Fresnillo Regulatory News (FRES)

Fresnillo plc

Fresnillo plc today announced its financial results for the full year ended 31 December 2015. Octavio Alvídrez, CEO said:

"I am pleased to report a solid overall performance against a backdrop of continued global economic uncertainty and weak precious metals prices. Silver production was at the top end of our guidance, whilst in gold we surpassed our long term 2018 target. Our performance was driven by substantial operational progress during the year: we ramped up Saucito II, reached steady state at Herradura, and have begun to see the results of the measures we have put in place to solve development delays at Fresnillo.

Development projects advanced largely according to plan, with commissioning of phase 1 at San Julián due in the second quarter of 2016, and we have continued to invest in exploration to advance projects and prospects where we have identified strong potential.

We maintained a strong financial position, ending the year with a healthy cash balance, and without impairments. Weaker precious metals prices clearly impacted financial performance, but this was offset by higher volumes; we continued to generate sound profit margins and substantial cashflow from operating activities.

Our 2015 performance underlines the quality of our assets, our low-cost and flexible operations, and the benefits of a disciplined approach to investment, maintenance of a strong balance sheet and a clear commitment to sustainable business practices. We are confident in our ability to build on these solid foundations to deliver long-term value for our shareholders, balancing growth and returns whilst maintaining the strong financial position which allows us to optimise performance in current market conditions.

In light of the weak precious metals price backdrop, we reduced 2015 capital expenditure and exploration spend from budgeted levels, and have similarly reduced these budgets for 2016, deferring certain investments whilst favouring those which accelerate cashflow generation as part of our contingency plan. We will continue to focus on further cost reductions, productivity improvements and value preservation measures as we work towards our 2016 production targets."

Twelve months to 31 December 2015

* 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 gold, lead and zinc hedging

*** The weighted average number of shares was 736,893,589 in 2015 and 2014

2015 Highlights

Robust balance sheet and healthy profit margins support strong financial position

· Adjusted revenue of US$1,583 million, 2.5% increase on 2014 as higher volumes more than offset lower metal prices

· Gross profit and EBITDA of US$433.1 million and US$547.5 million, down 16.9% and 3.5% respectively

· Profit from continuing operations of US$200.4 million, down 18.4%

· Devaluation of the Mexican peso vs. US dollar positively affected production costs, but also resulted in increased deferred taxes with a negative impact on effective tax rate

· Net cash from operating activities was US$542.9 million vs US$121.6 million in 2014

· Capital expenditures of US$474 million and exploration spend of US$140 million

· Maintained financial flexibility, with year-end cash balance of US$500.1 million and net debt position of US$296.9 million at 31 December 2015

· Basic and diluted EPS from continuing operations of US$0.094; adjusted EPS of US$0.069, down 36.1% and 6.8%

· 2015 final dividend of 3.35 US cents per share, equivalent to approximately US$24.7 million, recommended by the Board

· The consolidated income statement for the year was significantly impacted by certain foreign exchange effects, gold hedging and the Silverstream revaluation. Adjusting for these effects1, would result in EBITDA of US$576.1 million (2014: US$568.4 million) and profit for the year of US$131.0 million (2014: US$134.4 million).

Continued focus on optimising operations

· Silver production (including Silverstream) of 47 moz (+4.4%), at top end of guidance range; primarily attributable to Saucito II ramp-up ahead of schedule

· Gold production of 762 koz, surpassing 2018 gold production target of 750 koz; reached steady state production at Herradura and second Merrill Crowe plant installed

· Measures taken at Fresnillo to address development delays and control dilution; improvements in grade and production in 2H15 and targeting double digit increase in ore milled in 2016

· Cost per tonne decreased at four of our five operating mines

· Renewed focus on safety following fatalities in late 2015 and early 2016

 Prudent development of quality growth pipeline

· Commissioning of San Julián phase 1 on track for Q2 2016; key milestone in achieving silver production target of 65 moz by 2018

· Disciplined investment approach in low price environment: deferral of certain projects; reduced capex budget of US$600 million for 2016, focused on San Julián and optimising performance at operating mines; US$135-140 million for exploration

· Development work at Orisyvo deferred

· Equipment orders on hold for Pyrites Plant; resume project pending Board approval as market conditions warrant

· Juanicipio moving closer to development phase, with first production expected in 2018

· Exploration continues at Ciénega and Centauro Deep; economic evaluation of Centauro extension underway

· Gold resources increased 4%, silver resources and gold reserves stable, silver reserves decreased 6%

· 2016 production guidance of 49-51 moz silver (including 4 moz from the Silverstream) and 775-790 koz gold; 2018 production target of 65 moz silver

1 These effects are as follows:

· Foreign exchange effects- the 16.9% devaluation of the spot Mexican peso/US dollar exchange rate (2014: 12.6% devaluation) adversely affected income principally as a result of:

i) Realised losses on derivative instruments used in the Mexican peso/US dollar hedge programme (2015: US$28.6 million pre-tax loss, 2014: US$1.1 million pre-tax loss) (see note 6 to the Financial Information);

ii) the retranslation of monetary assets and liabilities transacted in Mexican pesos (2015: US$36.2 million pre-tax loss, 2014: US$24.4 million pre-tax loss);

iii) the translation of the tax values of assets and liabilities for the purposes of calculating deferred tax (2015: US$77.5 million negative impact on tax charge, 2014: US$53.4 million negative impact) (see note 11 to the Financial Information).

· The gold hedging programme put in place to protect the value of the investment in Penmont following the acquisition of the minority interest acquisition in 2014 resulted in a pre-tax gain of US$59.7 million (2014: US$4.4 million gain) representing the change in the time value of the hedging instruments (see note 31(c) to the Financial Information);

· The revaluation of the Silverstream contract resulted in a US$27.2 million pre-tax gain (2014: US$77.1 million pre-tax gain) (see note 15 to the Financial Information).

The tax effect of the pre-tax items above reflects tax at the statutory corporate tax rate of 30% (2014: 30%).

Analyst Presentation

Fresnillo plc will be hosting a presentation for analysts and investors today at 09.00 (GMT) at Bank of America Merrill Lynch Financial Centre, 2 King Edward St., EC1A 1HQ, London, United Kingdom.

For those unable to attend the presentation dial in details are:

Dial in numbers:

London: 020 3427 1908

New York: +1 646 254 3365

Mexico: +1 877 550 9932

Access Code: 1094271

A link to the webcast can be found on Fresnillo's homepage, www.fresnilloplc.com. The webcast will include audio from the conference call and synchronised power point slides. Please note that you will not be able to post questions through the webcast.

For further information, please visit our website: www.fresnilloplc.com or contact:

Bell Pottinger

Daniel Thole Tel: +44(0)20 3772 2500

Aarti Iyer

About Fresnillo plc

Fresnillo plc is the world's largest primary silver producer and Mexico's second largest gold producer, listed on the London and Mexican Stock Exchanges under the symbol FRES.

Fresnillo plc has six operating mines, all of them in Mexico - Fresnillo, Saucito, Ciénega (including the San Ramón satellite mine), Herradura, Soledad-Dipolos1 and Noche Buena, two development projects - San Julián and the Pyrites plant, and four advanced exploration prospects - Orisyvo, Juanicipio, Las Casas Rosario & Cluster Cebollitas and Centauro Deep, as well as a number of other long term exploration prospects. In total, Fresnillo plc has mining concessions covering approximately 2 million hectares in Mexico.

Fresnillo plc has a strong and long tradition of 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, producing 65 million ounces of silver and 750,000 ounces of gold by 2018.

1 Operations at Soledad and Dipolos are currently suspended.

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.

In the past year we have witnessed a continued downward trend in precious metal prices, to levels not seen in five years. This has led to short-term operational and financial challenges and raised long-term strategic questions for our industry. However, we have seen periods of uncertainty and low prices before and believe that, with our high quality assets, conservative financial structure and ability to adjust operations and investments, Fresnillo plc has demonstrated its capacity to meet these challenges, maintain solid profit margins and continue to pursue its long-term goals.

Within this context we successfully ramped up the Saucito II expansion, significantly ahead of the original three-year timeframe. This was essential to achieving the 4% rise in silver production year over year, to the upper range of our guidance. In addition, we reached steady state at Herradura, which combined with higher throughput at Saucito, increased the 2015 gold production to a record of 762 koz, 28% above the previous year and strongly ahead of guidance. Notably, at the time of our IPO in 2008 we had set a 10-year gold production target of 400 koz, which has been revised upward several times due in part to the acquisition of the remaining 44% of Penmont in 2014, and we have surpassed even that target.

Development projects advanced largely according to plan. In the second quarter of this year we will commission the first stage of the US$515 million San Julián mine, the key growth project to achieve our silver production target of 65 moz by 2018. Detailed engineering neared completion for the pyrites plant, which will recover silver and gold from old and current tailings of the Fresnillo and Saucito mines. The Juanicipio advanced exploration project in the Fresnillo District is moving closer to the development phase, with production expected to begin in 2018.

Exploration results were mixed, with a 4.2% rise in total gold resources and 1.9% decrease in silver resources. Gold reserves remained relatively stable while silver reserves decreased 6.0%, mainly at Fresnillo and San Julián. Our resource base remains exceptionally sound, particularly given the lower silver prices used for the estimates.

