Last checked at 9 Oct 2008 07:00
Fresnillo Plc
28 Grosvenor Street
London W1K 4QR
United Kingdom
www.fresnilloplc.com
9 October 2008
Production Report and Interim Management Statement
for the nine months ended 30 September 2008
Overview
Company's production for the nine months ended 30 September was in line with expectations at 26.4 million silver ounces and 200,000 gold ounces.
Board approval of Soledad and Dipolos gold project with stripping expected to commence before the end of the year and peak production expected in 2010.
Drilling programme at Fresnillo II remains on schedule and there has been significant progress on the construction of shafts and service ramps.
Drilling at San Julian and Orisyvo has resulted in increased resources.
Electricity prices have increased to the market price, as from 1 July.
Cost reduction initiatives remain on track.
Management remains confident of achieving its 2008 production target levels.
Jaime Lomelín, Chief Executive Officer, said:
"Strong and stable production over the quarter and nine month period illustrates the quality of the management team and our assets in these volatile markets. Our growth programme remains robust and on schedule and we have been successful in continuing to grow our resources. Cost inflation and volatile metal prices have impacted the Company as they have with the global mining industry, but Fresnillo is taking positive action to mitigate the impact. We remain confident of achieving our 2008 production target, maintaining rigorous control on costs, and growing production and resources from a solid platform. At the same time, the company remains well positioned to take advantage of opportunities presented by the current market turmoil."
Total Production
Fresnillo plc attributable production
| SEP 2008 YTD | SEP 2007 YTD | 2008 SEPQ | 2007 SEPQ | 2008 JUNQ | |
| Silver prod'n (kOz) | 26,359 | 25,982 | 8,921 | 8,556 | 8,989 |
| Gold prod'n (kOz) | 200 | 210 | 61 | 65 | 69 |
| Lead prod'n (kt) | 14 | 12 | 4 | 4 | 5 |
| Zinc prod'n (kt) | 17 | 16 | 5 | 5 | 6 |
Silver production year to date continued to be stable and was in line with the nine months ended 30 September 2007. Quarterly production was higher than the September 2007 quarter due to an increase in ore milled and higher ore grade at Fresnillo.
As set out in the silverstream contract, the Company has received the proceeds of the silver produced at the Sabinas polymetallic mine representing 2.4 million ounces for the nine months ended 30 September 2008, which is slightly above the estimated average annual rate of 3.0 million ounces per year.
Despite the higher production at Herradura, total gold production decreased on a year to date and quarterly basis as a result of the expected lower ore grade at Ciénega. Lead and zinc production for the nine months ended September 2008 increased by 8.9% and 8.1% respectively due to higher ore grades and recoveries at Ciénega.
Fresnillo mine production
| SEP 2008 YTD | SEP 2007 YTD | 2008 SEPQ | 2007 SEPQ | 2008 JUNQ | |
| Silver (kOz) | 25,531 | 25,173 | 8,662 | 8,267 | 8,739 |
| Gold (kOz) | 17 | 21 | 5 | 6 | 6 |
| Lead (kt) | 7 | 7 | 2 | 2 | 2 |
| Zinc (kt) | 9 | 9 | 2 | 3 | 3 |
Silver production at the Fresnillo mine remained stable year on year and when compared to the previous quarter. September 2008 quarterly production increased by 4.8% when compared to the same period last year due to the higher extraction from the San Carlos and Santa Cruz veins and to the higher ore grade obtained at the San Carlos vein, which in some areas reached 650 grams of silver per tonne.
Ciénega mine production
| SEP 2008 YTD | SEP 2007 YTD | 2008 SEPQ | 2007 SEPQ | 2008 JUNQ | |
| Silver (kOz) | 730 | 689 | 223 | 262 | 220 |
| Gold (kOz) | 92 | 108 | 28 | 35 | 31 |
| Lead (kt) | 7 | 5 | 2 | 2 | 2 |
| Zinc (kt) | 9 | 6 | 3 | 2 | 3 |
Gold production at Ciénega decreased against all comparative periods mainly due to lower ore grade and dilution. As mentioned in the previous production report, we continue to prepare new stopes, to increase the ore milled and control the dilution. Silver, lead and zinc production for the nine months ended September 2008 increased by 6.0%, 28.1% and 34.8% respectively when compared to the same period last year as a result of higher recoveries and higher lead and zinc ore grades.
Herradura mine production
Fresnillo plc attributable production
| SEP 2008 YTD | SEP 2007 YTD | 2008 SEPQ | 2007 SEPQ | 2008 JUNQ | |
| Silver (kOz) | 97 | 120 | 36 | 28 | 30 |
| Gold (kOz) | 91 | 82 | 28 | 25 | 32 |
Year to date gold production at Herradura achieved record levels as a result of higher extraction from the Centauro pit with a 23.3% increased in ore deposited on the leaching pads.
Cost update
The outlook for the mining industry remains challenging. Increased inflation and pressure on input and energy costs is expected to impact profitability margins industry wide.
The price of diesel in Mexico has increased during this year by the Mexican Oil Company (PEMEX) to gradually adjust its prices to international levels in the next two years. In the first nine months of 2008 the diesel price for the Company was 5.5% higher than in the corresponding period of 2007; although in absolute terms this remains lower than international market prices.
Additionally, as stated in the Prospectus, the guarantees granted by Fresnillo to the Peñoles subsidiaries in relation to payments for energy consumed were eliminated and the market price for electricity has been charged to Fresnillo plc since 1 July.
As expected, the prevailing market price is substantially higher and is in fact approximately double that paid under the previous agreement. Electricity prices in Mexico are largely determined by the price of oil and gas. The electricity and diesel cost increases are in line with our expectations at the time of announcing our interim results in August.
Cost reduction initiatives and efficiency projects
In response to the ongoing cost pressures, several actions have been taken to mitigate and to improve performance of the current operations.
Construction of the San Carlos shaft at Fresnillo mine is expected to reduce haulage cost; the engineering phase is on schedule and mining works have already begun. It is expected that the first access cross cut to the shaft will be concluded by October 2008 and several ramps are advancing according to the mine plan. The structural design of the concrete head frame of the shaft is 80% advanced. In terms of equipment requirements for this project, new ventilation machinery will start arriving later this month and the Company is already negotiating the acquisition of the hoist. This project is expected to take 3 years to complete.
Construction of a sewage water treatment plant is expected lower the cost of water; the contractor for the project has been selected and construction will begin before year end. The construction of the new water treatment plant would enable the use of sewage water from the city of Fresnillo, thus lowering the cost of water and bringing environmental benefits to the community.
The extention of the shaft at Cienega is expected to provide access to develop and recover deeper ore reserves; the contractor to sink the shaft an additional 300 metres has been selected and the contract is in the process of being signed.
Update on exploration
At the Fresnillo II project, 26,500 metres of diamond drilling were completed in 3Q 2008, a year to date total of 56,200 metres. Positive results were obtained on the west Valdecañas vein and the east Jarillas vein, both 100% owned by Fresnillo Plc. Infill drilling continues on the Valdecañas vein within the Minera Juanicipio claim (56 % Fresnillo Plc).
At the San Julian silver-gold project 11,800 metres of diamond drilling were completed in 3Q 2008 for a year to date total of 31,200 metres. Five holes intersected gold-silver values on the extension of the Todos Santos vein, which will increase the present resource (284,000 equivalent gold ounces). Additionally, three holes were also completed on a new silver deposit, extending mineralization 100 metres to the southwest.
At the Orisyvo gold project 4,970 metres of diamond drilling were completed in 3Q 2008 for a year to date total of 16,200 metres. The North and new Northwest oxide zones were extended with three and two diamond drill holes respectively, while five holes intersected interesting values in sulfides in the Central core zone.
Noche Buena
After extensive negotiations and a technical evaluation by Newmont and Fresnillo, the Executive Committee of Fresnillo plc reviewed and authorised the signing of a letter of intent to acquire the Noche Buena project subject to legal due diligence. The contract will be held through the Penmont joint venture with Newmont Mining Corporation, in which Fresnillo has a 56 percent interest.
Noche Buena is owned by Seabridge Gold Inc ("Seabridge Gold": SEA.TSX, SA.AMEX), located within the Herradura Corridor with a resource base of approximately 670,000 gold ounces.
The cost of the acquisition for the Penmont joint venture was an upfront payment of US$25 million, with a further US$5 million to be paid on commencement of production, and a 1.5% royalty, NSR, to Seabridge Gold payable whenever the monthly average gold price is higher than US$800 per ounce.
Update on development projects
Soledad and Dipolos
The Board of Directors approved the development of the Soledad and Dipolos gold project which is located at the northwest of Sonora state, adjacent to the Herradura mine. Soledad and Dipolos is held through the Penmont joint venture which is 56 per cent owned by Fresnillo and 44 per cent owned by Newmont Mining Corporation.
Soledad and Dipolos will be an open pit mine with similar average ore grade to Herradura and is expected to produce a peak rate of approximately 100,000 ounces of gold in 2010. The estimated pre-operative capital expenditure is US$67.8 million, the sustaining annual capital expenditure is expected to be US$13.5 million and the estimated investment in working capital is US$0.9 million.
The construction of the electricity and water infrastructure needed for Soledad and Dipolos is in line with the project schedule and stripping activities will start before the end of the year. The Company has placed orders to acquire new equipment and there are 120 workers already trained. The management is confident that these initiatives will allow Soledad and Dipolos to start production according to schedule in the first quarter of 2010.
Fresnillo II
Significant advances have been achieved at this project. The Saucito shaft has reached 542 metres, with 580 metres being the final target, while the Fatima service ramp is 2,340 metres in length. The Jarillas ramp, that will connect the Saucito and Jarillas veins, has reached 1,136 metres in length and is expected to extend to 1,400 metres by year end.
The ramp portal to the Jarillas vein, named Jarillas North ramp, began construction during the third quarter of 2008. In addition, the construction of the Jarillas shaft was started, and the concrete head frame is expected to be concluded by first quarter of 2009. The engineering of the mill and the tailings pond is expected to commence during the last quarter of 2008.
There will be a conference call for analysts and investors on Thursday 9 October at 10.30am BST (London time). Dial in details are as follows:
Participants' dial in number: + 44 (0) 1452 541 076
Access Code: 68095283
A replay of the conference call will be available for one week on the following number:
Dial in number: + 44 (0) 1452 55 00 00
Access Code 68095283 #
For further information, please visit our website: www.fresnilloplc.com or contact:
Fresnillo plc
London Office Tel: +44 (0)20 7399 2470
Octavio Alvidrez, Head of Investor Relations
Mexico City Office
Gabriela Mayor Tel: +52 55 52 79 3203
JPMorgan Cazenove Tel: +44 (0)20 7588 2828
Ian Hannam
Andrew Wray
Brunswick Tel: +44 (0)20 7404 5959
Patrick Handley
Carole Cable
About Fresnillo plc
Fresnillo Plc is the world's largest primary silver producer and Mexico's second largest gold producer, listed on the London Stock Exchange under the symbol FRES.
Fresnillo has three producing mines, all of them in Mexico - Fresnillo, Ciénega and Herradura; two development projects - Fresnillo II, Soledad & Dipolos; and three exploration prospects - San Juan, San Julian, Orysivo, as well as a number of other long term exploration prospects and, in total, has mining concessions covering approximately 1.3 million hectares in Mexico.
Fresnillo has a strong and long tradition of mining, a proven track record of mining development and reserves replacement, and a low cost of production, being in the lowest quartile of the cost curve for both silver and gold.
Fresnillo intends to maintain its position as the world's largest primary silver producer with the aim of approximately doubling production, on a silver equivalent ounce basis, within the next ten years and increasing its gold production.
Forward Looking Statements
Information contained in this announcement may include 'forward-looking statements'. All statements other than statements of historical facts included herein, including, without limitation, those regarding the Fresnillo Group's intentions, beliefs or current expectations concerning, amongst other things, the Fresnillo Group's results of operations, financial position, liquidity, prospects, growth, strategies and the silver and gold industries are forward-looking statements. Such forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of the Fresnillo Group's operations, financial position and liquidity, and the development of the markets and the industry in which the Fresnillo Group operates, may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. In addition, even if the results of operations, financial position and liquidity, and the development of the markets and the industry in which the Fresnillo Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in regulation, currency fluctuations (including the US dollar and Mexican Peso exchanges rates), the Fresnillo Group's ability to recover its reserves or develop new reserves, including its ability to convert its resources into reserves and its mineral potential into resources or reserves, changes in its business strategy and political and economic uncertainty.