Fresnillo plc (LON:FRES) today announced its financial results for the full year ended 31 December 2018.
Octavio Alvídrez, CEO said:
“Since we listed on the London Stock Exchange in 2008, we have successfully built a track record of creating value through growth and returns. We have remained committed to our stated strategy, investing in our business, growing production and delivering returns to our shareholders in what has been a volatile time for the wider mining sector.
2018 was however a more challenging year for Fresnillo.
We achieved record annual silver production of 61.8 moz and a very strong gold performance of 923 koz in 2018. Gold production surpassed the expectations we had at the beginning of the year. Despite the year on year increase in silver production, we reported lower silver production than anticipated and were disappointed not to meet our long-term silver target of 65 moz. This was mainly due to lower than expected ore grades at the Fresnillo and Saucito mines combined with some operational issues.
We are taking action to address this, not least by intensifying our infill drilling programmes, controlling dilution and further investment in equipment and infrastructure. The flotation plant to process historical and ongoing tailings at the Fresnillo mine is progressing and is expected to improve overall recoveries once completed. We have also invested in innovative technology to improve productivity with a new state-of-the-art tunnelling machine due to be commissioned in 2019.
A more challenging operating environment was also reflected in the financial performance for the year, with gross profit and EBITDA decreasing by 15.6% and 13.7% respectively, though margins remained strong. This decrease in gross profit was driven by the higher stripping ratio at Herradura, as well as higher depreciation and increased cost inflation across the Group, amongst other factors. These adverse factors were mitigated by the reassessment of inventories at Herradura as well as the higher production at San Julián (Disseminated Ore Body) following its first full year in operation.
We maintained a solid financial position, with US$560.8 million in cash and other liquid funds notwithstanding paying dividends of US$298.1 million, investing US$668.7 million in capex and spending US$172.8 million in exploration. The Board has recommended a final dividend of US$16.7 cents per share, bringing the total paid for the year to US$201.9 million.
Core to our organic growth strategy is ensuring we deliver on the potential of our existing assets while expanding our development pipeline.
I fully expect to be able to make a further positive announcement on our Juanicipio development project in due course. This joint venture project is expected to further contribute to silver and gold production, delivering high returns for our business while generating additional employment in the area. With first production anticipated in the second half of 2020, Juanicipio reaffirms the world-class status of the Fresnillo district and underlines the extent of the resources that have already been discovered there, as well as those that await discovery in the future.
We have also progressed our other development projects. The first stage of the new Pyrites plant has now been commissioned. The plant will make an important contribution to production by extracting additional quantities of gold and silver from the historical and ongoing tailings at the Fresnillo and Saucito mines. We were also pleased to commission the second line at the Dynamic Leaching Plant (DLP) at Herradura during the year.
Another point of difference for Fresnillo is our commitment to maintaining a strong exploration pipeline. We continued to make good progress at Orisyvo and Guanajuato, while the project at Rodeo is showing positive signs. At the end of 2018, our silver resources stood at 2.2 boz, down by 5.0% over the previous year, with our exploration mining concessions amounting to 1.8 million hectares in Mexico. Our gold resources increased by 1.5% during the year to 39.1 moz. In 2018 we also progressed our international pipeline, with exploration prospects in Chile and Peru.
The safety of our employees and contractors is the absolute priority for the Board. So it is with deep regret I confirm five fatalities during the year and one more at the beginning of 2019. We must do better. The safety of our workforce is at the top of our HSECR agenda for 2019, and we will renew our efforts to align employees and contractors alike with our safety culture.
Looking ahead, I expect 2019 to be another challenging year. We face a number of headwinds, including lower prices for precious metals and higher inflation. I also expect to see higher depreciation costs as a result of the investments we have made in recent years into the operations, while we continue to expect to work through operational issues and lower grades at certain mines during the year. All this has resulted in us slightly lowering our silver production guidance for 2019.
Our strategic goals remain unchanged, and we are committed to maintaining our position as the world’s largest primary silver company and a leading gold producer in Mexico. Our model is proven, our people are skilled, experienced and dedicated, and a track record of creating value through growth and returns will continue to be our defining characteristic.”
2018 Highlights
Challenging operational environment impacted financial performance
· Adjusted revenue of US$2,243.4 million, 0.5% increase vs. 2017 primarily due to record silver, lead and zinc volumes sold offset by lower prices.
· Higher adjusted production costs, up 23.8%, mainly driven by the higher stripping ratio at Herradura, cost inflation and additional costs associated with higher volumes produced.
· Gross profit of US$780.7 million down 15.6% respectively mainly due to lower prices, higher adjusted production costs and increased depreciation. Healthy profit margin maintained (37.1%).
· Exploration spend of US$172.8 million, up 22.5%.
· Profit from continuing operations of US$506.7 million, down 28.6% as a result of lower gross profit and higher exploration and administrative expenses.
· Profit for the year of USD$350.0 million, down 37.6% on 2017 mainly due to the lower profit from continuing operations and the US$22.5 million Silverstream revaluation loss recognised in 2018, compared to the US$70.3 million gain in 2017.
· Cash generated by operations before changes in working capital decreased by 13.3% to US$930.7 million (2017: US$1,073.9 million).
· Capital expenditures of US$668.7 million, up 10.6% vs 2017 but below guidance, mainly due to the delay in the start of the construction of the Juanicipio project.
· Maintained financial flexibility, with year-end cash and other liquid funds[1] of US$560.8 million (2017: US$896.1 million).
· Basic and diluted EPS from continuing operations of US$0.475; adjusted EPS of US$0.461, down 37.6% and 29.4% respectively.
· 2018 final dividend of US$16.7 cents per share, equivalent to approximately US$123.1 million, recommended by the Board
Delivering on the potential of existing assets while expanding development pipeline
· Commissioned the leaching plant at Saucito in 2Q18, the first phase of this US$155 million Pyrites Plant project in the Fresnillo district.
· Construction of the US$110 million second line of the Dynamic Leaching Plant at Herradura completed in 2018, albeit minor delays due to a longer testing period.
· Juanicipio project continued to advance and Board approval is expected in due course.
· Gold resources increased 1.5% mainly due to positive results at Centauro Deep; silver resources down 5.0% as a result of lower ore grade and tonnage at Saucito. Gold reserves declined 6.0% due to depletion at Noche Buena, Herradura and San Julián, while silver reserves decreased 5.1% mainly due to San Julián (Veins) and Saucito.
· 2018 exploration budget of approximately US$140 million (including capitalised exploration expenses)
Board change
· In view of the demands of his recent appointment as Chairman of BBVA Bancomer, Mr Jaime Serra Puche resigned from the Board on 25th February 2019. The Nominations Committee has begun a search for a new independent non-executive director of the Company.
Outlook
· Silver production expected to be in the range of 58 to 61 moz including the Silverstream. Gold production expected to be in the range of 910-930 koz
· Capital expenditure is anticipated to be approximately US$710 million
