561 54,122
--------------------------------------- --------- --------- --------- ---------
Summarised cash flow information for the year ended 31 December
2022 and 2021
Minera Juanicipio, Equipos Chaparral,
S. A. de C.V. S. A. de C.V.
------------------------------------------ -------------------- --------------------
31-Dec-22 31-Dec-21 31-Dec-22 31-Dec-21
------------------------------------------ --------- --------- --------- ---------
Operating 127,113 55,540 (28,354) -
Investing (115,961) (254,830) 261 -
Financing (24,777) 166,480 23,663 -
------------------------------------------ --------- --------- --------- ---------
Net decrease in cash and cash equivalents (13,625) (32,810) (4,430) -
------------------------------------------ --------- --------- --------- ---------
5. 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
------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------------- -------------- --------------
Revenues from contracts with customers 2,440,063 2,705,720
Revenues from other sources:
Provisional pricing adjustment on products sold (3,302) (1,274)
Hedging loss on sales (3,771) (1,351)
------------------------------------------------- -------------- --------------
2,432,990 2,703,095
------------------------------------------------- -------------- --------------
(b) Revenues by product sold
Year ended 31
December
------------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------------------------- -------------- --------------
Lead concentrates (containing silver, gold, lead and
by-products) 1,090,735 1,157,623
Doré and slag (containing gold, silver and by-products) 648,002 806,289
Zinc concentrates (containing zinc, silver and by-products) 326,912 346,892
Precipitates (containing gold and silver) 238,171 259,835
Activated carbon (containing gold, silver and by-products) 129,170 132,456
------------------------------------------------------------- -------------- --------------
2,432,990 2,703,095
------------------------------------------------------------- -------------- --------------
(c) Value of metal content in products sold
Invoiced revenues are derived from the value of metal content
which is determined by commodity market prices and adjusted for the
treatment and refining charges to be incurred by the metallurgical
complex of our customer. The value of the metal content of the
products sold, before treatment and refining charges is considered
as an alternative performance measure for the Group. The Group
considers this a useful additional measure to help understand
underlying factors driving revenue in terms of volumes sold and
realised prices. The value of production sold by metal is as
follows:
Year ended 31
December
---------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------------------------------- -------------- --------------
Silver 1,089,189 1,163,879
Gold 1,114,168 1,305,277
Zinc 283,453 259,987
Lead 106,640 117,448
---------------------------------------- -------------- --------------
Value of metal content in products sold 2,593,450 2,846,591
Refining and treatment charges (160,460) (143,496)
---------------------------------------- -------------- --------------
Total revenues (1) (,) 2,432,990 2,703,095
---------------------------------------- -------------- --------------
1 Includes provisional price adjustments which represent changes
in the fair value of trade receivables resulting in a loss of
US$3.3 million (2021: loss of US$1.2 million) and hedging loss of
US$3.8 million (2021: loss of US$1.4 million). For further detail,
refer to note 2(n).
The average realised prices for the gold and silver content of
products sold, prior to the deduction of treatment and refining
charges, were:
Year ended 31
December
----------- ------------------
2022 2021
US$ per US$ per
ounce ounce
----------- -------- --------
Gold (2) 1,799.26 1,794.96
----------- -------- --------
Silver (2) 21.72 24.87
----------- -------- --------
(2 For the purpose of the calculation, revenue by content of
products sold does not include the results from hedging.)
6. Cost of sales
Year ended 31 December
--------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
--------------------------------------------------- -------------- --------------
Depreciation and amortisation 500,569 528,206
Contractors 367,003 403,568
Energy 231,505 233,667
Operating materials 269,720 221,773
Maintenance and repairs 252,907 199,264
Personnel expenses (note 8) 175,508 135,758
Mine equipment leased (1) 48,991 -
Mining concession rights and contributions 22,044 20,266
Surveillance 18,741 9,832
Insurance 11,069 9,628
Freight 11,843 8,433
IT services 11,401 6,034
Other 34,675 22,250
--------------------------------------------------- -------------- --------------
Cost of production 1,955,976 1,798,679
Unabsorbed production costs(2) 2,592 956
Gain on foreign currency hedges - (3,827)
Change in work in progress and finished goods (ore
inventories) (61,598) (29,638)
1,896,970 1,766,170
--------------------------------------------------- -------------- --------------
(1 Corresponds to mine equipment leased to contractors, the
lease payments are based on a variable rate linked to the usage of
the assets.)
2 Corresponds to costs incurred in Juanicipio plant activities
(note 2 (c)) (2021: Corresponds to production cost incurred in
Minera San Julian as a result of a plant stoppage).
7. Exploration expenses
Year ended 31
December
------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------- -------------- --------------
Contractors 111,981 89,842
Mining concession rights and contributions 25,570 21,790
Administrative services 2,086 4,614
Personnel expenses (note 8) 10,779 6,425
Assays 6,269 1,783
Rentals 603 468
Other 8,502 5,369
------------------------------------------- -------------- --------------
165,790 130,291
------------------------------------------- -------------- --------------
These exploration expenses were mainly incurred in the operating
mines located in Mexico; the Guanajuato, Orisyvo and Valles
projects; and the Mexico Nuevo and Tajitos prospects. Exploration
expenses of US$17.9 million (2021: US$14.5 million) were incurred
in the year on projects located in Peru and Chile.
The following table sets forth liabilities (generally trade
payables) corresponding to exploration activities of the Group
companies engaged only in exploration, principally Exploraciones
Mineras Parreña, S.A. de C.V.
Year ended 31
December
---------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Liabilities related to exploration activities 70 348
---------------------------------------------- -------------- --------------
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
----------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
----------------------------------------------------------- -------------- --------------
Operating cash out flows related to exploration activities 166,068 130,915
----------------------------------------------------------- -------------- --------------
8. Personnel expenses
Year ended 31
December
----------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
----------------------------------------------- -------------- --------------
Salaries and wages 87,534 66,488
Statutory healthcare and housing contributions 32,856 23,771
Employees' profit sharing 9,841 16,662
Other benefits 26,458 18,679
Bonuses 19,752 14,906
Social security 257 5,777
Post-employment benefits 8,792 4,300
Vacations and vacations bonus 5,448 3,262
Training 3,749 2,867
Legal contributions 4,202 2,130
Other 3,451 4,028
----------------------------------------------- -------------- --------------
202,340 162,870
----------------------------------------------- -------------- --------------
(a) Personnel expenses are reflected in the following line
items:
Year ended 31
December
------------------------------ ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------ -------------- --------------
Cost of sales (note 6) 175,508 135,758
Administrative expenses 16,053 20,687
Exploration expenses (note 7) 10,779 6,425
------------------------------ -------------- --------------
202,340 162,870
------------------------------ -------------- --------------
(b) The monthly average number of employees during the year was
as follows:
Year ended 31
December
------------------------- ---------------
2022 2021
No. No.
------------------------- ------- ------
Mining 3,967 2,883
Plant 1,074 1,032
Exploration 265 432
Maintenance 1,382 1,259
Administration and other 1,237 1,062
------------------------- ------- ------
Total 7,925 6,668
------------------------- ------- ------
9. Other operating income and expenses
Year ended 31
December
-------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Other income:
Gain on sale of property, plant and equipment and other
assets - 5,026
Layback Agreement (note 2 (c)) 67,182 -
Rentals 767 1,802
Other 3,911 5,086
-------------------------------------------------------- -------------- --------------
71,860 11,914
-------------------------------------------------------- -------------- --------------
Year ended 31
December
-------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Other expenses:
Write-off of assets (1) 11,315 -
Maintenance (2) 2,939 3,663
Donations 8,794 538
Environmental activities(3) 2,997 4,813
Saucito rehabilitation cost for mine flood - 4,803
Cost of insurance claims 4,246 1,422
Consumption tax expensed 2,073 1,183
Other 6,391 6,824
-------------------------------------------------------- -------------- --------------
38,755 23,246
-------------------------------------------------------- -------------- --------------
(1 Mainly correspond to mobile equipment damage and mining works
collapsed)
2 Costs relating to the rehabilitation of the facilities of
Compañía Minera las Torres, S.A. de C.V. (a closed mine).