The maturity of the Company's Health, Safety, Environment and Community Relations (HSECR) System progressed toward its 2016 targets, as determined by an independent assessment. Notwithstanding the significant reduction in fatalities over the past few years, it is with much sadness I report one fatal accident in 2015, and two fatalities in early 2016, a disturbing reversal of our safety record. It is the Company's responsibility to ensure that everyone who works at our operations returns home safely to their family every day. The Board will always give the highest priority to safety issues and has overseen investigation of these accidents, ensuring that management takes action to improve safety systems and practices. I encourage you to review our social and sustainability performance for a deeper look at our programmes and progress, as well as how we intend to support the UN's sustainable development goals.

* * *

Revenues increased mainly as a result of higher production volumes and productivity improvements, which more than compensated for the 10.4% and 16.1% declines in our average realised gold and silver prices, respectively. As a result, total adjusted revenues of US$1,583.3 million were 2.5% above last year. Furthermore, the 19.2% average devaluation of the Mexican peso benefited peso-denominated production costs. However, profit attributable to equity shareholders was US$70.5 million, down 35.0%, mainly due to the non-cash accounting effect of the devaluation of the Mexican peso on deferred taxes.

EBITDA of US$547.5 million was 3.5% lower than in the previous year, while cash flow from operations was a healthy US$542.9 million, 346.3% higher mainly due to a reduction in accounts receivable. Our year-end cash balance was US$500 million, and net debt was US$300 million.

After a comprehensive review of the Company's financial situation, capital requirements, growth targets and the precious metal markets, the Board declared an interim dividend of 2.1 US cents per share and a final dividend of 3.35 US cents per share, totalling US$24.7 million.

Our goal is to create long-term shareholder value, and I believe that this can be achieved by balancing growth, corporate social responsibility and attractive returns for our shareholders. The Group's dividend policy takes into account the profitability of the business and underlying earnings, as well as its capital requirements and cash flows, whilst maintaining an appropriate level of dividend cover. A total dividend of between 33 and 50 per cent of profit after tax is paid out each year in the approximate proportion of one-third to be paid as an interim dividend, two-thirds to be paid as a final dividend. This gives us the required flexibility to consider the underlying cyclical behaviour of precious metal prices.

The Board's governance agenda in 2015 was focused on the action plan based on the 2014 External Board Evaluation and in response to UK Corporate Governance Code changes taking effect this year, most significantly conducting the assessment of viability for the preparation of the Viability Statement.

The Board also continued to take an active role in setting strategy, reviewing progress against plan and ensuring management retains sufficient flexibility to respond to market dynamics and operational developments. Our role is perhaps most vital in the allocation of capital, and my colleagues and I are aligned in seeking a balance between growth, returns to our shareholders and maintaining a strong financial position.

It is with these priorities in mind that we scaled down our capital expenditures and exploration budget in 2015, and have begun to implement our contingency plan in 2016 to safeguard our financial position at a time of cyclically low precious metal prices. Specifically, we have deferred equipment orders for the planned pyrites plant and development work at Orisyvo. We will continue to monitor market conditions closely to evaluate the timing of reinstating these projects, or if further deferrals are required, and will act accordingly. We have also directed management to focus on further cost reductions, productivity improvements and value preservation measures.

The challenges we face today are real and evolving. While there is little consensus on when we might next see upside, I believe that our low cost operations, development project pipeline and portfolio of exploration projects constitute the solid foundations to drive long-term shareholder value.

Fresnillo is well placed to withstand volatility and lower precious metal prices and to reap the benefits of an eventual upturn. For now, we will focus on ensuring that our operations are working to their full potential, bringing our new San Julián mine on line as planned, replenishing reserves and continuing to explore core districts.

It is in these challenging circumstances when strong leadership is most deeply appreciated, and for this reason I wish to recognise our management team and the people of Fresnillo for their endurance, and my fellow Directors for their invaluable advice and support.

Alberto Baillères

Non-executive Chairman

The mining industry faces significant pressures and challenges today: depressed prices, technical difficulties in accessing mineral resources and rising demands of multiple stakeholders. Many in our industry have responded by increasing productivity, innovating processes and technologies, and improving their response to competing interests. By necessity, best industry practices have been redefined.

But many miners have rationalised portfolios, curtailed production, cancelled or deferred investment in new projects and reduced exploration. Such cash preservation measures may be critical in the short term but, taken to the extreme, could undermine the foundations of long-term value creation.

In that regard Fresnillo is well placed, with solid foundations on which to drive long-term value creation: a strong balance sheet that enables us to invest across cycles, high quality assets, low cost and flexible operations, a disciplined approach to development, and a commitment to sustainable business practices.

These foundations uphold our commitment to balancing growth and returns, together with maintaining a strong financial position, allowing us to optimise performance in current market conditions while pursuing profitability and sustainability across precious metal price cycles. 

Indeed, we continued to generate solid profit margins in 2015, albeit lower year on year, while all in sustaining costs (AISC) for many of our mines remain amongst the lowest in the industry. We advanced our development projects and by investing in exploration across price cycles, we generated increases in gold resources over 2014, whilst silver resources remained relatively stable despite lower price assumptions.

We remain prepared to act, of course, favouring actions that accelerate cash flow while deferring investments that do not compromise the optimal timing of our critical growth projects. Such was the case in 2015 when we lowered our capital expenditure and exploration spending from their original budgeted amounts.

However, we did encounter some internal challenges of our own in the year. At the Fresnillo mine, we fell short of our own expectations of operational excellence following development delays that had begun in 2013 concurrent with the natural and expected decline in silver ore grade. These delays, which limited access to richer stopes, were caused by a combination of factors including narrower veins, which increase dilution and require additional development to maintain throughput levels, poor rock quality necessitating additional shotcreting and anchoring, issues with contractors, and insufficient implementation of in-mine infrastructure.

We continue to see the results of the measures we implemented at the Fresnillo mine gradually come through, with grades and throughput increasing in the final months of the year, whilst lowering dilution; I am confident of a turnaround in 2016 with a target of a double-digit increase in ore milled.

At Herradura, our focus this year centred on increasing our processing capacity to cater for both the solution produced at the leaching pads and the dynamic leaching plant (DLP). We installed a second Merrill Crowe plant and made technical modifications to the DLP, which allowed us to reach steady state production by year end.

Safety continues to be our highest priority and I am deeply saddened to report one fatality in late 2015 and two in early 2016, as well as an increase in injury rates. Failure to meet our targets in this regard has profound human implications, more than any other goal we set ourselves. We must continue to strengthen our safety culture and address the human factors involved in the majority of accidents in order to safeguard our workforce and retain our licence to operate.

In each of the areas above, we have taken important steps to improve performance in 2016 and we will hold ourselves accountable for the targets I outline below.

Operating and financial performance

We produced a record 47.0 moz of silver in 2015 (including the Silverstream), at the top end of our guidance range and 4.4% over 2014. This primarily reflected the ramp-up of Saucito II that resulted in higher ore throughput, as well as milling efficiencies at the Saucito I plant. Higher silver ore grade at Ciénega also contributed to the increase in production. These factors more than offset lower ore grade and volumes processed at Fresnillo.

Gold production of 762 koz increased 27.8% over the same period of 2014, against our target of 715-730 koz and surpassing the 2018 gold production target of 750 koz. This was a result of Herradura and its dynamic leaching plant being fully operational for the year, and installation of a second Merrill Crowe plant that was key in increasing capacity and reaching steady state.

By-product lead production increased 48.3% on 2014, to 42,413 tonnes, as a result of increased ore throughput and higher ore grade at Saucito and higher ore grades at Ciénega and Fresnillo. Similarly, by-product zinc production increased 45.2% to 46,022 tonnes due to higher ore throughput and ore grades at Saucito and higher ore grades and recovery rates at Fresnillo. We expect base metal production to continue to increase as we extract at deeper levels of the Fresnillo mine, and our capacity to process these lead and zinc ores will increase following the plant expansion.

Our development projects and high quality growth pipeline remain a key pillar of our long-term growth strategy. We significantly advanced development of the San Julián silver-gold project, and despite delays in permitting, weather-related issues, security concerns and a high rotation of contractor personnel arising from the project's remote location, execution delays were relatively minimal. The commissioning of the stage 1 leaching plant is now expected in the second quarter of 2016, only months after the revised target date.

Detailed engineering continued at the pyrites project, which is expected to increase silver and gold recovery rates by processing tailings, both historical and ongoing, from the Fresnillo and Saucito mines. Once engineering is completed in mid-2016, further work on the project will be put on hold as part of the contingency plan implemented by the Board to safeguard our financial position; equipment orders and construction work will resume as market conditions warrant.

Exploration mainly focused on areas of influence at current operating mines and key exploration sites, with our advanced exploration projects all progressing according to plan. At Juanicipio, mining works continued at a good pace and drilling showed positive results with a 10% increase in silver resources. We saw increases in silver-gold resources at the Huizache, San Julián Sur, Guanajuato and Rodeo projects.

Our resources and reserves reflect lowered price assumptions: the silver price assumption decreased to US$15 per oz (2014: US$18). The gold price assumption for open pit resources was lowered to US$1,300 per oz (2014: US$1,350), consistent with the price used for the purpose of the design of the pit shell, allowing for adequate long term design flexibility. The gold price assumption for underground reserves and resources and for reserves in open pits was unchanged at US$1,150 per oz. Notwithstanding these reductions, our high quality asset base remains healthy. Gold resources increased 4.2%, whilst silver resources and gold reserves decreased by 1.9% and 1.5% respectively. Silver reserves decreased, mainly at Fresnillo and San Julián, to 547.6 moz.

We continued to advance our HSECR framework in the year, and saw improvement in many key areas outside of the aforementioned safety issues. A notable highlight was the introduction of renewables in our energy portfolio as we move to decouple growth from carbon emissions. Moreover, our progress in terms of carbon emissions reporting transparency earned a 93 rating from the Carbon Disclosure Project against our initial rating of 58 in 2010. The response to climate change and the need to build resilience in a carbon-constrained economy, particularly in light of COP21 commitments, will require our considerable focus. Also notable was our inclusion as a top emerging markets performer by Vigeo, an international research group on environmental, social and governance issues.

While our financial performance in the year was impacted by the decline in precious metal prices, with our average realised silver and gold prices 16.1% and 10.4% lower than in 2014, respectively, this was more than compensated by the higher volumes of metal produced and sold in 2015.

As a result, adjusted revenues totalled US$1,583.3 million, 2.5% above the previous year. Higher cost of sales that included a significant hedging loss weighed on gross profit, which declined by 16.9% to US$433.1 million. Lower exploration expenses helped stem the decline in EBITDA to 3.5%, resulting in an EBITDA margin of 37.9%. The 16.9% devaluation of the Mexican peso against the US dollar resulted in non-cash charges to the income statement and affected the monetary position and value of certain assets and liabilities, resulting in a much higher deferred tax charge. A detailed review of our performance is set out in the Financial Review.

Moving forward: our 2016 outlook and objectives

While we see long-term fundamental support for precious metals, we do not expect significant shifts in the factors driving current volatility, nor does there appear to be a clear catalyst that would support a return to higher prices.

Fresnillo remains well positioned to weather such volatility, with sufficient financial and operating flexibility. Our long-term strategic goals are unchanged: to profitably and sustainably maintain the Group's position as the world's largest primary silver company and a leading gold producer in Mexico. Having already attained our 2018 gold production and reserves targets, we remain committed to our silver targets of 65 million ounces production at that time, and 650 million ounces in reserves.

Our near term focus remains on controlling expenditures, optimising performance and delivering returns, even as we hold firm to our belief that value creation requires sustainable growth through the disciplined development of new projects and ongoing investment in exploration across prices cycles. As such, and in consideration of the contingency plan, we have budgeted US$600 million in capital expenditures for 2016, to be allocated primarily to San Julián and sustaining capex at current operations, and US$135-140 million for exploration. However, we will continue to monitor market conditions and may adjust the budget accordingly.

We aim to produce 49-51 moz of silver, including 4 moz from the Silverstream, and 775-790 koz of gold in 2016. In addition, we will continue to pursue a favourable resolution on Soledad-Dipolos, where mining and beneficiation were suspended in 2013 following contested ownership of some surface lands; since that time, we have fostered strong relationships with other neighbouring agrarian communities that have led to the signing of new agreements.

As always, we will seek additional efficiencies at all our operating mines, investing in productivity and controlling costs to maintain our cost position and solid margins. I personally benchmark our success by the ability to meet our objectives within a framework of maturing sustainability and good governance, and continuous improvement in our safety culture.

I am humbled by and grateful for the confidence placed in us by our people and our communities, our suppliers and contractors, and our clients and shareholders, and feel a deep personal responsibility to meeting our commitments on sustainable value creation. I look forward to working together in 2016 to drive that vision ever forward.

Octavio Alvídrez

Chief Executive Officer

The Consolidated Financial Statements of Fresnillo plc are prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. 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 2015 figures compared to 2014, unless otherwise noted. The financial information and year on year variations are presented in US dollars, except where indicated.

Commentary on financial performance

 As we set out below, challenging and unpredictable conditions in the precious metals industry in 2015, combined with Company-specific issues, affected our financial results in the year. Notwithstanding these factors, the Group's profitable operating profile, disciplined focus on productivity and efficiency, and strong asset portfolio give us confidence in our cash generating capacity and ability to generate sustainable stakeholder value over the long term.

Income statement

1 Adjusted revenue is revenue as disclosed in the income statement adjusted to exclude treatment and refining charges and gold, lead and zinc hedging.

2 Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as gross profit plus depreciation less administrative, selling and exploration expenses.

3 The weighted average number of ordinary shares was 736,894,000 for 2015 and 2014. See Note 19 in the Consolidated Financial Statements.

Fresnillo plc's financial performance largely reflects the Group's operational performance, asset quality, and the ability of our management and personnel to execute towards our strategic goals. However, there are a number of macroeconomic variables that lie beyond our control which affect financial results. These include:

Precious metal prices

In 2015, the strengthening of the US dollar, an improving US economy and the significant decline in oil prices put further downward pressure on precious metal prices. The average realised gold price decreased 10.4%, to US$1,126.5 per ounce and the average realised silver price decreased 16.1% to $15.6 per ounce. Furthermore, the average lead and zinc prices decreased 13.6% and 15.2% year on year.

The Company has structured certain hedge positions to cover the risk of precious metal prices.

Foreign exchange rates

The average spot Mexican peso/US dollar exchange rate devalued by 19.2%, from $13.30 per US dollar in 2014 to $15.85 per US dollar in 2015. This resulted in a favourable effect estimated at US$48.0 million on the Group's production costs, as costs denominated in Mexican pesos (approximately 2/3 of total costs) were lower when converted to US dollars.

The Mexican peso/US dollar spot exchange rate at 31 December 2015 was $17.21 per US dollar, compared to $14.72 per US dollar at the beginning of the year. The 16.9% devaluation had an adverse effect on: i) monetary assets and liabilities transacted in Mexican pesos; ii) the Mexican peso/US dollar hedge programme and related realised and unrealised gains and losses; and iii) taxes and mining rights as the devaluation resulted in an increase in related deferred tax liabilities.

Cost deflation

For the first time since the Company's IPO in 2008, there was a net decrease in the weighted average input cost over the year, of 8.4%. This deflation reflected, amongst other factors, the favourable effect of the 19.2% average devaluation of the Mexican peso against the US dollar.

Labour

Employees received a 5.5% increase in wages in Mexican pesos and administrative employees at the mines received a 4.5% increase; when converted to US dollars the deflation factor was 11.7%.

Energy

Electricity

The Group's weighted average cost of electricity decreased by 35.6% to US$7.1 cents per kW in 2015, compared to US$11.0 in 2014. Electricity rates are set by the Comisión Federal de Electricidad (CFE), the national utility, based on their average generating cost, which correlates mainly to fuel oil and coal prices. In 2015, the decrease in electricity rates by CFE was mainly explained by the lower oil prices and its efforts to substitute expensive fuels for cheaper and cleaner alternatives such as natural gas and renewable energy.

Diesel

The weighted average cost of diesel in US dollars decreased 11.1% from US$83.5 cents per litre in 2014 to US$74.2 cents per litre in 2015. Diesel prices are controlled by Petróleos Mexicanos (PEMEX), the national oil company.

Operating materials

For the second consecutive year, unit prices of the majority of key operating materials decreased due to the lower demand for these inputs, resulting in a net weighted average decrease of -3.8%. This reflects the combined effect of price inflation and the weighting of each component in the total cost of operating materials.

There has not been a significant impact from the devaluation of the MXP/US dollar exchange rate as the majority of these items are dollar denominated.

Contractors

Agreements are signed individually with each contractor and have specific terms and conditions that cover operating materials, equipment and labour, amongst others. Contractor costs are an important component of the Company's total costs, denominated in Mexican pesos. In 2015, increases granted to contractors, whose agreement was due for review during the period, ranged from 1.9% - 23.9% in Mexican pesos (equivalent to -14.5% to 3.9% in dollar terms), resulting in a weighted average decrease of 4.8% in dollars.

Maintenance

Unit prices of spare parts for maintenance decreased 6.4% on average in US dollars.

Others

Other cost components include freight and insurance premiums, which decreased by an estimated 4.0% and 3.6% respectively on a per unit basis. The remaining components had an average deflation of 5.7% over 2014.

Treatment and refining charges

Treatment and refining charges1, which are deducted from adjusted revenue for the purposes of revenues as disclosed in the income statement, are determined annually using international benchmarks. Treatment charges per tonne of lead concentrate decreased by 7.0%, whilst silver refining charges and treatment charges per tonne of zinc concentrate remained relatively stable year on year. However this was more than offset by the increase in volumes of lead and zinc concentrates with high silver contents shipped mainly from Saucito to Met-Mex, resulting in an 8.7% aggregate increase in treatment and refining charges.

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.

Revenues

Consolidated revenues (US$ millions)

 1Adjusted revenue is revenue as disclosed in the income statement adjusted to exclude treatment and refining charges and gold, lead and zinc hedging.

Total revenues for the full year of US$1,444.4 million increased by 2.2% over 2014. This was mainly explained by higher adjusted revenue, which rose 2.5% to US$1,583.3 million as a result of the increase in sales volumes which more than mitigated the lower metal prices. However, this positive effect was slightly offset by the 8.7% increase in treatment and refining charges.

In 2015 we entered into derivative contracts to hedge part of our lead and zinc by-product production through collar structures, resulting in a US$3.9 million gain recorded in the income statement. The chart below illustrates the expired hedging structures, results in 2015 and the outstanding hedged position as of 31 December. 

In addition, in 2014 we initiated a one-off gold hedging programme to protect the value of the investment made in the Penmont acquisition, the effects of which are recorded as finance income and a small portion in revenue. The chart below illustrates the expired hedging structures, results in 2015 and the outstanding hedged position as of 31 December.

The Group's hedging policy remained unchanged for the remainder of the portfolio, providing shareholders with full exposure to gold and silver prices.

The higher volumes sold mainly due to the ramp-up at Saucito II and Herradura resulted in a positive impact on revenues of US$247.2 million. This was partly offset by the US$208.9 million unfavourable effect of the lower metal prices.

The contribution of gold to adjusted revenues rose from 47% in 2014 to 52% in 2015 and the contribution of silver decreased from 46% to 39%. This resulted from the combination of: i) the increase in the volume of gold sold (+28.2%) being higher than that of silver (+3.4%); and ii) that whilst the average price of gold decreased 8.5%, average silver price decreased 16.5%, thus increasing the gold/silver price ratio from 67.3 to 73.8.

Adjusted revenues1 by metal (US$ millions)

1 Adjusted revenue is revenue as disclosed in the income statement adjusted to exclude treatment and refining charges and gold, lead and zinc hedging.

In terms of adjusted revenues by mine, Saucito has become the main contributor to adjusted revenues as a result of the successful ramp-up at Saucito II. Herradura increased its share of consolidated adjusted revenues due to higher volumes of gold produced and sold resulting from the ramp-up to steady state post the lifting of the suspension of the explosives permit in 2014, and the first full year of operations at the dynamic leaching plant. The increased gold production at Noche Buena slightly increased its contribution. In contrast, Fresnillo contributed a lesser share of adjusted revenues and decreased to the third most important contributor to adjusted revenue, reflecting the lower volumes produced as a result of the operational challenges faced in this mine. The lower gold grades at Ciénega combined with lower precious metal prices resulted in a decrease in its contribution to adjusted revenues.

Adjusted revenues by metal

Adjusted revenues by mine

Volumes of metal sold

Cost of sales

4 Adjusted production costs is calculated as total production costs less depreciation, profit sharing and the effects of exchange rate hedging

Cost of sales totalled US$1,011.3 million, an increase of 13.3% over 2014. The US$118.7 million increase is explained by the following combination of factors:

· A decrease in adjusted production costs (-US$43.5 million): This was mainly driven by: i) the efficiencies achieved at Saucito, Noche Buena, Ciénega and the dynamic leaching plant resulting from the economies of scale (-US$53.2 million); ii) the favourable effect of the devaluation of the Mexican peso/US dollar exchange rate when converting peso-denominated costs to US dollars (-US$48.0 million); iii) energy costs, excluding foreign exchange effects, decreased due to lower unit prices of electricity and diesel (-US$12.6 million); iv) the lower volumes of ore processed at Fresnillo (-US$10.2 million); and v) others (-US$4.6 million) including a decrease in the unit cost of consumables priced in US dollars (electricity, operating materials, spare parts, diesel, etc.); partially offset by the increase in unit cost of personnel (excluding foreign exchange effects) and other items in pesos. These positive effects were partially offset by: i) the increased ore throughput at Saucito, Noche Buena and Herradura (US$70.2 million); ii) additional adjusted production costs resulting from a full year of operations at the DLP (US$5.2 million); and iii) contractor costs increased as a result of a greater number of contractors used to carry out development, mainly at the Fresnillo mine, and an increase in the unit fees charged by contractors in Mexican pesos (US$9.7 million).

The positive effect of adjusted production costs was more than offset by increases in:

· Variation in change in work in progress (+US$111.0 million). This was mainly explained by the increase in ore inventories in 2014 at Herradura as a result of not having sufficient capacity at the Merrill Crowe plant to process all the rich solution coming from both the pads and the new dynamic leaching plant; and at Noche Buena as part of the ramp-up to the new expanded capacity. This year, the bottle neck at Herradura was eliminated and Noche Buena operated steadily, resulting in a small reduction in inventory. Additionally, this year due to the continued drop in gold price we recognised a write down of US$5.01 million in the value of inventories at Soledad and Dipolos.

· Depreciation (+US$35.0 million): The increase was explained by the higher depreciation recorded at Saucito as a result of the start-up of Saucito II, additional mining works depreciated at Fresnillo and increased depletion factors mainly at Herradura and Noche Buena.

· Hedging (+US$27.5): The Group enters into certain exchange rate derivative instruments as part of a programme to manage its exposure to foreign exchange risk associated with costs incurred in Mexican pesos. The Company had short term forward dollar sales of US$ 116.5 million mature during the year at an average rate of $15.735 MXN/USD, resulting in a US$186,875 profit recognised in the income statement. As of 31 December, the where no outstanding forward instruments.

Additionally, the Group entered into a combination of put and call options structured at zero cost (collars). In 2015, these derivatives were used to hedge US$279.5 million of costs denominated in Mexican pesos with average floor and cap exchange rates of $13.488 and $14.422 per US dollar respectively, resulting in a US$28.42 million loss recorded in the income statement. The total outstanding position using collar structures as of 31 December 2015 was US$198.0 million with maturity dates throughout 2015 with average floor and cap exchange rates of $14.92 and $17.97 per US dollar respectively. These instruments guarantee a minimum exchange rate should the market fall below the floor exchange rate. Between the floor and cap exchange rates the Group sells US dollars at the market rate, and when the Mexican peso per US dollar exchange rate goes above the cap rate, the Company is obliged to sell US dollars at the contract rate.

· Profit sharing (+US$0.2 million): Slight increase due to higher profit base at Saucito and Penmont (Herradura and Noche Buena), as each Fresnillo subsidiary pays profit sharing individually.

· Others (-US$11.5 million): The change in others is principally relates to unproductive costs incurred in the first quarter of 2014 related to the limited operations at Herradura due to the temporary suspension of the explosives permit, that situation was solved and thus no unproductive costs were recognised this year.

Cost per tonne, cash cost per ounce and all-in sustaining cost

Cost per tonne, calculated as total production costs less depreciation, profit sharing and exchange rate hedging effects, divided by total tonnage milled or deposited, is a key indicator to measure the effects of mining inflation and cost control performance at each mine and the Group as a whole. 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.

Cash cost per ounce, calculated as total cash cost (cost of sales plus treatment and refining charges less depreciation) less revenues 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 cover its production costs.

Cash cost per ounce

The particular variations in cash cost for each mine are explained as follows:

Fresnillo: US$5.60/oz (2015) vs US$5.29/oz (2014), (+5.9%)

The increase in cash cost per ounce is mainly explained by the lower volumes of silver sold, reflecting lower ore throughput and decline in ore grade (+US$1.46/oz); higher treatment and refining charges per silver ounce due to: lower silver ore grade which implies producing more concentrate per ounce of silver, higher zinc and lead ore grades which increases the volume of concentrates, and an increase in the participation of zinc concentrate which has a higher per unit treatment charge (+US$0.28/oz); and higher cost per tonne (+US$0.12/oz). This was partly mitigated by higher by-product credits per silver ounce due to the increase in lead and zinc volumes (-US$1.40/oz); and lower profit sharing (-US$0.14/oz).

Saucito: US$1.15/oz (2015) vs US$2.48/oz (2014), ( -53.4%)

The decrease was driven by the lower cost per tonne (-US$1.71/oz); and higher by-product credits per ounce of silver resulting from increased gold, lead and zinc volumes sold (-US$0.44/oz). These positive effects were partly offset by the expected lower silver grade (+US$0.45/oz); higher treatment and refining charges resulting from the same reasons as mentioned for the Fresnillo mine (+US$0.25/oz); and higher profit sharing (+US$0.13/oz).

Ciénega: US$245.49/oz (2015) vs US$288.00/oz (2014), ( -14.8%)

The decrease in cash cost was primarily explained by higher by-product credits per ounce of gold due to the increased volumes of silver and lead sold (-US$198.32/oz); the decrease in cost per tonne (-US$108.62/oz); and others (-US$5.83). These favourable factors were partially offset by the expected decrease in gold grade (+US$221.58/oz); and higher treatment and refining charges resulting from lower gold ore grade which implies producing more concentrate per ounce of gold, and higher lead and zinc ore grades which increase the volume of concentrates (+US$48.68/oz).

Herradura: US$472.53/oz (2015) vs US$465.42/oz (2014), ( +1.5%)

The increase in cash cost resulted from: an adverse inventory valuation effect, as ounces with a lower cost of production in the current period are mixed with the initial higher cost of inventory affecting cost of sales (+US$78.52/oz); and lower by-product credits per gold ounce due to the lower silver price and decreased volumes of silver sold (+US$27.45/oz). These negative effects were partly mitigated by: i) the unproductive costs recorded in 2014 in relation to the stoppage (-US$52.81/oz); ii) the lower cost per tonne (-US$33.89/oz); iii) higher ore grade (-US$8.45/oz); and iv) others (-US$3.70/oz).

Noche Buena: US$972.74/oz (2015) vs US$945.63/oz (2014), ( +2.9%)

The increase in cash cost per ounce was mainly explained by i) the adverse inventory valuation effect mentioned for the Herradura mine (+US$164.27/oz); ii) the lower gold grade (+US$73.03/oz); and iii) others (+US$6.08/oz). These adverse effects were partially offset by the lower cost per tonne (-US$216.26/oz).

Soledad-Dipolos: There were no comparable figures in 2015 and 2014 due to the suspended operations.

In addition to the traditional cash cost described above, the Group is reporting all-in sustaining costs (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.

Management considers all-in sustaining costs a reasonable indicator of the mine's ability to generate free cash flow when compared with the corresponding metal price, and a means to monitor current production costs and 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

Fresnillo: Higher, mainly due to the increase in capitalised development and mining works to move towards full capacity operations with access to sufficient stopes; and the higher cash cost detailed above.

Saucito: Higher, as a result of the increase in capex invested in the expansion and in efficiency projects; which was partly mitigated by the lower cash cost detailed above.

Ciénega: Lower, primarily explained by the decrease in development, mining works and sustaining capex; and the lower cash cost detailed above.

Herradura: Higher, due mainly to the temporary increase in capitalised stripping costs and higher sustaining capex; and to a lesser extent, the higher cash cost detailed above. 

Noche Buena: Lower, driven by the decrease in capitalised stripping costs; sustaining capex and lower cash cost detailed above.

Soledad-Dipolos: There were no comparable figures in 2015 and 2014 due to the suspended operations.

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.

Contribution by mine to consolidated gross profit, excluding hedging gains and losses

Total gross profit, net of hedging gains and losses, decreased 16.9% to US$433.1 million in 2015.

The US$88.0 million decrease in gross profit was mainly explained by: i) the adverse effect of lower silver and gold prices (-US$187.0 million); ii) the 8.2% decrease in ore throughput and 14.9% decrease in silver grade at the Fresnillo mine (-US$64.3 million); iii) higher depreciation (-US$35.0 million); and iv) other effects (-US$8.4 million).

The above factors were partially mitigated by higher gross profit related to: i) increased ore volumes processed at Saucito (+US$117.2 million); ii) the 19.2% devaluation of the Mexican peso/US dollar (+US$48.0 million); iii) the positive effect of reaching steady state at Herradura (+US$23.8 million); iv) the first full year of operations at the dynamic leaching plant (+US$13.4 million); and v) higher ore grades at Herradura (+US$4.3 million).

On a per mine basis, Saucito became the largest contributor to the Group´s consolidated gross profit reflecting the increased volumes produced and sold as a result of the ramp-up of Saucito II and strong margins generated at this mine, despite the lower metal prices. Gross profit at Herradura increased 19.9% to US$163.3 million in 2015 due to Herradura and its DLP being operational for the full year, the ramp-up to steady state and the commissioning of the second Merrill Crowe plant. This increased Herradura's share of the Group's consolidated gross profit from 24.0% in 2014 to 36.5% in 2015. Gross profit at the Fresnillo mine decreased 59.8% to US$83.1 million in 2015, reflecting the adverse effect of the lower volumes produced and the decrease in metal prices, which reduced Fresnillo's contribution to the Group's total gross profit to 18.5%. Gross profit at Ciénega decreased 58.1% as a result of the lower sales volumes of gold and the decline in metal prices, which reduced its share of the Group's total to 3.8%. Lastly, at Noche Buena, the favourable effect of higher gold volumes produced and sold did not fully offset the impact of lower gold price and higher costs, generating a loss of US$1.2 million (including depreciation of US$43.5 million).

Administrative expenses

Administrative expenses decreased 7.0% from US$67.5 million to US$62.8 million due mainly to a decrease in non-recurring engineering and construction services provided by Servicios Industriales Peñoles, S.A.B. de C.V. and the positive effect of the devaluation of the Mexican peso against the US dollars in administrative expenses denominated in pesos.

Exploration expenses

Exploration expenses in 2015 totalled US$140.2 million, a 16.9% decrease over 2014, as a result of management's decision to continue reducing the expenditure given the decline in precious metals prices. Good results were obtained at a number of key exploration sites, and the resource base was expanded despite lower price assumptions. An additional US$11.1 million was recorded in association with mining works at Juanicipio and minor equipment acquired at the Centauro Deep and Orisyvo projects. Furthermore, unit costs for exploration and drilling came down substantially, which allowed for similar rates of advancement at a lower investment. As a result, total investment in exploration of US$151.3 million in 2015 decreased 18.0% over 2014, below the original budgeted figure of US$170 million. In 2016, risk capital invested in exploration is expected to be within the range of US$135-US$140 million, of which US$25 million is estimated to be capitalised.

EBITDA

A gauge of the Group's financial performance and key indicator to measure debt capacity is EBITDA, which is calculated as gross profit plus depreciation, less administrative, selling and exploration expenses. In 2015, EBITDA decreased 3.5% to US$547.5 million mainly due to the lower gross profit, which was partially mitigated by lower exploration and administrative expenses. EBITDA margin expressed as a percentage of revenues declined accordingly, from 40.1% in 2014 to 37.9% in 2015.

Other expenses

Other expenses decreased by 37.9% to US$15.9 million in 2015. This included disposals of fixed assets, remediation works carried out at the Saucito, Herradura, Fresnillo and Ciénega mines and costs incurred in the maintenance of closed mines. This positively compares to the US$25.5 million loss registered in the 2014 income statement.

Silverstream effects

The Silverstream contract is accounted for as a derivative financial instrument carried at fair value. The revaluation of the Silverstream contract generated a US$6.1 million non-cash gain mainly as a result of the increase in resources at Sabinas, which more than offset the lower forward price of silver and the higher discount rate used. In addition, a US$21.6 million non-cash gain was generated by: i) the unwinding of the discounted values (US$20.3); and ii) the difference between payments (volume and price) actually received and accrued in 2015 and payments estimated in the valuation model as at 31 December 2014 (US$1.3). The total effect recorded in the 2015 income statement was US$27.7 million, which represented a 64.0% decrease from the US$77.0 million registered in 2014.

Since the IPO, cumulative cash received has been US$502.0 million, while total non-cash revaluation gains of US$550.3 million have been taken to the income statement. The Group expects further unrealised gains or losses will be taken to the income statement in accordance with the cyclical behaviour of the silver price or changes in the variables considered in valuing this contract. Further information related to the Silverstream contract is provided in the Balance Sheet section below and in notes 15 and 32 to the Consolidated Financial Statements.

Finance costs and income

Finance costs in 2015 decreased mainly due to the decline from US$43.6 million to US$35.1 million in accrued interest payable in relation to the US$800 million principal amount of 5.500% Senior Notes.

In 2014 we entered into derivative contracts to protect the value of the Penmont acquisition. As at 31 December 2015, the outstanding collar derivative instruments mature over the period from January 2016 to December 2019 and hedge gold production of 1.3 million ounces with a floor price of US$1,100 per ounce and capped weighted average price of US$1,426 per ounce. In 2015, we recognised changes in the time value of the outstanding hedge position, resulting in a US$59.7 million non-cash gain recorded in the income statement.

Foreign exchange

A foreign exchange loss of US$36.2 million was recorded in 2015 as a result of the 16.9% devaluation of the Mexican peso against the US dollar. This loss adversely compares to the US$24.4 million loss recognised in 2014.

The Group also enters into certain exchange rate derivative instruments as part of a programme to manage its exposure to foreign exchange associated with the purchase of equipment denominated in Euro (EUR) and Swedish Krona (SEK). At year end, the total EUR and SEK outstanding net forward position was zero EUR and SEK 14.46 million with maturity dates through to March 2016.

Volumes that expired during 2015 were EUR 2.42 million with a weighted average strike of 1.193 usd/eur and SEK 59.67 million with a weighted average strike of 8.23 SEK/USD, which generated losses of US$0.1 million and US$0.9 million respectively. Both results were recognised in the income statement.

Taxation

Corporate income tax expense of US$129.0 million increased 9.1% over 2014 despite the lower profit base in 2015. This was mainly explained by the devaluation of the Mexican peso against the US dollar, which increased deferred income taxes, generated by higher differences arising between the carrying amount of assets and liabilities (denominated in US dollars) and their tax bases (denominated in Mexican pesos). As a result, the effective tax rate was 60.7%, significantly above the statutory corporate tax rate of 30%. Furthermore, US$14.0 million related to the special mining rights was registered in the income statement in 2015. Including the effect of mining rights, the effective tax rate was 67.3%.

Profit for the year

Profit for the year decreased by 40.7% to US$69.4 million, whilst profit attributable to equity shareholders of the Group declined by 35.0% from US$108.4 million to US$70.5 million in 2015.

Excluding the effects of the Silverstream Contract, profit for the year decreased 20.9% to US$50.0 million. Similarly, profit attributable to equity shareholders of the Group, excluding the Silverstream effects, declined by 6.2% to US$51.1 million.

Cash Flow

A summary of the key items from the cash flow statement is set out below:

* As disclosed in the Consolidated Cash Flow Statement, cash and cash equivalents at 31 December 2015 totalled US$381.4 million and short-term investment held in fixed-term bank deposits amounted US$118.7 million. In 2014, cash and cash equivalents at 31 December 2014 accounted for US$154.3 million and short-term investments amounted to US$295.0 million.

Cash generated by operations before changes in working capital decreased by 5.5% to US$537.3 million, mainly as a result of the lower profits generated in the year. Working capital decreased US$51.3 million mainly due to: i) a decrease in trade and other receivables resulting mainly from the lower metal prices (US$58.2 million); ii) a decrease in inventories (US$5.0 million); and iii) a decrease in prepayments and other assets (US$0.9 million). These reductions in working capital were partially offset by a decrease in trade and other payables (US$12.8 million).

