Operational highlights

·     Record attributable silver production of 38.6 million ounces, up 1.7%

·     Record attributable gold production of 368,995 ounces, up 33.4%

·     First year of commercial operations at Soledad-Dipolos exceeded production budget

·     Ciénega expansion and Saucito development on track for start up in 1H 2011

·     Pre-feasibility study at the Noche Buena gold project concluded, construction commencing in Q1 2011

·     Discovery of new ore shoot at Saucito, adding over 76 million ounces of silver and 300,000 ounces of gold to resources

·     Positive drilling results obtained at several exploration projects and prospects

·     Total resources base increased by over 15%, with reserves replenished at existing  mines

·     On track to produce 65 million ounces of silver and over 400,000 ounces of gold annually by 2018

Financial highlights

·     Adjusted revenue^[1] up 56.1% to US$1,473.9 million

·     EBITDA^[2]  up 90.3% to US$945.0 million

·     EBITDA margin increases to 67.0%, from 58.4% in 2009

·     Cost controls and efficiency measures enabled Fresnillo to remain in the lowest quartile of the   cost curve

·     Operating profit[3] up 94.4% to US$833.4 million

·    Profit attributable to equity shareholders of the Company, excluding the Silverstream revaluation effects up 72.3% to US$530.8 million (post  Silverstream revaluation up 106.6% to US$665.5 million)

·     Adjusted EPS[4] up 72.1% to US$0.740 per share, EPS up 106.5% to US$0.927 per share

·     Final dividend of 35.6 US cents per ordinary share

·     Robust balance sheet with no debt and a strong cash position up 79.2% to US$559.5 million

Highlights for 2010

*      Fresnillo attributable production

**    Adjusted Revenue is revenue as disclosed in the income statement adjusted to exclude hedging effects and treatment and refining charges

***  The weighted average number of shares for 2010 was 717,160,159.

Chief executive Jaime Lomelin said: “2010 was a year of exceptional performance. The combination of increased production, strong cost control and high metals prices led 2010 to be the best year in the company’s history. While continued market volatility and uncertainty regarding the pace of the economic recovery will undoubtedly offer challenges in 2011, I am confident that our focus on increasing productivity, containing costs, expanding the resource and reserve base, and strengthening our growth pipeline will create ongoing and sustainable value to all our stakeholders.”

Analyst Presentation

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

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

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

Access Code:     42460392

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

About Fresnillo plc

Fresnillo plc is the world’s largest primary silver producer and Mexico’s second largest gold producer, listed on the London and MexicanStock Exchanges under the symbol FRES.

Fresnillo has four producing mines, all of them in Mexico – Fresnillo, Ciénega, Herradura and Soledad-Dipolos; two development projects – Saucito and Noche Buena; and six advanced exploration prospects – San Ramon, San Julián, Orysivo, Centauro Deep, Las Casas and Juanicipio as well as a number of other long term exploration prospects and, in total, has mining concessions covering approximately 1.91 million hectares in Mexico.

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

Fresnillo’s goal is to maintain the Group’s position as the world’s largest primary silver company, producing 65 million ounces of silver and over 400,000 ounces of gold by 2018.

Dear Shareholders,

I am pleased to report a year of solid performance for Fresnillo plc. Record levels of silver and gold production, the start-up of a new mine, and substantial progress at development and exploration sites attest to the Group’s operational execution and robust resource base. Combined with high silver and gold prices, Fresnillo plc delivered the best year in its history.

This performance comes in the context of a complex global economic recovery, ongoing market volatility, debt crisis in Europe, large fiscal deficits in several developed countries, loose monetary policy in the USA and the continued ascendancy of China, factors that contributed to the exceptional rise in precious metal prices.

Notwithstanding the important benefit of favourable prices, the Group´s production and cost profile, growth platform and mining expertise contributed to the positive performance. With an average cash cost of US$3.3 per ounce of silver and US$309.1 per ounce of gold, the Fresnillo Group should be able to produce profitably well below current prices, and do so for years to come given the 1.47 billion silver ounces and 20.08 million gold ounces in resources. Furthermore, Fresnillo plc has the know-how to identify high potential resources and develop them economically, establishing a good pipeline for growth.

As such, I believe we are on course to meet the ambitious target set out at the time of our initial public offering in 2008: that by 2018, Fresnillo plc will be able to produce 65 million ounces of silver and over 400,000 ounces of gold annually. Furthermore, the Group should be in a position to maintain that level of production for the subsequent 10 years at least, based on our  project delivery schedule.

Investing across metal price cycles to extend the growth pipeline will continue to be a hallmark of our value-creation strategy. We also seek to deliver growth through development projects and maximise the potential of existing operations. Underlying this strategy are two fundamental pillars:

Ø prudent financial discipline to ensure sufficient investment capital even under unfavourable price scenarios; and most importantly,

Ø a profound and unwavering commitment to long-term sustainable development.

The Fresnillo Board regards the Group’s performance in health, safety, environmental and community issues as integral to its operational performance. This year we engaged in discussions about the strategic framework for corporate social responsibility, the impact of the Group’s social investments, and broader industry benchmarks in this regard. Our focus remains squarely on prioritising the health and safety of employees above all else, minimising the Group’s environmental impact, and engaging constructively with communities to create lasting economic and social value.

It is thus with great sadness that I report the death of two employees this year. We hold ourselves to the highest standard in which no fatality is ever acceptable. Additional training and monitoring across the organisation are being implemented to enforce adherence to safety measures.

Furthermore, and as part of the Company’s adoption of the Principles of the UK Corporate Governance Code, the Board has initiated a process to explicitly define the nature and extent of the risks we are willing to take to achieve our strategic objectives. We believe the Company already has a comprehensive approach to managing risks, and this process will enhance our framework and ensure full alignment of Board- and executive-level practices.

Like all of my board colleagues, I am firmly committed to ensuring that we collectively oversee Fresnillo plc with transparency and in the interest of all shareholders. We are fully committed to the best possible practices in corporate governance, and take our adherence to the principles and provisions of the new UK Code on Corporate Governance very seriously. In particular we recognise that the shareholding structure of Fresnillo plc requires us to ensure, as we have done, that the interests of all shareholders are well represented in the proceedings of the Board. In our reporting this year, we have sought to demonstrate the steps put in place to achieve this.

Based on the Group’s 2010 performance, the Directors have recommended a final dividend of 35.6 US cents per Ordinary Share, which will be paid on 20 May 2011 to shareholders on the register on 3 May 2011. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars. The Company´s dividend policy takes into account the profitability of the business and underlying growth in earnings of the Company, as well as its capital requirements and cashflows, whilst maintaining an appropriate level of dividend cover.

For 2011, despite the uncertain outlook for economic and metal price performance, we expect that our high quality resource base and low-cost production profile will enable Fresnillo plc to deliver growth. Silver and gold production volumes will reflect the start-up of commercial operations at Saucito, a significant property with 361.5 million ounces of silver resources. Gold production will benefit from expanded milling capacity at Ciénega and the expansion of Soledad-Dipolos.

The Board has authorised a 151.1% increase in the 2011 exploration budget, to US$251.4 million. The favourable exploration results obtained in 2010, including significant new resources identified at existing projects that will warrant mine expansion in the near term, reinforce our confidence that such expenditures are vital to the long-term growth of the Group. The focus will remain on consolidating mining districts in Mexico and Peru.

I would like to thank my fellow Board members for their service and contributions in the year. It is a pleasure to work together towards a common mission, and Fresnillo plc benefits from the wealth of experience and perspectives that our outstanding Board members bring. I would also like to commend the Group’s executives and employees for delivering great performance that affirms Fresnillo plc’s leadership position in primary silver and our growing profile in gold.

Alberto Baillères

Non-executive Chairman

Dear Shareholders,

I am pleased to report a year of exceptional performance. Silver and gold production reached record levels; Soledad-Dipolos started operations as our fourth operating mine and contributed importantly to the results; significant progress was made at the Saucito development project, and the Ciénega and Soledad-Dipolos expansions are on track; and exploration efforts increased mineralisation at all major prospects and led to a substantial increase in the total resource base.

Our operational performance was enhanced by the considerable increase in metal prices over the period, which enabled us to deliver record financial results to Fresnillo shareholders.  We begin 2011 with a robust operational profile, extensive growth pipeline, strong cash position and zero debt.

A sterling performance

Total attributable silver production slightly exceeded our forecasts, rising 1.7% over 2009 to 38.6 million ounces. This reflected stable production at Fresnillo, higher ore throughput from development works at Saucito, and higher ore grades and ore deposited at Herradura. In addition, we accrued 3.4 million ounces of silver under the Silverstream Contract, slightly above with the amount received in 2009.

Attributable gold production increased by 33.4% to a record 368,995 ounces with the start of commercial production at Soledad-Dipolos in January, as well as greater volumes deposited at Herradura and ore milled at Ciénega.

The Group’s precious metals production profile consolidates our global leadership position in primary silver and highlights the growing importance of gold in our portfolio.

Production of zinc and lead, which are by-products of the Group’s operations at Fresnillo and Ciénega, increased by 15.1% and 9.9% respectively, mainly as a result of higher volumes of ore milled and better ore grades.

Our Group, along with much of the precious metals industry, benefited from the rise in prices this year. Continued uncertainty about the global economic recovery, market volatility and weakness of the US dollar contributed to sustained investor interest in gold, while higher silver prices reflected both investor interest and recovering demand for silver as an industrial metal. Average realised gold and silver prices for the Group increased by 26.6% and 40.0% respectively, helping drive the significant growth in earnings.

Adjusted revenues, which exclude treatment and refining charges and hedging results, rose 56.1% in the year. Total revenues increased to US$1,409.6 million, 65.8% higher than at 31 December 2009. EBITDA rose to US$945.0 million, with a significant increase in the EBITDA margin from 58.4% in 2009 to 67.0% in 2010. Net profit attributable to shareholders, prior to Silverstream revaluation effects, was US$530.8 million, 72.3% higher than in 2009.

There were a number of variables that led to an increase in production costs this year, including the revaluation effect of the Mexican peso-US dollar exchange rate and higher electricity and diesel prices. Further contributing to the rise in production costs were increased mine development and rock bolting and shotcreting activities to enhance safety.

Nonetheless, higher volumes, strict cost controls, ongoing efficiency efforts and higher by-product credits resulted in lower cash costs and enabled us to remain in the lowest quartile of the cost curve relative to our peers. Our low cost production profile is a key competitive advantage because it provides downside protection in a cyclical environment.

Fresnillo plc carries no bank debt, and as of 31 December 2010 had a cash position of US$559.5 million, 79.2% above the 2009 figure. Our policy is to invest in the future growth of the business. Capital expenditures totalled US$340.3 million in 2010, and total exploration investment, including capitalised expenses was US$100.1 million.

An exceptional growth profile

These results are the outcome of a strategy designed to create value across precious metals cycles: a focus both on operational excellence in maximising current assets, and on delivering long-term growth through reserve replacement and expansion into new projects.

While we consider ourselves conservative in that we maintain strict and consistent investment parameters, we have a broad portfolio of high quality exploration projects and prospects. Our strategy is to consolidate mining districts with world-class potential, and prospects must meet our tonnage, ore grade and low-cost extraction criteria. We advance projects towards start-up through a disciplined development process.

Results from exploration activities in 2010 were very encouraging. We undertook an extensive drilling programme employing 75 exploration rigs at our mines, advanced projects and prospects. Total attributable resources rose from 1.3 billion ounces of silver at 31 December 2009 to 1.5 billion ounces, and 13.9 million ounces of gold to 20.1 million ounces.

Of particular note is the discovery of a new ore shoot at Saucito that added over 76 million ounces of silver and 300,000 ounces of gold to resources. Resources at Orisyvo rose significantly. At Noche Buena, we confirmed the resource estimate, completed the pre-feasibility study and secured all land requirements to initiate construction of a new mine in 2011. Scoping studies were completed at San Julián and Orisyvo, as was the pre-feasibility study at Juanicipio in January 2011.

The Group maintains the largest land position for precious metals exploration and mining in Mexico and we continued to acquire surface rights in 2010.  We signed exploration option agreements to explore the gold properties Candameña in Chihuahua, and Cebadillas and Yesca in Nayarit, with drilling planned for 2011. We are also expanding our district exploration efforts in Guerrero, Durango, Guanajuato and Zacatecas, as well as in Peru, where we acquired concessions this year.

We are on track to meet our goal of producing 65 million ounces of silver per year and over 400,000 ounces of gold per year by 2018.

By mid-2011, the expanded capacity at Ciénega is expected to become operational, which will stabilise gold production at 110,000 ounces per year and maintain mine life at over 10 years.  By the end of 2011, we expect to commission the shaft, giving us access to deeper ore reserves and reduce costs. 

We are also on track in expanding capacity at Soledad-Dipolos from 100,000 ounces of gold per year to 130,000 by increasing the number of leaching pads and mobile equipment at the mine.

The new world-class Saucito mine is also on track to start commercial operations in 1H 2011. First year production levels are expected to reach 4.7 million ounces of silver and 22,500 ounces of gold, then ramping up to more than 9.0 million ounces of silver and 45,000 ounces of gold per year by 2013. In 2010, we advanced the development of the mine and construction of the beneficiation plant.  During the year 1.2 million ounces of silver and 6,323 ounces of gold were obtained from the development works at Saucito, which were processed at the Fresnillo mill. In addition, 91,043 tonnes of ore from Saucito were stockpiled in preparation for the commissioning of the Saucito mill.

Renewed focus on safety

While we are proud of our operational and financial success this year, I regret to report we have not performed as well on safety. We suffered two fatalities in 2010 as a result of failure to follow company safety procedures. We have a responsibility to improve our employees’ and contractors’ decision-making capabilities when it comes to workplace safety, and as such we are reinforcing the rigorous procedures and programmes already in place with supplemental training and spot drills, and have enhanced the monitoring procedures across the Group to ensure that our policies are adhered to. A zero fatality tolerance is the only acceptable standard, and I am joined by the Board and management team in extending our deep condolences to the families and colleagues.

Sustainable development

Our business model is dependent upon sound environmental management practices and community and labour relations. Sustainable development is thus deeply integrated into every aspect of our operations.

Along with ISO 14001 certifications at all mines and exploration offices, we are signatories to the International Cyanide Management Code. Herradura completed the audit process to obtain certification in 2010, and the process is underway at Ciénega, where we expect to obtain certification in 2011. Soledad-Dipolos will begin the process in the coming year.

Employees received a greater number of training hours on average in 2010, and we continued to invest in a range of professional development initiatives and workplace enhancements, including housing and recreational facilities. Annual labour negotiations concluded with the agreement of a 6.5% wage increase and a 1% bonus on base salary.

Our community relations were strengthened this year with the first full year of operations at the sewage water treatment plant at Fresnillo. In a region of water scarcity, the plant has contributed to preserving aquifers and reducing a potential source of contamination for the city, while lowering our production costs and fresh water consumption. At Ciénega we worked with the municipality to pave the main streets of the town, improving the community’s transportation and air quality. We are pleased that our development projects are promoting job creation in the Herradura and Fresnillo districts, as we have a preference to utilise the services and products of local contractors and vendors. In every community where we operate we continued to actively participate in education, healthcare and infrastructure projects.

Outlook

Continued market volatility and uncertainty regarding the pace of the economic recovery will undoubtedly be reflected in metal prices. I am confident that our focus on increasing productivity, containing costs, expanding the resource and reserve base, and strengthening our growth pipeline will create ongoing and sustainable value to all our stakeholders.

Looking ahead at 2011, we expect:

·     Improved safety performance

·     Commissioning of Saucito

·     Commissioning of expanded milling capacity and deeper shaft at Ciénega

·     Completion of Soledad-Dipolos expansion

·     Construction at Noche Buena under way

·     Pre-feasibility study at San Julián

·     Determination of next steps for development of Juanicipio

·     Silver production to rise 5%

·     Gold production to rise 5-6%

·     Exploration budget to increase to US$251.4 million

On behalf of the Company’s personnel and the management team, I would like to extend my appreciation to our Chairman and members of the Board for their valuable support and guidance during 2010. I would also like to thank my fellow executives and employees for their enduring commitment to quality and sustainable growth.

Jaime Lomelín

Chief Executive Officer

Commentary on financial performance

In 2010, the Fresnillo Group generated strong financial results driven by the rally in precious metal prices, the contribution of Soledad-Dipolos and the robust operational performance of the Group mines. These were somewhat mitigated by i) higher exploration expenses and by higher depreciation expense resulting from recent capital investments, both in support of the Group’s organic growth strategy; and ii) higher adjusted production costs reflecting a stronger peso, rising electricity and diesel prices and an increase in activities to ensure continuous operations, as well as higher taxes and profit sharing. As a result, attributable profit in the year, excluding the effect of the Silverstream revaluation rose 72.3% from US$308.0 million in 2009 to US$530.8 million in 2010.

Income Statement

Key items of the Income Statement are shown below:

¹ The weighted average number of ordinary shares for 2010 and 2009 was 717,160,159.

Fresnillo plc’s financial performance is determined by the level of efficiency in executing the Group’s strategy and the impact of several external factors. The quality of our asset base, the ability to maximise its potential, and personnel and management’s skills are among the most important internal drivers underlying our financial results. The external variables with material impact on Group performance are dependent on market conditions and are thus outside of Fresnillo plc’s control. These include:

Precious metal prices

Volatility in the global economy and the sovereign debt crisis in Europe fostered safe-haven investment demand, resulting in gold and silver prices reaching record levels. In 2010 the average realised price of silver increased 40.0% to US$21.39 per ounce, while the average gold price reached US$1,252.05 per ounce, a 26.6% increase year-over-year. The Group’s Income Statement is considerably impacted by these variables, as 95% of our revenues come from these metals. In addition, the strengthening of forward silver prices in 2010 significantly impacted the valuation of the Silverstream contract, considered to be a derivative instrument under IFRS, which resulted in an unrealised pre-tax gain of US$191.8 million recognised in the income statement. Expectations of future silver price is one of the key assumptions underlying the valuation of this contract and analysis of the impact on the contract’s value of changes in the price of silver is provided in Note 11 to the Financial Statements. We maintain a policy not to hedge silver and gold price exposure and therefore provide shareholders with full exposure to fluctuations in silver and gold prices.

Foreign exchange rates

The average spot exchange rate of the Mexican peso to the US dollar was revalued from MXN13.52 per US dollar in 2009 to MXN12.64 per US dollar in 2010. This variable had an adverse effect on the Group’s production costs, as costs denominated in Mexican pesos (approximately 70% of total costs) increased when converted to US dollars. The negative impact of the 6.5% average revaluation within the costs was estimated at US$9.5 million.

The spot exchange rate at 31 December 2010 was MXN12.36 per US dollar, representing a 5.4% revaluation when compared to the MXN13.06 per US dollar at the beginning of the year.  The Group’s taxable profits are determined under Mexican GAAP in pesos and this revaluation had an adverse effect on the peso value of US dollar-denominated net monetary asset position, with the Silverstream Contract and cash and cash equivalents being the most important. As a result, a foreign exchange loss under Mexican GAAP was generated, lowering the Group’s taxable profits.

Inflation of key operating materials

The net increase in the weighted average input cost over the year was 1.9%. The average unit price of several operating materials fluctuated in 2010, reflecting prevailing economic conditions. Reagents such as zinc and copper sulphates increased significantly over the course of the year reflecting the higher prices of those metals. Average prices for sodium cyanide however, an important reagent used in the gold leaching process, declined.

Further increases in the unit prices of all inputs are expected for 2011, reflecting the increase in demand to support expansion plans within the broader mining industry.

Electricity

Fresnillo plc’s weighted average cost of electricity increased by 24.6% when compared to 2009.

This followed the expected rate increase from the Comisión Federal de Electricidad (CFE), the national utility, with recovering economic conditions prompting the Mexican government to reverse its policy of reducing electricity prices to control inflation.  The unit price of electricity for 2011 is expected to move in line with CFE’s average generating cost.

Diesel

The weighted average cost of diesel in Mexican pesos increased by 19.6% year-on year reflecting the Mexican government’s decision to align fuel and diesel prices with international rates. In accordance with this policy, a similar increase is anticipated for 2011.

Treatment and refining charges

Treatment and refining charges (TRCs), which are deducted from adjusted revenues for the purposes of revenues as disclosed in the income statement, are reviewed annually in accordance with international benchmarks. The treatment charge per tonne of lead concentrate, including the escalator, remained steady, while treatment charge per tonne of zinc concentrate increased by 3.2% when compared to 2009. However, this increase was completely offset by a 29.7% decrease in the refining charge per ounce of silver, which represented 42% of total treatment and refining charges. As a result, total TRC charges decreased by 6.9% year-on-year, despite the increase in volumes of product sold.

The effects of the internal and external factors impacting each of the items of the Income Statement are further described below.

Revenues

CONSOLIDATED REVENUES

(US$ millions)

² Adjusted Revenue is revenue as disclosed in the income statement adjusted to exclude hedging effects and treatment and refining charges.

³ Derivatives terminated prior to the IPO in 2008.

Total revenues for the full year rose to a record US$1,409.5 million, a 65.8% increase when compared to 2009. The main contributor to this significant increase was adjusted revenue which rose 56.1% to US$1,473.9 million. Higher average realised metal prices accounted for 65.6% of the total US$530.0 million increase in adjusted revenues. The remaining 34.4% of the favourable effect reflected the additional volumes of gold ounces sold from Soledad-Dipolos, Ciénega and Herradura. 

Hedging

The Fresnillo Group has not entered into any silver and gold hedging contracts since its Initial Public Offering (IPO) in 2008 and does not intend to do so, thus providing full exposure to fluctuations in silver and gold prices. In 2010, Fresnillo plc did not enter any new derivative contracts to hedge the price of lead and zinc by-products.

However, prior to the IPO, the Group used derivatives to reduce commodity price risks arising from the volatility of silver and gold prices. In 2009, a final non-cash charge of US$25.0 million was reflected against adjusted revenues as a result of the hedging instruments that were terminated in 2007, but for which cumulative losses were recycled to the income statement at the time of the occurrence of the hedge transaction to which they related.

ADJUSTED REVENUES4 BY METAL

(Year ended 31 December, US$ millions)

4Adjusted revenue is revenue as disclosed in the Income Statement adjusted to exclude hedging effects and treatment and refining charges.

Gold share of total adjusted revenues increased from 38% in 2009 to 44% in 2010 as a result of the start-up of commercial production at Soledad-Dipolos. Silver share thus declined to 51% in 2010.

VOLUMES OF METAL SOLD

(Year ended 31 December)

Cost of sales

⁵Calculated as total production costs less depreciation, profit sharing and exchange rate hedging effects.

The main factors affecting the increase in cost of sales were:

·     Adjusted production costs increased to US$312.0 million, a 48.7% increase when compared to 2009. Of the US$102.2 increase, US$55.1 million, or 53.9%, related to production costs incurred at the new Soledad-Dipolos mine in its first year of commercial production. In addition the revaluation of the average spot exchange rate resulted in a US$9.5 million adverse effect when converting peso-denominated costs to US dollars. The discussion below factors out the impact of foreign exchange movements in the peso denominated costs for each category in order to reflect the underlying operational unit cost changes:

−      Contractor costs rose by US$12.7 million as a result of i) stripping cost of the Valles pit recorded in the income statement, while in 2009 these costs were capitalised ii) the increase in development works to ensure continuous operations; iii) shotcreting and rock bolting activities carried out mainly at the Fresnillo mine to secure personnel safety; iv) increased mine services which are typically conducted by contractors such as road maintenance and pumping; v) additional volumes of ore and waste material hauled over longer distances at all our mines; and vi) higher unit fees charged by contractors, which include the annual rise in labour costs, depreciation of the contractors’ equipment, operating materials and fuel and lubricants.

−      The cost of energy rose by US$10.7 million as a result of increases in electricity and diesel prices of 24.7% and 19.6% respectively. Additional consumption of energy was associated mainly with higher production volumes at our mines, and to a lesser extent, to the longer haulage distances affecting consumption of diesel.

−      Operating materials increased by US$6.0 million due to increased consumption of explosives, anchors, steel and lubricants related to the additional volumes of ore produced at the mines. These increases were mitigated by operating efficiencies achieved through the Six Sigma methodology and other cost control initiatives.

−      The cost of personnel increased by US$2.4 million as a result of i) additional personnel hired at Herradura; ii) a 6.5% increase in wages plus a 1% bonus in base salary; iii) bonuses associated with the implementation of efficiency projects; and iv) training to improve safety indices.

−      The cost of maintenance rose by US$2.3 million due to i) maintenance and repair of locomotives at the Fresnillo mine; and ii) intensified use of equipment to load and haul ore and waste at the mines.

−      Other costs increased by US$3.5 million as a result of additional equipment insured, surveillance, freight and IT expenses.

·     Depreciation increased by US$38.0 million mainly due to the larger asset base following the completion of Soledad-Dipolos, higher production volumes which affected the depletion factor, and the purchase of additional high-capacity trucks and loaders.

·     The current year increase in work in progress as compared to the decrease in 2009 benefited the movement in COS by US$29.7 million. In 2010, ore deposited at Soledad-Dipolos increased inventories of ore at this mine, while in 2009 a charge of US$12.9 million was recognised as a result of the decrease of mineral and concentrate inventories at Herradura.

·     Profit sharing rose by US$13.1 million due to higher profits at our operating mines.

·     The Fresnillo Group enters into certain exchange rate derivative instruments as part of a programme to mitigate its exposure to foreign exchange risk associated with costs incurred in Mexican pesos. The forward sales position that matured throughout 2010 was for US$77.5 million at an average rate of MXN13.17 per US dollar. Forward contracts which matured throughout the year resulted in a US$2.9 million gain recognised in the income statement. The outstanding net forward position as of 31 December 2010 was US$51.0 million with maturity dates throughout 2011.

Additionally, the Group entered into a combination of put and call options structured at zero cost (collars). During the year, collars hedging US$14.5 million of costs denominated in Mexican pesos matured. Resulting in a US$0.2 million gain recognised in the income statement. Collars hedging costs denominated in Mexican pesos equivalent to US$36.0 million will mature in 2011 with an average floor exchange rate of MXN13.03 per US dollar and cap of MXN14.23 per US dollar. These instruments guarantee a minimum exchange rate should the market fall below the floor exchange rate. Between the floor and cap exchange rates the Group sells US dollars at the market rate, and when the Mexican peso per US dollar exchange rate goes above the cap rate, the Company is obliged to sell US dollars at the contract rate.

Cost per tonne and cash cost per ounce

Cost per tonne milled across our operating mines increased when compared to 2009 as shown in the table below.

COST PER TONNE⁶

(Year ended 31 December)

⁶ This indicator is calculated as total production costs less depreciation, profit sharing and exchange rate hedging effects. In 2010 however, freight costs associated with ore transported from Fresnillo plc’s mines to Met-Mex facilities, which are usually presented as a deduction to Adjusted Revenues, were reclassified and added to the cost of freight of inputs under production cost, thus illustrating the full impact of freight costs.

Cost per tonne figures presented within the 2009 Annual Report excluded freight charges against revenues, thus those figures are shown with a pro forma reclassification in order to be comparable with 2010 calculations.

CASH COST PER OUNCE⁷

(Year ended 31 December)

⁷Cash cost per ounce is calculated as total cash cost (cost of sales plus treatment and refining charges less depreciation) less revenues from by-products divided by the silver or gold ounces sold.

Cash cost per silver ounce at Fresnillo reflected a modest decrease (see table below) due to higher gold, lead and zinc by-product revenues (resulting from increased sales volumes and higher metal prices). In addition, the slight increase in volumes of silver produced and sold also mitigated the adverse effect of the higher adjusted production costs.

Cash cost per gold ounce at Ciénega slightly increased reflecting the higher adjusted production costs associated with the development works at the mine and the 24.6% decrease in silver by-product production, partially offset by the higher zinc and lead by-product sales and the increased gold ounces sold.

Cash cost per ounce at Herradura decreased by 5.5% as a result of the higher gold ounces produced and sold at this open pit mine. Cash cost per gold ounce at Soledad-Dipolos was US$383.15, higher than Herradura’s cash cost due to the natural lower ore grade impacting total gold ounces sold. 

Gross profit

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

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

In 2010, total gross profit for operating mines, adjusted to exclude hedging gains and losses, increased by US$410.5 million a 73.3% increase over 2009.

This indicator considerably benefited from the higher precious metal prices, contributing US$327.9 million, of which 64.9% corresponded to the price of silver, 31.4% to the price of gold and the remaining 3.7% to the prices of  lead and zinc by-products. 

Operating performance was also an important contributor to Gross Profit excluding hedging effects. The most important factor in the 2010 increase was the contribution of the new Soledad-Dipolos gold mine (US$84.1 million), with higher production volumes at Herradura, Fresnillo and Ciénega also benefiting gross profit. In total, the favourable effect generated by higher sales volumes at these three mines was US$64.9 million.

Other favourable effects were lower treatment and refining charges and changes in work in progress due to the increase in Soledad-Dipolos inventories.

The benefits described above were somewhat mitigated by: i) the adverse effect of the US$37.7 million increase in adjusted production cost; ii) the US$27.2 negative impact of the higher depreciation expense; iii) higher profit sharing; and iv) the adverse impact of the revaluation of the Mexican peso against the US dollar impacting peso-denominated costs.

The contribution by mine to the Group’s Gross Profit, excluding hedging, changed this year due to the incorporation of Soledad-Dipolos which comprised 8.7% of the total, diluting the participation of the other three mines. Fresnillo continues to be the biggest contributor with 59.2%, followed by Herradura and Ciénega with 22.4% and 9.7% respectively.

Administrative expenses

Administrative expenses of US$52.6 million increased by 5.5% compared to 2009, and include administrative fees paid to Servicios Administrativos Peñoles, S.A. de C.V. (SAPSA) under the New Services Agreement (NSA), legal and advisory fees, and expenses associated with administrative personnel working at the Group’s corporate offices. The increase was mainly related to additional administrative services provided by SAPSA related to the new Soledad-Dipolos mine and to the construction of Saucito.

Exploration expenses

Exploration expenses for the year totalled US$82.1 million, a 67.4% increase over the previous year. An additional US$18.0 million related to the development of the Saucito mine and for the San Julián and Juanicipio advanced exploration projects was capitalised. These projects have sufficient geological and technical information that allows for a reasonable expectation of becoming operating mines in the future. Exploration expenses, including those capitalised, totalled US$100.1 million, representing a 77.2% increase over 2009.

As anticipated, Fresnillo plc conducted an intensive programme of exploration and mining works over the course of the year aiming to expand the resource and reserve base and confirm resources estimates. This expenditure also included the Noche Buena pre-feasibility study, San Julian and Orisyvo scoping studies and the pre-feasibility study at Juanicipio. As part of our organic growth programme, the exploration budget for 2011 has been increased to US$251.4 million, of which US$100 million is expected to be capitalised.

EBITDA

EBITDA & EBITDA MARGIN

(Year ended 31 December, US$ millions)

EBITDA, which is calculated as gross profit as reflected in the income statement plus depreciation less administrative and exploration expenses, achieved a new record level of US$945.0 million in 2010, a 90.3% increase year-on-year. This key financial indicator benefited from the higher gross profit levels, partially offset by the increase in exploration expenses. Similarly, EBITDA margin rose from 58.4% in 2009 to 67.0% in 2010.

Silverstream revaluation effects

The Silverstream Contract is accounted for as a derivative financial instrument carried at fair value. In 2010, the increase in fair value of the Silverstream asset was US$191.8 million, which represents a significant increase of 64.2% compared to the value as at 31 December 2009. As a result, a corresponding non-cash gain was recognised in the income statement. This unrealised gain comprised 18.8% of the Group’s profit before tax, highlighting the increased impact of this instrument in the income statement. Since the IPO, unrealised, non-cash profits associated with the Silverstream Contract have totalled US$211.2 million. As silver prices are likely to move cyclically, any unrealised future losses would also be recognised in the income statement. For example, the Group estimates that a 25% increase/decrease in the expected future prices of silver as used in the valuation at 31 December 2010, would result in an unrealised gain/loss respectively of US$120.2 million recognised in the income statement. Further information related to the Silverstream Contract is provided in the Balance Sheet section below and note 8 in the Financial Information section.

Foreign exchange

The foreign exchange result is caused by the conversion of monetary assets and liabilities denominated in foreign currencies to US dollars. In 2010, a US$3.3 million foreign exchange loss arose mainly as a result of:  i) the devaluation of the UK pound sterling against the US dollar on the dividends paid in pounds and the conversion of the pound sterling position held in treasury to US dollars; and ii) the revaluation of the MXN/ US dollar exchange rate which affected the value of peso-denominated net liabilities when converted to US dollars. This loss adversely compared with US$9.5 million foreign exchange gain recognised in the 2009 Income Statement, following the devaluation of the US dollar against the UK pound sterling, which affected the cash position denominated in sterling.

Taxation

Increased profit levels drove the income tax expense up to US$273.0 million, a 175.3% increase compared to the previous year. Nevertheless, the effective tax rate under IFRS was 26.7%, which is lower than the statutory 30% tax rate. The main factors in the differential were: a) the revaluation of the MXN/US dollar exchange rate which generated i) a foreign exchange loss registered under Mexican GAAP, lowering the Group’s taxable profits; and ii) movements in the US dollar equivalent tax value of assets that were originally valued in MXN and are not subsequently revalued for tax purposes with fluctuations in the Mexican peso/ US dollar exchange rate under Mexican GAAP; and b) certain inflation adjustments for Mexican tax purposes that have no accounting effect.

Profit for the year

Profit for the year increased by 109.2% from US$358.3 million in 2009 to US$749.4 million in 2010. Profits due to non-controlling interests (minority shareholders) rose to US$84.3 million in 2010, a 132.4% increase, as a result of the higher profits recorded at Herradura, profits generated by Soledad-Dipolos and the unrealised gain resulting from the Silverstream revaluation. Both mines belong to Penmont, a company jointly owned by Fresnillo plc (56%) and Newmont (44%).

Despite the 132.4% increase in non-controlling interests, profit attributable to Group shareholders increased by 106.6% to US$665.1 million in 2010.

Profit for the year, excluding the effects of the revaluation of the Silverstream Contract, increased by 78.7% from US$344.3 in 2009 to US$615.1 million in 2010. Similarly, profit attributable to Group shareholders, excluding the Silverstream effects, rose by 72.3% to US$530.8 million in 2010.

Cash flow

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

CASH FLOW KEY ITEMS

Year ended 31 December, US$ millions)

The 79.2% increase in cash generated by operations before changes in working capital was a result of record profits generated at the mines. However, this effect was mitigated by a US$166.0 million increase in working capital, which is mainly explained by:

·     Trade and other receivables rose by US$116.7 million. The main factor underlying this was the US$99.1 million increase in accounts receivables due from Met-Mex, of which 55% is attributable to the higher metal prices, 27% to the higher volumes of ore sold to Met-Mex, and 18% by modifications in the payment conditions between Herradura and Met-Mex associated with the doré production.  Loans granted to contractors for the purchase of equipment further increased other receivables. These loans are consistent with our strategy of supporting contractors.

·     Inventories increased as a result of the higher volumes of ore deposited at the Soledad-Dipolos pads and ore from development works at Saucito, which were stocked in preparation for commercial production in 1H 2011. In addition, the inventory of spare parts, including tyres, increased in accordance with our policy to secure critical inputs subject to scarcity.

Despite the increase in working capital, cash flows from operating activities increased by 79.3% to US$700.7 million in 2010.

Other important sources of funds were US$55.6 million received in proceeds under the Silverstream Contract and US$25.6 million in proceeds generated from the sales of ore from the development works at Saucito and processed at the Fresnillo mine; the latter was credited to the cost of the project.

The Group invested US$340.3 million in the purchase of property, plant and equipment, a 30.3% increase when compared to spend in 2009. Investments in these items in 2010 are further described below:

PURCHASE OF PROPERTY, PLANT AND EQUIPMENT

(US$ millions)

Dividends paid in 2010 totalled US$191.1 million, almost doubling those paid in 2009. The 2010 dividend payments reflected i) the final 2009 dividend of US$116.2 million and the 2010 interim dividend of US$66.4 million paid to Fresnillo plc shareholders; and ii) US$8.5 million paid to Newmont, the minority shareholder in Penmont.

The sources and uses of funds described above resulted in a net increase of US$250.1 million in cash and cash equivalents during the year. The combination of this increase with the US$312.2  million balance at the beginning of the year and the unfavourable effect of exchange rate movements on cash of US$2.7 million, resulted in a net cash position of US$559.5 million as at 31 December 2010.

Balance sheet

In 2010, the Group maintained a solid financial position with no bank debt.

Cash and cash equivalents as of 31 December 2010 were US$559.5 million, a 79.2% increase compared to year-end 2009. The main factors driving the significant increase in cash and cash equivalents were described in the cash flow section.

Trade and other receivables of US$225.0 million rose as a result of the increase in metal prices and higher volumes sold. Additionally, turnover of accounts receivables increased from 30 days in 2009 to 34 days in 2010 mainly as a result of extended payment terms on doré sold by Minera Penmont from 5 to 15 days after product delivery. In addition, other accounts receivables increased as a result of loans granted to contractors to purchase equipment.

These increases were partially offset by the decrease in income tax refunds due, following the recovery of excess income tax paid in provisional payments during 2009 over the final income-tax return.

In accordance with the Silverstream Contract, Fresnillo plc is entitled to receive all of the proceeds in respect of the payable silver produced at the Sabinas mine owned and operated by the Peñoles Group. This contract is accounted for as a derivative financial instrument, with all payments received being credited against the carrying value of the related asset. The change in the value of the Silverstream derivative from US$298.6 million at the beginning of the year to US$427.7 million at the year-end reflects proceeds of US$62.8 million (US$55.6 million in cash and US$7.2 million receivable) offset by a revaluation effect of $191.8 million which is a non-cash gain reflected in the Group income statement. Given the cyclical movements of silver prices, the value of the Silverstream asset could increase or decline in line with the movements of the silver price.

The net book value of property, plant and equipment was US$895.8 million at 31 December 2010, an increase of 30.0% when compared to 2009, reflecting capital expenditure during the year on new development projects and ongoing investments to optimise our operations. The main additions underlying the US$207.1 increase were the construction of the Saucito project, acquisition of new equipment mainly at Minera Penmont, construction of the San Carlos shaft at Fresnillo, purchase of land, and the sinking of the shaft and expansion of milling capacity at Ciénega.

Fresnillo plc’s total equity was US$1,919.3 million as of 31 December 2010, a 47.3% increase when compared to the balance at 31 December 2009. The total number of issued shares remained at 717,160,159 and their corresponding rights and obligations are set in the Group’s Articles of Association.

The main factor increasing total equity was the higher profits achieved during the year. Equity attributable to minority shareholders rose from US$127.0 million to US$205.5 million as of 31 December 2010, reflecting the increased asset value attributable to the minority shareholders.

Dividends of US$191.1 million were paid in the year, from retained earnings generated in previous years. Fresnillo plc’s dividend policy takes into account the profitability of the business, underlying growth in earnings and the capital and cash flow requirements to support future production and expansions.

Dividend

In September 2010 an interim dividend of 9.2 US cents per Ordinary Share was declared and paid for a total of US$66.4 million. Based on the Group’s 2010 performance, the Directors have recommended a final dividend of 35.6 US cents per Ordinary Share, which will be paid on 20 May 2011 to shareholders on the register on 3 May 2011. The dividend will be paid in UK pounds sterling unless shareholders elect to be paid in US dollars. The Company´s dividend policy takes into account the profitability of the business and underlying growth in earnings of the Company, as well as its capital requirements and cashflows, whilst maintaining an appropriate level of dividend cover.

Responsibility Statement of the Directors

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

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

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

For and on behalf of the Board

Jaime Lomelín

Chief Executive Officer

28 February 2011

Forward looking statements

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

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

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

Consolidated Income Statement

(US$ thousands)

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet