Octavio Alvídrez, Chief Executive Officer, commented:

Our commitment to our purpose, to contribute to the wellbeing of people through the sustainable mining of silver and gold, drives our decisions as we navigate the on-going impact of the pandemic. The safety of our people, their families and our communities is our priority. We continue to engage extensively with our stakeholders to ensure we are playing our part as a large employer and long-standing community supporter, to contribute to the overall efforts to manage these challenges. Our connection to our local communities has only strengthened in the last 18 months, and the support we have offered including investment in local healthcare, employment and education programmes, has continued to increase.

“I am pleased to report a strong financial result in the first half. The combination of improved production performance and higher precious metals prices has seen a sharp increase in profitability during the period. This in turn, has enabled us to declare a dividend of US$73.0 million to shareholders, while continuing to invest in both our development and exploration projects.  The Juanicipio mine remains on track, with commissioning of the processing plant expected by the end of the year, and we are making strong progress with our intensified exploration activities to convert resources into reserves.

“With a proven strategy, high quality assets, talented personnel, a very strong balance sheet and considerable development pipeline, we are well placed to continue generating value for all our stakeholders long into the future.”

First half highlights

Financial highlights (1H21/1H20 comparisons)

• Adjusted Revenues^[1] of US$1,543.1m, up 37.1%; 75.8% of this due to higher metal prices and 24.2% due to increased volumes.
• Gross profit and EBITDA^[2] of US$606.8m and US$747.0m, up 88.9% and 59.0%, respectively.
• Operating profit and profit before income tax of US$471.9m and US$445.4m, up 117.6% and 248.3%, respectively.
• Profit for the period of US$308.4m, up 445.8%.
• Basic and diluted EPS from continuing operations of US$41.0 cents per share, up 365.9%.
• Adjusted EPS^[3] of US$41.4 cents per share, up 250.8%.
• Cash generated from operations, before changes in working capital, of US$750.4m, up 64.5%.
• Free cash flow^[4] of US$305.1m in 1H21 (US$265.7m in 1H20).
• Strong balance sheet with cash and other liquid funds^[5] as at 30 June 2021 of US$1,202.9m (31 December 2020: $1,070.4m); net debt/EBITDA of -0.02x^[6] (31 December 2020: 0.08x).
• Interim dividend of 9.90 US cents per share, totalling US$73.0m (1H20: 16.9m).

Operational highlights (1H21/1H20 comparisons)
As disclosed in the 2Q21 production report on 28 July 2021:

• First half attributable silver production of 27.5 moz (including Silverstream), up 2.7% vs. 1H20.
• First half attributable gold production of 428.4 koz, up 12.3% vs. 1H20.
• Continued progress was achieved on the construction of the Juanicipio processing plant, with the assembly of flotation cells and filters concluded during the quarter. Commissioning of the plant in 4Q21 remains on track and on budget.
• As previously reported, the connection of the new circuit to the Fresnillo flotation plant was completed in 1Q21, and the programming of the control loop system was concluded in 2Q21.
• Ongoing focus on costs control and productivity.

Covid-19 update

We continue to prioritise the safety and welfare of our people and our local communities. Our teams have adapted very well and we have been able to contain the impact of the virus, though we remain vigilant around the continued evolution of the pandemic and its potential effect on our operations. Our various community health programmes are on-going, as are the safety measures we put in place last year.

Highlights for 1H21

* Silver production includes volumes realised under the Silverstream contract
¹ Adjusted revenues are the revenues shown in the income statement adjusted to add back treatment and refining charges and the effects of metals prices hedging. The Company considers this is a useful additional measure to help understand underlying factors driving revenue in terms of volumes sold and realised prices
² Earnings before interest, taxes, depreciation and amortisation (EBITDA) is calculated as profit for the year from continuing operations before income tax, less finance income, plus finance costs, less foreign exchange gain/(loss), less revaluation effects of the Silverstream contract and other operating income plus other operating expenses and depreciation.
³ The weighted average number of shares for H1 2021 and H1 2020 was 736.9m. See Note 8 in the Interim Consolidated Financial Statements.

Commentary on the Group’s results

Operating results

First half attributable silver production of 27.5 moz (including Silverstream), up 2.7% vs. 1H20 mainly due to a higher ore grade at San Julián Disseminated Ore Body (DOB) and, to a lesser extent, the contribution of development ore from Juanicipio, partially offset by a lower ore grade and volume of ore processed at Saucito.

First half attributable gold production of 428.4 koz, up 12.3% vs. 1H20 primarily due to the higher volume of ore processed at Herradura and, to a lesser extent, a higher ore grade at Saucito. This was partially offset by a lower speed of recovery at Herradura and Noche Buena.  

First half attributable by-product lead and zinc production increased 5.5% and 8.5% vs. 1H20 respectively primarily due to higher ore grades at both Saucito and San Julián DOB, partially offset by lower ore grades at both Fresnillo and Ciénega.

We are completing the roll-out of the ‘I Care, We Care’ programme across all our operations, which has provided an excellent focus for us all in the Group to ensure safety remains our key focus.

Financial results

Total revenues increased 39.1% to US$1,466.8 million in 1H21, due mainly to the increase in metal prices and, to a lesser extent, higher volumes of all metals sold.

The average realised silver price increased 57.3% from US$16.8 per ounce in 1H20 to US$26.4 per ounce in 1H21, while the average realised gold price rose 6.7%, from US$1,676.8 per ounce in 1H20 to US$1,789.2 per ounce in 1H21. Further, the average realised lead and zinc by-product prices increased 22.9% and 43.8% against their corresponding periods, to US$0.96 and US$1.31 per pound, respectively.

Adjusted production costs^[7] increased by 20.6% to US$611.1 million in 1H21. The US$104.5 million increase resulted mainly from: i) a higher volume of ore processed at Herradura following Covid-19 operational restrictions in 1H20 (US$52.8 million); ii) increased development and infrastructure works at our underground mines (US$24.9 million); iii) cost inflation, excluding the Mexican peso vs. US dollar revaluation effect (US$21.3 million); iv) the adverse effect of the revaluation of the Mexican peso vs. US dollar (US$19.5 million)^[8] and; v) costs from the start-up of operations at Juanicipio (US$4.3 million). These adverse impacts were mitigated by a decreased volume of ore processed at Saucito, San Julián (Veins and DOB) and Fresnillo (-US$14.3 million) and others (-US$3.9 million).

Additionally, the variation in the change in work in progress had a negative effect of US$12.5 million versus 1H20. This resulted mainly from recognising a smaller favourable effect from the reassessment of recoverable gold inventories at the leaching pads in 1H21 compared to the one recorded in 1H20.

Depreciation rose 5.4% compared with 1H20, mainly due to increased amortisation of capitalised mining works and increased depletion factors at Fresnillo and San Julián, in addition to the higher depreciation at Herradura and Noche Buena as some equipment was not in use during the period when preventive measures related to Covid-19 were in place in 1H20.

The higher adjusted production costs, adverse effect of the variation in change in work in progress at Herradura and the increase in depreciation resulted in a 17.3% increase in cost of sales compared with 1H20.

The increase in total revenues more than offset the increase in cost of sales, resulting in an 82.1% increase in gross profit to US$584.9 million in 1H21.

Administrative and corporate expenses increased 22.5% from US$41.8 million in 1H20 to US$51.2 million in 1H21, mainly due to an increase in fees paid to advisors, the increase in non-recurring corporate services provided by Servicios Industriales Peñoles S.A.B. de C.V. and the adverse effect of the revaluation of the Mexican peso vs. the US dollar. 

Exploration expenses increased 20.0% over 1H20 due to the higher budget allocated and our intensified exploration activities aimed at converting resources into reserves and direct mine development at our operations.

Driven by an increase in gross profit, EBITDA increased by 59.0%, with EBITDA margin increasing from 44.6% in 1H20 to 50.9% in 1H21. Similarly, profit from continuing operations increased from US$216.9 million in 1H20 to US$471.9 million in 1H21, an increase of 117.6%.

During the period, there was a net negative Silverstream effect  of US$4.0 million (US$21.1 million amortisation profit and US$25.1 million revaluation loss), primarily due to the increase in the LIBOR reference rate; and a decrease in the production plan due to a silver resources update; partly compensated by inflation and exchange rate forecasts and a slight increase in the forward silver price curve.

Net finance costs of US$25.4 million compared unfavourably to the US$16.2 million recorded in 1H20. Financial expenses in 1H21 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. In 1H20, financial expenses mainly reflected the interest paid on the US$800 million Senior Notes due 2023.

We recorded a foreign exchange gain of US$2.9 million in the income statement. This was as a result of the 0.73% revaluation of the Mexican peso against the US dollar over the period. This compared favourably to the US$41.0 million loss in 1H20.

As a result of the increase in profit from continuing operations, partly offset by the adverse effects mentioned above, profit from continuing operations before income tax increased 248.3% from US$127.9 million in 1H20 to US$445.4 million in 1H21.

Income tax for the period was US$111.1 million (US$62.0 million in 1H20). The effective tax rate, excluding the special mining rights, was 24.9%, which was below the 30% statutory tax rate. The reason for the lower effective tax rate was the significant permanent differences between the tax and the accounting treatment related mainly to: i) the revaluation of the Mexican peso, which had a significant impact on the tax value of assets and liabilities that are denominated in Mexican pesos; ii) the inflation rate (Mexican Consumer Price Index), which impacted the inflationary uplift of the tax base for assets and liabilities; and iii) the benefit from the lower border zone tax which applied to Herradura and Noche Buena operations.  

Net profit for the period increased 445.8% from US$56.5 million to US$308.4 million in 1H21.

Cash flow generated by operations, before changes in working capital, increased by 64.5% to US$750.4 million.

Capital expenditure totalled US$256.8 million, an increase of 41.1% compared to 1H20, reflecting a faster rate of deploying capital following the disruption caused by Covid-19. Investments during the period included construction of Juanicipio, mine development, purchase of in-mine equipment, construction of a leaching pad at Herradura and the deepening of the San Carlos and Jarillas shafts.

Other uses of funds during the period were income tax, special mining rights and profit sharing paid of US$253.5 million (US$71.0 million in 1H20) and dividends paid of US$172.6 million (US$87.7 million in 1H20).

Cash and other liquid funds as at 30 June 2021 totalled US$1,202.9 million, a 133.7% increase compared to the US$514.7 million in cash and other liquid assets at the end of June 2020 and a 12.4% increase over the year-end total of US$1,070.4 million. Taking into account the cash and other liquid funds of US$1,202.9 million and the US$1,167.8 million outstanding Senior Notes, Fresnillo plc’s net debt was -US$35.1 million as at 30 June 2021, compared with a net debt position of US$97.4 million for the corresponding period in the previous year. Considering these variations, the balance sheet at 30 June 2021 remains strong, with a net debt / EBITDA ratio of -0.02x^[9].

Interim Dividend

The Board of Directors has declared an interim dividend of 9.90 US cents per share totalling US$73.0 million to be paid on 15 September 2021 to shareholders on the register on 13 August 2021. This decision was made after a comprehensive review of the Company’s and Group’s financial situation, as well as the Company’s distributable earnings, ensuring 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% relating to the payment of dividends, including to foreign nationals.

Historically the Company has been making dividend payments out of retained earnings generated before the tax reform came into force and no withholding tax has therefore been applied. Dividend payments relating to 2021 and future years will attract the withholding obligation. However, foreign shareholders may be able to recover such tax depending on their tax residence and the existence of double taxation agreements.

Growth

We made good progress on our development projects in 1H21. Despite the adversity caused by the pandemic, we continue to advance our key project, Juanicipio. Progress was achieved on the construction of the beneficiation plant with commissioning expected in 4Q21.

Mine development fell behind over the last three months but, with a new contractor in place, is now advancing as planned. We continue to process development ore through the Fresnillo beneficiation plant. Juanicipio will be a major factor in the Group’s future silver production.

The new Pyrites Plant at the Fresnillo mine was completed on schedule early in 4Q20 – the start of operations was deferred mainly due to a delay in final inspections by the authorities at the Mexican state-owned electricity utility Comisión Federal de Electricidad (CFE)  as a result of Covid-19 restrictions on travel and other regulatory delays. We continue to anticipate that this inspection will take place in the third quarter of 2021. However, the timing of both, this and the future inspection required to connect the Juanicipio plant, is out of our control.

The connection of the new flotation circuit to the Fresnillo flotation plant, which required a few days’ stoppage of the existing beneficiation plant, was completed in 1Q21, and the programming of the control loop system was concluded in 2Q21.

Outlook

We remain on track to meet our 2021 full year guidance of 53.5 to 59.5 moz of silver (including Silverstream) and 675 to 725 koz of gold. We are assessing any potential impact that might result from the implementation of the new law restricting the ability to subcontract labour in Mexico. However, these new measures are not expected to materially impact second half production.

Exploration expenses are expected to remain within the range of US$175-US$180 million, of which approximately US$15 million is anticipated to be capitalised.

The Group has reduced its estimated capex from US$680 million to approximately US$580 million to reflect the lower rate of capital deployment at our different mines and projects.

Analyst Presentation

Management will host a webcast for analysts and investors today at 3pm UK / 9am Mexico. Registration and access will be provided on the homepage of Fresnillo’s website and directly via this link:
https://kvgo.com/IJLO/Fresnillo_HY_2021_Interim_Results

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

UK: +44 (0) 33 0551 0200
US: +1 212 999 6659
MX: 00 1 866 966 8830
Password: Quote Fresnillo when prompted by the operator

Questions may be submitted via the conference dial-in.

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

ABOUT FRESNILLO PLC

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

Fresnillo plc has seven operating mines, all of them in Mexico – Fresnillo, Saucito, Ciénega (including the San Ramón satellite mine, Las Casas Rosario & Cluster Cebollitas), Herradura, Soledad-Dipolos¹, Noche Buena and San Julián (Veins and Disseminated Ore Body), three development projects – the Pyrites Plant at Fresnillo, the optimisation of the beneficiation plant also at Fresnillo and Juanicipio, and three advanced exploration projects – Rodeo, Orisyvo and Guanajuato, as well as a number of other long term exploration prospects.

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

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

Fresnillo plc’s goal is to maintain the Group’s position as the world’s largest primary silver company and Mexico’s largest gold producer.

¹ Operations at Soledad-Dipolos are currently suspended.

FORWARD LOOKING STATEMENTS

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

Original Article: http://otp.investis.com/clients/uk/fresnillo2/rns/regulatory-story.aspx?cid=191&newsid=1496658