(3) Main activities were related with the evaluation of
improvement in tailing dams in Fresnillo and Cienega and closure
activities in the San Ramon satellite mine (closed at the end of
2020) (2021: main activities were related with the evaluation of
improvement in tailing dams in Fresnillo and Cienega)
10. Finance income and finance costs
Year ended 31
December
------------------------------------------------------ ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------------------ -------------- --------------
Finance income:
Interest on short-term deposits and investments 20,956 5,167
Interest on tax receivables 4,507 3,637
Other 997 70
------------------------------------------------------ -------------- --------------
26,460 8,874
------------------------------------------------------ -------------- --------------
Year ended 31
December
------------------------------------------------------ ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------------------ -------------- --------------
Finance costs:
Interest on interest-bearing loans and notes payables 51,395 48,888
Interest on tax amendments (Note 11) 11,519 -
Interest on lease liabilities 720 504
Unwinding of discount on provisions 15,243 11,522
Other 2,744 836
------------------------------------------------------ -------------- --------------
81,621 61,750
------------------------------------------------------ -------------- --------------
11. Income tax expense
a) Major components of income tax expense:
Year ended 31
December
---------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Consolidated income statement:
Corporate income tax
Current:
Income tax charge 134,896 268,945
Amounts under provided in previous years (1,710) 7,696
---------------------------------------------------- -------------- --------------
133,186 276,641
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (206,196) (120,043)
Revaluation effects of Silverstream contract 5,636 (125)
---------------------------------------------------- -------------- --------------
(200,560) (120,168)
---------------------------------------------------- -------------- --------------
Corporate income tax (67,374) 156,473
Special mining right
Current:
Special mining right charge (note 11 (e)) 38,230 53,147
Amounts under provided in previous years 1,954 363
---------------------------------------------------- -------------- --------------
40,184 53,510
---------------------------------------------------- -------------- --------------
Deferred:
Origination and reversal of temporary differences (32,530) (36,947)
---------------------------------------------------- -------------- --------------
Special mining right 7,654 16,563
Income tax expense reported in the income statement (59,720) 173,036
Year ended 31
December
--------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Consolidated statement of comprehensive income:
Deferred income tax (charge)/credit related to items
recognised directly in other comprehensive income:
Gain on cash flow hedges recycled to income statement (1,131) 743
Changes in fair value of cash flow hedges (184) 298
Changes in the fair value of cost of hedges 414 1,619
Changes in fair value of equity investments at FVOCI 1,714 14,415
Remeasurement losses on defined benefit plans 114 (908)
--------------------------------------------------------- -------------- --------------
Income tax effect reported in other comprehensive income 927 16,167
--------------------------------------------------------- -------------- --------------
Following conversations held by the Company with the Servicio de
Admnistracion Tributario (SAT) regarding its income tax audits for
the year 2014, 2015 and 2016 at Desarrollos Mineros Fresne, the
Group decided to voluntarily amend the income tax and mining
right's treatment of: (i) the stripping costs, and (ii) the
deduction of exploration expenses.
These amendments were applied to tax returns from 2014 to 2021
(for the year 2021 the amendment also included Minera Penmont as
the merging entity of Desarrollos Mineros Fresne) and resulted in
an increase in the current corporate income tax charge of US$ 3.2
million and current special mining right charge of US$2.7 million
and a recoverable income tax balance of US$ 3.2 million.This effect
was offset by a decrease in deferred corporate income tax of US$3.4
million. The amendment also resulted in US$11.5 million of interest
and surcharges presented in finance costs.
(b) Reconciliation of the income tax expense at the Group's
statutory income rate to income tax expense at the Group's
effective income tax rate:
Year ended 31
December
-------------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------------------------------------------- -------------- --------------
Accounting profit before income tax 248,571 611,532
-------------------------------------------------------------- -------------- --------------
Tax at the Group's statutory corporate income tax rate
30.0% 74,571 183,460
Expenses not deductible for tax purposes 7,045 3,442
Inflationary uplift of the tax base of assets and liabilities (62,666) (49,389)
Current income tax (over)/underprovided in previous
years 3,107 1,569
Exchange rate effect on tax value of assets and liabilities
(1) (72,888) 32,078
Non-taxable/non-deductible foreign exchange effects 1,167 1,892
Inflationary uplift of tax losses (7,843) (4,165)
Inflationary uplift on tax refunds (1,352) (1,732)
Incentive for Northern Border Zone (17,491) (10,077)
Deferred tax asset not recognised 7,893 6,465
Special mining right deductible for corporate income
tax (2,296) (4,969)
Other 3,379 (2,101)
-------------------------------------------------------------- -------------- --------------
Corporate income tax at the effective tax rate of (27.1%)
(2021: 25.5%) (67,374) 156,473
-------------------------------------------------------------- -------------- --------------
Special mining right 7,654 16,563
-------------------------------------------------------------- -------------- --------------
Tax at the effective income tax rate of (24.02%) (2021:
28.2%) (59,720) 173,036
-------------------------------------------------------------- -------------- --------------
(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
-------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Opening net liability (1,445) (174,919)
Income statement credit arising on corporate income
tax 200,560 120,168
Income statement credit arising on special mining right 32,530 36,947
Exchange difference (4) 192
Net charge related to items directly charged to other
comprehensive income 927 16,167
Closing net asset/(liability) 232,568 (1,445)
-------------------------------------------------------- -------------- --------------
The amounts of deferred income tax assets and liabilities as at
31 December 2022 and 2021, considering the nature of the related
temporary differences, are as follows:
Consolidated Consolidated
balance sheet income statement
---------------------------------------------------- ------------------------------ ------------------------------
2022 2021 2022 2021
US$ thousands US$ thousands US$ thousands US$ thousands
---------------------------------------------------- -------------- -------------- -------------- --------------
Related party receivables (158,797) (153,702) 5,095 (113,284)
Other receivables (3,974) (3,247) 727 (45)
Inventories 115,383 97,170 (18,213) 134,414
Prepayments (2,423) (2,872) (449) 1,039
Derivative financial instruments including
Silverstream contract (147,887) (153,111) (6,125) (14,352)
Property, plant and equipment arising from
corporate income tax 142,241 (50,155) (192,396) (65,896)
Exploration expenses and operating liabilities 91,265 110,989 19,724 (49,890)
Other payables and provisions 74,162 78,092 3,930 (4,386)
Losses carried forward 117,689 90,439 (27,250) (15,396)
Post-employment benefits 1,504 1,034 (356) (38)
Deductible profit sharing 3,095 4,937 1,842 1,516
Special mining right deductible for corporate
income tax 10,738 23,692 12,954 (2,037)
Equity investments at FVOCI (16,937) (20,554) (1,903) (975)
Other (11,172) (9,309) 1,860 9,161
---------------------------------------------------- -------------- -------------- -------------- --------------
Net deferred tax asset related to corporate
income tax 214,887 13,403
Deferred tax credit related to corporate
income tax (200,560) (120,169)
Related party receivables arising from
special mining right (39,541) (38,150) 1,391 9,368
Inventories arising from special mining right 28,685 21,332 (7,353) (4,436)
Property plant and equipment arising from special
mining right 7,887 (19,298) (27,185) (20,615)
Other 20,650 21,268 617 (21,264)
---------------------------------------------------- -------------- -------------- -------------- --------------
Net deferred tax (asset)/liability related
to special mining rights 17,681 (14,848)
Deferred tax credit (233,090) (157,116)
---------------------------------------------------- -------------- -------------- -------------- --------------
Reflected in the statement of financial
position as follows:
Deferred tax assets 343,688 67,300
Deferred tax liabilities (111,120) (68,745)
---------------------------------------------------- -------------- -------------- -------------- --------------
Net deferred tax asset/(liability) 232,568 (1,445)
---------------------------------------------------- -------------- -------------- -------------- --------------
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 of
US$117.7 million (2021: US$90.4 million) has been recognised in
respect of tax losses amounting to US$391.6 million (2021: US$301.5
million). If not utilised, US$33.2 million (2021: US$29.5 million)
will expire within five years and US$358.4 million (2021: US$272.0
million) will expire between six and ten years. Of the total
deferred tax asset related to losses, US$34.4 million (2021:
US$23.3 million) is covered by the existence of taxable temporary
differences, the remaining US$83.3 million (2021: US$67.1 million)
corresponds to Fresnillo plc which maintained a deferred net asset
position. The Group has performed an assessment of the
recoverability of tax losses before their expiration, thus there is
convincing other evidence that sufficient taxable profit will be
available against which the unused tax losses can be utilised.
The Group has further tax losses and other similar attributes
carried forward of US$91.9 million (2021: US$72.6 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$1,006 million (2021: US$1,056
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 remained in force until 31 December 2020. On 30
December 2020 and extension of the Decree was published in the
Official Gazette which remains 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 2022, the Group
credited US$0.00 million (2021: US$11.5 million) of mining
concession rights against the SMR. Total mining concessions rights
paid during the year were US$24.6 million (2021: US$22.9 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$38.3 million (2021: US$64.6 million).
12. Earnings per share
Earnings per share ('EPS') is calculated by dividing profit for
the year attributable to equity shareholders of the Company by the
weighted average number of Ordinary Shares in issue during the
period.
The Company has no dilutive potential Ordinary Shares.
As of 31 December 2022 and 2021, earnings per share have been
calculated as follows:
Year ended 31
December
--------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Earnings:
Profit from continuing operations attributable to equity
holders of the Company 271,897 421,209
Adjusted profit from continuing operations attributable
to equity holders of the Company 258,747 421,500
--------------------------------------------------------- -------------- --------------
Adjusted profit is profit as disclosed in the Consolidated
Income Statement adjusted to exclude revaluation effects of the
Silverstream contract of US$18.8 million gain (US$13.1 million net
of tax) (2021: US$0.4 million loss (US$0.3 million net of
tax)).
Adjusted earnings per share have been provided in order to
provide a measure of the underlying performance of the Group, prior
to the revaluation effects of the Silverstream contract, a
derivative financial instrument.
2022 2021
thousands thousands
------------------------------------------------------- ---------- ----------
Number of shares:
Weighted average number of Ordinary Shares in issue 736,894 736,894
------------------------------------------------------- ---------- ----------
2022 2021
US$ US$
------------------------------------------------------- ---------- ----------
Earnings per share:
Basic and diluted earnings per share 0.369 0.572
Adjusted basic and diluted earnings per Ordinary Share 0.351 0.572
------------------------------------------------------- ---------- ----------
13. Property, plant and equipment
Year ended 31 December 2022(3)
------------------ --------------------------------------------------------------------------------------------------
Mining
Land properties
and Plant and development Other Construction
buildings and equipment(4) costs assets(2) in progress Total
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
US$ thousands
------------------ --------------------------------------------------------------------------------------------------
Cost
At 1 January 2022 354,605 2,641,444 2,457,292 374,211 804,650 6,632,202
Additions 2,971 30,249 11,750 (16,947) 556,509 584,532
Disposals(5) (224) (104,445) (21,999) (7,198) - (133,866)
Transfers and
other movements 55,632 261,672 554,618 27,747 (899,669) -
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
At 31 December
2022 412,984 2,828,920 3,001,661 377,813 461,490 7,082,868
Accumulated
depreciation
At 1 January 2022 (198,653) (1,730,511) (1,692,189) (211,774) - (3,833,127)
Depreciation for
the year(1) (23,647) (176,445) (271,552) (34,861) - (506,505)
Disposals(5) 134 96,472 15,873 6,849 - 119,328
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
At 31 December
2022 (222,166) (1,810,484) (1,947,868) (239,786) - (4,220,304)
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
Net book amount at
31 December
2022 190,818 1,018,436 1,053,793 138,027 461,490 2,862,564
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
(1 Depreciation for the year includes US$501.8 million
recognised as an expense in the income statement and US$4.7
million, capitalised as part of construction in progress.)
2 From the additions in "other assets" category US$(27.3)
million corresponds to the reassessment of mine closure
rehabilitations costs, see note 21.
(3 Amounts include Right-of-use assets as described in note
25)
(4 The amount of Property, plant and equipment related to
Soledad & Dipolos at 31 December 2022 is US$35.6 million and
reflects capitalised mining works and the amount recognised in the
cost of Property plant and equipment related to estimated
remediation and closure activities.)
(5 From the total net amount of disposals, US$11.3 million
correspond to a write of assets as disclosed in note 9.)
Year ended 31 December 2021(3)
------------------ --------------------------------------------------------------------------------------------------
Mining
properties
Land and Plant and development Other Construction
buildings and equipment(4) costs assets(2) in progress Total
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
US$ 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 155,952 910,933 765,103 162,437 804,650 2,799,075
------------------ ---------- ----------------- ---------------- ---------- ------------------------ -----------
(1 Depreciation for the year includes US$529.4 million
recognised as an expense in the income statement and US$4.6
million, capitalised as part of construction in progress.)
(2 From the additions in "other assets" category US$3.9 million
corresponds to the reassessment of mine closure rehabilitations
costs, see note 21.)
(3 Amounts include Right-of-use assets as described in note
25)
(4 The amount of Property, plant and equipment related to
Soledad & Dipolos at 31 December 2021 is US$35.4 million and
reflects capitalised mining works and the amount recognised in the
cost of Property plant and equipment related to estimated
remediation and closure activities.)
The table below details construction in progress by operating
mine and development projects
Year ended 31
December
---------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 80,566 85,926
Herradura 27,208 29,479
Noche Buena 9,583 9,685
Ciénega 53,204 38,976
Fresnillo 186,666 188,146
San Julián 34,203 17,304
Juanicipio 67,228 425,513
Other(1) 2,832 9,621
---------------- -------------- --------------
461,490 804,650
---------------- -------------- --------------
(1) (Mainly) corresponds to Minera Bermejal, S.A. de C.V. (2021:
Minera Bermejal, S.A. de C.V.).
During the year ended 31 December 2022, the Group capitalised
US$8.6 million of borrowing costs within construction in progress
(2021: US$8.4 million). Borrowing costs were capitalised at the
rate of 5.02% (2021: 5.02%).
Sensitivity analysis
The key assumptions on which management bases the recoverable
value calculations of the mining assets are commodity prices,
future capital requirements, production costs, reserves and
resources volumes (reflected in production volumes) and discount
rate.
Management considers that the recoverable value models support
the carrying amounts of mining assets as at 31 December 2022. The
models are most sensitive to changes in commodity price assumptions
and production volumes.
Other than as disclosed below, management has considered no
reasonably possible change in any other key assumption above would
cause the carrying value of any of its mining assets to exceed its
recoverable amount.
In the absence of any changes to any of the other key
assumptions, a change in the below assumptions would have the
following impact as at 31 December 2022:
-- A decrease of 10% in gold and 15% in silver prices would
result in an impairment charge of US$318.6 million.
-- A decrease of 10% in the forecasted volume of silver produced
would result in an impairment charge of US$128.0 million. A
decrease of 10% in the forecasted volume of gold produced would not
result in an impairment charge.
14. Silverstream contract
On 31 December 2007, the Group entered into an agreement with
Peñoles through which the Group 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 to Peñoles per ounce of silver for the
year ended 31 December 2022 was $5.54 per ounce (2021: $5.43 per
ounce). Under the contract, the Group has the option to receive a
net cash settlement from Peñoles attributable to the silver
produced and sold from Sabinas, to take delivery of an equivalent
amount of refined silver or to receive settlement in the form of
both cash and silver. If, by 31 December 2032, the amount of silver
produced by Sabinas is less than 60 million ounces, a further
payment is due from Peñoles of US$1 per ounce of shortfall.
The Silverstream contract represents a derivative financial
instrument which has been recorded at FVPL and classified within
non-current and current assets as appropriate. The term of the
derivative is based on Sabinas' life of mine which is currently 26
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 2022 total proceeds
received in cash were US$33.4 million (2021: US$49.0 million) of
which, US$4.8 million was in respect of proceeds receivable as at
31 December 2021 (2021: US$7.7 million in respect of proceeds
receivable as at 31 December 2020). Cash received in respect of the
year of US$28.5 million (2021: US$41.3 million) corresponds to 2.06
million ounces of payable silver (2021: 2.4 million ounces). As at
31 December 2022, a further US$8.3 million (2021: US$4.8 million)
of cash receivable corresponding to 453,158 ounces of silver is due
(2021: 274,237 ounces).
A reconciliation of the beginning balance to the ending balance
is shown below:
2022 2021
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Balance at 1 January 529,544 576,140
Cash received in respect of the year (28,513) (41,338)
Cash receivable (8,342) (4,842)
Remeasurement gains/(loss) recognised in profit and
loss 18,785 (416)
---------------------------------------------------- -------------- --------------
Balance at 31 December 511,474 529,544
---------------------------------------------------- -------------- --------------
Less - Current portion 36,218 35,152
---------------------------------------------------- -------------- --------------
Non-current portion 475,256 494,392
---------------------------------------------------- -------------- --------------
The US$18.8 million unrealised gain recorded in the income
statement (31 December 2021: US$0.4 million loss) resulted mainly
from an update in the production mine plan with higher reserves,
the amortization effect, and an increase in the forward silver
price curve, these effects were partially offset by an increase in
the discount rates (SOFR).
Significant assumptions used in the valuation of the
Silverstream contract are as follows:
- Forecasted volumes (millions of ounces/moz)
- Silver to be produced and sold over the life of mine 103.2 moz (2021: 97.4 moz)
- Average annual silver to be produced and sold 4.0 moz (2021: 3.5 moz)
- Weighted average discount rate 9.82% (2021: 7.92%)
- Future silver prices (US$ per ounce)
Year ended 31 Year 1 Year 2 Year 3 Year 4 Year 5 Long-term
December
-------------- ------ ------ ------ ------ ------ ---------
2022 24.45 25.53 26.22 27.12 27.33 18.81
-------------- ------ ------ ------ ------ ------ ---------
2021 22.54 22.19 21.90 21.63 21.39 18.51
-------------- ------ ------ ------ ------ ------ ---------
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 26 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 fair
value of the Silverstream contract is significantly sensitive to a
reasonably possible change in future silver price. the discount
rate used to discount future cash flows and total recoverable
resources and reserves over the life of mine. The sensitivity of
these key inputs is as follows:
Commodity
price Discount rate
----------------------- ---------------------------- -------------------------
Effect
on profit
Effect Basis before
Increase/ on profit point tax:
(decrease) before increase/ increase/
in tax: increase/ (decrease) (decrease)
silver (decrease) in interest US$
Year ended 31 December price US$ thousands rate thousands
----------------------- ----------- --------------- ------------ -----------
2022 20% 133,736 100% (41,860)
(15%) (100,302) (25%) 11,452
----------------------- ----------- --------------- ------------ -----------
2021 15% 104,419 25% (13,219)
(15%) (104,419) - -
----------------------- ----------- --------------- ------------ -----------
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. Reasonably possible change in total
recoverable resources and reserves quantities over the life of the
mine of an increase of approximately 6% would result in an increase
in the value of the contract of US$30.6 million (a reduction of 6%
in reserves and resources quantity would decrease the fair value of
the contract by US$30.6 million).
The significant unobservable inputs are not interrelated. The
Sabinas mine is a polymetallic mine that contains copper, lead and
zinc as well as silver, which is produced as a by-product.
Therefore, changes to base metals prices (rather than the price of
silver) are most relevant to the Sabinas mine production plans and
the overall economic assessment of the mine.
The effects on profit before tax and equity of reasonably
possible changes to the inflation rates and the US dollar exchange
rate compared to the Mexican peso on the Silverstream contract are
not material. The Group's exposure to reasonably possible changes
in other currencies is not material.
15. Inventories
As at 31 December
--------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
--------------------------------------------------- -------------- --------------
Finished goods (1) 27,257 19,137
Work in progress (2) 375,603 344,805
Ore stockpile (3) 26,020 3,234
Operating materials and spare parts 163,947 125,824
--------------------------------------------------- -------------- --------------
592,827 493,000
Allowance for obsolete and slow-moving inventories (5,463) (5,196)
--------------------------------------------------- -------------- --------------
Balance as 31 December 587,364 487,804
--------------------------------------------------- -------------- --------------
Less - Current portion 495,744 396,184
--------------------------------------------------- -------------- --------------
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 for an amount of US$307.6 million (2021: US$316.6 million) and
in stockpiles US$58.8 million (2021: US$28.2 million) 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. As at 31 December 2022 and 2021 non-current
inventories corresponds to Soledad & Dipolos mine unit (note 2
(c)).
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 amount of inventories recognised as an expense in the year
was US$1,906.8 million (2021: US$1,770.3 million). During 2022 and
2021, 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$2.59 million (2021: US$0.1 million).
16. Trade and other receivables
Year ended 31
December
--------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
--------------------------------------------------------- -------------- --------------
Trade receivables from related parties (note 27) 275,844 265,473
Value Added Tax receivable 85,979 103,448
Other receivables from related parties (note 27) 8,377 4,886
Other receivables from contractors 52 27
Other receivables 8,697 11,478
Other receivables arising from the Layback Agreement
(note 2 (c)) 25,994 16,684
--------------------------------------------------------- -------------- --------------
404,943 401,996
Expected credit loss of 'Other receivables' (444) (572)
--------------------------------------------------------- -------------- --------------
Trade and other receivables classified as current assets 404,499 401,424
--------------------------------------------------------- -------------- --------------
Other receivables classified as non-current assets:
Other receivable from contractors 1,638 -
Value Added Tax receivable 36,820 34,634
Other receivables arising from the Layback Agreement
(note 2 (c)) - 23,914
--------------------------------------------------------- -------------- --------------
Trade and other receivables classified as non-current
assets 38,458 58,548
--------------------------------------------------------- -------------- --------------
Total trade and other receivables 442,957 459,972
--------------------------------------------------------- -------------- --------------
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$311.7 million
(2021: US$315.6 million), and in Mexican pesos US$131.2 million
(2021: US$144.4 million)
Balances corresponding to Value Added Tax receivables and US$8.7
million within Other receivables (2021: US$10.4 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 2022 is US$0.4
million (2021: US$0.6 million). Trade receivables from related
parties and other receivables from related parties (see note 14)
are classified as financial assets at FVTPL and are therefore not
considered in the expected credit loss analysis. In determining the
recoverability of receivables, the Group performs a risk analysis
considering the type and age of the outstanding receivable and the
credit worthiness of the counterparty, see note 31(b).
