Fresnillo plc (LON: FRES) has today provided interim results for the six months to 30 June 2019.
Financial highlights (1H19/1H18 comparisons)
· Adjusted revenues[1] of US$1,069.0m, down 10.2%; 55% of this due to lower volumes and 45% due to lower prices
· Gross profit and EBITDA[2] of US$205.5m and US$307.9m, down 59.1% and 45.7%, respectively
· Profit for the period of US$70.9m, down 69.1%
· Basic and diluted EPS from continuing operations of US$9.5 cents per share, adjusted EPS of US$8.4 cents per share, down 69.4% and 74.8% respectively
· Cash generated from operations, before changes in working capital of US$316.1m, down 45.1%
· Strong balance sheet with cash and other liquid funds[3] as at 30 June 2019 of US$362.1m
· 2019 capex has been revised and reduced to US$655m
· Interim dividend of US$19.2m (2.6 US cents per share)
Operational highlights (1H19/1H18 comparisons)
As disclosed in the 2Q19 production report on 17 July 2019:
· Silver production of 27.6 moz (including Silverstream), down 10.4%, and gold production of 432 koz, down 7.1%
· Construction of Juanicipio remains on track to be concluded by the end of 2020.
· Construction of the pyrites plant (phase II) at Fresnillo continued to progress, with commissioning expected by the end of 2020.
· Optimisation of the Fresnillo flotation plant to cope with higher content of lead and zinc is progressing according to plan and is expected to be concluded by 2H20.
· A programme to control costs and further operational measures to increase productivity will be deployed in 2H19.
Highlights for 1H19
| US$ million unless stated | H1 19 | H1 18 | % change |
| Silver Production (koz) * | 27,557 | 30,764 | -10.4 |
| Gold Production (oz) | 432,417 | 465,299 | -7.1 |
| Total revenues | 1,002.0 | 1,115.0 | -10.1 |
| Adjusted revenues1 | 1,069.0 | 1,189.9 | -10.2 |
| Cost of Sales | 796.5 | 612.9 | 30.0 |
| Exploration expenses | 84.0 | 78 | 7.3 |
| EBITDA2 | 307.9 | 566.9 | -45.7 |
| Profit for the period | 70.9 | 229.3 | -69.1 |
| Cash generated by operations before changes in working capital | 316.1 | 575.9 | -45.1 |
| Basic and Diluted EPS (US$)3 | 0.095 | 0.311 | -69.4 |
| Dividend per ordinary share (US$) | 0.026 | 0.107 | -75.7 |
*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 costs and the effects of gold, lead and zinc 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 gross profit plus depreciation less administrative, selling and exploration expenses
3 The weighted average number of shares for H1 2019 and H1 2018 was 736.9m. See Note 8 in the Interim Consolidated Financial Statements.
Octavio Alvídrez, Chief Executive Officer of Fresnillo plc, said:
“As we previously disclosed in our second quarter production report, continued challenges at our Fresnillo, Saucito and Herradura mines, combined with higher costs, have impacted profitability for the period. Following the measures put in place, we have seen some short term improvement in mine performance at both Fresnillo and Saucito and we expect to see a gradual improvement in the following quarters, albeit not at the rate we had anticipated. We have therefore adjusted our full year production forecasts in the second quarter production report.
Performance of the business in the first half has not met our expectations. I am however encouraged that the steps we are taking, the targeted, albeit downsized compared to last year exploration programme and the progress on nearer term growth projects, give us greater confidence in the medium term outlook.
A key strength of Fresnillo is our ability to invest through the economic cycle. Our exploration programme continues to produce good results and we are working hard to convert resources into reserves. The Orisyvo and Centauro projects alone have the potential to be significant contributors to the future value of the group and yet are only a small proportion of our overall pipeline.
Meeting the challenge of improving our near term performance however is key. We are committed to working through these short term issues, returning the Fresnillo and Saucito mines to growth and increasing efficiencies, completing the Juanicipio construction on time and on budget and then delivering on the potential of our development pipeline.”
Commentary on the Group’s results
Operating results
First half silver production (including Silverstream) decreased 10.4% vs. 1H18 mainly as a result of the lower volumes of ore processed and lower ore grades at the Fresnillo and Saucito mines, the latter being expected. The lower ore grades at San Julián veins and San Julián Disseminated Ore Body (San Julián DOB) further impacted silver production during the period. However, this was mitigated by the higher silver grade at Ciénega and the contribution from the pyrites plant at Saucito (phase I), following its commissioning in mid 2018.
First half gold production decreased 7.1% vs. 1H18 mainly as a result of the lower volume of ore processed at Noche Buena, but in line with the mine plan, which reflects the gradual decrease in ore deposited towards the end of the mine life. The delay in the construction of the 13th leaching pad at Herradura caused a decrease in ore deposited and a lower overall speed of recovery as ore was deposited at higher levels of the current leaching pads, thus impacting gold production. Furthermore, lower gold ore grades at Ciénega, San Julián veins and Saucito negatively impacted gold production, mitigated by higher gold grade at Fresnillo and the contribution from the pyrites plant at Saucito (phase I).
First half by-product lead production remained at similar levels vs. 1H18 driven by higher ore grades at Saucito, and to a lesser extent, a higher recovery rate, ore grade and volume of ore processed at San Julian (DOB). These were partially offset by lower ore grade and volume of ore processed at Fresnillo.
First half by-product zinc production increased 3.3% vs. 1H18 due to higher grades and recovery rates at both Saucito and Ciénega, offset by a lower ore grade and rate of recovery at Fresnillo.
Fresnillo plc regrets to report two fatalities in 1H19. A thorough investigation of each incident was conducted, and measures were taken to address and prevent the root causes of these fatal injuries. The Group continues to implement the “I care, we care” programme and, despite improvements in Total Recordable and Lost Time Injury Frequency Rates in 1H19, there remain areas of required improvement in continuing to mature Fresnillo’s safety culture.
Financial results
Total revenues decreased 10.1% to US$1,069 million in 1H19 mainly due to the lower volumes of gold and silver sold and lower metal prices, except for gold.
In particular, the average realised silver price decreased 7.5% from US$16.5 per ounce in 1H8 to US$15.2 per ounce in 1H19, while lead and zinc prices decreased 20.8% and 13.1% respectively on 1H18. The average realised gold price remained flat at US$1,320.7 in 1H19.
Adjusted production costs[4] of US$566.4 million increased by 31.7% over 1H18. The US$136.5 million increase resulted mainly from: i) the expected higher stripping costs expensed at Herradura following the reassessment of the number of mining components from two to one; ii) the additional maintenance, operating materials and contractors associated with longer haulage distances, narrower veins, better equipment availability and the infill drilling programme; iii) an expected increase in development works; iv) the expected additional production costs associated with the start of operations at the Pyrites Plant at Saucito and the second line of the Dynamic Leaching Plant at Herradura; and v) anticipated cost inflation, which in the period was 4.2% (excluding the positive effect of the 0.6% devaluation of the Mexican peso against the US dollar) mainly related to higher unit prices of electricity and diesel, higher unit fees of contractors and increases in wages to personnel.
Additionally, depreciation increased 24.7% half on half primarily due to the increased asset base including the Pyrites Plant and the 2nd Dynamic Leaching plant, the tailings dam at San Julián, additional equipment at all the operations and the amortisation of new capitalised mining works and stripping.
The higher adjusted production costs and depreciation, together with the smaller positive effect of the changes in gold inventories at Herradura, resulted in an increase of 30.0% in cost of sales over 1H18.
The decrease in total revenues and the increase in cost of sales resulted in a 59.1% decrease in gross profit to US$205.5 million in 1H19.
Administrative expenses rose by 13.2% mainly due to an increase in the volume of services provided by Servicios Industriales Peñoles, S.A.B de C.V. in relation to new operations, primarily the Pyrites Plant and the 2nd Dynamic Leaching Plant, and approved development projects, and an increase in fees paid to advisors.
Exploration expenses rose 7.3% over 1H18 due to the intensive exploration programme undertaken in our operating mining districts to increase infill drilling, convert resources into reserves and direct mine development.
The decrease in gross profit, together with the higher administrative and exploration expenses resulted in a 45.7% decrease in EBITDA, with EBITDA margin reducing from 50.8% in 1H18 to 30.7% in 1H19.
During the period, there was a positive revaluation of the Silverstream contract of US$11.4 million primarily due to the decrease in the reference discount rate (LIBOR) and the favourable effect of the unwinding of the discount, partly offset by the decrease in silver resources at the Sabinas mine, updates to US dollar/Mexican peso exchange rate and inflation forecasts and a lower forward silver price of silver. This compared favourably to the US$21.8 million negative revaluation recognised in 1H18.
Net finance costs of US$27.8 million mainly reflected the interest recognised in the income statement in relation to the US$800 million debt facility raised in November 2013. An impact of US$15.7 million in interest and surcharges further increased net finance costs, which resulted from aligning the tax treatment of mining works across the Group’s underground mines to the agreement reached between SAT, Prodecon and Fresnillo plc in November 2018, as announced on 1 July 2019. This adversely compared against the US$15.1 million net finance costs in 1H18.
A US$5.1 million foreign exchange gain was recorded in 1H19, as a result of the realised transactions in the period and the marginal revaluation of the Mexican peso against the US dollar on the value of peso-denominated net monetary assets. This compared favourably against the US$11.8 million foreign exchange loss recognised in 1H18.
As a result of the adverse effects mentioned above, profit from continuing operations before income tax decreased 83.3% from US$323.0 million to US$54.1 million in 1H19.
Income tax for the period was -US$4.0 million (US$82.8 million expense in 1H18). The effective tax rate, excluding the special mining rights was -7.4% (25.6% in 1H18). The main factors that have reduced the tax rate in the period were usual adjustments to the tax bases of assets or liabilities for foreign exchange and inflation, the effect recorded in the period in respect of the voluntary amendment to the tax treatment for mining works for the years 2014 to 2018 and a tax credit related to the special tax on diesel. These factors, in combination with reduced profit before tax, resulted in the negative tax rate.
Furthermore, special mining rights for 1H19 were -US$12.9 million vs US$10.9 million in 1H18. The main reason for the negative mining rights was the effect that the voluntary amendment to the tax treatment for mining works had on the deferred mining rights.
Net profit for the period decreased 69.1% from US$229.3 million to US$70.9 million in 1H19.
Cash flow generated by operations, before changes in working capital, decreased by 45.1% to US$316.1 million.
Capital expenditure totalled US$248.4 million, a decrease of 29.5% compared to 1H18. Investments during the period included ongoing construction of the pyrites plant (phase II) at Fresnillo and Juanicipio, mine development at Fresnillo, Saucito and Ciénega and construction of leaching pads at the open pit mines.
Other uses of funds during the period were income tax, special mining rights and profit sharing paid of US$140.8 million (US$145.3 million in 1H18) and dividends paid of US$123.1 million (US$219.4 million in 1H18).
Cash and other liquid funds as at 30 June 2019 totalled US$362.1 million, a 48.9% decrease compared to the US$708.6 million in cash and other liquid assets at the end of June 2018 and a 35.4% decrease over the year-end total of US$560.8 million. Taking into account the cash and other liquid funds of US$362.1 million and the US$800.6 million amortised cost of the Senior Notes, Fresnillo plc’s net debt was US$438.5 million as at 30 June 2019. The Group had a net debt position of US$90.9 million as at 30 June 2018. Despite these movements, the Board considers the balance sheet to remain strong at 30 June 2019, with a net debt / last twelve months EBITDA ratio of 0.7x
Interim Dividend
The Board of Directors has declared an interim dividend of 2.6 US cents per share totaling US$19.2 million to be paid on 6 September 2018 to shareholders on the register on 9 August 2018. This decision was made after a comprehensive review of the Company’s and Group’s financial situation, as well as the Parent’s distributable earnings, ensuring that the Group is well placed to meet its current and future financial requirements, including its development and exploration projects.
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 applicable. It is expected that the 2019 interim dividend will be paid out of the remaining balance of the retained earnings generated before 2014.
Growth
Fresnillo plc maintains a disciplined approach to profitable growth by investing in a high quality pipeline of projects and prospects.
To that extent, during the first half of the year, the Company was pleased to announce the Board approval of the Juanicipio project (Fresnillo plc 56%, MAG Silver 44%) and construction of this new mine commenced immediately.
Construction of the tailings flotation plant at the Fresnillo mine (phase II of the Pyrites project) is on track, and is due to be commissioned in the second half of 2020.
Exploration continues to be a key pillar of our strategy and in 1H19 risk capital invested in exploration totalled US$91.3 million. The Group focused its exploration efforts in 13 areas, with interesting results obtained at Fresnillo, San Julián and San Juan extending known ore shoots and identifying new structures. Negotiations with communities to obtain access permits to drill continued advancing at several project areas in Peru and Chile.
Total risk capital expected to be invested in exploration for the full year 2019 has been increased to approximately US$160 million, while capital expenditure for the year has been reduced to US655 million to reflect the lower rate of capital deployment at our different mines and projects.
Reserves and resources estimates will be updated by the Company and subsequently audited by SRK at year end.
Outlook
Our consolidated production guidance was recently revised as stated in our production report dated 17th of July. Total gold production guidance was decreased around 3% to 880-910 thousand ounces (910-930 thousand ounces previously) mainly due to the delay in the construction of a leaching pad at Herradura and lower volumes of ore processed at the DLP. Total silver production guidance (including Silverstream) was reduced approximately 5% to 55-58 million ounces (previous guidance of 58-61 million ounces) mainly due to lower ore grades and ore throughput at the Fresnillo mine and, to a lesser extent, the lower ore grade at San Julián resulting from the changes to the sequencing of the mine plan.
We will continue prioritising cost reduction initiatives and focusing on increasing productivity.
We recognise that 2019 has been and will prove to be a challenging year but we remain confident that with the measures we continue to implement at our mines to address these challenges, together with our consistent, focused strategy, the Group will continue to create sustained value for stakeholders in the medium and long-term, balancing growth with returns and maintaining a solid financial position.
