Fresnillo Regulatory News (FRES)

Fresnillo plc

Fresnillo plc today announced its financial results for the full year ended 31 December 2019. Octavio Alvídrez, CEO said:

"2019 was a more challenging year as expected, but we remain determined and optimistic for the future.

Production did not meet our expectations in 2019. Total silver production fell by 11.6% to 54.6 moz as a result of the expected lower ore grade at Saucito as well as lower than expected ore grades at Fresnillo and San Julián Veins and Disseminated Ore Body (DOB). Gold production of 875.9 koz was down compared to 2018 due to the expected lower production from Noche Buena and a lower ore grade at San Julián Veins.

This challenging operating environment was reflected in our financial performance, with gross profit and EBITDA decreasing by 40.9% and 26.3% respectively. Profit margins decreased accordingly but still remained at healthy levels. We maintained a solid financial position, with US$336.6 million in cash and other liquid funds[1] as of 31 December 2019, notwithstanding paying dividends of US$142.2 million, investing US$559.3 million in capex and spending US$157.9 million on exploration to underpin future growth.

Our focus in 2020 is on maximising the potential of our existing operations. We are committed to working smarter and more efficiently in order to extract maximum value from our asset base. We have implemented a major performance improvement plan across our portfolio that includes intensive infill drilling to improve the certainty of the geological model, dilution control and raising development rates, together with actions to address contractor productivity and equipment availability.

We are investing in infrastructure, plant and machinery including the new Tunnel Boring Machine which is now being ramped up at Fresnillo - one of the first of its kind. We have also begun to define a new programme to control costs and increase productivity.

Though it will take time for these measures to take full effect, we do expect production to stabilise in 2020 and start increasing during 2021.

We continue to invest in our longer term development projects in line with our organic growth strategy. I was pleased to confirm Board approval for the Juanicipio project in early 2019. Juanicipio will be a core element in the Group's future production of silver. Production at Fresnillo will also benefit from the new US$53.8m Pyrites Plant which is on track for completion in 2020.

The safety of our employees and contractors is our key priority so it is with deep sadness that I confirm two fatalities during the year. We remain determined to instil a safety first culture. The "I Care, We Care" has proven to be effective and has contributed to the reduction in our Lost Time Injury Frequency Rate.

We have made excellent progress with our other ESG commitments in the year. Effective and safe management of our tailings facilities has been a major focus after the tragic events in Brazil. Already in line with international standards, we have gone a step further by establishing our own Independent Tailings Review Panel and appointed third party specialists to perform dam safety inspections and review our tailing dam governance system.

As a major participant in the extractive industry, we have a responsibility to integrate renewables and clean technologies into our energy mix. Although the percentage of our energy consumption met by wind power decreased slightly in 2019, due to a significant increase in overall energy use, we remain committed to achieving our goal of using wind power to generate 75% of our electricity consumption by the end of the year. We are rolling out dual fuel engines in haulage trucks, initially at Herradura, which has also had a positive impact on greenhouse gas (GHG) emissions.

Looking ahead, we will continue to manage operational challenges, as we make progress with the performance improvement initiatives. As previously guided, we expect silver production to be in line with 2019, before returning to growth in 2021, driven by operational improvements at the Fresnillo mine, the Pyrites plant, Juanicipio and San Julián. Gold is expected to decline driven by the planned Noche Buena closure and lower production from Herradura. We also anticipate that fixed costs will remain relatively high during 2020, before the cost management initiatives have an impact.

While the broader macro economic environment remains uncertain, we are confident on the outlook for mining in Mexico, where we have welcomed the on-going support of the Mexican Government. We will continue to work hard to ensure that mining is supported by all parts of the federal and state administration.

We will rise to the immediate challenges confronting our business today, and we move forward with certainty and vigour. Our assets are of high quality and our exploration pipeline continues to confirm promising prospects. We have a clear strategy, a talented and committed team, and we look ahead with confidence."

Twelve months to 31 December 2019

* 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 ordinary shares was 736,893,589 for 2019 and 2018. See note 17 in the consolidated financial statements.

2019 Highlights

Higher gold and silver prices offset by lower volumes and operational setbacks

· Adjusted revenue of US$2,270.2 million, up 1.2% over 2018, due to higher gold and silver prices.

· Profit margins decreased but remained at healthy levels. Gross profit and EBITDA down 40.9% and 26.3%, to US$461.7 million and US$674.0 million respectively.

· Profit from continuing operations of US$171.7 million, down 66.1%.

· Capex of US$559.3 million, down 16.4% primarily due to the commissioning of several projects including the pyrites plant at Saucito and the dynamic leaching plant at Herradura in 2018.

· Strong balance sheet and low leverage ratio; cash and other liquid funds[2] of US$336.6 million, down 40.0% mainly due to the high level of capex and dividends albeit being lower 16.4% and 52.3% respectively vs. 2018.

· Dividends of US$142.2 million paid, down 52.3% mainly due to lower profits for the period, in accordance with our dividend policy.

Delivering on development projects and operational improvements

· Full year silver production of 54.6 moz (including Silverstream) down 11.6% on 2018, driven by the lower ore grades at Saucito, Fresnillo and San Julián, both veins and disseminated ore body.

· Gold production of 875.9 koz down 5.1% vs. 2018 mainly driven by the anticipated lower volume of ore processed at Noche Buena, exacerbated by lower ore grades at San Julián.

· Board approval of Juanicipio early in 2019. Mine development at Juanicipio reached over 25 km, with ore from these activities set to be processed at the Fresnillo beneficiation plant from June 2020.

· Construction of the Juanicipio beneficiation plant has been delayed by six months with commissioning now expected in mid 2021.

· The Fresnillo Full Potential (FFP) project underway to address the structural challenges posed by deeper operations, narrower veins and greater ore variability at the Fresnillo and Saucito mines.

· Construction of the new Pyrites Plant at Fresnillo on track for completion in 2H 2020. 

· The second phase of the beneficiation plant optimisation at Fresnillo also continued to progress.

· Successfully commissioned new US$22.7m state-of-the-art tunnel boring machine (TBM) at Fresnillo.

· US$69.3m project to deepen the Jarillas shaft to 1,000 metres at Saucito progresses, with completion due in 2024.

· Silver resources increased 2.4%; gold resources remained stable at 39.0 moz.

· Silver reserves increased 1.7% reflecting the recognition of reserves at Juanicipio for the first time offset by the decrease in reserves at the underground silver mines.

· Gold reserves decreased 16.0% mainly due to the exclusion of reserves at Soledad & Dipolos following the absence of an agreement with the Ejido community, and the exclusion of a number of benches at Herradura resulting from the negative infill drilling results and revised calculations.

· We are committed to improving our safety record as we regret to report that two fatalities occurred during 2019.

· We began work on defining a new programme to control costs and increased productivity in 2H19.

Outlook - stable 2020, return to silver growth in 2021

· In 2020, Fresnillo expects to produce in the range of 51 to 56 moz of silver and 815 to 900 koz of gold.

· The 2019 capex projects will continue in 2020 and will account for the majority of our investment in the year ahead, together with an increase in capex as the construction of Juanicipio progresses.

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://kvgo.com/IJLO/Fresnillo_FY19_Preliminary_Results.

If you are not attending the presentation in person, but wish to ask questions, you will need 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: 0808 109 0700

US: + 1 866 966 5335

Mexico: 00 1 866 966 8830

Int'l: +44 (0) 20 3003 2666

Password: Fresnillo

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

Number: +44 (0) 20 8196 1998

Pin: 8829454#

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 Las Casas Rosario & Cluster Cebollitas), Herradura, Soledad-Dipolos1, Noche Buena and San Julián (Veins and Disseminated Ore Body), three development projects - the Pyrites Plant at Fresnillo, the optimisation of the beneficiation plant also at Fresnillo and Juanicipio, and six advanced exploration projects - Orisyvo, Centauro great potential and Centauro Deep, Guanajuato, Rodeo and Tajitos as well as a number of other long term exploration prospects.

Fresnillo plc has mining concessions and exploration projects in Mexico, Peru and Chile. 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.

1 Operations at Soledad-Dipolos are currently suspended.

cHAIRMAN'S STATEMENT

Addressing our operational setbacks, reaffirming our commitment

In many respects, this has been a disappointing year. We have failed to achieve our expected production volumes and the improvement in our health and safety record has proved elusive. These matters are discussed below or elsewhere in this report.

Furthermore, it is important to reiterate that our commitment to delivering long-term benefits to all of our stakeholders remains undiminished. Indeed, this commitment was formalised during the year through the definition and approval of our Purpose, in line with the requirements of the new UK Corporate Governance Code, as we promised in last year's annual report.

A challenging year for our operations

Unfortunately, our efforts to address a number of the key issues that have been holding back production did not deliver the anticipated outcomes, particularly in the first half of the year at our Fresnillo, San Julián and Herradura mines.

During the year we experienced unexpectedly low ore grades and production, delays to infrastructure projects, shortfalls in contractor performance, higher costs and ineffective maintenance, among other issues. In the face of these challenges, our response has been to increase the pace and scale of investments in a series of projects and take corrective actions to bring production back to acceptable levels in the short term, and to achieve steady growth in future years.

These projects include: the appointment of new teams at Fresnillo and Saucito; significant investment in development works at Fresnillo, specifically one of the first tunnel boring machines of its kind in the world as well as new equipment and technologies; the deepening of hoisting shafts at Fresnillo and Saucito to access deeper reserves; the expansion of the flotation plant at Fresnillo to treat higher lead and zinc grades, and the tailings treatment/pyrite flotation plant at Fresnillo.

Production saw a gradual improvement in the second half of the year, largely due to these actions. In addition, the commissioning in Q3 2019 of a new leaching pad at Herradura is already leading to faster gold recovery.

I would also like to highlight that during 2019 the Board approved our next new mine, at Juanicipio. Construction has commenced and mine development already stands at over 25 kms of underground workings, and we expect the first production stope to be fully prepared by 3Q 2020. After careful analysis, we have made minor adjustments to the project. For example, construction of the beneficiation plant is now expected in mid 2021 and capex has been increased from US$395 million to US$440 million. However, material from development and initial production stopes will be processed at the Fresnillo beneficiation plant from June 2020. 2019 was the first year in which we have recognised reserves at Juanicipio, confirming our belief that this will be an exceptionally high grade mine with the potential to be the foundation for growth in future years.

Financial performance

The year saw production decrease due to a range of challenges. Fresnillo generated $2,270.2 million in adjusted revenue, up 1.2% due to higher precious metal prices. Net Profit decreased 41.2% year on year mainly due to higher costs, while cash and other liquid funds fell by $224.2 million to $336.6 million primarily due to capex investments in new projects.

Articulating our Purpose

Our Purpose is to contribute to the wellbeing of people, through the sustainable mining of silver and gold.

Linking and strengthening our Vision and Values, our Purpose articulates our contribution to society at large and how we will continue to prosper over time - in financial terms and through the positive contribution we make to local communities and the lives of people in Mexico and beyond.

Mining can be a major force for good, but only when it is carried out sustainably and for the benefit of all. We aim to satisfy current demand for our precious metals, which are important investment assets as well as being essential to many industrial products such as medical equipment, solar panels and mobile phones, among others.

At the same time, we are continuing to develop increasingly sophisticated and sustainable mining practices that will create greater efficiency and healthier, safer work environments.

This twin-track approach will ensure our ongoing sustainability as a business, underpin our long-term ability to deliver growth and returns, continue to create employment and help us win recognition as a positive influence for all our stakeholders - local communities and shareholders, our workforce, customers and suppliers as well as governments.

How we are realising our Purpose

Our Purpose expresses our commitment to the wellbeing of all stakeholders; I will outline how we delivered benefits for our key stakeholder groups during the year:

Shareholders

Our operational performance inevitably led to adjustments in our production forecasts, a situation that I know has been frustrating for investors and analysts. While I share their concerns, I am confident that the measures now in place are already providing greater certainty and better results, and will continue to do so in the future.

Our dividend policy remains unchanged. We aim to pay out 33-50% of profit after tax each year, while making certain adjustments to exclude non-cash effects in the income statement. Dividends are paid 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 flow. 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 2.6 US cents per share, with a final dividend of 11.9 US cents per share, bringing the total for the year to 14.5 US cents per share.

Employees and contractors

Our people are the bedrock of our business. We depend on their skills and hard work for each and every ounce of precious metal we recover from the earth - and we owe them the very highest standards of health and safety. This is an area that still requires more focus, cultural change and investment. We regret that two people lost their lives while working at our facilities during the year. Our thoughts and prayers are with the families and friends who lost loved ones.

Our response has been to step up the implementation of our I Care, We Care programme. This has already had an impact at the mines where it is in operation, and it will soon be part of everyday working practices across the Group.

In addition to high standards of health and safety, our people also deserve the best in training and development. During the year, we provided 120 hours of such support to individuals, helping them build their skills, improve their earnings and access all the advantages of long-term careers. In light of the ongoing skills shortages across our industry, we continued to forge strong relationships with leading universities and the top earth science institutions in Mexico. In addition, we have reviewed our recruitment processes to ensure that they maximise the potential of women. Our recruitment of interns and Engineers in Training demonstrate good progress regarding improved diversity, with the percentage of women in these roles increasing from 27.02% in 2018 to 34.84 % in 2019.

Working practices in the Group are characterised by a spirit of partnership and mutual respect, and this was instrumental in the agreement by our unionised employees at the Fresnillo mine to introduce Sunday working. Once fully implemented in 2020, this will give us an additional 52 days of ore extraction. I would like to reaffirm my appreciation for the hard work and expertise, which our teams bring to their work, at every mine and no matter whether they are employees or contractors.

Local communities

As well as providing much needed employment, our mines play important roles in the lives of local people and their families. We rely on local communities for labour and for the general goodwill that helps us maintain our licence to operate - and in return, we invest in a wide range of locally-based programmes. The ultimate aim is to support the creation of sustainable businesses that can prosper without relying exclusively on mining operations.

Consultation is a key element of our community partnerships, never more so than in the early days of a mining project. The Mexican administration has recently emphasised the vital role that consultation with indigenous people has in the permitting process for mines. We fully support this stance and believe that the experiences we have gained in recent years will stand us in good stead for the challenges ahead.

Children are a particular focus for our community activities, and during 2019, 8,700 children benefited from our long-established Picando Letras programme, which aims to encourage reading. We also continue to offer Health Weeks to local people, and in 2019 over 10,500 individuals benefited from high quality health advice and practical support that they would otherwise not have been able to access.

Environmental impact

As our Purpose makes clear, we are a business that aims to serve humanity for decades to come. While extractive industries can impact the availability of resources for future generations, we are committed to developing sustainable mining practices which enable us to contribute to the wellbeing of people while having minimum impact on the environment.

Our climate commitment increases energy efficiency and reduces greenhouse gas emissions. Our drive to increase the use of wind power and innovative dual fuel vehicles prepares the company for a transition to a low carbon future, while also cutting costs. These are concrete examples of how we are embedding sustainability in the DNA of our company.

Board activities

This has been a busy year for the Board. In addition to carrying out our regular activities, we have invested considerable time and expertise in understanding and responding to new regulatory requirements. The new UK Corporate Governance Code and the Companies Miscellaneous (Reporting) Regulations both came into effect on 1 January 2019.

I wish to emphasise here the Board's focus on stakeholder engagement, and in particular workforce engagement, in line with the new Code. During the year the Board assigned the responsibility for overseeing our workforce engagement to Arturo Fernández. We also considered our approach and processes towards stakeholder input into decision-making processes, ensuring the Board's continued compliance with Section 172.

As constituents of the FTSE Index, we have always adopted the highest standards of corporate governance and believe that the new and revised regulations will have a significant impact on the drive to restore public trust in business. Executive pay is an important element in trust, and I was pleased that 99% of votes cast at the AGM were in favour of our policy, endorsing our approach to executive remuneration.

Our aim is for our culture to foster the necessary mindset and behaviours to deliver on our commitment to the sustainable mining of silver and gold.  This culture must embrace ethics and safety, while also driving innovation and operational excellence to enhance productivity while reducing costs and our environmental footprint. During the year, the Board again provided master classes and online training modules for teams across the business, helping them to understand our Purpose, to engage with our culture and to live our Values of Responsibility, Integrity, Trust and Loyalty. The Board has committed to placing even greater focus on our culture in the year ahead.

Changes to the Board

Following Jaime Serra Puche's resignation at the 2019 AGM, we were pleased to welcome Luis Robles to the Board, as an Independent Non-executive Director. A former Chairman of the largest bank in Mexico, BBVA Bancomer, Luis brings valuable experience and expertise to his role. During his career in the banking and financial sectors, he served on various national and international associations, including as Chairman of the Latin American Banking Federation from 2010 to 2012 as well as various roles in the Mexican Banking Association and as Chairman from 2014 to 2017. Luis is a member of both our Audit and Remuneration Committees.

The Board considers that its composition has the appropriate balance of skills, experience and gender to oversee the performance of the executive team and the development of long-term strategy.

Outlook

During the last six months of the year we saw a gradual upturn in production, as the projects and initiatives I have outlined began to feed through into results. I expect this trend to continue, with the year ahead being characterised by greater stability. However, significant improvements will not be seen until 2021.

Despite the operational setbacks of 2019, I have confidence in the Group's underlying strengths, in our strategy and teams, in our culture and behaviour, and in our ability to make valuable contributions to the wellbeing of all our stakeholders.

I would like to place on record my thanks to Board members for their support, and also to pay tribute to the senior management team, which has worked hard to address the year's challenges.

Alberto Baillères

- Non-executive Chairman

chief's executive statement

Rising to challenges, moving forward with confidence

2019 was a year when several negative factors combined to drive down the performance of our mines and caused us to revise our guidance to the markets.

We fell short of the high mine planning and operational execution standards that we have come to expect from our teams, which contributed to lower ore grades and tonnages than anticipated. Delays to infrastructure projects, poor contractor performance, higher costs, new regulatory pressures in Mexico and low equipment availability were significant challenges faced during the year. None of these challenges is insurmountable in its own right - but what marks 2019 as an unusual year is that they coincided at several operations, indicating systemic failures that are now being addressed.

Having realised that we were going to miss our target for silver production, we revised our guidance in Q2 2019 and introduced extensive corrective measures. Inevitably, it is taking time for these measures to have the desired effect and our overall operating performance for this year has therefore been adversely impacted. We expect production to stabilise in 2020, with results improving during 2021.

In addition, although gold production was within the guidance provided at the Capital Markets Day in December, we failed to reach the revised target we had communicated in August, of 880-910 koz. This was primarily due to delays in the construction of the 13th leaching pad at Herradura. We had no alternative but to deposit ore at the top of existing pads, and this led to a slower recovery than initially forecast. Furthermore, the project to implement a Carbon-in-Column process at Noche Buena to increase gold recovery was delayed. While this was successfully concluded later in 2019, it contributed to further decrease gold production against expectation.

Production highlights and price review

In short, total silver production fell by 11.6% to 54.6 moz. At the Fresnillo mine, this was primarily due to decreasing vein width, increased dilution and greater ore variability, contractor underperformance and the need for additional infrastructure as we extend the mine to greater depths. Ore grade variability was also a factor in performance at Saucito and San Julián, together with narrower veins at Saucito.

Gold production of 875.9 koz was down more than expected compared to 2018 driven by the anticipated lower volume of ore processed at Noche Buena, further exacerbated by lower ore grades at San Julián.

There was a steady increase in gold and silver prices during the second half of the year, on the back of healthy demand and a slight reduction in supply. In 2019, average realised silver prices rose by 3.9% while those for gold increased by 11.7%. Average prices for zinc and lead decreased, by 9.3% and 10.5% respectively.

A time to pause, reflect and prepare

Despite the disappointments of 2019, it is important to stand back and take stock of how far we have come, and how the work we are doing today will bear fruit in the future. As we made clear in last year's annual report, 2019 was an opportunity to consolidate our growth while advancing our pipeline. Following a decade where we consistently created value through growth and returns, these last 12 months have been a valuable time for us to pause, reflect and prepare ourselves in order to rise to the challenges we are facing.

How are we going to deliver a performance that will regain the confidence of our stakeholders? By remaining true to the strategy that has seen us established as the world's largest silver producer and Mexico's largest gold producer. This strategy has four pillars, and here I will outline our progress against each one.

Maximising the potential of existing operations

This is the key focus for 2020 and is central to our commitment to consolidate our achievements to date. We are committed to working smarter and more efficiently in order to extract maximum value from our asset base.

Our efforts during 2019 and for the coming year focus primarily on the Fresnillo district. The Fresnillo Full Potential (FFP) project is already helping us to address the structural challenges posed by deeper operations, narrower veins and greater ore variability at the Fresnillo and Saucito mines. At the same time, FFP addresses processing issues that include delayed development and preparation of mining areas, infrastructure, efficiency and productivity.

With regard to infrastructure improvements, we commissioned our new US$22.7m state-of-the-art tunnel boring machine (TBM) in December 2019, with ramp up in the first quarter of 2020. Designed specifically for the conditions at the Fresnillo mine and capable of boring at least 300 metres per month, this is one of the first TBMs of its kind. Further investments in infrastructure at Fresnillo include a new pumping station to improve drainage as well as a new elevator that will cut the travel time of our teams by up to an hour.

On the surface, we are making good progress on our US$30m plant optimisation project at the Fresnillo mine, which will help us manage the higher lead and zinc contents in the deeper areas of the mine. As planned, we have commenced the expansion of the flotation plant. On track for completion by mid 2020, this will complement the additional thickening capacity installed in 2017. Once the mine is developed and able to sustain a production rate of 9,000 tonnes per day, we will implement the third element in the plant optimisation project - the installation of additional vibrating screens, which will further increase the capacity of the plant.

At Saucito, we are continuing with our US$69.3m project to deepen the Jarillas shaft to 1,000 metres. Due for completion in 2024, this will enable us to efficiently hoist ore from the deeper levels of the mine where 42% of the reserves are located.

Technology sits at the heart of initiatives to improve our processes. For example, we are currently implementing semi-automatic operations of long hole drills, in order to increase productivity and equipment utilisation. A total of 15 long hole stopes are being prepared at Fresnillo, with ten of these set for completion by the end of Q2 2020. We also introduced a new communications system in 2019, to improve planning and control processes at the mine. This system provides management with real-time data on everything from manpower allocation to equipment availability - boosting productivity by making sure that we have the equipment and resources we need, when and where we need them.

In addition, we have increased our focus on maintenance in order to improve the availability and reliability of critical equipment.

We have also addressed the lack of reliability of our geological models by creating four specialised teams, each headed by senior operations and exploration specialists and supported by the executive team. These teams are tasked with: improving sampling and geological mapping; ensuring greater quality assurance and control, including at our laboratories; enhancing our geological and resource modelling processes; and implementing measures such as full 3D cavity monitoring technology to improve dilution control and improving the conciliation of reserve estimates and actual tonnages and grades.

Cost management is a key factor in maximising the potential of our existing operations. As Fresnillo has matured as a company, we have realised that our cost control processes have not always kept pace. We are therefore introducing new initiatives to ensure that the fundamentals of sound accounting and cost management remain in place and continue to work effectively. Any developments will take time to feed through into the financial numbers, but we have already made a good start and will continue to focus on this important area through 2020.

Delivering growth through development projects

Situated in the Fresnillo district approximately eight kilometres from the main Fresnillo shaft, the Juanicipio project will be a core element in the Group's future production of silver.

The Board approved the development of Juanicipio early in 2019, and construction is now well underway with over 25 km of underground development already completed and processing of development ore currently expected to commence in mid 2020, ahead of schedule. A joint project with MAG Silver in which we hold 56%, the mine is forecast to produce 11.7 moz of silver and 43.5 koz of gold per year on average, with total indicated and inferred resources of 275.0 moz of silver and 1.48 moz of gold. With an initial mine life of 12 years and considerable potential at depth, Juanicipio's reserves were recognised for the first time in 2019.

Production at the Fresnillo mine will benefit from the new Pyrites Plant. On track for completion in 2020, this 14,000 tonnes per day plant will increase the recovery of silver and gold from the current and historical tailings of Fresnillo. Once operating at full capacity, and including total production from the Saucito plant, it is estimated to produce an average of 3.5 moz of silver and 13 koz of gold every year.

Extending the growth pipeline

Our commitment to exploration across the peaks and troughs of economic cycles has remained consistent since our IPO 11 years ago - and while our current priority is to focus on our existing operations, exploration will continue to be the cornerstone of our longer-term strategy.

During 2019, our team of 100 experienced geologists again worked hard to explore new opportunities, both in the areas around our operations and to a lesser degree in new districts. In total, we invested some US$170m in these activities in 2019.

The results include the identification of a large number of targets in the Fresnillo district, as well as at San Julián, aimed at extending the life of our mines. These are areas where we already have a deep understanding of the geology, and are confident in our ability to exploit new opportunities both quickly and cost-effectively. The projects at Orisyvo and in the Ciénega district also continue to offer exciting potential. However, we have decided to slow the pace of these projects to prioritise current operations, while continuing to de-risk them so we can move them forward when the time is right.

During the year we continued to carry out further work in Peru and Chile, where we have a total of four projects showing good potential. In Peru we are concentrating our efforts on permits and drilling parametric holes, while in Chile our focus is on exploration options with well-established local partners.

As the audit of reserves and resources is a lengthy process, this year for operating mines we brought it forward to 31 May, compared to December in previous years. The earlier timing of the audit meant that costs considered in the estimation were taken from 2018, and not from the most recent 2019 cost base.

Silver resources stood at 2.3 boz, a 2.4% increase over 2018 mainly as a result of exploration at San Julián and, to a lesser extent, Guanajuato. Gold resources remained stable at 39.0 moz. Silver reserves rose slightly, by 1.7% to 484 moz as the recognition of reserves at Juanicipio for the first time was offset by decreases in all our underground silver mines. Gold reserves decreased 16.0%, due to the exclusion of reserves at Soledad-Dipolos and a decrease in reserves at Herradura.

All the Group's reserves are in the probable category because of a lack of detailed mine plans, and geotechnical and financial models. A key focus for 2020 will be tackling these issues and converting resources into reserves.

Advancing and enhancing the sustainability of our operations

We will never compromise the safety of our employees or contractors. Our priority is that everyone goes home to their families at the end of their shift.

Safety is a never-ending challenge for the mining industry, and it is with great sadness that I have to report that despite our best efforts, we had two fatalities during the year. Although this is an improvement on the previous year, it is unacceptable. We are striving to create a working environment that protects all our people from harm, at all times. For example, our I Care, We Care programme brings together industry best practices, systems and behaviours, and was one of primary reasons that the year saw a reduction in our Lost Time Injury Frequency Rate. Over the last 12 months, the programme has been rolled-out to all employees and contractors, focusing on engagement and accountability.

While our tailings storage facilities (TSFs) are considerably smaller than those of other mining companies, we nevertheless recognise their potential to cause human and environmental harm, as highlighted by the recent tragedy in Brazil. We have therefore taken significant steps to ensure the ongoing safety of these facilities. We have 11 TSFs, each one constructed in line with local geologic and seismic conditions. Although all dams comply with Mexican safety requirements, which are similar to standards set in the USA, Canada and Chile, we have taken the decision to go beyond such legislation. We have established our own Independent Tailings Review Panel and appointed independent specialists to perform dam safety inspections and also review and update our tailings dam governance system. We expect their findings to be finalised in 2020.

Although the percentage of our energy consumption met by wind power decreased slightly in 2019, due to a significant increase in overall energy use, we remain committed to achieving our long-term goal for wind power to generate 75% of our electricity consumption. We are also installing dual fuel engines in haulage trucks, initially at Herradura. The usage of Liquid Natural Gas has already led to a 5% fall in greenhouse gas emissions. Both these projects are excellent examples of how wise investment can benefit the environment while also cutting costs.

Our social and environmental performance has consistently been recognised by many organisations. In 2019, among other accolades, we were placed first in the prestigious Integridad Corporativa scheme, which ranked 500 large national and international companies operating in Mexico for their corporate integrity.

Looking ahead

The coming year will see us continue to manage challenges, as we make progress with the initiatives I have outlined in this statement.

Production at our underground silver mines in 2020 is expected to remain at a broadly similar level to 2019, as the anticipated positive impact of the operating initiatives at the Fresnillo mine is likely to be partly offset by the lower ore grade we expect at Saucito.

Gold production is expected to decrease slightly mainly as a result of lower production at Herradura.

We also anticipate that fixed costs will remain relatively high during 2020. As a result, our financial performance could temporarily deteriorate next year in the face of these pressures before our cost management initiatives have an impact. An improvement in operational performance is expected to contribute to lowering the cost per tonne of ore milled as we continue to make significant investment in efficiency initiatives, while we remain committed to improved safety.

The broader environment is to a degree characterised by uncertainty. Trade disagreements, particularly between the US and China, together with ongoing political and economic issues elsewhere including Europe, could lead to headwinds for the mining industry. On the other hand, the greater uncertainty and risk of conflicts in several points of the world, as well as the coronavirus, could lead to higher precious metal prices. Furthermore, there appears to be support for our industry at the higher levels of the new Government in Mexico and we will continue to work hard to ensure that mining is supported by all parts of the federal and state administration.

But while we are striving to rise to the immediate challenges confronting our business today, we are nevertheless moving forward with certainty and vigour. Our assets are of high quality and our pipeline continues to confirm promising prospects. Buoyed by a clear strategy and supported by a talented and committed team, we look ahead with confidence.

Octavio Alvídrez

- Chief Executive Officer

Financial review

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 2019 figures compared to 2018, 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 the business and deliver returns to shareholders.

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

COMMENTARY ON FINANCIAL PERFORMANCE

2019 continued to be a challenging year for the Group. This was reflected in the financial performance for the year, with gross profit and EBITDA decreasing from 2018 by 40.9% and 26.3% respectively and profit margins decreasing accordingly. We maintained a solid financial position, with US$336.6 million in cash and other liquid funds 1 as of 31 December 2019 notwithstanding paying dividends of US$142.2 million in accordance with our policy, investing US$559.3 million in capex and spending US$157.9 million on exploration to underpin our future growth.

Adjusted revenue increased slightly year-on-year due to higher gold and silver prices, which were mostly offset by the lower volumes of gold and silver sold. This slight increase was more than offset by the increase in adjusted production costs[3], higher depreciation and the much smaller positive effect from changes in inventory in 2019 compared to that in 2018 resulting from the gold content in the leaching pads at Herradura being re-assessed. As a result, gross profit and EBITDA decreased 40.9% and 26.3% over 2018.

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 2019 and 2018. See note 17 in the consolidated financial statements.

The Group's financial results are largely determined by the performance at our operations. However, there are other factors such as a number of macroeconomic variables that lie beyond our control and which affect financial results. These include:

PRECIOUS METAL PRICES

In 2019, the average realised silver price increased by 3.9% from US$15.5 per ounce in 2018 to US$16.1 per ounce in 2019, while the average realised gold price rose 11.7% from US$1,269.1 per ounce in 2018 to US$1,418.0 per ounce. In contrast, the average realised lead and zinc by-product prices decreased 9.3% and 10.5% year-on-year, to US$0.89 and US$1.15 per pound, respectively.

However, the Group was affected by the results of the one-off five-year gold hedging programme entered into in 2014, and a series of financial derivatives entered into in 2019 to hedge a portion of its lead and zinc production, both of which are further described below.

MX$/US$ EXCHANGE RATE

The Mexican peso/US dollar spot exchange rate at 31 December 2019 was $18.85 per US dollar, compared to $19.68 per US dollar at the beginning of the year. The 4.3% spot revaluation had a favourable effect on: i) the net monetary peso asset position, which contributed to the US$4.5 million foreign exchange gain; and ii) taxes and mining rights as the revaluation resulted in a decrease in related deferred tax liabilities.

The average spot Mexican peso/US dollar exchange rate remained broadly unchanged at $19.3 per US dollar (2018: $19.2 per US dollar). As a result, there was an insignificant effect on the Group's costs denominated in Mexican pesos (approximately 45% of total costs) when converted to US dollars.

COST INFLATION

In 2019, cost inflation was 3.8%. The main components of our cost inflation basket are listed below:

LABOUR

Unionised employees received on average a 7.5% 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 6.5%.

ENERGY

ELECTRICITY

The Group's weighted average cost of electricity increased by 4.1% from 7.1 US cents per kW in 2018 to 7.4 US cents per kW in 2019. This increase was mainly due to the higher average generating cost of the Comisión Federal de Electricidad (CFE), the national utility.

DIESEL

The weighted average cost of diesel in US dollars increased 6.7% to 87.9 US cents per litre in 2019, compared to 82.42 US cents per litre in 2018.

OPERATING MATERIALS

Unit prices of the majority of operating materials remained broadly stable in US dollar terms, with the exception being sodium cyanide, which experienced year-on-year inflation of 4.4%. However, this was partly offset by the decrease in the unit price of other reagents, such as zinc sulphate. As a result, the weighted average unit prices of all operating materials increased by 1.2% over the year. 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 2019, increases granted to contractors, whose agreements were due for review during the period, resulted in a weighted average increase of 4.7% in US dollars.

MAINTENANCE

Unit prices of spare parts for maintenance increased slightly, by 1.4% on average in US dollar terms.

OTHER costS 

Other cost components include freight and insurance costs, which increased by an estimated 10.3% and 2.5% in US dollars, respectively. The remaining cost inflation components experienced average inflation of 1.1% in US dollars over 2018.

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 1 (US$ MILLIONS)

Adjusted revenue increased by US$26.8 million mainly as a result of the increase in gold and silver prices. Total revenue remained broadly unchanged at US$2,119.6 million.

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 1 BY METAL (US$ MILLION)

The increase in gold and silver prices, partially offset by the lower lead and zinc prices, resulted in a positive effect in Adjusted revenue of US$128.5 million. This was mostly offset by the US$101.7 million adverse effect of the lower volumes of silver and gold sold, partially offset by the higher lead and zinc sales volumes. Silver volumes sold were impacted by the lower production at each of the silver underground mines, while the volumes of gold sold were affected by the expected lower production from the Noche Buena mine and the lower grade at San Julián veins.

ADJUSTED REVENUE BY METAL

Herradura continued to be the greatest contributor to Adjusted revenue, representing 30.6% due to the slight increase of 1.8% in volume of gold sold at a higher price. Saucito's contribution remained broadly stable at 21.7% in 2019 (2018: 21.9%), while Fresnillo contributed a lesser share of Adjusted revenue but remained the third most important, contributing 15.9%. The contribution to the Group's Adjusted revenue from the San Julián mine decreased from 16.4% in 2018 to 15.0% in 2019, reflecting the lower volumes of gold and silver sold. As expected, Noche Buena's contribution continued to decrease from 9.4% in 2018 to 7.8% in 2019, reflecting the gradual depletion of the mine as it approaches the end of its mine life. Ciénega's contribution to the Group's Adjusted revenue increased slightly, from 8.3% in 2018 to 9.0% in 2019 as a result of the higher gold and silver prices and the increase in lead and zinc volumes sold.

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.

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 REVENUE1 BY MINE

VOLUMES OF METAL SOLD

Hedging

In 2019, a loss of US$6.0 million was recognised in the income statement as a result of the hedging of gold, lead and zinc. This compared unfavourably to the US$1.6 million gain registered in 2018. The following paragraphs outline our hedging activities and explain the background to the 2019 loss.

In the second half of 2014, Fresnillo plc initiated a five-year one-off hedging programme to protect the value of the investment made in the acquisition of Newmont's minority stake (44%) in Penmont. 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 expiry of the derivatives over the last five years of the hedging programme.

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

We hedged a portion of our by-product zinc production in the first half of 2019 with maturities throughout the year, while in the last quarter of 2019 we hedged a portion of our by-product lead production with maturities in 2020. The table below illustrates the expired hedging volume, the results in 2019 and the outstanding balance for 2020.

TREATMENT AND REFINING CHARGES

Treatment and refining charges 1 are reviewed annually using international benchmarks. Treatment charges per tonne of lead and zinc concentrate increased in dollar terms by 4.0% and 51.7%, respectively, compared to 2018, while silver refining charges declined by 17.0% over the year as a result of the lower mine supply of lead concentrates. The significant rise in the treatment charge per tonne of zinc is explained by the increase in mine supply, which is surpassing the limited worldwide smelting capacity. The increase in treatment charges per tonne of lead and zinc and reduction in silver charges, combined with the higher volumes of zinc concentrates shipped from our mines to Met-Mex, resulted in a 2.4% increase in treatment and refining charges set out in the income statement in absolute terms when compared to 2018.

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

COST OF SALES

2 Adjusted production costs is calculated as total production costs less depreciation and profit sharing. The Company considers this a useful additional measure to help understand underlying factors driving production costs in terms of the different stages involved in the mining and plant processes, including efficiencies and inefficiencies as the case may be and other factors outside the Company's control such as cost inflation or changes in accounting criteria.

Cost of sales increased 25.3% to US$1,657.9 million in 2019. The US$334.8 million increase is explained by the following combination of factors:

• An increase in Adjusted production costs (+US$221.1 million). This was primarily due to: i) an increase in development works mainly at Fresnillo, San Julián veins and Saucito (+US$56.9 million); ii) additional maintenance, operating materials and contractors associated with longer haulage distances, narrower veins, better equipment availability and the infill drilling programme mainly at Herradura, Ciénega and San Julián DOB (+US$46.2 million); iii) higher stripping costs expensed at Herradura following the reassessment of the number of mining components from two to one effective from 2H 2018 (+US$46.1 million); iv) cost inflation of 3.8% (+US$35.4 million); v) the additional adjusted production costs associated with the first complete year of operations at the Pyrites Plant at Saucito and the second line of the Dynamic Leaching Plant at Herradura (+US$33.4 million); and vi) other costs (+US$3.1 million).

• Depreciation (+US$77.8 million). This is mainly due to the increased depletion factors, the full year of operation at the Pyrites plant and the second line of the dynamic leaching plant and the amortisation of capitalised mining works.

• The decrease in the change in work in progress of US$42.5 million (of which -US$85.6 million related to the reassessment of gold contents in the leaching pads at Herradura and US$43.1 million were explained by the variation of change in inventories excluding the latter effect). Change in work in progress was -US$11.1 million in 2019 mainly as a result of the increase in unit cost at Herradura and Noche Buena, together with an increase in the volume of inventories at the dynamic leaching plants. This compared negatively to the -US$53.6 million registered in 2018 mainly as a result of the re-assessment of the gold content in the leaching pads at Herradura (see notes (2c) and (5) in the notes to the financial statements).

These negative effects were partly offset by year-on-year decrease in:

• Profit sharing (-US$3.4 million) and others (-US$3.0 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 changes in production costs 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.

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 generate competitive profit margins.

Fresnillo: Mainly due to an increase in development works and maintenance activities, together with increased consumption of operating materials. Additionally, cost inflation for this mine was 4% mainly due to contractors and labour.

Saucito: Mainly due to the full year of operations of the new pyrites plant following its commissioning at the end of 1H 2018; cost inflation for this mine was 4.1% primarily due to contractors, operating materials and labour.

Ciénega: Primarily due to increased contractor, operating materials and labour costs.

San Julián (Veins): Mainly due to the increase in development.

San Julián (DOB): Mainly due to the increased consumption of operating materials to improve stability in certain areas.

Herradura: Mainly due to the increase in maintenance and higher consumption of operating materials associated with longer haulage distances and the increased stripping costs expensed following the reassessment of the number of mining components from two to one. Additionally, cost inflation for this mine was 3.2% mainly due to diesel, maintenance and labour

Noche Buena: Primarily as a result of lower economies of scale due to the decrease in volume of ore processed, winding down as it approaches it nears end of mine life.

Fresnillo: Principally due to lower silver ore grade, higher cost per tonne and higher treatment charges, partially mitigated by the higher by product credits.

Saucito: Mainly as a result of the higher cost per tonne , the lower silver grade and the higher treatment charges, partially mitigated by the increase in by-product credits per ounce of silver resulting from the higher price of gold and increased volume of zinc sold.

Ciénega: Primarily due to the higher by-product credits per gold ounce due to the increase in silver price and increased base metal contents sold. This was partially offset by the higher cost per tonne; the decrease in silver grade and higher treatment and refining charges.

San Julián (Veins): Mainly due to the lower ore grade and higher cost per tonne, mitigated by higher by-product credits per ounce of silver.

San Julián (DOB): Mainly explained by the lower ore grade achieved and higher treatment and refining charges resulting from the increase in volumes of lead and zinc concentrates send to Met-Mex.

Herradura: A result of the higher cost per tonne and the reassessment of the number of mining components from two to one.

Noche Buena: Due to higher cost per tonne.

In addition to the traditional cash cost, 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

Fresnillo: The US$4.6 per ounce increase was explained by higher capitalised mine development per ounce, an increase in sustaining capex per ounce and the higher cash cost.

Saucito: Mainly due to higher capitalised mine developments per ounce and increase in cash cost, mitigated by lower sustaining capex per ounce.

Ciénega: Primarily driven by lower sustaining capex per ounce and the factors benefiting cash cost.

San Julián (Veins): Due to higher capitalised mine development per ounce, increased sustaining cost per ounce and the factors affecting cash cost.

San Julián (DOB): Driven by the higher sustaining capex per ounce and the increase in cash cost, mitigated by a decrease in capitalised mine development per ounce.

Herradura: Mainly due to the higher cash costs, mitigated by the decrease in capitalised stripping per ounce and lower sustaining capex per ounce.

Noche Buena: Result of the lower capitalised stripping per ounce, partly offset by the higher cash cost.

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 40.9% to US$461.7 million in 2019.

The US$319.0 million decrease in gross profit was mainly explained by: i) the much smaller positive effect from changes in inventory in 2019 compared to that in 2018 (-US$96.1 million, of which -US$85.6 million was explained by the variation of change in work in progress resulting from the reassessment of gold contents in the leaching pads and -US$10.5 million resulted from the imputed impact on revenues); ii) the lower silver ore grades at the silver underground mines, mitigated by higher grades at Herradura and Noche Buena, (-US$80.1 million); iii) higher depreciation (-US$77.8 million); iv) the decrease in volume of ore processed, mainly at Noche Buena (-US$62.2 million); iv) the increased development works (-US$56.9 million); v) the additional costs incurred due to increased requirements for maintenance, operating materials and contractors, associated with longer haulage distances, narrower veins, better equipment availability and tighter infill drilling (-US$46.1 million); vi) the increased stripping costs expensed following the reassessment of the number of mining components from two to one at Herradura (-US$46.1 million); vii) cost inflation (-US$35.4 million); and viii) others (-US$8.4 million). These adverse factors were partly mitigated by: i) the higher average realised gold and silver prices (+US$128.5 million); ii) the variation of change in inventories excluding the effect of the 2018 reassessment of gold contents in the leaching pads at Herradura (+US$43.1 million); and iii) increased gross profit at pyrites plant and second line of the dynamic leaching plant resulting from its first complete year of operations (+US$18.5 million).

With the exception of Ciénega, gross profit decreased year-on-year at all mines. Herradura and Saucito remained the largest contributors to the Group's consolidated gross profit, with both recording small increases in their percentage share. In contrast, the lower ore grades at San Julián, together with the increased production costs and depreciation, resulted in a gross loss in 2019. Fresnillo and Noche Buena's share of the Group's total gross profit remained steady at 18.8% and 7.4% respectively, while Ciénega's contribution increased slightly to 7.3%.

CONTRIBUTION BY MINE TO CONSOLIDATED GROSS PROFIT, EXCLUDING HEDGING GAINS AND LOSSES

ADMINISTRATIVE AND CORPORATE EXPENSES

Administrative and corporate expenses increased 15.7% from US$83.3 million in 2018 to US$96.4 million, mainly due to an increase in advisory services provided by consultants (legal, safety, taxes, geological, amongst others), and increased corporate services provided by Servicios Industriales Peñoles, S.A.B de C.V., in relation to new operations, namely the pyrites plant and the second line of the dynamic leaching plant, and approved development projects.

EXPLORATION EXPENSES

Exploration expenses decreased as planned by 8.6% from US$172.8 million in 2018 to US$157.9 million in 2019, in line with the strategy to focus exploration at specific targets, including our current operating districts and advanced exploration projects. An additional US$12.2 million was capitalised, mainly relating to exploration expenses at the Juanicipio project, Guanajuato and Centauro Deep. As a result, risk capital invested in exploration totalled US$170.1 million in 2019, a 6.1% decrease over 2018. In 2020, total invested in exploration is expected to be approximately US$150 million, of which US$15 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 2019, EBITDA decreased 26.3% to US$674.0 million mainly due to the lower gross profit. As a result, EBITDA margin expressed as a percentage of revenue decreased, from 43.5% in 2018 to 31.8% in 2019.

OTHER OPERATING INCOME AND EXPENSE

In 2019, a net loss of US$12.8 million was recognised in the income statement mainly as a result of the disposal of assets, environmental activities and donations. This compared unfavourably to the US$3.3 million net gain recognised in 2018 mainly as a result of the partial reimbursement for an insurance claim at Saucito.

SILVERSTREAM EFFECTS

The Silverstream contract is accounted for as a derivative financial instrument carried at fair value. The total revaluation effect recorded in the 2019 income statement was a gain of US$48.3 million. This includes: i) a positive non-cash revaluation effect of US$6.7 million mainly as a result of the market update of certain variables such as the forward price of silver and the discount rate used; partially offset by the updating of the Sabinas production plan, which included a new estimate of reserves and resources; and ii) a US$41.6 million non-cash gain mainly generated by the unwinding of the discounted values. The total revaluation effect recorded in 2018 was a US$15.0 million gain.

Since the IPO, cumulative cash received has been US$653.6 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

Net finance costs of US$46.5 million compared unfavourably to the US$26.9 million recorded in 2018. The 2019 net finance costs mainly reflected: i) the interest on the US$800 million principal amount of 5.5% Senior Notes, net of interest received and capitalised; and ii) US$15.7 million in interest and surcharges, which resulted from aligning the tax treatment of mining works across the Group's underground mines to the agreement reached between SAT, Prodecon and Fresnillo plc relating to years 2014 to 2018, which was paid in 2019 (the voluntary tax amendment). Detailed information is provided in note [X] to the financial statements. A portion of the interests from the Senior Notes are capitalised, hence not included in finance costs. The amounts capitalised in 2019 and 2018 were similar so the year on year impact was immaterial.

FOREIGN EXCHANGE

A foreign exchange gain of US$5.1 million was recorded as a result of the realised transactions in the year and the 4.3% revaluation of the Mexican peso against the US dollar over the year on the value of peso-denominated net monetary assets. This compared positively against the US$8.1 million foreign exchange loss recognised in 2018.

The Group enters into certain exchange rate derivative instruments to manage its exposure to foreign exchange risk. The aggregate effect on income in the year was a loss of US$776,661, which compared negatively to the loss of US$321,873 registered in 2018.

TAXATION

A corporate income tax credit of US$8.0 million arose in the current year which compared favourably to the US$120.6 million charge in 2018. The effective tax rate, excluding the special mining rights, was -4.5% (24.9% in 2018). The reason for the negative tax rate was the significant permanent differences between the tax and accounting bases, together with the low level of profit before income tax. The permanent differences were mainly related to: i) the revaluation of the Mexican peso which had an important impact on the tax value of assets and liabilities that are denominated in Mexican pesos (US$37.1 million); ii) the inflation rate which impacted the inflationary uplift of the tax base for assets and liabilities (US$17.1 million); iii) the tax credit related to the special tax on diesel (US$10.0 million); iv) a new border zone tax benefit which benefited the Herradura and Noche Buena operations (US$6.4 million); and v) the effect recorded in the year in respect of the voluntary tax amendment relating to the tax treatment for mining works at underground mines for the years 2014 to 2018 (US$5.1 million).

A mining rights credit of US$19.1 million arose in 2019 compared to a US$13.3 million charge in 2018. The main reason for the negative mining rights was the effect that the voluntary tax amendment relating to the tax treatment for mining works for the years 2014 to 2018 had on the deferred mining rights.

PROFIT FOR THE YEAR

Profit for the year decreased from US$350.0 million to US$205.8 million in 2019, a 41.2% decline year-on-year as a result of the factors described above.

Excluding the effects of the Silverstream contract, profit for the year decreased from US$339.5 million to US$172.0 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 30(c) to the financial statements.

Cash generated by operations before changes in working capital decreased by 26.3% to US$685.5 million, mainly as a result of the lower profits generated in the year. Working capital increased US$56.6 million mainly due to: i) higher trade and other receivables resulting from higher precious metals prices and an increase in VAT receivables (US$39.2 million); ii) increased ore inventories in the leaching pads at Herradura and Noche Buena (US$28.7 million); and iii) an increase in prepayments and other assets (US$3.3 million). This increase in working capital was partly offset by an increase in trade and other payables (US$14.6 million).

Taxes and employee profit sharing paid decreased 10.0% over 2018 to US$193.0 million. This included a US$39.7 million cash payment of income tax and special mining rights related to the amendment in the treatment of mining works across the underground mines. For further details, please see note 10 to the financial statements. The main reason for the 10% decrease was that the Group was able to recover US$45.7 million of income tax receivables.

As a result of the above factors, net cash from operating activities decreased 25.9% from US$588.4 million in 2018 to US$435.9 million in 2019.

Other sources of cash were the proceeds of the Silverstream contract of US$24.3 million and capital contributions from minority shareholders in subsidiaries of US$53.3 million.

Main uses of funds were:

i) purchase property, plant and equipment for a total of US$559.3 million, a 16.4% decrease over 2018. Capital expenditures for 2019 are further described below:

PURCHASE OF PROPERTY, PLANT AND EQUIPMENT

ii) Dividends paid to shareholders of the Group in 2019 totalled US$142.2 million, a 52.3% decrease over 2018, in line with our dividend policy which includes a consideration of profits generated in the year. The 2019 payment included the final 2018 dividend of US$123.1 million and the 2019 interim dividend paid in September of US$19.2 million.

iii) Net finance expenses of US$32.9 million, mainly reflecting the interest paid in relation with the issuance of the US$800 million principal amount of 5.500% Senior Notes, and the interest and surcharges which resulted from the voluntary tax amendment.

The sources and uses of funds described above resulted in a decrease in net cash of US$224.2 million (net decrease in cash and other liquid assets), which combined with the US$560.8 million balance at the beginning of the year resulted in cash and other liquid assets of US$336.6 million at the end of 2019.

BALANCE SHEET

Fresnillo plc continued to maintain a solid financial position with cash and other liquid funds 1 of US$336.6 million as of 31 December 2019, albeit decreasing 40.0% versus December 2018, as explained above.

Inventories increased 8.6% to US$363.7 million mainly as a result of the increase in inventories of gold on the leaching pads at Herradura.

Trade and other receivables increased 12.1% to US$517.8 million mainly as a result of an increase in value added tax recoverable [and the higher precious metals prices, which increased the accounts receivables with Met-Mex]. The increase in value added tax recoverable resulted mainly from the additional review procedures set out by the Mexican tax authorities to validate and authorise reimbursement of balances to taxpayers, thus resulting in delays in reimbursements. Management is actively working to ensure that requirements have been met in order to reduce the time to recover VAT receivable balances.

The change in the value of the Silverstream derivative from US$519.1 million at the beginning of the year to US$541.3 million as of 31 December 2019 reflects proceeds of US$26.2 million corresponding to 2019 (US$20.9 million in cash and US$5.3 million in receivables) and the Silverstream revaluation effect in the income statement of US$48.4 million.

The net book value of property, plant and equipment was US$2,813.4 million at year end, representing a 4.0% increase over 2018. The US$108.1 million increase was mainly due to the advancement of 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$3,278.7 million as of 31 December 2019, a 4.8% increase over 2018. This was mainly explained by the increase in retained earnings, reflecting the 2018 profit and the net unrealised gains on cash flow hedges.

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

DIVIDENDS

Based on the Group's 2019 performance, the Directors have recommended a final dividend of 11.9 US cents per Ordinary Share, which will be paid on 2 June 2020 to shareholders on the register on 24 April 2020. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars. This is in addition to the interim dividend of 2.6 US cents per share amounting to US$19.2 million. This final dividend is lower than the previous year due to the lower profit in 2019, and remains in line with the Group's dividend policy.

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.

MANAGING OUR RISKS AND OPPORTUNITIES

Our risk management process aims to strike a balance between mitigating and monitoring our risks, and maximising the potential reward. We have a structured internal risk management process in place to identify risks while simultaneously taking into account the views and interests of our stakeholders.

Our risk management framework reflects the importance of risk awareness across the Group. The 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 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.

The 2018 UK Corporate Governance Code covers emerging risks for the first time, and this has required the Board to carry out a robust assessment of the Company's emerging risks, disclose procedures to identify them and also explain how these are being managed.

Within the system's identification phase, we capture 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. To strengthen our emerging risks management framework, during the last quarter of 2019 and early 2020 we carried out activities to: (1) define the emerging risk concept for Fresnillo; (2) deploy effective monitoring mechanisms; (3) carry out horizon scanning to consider disruptive scenarios, and; (4) implement mitigating control actions and enhance our risk awareness culture. This process involved workshops, surveys and meetings with the Executive Committee, business unit leaders, support and corporate areas, as well as suppliers, contractors and customers. We also consulted third party information from global risk reports, academic publications, risk consulting experts and industry benchmarks.

We define emerging risks as new manifestations of risk that cannot yet be fully assessed, risks that are known to some degree but are not likely to materialise or have an impact for several years, or risks that we are not aware of but that could, due to emerging macro trends in the mid or long term, have significant implications for our ability to achieve our strategic goals.

An example of an emerging risk is a water crisis, which we define as the lack of sufficient available water resources to meet the consumption demanded by a region. Such an outcome could involve water stress, water shortage or loss of a water source. This risk could represent a long-term threat to our business, given society's increasing demand for sustainable working practices.

We have a number of mitigation activities in place regarding water stewardship. Examples include: evaluating water risk using the aqueduct tool from the World Resources Institute (WRI); carrying out an Environmental Impact Assessment (EIA) of irrigation and drainage projects to gain knowledge of water resources and their vulnerability on a local and regional scale; respecting our water quotas, monitoring our discharges and taking action to ensure that they adhere to water quality regulations; cooperating with water authorities and other stakeholders, including communities, to increase water access; implementing closed water circuits to eliminate the need to discharge processed water into water streams; reusing wastewater from municipalities and our own operations and camps, and; accounting for water use, using the Water Accounting Framework proposed by the Minerals Council of Australia. From 2020 onwards, emerging risk assessment will be embedded as part of the principal and individual risk management process.

2019 risk assessment

As part of our bottom-up process, each business unit head determined the perceived level of risk for their individual unit's risk universe. Executive management then reviewed and challenged each perceived risk level, and compared it to Fresnillo plc's risk universe (109) as a whole. The results of this exercise were used as an additional input to define 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.

During our 2019 risk assessment exercise, 144 people provided input to evaluate 109 risks across all our operations, advanced projects, exploration offices, and support and corporate areas.

The ERM 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.

Following this exercise, there were no changes to the principal risks identified, however the likelihood and potential impact increased in respect of Safety, Union Relations, Exploration and Projects.

Statement of Directors' responsibilities

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

2 March 2020