Fresnillo Regulatory News (FRES)

Fresnillo plc

Fresnillo plc today announced its financial results for the full year ended 31 December 2016. Octavio Alvídrez, CEO said:

"I am pleased to report a strong overall performance in 2016. We delivered record silver production of 50.3 million ounces, in line with our guidance, reflecting the initial contribution of San Julián phase I and higher grades at Fresnillo and Ciénega. Gold production of 935.5 thousand ounces exceeded our revised guidance, mainly as a result of the reduction in inventories at Herradura. Our record production, combined with higher metal prices and the devaluation of the Mexican peso during the year allowed us to deliver strong financial results in 2016 and as a result the Board has recommended a final dividend of 21.5 cents per share, equivalent to approximately US$158.4 million.

At the Fresnillo mine, despite reporting a slight improvement in silver production in 2016, we continued to experience some issues that impacted the delivery of our turnaround plan. However, we have implemented additional measures to increase mine preparation and expect a gradual improvement in production in 2017.

San Julián phase I was commissioned in the third quarter and contributed to our record annual production. It is now operating at levels above its designed capacity. Despite taking the decision to delay the start-up of San Julián phase II, we are pleased with the progress made during the year and are confident that this second phase will be commissioned in the second quarter of 2017.

We continued to optimise our operations in 2016; we not only made good progress with our development projects but we also increased our resource base. The pyrites plant and second line of the dynamic leaching plant at Herradura advanced largely according to plan, with commissioning of both due in 2018, and our exploration work resulted in an increase of our resource base at our operating mines and at projects where we have identified strong potential.

Our solid operational performance, together with higher prices, lower costs and the favourable effect of the devaluation of the Mexican peso allowed us to almost double the cash generation from our mines. This more than offset our capital expenditure and the payment of dividends, resulting in the Company having a cash, cash equivalents and short-term investments balance of US$912.0 million, which increased by US$412.5 million from 2015 to 2016.

Regrettably, we did not achieve our target of zero fatal accidents in 2016. We have put in place a number of safety programmes and best practices at all of our operations and our focus remains on prioritising safety in all of our activities and continuing to strengthen our safety culture.

For 2017, we expect further increases in production with silver reaching the 58-61 million ounces range (including Silverstream) and gold production to be between 870-900 thousand ounces. Capital expenditure is anticipated to be approximately US$800 million and exploration expenses US$160 million, including the capitalised portion. We will continue to focus on delivering further cost reductions and productivity improvements in 2017 as well as improving our safety performance to meet our zero harm target.

Our performance in 2016 again demonstrated the quality of our asset base and our low-cost and flexible operations. I am confident that with our focus on operational delivery, disciplined approach to investment and clear commitment to sustainable business practices, we can continue to optimise our performance and maintain our strong financial position to deliver considerable long-term value for our shareholders.

Twelve months to 31 December 2016

* Fresnillo attributable production, plus ounces registered in production through the Silverstream Contract

** Adjusted Revenue is revenue as disclosed in the income statement adjusted to exclude treatment and refining charges and lead and zinc hedging

*** The weighted average number of shares was 736,893,589 for 2016 and 2015

2016 Highlights

Robust profit margins and strong financial position continue to deliver healthy returns

· Adjusted revenue of US$2,045.0 million, 29.2% increase vs. 2015 on increased volumes and higher metal prices

· Gross profit and EBITDA of US$882.1 million and US$1,032.0 million, up 103.7% and 88.5% respectively

· Profit from continuing operations before net finance costs and income tax of US$676.5 million, up 237.5%

· Devaluation of the Mexican peso vs. US dollar positively affected production costs

· Cost per tonne and cash cost decreased at all mines, due to devaluation of Mexican peso and cost reduction initiatives

· Net cash from operating activities increased by 65.4% to US$898.0 million vs US$542.9 million in 2015

· Capital expenditures of US$434.1 million, 8.6% lower than 2015 and below guidance, mainly due to lower capex at San Julián reflecting the delay in phase II.

· Exploration spend of US$121.2 million, 13.6% lower than 2015

· Free cash flow1 of US$463.9 million (2015: US$68.2 million)

· Maintained financial flexibility, with year-end cash, cash equivalents and short term investments balance of US$912.0 million (2015: US$500.1 million), and debt of US$800 million

· Basic and diluted EPS from continuing operations of US$0.579; adjusted EPS of US$0.453, up 503.1% and 556.5% respectively

· 2016 final dividend of 21.5 cents per share, equivalent to approximately US$158.4 million, recommended by the Board

Focus on continued optimisation of operations

· Record annual silver production (including Silverstream) of 50.3 moz (up 7.1%, in line with guidance; reflecting start-up of San Julián phase I and higher ore grades at Fresnillo and Ciénega

· Gold production of 935.5 koz, exceeded revised guidance; resulting from the reduction of inventories at Herradura, production from San Julián phase I and increased production at Noche Buena

· San Julián phase I commissioned, production already exceeding design capacity by 20%

· Measures taken at Fresnillo to address development delays resulting from maintenance issues by hiring additional skilled contractors and improving operative supervision

· Continued focus on delivery of safety culture

 Disciplined investment and development of extensive growth pipeline

· Juanicipio moving closer to development phase, with first production expected in 1H2019

· Gold and silver resources increased 8.2% and 10.2%, respectively and gold reserves remained stable, silver reserves decreased 3.2%

· 2017 production guidance of 58-61 moz silver (including 4 moz from the Silverstream) and 870-900 koz gold; 2018 production target of 65 moz silver

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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 number: +44 (0) 20 3427 1906 / national free phone: 0800 279 5736

Access Code: 2652035

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

Liz Morley Tel: +44(0)20 3772 2500

Marianna Bowes

Aarti Iyer

Over the course of Fresnillo plc's eight years as a publicly listed company, a number of trends have reshaped the global mining industry and altered the competitive landscape: pressure on profitability arising from commodity price and currency volatility, rising costs, and maturing mines with declining ore grades; lower rates of return on capital projects concurrent with increased shareholder appetite for returns; rising social and environmental awareness; and governmental initiatives to regulate and derive additional revenue from the sector, among others.

Against this backdrop, we have remained firmly committed to creating sustained and shared value for all our stakeholders, focusing on efficient, competitive operations, and high potential silver and gold projects that can be developed into low cost mines able to withstand unpredictable metal prices. We have invested consistently over the cycle, and thus have been able to grow and retain a motivated and qualified team. Our strategic direction, combined with quality assets, operational flexibility and efficiency, solid financial position, and enduring commitment to responsible business practices are the pillars of long-term value creation.

The year in review

Precious metal prices, while still volatile, performed well in 2016 and reversed their downward trend spanning several years. Our average realised gold and silver prices rose 10.7% and 10.3% respectively over 2015. The Group's gold and silver production increased 22.8% and 7.1% respectively, exceeding its gold production target for the year and meeting the target for silver.

Better prices and higher volumes led to robust financial results. Your company generated US$2,045.0 million in adjusted revenues in 2016, a rise of 29.2% over the prior year, with a 505.5% increase in profit attributable to shareholders and US$12.6 million distributed to employees and workers in profit sharing. The cash, cash equivalents and short-term investments at year end were US$912.0 million and debt was US$800 million.

