Fresnillo Regulatory News (FRES)

Fresnillo plc

Fresnillo plc today announced its financial results for the full year ended 31 December 2018. Octavio Alvídrez, CEO said:

"Since we listed on the London Stock Exchange in 2008, we have successfully built a track record of creating value through growth and returns. We have remained committed to our stated strategy, investing in our business, growing production and delivering returns to our shareholders in what has been a volatile time for the wider mining sector.

2018 was however a more challenging year for Fresnillo.

We achieved record annual silver production of 61.8 moz and a very strong gold performance of 923 koz in 2018. Gold production surpassed the expectations we had at the beginning of the year. Despite the year on year increase in silver production, we reported lower silver production than anticipated and were disappointed not to meet our long-term silver target of 65 moz. This was mainly due to lower than expected ore grades at the Fresnillo and Saucito mines combined with some operational issues.

We are taking action to address this, not least by intensifying our infill drilling programmes, controlling dilution and further investment in equipment and infrastructure. The flotation plant to process historical and ongoing tailings at the Fresnillo mine is progressing and is expected to improve overall recoveries once completed. We have also invested in innovative technology to improve productivity with a new state-of-the-art tunnelling machine due to be commissioned in 2019.

A more challenging operating environment was also reflected in the financial performance for the year, with gross profit and EBITDA decreasing by 15.6% and 13.7% respectively, though margins remained strong. This decrease in gross profit was driven by the higher stripping ratio at Herradura, as well as higher depreciation and increased cost inflation across the Group, amongst other factors. These adverse factors were mitigated by the reassessment of inventories at Herradura as well as the higher production at San Julián (Disseminated Ore Body) following its first full year in operation.

We maintained a solid financial position, with US$560.8 million in cash and other liquid funds notwithstanding paying dividends of US$298.1 million, investing US$668.7 million in capex and spending US$172.8 million in exploration. The Board has recommended a final dividend of US$16.7 cents per share, bringing the total paid for the year to US$201.9 million.

Core to our organic growth strategy is ensuring we deliver on the potential of our existing assets while expanding our development pipeline.

I fully expect to be able to make a further positive announcement on our Juanicipio development project in due course. This joint venture project is expected to further contribute to silver and gold production, delivering high returns for our business while generating additional employment in the area. With first production anticipated in the second half of 2020, Juanicipio reaffirms the world-class status of the Fresnillo district and underlines the extent of the resources that have already been discovered there, as well as those that await discovery in the future.

We have also progressed our other development projects. The first stage of the new Pyrites plant has now been commissioned. The plant will make an important contribution to production by extracting additional quantities of gold and silver from the historical and ongoing tailings at the Fresnillo and Saucito mines. We were also pleased to commission the second line at the Dynamic Leaching Plant (DLP) at Herradura during the year.

Another point of difference for Fresnillo is our commitment to maintaining a strong exploration pipeline. We continued to make good progress at Orisyvo and Guanajuato, while the project at Rodeo is showing positive signs. At the end of 2018, our silver resources stood at 2.2 boz, down by 5.0% over the previous year, with our exploration mining concessions amounting to 1.8 million hectares in Mexico. Our gold resources increased by 1.5% during the year to 39.1 moz. In 2018 we also progressed our international pipeline, with exploration prospects in Chile and Peru.

The safety of our employees and contractors is the absolute priority for the Board. So it is with deep regret I confirm five fatalities during the year and one more at the beginning of 2019. We must do better. The safety of our workforce is at the top of our HSECR agenda for 2019, and we will renew our efforts to align employees and contractors alike with our safety culture.

Looking ahead, I expect 2019 to be another challenging year. We face a number of headwinds, including lower prices for precious metals and higher inflation. I also expect to see higher depreciation costs as a result of the investments we have made in recent years into the operations, while we continue to expect to work through operational issues and lower grades at certain mines during the year. All this has resulted in us slightly lowering our silver production guidance for 2019.

Our strategic goals remain unchanged, and we are committed to maintaining our position as the world's largest primary silver company and a leading gold producer in Mexico. Our model is proven, our people are skilled, experienced and dedicated, and a track record of creating value through growth and returns will continue to be our defining characteristic."

Twelve months to 31 December 2018

* 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 2018 and 2017

2018 Highlights

Challenging operational environment impacted financial performance

· Adjusted revenue of US$2,243.4 million, 0.5% increase vs. 2017 primarily due to record silver, lead and zinc volumes sold offset by lower prices.

· Higher adjusted production costs, up 23.8%, mainly driven by the higher stripping ratio at Herradura, cost inflation and additional costs associated with higher volumes produced.

· Gross profit of US$780.7 million down 15.6% respectively mainly due to lower prices, higher adjusted production costs and increased depreciation. Healthy profit margin maintained (37.1%).

· Exploration spend of US$172.8 million, up 22.5%.

· Profit from continuing operations of US$506.7 million, down 28.6% as a result of lower gross profit and higher exploration and administrative expenses.

· Profit for the year of USD$350.0 million, down 37.6% on 2017 mainly due to the lower profit from continuing operations and the US$22.5 million Silverstream revaluation loss recognised in 2018, compared to the US$70.3 million gain in 2017.

· Cash generated by operations before changes in working capital decreased by 13.3% to US$930.7 million (2017: US$1,073.9 million).

· Capital expenditures of US$668.7 million, up 10.6% vs 2017 but below guidance, mainly due to the delay in the start of the construction of the Juanicipio project.

· Maintained financial flexibility, with year-end cash and other liquid funds[1] of US$560.8 million (2017: US$896.1 million).

· Basic and diluted EPS from continuing operations of US$0.475; adjusted EPS of US$0.461, down 37.6% and 29.4% respectively.

· 2018 final dividend of US$16.7 cents per share, equivalent to approximately US$123.1 million, recommended by the Board

 Delivering on the potential of existing assets while expanding development pipeline

· Commissioned the leaching plant at Saucito in 2Q18, the first phase of this US$155 million Pyrites Plant project in the Fresnillo district.

· Construction of the US$110 million second line of the Dynamic Leaching Plant at Herradura completed in 2018, albeit minor delays due to a longer testing period.

· Juanicipio project continued to advance and Board approval is expected in due course.

· Gold resources increased 1.5% mainly due to positive results at Centauro Deep; silver resources down 5.0% as a result of lower ore grade and tonnage at Saucito. Gold reserves declined 6.0% due to depletion at Noche Buena, Herradura and San Julián, while silver reserves decreased 5.1% mainly due to San Julián (Veins) and Saucito.

· 2018 exploration budget of approximately US$140 million (including capitalised exploration expenses)

Board change

· In view of the demands of his recent appointment as Chairman of BBVA Bancomer, Mr Jaime Serra Puche resigned from the Board on 25th February 2019. The Nominations Committee has begun a search for a new independent non-executive director of the Company.

Outlook

· Silver production expected to be in the range of 58 to 61 moz including the Silverstream. Gold production expected to be in the range of 910-930 koz

· Capital expenditure is anticipated to be approximately US$710 million

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.

The presentation will also be available via a live webcast. A link to the webcast will be made available on Fresnillo's homepage: www.fresnilloplc.com or can be accessed directly here https://edge.media-server.com/m6/p/jyrt7fps

If you are not attending the presentation in person, but wish to ask questions, you must also join the live conference call as questions cannot be submitted via the webcast function.

Conference Call:

To access the conference call, please use the following details:

UK: 0800 376 7425

US: + 1 866 869 2321

Mexico: 01 800 801 7884

Confirmation code: 4661517

A recording of the conference call will be available for 7 days following the presentation. The access details for the replay are as follows:

Replay dial in:

Replay dial in:

UK: 0808 238 0667

US: 1(917) 677-7532

Mexico: +44(0) 3333009785

Confirmation code: 4661517

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

About Fresnillo plc

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

Fresnillo plc has seven operating mines, all of them in Mexico - Fresnillo, Saucito, Ciénega (including the San Ramón satellite mine), Herradura, Soledad-Dipolos1, Noche Buena and San Julián (Phase I and II), one development project - the Pyrites Plant at Fresnillo, and four advanced exploration projects - Orisyvo, Juanicipio, Las Casas Rosario & Cluster Cebollitas and Centauro Deep, as well as a number of other long term exploration prospects. In total, Fresnillo plc has mining concessions covering approximately 1.8 million hectares in Mexico and 700 thousands hectares in Peru.

Fresnillo plc has a strong and long tradition of exploring, mining, a proven track record of mine development, reserve replacement, and production costs in the lowest quartile of the cost curve for silver.

Fresnillo plc's goal is to maintain the Group's position as the world's largest primary silver company and Mexico's largest gold producer.

1Operations at Soledad-Dipolos are currently suspended.

Celebrating the last ten years, while preparing ourselves for the future

During its first ten years as a plc, Fresnillo has achieved remarkable success. The company has positioned itself as one of the most profitable on the London Stock Exchange (LSE), generating significant benefits for shareholders, local communities and Mexico in general.

Major achievements and milestones over this period include: an 80% increase in silver production and a 230% increase in attributable gold production; four new mining operations and a strong project pipeline based on successful exploration efforts; a 149% growth in employment; investments of over US$135 million in health, safety and training; direct payments of close to US$32 million to support local communities, including primary education of over 8,000 children in 66 schools; more than US$2.3 billion paid in taxes; US$5.0 billion invested in new and existing operations; and over US$2.8 billion of dividends paid to shareholders. Through the support of our workforce and local communities, as well as the introduction of new technologies to improve working conditions, safety and environmental impacts, we are recognised around the globe as a leading and respected public limited company.

It has been a privilege for me to lead the development of Fresnillo from its initial establishment as a LSE listed company to the present day. During those ten years, we have enjoyed high levels of growth and generated high returns consistently across price cycles and through a wide range of economic conditions. At the same time, we have learnt from the challenges encountered along the way, including the shortfall in production at our flagship Fresnillo mine and the delay of a couple of projects, which in turn has made us narrowly miss our long-term silver target of 65 moz despite considerable investments in successful new mines. On the positive side, we surpassed our long-term gold target in 2015 and have continued to build on that achievement over the last three years.

The Board and I continue to place the utmost importance on providing safe and healthy working conditions for our workforce. We are extremely saddened about the five fatalities during the year, as well as a further one in early 2019, and our thoughts are with the families and friends of those concerned. Our response has been to further strengthen our procedures and controls, with the ongoing support of an experienced engineer in charge of safety, health and community issues.

As you will read in the Chief Executive Officer's statement and throughout this report, we are carefully considering the demands and challenges of the coming years and we will invest in initiatives that will enable us to continue to grow and achieve good returns.

Achieving year-on-year growth by remaining true to our principles

Proven and practical, our strategy remained untouched during 2018. The focus on disciplined organic growth and on our four strategic pillars of exploration, development, operations and sustainability, enabled us once again to deliver year-on-year growth, despite silver production failing to meet our guidance and long-term target.

The Group generated over US$2.1 billion in adjusted revenue for the year, flat year on year. Profit during the year decreased, while cash and other liquid funds were US$560.8 million at the year end, a decrease of US$335.2 million over 2017. Debt remained unchanged at US$800 million.

Operational highlights

In summary, gold production had to be revised upwards twice during the year, driven by a better than expected performance in Noche Buena and Saucito. Although silver production was up year-on-year, it failed to reach our targets, despite guidance being lowered twice during the period. This was due to continuing challenges at our main underground silver mines. Production at the Fresnillo and Saucito mines was affected by shortcomings in our geological models and poor contractor performance. The geological models at both mines are being revised and in-fill drilling has been increased, while new contractors have been appointed at Fresnillo. At San Julián, although both phases have been operating above nameplate capacity, production was temporarily impacted by water shortages caused by exceptionally dry weather. This limited access to certain production areas included in the mining plan, and led to the need to process lower grade development ore from the existing stockpiles.

Having been part of Mexico's 500 years of mining history, Fresnillo is clearly here for the long term. The key aspects of our longevity are careful planning, extensive development and preparation, not only for the months ahead but also for the many decades to come. As outlined by the Chief Executive Officer, further investments in infrastructure and technology are set to improve the rate of development and construction of the mining infrastructure to underpin production in future years.

At the same time, the investments made in recent years are beginning to bear fruit, including two major projects commissioned during 2018. The new Pyrite plant - to improve gold and silver recoveries at Fresnillo and Saucito - and the second line of the Dynamic Leaching Plant at Herradura have not been without challenges, but are now contributing to production.

The feasibility study for the Juanicipio project, a joint venture with Mag Silver, was completed in 2018 and the formal approval of the project is expected in due course. We are confident that Juanicipio will become a key project, maintaining our track record of high growth and returns.

San Julián and Juanicipio are proof that our consistent commitment to exploration through the cycles of our industry pays clear long-term dividends for our stakeholders. Although this year's results were mixed, the last ten years have seen a substantial increase in reserves and resources.

During 2018, silver and gold reserves decreased 5.1% and 6.0% respectively. Following the 2018 drilling programmes, total silver resources reduced from 2.3 to 2.2 Boz, while total gold resources increased from 38.5 to 39.1 Moz. Our exploration mining concessions amount to 1.8 million hectares in Mexico, 655,000 hectares in Peru, and 10,000 hectares in two exploration options in Chile.

A committed and talented workforce...

A great company is built by great people, and I'm proud to say that our committed teams - from those working in mines and projects to their colleagues in offices across Mexico, South America and the UK- have again demonstrated their experience, dedication and talent. On behalf of the Board, I would like to thank them sincerely for these efforts.

In common with our industry peers as well as businesses operating in many other sectors, we face significant challenges in ensuring that we have the right calibre of people in the right jobs at the right time. To this end, during 2018 we increased the number and scope of partnerships with leading universities and the top earth science institutions in Mexico to develop new training programmes tailored to our requirements. As a result, we have provided 194 students with first hand practical experience during the year, and 173 are now in full time training.

...led by a skilled and experienced executive team

Our Chief Executive Officer Octavio Alvídrez continues to lead the executive management team with distinction, supported by Chief Financial Officer Mario Arreguín and Vice President of Exploration David Giles.

Our Chief Operating Officer, Roberto Díaz, retired at the beginning of 2019, following eight years of service during which our operations made significant progress and major projects were successfully implemented. On behalf of the Board, I thank Roberto for his outstanding contribution and I am pleased to announce that he has agreed to continue to work with us as an advisor on special projects.

We have recently made three senior appointments, two of which are completely new roles for Fresnillo. Together, these appointments will underpin our commitment to improving our safety record and preparing the Group for the future. Firstly, I would like to welcome Andre Sougarret, as new Chief Operating Officer. He brings great mining experience and knowledge to Fresnillo following a notable career in the mining industry, previously holding important positions in Codelco and as Executive Vice President at Empresa National de Mineria in Chile. At the same time, we have appointed a new Chief Projects Officer who is responsible for development projects, freeing up Andre to focus more on the operations side of the business. Finally, and as mentioned earlier, our top team has also been supplemented by the appointment of a permanent specialist advisor who has responsibility for addressing our health and safety record, which was unacceptable during 2018.

Board activities

The Board supports the executive team by playing an active role in defining the strategy, reviewing progress versus plan and making sure that the business has sufficient flexibility to respond to ever-changing market conditions. As a Group, we work hard to ensure that capital allocation is balanced by growth, shareholder returns, financial strength and flexibility, while maintaining our commitment to sustainability and risk management.

The Board's duties include ensuring the highest standards of corporate governance, as befits a constituent of the FTSE100 Index. We are currently considering the implications of the new version of the UK Corporate Governance Code, which will take effect from 1 January 2019.

During the first half of 2018, our Senior Independent Director Charles Jacobs engaged with institutional investors and others regarding Board composition and membership.

Board members also maintain oversight of our corporate culture, and at Board meetings we receive regular reports from the CEO on our Ethics programme and how our values of Responsibility, Integrity, Trust and Loyalty continue to guide our actions. In addition, our Head of Sustainability provides an annual presentation that gives us greater depth and detail about this matter.

Our culture is well-established and ingrained in all areas of operations. During the year we continued to conduct master classes and deliver online training modules in order to ensure that all our people, whether long-time employees or recent ones, understand the importance that we place on the Group's values. However, we recognise that there remains work to do. Our recent safety record is unacceptable and we are therefore bringing additional focus and resources to drive improvement.

Changes to the Board

Guy Wilson retired from the Board at the 2018 AGM, following ten years of service. Guy was instrumental in establishing and then overseeing the work of the Audit Committee and I thank him unreservedly for his tireless work, constant support and good humour. He has been replaced as Chairman of the Audit Committee by Alberto Tiburcio, who joined the Board and Audit Committee in 2016, bringing with him extensive experience in audit and financial reporting.

During the year, the Board was strengthened by the appointment of Georgina Kessel as an Independent Non-executive Director. Ms Kessel worked in the Mexican government where she served as Secretary of State of the Ministry of Energy from 2006 to 2011. She also chaired the Governing Board of the Federal Electricity Commission and has been president and member of the Board of Directors of Petróleos Mexicanos (PEMEX). She is currently an independent director of Scotiabank and Iberdrola and is a partner at Spectron. The Board now has three female members, demonstrating our continued commitment to gender diversity which sits alongside our insistence that all Board members should also have relevant work experience.

In view of the demands of his recent appointment as Chairman of BBVA Bancomer, Mr Jaime Serra Puche resigned from the Board on 25th February 2019. The Nominations Committee has begun a search for a new independent non-executive director of the Company. My Board colleagues and I have greatly valued Jaime Serra Puche's contributions to the Fresnillo board meetings over the past five years. His political insight has been particularly valued and we have been grateful to have someone of his calibre and experience on our Board. We will miss his input greatly but wish him well for the future.

Continuing our dividend policy

Our dividend policy is well-established, consistent and closely aligned with our commitment to create value through growth and returns. In short, each year we aim to pay out 33-50% of profit after tax, while making certain adjustments to exclude non-cash effects in the income statement. We pay dividends in the approximate ratio of one-third as an interim dividend and two-thirds as a final dividend.

Before declaring a dividend, the Board carries out a detailed analysis of the profitability of the business, underlying earnings, capital requirements and cash flows. Our aim is to maintain enough flexibility to be able to react to movements in precious metals prices and seize attractive business opportunities.

We declared an interim dividend of 10.7 US cents per share, with a final dividend of 16.7 US cents per share, bringing the total for the year to 27.4 US cents per share.

Outlook

In the short term, we are likely to experience a lower rate of growth, as we consolidate the progress made since our IPO and implement the necessary investments and initiatives that will advance our pipeline and underpin our future long-term growth.

Political and economic factors, both in Mexico and across the globe, could also impact our performance. For example, the buoyancy of the US domestic economy is attracting some investment that would otherwise have been directed towards our sector, while the China-US trade war as well as issues in South America and Europe are generating an unwelcome degree of uncertainty. In Mexico, we have a new administration and although we are yet to see any firm indication of direction, we are already working closely with the Government.

The Board and I believe that the developments currently underway, and those that will be introduced or extended during 2019, will position us well for the years ahead. In the coming months and to comply with the 2018 UK Corporate Governance Code, we will continue to work towards defining our Company Purpose. This will be a succinct expression of what Fresnillo is and what we stand for - and it will further focus the minds of all our people on our culture and the things we truly value, such as safety.

We have now established a long track record for delivering growth and returns, and our commitment to keeping that reputation remains undimmed. Fresnillo faces the future with confidence.

Alberto Baillères

Non-executive Chairman

Chief Executive's statement

Consolidating our growth, advancing our pipeline

Since the IPO in 2008, we have recorded an excellent set of achievements and over that period built a track record of creating value through growth and returns. Now is the time to consolidate our position while also making sure we continue to fuel our pipeline in order to deliver further growth in the years ahead.

Although it was disappointing not to reach our long-term silver target of 65 moz, we nevertheless look back with pride on the achievements of the last decade, including the fact that we reached our long-term goal for gold three years ahead of target.

We have delivered on the vast majority of the plans we laid out at the time of the IPO, in both financial and non-financial terms. We are now firmly established as the world's largest silver producer, Mexico's largest gold producer and a company that has earned the respect of its employees and local communities as well as of its shareholders.

Now, in the early months of our second decade, it is time to continue to prepare Fresnillo for the many challenges and opportunities that lie ahead.

Consistency, consistency, consistency

Our strategy has remained the same throughout the last ten years, and this will continue to be the case. While other miners may change their stance depending on which way the economic wind is blowing, at Fresnillo we understand that consistent performance can only be delivered by remaining true to a conservative, long-term strategy.

This strategy has and will continue to achieve results across the various price cycles of precious metals. Although Fresnillo plc has only been in existence for a decade, our history stretches back over 125 years. The knowledge and experience gathered over that period is part of Fresnillo's DNA - and it ensures that we always take a long-term view, executing our strategy with consistency in order to manage fluctuations in prices.

Production highlights and price review

In 2008, we set ourselves the target to double annual silver production to 65 moz and to achieve gold production of 750,000 ounces in the decade to the end of 2018. We successfully reached the gold target in 2015 and although we have fallen just short of that ambitious goal, for silver, this period of consolidation will improve our efficiency, strengthen our operational base and ensure that we continue to deliver growth in the years and decades to come.

Silver production did not quite reach the levels we forecast at the start of the year, following lower than expected ore grades at the Fresnillo and Saucito mines, as well as lower throughput at Fresnillo.

Notwithstanding, silver production from our mines increased 7.1% to 58.1 million ounces in 2018 driven mainly by the first full year of production at the San Julián Disseminated ore body and the contribution from the first phase of the new Pyrites plant at Saucito, which more than offset the lower production at the Fresnillo and Saucito mines.

We achieved better than anticipated results for gold in 2018, with production increasing slightly by 1.3% to 922,527 ounces. This reflected a good performance at Saucito, the start-up of the Pyrites plant and higher gold production at Fresnillo.

During the year, average realised silver prices decreased by 8.3%, with those for gold remaining broadly flat (up 0.1%). At the same time, average prices for zinc and lead, which are by-products of our silver and gold operations, decreased by 5.7% and 7.4% respectively and this had an impact on our financial performance.

Consolidating growth, maximising potential

The first pillar of our strategy is to maximise the potential of our existing operations, and during the year we were pleased to launch a series of operational excellence initiatives that will provide the platform for further growth in the years to come.

At the Fresnillo mine, for example, we have invested in innovative technology to improve productivity. Costing US$22.7 million and capable of boring at least 300 metres per month, a new state-of-the-art tunnelling machine is due to be commissioned in 2H19. Together with the vertical conveyor, which was commissioned towards the end of 2017, and the installation of new vibrating screens which have already proved their value at Saucito, the tunnelling machine will support our drive to extract greater value from the long-established Fresnillo mine.

Meanwhile, at San Julián we have addressed the low water availability that limited production during the early months of 2018. In the short term this involved digging wells, but in line with our commitment to always taking a long-term view, we have since successfully concluded consultations with the indigenous population regarding the construction of a new water reservoir which will ensure sufficient water to support greater production at San Julián.

IT is another example of how we are using innovation and new ways of working to improve production while lowering costs. For example, during 2018, we launched or rolled-out a wide range of projects that are already beginning to transform productivity.

Delivering growth through development projects

I fully expect to be able to make a positive announcement on our Juanicipio development project in due course, following a highly detailed technical evaluation that demonstrated its long-term viability. Eight kilometres from the Fresnillo mine, Juanicipio is expected to contribute to both silver and gold production, delivering high returns for our business while generating additional employment in the area. With first production anticipated in 2H20, Juanicipio reaffirms the world-class status of the Fresnillo district and underlines the wealth of resources that have already been discovered there, as well as those that await discovery in the future.

In addition, the first stage of the new Pyrites plant has now been completed and commissioned on budget, with only minor delays. While the ramp up did not accelerate as expected due to issues with the vertical mills, which have now been resolved, the plant will make an important contribution to production by extracting additional quantities of gold and silver from the historical and ongoing tailings at the Fresnillo and Saucito mines. Stage two is now underway and is expected to be concluded in 2H20.

We were also pleased to commission the second line at the Dynamic Leaching Plant (DLP) at Herradura during the year. The testing period took longer than expected and despite production coming from the plant during the year, commercial production did not commence until 2019. Now complete, the DLP is processing an extra 8,000 tonnes per day of high grade ore from the pit, taking the daily throughput for the two DLP plants to 16,000 tonnes. Also at Herradura, tests of the leaching pads led to an increase of 98.9 thousand ounces of gold in inventory.

Extending the growth pipeline

Our approach towards exploration is one of the qualities that sets us apart from our peers. Where they may choose to cut back on exploration in order to meet short-term price challenges, our commitment remains unequivocal and unchanging, regardless of the prevailing economic climate. Rather than opting to boost our pipeline through acquisition, we remain determined to fuel ours organically - drawing on the skills of more than 100 talented geologists to explore opportunities and build our resource base.

Among the year's most significant exploration developments, we continued to make good progress at Orisyvo and Guanajuato, while the project at Rodeo is showing good potential. At the end of 2018, our silver resources stood at 2.2 boz, down by 5.0% over the previous year, with our exploration mining concessions amounting to 1.8 million hectares in Mexico. Our gold resources increased by 1.5% during the year to 39.1 moz.

Furthermore, 2018 saw us take decisive steps in the internationalisation of our Company, with drilling now expected to take place at two projects in Chile that show good potential. We are also working hard to gain the necessary permits in Peru and continuing to scout projects in Argentina.

Advancing and enhancing the sustainability of our operations

The safety of our employees and contractors is our highest priority, and we continually monitor our performance and introduce new initiatives to address any gaps or failings in our processes. So it was both deeply saddening and totally unacceptable that we experienced five fatalities during the year and one more in early 2019. While we acknowledge that contractor safety is a particular challenge for our industry, this performance is clearly unacceptable. The safety of all of our employees and contractors is at the top of our HSECR agenda for 2019, and we will renew our efforts to align employees and contractors alike with our commitment to safety.

As I highlighted in last year's report, we began to roll out a new safety programme during 2018, following encouraging results from the pilot phase at our Fresnillo and Saucito mines. Known as I Care, We Care, this programme builds on and strengthens our existing processes. The key aspect of I Care, We Care is that it encourages people to fully report every incident, no matter how minor, so that our safety team can identify its root cause, develop risk awareness and put measures in place to prevent reoccurrence. The roll out is expected to be completed in 2019.

In terms of environmental sustainability, we passed an important milestone in 2018. Over 60% of the electricity we consume is now provided by wind power - and we aim to increase this to 75% by the second half of 2019. The resultant decrease in our carbon emissions will also be supported by an initiative to convert a number of trucks in our fleet from diesel to Liquid Natural Gas, which will benefit the environment while also reducing our costs.

Our strong environmental, social and governance practices have again been recognised by external organisations. Not only did we retain our place in the FTSE4Good Index, but we also joined the STOXX Global ESG Leaders index for the first time. In addition, we received or retained a large number of national and international awards and certifications including:

· An Ethics and Values award from the Confederation of Industrial Chambers (Concamin) in Mexico

· The Social Responsibility Award from the Federal Attorney for Environmental Protection (Profepa) in Mexico

· A Profepa Award for Environmental Excellence at Saucito and Herradura

· Clean Industry national certification from Profepa

· International certifications including; the Cyanide Code at Herradura and Noche Buena; ISO 14,001 (Environment); and OHSAS 18,001 (Safety and Environment)

The year ahead

We anticipate that 2019 will be a more challenging year than 2018, with a number of industry variables potentially working against us. While the volatility of precious metals prices is likely to reduce, the prices themselves may reduce, for example, and we could see headwinds from higher inflation and possibly a worsening of the US$-Peso exchange rate. The significant investments we have made in recent years will inevitably lead to greater depreciation costs and these will in turn impact our financial performance. In addition, silver and gold production may temporarily reduce, as we invest time and resources in consolidating our past achievements and preparing the ground for greater growth in future years, while also focusing on improved safety.

None of these possible developments are unusual or present us with issues we have not faced before. Change is part of the business cycle. We will continue to stand firm behind our strategy in the clear knowledge that it has guided us through a wide range of market and political conditions in the past, and will do so again in the future.

While we face short-term pressures, the long-term fundamentals remain sound. Our model is proven, our people are skilled, experienced and dedicated, and a track record of creating value through growth and returns will continue to be our defining characteristic.

Octavio Alvídrez

- Chief Executive Officer

The Consolidated Financial Statements of Fresnillo plc are prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. This Financial Review is intended to convey the main factors affecting performance and to provide a detailed analysis of the financial results in order to enhance understanding of the Group's financial statements. All comparisons refer to 2018 figures compared to 2017, unless otherwise noted. The financial information and year-on-year variations are presented in US dollars, except where indicated.

By following strict controls on cash, costs and expenses and while adhering to our capex budgets, we have maintained a healthy cash and other liquid funds 1 position and a low leverage ratio. This has enabled us to invest in profitable growth and deliver solid returns to shareholders.

The following report presents how we have managed our financial resources.

Commentary on financial performance

2018 was a year of challenges and opportunities for the Group. This was also reflected in the financial performance for the year, with gross profit and EBITDA decreasing over 2017 by 15.6% and 13.7% respectively, while we nevertheless delivered healthy profit margins. We maintained a solid financial position, with US$560.8 million in cash and other liquid funds 1 as of 31 December 2018 notwithstanding paying dividends of US$298.1 million in accordance with our policy, investing US$668.7 million in capex and spending US$172.8 million in exploration to underpin our future growth.

Adjusted revenue slightly increased year-on-year due to the increased volumes of silver, lead and zinc sold, primarily from the San Julián (Disseminated Ore Body), offset by lower prices. This increase, together with the positive effect of the re-assessment of gold content in the leaching pads and the higher ore grade at Herradura, was more than offset by the higher stripping ratio at Herradura and higher depreciation. As a result gross profit decreased 15.6% over 2017 and, together with the higher exploration expenses, this contributed to the 13.7% decline in EBITDA.

Income statement

1 Cash and other liquid funds are disclosed in note 30(c) to the financial statements.

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

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

4 The weighted average number of ordinary shares was 736,893,589 for 2018 and 2017. See note 17 in the consolidated financial statements.

The Group's financial performance is largely determined by the quality of our assets, the skills of our people and the execution capabilities of management to achieve our strategic goals. However, there are a number of macroeconomic variables that lie beyond our control and which affect financial results. These include:

Precious metal prices

In 2018, the average realised silver price decreased by 8.3% from US$16.9 per ounce in 2017 to US$15.5 per ounce in 2018. In addition, average realised lead and zinc prices decreased 7.4% and 5.7% year-on-year, to US$0.99 and US$1.28 per pound, respectively. The average realised gold price remained broadly stable at US$1,269.1 per ounce (2017: US$1,267.4).

Hedging

In the second half of 2014, Fresnillo plc initiated a one-off hedging programme to protect the value of the investment made in the Penmont acquisition. The hedging programme was executed for a total volume of 1,559,689 ounces of gold with monthly settlements until December 2019.

The table below illustrates the expired structures and the outstanding hedged position as of 31st December 2018.

*Monthly settlements through December 2019

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

MX$/US$ exchange rate

The average spot Mexican peso/US dollar exchange rate devalued by 1.6%, from $18.94 per US dollar in 2017 to $19.24 per US dollar in 2018. This resulted in a favourable effect estimated at US$6.7 million on the Group's production costs, as costs denominated in Mexican pesos (approximately 45% of total costs) were lower when converted to US dollars.

Hedging

As previously reported, in 2016 Fresnillo plc decided to suspend its Mexican peso exchange rate hedging programme to hedge payment of certain peso denominated production costs. However, the Group has continued to enter 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). The aggregate effect on income in the year was a loss of US$321,873 (See foreign exchange section below).

Cost INflation

In 2018, there was a cost inflation of 2.6% net of the 1.6% average devaluation of the Mexican peso against the US dollar. The main components of our cost inflation basket are listed below:

Labour

Unionised employees received on average a 7.0% increase in wages in Mexican pesos, and administrative employees at the mines received a 5.5% increase; when converted to US dollars, the weighted average labour inflation was 4.5%.

Energy

Electricity

The Group's weighted average cost of electricity decreased by 6.4% from US$7.6 cents per kW in 2017 to US$7.1 cents per kW in 2018. This decrease was mainly due to the lower average generating cost of the Comisión Federal de Electricidad (CFE), the national utility.

Diesel

The weighted average cost of diesel in US dollars increased 7.7% to US$82.4 cents per litre in 2018, compared to US$76.5 cents per litre in 2017.

Operating materials

Unit prices of the majority of operating materials remained broadly stable in US dollar terms, with the exception being the steel balls for milling and other reagents, which experienced year-on-year inflation of over 5%. However, this was partly offset by the decrease in the unit price of tyres and steel for drilling. As a result, the weighted average unit prices of all operating materials increased by 1.4% over the year. There has been no significant impact on the unit cost of operating materials from the devaluation of the MXN peso/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 our total production costs. In 2018, increases granted to contractors, whose agreements were due for review during the period, resulted in a weighted average increase of 2.9% in US dollars.

Maintenance

Unit prices of spare parts for maintenance remained broadly unchanged on average in US dollar terms (0.7% increase).

Others

Other cost components include freight, which increased by an estimated 7.7% in US dollars, partially offset by a 2.7% decrease in insurance costs. The remaining cost inflation components experienced average inflation of 1.8% in US dollars over 2017.

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.

Revenue

Consolidated revenue (US$ millions)

Adjusted revenue increased by US$10.5 million as a result of the increase in volumes of silver, lead and zinc sold, partially offset by the lower prices of these same metals. Total revenue remained broadly unchanged at US$2,103.8 million.

Adjusted revenue 1 by metal (US$ million)

The higher volumes of silver sold resulted from the first complete year of San Julián (Disseminated Ore Body) and the increased production at Herradura and Ciénega, while the higher sales of lead and zinc were mainly driven by the contribution of San Julián (Disseminated Ore Body) and the increased volumes of base metals at depth in the Saucito mine. These favourable effects, net of the lower volume of gold sold, resulted in a positive impact on revenue of US$108.3 million. This was offset by a US$98.2 million negative effect primarily resulting from the lower silver, lead and zinc prices.

The contribution of gold to Adjusted revenue decreased slightly from 50.4% in 2017 to 49.9% in 2018, reflecting the expected lower volumes of gold produced and sold, while silver's contribution to Adjusted revenue decreased to 36.3% as the increased volumes of silver sold were more than offset by the lower price. As expected, the higher content of base metals at certain mines is changing the relative proportion of Adjusted revenue, with zinc increasing its contribution from 7.2% in 2017 to 9.1% in 2018, and lead representing 4.7%.

Herradura remained the main contributor to Adjusted revenue, primarily due to the higher volumes of silver sold during the year. Saucito's and Fresnillo's contribution declined from 22.6% and 18.9% in 2017to 21.9% and 16.9% respectively in 2018, reflecting the decrease in silver ore grade and a lower silver price. The San Julián mine continued to increase its contribution to the Group's Adjusted revenue from 12.9% in 2017 to 16.4% in 2018. Noche Buena's contribution decreased to 9.4%, in line with the 1.9% decline in its Adjusted revenue, while Ciénega maintained its contribution to the Group's Adjusted revenue at 8.3%.

The relative contribution to Adjusted silver revenue continued to change in 2018 with the San Julián mine representing 24.8% (2017: 18.6%), and the contributions of Saucito and Fresnillo decreasing as expected due to an expanded silver asset base.

The start-up of San Julián (Disseminated Ore Body) also affected the relative contribution to zinc adjusted revenues. This new mine represented 25.7% of total zinc Adjusted revenues in 2018, helping to increase zinc's relative contribution to the Group's Adjusted revenues.

The contribution by metal and by mine to Adjusted revenues is expected to change further in the future, as new projects are incorporated into the Group's operations and as precious metal prices fluctuate.

Adjusted revenue by metal

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

Adjusted revenue by mine

Volumes of metal sold

Hedging

In 2018 we entered into a series of derivative contracts to hedge part of our lead and zinc by-product production through collar structures. The chart below illustrates the expired hedging structures, their impact on income in 2018 and the outstanding hedged position as of December 31st.

Treatment and refining charges

Treatment and refining charges 3 are reviewed annually using international benchmarks. Treatment charges per tonne of lead and zinc concentrate decreased in dollar terms by 13.3% and 7.5%, respectively, compared to 2017, while silver refining charges declined by 7.4% over the year. This lower charge per tonne was offset by the increase in volumes of lead and zinc concentrates with high silver contents mainly shipped from Saucito and San Julián (Disseminated Ore Body) to Met-Mex, as well as the volumes of precipitates sold from the Pyrites plant. As a result, treatment and refining charges set out in the income statement in absolute terms increased by only 0.9% over 2017.

Cost of sales

3 Treatment and refining charges include the cost of treatment and refining as well as the margin charged by the refiner.

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

Cost of sales increased 13.3% to US$1,323.1 million in 2018. The US$155.2 million increase is explained by the following combination of factors:

· An increase in Adjusted production costs (+US$182.8 million). This was primarily due to: i) higher stripping costs at Herradura (+US$82.6 million); ii) additional Adjusted production costs associated with the first complete year of operations at San Julián (Disseminated Ore Body) (+US$49.6 million); iii) the decrease in volume of ore processed from development works at Saucito, the costs of which were capitalised (+US$31.2 million); iv) cost inflation (+US$26.4 million); v) the reassessment in the year of the number of mining components at Herradura from two to one, effective from July 2019, which increased stripping costs expensed (+US$21.9 million). The increase was partly offset by the lower volume of ore processed mainly at Herradura (-US$19.6 million); and the favourable effect of the devaluation of the Mexican peso vs US dollar and others (-US$9.3 million).

· Depreciation (+US$44.2 million). This is mainly due to the full year of operation at San Julián and the increased depreciation at the Saucito mine resulting from the start up of the Pyrites plant and the amortisation of capitalised mining works.

These negative effects were partly offset by:

· The increase in change in work in progress (-US$70.4 million). Change in work in progress was -US$53.6 million in 2018 as a result of the re-assessment of the gold content in the leaching pads at Herradura (see notes 2c and 5 in the financial information). This compared favourably to the US$16.9 million costs recorded in 2017 as a result of the decrease in inventories in the leaching pads at Herradura.

· Others -US$1.3 million.

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

Cost per tonne is a key indicator to measure the effects of mining inflation and cost control performance at each mine. This indicator is calculated as total production costs, plus ordinary mining rights, less depreciation, profit sharing and exchange rate hedging effects, divided by total tonnage processed. 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.

5 Indicator may not be representative as it corresponds to the start-up period, when a significant volume of ore from stock pile is processed.

Fresnillo

Cost per tonne increased 4.1% to US$49.4 in 2018 mainly due to: i) cost inflation for this mine of 2.53% (largely related to contractors, personnel and operating materials); and ii) a greater number of contractors for maintenance to solve the problem related to equipment availability.

Saucito

Cost per tonne increased 26.2% to US$60.1, mainly due to: i) lower volume of ore processed from development work; ii) increased in the number of contractors for development works; and iii) higher consumption of reagents. Cost inflation at this mine was 2.45%.

Ciénega

Cost per tonne at Ciénega increased 6.5% to US$70.8 mainly due to the increase in contractors for development and civil works. Cost inflation at this mine was 1.57%.

Herradura

Cost per tonne of ore deposited increased 65.8% to US$13.2 mainly due to: i) higher stripping charged to production costs; ii) the change in criteria from two to one component; and iii) inefficiencies due to lower volume deposited (-14.9%). Cost inflation at this mine was 4.0% (largely related to the increase in the price of diesel).

Noche Buena

Cost per tonne at this mine decreased 9.4% to US$6.8 in 2018 as a result of shorter distances to haul mineral from the pit to the leaching pads, despite the fact that cost inflation at this mine was 2.54% (mainly related to the unit price of diesel).

San Julián (Veins)

Cost per tonne at San Julián (Veins) rose 10.1% mainly due to the increase in the number of contractors for mining works.

Cash cost per ounce, calculated as total cash cost (cost of sales plus treatment and refining charges, less depreciation) less revenue 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.

6 Indicator may not be representative as it corresponds to the start-up period, when a significant volume of ore from stock pile is processed.

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

Fresnillo: US$0.46/oz (2018) versus US$0.71/oz (2017), (-35.2%)

Cash cost per ounce decreased, principally due to higher by-product credits (-US$0.97/oz) and lower treatment charges (-US$0.24/oz), partially offset by the lower silver ore grade (+US$0.71/oz) and the higher cost per tonne (+US$0.28/oz).

Saucito: US$0.97/oz (2018) versus US$1.50/oz (2017), (-35.6%)

The decrease was driven by the higher by-product credits per ounce of silver resulting from the increased volume of gold sold (-US$2.29/oz), partially offset by the higher cost per tonne (+US$1.21/oz) and the lower silver grade (+US$0.55/oz).

Ciénega: US$25.88/oz (2018) versus -US$163.74/oz (2017), (N/A)

The increase in cash cost was primarily due to: the expected decrease in gold grade (+US$115.01/oz), the higher cost per tonne (+US$42.32/oz) and higher treatment and refining charges (+US$6.78/oz). These unfavourable factors were mitigated by higher by-product credits per gold ounce due to the lower volume of gold produced (-US$19.26/oz); and others (-US$3.96/oz).]

Herradura: US$504.00/oz (2018) versus US$492.86/oz (2017), (+2.3%)

The increase in cash cost resulted from the higher cost per tonne (+US$261.13/oz) and the change from two mining components to one during the year (+US$60.68/oz); mitigated by the higher gold grade (-US$247.39/oz); a favourable inventory valuation effect due to the increase in gold inventories on the leaching pads (-US$34.32/oz); and higher by-product credits per gold ounce due to the increased volume of silver sold, albeit at a lower price (-US$29.75/oz).

Noche Buena: US$735.41/oz (2018) versus US$793.48/oz (2017), (-7.3%)

The decrease in cash cost per ounce was mainly due to the lower cost per tonne (-69.41/oz).

San Julián VEINS: -US$3.64/oz (2018) versus -US$4.30/oz (2017), (+15.4%)

The increase in cash cost was explained mainly by the lower silver ore grade (+US$1.29/oz) and higher cost per tonne (+US$0.04/oz), mitigated by lower by-product credits due to the decline in volume of gold sold (-0.67/oz).

San Julián DISSEMINATED ORE BODY: As operations commenced in July 2017, 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.

We consider all-in sustaining costs to be a reasonable indicator of a mine's ability to generate free cash flow when compared with the corresponding metal price. We also believe it is 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

1 Indicator may not be representative as it corresponds to the start-up period, when a significant volume of ore from stock pile was processed.

Fresnillo: Higher, mainly due to capitalised mine development mitigated by lower sustaining capex.

Saucito: Higher, as a result of higher capitalised mine development and an increase in sustaining capex.

Ciénega: Higher, primarily due to an increase in sustaining capex, higher capitalised mine development and a higher cash cost.

Herradura: Broadly stable, mainly due to the decrease in capitalised stripping costs following the reassessment of the number of mining components from two to one; offset by higher cash cost detailed above.

Noche Buena: Higher, driven by the higher capitalised stripping, mitigated by the lower cash cost detailed above.

San Julián: 

San Julián (Veins): Higher, mainly due to increased sustaining capex and higher capitalised mine development.

San Julián (Disseminated Ore Body): As operations commenced in July 2017, 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.

Total gross profit, net of hedging gains and losses, decreased by 15.6% to US$780.7 million in 2018.

The US$144.7 million decrease in gross profit was mainly explained by: i) lower silver, lead and zinc prices (-US$97.7 million); ii) the higher stripping ratio at Herradura (-US$82.6 million); iii) the 17.5% decrease in volume of ore deposited at the Herradura heap leach (-US$64.8 million); iv) higher depreciation (-US$44.2 million); v) the decrease in volume of ore processed from development at Saucito, the costs of which were capitalised (-US$31.2 million); vi) cost inflation (-US$26.4 million); vii) the adverse effect of recognising the entirety of the stripping in the income statement in 2H 2019 following the change from two components to one at Herradura, as opposed to partially capitalising it (-US$21.8 million); viii) lower production at San Julián (Veins) (-US$19.5 million); and ix) others (-US$7.0 million). These factors were partly mitigated by: i) the re-assessment of gold inventories in the leaching pads at Herradura (+US$94.4 million); ii) the higher ore grade from the inventory and improved speed of recovery at Herradura (+US$68.4 million); iii) increased production at San Julián (Disseminated Ore Body) resulting from its first complete year of operations (+US$67.1 million); and iv) the higher recovery rate at Saucito (+US$20.7 million).

As reflected in the table below, Herradura remained the largest contributor to the Group's consolidated gross profit, although there was a slight decrease in its gross profit when compared to 2017. Gross profit at Saucito and Fresnillo declined by 22.1% and 24.5% over 2017 respectively, decreasing its contribution to the consolidated gross profit. San Julián remained the fourth largest contributor. Gross profit at Noche Buena increased 18.1% year on year, providing 8.7% of total gross profit, while Ciénega's share of the Group's total gross profit decreased to 4.1%.

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

Administrative and corporate expenses

Administrative expenses increased 21.0% from US$42.3 million to US$51.2 million, due mainly to an increase in services provided by consultants (legal, safety, taxes, geological, indigenous community consultation, amongst other).

Corporate expenses increased 5.7% over 2017 to US$32.1 million mainly as a result of increased corporate services provided by Servicios Industriales Peñoles, S.A.B de C.V., due to a larger number of mines and projects, and to a lesser extent, a 2.0% cost inflation.

Exploration expenses

Exploration expenses increased as planned by 22.5% from US$141.1 million in 2017 to US$172.8 in 2018, due to intensified exploration activities, mainly around our mining districts and advanced exploration projects. An additional US$8.4 million was capitalised, mainly relating to exploration expenses at the Juanicipio project, Centauro Deep and Guanajuato. As a result, risk capital invested in exploration totalled US$181.2 million in 2018, a 24.7% increase over 2017. In 2019, total invested in exploration is expected to be approximately US$140 million, of which US$10 million is expected to be capitalised.

EBITDA

EBITDA is a gauge of the Group's financial performance and a key indicator to measure debt capacity. It is calculated as gross profit plus depreciation, less administrative, selling and exploration expenses. In 2018, EBITDA decreased 13.7% to US$915.1 million mainly due to the lower gross profit. As a result, EBITDA margin expressed as a percentage of revenue decreased, from 50.6% in 2017 to 43.5% in 2018.

Other OPERATING INCOME AND EXPENSE

In 2018, a net gain of US$3.3 million was recognised in the income statement. This compared unfavourably to the US$16.8 million net gain recognised in 2017 mainly as a result of the sale of non-strategic mining claims to Argonaut Gold Inc.

Silverstream effects

The Silverstream contract is accounted for as a derivative financial instrument carried at fair value. The total revaluation effect recorded in the 2018 income statement was a gain of US$15.0 million. This includes negative non-cash revaluation effects of US$22.5 million mainly as a result of the lower forward price of silver and a higher discount rate used, mitigated by the updating of the Sabinas production plan, which resulted from the updated estimate of reserves and resources. This was more than offset by a US$37.5 million non-cash gain mainly generated by the unwinding of the discounted values. In 2017, a US$113.7 million gain was registered mainly as a result of converting resources into reserves at the Sabinas mine.

Since the IPO, cumulative cash received has been US$629.3 million. The Group expects that 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 and in notes 13 and 29 to the consolidated financial statements.

Finance costs

Finance costs reflected the interest on the US$800 million principal amount of 5.5% Senior Notes, net of interest received. In 2018 finance costs decreased 21.8%, from US$34.0 million to US$29.6 million, mainly due to the decrease in borrowing costs capitalised in 2018 compared to 2017.

In 2018, following the adoption of IFRS 9, Financial Instruments, the effects of the mark-to market time value of the outstanding gold hedging programme are recognised in other comprehensive income, rather than in income as in 2017 (see note 2c in the financial information). This caused a favourable effect as a US$41.1 million loss was recognised in 2017.

Foreign exchange

A foreign exchange loss of US$8.1 million was recorded as a result of the realised transactions in the year. This compared negatively against the US$6.4 million foreign exchange loss recognised in 2017.

The Group 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 2018, the total EUR, SEK and CAD outstanding net forward position was EUR 12.67 million, CAD 0.0 and SEK 13.29 million with maturity dates from March through September 2019. Volumes that expired during 2018 were EUR 26.41 million with a weighted average strike of 1.2024 USD/EUR, CAD 1.10 million with a weighted average strike of 1.2847 CAD/USD and SEK 69.70 million with a weighted average strike of 8.5762 SEK/USD. The aggregate effect on income in the year was a loss of US$321,873.

Taxation

Corporate income tax expense decreased 21.4% from US$153.5 million in 2017 to US$120.6 million in 2018, reflecting the decline in profit before income tax.

The effective tax rate, excluding the special mining rights, was 24.9%, which was below the 30% statutory tax rate. This was mainly due to the inflationary uplift of the tax base of assets and liabilities, together with the tax credit related to the special tax on diesel. Including the effect of the special mining rights, the effective tax rate was 27.7% in 2018.

The effective tax rate in 2017 was lower (20.7% in 2017 vs 24.9% in 2018) mainly because in 2017 there was a 4.5% revaluation of the Mexican peso which had an important impact on the tax value of assets and liabilities that are denominated in Mexican pesos; together with a higher inflation rate which impacted the inflationary uplift of the tax base of assets and liabilities (See note 10 to the financial statements).

Profit for the year

Profit for the year decreased from US$560.8 million to US$350.0 million in 2018, a 37.6% decline year on year as a result of the factors decribed above.

Excluding the effects of the Silverstream Contract, profit for the year decreased from US$481.2 million to US$339.5 million.

Cash flow

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

1 Cash and other liquid funds are disclosed in note 31(c) to the financial statements.

Cash generated by operations before changes in working capital decreased by 13.3% to US$930.7 million, mainly as a result of the lower profits generated in the year. Working capital increased US$127.9 million mainly due to increased ore inventories in the leaching pads at Herradura (US$63.9 million); higher trade and other receivables resulting from an increase in VAT receivables (US$60.4 million); and an increase in prepayments and other assets (US$11.8 million). This increase in working capital was partly offset by an increase in trade and other payables (US$8.2 million).

Taxes and employee profit sharing paid decreased 30.7% over 2017 to US$214.4 million.

As a result of the above factors, net cash from operating activities decreased 22.7% from US$761.5 million in 2017 to US$588.4 million in 2018.

Other sources of cash were the proceeds of the Silverstream Contract of US$36.3 million and capital contributions from minority shareholders in subsidiaries of US$23.6 million.

The above funds were mainly used to purchase property, plant and equipment for a total of US$668.7 million, a 10.6% increase over 2017. Capital expenditures for 2018 are further described below:

Purchase of property, plant and equipment

Dividends paid to shareholders of the Group in 2018 totalled US$298.1 million, a 26.0% increase over 2017, in line with our dividend policy which includes a consideration of profits generated in the period. The 2018 payment included the final 2017 dividend of US$219.4 million and the 2018 interim dividend paid in September of US$78.8 million.

Net interest of US$15.7 million was paid, mainly reflecting the interest paid in relation with the issuance of the US$800 million principal amount of 5.500% Senior Notes.

The sources and uses of funds described above resulted in a decrease in net cash of US$335.2 million (net decrease in cash and other liquid assets), which combined with the US$896.0 million balance at the beginning of the year resulted in cash and other liquid assets of US$560.8 million at the end of 2018.

Balance sheet

Fresnillo plc continued to maintain a solid financial position with cash and other liquid funds 1 of US$560.8 million as of 31 December 2018, albeit decreasing 37.4% versus December 2017, as explained above.

Inventories increased 23.6% to US$335.0 million mainly as a result of the increase in inventories of gold on the leaching pads at Herradura.

Trade and other receivables increased 14.9% to US$462.0 million mainly as a result of the increase in value added tax recoverable.

The change in the value of the Silverstream derivative from US$538.9 million at the beginning of the year to US$519.1 million as of 31 December 2018 reflects proceeds of US$34.8 million corresponding to 2018 (US$31.4 million in cash and US$3.4 million in receivables) and the Silverstream revaluation effect in the income statement of US$15.0 million.

The net book value of property, plant and equipment was US$2,693.1 million at year end, representing a 10.0% increase over 2017. The US$244.5 million increase was mainly due to the advancement in the development projects; capitalised development works; purchase of additional in-mine equipment; and the construction of leaching pads at Herradura and Noche Buena.

The Group's total equity was US$3,128.3 million as of 31 December 2018, a 2.0% increase over 2017. This was mainly explained by the increase in retained earnings, reflecting the 2017 profit and the net unrealised gains on cash flow hedges.

Dividends

Based on the Group's 2018 performance, the Directors have recommended a final dividend of US$16.7 cents per Ordinary Share, which will be paid on 24 May 2019 to shareholders on the register on 26 April 2018. 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 US$10.7 cents per share amounting to US$78.8 million.

The corporate income tax reform introduced in Mexico in 2014 created a withholding tax obligation of 10% relating to the payment of dividends, including to foreign nationals.

Historically the Company has been making dividend payments out of retained earnings generated before the tax reform came into force and no withholding tax has therefore been applicable. We expect that dividend payments relating to 2019 and future years will attract the withholding obligation. However, foreign shareholders may be able to recover such tax depending on their tax residence and the existence of double taxation agreements.

Our risk management framework is based on our belief in the importance of risk awareness across the Group. This framework enables us to identify, assess, prioritise and manage risks in order to deliver the value creation objectives defined in our business model.

Risk management system

Our risk management system is based on risk identification, assessment, prioritisation, mitigation and monitoring processes, which are continually evaluated, improved and enhanced in line with best practice.

In addition to our established risk management activities, our executives, including operations managers, the controllership group, HSECR managers and exploration managers regularly engage in strengthening the effectiveness of our current controls. This supports the executives and the Board in each of their responsibilities.

Within the identification phase of our risk management system, the company also captures emerging risks that could arise as a result of new developments that have a chance of impacting Fresnillo, either at a macro or operational level. Examples of these are new requirements imposed by changes to regulation, including stricter environmental rules, the commissioning of a new project and the use of state of the art underground technology, amongst others.

2018 risk assessment

During our 2018 risk assessment exercise, a team of 135 people evaluated 109 risks across all our operations, advanced projects, exploration offices, and support and corporate areas.

We narrowed down our 109 risks into major risks which are monitored by executive management and the Audit Committee. We then further consolidated these into 12 principal risks which are closely monitored by the Board of Directors.

As part of our bottom-up process, each business unit head 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 to identify the Group's principal risks. We conducted the same risk analysis on advanced projects, detailing the specific risks faced by each project according to their unique characteristics and conditions.

Response / mitigation to our risks

The Directors are responsible for preparing the annual report and the Group and parent company financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards (IFRS) adopted by the European Union.

The Directors are required to prepare financial statements for each financial year which present a true and fair view of the financial position of the Company and of the Group and the financial performance and cash flows of the Company and of the Group for that period. In preparing those financial statements, the Directors are required to:

• select suitable accounting policies in accordance with IAS 8: 'Accounting Policies, Changes in Accounting Estimates and Errors' and then apply them consistently;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and of the Group's financial position and financial performance;

• state that the Company and the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and

• prepare the accounts on a going concern basis unless, having assessed the ability of the Company and the Group to continue as a going concern, management either intends to liquidate the entity or to cease trading, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the Companies Acts 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable UK law and regulations the Directors are responsible for the preparation of a Directors' report, Directors' remuneration report and corporate governance report that comply with that law and regulations. In addition the Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Neither the Company nor the Directors accept any liability to any person in relation to the annual financial report except to the extent that such liability could arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A and schedule 10A of the Financial Services and Markets Act 2000.

In accordance with provision C.1.1 of the UK Corporate Governance Code, the Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides information to enable shareholders to assess the Company's performance, business model and strategy.

Responsibility statement of the Directors in respect of the annual report and accounts

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.

Signed for and on behalf of the Board

Charles Jacobs

Senior Independent Director

25 February 2019