17. Cash and cash equivalents
The Group considers cash and cash equivalents when planning its
operations and in order to achieve its treasury objectives.
As at 31 December
-------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------- -------------- --------------
Cash at bank and on hand 2,516 2,834
Short-term deposits 966,544 1,232,448
-------------------------- -------------- --------------
Cash and cash equivalents 969,060 1,235,282
-------------------------- -------------- --------------
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.
18. Equity
Share capital and share premium
Authorised share capital of the Company is as follows:
As at 31 December
--------------------------------------- --------------------------- ---------------------------
2022 2021
--------------------------------------- --------------------------- ---------------------------
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 2021 736,893,589 $368,545,586 50,000 GBP50,000
At 31 December 2021 736,893,589 $368,545,586 50,000 GBP50,000
At 31 December 2022 736,893,589 $368,545,586 50,000 GBP50,000
-------------------- ----------- ------------ ------- ----------
As at 31 December 2022 and 2021, 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
This reserve records the accumulated results of the Group, less
any distributions and dividends paid.
19. Dividends declared and paid
The dividends declared and paid during the years ended 31
December 2022 and 2021 are as follows:
US cents
per
Ordinary Amount
Share US$ thousands
------------------------------------------------------- --------- --------------
Year ended 31 December 2022
Final dividend for 2021 declared and paid during the
year(1) 24.00 176,855
Interim dividend for 2022 declared and paid during the
year(2) 3.40 25,054
27.4 201,909
------------------------------------------------------- --------- --------------
Year ended 31 December 2021
Final dividend for 2020 declared and paid during the
year(3) 23.50 173,170
Interim dividend for 2021 declared and paid during the
year(4) 9.90 72,952
------------------------------------------------------- --------- --------------
33.40 246,122
------------------------------------------------------- --------- --------------
(1 This dividend was approved by the Shareholders on 17 May 2022
and paid on 27 May 2022)
(2 This dividend was approved by the Board of Directors on 1
August 2022 and paid 14 September 2022)
(3 This dividend was approved by the Shareholders on 24 June
2021 and paid on 28 June 2021)
(4 This dividend was approved by the Board of Directors on 3
August 2021 and paid 15 September 2021)
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
------------------------------------------ ------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------ -------------- --------------
Dividends declared 201,909 246,122
Foreign exchange effect - 60
------------------------------------------- -------------- --------------
Dividends recognised in retained earnings 201,909 246,182
------------------------------------------- -------------- --------------
Foreign exchange and hedging effect 41 (621)
------------------------------------------- -------------- --------------
Dividends paid 201,950 245,561
------------------------------------------- -------------- --------------
As previously reported, 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. As a matter of prudency,
in 2022 the Directors put forward a resolution to shareholders in
order to regularise the position. The resolution was passed at the
2021 annual general meeting. This matter will have no effect on the
monies received pursuant to these dividends and will not adversely
impact shareholders or the Company. The Company therefore considers
the matter closed.
The directors have proposed a final dividend of US$13.3 cents
per share, which is subject to approval at the annual general
meeting and is not recognised as a liability as at 31 December
2022. 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.
20. Interest-bearing loans
Senior Notes
On 13 November 2013, the Group completed its offering of US$800
million aggregate principal amount of 5.500% Senior Notes due
November 2023 (the 5.500% Notes). On 29 September 2020, the Group
repurchased certain of its 5.500% Notes that had a carrying value
of US$482.1 million for a consideration of US$543.0 million.
On 2 October 2020, the Group completed its offering of US$850
million aggregate principal amount of 4.250% Senior Notes due 2050.
The proceeds were partially used to finance the repurchase
mentioned above.
Movements in the year in the debt recognised in the balance
sheet are as follows:
As at 31 December
------------------------------------------------ --------------------------------
2022 2021
US$ thousands US$ thousands
------------------------------------------------ --------------- ---------------
Opening balance 1,157,545 1,156,670
Accrued interest 56,475 56,384
Interest paid (1) (56,371) (56,370)
Amortisation of discount and transaction costs 908 861
------------------------------------------------ --------------- ---------------
Closing balance 1,158,557 1,157,545
------------------------------------------------ --------------- ---------------
Less - Current portion 317,879 -
------------------------------------------------ --------------- ---------------
Non-current portion 840,678 1,157,545
------------------------------------------------ --------------- ---------------
(1 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 earned at the
repurchase date, if requested to do so by any creditor.
Pledge on assets:
The Group shall not pledge or allow a pledge on any property
that may have a material impact on business performance (key
assets). Nevertheless, the Group may pledge the aforementioned
properties provided that the repayment of the Notes keeps the same
level of priority as the pledge on those assets.
21. Provision for mine closure cost
The provision represents the discounted values of the
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
2022, the discount rates used in the calculation of the parts of
the provision that relate to Mexican pesos range from 10.08% to
10.62% (2021: range from 6.39% to 8.33%). The range for the current
year parts that relate to US dollars range from 3.08% to 4.44%
(2021: range from 0.57% to 1.40%).
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 1 to 22 years from 31 December 2022 (3 to 24
years from 31 December 2021). As at 31 December 2022 the weighted
average term of the provision is 12 years (2021: 12 years).
As at 31 December
----------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
----------------------------------- -------------- --------------
Opening balance 260,307 245,688
Increase to existing provision 23,757 17,078
Effect of changes in discount rate (63,061) (7,821)
Unwinding of discount rate 15,243 11,622
Payments (1,085) (879)
Foreign exchange 12,046 (5,381)
----------------------------------- -------------- --------------
Closing balance 247,207 260,307
----------------------------------- -------------- --------------
Less - Current portion 4,827 3,351
----------------------------------- -------------- --------------
Non-current portion 242,380 256,956
----------------------------------- -------------- --------------
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 2022 decreased by 50 basis points then the provision
would be US$13.0 million higher (2021: US$43.4 million). If the
discount rate increased by 50 basis points then the provision would
be US$12.0 million lower (2021: US$27.2 million).
22. Pensions and other post-employment benefit plans
The Group has a defined contribution plan and a defined benefit
plan.
The defined contribution plan was established as from 1 July
2007 and consists of periodic contributions made by each 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)
to income statement in OCI
---------------------------------------- -----------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes Sub-total decrease at
1 recognised included in in included due to 31
January Service Net Foreign in the Benefits in net demographic financial in Contributions personnel December
2022 cost interest exchange year paid interest assumptions assumptions OCI(1) by employer transfer 2022
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- --------- ------------- --------- --------
US$ thousands
--------------------------------------------------------------------------------------------------------------------------------------------------------------
Defined
benefit
obligation (25,673) (1,260) (1,826) (1,651) (4,737) 2,065 1,894 1,894 437 (26,014)
Fair value
of plan
assets 19,167 1,333 1,160 2,493 (2,065) (2,615) (2,615) - (428) 16,552
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- --------- ------------- --------- --------
Net benefit
liability (6,506) (1,260) (493) (491) (2,244) - (2,615) 1,894 (721) 9 (9,462)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- --------- ------------- --------- --------
Pension cost charge Remeasurement gains/(losses)
to income statement in OCI
---------------------------------------- ------------------------------------------------
Return Actuarial Actuarial
on plan changes changes
assets arising arising Defined
Balance (excluding from from benefit Balance
at Sub-total amounts changes changes decrease at
1 recognised included in in Sub-total due to 31
January Service Net Foreign in the Benefits in net demographic financial included Contributions personnel December
2021 cost interest exchange year paid interest assumptions assumptions in OCI(1) 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) 551 (841) 1,744 1,744 732 (2,400) 19,167
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ---------- ------------- --------- --------
Net benefit
liability (11,977) (1,249) (739) 956 (1,032) - 1,744 3,946 5,690 732 81 (6,506)
----------- -------- -------- -------- -------- ---------- -------- ---------- ----------- ----------- ---------- ------------- --------- --------
(1 The effect corresponding to partially-owned subsidiaries has
been allocated in the non-controlling interest of the year.)