However, we also encountered operational challenges. The Fresnillo mine faced ongoing issues and failed to reach its projected production. While silver grades were slightly higher than in 2015, volumes came under pressure due to a shortage of skilled personnel, leading to insufficient mine development and preparation, as well as narrower veins. Management oversight and mine planning have been strengthened, and we expect gradual and continued improvement over the coming year. Fortunately, a solid performance at Saucito and the initial contribution of San Julián compensated for the shortfall and the Group as a whole met its silver targets for the year.

The first phase of San Julián was commissioned in the year, despite a delay, and is now operating above its nominal capacity, contributing to annual silver and gold production. The second phase is expected to be commissioned in 2Q 2017, also at a delay of several months from the previous target, as the impact of certain external factors had been underestimated, including unforeseen extreme weather, delays in equipment deliveries and difficulties in obtaining permits. We remain confident that San Julián will be a successful new mine and may open up additional growth potential in the district.

The Board approved the resumption of the pyrites project in the Fresnillo District, which will improve overall recoveries of gold and silver contents by processing historical and ongoing tailings from the Fresnillo and Saucito mines, which otherwise would have been lost. Always an attractive project from an IRR perspective, the Board's decision to resume construction was supported by better than expected cash generation in the first half of the year and a healthy balance sheet.

The Board also approved the construction of a second line at the Dynamic Leaching Plant (DLP) at Herradura to increase gold recovery from the Centauro pit, and thus higher production from this mine. We continue to evaluate a major expansion of Herradura based on the most recent exploration results below the open pit. Furthermore, Juanicipio, our joint venture with Mag Silver, will be presented to the Board for approval in 2017.

Exploration results were positive, with an 8.2% and 10.2% increase in total gold and silver resources respectively. Gold reserves remained stable, whilst silver reserves decreased 3.2%. Our resource base remains very sound as we progress towards our 2018 goals.

I deeply regret to report the three fatal accidents that occurred in the year as well as one in early 2017, a major setback for our safety programme. Following investigations, management has taken decisive steps to prevent the type of human errors that are invariably a root cause in these accidents. Safety continues to be our highest priority, above production and profitability, yet we recognise that even with best-in-class systems and practices in place, our safety culture must be further strengthened and deeply embedded within the Company. To that end, the Board's Health, Safety, Environment and Community Relations (HSECR) Committee continued to review the culture and values as part of its work in overseeing the safety culture in 2016.

Dividends

Fresnillo plc's dividend policy takes into account the profitability of the business and underlying earnings, as well as the Group's capital requirements and cash flows. An annual dividend of between 33-50% of profit after tax is paid out each year in the approximate proportion of one-third as an interim dividend and two-thirds as a final dividend. This provides the required flexibility to consider the cyclical behaviour of precious metal prices and other factors that could affect our financial position.

For 2016, the Board declared an interim dividend of 8.6 US cents per share and a final dividend of 21.5 US cents per share, totalling US$158.4 million. We believe the Group remains well placed to meet its current and future financial requirements, including its development and exploration projects.

Our governance agenda

The Board's agenda in 2016 was focused on ensuring continued compliance with the UK Corporate Governance Code, addressing outstanding and emerging issues related to our 2014 External Board Evaluation action plan, Group culture, and the composition of the Board with regards to the number of Independent Non-executive Directors.

My colleagues and I take an active role in setting Group strategy, reviewing progress against plan, and ensuring sufficient flexibility to respond to changing market conditions within the context of our commitment to continuous investment through metal price cycles. As part of the Board's planning process, we seek to ensure that capital allocation balances growth, shareholder returns, financial strength and flexibility, within the context of a maturing sustainability framework centred on good corporate governance, environmental stewardship and constructive community engagement.

Board changes

Charles Jacobs was appointed Senior Independent Director at the AGM in May 2016, and we welcomed Alberto Tiburcio to the Board as an Independent Non-executive Director, serving on the Audit Committee. As Chairman and CEO of Ernst & Young Mexico from 2001 until his retirement in 2013, Mr Tiburcio brings with him extensive experience as statutory auditor and advisor to many prestigious Mexican companies.

I am grateful for the service of the two members who stood down from the Board in 2016: Rafael MacGregor, Non-executive Director, whose role as Chairman of the Health, Safety, Environment and Community Relations Committee has been filled by Arturo Fernández, Non-executive Director; and María Asunción Aramburuzabala, Independent Non-executive Director who also served on the HSECR Committee. Both Directors made significant contributions to the Board and Company during their eight and four years of respective service.

Looking ahead

Despite their recovery during the year, we believe gold and silver prices will remain volatile. Indeed, renewed signs of weakness at year end 2016 due to expectations of rising interest rates in the US point to the uncertainty of any sustained recovery. Furthermore, geopolitical factors such as Brexit, the new administration in the United States, ongoing tensions in the Middle East, and developments in China and India make forecasting unpredictable.

We therefore maintain our disciplined approach to investment: growth projects will continue to be evaluated against a range of metrics, including operational and technical factors, pricing and market considerations, and our financial position.

For 2017, we have increased our year on year capital expenditures and exploration budget, by 71.1% over the 2016 spend, to US$950 million. We believe this level of investment enables us to achieve our 2018 goals while setting the groundwork for the next decade of the Company's development.

Dedicated to meeting our commitments

The goals to which we held ourselves accountable at the time of our IPO in 2008 have changed only insomuch as some targets have already been met, notably our gold production as a result of the acquisition of 44% of Penmont and continued improvements at Herradura.

For the near term, our focus will be on efficiency, cost control and meeting our operational commitments: the turnaround of the Fresnillo mine and the successful start-up of the second phase of San Julián. We will continue to set the bar higher for ourselves in other areas such as safety, governance processes and organisational effectiveness. The latter may be more difficult to quantify, but is as vital to long-term shareholder value creation as our low cost operations, project pipeline, and portfolio of exploration projects that serve as key drivers of future growth.

Our ability to meet these commitments depends chiefly on our people. Together with my fellow Directors, I extend my gratitude for their dedication and hard work.

Alberto Baillères

Non-executive Chairman

I am pleased to report solid performance in 2016, with a rise in production, delivery of the first phase of a key growth project, expansion of our resource base, and a maturing sustainability framework. There were challenges and setbacks, to be sure - three fatalities, which we see as unacceptable, slower than expected turnaround at our flagship Fresnillo mine, and technical issues and construction delays at San Julián - but also remarkable improvements in capacity utilisation, notably at Saucito and Herradura, and cash costs across the organisation. This comes in the context of volatile but improved metal prices that boosted revenues, profits and our cash position.

My enthusiasm for improved market conditions is somewhat tempered by their current unpredictability. In years past, precious metals prices were generally driven upward by supply constraints, geopolitical tensions and investors seeking safe havens. Over the course of 2016, these fundamentals may not have impacted pricing the way we have come to expect, confounding both industry analysts and market experts.

However, at Fresnillo, we have always believed that strategy and execution are the true drivers of value creation. We look to operational excellence, targeted investment, disciplined cash management, and sustainable business practices as the benchmark of success. In that regard, I remain confident that we are on the right path to meeting our commitments to profitability and sustainability across precious metal price cycles. 

To support this, we are undertaking a comprehensive review of the role technology and innovation play in managing the internal variables under our control, and the extent to which our systems and data are secure. I am leading the IT Governance Committee through a digital transformation: everything from personnel management and predictive maintenance, to mine ventilation, simulator training, and reactant consumption. We have implemented a number of new systems already and will continue to monitor their effectiveness in delivering results and driving our competitive advantage, while bolstering our cybersecurity protocols.

Operating performance

We produced a record 50.3 moz of silver in 2016 (including Silverstream), 7.1% over 2015 and within our range of 49-51 moz. This was primarily due to the start-up of San Julián, higher ore grades at Fresnillo and Ciénega and to a lesser extent, higher production from Silverstream.

While we met our silver production targets, I am disappointed that the Fresnillo mine fell short of its turnaround objectives. Our aim was to stabilise the rate of development at 4,500 metres per month in order to maintain throughput at levels that would offset the natural and expected decline in ore grade. However, due to a lack of equipment availability and a shortage of skilled personnel, we were unable to prepare sufficient infrastructure to sustain that rate of development, which put pressure on volumes. The Fresnillo mine produced 15.9 moz silver in 2016, 1.6% higher than in 2015, against our target of a double-digit increase. We have already made improvements but are looking to make additional progress in 2017 to deliver our targets.

Gold production reached a record level, increasing 22.8% over 2015 to 935.5 koz, against our revised guidance of 850-870 koz. This was the result of the reductions of inventories from the leaching pads at Herradura, the start-up of phase I at San Julián and a higher speed of recovery at Noche Buena, which partially offset the expected lower ore grade and ore processed at Ciénega.

By-product lead production increased 13.5% on 2015, to 48,144 tonnes, mainly as a result of higher ore grades at Fresnillo and Ciénega. Similarly, by-product zinc production increased 23.5% to 56,845 tonnes due to higher ore grades and recovery rates at Fresnillo and Ciénega and increased ore throughput and recovery rate at Saucito.

Construction of phase one of the San Julián mine was completed at a slight delay due to the need for the contractor to do some initial rectification. The milling facility and leaching plant were commissioned in the summer, and the plant exceeded design capacity in the final quarter of the year, contributing 2.1 moz to the Group's total silver production and enhancing our productivity metrics. Start-up of the phase two flotation plant has been delayed from year end 2016 to 2Q 2017 due to unusually high rainfall, contractor turnover, and delays in the delivery of certain equipment that affected the pace of construction.

Following Board approval of project resumption, we completed engineering for the new pyrites plant, placed initial equipment orders and began construction. This US$155 million project will increase silver and gold recovery rates by processing tailings, both historical and ongoing, from the Fresnillo and Saucito mines, generating an expected 3.5 moz silver and 13 koz gold per year. The first phase leaching plant is expected to come on line in 1Q 2018, and the tailing flotation facility by year end 2018. 

The Centauro Extension project at Herradura, encompassing a second line to the dynamic leaching plant, has also been approved. Progress in the year included detailed engineering, advancing the foundations of the milling area and placement of orders for various components. The US$110 million project is expected to extend the life of the mine with average gold production of 390 koz per year.

Investment in exploration totalled US$137.9 million, mainly focused on areas of influence at current operating mines and key exploration sites. Good results were achieved at Fresnillo, Saucito, San Julian, Pilarica and Guanajuato.

Resources and reserves reflect the following price assumptions: silver at US$17.50 per oz (2015: US$15.00), gold in underground mines at US$1,250.00 per oz (2015: US$1,150.00), and gold in open pit resources at US$1,400.00 per oz (2015: US$1,300.00). Our high quality asset base remains healthy. Gold and silver resources increased by 8.2% and 10.2% respectively, whilst gold reserves remained unchanged and silver reserves decreased 3.2%.

A commitment to sustainable business practices

Robust sustainability practices not only underpin our licence to operate, they also lower operating risk and ensure alignment with stakeholders. To coincide with our HSECR framework reaching maturity this year, we conducted our first materiality assessment to gauge the effectiveness of our sustainability strategy and the quality of our reporting.

We fell short of our safety targets this year, with three fatal injuries in 2016 and one at the beginning of 2017. We have taken a number of steps to strengthen our safety culture, including the implementation of a new Safety Information System. Our decision to terminate a company contractor this year reflects the prioritisation of safety above all other operational considerations, notwithstanding the shortage of contractors in certain districts as well as the short-term impact on production.

However, we made important advances in other metrics of sustainability in the areas of health, environment and community relations. These include chronic illnesses and water utilisation rates.

Financial results

Our average realised gold and silver prices rose by 10.7% and 10.3%, respectively. As a result, adjusted revenues totalled US$2,045 million, 29.2% above the previous year.

Adjusted production costs2 decreased by 2.5%, mainly explained by the favourable effect of the 17.7% average devaluation of the Mexican peso vs. the US dollar during 2016, lower energy prices and the positive impact of our cost reduction initiatives. These factors more than compensated for the additional production costs arising from the increased ore throughput at Herradura and Saucito. However, cost of sales increased by 1.0% over 2015 mainly due to the decrease in inventories at Herradura following the increased processing capacity achieved with the commissioning of the second Merrill Crowe plant, as well as higher depreciation.

The increase in revenues more than offset the higher cost of sales, resulting in a 103.7% increase in gross profit to US$882.1 million. Gross margin was 46.3% compared to 30.0% in the previous year. The higher gross profit and lower administrative and exploration expenses resulted in an 88.5% increase in EBITDA, with an expansion in the margin from 37.9% in 2015 to 54.2% in 2016.

Profit from continuing operations before income tax increased by 238.2% to US$718.2 million. Income tax expense increased 101.4% to US$259.9 million as a result of higher profits, with an effective tax rate of 36.2% excluding the special mining right (2015: 60.7%), and 40.8% including the effects of the special mining right (2015: 67.3%). Net profit for the period was US$425.0 million, a 512.4% increase over 2015.

The 20.1% devaluation of the Mexican peso against the US dollar as of 31 December resulted in non-cash charges to the income statement and affected the monetary position and value of certain assets and liabilities, resulting in a higher deferred tax charge.

Cash flow generated by operations, before changes in working capital, increased by 90.5% to US$1,023.3 million as a result of higher profits. Capital expenditure totalled US$434.1 million, a decrease of 8.6% over 2015; key investments in the year included construction at the San Julián project, stripping activities and the construction of the leaching pads at Herradura, and development at Fresnillo, Ciénega and Saucito. Other uses of funds in the year were income tax and profit sharing paid of US$114.8 million and dividends paid of US$88.2 million. We closed the year net cash flow positive.

The Group maintained a strong balance sheet. Cash, cash equivalents and short-term investments totalled US$912.0 million, an 82.3% increase over 2015; debt remained at US$800.0 million as at 31 December 2016.

A detailed review of our performance is set out in the Financial Review.

Outlook 2017

By design, our mines are set to yield returns across the price cycle, with all-in sustaining costs that are amongst the lowest in the industry, giving us financial and operating flexibility in a range of market conditions. We aim to produce 58- 61 moz of silver, including 4 moz from the Silverstream, and 870 - 900 koz of gold in 2017, reflecting no further production benefit from the reduction of inventories at Herradura.

