Fresnillo plc today announced its financial results for the full year ended 31 December 2019. Octavio Alvídrez, CEO said:

“2019 was a more challenging year as expected, but we remain determined and optimistic for the future.

Production did not meet our expectations in 2019. Total silver production fell by 11.6% to 54.6 moz as a result of the expected lower ore grade at Saucito as well as lower than expected ore grades at Fresnillo and San Julián Veins and Disseminated Ore Body (DOB). Gold production of 875.9 koz was down compared to 2018 due to the expected lower production from Noche Buena and a lower ore grade at San Julián Veins.

This challenging operating environment was reflected in our financial performance, with gross profit and EBITDA decreasing by 40.9% and 26.3% respectively. Profit margins decreased accordingly but still remained at healthy levels. We maintained a solid financial position, with US$336.6 million in cash and other liquid funds^[1] as of 31 December 2019, notwithstanding paying dividends of US$142.2 million, investing US$559.3 million in capex and spending US$157.9 million on exploration to underpin future growth.

Our focus in 2020 is on maximising the potential of our existing operations. We are committed to working smarter and more efficiently in order to extract maximum value from our asset base. We have implemented a major performance improvement plan across our portfolio that includes intensive infill drilling to improve the certainty of the geological model, dilution control and raising development rates, together with actions to address contractor productivity and equipment availability.

We are investing in infrastructure, plant and machinery including the new Tunnel Boring Machine which is now being ramped up at Fresnillo – one of the first of its kind. We have also begun to define a new programme to control costs and increase productivity.

Though it will take time for these measures to take full effect, we do expect production to stabilise in 2020 and start increasing during 2021.

We continue to invest in our longer term development projects in line with our organic growth strategy. I was pleased to confirm Board approval for the Juanicipio project in early 2019. Juanicipio will be a core element in the Group’s future production of silver. Production at Fresnillo will also benefit from the new US$53.8m Pyrites Plant which is on track for completion in 2020.

The safety of our employees and contractors is our key priority so it is with deep sadness that I confirm two fatalities during the year. We remain determined to instil a safety first culture. The “I Care, We Care” has proven to be effective and has contributed to the reduction in our Lost Time Injury Frequency Rate.

We have made excellent progress with our other ESG commitments in the year. Effective and safe management of our tailings facilities has been a major focus after the tragic events in Brazil. Already in line with international standards, we have gone a step further by establishing our own Independent Tailings Review Panel and appointed third party specialists to perform dam safety inspections and review our tailing dam governance system.

As a major participant in the extractive industry, we have a responsibility to integrate renewables and clean technologies into our energy mix. Although the percentage of our energy consumption met by wind power decreased slightly in 2019, due to a significant increase in overall energy use, we remain committed to achieving our goal of using wind power to generate 75% of our electricity consumption by the end of the year. We are rolling out dual fuel engines in haulage trucks, initially at Herradura, which has also had a positive impact on greenhouse gas (GHG) emissions.

Looking ahead, we will continue to manage operational challenges, as we make progress with the performance improvement initiatives. As previously guided, we expect silver production to be in line with 2019, before returning to growth in 2021, driven by operational improvements at the Fresnillo mine, the Pyrites plant, Juanicipio and San Julián. Gold is expected to decline driven by the planned Noche Buena closure and lower production from Herradura. We also anticipate that fixed costs will remain relatively high during 2020, before the cost management initiatives have an impact.

While the broader macro economic environment remains uncertain, we are confident on the outlook for mining in Mexico, where we have welcomed the on-going support of the Mexican Government. We will continue to work hard to ensure that mining is supported by all parts of the federal and state administration.

We will rise to the immediate challenges confronting our business today, and we move forward with certainty and vigour. Our assets are of high quality and our exploration pipeline continues to confirm promising prospects. We have a clear strategy, a talented and committed team, and we look ahead with confidence.”

Twelve months to 31 December 2019

*      Fresnillo attributable production, plus ounces registered in production through the Silverstream Contract

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

***   The weighted average number of ordinary shares was 736,893,589 for 2019 and 2018. See note 17 in the consolidated financial statements.

2019 Highlights

Higher gold and silver prices offset by lower volumes and operational setbacks

·     Adjusted revenue of US$2,270.2 million, up 1.2% over 2018, due to higher gold and silver prices.

·     Profit margins decreased but remained at healthy levels. Gross profit and EBITDA down 40.9% and 26.3%, to US$461.7 million and US$674.0 million respectively.

·     Profit from continuing operations of US$171.7 million, down 66.1%.

·     Capex of US$559.3 million, down 16.4% primarily due to the commissioning of several projects including the pyrites plant at Saucito and the dynamic leaching plant at Herradura in 2018.

·     Strong balance sheet and low leverage ratio; cash and other liquid funds^[2] of US$336.6 million, down 40.0% mainly due to the high level of capex and dividends albeit being lower 16.4% and 52.3% respectively vs. 2018.

·     Dividends of US$142.2 million paid, down 52.3% mainly due to lower profits for the period, in accordance with our dividend policy.

Delivering on development projects and operational improvements

·     Full year silver production of 54.6 moz (including Silverstream) down 11.6% on 2018, driven by the lower ore grades at Saucito, Fresnillo and San Julián, both veins and disseminated ore body.

·     Gold production of 875.9 koz down 5.1% vs. 2018 mainly driven by the anticipated lower volume of ore processed at Noche Buena, exacerbated by lower ore grades at San Julián.

·     Board approval of Juanicipio early in 2019. Mine development at Juanicipio reached over 25 km, with ore from these activities set to be processed at the Fresnillo beneficiation plant from June 2020.

·     Construction of the Juanicipio beneficiation plant has been delayed by six months with commissioning now expected in mid 2021.

·     The Fresnillo Full Potential (FFP) project underway to address the structural challenges posed by deeper operations, narrower veins and greater ore variability at the Fresnillo and Saucito mines.

·     Construction of the new Pyrites Plant at Fresnillo on track for completion in 2H 2020. 

·     The second phase of the beneficiation plant optimisation at Fresnillo also continued to progress.

·     Successfully commissioned new US$22.7m state-of-the-art tunnel boring machine (TBM) at Fresnillo.

·     US$69.3m project to deepen the Jarillas shaft to 1,000 metres at Saucito progresses, with completion due in 2024.

·     Silver resources increased 2.4%; gold resources remained stable at 39.0 moz.

·     Silver reserves increased 1.7% reflecting the recognition of reserves at Juanicipio for the first time offset by the decrease in reserves at the underground silver mines.

·     Gold reserves decreased 16.0% mainly due to the exclusion of reserves at Soledad & Dipolos following the absence of an agreement with the Ejido community, and the exclusion of a number of benches at Herradura resulting from the negative infill drilling results and revised calculations.

·     We are committed to improving our safety record as we regret to report that two fatalities occurred during 2019.

·     We began work on defining a new programme to control costs and increased productivity in 2H19.

Outlook – stable 2020, return to silver growth in 2021

·     In 2020, Fresnillo expects to produce in the range of 51 to 56 moz of silver and 815 to 900 koz of gold.

·     The 2019 capex projects will continue in 2020 and will account for the majority of our investment in the year ahead, together with an increase in capex as the construction of Juanicipio progresses.  

Analyst Presentation

Fresnillo plc will be hosting a presentation for analysts and investors today at 09.00 (GMT) at Bank of America Merrill Lynch Financial Centre, 2 King Edward St., EC1A 1HQ, London, United Kingdom.

The presentation will also be available via a live webcast. A link to the webcast will be made available on Fresnillo’s homepage: www.fresnilloplc.com or can be accessed directly here  

If you are not attending the presentation in person, but wish to ask questions, you will need join the live conference call as questions cannot be submitted via the webcast function. 

Conference Call:

To access the conference call, please use the following details:

UK: 0808 109 0700

US: + 1 866 966 5335

Mexico: 00 1 866 966 8830

Int’l: +44 (0) 20 3003 2666

Password: Fresnillo

A recording of the conference call will be available for 7 days following the presentation. The access details for the replay are as follows:

Number: +44 (0) 20 8196 1998

Pin: 8829454#

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 six advanced exploration projects – Orisyvo, Centauro great potential and Centauro Deep, Guanajuato, Rodeo 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.

CHAIRMAN’S STATEMENT

Addressing our operational setbacks, reaffirming our commitment

In many respects, this has been a disappointing year. We have failed to achieve our expected production volumes and the improvement in our health and safety record has proved elusive. These matters are discussed below or elsewhere in this report.

Furthermore, it is important to reiterate that our commitment to delivering long-term benefits to all of our stakeholders remains undiminished. Indeed, this commitment was formalised during the year through the definition and approval of our Purpose, in line with the requirements of the new UK Corporate Governance Code, as we promised in last year’s annual report.

A challenging year for our operations

Unfortunately, our efforts to address a number of the key issues that have been holding back production did not deliver the anticipated outcomes, particularly in the first half of the year at our Fresnillo, San Julián and Herradura mines.

During the year we experienced unexpectedly low ore grades and production, delays to infrastructure projects, shortfalls in contractor performance, higher costs and ineffective maintenance, among other issues. In the face of these challenges, our response has been to increase the pace and scale of investments in a series of projects and take corrective actions to bring production back to acceptable levels in the short term, and to achieve steady growth in future years.

These projects include: the appointment of new teams at Fresnillo and Saucito; significant investment in development works at Fresnillo, specifically one of the first tunnel boring machines of its kind in the world as well as new equipment and technologies; the deepening of hoisting shafts at Fresnillo and Saucito to access deeper reserves; the expansion of the flotation plant at Fresnillo to treat higher lead and zinc grades, and the tailings treatment/pyrite flotation plant at Fresnillo. 

Production saw a gradual improvement in the second half of the year, largely due to these actions. In addition, the commissioning in Q3 2019 of a new leaching pad at Herradura is already leading to faster gold recovery.

I would also like to highlight that during 2019 the Board approved our next new mine, at Juanicipio. Construction has commenced and mine development already stands at over 25 kms of underground workings, and we expect the first production stope to be fully prepared by 3Q 2020. After careful analysis, we have made minor adjustments to the project. For example, construction of the beneficiation plant is now expected in mid 2021 and capex has been increased from US$395 million to US$440 million. However, material from development and initial production stopes will be processed at the Fresnillo beneficiation plant from June 2020. 2019 was the first year in which we have recognised reserves at Juanicipio, confirming our belief that this will be an exceptionally high grade mine with the potential to be the foundation for growth in future years.

Financial performance

The year saw production decrease due to a range of challenges. Fresnillo generated $2,270.2 million in adjusted revenue, up 1.2% due to higher precious metal prices. Net Profit decreased 41.2% year on year mainly due to higher costs, while cash and other liquid funds fell by $224.2 million to $336.6 million primarily due to capex investments in new projects.

Articulating our Purpose

Our Purpose is to contribute to the wellbeing of people, through the sustainable mining of silver and gold. 

Linking and strengthening our Vision and Values, our Purpose articulates our contribution to society at large and how we will continue to prosper over time – in financial terms and through the positive contribution we make to local communities and the lives of people in Mexico and beyond.

Mining can be a major force for good, but only when it is carried out sustainably and for the benefit of all. We aim to satisfy current demand for our precious metals, which are important investment assets as well as being essential to many industrial products such as medical equipment, solar panels and mobile phones, among others.

At the same time, we are continuing to develop increasingly sophisticated and sustainable mining practices that will create greater efficiency and healthier, safer work environments.

This twin-track approach will ensure our ongoing sustainability as a business, underpin our long-term ability to deliver growth and returns, continue to create employment and help us win recognition as a positive influence for all our stakeholders – local communities and shareholders, our workforce, customers and suppliers as well as governments.

How we are realising our Purpose

Our Purpose expresses our commitment to the wellbeing of all stakeholders; I will outline how we delivered benefits for our key stakeholder groups during the year:

Shareholders

Our operational performance inevitably led to adjustments in our production forecasts, a situation that I know has been frustrating for investors and analysts. While I share their concerns, I am confident that the measures now in place are already providing greater certainty and better results, and will continue to do so in the future.

Our dividend policy remains unchanged. We aim to pay out 33-50% of profit after tax each year, while making certain adjustments to exclude non-cash effects in the income statement. Dividends are paid in the approximate ratio of one-third as an interim dividend and two-thirds as a final dividend. Before declaring a dividend, the Board carries out a detailed analysis of the profitability of the business, underlying earnings, capital requirements and cash flow. Our aim is to maintain enough flexibility to be able to react to movements in precious metals prices and seize attractive business opportunities.

We declared an interim dividend of 2.6 US cents per share, with a final dividend of 11.9 US cents per share, bringing the total for the year to 14.5 US cents per share.

Employees and contractors

Our people are the bedrock of our business. We depend on their skills and hard work for each and every ounce of precious metal we recover from the earth – and we owe them the very highest standards of health and safety. This is an area that still requires more focus, cultural change and investment. We regret that two people lost their lives while working at our facilities during the year. Our thoughts and prayers are with the families and friends who lost loved ones.

Our response has been to step up the implementation of our I Care, We Care programme. This has already had an impact at the mines where it is in operation, and it will soon be part of everyday working practices across the Group.

In addition to high standards of health and safety, our people also deserve the best in training and development. During the year, we provided 120 hours of such support to individuals, helping them build their skills, improve their earnings and access all the advantages of long-term careers. In light of the ongoing skills shortages across our industry, we continued to forge strong relationships with leading universities and the top earth science institutions in Mexico. In addition, we have reviewed our recruitment processes to ensure that they maximise the potential of women. Our recruitment of interns and Engineers in Training demonstrate good progress regarding improved diversity, with the percentage of women in these roles increasing from 27.02% in 2018 to 34.84 % in 2019.

Working practices in the Group are characterised by a spirit of partnership and mutual respect, and this was instrumental in the agreement by our unionised employees at the Fresnillo mine to introduce Sunday working. Once fully implemented in 2020, this will give us an additional 52 days of ore extraction. I would like to reaffirm my appreciation for the hard work and expertise, which our teams bring to their work, at every mine and no matter whether they are employees or contractors.

Local communities

As well as providing much needed employment, our mines play important roles in the lives of local people and their families. We rely on local communities for labour and for the general goodwill that helps us maintain our licence to operate – and in return, we invest in a wide range of locally-based programmes. The ultimate aim is to support the creation of sustainable businesses that can prosper without relying exclusively on mining operations.

Consultation is a key element of our community partnerships, never more so than in the early days of a mining project. The Mexican administration has recently emphasised the vital role that consultation with indigenous people has in the permitting process for mines. We fully support this stance and believe that the experiences we have gained in recent years will stand us in good stead for the challenges ahead.

Children are a particular focus for our community activities, and during 2019, 8,700 children benefited from our long-established Picando Letras programme, which aims to encourage reading. We also continue to offer Health Weeks to local people, and in 2019 over 10,500 individuals benefited from high quality health advice and practical support that they would otherwise not have been able to access.

Environmental impact

As our Purpose makes clear, we are a business that aims to serve humanity for decades to come. While extractive industries can impact the availability of resources for future generations, we are committed to developing sustainable mining practices which enable us to contribute to the wellbeing of people while having minimum impact on the environment.

Our climate commitment increases energy efficiency and reduces greenhouse gas emissions. Our drive to increase the use of wind power and innovative dual fuel vehicles prepares the company for a transition to a low carbon future, while also cutting costs. These are concrete examples of how we are embedding sustainability in the DNA of our company.

Board activities

This has been a busy year for the Board. In addition to carrying out our regular activities, we have invested considerable time and expertise in understanding and responding to new regulatory requirements. The new UK Corporate Governance Code and the Companies Miscellaneous (Reporting) Regulations both came into effect on 1 January 2019.

I wish to emphasise here the Board’s focus on stakeholder engagement, and in particular workforce engagement, in line with the new Code. During the year the Board assigned the responsibility for overseeing our workforce engagement to Arturo Fernández. We also considered our approach and processes towards stakeholder input into decision-making processes, ensuring the Board’s continued compliance with Section 172.

As constituents of the FTSE Index, we have always adopted the highest standards of corporate governance and believe that the new and revised regulations will have a significant impact on the drive to restore public trust in business. Executive pay is an important element in trust, and I was pleased that 99% of votes cast at the AGM were in favour of our policy, endorsing our approach to executive remuneration.

Our aim is for our culture to foster the necessary mindset and behaviours to deliver on our commitment to the sustainable mining of silver and gold.  This culture must embrace ethics and safety, while also driving innovation and operational excellence to enhance productivity while reducing costs and our environmental footprint. During the year, the Board again provided master classes and online training modules for teams across the business, helping them to understand our Purpose, to engage with our culture and to live our Values of Responsibility, Integrity, Trust and Loyalty. The Board has committed to placing even greater focus on our culture in the year ahead.

Changes to the Board

Following Jaime Serra Puche’s resignation at the 2019 AGM, we were pleased to welcome Luis Robles to the Board, as an Independent Non-executive Director. A former Chairman of the largest bank in Mexico, BBVA Bancomer, Luis brings valuable experience and expertise to his role. During his career in the banking and financial sectors, he served on various national and international associations, including as Chairman of the Latin American Banking Federation from 2010 to 2012 as well as various roles in the Mexican Banking Association and as Chairman from 2014 to 2017. Luis is a member of both our Audit and Remuneration Committees.

The Board considers that its composition has the appropriate balance of skills, experience and gender to oversee the performance of the executive team and the development of long-term strategy.

Outlook

During the last six months of the year we saw a gradual upturn in production, as the projects and initiatives I have outlined began to feed through into results. I expect this trend to continue, with the year ahead being characterised by greater stability.  However, significant improvements will not be seen until 2021.

Despite the operational setbacks of 2019, I have confidence in the Group’s underlying strengths, in our strategy and teams, in our culture and behaviour, and in our ability to make valuable contributions to the wellbeing of all our stakeholders.

I would like to place on record my thanks to Board members for their support, and also to pay tribute to the senior management team, which has worked hard to address the year’s challenges.

Alberto Baillères

– Non-executive Chairman

CHIEF’S EXECUTIVE statement

Rising to challenges, moving forward with confidence

2019 was a year when several negative factors combined to drive down the performance of our mines and caused us to revise our guidance to the markets.

We fell short of the high mine planning and operational execution standards that we have come to expect from our teams, which contributed to lower ore grades and tonnages than anticipated. Delays to infrastructure projects, poor contractor performance, higher costs, new regulatory pressures in Mexico and low equipment availability were significant challenges faced during the year. None of these challenges is insurmountable in its own right – but what marks 2019 as an unusual year is that they coincided at several operations, indicating systemic failures that are now being addressed.

Having realised that we were going to miss our target for silver production, we revised our guidance in Q2 2019 and introduced extensive corrective measures. Inevitably, it is taking time for these measures to have the desired effect and our overall operating performance for this year has therefore been adversely impacted. We expect production to stabilise in 2020, with results improving during 2021.

In addition, although gold production was within the guidance provided at the Capital Markets Day in December, we failed to reach the revised target we had communicated in August, of 880-910 koz. This was primarily due to delays in the construction of the 13th leaching pad at Herradura. We had no alternative but to deposit ore at the top of existing pads, and this led to a slower recovery than initially forecast. Furthermore, the project to implement a Carbon-in-Column process at Noche Buena to increase gold recovery was delayed. While this was successfully concluded later in 2019, it contributed to further decrease gold production against expectation.

Production highlights and price review

In short, total silver production fell by 11.6% to 54.6 moz. At the Fresnillo mine, this was primarily due to decreasing vein width, increased dilution and greater ore variability, contractor underperformance and the need for additional infrastructure as we extend the mine to greater depths. Ore grade variability was also a factor in performance at Saucito and San Julián, together with narrower veins at Saucito.

Gold production of 875.9 koz was down more than expected compared to 2018 driven by the anticipated lower volume of ore processed at Noche Buena, further exacerbated by lower ore grades at San Julián.

There was a steady increase in gold and silver prices during the second half of the year, on the back of healthy demand and a slight reduction in supply. In 2019, average realised silver prices rose by 3.9% while those for gold increased by 11.7%. Average prices for zinc and lead decreased, by 9.3% and 10.5% respectively.

A time to pause, reflect and prepare

Despite the disappointments of 2019, it is important to stand back and take stock of how far we have come, and how the work we are doing today will bear fruit in the future. As we made clear in last year’s annual report, 2019 was an opportunity to consolidate our growth while advancing our pipeline. Following a decade where we consistently created value through growth and returns, these last 12 months have been a valuable time for us to pause, reflect and prepare ourselves in order to rise to the challenges we are facing.

How are we going to deliver a performance that will regain the confidence of our stakeholders? By remaining true to the strategy that has seen us established as the world’s largest silver producer and Mexico’s largest gold producer. This strategy has four pillars, and here I will outline our progress against each one.

Maximising the potential of existing operations

This is the key focus for 2020 and is central to our commitment to consolidate our achievements to date. We are committed to working smarter and more efficiently in order to extract maximum value from our asset base.

Our efforts during 2019 and for the coming year focus primarily on the Fresnillo district. The Fresnillo Full Potential (FFP) project is already helping us to address the structural challenges posed by deeper operations, narrower veins and greater ore variability at the Fresnillo and Saucito mines. At the same time, FFP addresses processing issues that include delayed development and preparation of mining areas, infrastructure, efficiency and productivity.

With regard to infrastructure improvements, we commissioned our new US$22.7m state-of-the-art tunnel boring machine (TBM) in December 2019, with ramp up in the first quarter of 2020. Designed specifically for the conditions at the Fresnillo mine and capable of boring at least 300 metres per month, this is one of the first TBMs of its kind. Further investments in infrastructure at Fresnillo include a new pumping station to improve drainage as well as a new elevator that will cut the travel time of our teams by up to an hour.

On the surface, we are making good progress on our US$30m plant optimisation project at the Fresnillo mine, which will help us manage the higher lead and zinc contents in the deeper areas of the mine. As planned, we have commenced the expansion of the flotation plant. On track for completion by mid 2020, this will complement the additional thickening capacity installed in 2017. Once the mine is developed and able to sustain a production rate of 9,000 tonnes per day, we will implement the third element in the plant optimisation project – the installation of additional vibrating screens, which will further increase the capacity of the plant.

At Saucito, we are continuing with our US$69.3m project to deepen the Jarillas shaft to 1,000 metres. Due for completion in 2024, this will enable us to efficiently hoist ore from the deeper levels of the mine where 42% of the reserves are located.

Technology sits at the heart of initiatives to improve our processes. For example, we are currently implementing semi-automatic operations of long hole drills, in order to increase productivity and equipment utilisation. A total of 15 long hole stopes are being prepared at Fresnillo, with ten of these set for completion by the end of Q2 2020. We also introduced a new communications system in 2019, to improve planning and control processes at the mine. This system provides management with real-time data on everything from manpower allocation to equipment availability – boosting productivity by making sure that we have the equipment and resources we need, when and where we need them.

In addition, we have increased our focus on maintenance in order to improve the availability and reliability of critical equipment.

We have also addressed the lack of reliability of our geological models by creating four specialised teams, each headed by senior operations and exploration specialists and supported by the executive team. These teams are tasked with: improving sampling and geological mapping; ensuring greater quality assurance and control, including at our laboratories; enhancing our geological and resource modelling processes; and implementing measures such as full 3D cavity monitoring technology to improve dilution control and improving the conciliation of reserve estimates and actual tonnages and grades.

Cost management is a key factor in maximising the potential of our existing operations. As Fresnillo has matured as a company, we have realised that our cost control processes have not always kept pace. We are therefore introducing new initiatives to ensure that the fundamentals of sound accounting and cost management remain in place and continue to work effectively. Any developments will take time to feed through into the financial numbers, but we have already made a good start and will continue to focus on this important area through 2020.

Delivering growth through development projects

Situated in the Fresnillo district approximately eight kilometres from the main Fresnillo shaft, the Juanicipio project will be a core element in the Group’s future production of silver.

The Board approved the development of Juanicipio early in 2019, and construction is now well underway with over 25 km of underground development already completed and processing of development ore currently expected to commence in mid 2020, ahead of schedule. A joint project with MAG Silver in which we hold 56%, the mine is forecast to produce 11.7 moz of silver and 43.5 koz of gold per year on average, with total indicated and inferred resources of 275.0 moz of silver and 1.48 moz of gold. With an initial mine life of 12 years and considerable potential at depth, Juanicipio’s reserves were recognised for the first time in 2019.

Production at the Fresnillo mine will benefit from the new Pyrites Plant. On track for completion in 2020, this 14,000 tonnes per day plant will increase the recovery of silver and gold from the current and historical tailings of Fresnillo. Once operating at full capacity, and including total production from the Saucito plant, it is estimated to produce an average of 3.5 moz of silver and 13 koz of gold every year.

Extending the growth pipeline

Our commitment to exploration across the peaks and troughs of economic cycles has remained consistent since our IPO 11 years ago – and while our current priority is to focus on our existing operations, exploration will continue to be the cornerstone of our longer-term strategy.

During 2019, our team of 100 experienced geologists again worked hard to explore new opportunities, both in the areas around our operations and to a lesser degree in new districts. In total, we invested some US$170m in these activities in 2019.

The results include the identification of a large number of targets in the Fresnillo district, as well as at San Julián, aimed at extending the life of our mines. These are areas where we already have a deep understanding of the geology, and are confident in our ability to exploit new opportunities both quickly and cost-effectively. The projects at Orisyvo and in the Ciénega district also continue to offer exciting potential. However, we have decided to slow the pace of these projects to prioritise current operations, while continuing to de-risk them so we can move them forward when the time is right.

During the year we continued to carry out further work in Peru and Chile, where we have a total of four projects showing good potential. In Peru we are concentrating our efforts on permits and drilling parametric holes, while in Chile our focus is on exploration options with well-established local partners.

As the audit of reserves and resources is a lengthy process, this year for operating mines we brought it forward to 31 May, compared to December in previous years. The earlier timing of the audit meant that costs considered in the estimation were taken from 2018, and not from the most recent 2019 cost base.

Silver resources stood at 2.3 boz, a 2.4% increase over 2018 mainly as a result of exploration at San Julián and, to a lesser extent, Guanajuato. Gold resources remained stable at 39.0 moz. Silver reserves rose slightly, by 1.7% to 484 moz as the recognition of reserves at Juanicipio for the first time was offset by decreases in all our underground silver mines. Gold reserves decreased 16.0%, due to the exclusion of reserves at Soledad-Dipolos and a decrease in reserves at Herradura.

All the Group’s reserves are in the probable category because of a lack of detailed mine plans, and geotechnical and financial models. A key focus for 2020 will be tackling these issues and converting resources into reserves.

Advancing and enhancing the sustainability of our operations

We will never compromise the safety of our employees or contractors.  Our priority is that everyone goes home to their families at the end of their shift.

Safety is a never-ending challenge for the mining industry, and it is with great sadness that I have to report that despite our best efforts, we had two fatalities during the year. Although this is an improvement on the previous year, it is unacceptable. We are striving to create a working environment that protects all our people from harm, at all times. For example, our I Care, We Care programme brings together industry best practices, systems and behaviours, and was one of primary reasons that the year saw a reduction in our Lost Time Injury Frequency Rate. Over the last 12 months, the programme has been rolled-out to all employees and contractors, focusing on engagement and accountability.

While our tailings storage facilities (TSFs) are considerably smaller than those of other mining companies, we nevertheless recognise their potential to cause human and environmental harm, as highlighted by the recent tragedy in Brazil. We have therefore taken significant steps to ensure the ongoing safety of these facilities. We have 11 TSFs, each one constructed in line with local geologic and seismic conditions. Although all dams comply with Mexican safety requirements, which are similar to standards set in the USA, Canada and Chile, we have taken the decision to go beyond such legislation. We have established our own Independent Tailings Review Panel and appointed independent specialists to perform dam safety inspections and also review and update our tailings dam governance system. We expect their findings to be finalised in 2020.

Although the percentage of our energy consumption met by wind power decreased slightly in 2019, due to a significant increase in overall energy use, we remain committed to achieving our long-term goal for wind power to generate 75% of our electricity consumption. We are also installing dual fuel engines in haulage trucks, initially at Herradura. The usage of Liquid Natural Gas has already led to a 5% fall in greenhouse gas emissions. Both these projects are excellent examples of how wise investment can benefit the environment while also cutting costs.

Our social and environmental performance has consistently been recognised by many organisations. In 2019, among other accolades, we were placed first in the prestigious Integridad Corporativa scheme, which ranked 500 large national and international companies operating in Mexico for their corporate integrity.

Looking ahead

The coming year will see us continue to manage challenges, as we make progress with the initiatives I have outlined in this statement. 

Production at our underground silver mines in 2020 is expected to remain at a broadly similar level to 2019, as the anticipated positive impact of the operating initiatives at the Fresnillo mine is likely to be partly offset by the lower ore grade we expect at Saucito.

Gold production is expected to decrease slightly mainly as a result of lower production at Herradura.

We also anticipate that fixed costs will remain relatively high during 2020. As a result, our financial performance could temporarily deteriorate next year in the face of these pressures before our cost management initiatives have an impact. An improvement in operational performance is expected to contribute to lowering the cost per tonne of ore milled as we continue to make significant investment in efficiency initiatives, while we remain committed to improved safety.

The broader environment is to a degree characterised by uncertainty. Trade disagreements, particularly between the US and China, together with ongoing political and economic issues elsewhere including Europe, could lead to headwinds for the mining industry. On the other hand, the greater uncertainty and risk of conflicts in several points of the world, as well as the coronavirus, could lead to higher precious metal prices. Furthermore, there appears to be support for our industry at the higher levels of the new Government in Mexico and we will continue to work hard to ensure that mining is supported by all parts of the federal and state administration.

But while we are striving to rise to the immediate challenges confronting our business today, we are nevertheless moving forward with certainty and vigour. Our assets are of high quality and our pipeline continues to confirm promising prospects. Buoyed by a clear strategy and supported by a talented and committed team, we look ahead with confidence.

Octavio Alvídrez
– Chief Executive Officer

Original Article: http://otp.investis.com/clients/uk/fresnillo2/rns/regulatory-story.aspx?cid=191&newsid=1376176