Last checked at 21 Apr 2009 07:00
Fresnillo Plc
28 Grosvenor Street
London W1K 4QR
United Kingdom
www.fresnilloplc.com
21 April 2009
Annual Report and 2009 Annual General Meeting
Fresnillo plc can confirm that it has posted to shareholders and submitted to the Financial Services Authority printed copies of the following documents:
Annual Report and Accounts for the year ended 31 December 2008 (the "Annual Report")
Circular relating to the Annual General Meeting to be held at 11:30 a.m. on 27 May 2009, at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ
These documents will shortly be available for inspection at the Document Viewing Facility (from 9:00 am to 5.30 pm, Mon to Fri, except bank holidays) which is situated at the following address:
UK Listing Authority
The Financial Services Authority
25 The North Colonnade Canary Wharf
London E14 5HS
The Annual Report and the Circular relating to the Annual General Meeting are also available to view or download in pdf format from the Fresnillo plc website, www.fresnilloplc.com.
In Compliance with DTR 6.3.5., the information set out in the appendix should be read in conjunction with Fresnillo plc's Preliminary Announcement issued on 23 February 2009. Together these constitute the material required to be disseminated in unedited full text through a Regulatory Information Service.
Fresnillo plc confirms that one of the resolutions to be proposed at the Annual General Meeting is the adoption of new articles and that copies of the blacklined Articles of Association showing the proposed changes will shortly be lodged with the Document Viewing Facility and are available from the Company Secretary, Fresnillo plc, 28 Grosvenor Street, London, W1K 4QR, and, on the date of the Annual General Meeting, at Linklaters, One Silk Street, London EC2Y 8HQ, from at least 15 minutes before the commencement of the meeting until its conclusion.
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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 - Saucito, 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 1.75 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 by 2018 and increasing its gold production.
Appendix
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and the Group and parent Company's Financial Statements ("Financial Statements") in accordance with applicable United Kingdom law and those International Financial Reporting Standards (IFRS) adopted by the European Union.
The Directors are required to prepare financial statements for each financial year which present a true and fair view of the financial position of the Company and of the Group and the financial performance and cash flows of the Company and of the Group for that period. In preparing those financial statements, the Directors are required to:
select suitable accounting policies in accordance with IAS 8: "Accounting Policies, Changes in Accounting Estimates and Errors" and then apply them consistently;
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and of the Group's financial position and financial performance; and
state that the Company and the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements.
prepare the accounts on a going concern basis unless, having assessed the ability of the Company and the Group to continue as a going concern, management either intends to liquidate the entity or to cease trading, or have no realistic alternative but to do so.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the Companies Acts 1985 and 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable UK law and regulations the directors are responsible for the preparation of a Directors' Report, Directors' Remuneration Report and Corporate Governance Report that comply with that law and regulations. In addition the directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Risk and Uncertainties
The Fresnillo Group has a system of internal control that is designed to identify, evaluate and manage significant risks associated with the achievement of the Group's objectives. The day-to-day responsibility for managing risk, and the maintenance of the Group's system of internal control, is collectively assumed by the Executive Committee, which is supported in this task by the Internal Audit Department.
The key business risks affecting the Group are set out below, as well as some of the steps the Group has taken to mitigate these risks when they are within its control.
Strategic risks
Political, legal and regulatory risks in Mexico
The Fresnillo Group's business could be materially adversely affected by changes in economic or other policies of the Mexican govemment or other political, regulatory or economic developments in Mexico. Past governments in Mexico have, at times, intervened in the nation's economy and social structure. The courts and legal systems in Mexico or other jurisdictions in which the Fresnillo Group might operate in the future may offer less certainty as to judicial outcome than is the case in the US or western Europe. Accordingly, the Fresnillo Group could face risks from, among other things, the relative inexperience of the judiciary and courts resulting in the inconsistent application of applicable laws, rules and regulations; and more protracted judicial processes. Similarly, there may be less certainty that government officials and agencies will abide by legal requirements, licences, permits and negotiated agreements. Management seek to mitigate the political risks through regular dialogue with Federal and State government.
Dominant shareholder
The Peñoles Group beneficially owns approximately 77.1 per cent. of the issued Ordinary Shares in the Company. As a result, the Peñoles Group, whose interests may differ from those of other shareholders, will be able to exercise significant influence over all matters requiring shareholder approval, including the election of Directors, significant corporate transactions, the issuance of Ordinary Shares and the payment of any dividends. The Company has entered into the Relationship Agreement and other agreements with the Peñoles Group to ensure that the Fresnillo Group is capable of carrying on its business independently, and to ensure that transactions and relationships between the Fresnillo Group and the Peñoles Group are at arm's length and on normal commercial terms including the agreements relating to (i) the supply of products by the Fresnillo Group to the Peñoles Group; and (ii) the supply of services by the Peñoles Group to the Fresnillo Group.
One customer
The primary products produced by Fresnillo and Ciénega are silver- and gold-rich lead and zinc concentrates and Herradura's primary product is gold/silver doré bars. Since 2006, all of the products from each of these three mines have been sold by Fresnillo to the Peñoles Group's refining and smelting facility at Torreón in Mexico which is operated by Met-Mex Peñoles, S.A. de C.V. ("Met-Mex") under a series of contracts (the "Met-Mex Arrangements"). The refining and smelting facilities operated by Met-Mex produce gold, silver as well as lead and zinc as by-products from the lead and zinc concentrates supplied by Fresnillo.
The Fresnillo Group benefits from the relatively low transport costs arising from the proximity of its operations to Met-Mex's refining and smelting facilities. If the Met-Mex refining and smelting operations ceased to operate or were otherwise no longer available to the Fresnillo Group, this could restrict the Fresnillo Group's ability to sell its products, affect the terms or costs of sale and/or increase the Fresnillo Group's costs incurred in transporting its products to an alternative facility.
Constraints on Supply
In early 2008 the resources industry experienced worldwide shortages in certain equipment, spare parts (for example giant tyres, used principally at Herradura) and labour. The occurrence of such shortages may increase the costs of the Fresnillo Group's operations, as a result of equipment, spare parts or labour becoming more expensive due to increased demand. Such shortages may also cause delays to, and quality issues in respect of, the Fresnillo Group's operations.
The Fresnillo Group's mining, processing, development and exploration activities depend on adequate infrastructure. The Fresnillo Group requires reliable roads, power sources and water supplies to access and conduct its operations and the availability and cost of this infrastructure affects capital and operating costs and the Fresnillo Group's ability to maintain expected levels of production and sales. Unusual weather or other natural phenomena, sabotage or other interference in the maintenance or provision of such infrastructure could impact the Fresnillo Group's activities. Similarly, any failure or unavailability of the Fresnillo Group's operational infrastructure (for example, through equipment failure at its concentrator or leaching facilities or disruption to its transportation arrangements) could adversely affect the production output from its mines or impact its exploration activities and development of a mine or project.
Macroeconomic and Financial risks
Fluctuation in metal prices
The products sold by the Fresnillo Group are primarily silver- and gold-rich lead and zinc concentrates, precipitates containing gold and silver and gold/silver doré bars. The price the Fresnillo Group's customer(s) pay(s) for these products varies according to the market prices of silver and gold and, to a lesser extent, the market prices of lead and zinc. Accordingly, the Fresnillo Group's financial performance is highly dependent on the market prices of silver and gold and, to a lesser extent, the market prices of lead and zinc. These prices have historically been subject to wide and, at times, rapid fluctuations and are affected by numerous factors beyond the Fresnillo Group's control, including international economic and political conditions, levels of supply and demand, the availability and costs of substitutes, inventory levels maintained by producers and others, actions of participants in the commodities markets and, to a lesser extent, the effects of inventory carrying costs and currency exchange rates. Furthermore, the Fresnillo Group does not currently engage in any hedging activities in relation to the prices of silver and gold, accordingly, is fully exposed to market price movements in respect of these metals.
Fluctuation in exchange rates
The Fresnillo Group's revenues are almost entirely in US dollars, while a substantial proportion of the Fresnillo Group's costs are incurred in Mexican Pesos. The Fresnillo Group does not undertake any speculative hedging activities in relation to currency fluctuation risk but may hedge selectively according to the needs of the business.
Inflation and input costs
The Fresnillo Group currently has relatively low production costs compared to the industry average and inflation has been largely stable in recent years in Mexico. If it were to increase without a corresponding devaluation of the Mexican Peso relative to the US dollar, the Fresnillo Group's results of operations and financial condition could be materially and adversely affected. The Fresnillo Group's main production expenses are personnel expenses, maintenance and repairs, materials, energy and contractors. Increased costs could result from a number of factors beyond the Fresnillo Group's control including increased charges for diesel fuel, electricity, transport or site contractors or increased treatment or refining charges for the Fresnillo Group's concentrates, precipitates and doré.
Silverstream Arrangements
Pursuant to the terms of the Silverstream Arrangements, the Fresnillo Group is entitled to receive all of the proceeds (before deduction of any treatment and refining charges) in respect of the Payable Silver produced from the zinc and lead concentrates produced at the Peñoles Group's Sabinas. The Fresnillo Group made an up-front payment of US$350 million to Peñoles in consideration for entering into the Silverstream Arrangements.
The Fresnillo Group has no contractual rights relating to the operation of the Sabinas mine nor does it have any ownership interest in the Sabinas mine. Under the terms of the Silverstream Arrangements, the Peñoles Group has an obligation to deliver at least 60 million ounces of Payable Silver by 31 December 2032. If the Peñoles Group fails to deliver such amount by such date it is required to pay Fresnillo US$1 per ounce of shortfall on 31 December 2032. However, due to the limited amount and the timing of this payment, Fresnillo effectively bears the production risk in respect of the Sabinas mine's silver production. For example, the Fresnillo Group will not be entitled to compensation if the Sabinas mine does not meet its planned silver production targets in any year. In addition, under the terms of the Silverstream Arrangements, the Peñoles Group has reserved the right to shut down the Sabinas mine if it becomes uneconomic for the Peñoles Group to continue production or for any other reason. If the Peñoles Group shuts down or discontinues its mining operations at the Sabinas mine on a temporary or permanent basis, the Fresnillo Group is only entitled to the compensation payable for the aggregate shortfall on 31 December 2032. As a result, any loss of the up-front payment, any failure by Peñoles to meet its production targets at the Sabinas mine or any reduction of operations at or closure of the Sabinas mine could have a material adverse effect on the Fresnillo Group's results of operations and financial condition.
Operational risks
Business interruption
The mining business is subject to risks and hazards, many of which are outside the Fresnillo Group's control. Such factors include, among others, environmental hazards, industrial accidents, the encountering of unusual or unexpected geological formations or seismic activity, cave-ins, flooding, earthquakes, periodic interruptions due to inclement or hazardous weather conditions, interruptions to power supplies, industrial action or disputes, technical failures, fires, explosions and other accidents at a mine, processing plant or related facilities. These risks and hazards could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, business interruption and delays in mining, asset write-downs, monetary losses, possible legal liability and may result in actual production differing, potentially materially, from estimates of production, including those contained in this document, whether expressly or by implication.
Although the Fresnillo Group maintains liability and business continuity insurance, its insurance does not cover every potential risk associated with its operations and meaningful coverage at reasonable rates is not obtainable for certain types of environmental hazards.
Project delivery (permits, equipment, funding, access to energy/water, etc.)
Successful implementation of the Fresnillo Group's expansion and development projects is subject to various factors, many of which are not within its control. In addition to the risks and hazards outlined above, these factors include the granting of consents and permits from the relevant government departments, the availability, terms, conditions and timing of the delivery of plant, equipment and other materials necessary for the construction and./or operation of the relevant facility, the availability of acceptable arrangements for transportation and construction, the performance of engineering and construction contractors, mining contractors, suppliers and consultants and adverse weather conditions affecting access to the development site or the development process. Implementation of the Fresnillo Group's development projects and prospects may also be compromised (or cease to be economic) in the event of a prolonged decline in the market price of silver or gold.
Reserve and resource replacement
As at 31 December 2008, the average life of mine of each of the Fresnillo Group's operating mines was at least 10 years calculated on the basis of proven and probable reserves. To realise its growth strategy, extend the lives of its mines and ensure the continued operation of the business, it is essential that the Fresnillo Group continues to realise its existing identified reserves, convert resources into reserves, develop its resource base through the realisation of identified mineralised potential and/or undertake successful exploration or acquire new resources.
While discovery of additional mineral potential is key to the Fresnillo Group's strategy, minerals exploration is highly speculative in nature, involves many risks and is frequently unsuccessful. Once mineralisation is discovered, it may take a number of years to complete the geological surveys to assess whether production is possible and, even if production is possible, the economic feasibility of production may change during that time.
Substantial capital expenditure is required to identify and delineate ore reserves through geological surveying and trenching and drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct mining and processing facilities. There can be no assurance that the Fresnillo Group will be able to identify future reserves or continue to extend the mine life of its existing operations.
Corporate social responsibility risks
Employee Relations
The Fresnillo Group's business depends in significant part upon the contributions of a number of the Fresnillo Group's key senior management and personnel, in particular its senior management team and its highly skilled team of engineers and geologists. There can be no certainty that the services of its key personnel will continue to be available to the Fresnillo Group. In Mexico, where the Fresnillo Group's operations and development projects and exploration prospects are located, it may be difficult for the Fresnillo Group to hire sufficiently skilled and qualified people or to obtain all of the necessary expertise locally or at reasonable rates due to the shortage of appropriately qualified individuals. The retention of senior management, geologists and engineers is being monitored by the Remuneration Committee on the advice of the Chief Executive Officer.
Although management believes its labour relations, with both employees and contractors, are good, there can be no assurance that a work slowdown, a work stoppage or strike will not occur at any of the Fresnillo Group's operating units or development projects or exploration prospects. There have been a number of instances in recent years of mining companies facing industrial action and work stoppages at their Latin American operations which, in certain instances, have led to the operations being shut down. Furthermore, under Mexican law, it is permissible for employees to engage in industrial action (i.e. work stoppages) in sympathy with unionised employees of other companies who are engaged in a dispute, despite the absence of any dispute with their own employer. Work slowdowns, stoppages, disputes with employee unions or other labour-related developments or disputes could result in a decrease in the Fresnillo Group's production levels and adverse publicity.
Environmental
Mining activities are generally subject to environmental hazards as a result of the processes and chemicals used in the extraction and production methods. In particular, the Fresnillo Group employs cyanide at Herradura and Ciénega and the transportation of lead and zinc concentrates gives rise to the risk of spillage in areas where there could be damage or harm caused to the environment or to the public. While the Directors consider that the Fresnillo Group is in substantial compliance with applicable Mexican law and regulation and has met current international standards with regard to its environmental policies and procedures, environmental hazards may exist on the Fresnillo Group's properties, or may be encountered while its products are in transit, which are currently unknown to it or may arise irrespective of such compliance. In addition, the storage of tailings may present a risk to the environment, property and persons. While the design of the Fresnillo Group's tailings dams is again in accordance with current regulation and guidance and good engineering standards, there remains a risk of leakage from or failure of the Fresnillo Group's tailings dams.
The Fresnillo Group may be liable for losses associated with such hazards, or may be forced to undertake extensive remedial clean-up action or to pay for governmental remedial clean-up actions, even in cases where such hazards have been caused by any previous or subsequent owners or operators of the property, or by any past or present owners of adjacent properties.
Community
While the Fresnillo Group believes it maintains good relations with local communities, the Fresnillo Group cannot rule out the possibility of local opposition arising in the future in respect of its existing operations, development projects or prospects (such opposition has arisen in the past) or in relation to obtaining concessions for current or future projects. If the Fresnillo Group were to experience opposition in connection with its existing operations or current or future projects, it could interfere with the Fresnillo Group's ability to operate its mines or develop its projects or prospects.
Related party balances and transactions
The Group had the following related party transactions during the years ended 31 December 2008 and 2007 and balances as at 31 December 2008 and 2007. During the year, and as a result of the initial public offering of the Group, related party receivables and payables with members of the Peñoles Group have been settled other than related party trade receivables arising from the sale of the Group's products to Met-Mex Peñoles S.A.B. de C.V., with whom trade is continuing.
Related parties are those entities owned or controlled by the ultimate controlling party, those who have a minority participation in Group companies, and key management personnel of the Group.
(a) Related party accounts receivable and payable
| Accounts Receivable | Accounts Payable | |||
| Year ended 31 December | Year ended 31 December | |||
| 2008 | 2007 | 2008 | 2007 | |
| (in thousands of US dollars) | ||||
| Trade: | ||||
| Met-Mex Peñoles, S.A. de C.V. | 60,423 | 149,474 | - | - |
| Loans granted / received and interest: | ||||
| Industrias Peñoles, S.A.B. de C.V. | - | 27,380 | - | 105,921 |
| Minas Peñoles, S.A. de C.V. | - | - | - | 350,000 |
| Servicios Industriales Peñoles, S.A. de C.V. | - | 3,175 | - | - |
| - | 30,555 | - | 455,921 | |
| Expenses incurred relating to IPO: | ||||
| Minas Peñoles, S.A. de C.V. | - | 11,310 | - | - |
| Administrative services: | ||||
| Servicios Industriales Peñoles, S.A. de C.V. | - | - | - | 514 |
| Other | 68 | 1,145 | 668 | 964 |
| Sub-total | 60,491 | 192,484 | 668 | 457,399 |
| Less-Current portion | 60,491 | 192,484 | 668 | 457,399 |
| Non-current portion | - | - | - | - |
Effective interest rates on loans granted to and received from related parties are as follows:
| Accounts Receivable As of 31 December | Accounts Payable As of 31 December | |||
| 2008 | 2007 | 2008 | 2007 | |
| Industrias Peñoles, S.A.B. de C.V.in Mexican pesos | - | 9.4% | - | 9.4% |
| Industrias Peñoles, S.A.B. de C.V. US dollars | - | 7.2% | - | - |
| Minas Peñoles, S.A. de C.V. in US dollars | - | - | - | 7.2% |
| Servicios Industriales Peñoles S.A. de C.V. in Mexican Pesos | - | 9.4% | - | - |
As at 31 December of each year, trade receivables from related parties were neither past due nor impaired. No security has been granted or guarantees given by the Group in respect of these related party balances. The expectation is for all balances to be cash settled.
Other balances and operations with related parties:
| Year ended 31 December | |||
| 2008 | 2007 | ||
| (in thousands of US dollars) | |||
| Unrealised result on valuation of hedges: | |||
| Industrias Peñoles, S.A.B. de C.V. | - | 70,621 | |
| Silverstream contract: | |||
| Industrias Peñoles, S.A.B. de C.V. | 318,268 | 350,000 | |
(b) Principal transactions between affiliates are as follows:
| Year ended 31 December | ||||
| 2008 | 2007 | |||
| (in thousands of US dollars) | ||||
| Income: | ||||
| Sales:(1) | ||||
| Met-Mex Peñoles, S.A. de C.V. | 773,704 | 646,788 | ||
| Interest on loans to related parties: | ||||
| Industrias Peñoles, S.A.B. de C.V. | 1,863 | 14,165 | ||
| Minas Peñoles, S.A. de C.V. | - | 331 | ||
| Other | 13 | 27 | ||
| 1,876 | 14,523 | |||
| Other income | 2,820 | 4,190 | ||
| Total income | 778,400 | 665,501 | ||
(1) Figures do not include hedging losses.
| Year ended 31 December | ||||
| 2008 | 2007 | |||
| (in thousands of US dollars) | ||||
| Expenses: | ||||
| Administrative services: | ||||
| Servicios Industriales Peñoles, S.A. de C.V. | 44,825 | 65,051 | ||
| Servicios de Exploración, S.A. de C.V. | 3,324 | 2,872 | ||
| 48,149 | 67,923 | |||
| Trademark royalties: | ||||
| Industrias Peñoles, S.A.B. de C.V. | 31,232 | 66,890 | ||
| Realised result on derivatives: | ||||
| Industrias Peñoles, S.A.B. de C.V. | - | 63,411 | ||
| Energy: | ||||
| Termoelectrica Peñoles, S. de R.L. de C.V. | 17,038 | 10,929 | ||
| Interest on loans from related parties: | ||||
| Minas Peñoles, S.A. de C.V. | 5,864 | - | ||
| Industrias Peñoles, S.A.B. de C.V. | 3,064 | 938 | ||
| Other | - | 184 | ||
| 8,928 | 1,122 | |||
| Operating materials and spare parts: | ||||
| Wideco Inc | 2,870 | 569 | ||
| Equipment repair and adninistrative services: | ||||
| Serviminas, S.A. de C.V. | 2,241 | 1,343 | ||
| Met-Mex Peñoles, S.A. de C.V. | 1,891 | 908 | ||
| 4,132 | 2,251 | |||
| Other expenses: | 9,555 | 3,921 | ||
| Total expenses | 121,904 | 217,016 | ||
(c) Compensation of key management personnel of the Group
Key management personnel include the members of the Board of Directors and the Executive Committee who receive remuneration.
|
| Year ended 31 December | |
|
| 2008 | 2007 |
|
| (in thousands of US dollars) | |
| Salaries and bonuses | 2,322 | - |
| Other benefits | 508 | - |
| Total compensation paid to key management personnel | 2,830 | - |
Includes amounts paid to directors disclosed in the Directors' Remuneration Report.