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Fresnillo 2019 more challenging year which impacted financial performance

Fresnillo plc (LON:FRES) will hold its Annual General Meeting today and the following Company update will be made.

“We are living in difficult and challenging times, with the spread of COVID-19 globally, and the resulting unprecedented social and economic impact. Our thoughts are with those who have been affected by this virus, in particular the friends, families and colleagues of those who have sadly passed away as a result.

We regret we are unable to host our typical annual general meeting (AGM) this year and meet our shareholders face-to-face, but in observance of the UK Government’s introduction of social distancing rules, this has made it impossible for shareholders to attend in person. The Board would like to thank shareholders for their understanding and support at this time – their health and safety must come first.

Our response to the COVID-19 crisis has been the key focus for the past three months, so while my statement would normally focus on a review of the previous year’s activities, I would also like to provide an update on our COVID-19 response.

Our priority is the well-being of our workforce and the communities in which we operate. We closely monitored the spread of the outbreak and implemented a range of safety measures across our business, following guidelines in accordance with the World Health Organisation and Mexican authorities. This included stringent monitoring & hygiene, temperature screening, social distancing, and greater working from home for all office-based colleagues, as well as supporting education campaigns across our local communities.

I was hugely impressed with the rigour with which our teams embraced this new way of working. They adapted quickly and with diligence. Up to this point, we have had no officially confirmed COVID-19 cases originating from inside our operations. Where we have identified any suspected cases, those individuals have been immediately isolated and monitored. Three colleagues were officially diagnosed from exposure outside our premises and I am pleased to say they are making a speedy recovery.

In light of the challenges we face as a country, and in solidarity with the millions of workers in Mexico whose livelihoods have been threatened by the outbreak, I can confirm the Board and senior management are taking voluntary and temporary pay cuts while we get through this unprecedented situation.

Fresnillo’s operations are critical to the economies in which we operate and central to the fabric of the local community. We take this role extremely seriously and the well-being of our teams will always come first. In particular, we are very sensitive to the threat to mental health that COVID-19 presents.  We have invested significantly in mental health support for our people and their families. We have also become a distributor of medical supplies, donated ventilators to local hospitals and facilitated land to support the extension of a hospital in the city of Fresnillo. We have done all we can to support the Government’s efforts to prevent the spread of the virus and look after the sick including supporting local food pantries.

Being a responsible operator is central to our ethos and the way we do business. Our purpose is “to contribute to the wellbeing of people, through the sustainable mining of silver and gold”. Our actions during this COVID-19 crisis illustrate that.

We believe the mining industry plays a vital role in the Mexican economy, supporting thousands of jobs, generating considerable tax revenues and supporting local communities. We remained in constant dialogue with the Mexican Government and I am pleased to say mining is now confirmed as an essential activity in Mexico. Our operations are in the process of adapting to this “new normal”.

Regarding our ongoing operations, attention to safety is our priority. We have made strides in 2019 with the implementation of our “I Care, We Care” programme, and I expect this effort to continue into the future. However, 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 2019. Our thoughts and prayers are with the families and friends who lost loved ones. These tragedies show we must continue to prioritise safety over everything else.

Strong environmental stewardship is a crucial element of sustainable mining and helps us to retain our social licence to operate.  One fact of which I am very proud is our approach to energy consumption and emissions. We are making progress in terms of sourcing our electricity from renewable means, with 56% of our electricity coming from wind energy and the Company looking set to hit our 75% target by the end of this year. This fact is also financially compelling, as it provides us with greater stability in terms of pricing for this cost.

Operationally, 2019 was a more challenging year, as expected. Both silver and gold production fell from 2018 levels, and this was mainly due to lower than anticipated grades in our key mines. This also impacted our financial performance. Though revenue was up in 2019 thanks to higher gold and silver prices, profits were down due to higher costs caused by our operational challenges. Our dividend policy has remained unchanged and 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.

In the face of these operational 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.

We were pleased to host a Capital Markets Day in London in December 2019 where we gave a detailed presentation on the actions we are taking to address the underperformance at our mines. We have implemented a range of measures, including an intensive infill drilling programme to improve the certainty of the geological model, dilution control and raising development rates, as well as actions to address contractor productivity and equipment availability.

We are investing in infrastructure, plant and machinery including a state-of-the-art 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. Those measures will not result in an immediate turnaround. But I am confident that we are making good progress, and we should really start to see these measures take effect in the second half of this year and beyond.

Our development pipeline is a constant and vital part of our strategy to drive long term sustainable value for our shareholders. I am pleased to report in 2019 we made good progress. The Pyrites Plant project in the Fresnillo district is on track for completion in the second half, as is the second phase of the beneficiation plant optimisation project at Fresnillo.

Our next flagship project is the Juanicipio mine which we are developing in partnership with MAG Silver. In February this year we announced a change to the delivery of the project. In mid-2020, the underground mine will start to process 16,000 tonnes a month of development ore through the Fresnillo beneficiation plant, with no impact to the Fresnillo mine. This will contribute to realising commercial and operational opportunities for the joint venture, including improving cash flow metrics and de-risking the metallurgical process. The construction of the Juanicipio beneficiation plant was extended by six months and is now expected to be commissioned mid-2021. We remain very excited about this mine´s potential.

2019 was another busy year for the Board. We have invested considerable time and expertise in understanding and responding to new regulatory requirements including the 2018 UK Corporate Governance Code and the Companies Miscellaneous (Reporting) Regulations which came into effect on 1 January 2019. We are also very focused on stakeholder engagement, in particular workforce engagement, in line with the new Corporate Governance Code. During the year, the Board assigned the responsibility for overseeing our workforce engagement to Arturo Fernández, Chairman of the Health, Safety, Environment and Community Relations Committee and I would like to thank him for the advances he has already made. Looking ahead, the Board has also committed to placing even greater focus on our culture. The 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, reduce costs and decrease our environmental footprint.

Following Jaime Serra Puche’s resignation in February 2019, we were pleased to welcome Luis Robles to the Board, as an Independent Non-executive Director. A former chairman of Mexico’s largest bank, BBVA Bancomer, Luis brings valuable experience and expertise to his role and he has already made a meaningful contribution as a member of both our Audit and Remuneration Committees.

In February 2020, the Board approved a recommendation by the Nominations Committee that Ms. Georgina Kessel be appointed as a member of the Health, Safety, Environment and Community Relations Committee, following Mr. Jaime Lomelín’s retirement.

The Nominations Committee also recommended Ms. Myriam Guadalupe de la Vega be proposed for election as an independent non-executive director of the Company at today’s meeting with her appointment to take effect immediately after the conclusion of the AGM. Ms. de la Vega serves on the board of Citibanamex and is Vice-president of COPARMEX (the National Mexican Employers Confederation), amongst other positions.

Improving diversity, in particular the representation of women in the workforce, remains a key focus for the Board. In 2019 we collaborated with leading educational institutions in Mexico to encourage more women to participate in the mining sector. We successfully increased the recruitment of women into our internships and Engineers in Training programmes from 27% in 2018 to 35% in 2019. We also conducted a broad survey to understand and identify how we can further enhance diversity. With these results, the Board and management have identified several initiatives to roll out throughout 2020 and 2021. These include workshops to raise awareness on inclusiveness and unconscious bias, changes to established recruitment practices, leadership development, mentoring and sponsorship programmes for women.  We will also begin more detailed monitoring of our progress, with improved diversity data collection and analytics.

In closing, I would like to re-emphasise the Board’s determination to oversee an improved operational performance after a challenging period for the Company. 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. The full impact of COVID-19 on the global economy is still not clear, though consensus is for a steep fall in GDP. It is therefore too early to determine exactly what impact this will have on Fresnillo operationally or financially, so we are planning cautiously.

Despite these challenges, 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 appreciation to the Fresnillo Board members for their support, and also to pay tribute to the senior management team and all our colleagues, who have worked so hard to address this year’s challenges.

Thank you.

Mr Alberto Baillères

Chairman of the Board

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