Of the total defined benefit obligation, US$10.7million (2021:
US$9.6 million) relates to statutory seniority premiums for
unionised workers which are not funded. The expected contributions
to the plan for the next annual reporting period are nil.
The principal assumptions used in determining pension and other
post-employment benefit obligations for the Group's plans are shown
below:
As at 31 December
-------------------------------------------------------- -------------------
2022 2021
% %
-------------------------------------------------------- ---------- -------
Discount rate 10.23 7.99
Future salary increases (National Consumer Price Index) 5.25 5.00
-------------------------------------------------------- ---------- -------
The life expectancy of current and future pensioners, men and
women aged 65 and older will live on average for a further 23.98
and 26.72 years respectively (2021: 24.08 years for men and 27.05
for women). The weighted average duration of the defined benefit
obligation is 10.8 years (2021: 12.1 years).
The fair values of the plan assets were as follows:
As at 31 December
--------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
--------------------------- -------------- --------------
State owned companies - 3,180
Mutual funds (fixed rates) 16,552 15,987
--------------------------- -------------- --------------
16,552 19,167
--------------------------- -------------- --------------
As at 31 December 2022 and 2021, 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 2022 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
-------------------------------- ---------- --------- --------- --------- ---------------
Year ended 31 December
2022
(Decrease)/increase to the
net defined benefit obligation
(US$ thousands) (967) 1,044 176 (174) 145
--------------------------------- ---------- --------- --------- --------- ---------------
Year ended 31 December
2021
(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.
23. Trade and other payables
As at 31 December
-------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------------------------- -------------- --------------
Trade payables 140,297 130,187
Other payables to related parties (note 27) 35,969 30,930
Accrued expenses 60,321 22,319
Layback Agreement (note 2 (c)) - 67,182
Other taxes and contributions 22,280 19,699
-------------------------------------------- -------------- --------------
258,867 270,317
-------------------------------------------- -------------- --------------
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 31.
24. Commitments
A summary of capital expenditure commitments by operating mine
and development project is as follows:
As at 31 December
---------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------- -------------- --------------
Saucito 33,980 49,127
Herradura 11,024 21,258
Noche Buena 227 213
Ciénega 10,753 15,710
Fresnillo 48,629 43,541
San Julián 9,745 6,379
Juanicipio 47,809 103,100
Other 414 970
---------------- -------------- --------------
162,581 240,298
---------------- -------------- --------------
25. Leases
(a) The Group as lessee
The Group leases various offices, buildings, plant and equipment
and IT equipment. The resulting lease liability is as follows:
As at
----------------------- ------------------------------
31 December 31 December
2022 2021
US$ thousands US$ thousands
----------------------- -------------- --------------
IT equipment 10,914 8,406
Plant and equipment 3,776 -
Buildings 439 2,421
----------------------- -------------- --------------
Total lease liability 15,129 10,827
----------------------- -------------- --------------
Less - Current portion 5,209 4,681
----------------------- -------------- --------------
Non-current portion 9,920 6,146
----------------------- -------------- --------------
The total cash outflow for leases for the year ended 31 December
2022, except short term and low value leases, amounts to US$5.8
million (2021: US$6.5 million), including finance costs of U$0.7
million (2021: US$0.5 million).The table below details right-of-use
assets included as property plant and equipment in note 13
Year ended 31 December
2022
Computer Plant
Buildings equipment and Equipment Total
------------------------------------ --------- --------------------- -------------- -------------
US$ thousands
------------------------------------ --------- --------------------- -------------- -------------
Cost
At 1 January 2022 4,332 15,704 - 20,036
Additions 288 5,580 3,933 9,801
------------------------------------ --------- --------------------- -------------- -------------
At 31 December 2022 4,620 21,284 3,933 29,837
Accumulated depreciation
At 1 January 2022 (1,786) (7,719) - (9,505)
Depreciation for the year (799) (4,675) (234) (5,708)
At 31 December 2022 (2,585) (12,394) (234) (15,213)
------------------------------------ --------- --------------------- -------------- -------------
Net book amount at 31 December 2022 2,035 8,890 3,699 14,624
------------------------------------ --------- --------------------- -------------- -------------
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$0.7 million
(2021: US$0.5 million) relating to interest expense, US$60.4
million on relating variable lease payments (note 6) of which
US$11.4 million were capitalised as a part of stripping cost (2021:
nil), US$0.8 million (2021: US$0.7 million) relating to short-term
leases and US$3.3 million (2021: $3.3 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.
26. Contingencies
As of 31 December 2022, 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.
- 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$13.6 million in respect of the insurance claim, however
this does not constitute a final settlement and management
continues to pursue a higher insurance payment. Due to the fact
that negotiations are on-going and there is uncertainty regarding
the timing and amount involved in reaching a final settlement with
the insurer, it is currently not practicable to determine the total
amount expected to be recovered.
- It is probable that interest income will be earned on the
Group's outstanding income and value added tax receivable balances;
however, there is no certainty that this interest will be realised
until the underlying balance is recovered. Due to that uncertainty,
it is also not practicable to estimate the amount of interest
income earned but not recovered to date.
27. Related party balances and transactions
The Group had the following related party transactions during
the years ended 31 December 2022 and 2021 and balances as at 31
December 2022 and 2021.
Related parties are those entities owned or controlled by the
ultimate controlling party, as well as those who have a minority
participation in Group companies and key management personnel of
the Group.
(a) Related party balances
Accounts Accounts
receivable payable
--------------------------------------------- ---------------------- -----------------
As at 31 December As at 31 December
--------------------------------------------- ---------------------- ----------------- ----------
2022 2021 2022 2021
US$ US$ US$ US$
thousands thousands thousands thousands
--------------------------------------------- ---------- ---------- ----------------- ----------
Trade:
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. 275,844 265,473 421 298
Other :
Industrias Peñoles, S.A.B. de C.V.(1) 8,342 4,842 - -
Metalúrgica Met-Mex Peñoles, S.A.
de C.V. - 6 - -
Servicios Administrativos Peñoles, S.A.
de C.V. - - 4,630 4,519
Servicios Especializados Peñoles, S.A.
de C.V. - - 8,964 179
Fuentes de Energía Peñoles, S.A.
de C.V. - - 1,062 5,220
Termoeléctrica Peñoles, S. de R.L.
de C.V. - - 3,206 2,154
Eólica de Coahuila S.A. de C.V. - - 13,466 13,589
Minera Capela, S.A. de C.V. - - 714
Other 35 38 4,220 4,257
--------------------------------------------- ---------- ---------- ----------------- ----------
Sub-total 284,221 270,359 35,969 30,930
Less-current portion 284,221 270,359 35,969 30,930
--------------------------------------------- ---------- ---------- ----------------- ----------
Non-current portion - - - -
--------------------------------------------- ---------- ---------- ----------------- ----------
(1 This balance corresponds to the cash receivable related to
the Silverstream contract, see note 14.)
Related party accounts receivable and payable will be settled in
cash.
Other balances with related parties:
Year ended 31
December
---------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------------------------------- -------------- --------------
Silverstream contract:
---------------------------------------- -------------- --------------
Industrias Peñoles, S.A.B. de C.V. 511,474 529,544
---------------------------------------- -------------- --------------
The Silverstream contract can be settled in either silver or
cash. Details of the Silverstream contract are provided in note
14.
(b) Principal transactions with affiliates, including Industrias
Peñoles S.A.B de C.V., the Company's parent, are as follows:
Year ended 31
December
---------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
---------------------------------------------------- -------------- --------------
Income:
Sales:(1)
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 2,436,761 2,704,447
---------------------------------------------------- -------------- --------------
Insurance recovery
Grupo Nacional Provincial, S.A. B. de C.V. 606 23
---------------------------------------------------- -------------- --------------
Other income 4,959 2,708
---------------------------------------------------- -------------- --------------
Total income 2,442,326 2,707,178
---------------------------------------------------- -------------- --------------
(1 Figures do not include the effects of hedging as the
derivative transactions are not undertaken with related
parties.)
Year ended 31
December
----------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Expenses:
Administrative services:
Servicios Administrativos Peñoles, S.A. de C.V.
(2) 34,755 35,654
Servicios Especializados Peñoles, S.A. de C.V.
(3) 18,918 19,105
Peñoles Tecnología, S.A. de C.V. 4,356 1,425
58,029 56,184
----------------------------------------------------- -------------- --------------
Energy:
Termoeléctrica Peñoles, S. de R.L. de C.V. 20,630 19,597
Fuentes de Energía Peñoles, S.A. de C.V. 3,259 5,019
Eólica de Coahuila S.A. de C.V. 31,031 39,423
----------------------------------------------------- -------------- --------------
54,920 64,039
Operating materials and spare parts:
Wideco Inc 6,610 5,465
Metalúrgica Met-Mex Peñoles, S.A. de C.V. 9,694 10,579
----------------------------------------------------- -------------- --------------
16,304 16,044
----------------------------------------------------- -------------- --------------
Equipment repair and administrative services:
Serviminas, S.A. de C.V. 7,492 10,029
----------------------------------------------------- -------------- --------------
Insurance premiums:
Grupo Nacional Provincial, S.A. B. de C.V. 16,443 16,422
----------------------------------------------------- -------------- --------------
Other expenses: 4,395 7,441
----------------------------------------------------- -------------- --------------
Total expenses 157,583 170,159
----------------------------------------------------- -------------- --------------
2 Includes US$0.8 million (2021: US$3.1 million) corresponding
to expenses reimbursed.
3 Includes US$nil (2021: US$2.6 million) relating to engineering
costs that were capitalised.
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of
Directors and the Executive Committee.
Year ended 31
December
----------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
----------------------------------------------------- -------------- --------------
Salaries and bonuses 2,792 3,142
Post-employment benefits 244 192
Other benefits 316 337
----------------------------------------------------- -------------- --------------
Total compensation paid in respect of key management
personnel 3,352 3,671
----------------------------------------------------- -------------- --------------
Year ended 31
December
-------------------------------------------------------- ------------------------------
2022 2021
US$ thousands US$ thousands
-------------------------------------------------------- -------------- --------------
Accumulated accrued defined benefit pension entitlement 4,035 4,138
-------------------------------------------------------- -------------- --------------
This compensation includes amounts paid to directors disclosed
in the Directors' Remuneration Report.
The accumulated accrued defined pension entitlement represents
benefits accrued at the time the benefits were frozen. There are no
further benefits accruing under the defined benefit scheme in
respect of current services.
28. Auditor's remuneration
Fees due by the Group to its auditor during the year ended 31
December 2022 and 2021 are as follows:
Year ended
31 December
------------------------------------------------------- ------------------------------
2022 2021
Class of services US$ thousands US$ thousands
------------------------------------------------------- -------------- --------------
Fees payable to the Group's auditor for the audit of
the Group's annual accounts 1,879 1,413
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 316 382
Audit-related assurance services 437 497
Total 2,632 2,292
------------------------------------------------------- -------------- --------------
29. Notes to the consolidated statement of cash flows
2022 2021
Notes US$ thousands US$ thousands
--------------------------------------------------------- ----- -------------- --------------
Reconciliation of profit for the year to net cash
generated from operating activities
Profit for the year 308,291 438,496
Adjustments to reconcile profit for the period to
net cash inflows from operating activities:
Depreciation and amortisation 13 501,769 529,390
Employee profit sharing 8 9,841 16,662
Deferred income tax credit 11 (233,090) (157,116)
Current income tax expense 11 173,370 330,151
Write-off of assets 9 11,315 -
Loss/(gain) on the sale of property, plant and equipment
and other assets 305 (5,041)
Net finance costs 55,148 52,863
Foreign exchange loss 823 1,306
Difference between pension contributions paid and
amounts recognised in the income statement 1,259 625
Non-cash movement on derivatives - 531
Layback agreement (note 2 (c)) (67,182) -
Changes in fair value of Silverstream 14 (18,785) 416
Working capital adjustments
Decrease in trade and other receivables 7,199 85,581
Increase in prepayments and other assets (14,064) (2,233)
Increase in inventories (99,562) (44,596)
Increase in trade and other payables 40,282 19,252
--------------------------------------------------------- ----- -------------- --------------
Cash generated from operations 676,919 1,266,287
Income tax paid(1) (158,343) (349,840)
Employee profit sharing paid (16,391) (21,306)
--------------------------------------------------------- ----- -------------- --------------
Net cash from operating activities 502,185 895,141
--------------------------------------------------------- ----- -------------- --------------
(1) Income tax paid includes US$116.1 million corresponding to
corporate income tax (2021: US$321.8 million) and US$53.3
corresponding to special mining right (2021: US$28.0 million), for
further information refer to note 11.
30. Financial instruments
(a) Fair value category
As at 31 December 2022
--------------------------------------------------------------------------------------
US$ thousands
--------------------------------------------------------------------------------------
Fair value
Fair value Fair value through
Amortized through (hedging profit or
Financial assets: cost OCI instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Trade and other receivables(1) 27,276 - - 284,186
Equity instruments at FVOCI - 158,813 - -
Silverstream contract (note
14) - - - 511,474
Derivative financial instruments - - 231 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Interest-bearing loans (note
20) 1,158,557 - -
Notes payable(2) 104,962 - -
Trade and other payables
(note 23) 176,266 - -
Derivative financial instruments - 487 -
---------------------------------- --------- ---------- ------------- ----------
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(1) 41,217 - - 270,315
Equity instruments at FVOCI - 164,525 - -
Silverstream contract (note
14) - - - 529,544
Derivative financial instruments - - 96 -
Fair value
Fair value through
Amortized (hedging profit or
Financial liabilities: cost instruments) loss
--------------------------------- --------- ---------- ------------- ----------
Interest-bearing loans (note
20) 1,157,545 - -
Notes payable(2) 107,918 - -
Trade and other payables
(note 23) 161,117 - -
Derivative financial instruments - 3,885 -
---------------------------------- --------- ---------- ------------- ----------
(1 Trade and other receivables and embedded derivative within
sales contracts are presented net in Trade and other receivables in
the balance sheet.)
2 Corresponds to interest-bearing notes payable received from
Minera los Lagartos, S.A. de C.V. which holds a non-controlling
interest in Juanicipio project. The notes are denominated in US
Dollars and bear interest at a rate that ranges between 2.15% to
6.34% with a maturity of nine to eighteen months (2021: twelve
months). During the year, proceeds and payments from these Notes
amounted to US$8.1 million and US$10.0 million respectively (2021:
US$41.7 million and US$nil).
(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
------------------------------------- ------------------------------ ----------------- --------------
2022 2021 2022 2021
US$ thousands US$ thousands US$ thousands US$ thousands
------------------------------------- -------------- -------------- ----------------- --------------
Financial assets:
Trade and other receivables 27,276 41,217 27,276 41,217
Financial liabilities:
Interest-bearing loans (1) (note 20) 1,158,557 1,157,545 990,588 1,237,689
Trade and other payables 176,266 161,117 176,266 161,117
Note payable 104,962 107,918 104,962 107,918
------------------------------------- -------------- -------------- ----------------- --------------
(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 2022
---------------------------------------------------------------------------------------------------
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 - - 284,186 284,186
Derivative financial instruments: - - - -
Option and forward foreign
exchange contracts - 231 - 231
Silverstream contract - - 511,474 511,474
Other financial assets:
Equity instruments at FVOCI 158,813 - - 158,813
----------------------------------- -------------- -------------- -------------- --------------
158,813 231 795,660 954,704
---------------------------------- -------------- -------------- -------------- --------------
Financial liabilities:
Derivative financial instruments:
Option and forward foreign
exchange contracts - 487 - 487
----------------------------------- -------------- -------------- -------------- --------------
- 487 - 487
---------------------------------- -------------- -------------- -------------- --------------
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 - 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 - 2,987 - 2,987
Option and forward foreign
exchange contracts - 898 - 898
----------------------------------- -------------- -------------- -------------- --------------
- 3,885 - 3,885
---------------------------------- -------------- -------------- -------------- --------------
There have been no transfers between Level 1 and Level 2 of the
fair value hierarchy, and no transfers into and out of Level 3 fair
value measurements.
A reconciliation of the opening balance to the closing balance
for Level 3 financial instruments other than Silverstream (which is
disclosed in note 14) is shown below:
2022 2021
US$ thousands US$ thousands
---------------------------------------------- -------------- --------------
Balance at 1 January: 265,473 326,834
Sales 2,440,063 2,705,720
Cash collection (2,426,390) (2,765,807)
Changes in fair value (20,178) (3,695)
Realised embedded derivatives during the year 16,876 2,421
---------------------------------------------- -------------- --------------
Balance at 31 December 275,844 265,473
---------------------------------------------- -------------- --------------
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 commodity 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
For further information relating to the valuation techniques
were used to estimate the fair value of the Silverstream contract
as well as the sensitivity of the valuation to the key inputs are
disclosed in note 14.
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 2022, approximately 91.6% of the investments correspond to
9,314,877 shares (2021: 9,314,877 shares) of Mag Silver, Corp. for
an amount of US$145.5 million (2021: US$146.1 million) and 5.7% of
Endeavor, Inc. represented by 2,800,000 (2021: 2,800,000 shares)
shares for an amount of US$9.1 million (2021: US$11.9 million).
These equity investments are listed on the Canadian Stock Exchange.
The prices per share as 31 December 2022 were US$15.62 (2021:
US$15.69) and US$3.24 (2021: US$4.23 ), 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.
31. Financial risk management
Overview
The Group's principal financial assets and liabilities, other
than derivatives, comprise trade and other receivables, cash,
equity instruments at FVOCI, interest-bearing loans, notes payable
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 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 which impact is disclosed in note 14) 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
----------------------- -------------- --------------- --------------
2022 5% 742 1,120
(5%) (820) 3,610
----------------------- -------------- --------------- --------------
2021 10% 2,123 1,251
(5%) (1,229) (1,587)
----------------------- -------------- --------------- --------------
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 which impact is
disclosed in note 14) 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
---------- ----------- --------- ---------
2022 10% 20% 20% 15% 31,529 -
(10%) (15%) (15%) (15%) (27,660) -
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
2021 10% 15% 25% 15% 40,688 (4,861)
(10%) (15%) (15%) (15%) (36,638) 2,707
----------------------- ---------- ----------- --------- --------- --------------------------- -----------------
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 and notes payable 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, notes payable 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 which
impact is disclosed in note 14) 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
----------------------- ------------ ---------------
2022 100 8,667
(25) (2,167)
----------------------- ------------ ---------------
2021 25 3,088
- -
----------------------- ------------ ---------------
The sensitivity shown in the table above primarily relates to
the full year of interest on cash balances held as at the year
end.
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
----------------------- ----------- --------------- --------------
2022 10% - 15,881
(25%) - (39,703)
----------------------- ----------- --------------- --------------
2021 25% - 40,707
(45%) - (73,272)
----------------------- ----------- --------------- --------------
(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 27, the counterparties to a significant proportion of these
financial assets are related parties. At each balance sheet date,
the Group's financial assets were neither credit-impaired nor past
due, other than 'Other receivables' as disclosed in note 16. The
Group's policies are aimed at minimising losses from foreign
currency hedging contracts. The Company's foreign currency hedging
contracts are entered into with large financial institutions with
strong credit ratings.
The Group has a high concentration of trade receivables with one
counterparty Met-Mex Peñoles, the Group's sole customer throughout
2022 and 2021. 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 2022, the
Group had concentrations of credit risk as 35 percent of surplus
funds were deposited with one financial institution of which the
total investment was held in short term deposits.
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 17 for the maximum credit exposure
to cash and cash equivalents note 16 for other receivables and note
27 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 2022, being US$511.5
million (2021: US$529.5 million).
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due.
The Group monitors its risk of a shortage of funds using
projected cash flows from operations and by monitoring the maturity
of both its financial assets and liabilities.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments.
US$ thousands
--------------------------------- ---------------------------------------- ---------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- ---------
As at 31 December 2022
Interest-bearing loans (note 20) 374,249 75,973 75,973 1,723,686 2,249,881
Trade and other payables 176,266 - - - 176,266
Note payable 9,109 95,853 - - 104,962
Lease liabilities (note 25) 6,055 6,933 3,129 1,620 17,737
Derivative financial instruments
- liabilities 487 - - - 487
--------------------------------- ------- --------- --------- --------- ---------
US$ thousands
--------------------------------- ---------------------------------------- ---------
Within
1 year 2-3 years 3-5 years > 5 years Total
--------------------------------- ------- --------- --------- --------- ---------
As at 31 December 2021
Interest-bearing loans (note 20) 56,370 412,236 75,973 1,761,672 2,306,251
Trade and other payables 161,117 - - - 161,117
Note payable 107,918 - - - 107,918
Lease liabilities (note 25) 5,054 5,213 846 639 11,752
Derivative financial instruments
- liabilities 3,885 - - - 3,885
--------------------------------- ------- --------- --------- --------- ---------
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 2022
Inflows 13,319 - - - 13,319
Outflows (13,322) - - - (13,322)
----------------------- -------- --------- --------- --------- --------
Net (3) - - - (3)
----------------------- -------- --------- --------- --------- --------
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)
----------------------- -------- --------- --------- --------- --------
The above liquidity tables include expected inflows and outflows
from currency option contracts which the Group expects to be
exercised during 2023 as at 31 December 2022 and during 2022 as at
31 December 2021, 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, excluding net unrealised gains or losses on
revaluation of derivatives financial instruments and Equity
instruments at FVOCI. Refer to notes 18, 20 and 30 respectively for
a quantitative summary of these items.
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 2022 and 2021 consisted of only cash and cash
equivalents, which details are disclosed in note 17.
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END
FR MZGGFKNLGFZG
(END) Dow Jones Newswires
March 07, 2023 02:00 ET (07:00 GMT)
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