Taxes and employee profit sharing paid decreased 82.6% over 2014 to US$45.8 million, mainly as a result of lower profits generated.

As a result of the above factors, net cash from operating activities increased significantly from US$121.6 million in 2014 to US$542.9 million in 2015.

Other sources of cash were the proceeds from the Silverstream Contract of US$39.4 million.

The above funds were mainly used to purchase property plant and equipment for a total of US$474.7 million, which represented a 11.5% increase over 2014.This was below the revised guidance of US$570 million as a result of the deferral of some expenditures in light of the prevailing low precious metal prices. Capital expenditures for 2015 are further described below:

Purchase of property, plant and equipment

Dividends paid to shareholders of the Group in 2015 totalled US$37.5 million, a 56.8% decrease from 2014, in line with our dividend policy that includes a consideration of profits generated in the period. The 2015 payment included: i) the final 2014 dividend of US$22.1 million; and ii) the 2015 interim dividend paid in September of US$15.5 million.

Net interest of US$30.5 million was paid, mainly reflecting the interest paid in relation with the issuance of the US$800 million principal amount of 5.500% Senior Notes.

The sources and uses of funds described above resulted in a net increase of US$52.0 million in cash and cash equivalents, which combined with the US$449.3 million balance at the beginning of the year and the US$1.2 million unfavourable effect of the exchange rate resulted in cash, cash equivalents and short-term investments of US$500.1 million at the end of 2015.

Balance Sheet

Fresnillo plc continues to prioritise and maintain a strong, flexible financial position.

Cash, cash equivalents and short-term investments increased during the year to US$500.1 million as explained above.

Inventories slightly decreased 1.6% to US$300.6 million due to the decreased inventories of lead concentrate at Saucito, which more than offset the increase in inventories of gold deposited on the leaching pads at Herradura and Noche Buena.

Trade and other receivables of US$305.7 million decreased 33.0% as a result of the decrease in prices which reduced receivables from Met-Mex.

The change in the value of the Silverstream derivative from US$392.3 million at the beginning of the year to US$384.8 million as of 31 December 2015 reflects proceeds of US$35.2 million corresponding to 2015, (US$32.5 million in cash and US$2.7 million in receivables) and the Silverstream effect in the income statement of US$27.7 million.

The net book value of property, plant and equipment was US$2,138.6 million at year end, representing an 8.6% increase over 2014. The US$169.2 million increase was mainly explained by the capitalised development works at Fresnillo and Saucito; construction of San Julián and of the Merrill Crowe plant at Herradura; purchase of additional in-mine equipment and surface land; and construction of leaching pads at Herradura.

The Group's total equity was US$2,374.3 million as of 31 December 2015, a 3.1% increase over 2014. This was mainly explained by the increase in retained earnings, reflecting the 2014 profit, less dividend paid during the year, and the net unrealised gains on cash flow hedges.

Dividends

Based on the Group's 2015 performance, the Directors have recommended a final dividend of 3.35 US cents per Ordinary Share, which will be paid on 9 May 2016 to shareholders on the register on 22 April 2016. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars. This is in addition to the interim dividend of 2.1 US cents per share totalling U$15.5 million.

Risk management framework

Risk is inherent in all business activities. We maintain a comprehensive risk management framework that serves to identify, assess and respond to our principal risks. Our approach is not intended to eliminate risk entirely, but rather to provide the structural means to identify, prioritise and manage the risks involved in our activities in order to support our value creation objectives.

Governance

The Board of Directors is responsible for maintaining the Company's risk management and internal control systems. The Board's mandate includes defining risk appetite and monitoring risk exposures to ensure that the nature and extent of significant risks taken by the Company are aligned with our overall goals and strategic objectives.

In accordance with our governance practices, the Audit Committee supports the Board of Directors in monitoring the Company´s risk exposures and is responsible for reviewing the effectiveness of the risk management and internal control systems. The Risk Manager and Internal Audit supports the Audit Committee in evaluating the design and operating effectiveness of the risk mitigation strategies and the internal controls implemented by management.

Executive Management reviews strategic objectives and risk appetite, assesses the level of risk related to achieving these objectives, and incorporates controls into the strategic and operating plans to mitigate them. This top down risk identification and assessment process helps to ensure that the bottom up process performed at the business unit level is aligned with and focused on current strategy and objectives.

Risk management system

The annual and ongoing elements of the Group's risk management process are controlled by well-established risk identification, assessment and monitoring processes. We have progressed in embedding a risk management culture amongst all employees, however this is an ongoing process and we are still working to demonstrate this with evidence collected through the monitoring of our controls to mitigate risks.

We have continued to build on our existing risk management framework, enhancing risk management and internal control systems across the business in line with changes to the UK Corporate Governance Code.

In addition to the permanent risk management activities, our priority for 2016 is to continue promoting a 'monitoring environment' which consists of validating the effectiveness of our current controls in order to support the Board in their responsibilities, which include monitoring and reviewing risk management and the internal control systems.

2015 risk assessment

The annual risk assessment exercise across all our operations, advanced projects, exploration offices, support and corporate areas identified and evaluated 104 risks in 2015. This universe was narrowed down into major risks monitored by Executive Management and the Audit Committee, and then further consolidated into eleven principal risks closely monitored by Executive Management and the Board of Directors.

For the bottom up process, the teams in charge of each business unit determined the perceived level of risk for their individual unit. Executive Management then reviewed and challenged each perceived level through the evaluation of certain controls and relative risk levels, and compared it to Fresnillo plc's risk universe as a whole. The result of this exercise is used as another input for the selection of the principal risks of Fresnillo plc. The same risk analysis was conducted on advanced projects, detailing the specific risks faced by each project according to the unique characteristics and conditions of each site.

We believe there were a number of developments in 2015 that have the potential to adversely impact the entire Mexican mining industry. These include Mexico's transition towards indigenous consultation (which is an emerging initiative but worth monitoring); the perceived level of corruption across Mexico remaining high; continued legal challenges to the mining industry by individuals and local communities who may seek to disregard previous land agreements; and due to lower metal prices, profit levels have been impacted and also profit sharing to employees and union workers has decreased. As a result of these changes we determined that the following risk rating levels facing Fresnillo plc have increased: 'potential actions by the government', 'security', 'access to land' and 'union relations'. As with all our key risks, the Board and the Executive Committee continue to closely monitor them.

I confirm on behalf of the Board that to the best of its knowledge:

a) the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Commission, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole; and

b) the management report 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

Guy Wilson

Senior Independent Director

29 February 2016

These financial statements were approved by the Board of Directors on 29 February 2016 and signed on its behalf by:

Mr Arturo FernandezNon-executive Director

29 February 2016

1Total interest paid during the year ended 31 December 2015 less amounts capitalised as part of fixed assets projects totalling US$11.1 million (31 December 2014: US$2.7 million).

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 6 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. 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 28.

The consolidated financial statements of the Group for the year ended 31 December 2015 were authorised for issue by the Board of Directors of Fresnillo plc on 29 February 2016.

The auditor's report on those financial statements will be delivered to the Registrar in due course.

The financial information contained in this document does not constitute statutory accounts as defined in section 435 of the Companies Act 2006.

The Group's principal business is the mining and beneficiation of non-ferrous minerals, and the sale of related production. The primary contents of this production are silver, gold, lead and zinc. Further information about the Group operating mines and its principal activities is disclosed in note 3.

2. Significant accounting policies

(a) Basis of preparation and consolidation, and statement of compliance

Basis of preparation and statement of compliance

The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union as they apply to the financial statements of the Group for the years ended 31 December 2015 and 2014, 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 derivative financial instruments, available-for-sale financial instruments and defined benefit pension scheme assets which have been measured at fair value.

The consolidated financial statements are presented in dollars of the United States of America (US dollars or US$) and all values are rounded to the nearest thousand ($000) except when otherwise indicated.

Basis of consolidation

The consolidated financial statements set out the Group's financial position as of 31 December 2015 and 2014, 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 the Group 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 applied are consistent with those applied in the preparation of the consolidated financial statements for the year ended 31 December 2014. During 2015, there were no amendments to existing accounting policies.

New standards, interpretations and amendments (new standards) adopted by the Group

During 2015 there were no new standards adopted by the Group. New standards issued by the IASB effective as of 1 January 2015 had no impact in the financial information of the Group.

Standards, interpretations and amendments issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group's financial statements are disclosed below. The Group intends to adopt these standards that consider will be applicable to the Group's financial statements, when they become effective.

IFRS 9 Financial Instruments: In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. The Group is currently assessing the impact of IFRS 9 and plans to adopt the new standard on the required effective date.

IFRS 15 Revenue from Contracts with Customers: IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018, when the IASB finalises their amendments to defer the effective date of IFRS 15 by one year. Early adoption is permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date.

IFRS 16 Leases

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. These amendments are effective for annual periods beginning on or after 1 January 2019, earlier application is permitted. However, as there are several interactions between IFRS 16 and IFRS 15 Revenue from contracts with customers, early application is restricted to entities that also early apply IFRS 15. The Group is currently assessing the impact of IFRS 16 and plans to adopt the new standard on the required effective date.

Amendments to IAS 1 Disclosure Initiative

The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. These amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. The Group has not early adopted this standard; however, management has reviewed the aggregation level in the financial statements including disclosures in notes, considering the new guidance on materiality. The amendments to this standard are not expected to have any impact in the financial information of the Group.

Amendments to IAS 7 Disclosure Initiative

The amendments to IAS 7 require disclosure of information that will allow users to understand changes in liabilities arising from financing activities. This include changes arising from (i) cash flows, such as drawdowns and repayments of borrowings; and (ii) non-cash changes, such as acquisitions, disposals and unrealised exchange differences. These amendments are effective for annual periods beginning on or after 1 January 2017, with early adoption permitted. The amendments to this standard are not expected to have any impact in the financial information of the Group.

Amendments to IAS 12 Income Taxes

The amendments to IAS 12 clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset's tax base. They also clarify certain other aspects of accounting for deferred tax assets. These amendments are effective for annual periods beginning on or after 1 January 2017, with early adoption permitted. The amendments to this standard are not expected to have any impact in the financial information of the Group.

The IASB have issued other amendments to standards 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 judgments, estimates and assumptions

The preparation of the Group's consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances, with regard to prior experience, but actual results may differ from the amounts included in the consolidated financial statements. Information about such judgements and estimates is contained in the accounting policies and/or the notes to the consolidated financial statements.

Judgements

Areas of judgement, apart from those involving estimations, that have the most significant effect on the amounts recognised in the consolidated financial statements are:

Determination of functional currencies(note 2(d)):

The determination of functional currency requires management judgement, particularly where there may be several currencies in which transactions are undertaken and which impact the economic environment in which the entity operates.

Evaluation of projects status (note 2(e)):

The evaluation of project status impacts the accounting for costs incurred and requires management judgement. This includes the assessment of whether there is sufficient evidence of the probability of the existence of economically recoverable minerals to justify the commencement of capitalisation of costs; the timing of the end of the exploration phase and the start of the development phase and the commencement of the production phase. These judgements directly impact the treatment of costs incurred and proceeds from the sale of metals from ore produced.

Stripping costs (note 2(e)):

The Group incurs waste removal costs (stripping costs) during the development and production phases of its surface mining operations. During the production phase, stripping costs (production stripping costs) can be incurred both in relation to the production of inventory in that period and the creation of improved access and mining flexibility in relation to ore to be mined in the future. The former are included as part of the costs of inventory, while the latter are capitalised as a stripping activity asset, where certain criteria are met. Significant judgement is required to distinguish between development stripping and production stripping and, within production stripping, to distinguish between the portion that relates to the extraction of inventory and that which relates to the creation of a stripping activity asset.

Once the Group has identified production stripping for a surface mining operation, it identifies the separate components of the ore bodies for that operation. An identifiable component is a specific volume of the ore body that is made more accessible by the stripping activity. Significant judgement is required to identify and define these components, and also to determine the expected tonnes of waste to be stripped and ore to be mined in each of these components. These assessments are undertaken for each individual mining operation based on the information available in the mine plan. The mine plans and, therefore, the identification of components, will vary between mines for a number of reasons. These include, but are not limited to, the type of commodity, the geological characteristics of the ore body, the geographical location and/or financial considerations.

Once production stripping costs have been identified, judgement is also required to identify a suitable production measure to be used to allocate production stripping costs between inventory and any stripping activity asset(s) for each component. The Group considers that the ratio of the expected tonnes of waste to be stripped for an expected tonnes of ore to be mined for a specific component of the ore body is the most suitable production measure.

Furthermore, judgements and estimates are also used to apply the units of production method in determining the depreciable lives of the stripping activity asset(s).

Qualifying assets (note 2(e)):

All interest-bearing loans are held by the parent company and were not obtained for any specific asset's acquisition, construction, or production. Funds from these loans are transferred to subsidiaries to meet the strategic objectives of the Group or are otherwise held centrally. Due to this financing structure, judgement is required in determining whether those borrowings are directly attributable to the acquisition, construction or production of a qualifying asset. Therefore, Management determines whether borrowings are directly attributable to an asset or group of assets based on whether the investment in an operating or development stage project is classified as contributing to achieving the strategic growth of the Group.

Contingencies (note 27)

By their nature, contingencies will be resolved only when one or more uncertain future events occur or fail to occur. The assessment of the existence and potential quantum of contingencies inherently involves the exercise of significant judgement and the use of estimates regarding the outcome of future events.

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 estimates of commodity prices, foreign exchange rates, future capital requirements and production costs, along with geological assumptions and judgements made in estimating the size and grade of the ore body.

As the economic assumptions used may change and as additional geological information is produced during the operation of a mine, 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 estimated future cash flows, those cash flows consider both ore reserves and mineral resources;

· Depreciation and amortisation charges in the income statement may change where such charges are determined using the unit-of- production method based on ore reserves;

· Capitalised stripping costs recognised in the income statement as either part of mine properties or as part of inventory or charged to profit or loss may change due to changes in stripping ratios; determination of stripping ratios is based on ore reserves and resources;

· Provisions for mine closure costs may change where changes to the ore reserve and resources estimates affect expectations about when such activities will occur;

· The recognition and carrying value of deferred income tax assets may change due to changes in the judgements regarding the existence of such assets and in estimates of the likely recovery of such assets.

Determination of useful lives of assets for depreciation and amortisation purposes, notes 2(e) and 13:

Estimates are required to be made by management as to the useful lives of assets. For depreciation calculated under the unit-of-production method, estimated recoverable reserves are used in determining the depreciation and/or amortisation of mine specific assets. This results in a depreciation/amortisation charge proportional to the depletion of the estimated remaining life of mine production. Estimated useful lives of other assets is based on the expected usage of the asset. Each item's life, which is assessed annually, has regard to both its physical life limitations and to present assessments of economically recoverable reserves of the mine property at which the asset is used.

Silverstream, note 15:

The valuation of the Silverstream contract as a derivative financial instrument requires significant estimation by management. The derivative has a term of over 20 years 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, the estimated recoveries of silver from ore mined, estimates of the future price of silver and the discount rate used to discount future cash flows. For further detail on the inputs that have a significant effect on the fair value of this derivative, see note 31. The impact of changes in silver price assumptions, foreign exchange, inflation and the discount rate is included in note 32.

Assessment of recoverability of assets and impairment charges, note 2 (f):

The recoverability of an asset requires the use of estimates and assumptions such as long-term commodity prices, reserves and resources and the associate production profiles, discount rates, future capital requirements, exploration potential and operating performance. Changes in these assumptions will affect the recoverable amount of the property, plant and equipment.

Estimation of the mine closure costs, notes 2(l) and 22:

Significant estimates and assumptions are made in determining the provision for mine closure cost as there are numerous factors that will affect the ultimate liability payable. These factors include estimates of the extent and costs of rehabilitation activities, technological changes, regulatory changes, cost increases, mine life and changes in discount rates. Those uncertainties may result in future actual expenditure differing from the amounts currently provided. The provision at the balance sheet date represents management's best estimate of the present value of the future closure costs required.

Income tax, notes 2(r) and 11:

Judgement is required in determining whether deferred tax assets are recognised on the balance sheet. Deferred tax assets, including those arising from un-utilised tax losses require 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.

(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. 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 or on a straight line basis over the estimated useful life of the individual asset when 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 expected useful lives are as follows:

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.

Revenues from metals recovered from ore mined in the mine development phase, prior to commercial production, are credited to mining properties and development costs. 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 is 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 annually. 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.

In identifying components of the ore body, the Group works closely with the mining operations personnel for each mining operation to analyse each of the mine plans. Generally, a component will be a subset of the total ore body and a mine may have several components that are identified based on the mine plan. The mine plans and therefore the identification of components can vary between mines for a number of reasons including but not limited to, the type of commodity, the geological characteristics of the ore body, the geographical location and/or financial considerations.

(f) Impairment of non-financial assets

The carrying amounts of assets are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. At each reporting date, an assessment is made to determine whether there are any indications of impairment. If there are indicators of impairment, an exercise is undertaken to determine whether carrying values are in excess of their recoverable amount. Such reviews are undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of those from other assets or groups of assets, and then the review is undertaken at the cash generating unit level.

If the carrying amount of an asset or its cash generating unit exceeds the recoverable amount, a provision is recorded to reflect the asset at the recoverable amount in the balance sheet. Impairment losses are recognised in the income statement.

The recoverable amount of an asset

The recoverable amount of an asset is the greater of its value in use and fair value less costs to disposal. Fair value is based on an estimate of the amount that the Group may obtain in an orderly sale transaction between market participants. 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. 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 are recognised when the Group becomes party to contracts that give rise to them and are classified as financial assets at fair value through profit or loss; held to maturity investments; available-for-sale financial assets; or loans and receivables or derivatives designated as hedging instruments, as appropriate. The Group determines the classification of its financial assets at initial recognition and re-evaluates this designation at each balance sheet date. When financial assets are recognised initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs.

The Group recognises financial liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. Financial liabilities are classified 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 initially recognised at the fair value of the consideration received, including any transaction costs incurred.

Financial assets and liabilities at fair value through profit or loss

Financial assets and liabilities classified as held-for-trading and other assets or liabilities designated as fair value through profit or loss at inception are included in this category. Financial assets or liabilities are classified as held-for-trading if they are acquired or incurred for the purpose of selling or repurchasing in the short term. Derivatives, including separated embedded derivatives are also classified as held-for-trading unless they are designated as effective hedging instruments as defined by IAS 39. Financial assets or liabilities at fair value through profit or loss are carried in the balance sheet at fair value with gains or losses arising from changes in fair value, presented as finance costs or finance income in the income statement.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available-for-sale.

After initial measurement, such assets are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Gains or losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Current trade receivables are carried at the original invoice amount less provision made for impairment of these receivables. Non-current receivables are stated at amortised cost. Loans and receivables from contractors are carried at amortised cost.

Loans and borrowings

After initial recognition at fair value, net of directly attributable transaction costs, interest-bearing loans are subsequently measured at amortised cost using the effective interest rate (EIR) method. The EIR amortisation is included as finance costs in the income statement. Gains and losses are recognised in profit or loss, in the income statement, when the liabilities are derecognised as well as through the EIR amortisation process.

The Group adjusts the carrying amount of the financial liability to reflect actual and revised estimated cash flows. The carrying amount is recalculated by computing the present value of estimated future cash flows at the financial instrument's original effective interest rate or, when applicable, the revised effective interest rate. Any adjustment is recognised in profit or loss as income or expense.

This category generally applies to interest-bearing loans and borrowings. For more information, refer to note 21.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as such or are not classified in any of the preceding categories and are not held to maturity investments.

Available-for-sale financial assets represent equity investments that have a quoted market price in an active market; therefore, a fair value can be reliably measured. After initial measurement, available-for-sale financial assets are measured at fair value with mark-to-market unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the financial asset is de-recognised.

Financial assets classified as available-for-sale are de-recognised when they are sold, and all the risks and rewards of ownership have been transferred. When financial assets are sold, the accumulated fair value adjustments recognised in other comprehensive income are included in the income statement within other operating income or expense.

De-recognition of financial assets and liabilities

A financial asset or liability is generally de-recognised when the contract that gives rise to it is settled, sold, cancelled or expires.

Where 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 a de-recognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss.

The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the income statement.

(h) Impairment of financial assets

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss is recognised in profit or loss.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired receivables are de recognised when they are assessed as uncollectible.

Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income statement. In assessing whether there is an impairment, the Group considers whether a decline in fair value is either significant or prolonged, by considering the size of the decline in this value, the historic volatility in changes in fair value and the duration of the sustained decline. Reversals in respect of equity instruments classified as available-for-sale are not recognised in the income statement.

(i) Inventories

Finished goods and work in progress 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).

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.

(j) Short-term investments

Where the Group invests in short-term instruments which are either not readily convertible into known amounts of cash or are subject to risk of changes in value that are not insignificant, these instruments are classified as short-term investments. Short-term investments are classified as loans and receivables.

(k) 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 four months. For the purposes of the cash flow statement, cash and cash equivalents as defined above are shown net of outstanding bank overdrafts.

(l) 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.

(m) Employee benefits

The Group operates the following plans:

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 cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method and prepared by an independent actuarial firm as at each year-end balance sheet date. The discount rate is the yield on mxAAA (Standard & Poor's) and AAA-mex (Fitch Ibca) credit-rated 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 as an expense on a straight line basis over the average period until the benefits become vested. If the benefits have already vested following the introduction of, or changes to, a pension plan, the past service cost is recognised immediately.

The defined benefit asset or liability comprises the present value of the defined benefit obligation less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

Net interest cost is recognised in finance cost and return on plan assets (other than amounts reflected in net interest cost) is recognised in OCI and permanently excluded from profit or loss.

Defined contribution pension plan

A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss when they are due. The contributions are based on the employee's salary.

This plan started on 1 July 2007 and it is voluntary for all employees to join this scheme.

Seniority premium for voluntary separation

This unfunded plan corresponds to an additional payment over the legal seniority premium equivalent to approximately 12 days of salary per year for those unionised workers who have more than 15 years of service. Non-unionised employees with more than 15 years of service have the right to a payment equivalent to 12 days for each year of service. For both cases, the payment is based on the legal current minimum salary.

The cost of providing benefits for the seniority premium for voluntary separation is determined using the projected unit credit actuarial valuation method and prepared by an independent 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.

(n) Employee profit sharing

In accordance with the Mexican legislation, companies in Mexico are subject to pay for employee profit sharing ('PTU') equivalent to ten percent of the taxable income of each fiscal year.

PTU is accounted for as employee benefits and is calculated based on the services rendered by employees during the year, considering their most recent salaries. The liability is recognised as it accrues and is charged to the income statement. PTU, paid in each fiscal year, is considered deductible for income tax purposes.

(o) Leases

The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date including whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a) There is a change in contractual terms, other than a renewal or extension of the arrangement;

b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

c) There is a change in the determination of whether fulfilment is dependent on a specified asset; or

d) There is a substantial change to the asset.

Group as a lessee

Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset, or if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.

Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.

Group as a lessor

Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

Where a reassessment is made, lease accounting commences or ceases from the date when the change in circumstances gave rise to the reassessment for scenarios a), c) or d) and at the date of renewal or extension period for scenario b) above.

For arrangements entered into prior to 1 January 2005, the date of inception is deemed to be 1 January 2007, in accordance with the transitional requirements of IFRIC 4.

(p) Revenue recognition

Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of consideration received excluding discounts, rebates, and other sales taxes.

Sale of goods

Revenue is recognised in the income statement when all significant risks and rewards of ownership are transferred to the customer, usually when title has been passed. Revenue excludes any applicable sales taxes.

The Group recognises revenue on a provisional basis at the time concentrates, precipitates and doré bars are delivered to the customer's smelter or refinery, using the Group's best estimate of contained metal. Revenue is subject to adjustment once the analysis of the product samples is completed, contract conditions have been fulfilled and final settlement terms are agreed. Any subsequent adjustments to the initial estimate of metal content are recorded in revenue once they have been determined.

In addition, sales of concentrates and precipitates throughout each calendar month, as well as doré bars that are delivered after the 20th day of each month, are 'provisionally priced' subject to a final adjustment based on the average price for the month following the delivery to the customer, based on the market price at the relevant quotation point stipulated in the contract. Doré bars that are delivered in the first 20 days of each month are finally priced in the month of delivery.

For sales of goods that are subject to provisional pricing, revenue is initially recognised when the conditions set out above have been met using the provisional price. The price exposure is considered to be an embedded derivative and hence separated from the sales contract. At each reporting date, the provisionally priced metal is revalued based on the forward selling price for the quotation period stipulated in the contract until the quotation period ends. The selling price of the metals can be reliably measured as these are actively traded on international exchanges. The revaluing of provisionally priced contracts is recorded as an adjustment to revenue.

The customer deducts treatment and refining charges before settlement. Therefore, the fair value of consideration received for the sale of goods is net of those charges.

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.

Other income

Other income is recognised in the income statement when all significant risks and rewards of ownership are transferred to the customer, usually when title has been passed.

(q) 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:

o Costs incurred in geographical proximity to existing mines in order to replenish or increase reserves, and

o 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.

(r) 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. 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, as applicable;

When receivables and payables are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

(s) 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.

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.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for the undertaken hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

Cash flow hedges

For derivatives that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of derivative instruments are recorded as in other comprehensive income and are transferred to the income statement when the hedged transaction affects profit or loss, such as when a forecast sale or purchase occurs. For gains or losses related to the hedging of foreign exchange risk these are included, in the line item in which the hedged costs are reflected. Where the hedged item is the cost of a non-financial asset or liability, the amounts recognised in other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. 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. Changes in fair value of time value is recognised in the income statement in finance costs.

Embedded derivatives

Contracts are assessed for the existence of embedded derivatives at the date that the Group first becomes party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. Embedded derivatives which are not clearly and closely related to the underlying asset, liability or transaction are separated and accounted for as stand-alone derivatives.

(t) 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.

 (u) 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 31 and 32.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or

In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable

Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Further information on fair values is described in note 31.

(v) Dividend distribution

Dividends payable to the Company's shareholders are recognised as a liability when these are approved by the Company's shareholders or Board as appropriate. Dividends payable to minority shareholders are recognised as a liability when these are approved by the Company's subsidiaries.

3. Segment reporting

For management purposes, the Group is organised into operating segments based on producing mines.

At 31 December 2015, the Group has six reportable operating segments represented by six producing mines as follows:

The Fresnillo mine, located in the State of Zacatecas, the world's largest primary silver mine;

The Saucito mine, located in the State of Zacatecas, an underground silver mine;

The Cienega mine, located in the State of Durango, an underground gold mine; including the San Ramon satellite mine;

The Herradura mine, located in the State of Sonora, a surface gold mine;

The Soledad-Dipolos mine, located in the State of Sonora, a surface gold mine; and

The Noche Buena mine, located in State of Sonora, a surface gold mine.

The operating performance and financial results for each of these mines are reviewed by management. As the Group´s chief operating decision maker does not review segment assets and liabilities, the Group has not disclosed this information.

Management monitors the results of its operating segments separately for the purpose of performance assessment and making decisions about resource allocation. Segment performance is evaluated without taking into account certain adjustments included in Revenue as reported in the consolidated income statement, and certain costs included within Cost of Sales and Gross Profit which are considered to be outside of the control of the operating management of the mines. The table below provides a reconciliation from segment profit to Gross Profit as per the consolidated income statement. Other income and expenses included in the consolidated income statement are not allocated to operating segments. Transactions between reportable segments are accounted for on an arm's length basis similar to transactions with third parties.

In 2015 and 2014, substantially 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 2015 and 2014, respectively: