Fresnillo Regulatory News (FRES)

Fresnillo plc

2011 Preliminary Announcement

Operational highlights

·; Record attributable gold production of 448.9 koz (up 21.6%) due to ramp-up at Soledad-Dipolos and higher throughput at Herradura

·; Stable silver production of 41.87Moz (including Silverstream) benefited from the start-up of Saucito

·; Noche Buena to commence production in March 2012

·; Very strong exploration results, 23% increase in silver resources (1.8 billion oz) and 17% in gold resources (23.5Moz).

·; Implementation of the Safety Action Plan in response to fatalities in the year

·; On track to produce 65 million ounces of silver and a new target of 500,000 attributable ounces of gold annually by 2018

Financial highlights

·; Adjusted revenue1 up 56.6% to US$2,307.5 million

·; EBITDA2 up 62.8% to US$1,538.5 million (EBITDA margin of 70.2%)

·; Fresnillo remains in the lowest quartile of the cost curve

·; Profit from continuing operations up 63.3% to US$1,360.9million

·; Profit before interest and tax for the year of US$1,038.6 million up 39% (including a US$114.5 million of Silverstream revaluation effects)

·; EPS up 35.6% to US$1.257

·; Robust balance sheet with no debt and a strong cash position of US$685 million

·; US$ 179m capital invested in exploration3

·; US$423m invested in CAPEX4

·; Final dividend of 40.0 US cents per ordinary share declared, bringing total dividends for 2011 to 102.85 US cents per share (2010: 44.8 US cents)

Highlights for 2011

* 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

*** 2010 gross profit does not include freight cost as this is now presented as selling expenses

**** The weighted average number of shares for 2011 was 717,160,159

Chief executive Jaime Lomelín said: "We delivered exceptional financial performance in 2011 on the back of strong precious metal prices and record gold production. EBITDA was up 63% to US$1.5 billion with EBITDA margin for the year increasing to over 70% and EPS up 36% despite cost pressures. We are delighted to declare a final dividend of 40 US cents per share bringing our total dividend for the year to 103 US cents per share.

"We also made significant progress towards our long-term goals, with development projects on track, significant expansion of the resource base, and a robust pipeline of growth projects. We are now a significant gold producer in our own right and have increased our 2018 target to produce 500,000 ounces per year.

"However, we are disappointed with our safety performance as 2011 saw a reversal of our strong track record. A comprehensive review of our safety and health programme was undertaken, and we will continue to implement rigorous initiatives to achieve our zero fatality target.

"For 2012, the economic outlook may be uncertain, but our commitment to continuous investment in exploration, productivity improvements, bringing a new mine or expansion on line every year for the next five years, cost controls and the enhanced safety culture remains unchanged, supporting long-term value creation for all stakeholders."

Analyst Presentation

Fresnillo plc will be hosting a presentation for analysts and investors today at 09.00 (GMT) at JP Morgan Cazenove at Level 6, Board Room, 20 Moorgate London EC2R 6DA.

For those unable to attend the presentation, dial-in details are set out below:

Dial in number: +44 (0) 1452 541 076

Access Code: 52885754

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 second largest gold producer, listed on the London and Mexican Stock Exchanges under the symbol FRES.

Fresnillo has five producing mines, all of them in Mexico - Fresnillo, Ciénega, Herradura, Soledad-Dipolos and Saucito; four development projects -Noche Buena (new gold mine at Herradura District), San Ramón mine (a satellite of the Ciénega gold mine), Saucito II, and Dynamic leaching to treat high grade gold ore from Herradura and Soledad-Dipolos mine; and five advanced exploration prospects - San Julián, Centauro Deep, Juanicipio, Orysivo and Las Casas as well as a number of other long term exploration prospects. In total, has mining concessions covering approximately 2.1 million hectares in Mexico.

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

Fresnillo's goal is to maintain the Group's position as the world's largest primary silver company, producing 65 million ounces of silver and 500,000 ounces of gold by 2018.

Dear Shareholders,

Dear Shareholders,

I am pleased to report strong financial results in 2011, driven by the strength of precious metal prices and record gold production. While silver production dropped at our flagship Fresnillo mine due to declining ore grades and additional safety measures, it was largely compensated by the successful start-up of the Saucito mine. 

Our continuous and growing investment in exploration in recent years has resulted in a strong pipeline of projects at all stages of exploration and development, ensuring long-term organic growth and advancing our strategic objectives. We begin 2012 well positioned in the precious metals industry with a low cost production profile, rich resource base, robust growth pipeline and strong cash position.

I believe the renewed focus on safety and corrective measures we are taking following our unacceptable 2011 safety performance, combined with a more deeply embedded risk management culture will support long-term value creation for all Fresnillo stakeholders.

Our growth strategy

The fundamentals of the precious metals market have significantly changed in the past decade, with exchange traded funds and investment demand now seen as the primary drivers of pricing, which in turn are strongly influenced by global macroeconomic instability and geopolitical tensions rather than the once typical cycle of our industry: rising demand-higher prices-producer expansion-rising inventories-softer prices.

Our strategy of consistent investment across precious metals cycles seems particularly prescient when those cycles are increasingly volatile and unpredictable. Given the typical 10+ year span from discovery of an ore body to commissioning of a mine and the difficulty of predicting metal prices, we believe that consistent investment in exploration and low cost production is most likely to ensure long-term, profitable growth. Furthermore, this strategy has allowed us to continuously employ a stable and loyal workforce with the skill mix required for all stages of the project cycle, which is a competitive advantage during times such as these when skilled workers are in high demand.

As a result of this strategy, in 2011 we commissioned the new Saucito mine (silver), completed construction of Noche Buena (gold) and expanded production capacity at Soledad-Dipolos (gold), all of which were early exploration prospects at a time when silver and gold prices were nowhere near their levels today.

Maximising the potential of our operations

Of course revenue generation is driven by prevailing prices at the time our concentrates reach the market. Our margins are driven by continued improvements in production, productivity, replacement of ore reserves and cost controls.

Our flagship Fresnillo silver mine has been in near continuous operation for almost 500 years and is still the world's single largest primary silver mine, producing 2.8% of global production in 2011. The challenge is to compensate for the trend of declining grades in current reserves by identifying new high grade areas and increasing the volume of ore processed, while profitably mining the plentiful, lower grade resources. To do so, we continue to explore in the mine's area of influence and plan to expand milling capacity from 8,000 to 10,000 tpd in 2013-2014.

To reinforce safety conditions in the mine, we restricted production at certain higher grade stopes at Fresnillo for several months to ensure adequate backfilling and ground control. This resulted in annual silver production at this mine of 30.3 million ounces, lower than the expected 34.7 million, but reaffirmed our commitment to the safety of our employees. The San Carlos shaft was commissioned at year end, which will reduce hoisting and haulage costs by providing direct access to the western zone of the San Carlos vein.

The successful commercial start-up of the Saucito mine in April 2011, the Group's fifth operating mine, compensated for the lower production of the Fresnillo mine. The ramp-up of production to 5.9 million silver ounces over the course of the year exceeded the revised target of 5.5 million ounces, itself up from the original full year target of 4.7 million ounces. Higher than expected production was achieved by milling at full capacity of 3,000 tpd, treatment of stockpiled ore from the pre-operative phase and ore from the initial production stopes. Over the course of 2012 the mine and plant operations should stabilise and concentrate quality improve as more ore becomes available from production stopes.

Total attributable silver production in the year included 3.9 million ounces of silver accrued under the Silverstream Contract, 10.8% higher than in 2010.

The Group achieved record gold production of 448,866 attributable ounces, up 21.6% over 2010. This was due to the successful ramp-up of expanded production capacity at Soledad-Dipolos to 158,513 ounces, exceeding the target of 130,000 ounces (attributable production at this mine was 88,767 ounces); higher volumes from Herradura and Saucito; and the commissioning of Ciénega's plant expansion and development ore from its new satellite mining area, San Ramón.

These results put us on track to meet our revised production targets for 2018 of 65 million ounces of silver and 500,000 ounces of gold per year, with 650 million ounces of silver and 5.0 million ounces of gold in reserves at that time.

Lead and zinc production increased by 13.0% and 2.9% respectively, due to the increased volumes of ore processed and higher ore grades at Fresnillo and Saucito. These base metals are by-products of the Group's core operations.

Silver continues to account for a majority of Group revenues, but the share of gold rose from 36.1% in 2008 to 43.7% in 2011. Given that 3 of our 5 operating mines, the new mine coming on line next year, and 3 of our 5 advanced exploration prospects are all in gold, our profile as a gold producer will strengthen over time while we maintain our position as the world's largest primary silver miner. By-product metals, lead and zinc, comprised only 3.7% of 2011 revenues.

Our capital expenditure profile illustrates the Group's strategy of organic growth and continued productivity improvements.

In 2011, we completed the expansion at Soledad-Dipolos and construction of the San Carlos shaft at Fresnillo. We also expanded milling capacity at Ciénega and the sinking of the shaft to stabilise gold production at this mine at 110,000 ounces per year.

We also completed the sinking of the Jarillas shaft at Saucito, which will reduce hoisting and haulage costs when operational in late 2012; and began construction of the dynamic leaching plant at Herradura, which will process high grade ore from Herradura and Soledad-Dipolos, increasing the gold recovery rate from approximately 70% (obtained with the current heap leaching process) to 95% once operational in 2013. This project will add an average of 51,000 gold ounces per year.

A robust growth profile in precious metals

In 2011 we concluded construction of the Noche Buena gold mine, consolidating our position in the Herradura District. The mine will become operational in the first quarter of 2012 with annual average production of 42,000 attributable ounces of gold over the initial five year mine life (75,000 total gold ounces), although we are confident that there is potential for longer mine life.

The Group maintains the largest land area of concessions for precious metals exploration and mining in Mexico, totalling 2.1 million hectares. Our primary focus is on high potential silver and gold projects that can be developed into low-cost, long-life world-class mines or clusters of mines. Central to our land acquisition and exploration efforts are community relations. The support of local governments, non-governmental organisations and community leaders is essential to the successful progression of any project.

We maintain strict and consistent investment parameters in terms of tonnage, ore grade and production costs, with an eye towards consolidating our mining districts. Projects that meet these criteria are advanced through a disciplined development process.

The development of underground mines takes time, with results from surface drilling requiring confirmation by underground exploration and the metallurgical testing of bulk samples. We conduct initial underground exploration and development in the pre-feasibility phase in a manner that will optimise the investment and shorten future mine development schedules. Progress at advanced projects includes:

• At San Julián (silver/gold) and Centauro Deep (gold), we are constructing ramps to conduct further exploratory drilling and testing.

• Work on the second stage of the Saucito mine included drilling at the Santa Natalia (silver/gold) and Jarillas west (silver/gold) veins and commencement of development activities.

• At Orisyvo (gold) we are constructing an exploration adit and are continuing to delineate the ore body in order to determine whether it should be developed into an open pit or underground mine, and to obtain further samples for metallurgical testing.

The Group's total capital investment in exploration was a record US$179.0 million in 2011, a 78.8% increase over the 2010 figure. Of this, US$134.0 million was expensed to the income statement, while the remainder was capitalised on the balance sheet, reflecting investment in construction and mine works.

The 2011 exploration programme yielded promising results. Total attributable resources rose from 1.5 billion ounces of silver at 31 December 2010 to 1.8 billion ounces, and from 20.1 million ounces of gold to 23.5 million ounces.

Interesting values were intersected in new areas at the Lucerito (Durango), Candameña (Chihuahua), and Amata (Peru) projects. A number of new targets are currently being analysed in the Herradura corridor and northern Mesa Central (the plateau in Mexico that extends across the states of Coahuila, San Luis Potosí, Aguascalientes and Zacatecas), where additional ground was staked to consolidate positions.

The pre-feasibility study for Juanicipio will be delivered in 1Q 2012, and for San Julián in 2Q 2012.

Strengthening the sustainability framework

Our business model is dependent on community support and constructive labour relations, sound environmental management, and exemplary safety and healthy performance. Indeed, a core pillar of our strategy is strengthening the Group's sustainability framework.

Yet our safety performance in 2011 was unacceptable, particularly in the context of our strong track record, with 11 fatalities in our mining operations during the year, and an additional fatality in early 2012. Whether these were contractors or employees, new or experienced personnel, the result of human error or equipment failure, no fatality is ever acceptable. With deep sadness, the Board of Directors and entire Senior Management team extends our condolences to the families and colleagues of the deceased.

As a result of our safety performance in 2011 we undertook a major review of our safety and health programme. We solicited an independent audit by a third party safety consultancy and asked Industrias Peñoles, S.A.B. de C.V to carry out an audit as part of the services provided to us5.

We also recruited a rock mechanics specialist to identify safety risks and recommend corrective

 measures. Based on these findings, actions were immediately taken including backfilling of long-hole stopes and improved ground control by wider use of rock bolts and shotcreting. In addition, inspections were conducted in collaboration with the Mexican Secretariat of Labour at all our mines and contractors.

Across the Group we intensified training and drills, enhanced monitoring procedures, and held working sessions with our contractors to underscore compliance procedures. We then reviewed and reinforced the alignment of our strategies and policies with on-the-ground execution, monitoring and enforcement. The aim is to deeply embed a safety culture within the operation through action and accountability. We also hired an experienced corporate safety manager focused exclusively on monitoring measures across the Group, who reports directly to the Chief Operating Officer.

The independent reports highlighted the importance of high level leadership to achieve our objectives. Our Chairman and the entire Board took an active role in the fatality review process and development of corrective measures, reaffirming that safety is a high priority and that no effort should be spared to implement a culture of safety that starts at the top and permeates through all levels of the organization and its contractors.

I am personally committed to turning around our performance in this area and see it as an important corollary to the work we are doing in enterprise risk management and enhancing the overall sustainability framework.

Strong financial results

Precious metals prices reached record levels in 2011, helping drive the significant growth in Group revenue and earnings. The average realised silver price rose 62.5% (US$34.75 per ounce in 2011 versus US$21.39 per ounce in 2010), while the average realised gold price rose by 26.6% to US$1,585.33 per ounce (2010: US$1,252.05 per ounce).

Adjusted revenue, which excludes treatment and refining charges, rose 56.6% in 2011. Refining charges per silver ounce rose a significant 193.8% in the year (US$2.17 per ounce in 2011 versus US$0.74 per ounce in 2010) due to the lack of global refining capacity for lead concentrates with high silver content.

Total revenues increased to US$2,192.7 million, 55.6% higher than in 2010. EBITDA rose to US$1,538.5 million, with a corresponding increase in EBITDA margin from 67.0% in 2010 to 70.1% in 2011. Net profit, including US$ 114.5 million of the Silverstream revaluation effects, was US$1,038.6 million, up 38.6%.

There were a number of variables that led to an increase in costs per tonne this year, including higher average electricity and diesel prices (15.4% and 15.2%, respectively), higher costs for key operating materials, the increase in mine development, and more safety and ground control measures.

While we benefited from higher volumes and increased by-product credits, higher profit sharing and the significant increase in refining charges led to an increase in cash costs year over year, primarily at the Fresnillo mine. Notwithstanding, we believe Group performance continued to position us in the lowest quartile of the cost curve relative to our peers.

Fresnillo plc carries no debt, and as of 31 December 2011 had a cash position of US$684.9 million, 22.4% above the 2010 figure of US$559.5 million. This follows total dividend payments of US$786.9 million, purchase of property, plant and equipment of US$467.7 million and exploration expenses of US$134.0 million.

Achievements and outlook

I see our safety performance as the most challenging development of the year and consider our work in reinforcing safety conditions as the single most important effort. That said, I am pleased with our performance in operational efficiency and competitive cash costs, our progress at development sites, and the significant advancement of our growth platform as a result of the increase in total ore resources.

I am confident that we are on track to meet our goal of producing 65 million ounces of silver per year and 500,000 attributable ounces of gold per year by 2018, with 650 million ounces of silver and 5.0 million ounces of gold in reserves at that time, based on our proven track record of evaluating, designing, developing and building new mines.

What we said we would do in 2011

• Improved safety performance

• Increase silver production 5% and gold production 5-6%

• Complete the expansion of Soledad-Dipolos

• Commence commercial operations at Saucito

• Commission expanded milling capacity and deeper shaft at Ciénega

• Conclude construction of the San Carlos shaft at Fresnillo

• Construct the Noche Buena mine

• Conduct pre-feasibility study at San Julián

• Continue pre-feasibility study at Juanicipio which was originally scheduled for October 2010

What we did in 2011

• Implement the Safety Action Plan with a range of corrective measures in response to fatalities in the year

• Silver production remained stable; gold production rose 21.6%

• Completed expansion at Soledad-Dipolos; started up commercial production at Saucito; commissioned expanded milling capacity and concluded sinking of the shaft at Ciénega and construction of the San Carlos shaft at Fresnillo

• Concluded construction of the new Noche Buena gold mine

• Initiated construction of the dynamic leaching plant at Herradura

• Pre-feasibility studies initiated at San Julián and in progress at Juanicipio

• Added 338.4 million ounces of new silver resources and 3.4 million new ounces of gold

• Obtained Cyanide Code certification at Herradura and Highly Protected Risk recognition from FM Global at the Fresnillo mine

• Reviewed and enhanced the Risk Management framework and established policies for adherence to the Bribery Act

What we plan to do in 2012

• Improve our safety culture and systems at all levels

• Ramp up production at Saucito to 6.5 million ounces of silver

• Commission Noche Buena

• Continue construction of the dynamic leaching plant at Herradura (1H 2013 start-up)

• Complete construction of the Jarillas shaft at Saucito

• Conclude engineering for the expansion of the beneficiation plant at Fresnillo to 10,000 tpd (2013/2014 start-up)

• Conclude pre-feasibility study at San Julián and initiate construction

• Initiate pre-feasibility study at Las Casas

• Define mining method and metallurgy at Orisyvo

• Continue development/ramps at Centauro Deep

• Conclude pre-feasibility at Juanicipio 1Q 2012 and define course of action

• Expand our resource base to help support our long-term targets; US$360.4 million has been budgeted for risk capital investment in exploration

We remain committed to identifying and evaluating partnership and acquisition opportunities that align with our strategy and add value. I also believe that our ongoing focus on increasing productivity, containing costs, expanding the resource and reserve base, and strengthening our growth pipeline while investing in our people and communities will create ongoing and sustainable value for our shareholders and all our stakeholders.

I would like to extend my appreciation to our Chairman, Board Members and Executive Committee for their guidance and support; to the employees of the Group, whom I am proud to call my colleagues, for their dedication and efforts each and every day; and to our shareholders for their continued confidence in Fresnillo plc.

Jaime Lomelín

Chief Executive Officer

The Consolidated Financial Statements of Fresnillo plc are prepared in accordance with International Financial Reporting Standards (IFRS). 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 2011 figures compared to 2010, unless otherwise noted.

Commentary on financial performance

The Company achieved strong financial results with 56.6% growth in adjusted revenue, 59.6% in gross profit, 62.8% in EBITDA and 48.3% in attributable profit for the year, excluding the effect of the Silverstream revaluation.

The Group's financial results were driven by the strength of gold and silver prices and the increase in sales volume of gold following the successful expansion of production capacity at Soledad-Dipolos, expanded milling capacity at Ciénega and higher throughput at Herradura. Furthermore, the start-up of Saucito contributed to maintaining sales volume in silver at similar levels to 2010, offsetting lower production at the Fresnillo mine.

Notwithstanding favourable top line performance, there was an increase in refining charges driven by market conditions as well as in cost of sales resulting from: i) new operations and increased production levels at current mines which required additional consumption of inputs and personnel, ii) additional development and preparation at our mines, as well as backfilling, rock bolting and shotcreting activities carried out at the Fresnillo mine to improve safety conditions, iii) higher electricity and diesel prices, and iv) industry costs pressures resulting from global shortages of mining inputs.

As anticipated, exploration expenditure rose significantly over 2010 to support the Group's organic growth strategy.

Cash flow generated by our operations and the Silverstream Contract, combined with a healthy cash position, enabled the Company to continue investing in plant and equipment and to pay dividends. As of December, Fresnillo plc held US$684.9 million in cash which will continue to support our growth strategy in the future.

Income Statement

Key items of the Income Statement are shown below:

The Group's financial performance is strongly determined by the operating performance of our assets, the skills of our personnel and management's efficiency in executing the Group's strategy. However, a number of external factors also have a material impact on our financial statements. These include:

Precious metal prices

In 2011, demand for precious metals as safe haven instruments gained further momentum as a result of geopolitical tensions arising in the Middle East and North Africa, increased sovereign risk in Europe and uncertainty surrounding global economic recovery. These factors also fostered volatility in the financial markets and gold and silver prices reached record levels in the year. The average realised price of silver increased by 62.6% over 2010 to US$34.75 per ounce, while the average realised gold price rose by 26.6% to US$1,585.33. These increases drove the Group's financial results, as 96.4% of our adjusted revenue come from these metals.

The Group maintains a policy not to hedge silver and gold price and therefore provides shareholders with full exposure to underlying metal price trends.

Foreign exchange rates

In 2011, the average spot Mexican peso/US dollar exchange rate was MXN12.42 per US dollar, compared to MXN12.64 per US dollar in 2010. While this represented an average 1.7% revaluation, there was in fact significant fluctuation in the exchange rate over the course of the year: in the first eight months, the Mexican peso rose strongly against the US dollar, while in the last four months the dollar regained its strength against the peso. This resulted in an estimated US$3.4 million adverse effect on the Group's production costs denominated in Mexican pesos (approximately 70% of total costs) when converted to US dollars.

The spot exchange rate at 31 December 2011 was MXN13.98 per US dollar, a 13.1% devaluation compared to the MXN12.36 per US dollar at the beginning of the year. As the Group's taxable profits are determined in accordance with Mexican legislation based on spot rates in pesos, this increased the peso value of US dollar-denominated net monetary asset position, with the Silverstream Contract and cash equivalents being the most important components. As a result, a foreign exchange gain (MXN$2,028 million) in Mexican pesos was generated, increasing the Group's taxable profits.

Inflation of key operating materials

In 2011, cost pressures across the mining industry arose reflecting the increase in the price of commodities used to fabricate inputs and greater demand for these inputs as a result of industry-wide expansion. Specifically, unit prices of explosives were affected as a result of a global shortage of ammonium nitrate, while increased demand for sodium cyanide drove prices up by 29.0%. Cost of lubricants and greases increased by 14.6% while price of steel continue to rise gradually, affecting unit prices of mining and milling steel, anchors, and liners for mills, crushers and trucks. As a result, the net increase in the weighted average input cost over the year was 11.7%.

Electricity

The Group's weighted average cost of electricity increased by 15.4%.

Unit cost of electricity depends on the rates set by the Comisión Federal de Electricidad (CFE), the national utility, based on their average generating cost, which correlates to fuel oil and coal prices.

Diesel

The weighted average cost of diesel in US dollars increased by 15.2% in accordance with the Mexican government's decision to align fuel and diesel prices with rates in the United States.

Treatment and refining charges

Treatment and refining charges, which are deducted from adjusted revenue for the purposes of revenues as disclosed in the income statement, are reviewed annually in accordance with international benchmarks. The treatment charge per tonne of lead concentrate, including the escalator, remained stable, while the treatment charge per tonne of zinc concentrate decreased by 9.0%. However, silver refining charges for lead concentrates increased by 193.8% year-on-year due to the shortage of global refining capacity to process lead concentrates with high silver content.

The higher silver refining charges, together with greater volumes of concentrates and doré shipped to Met-Mex, resulted in a 78.3% increase in treatment charges expressed in absolute term in the income statement.

The main line items of the Income Statement are further analysed below.

Revenues

CONSOLIDATED REVENUES

(US$ millions)

Total revenues for the full year reached a new record at US$2,192.7 million, a 55.6% increase compared to 2010. This was explained by higher adjusted revenue, which rose by 56.6% to US$2,307.4 million. The benefit of higher metal prices represented 79.5% of the total US$833.53 million increase in adjusted revenue, while the favourable effect of higher volumes sold accounted for 20.5%, with the rise in gold sales volume being the main contributor to this increase. 

ADJUSTED REVENUE10 BY METAL

(Year ended 31 December, US$ millions)

While silver volumes were stable and gold production increased markedly, the rise in silver prices significantly outpaced that of gold, thus each metal's share of adjusted revenue remained nearly unchanged in the year.

Saucito contributed 10.2% to adjusted revenue with 5.3 million silver ounces and 29,532 gold ounces sold in its first year of operations. The lower sales volume of silver from the Fresnillo mine reduced its participation to adjusted revenue from 52% to 46%.

VOLUMES OF METAL SOLD

(Year ended 31 December)

Cost of sales

In the year, cost of sales totalled US$629.2 million, representing a 46.3% increase compared to 2010. The main factors explaining the US$199.0 million increase were:

·; Adjusted production costs accounted for US$419.4 million, a 36.6% increase over 2010. However, of the total US$112.3 increase, 37.7% or US$42.3 million, was related to the adjusted production costs incurred at Saucito in its first year of commercial production. In addition the revaluation of the average spot exchange rate resulted in a US$3.4 million adverse effect when converting peso-denominated costs to US dollars. By factoring out the new Saucito mine and the impact of the exchange rate on the peso-denominated components for each category, the factors explained below reflect the underlying operational and dollar-denominated cost changes:

− Contractor costs rose by US$22.5 million as a result of: i) higher production volumes which required a greater number of contractors particularly at San Ramón and Soledad-Dipolos, contributing to an estimated 55% of the total increase in contractor costs; ii) higher unit fees charged by contractors, which include the annual rise in labour costs, depreciation of contractors' equipment, and higher costs for their operating materials, fuel and lubricants; iii) backfilling, shotcreting and rock bolting activities carried out mainly at the Fresnillo mine to secure safety conditions for our personnel; iv) increased mine services which are typically conducted by contractors, such as road maintenance, personnel transportation and surveillance; and v) haulage of ore and waste material across longer distances at all our mines

− Operating materials increased by US$14.4 million, of which a 30% is estimated to be linked to the additional volumes of ore produced at the mines. The remaining US$10.1 million was explained by the 11.7% weighted average increase in the unit price of operating materials and higher consumption of several inputs such as explosives and drilling steel related to the stripping of waste material, development activities and shotcreting, rock bolting and backfilling to enhance mine safety.

− The cost of energy rose by US$12.6 million as a result of higher electricity and diesel prices (15.4% and 15.2% respectively). Additional consumption of electricity and diesel directly associated with higher production volumes was estimated at US$3.0 million. However, diesel consumption was further increased due to longer haulage distances and backfilling and rock bolting activities.

− The cost of personnel increased by US$5.8 million as a result of i) additional personnel hired mainly at Soledad-Dipolos, Fresnillo and Ciénega to increase production levels, which contributed an estimated 30% of the increase in cost of personnel; ii) a 6.5% increase in wages plus a 1.5% increase in fringe benefits in Mexican pesos; iii) a minor adjustment to the pension plan in accordance with annual actuarial studies; iv) training to improve the safety of our personnel; and v) acquisition of safety equipment for the additional employees.

− The cost of maintenance rose by US$5.5 million due to i) the intensified use of equipment to haul waste at Herradura; ii) consumption of additional spare parts at higher prices; and iii) the programmed maintenance of hydraulic shovels at Herradura which did not take place last year. It is estimated that 50% of the increase in the cost of maintenance was related to the higher volumes of ore milled/deposited at the mines.

− Other costs increased by US$5.8 million as a result of additional rights paid related to mining concessions to consolidate the Group's growth strategy, equipment insurance, freight and IT expenses.

·; Profit sharing rose by US$31.4 million due to increased profits at our operating mines.

·; Depreciation increased by US$66.9 million mainly due to the larger asset base following the completion of Saucito, expanded capacity at Soledad-Dipolos and Ciénega, and higher production volumes which affected the depletion factor.

·; The increase in work in progress, which had a favourable effect of US$8.7 million in the income statement. The higher inventories of ore deposited on the leaching pads at Herradura and Soledad-Dipolos were the main factor explaining this benefit.

·; The Fresnillo Group enters into certain exchange rate derivative instruments as part of a programme to mitigate its exposure to foreign exchange risk associated with costs incurred in Mexican pesos. In 2011, Fresnillo plc sold forward US$77.0 million at an average rate of MXN12.87 per US dollar, which matured throughout the year and resulted in a US$3.2 million gain recognised in the income statement. The outstanding net forward position of these derivatives as of 31 December 2011 was US$38.5 million with maturity dates throughout 2012.

Additionally, the Group entered into a combination of exchange rate put and call options structured at zero cost. In 2011, US$44 million of costs denominated in Mexican pesos were hedged using these collars, with an average floor exchange rates of MXN13.02 per US dollar and cap of MXN14.17 per US dollar, which resulted in a US$2.7 million gain recognised in the income statement. The total outstanding position using collar structures as of 31 December 2011 was US$82 million with maturity dates throughout 2012. These instruments guarantee a minimum exchange rate should the market fall below the floor exchange rate. Between the floor and cap the Group sells US dollars at the market rate, and when the Mexican peso per US dollar exchange rate goes above the cap rate, the Company is obliged to sell US dollars at the contract rate.

Cost per tonne and cash cost per ounce

Cost per tonne, calculated as total production costs less depreciation, profit sharing and the exchange rate hedging effects, increased when compared to 2010 as shown in the table below.

COST PER TONNE12

(Year ended 31 December)

At all operating mines increases in the cost per tonne were due to i) the higher unit prices of operating materials, with an estimated weighted average increase of 11.7%; ii) higher electricity (+15.4%) and diesel (+15.2%) costs; iii) a 6.5% wage increase in pesos, plus 1.5% in fringe benefits; and iv) to a lesser extent, the adverse effect of a 1.7% revaluation of the peso against the dollar, which affected peso-denominated production costs when converted to US dollars; and v) higher unit fees charged by contractors, as the factors explained above also impacted their unit costs.

In addition, certain specific factors impacted cost per tonne at each individual mine. These included:

·; Fresnillo: changes in the pension plan resulting from changes in the actuarial assumptions that had greater impact at this mine due to the age, seniority and wage profile of employees; higher insurance fees; and additional shotcreting, rock bolting and backfilling activities.

·; Ciénega: mine development and the new San Ramón satellite whose distance from the mill incurred additional haulage costs.

·; Herradura: maintenance of trucks and loaders; higher haulage distances and deeper pits; and productivity bonuses paid to workers for reaching efficiency goals.

·; Soledad-Dipolos: mine development.

CASH COST PER OUNCE13

(Year ended 31 December)

Cash costs increased at most Group mines in the year. This was a combined result of increased mining costs, as outlined in the cost per tonne explanation above, lower average ore grades, higher treatment and refining charges, and higher profit sharing. By-product revenues in mines producing secondary metals are credited to the cost which helped mitigate these factors, and in the case of Ciénega to completely offset other cash cost pressures.

The specific variations in year over year cash costs are explained as follows:

·; Fresnillo +US$1.97 per silver ounce (+60.2%)

Higher refining charges (+US$1.53), lower ore grades (+US$0.66), higher profit sharing (+US$0.50), and increase in mining costs (+US$0.16), partially offset by higher gold, lead and zinc by-product credits resulting from increased production volumes and higher metal prices (-US$0.88 per silver ounce)

·; Ciénega -US$51.04 per gold ounce (-29.7%)

Increased mining costs (+US$82.50), lower gold ore grades (+US$49.2) and higher profit sharing (+US$5.14), more than offset by higher by-product credits, primarily reflecting the 23% increase in silver production and 65% rise in silver price, as well as lead and zinc by-product credits; the combined effect of these credits (-US$187.88) reflected the mine's strong polymetallic profile

·; Herradura +US$39.87 per gold ounce (+12.4%)

Higher profit sharing (+US$42.2) and increased mining costs (+US$20.0), offset by the silver by-product revenues credited (-US$15.0) and the net benefit of higher gold recovery rates despite lower ore grades (-US$7.3.)

·; Soledad-Dipolos +US$96.0 per gold ounce (+25.1%)

Lower ore grades (+US$52.3), higher profit sharing (+US$33.0) and the increase in mining costs and treatment and refining charges (+US$10.7)

·; Saucito N/A

The low cash cost of US$0.81 per silver ounce reflects a total cost of US$10.8 per silver ounce offset by US$9.99 in by-product revenues

Gross profit

Gross profit, excluding hedging gains and losses, is an important financial indicator continuously monitored to measure the profitability at each mine and at the Fresnillo Group as a whole.

CONTRIBUTION BY MINE TO THE GROUP'S GROSS PROFIT EXCLUDING HEDGING GAINS AND LOSSES

In 2011, total gross profit for operating mines, adjusted to exclude hedging gains and losses, reached US$1,550.42 million, a 59.0% increase over 2010.

The US$575.2 million increase was largely explained by the benefit of higher precious metal prices, which accounted for US$620.5 million, of which 70% corresponded to the price of silver and the remaining 30.0% to the price of gold.

Operating results were also an important driver to this significant increase. The start-up of the Saucito mine contributed US$136.3 million to the Group's gross profit, while the expansion of Soledad-Dipolos added an estimated US$68.1 million to this indicator.

In addition, an estimated US$127.5 million reflected increased ore volumes processed at the Fresnillo, Ciénega and Herradura mines. These activities partially mitigated the estimated US$219.4 million adverse effect of lower ore grades processed at those mines.

Other factors affecting this indicator were higher adjusted production costs, higher treatment and refining charges and increased profit sharing.

The contribution by mine to the Group's Gross Profit, excluding hedging effects, changed this year, reflecting the 8.8% contribution of the new Saucito mine and the 9.9% participation of Soledad-Dipolos following the ramp-up of its capacity expansion. These factors diluted the contribution of the other three mines, while Fresnillo's participation was further decreased as a result of lower silver sales volume in 2011. Notwithstanding, this mine continues to be the biggest contributor to Gross Profit with 51.1%, followed by Herradura and Soledad-Dipolos with 21.8% and 9.9% respectively.

Given the great dependency of our profit levels to changes in precious metals prices, management continuously conduct financial and sensitivity analysis to estimate the economic effect should the prices increase/decrease by 15%. For example, a 15% increase/decrease in gold and silver prices would result in a +US$24.5(-US$24.4) million effect in the Company´s profit before tax.

Administrative expenses

Administrative expenses of US$31.2 million increased by 36.9% compared to 2010 due mainly to the 6.8% increase in salaries, increased advisory fees associated mainly with the new Bribery Act and risk management, and changes in actuarial assumptions which affected the pension plan at Servicios Administrativos Fresnillo S.A. Additional administrative personnel hired to service a larger number of mines and projects further increased administrative expenses. Corporate expenses of US$25.3 million were broadly in line with the previous year.

Exploration expenses

Exploration expenses for the year totalled US$134.0 million, a 63.2% increase over the previous year, reflecting the commitment to our organic growth programme. Further details of the exploration programme and its results may be found in the Review of Operations. In addition, US$45.0 million was capitalised mainly at San Julián, Exploraciones Minera Parreña and Juanicipio as there was sufficient geological and technical information to allow for a reasonable expectation of becoming operating mines in the future. This figure was below the expected US$100 million due to additional resources discovered at the San Julián project which required the original plan to be adjusted accordingly, as well as security concerns in the region that delayed contractor work at the project. In total, risk capital invested in exploration reached US$179.0 million, a 78.8% increase compared to 2010. 

To continue expanding our resource base and achieve our long-term goals, the exploration budget for 2012 has been revised and increased to US$360.4 million, of which US$161.2 million is expected to be capitalised.

EBITDA

EBITDA & EBITDA MARGIN

(Year ended 31 December, US$ millions)

A key indicator of the Group's ability to generate cash is EBITDA, which is calculated as gross profit as reflected in the income statement plus depreciation, less administrative, selling and exploration expenses. In 2011, this indicator achieved a new record level at US$1,538.5 million. The 62.8% year-on-year increase largely reflected higher gross profit, which was partially offset by the increase in expenses. As a result, EBITDA margin rose from 67.0% in 2010 to 70.2% in 2011.

Silverstream revaluation effects

The Silverstream Contract is accounted for as a derivative financial instrument carried at fair value. In 2011, the higher long-term price of silver, increase in resources at the Sabinas mine and an adjustment to the discount rate reflecting current LIBOR rates, increased the fair value of the Silverstream asset by US$159.9 million, with a corresponding non-cash gain being recognised in the income statement. While this unrealised gain was lower than the US$191.8 million recorded in 2010, it comprised 10.4% of the Group's profit before tax.

Since the IPO, unrealised, non-cash profits associated with the Silverstream Contract have totalled US$371.1 million. The cyclical behaviour of the silver price may generate unrealised losses in the future, which would also be recognised in the income statement. For example, the Group estimates that a 25% increase/decrease in the expected future prices of silver as used in the valuation at 31 December 2011, would result in an unrealised gain/loss respectively of US$143.0 million recognised in the income statement. Further information related to the Silverstream Contract is provided in the Balance Sheet section below and note 8 of the financial information included in this Preliminary Announcement.

Foreign exchange

The foreign exchange result is caused by the conversion of monetary assets and liabilities denominated in foreign currencies to US dollars. In 2011, a US$14.7 million foreign exchange gain was recorded in the income statement mainly as a result of the devaluation of the MXN/ US dollar exchange rate which affected the value of peso-denominated net liabilities when converted to US dollars. This gain favourably compared with the US$3.3 million loss recognised in 2010.

Taxation

Income tax expense of US$495.8 million increased by 81.6% compared to 2010 as a result of the higher profits levels achieved. The effective tax rate during the year was 32.3%, which is higher than the statutory 30% tax rate. The difference is explained by: a) the devaluation of the MXN/US dollar exchange rate generating i) a taxable foreign exchange gain when taxable profit is determined in MXN for the purpose of current tax calculations, which does not arise in the Group's USD denominated IFRS results; and ii) movements in the tax values of assets and liabilities, which are fixed in MXN for tax purposes, but are translated into USD for the purposes of the calculation of deferred tax under IFRS; and b) certain inflation adjustments for Mexican tax purposes that have no accounting effect.

Profit for the year

Profit for the year increased by 38.6% from US$749.4 million in 2010 to $1,038.6 million in 2011. Profits attributable to non-controlling interests (minority shareholders) rose to US$136.9 million in 2011, a 62.4% increase, as a result of the higher profits recorded at Herradura and Soledad-Dipolos. Both mines are owned by Penmont, a company jointly held by Fresnillo plc (56%) and Newmont (44%). Profit attributable to Group shareholders increased by 35.6% to US$901.7 million in 2011.

Profit for the year, excluding the effects of the revaluation of the Silverstream Contract, increased by 50.2% from US$615.1 million in 2010 to US$924.1 million in 2011. Similarly, profit attributable to Group shareholders, excluding the Silverstream effects, rose by 48.3% to US$787.3 million in 2011.

Cash flow

A summary of the key items impacting the Group's cash flow is set out below:

CASH FLOW KEY ITEMS

Year ended 31 December, US$ millions)

In 2011, cash generated by operations before changes in working capital reached US$1,612.1 million, a 63.9% increase due to higher profits generated at the mines. Taxes and profit sharing figures rose by 179.3% to US$326.8 million; these figures reflect cash payments for the previous year's tax and profit sharing obligations and provisional tax payment for 2011.

Working capital increased by US$36.1 million due mainly to:

·; Trade and other receivables rose by US$10.9 million, most significantly as a result of insurance claims pending.

·; A US$37.7 million increase in ore inventories at Herradura and Soledad-Dipolos pads and the additional inventory of spare parts, including tyres, to secure critical inputs subject to scarcity.

As a result of the above factors, net cash from operating activities increased by 78.3% to US$1,249.2 million in 2011.

The proceeds received from the Silverstream Contract were another important source of funds accounting for US$103.0 million. In addition, a US$20.8 million capital contribution was recorded in the year from our non-controlling interest partners to purchase new equipment at Penmont and conduct exploration activities at Minera Juanicipio.

The Group invested US$467.7 million in the purchase of property, plant and equipment, a 37.5% increase compared to 2010. Capital expenditure in 2011 is further described below:

PURCHASE OF PROPERTY, PLANT AND EQUIPMENT

(US$ millions)

Dividends paid in 2011 totalled US$786.9 million, which represented a 311.8% increase compared to 2010. This payment included i) the final 2010 dividend of US$254.8 million, the 2011 interim dividend of US$150.6 million and the second interim dividend of US$300.0 paid to Fresnillo plc shareholders; and ii) US$81.5 million paid to Newmont, the minority shareholder in Penmont.

The sources and uses of funds described above resulted in a net increase of US$130.6 million in cash and cash equivalents during the year. The combination of this increase with the US$559.5 million balance at the beginning of the year and the unfavourable effect of exchange rate movements on cash of US$5.2 million, resulted in a net cash position of US$684.9 million as at 31 December 2011.

Balance sheet

In 2011, the Group continued to maintain a solid financial position with no bank debt.

Cash and cash equivalents as of 31 December 2011 totalled US$684.9 million, a 22.4% increase compared to year-end 2010. The main factors driving the significant increase in cash and cash equivalents were described in the cash flow section.

Trade and other receivables of US$249.3 million rose as a result of the an insurance claim pending and increase in value added tax refunds due. Additionally, loans granted to contractors to purchase equipment and receivables on the sale of fixed assets to contractors further increased other accounts receivables.

The change in the value of the Silverstream derivative from US$427.7 million at the beginning of the year to US$478.1 million at the year-end reflects proceeds of US$95.9 million received in cash and US$13.6 million receivable as at 31 of December and a revaluation effect of $159.9 million which is a non-cash gain reflected in the Group income statement. Given the cyclical movements of silver prices, the value of the Silverstream asset could increase or decline in line with the movements of the silver price.

The net book value of property, plant and equipment was US$1,194.4 million at 31 December 2011, an increase of 33.3% over 2010, reflecting investment during the year on new development projects, replacement of equipment and ongoing capital expenditures related to cost control initiatives. The main additions underlying the US$298.6 increase were the construction of the Saucito project, the expansion of production capacity at Soledad-Dipolos, construction of the Noche Buena gold mine, the sinking of the shaft and expansion of milling capacity at Ciénega, acquisition of new equipment mainly at Minera Penmont, construction of the San Carlos shaft at Fresnillo and purchase of surface land.

Fresnillo plc's total equity was US$2,149.4 million as of 31 December 2011, a 12.0% increase compared to the balance at 31 December 2010. The higher profits achieved in 2011 were the main factor driving this increase. The rights and obligations of the 717,160,159 issued shares are set in the Group's Articles of Association.

Equity attributable to minority shareholders rose from US$205.5 million to US$281.6 million as of 31 December 2011, reflecting the increased asset value attributable to the minority shareholders, primarily at Penmont.

The increase in retained earnings reflects the profit from 2011 less dividends paid during the period. Dividends were declared in line with Fresnillo plc's dividend policy that takes into account the profitability of the business, underlying growth in earnings and the capital and cash flow requirements to support future production and expansions.

Dividend

In September 2011 an interim dividend of 21.0 US cents per Ordinary Share was paid for a total of US$150.6 million. However, the prevailing strength of the precious metal prices during 2011 and the solid operating performance of the Group generated additional cash flow. As a result, a second interim dividend of 41.85 US cents per Ordinary Share was declared and paid in December, accounting for US$300.0 million. Based on the Group's 2011 performance, the Directors have recommended a final dividend of 40.0 US cents per Ordinary Share, which will be paid on 23 May 2012 to shareholders on the register on 27 April 2012. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars.

I confirm on behalf of the Board that to the best of my knowledge;

a) the financial information presented in this preliminary announcement, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, gives a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the Group; and

b) the Management Report includes a fair review of the development and performance of the business, and the principal risks and uncertainties that they face.

For and on behalf of the Board

Jaime Lomelín

Chief Executive Officer

29 February 2012

Forward looking statements

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will", or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and the silver and gold industries. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances.

Forward-looking statements are not guarantees of future performance and the actual results of the Group's operations, financial position and liquidity, and the development of the markets and the industry in which the Group operates, may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. In addition, even if the results of operations, financial position and liquidity, and the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in regulation, currency fluctuations (including the US dollar and Mexican peso exchange rates), the Group's ability to recover its reserves or develop new reserves, including its ability to convert its resources into reserves and its mineral potential into resources or reserves, changes in its business strategy, political and economic uncertainty.

Forward-looking statements may, and often do, differ materially from actual results. Any forward-looking statements in this document speak only as of the date of this document, reflect the Group's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Group's operations, results of operations, growth strategy and liquidity. Investors should specifically consider the factors identified in this document which could cause actual results to differ before making an investment decision. Subject to the requirements of the Prospectus Rules, the Disclosure and Transparency Rules and the Listing Rules or applicable law, the Group explicitly disclaims any obligation or undertaking publicly to release the result of any revisions to any forward-looking statements in this document that may occur due to any change in the Group's expectations or to reflect events or circumstances after the date of this document.

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Balance Sheet

Continued

Consolidated Cash Flow Statement

Consolidated Statement of Changes in Equity

Notes to the Financial Information

1 Corporate Information

Fresnillo plc ("the Company") is a public limited company and registered in England and Wales with registered number 6344120 and is the holding company for the Fresnillo subsidiaries detailed below ("the Group").

Industrias Peñoles S.A.B. de C.V.("Peñoles") currently owns 77 percent of the shares of the Company and the ultimate controlling party of the Company is the Baillères family, whose beneficial interest is held through Peñoles. Copies of Peñoles' accounts can be obtained from www.penoles.com.mx.

The financial information presented in this preliminary announcement was authorised for issue by the Board of Directors of Fresnillo plc on 5 March 2012

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

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

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

The Group's principal business is the mining and beneficiation of non-ferrous minerals, and the sale of related production. The primary contents of this production are silver, gold, lead and zinc. The Group has five fully developed operating mines: Fresnillo, Herradura, Ciénega, Soledad-Dipolos and Saucito, the latter having started production in April 2011. 

2 Significant Accounting Policies

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

The financial information presented in this preliminary announcement has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority, International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with the provisions of the Companies Act 2006. The financial information presented in this preliminary announcement is also consistent with IFRS as issued by the International Accounting Standards Board.

The financial information presented in this preliminary announcementhas been prepared on a historical cost basis, except for derivative financial instruments, available-for-sale financial instruments and defined benefit pension scheme assets which have been measured at fair value.

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

In 2011, freight costs associated with ore transported from Fresnillo plc's mines to Met-Mex facilities have been presented as selling expenses in the income statement in order to be consistent with the information reviewed by the Executive Committee and the Board of Directors. These were previously presented as part of cost of sales. Comparative information has been amended to reflect this reclassification in order to be comparable with the presentation in 2011. As a result cost of sales as at 31 December 2010 has decreased by USD$4.9 million.

Basis of consolidation

The financial information presented in this preliminary announcement sets out the Group's financial position as of 31 December 2011 and 2010, and the results of operations and cash flows for the years then ended.

Entities that constitute the Group are those enterprises controlled by the Group regardless of the number of shares owned by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Entities are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.

 All intra-group balances, transactions, income and expenses and profits and losses, including unrealised profits arising from intra-group transactions, have been eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. These interests primarily represent the interests in Minera Penmont, S. de R.L. de C.V., Minera El Bermejal, S. de R.L. de C.V. and Minera Juanicipio, S.A. de C.V. not held by the Group. The interest of non-controlling shareholders may be initially measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. The choice of measurement basis is made on an acquisition by-acquisition basis. Subsequent to acquisition, non-controlling interests consist of the amount attributed to such interests at initial recognition and the non-controlling interest's share of changes in equity since the date of the combination. Any losses of a subsidiary are attributed to the non-controlling interests even if that results in a deficit balance.

(b) Changes in accounting policies and disclosures

The accounting policies applied are consistent with those applied in the preparation of the consolidated financial statements for the year ended 31 December 2010, except for the reclassifications of freight cost from cost of sales to selling expenses described in note 2 (a) and for the adoption of certain amendments to existing standards effective as of 1 January 2011. Those that are applicable or relevant to the Group, resulting in changes to accounting policies, but with no impact on its financial position or performance are as follows:

Amendments for IFRSs

·; IAS 24 Related Party Transactions (Amendment): It clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships as well as clarifying in which circumstances persons and key management personnel affect related party relationships of an entity. Also, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity.

Other amendments to existing interpretations that are effective but not applicable to the Group are as follows:

·; IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment): The amendment removes an unintended consequence when an entity is subject to minimum funding requirements (MFR) and makes an early payment of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as a pension asset.

Improvements to IFRSs

In May 2010, the IASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position, performance or disclosures of the Group.

·; IFRS 3 Business Combinations: The measurement options available for a non-controlling interest (NCI) have been amended. Only components of NCI that constitute a present ownership interest that entitles their holder to a proportionate share of the entity's net assets in the event of liquidation shall be measured at either fair value or at the present ownership instruments' proportionate share of the acquiree's identifiable net assets. All other components are to be measured at their acquisition date fair value. The improvements to IFRS 3 will have an impact on the Group's future acquisitions.

·; IFRS 7 Financial Instruments - Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context.

The IASB and IFRIC have issued other amendments resulting from Improvements to IFRSs that management considers do not have any impact on the accounting policies, financial position or performance of the Group.

New and amended standards and interpretations

Standards and amendments issued but not yet effective or early adopted up to the date of issuance of the Group's financial statements are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt those standards when they become effective.

·; IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income ("OCI"): The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or 'recycled') to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified.

The amendment affects presentation only and has no impact on the Group's financial position or performance. The amendment becomes effective for annual periods beginning on or after 1 July 2012. The Group currently does not have items in OCI that will never be recycled through earnings and therefore, the adoption of this revised standard would not impact the current presentation of the statement of comprehensive income except for the potential impacts of IAS 19 (2011) described below, which requires that actuarial gains or losses arising from employee benefits that are currently recognised in the income statement would have to be presented in OCI as items that would never be recycled to the income statement.

·; IAS 19 Employee Benefits (Amendment): The IASB has issued numerous amendments to IAS 19. The amendment becomes effective for annual periods beginning on or after 1 January 2013 and is applicable retrospectively from the beginning of the earliest period presented.

The most significant impacts of this standard as it relates to the Group's consolidated financial position and results of operations are expected to be as follows:

·; Presentation changes to the statement of comprehensive income: the net actuarial gain recognised in the year will be presented within OCI, instead of being recognised in the income statement; and

·; Financial performance change: due to presentation changes, the profit/(loss) of the year and earning per shares will be impacted.

The Group is currently assessing the full impact of the remaining standards and interpretations.

·; IAS 27 Consolidated and Separate Financial Statements (as revised in 2011): As a consequence of the new IFRS 10 and IFRS 12 (see below), what remains of IAS 27 does not change the recognition and presentation requirements as it relates to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements (cost method or fair value) and as a result the adoption of this revised standard is not expected to impact the separate financial statements of the Group. The amendment becomes effective for annual periods beginning on or after 1 January 2013.

·; IAS 28 Investments in Associates and Joint Ventures (as revised in 2011): As a consequence of the new IFRS 11 and IFRS 12. IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The other provisions within IAS 28 remain consistent as it relates to accounting for investments in associates under the equity method. The amendment becomes effective for annual periods beginning on or after 1 January 2013.

·; IFRS 9 Financial Instruments - Classification and Measurement IFRS 9: It reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The Group is in the process of identifying the potential impacts of the current changes to IFRS 9 and will quantify the effects on its consolidated financial position and results of operations in conjunction with the other phases, when issued, to present a comprehensive picture of such impacts on its consolidated financial statements.

·; IFRS 10 Consolidated Financial Statements IFRS 10: It replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation - Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard becomes effective for annual periods beginning on or after 1 January 2013. The Group's management does not expect impacts on its consolidated financial statements with the adoption of this new standard when it becomes effective.

·; IFRS 12 Disclosure of Involvement with Other Entities IFRS 12: It includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity's interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. This standard will become effective for annual periods beginning on or after 1 January 2013 with the adoption of IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011). The Group will include the relevant disclosures required by IFRS 12 upon adoption.

·; IFRS 13 Fair Value Measurement: IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently assessing the impact that this standard will have on its financial position and performance. This standard becomes effective for annual periods beginning on or after 1 January 2013. Given that the Group does not currently have non-monetary assets measured at fair value, the potential impacts of this new standard would be in relation to its financial instruments measured at fair value.

·; IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (New interpretation): This interpretation provides guidance for the recognition of production stripping cost as a non-current asset. This interpretation establishes that stripping costs are recognised as a non-current asset, to the extent the benefit is improved access to ore and only if it is probable that the future economic benefit associated with the stripping activity will flow to the entity, the component of the ore body for which access has been improved can be clearly identified and the costs relating to the stripping activity associated with that component can be measured reliably. This standard becomes effective for annual periods beginning on or after 1 January 2013. The Group is in the process of analysing the impacts of IFRIC 20.

The IASB has issued other amendments resulting from Improvements to IFRSs that management considers do not have any impact on the accounting policies, financial position or performance of the Group.

3 Segment Reporting

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

At 31 December 2011 the Group has five reportable operating segments following the successful conclusion of the development of the Saucito mine in March 2011 and commercial production starting in April 2011. These represent the Group's five producing mines as follows:

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

·; The Herradura mine, located in the State of Sonora, an open pit gold mine;

·; The Cienega mine, located in the State of Durango, an underground gold mine;

·; The Soledad-Dipolos mine, located in the State of Sonora, an open pit gold mine; and

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

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

The exploration services provided by Exploraciones Mineras Parreña, S.A. de C.V and projects under development have been aggregated into the Other segment below.

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

In 2011 and 2010 all revenue was derived from customers based in Mexico.

Operating segments

The following tables present revenue and profit information regarding the Group's operating segments for the year ended 31 December 2011 and 2010, respectively.

1 Capital expenditure consists of additions to property, plant and equipment, excluding additions relating to changes in the mine closure provision.

2 Capital expenditure relates to mine development work, scoop equipment, land and raise boring equipment.

3 Capital expenditure relates to the construction of leaching pads, equipment such as rotary drill rig tractors and dump trucks, construction of an electrical

station and open pit mine development activities

4 Capital expenditure relates to mine development work, scoop equipment, land and raise boring equipment.

5 Capital expenditure relates to the construction of leaching pads, equipment such as dump trucks and tractors and a rotary drill rig and open pit mine

development activities.

6 Capital expenditure relates to mine development work, including hoisting equipment and ramp and shaft developments and scoop equipment.

7 Capital expenditure relates to mine development and acquisition of property, plant and equipment for the Noche Buena and San Julian projects

8 Treatment and refining charges amounting to US$114.8 million thousand are included in Segment Profit.

9 Exploration services provided by Exploraciones Mineras Parreña, S.A. de C.V.

1 Capital expenditure consists of additions to property, plant and equipment, excluding additions relating to changes in the mine closure provision.

2 Capital expenditure consists of scoop equipment and drilling jumbos and mine development work including a shaft and ramps.

3 Capital expenditure relates to the construction of leaching pads, equipment such as rotary drill rig tractors and dump trucks, construction of an electrical

station, open pit mine development activities and Noche Buena´s payment for the acquisition of mineral rights.

4 Capital expenditure relates to a processing plant expansion, scoop equipment, land and mine development work including work on a tailing dam.

5 Capital expenditure relates to the construction of leaching pads, equipment such as dump trucks and tractors and a rotary drill rig and open pit mine

development activities.

6 Certain comparative information has been disclosed to conform to current period presentation, such as capital expenditure related to the Saucito mine

development, including hoisting equipment and ramp and shaft developments, which was previously presented in the "Other" line.

7 Treatment and refining charges amounting to US$64.4 million are included in Segment Profit.

8 Freight costs relating to sales, amounting to US$4.9 milliion are excluded from Segment Profit. In the prior year, these costs were presented within cost of

sales.

9 Exploration services provided by Exploraciones Mineras Parreña, S.A. de C.V.

4 Revenues

Revenues reflect the sale of goods, being concentrates, doré, slag, and precipitates of which the primary contents are silver, gold, lead and zinc1.

a) Revenues by product sold

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

(1) Included in the value of lead and zinc concentrates, precipitates and doré are provisional price adjustments which represent changes in the fair value of embedded derivatives. In 2011 the Group has recognised a loss of US$20.6 million (2010: profit of US$35.6 million).

b) Value of metal content in products sold

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

(1) Included in the value of lead and zinc concentrates, precipitates and doré are provisional price adjustments which represent changes in the fair value of embedded derivatives. In 2011 the Group has recognised a loss of US$20.6 million (2010: profit of US$35.6 million).

The average realised prices for the gold and silver content of products sold, prior to the deduction of treatment and refining charges, were:

5 Cost of sales

In 2011, the classification of freight costs relating to sales was modified, (as detailed in note 2(a)) and as a result the December 2010 disclosure was modified for comparative purposes. In addition to this, insurance cost has been reclassified from other cost of sales to be disclosed separately in 2011, consequently 2010 figures have been modified for comparative purposes.

6 Income tax expense

a) Major components of income tax expense:

(b) Reconciliation of the income tax expense at the Group's statutory income rate to income tax expense at the Group's effective income tax rate:

(c) Movements in deferred income tax liabilities and assets:

The amounts of deferred income tax assets and liabilities as at 31 December 2011 and 2010, considering the nature of the temporary differences, are as follows: