Fresnillo plc

21 Upper Brook Street

London W1K 7PY

United Kingdom

www.fresnilloplc.com

 

1 August 2023

 

Fresnillo plc interim results

for the six months to 30 June 2023

 

 

Octavio Alvídrez, Chief Executive Officer, commented:

 

"We achieved a solid operating performance in the first half. Higher silver and gold production combined with stronger precious metals prices, also saw a rise in revenue in the period.

 

"I am pleased to report we are fully staffed across the business and have now overcome the challenges presented by the labour reforms in Mexico as well as the tight labour market. Further, in the period we have delivered on the ramp up of our new Juancipio mine and begun operations at the new pyrites plant following the successful tie-in to the national electricity grid earlier this year.

 

"These are considerable development milestones and testament to the skill of our teams on the ground. It is with both huge sadness and regret however that we confirm two fatal contractor incidents in the period, a stark reminder of the critical need to ensure safety remains at the heart of everything we do, for both employees and contractors.

 

"Though we have made good operational progress, we are facing higher costs across the business driven by inflation as well as the material impact of the revaluation of the peso against the US dollar, which have resulted in an impact on profitability in the period.

 

"Our priorities in the second half are clear. We will continue to focus on the safety of our people and instilling a true culture of safety across the business. We are committed to managing costs and further improving productivity, while delivering on the promise of Juanicipio as we complete the ramp up. We are well placed to meet our operating targets for the year."

 

 

 

 

First half highlights

 

Financial highlights (1H23/1H22 comparisons)

·    Adjusted Revenues[1] of US$1,430.8m, up 6.1%; mainly due to higher gold and silver volumes sold at higher prices, partly offset by a lower zinc price.

·    Revenues of US$1,343.3m, up 6.7%.

·    Adjusted production costs[2] of US$773.9m, up 17.4% over 1H22 primarily due to the revaluation of the Mexican peso vs. US dollar, cost inflation, additional costs from the start up of the beneficiation plant at Juanicipio and an increase in stripping recognised as costs rather than capitalised.

·    Cost of sales of US$1,060.6m, up 18.7% mainly as a result of the higher adjusted production costs and the effect of the consumption of inventories at Juanicipio and Noche Buena net of the reassessment of gold inventories at Herradura.

·    Gross profit and EBITDA[3] of US$282.7m and US$351.0m, down 22.7% and 23.5%, respectively.

·    Exploration expenses of US$96.9m, up 24.7% as exploration spend was front loaded.

·    Profit from continuing operations before net finance costs and income tax and profit before income tax of US$81.2m and US$47.9m, down 62.8% and 69.2%, respectively.

·    Profit for the period of US$89.7m, down 36.4%.

·    Basic and diluted EPS from continuing operations of US$8.8 cents per share, down 44.7%.

·    Adjusted EPS[4] of US$10.4 cents per share, down 46.4%.

·    Cash generated from operations, before changes in working capital, of US$322.9m, down 29.7%.

·    Free cash flow[5] of US$18.7m in 1H23 (US$93.5m in 1H22).

·    Strong balance sheet with cash and other liquid funds as at 30 June 2023 of US$889.7m (31 December 2022: $969.1m); net debt/EBITDA of 0.42x⁶ (31 December 2022: 0.26x).

·    Interim dividend of 1.40 US cents per share, totaling US$10.3m (1H22: 25.0m).

 

Operational highlights (1H23/1H22 comparisons)

As disclosed in the 2Q23 production report on 26 July 2023:

·    First half attributable silver production of 28.0 moz (including Silverstream), up 1.4% vs. 1H22.

·   First half attributable gold production of 325.4 koz, up 5.4% vs. 1H22.

·    Ramp up at new Juanicipio mine is progressing as planned, with full nameplate capacity expected in 3Q23.  

·    Tie-in of the new Pyrites Plant to the national power grid completed in 2Q23, followed by its commissioning and the start up of operations.

·    Ongoing focus on safety, cost control and productivity.

 

 

Highlights for 1H23

 

US$ million unless stated	H1 23	H1 22	% change
Silver production (koz) *	28,018	27,632	1.4
Gold production (oz)	325,415	308,752	5.4
Total revenues	1,343.3	1,259.1	6.7
Adjusted revenues1	1,430.8	1,349.0	6.1
Cost of Sales	1,060.6	893.2	18.7
Adjusted production costs2	773.9	659.3	17.4
Exploration expenses	96.9	77.7	24.7
EBITDA3	351.0	459.1	(23.5)
Profit for the period	89.7	141.0	(36.4)
Cash generated by operations before changes in working capital	322.9	459.5	(29.7)
Basic and Diluted EPS (US$)4	0.088	0.159	(44.7)
Basic and Diluted EPS, excluding post-tax Silverstream revaluation effects (US$)	0.104	0.194	(46.4)
Dividend per ordinary share (US$)	0.014	0.034	(58.8)

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

³ 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.

⁴ The weighted average number of shares for H1 2023 and H1 2022 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 28.0 moz (including Silverstream) increased 1.4% vs. 1H22, primarily due to the ramp-up of Juanicipio, partially offset by the lower ore grade at San Julián (DOB).

First half attributable gold production of 325.4 koz increased 5.4% vs. 1H22 mainly due to the increased volume of ore processed and higher ore grade at Herradura and Saucito, partially compensated for by the decrease in gold production at Noche Buena.

First half by-product lead production increased 2.2% vs. 1H22 due to the increased contribution from Juanicipio and higher ore processed at Fresnillo, partly offset by the lower ore grade at Saucito.

First half by-product zinc production decreased 1.5% vs. 1H22 due to the lower ore grades at Saucito and San Julián (DOB), mitigated by the increased production at Juanicipio and the higher ore processed at Fresnillo.

With profound sadness we informed the tragic loss of two of our colleagues. The safety and wellbeing of our people remains our absolute priority and our aim is to promote a safety culture that is upheld by our robust safety management system and a preventive culture. The 'I Care, We Care' philosophy continued to be rolled out across the business, focusing on critical risk and control management, leadership practices, preventive management, learning from high-potential incidents and contractor engagement.

 

Financial results

Total revenues increased 6.7% to US$1,343.3 million in 1H23, mainly due to the increased volumes of gold and silver sold at higher prices, partly offset by the lower zinc price.

 

The average realised silver price increased 2.4% from US$22.8 per ounce in 1H22 to US$23.3 per ounce in 1H23, while the average realised gold price rose 4.1%, from US$1,871.1 per ounce in 1H22 to US$1,948.9 per ounce in 1H23. However, the average realised zinc and lead by-product prices decreased 29.5% and 4.7% against their corresponding periods, to US$122.4 cents and US$93.7 cents per pound, respectively.

Adjusted production costs[6] increased by 17.4% to US$773.9 million in 1H23. The US$114.5 million increase resulted mainly from: i) the adverse effect of the 10.2% average revaluation of Mexican peso vs. the US dollar (US$45.0 million); ii) underlying cost inflation excluding the revaluation of the Mexican peso vs. US dollar (US$41.6 million) - these two factors combined resulted in a cost inflation in US dollars of 13.4%, which increased adjusted production cost by US$86.6 million; iii) costs from the start-up of the beneficiation plant and mine ramp up at Juanicipio (US$19.6 million); iv) higher stripping to cost at Herradura (US$19.5 million); v) increased maintenance, contractors, operating materials and diesel consumption due to longer haulage distances, deeper mines and increased development works (US$16.7 million); and vi) higher volume of ore processed (US$5.4 million). These adverse effects were mitigated by: i) a decrease in mining costs as depositing activities stopped at Noche Buena as part of the mine closure process which started in May (-US$19.8 million); and ii) the reclassification of fixed costs incurred at Herradura and Noche Buena during the 14 days illegal stoppage to unproductive costs (-US$13.5 million) (see 1H23 Operational Review -Herradura). 

Additionally, the variation in the change in inventories had a negative effect of US$32.3 million vs. 1H22. The change in inventories in 1H23 of US$26.3 million was explained by the decrease in inventories at Juanicipio as a result of the start up of the beneficiation plant in 2Q23, and at Noche Buena as it approached the end of its mine life. This was partly mitigated by the gold inventory uplift at Herradura.

Depreciation remained broadly stable at US$236.3 million, 1.1% up. This is mainly due to the depreciation of the additional asset base at Juanicipio, and to a lesser extent, increased amortisation of capitalised mining works at Fresnillo and Saucito, partly mitigated by the lower depreciation at Noche Buena.

The factors mentioned above resulted in an 18.7% increase in cost of sales compared with 1H22.

The increase in revenues was more than offset by the rise in cost of sales, resulting in a 22.7% decrease in gross profit to US$282.7 million in 1H23.

Exploration expenses increased by 24.7% from US$77.7 million in 1H22 to US$96.9 million in 1H23 as the exploration programme was accelerated at both brownfield and greenfield projects in 1H23.

Other expenses of US$33.5 million in 1H23 increased by US$26.3 million, primarily explained by the write off of 20 thousand gold ounces, following illegal extraction of ore from the leaching pads at Soledad-Dipolos.

Driven by a decrease in gross profit, EBITDA decreased by 23.5%, with EBITDA margin decreasing from 36.5% in 1H22 to 26.1% in 1H23. Similarly, profit from continuing operations before net finance costs and income tax decreased from US$218.2 million in 1H22 to US$81.2 million in 1H23, a decrease of 62.8%.

The net Silverstream effect recorded in the 1H23 income statement was a loss of US$17.0 million (US$23.3 million amortisation profit and -US$40.3 million revaluation loss), which compared favourably to the net loss of US$36.3 million registered in 1H22. The negative revaluation was mainly driven by the decrease in the forward silver price curve and an updated mine plan, which considers a decrease in silver reserves.

Net finance costs of US$19.5 million decreased 30.1% compared to the US$27.9 million recorded in 1H22, primarily due to the higher interest gained on short term deposits and investments. Financial expenses in 1H23 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.

The decrease in profit from continuing operations, together with the net Silverstream loss, resulted in a 69.2% decrease in profit from continuing operations before income tax from US$155.2 million in 1H22 to US$47.9 million in 1H23.

Tax income for the period was US$19.5 million, which compared favourably to the US$6.8 million tax expense in 1H22. The effective tax rate, excluding the special mining rights, was -40.7% (1H22: 4.4%), which was substantially below the 30% statutory tax rate. The reasons for the unusual positive effective tax rate was the significant permanent differences between the tax and the accounting treatment related mainly to: i) the effect of the 11.8% revaluation of the Mexican peso/US dollar spot exchange rate in 1H23 on the tax value of assets and liabilities; and ii) the inflation rate (Mexican Consumer Price Index), which impacted the inflationary uplift of the tax base for assets and liabilities.

Mining rights income for the first half of the period were US$22.3 million compared to the mining rights charges of US$7.4 million registered in 1H22.

Profit for the period decreased from US$141.0 million in 1H22 to US$89.7 in 1H23, a 36.4% decrease period-on-period as a result of the factors described above. Profit due to non-controlling interests was US$25.0 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$64.7 million, a 44.9% decrease half-on-half.

Excluding the effects of the Silverstream contract, profit for the year decreased from US$166.3 million to US$101.6 million, a 38.9% decrease.

Cash generated by operations before changes in working capital decreased by 29.7% to US$322.9 million, mainly as a result of the lower profits generated in the year.

Capital expenditure in 1H23 totalled US$227.8 million, a 23.8% decrease over 1H22. Investments during the period included mine development and stripping, purchase of in-mine equipment, construction of a leaching pad at Herradura, the deepening of the San Carlos and Jarillas shafts and investments in tailings dams.

Other uses of funds during the period were income tax, special mining rights and profit sharing paid of US$192.8 million (US$141.2 million in 1H22) and dividends paid of US$98.0 million (US$176.9 million in 1H22).

Fresnillo plc continued to maintain a solid financial position during the period with cash and other liquid funds of US$889.7 million as of 30 June 2023, decreased -8.2% and -22.8% versus 31 December 2022 and 30 June 2022 respectively. Taking into account the cash and other liquid funds of US$889.7 million and the US$1,158.9 million outstanding Senior Notes, Fresnillo plc's net debt is US$269.2 million as at 30 June 2022. This compares to the net debt position of US$15.9 million as at 31 December 2022. Considering these variations, the balance sheet at 30 June 2023 remains strong, with a net debt / EBITDA ratio of 0.42x[7].

 

Interim Dividend

 

The Board of Directors has declared an interim dividend of 1.40 US cents per Ordinary Share totalling US$10.3 million, which will be paid on 14 September 2023 to shareholders on the register on 11 August 2023. 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 1H23, 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). The 2023 interim dividend will be subject to this withholding obligation.

 

Outlook

2023 guidance remains unchanged. Attributable silver production is expected to be in the range of 57.0 to 64.0 moz (including Silverstream) while attributable gold production is expected to be in the range of 590 to 640 koz. Expressed in silver equivalent ounces[8], production is expected to be 104 -115 million ounces.

Exploration expenses for 2023 are expected to remain around US$175 million.

Capex for 2023 has been revised from US$630 million to US$555 million following a project review and timetable optimisation.

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_1H23_Interim_Results

Conference call:

Participants will be able to join the call with the usual dialling numbers, but they will also be able to pre-register through a link, and they will receive a pin code, confirmation email and a calendar invite directly to their inbox. When they dial into the call, they can just input the code and gain access and bypassing the operator.

Conference Call Registration Link: https://www.netroadshow.com/events/login?show=37639fc5&confId=53607

Avoid wait time - Bypass speaking with an operator to join the call

Receive a calendar invite with call access details including unique PIN.

Only if participants require operator assistance:

Operator Assisted Dial-In:

All Other Locations: +44 20 3936 2999

United Kingdom (Local): +44 20 4587 0498

United Kingdom (Toll-Free): +44 800 358 1035

USA (Local): 1 646 664 1960

USA (Toll-Free): 1 855 9796 654

Global Dial-In Numbers: https://www.netroadshow.com/conferencing/global-numbers?confId=53607

Access Code: 334950

 

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

 

Fresnillo plc
London Office Gabriela Mayor, Head of Investor Relations Mark Mochalski	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 eight operating mines, all of them in Mexico - Fresnillo, Saucito, Juanicipio, Ciénega, Herradura, Soledad-Dipolos¹, Noche Buena and San Julián (Veins and Disseminated Ore Body) and four advanced exploration projects - Orisyvo, Rodeo, Guanajuato and Tajitos as well as a number of other long term exploration prospects.

Fresnillo plc has mining concessions and exploration projects in Mexico, Peru and Chile. Fresnillo plc has a strong and long tradition of exploring, mining, a proven track record of mine development, reserve replacement, and production costs in the lowest quartile of the cost curve for silver. Fresnillo plc's goal is to maintain the Group's position as the world's largest primary silver company and Mexico's largest gold producer.

¹ Operations at Soledad-Dipolos are currently suspended.

 

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.

 

 

1H23 Operational Review

 

Production

 

Production	H1 2023	H1 2022	%  change
Silver (koz)	26,472	26,192	1.1
Silverstream prod'n (koz)	1,546	1,440	7.4
Total Silver prod'n (koz)	28,018	27,632	1.4
Gold  (oz)	325,415	308,752	5.4
Lead  (t)	27,363	26,779	2.2
Zinc  (t)	49,788	50,533	(1.5)

 

First half attributable silver production of 28.0 moz (including Silverstream) increased 1.4% vs. 1H22, primarily due to the ramp-up of Juanicipio, partially offset by the lower ore grade at San Julián (DOB).

First half attributable gold production of 325.4 koz increased 5.4% vs. 1H22 mainly due to the increased volume of ore processed and higher ore grade at Herradura and Saucito, partially compensated for by the decrease in gold production at Noche Buena.

First half by-product lead production increased 2.2% vs. 1H22 due to the increased contribution from Juanicipio and higher ore processed at Fresnillo, partly offset by the lower ore grade at Saucito.

First half by-product zinc production decreased 1.5% vs. 1H22 due to the lower ore grades at Saucito and San Julián (DOB), mitigated by the increased production at Juanicipio and the higher ore processed at Fresnillo.

 

Fresnillo mine production

 

	H1 2023	H1 2022	%  change
Ore Processed (t)	1,336,142	1,194,359	11.9
Production
Silver (koz)	6,789	6,609	2.7
Gold  (oz)	19,747	18,148	8.8
Lead (t)	10,972	10,432	5.2
Zinc (t)	22,790	20,139	13.2
Ore Grades
Silver (g/t)	177	189	(6.3)
Gold (g/t)	0.64	0.67	(4.5)
Lead (%)	0.96	1.04	(7.7)
Zinc (%)	2.27	2.35	(3.4)

 

 

First half silver production increased 2.7% vs. 1H22 mainly as a result of the increase in volume of ore processed, partly offset by the lower ore grade and recovery rate.

 

Mine development rates increased half on half to an average of 3,197m per month in 1H23 (1H22: 2,883m per month), primarily due to the higher productivity of the unionised personnel.

 

First half by-product gold production increased 8.8% vs. 1H22 primarily as a result of the higher volume of ore processed, partly offset by the lower ore grade.

 

The silver ore grade in 2023 is expected to remain in the range of 185-205 g/t, while the gold ore grade is expected to remain in the range of 0.50-0.70 g/t.

 

Progress at the San Carlos shaft has been slower than anticipated due to service infrastructure redesign. The commissioning of the San Carlos shaft has been delayed to year end, which will provide further time to optimise haulage of ore through ramps whilst the two sections of the shaft are connected. This project is expected to support a reduction in haulage costs.

 

 

Pyrites Plant at Fresnillo

 

The tie in of the Pyrites Plant to the national grid at Fresnillo was completed in 2Q23 and commissioning began immediately with ramp up of production expected in 2H23.

 

This facility and the Pyrites plant (phase I) at Saucito are together expected to produce an average of 3.5 moz silver and 13 koz gold per year, once both are operating at full capacity.

 

 

Saucito mine production

 

	H1 2023	H1 2022	% change
Ore Processed (t)	1,034,921	1,008,158	2.7
Production
Silver (koz)	5,811	5,781	0.5
Gold  (oz)	40,080	33,172	20.8
Lead (t)	8,251	9,444	(12.6)
Zinc (t)	12,993	15,665	(17.1)
Ore Grades
Silver (g/t)	197	199	(1.0)
Gold (g/t)	1.52	1.30	16.9
Lead (%)	0.95	1.09	(12.8)
Zinc (%)	1.65	1.97	(16.2)

 

 

First half silver production remained at similar levels vs. 1H22, as higher volumes of ore processed were offset by the lower ore grade resulting from the delays in preparation, thus limiting operational flexibility.

We continued working on increasing the availability of equipment and improving the productivity of our personnel and expect to further increase volumes of ore processed in 2H23 to reach the optimal run rate of c. 7,000 tpd.

 

First half by-product gold production increased 20.8% vs. 1H22 as a result of the higher ore grade and increase in volume of ore processed.

 

Full year 2023 silver ore grade is estimated to remain between 190-210 g/t, while the gold ore grade is estimated to continue to be around 1.20-1.40 g/t.

 

 

 

PYRITES PLANT (PHASE I)

 

	H1 2023	H1 2022	% change
Pyrite Concentrates Processed (t)	55,844	65,690	(15.0)
Production
Silver (koz)	238	277	(14.1)
Gold  (oz)	601	932	(35.5)
Ore Grades
Silver (g/t)	192	176	9.1
Gold (g/t)	1.44	1.40	2.9

 

First half silver production decreased 14.1% vs. 1H22 due to the decreased volume of pyrite concentrates processed and lower recovery rates, partly mitigated by the higher ore grade.

 

First half gold production decreased 35.5% vs. 1H22 as a result of the lower recovery rate and the decrease in volume of pyrite concentrates processed, partly offset by a higher ore grade.

 

Juanicipio - Attributable

 

	H1 2023*	H1 2022**	% change
Ore Processed (t)	335,855	167,751	100.2
Production
Silver (koz)	4,214	2,672	57.7
Gold  (oz)	9,351	6,412	45.8
Lead (t)	2,718	1,286	111.4
Zinc (t)	4,309	2,041	111.1
Ore Grades
Silver (g/t)	448	582	(23.0)
Gold (g/t)	1.18	1.53	(22.9)
Lead (%)	0.94	0.92	2.2
Zinc (%)	1.74	1.73	0.6

* Includes ore processed as part of the initial tests during the commissioning of the Juanicipio plant and ore processed at the Fresnillo and Saucito beneficiation plants.

** Ore processed at the Fresnillo and Saucito beneficiation plants.

 

Attributable first half silver and gold production reached 4.2 moz and 9.4 koz respectively as the ramp-up progressed as planned following the commissioning completed in 1Q23. Full nameplate capacity is expected to be reached by 3Q23. As previously reported, ore will continue to be processed at the nearby Saucito and Fresnillo plants as required.

 

 

Ciénega mine production

 

	H1 2023	H1 2022	% change
Ore Processed (t)	501,401	563,094	(11.0)
Production
Gold  (oz)	17,434	18,907	(7.8)
Silver (koz)	1,991	2,485	(19.9)
Lead (t)	1,504	1,684	(10.7)
Zinc (t)	1,921	2,596	(26.0)
Ore Grades
Gold (g/t)	1.18	1.14	3.5
Silver (g/t)	144	159	(9.4)
Lead (%)	0.47	0.47	0.0
Zinc (%)	0.72	0.82	(12.2)

 

First half gold production decreased 7.8% vs. 1H22 mainly due to the lower volume of ore processed, partly mitigated by the higher ore grade.

First half silver production decreased 19.9% vs. 1H22 due to the decrease in volume of ore processed and lower ore grade as a result of the increased dilution.

The gold and silver ore grades for 2023 are estimated to remain in the ranges of 1.0-1.1 g/t and 150-160 g/t respectively.

 

 

San Julián mine production

 

	H1 2023	H1 2022	% change
Ore Processed Veins (t)	558,257	583,966	(4.4)
Ore Processed DOB(t)	1,050,158	1,076,326	(2.4)
Total production at San Julián
Gold (oz)	22,292	23,433	(4.9)
Silver (koz)	7,008	7,968	(12.0)
Production Veins
Gold (oz)	20,464	21,710	(5.7)
Silver (koz)	2,480	2,235	11.0
Production DOB
Gold (oz)	1,828	1,723	6.1
Silver (koz)	4,528	5,733	(21.0)
Lead (t)	3,917	3,933	(0.4)
Zinc (t)	7,775	10,093	(23.0)
Ore Grades Veins
Gold (g/t)	1.20	1.22	(1.6)
Silver (g/t)	152	131	16.0
Ore Grades DOB
Gold (g/t)	0.09	0.08	12.5
Silver (g/t)	156	193	(19.2)
Lead (%)	0.48	0.45	6.7
Zinc (%)	0.99	1.20	(17.5)

 

San Julián Veins

First half gold production decreased 5.7% vs. 1H22 mainly due to the decrease in volume of ore processed and the lower ore grade as a result of lower equipment availability, which limited access to the San Atanasio vein with higher ore grades.

First half silver production increased 11.0% vs. 1H22 mainly due to the higher ore grade at San Antonio, Ultima Tierra and Elisa stopes, partly offset by the lower volume of ore processed.

Additional anchoring equipment is expected to arrive in 3Q23, which will contribute to the normalisation of mining cycles.

We continue to expect the 2023 silver and gold ore grades to average 130-140 g/t and 1.20-1.30 g/t, respectively.

 

San Julián Disseminated Ore Body

 

First half silver production decreased 21.0% vs. 1H22 respectively, mainly due to the lower ore grade in the areas in the periphery of the ore body and structural geological features which slowed down the long hole drilling cycles.

We continue to expect the 2023 silver ore grade to be in the range of 130-140 g/t.

 

Herradura mine production

 

	H1 2023	H1 2022	% change
Ore Processed (t)	11,705,553	9,518,276	23.0
Total Volume Hauled (t)	50,669,525	64,333,382	(21.2)
Production
Gold (oz)	189,869	160,644	18.2
Silver (koz)	344	387	(11.1)
Ore Grades
Gold (g/t)	0.74	0.68	8.8
Silver (g/t)	1.55	1.83	(15.3)

 

First half gold production increased 18.2% vs. 1H22 mainly driven by the increased volume of ore processed and higher ore grade in the sulphides in the lower areas of the pit and positive variations with the geological model. The aforementioned factors were partly offset by the lower recovery rate driven by the temporary suspension of operations following an illegal stoppage by a very small group of unionised employees, as reported in May, and the slower pace of irrigation.

The adjusted production costs were impacted by the increase in waste material hauled charged to costs, rather than capitalised, despite the 28.9% decrease in the total volume of waste material hauled (capitalised and charged to costs). This is because in 1H22 the stripping ratio for the main component of the Herradura mine of c. 7.3 was significantly higher than the prevailing stripping ratio for the life of the mine (LOM) of this component (under IFRIC 20 stripping costs above the average LOM stripping ratio are capitalised), this higher stripping ratio was due to the need to prepare and gain access to the mineral benches; whereas in 1H23 the 3.4 stripping ratio was below the prevailing stripping ratio for LOM of this component, thus recognising all the stripping as cost in the income statement.

The gold ore grade in 2023 is estimated to be in the range of 0.65-0.75 g/t.

 

Noche Buena mine production

 

	H1 2023	H1 2022	% change
Ore Processed (t)	2,510,639	4,384,077	(42.7)
Total Volume Hauled (t)	8,424,676	13,283,655	(36.6)
Production
Gold (oz)	25,878	47,103	(45.1)
Silver (koz)	8	14	(42.9)
Ore Grades
Gold (g/t)	0.47	0.57	(17.5)
Silver (g/t)	0.17	0.26	(34.6)

 

First half gold production decreased 45.1% vs. 1H22 as a result of the decrease in the volume of ore processed and lower ore grade following the mine closure process which started in May.

The 2023 estimated gold ore grade remains in the range of 0.40-0.50 g/t, as the mine approaches the end of its operational life.

 

Soledad-Dipolos mine

The Company has recently identified certain suspected illegal extraction of gold content at its Soledad-Dipolos leaching pads. The Company estimates a loss of approximately 20,000 ounces of gold content and consequently has recognised a write off of US$21.9 million regarding the Soledad-Dipolos gold contents in inventory, which has been presented as other expenses in the Interim Consolidated Income Statement. The Company is taking relevant actions so that the illegal leaching activities be ceased a soon as possible. The Company does not currently expect any further losses of this inventory to be significant.

 

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 2023 approved capex and exploration budget.

 

Advanced exploration projects

 

Rodeo

Rodeo is an open pit, heap leaching gold project located in central Durango state. Disseminated gold occurs in volcanic rocks showing thorough oxidation down to depths exceeding 200 meters, with good metallurgical recoveries in ores coming from a projected low strip ratio pit. During 1H 2023 several regional studies continued, including hydrological, environmental, and social base lines along with the analysis of power supply and infrastructure alternatives. A community and local-to-state level government engagement programme has been implemented, focused on education and health initiatives that have been well received. Several land access alternatives continue in negotiation with the local Ejidos and once agreements are reached, comprehensive pre-feasibility to feasibility level exploration, engineering, and development programmes will be performed.

 

Orisyvo

Orisyvo is a world-class, high-sulphidation epithermal disseminated gold deposit located in the Sierra Madre mountains of Chihuahua state. Several activities aimed at delivering an updated pre-feasibility study progressed as scheduled during 1H 2023. Simultaneously, a region-wide community and local government engagement programme fostering the improvement of educational, health, environmental care and entrepreneurship skills of local stakeholders has been strengthened and the preparation for the required indigenous consultation and land acquisition strategies have advanced as scheduled as well.

Some of the technical works in progress include the analysis of alternatives for power supply, conceptual mine design and engineering scenarios, detailed environmental studies for permitting and options for tailings storage. The detailed geotechnical studies of the mineralised and barren rocks have been completed, and initial bio-oxidation and Albion metallurgical processing technologies delivered promising results for increasing the gold recovery in sulphide ores and a full-scale investigation of these methods is underway.

 

Tajitos

Tajitos is a low strip ratio open-pit, heap-leach, orogenic type, disseminated gold project located in the Herradura Corridor of northwestern Sonora state. During 1H 2023, 46,972 meters of core and reverse circulation drilling were completed in the main resource area, as part of a programme designed to fully evaluate the ore bodies to deliver an updated resource estimation by the end of the year. Additional metallurgical investigations and geotechnical studies are scheduled for 2H 2023, as we look to produce a new preliminary economic study in 2024.

After completing over 95% of claim consolidation of the district and acquiring an important land block, environmental studies for permitting the exploration drilling of the remaining exploration targets in the region are underway and additional land purchase for mine development is under consideration.

 

Guanajuato

Guanajuato is a historic, world-class gold and silver epithermal vein field stretching more than 40 kilometers along the central Mexican state of Guanajuato. Exploration was intensified in 1H 2023, with core drilling amounting to 44,704 meters distributed in the three main sectors making up the district. Good results have been obtained from quartz veins and stockwork zones, the latter amenable to massive, low-cost mining methods in the Veta Madre, Peregrina, and San Gregorio areas. The application of our upper-level epithermal model has yielded significant intercepts below hydrothermally altered, barren zones at the surface. Investigations of the use of ore-sorting technologies for the Guanajuato ores and detailed metallurgical test work are in progress. A preliminary economic study was completed, delivering possibilities for conceptual mining and processing scenarios for the district. These types of studies will continue as an updated resource estimation becomes available in late 2023.

 

Exploration

Exploration was accelerated during 1H 2023 on both brownfield and greenfield projects; the 490, 996 meters completed by the end of June represent a 3% increase from the same period of 2022. 90% of the drilling was devoted to brownfield targets, including in-mine zones for resource conversion/expansion and increase of the certainty of reserves for short to medium-term mine planning, and also the evaluation of early-stage peripheral targets. In particular, drilling was intensified at the Fresnillo and San Julian districts.

Greenfield drill programmes designed to test expansion targets at the Candameña and San Juan projects in Mexico and Capricornio in Chile advanced well. In Peru, good results were obtained from the strengthening of our community and government engagement initiatives, allowing our teams to resume drilling at the Pilarica project and the initiation of the programme at Santo Domingo, both of which remain in progress.

The evaluation of our full portfolio was renewed in 1H 2023, delivering an updated ranking of our prospect pipeline for budget allocation to continue our programme of project generation using an array of geological, geochemical, geophysical, and remote sensing techniques. The effort to strengthen our portfolio will continue as a standard practice of our exploration teams.

In the first six months, US$96.9 million of exploration expenses were recorded in the income statement, an increase of 24.7% over 1H22. Total risk capital invested in exploration for the full year 2023 remains at approximately US$175 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 integrating responsible business practices deeply into our business model and considering factors that affect stakeholders at every critical decision-making level.

 

Our People

 

Our workforce is vital to achieve our organisational purpose; thus, we prioritise their health, safety and wellbeing, and aim to attract, nurture, and retain top talent, ensuring long-term engagement. We promote leadership development programmes, wellbeing initiatives, continuous improvement projects and actively collaborate with unions to foster trust through ongoing dialogue. Our goal is to cultivate an inclusive culture where diversity is valued, and all employees feel respected and empowered to reach their full potential.

 

Table 1. Workforce composition

 

	As at June 30, 2023	As at December 31, 2022	% Change
Unionised employees	5,817	6,360	-8.54
Non-unionised employees	1,562	1,710	-8.65
Total unionised and non-unionised employees	7,379	8,070	-8.56
Unionised and non-unionised women (%)	13.80	14.03	-
Contractors	13,060	13,639	-4.25
Total workforce	20,439	21,709	-5.85
Total women (%)	11.78	12.11	-

 

Table 2. Turnover

 

	As at June 30, 2023	As at June 30, 2022
Voluntary turnover (%)	5.10	4.14
Total turnover (%)	12.36	6.45

 

We have continued to increase the participation of women in our workforce throughout recent years. The percentage of unionised and non-unionised women was 13.80% (14.03% in 2022) while the percentage of our overall total workforce, including contractors, was 11.78% (12.11% in 2022). In 2022 we achieved our 2025 target, well ahead of time, of 12% of women in our workforce and we expect to maintain it throughout 2023. We also expect to continue making progress towards our target of 8% women in managerial roles by 2025. The increase in total turnover in 1H23 was explained by: i) the administrative reorganisation that was undertaken to achieve efficiencies and cost reductions; and ii) the workforce consolidation at the Herradura district following the closure of mine operations at Noche Buena.

 

During the period we continued our female and reproductive health programmes such as gestational follow-up and gynaecological check-ups and finalised the construction of lactation facilities at Penmont and Juanicipio, adding to those already constructed in Ciénega and Saucito last year, while at Fresnillo, San Julián and exploration offices, flexible schedules exist to allow for lactation at home.

 

Our 'Women for Women' Mentoring Programme's first generation graduated, and an open invitation has been distributed among our female staff for a new generation to begin in the second half of the year, which will incorporate lessons learnt from the first generation to enhance the programme's effectiveness. We have also defined a set of KPIs for the Women Leadership Program that aim to measure our understanding of aspects of representation, retention, compensation, development and environment to better assess our Diversity, Equity and Inclusion (DEI) strategy progress over time. Finally, we also supported the creation of the first Women in the Mining Industry Survey in collaboration with the Mexican Mining Chamber and KPMG.

 

Our organisation began its cultural evolution journey in 2021 focused on human dignity and respect, equal opportunities and non-discrimination. Our goal remains to prioritise the wellbeing of our workforce through results oriented collaborative ecosystems that strive to improve the company's effectiveness and efficiency. As part of these endeavours, we have updated and deployed a new organisational competencies model based on agility, inclusive collaboration, results-oriented commitment, trust-based communication, talent development and emotional intelligence.

 

The Behaviour Commissioners continued to deal with related cases to the harassment prevention and attention programme. In addition, three years into the programme, a review and update of the protocol has been initiated to incorporate learnings and experiences from its application.

 

We also updated our Code of Conduct building up on its predecessor with the purpose of homogenising our applicable behavioural framework with our parent company, Industrias Peñoles.

 

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. In recent years, the health departments of each business unit have expanded beyond occupational health programmes, establishing a more comprehensive perspective and promoting other aspects of health, defining five lines of action compatible with the 'I Care, We Care' philosophy: Health surveillance, Integral wellbeing, Industrial care, Development and Innovation and Emergency Preparedness.

 

We persist in implementing measures to reduce psychosocial risk factors and foster well-being programmes that align with our desired organisational culture. During the period we concluded the second phase of the Living in BALance Programme, identifying the top 3 critical risks: anxiety/ depression, inadequate sleeping habits and work-related stress. We also began a pilot for a Fatigue Management System at Herradura and Juanicipio, using technology that allows us to monitor worker's sleep quality in order to reduce accidents, increase productivity and promote a healthier lifestyle.

 

We continue working towards the 'Safe and Healthy Workplace Environments' certification of 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, achieving the recertification of Penmont during this period, with an objective to obtain it for the first time in Ciénega and San Julián later in the year.

 

Safety

 

As an organisation, safety stands as one of our core values, and our unwavering commitment is to meet the objective of zero harm. Our aim is to foster a safety culture that is upheld by our robust safety management system, with prevention being a fundamental pillar of our approach. Our 'I Care, We Care' philosophy promotes leadership, accountability, risk-based management systems and cross-functional learning. In 2022 we set a goal to achieve zero fatalities and a Total Recordable Injury Frequency Rates (TRIFR) in the International Council on Mining and Metals (ICMM) ranges. To achieve this vision, during 2023 we have continued to deploy the 'I Care, We Care' Safety Plan, focusing on critical risk and critical control management, compliance with leadership practices, preventive management, learning from high-potential incidents and contractor engagement.

 

The 'I Care, We Care' Operational Committee - formalised last year to ensure the effective implementation of critical risk management and incident management - holds monthly meetings to review performance results, progress in the operating plan, as well as carrying out leadership practices on the field. Sub-optimal critical risks are emphasised and communicated accordingly across our operations to capitalise from lessons learnt. As part of the management of critical risks, awareness sessions were held across our mining units with the participation of our COO, unit managers and in partnership with the union, to train the workforce on accident prevention, and to empower them through the materialisation of the "Right to Say No" Policy in case of a missing or failed critical control. We have also launched '3 in line,' a mentorship programme that accelerates learning for young safety supervisors by pairing them with experienced peers. It aims to foster safety awareness and develop sound judgment in safety practices.

 

With profound sadness we regret to inform of the tragic loss of two of our colleagues - a stark reminder of the critical work ahead in our unwavering pursuit of zero harm. Despite continued improvement compared to previous periods, our performance of Total Recordable Injury Frequency Rates (TRIFR) and Lost Time Injury Frequency Rates (LTIFR) per million hours worked increased to 12.04 (10.26 in 2022) and 6.79 (5.44 in 2022) respectively. It is important to highlight though that only 15% of the TRIFR indicator corresponds to high potential accidents, meaning that 85% of the cumulative injuries of the period were generated in incidents associated to low potential risks. Furthermore, we remain steadfast in our diligent reporting of near-miss incidents to identify any missed or failed critical controls that could lead to harm, with the purpose of fostering worker engagement in an early warning system, monitoring the safety of operational areas, and facilitating timely decision-making.

 

Table 3. TRIFR and LTIFR performance*

 

	As at June 30, 2023	As at December 31, 2022	% Change
Total Recordable Injury Frequency Rates (TRIFR)	12.04	10.26	17.3
Lost Time Injury Frequency Rates (LTIFR)	6.79	5.44	24.8

 

     * Frequencies for every 1,000,000 hours worked

 

 

Tailings Storage Facilities

 

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

 

·    The Board and the HSECR Committee establish the mandate and rely on management for implementation.

·    The Technical Review Committee is accountable for oversight.

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

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

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

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

 

During the first half of the year, relevant activities have been carried out in tailings management, starting with the authorisation and issuance of the Responsible Tailings Management Policy by our Board of Directors, and the guidelines for the Tailings Management System. These establish the compliance guidelines for the best international practices adopted by the Company.

 

At each site, progress has been made in the operational units, projects, and those under care and maintenance. The Orysivo project has begun its design phase accompanied by the company that will serve as the design registrar until this role transitions into the role of the Engineer of Record (EoR), as outlined in our guidelines. At Ciénega, a secure TSF has been successfully developed, adhering to the best practice guides of the Mining Association of Canada (MAC), the International Commission on Large Dams (ICOLD) and the Canadian Dam Association (CDA). It has been designed to provide a safe space for depositing tailings until the end of the mine's life. Finally, as the Juanicipio unit begins operations, its TSF has transitioned to an operational status with full compliance with standards, accompanied by a formal EoR that supports day-to-day operations.

 

Environmental Management

 

We optimise resource use to curb our impacts and are accountable for our environmental footprint. We're also committed to implement sound measures to safeguard biodiversity and ensure that it is not adversely affected by our operations.

 

To pursue these ambitions, throughout the period, we developed ICMM high potential methodology (risk management system) for environmental risks, resulting in a portfolio identification and prioritisation of top risks, which we will roll-out in phases in the upcoming months. We also conducted the engineering survey for the project design that will materialise our ambition to eliminate freshwater consumption in our mining and mineral processing activities at the Fresnillo District and are in the process of updating our conceptual mine closure plan at Noche Buena, including geological, geochemical and hydrology characterisation studies, among others.

 

We've also held biodiversity-oriented awareness training, activities and reforestation campaigns in our neighbouring communities in collaboration with volunteers from our workforce, communities and business partners, capitalising on these experiences to instil an environmental-prone culture in our stakeholders. Additionally, we supported San Julián and Ciénega neighbouring communities in forest firefighting activities.

 

Climate Change

 

We continue to mature our capabilities to disclose climate-related financial information, considering the risks and opportunities of climate change and setting the road ahead towards the compliance with the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures issued by the International Sustainability Standards Board (ISSB) in June 2023. During the period we carried out an external assurance of our 2022 Greenhouse Gas (GHG) emissions and are in the process of issuing an internal reporting procedure, capitalising from lessons learnt across different voluntary and regulatory assurance exercises. Additionally, we enrolled in the third generation of Mexico's UN Global Compact's Climate Accelerator Programme to build capacities that will support us moving forward in our climate ambitions. Finally, we're piloting different mineral processing technologies that have the potential to improve our performance while minimising our impact on the environment.

 

Community Relations

 

We earn and maintain the trust of our communities through meaningful engagement and by being accountable for our impacts. 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. 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"

We organised Community Health Weeks for the communities of Fresnillo, San Julián and Ciénega in partnership with National University Foundation (UNAM Foundation) and local authorities, providing free dental and eye care, general medicine and physiotherapy, benefiting a little under 4,000 people. Activities are programmed at Penmont, Guanajuato and Orysivo for the second half of the year. Also, as part of our sports and physical reactivation axis at the Fresnillo District, we initiated the Santos Fresnillo Soccer Academy activities and organised a championship with Social Cause, inaugurated the Baseball Academy, and in synergy with 'Fútbol Más', implemented work sessions with the objective of promoting social cohesion at Penmont.

 

Sustainable Development Goal 6 "Clean Water and Sanitation"

In Penmont, we carried out a study to determine the conditions of the wells in 10 communities, including level checks, pumping equipment conditions, and well desilting. The results were presented to state and municipal authorities as well as civil organisations and NGOs in the area, in order to involve them in possible maintenance and creation of new wells in the zone. In San Julián, the community committee is working to develop a collective water system. The project involves the company contributing a portion of the materials, the community working together with the NGO FORMAC, and the state of Chihuahua providing the majority of the resources and manpower.

 

Sustainable Development Goal 4 "Quality Education"

We sponsored teams from our communities to compete at the Laguna Regional FIRST Robotics Competition to foster science, technology, engineering and mathematics (STEM) education. This programme aims to develop the talent and skills of high school students by promoting teamwork, leadership, solidarity and project management. The Volunteer of the Year Award, Gracious Professionalism, Team Spirit and Rookie All Star Award were won by Fresnillo sponsored teams. Additionally, graduates of our four teams compete for 100% scholarships in partnership with La Salle University at the Laguna and Noroeste campuses. We also continued the 'Picando Letras' programme at Penmont and Juanicipio carrying out reading activities at local schools, such as: Literary Creation, 'Reencounter with my books' workshop and reading circles, among others.

 

Sustainable Development Goal 8 "Decent Work and Economic Growth"

We continued with our entrepreneurial programmes to promote capacity building, micro-enterprises and productive project development, carrying out workshops in neighbouring rural communities with the support of the Education for Rural Development Brigade. We provided training in cleaning and personal hygiene products, recycling, family gardens and fodder cactus; some of these projects are already at the marketing stage. On the other hand, 'Emprende Kids' at San Julián, aims to encourage elementary students to create a business idea through playful activities, fostering skills such as leadership, teamwork and communication, with guidance from Pro Empleo.

 

 

 

 

FINANCIAL REVIEW

 

The interim consolidated financial statements of the Group for the six months ended 30 June 2023 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the IASB and as adopted by the UK. All comparisons refer to the first halves of 2023 and 2022, 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 2023 US$ million	1H 2022 US$ million	Amount Change US$ million	Change %
Adjusted revenue [9]	1,430.8	1,349.0	81.8	6.1
Total revenue	1,343.3	1,259.1	84.2	6.7
Cost of sales	1,060.6	893.2	167.4	18.7
Gross profit	282.7	365.9	(83.2)	(22.7)
Exploration expenses	96.9	77.7	19.2	24.7
Operating profit	81.2	218.2	(137.0)	(62.8)
EBITDA [10]	351.0	459.1	(108.1)	(23.6)
Income tax expense including special mining rights	(41.8)	14.2	(56.0)	N/A
Profit for the period	89.7	141.0	(51.3)	(36.4)
Profit for the period, excluding post-tax Silverstream effects	101.6	166.3	(64.7)	(38.9)
Basic and diluted earnings per share (US$/share) 5	0.088	0.159	(0.071)	(44.7)
Basic and diluted earnings per share, excluding post-tax Silverstream effects (US$/share)	0.104	0.194	(0.09)	(46.4)

 

 

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 increased 2.4% from US$22.8 per ounce in 1H22 to US$23.3 per ounce in 1H23, while the average realised gold price rose 4.1%, from US$1,871.1 per ounce in 1H22 to US$1,948.9 per ounce in 1H23. However, the average realised zinc and lead by-product prices decreased 29.5% and 4.7% against their corresponding periods, to US$122.4 cents and US$93.7 cents per pound, respectively. The decrease in zinc and lead prices had an adverse effect on cash cost as it lowered by product credits.

 

MX$/US$ EXCHANGE RATE

The Mexican peso/US dollar spot exchange rate at 30 June 2023 was $17.07 per US dollar, compared to the exchange rate at 31 December 2022 of $19.36 per US dollar. The 11.8% spot revaluation had a positive effect on deferred taxes and mining rights.

 

The average spot Mexican peso/US dollar exchange rate decreased from $20.28 per US dollar in 1H22 to $18.21 per US dollar in 1H23. As a result, there was an adverse effect of US$45 million on the Group's costs denominated in Mexican pesos (approximately 45% of total costs) when converted to US dollars.

 

 

COST INFLATION

In 1H23, cost inflation (increase in unit price) considering Fresnillo plc's basket of goods and services was 13.4% (including the adverse effect of the revaluation of the Mexican peso vs. US dollar). Underlying cost inflation (cost inflation excluding the revaluation of the Mexican peso vs. US dollar) was 6.2%. The main components of our cost inflation (including the effect of the revaluation of the Mexican peso vs. US dollar) basket are listed below:

 

Labour

Unionised employees received on average an 8.5% increase in wages in Mexican pesos, while non-unionised employees received on average a 7.5% increase in wages in Mexican pesos; when converted to US dollars, this resulted in a weighted average labour inflation of 20.3%.

 

Energy

Electricity

The weighted average cost of electricity in US dollars increased 18.3% from US$8.88 cents per kw in 1H22 to US$10.50 cents per kw in the same period of 2023, reflecting an increase in the average generating cost of the Comisión Federal de Electricidad (CFE), the national utility.

 

Diesel

The weighted average cost of diesel in US dollars increased 16.2% to 102.97 US cents per litre in 1H23, compared to 88.59 US cents per litre in 1H22. This resulted primarily from the revaluation of the Mexican peso vs. US dollar and the gradual lifting of the Mexican Government's fuel tax relief that subsidised the cost of diesel and gasoline in Mexico in previous months.

 

Operating materials

 

	Half on half change in unit price %
Lubricants	33.5
Other reagents	12.1
Sodium cyanide	10.7
Steel for drilling	9.6
Explosives	8.5
Tyres	5.7
Steel balls for milling	(0.1)
Weighted average of all operating materials	9.4

 

Unit prices of the majority of key operating materials significantly increased in US dollar terms primarily reflecting global inflationary pressures and supply disruptions. As a result, the weighted average unit prices of all operating materials over the half increased by 9.4%.

 

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 1H23, increases per unit (i.e. per metre developed/ per tonne hauled) granted to contractors, resulted in a weighted average increase of 13.2% in US dollars, after considering the revaluation of the Mexican peso vs. US dollar.

 

Maintenance

Unit prices of spare parts for maintenance increased by 10.3% on average in US dollar terms.

 

Other costs

Other cost components include freight which increased by an estimated 23.4% in US dollars, while insurance costs increased by 12.0% in US dollars mainly due to higher market premiums. The remaining cost inflation components experienced average inflation of 10.2% in US dollars over 1H22.

 

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 REVENUE¹

             

	1H 2022 US$ million	1H 2022 US$ million	Amount US$ million	Change %
Adjusted revenue [11]	1,430.8	1,349.0	81.8	6.1
Metals prices hedging	0.0	(3.8)	3.8	N/A
Treatment and refining charges	(87.4)	(86.2)	(1.2)	1.4
Total revenue	1,343.3	1,259.1	84.2	6.7

 

Adjusted revenue increased by US$81.8 million mainly due to the increased volumes of gold and silver sold at higher prices, partly offset by the lower zinc price. Total revenue increased by 6.7% to US$1,343.3 million in 1H23.

 

 

ADJUSTED REVENUE [12] BY METAL

 

	1H 2023		1H 2022
	US$ million	%	US$ million	%	Volume Variance US$ million	Price Variance US$ million	Total net change US$ million	%
Gold	625.0	43.7	555.9	41.2	45.1	24.1	69.1	12.4
Silver	632.4	44.2	576.8	42.8	41.2	14.5	55.7	9.6
Lead	55.1	3.9	54.2	4.0	3.5	(2.6)	0.9	1.7
Zinc	118.2	8.3	162.2	12.0	4.8	(48.7)	(44.0)	27.1
Total adjusted revenue	1,430.8	100	1,349.0	100	94.5	(12.8)	81.7	6.1

 

The higher gold volumes sold were primarily due to the increased volume of ore processed and higher ore grade at Herradura and Saucito. The increase in volumes of silver sold was primarily driven by the ramp up of production at Juanicipio (for further detail, see 1H23 Operational Review).

 

Changes in the contribution by metal were the result of the relative changes in metal prices and volumes produced. Gold increased its contribution to total adjusted revenues from 41.2% in 1H22 to 43.7% in 1H23, while silver increased its contribution from 42.8% in 1H22 to 44.2% in 1H23. Zinc decreased its contribution from 12.0% in 1H22 to 8.3% in 1H23, reflecting the adverse effect of the lower price. Lead's contribution to total adjusted revenues remained flat period-on-period.

 

ADJUSTED REVENUE[13] 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 2023		1H 2022
	(US$ million)	%	(US$ million)	%
Herradura	379.7	26.5	302.9	22.4
Saucito	252.7	17.7	250.8	18.6
Fresnillo	243.4	17.0	243.6	18.1
Juanicipio	215.5	15.1	140.1	10.4
San Julián (DOB)	114.1	8.0	148.0	11.0
San Julián (Veins)	96.0	6.7	78.8	5.8
Ciénega	80.6	5.6	98.6	7.3
Noche Buena	48.8	3.4	86.4	6.4
Total	1,430.8	100	1,349.0	100

 

 

 

VOLUMES OF METAL SOLD

 

	1H 2023	% contribution of each mine	1H 2022	% contribution of each mine	% change
Silver (koz)
Juanicipio	6,879	25.4%	4,494	19.1%	53.1
Fresnillo	6,042	22.3%	5,943	25.4%	1.7
Saucito	5,099	18.8%	5,138	21.9%	(0.8)
San Julián (DOB)	3,776	14.0%	4,759	20.3%	(20.7)
San Julián (Veins)	2,415	8.9%	1,878	8.0%	28.6
Ciénega	1,797	6.6%	2,311	9.8%	(22.2)
Pyrites Plant at Saucito	698	2.6%	423	1.8%	65.0
Herradura	350	1.3%	389	1.7%	(10.0)
Noche Buena	3	0.0%	5	0.0%	(40.0)
Total silver (koz)	27,059		25,340		6.8
Gold (oz)
Herradura	191,073	59.4%	162,404	54.7%	17.7
Saucito	36,083	11.2%	29,360	9.9%	22.9
Noche Buena	24,742	7.7%	40,671	13.7%	(39.2)
San Julián (Veins)	20,183	6.3%	18,980	6.4%	6.3
Ciénega	16,187	5.0%	17,875	6.0%	(9.4)
Fresnillo	15,918	5.0%	15,235	5.1%	4.5
Juanicipio	14,791	4.6%	10,464	3.5%	41.4
Pyrites Plant at Saucito	1,595	0.5%	1,264	0.4%	26.2
San Julián (DOB)	893	0.3%	740	0.3%	20.7
Total gold (oz)	321,465		296,993		8.2
Lead (t)
Fresnillo	9,829	36.9%	9,358	37.4%	5.0
Saucito	7,443	27.9%	8,382	33.5%	(11.2)
Juanicipio	4,379	16.4%	2,082	8.3%	110.3
San Julián (DOB)	3,626	13.6%	3,642	14.6%	(0.4)
Ciénega	1,392	5.2%	1,556	6.2%	(10.5)
Total lead (t)	26,669		25,020		6.6
Zinc (t)
Fresnillo	18,753	42.8%	16,063	38.0%	16.7
Saucito	10,726	24.5%	12,798	30.2%	(16.2)
San Julián (DOB)	6,371	14.6%	8,241	19.5%	(22.7)
Juanicipio	6,291	14.4%	3,047	7.2%	106.5
Ciénega	1,636	3.7%	2,170	5.1%	(24.6)
Total zinc (t)	43,777		42,318		3.4

 

 

TREATMENT AND REFINING CHARGES

Similar to previous years, the 2023 treatment and refining charges^[14] (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 2023. We expect these negotiations to conclude by October 2023.

 

The increased volumes of lead and zinc concentrates shipped from our mines to Met-Mex resulted in a 1.4% increase in treatment and refining charges set out in the income statement in absolute terms when compared to 1H22.

 

COST OF SALES

 

	1H 2023 US$ million	1H 2022 US$ million	Amount US$ million	Change %
Adjusted production costs [15]	773.9	659.3	114.6	17.4
Depreciation	236.3	233.7	2.6	1.1
Profit sharing	2.9	5.6	(2.8)	(49.2)
Hedging	(0.1)	0.0	(0.1)	100.0
Change in inventories	26.3	(6.0)	32.3	N/A
Unproductive costs[16]	21.5	0.5	21.0	>100
Cost of sales	1,060.6	893.2	167.4	18.7

 

 

Cost of sales increased 18.7% to US$1,060.6 million in 1H23. The US$167.4 million increase is explained by the following combination of factors:

•   An increase in Adjusted production costs (US$114.6 million). This was primarily due to: i) the adverse effect of the 10.2% average revaluation of Mexican peso vs. the US dollar (US$45.0 million); ii) underlying cost inflation excluding the revaluation of the Mexican peso vs. US dollar (US$41.6 million) - these two factors combined resulted in a cost inflation in US dollars of 13.4%, which increased adjusted production cost by US$86.6 million; iii) costs from the start-up of the beneficiation plant and mine ramp up at Juanicipio (US$19.6 million); iv) higher stripping to cost at Herradura (US$19.5 million); v) increased maintenance, contractors, operating materials and diesel consumption due to longer haulage distances, deeper mines and increased development works (US$16.7 million); and vi) higher volume of ore processed (US$5.4 million). These adverse effects were mitigated by: i) a decrease in mining costs as depositing activities stopped at Noche Buena as part of the mine closure process which started in May (-US$19.8 million); and ii) the reclassification of fixed costs incurred at Herradura and Noche Buena during the 14 days illegal stoppage to unproductive costs (-US$13.5 million).

•   The variation in the change in inventories had a negative effect of US$32.3 million versus 1H22 primarily due to a decrease in inventories at Juanicipio as a result of the start up of the beneficiation plant in 2Q23, and at Noche Buena as it approached the end of its mine life. This was partly mitigated by the gold inventory uplift at Herradura with an estimated positive effect of US$21.6 million (see notes 2c and 5 to the financial statements).

•   Unproductive costs of US$21.5 million (+US$21.0 million vs 1H22) mainly related to fixed costs incurred during the temporary illegal stoppage at Herradura and Noche Buena.

•   Depreciation (+US$2.6 million). This is mainly due to the depreciation of the additional asset base at Juanicipio, and to a lesser extent, increased amortisation of capitalised mining works at Fresnillo and Saucito, partly mitigated by the lower depreciation at Noche Buena.

 

These negative effects were mitigated by the lower profit sharing (-US$2.8 million).

 

 

COST PER TONNE, CASH COST PER OUNCE AND ALL-IN SUSTAINING COST (AISC)

Cost per tonne is a key indicator to measure the effects of changes in production costs and cost control performance at each mine. This indicator is calculated as total production costs, plus ordinary mining rights, less depreciation, profit sharing and exchange rate hedging effects, divided by total tonnage processed. We have included cost per tonne hauled/moved as we believe it is a useful indicator to thoroughly analyse cost performance for the open pit mines.

 

Cost per tonne		1H 2023	1H 2022	% change
Fresnillo	US$/tonne milled	91.69	87.23	5.1
Saucito	US$/tonne milled	137.67	116.22	18.5
San Julián (Veins)	US$/tonne milled	107.32	89.12	20.4
San Julián (DOB)	US$/tonne milled	49.50	41.23	20.0
Ciénega	US$/tonne milled	141.45	105.80	33.7
Herradura	US$/tonne deposited	19.41	20.02	(3.0)
Herradura	US$/tonne hauled	4.86	5.04	(3.5)
Noche Buena	US$/tonne deposited	10.19	9.72	4.8
Noche Buena	US$/tonne hauled	3.04	3.21	(5.3)

 

 

Fresnillo: Cost per tonne increased 5.1% to US$91.7 in 1H23, driven by the underlying cost inflation and the adverse effect of the revaluation of the Mexican peso vs. the US dollar. This was mitigated by the decrease in development contractors and the higher volume of ore milled.

 

Saucito: Cost per tonne increased 18.5% to US$137.7, mainly driven by the adverse effect of the revaluation of the Mexican peso vs. the US dollar underlying cost inflation and increased use of operating materials and maintenance.

 

San Julián Veins: Cost per tonne increased 20.4% to US$107.3, primarily driven by the underlying cost inflation, the adverse effect of the revaluation of the Mexican peso vs. the US dollar, an increase in the use of maintenance and personnel.

 

San Julián (DOB): Cost per tonne increased 20.0% to US$49.5, mainly driven by the underlying cost inflation, the adverse effect of the revaluation of the Mexican peso vs. the US dollar, and an increase in the use of maintenance energy and personnel.

 

Ciénega: Cost per tonne increased 33.7% to US$141.5 mainly driven by an increase in development  and infrastructure contractors, underlying cost inflation, the revaluation of the Mexican peso vs. the US dollar and the lower volume of ore milled.

 

Herradura: Cost per tonne of ore deposited decreased by 3.0% to US$19.4 as the adverse effect of the revaluation of the Mexican peso vs. the US dollar and underlying cost inflation was more than offset by the favourable effect of the increase in volumes of ore deposited at the leaching pads.

 

Noche Buena: Cost per tonne increased 4.8% to US$10.2 in 1H23, primarily driven by the underlying cost inflation and the revaluation of the Mexican peso vs. the US dollar.

 

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 2023	1H 2022	% change
Fresnillo	US$ per silver ounce	7.41	3.53	110.1
Saucito	US$ per silver ounce	6.84	2.52	171.0
San Julián (Veins)	US$ per silver ounce	7.10	5.41	31.4
San Julián (DOB)	US$ per silver ounce	10.23	4.45	129.9
Ciénega	US$ per gold ounce	1,455.39	84.00	1,632.6
Herradura	US$ per gold ounce	1,214.70	1,248.08	(2.7)
Noche Buena	US$ per gold ounce	1,573.75	1,098.34	43.3

 

Fresnillo: Cash cost per silver ounce increased to US$7.4 (1H22: US$3.5 per silver ounce) mainly due to the lower silver ore grade, a decrease in zinc by-product credits per silver ounce due to the lower price of zinc, and a higher cost per tonne.

 

Saucito: Cash cost per silver ounce increased to US$6.8 per ounce (1H22: US$2.5 per silver ounce) as a result of a higher cost per tonne and lower zinc by-product credits per silver ounce (lower volumes of zinc sold at a lower price).

 

San Julián Veins: Cash cost per ounce of silver increased to US$7.1 per ounce mainly due to the higher cost per tonne and lower gold by-product credits per silver ounce, largely mitigated by a higher silver ore grade.

 

San Julián (DOB): Cash cost per silver ounce increased to US$10.2 per ounce of silver driven by the lower silver ore grade (-19.2%), a higher cost per tonne and lower zinc by-product credits per silver ounce (lower volumes of zinc .

 

Ciénega: The increase in cash cost per gold ounce to US$1,455.4 per ounce in 1H23 was primarily due to a higher cost per tonne and a decrease in silver, zinc and lead by-product credits per gold ounce.

 

Herradura: Cash cost per gold ounce decreased to US$1,214.7 mainly due to the higher gold ore grade, the uplift in gold inventories at the leaching pads and a decrease in cost per tonne.

 

Noche Buena: Cash cost per gold ounce decreased by 43.3% to US$1,573.8 per ounce primarily driven by the decrease in gold ore grade and the lower cost per tonne. 

 

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 2023	1H 2022	% change
Fresnillo	US$ per silver ounce	15.27	12.52	22.0
Saucito	US$ per silver ounce	18.40	14.20	29.5
San Julián (Veins)	US$ per silver ounce	22.24	16.39	35.7
San Julián (DOB)	US$ per silver ounce	12.53	6.40	95.8
Ciénega	US$ per gold ounce	3,072.87	1,302.58	135.9
Herradura	US$ per gold ounce	1,390.22	1,755.78	(20.8)
Noche Buena	US$ per gold ounce	1,564.17	1,154.23	35.5

 

Fresnillo: All-in sustaining cost increased 22.0% over 1H22 primarily due to a higher cash cost, mitigated by lower sustaining capex and a decrease in capitalised mine development per ounce.

 

Saucito: All-in sustaining cost increased to US$18.4 per ounce due to higher cash cost, partially offset by a lower sustaining capex.

 

San Julián Veins: All-in sustaining cost increased to US$22.2 per ounce due to a higher cash cost, increased sustaining capex, and higher capitalised mine development per ounce.

 

San Julián DOB: All-in sustaining cost increased to US$12.5 per ounce driven by the increase in cash cost, partly mitigated by the lower sustaining capex.

 

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

 

Herradura: All-in sustaining cost decreased by 20.8% mainly due to the lower cash cost and a decrease in capitalised stripping.

 

Noche Buena: The 35.5% increase in all-in sustaining cost was the result of the higher cash cost.

 

 

 

GROSS PROFIT

Gross profit, excluding hedging gains and losses, is a key financial indicator of profitability at each business unit and the Fresnillo Group as a whole.

 

Total gross profit, including hedging gains and losses, decreased by 22.7% from US$365.9 million in 1H22 to US$282.7 million in 1H23.

 

The US$83.2 million decrease in gross profit was mainly explained by: i) the variation in change of inventories (-US$54.2 million); ii) the lower zinc and lead prices (-US$51.3 million); iii) the MXP/USD revaluation effect (-$45.0 million); iv) underlying cost inflation (-$41.6 million); v) increase in unproductive costs primarily from the illegal stoppage at Herradura and Noche Buena (-US$21.0 million);  vi) higher stripping to cost at Herradura (-US$19.5 million);  and vii) others (-US$12.8 million).These negative effects were mitigated by: i) the start up of the beneficiation plant and ramp up of the Juanicipio mine (US$59.2 million); ii) a higher volume of ore extracted (US$42.6 million); iii) higher gold and silver prices (US$38.5 million); and iv) the positive effect of the gold inventory uplift at Herradura (US$21.8 million).

 

 

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

 

	1H 2023		1H 2022		Change
	US$ million	%	US$ million	%	US$ million	%
Herradura	86.8	31.9	65.3	17.7	21.5	32.9
Juanicipio	79.0	29.0	82.9	22.5	(3.9)	(4.7)
Fresnillo	45.1	16.6	69.3	18.8	(24.2)	(34.9)
Saucito	39.8	14.6	62.8	17.1	(23.0)	(36.6)
San Julián	36.4	13.4	60.2	16.3	(23.8)	(39.5)
Noche Buena	3.0	1.1	20.9	5.7	(17.9)	(85.6)
Ciénega	(17.9)	(6.6)	6.8	1.9	(24.7)	(363.2)
Total for operating mines	272.2	100.0	368.2	100.0	(96.0)	(26.1)
Metal hedging and other subsidiaries	10.5		(2.3)		12.8	N/A
Total Fresnillo plc	282.7		365.9		(83.2)	(22.7)

 

ADMINISTRATIVE AND CORPORATE EXPENSES

Administrative and corporate expenses increased 11.6% from US$49.1 million in 1H22 to US$54.8 million in 1H23, mainly due to the negative effect of the revaluation of the Mexican peso against the US dollar in administrative expenses denominated in pesos, and an increase in fees paid to advisors (legal, labour, tax and technical). An increase in non-recurring engineering and construction services provided by Servicios Industriales Peñoles, S.A.B de C.V., together with an adjustment to reflect the higher costs of services provided, also contributed to the increase in administrative expenses

 

 

 

EXPLORATION EXPENSES

 

Business unit/project (US$ million)	Exploration expenses 1H 2023	Exploration expenses 1H 2022	Capitalised expenses 1H 2023	Capitalised expenses 1H 2022
Ciénega	4.2	3.4	-	-
Fresnillo	10.1	6.1	-	-
Herradura	2.8	2.4	-	-
Saucito	6.4	6.1	-	-
Noche Buena	0.7	0.4	-	-
San Julián	10.6	11.3	-	-
Orisyvo	2.1	2.2	-	0.6
Centauro Deep	0.3	0.2	-	-
Guanajuato	9.2	4.0	-	1.3
Juanicipio	3.9	5.6	-	-
Others	46.6	36.0	0.4	0.4
Total	96.9	77.7	0.4	2.2

 

Exploration expenses increased by 24.7% from US$77.7 million in 1H22 to US$96.9 million in 1H23, in line with our strategy to focus exploration on specific targets, mainly at our Fresnillo and San Julián districts and Guanajuato. The increase of US$19.2 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. In addition, US$0.4 million was capitalised in 1H23, compared to US$2.2 million in 1H23. As a result, risk capital invested in exploration increased 19.0%, from US$79.9 million in 1H22 to US$97.3 million in 1H23. The full year guidance of US$175 million remains unchanged.

 

 

EBITDA

 

	1H 2023 US$ million	1H 2022 US$ million	Amount US$ million	Change %
Profit from continuing operations before income tax	47.9	155.2	(107.3)	(69.1)
- Finance income	(26.5)	(7.0)	(19.5)	278.6
+ Finance costs	46.0	34.9	11.1	31.8
+ Revaluation effects of Silverstream contract	17.0	36.3	(19.3)	(53.2)
- Foreign exchange gain (loss), net	(3.2)	(1.2)	(2.0)	166.7
- Other operating income	(1.9)	(2.2)	0.3	(13.6)
+ Other operating expense	35.4	9.4	26.0	276.6
+ Depreciation	236.3	233.7	2.6	1.1
EBITDA	351.0	459.1	(108.1)	(23.5)
EBITDA margin	26.1%	36.5%

 

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 1H23, EBITDA decreased 23.5% to US$351.0 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 36.5% in 1H22 to 26.1% in 1H23.

 

OTHER OPERATING INCOME AND EXPENSE

In 1H23, a net loss of US$33.5 million was recognised in the income statement mainly due to identification of certain suspected illegal extraction of an estimated 20,000 ounces of gold from the Soledad-Dipolos leaching pads, which resulted in a write off of US$21.9 million of gold contents in inventory. Maintenance costs of closed mines also contributed to the net loss in other expenses. This compares unfavourably to the net loss of US$7.2 million recognised in the income statement in 1H22, 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 1H23 income statement was a loss of US$17.0 million (US$23.3 million amortisation profit and -US$40.3 million revaluation loss), which compared favourably to the net loss of US$36.3 million registered in 1H22. The negative revaluation was mainly driven by the decrease in the forward silver price curve and an updated mine plan, which considers a decrease in silver reserves at the Sabinas mine.

 

Since the IPO, cumulative cash received has been US$789.9 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 decreased -30.1% to US$19.5 million in 1H23, primarily due to the favourable effect of the higher interest gained on short term deposits and investments. Financial expenses in 1H23 included mainly: i) interest paid on the outstanding US$317.9 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$3.2 million was recorded over the period. This was higher than  the US$1.2 million gain registered in 1H22.

 

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 30 June 2023, the total EUR outstanding net forward position was EUR 5.04 million with maturity dates through December 2023. Volumes that expired during the first half of 2023 were EUR 7.22 million with a weighted average strike of 1.0635 USD/EUR, which have generated a marginal result in the period of US$0.124 million.

 

 

TAXATION

Tax income for the period was US$19.5 million, which compared favourably to the US$6.8 million tax expense in 1H22. The effective tax rate, excluding the special mining rights, was -40.7%, which was substantially below the 30% statutory tax rate. The reasons for the unusual positive effective tax rate were the significant permanent differences between the tax and the accounting treatment related mainly to: i) the effect of the 11.8% revaluation of the Mexican peso/US dollar spot exchange rate in 1H23 on the tax value of assets and liabilities; and ii) the inflation rate (Mexican Consumer Price Index), which impacted the inflationary uplift of the tax base for assets and liabilities.

 

The effective tax rate, excluding the special mining rights, was 4.4% in 1H22.

 

Mining rights income for the first half of the period was US$22.3 million compared to US$7.4 million charged in 1H22. The reasons for the positive tax rate in mining rights were the same as the ones affecting income tax.

 

 

PROFIT FOR THE PERIOD

Profit for the period decreased from US$141.0 million in 1H22 to US$89.7 million in 1H23, a 36.4% decrease period-on-period as a result of the factors described above. Profit due to non-controlling interests was US$25.0 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$64.7 million, a 44.9% decrease half-on-half.

 

Excluding the effects of the Silverstream contract, profit for the year decreased from US$166.3 million to US$101.6 million, a 38.9% decrease.

 

CASH FLOW

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

 

	1H 2023 US$ million	1H 2022 US$ million	Amount US$ million	Change %
Cash generated by operations before changes in working capital	322.9	459.5	(136.6)	(29.7)
Decrease in working capital	75.4	76.8	(1.4)	(1.8)
Taxes and employee profit sharing paid	(192.8)	(141.2)	(51.7)	36.6
Net cash from operating activities	205.5	395.1	(189.6)	(48.0)
Silverstream contract	20.2	18.3	1.9	10.4
Capital contributions and loans by minority shareholders	25.0	10.1	14.9	147.4
Purchase of property, plant and equipment	(227.8)	(299.0)	71.3	(23.8)
Dividends paid to shareholders of the Company	(98.0)	(176.9)	78.8	(44.6)
Financial expenses and foreign exchange effects	1.5	(29.0)	30.5	N/A
Net (decrease)/increase in cash during the period after foreign exchange differences	(79.4)	(83.4)	4.0	(4.8)
Cash and other liquid funds at 30 June	889.7	1,151.9	(262.2)	(22.8)

 

 

 

Cash generated by operations before changes in working capital decreased by 29.7% to US$322.9 million, mainly as a result of the lower profits generated in the year. Working capital decreased US$75.4 million, mainly due to: i) a US$43.7 million decrease in inventories; ii) a decrease in trade and other receivables of US$22.8 million; iii) a US$9.2 million decrease in prepayments; and iv) a US$0.3 million increase in accounts payable.

 

Taxes and employee profit sharing paid increased 36.6% over 1H22 to US$192.8 million mainly due to: i) the provisional tax payments paid in 1H23; ii) the higher final income tax paid in 1H23, net of provisional taxes paid (corresponding to the 2022 tax fiscal year); iii) an increase in mining rights; and iv) profit sharing paid.

 

As a result of the above factors, net cash from operating activities decreased 48.0% from US$395.1 million in 1H22 to US$205.5 million in 1H23.

 

The Group received other sources of cash including; i) the proceeds of the Silverstream contract of US$20.2 million and; ii) notes payable by minority shareholders in subsidiaries and capital contribution of US$25.0 million.

 

Main uses of funds were:

 

i)  the purchase of property, plant and equipment for a total of US$227.8 million, a 23.8% decrease over 1H22. Capital expenditures for 1H23 are described below:

 

PURCHASE OF PROPERTY, PLANT AND EQUIPMENT

	1H 2023 US$ million
Saucito mine	54.1		Mine development, purchase of in-mine equipment, deepening of the Jarillas shaft and tailings dam.
Fresnillo mine	43.5		Mine development and mining works, purchase of in-mine equipment, deepening of the San Carlos shaft and tailings dam.
Juanicipio project	41.3		Mine development and equipment
San Julián Veins and DOB	34.3		Mining works, tailings dam and purchase of in-mine equipment.
Herradura mine	28.7		Stripping, carbon in column project and purchase of mine equipment.
Ciénega mine	23.9		Mining works, purchase of in-mine equipment and construction of tailings dam.
Other	2.0		Minera Bermejal.
Total purchase of property, plant and equipment	227.8

 

ii) Dividends paid to shareholders of the Group in 1H23 totalled US$98.0 million, a 44.6% decrease over 1H22 as a result of the 2022 final dividend of 13.3 cents per share paid in May 2023, in line with our dividend policy.

 

iii) Financial income and foreign exchange effects of US$1.5 million in 1H23. Financial expenses in 1H23 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. Interest received during the period totalled US$27.0 million.

 

The sources and uses of funds described above resulted in a net decrease in cash of US$79.4 million (net decrease in cash and other liquid assets), which combined with the US$969.1 million balance at the beginning of the year resulted in cash and other liquid assets of US$889.7 million at the end of June 2023.

 

BALANCE SHEET

Fresnillo plc continued to maintain a solid financial position during the period with cash and other liquid funds of US$889.7 million as of 30 June 2023, decreasing 8.2% versus 31 December 2022 and 22.8% versus 30 June 2022. Taking into account the cash and other liquid funds of US$889.7 million and the US$1,158.9 million outstanding Senior Notes, Fresnillo plc's net debt is US$269.2 million as at 30 June 2023. This compares to the net debt position of US$198.7 million as at 31 December 2022. Considering these variations, the balance sheet at 30 June 2023 remains strong, with a net debt / EBITDA ratio of 0.42x^[17]

 

Inventories decreased 7.4% to US$543.6 million mainly driven by the consumption of inventories at Juanicipio due to the start up of the beneficiation plant, and at Noche Buena as it approached the end of its mine life.

 

Trade and other receivables increased 9.0% to US$441.1 million mainly as a result of income tax recoverable.

 

The change in the value of the Silverstream derivative from US$511.5 million at the end of the 2022 to US$477.2 million as of 30 June 2023 reflects proceeds of US$17.3 million in the period (US$11.8 million in cash and US$5.4 million in accounts receivables) and the Silverstream revaluation effect in the income statement of US$17.0 million.

 

The net book value of property, plant and equipment was US$2,860.6 million at the end of June, broadly stable over 31 December 2022.

 

The Group's total equity was US$3,877.2 million as of 30 June 2023, a 1.0% decrease over 31 December 2022. This was mainly explained by the decrease in retained earnings as a result of the dividends paid during the period.

 

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 2022. 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 2022.

 

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 2024 (being the going concern assessment period). The Directors have also considered the cash position at 30 June 2023 (US$889.7 million), as described in the financial review. In addition, they reviewed a more conservative cash flow scenario with reduced silver and gold prices of US$21.1 and US$1,734 respectively throughout this period, whilst maintaining current budgeted expenditure and only considering projects approved by the Executive Committee. This resulted in our current cash and cash equivalents balances reducing over time but maintaining sufficient liquidity throughout the period.

 

The Directors have further calculated prices (US$18.3 and US$1,481 for silver and gold respectively), which should they prevail to the end of 2024 would result in cash balances decreasing to minimal levels by the end of 2024, 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 1.40 US cents per Ordinary Share totalling US$10.3 million, which will be paid on 14 September 2023 to shareholders on the register on 11 August 2023. 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 1H23, 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). The 2023 interim dividend will be subject to this withholding obligation.