Given the uncertainty of forecasting precious metals prices in the current environment, we continue to take a cautious approach and investment decisions will be evaluated on a project-by-project basis against key criteria; US$800 million has been budgeted for capital expenditures in 2017, to be allocated primarily to San Julián, the pyrites plant, the second line of the DLP, and, pending approval, initial construction at Juanicipio, as well as sustaining capex at current operations including the Fresnillo expansion. A further US$160 million has been budgeted for exploration, including capitalised expenses.

The Centauro Deep and Ciénega expansion projects are still under exploration prior to Board evaluation, while every effort will be made to improve and enhance project metrics for longer-term growth prospects such as Orisyvo.

Our 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. Our high quality, low cost assets, extensive growth pipeline and balance sheet strength leave us well placed to deliver on our 2018 production and reserves targets. More immediately, we are focused on meeting our commitments to improve and optimise performance at the Fresnillo mine, commission the second phase of San Julián on time and on budget, and strengthen our safety performance.

I am grateful for the continued confidence placed in us by our people, communities, suppliers, clients and shareholders, and look forward to another year together.

Octavio Alvídrez

Chief Executive Officer

Key commitments for 2017

· Strengthen our safety performance with zero tolerance for non-compliance, and increased investment and support for training and oversight.

· Improve and optimise performance at the Fresnillo mine by developing infrastructure at the lower levels sufficient to increase the development rate to 4,800 metres per month by year end; commence work on plant optimisation; continue the deepening of the San Carlos shaft and expansion of the tailings dam.

Commission the second phase of San Julián on time and on budget in 2Q 2017, including installing vibrating screens at the leaching plant to achieve an average of 4,000 tpd milling capacity. Furthermore, we will deploy efficiency teams to reduce costs, with a focus on drilling methods, and identify additional long-term sources of water for industrial use.

____________[2]Adjusted production costs is calculated as total production costs less depreciation, profit sharing and the effects of exchange rate hedging.

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 2016 figures compared to 2015, unless otherwise noted. The financial information and year-on-year variations are presented in US dollars, except where indicated.

Commentary on financial performance

The Company achieved strong financial results with growth of 104.2% in gross profit, 88.5% in EBITDA, and 580.8% in attributable profit for the year, excluding the effect of the Silverstream revaluation. Furthermore, cash generation from our operations more than offset the investment in capex and the payment of dividends, resulting in the Company generating net cash of US$412.5 million for the period, with a cash and short term investment balance of US$912.0 million as of 31 December 2016. This strong financial position both reflects and extends our ability to continue generating value for our stakeholders.

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 736,893,589 for 2016 and 2015. See Note 19 in the Consolidated Financial Statements.

The Group's financial performance is largely determined by the operational performance of our assets and the ability of our management and personnel to achieve our strategic goals. This year in particular, metal prices and the devaluation of the Mexican peso, which lie beyond our control, have had a favourable effect on our financial results. These include:

Precious metal prices

In 2016, the average realised gold price increased 10.7%, to US$1,246.5 per ounce and the average realised silver price increased 10.3% to $17.2 per ounce. Furthermore, the average realised lead and zinc prices increased 7.0% and 20.0% year on year, to US$85.1 and US$100.5 cents per pound, respectively.

As in previous years, the Company has structured certain hedge positions for lead and zinc to mitigate the risk of metal price volatilities.

MXN/USD exchange rate

The average spot Mexican peso/US dollar exchange rate devalued by 17.7%, from $15.85 per US dollar in 2015 to $18.66 per US dollar in 2016. This resulted in a favourable effect estimated at US$45.2 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 2016 was $20.66 per US dollar, compared to $17.21 per US dollar at the beginning of the year. The 20.1% devaluation had an adverse effect on: i) monetary assets transacted in Mexican pesos; and ii) taxes and mining rights as the devaluation resulted in an increase in related deferred tax liabilities.

Cost deflation

In 2016, there was a net decrease in the weighted average input cost over the year, of 8.1%. This deflation reflected, amongst other factors, the favourable effect of the 17.7% average devaluation of the Mexican peso against the US dollar.

Labour

Employees received on average a 5.0% increase in wages in Mexican pesos, and administrative employees at the mines received a 4.5% increase; when converted to US dollars, the weighted average labour deflation was 11.1%.

Energy

Electricity

The weighted average cost of electricity decreased by 16.6% from US$7.1 cents per kW in 2015 to US$5.9 cent per kW in 2016. 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 2016, the decrease in electricity rates by CFE was mainly explained by the positive effect of the devaluation of the Mexican peso/US dollar exchange rate, and to a lesser extent, the lower average generating cost following a decrease in fuel prices.

Diesel

The weighted average cost of diesel in US dollars decreased 15.6% to US$62.6 cents per litre in 2016, compared to US$74.2 cents per litre in 2015. Diesel prices in 2016 were controlled by Petróleos Mexicanos (PEMEX), the national oil company. Complete price liberalisation of fuels is expected in 2018.

Operating materials

For the third consecutive year, unit prices of the majority of key operating materials decreased, resulting in a net weighted average decrease of 6.5%. This reflects the combined effect of price deflation and the weighting of each component in the total cost of operating materials. There has been no significant impact on the unit cost of operating materials from the devaluation of the MXN/US dollar exchange rate as the majority of these items are dollar denominated.

Contractors

Agreements are signed individually with each contractor company, and include specific terms and conditions that cover not only labour, but also operating materials, equipment and maintenance, amongst others. Contractor costs are mainly denominated in Mexican pesos and are an important component of the Company's total production costs. In 2016, increases granted to contractors, whose agreements were due for review during the period, ranged from 2.2% to 20.0% in Mexican pesos (equivalent to -13.2% to 2.0% in dollar terms), resulting in a weighted average decrease of 4.0% in US dollars.

Maintenance

Unit prices of spare parts for maintenance decreased 6.0% on average in US dollar terms.

Others

Other cost components include freight and insurance premiums, which decreased by an estimated 11.6% and 7.7% respectively on a per unit basis. The remaining components had an average deflation of 7.0% over 2015.

Treatment and refining charges

Treatment and refining charges3 are reviewed annually using international benchmarks. Treatment charges per tonne of lead and zinc concentrate decreased in dollar terms by 11.5% and 8.7%, respectively, whilst silver refining charges decreased 4.3% year on year. However, this was mostly offset by the increase in volumes of zinc concentrates with high silver contents shipped from Fresnillo and Saucito to Met-Mex. As a result, treatment and refining charges set out in the income statement decreased by only 1.2% over 2015.

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.

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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$1,905.5 million increased by 31.9% over 2015. This was mainly explained by the 29.2% increase in adjusted revenue as a result of the increase in sales volumes and higher metal prices.

In 2015, we entered into derivative contracts (which extended into 2016) to hedge part of our lead and zinc by-product production through collar structures, resulting in a US$1.5 million gain recorded in this year's income statement. The chart below illustrates the total expired hedging structures for 2016; as of December 31st there were no outstanding positions.

In addition, during the second half of 2014, we initiated a one-off hedging programme to protect the value of the investment made on the Penmont acquisition. The hedging programme was executed for a total volume of 1,559,689 oz of gold with monthly maturities until December 2019, the effects of which are recorded as finance income and a small portion in revenue.

The table below illustrates the expired structures and the outstanding hedged position as of December 31st 2016.

Fresnillo plc's hedging policy for metal prices 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 reduction of gold inventories in the leaching pads at Herradura, and to a lesser extent, the start-up of San Julián, resulted in a positive impact on revenues of US$292.4 million, which represented 63.3% of the US461.7 million increase in adjusted revenues. The remaining 36.7%, or US$169.3 million, was explained by the benefit of higher metal prices.

The contribution of gold to adjusted revenues increased from 52% in 2015 to 55% in 2016, while the contribution of silver decreased from 39% to 35%. This resulted from the combination of: i) the increase in volume of gold sold (+36.9%) which was higher than that of silver (+17.3%); and ii) the 10.7% increase in the average price of gold, whilst the average silver price rose 10.3%.

Adjusted revenues1 by metal (US$ millions)

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

· Herradura was the main contributor to adjusted revenues, reflecting the decrease in gold inventories in the leaching pads which was made possible due to the commissioning of the second Merrill Crowe Plant at the dynamic leaching plant (DLP) in the last quarter of 2015, eliminating the bottleneck in processing solution coming from the leaching pads and the DLP.

· Saucito was the second contributor, although its contribution declined from 30% in 2015 to 26% in 2016, notwithstanding a 12.7% increase in adjusted revenues.

· Similarly, Fresnillo contributed a lesser share of adjusted revenues, but remained as the third most important contributor to the Group's adjusted revenues.

· Ciénega slightly decreased its contribution; whilst phase I of San Julián contributed for the first time.

Adjusted revenues by metal

Adjusted revenues by mine

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 remained fairly stable at US$1,023.4 million. The US$12.1 million increase is explained by the following combination of factors:

· A decrease in adjusted production costs (-US$15.6 million): This was mainly driven by: i) the favourable effect of the 17.7% devaluation of the Mexican peso/US dollar exchange rate when converting peso-denominated costs to US dollars (-US$45.2 million); ii) the efficiencies achieved at Fresnillo, Saucito and Ciénega resulting from some optimisation projects and cost reduction initiatives (-US$8.6 million); iii) lower energy costs, excluding foreign exchange effects, reflecting lower unit prices of electricity and diesel (-US$6.4 million); iv) lower cost of operating materials (-US$6.0 million); and v) lower maintenance costs (-US$4.0 million). These positive effects were partially offset by: i) additional production costs related to the start-up of San Julián phase I (US$20.4 million); ii) additional production costs related to increased ore throughput at Herradura and Saucito (US$24.6 million); iii) higher contractor costs as a result of a greater number of contractors used to carry out development, mainly at Saucito, and an increase in the unit fees charged by contractors in Mexican pesos (US$4.8 million); iv) an increase in the unit cost of personnel (excluding foreign exchange effects) and other items in pesos (US$4.8).

· Mexican peso/US dollar hedging (-US$25.8 million): During 2015 the Group entered into a combination of put and call options structured at zero cost (collars) which extended into 2016. The volume that expired during 2016 had been put in place to hedge US$198 million of costs denominated in Mexican pesos with average floor and cap exchange rates of $14.91 and $18.26 per US dollar respectively, resulting in a US$2.77 million loss recorded in the income statement; as of December 31st 2016, there were no outstanding positions.

· Reversal of inventories write-down, profit sharing and others (-US$15.8 million): The change is principally explained by the reversal of the provision recorded in December 2015 related to the forward price of gold falling below the inventory carrying cost at Soledad-Dipolos. This trend was reversed in 2016.

These positive effects were more than offset by increases in:

· Variation in change in work in progress (+US$53.9 million). This was mainly explained by the decrease in inventories at the leaching pads at Herradura.

· Depreciation (+US$15.3 million): The increase was explained by the larger asset base following the completion of San Julián phase I, and the increased depletion factor at Herradura.

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$2.09/oz (2016) vs. US$5.60/oz (2015), (-62.6%)

The decrease in cash cost per ounce is mainly explained by the higher by-product credits per silver ounce due to the increase in gold, lead and zinc volumes sold at higher prices (-US$2.88/oz); lower cost per tonne (-US$0.66/oz) ; increase in ore grade (-US$0.07/oz); and others (-US$0.01/oz). This was partly offset by higher treatment and refining charges per silver ounce due to: higher zinc and lead ore grades which increased the volume of concentrates, and an increase in the participation of zinc concentrate which has a higher per unit treatment charge (+US$0.12/oz).

Saucito: -US$0.39/oz (2016) vs. US$1.15/oz (2015), (-133.9%)

The decrease was driven by the higher by-product credits per ounce of silver resulting from increased gold, lead and zinc volumes sold at higher prices (-US$0.1.21/oz); lower cost per tonne (-US$0.63/oz); and lower treatment and refining charges (-US$0.23/oz). These positive effects were partly offset by the expected lower silver grade (+US$0.52/oz); and others (+US$0.01/oz).

Ciénega: -US$217.19/oz (2016) vs. US$245.49/oz (2015), (-188.5%)

The decrease in cash cost was primarily explained by higher by-product credits per ounce of gold due to the increased volumes of silver, lead and zinc sold at higher prices (-US$457.22/oz); and the decrease in cost per tonne (-US$141.54/oz). These favourable factors were partly offset by the expected decrease in gold grade (+US$98.31/oz); higher treatment and refining charges resulting from lower gold ore grade which requires producing more concentrate per ounce of gold, and higher lead and zinc ore grades which increase the volume of concentrates (+US$33.89/oz); and others (+US$3.88/oz).

Herradura: US$470.72/oz (2016) vs. US$472.53/oz (2015), (-0.4%)

The decrease in cash cost resulted from the lower cost per tonne (-US$47.68/oz); higher by-product credits per gold ounce due to the increased volume of silver sold at a higher price (-US$1.09/oz); and lower treatment and refining charges (-US$0.05/oz). These favourable effects were offset by: i) the expected lower gold grade (-US$30.29/oz); ii) 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$16.47/oz); and others (+US$0.24/oz).

Noche Buena: US$765.90/oz (2016) vs. US$972.74/oz (2015), (-21.3%)

The decrease in cash cost per ounce was mainly explained by: i) the higher gold grade (-US$123.96/oz); ii) the lower cost per tonne (-US$46.03/oz); and iii) the others (-US$36.85/oz).

San Julián (phase I): commenced operations in August 2016, thus there are no comparable year-on-year figures.

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 not only current production costs, but also sustaining costs as it includes mine development costs incurred to prepare the mine for future production, as well as sustaining capex.

All-in sustaining cost

Fresnillo: Lower, mainly due to the lower administrative expenses and a decrease in capitalised development and mining works reflecting the temporary decrease in development rates; and the lower cash cost detailed above.

Saucito: Lower, as a result of the decrease in capex in 2016 compared to capex invested in expansion and efficiency projects in 2015; and the lower cash cost detailed above.

Ciénega: Lower, primarily explained by the lower cash cost detailed above.

Herradura: Lower, mainly due to the decrease in capitalised stripping costs; and to a lesser extent, the lower cash cost detailed above. 

Noche Buena: Lower, driven by the lower cash cost detailed above.

San Julián (phase I): commenced operations in August 2016, thus there are no comparable year-on-year figures.

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, totalled US$882.1 million in 2016.

The US$449.0 million increase in gross profit was mainly explained by: i) the favourable effect of higher metal prices (+US$167.5 million); ii) the positive impact of increased gold production at Herradura (+US$128.9 million); iii) the start-up of San Julián phase I (+US$45.8 million); iv) the 17.7% devaluation of the Mexican peso/US dollar (+US$45.2 million); v) higher ore grade at the Fresnillo mine (+US$29.0 million); vi) higher production at Noche Buena (+US$23.4 million); vii) the reversal of the write down of inventories at Soledad-Dipolos (+US$10.7 million); viii) the positive effect of lower hedging losses and other effects (+US$24.1 million); and ix) efficiencies achieved at some of our mines through optimisation projects and cost reduction initiatives (+US$8.6 million).

The above factors were partially offset by the lower ore grades at Herradura (-US$18.9 million) and the higher depreciation (-US$15.3 million).

Herradura became the largest contributor to the Group´s consolidated gross profit. Gross profit at Saucito increased by 35.6% to US$269.4 million, although its share of the Group's consolidated gross profit declined to 31.1% in 2016. Gross profit at the Fresnillo mine rose to US$158.6 million in 2016, while the mine's contribution to the Group's total gross profit slightly increased to 18.3%. Noche Buena generated a gross profit of US$54.1 million, and contributed 6.2% to the Group's consolidated gross profit. Ciénega's share of the Group's total gross profit increased to 5.6%, whilst San Julián contributed for the first time with 3.0%.

Administrative expenses

Administrative expenses decreased 10.7% from US$62.8 million to US$56.1 million due mainly to a decrease in non-recurring engineering and construction services provided by Servicios Industriales Peñoles, S.A.B. de C.V., lower cost of services provided by third parties, and the positive effect of the devaluation of the Mexican peso against the US dollar in administrative expenses denominated in pesos.

Exploration expenses

Exploration expenses decreased by 13.6% to US$121.2 million in 2016, reflecting management's decision to reduce the expenditure in volatile market conditions. Nonetheless, the resource base was expanded. An additional US$16.7 million was capitalised in association with mining works at Juanicipio and minor equipment acquired at the Centauro Deep, Orisyvo and Guanajuato projects. As a result, total investment in exploration was US$137.9 million in 2016, a decrease of 8.9% over 2015. In 2017, total invested in exploration is expected to be approximately US$160 million, of which US$8 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 2016, EBITDA increased 88.5% mainly due to the higher gross profit, the higher depreciation which is added back and the lower exploration and administrative expenses. EBITDA margin expressed as a percentage of revenues increased accordingly, from 37.9% in 2015 to 54.2% in 2016.

Other income and expenses

Other expenses decreased by 43.4% to US$9.0 million in 2016. This included disposals of fixed assets, remediation works and costs incurred in the maintenance of closed mines. This positively compares to the US$15.9 million recorded in the 2015 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$85.8 million non-cash gain mainly as a result of the increase in resources at Sabinas and the higher forward price of silver, which were partly mitigated by the higher discount rate used. In addition, a US$47.7 million non-cash gain was generated by: i) the unwinding of the discounted values; and ii) the difference between payments (volume and price) actually received and accrued in 2016 and payments estimated in the valuation model as at 31 December 2015. The total effect recorded in the 2016 income statement was US$133.5 million, which favourably compares to the US$27.7 million registered in 2015.

Since the IPO, cumulative cash received has been US$559.6 million, while total non-cash revaluation gains of US$683.8 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 silver price cyclicality or changes in the variables considered in valuing this contract. Further information related to the Silverstream contract is provided in the Balance Sheet section below and in notes 15 and 31 to the Consolidated Financial Statements.

Finance costs and income

Finance costs in 2016 decreased mainly due to the decline in accrued interest payable on the US$800 million principal amount of 5.500% Senior Notes, from US$36.0 million to US$29.0 million.

In 2014 we entered into gold derivative contracts to protect the value of the Penmont acquisition. As at 31 December 2016, outstanding collar derivative instruments mature over the period of January 2017 to December 2019 and hedge gold production of 1.04 million ounces with a floor price of US$1,100 per ounce and capped weighted average price of US$1,423.76 per ounce. In 2016, we recognised changes in the time value of the outstanding hedge position, resulting in a US$41.1 million non-cash loss recorded in the income statement.

Foreign exchange

A foreign exchange loss of US$18.4 million was recorded in 2016 as a result of the 20.1% devaluation of the spot MXN/USD exchange rate at 31 December. This loss positively compares to the US$36.2 million loss recognised in 2015.

The Group also enters into certain exchange rate derivative instruments as part of a programme to manage its exposure to foreign exchange risk associated with the purchase of equipment denominated in Euro (EUR), Swedish krona (SEK) and Canadian dollar (CAD). At the end of the year, the total EUR, SEK and CAD outstanding net forward position was EUR 9.35 million, CAD 0.0 and SEK 7.09 million with maturity dates from March through September 2017. Volumes that expired during 2016 were EUR 2.31 million with a weighted average strike of 1.1250 USD/EUR, CAD 3.86 million with a weighted average strike of 1.2629 CAD/USD and SEK 14.46 million with a weighted average strike of 8.41 SEK/USD, which has generated a result of US$46,627, -US$206,810 and -USS18,970 recorded in the income statement respectively.

Taxation

Corporate income tax expense of US$259.9 million increased 101.5% over 2015 which resulted mainly from the increase in profit generated in 2016. The effective tax rate, excluding the special mining rights, was 36.2% which was above the statutory corporate tax rate of 30%. 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). Furthermore, US$33.4 million related to the special mining rights was registered in the income statement in 2016. Including the effect of mining rights, the effective tax rate was 40.8%. 

Profit for the year

Profit for the year increased from US$69.4 million to US$425.0 million, whilst profit attributable to equity shareholders of the Group increased to US$427.0 million, up from US$70.5 million in 2015.

Excluding the effects of the Silverstream Contract, profit for the year increased from US$50.0 million to US$331.5 million. Similarly, profit attributable to equity shareholders of the Group, excluding the Silverstream effects, increased to US$333.5 million, up from 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 2016 totalled US$712.0 million and short-term investment held in fixed-term bank deposits amounted US$200.0 million. In 2015, cash and cash equivalents at 31 December 2015 accounted for US$381.4 million and short-term investments amounted to US$118.7 million.

Cash generated by operations before changes in working capital increased by 90.5% to US$1,023.3 million, mainly as a result of the higher profits generated in the year. Working capital increased US$10.6 million mainly due to an increase in trade and other receivables resulting from the higher volumes sold at higher metal prices (US$39.5 million). This increase in working capital was partly offset by: i) a decrease in inventories (US$23.7 million); ii) a decrease in prepayments and other assets (US$0.1 million); and iii) an increase in trade and other payables (US$5.1 million).

Taxes and employee profit sharing paid increased 150.9% over 2015 to US$114.8 million.

As a result of the above factors, net cash from operating activities increased significantly, from US$542.9 million in 2015 to US$898.0 million in 2016.

Other sources of cash were the proceeds of the Silverstream Contract of US$47.6 million and capital contributions from minority shareholders in subsidiaries of US$7.4 million.

The above funds were mainly used to purchase property, plant and equipment for a total of US$434.1 million, an 8.6% decrease over 2015. This was below the guidance of US$600 million mainly as a result of the delay in commissioning San Julián phase II. Capital expenditures for 2016 are further described below:

Purchase of property, plant and equipment

Dividends paid to shareholders of the Group in 2016 totalled US$88.2 million, a 135.1% increase from 2015, in line with our dividend policy that includes a consideration of profits generated in the period. The 2016 payment included: i) the final 2015 dividend of US$24.8 million; and ii) the 2016 interim dividend paid in September of US$63.4 million.

Net interest of US$21.1 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 an increase in net cash of US$412.5 million (net increase in cash and cash equivalents), which combined with the US$500.1 million balance at the beginning of the year and the US$0.6 million unfavourable effect of the exchange rate resulted in cash, cash equivalents and short-term investments of US$912.0 million at the end of 2016.

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$912.0 million as explained above.

Inventories decreased 7.9% to US$276.9 million mainly as a result of the decreased inventories of gold deposited on the leaching pads at Herradura.

Trade and other receivables of US$286.7 million decreased 6.2% as a result of the decrease in income tax recoverable, partly offset by higher metal volumes sold at higher prices which increased receivables.

The change in the value of the Silverstream derivative from US$384.8 million at the beginning of the year to US$467.5 million as of 31 December 2016 reflects proceeds of US$50.7 million corresponding to 2016, (US$44.8 million in cash and US$5.9 million in receivables) and the Silverstream revaluation effect in the income statement of US$133.5 million.

The net book value of property, plant and equipment was US$2,180.2 million at year end, representing a 1.9% increase over 2015. The US$41.6 million increase was mainly explained by the capitalised development works; construction of San Julián; purchase of additional in-mine equipment; and construction of leaching pads at Herradura.

The Group's total equity was US$2,716.4 million as of 31 December 2016, a 14.4% increase over 2015. This was mainly explained by the increase in retained earnings, reflecting the 2015 profit, less dividends paid during the year, and the net unrealised gains on cash flow hedges.

Dividends

Based on the Group's 2016 performance, the Directors have recommended a final dividend of 21.5 US cents per Ordinary Share, which will be paid on 26 May 2017 to shareholders on the register on 28 April 2017. 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 8.6 US cents per share totalling U$63.4 million.

The Company's approach to managing the risk inherent in our business activities is to ensure that our framework is able to identify, assess, prioritise and manage the most likely risks to have the greatest impact on the value creation objectives defined in our business model.

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 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 our established risk management activities, our priority for 2016 was to promote a "monitoring environment" which consists of validating the effectiveness of our current controls in order to support the Board in their responsibilities of monitoring and reviewing risk management and the internal control systems. For this task, over the course of 2016, operations managers, the controllership group, HSECR managers and exploration managers have all been engaged in strengthening their understanding of internal controls monitoring requirements.

2016 risk assessment

Our 2016 risk assessment exercise took place across all our operations, advanced projects, exploration offices, and support and corporate areas, which identified and evaluated 107 risks, including three new risks added over the course of the year that reflect specific circumstances related to certain projects (2015: 104 risks). This universe was narrowed down into major risks monitored by Executive Management and the Audit Committee, and then further consolidated into 11 principal risks closely monitored by the Board of Directors.

For the bottom-up process, business unit heads determined the perceived level of risk for their individual unit. Executive Management then reviewed and challenged each perceived risk level, and compared it to Fresnillo plc's risk universe as a whole. The results of this exercise were used as an additional input for the identification of the Group's principal risks. The same risk analysis was conducted on advanced projects, detailing the specific risks faced by each project according to their unique characteristics and conditions.

A number of developments have adversely impacted the entire Mexican mining industry in recent years as reflected in the Investment Attractiveness Index4 that assesses how mineral endowments and public policy factors, such as taxation and regulatory uncertainty, affect exploration and mining investment. Specific examples that have impacted the industry in Mexico include: weak rule of law in disbanding illegal blockades to mining assets; legal uncertainty regarding certain land tenure issues; instances of community opposition to mining resulting in the cancellation of major projects; aggressive and unfavourable tax requirements that disadvantage Mexico relative to other mining countries; and the adverse security environment still facing a number of regions in the country.

Based on the aforementioned circumstances, we assessed that the risk rating levels for potential actions by the government (e.g. taxes), security, and public perception against mining have increased for 2017. In addition, while the Board has always given the highest priority to safety issues, three fatal accidents occurred in 2016; thus we also elevated the risk rating level for safety to reflect this troubling reversal of our safety record. 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 Union, 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 (encompassed within the 'Overview', 'Strategic report', 'Performance' and 'Governance' sections) includes a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Charles Jacobs

Senior Independent Director

27 February 2017

These financial statements were approved by the Board of Directors on 27 February 2017 and signed on its behalf by:

Mr Arturo Fernandez

Non-executive Director

27 February 2017

1 Total interest paid during the year ended 31 December 2016 less amounts capitalised totalling US$18.2 million (31 December 2015: US$11.1 million) which were included within the caption Purchase of property, plant and equipment.

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. The registered address of Peñoles is Calzada Legaria 549, Mexico City 11250. Copies of Peñoles' accounts can be obtained from www.penoles.com.mx. Further information on related party balances and transactions with Peñoles' group companies is disclosed in note 27.

The 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.

The consolidated financial statements of the Group for the year ended 31 December 2016 were authorised for issue by the Board of Directors of Fresnillo plc on 27 February 2017.

The auditor's report on those financial statements was unqualified and did not contain a statement under section 498 of the Companies Act 2006.

The audited financial statements will be delivered to the Registrar of Companies 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.

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 2016 and 2015, 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 assets 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 2016 and 2015, 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 2015. During 2016, there were no amendments to existing accounting policies.

As at 31 December 2015, derivatives relating to the gold hedging programme initiated in 2014 that mature after one year had been presented as current assets. During 2016, the Group restated the prior year comparatives and reclassified these derivatives to non-current assets. The reclassification resulted in an increase in non-current assets and a corresponding reduction in current assets by US$97.5 million as at 31 December 2015, with no impact on previously reported profit, other comprehensive income, liabilities, equity, cash flow or earnings per share. In addition, there is no tax effect and no impact on segmental disclosures.

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

The Group has adopted "IAS 1 Disclosure Initiative - Amendments to IAS 1". The amendments clarify existing requirements on materiality, aggregation and disaggregation in the preparation of financial statements and presentation of the notes. This amendment had no impact in the financial information of the Group.

Other than the above mentioned amendment there were no significant new standards that the Group was required to adopt effective from 1 January 2016.

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, as applicable to the Group's financial statements, when they become effective, except where indicated.

IFRS 9 Financial Instruments: In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which concludes all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. The Group plans to adopt IFRS 9 Financial instruments from the mandatory effective date. The Group has completed a preliminary assessment of the expected major impacts of this standard, the most relevant are set out below.

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. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Early adoption is permitted.  IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. The Group plans to adopt IFRS 15 Revenue from Contracts with Customers from the mandatory effective date. The Group has completed a preliminary assessment of the expected major impacts of this standard, the most relevant are set out below.

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 and 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 adopt IFRS 15. The Group is currently assessing the impact of IFRS 16 and is considering early adoption in 2018 to align with the adoption of IFRS 9 and IFRS 15.

Amendments to IAS 7 Disclosure Initiative

The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The amendments do not prescribe a specific format to disclose financing activities; however, an entity may fulfil the disclosure objective by providing reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities.

The amendments apply prospectively for annual periods beginning on or after 1 January 2017 with earlier application permitted. Entities are not required to present comparative information for earlier periods. 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.

IFRIC 22 Foreign currency transactions and advance consideration

IFRIC 22 provides requirements about which exchange rate to use in reporting foreign currency transactions when payment is made or received in advance. The interpretation requires the company to determine a "date of transaction" for the purposes of selecting an exchange rate to use on initial recognition of the related asset, expense or income. In case there are multiple payments or receipts in advance, the entity should determine a date of the transaction for each flow of advance consideration. IFRIC 22 is applicable for annual periods beginning on or after 1 January 2018 and earlier adoption is permitted. The interpretation is not expected to have any impact in the financial information of the Group.

The IASB has 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 currency (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 the status of projects (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.

Once the Group has identified production stripping for a surface mining operation, judgment is required in identifying the separate components of the ore bodies for that operation, to which stripping costs should be allocated. Generally a component is a specific volume of the ore body that is made more accessible by the stripping activity. In identifying components of the ore body, the Group works closely with the mining operations personnel to analyse each of the mine plans. 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. The Group reassesses the components of ore bodies annually in line with the preparation of mine plans. In the current year, this reassessment did not give rise to any changes in the identification of components.

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 attributable to the acquisition, construction or production of a qualifying asset. Therefore, Management determines whether borrowings are 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 26)

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

As additional geological information is produced during the operation of a mine, the economic assumptions used and the estimates of ore reserves and mineral resources may change. Such changes may impact the Group's reported balance sheet and income statement including:

· The carrying value of property, plant and equipment and mining properties may be affected due to changes in estimated future cash flows, which 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;

· Stripping costs capitalised in the statement of financial position, either as part of mine properties or inventory, or charged to profit or loss may change due to changes in stripping ratios;

· 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 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 12:

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. Depreciation/amortisation charge is proportional to the depletion of the estimated remaining life of mine of production. Estimated useful lives of other assets are 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 expectations of the use of the asset by the Group, including with reference to present assessments of economically recoverable reserves of the mine property at which the asset is used.

Silverstream, note 14:

The valuation of the Silverstream contract as a derivative financial instrument requires significant estimation by management. The term of the derivative is based on Sabinas life of mine which is currently 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 30. The impact of changes in silver price assumptions, foreign exchange, inflation and the discount rate is included in note 31.

Assessment of recoverability of property plant and equipment 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 associated 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 21:

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 10:

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 non-financial assets are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. At each reporting date, an assessment is made to determine whether there are any 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 of disposal. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Fair value is based on an estimate of the amount that the Group may obtain in an orderly sale transaction between market participants. For an asset that does not generate cash inflows largely independently of those from other assets, or groups of assets, the recoverable amount is determined for the cash generating unit to which the asset belongs. The Group's cash generating units are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Reversal of impairment

An assessment is made each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the Group makes an estimate of the recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in estimates used to determine the asset's recoverable amount since the impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to the recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised in previous years. Such impairment loss reversal is recognised in the income statement.

(g) Financial assets and liabilities

Financial assets 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 20.

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 external actuarial firm as at each year-end balance sheet date. The discount rate is the yield on bonds that have maturity dates approximating the terms of the Group's obligations and that are denominated in the same currency in which the benefits are expected to be paid. Actuarial gains or losses are recognised in OCI and permanently excluded from profit or loss.

Past service costs are recognised 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 external actuarial firm as at each year-end balance sheet date. Actuarial gains or losses are recognised as income or expense in the period in which they occur.

Other

Benefits for death and disability are covered through insurance policies.

Termination payments for involuntary retirement (dismissals) are charged to the income statement, when incurred.

(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.

The Group also recognises in selling expenses a discovery premium royalty equivalent to 1% of the value of the mineral extracted and sold during the year from certain mining titles granted by the Mexican Geological Survey (SGM) in the San Julian mine. The premium is settled to SGM on a quarterly basis.

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 10).

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 30 and 31.

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 30.

(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 2016, the Group has six reportable operating segments1 as follows:

The Fresnillo mine, located in the state of Zacatecas, an underground silver mine;

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

The Ciénega mine, located in the state of Durango, an underground gold mine; 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.

1 Due to its size in the current year, the operations at San Julián located on the border between the states of Chihuahua and Durango, are reported within Other segments.

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 2016 and 2015, 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 2016 and 2015, respectively:

1 Total third party revenues include treatment and refining charges amounting US$141.1 million.

2 Segment profit excluding foreign exchange hedging losses, depreciation and amortisation and employee profit sharing.

3 Capital expenditure represents the cash outflow in respect of additions to property, plant and equipment, including mine development, construction of leaching pads, purchase of mine equipment and capitalised stripping activity, excluding additions relating to changes in the mine closure provision. Significant additions include the construction of second beneficiation plant (Merrill Crowe) at Herradura and the expansion of the flotation plant and the construction of the pyrites plant at Saucito.

4 During 2016, this segment did not operate due to the Bajio conflict (note 26). Segment profit is derived from the changes in the net realisable value allowance against inventory (note 15).

5 Other includes San Julián, the Juanicipio project and inter-segment leasing services provided by Minera Bermejal, S.A. de C.V.

1 Total third party revenues include treatment and refining charges amounting US$142.8 million.

2 Segment profit excluding foreign exchange hedging losses, depreciation and amortisation and employee profit sharing.

3 Capital expenditure represents the cash outflow in respect of additions to property, plant and equipment-including mine development, construction of leaching pads, purchase of mine equipment and stripping activity asset-excluding additions relating to changes in the mine closure provision. Significant additions include construction of finalisation of the dynamic leaching plant and purchase of land at Herradura, construction of employees' facilities at Ciénega, expansion of the flotation plant at Saucito and the purchase of land at Noche Buena.

4 During 2015 this segment did not operate due to the Bajio conflict (note 26).

5 Other includes San Julián, the Juanicipio project and inter-segment leasing services provided by Minera Bermejal, S.A. de C.V. The operations of San Julián have been reclassified from the Fresnillo segment to Other to align to the presentation in the current year. 

4. Revenues

Revenues reflect the sale of goods, being concentrates doré, slag, and precipitates of which the primary contents are silver, gold, lead and zinc.

(a) Revenues by product sold

Substantially all lead concentrates, precipitates, doré and slag, were sold to Peñoles' metallurgical complex, Met-Mex, for smelting and refining.

(b) Value of metal content in products sold

For products other than refined silver and gold, invoiced revenues are derived from the value of metal content adjusted by treatment and refining charges incurred by the metallurgical complex of the customer. The value of the metal content of the products sold, before treatment and refining charges is as follows: