Fresnillo plc

21 Upper Brook Street

London W1K 7PY

United Kingdom

www.fresnilloplc.com

 

2 August 2022

 

Fresnillo plc interim results

for the six months to 30 June 2022

 

 

Octavio Alvídrez, Chief Executive Officer, commented:

 

"We have remained committed to our purpose during the year, with the safety and well-being of our people the key priority in every decision we make as a company. Though the impact of the pandemic has reduced over time, the recent fifth wave in Mexico highlights how we must continue to support our people and our communities, in particular as we face new uncertainties in these challenging times.

 

"We have proactively addressed these challenges and I am pleased to report a good financial performance in the first half. The actions we have taken to implement the Mexican labour reform have been effective. We are on track to complete the staffing process at Fresnillo and San Julián by the end of 3Q22, and at Ciénega and Saucito by year end, despite a tight labour market. The global supply chain bottlenecks that so many industries are facing, together with cost inflation will have some impact in the second half. However, we are confident in our ability to weather these short term challenges, without limiting our ambitious longer term growth plans. We look forward to achieving connection to the electricity grid at Juanicipio in the coming weeks, and rapidly ramping up production, while also continuing to develop the Rodeo and Orisyvo mining projects.

 

"We benefit from a consistent strategy, exceptional assets, an exciting growth pipeline and a very strong balance sheet. We are well placed to deliver on our objectives this year. We look forward with determination and confidence."

 

 

First half highlights

 

Financial highlights (1H22/1H21 comparisons)

·    Adjusted Revenues[1] of US$1,349.0m, down 12.6%; 91% of this mainly due to lower gold volumes and 9% due to lower silver prices.

·    Revenues of US$1,259.1m, down 14.2%.

·    Gross profit and EBITDA[2] of US$365.9m and US$459.1m, down 39.7% and 38.5%, respectively.

·    Profit from continuing operations before net finance costs and income tax and profit before income tax of US$218.2m and US$155.2m, down 53.8% and 65.1%, respectively.

·    Profit for the period of US$141.0m, down 54.3%.

·    Basic and diluted EPS from continuing operations of US$15.9 cents per share, down 61.2%.

·    Adjusted EPS[3] of US$19.4 cents per share, down 53.1%.

·    Cash generated from operations, before changes in working capital, of US$459.5m, down 38.8%.

·    Free cash flow[4] of US$93.5m in 1H22 (US$305.1m in 1H21).

·    Strong balance sheet with cash and other liquid funds[5] as at 30 June 2022 of US$1,151.9m (31 December 2021: $1,235.3m); net debt/EBITDA of 0.02x[6] (31 December 2021: -0.06x).

·    Interim dividend of 3.40 US cents per share, totaling US$25.1m (1H21: 73.0m).

 

Operational highlights (1H22/1H21 comparisons)

As disclosed in the 2Q22 production report on 27 July 2022:

·    First half attributable silver production of 27.6 moz (including Silverstream), up 0.4% vs. 1H21.

·   First half attributable gold production of 308.8 koz, down 27.9% vs. 1H21.

·    We expect to complete the tie-in of the Juanicipio plant and Pyrites Plant at Fresnillo to the national electricity grid in the coming weeks. Commissioning of the Juanicipio plant will follow soon after with the ramp up of the plant beginning towards the end of the third quarter.

·    Ongoing focus on costs control and productivity.

 

 

Covid-19 update

We saw a drop in Covid-related absenteeism across our operations from March onwards following the arrival of the fourth wave of Covid towards the end of 2021, and have seen a more limited impact on our operations during 2Q22. Despite continuing to implement strict protocols to limit the spread of the virus, a fifth wave has now reached Mexico and we are seeing a rise in positive cases in the country. Should this trend continue, we will see an increase in Covid-related absenteeism in the second half. The safety and well-being of our people is our priority, and we continue to closely monitor the spread of the virus and implement a range of safety measures across our business.

 

 

Highlights for 1H22

 

US$ million unless stated	H1 22	H1 21	% change
Silver production (koz) *	27,632	27,530	0.4
Gold production (oz)	308,752	428,356	(27.9)
Total revenues	1,259.1	1,466.8	(14.2)
Adjusted revenues1	1,349.0	1,543.1	(12.6)
Cost of Sales	893.2	860.1	3.8
Exploration expenses	77.7	60.9	27.6
EBITDA2	459.1	747.0	(38.5)
Profit for the period	141.0	308.4	(54.3)
Cash generated by operations before changes in working capital	459.5	750.4	(38.8)
Basic and Diluted EPS (US$)3	0.159	0.410	(61.2)
Basic and Diluted EPS, excluding post-tax Silverstream revaluation effects (US$)	0.194	0.414	(53.1)
Dividend per ordinary share (US$)	0.034	0.099	(65.7)

* Silver production includes volumes realised under the Silverstream contract

¹ Adjusted revenues are the revenues shown in the income statement adjusted to add back treatment and refining charges and the effects of metals prices hedging. The Company considers this is a useful additional measure to help understand underlying factors driving revenue in terms of volumes sold and realised prices

² Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as profit for the year from continuing operations before income tax, less finance income, plus finance costs, less foreign exchange gain/(loss), less revaluation effects of the Silverstream contract and other operating income plus other operating expenses and depreciation.

³ The weighted average number of shares for H1 2022 and H1 2021 was 736.9m. See Note 8 in the Interim Consolidated Financial Statements.

 

 

 

 

Commentary on the Group's results

Operating results

First half attributable silver production of 27.6 moz (including Silverstream), in line with 1H21 as the expected lower ore grade at San Julián DOB and lower volume of ore processed at Saucito was offset by the increased contribution of ore from Juanicipio.

First half attributable gold production of 308.8 koz, down 27.9% vs. 1H21 primarily due to the expected decrease in the volume of ore processed and lower ore grades at Herradura and Saucito.    

First half attributable by-product lead and zinc production decreased 15.6% and 5.7% vs. 1H21 respectively, primarily due to lower volumes of ore processed and ore grades at Saucito and a decrease in ore grades at San Julián DOB.

The safety and wellbeing of our people remains our absolute priority and we continue to nurture a strong safety culture across all our mines through the reinforcement of our safety training and the monitoring of the adherence to our safety policies. The 'I Care, We Care' programme continues to be rolled out across the business and is a central aspect of all operations and new development projects.

 

Financial results

Total revenues decreased 14.2% to US$1,259.1 million in 1H22, due mainly to the lower volume of gold sold and a decrease in silver price, mitigated by higher zinc and gold prices.

 

The average realised silver price decreased 13.8% from US$26.4 per ounce in 1H21 to US$22.8 per ounce in 1H22, while the average realised gold price rose 4.6%, from US$1,789.2 per ounce in 1H21 to US$1,871.1 per ounce in 1H22. Further, the average realised lead and zinc by-product prices increased 2.8% and 33.1% against their corresponding periods, to US$98.3 and US$173.8 per pound, respectively.

Adjusted production costs[7] increased by 7.9% to US$659.3 million in 1H22. The US$48.2 million increase resulted mainly from: i) cost inflation, including the Mexican peso vs. US dollar devaluation effect (US$44.1 million); ii) costs from the start-up of operations at Juanicipio (US$43.1 million); iii) increase in the use of infrastructure contractors, and maintenance (electric and mechanical) (US$24.5 million); iv) higher volume of ore processed at Fresnillo and San Julián DOB (US$7.1 million); v) and others (US$9.2 million). These adverse effects were mitigated by lower stripping to cost at Herradura (-US$47.7 million); and a decreased volume of ore processed at Saucito, Ciénega, San Julián (Veins) and the Pyrites plant (-US$32.2 million).

Additionally, the variation in the change in inventories and others had a negative effect of US$19.5 million versus 1H21.

Depreciation decreased half on half. This is mainly due to decreased amortisation of capitalised mining works and lower depletion factors at all of the mines except for Fresnillo and Juanicipio

The higher adjusted production costs and the variation in change in work in progress at Herradura, mitigated by the decrease in depreciation and lower profit sharing resulted in a 3.9% increase in cost of sales compared with 1H21.

The lower total revenues combined with the increase in cost of sales, resulted in a 39.7% decrease in gross profit to US$365.9 million in 1H22.

Administrative and corporate expenses decreased 4.1% from US$51.2 million in 1H21 to US$49.1 million in 1H22, mainly due to a decrease in fees paid to advisors (legal, labour, tax and technical).

Exploration expenses increased, as expected, by 27.6% from US$60.9 million in 1H21 to US$77.7 million in 1H22, in line with the budget for this year and our strategy to focus exploration on specific targets, mainly at our Fresnillo and San Julián districts. The increase of US$16.8 million seen period-on-period was due to our intensified exploration activities aimed at increasing the resource base, converting resources into reserves and improving the confidence of the grade distribution in reserves.

Driven by a decrease in gross profit, EBITDA decreased by 38.5%, with EBITDA margin decreasing from 50.9% in 1H21 to 36.5% in 1H22. Similarly, profit from continuing operations before net finance costs and income tax decreased from US$471.9 million in 1H21 to US$218.2 million in 1H22, a decrease of 53.8%.

The net Silverstream effect recorded in the 1H22 income statement was a loss of US$36.3 million (US$20.3 million amortisation profit and US$56.6 million revaluation loss), which compared negatively to the net loss of US$4.0 million registered in 1H21. The negative revaluation was mainly driven by the increase in the LIBOR reference rate; and a decrease in the forward silver price curve; partially compensated by a new mine plan, which considers an increase in silver reserves.

Net finance costs of US$27.9 million remained at similar levels to the US$25.4 million recorded in 1H21. Financial expenses in 1H22 included mainly: i) interest paid on the outstanding US$317.9 million from the US$800 million Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes due 2050.

We recorded a foreign exchange gain of US$1.2 million in the income statement as a result of the 2.91% revaluation of the Mexican peso against the US dollar over the period. This was similar to the US$2.9 million gain in 1H21.

The decrease in profit from continuing operations, together with the net Silverstream loss, resulted in a 65.1% decrease in profit from continuing operations before income tax from US$445.4 million in 1H21 to US$155.2 million in 1H22.

Income tax expense for the period was US$6.8 million, which compared favourably vs. US$111.1 million in 1H21. The effective tax rate, excluding the special mining rights, was 4.4%, which was below the 30% statutory tax rate. The reason for the lower effective tax rate was the significant permanent differences between the tax and the accounting treatment related mainly to: i) the inflation rate (Mexican Consumer Price Index), which impacted the inflationary uplift of the tax base for assets and liabilities; and ii) the benefit from the lower border zone tax which applied to Herradura and Noche Buena operations. 

Profit for the period decreased from US$308.4 million in 1H21 to US$141.0, a 54.3% decrease period-on-period.

Profit due to non-controlling interests was US$23.6 million reflecting the profit generated at Juanicipio, where MAG Silver owns 44% of the outstanding shares. Accordingly, profit attributable to equity shareholders of the Group was US$117.4 million.

Cash generated by operations before changes in working capital decreased by 38.8% to US$459.5 million, mainly as a result of the lower profits generated in the year.

Capital expenditure in 1H22 totalled US$299.0 million, a 16.4% increase over 1H21. Investments during the period included mine development and stripping, purchase of in-mine equipment, construction of a leaching pad at Herradura and the deepening of the San Carlos and Jarillas shafts.

Other uses of funds during the period were income tax, special mining rights and profit sharing paid of US$141.2 million (US$253.5 million in 1H21) and dividends paid of US$176.9 million (US$172.6 million in 1H21).

Fresnillo plc continued to maintain a solid financial position during the period with cash and other liquid funds of US$1,151.9 million as of 30 June 2022, decreasing 6.8% versus 31 December 2021 and 4.2% versus 30 June 2021. Taking into account the cash and other liquid funds of US$1,151.9 million and the US$1,167.8 million outstanding Senior Notes, Fresnillo plc's net debt is US$15.9 million as at 30 June 2022. This compares to the net cash position of US$67.5 million as at 31 December 2021. Considering these variations, the balance sheet at 30 June 2022 remains strong, with a net debt / EBITDA ratio of 0.02x[8].

 

Interim Dividend

 

The Board of Directors has declared an interim dividend of 3.40 US cents per Ordinary Share totalling US$25.1 million, which will be paid on 14 September 2022 to shareholders on the register on 12 August 2022. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars. This interim dividend is lower than the previous period due to the decrease in profit in 1H22, and remains in line with the Group's dividend policy. This decision was made after a comprehensive review of the Group's financial situation, assuring that the Group is well placed to meet its current and future financial requirements, including its development and exploration projects.

 

As previously disclosed, the corporate income tax reform introduced in Mexico in 2014 created a withholding tax obligation of 10% (including to foreign nationals) relating to the payment of dividends, which are paid using the Net Tax Profit Account (CUFIN) generated from 2014 onward. The 2022 interim dividend will be subject to this withholding obligation.

 

Growth

We expect to complete the tie-in of the Juanicipio plant and Pyrites Plant at Fresnillo to the national electricity grid in the coming weeks. Commissioning of the Juanicipio plant will follow soon after with the ramp up of the plant beginning towards the end of the third quarter.

Development ore from Juanicipio continued to be processed through the Fresnillo and Saucito flotation plants during the half. On an attributable basis, 2,672 koz of silver and 6,412 oz of gold were produced.

 

Outlook

We remain on track to meet our 2022 full year guidance of 50.5 to 56.5 moz of attributable silver (including Silverstream) and 600 to 650 koz of attributable gold production.

The labour reform in Mexico which restricts subcontracting of labour came into effect from 1st September 2021 resulting in the requirement to internalise a high proportion of our contractor workforce. The actions we announced to address this short term challenge, including recruitment campaigns, training and investment in new equipment, are on-going. We expect to complete the staffing process at Fresnillo and San Julián by the end of 3Q22, and at Ciénega and Saucito by year end, and as previously reported, our open pit mines are now fully staffed. The challenges set out at the beginning of the year including a tight labour market, global supply chain bottlenecks and cost inflation remain and these will have some impact in the second half of the year.

Exploration expenses are expected to remain around US$180 million, of which approximately US$10 million is anticipated to be capitalised.

Analyst Presentation

Management will host a webcast for analysts and investors today at 9am UK. Registration and access will be provided on the homepage of Fresnillo's website and directly via this link:
https://kvgo.com/IJLO/Fresnillo_1H22_Interim_Results

For those unable to access the webcast, a conference line will also be provided:

Mexico Toll Free: 00 1 866 966 8830
UK-Wide: +44 (0) 33 0551 0200
UK Toll Free: 0808 109 0700
USA Toll Free: 1 866 966 5335

Password: Quote Fresnillo when prompted by the operator

Questions may be submitted via the conference dial-in.

 

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

 

Fresnillo plc
London Office Gabriela Mayor, Head of Investor Relations Patrick Chambers	Tel: +44(0)20 7339 2470
Mexico City Office Ana Belém Zárate	Tel: +52 55 52 79 3206
Powerscourt Peter Ogden	Tel: +44(0)20 7250 1446

 

 

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 Las Casas Rosario & Cluster Cebollitas), Herradura, Soledad-Dipolos1, Noche Buena and San Julián (Veins and Disseminated Ore Body), two development projects - the Pyrites Plant at Fresnillo and Juanicipio, both of which have been completed and are awaiting tie-ins of the plants to the national electricity grid in the coming weeks, and three advanced exploration projects - Orisyvo, Rodeo and Guanajuato, 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.

 

FORWARD LOOKING STATEMENTS

Information contained in this announcement may include 'forward-looking statements'. All statements other than statements of historical facts included herein, including, without limitation, those regarding the Fresnillo Group's intentions, beliefs or current expectations concerning, amongst other things, the Fresnillo Group's results of operations, financial position, liquidity, prospects, growth, strategies and the silver and gold industries are forward-looking statements. Such forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of the Fresnillo Group's operations, financial position and liquidity, and the development of the markets and the industry in which the Fresnillo Group operates, may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. In addition, even if the results of operations, financial position and liquidity, and the development of the markets and the industry in which the Fresnillo Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in regulation, currency fluctuations (including the US dollar and Mexican Peso exchanges rates), the Fresnillo Group's ability to recover its reserves or develop new reserves, including its ability to convert its resources into reserves and its mineral potential into resources or reserves, changes in its business strategy and political and economic uncertainty.

 

 

1H21 Operational Review

 

Production

 

Production	H1 2022	H1 2021	%  change
Silver (koz)	26,192	25,931	1.0
Silverstream prod'n (koz)	1,440	1,599	(9.9)
Total Silver prod'n (koz)	27,632	27,530	0.4
Gold  (oz)	308,752	428,356	(27.9)
Lead  (t)	26,779	31,726	(15.6)
Zinc  (t)	50,533	53,568	(5.7)

 

First half attributable silver production of 27.6 moz (including Silverstream), in line with 1H21 as the expected lower ore grade at San Julián DOB and lower volume of ore processed at Saucito was mitigated by the increased contribution of ore from Juanicipio.

First half attributable gold production of 308.8 koz, down 27.9% vs. 1H21 primarily due to a decrease in volume of ore processed and lower ore grade at Herradura and Saucito.    

First half attributable by-product lead and zinc production decreased 15.6% and 5.7% vs. 1H21 respectively, primarily due to lower volumes of ore processed and ore grades at Saucito and a decrease in ore grades at San Julián DOB.

 

Fresnillo mine production

 

	H1 2022	H1 2021	%  change
Ore Processed (t)	1,194,359	1,141,223	4.7
Production
Silver (koz)	6,609	6,608	0.0
Gold  (oz)	18,148	17,112	6.1
Lead (t)	10,432	9,367	11.4
Zinc (t)	20,139	15,546	29.5
Ore Grades
Silver (g/t)	189	202	(6.5)
Gold (g/t)	0.67	0.69	(3.3)
Lead (%)	1.04	0.97	7.8
Zinc (%)	2.35	1.95	20.5

 

 

First half silver production remained in line with. 1H21 due to a lower ore grade, mitigated by a higher volume of ore processed.

 

Mine development rates remained at similar levels quarter on quarter averaging 2,900m per month in 2Q22 (1Q22: 2,866m per month). We remain confident that we can maintain a rate of 2,900 to 3,100m per month on average as previously stated over the coming months.

 

First half by-product gold production increased 6.1% vs. 1H21 due to a higher volume of ore processed and a higher recovery rate.

  

The silver ore grade in 2022 is expected to remain in the range of 190-210 g/t, while the gold ore grade is expected to remain in the range of 0.55-0.70 g/t.

 

The deepening of the San Carlos shaft continued to progress with completion expected by the end of September. This project is expected to support a decrease in haulage costs and lower greenhouse gas emissions, while providing access to reserves in the medium term.

 

Saucito mine production

 

	H1 2022	H1 2021	% change
Ore Processed (t)	1,008,158	1,310,923	(23.1)
Production
Silver (koz)	5,781	6,602	(12.4)
Gold  (oz)	33,172	51,578	(35.7)
Lead (t)	9,444	15,490	(39.0)
Zinc (t)	15,665	23,570	(33.5)
Ore Grades
Silver (g/t)	199	184	8.4
Gold (g/t)	1.30	1.58	(17.9)
Lead (%)	1.09	1.38	(21.1)
Zinc (%)	1.97	2.45	(19.7)

 

 

First half silver production decreased 12.4% vs. 1H21 due to a lower volume of ore processed driven by the residual impact of the labour reform in Mexico and the localised seismicity in certain areas of the mine. This was mitigated by the higher ore grade due to improved dilution control, as well as successfully regaining access in 2Q22 to certain areas with higher ore grade, which were impacted by the seismicity in previous quarters.

 

We continued our recruitment and training campaigns with the target of gradually reducing the shortage of personnel through the second half of the year. However, as explained in the prior quarters, we continue to expect some variability in the ore grade and volumes of ore processed in 2022 driven by the need for additional development of the mine in order to recapture operational flexibility following high levels of localised seismicity and shortages of personnel reported last year.

 

First half by-product gold production decreased 35.7% vs. 1H21 due to a lower volume of ore processed and ore grade for reasons explained above.

 

Full year 2022 silver ore grade is expected to remain between 175-195 g/t, while the gold ore grade is estimated to remain around 1.10-1.20 g/t.

The third party review of the short term planning cycle was completed in 1H22, concluding that the optimal run rate of the beneficiation plant should be 7,000 tpd. The medium and long term planning cycle continues to be under review.

 

 

PYRITES PLANT (PHASE I)

 

	H1 2022	H1 2021	% change
Pyrite Concentrates Processed (t)	65,690	90,283	(27.2)
Production
Silver (koz)	277	304	(9.0)
Gold  (oz)	932	1,399	(33.3)
Ore Grades
Silver (g/t)	176	145	21.4
Gold (g/t)	1.40	1.60	(12.6)

 

First half silver production decreased vs. 1H21 primarily due to a lower volume of pyrite concentrates processed, mitigated by a higher ore grade and recovery rate.

 

First half gold production decreased vs. 1H21 primarily due to a lower volume of pyrite concentrates processed and lower ore grade, mitigated by a higher recovery rate.

 

In 2022, we continue to estimate silver production from the Pyrites plant at Saucito to be in the range of 700 to 750 koz while gold production is estimated to remain in the range of 1.5 to 2.5 koz.

 

We expect to complete the tie-in of the plant to the national electricity grid in the coming weeks followed by the ramp up of the plant soon after.

 

Ciénega mine production

 

	H1 2022	H1 2021	% change
Ore Processed (t)	563,094	660,123	(14.7)
Production
Gold  (oz)	18,907	26,696	(29.2)
Silver (koz)	2,485	2,723	(8.7)
Lead (t)	1,684	2,191	(23.1)
Zinc (t)	2,596	3,642	(28.7)
Ore Grades
Gold (g/t)	1.14	1.34	(15.4)
Silver (g/t)	159	150	5.9
Lead (%)	0.47	0.54	(13.3)
Zinc (%)	0.82	0.99	(16.9)

 

First half gold production decreased 29.2% vs. 1H21, due to the lower ore grade year-on-year, and lower volume of ore processed given the continued impact of the labour reform in Mexico. First half silver production decreased 8.7% vs. 1H21 due to a lower volume of ore processed, mitigated by a higher ore grade.

The gold and silver ore grades for 2022 are expected to remain in the range of 1.20-1.40 g/t and 145-155 g/t respectively.

 

San Julián mine production

 

	H1 2022	H1 2021	% change
Ore Processed Veins (t)	583,966	591,148	(1.2)
Ore Processed DOB(t)	1,076,326	1,003,728	7.2
Total production at San Julián
Gold (oz)	23,433	29,346	(20.1)
Silver (koz)	7,968	8,649	(7.9)
Production Veins
Gold (oz)	21,710	27,147	(20.0)
Silver (koz)	2,235	1,992	12.2
Production DOB
Gold (oz)	1,723	2,199	(21.7)
Silver (koz)	5,733	6,657	(13.9)
Lead (t)	3,933	4,507	(12.7)
Zinc (t)	10,093	10,533	(4.2)
Ore Grades Veins
Gold (g/t)	1.22	1.52	(19.7)
Silver (g/t)	131	115	13.7
Ore Grades DOB
Gold (g/t)	0.08	0.12	(29.2)
Silver (g/t)	193	240	(19.8)
Lead (%)	0.45	0.55	(18.4)
Zinc (%)	1.20	1.38	(13.0)

 

San Julián Veins

First half gold production decreased 20.0% vs. 1H21 mainly as a result of a lower ore grade driven by an operational decision to adjust the mine plan to prioritise extraction from wider veins of the mine with higher silver content but a lower gold ore grade.

First half silver production increased 12.2% vs. 1H21 due to a higher ore grade for reasons explained above.

We continue to expect the 2022 silver and gold ore grades to average 120-130 g/t and 1.35-1.55 g/t, respectively.

 

San Julián Disseminated Ore Body

First half silver production decreased 13.9% vs. 1H21 as a result of the expected lower ore grade following the higher than anticipated ore grade in 2Q21 as a result of: i) the positive variation with the geological model in the central area of the ore body; and ii) access to higher ore grade areas following the mine resequencing in 2019, as set out at the time. This adverse effect was mitigated by a higher volume of ore processed.

We continue to expect the 2022 silver ore grade to be in the range of 150-170 g/t as we advance towards the lower grade areas in the periphery of the ore body.

 

Herradura mine production

 

	H1 2022	H1 2021	% change
Ore Processed (t)	9,518,276	11,494,407	(17.2)
Total Volume Hauled (t)	64,333,382	66,655,154	(3.5)
Production
Gold (oz)	160,644	258,165	(37.8)
Silver (koz)	387	530	(27.0)
Ore Grades
Gold (g/t)	0.68	0.81	(16.3)
Silver (g/t)	1.83	2.03	(9.9)

 

First half gold production decreased 37.8% vs. 1H21 due to an expected lower volume of ore processed and ore grade, in line with the mine plan.

The gold ore grade in 2022 is expected to remain in the range of 0.65-0.75 g/t.

 

Noche Buena mine production

 

	H1 2022	H1 2021	% change
Ore Processed (t)	4,384,077	3,703,923	18.4
Total Volume Hauled (t)	13,283,655	13,248,211	0.3
Production
Gold (oz)	47,103	43,228	9.0
Silver (koz)	14	12	14.6
Ore Grades
Gold (g/t)	0.57	0.52	10.3
Silver (g/t)	0.26	0.19	38.6

 

First half gold production increased 9.0% vs. 1H21 due to a higher volume of ore deposited as a result of a lower stripping ratio, decreasing the waste material moved, in addition to a higher ore grade, partially offset by a lower recovery rate.

The expected gold ore grade in 2022 is expected to remain in the range of 0.40-0.50 g/t.

 

 

Pyrites Plant at Fresnillo

 

The Pyrites Plant (phase II) was completed on time in 4Q20 but the inspection that is required to be carried out by the authorities in order to grant the energy permit was delayed late last year.

 

We expect to complete the tie-in of the plant to the national electricity grid in the coming weeks followed by the ramp up of the plant soon after.

 

Juanicipio

The construction of the Juanicipio project was concluded on schedule in 4Q21. Ore from the Juanicipio mine was processed through the Fresnillo and Saucito flotation plants during the half. However, the beneficiation plant at Juanicipio has not started operations as it is awaiting the tie-in to the national electricity grid in the coming weeks. As a result, the Group considered that commercial production at the Juanicipio mine started from 1^st January 2022, while the plant is still in the commissioning process. Ramp up of commercial production to 85-90% of nameplate capacity remains within reach by year end.

On an attributable basis, 2,672 koz of silver and 6,412 oz of gold were produced in 1H22. The average ore grade processed in 1H22 was 582 g/t of silver and 1.5 g/t of gold.

Juanicipio is expected to contribute a total average annual production of 11.7 moz silver and 43.5 koz gold, with an initial life of mine of 12 years.

 

Below we provide an update on other projects which are expected to contribute to our medium and long term growth. These projects have not yet been approved by the Board and are subject to ongoing internal review. However, certain minor works and exploration activities might be in progress in preparation for Board approval and as such, are included within the 2022 approved capex and exploration budget.

 

Advanced exploration projects

 

Rodeo

 

Negotiations to acquire the right to access the land while engaging with the surrounding communities continued to advance at this gold silver project located in Durango. The water rights for 2.8 million cubic meters were acquired and a scoping study is being developed. Indicated and inferred resources amounted to 1.3 million ounces of gold and 13.8 million ounces of silver as of 31st of May 2021.

 

Orisyvo

Preliminary stage of the metallurgical research was concluded and further work began investigating optimal recovery techniques. Our 6,000m geotechnical drilling programme was concluded and we are in the process of preparing the geotechnical model with the aim of concluding the conceptual study before then updating the pre-feasibility study, due to be completed in 2023. Acquisition of land for the construction of the tailings dam, water dam and industrial area are on-going.

Guanajuato

 

Guanajuato is a large historic silver-gold mining district with Fresnillo's holdings comprised of three areas of interest: the Gigante-Opulencia systems in the north, the Las Torres-San Gregorio targets in the centre of the district and La Joya-Cerro Blanco in the south. Exploration activities continued in 1H22 with 25,082m drilled. At the end of 2021, indicated and inferred resources at this project totaled 1.7 million ounces of gold and around 101 million ounces of silver.

 

Exploration

Significant progress was made during the first half of 2022 by both the mines and the exploration division teams, drilling a total of 475,592m.

71% of this was completed by the mine teams, focused in improving the confidence of the grade distribution in the reserves, converting inferred resources into the indicated category and finding additional mineralisation; information gathered will be included in an updated resources and reserves estimation scheduled for the end of the year. 96,114m of drilling were completed by the exploration division focused on brownfield targets, in particular at the Fresnillo, San Julián and Herradura districts. All three programmes delivered positive results.

Exploration at advanced and priority early stage projects in Mexico and Chile continued at a good pace, drilling 47,500m, following the strategy of accelerating the development plans at several favourable locations. Good results were obtained at the Guanajuato, San Juan and Capricornio projects with drilling scheduled to continue for the rest of the year.

An intensive field-based programme is being carried out at several promising prospects in Mexico, Peru, and Chile, where teams of our geologists are advancing mapping and geochemical surveys at a regional level, followed up by detailed analysis of targets identified using remote sensing and geophysical techniques. Drilling is scheduled at some of these projects in the second half of 2022 and during 2023, confirming our commitment to continuously strengthening our asset portfolio across metal price cycles using a disciplined "milestone completion"-based approach for budget allocation.

To ensure that our teams are able to complete the exploration programmes, a strengthened team of environmental and safety professionals has been deployed across all of our projects in the countries where we operate, taking special care of the health of our people and the communities surrounding our projects following a strict Covid-related sanitary protocol.

In the first six months, US$77.7 million of exploration expenses were recorded in the income statement, an increase of 27.6% over 1H21. Total risk capital expected to be invested in exploration for the full year 2022 remains at approximately US$180 million.

 

 

Related party transactions

Details of related party transactions that have taken place in the first six months of the current financial year are detailed in note 16 of the interim consolidated financial statements.

 

 

Health and safety, environment and community relations

 

 

We are committed to our Purpose: "Contribute to the wellbeing of people through the sustainable mining of silver and gold". This commitment underlines the importance of deeply integrating responsible business practices into our business model while understanding the factors that affect stakeholders at all critical decision-making levels. This commitment was once again highlighted through the recognition of our Environment, Social and Governance (ESG) performance by the inclusion of Fresnillo plc in the FTSE4Good Index and Ethisphere's world most ethical companies.

 

Covid-19

 

Throughout the Covid-19 outbreak we have made the health and wellbeing of our people our priority. We saw a drop in Covid-related absenteeism across our operations from March onwards following the arrival of the fourth wave of Covid towards the end of 2021, and have seen a more limited impact on our operations during 2Q22. Despite continuing to implement strict protocols to limit the spread of the virus, a fifth wave has now reached Mexico and we are seeing a rise in positive cases in the country. We have maintained our comprehensive strategy to protect our employees and contractors in our mining operations, development and exploration projects through the following measures:

 

1.    Senior Management oversight of the Covid-19 strategy and performance

2.   Raising awareness on preventive measures and the benefits of vaccination

3.   Mandatory use of masks and social distancing in the workplace and transport

4.   Supporting and monitoring the progress of vaccination

5.   Partnering with authorities to vaccinate, especially in remote locations for the benefit of our workforce and local communities

6.   Hand washing, antibacterial gel and sanitisation of work areas, accommodation and transportation

7.   Sanitary filters supported by rapid testing

8.   Testing, monitoring and contagion tracing

9.   Daily monitoring and psychological support for active cases

 

Mexico implements a two dose vaccination scheme with a third dose as booster. A fourth dose is being administered to the vulnerable population. We have encouraged and supported vaccination of our workforce and communities, collaborating with health authorities to make vaccines available in the remote locations where we operate. Close to 90% of our workforce have been fully vaccinated (two doses) and 45% have received the booster. We have, and will continue to implement testing campaigns across our operations, development and exploration projects and corporate offices.

 

 

Our People

 

Our workforce is fundamental to our purpose, contributing to the wellbeing of people through the sustainable mining of silver and gold. Their health and safety have always been our top priority. We engage unions to build trust through continuous dialogue, leadership development programmes, wellbeing activities and continuous improvement projects. We seek to attract, develop and retain the best people, and engage them over the long term. Our harassment prevention, women development, and cultural evolution initiatives seek to develop a fair, respectful and inclusive workplace.

In 2022, Mexico pursued the implementation of the 2019 Labour reform resulting from the United States-Mexico-Canada Agreement (USMCA), which includes the ratification of Collective Bargain Agreements (CBA) by a majority of workers. To date, six out of seven CBA's have been ratified with over 95% approval rates, contributing to labour certainty and trust. To date in 2022, we have supported the training of 206 union representatives. These leaders were freely elected to represent unionised workers at the local union committees of our mining operations.

We engage with the most prestigious Earth Sciences and Engineering universities in Mexico to secure our talent pipeline. Our 'Engineers in Training' programme recruited 43 new earth science and engineering professionals during the year. We continue to implement the 'Leaders with Vision' programme to develop our pipeline of managers. The seventh generation of the 'Leaders with Vision' programme have now graduated, and we have since begun the eighth generation, with an average of 20 participants.

We have increased the participation of women in our workforce. We see the increasing participation and inclusion of women as the first step in the journey to making diversity a competitive advantage. Our two strategic objectives are to enhance the contribution of women to the success of the Company and have a positive impact on female employees. The percentage of unionised and non-unionised women reached 13.65% in the first half of the year (12.66 % in 2021) while our overall total workforce, including contractors, reached 11.79% in 1H22 (11.01% in 2021). We are making consistent progress to meet our target of 12% in 2025. Our "Mom with a Miner's M" accompanies and supports women during pregnancy through providing counselling and flexibility in working hours, temporary transfer of their working area, special assignments or working from home. We launched the 'Women for Women Mentoring Programme' to develop leadership and support networks. The programme has identified mentees and is currently training mentors. A key outcome of our strategy is the appointment of more women to superintendent positions across our operations.

Our Harassment Prevention Programme launched a communication campaign to raise awareness on structural violence and discrimination. We delivered awareness workshops for new personnel across our mining operations and introduced a best practice framework for our exploration and development teams, encompassing a total of 803 people (229 non-unionised employees, 480 unionised employees and 94 contractors). In addition, we delivered an online training for 277 non-unionised employees on bullying and harassment prevention.

We further launched a culture evolution initiative to foster accountability, co-creation, agility and collaboration. We identified and trained 36 senior managers as culture champions. Additionally, 136 non-unionised employees, including 65 members of the operating units' management, attended culture workshops.

In the following tables we summarise the composition of our workforce and turnover throughout the period:

 

Table 1. Workforce composition

 

	As at 30 June 2022	As at 31 December 2021	% Change
Unionised employees	6,291	5,826	7.98
Non-unionised employees	1,580	1,533	3.07
Total unionised and non-unionised employees	7,871	7,359	6.94
Unionised and non-unionised women (%)	13.65	12.66	-
Contractors	13,201	12,757	3.48
Total workforce	21,072	20,116	4.75
Total women (%)	11.79	11.01	-

 

Table 2. Turnover

 

	1H 2022	1H 2021
Voluntary turnover (%)	4.14	2.44
Total turnover (%)	6.45	4.06

 

 

 

Board level workforce engagement

 

The insights gained following the dialogue of our Designated Non-Executive Director (NED) with the workforce has been used by the Company to improve current initiatives and launch new ones. The Company implemented a communication campaign across the Group, updating the workforce on the progress to date for our initiatives stemming from their feedback on health & safety, wellbeing, ethics culture, diversity, equity and inclusion, harassment prevention and leadership.

 

 

Occupational Health

 

Our approach aims to pre-emptively identify and manage the health risks to which our workforce is exposed. Preventive care and the promotion of healthier lifestyles can limit certain chronic diseases and enhance overall wellness and fitness for work. While our focus is on prevention, emergency response is a core competence of all our health teams.

We continue to implement measures in our business units to mitigate psychosocial risk factors and promote wellbeing programmes to shape a working environment aligned with our aspiration of organisational culture. Additionally, we are working towards the 'Safe and Healthy Workplace Environments' certification for all our business units by the Mexican Social Security Institute, a voluntary programme to implement strategies and measures to improve health, safety and well-being of workers, as well as productivity and quality in the workplace.

 

 

Safety

 

Our goal is zero harm. Our 'I Care, We Care' programme focuses on leadership, accountability, safety culture, high potential incidents management, engineering systems and lessons learnt. In 2022 we have focused our efforts on the implementation of critical controls and visible leadership practices across our mining operations.

We have focused our efforts on empowering our people to effectively use the Hazard Identification and Risk Assessment and Critical Risk Verification Tools. An Operational Committee has been formalised to ensure the effective implementation of critical risk management and incident management across our mining operations.

We have reinforced leadership practices for senior management and the management teams at the operations as well as workshops with our employees, contractors and service providers. As part of our commitment to the programme, our Senior Operations Managers and Executives gathered in the Fresnillo District to strengthen our four leadership practices: i) Planning and communication, ii) Field verification, iii) Generation, review and improvement of action plans and iv) Recognition and accountability. The group verified the critical risks found at both the Fresnillo and Saucito mines, as well as the Juanicipio project, with data taken from incident analysis, including: rock fall, loss of vehicle control, explosives handling and uncontrolled release of energy.

Our performance of Total Recordable Injury Frequency Rates (TRIFR) and Lost Time Injury Frequency Rates (LTIFR) per million hours worked, decreased to 9.53 (10.42 in 2021) and 5.04 (5.76 in 2021) in 1H22, respectively. Despite the sustained improvement in injury frequency, we deeply regret the one fatal accident at the beginning of 2022. This is a sober reminder of the work ahead to achieve our goal of zero harm.

 

 

Table 3. TRIFR and LTIFR*

 

	1H 2022	2021	% Change
Total Recordable Injury Frequency Rates (TRIFR)	9.53	10.42	-8.5
Lost Time Injury Frequency Rates (LTIFR)	5.04	5.76	-12.5

 

     * Frequencies for every 1,000,000 hours worked

 

As part of the workforce engagement feedback, we conducted an assessment of transport services to improve quality and safety.  Workshops and campaigns were organised to promote road safety and encourage safer driving. We provided group coaching to strengthen leadership and effective communication skills for the management teams across our mining operations.

 

 

Tailings Storage Facilities

 

We implement best practise governance and engineering to manage our Tailings Storage Facilities (TSF). Our governance framework considers:

 

·    The Board and the HSECR Committee establishing the mandate and relying on management to implement.

·    The Technical Review Committee being accountable for oversight.

·    The CEO (Accountable Executive), Senior Management of Operations and Mine Managers (Risk Owners) being accountable for operating in compliance with the policies and governance.

·    Peñoles' Technical Services Co-CEO (Accountable Executive), Assistant VP of Infrastructure and Engineering Corporate Tailings Specialists and Managers also being accountable for the governance.

·    TSF Operators, Regional TSF Superintendents and Managers, and Engineers of Record (EOR) being responsible of Operation, Control and assurance.

·    Independent Tailings Review Panel (ITRP) and Independent Inspectors providing independent verification.

 

The Independent Reviews of our ITRF continues with virtual and in person site visits, providing recommendations that guide our implementation plans. We are developing our Emergency and Response Plans and maturing our Tailings Management System along with a dashboard with key indicators for every level of involvement and responsibility. We have made good progress in our recruitment and training programmes.

 

Among our key accomplishments, Juanicipio became our first TSF that fully met Canadian Dam Association (CDA), Mining Association of Canada (MAC), International Commission on Large Dams (ICOLD) and International Council on Mining and Metals (ICMM) Principles from the initiation of its development, design and construction. Knight Piésold, a global consulting firm providing specialised services to the mining industry, officially accepted the role as Engineer of Record for our San Carlos (Fresnillo Mine) TSF. San Carlos became our first TSF designed and constructed by a third-party consultant under our old standards that has been certified to comply with all the requirements established by a new competent international consultant for their formal assumption of the role of Engineer of Record.

 

 

Environmental Management

 

We launched an initiative to increase the use of the municipal wastewater in the Fresnillo District to reduce the consumption of in-mine groundwater for our mining and mineral processing activities. We've also held reforestation campaigns across our units and projects in collaboration with volunteers from our workforce, communities and business partners, capitalising on these experiences to instil an environmental-prone culture in our stakeholders.

 

We are committed to biodiversity conservation. During the period, we pioneered the natural breeding of a golden eagle pair as well as caring for scarlet macaws and toucans as part of our Environmental Management Unit in the Fresnillo District. San Julián designated a 20 -hectare area as a conservation zone at the launch of our Wildlife Conservation Management Unit, promoting the conservation and non-extractive use of the Pinabete Pseudotsuga tree, a species declared endangered by Mexican environmental authorities. Finally, we also inaugurated our forestry nursery at Penmont, specialising in 23 endemic species, with a capacity of 150 thousand saplings per year, and whose facilities will be open to the public for educational purposes. 

 

 

 

Climate Change

 

We continue to mature our capabilities to disclose climate-related financial information, considering the risks of climate change. We have joined the TCFD Consortium in Mexico to share best practices and participated in the Financial Reporting Council's (FRC) Lab research project "Net-zero disclosures". We launched a Climate Modelling project with the University of Arizona to generate future climate projections under different scenarios, to support the development of our adaptation strategy.

 

 

Community Relations

 

We earn and maintain the trust of our communities through meaningful engagement and by being accountable for our actions. Our community strategy, which embraces all phases of the mining lifecycle, aims to build mutual understanding between our operations and local communities, ensuring that we engage, develop and grow together.  Our grievance mechanism is intended to provide a fair way to respond to concerns and resolve disputes. We recognise the strategic importance of going beyond maintaining our social licence to operate - supporting the issues that matter to our communities and working with them for the long term.

 

Sustainable Development Goal 3 "Good Health and Wellbeing"

Throughout the Covid-19 pandemic, we've collaborated with Mexican authorities to support the logistics of vaccination for our workforce and communities as well as offering free testing. In the Fresnillo District, we organised a Health Week to serve the communities of Fresnillo, Saucito and Juanicipio.  To this end, we partnered with the National University Foundation (UNAM Foundation), the Mexican Institute of Social Security (IMSS) and Zacatecas' Health Ministry, providing free dental and eye care, general medicine, physiotherapy, as well as chronic diseases, reproductive health and gynaecological consultations, benefiting 14 neighbouring communities. Our "Leaders on the horizon" football league at Penmont develops social cohesion, promoting respect, joy, responsibility, and teamwork through games and sports.

 

Sustainable Development Goal 4 "Quality Education"

We sponsored teams from our communities to compete at the Laguna Regional FIRST Robotics Competition. This programme aims to develop the talent and skills of high school children by promoting teamwork, leadership and project management. Additionally, graduates of our four teams compete for 100% scholarships in partnership with LaSalle University Laguna. We support schools with hygiene equipment, masks, and school furniture in San Julián and we supported school improvements of classrooms, restrooms and sports areas at Juanicipio. We further continued our support though the donation of 3,000 Larousse books at Penmont and San Julián.

 

Sustainable Development Goal 8 "Decent Work and Economic Growth"

We continued with our entrepreneurial programmes to promote capacity building, micro-enterprises and productive project such as the Vegetable Gardens, Backyard Poultry and Sustainable Carpentry Workshop at Juanicipio, entrepreneurial programmes in partnership with Proempleo CDMX and CEDO at the Penmont and Fresnillo Districts, and the Masks, Uniforms and Equipment sewing workshops at San Julián and Juanicipio, among others.

FINANCIAL REVIEW

 

The interim consolidated financial statements of the Group for the six months ended 30 June 2022 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the IASB and as adopted by UK. All comparisons refer to the first halves of 2022 and 2021, unless otherwise noted. The financial information and half year on half year variations are presented in US dollars, except where indicated. Management recommends reading this section in conjunction with the Interim Financial Statements and their accompanying Notes.

 

 

INCOME STATEMENT

 

	1H 2022 US$ million	1H 2021 US$ million	Amount Change US$ million	Change %
Adjusted revenue [9]	1,349.0	1,543.1	(194.1)	(12.6)
Total revenue	1,259.1	1,466.8	(207.8)	(14.2)
Cost of sales	893.2	860.1	33.2	3.8
Gross profit	365.9	606.8	(240.9)	(39.7)
Exploration expenses	77.7	60.9	16.8	27.6
Operating profit	218.2	471.9	(253.7)	(53.8)
EBITDA [10]	459.1	747.0	(287.9)	(38.5)
Income tax expense including special mining rights	14.2	136.9	(122.7)	(89.6)
Profit for the period	141.0	308.4	(167.4)	(54.3)
Profit for the period, excluding post-tax Silverstream effects	166.3	311.2	(144.9)	(46.6)
Basic and diluted earnings per share (US$/share) 5	0.159	0.410	(0.251)	(61.2)
Basic and diluted earnings per share, excluding post-tax Silverstream effects (US$/share)	0.194	0.414	(0.220)	(53.1)

 

 

The Group's financial results are largely determined by the performance of 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:

 

 

METALS PRICES

The average realised silver price decreased 13.8% from US$26.4 per ounce in 1H21 to US$22.8 per ounce in 1H22, while the average realised gold price rose 4.6%, from US$1,789.2 per ounce in 1H21 to US$1,871.1 per ounce in 1H22. Further, the average realised lead and zinc by-product prices increased 2.8% and 33.1% against their corresponding periods, to US$98.3 and US$173.8 per pound, respectively.

 

MX$/US$ EXCHANGE RATE

The Mexican peso/US dollar spot exchange rate at 30 June 2022 was $19.98 per US dollar, compared to the exchange rate at 31 December 2021 of $20.58 per US dollar. The 2.91% spot revaluation had a limited positive effect on the net monetary peso asset position, which contributed to the US$1.2 million foreign exchange gain recognised in the income statement.

 

The average spot Mexican peso/US dollar exchange rate remained relatively unchanged at $20.28 per US dollar in 1H22 ($20.18 per US dollar in 1H21), thus having an immaterial effect on the Group's costs denominated in Mexican pesos (approximately 45% of total costs) when converted to US dollars.

 

COST INFLATION

In 1H22, cost inflation considering Fresnillo plc's basket of goods and services was 7.57%. The main components of our cost inflation basket are listed below:

 

Labour

Unionised employees received on average a 6.8% increase in wages in Mexican pesos, while non-unionised employees received on average a 5.5% increase in wages in Mexican pesos; when converted to US dollars, this resulted in a weighted average labour inflation of 6.3%.

 

Energy

Electricity

The weighted average cost of electricity in US dollars slightly increased 0.7% from US$8.82 cents per kw in 1H21 to US$8.88 cents per kw in the same period of 2022, reflecting the average generating cost of the Comisión Federal de Electricidad (CFE), the national utility, remaining flat period on period.

 

Diesel

The weighted average cost of diesel in US dollars decreased 1.1% to 88.59 US cents per litre in 1H22, compared to 89.61 US cents per litre in 1H21. This resulted from the Mexican Government's fuel tax relief, subsidising the cost of diesel and gasoline in Mexico, looking to insulate consumers from the increase in global oil prices.

 

Operating materials

 

	Half on half change in unit price %
Sodium cyanide	50.3
Explosives	31.3
Other reagents	25.8
Steel balls for milling	24.1
Steel for drilling	11.9
Lubricants	8.2
Tyres	1.3
Weighted average of all operating materials	18.9

 

Unit prices of the majority of key operating materials significantly increased in US dollar terms primarily reflecting global inflationary pressures and supply disruptions resulting from Covid-19 lockdowns in China and the impact of the invasion of Ukraine by Russia. As a result, the weighted average unit prices of all operating materials over the half increased by 18.9%.

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 1H22, increases per unit (i.e. per metre developed/ per tonne hauled) granted to contractors, resulted in a weighted average increase of 6.9% in US dollars, after considering the devaluation of the Mexican peso vs. US dollar.

 

Maintenance

Unit prices of spare parts for maintenance increased by 1.8% on average in US dollar terms.

 

Other costs

Other cost components include freight which increased by an estimated 11.9% in US dollars, while insurance costs increased by 5.5% in US dollars mainly due to higher market premiums as a result of Covid-19 claims. The remaining cost inflation components experienced average inflation of 11.4% in US dollars over 1H21.

 

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

	1H 2022 US$ million	1H 2021 US$ million	Amount US$ million	Change %
Adjusted revenue [11]	1,349.0	1,543.1	(194.1)	(12.6)
Metals prices hedging	(3.8)	0.0	(3.8)	N/A
Treatment and refining charges	(86.2)	(76.2)	(10.0)	(13.1)
Total revenue	1,259.1	1,466.8	(207.8)	(14.2)

 

Adjusted revenue decreased by US$194.0 million mainly due to the lower volume of gold sold and to a lesser extent, the decrease in silver price. As a result, total revenue decreased by 14.2% to US$1,259.1 million in 1H22.

 

ADJUSTED REVENUE BY METAL

 

	1H 2022		1H 2021
	US$ million	%	US$ million	%	Volume Variance US$ million	Price Variance US$ million	Total net change US$ million	%
Gold	555.9	41.2	720.0	46.7	(192.8)	28.6	(164.2)	(22.8)
Silver	576.8	42.8	629.1	40.8	37.4	(89.7)	(52.3)	(8.3)
Lead	54.2	4.0	62.1	4.0	(9.5)	1.6	(7.9)	(12.7)
Zinc	162.2	12.0	131.8	8.5	(11.7)	42.0	30.3	23.1
Total adjusted revenue	1,349.0	100	1,543.1	100.0	(176.6)	(17.5)	(194.1)	(12.6)

Lower gold volumes sold were primarily due to the decreased volume of ore processed and lower ore grade at Herradura and Saucito, while the higher silver volumes were due to the ore processed from Juanicipio at Fresnillo and Saucito's beneficiation plants (for further detail, see 1H22 Operational Review).

 

Changes in the contribution by metal were the result of the relative changes in metal prices and volumes produced. Gold decreased its contribution to total adjusted revenues from 46.7% in 1H21 to 41.2% in 1H22, while silver increased its contribution from 40.8% in 1H21 to 42.8% in 1H22. Zinc also increased its contribution from 8.5% in 1H21 to 12.0% in 1H22.  Lead's contribution to total adjusted revenues remained flat period-on-period.

 

ADJUSTED REVENUE[12] BY Mine

 

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 metals prices fluctuate.

 

	1H 2022		1H 2021
	(US$ million)	%	(US$ million)	%
Herradura	302.9	22.4	449.7	29.1
Saucito	250.8	18.6	338.9	22.0
Fresnillo	243.6	18.1	245.9	15.9
San Julián (DOB)	148.0	11.0	187.2	12.1
Juanicipio	140.1	10.4	25.1	1.6
Ciénega	98.6	7.3	121.9	7.9
Noche Buena	86.4	6.4	75.4	4.9
San Julián (Veins)	78.8	5.8	99.0	6.4
Total	1,349.0	100	1,543.1	100

 

 

 

VOLUMES OF METAL SOLD

 

	1H 2022	% contribution of each mine	1H 2021	% contribution of each mine	% change
Silver (koz)
Fresnillo	5,943	23.5%	6,163	25.9%	(3.6)
Saucito	5,138	20.3%	5,966	25.0%	(13.9)
San Julián (DOB)	4,759	18.8%	5,680	23.8%	(16.2)
Juanicipio	4,494	17.7%	785	3.3%	472.5
Ciénega	2,311	9.1%	2,449	10.3%	(5.6)
San Julián (Veins)	1,878	7.4%	1,934	8.1%	(2.9)
Pyrites Plant at Saucito	423	1.7%	332	1.4%	27.4
Herradura	389	1.5%	502	2.1%	(22.5)
Noche Buena	5	0.0%	8	0.0%	(37.5)
Total silver (koz)	25,340		23,817		6.4
Gold (oz)
Herradura	162,404	54.7%	243,857	60.6%	(33.4)
Noche Buena	40,671	13.7%	41,845	10.4%	(2.8)
Saucito	29,360	9.9%	46,714	11.6%	(37.1)
San Julián (Veins)	18,980	6.4%	26,766	6.7%	(29.1)
Ciénega	17,875	6.0%	24,593	6.1%	(27.3)
Fresnillo	15,235	5.1%	14,881	3.7%	2.4
Juanicipio	10,464	3.5%	1,273	0.3%	722.0
Pyrites Plant at Saucito	1,264	0.4%	1,330	0.3%	(5.0)
San Julián (DOB)	740	0.3%	1,147	0.3%	(35.5)
Total gold (oz)	296,993		402,405		(26.2)
Lead (t)
Fresnillo	9,358	37.4%	8,638	29.3%	8.3%
Saucito	8,382	33.5%	14,199	48.2%	(41.0)
San Julián (DOB)	3,642	14.6%	4,350	14.8%	(16.3)
Juanicipio	2,082	8.3%	272	0.9%	665.4
Ciénega	1,556	6.2%	2,017	6.8%	(22.9)
Total lead (t)	25,020		29,477		(15.1)
Zinc (t)
Fresnillo	16,063	38.0%	13,509	29.5%	18.9
Saucito	12,798	30.2%	20,055	43.8%	(36.2)
San Julián (DOB)	8,241	19.5%	8,757	19.1%	(5.9)
Ciénega	2,170	5.1%	3,085	6.7%	(29.7)
Juanicipio	3,047	7.2%	399	0.9%	663.7
Total zinc (t)	42,318		45,806		(7.6)

 

METALS PRICE HEDGING

 

The hedging programme we entered into for a total volume of 1,800,000 ounces of silver had its last expiration in February of 2022. This transaction was structured as a collar with an average floor price of US$22 per ounce, and an average price ceiling of US$50.33 per ounce.

 

Additionally, a portion of our expected by-product zinc production was hedged from May 2021 through April 2022 using a similar financial structure as with silver.

 

The table below illustrates the expired structures and their results.

 

Concept	As of June 30th 2022	As of June 30th 2022
	Silver1	Zinc2
Weighted Floor	22 usd/oz	2,491 usd/ton
Weighted Cap	50.33 usd/oz	3,134 usd/ton
Expired volume	300,000 oz	5,960 ton
Profit/Loss (US$ dollars)	0	-3,770,174
Total outstanding volume	0	0

¹Monthly settlements until February 2022

²Monthly settlements until April 2022

 

There are no outstanding hedging positions as of June 30^th 2022.

 

 

TREATMENT AND REFINING CHARGES

 

Similar to previous years, the 2022 treatment and refining charges^[13] (TRCs) per tonne and per ounce are currently being negotiated with Met-Mex (Peñoles' smelter and refinery) in accordance with international benchmarks and will apply retrospectively from January 2022. We expect these negotiations to conclude by October 2022. However, we accrued a US$12.4 million increase to the charge (1H21: US$17.8 million decrease to the charge) for an expected change in treatment and refining charges in these Interim Financial Statements to reflect current market conditions which are expected to materialise once negotiations are concluded.

 

The combination of higher treatment charges per tonne of zinc and lead refining charges, mitigated by the lower volumes of lead and zinc concentrates shipped from our mines to Met-Mex, resulted in a 13.1% increase in treatment and refining charges set out in the income statement in absolute terms when compared to 1H21.

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

Concept	1H 2022 US$ million	1H 2021 US$ million	Amount US$ million	Change %
Adjusted production costs [14]	659.3	611.1	48.2	7.9
Depreciation	233.7	265.4	(31.6)	(11.9)
Profit sharing	5.6	12.3	(6.7)	(54.5)
Hedging	0.0	(3.8)	3.8	N/A
Change in inventory and unproductive costs[15]	(5.5)	(25.0)	19.5	(78.0)
Cost of sales	893.2	860.1	33.2	3.9

 

 

Cost of sales increased 3.9% to US$893.2 million in 1H22. The US$33.2 million increase is explained by the following combination of factors:

•   An increase in Adjusted production costs (US$48.2 million). This was primarily due to: i) cost inflation in US dollars (US$44.1 million); ii) costs from the start-up of operations at Juanicipio (US$43.1 million); iii) increase in the use of infrastructure contractors, maintenance (electric and mechanical) and internalisation process at Saucito (US$24.5 million); iv) higher volume of ore processed at Fresnillo and San Julián DOB (US$7.1 million); v) and others (US$9.2 million). These adverse effects were mitigated by lower stripping to cost at Herradura (-US$47.7 million); and a decreased volume of ore processed at Saucito, Ciénega, San Julián (Veins) and the Pyrites plant (-US$32.2 million).

•   The variation in the change in inventories and others had a negative effect of US$19.5 million versus 1H21.

•   Mexican peso/US dollar hedging (US$3.8 million).

 

These negative effects were offset by:

•   Depreciation (-US$31.6 million). This is mainly due to decreased amortisation of capitalised mining works and lower depletion factors at all of the mines except for Fresnillo and Juanicipio.

•   Profit sharing (-US$6.7 million) due to lower profits at the operating mines.

 

 

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.

 

Cost per tonne		1H 2022	1H 2021	% change
Fresnillo	US$/tonne milled	87.23	79.95	9.1
Saucito	US$/tonne milled	116.22	76.27	52.4
San Julián (Veins)	US$/tonne milled	89.12	78.73	13.2
San Julián (DOB)	US$/tonne milled	41.23	39.81	3.6
Ciénega	US$/tonne milled	105.80	83.52	26.7
Herradura	US$/tonne deposited	20.02	19.47	2.8
Herradura	US$/tonne hauled	5.04	3.36	50.1
Noche Buena	US$/tonne deposited	9.72	11.27	(13.8)
Noche Buena	US$/tonne hauled	3.21	3.15	1.9

 

 

Fresnillo: Cost per tonne increased 9.1% to US$87.2 in 1H22, driven by cost inflation and an increase in maintenance costs. This was mitigated by the increased volume of ore milled.

 

Saucito: Cost per tonne increased 52.4% to US$116.2, mainly driven by an increase in the use of infrastructure contractors and maintenance, cost inflation, and a decrease in the volume of ore milled.

 

San Julián Veins: Cost per tonne increased 13.2% to US$89.1, primarily driven by cost inflation and an increase in the use of maintenance.

 

San Julián (DOB): Cost per tonne increased 3.6% to US$41.2, mainly driven by a cost inflation, mitigated by the increased volume of ore processed and a decrease in the use of contractors.

 

Ciénega: Cost per tonne increased 26.7% to US$105.8 mainly driven by cost inflation and an increase in the use of maintenance. Additionally, a lower volume of ore milled also drove the cost per tonne higher period-on-period.

 

Herradura: Cost per tonne of ore deposited increased by 2.8% to US$20.0 primarily driven by a decrease in the volume of ore processed and cost inflation of 8.0%. This was offset by a decrease in stripping charged to cost.

 

Noche Buena: Cost per tonne decreased 13.8% to US$9.7 in 1H22, primarily driven by a decrease in the use of maintenance and spare parts and, to a lesser extent, a higher volume of ore processed. This was partially offset by cost inflation and a higher stripping cost.

 

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.

 

 

 

 

 

 

 

Cash cost per ounce		1H 2022	1H 2021	% change
Fresnillo	US$ per silver ounce	3.53	6.41	(45.0)
Saucito	US$ per silver ounce	2.52	(4.37)	N/A
San Julián (Veins)	US$ per silver ounce	5.41	(0.48)	N/A
San Julián (DOB)	US$ per silver ounce	4.45	4.66	(4.5)
Ciénega	US$ per gold ounce	84.00	(606.99)	N/A
Herradura	US$ per gold ounce	1,248.08	756.42	65.0
Noche Buena	US$ per gold ounce	1,098.34	1,235.33	(11.1)

 

Fresnillo: Cash cost per silver ounce decreased to US$3.5 (1H21: US$6.4 per silver ounce) mainly due to the higher gold, lead and zinc by-product credits and lower mining rights, partially offset by a lower ore grade, higher treatment and refining charges and a higher cost per tonne.

 

Saucito: Cash cost per silver ounce increased to US$2.5 per ounce (1H21: -US$4.4 per silver ounce) as a result of a higher cost per tonne and lower gold, lead and zinc by-product credits per silver ounce. This was mitigated by a higher silver ore grade and lower mining rights.

 

San Julián Veins: Cash cost per ounce of silver increased by US$5.41 per ounce mainly due to the lower gold by-product credits per silver ounce and higher cost per tonne, mitigated by lower mining rights.

 

San Julián (DOB): Cash cost remained flat half on half at US$4.5 per ounce of silver driven by higher zinc by-product credits per silver ounce and lower mining rights, offset by a lower ore grade and higher treatment and refining charges.

 

Ciénega: The increase in cash cost per gold ounce from -US$607.0 per ounce in 1H21 to US$84.0 per ounce in 1H22 was primarily due to a higher cost per tonne, lower gold ore grade and higher treatment and refining charges. This was mitigated by higher silver, zinc and lead by-product credits per gold ounce and lower mining rights.

 

Herradura: Cash cost per gold ounce increased to US$1,248.1 mainly due to the lower gold ore grade and the variation in the change of inventories, which resulted from the decrease in the inventory volume (-6.7%) in 1H22 combined with the increase in the value of the inventories in 1H21 mainly caused by the effect of the reassessment of recoverable gold inventories at the leaching pads in 2020.

 

Noche Buena: Cash cost per gold ounce decreased by 11.1% to US$1,098.3 per ounce mainly due to higher gold ore grade, offset by the variation in the change of inventories, which resulted from the decrease in the cost per ounce and a decrease in the volume of inventory in 1H22 combined with the increase in volume of inventory in 1H21.

 

In addition to the traditional cash cost, the Group is reporting All-In Sustaining Cost (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 AISC 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 (AISC)

 

AISC		1H 2022	1H 2021	% change
Fresnillo	US$ per silver ounce	12.52	14.45	(13.4)
Saucito	US$ per silver ounce	14.20	3.46	310.8
San Julián (Veins)	US$ per silver ounce	16.39	11.48	42.8
San Julián (DOB)	US$ per silver ounce	6.40	6.01	6.4
Ciénega	US$ per gold ounce	1,302.58	405.67	221.1
Herradura	US$ per gold ounce	1,755.78	874.36	100.8
Noche Buena	US$ per gold ounce	1,154.23	1,497.08	(22.9)

 

Fresnillo: All-in sustaining cost decreased 13.4% over 1H21 to US$12.5 per ounce, explained by a lower cash cost, partially offset by higher capitalised mine development per ounce.

 

Saucito: All-in sustaining cost increased to US$14.2 per ounce due to higher cash cost, increased sustaining capex and higher capitalised mine development per ounce.

 

San Julián Veins: All-in sustaining cost increased to US$16.4 per ounce due to a higher cash cost and higher sustaining capex, mitigated by lower capitalised mine development.

 

San Julián DOB: The 6.4% increase in all-in sustaining cost was mainly driven by the higher sustaining capex.

 

Ciénega: The increase in all-in sustaining cost was primarily driven by the higher cash cost.

 

Herradura: All-in sustaining cost increased by 100.8% mainly due to the increase in capitalised stripping and higher cash cost.

 

Noche Buena: The US$342.9 per ounce decrease in all-in sustaining cost was the result of the lower capitalised stripping and lower 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, including hedging gains and losses, decreased by 39.7% from US$606.8 million in 1H21 to US$365.9 million in 1H22.

 

The US$240.9 million decrease in gross profit was mainly explained by: i) the lower ore grade mostly at Herradura, and also at San Julian (DOB), Saucito, San Julián (Veins) and Ciénega (-US$208.3 million); ii) lower silver price (-US$89.8 million); iii) lower volumes processed at our underground and open pit operations (-US$84.9); iv) cost inflation including the MXP/USD devaluation effect (-$44.1 million); v) increase in the use of infrastructure contractors and maintenance (electric and mechanical) (-US$25.1 million); vi) the variation in change of inventories (-US$19.8); vii) higher treatment and refining charges (-US$10.0 million) and; others (-US$8.9 million).These negative effects were mitigated by: i) the new Juanicipio operation (US$77.7 million); ii) higher gold, lead and zinc prices (US$72.3 million); iii) lower stripping to cost at Herradura (US$47.7 million); iv) lower depreciation (US$31.6 million); and v) a higher volume of ore processed at San Julián (DOB), Noche Buena and Fresnillo (US$20.6 million).

 

 

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

 

	1H 2022		1H 2021		Change
	US$ million	%	US$ million	%	US$ million	%
Fresnillo	69.3	18.8	85.3	14.7	(16.0)	(18.8)
Herradura	65.3	17.7	203.6	35.0	(138.3)	(67.9)
Saucito	62.8	17.1	145.9	25.1	(83.1)	(57.0)
San Julián	60.2	16.3	110.2	19.0	(50.0)	(45.4)
Noche Buena	20.9	5.7	6.7	1.1	(14.2)	211.9
Ciénega	6.8	1.9	29.5	5.1	(22.7)	(76.9)
Juanicipio	82.9	22.5	0.0	0.0	82.9	100.0
Total for operating mines	368.2	100	581.2	100	(213.0)	(36.6)
Metal hedging and other subsidiaries	(2.3)		25.6		(27.9)	N/A
Total Fresnillo plc	365.9		606.8		(240.9)	(39.7)

 

ADMINISTRATIVE AND CORPORATE EXPENSES

Administrative and corporate expenses decreased 4.1% from US$51.2 million in 1H21 to US$49.1 million in 1H22, mainly due to a decrease in fees paid to advisors (legal, labour, tax and technical).

 

 

 

EXPLORATION EXPENSES

 

Business unit/project (US$ million)	Exploration expenses 1H 2022	Exploration expenses 1H 2021	Capitalised expenses 1H 2022	Capitalised expenses 1H 2021
Ciénega	3.4	2.6	-	-
Fresnillo	6.1	3.0	-	-
Herradura	2.4	3.0	-	-
Saucito	6.1	4.7	-	-
Noche Buena	0.4	0.4	-	-
San Julián	11.3	11.1	-	-
Orisyvo	2.2	1.6	0.6	0.1
Centauro Deep	0.2	0.0	-	-
Guanajuato	4.0	3.1	1.3	0.3
Juanicipio	5.6	0.0	-	2.7
Others	36.0	31.3	0.4	0.2
Total	77.7	60.9	2.2	3.3

 

Exploration expenses increased, as expected, by 27.6% from US$60.9 million in 1H21 to US$77.7 million in 1H22, in line with the budget for this year and our strategy to focus exploration on specific targets, mainly at our Fresnillo and San Julián districts. The increase of US$16.8 million seen period-on-period was due to our intensified exploration activities aimed at increasing the resource base, converting resources into reserves and improving the confidence of the grade distribution in reserves. An additional US$2.2 million was capitalised, mainly relating to exploration expenses at the Guanajuato project. As a result, risk capital invested in exploration totalled US$79.9 million in 1H22, while in 1H21, US$3.3 million was capitalised, totalling US$64.2 million in risk capital invested in exploration, a 24.5% increase over 1H21. For the remainder of 2022, total invested in exploration is expected to remain at US$180 million, of which approximately US$10 million is expected to be capitalised.

 

 

EBITDA

 

	1H 2022 US$ million	1H 2021 US$ million	Amount US$ million	Change %
Profit from continuing operations before income tax	155.2	445.4	(290.1)	(65.1)
- Finance income	(7.0)	(5.6)	(1.4)	25.0
+ Finance costs	34.9	31.0	3.9	12.6
+ Revaluation effects of Silverstream contract	36.3	4.0	32.3	807.5
- Foreign exchange gain (loss), net	(1.2)	(2.9)	1.7	(58.6)
- Other operating income	(2.2)	(2.8)	0.6	(21.4)
+ Other operating expense	9.4	12.5	(3.1)	(24.8)
+ Depreciation	233.7	265.4	(31.6)	(11.9)
EBITDA	459.1	747.0	(287.9)	(38.5)
EBITDA margin	36.5%	50.9%

 

EBITDA is a gauge of the Group's financial performance and a key indicator to measure debt capacity. It is calculated as profit for the year from continuing operations before income tax, less finance income, plus finance costs, less foreign exchange gain / (loss), plus the net Silverstream effects and other operating income plus other operating expenses and depreciation. In 1H22, EBITDA decreased 38.5% to US$459.1 million primarily driven by the lower gross profit and, to a lesser extent, a higher exploration expense. As a result, EBITDA margin expressed as a percentage of revenue decreased, from 50.9% in 1H21 to 36.5% in 1H22.

 

OTHER OPERATING INCOME AND EXPENSE

In 1H22, a net loss of US$7.2 million was recognised in the income statement mainly as a result of maintenance costs of closed mines.

 

SILVERSTREAM EFFECTS

The Silverstream contract is accounted for as a derivative financial instrument carried at fair value. The net Silverstream effect recorded in the 1H22 income statement was a loss of US$36.3 million (US$20.3 million amortisation profit and US$56.6 million revaluation loss), which compared negatively to the net loss of US$4.0 million registered in 1H21. The negative revaluation was mainly driven by the increase in the LIBOR reference rate; and a decrease in the forward silver price curve; partially mitigated by a new mine plan, which considers an increase in silver reserves.

 

Since the IPO, cumulative cash received has been US$754.6 million vs. US$350 million initially paid. The Group expects that further unrealised gains or losses related to the valuation of the Silverstream 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 in notes 10 and 18 to the consolidated financial statements.

 

 

NET FINANCE COSTS

Net finance costs of US$27.9 million remained at similar levels to the US$25.4 million recorded in 1H21. Financial expenses in 1H22 included mainly: i) interest paid on the outstanding US$317.9 million from the US$800 million Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes due 2050.

 

FOREIGN EXCHANGE

A foreign exchange gain of US$1.2 million was recorded as a result of the 2.91% revaluation of the Mexican peso against the US dollar over the period. This was similar to the US$2.9 million gain in 1H21.

 

The Group also enters into certain exchange rate derivative instruments as part of a programme to manage its exposure to foreign exchange risk associated with the purchase of equipment denominated in Euro (EUR) and Swedish krona (SEK). As of June 30th 2022, the total EUR and SEK outstanding net forward position was EUR 29.70 million with maturity dates through December 2023. Volumes that expired during the first half of 2022 were EUR 3.51 million with a weighted average strike of 1.1119 USD/EUR and SEK 5.05 million with a weighted average strike of 10.2124 SEK/USD, which have generated a marginal result in the period of -US$1.842 million.

 

 

TAXATION

Income tax expense for the period was US$6.8 million, which compared favourably vs. US$111.1 million in 1H21. The effective tax rate, excluding the special mining rights, was 4.4%, which was below the 30% statutory tax rate. The reason for the lower effective tax rate was the significant permanent differences between the tax and the accounting treatment related mainly to: i) the inflation rate (Mexican Consumer Price Index), which impacted the inflationary uplift of the tax base for assets and liabilities; and ii) the benefit from the lower border zone tax which applied to Herradura and Noche Buena operations. The effective tax rate, including mining rights, was 9.1% in 1H22.

 

The effective tax rate, excluding mining rights, in 1H21 was 24.9%.

 

Mining rights for the first half of the year were US$7.4 million compared to US$25.8 million charged in 1H21 due to lower profit levels.

 

 

 

 

PROFIT FOR THE PERIOD

Profit for the period decreased from US$308.4 million in 1H21 to US$141.0, a 54.3% decrease period-on-period as a result of the factors described above. Profit due to non-controlling interests was US$23.6 million reflecting the profit generated at Juanicipio, where MAG Silver owns 44% of the outstanding shares. Accordingly, profit attributable to equity shareholders of the Group was US$117.4 million.

 

Excluding the effects of the Silverstream contract, profit for the year decreased from US$311.2 million to US$166.3 million, a 46.6% decrease.

 

CASH FLOW

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

 

	1H 2022 US$ million	1H 2021 US$ million	Amount US$ million	Change %
Cash generated by operations before changes in working capital	459.5	750.4	(290.9)	(38.8)
Decrease in working capital	76.8	15.1	61.7	407.7
Taxes and employee profit sharing paid	(141.2)	(253.5)	112.3	(44.3)
Net cash from operating activities	395.1	512.0	(116.9)	(22.8)
Proceeds from the layback agreement	0.0	25.0	(25.0)	N/A
Silverstream contract	18.3	22.5	(4.2)	(18.7)
Purchase of property, plant and equipment	(299.0)	(256.8)	(42.2)	16.4
Dividends paid to shareholders of the Company	(176.9)	(172.6)	(4.3)	(2.5)
Financial expenses and foreign exchange effects	(29.0)	(18.2)	(10.9)	(59.7)
Net (decrease)/increase in cash during the period after foreign exchange differences	(83.4)	132.5	(215.9)	N/A
Cash and other liquid funds at 30 June [16]	1,151.9	1,202.9	(51.0)	(4.2)

 

Cash generated by operations before changes in working capital decreased by 38.8% to US$459.5 million, mainly as a result of the lower profits generated in the year. Working capital decreased US$76.8 million, mainly due to: i) a decrease in trade and other receivables of US$70.3 million mainly due to VAT recovered; and ii) an US$26.9 million increase in accounts payable; partially offset by iii) a US$12.4 million increase in inventories; and iv) an increase in prepayments of US$8.0 million.

 

Taxes and employee profit sharing paid decreased 44.3% over 1H21 to US$141.2 million mainly due to: i) a decrease in provisional tax payments resulting from the lower profit factor determined to calculate the estimated taxable income and lower revenue; and ii) lower final income tax paid in 1H22, net of provisional taxes paid (corresponding to the 2021 tax fiscal year.

 

As a result of the above factors, net cash from operating activities decreased 22.8% from US$512.0 million in 1H21 to US$395.1 million in 1H22.

 

The Group received other sources of cash including; i) the proceeds of the Silverstream contract of US$18.3 million and; ii) note payable by minority shareholders in subsidiaries of US$10.1 million.

Main uses of funds were:

 

i)  the purchase of property, plant and equipment for a total of US$299.0 million, a 16.4% increase over 1H21. Capital expenditures for 1H22 are described below:

 

PURCHASE OF PROPERTY, PLANT AND EQUIPMENT

	1H 2022 US$ million
Herradura mine	75.4		Stripping, construction of leaching pad 14 and purchase of mine equipment.
Fresnillo mine	45.5		Mine development and mining works, purchase of in-mine equipment, deepening of the San Carlos shaft and tailings dam.
Saucito mine	45.0		Mine development, purchase of in-mine equipment, deepening of the Jarillas shaft and tailings dam.
San Julián Veins and DOB	28.0		Mining works, tailings dam and purchase of in-mine equipment.
Ciénega mine	19.1		Mining works, purchase of in-mine equipment and construction of tailings dam.
Noche Buena mine	0.1		Sustaining capex
Juanicipio project	82.9		Mine development and construction of beneficiation plant
Other	3.0		Minera Bermejal.
Total purchase of property, plant and equipment	299.0

 

ii) Dividends paid to shareholders of the Group in 1H22 totalled US$176.9 million, a 2.5% increase over 1H21 as a result of the 2021 final dividend of 24.0 cents per share paid in May 2022, in line with our dividend policy.

 

iii) Financial expenses and foreign exchange effects of US$29.0 million increased US$10.9 million period-on-period. Financial expenses in 1H22 included: i) interest paid on the outstanding US$317.9 million from the US$800 million Senior Notes due 2023, and ii) interest paid on the 4.250% Senior Notes due 2050.

 

The sources and uses of funds described above resulted in a net decrease in cash of US$83.4 million (net decrease in cash and other liquid assets), which combined with the US$1,235.3 million balance at the beginning of the year resulted in cash and other liquid assets of US$1,151.9 million at the end of June 2022.

 

BALANCE SHEET

Fresnillo plc continued to maintain a solid financial position during the period with cash and other liquid funds^[17] of US$1,151.9 million as of 30 June 2022, decreasing 6.8% versus 31 December 2021 and 4.2% versus 30 June 2021. Taking into account the cash and other liquid funds of US$1,151.9 million and the US$1,167.8 million outstanding Senior Notes, Fresnillo plc's net debt is US$15.9 million as at 30 June 2022. This compares to the net cash position of US$67.5 million as at 31 December 2021. Considering these variations, the balance sheet at 30 June 2022 remains strong, with a net debt / EBITDA ratio of 0.02x^[18]

 

Inventories increased 2.5% to US$500.2 million mainly as a result of inventory of operating materials and spare parts.

 

Trade and other receivables decreased 12.3% to US$332.6 million mainly as a result of a decrease in value added tax receivables and reduced receivables to Met-Mex.

 

The change in the value of the Silverstream derivative from US$529.5 million at the end of the 2021 to US$474.5 million as of 30 June 2022 reflects proceeds of US$18.8 million in the period (US$13.4 million in cash and US$5.4 million in accounts receivables) and the Silverstream revaluation effect in the income statement of US$36.3 million.

 

The net book value of property, plant and equipment was US$2,865.7 million at the end of June, representing a 2.4% increase over 31 December 2021. The US$55.3 million increase was mainly due to capitalised mine development and stripping and purchase of in-mine equipment.

 

The Group's total equity was US$3,751.2 million as of 30 June 2022, a 1.4% decrease over 31 December 2021. This was mainly explained by the decrease in retained earnings, reflecting the 1H22 profit.

 

GOING CONCERN

 

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out above in the Operational Review, with further detail in the Annual Report 2021. The financial position of the Group, its cash flows and liquidity position are described in the Financial Review. In addition, the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk were set out in the Annual Report 2021.

 

In making their assessment of the Group's ability to manage its future cash requirements, the Directors have considered the Company and Group budgets and the cash flow forecasts for the period to 31 December 2023. In addition, they reviewed a more conservative cash flow scenario with reduced silver and gold prices of US$19.9 and US$1,712 respectively throughout this period, whilst maintaining current budgeted expenditure while only considering projects approved by the Executive Committee. This resulted in our current cash balances reducing over time but maintaining sufficient liquidity throughout the period.

 

The Directors have further calculated prices (US$14.7 and US$1,211 for silver and gold respectively), which should they prevail to the end of 2023 would result in cash balances decreasing to minimal levels by the end of 2023, without applying mitigations.

 

Should metal prices remain below the stressed prices above for an extended period, management have identified specific elements of capital and exploration expenditures which could be deferred without adversely affecting production profiles throughout the period. Finally, management could amend the mining plans to concentrate on production with a higher margin in order to accelerate cash generation without affecting the integrity of the mine plans.

 

After reviewing all of the above considerations, the Directors have a reasonable expectation that management have sufficient flexibility in adverse circumstances to maintain adequate resources to continue in operational existence for the foreseeable future. The Directors, therefore, continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

 

DIVIDENDS

 

The Board of Directors has declared an interim dividend of 3.40 US cents per Ordinary Share totalling US$25.1 million, which will be paid on 14 September 2022 to shareholders on the register on 12 August 2022. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars. This interim dividend is lower than the previous period due to the decrease in profit in 1H22, and remains in line with the Group's dividend policy. This decision was made after a comprehensive review of the Group's financial situation, assuring that the Group is well placed to meet its current and future financial requirements, including its development and exploration projects.

 

As previously disclosed, the corporate income tax reform introduced in Mexico in 2014 created a withholding tax obligation of 10% (including to foreign nationals) relating to the payment of dividends, which are paid using the Net Tax Profit Account (CUFIN) generated from 2014 onward. The 2022 interim dividend will be subject to this withholding obligation.