Last checked at 3 Aug 2010 07:00
Fresnillo plc
28 Grosvenor Street
London W1K 4QR
United Kingdom
www.fresnilloplc.com
3 August 2010
Fresnillo plc interim results
for the six months to 30 June 2010
Financial highlights (H1 2010/H1 2009 comparisons)
·; Average realised silver price US$17.93 per oz, up 28.8%.
·; Average realised gold price US$1,171.9 per oz, up 27.4%.
·; Adjusted Revenue* of US$636.3m, up 49.4%.
·; Revenue of US$605.7m, up 59.9%.
·; Gross Profit of US$401.5m, up 82.4%.
·; EBITDA** up 92.7% to US$392.0m.
·; EBITDA margins increased to 64.7% in 1H10 from 53.7 % in 1H09.
·; Profit for the period of US$258.9m, up 88.8%.
·; Cash generated by operations before changes in working capital US$419.9m, up 79.2%.
·; Earnings per share 30.8 US cents, up by 82.2%.
·; Interim dividend 9.20 US cents per share, up by 75.2%.
Operational highlights
·; First half record attributable silver production of 19.1 million ounces.
·; Record attributable gold production of 176,351 ounces, up 32.7%.
·; On track to achieve full year production targets of 38moz of silver and 340,000oz of gold.
·; Start-up of Soledad-Dipolos.
·; Encouraging exploration results at Saucito, Orisyvo, San Julián, Herradura and Las Casas.
·; Saucito project and Ciénega's expansion on track for initial production to begin in 1H 2011.
·; San Julián and Orisyvo scoping studies and Noche Buena and Juanicipio prefeasibility studies expected by end 2010.
* Adjusted Revenue is revenue as disclosed in the income statement adjusted to exclude hedging effects and treatment and refining charges.
** Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as gross profit plus depreciation less administrative and exploration expenses.
Highlights for 1H10
| US$ million unless stated | 1H10 | 1H09 | % change |
| Silver Production (koz) - Attributable | 19,107 | 18,805 | 1.6 |
| Gold Production (oz) - Attributable | 176,351 | 132,894 | 32.7 |
| Total Revenue | 605.7 | 378.9 | 59.9 |
| Adjusted Revenue* | 636.3 | 426.0 | 49.4 |
| Exploration expenses | 33.4 | 22.1 | 51.1 |
| EBITDA** | 392.0 | 203.4 | 92.7 |
| Attributable Profit | 220.7 | 121.1 | 82.2 |
| Cash generated by operations before changes in working capital | 419.9 | 234.3 | 79.2 |
| Basic and diluted EPS (US$)*** | 0.308 | 0.169 | 82.2 |
| Adjusted basic and diluted EPS (US$/share)**** | 0.291 | 0.169 | 72.2 |
| Dividend per ordinary share (US$) | 0.0920 | 0.0525 | 75.2 |
* Adjusted Revenue is revenue as disclosed in the income statement adjusted to exclude hedging effects and treatment and refining charges.
** Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as gross profit plus depreciation less administrative and exploration expenses.
*** The weighted average number of shares was 717,160,159 . See Note 10 in the Financial Statements.
**** Adjusted basic and diluted earnings per share reflects profit in the period attributable to equity shareholders of the company adjusted to exclude Silverstream revaluation effects in the period (see note 10 in the Financial Statements).
Jaime Lomelin, Chief Executive Officer of Fresnillo plc, said:
"We are pleased to be able to report a very strong first half of the year. Although this solid performance is in part due to a recovery in silver and gold prices, we are particularly pleased with the operational improvements that have been made in the first half of 2010 and which have contributed to these record results.
The commercial start-up of Soledad-Dipolos in January this year has added a fourth operating mine to our portfolio and highlights our commitment to growth and the development of further world-class assets. The performance of our ongoing exploration projects gives us confidence in further expansion of our resource base to support our strategy of one new mine or expansion per year for the next five years.
Despite the increase in operational costs as a result of the revaluation of the Mexican peso against the US dollar and higher electricity and diesel prices, we continue to work hard to keep our costs under control and remain in the lowest quartile of the cost curve relative to our peers. As a result our EBITDA margins continue to improve.
We remain positive about delivering robust operational performance in the second half of the year. Combined with the high silver and gold prices, we are confident that Fresnillo plc is well placed to deliver strong financial results by the end of the year, with the potential to make 2010 one of the most outstanding years in Fresnillo plc's history."
Commentary on the Group's results
During the first half of 2010, the global financial crisis continued to disrupt the world economy while sovereign risk in Europe and economic uncertainty in the United States also increased market volatility. These economic conditions drove up precious metals prices. Average realised silver and gold prices for Fresnillo plc increased by 28.8% and 27.4% respectively, resulting in significant earnings growth and improvements to the company's income statement.
From an operating perspective, stable silver production at Fresnillo, record gold production at Herradura and increased gold ore grades and recoveries at Ciénega boosted production levels. This solid operating performance, combined with the start-up of our new Soledad-Dipolos gold mine, resulted in record silver and gold production. Additionally, the Group intensified its exploration activities at all its operating mines and projects, resulting in an increase in the resource base.
Despite the above achievements, cost per tonne milled/deposited increased at all our operating mines. These increases were driven by the 8.5% revaluation of the Mexican peso against the US dollar and by higher electricity and diesel prices which returned to international levels at the beginning of the year following a period where the Government tried to control inflation by maintaining prices. Other factors contributing to the higher cost per tonne were the increased mine development, which resulted in higher contractors costs, and an increase in the workforce at Herradura to operate the additional trucks and loaders. These increases in costs per tonne were partly mitigated by higher volumes of ore milled/deposited and reductions in the prices of certain operating materials.
Notwithstanding the higher cost per tonne described above, consolidated gross profit, excluding hedging gains and losses, reached US$399.0 million, a 69.2% increase when compared with the first half of 2009. The increase in silver and gold prices, the strong operating performance and US$37.2 million gross profit from the new mine at Soledad-Dipolos were the primary contributors to the increase in profit during the first half of this year. However, this increase was partially offset by higher depreciation, adjusted production costs and profit sharing. EBITDA rose by 92.7% to US$392.0 million, increasing the EBITDA margin from 53.7% in the first six months of 2009 to 64.7% in the equivalent period of 2010.
The effective tax rate for the six months ended 30 June 2010 was 27.0%. This is lower than the Mexican statutory rate of 30%, due primarily to the revaluation of the Mexican peso over the period from 31 December 2009 to 30 June 2010, which generated a foreign exchange loss in the income statement under Mexican GAAP. However, the higher profits resulted in an overall tax charge of US$95.6 million, which represented a 123.4% increase when compared with the first half of 2009.
Net profit for the period totaled US$258.9 million, representing an increase of 88.8%. The Group's attributable profit increased to US$220.7 million, representing a 82.2% increase over the comparable period last year. This increase in profits was the primary driver of increased cash flow generated by operations before changes in working capital, which increased from US$234.3 million in the first half 2009 to US$419.9 million in the same period of 2010, an increase of 79.2%. Capital expenditures for the period were US$131.1 million, which were used to purchase property, plant and equipment mainly for the Saucito project, the expansion of Ciénega and the construction of ramps at the exploration projects.
The Directors have recommended an interim dividend of 9.20 US cents per share amounting to US$66.0 million which is scheduled to be paid on 14 September 2010 and is accordance with the Company's stated dividend policy.
Growth
Exploration is the main pillar of our growth strategy and a significant increase in the exploration budget was approved for this year. In the first half of 2010, US$33.4 million was spent on exploration out of US$77.6 million approved for 2010 as a whole. Our exploration efforts were focused on intensifying drilling programmes at Saucito, San Julián, San Ramón and Orisyvo, while we also confirmed resource estimates at Noche Buena and Juanicipio. Although positive results were obtained at all these properties, results at Saucito and Orisyvo were the most encouraging as new extensions of ore bodies were discovered.
The Ciénega expansion and the Saucito development project remained on schedule and we continue to expect to begin operations in the first half of 2011. The expected production levels during the first year of operation are approximately 4.7 million ounces of silver and 22,500 ounces of gold, gradually ramping up to annual production of approximately 9.0 million ounces of silver and 45,000 ounces of gold from the third year of operations onwards.
During the first half of 2010, the resources at Noche Buena were confirmed and the prefeasibility study will be prepared for approval.
Both San Julián and Orisyvo scoping studies are currently being performed by independent engineering firms and will be completed in the fourth quarter of 2010. AMC Mining Consultants (Canada) Ltd has been appointed to undertake a prefeasibility study for the development of Juanicipio as a stand alone underground silver mine.
Outlook
We believe that the foundations for silver and gold investment will remain positive for the remainder of the year assisted by current economic conditions, the sovereign debt crisis and the narrow high-yield investment possibilities offered by the global market. However, we remain cautious as we wait to see clearer signs of the strong economic recovery that would drive industrial demand for silver.
Despite the uncertain economic climate and volatile commodities prices, Fresnillo plc continues to focus on increasing productivity, controlling costs, expanding the resource and reserve base, and strengthening our growth pipeline. Together, we expect these to create ongoing and sustainable value to all our stakeholders through economic cycles in the years to come.
For further information, please visit our website: www.fresnilloplc.com or contact:
| Fresnillo plc London Office Arturo Espinola, Head of Investor Relations | Tel: +44 (0)20 7399 2470 |
| Mexico City Office Gabriela Mayor | Tel: +52 55 52 79 3203 |
| Brunswick Carole Cable David Litterick | Tel: +44 (0)20 7404 5959 |
About Fresnillo plc
Fresnillo plc is the world's largest primary silver producer and Mexico's second largest gold producer, listed on the London Stock Exchange under the symbol FRES.
Fresnillo plc has four producing mines, all of them in Mexico - Fresnillo, Ciénega, Herradura and Soledad-Dipolos; one development project - Saucito; and five advanced exploration prospects - Noche Buena, San Juan, San Julián, Orysivo and Juanicipio as well as a number of other long term exploration prospects. In total the group has mining concessions covering approximately 1.75 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 both silver and gold.
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 over 400,000 ounces of gold by 2018.
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.
Operational Review
In the first half of 2010, Fresnillo plc's core operations were strengthened by the addition of Soledad-Dipolos as an operating mine. With the inclusion of this asset, the Company currently has four producing mines located in Mexico, comprising two underground mines (Fresnillo and Ciénega) and two open pit mines (Herradura and Soledad-Dipolos).
Additionally, during the first six months of the year we made further progress with the expansion at Ciénega, the development of the Saucito project and the exploration programmes at our Noche Buena, San Julián, San Juan, Orisyvo and Juanicipio advanced prospects.
Production
Total attributable silver production for the first half of the year reflected a slight increase of 1.6% over the same period of 2009. Stable production at the Fresnillo mine, higher ore throughput from the development works at Saucito and higher silver ore grades and tonnages leached at Herradura offset the lower silver ore grade mined at Ciénega. However, this modest increase was sufficient to achieve a record level in comparison to the corresponding periods of previous years. With this result, Fresnillo plc remains on track to achieve its full year target of 38 million silver ounces.
| Production | H1 2010 | H1 2009 | % change |
| Silver (kOz) - attributable | 19,107 | 18,805 | 1.6 |
| Silverstream prod’n (koz) | 1,816 | 1,759 | 3.2 |
| Total Silver prod’n (koz) | 20,923 | 20,564 | 1.7 |
| Gold (Oz) - attributable | 176,351 | 132,894 | 32.7 |
| Lead (t) | 9,144 | 8,446 | 8.3 |
| Zinc (t) | 10,825 | 10,199 | 6.1 |
In addition to the silver ounces produced by our existing operating mines, Fresnillo plc receives proceeds from the sale of silver from the Sabinas mine in accordance with the Silverstream contract. In the first half of 2010, total silver production from Peñoles' Sabinas mine was 1.8 million silver ounces, a 3.2% increase as a result of higher volumes of ore milled and improved recovery.
Attributable gold production increased by 32.7% in the first half to a record 176,351 ounces due to the successful start-up in January of commercial production at Soledad-Dipolos. Other factors which also contributed to this significant increase were the higher ore grades and greater volumes of ore milled at Ciénega and increased volumes of ore deposited at Herradura. We continue to expect production of approximately 340,000 attributable gold ounces for the whole of 2010, which is in line with our previous estimates.
Production of lead and zinc, which are by-products of the Group's operations, increased by 8.3% and 6.1% respectively when compared with the first half of last year. Both lead and zinc production benefited from the higher volumes of ore milled and ore grades at Fresnillo, while better recovery and higher volumes of ore milled at Ciénega further increased the tonnage of zinc produced.
Fresnillo mine production
| Production | H1 2010 | H1 2009 | % change |
| Silver (kOz) | 17,820 | 17,544 | 1.6 |
| Gold (Oz) | 11,488 | 12,577 | -8.7 |
| Lead (t) | 5,836 | 5,031 | 16.0 |
| Zinc (t) | 6,014 | 5,873 | 2.4 |
Silver production at the Fresnillo mine, which accounts for 93% of the Group's silver production, remained broadly stable when compared to the first half of 2009; whilst lower ore grades led to an 8.7% decrease in gold production.
Sinking of the San Carlos shaft to extract minerals from the western zone of the San Carlos vein is on schedule. The shaft reached a depth of 360 metres and the construction of infrastructure required to install the hoist was started. All equipment to continue developing the next phase of the San Carlos shaft is currently in place. This US$19.1 million project, which will reduce production costs by reducing underground haulage distances from 5,300 to 1,600 metres, is expected to be concluded in the third quarter of 2011.
Ciénega mine production
| Production | H1 2010 | H1 2009 | % change |
| Gold (Oz) | 55,772 | 47,625 | 17.1 |
| Silver (kOz) | 676 | 751 | -10.0 |
| Lead (t) | 3,228 | 3,360 | -3.9 |
| Zinc (t) | 4,811 | 4,284 | 12.3 |
Gold production for the first half of 2010 increased by 17.1% when compared with the same period last year due to higher gold ore grades and a 9.1% increase in volume of ore milled. This result was achieved mainly through the implementation of Six Sigma quality control methodology and other development activities, which enables the mine to extract more ore from higher ore grade veins. To a lesser extent, recovery rates also improved due to the optimisation of the leaching circuit.
Silver production for the first half of the year declined by 10.0% when compared to the corresponding period of 2009 due to lower ore grades. However, the favourable economic effect of the increased gold production more than offset the adverse impact of the lower silver production.
The project to sink the shaft a further 300 metres to gain access to deeper ore reserves and reduce costs is on schedule, with 214.5 metres advanced as of 30 June 2010. The investment required for this project is estimated at US$13.3 million and is expected to be concluded in the second half of 2011.
We remain committed to reaching a production target of 110,000 gold ounces per year and our plans to expand milling capacity from 755,000 to 930,000 tonnes per year. This US$24.9 expansion project is progressing according to schedule and is expected to become operational in the first half of 2011.
Herradura mine production - Attributable
| Production | H1 2010 | H1 2009 | % change |
| Gold (Oz) | 79,569 | 71,428 | 11.4 |
| Silver (kOz) | 122 | 87 | 40.2 |
Attributable gold production increased by 11.4% year on year, reaching a record level of 79,569 ounces. This considerable increase was driven by additional volumes of ore deposited on the leaching pads. Gold ore grades remained unchanged whilst better recovery also contributed to increase gold production at this mine, which represents 45.1% of the Group's attributable gold production.
Silver production for the first six months of 2010 increased by 40.2% when compared to the equivalent period of last year as a result of an higher than expected silver ore grade.
Soledad-Dipolos mine production - Attributable
| Production | H1 2010 | H1 2009 | % change |
| Gold (Oz) | 27,524 | - | N/A |
| Silver (kOz) | 11 | - | N/A |
After a US$67.8 million investment and the commencement of commercial production in January 2010, 27,524 attributable gold ounces were produced at this open-pit mine, achieving a contribution of 15.6% to the Group's attributable gold production. The mine is currently operating according to plan, giving us confidence that we will achieve our 2010 target of 56,000 attributable gold ounces.
As a result of the increase in resources reported at Soledad-Dipolos in 2009, an expansion project to produce 130,000 total gold ounces per annum during the life of the mine was approved by the Executive Committee early this year. The additional investment required for this expansion is US$34.0 million, of which US$22.0 million will be spent in 2010, US$6 million in 2012 and the remaining US$6 million in 2013.
In-Mine exploration
Fresnillo plc has an active and continuing in-mine exploration programme to replace reserves and resources at all operating mines. Silver and gold ounces contained in ore reserves remained at similar levels to 2009. At the time of this report, these resources have been calculated in-house and have not been audited. Auditing is scheduled to occur at year-end and will underpin the annual reserve and resource statement for all operating mines, development projects and exploration prospects.
Growth Projects
Saucito
Development of the Saucito project remains on track, with the first stage scheduled for completion in the first half of 2011. Total mining works at this US$309 million project have reached 24,035 metres, while the equipment for the concentrator and shafts is already on site and further machinery is expected to arrive in the next few months.
In the first half of the year, the Saucito shaft was commissioned and became fully operational. The electricity lines and substation were completed and a pumping station located at the Saucito vein is already in operation. The construction of the patio of the Saucito shaft and the compressor building was also completed.
At the Jarillas shaft, the engineering and foundation work for the construction of the production hoist area was completed and the hoist is currently being shipped from Canada. In the first months of the year, an emergency electricity plant was tested and will be available in the case of any power shortfall from the national utility, Comisión Federal de Electricidad. Sinking of this shaft reached a depth of 208 metres out of a total 645 metres.
Saucito will have an initial capacity of 330,000 tonnes of ore per year, gradually ramping up to 990,000 tonnes per year by 2014. The expected 2011 production is approximately 4.7 million ounces of silver and 22,500 ounces of gold gradually ramping up to approximately 9.0 million ounces of silver and 45,000 ounces of gold from the third year of operations onwards.
In the first half of the year, the metal content recovered at the Fresnillo mine concentrator from Saucito development ore resulted in an additional 477,178 silver ounces, 1,998 gold ounces and 80 tonnes of lead being produced, whilst in 2009 424,000 silver ounces, 1,263 gold ounces and 56 tonnes of lead were recovered. This production is included in the total production figures of Fresnillo plc but not in the Fresnillo mine figures. Additional ore from Saucito will be processed at the Fresnillo mill as ore extracted from development works is accumulated.
Exploration
Our growth strategy relies on our exploration programme. It is through investment in exploration and consolidation of mining districts that the Company is able to expand its mineral resources and pursue organic growth. In the first half of 2010, exploration expenses were US$33.4 million, a 51.1% increase year over year as a result of the higher budget that was approved to fulfill our extensive 2010 exploration programme. Additionally, US$4.8 million was capitalised at the Saucito and Juanicipio projects.
During the first half, the Company undertook a broad drilling programme through 40 exploration rigs operating around our mines, advanced projects and prospects. Total ore resources and reserves, audited and updated as of December 2010, will be released in early 2011.
Saucito
Drilling to explore the extensions of the Jarillas, Valdecanas East, and Santa Natalia veins was completed through 19 holes (12,955 metres). Encouraging results were obtained west of Jarillas and southeast of Santa Natalia. Resources will be updated at the end of the year.
Noche Buena (56% Fresnillo plc)
An extensive drilling campaign was completed at this open-pit gold project located 24 km SE of the Herradura mine. 165 reverse circulation holes (15,466 metres) and 69 diamond drill holes (14,143 metres) were completed. The unaudited preliminary resource estimate yielded 627,000 gold ounces inside a US$950 per gold ounce conceptual pit shell, with an average grade of 0.45 g/t. Drilling and engineering studies continue and the prefeasibility study will be carried out during the second half of this year in order to obtain the approval to go ahead with the construction. All the land required has been secured.
Herradura (56% Fresnillo plc)
Exploration in the immediate surroundings of the Herradura mine continued to produce good results. Interesting gold intercepts have been obtained from Centauro Deep (32 holes, 13,844m), where underground mining of several veins is being considered below the pit limits; and from the Dunas-Ocotillo target (3,807 metres, 14 reverse circulation holes), opening the possibility of further expanding the Centauro mega-pit. Drilling has commenced at the Altar gold prospect, 120km southeast of the Herradura mine, with 10 reverse circulation holes (1,423 metres) completed to date.
Juanicipio (56% Fresnillo plc and 44% Mag Silver)
28 holes (16,032 metres) were completed to infill drill the Valdecañas shoot and explore other targets. Mixed results were obtained on the Juanicipio vein; an interesting intersection was obtained north of Juanicipio where additional holes are planned.
Minera Juanicipio appointed AMC Mining Consultants (Canada) Ltd. to undertake a prefeasibility study for the development of a stand alone underground silver mine. The prefeasibility study is expected to be concluded by the end of the year.
Ciénega
At the Las Casas veins located 500 metres north of the mine workings, 43 diamond drill holes (24,156 metres) were completed on 100m centres. Results show lower grades than average at the Cienega mine, but the veins are of 10 to 20m width and have good tonnage potential. A resource estimate will be completed in the last quarter of 2010. Exploration was initiated at the Jessica East target, located 500 metres from the mine.
San Ramón in the Ciénega District
Infill diamond drilling continues on the Porvenir-Bandera vein to upgrade the inferred gold-silver resources to the indicated category. Footwall splays including the historic Candelaria vein are also under evaluation. 29 holes (9,431 metres) were completed in the period and an exploration adit initiated in the Porvenir area.
San Julián
Exploration continues at the San Julián project with 83 holes (25,733 metres) being drilled during the period. The San Atanasio-Ruth, San Julián-Refugio, La Dura, and La Gloria veins are being systematically drilled to define new ore-shoots, and the search for new disseminated silver ore bodies continues in adjacent areas. The San Julián ramp reached 850 metres length, and 330 metres of drifting were developed along the San Atanasio vein where it attains 1 to 5 metres width with economic silver-gold grades. The San Roberto exploration adit in the southern part of the district was advanced 470 metres.
The independent scoping study, which aims to help in designing the development works at this project, will be concluded in the third quarter of 2010. This study includes the mine, concentrator plant and infrastructure.
Orisyvo
Drilling through 23 holes (9,824 metres) was completed at Orisyvo, extending the upper North and West oxide gold deposits, and the deeper Central sulphide zone. Exploration potential remains open to the north and east. A 1.5 kilometre adit to explore the higher grade sulphide zone and obtain bulk samples for metallurgical testing has been approved.
The scoping study, which in this project is limited to the preliminary mine design, will be concluded in the third quarter of 2010.
San Juan
Drilling through 14 holes (5,056 metres) was completed in the period, exploring the Tulillo alteration zone. Results delivered only anomalous gold and silver values. Sampling and geological mapping defined a new target at Acatita, which will be drill-tested in the second half of 2010 along with the north extension of the Lorena gold-silver vein.
Leones
An initial drill program consisting of 20 holes (5,780 metres) was completed at this silver property located in Chihuahua. The near-surface potential is 15 million silver ounces in the Leones breccia, with grades of 140g/t. Other geochemical and geophysical targets remain to be tested.
Other
Drill targets have been defined through mapping and sampling at San Nicolás del Oro, Guanajuato, Otzumatlan, Lucerito and Manzanillas in México, and Amata and Huacravilca in Perú. Permits have been obtained and drilling will start at these prospects in the second half of the year.
Health and safety, human resources, environment and community relations
No fatal accidents occurred during the first half of 2010. However, we continue to focus on health and safety as the Group's injury frequency rate index increased from 1.28 in the first half of 2009 to 1.43 in the equivalent period of 2010. Similarly, the lost work days ratio increased from 0.59 in 2009 to 0.61. The above increases were related to the hiring of new personnel, mainly at Herradura and Saucito development works. In response, the Group has intensified employee and contractors training through different safety programmes and procedures at all our operating mines.
Fresnillo plc's relationship with the communities where we operate are fundamental to the continuity of our operations. The Group's ongoing practice is to share our success with our personnel and our resources with local communities. In the first half of 2010, operation of the sewage water treatment plant at Fresnillo has contributed to preserving aquifers where water is a scarce resource. In this period, 658,000m3 were used at the mine's processes, reducing a potential source of contamination for the community, whilst lowering our production costs and our fresh water usage.
Other activities include education programmes, sponsorship of recreational activities and sports, water conservation initiatives, protection of endangered species and recycling efforts, amongst others. These activities for our workers and their families are performed on a continuous basis at our operating mines and also at Saucito, where several sports competitions took place during the period. At Herradura and Cienega mines, efforts to re-locate plant species continued.
Activities aimed at gaining certification in accordance to the Code of the International Cyanide Management Institute continued at Ciénega and at Herradura, which is already a signatory, additional audits were undertaken. An audit was undertaken by Golder Associates and we defined an action plan to comply with the areas of opportunity identified during the process.
The Company successfully concluded the annual wage negotiations with each of the local mining unions, agreeing a 6.5% wage increase across all operating mines, plus a 1% bonus on base salary.
In the first half of the year, elections were held in several states, including Zacatecas and Durango, where the Fresnillo and Ciénega districts are located. Regardless of the political party assuming the government, it is the Group's intention to maintain sound and harmonious relations with the newly elected authorities.
Related party transactions
Details of related party transactions that have taken place in the first six months of the current financial year are detailed in note 18 of the financial statements.
Financial Review
The interim consolidated financial statements of Fresnillo plc for the first half of 2010 and 2009 have been prepared in accordance with IAS 34 "Interim Financial Statements". The financial information is presented in US dollars, and all values in this commentary are expressed in millions except where indicated. Management recommends reading this section in conjunction with the Financial Statements and their accompanying Notes.
Commentary on financial performance
The Group's financial results for the first half of 2010 were strong, with adjusted revenues up by 49.4% (to US$636.3m), consolidated gross profit up by 82.4% (to US$401.5m), EBITDA up by 92.7% (to US$392.0m) and profit for the period up by 88.8% (to US$258.9m) compared with the corresponding period last year.
The significant increases were primarily driven by three factors: increases in silver and gold prices, the start up of the Soledad-Dipolos gold mine and the solid operating performance at all Fresnillo plc's mines.
However, there were certain cost variables which affected the adjusted production costs during the period. Excluding the increase in costs associated with the Soledad-Dipolos operations, other factors contributing to the increase in production costs were the revaluation effect of the Mexican peso/US dollar exchange rate and higher electricity and diesel prices. Additionally, other factors which contributed to the production cost increase were the development works performed at our mines, the higher volumes produced, and rises in labour costs. Management plans to continue investing in cost-saving initiatives and efficiency projects aimed at reducing costs.
As anticipated, exploration expenses increased to fund an intensive drilling programme at all our mines and advanced exploration projects. As exploration is a vital part of our strategy, we believe that these expenses will accrue more advantages to the Group as our resource base is expanded.
Considering the results obtained during this first half of the year, management remains confident of delivering another year of robust operational performance, which combined with the high silver and gold prices, should continue to deliver strong financial results for the remainder of the year, with the potential to make 2010 one of the most outstanding years in Fresnillo plc's history.
Income Statement
Income Statement Key Line Items
Six months ended 30 June 2010
(in millions of US$)
|
| H1 2010 | H1 2009 | % change |
| Adjusted Revenue1 | 636.3 | 426.0 | 49.4 |
| Treatment & Refining charges | 30.6 | 35.1 | -12.8 |
| Hedging | 0.0 | 12.0 | -100.0 |
| Total Revenues | 605.7 | 378.9 | 59.9 |
| Cost of sales | 204.2 | 158.8 | 28.6 |
| Gross Profit | 401.5 | 220.1 | 82.4 |
| Exploration expenses | 33.4 | 22.1 | 51.1 |
| EBITDA2 | 392.0 | 203.4 | 92.7 |
| Profit before income tax | 354.5 | 179.9 | 97.1 |
| Income tax expense | 95.6 | 42.8 | 123.4 |
| Profit for the period | 258.9 | 137.1 | 88.8 |
| Attributable profit | 220.7 | 121.1 | 82.2 |
| Basic and diluted Earnings per share (usd/share) 3 | 0.308 | 0.169 | 82.2 |
1 Adjusted revenue is revenue as disclosed in the income statement adjusted to exclude hedging effects and treatment and refining charges.
2 Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as gross profit plus depreciation less administrative and exploration expenses.
3 The weighed average number of shares was 717,160,159. See Note 10 in the Consolidated Financial Statements.
.
The Group's financial results rely, to a great extent, on the quality and performance of our assets, the effort of our personnel and the management's execution capabilities. However, these aspects are strengthened or weakened by certain variables that are beyond the Group's control. A description of these external factors is provided below:
Precious metal prices
Silver and gold prices are considered amongst the Group's most important variables impacting the financial statements. In the first half of 2010, the average realised silver price increased by 28.8% compared to the same period last year (from US$13.92 per ounce in H1 2009 to US$17.93 per ounce in H1 2010). Similarly, the average realised gold price reached US$1,171.92 per ounce, representing a 27.4% increase when compared to the first six months of 2009. Both prices gave a significant increase to revenues as approximately 95% of the income comes from these metals, thus benefiting the financial results for the period.
Foreign exchange rates
The average spot Mexican peso/US dollar exchange rate for the first half of 2010 was $12.68 per US dollar, compared with $13.86 per US dollar during the same period of last year. This 8.5% revaluation had an adverse effect on the Group's income statement as costs denominated in Mexican pesos (approximately 70% of total costs) were higher when converted to US dollars. As a result, the Group estimates that a fifth (US$5.8 million) of the benefits that were obtained last year as a result of the costs conversion at a higher exchange rate, were reversed in the first half of 2010.
The Mexican peso/US dollar spot exchange rate at 30 June 2010 was $12.66 per US dollar, 3.08% lower than the prevailing spot exchange rate at the beginning of the period ($13.06 per US dollar), generating a foreign exchange loss over our net dollar position for Mexican GAAP purposes, therefore lowering the Group's taxable profits which are determined on this basis.
Inflation of key operating materials
In the first half of 2010, there were reductions in the unit prices of certain key materials, such as sodium cyanide and steel for milling, which began to decline in the second half of 2009. In contrast, the average unit price of these inputs was considerably higher during the first half of 2009, after reaching record levels in 2008. As a result, the weighted average unit prices of all operating materials over the half decreased by 3.0%.
| Key operating materials | HALF OVER HALF CHANGES |
| Steel balls for milling | -9.5% |
| Steel for drilling | 0.5% |
| Explosives | 3.7% |
| Tyres | -6.9% |
| Reagents | -7.5% |
| Weighted average of all operating materials | -3.0% |
Electricity
The Group's weighted average cost of electricity increased significantly by 34.3% when compared to the first half of 2009. As anticipated, the higher electricity rate resulted from the improved 2010 economic conditions, which prompted the Mexican Government to reverse its policy of reducing electricity prices to control inflation. No further increases are expected in the forthcoming months.
Diesel
The weighted average cost of diesel in Mexican pesos increased by 9.7% half on half. This increase is based on the Mexican Government's decision to align fuel and diesel prices with prevailing international rates.
Treatment and Refining charges
Treatment and refining charges (TRCs), which are deducted from adjusted revenues for the purposes of revenues as disclosed in the income statement, are negotiated annually in accordance with international benchmarks. The lower TRCs per tonne or ounce, including the effects of the upward zinc and lead prices adjustments (escalator), resulted in a net decrease of 12.8% in total TRCs despite the increase in sales volume.
Having described the impact of the external factors, the main line items of the income statement for the first half of 2010 are described below.
Revenues
Consolidated Revenues
(US$ millions)
|
| H1 2010 | H1 2009 | Amount | %Change |
| Adjusted Revenue1 | 636.3 | 426.0 | 210.3 | 49.4 |
| Treatment and refining charges | -30.6 | -35.1 | 4.5 | -12.8 |
| Hedging | 0.0 | -12.0 | 12.0 | -100 |
| Total Revenues | 605.7 | 378.9 | 226.8 | 59.9 |
Total consolidated revenues for the first six months of the year increased significantly when compared to the same period of last year. The US$226.8 million increase was mainly driven by the benefit of the higher adjusted revenue, which increased by 49.4% reaching US$636.3 million. As shown in the table below, 64.3% of the increase in the adjusted revenues was explained by the higher average realised metal prices. The remaining 35.7% of the favourable US$210.3 million movement was achieved by the additional volume of gold ounces sold from Ciénega, Herradura and the recently opened Soledad-Dipolos mine.
Adjusted Revenues2 by metal
(US$millions)
|
| H1 2010 |
| H1 2009 |
| Volume variance | Price variance | Total | % |
| Silver | 311.9 | 49% | 238.1 | 56% | 4.4 | 69.4 | 73.8 | 31.0 |
| Gold | 291.4 | 46% | 166.2 | 39% | 68.7 | 56.5 | 125.2 | 75.3 |
| Lead | 14.7 | 2% | 10.2 | 2% | 0.8 | 3.7 | 4.5 | 44.1 |
| Zinc | 18.3 | 3% | 11.5 | 3% | 1.2 | 5.6 | 6.8 | 59.1 |
| Total Revenues | 636.3 | 100% | 426.0 | 100% | 75.1 35.7% | 135.2 64.3% | 210.3 100.0% | 49.4 |
The Soledad-Dipolos mine contributed 9% to adjusted revenues with 48,270 gold ounces sold in the period. This new operating mine changed the relative proportion of adjusted revenues represented by silver and gold, increasing gold from 39% to 46% in the first half of 2010, whilst silver contribution decreased to 49% in this period.
Volumes of metal in products sold
Six months ended 30 June
|
| H1 2010 | H1 2009 | % change |
| SILVER (kOz) |
|
|
|
| Fresnillo | 16,556 | 16,276 | 1.7 |
| Ciénega | 605 | 681 | -11.2 |
| Herradura | 216 | 154 | 40.3 |
| Soledad-Dipolos | 20 | - | N/A |
| Total (kOz) | 17,397 | 17,111 | 1.7 |
| GOLD k(Oz) |
|
|
|
| Fresnillo | 9 | 11 | -18.2 |
| Ciénega | 51 | 44 | 15.9 |
| Herradura | 141 | 126 | 11.9 |
| Soledad-Dipolos | 48 | - | N/A |
| Total k(Oz) | 249 | 181 | 37.6 |
| LEAD (MT) |
|
|
|
| Fresnillo | 4,802 | 4,262 | 12.7 |
| Ciénega | 2,841 | 2,883 | -1.5 |
| Total (MT) | 7,643 | 7,145 | 7.0 |
| ZINC (MT) |
|
|
|
| Fresnillo | 5,124 | 4,871 | 5.2 |
| Ciénega | 3,996 | 3,514 | 13.7 |
| Total (MT) | 9,120 | 8,385 | 8.8 |
The Group has not entered into any new silver or gold hedging contracts since its Initial Public Offering in 2008, and at this stage does not intend to do so. As such, Fresnillo plc is fully exposed to fluctuations in silver and gold prices. Furthermore, Fresnillo plc did not enter any new derivative contracts to hedge the price of lead and zinc by-products during the period.
However, a favourable movement is reflected in the results of hedging primarily as a result of a non-cash charge of US$12.4 million in the first six months of 2009 relating to hedging instruments that were terminated in 2007 but for which cumulative losses were recycled to income at the time of the occurrence of the hedged transaction to which they related.
Cost of sales
|
|
|
| Change | |
|
| H110 | H109 | Amount | % |
| Adjusted Production Cost3 | 142.8 | 100.4 | 42.4 | 42.2 |
| Depreciation | 48.8 | 31.3 | 17.5 | 55.9 |
| Change in work in progress | -7.6 | 5.5 | -13.1 | N/A |
| Profit Sharing | 22.7 | 17.9 | 4.8 | 26.8 |
| Hedging | -2.5 | 3.7 | -6.2 | N/A |
| Cost of Sales | 204.2 | 158.8 | 45.4 | 28.6 |
Cost of sales increased by US$45.4, representing an increase of 28.6% when compared with the first half of 2009. The main reasons for this increase are described below:
·; Adjusted production costs were the main contributor to the higher cost of sales, increasing 42.2% in the first half of 2010. However, 52.6% of the US$42.4 million increase, that is US$22.3 million, is attributable to the adjusted production costs generated by the new Soledad-Dipolos operations which started production at the beginning of the year. Additionally, the lower average spot exchange rate adversely impacted costs when converting peso-denominated costs to US dollars. The increase in adjusted production costs relating to the 8.5% Mexican peso/US dollar revaluation was estimated at US$5.8 million. By factoring out the impact of the exchange rate on the peso-denominated components for each category, the figures explained below reflect the estimated underlying operational and dollar-denominated unit cost changes:
§ The cost of contractors increased by US$6.2 million as a result of: i) an increase in development works at all our operating mines to ensure continuous operation in the future; ii) shotcreting and rock bolting activities carried out mainly at the Fresnillo mine due to ground instability at certain areas; iii) additional volumes of ore and waste hauled through longer distances at all our mines; iv) an increase in unit fees charged by contractors, which include the annual rise in labour cost, depreciation of the contractors' equipment, operating materials to perform drilling activities and fuel and lubricants.
§ The cost of energy increased by US$4.8 million mainly due to the higher prices of electricity and diesel, which increased by 34.3% and 9.7% respectively. Additionally, there was an increase in the consumption of energy which resulted from higher production volumes, longer haulage distances, a greater number of trucks and loaders and the need for more ventilation systems.
§ Personnel costs, excluding profit sharing, increased by US$1.9 million mainly due to: i) a 6.5% increase in wages at our mines, plus a 1% bonus on base salary; ii) additional personnel hired at Herradura and iii) training to improve performance and safety indices.
§ Operating materials increased by US$1.4 million as a result of the increased consumption of explosives, tyres and steel for drilling, which resulted from higher production volumes. These increases were mitigated by operating efficiencies and lower weighted average unit prices.
§ Other costs increased by US$1.3 million due to additional equipment insured, security, freight and maintenance of workers camps and administrative offices.
The above adverse effects were mitigated by the lower cost of other maintenance elements, which decreased by US$1.3 million as a result of discounts obtained in the acquisition of spare parts.
·; Depreciation increased by US$17.5 million mainly due to the addition of assets from Soledad-Dipolos, increased production volumes which affected the depletion factor and the purchase of additional trucks and loaders at Herradura and in-mine equipment at the underground mines.
·; Profit sharing increased by US$4.9 million due to increased profits at the operating mines.
·; Change in work in progress decreased by US$6.2 million mainly as a result of the ore deposited at Soledad-Dipolos, resulting in an increase of inventories.
·; The Group enters into certain forward and option derivative contracts in order to manage its exposure to foreign exchange risk associated with costs incurred in Mexican pesos and Euros. In the first half of 2010, forward dollar sales for US$39.0 million matured, resulting in gains of US$2.5 million being recycled to income.
During the period the Group entered into a combination of put and call options structured at zero cost that mature in the second half of 2010 and the first half of 2011. The average floor and cap exchange rates of these collars are $12.90 and $13.83 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. The total amount hedged by these options was US$27.0 million.
Additionally, during the first half Fresnillo plc sold forward US$60.5 million at an average price of $12.89 per US dollar, including US$10.0 million which matured in the same period. The total net outstanding position relating to the hedging of costs incurred in Pesos as of 30 June 2010 was US$70.5 million.
Furthermore, at 30 June 2010 the Group holds Euro forward contracts to purchase Euros to cover the purchase of equipment for the Saucito project (€5.5 million) and the Herradura mine (€5.2 million). These positions matured in July 2010.
Cost per tonne and cash cost per ounce
Cost per tonne, calculated as total production costs less depreciation, profit sharing and the effects of exchange rate hedging, represents a key indicator to monitor productivity at the operating mines while controlling costs. In the first half of 2010, cost per tonne milled at Fresnillo and Ciénega increased by 14.2% and 6.4% respectively, whilst at Herradura cost per tonne deposited remained stable when compared to the same period of last year.
| COST PER TONNE4 | ||||
|
|
|
|
| % |
|
|
| H110 | H1095 | Change |
| Fresnillo | US$/TONNE MILLED | 40.76 | 35.68 | 14.2% |
| Ciénega | US$/TONNE MILLED | 63.32 | 59.49 | 6.4% |
| Herradura | US$/TONNE DEPOSITED | 5.05 | 5.03 | 0.4% |
| Soledad-Dipolos | US$/TONNE DEPOSITED | 4.65 | - | N/A |
4 Cost per tonne is calculated as total production costs less depreciation, profit sharing and exchange rate hedging effects.
5 1H09 figures in this table were adjusted to include reclassification of freight expense from sales to production costs.
The main reasons for the increase in cost per tonne at all of Fresnillo plc's operating mines were the revaluation of the Mexican peso against the US dollar, the increase in electricity and diesel prices and the 6.5% increase in wages for unionised workers plus a 1% bonus on base salary. However, there were other negative impacts affecting individual mines as follows:
At Fresnillo mine, cost per tonne was also negatively impacted by an increase in energy consumption due to the expansion of the San Carlos vein to the west, which required more electricity for the ventilation and pumping systems, whilst longer distances of haulage affected diesel consumption. Additionally, a 13.5% increase in metres of shotcreting to stabilise the San Alberto and San Carlos areas resulted in a higher contractor costs. Consumption of cable for the General shaft, anchors for rock bolting, additional spare parts and installation of key components for equipment further increased cost per tonne.
At Ciénega, cost per tonne was also affected by higher contractor costs due to a 72.4% increase in development works (2,510 additional metres). Other factors impacting this were the higher costs related to security and the maintenance of administrative offices and employees' houses.
At Herradura, an increase in the cost of contractors was recognised due to the stripping cost of the Valles pit recorded in the income statement, whilst in 2009 these costs were capitalised. Longer hauling distances and deeper pits were the reason for higher diesel consumption at this mine.
The above adverse effects were mitigated by the economies of scale related to the increases in volume of ore milled/deposited at all the operating mines. Furthermore, there were certain additional benefits lowering cost per tonne. For instance, discounts in the purchase of spare parts obtained at Herradura and a reduction in cost of repairs at Ciénega decreased maintenance costs.
Despite the 6.4% increase in Ciénega's cost per tonne, cash cost6 at this mine decreased by 35.1% from US$284.16 per gold ounce in the first six months of 2009 to US$184.49 per gold ounce in the equivalent period of 2010. This reduction resulted from the favourable effect of the increase in price and volume of by-products which are credited to costs. This positive impact, combined with the lower treatment and refining charges, also benefited Fresnillo's cash cost, which more than offset the adverse effect of lower ore grade at this mine, resulting in a decrease of 3.3% (US$3.70 per silver ounce in the first half of 2009 to US$3.58) compared to the 14.2% increase in cost per tonne. Herradura's cash cost of US$324.88 per gold ounce in 1H10 decreased by 3.6% when compared to the same period last year as a result of the increased gold ounces produced, whilst Soledad-Dipolos' cash cost was US$308.16 per gold ounce during its first six months of production.
Gross profit
Management continuously monitors gross profit, excluding hedging gains and losses, for each mine as it represents a key indicator of the profitability of each business unit and the Group as a whole. Consolidated gross profit, excluding hedging gains and losses for the first half of 2010, reached US$399.0 million, a 69.2% increase when compared with the same period of last year. The combination of higher average realised silver and gold prices and robust operating results together with the gross profit generated by the newly opened Soledad-Dipolos mine resulted in the US$163.2 million increase in the consolidated gross profit excluding hedging effects.
In the first half of 2010, the Fresnillo mine remained the largest contributor to the consolidated gross profit, however its contribution decreased to 56.0%. The Herradura mine was the second contributor with 24.0% share of the consolidated gross profit as a result of increased silver and gold ounces sold at higher prices. Similarly, Cienega's gross profit was increased by 92.8% to US$42.3 million due to the increase in ore milled and higher gold ore grade, which enabled the mine to increase its contribution to the consolidated gross profit to 10.6%. Finally, the commencement of the commercial production at Soledad & Dipolos resulted in a gross profit of US$37.2 million, which represented 9.4% of the consolidated gross profit, excluding hedging gains and losses.
| CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT EXCLUDING HEDGING GAINS AND LOSSES | |||||||
| (US$ millions) |
|
|
|
| Change | ||
|
| H110 |
| H109 |
| Amount |
| % |
| Fresnillo | 223.23 | 56.0% | 154.44 | 65.4% | 68.79 | 42.4% | 44.5 |
| Ciénega | 42.31 | 10.6% | 21.94 | 9.3% | 20.37 | 12.5% | 92.8 |
| Herradura | 95.83 | 24.0% | 59.75 | 25.3% | 36.08 | 22.2% | 60.4 |
| Soledad-Dipolos | 37.24 | 9.4% | - | N/A | 37.24 | 22.9% | N/A |
| Total for operating mines | 398.61 | 100.0% | 236.13 | 100.0% | 162.48 | 100.0% | 68.8 |
| Other subsidiaries | 0.37 |
| -0.31 |
| 0.68 |
| N/A |
| Total Fresnillo plc | 398.98 |
| 235.82 |
| 163.16 |
| 69.2 |
Administrative expenses
Administrative expenses for the first half of 2010 decreased by 3.9% to US$24.9 million when compared to the same period of last year. The modest reduction was a result of lower administrative fees paid to Servicios Administrativos Peñoles, S.A. de C.V. under the New Services Agreement. The annual fee agreed under that contract was US$27.6 million, which compared favourably with the US$34.0 million annual fee that was payable under the previous Transitional Services Agreement, in effect until October 2009.
Exploration expenses
Exploration expenses for the first half of 2010 increased significantly to US$33.4 million, 51.1% higher than the same period of 2009. As anticipated, the Group intensified its exploration efforts with the purpose of expanding the resource and reserve base and confirming the resource estimations at Noche Buena and Juanicipio (Fresnillo plc 56% and Mag Silver 44%). Our strategic goal is to discover enough reserves by the year 2018 to reach our annual production target of 65moz of silver and 400,000 ounces of gold (attributable) and to sustain at least a 10 year average mine life.
In addition to the aforementioned expenses, the Group capitalised US$4.8 million related to the Saucito and Juanicipio projects.
| BUSINESS UNIT / PROJECT (US$ millions) | Exploration expenses | Capitalised expenses |
|
|
|
|
| Ciénega | 7.8 | 0.0 |
| Fresnillo | 5.2 | 0.0 |
| Herradura | 4.1 | 0.0 |
| Soledad-Dipolos | 0.9 | 0.0 |
| Noche Buena | 3.2 | 0.0 |
| San Julián | 3.1 | 0.0 |
| Orisyvo | 2.4 | 0.0 |
| Nuevo Corredor Herradura | 2.0 | 0.0 |
| San Juan | 0.9 | 0.0 |
| Leones | 0.8 | 0.0 |
| Saucito | 0.0 | 2.2 |
| Juanicipio | 0.0 | 2.6 |
| Others | 3.0 | 0.0 |
| TOTAL | 33.4 | 4.8 |
EBITDA
A key indicator of the Group's financial performance is EBITDA, which is calculated as gross profit plus depreciation, less administrative and exploration expenses. In the first half of 2010, EBITDA increased by 92.7% over the same period of 2009 due to the higher gross profit, despite the fact that exploration expenses increased by US$11.3 million. As a result, the EBITDA margin increased from 53.7% in the first half of 2009 to 64.7% in the first half of 2010.
EBITDA and EBITDA Margin
Six months ended 30 June
(in millions of US$)
|
| H1 2010 | H1 2009 | % change |
| Gross Profit | 401.5 | 220.1 | 82.4 |
| + Depreciation | 48.8 | 31.3 | 55.9 |
| - Administrative Expenses | -24.9 | -25.9 | -3.9 |
| - Exploration Expenses | -33.4 | -22.1 | 51.1 |
| EBITDA | 392.0 | 203.4 | 92.7 |
| EBITDA Margin | 64.7% | 53.7% |
|
Silverstream revaluation effects
The Silverstream contract is accounted for as a derivative financial instrument, which is carried at fair value. In the first half of 2010, the fair value of this instrument increased by US$17.3 million, with a corresponding non-cash gain recognised in the income statement. Further information related to the Silverstream contract is provided in the Balance Sheet section below and in note 12 to the Consolidated Financial Statements.
Foreign exchange
In the first half of 2010, a foreign exchange loss of US$5.1 million was recorded in the income statement which was driven primarily by the devaluation of the UK pound sterling against the US dollar on the dividends paid in pounds and the conversion of the pound sterling position held in treasury to US dollars. Another factor contributing to the foreign exchange loss was the revaluation of the Mexican peso against the US dollar which adversely affected the value of peso-denominated net liabilities. In contrast, a foreign exchange gain of US$6.9 million was recorded in the first half of 2009 as a result of the 12.3% devaluation of the US dollar against the UK pound sterling.
Taxation
As a result of the higher profits achieved during the first half of 2010, the income tax expense reached US$95.6 million, an increase of 123.4% when compared to the same period of 2009. Notwithstanding, the effective tax rate for the period was 27.0%, which is lower than the statutory tax rate of 30.0%. The difference is explained mainly by the 3.1% revaluation of the Mexican peso vs US dollar which had two effects: i) it generated a foreign exchange loss that was recorded under Mexican GAAP, which lowered the Group's taxable profits; and ii) it generated movements in the US dollar equivalent tax value of assets that were originally valued in Mexican pesos and are not subsequently revalued for tax purposes with fluctuations in the Mexican peso/US dollar exchange rate under Mexican GAAP. Additionally, there were inflationary adjustments of certain assets for tax purposes which had no accounting effect.
Profit for the period
Profit for the period totaled US$258.9 million, representing an increase of 88.8% half on half. The profits due to non-controlling interests recorded in the first half of the year was US$38.2 million, which is 138.5% above the equivalent period of 2009 due to the increased profits at Herradura and the profits generated by Soledad-Dipolos.
As a result, profit attributable to equity shareholders of the Group increased by 82.2% from US$121.1 million to US$220.7 million compared with the same period in 2009.
Cash Flow
A summary of the key line items from the cash flow is set out below:
Cash Flow Key Line Items
Six months ended 30 June
(in millions of US$)
|
| H1 2010 | H1 2009 | (US $) | (%) |
| Cash generated by operations before changes in working capital | 419.9 | 234.3 | 185.6 | 79.2 |
| (Increase) in working capital | -53.3 | -57.3 | 4.0 | -7.0 |
| Taxes and Employee Profit Sharing paid | 61.0 | 82.8 | -21.8 | -26.3 |
| Silverstream contract | 21.7 | 20.6 | 1.1 | 5.3 |
| Purchase of property, plant & equipment | 131.1 | 105.5 | 25.6 | 24.3 |
| Dividends paid | 116.2 | 55.9 | 60.3 | 107.9 |
| Net increase/(decrease) in cash during the period before foreign exchange differences | 81.3 | (41.6) | 122.9 | N/A |
| Cash at 30 June | 389.8 | 174.6 | 215.2 | 123.3 |
In the first half of 2010, cash generated by operations before changes in working capital increased by 79.2% from US$234.3 million in the first half of 2009 to US$419.9 million in the period under review. This increase was achieved primarily as a result of the increase in profits.
However, there was a US$53.3 million increase in working capital due to the increase in trade receivables resulting from higher prices and volumes sold to Met-Mex Peñoles.
As a result of the above effects, cash flow from operating activities of US$305.6 million increased by 224.4% when compared to the corresponding figure for 2009.
Another important source of funds was the proceeds received under the Silverstream contract (US$21.7 million).
A portion of the funds generated by operations was used to purchase property plant and equipment (US$131.1 million). Capital expenditures in the first half of 2010 are described below in detail:
| Purchase of property, plant and equipment | ||
| (US$ millions) | ||
|
| H110 |
|
| Saucito project | 35.8 | Mining works and purchase of key equipment, net of US$8 million revenues recovered from ore mined. |
| Ciénega mine | 28.8 | Mine development, purchase of land and mining concessions, expansion of the plant to 930,000 tonnes per year and sinking of the shaft |
| Herradura mine | 25.0 | Expansion of the Centauro pit, stripping of the Valles pit, construction of the eighth leaching pad and Noche Buena gold project. |
| Fresnillo mine | 21.1 | Construction of the ramp at San Julián project, mining works, construction of the San Carlos shaft, purchase of equipment and ventilation systems. |
| Soledad-Dipolos | 16.0 | Construction of the second leaching pad and purchase of equipment. |
| Juanicipio project | 2.6 | Mining works |
| Exploraciones Mineras La Parreña | 0.4 |
|
| Servicios Administrativos Fresnillo | 0.3 |
|
| Other | 1.1 |
|
| Total Purchase of property, plant and equip. | 131.1 |
|
In June, the final dividend for the 2009 financial year was paid, totaling US$116.2 million.
The sources and uses of funds described above resulted in a net increase of US$81.3 million in cash and cash equivalents during the period. The combination of this increase with the US$312.2 million balance at the beginning of the year and the unfavourable effect of the exchange rate (US$3.7 million), resulted in a net cash position of US$389.8 million as at 30 June 2010.
Balance Sheet
Fresnillo plc continues to have a solid financial position with no bank debt.
Cash and cash equivalents as of June 2010 of US$389.8 million increased by 24.8% compared to the cash position at year-end 2009, and 123.3% when compared to the cash position as of 30 June 2009 due to the factors described in the cash flow section.
Trade and other receivables increased during the period by US$38.7 million to US$146.9 million primarily as a result of the rise in metal prices and volumes sold during the period.
In accordance with the Silverstream Agreement, Fresnillo plc is entitled to receive all of the proceeds in respect of the payable silver produced at the Sabinas mine, owned and operated by the Peñoles Group. The contract is accounted for as a derivative financial instrument, with all payments received or due being credited against the carrying value of the asset. The change in the value of the Silverstream contract from US$298.7 million at the beginning of the year to US$291.0 million at the end of the period reflects cash proceeds of US$21.7 million and proceeds due of US$3.2 million offset by a revaluation of US$17.3 million, which is a non-cash gain reflected in the Group's income statement.
As a result of the Company's investments during the first half of the year, property, plant and equipment, net of depreciation effects, increased by 10.8% since December 2009 to US$762.9 million.
Dividends
The Directors have declared an interim dividend of 9.20 US cents per share amounting to US$66.0 million which is scheduled to be paid on 14 September 2010.
The interim dividend will be paid in UK pound sterling to shareholders on the register on 20th August 2010. Whilst the dividends are declared in US dollars, unless a shareholder elects to receive dividends in US dollars, they will be paid in UK pound sterling with the declared dividend being converted into UK pound sterling on or around 20th August 2010.
The Company´s dividend policy takes into account the profitability of the business and underlying growth in earnings of the Company, as well as its capital requirements and cashflows, while maintaining an appropriate level of dividend cover. Interim and final dividends will be paid in the approximate proportions of one-third and two-thirds of the total annual dividend, respectively.
Going Concern
The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and for this reason, they continue to adopt the going concern basis in preparing the financial statements of the Group.
Risks and uncertainties
The Group's operating and financial results could be adversely impacted by certain risks. The Board is responsible for ensuring that risk is effectively managed across the Group, whilst the day-to-day risk management and internal control system relies on the Executive Committee. Although key risks are continuously being assessed and monitored, management remains committed to further improve the risk management process.
The main risks and uncertainties that could have a material impact on the Group's performance over the remainder of the financial year have not changed from those which are set out within the Business Review section of the Annual Report for the year ended 31 December 2009. A copy of the Fresnillo's Group 2009 Annual Report is available at the Company's website at www.fresnilloplc.com. Nonetheless, a brief description of the principal risks is shown below:
Strategic risks
·; Depletion of reserves and/or failure to identify new mineral deposits could impact the Company's growth projections and production capabilities.
·; Delays in obtaining access to the land for performing exploration/mining activities.
·; Difficulty in finding and/or retaining personnel with the requisite knowledge, skills and experiences for key positions.
·; Internal union conflicts at the national level may cause temporary stoppages or discontinue operations.
·; Security related risks such as drug cartels, kidnapping, thefts, etc., could cause business interruptions resulting from their impact on our personnel and property.
Operational risks
·; Lower ore grade extracted could impact cash cost projections and production programmes.
·; Difficulty in sourcing critical equipment and strategic spare parts to meet operational needs.
·; Continued upward trend in the price of key operating materials due to competitive demand and reliance on third party suppliers.
·; Expensive or insufficient energy to meet demands of mining operations, due to reliance on CFE, the state-run electric utility.
·; Accidents or irresponsible actions caused by the Company in the communities where it operates that may disrupt operations from a civil or legal perspective.
·; Difficulties in obtaining permission from the Mexican Ministry of Defence for the use of explosives.
Macroeconomic and Financial risks
·; Fluctuation in metal prices and exchange rates could limit profitability margins.
·; Adverse changes in the tax law and/or new mining royalties, rights or duties that could impact the Company's profitability.
Compliance
·; External pressure (from NGOs, political groups and others) for more regulation to the mining industry in Mexico, which could increase our regulatory burden.
·; Failure to comply with environmental, health and safety regulations that could disrupt operations, lead to financial and legal penalties, and/or terminate the Company's mining licences.
Directors
The names and functions of the current directors and senior management team of Fresnillo plc are as listed in the Fresnillo Group's Annual Report for 2009. A list of current directors is maintained on the Group website: www.fresnilloplc.com
Statement of directors' responsibilities
The Directors of the Company as listed on pages 67 to 69 of the Fresnillo plc 2009 Annual Report, hereby confirm that to the best of their knowledge:
(a) the condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Fresnillo Group as required by DTR 4.2.4; and
(b) the interim management report includes a fair review of the information required by DTR 4.2.7 (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principle risks and uncertainties for the remaining six months of the year) and DTR 4.2.8 (being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period and changes since the last annual report).
On behalf of the board of directors of Fresnillo plc.
Jaime Lomelín
Chief Executive Officer