Fresnillo revenue decreased 10.0% year-on-year

Fresnillo plc (LON:FRES) has announced its financial results for the full year ended 31 December 2022.

Octavio Alvídrez, CEO said:

“Fresnillo delivered a resilient operating performance in 2022, with our people rising to meet a number of external challenges and deliver on our production guidance. Our financial results were impacted by industry pressures included volatile precious metal prices and higher cost inflation, while our workforce continued to feel the impact of the pandemic and caused delays to our development programme, and more specific to Mexico, the labour reform which limited the use of contractors requiring us to train new employees. Despite these, gold and silver production was in line with guidance and we have made solid progress on our strategy, both maximising the potential of our current mines, while also continuing to explore on our considerable growth pipeline. Our new Juanicipio mine is now being commissioned and we expect to achieve grid connection of the new pyrites plant phase II in the second quarter. We achieved much in 2022, and I would like to thank all my colleagues for their diligence. We are announcing a final dividend for 2022 of 13.3 US cents per share to shareholders, in line with our policy. Looking ahead, we are confident in our existing operations, and excited about our growth pipeline. We are the largest silver producer in the world, have high quality assets, a consistent strategy, a very strong balance sheet, a vibrant culture, talented personnel and an experienced management team. Fresnillo’s future is bright.”

Financial Highlights – 12 months to 31 December 2022

$ million unless stated20222021% change
Silver Production* (kOz)53,74053,0951.2
Gold Production* (Oz)635,926751,203(15.3)
Total Revenue2,433.02,703.1(10.0)
Adjusted Revenue**2,597.22,847.9(8.8)
Gross Profit536.0936.9(42.8)
Profit Before Income Tax248.6611.5(59.4)
Profit for the year308.3438.5(29.7)
Basic and Diluted EPS excluding post-tax Silverstream effects (USD)*** 0.3510.572(38.6)

*       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 2022 and 2021. See note 18 in the consolidated financial statements.

2022 Highlights

Resilient operating performance in line with guidance

·    Full year attributable silver production of 53.7 moz (including Silverstream), in line with guidance, slightly above FY21, with initial production from Juanicipio and increased volumes of ore processed at Fresnillo, offset by the lower ore grade at San Julián (DOB).

·    Full year attributable gold production of 635.9 koz, in line with guidance, down 15.3% vs. FY21, primarily due to a lower recovery rate as higher volumes of sulphide ore are processed and lower ore grade at Herradura, and a decrease in the volume of ore processed and lower ore grades at Noche Buena, Saucito and Ciénega.

·    Full year attributable by-product lead production decreased 6.4% vs. FY21 due to a decrease in the volume of ore processed and lower ore grade at Saucito and decreased ore grade at San Julián (DOB), mitigated by increased ore throughput and higher ore grade at Fresnillo and increased contribution from Juanicipio

Challenging operational and economic environment impacted financial results

·    Adjusted revenue decreased 8.8% over 2021 primarily due to the lower volumes of gold sold and the decrease in silver price, mitigated by the increase in silver production and higher zinc price.

·    Revenue decreased 10.0% year-on-year to US$2,433.0 million due to the lower adjusted revenue combined with higher treatment and refining charges.

·    Adjusted production costs to US$1,445.8 million, up 15.2% over 2021 mainly due to cost inflation in US dollar, costs from the start-up of operations at Juanicipio and increase in the use of infrastructure contractors, maintenance, operating materials and diesel; mitigated by lower stripping to cost at Herradura and a decrease in volume of ore processed at Saucito, Ciénega, San Julián (Veins).

·    Gross profit and EBITDA decreased to US$536.0 million and US$751.1 million, a 42.8% and 37.7% decrease over 2021.

·    Exploration spend of US$165.8 million, up 27.2% in line with our strategy to intensify exploration activities in specific targets.

·    Profit from continuing operations of US$283.6 million, down 57.5% as a result of lower gross profit and higher exploration expenses.

·    Profit for the year attributable to equity shareholders of the Group of US$271.9 million, down 35.4% on 2021 mainly due to the lower profit from continuing operations, mitigated by the US$18.8 million Silverstream revaluation gain compared to US$0.4 million loss registered in 2021 and tax income for the period of US$67.4 million, which compared favourably to the US$156.5 million tax expense in 2021 (See Financial Review section).

·    US$969.1 million in cash and other liquid funds1 as of 31 December 2022 notwithstanding paying dividends of US$202.0 million and investing US$592.1 million in capex.

·    Net debt was US$198.7 million as at 31 December 2022. This compares to the net cash position of US$67.5 million as at 31 December 2021.

·    Final dividend of 13.3 US cents per share, amounting to US$98.0 million. This is in addition to the interim dividend of 3.40 US cents per share amounting to US$25.1 million.

·    This brings the total dividend for the year to 16.7 US cents per share, in line with the Group’s dividend policy.

Maintaining focus on operational improvement and addressing challenges of the labour reform

·    Intensive recruitment and training campaigns were completed, albeit with some impacts to productivity and development during the year, and our mines are well staffed for 2023.

·    Invested in new equipment to replace what was provided by contractors prior to the labour reform.

·    Infrastructure projects continued to progress:

o  The new pumping station was commissioned at the beginning of the year at Fresnillo, enabling us to increase pumping capacity and ensuring access to development and production areas.

o  The works to deepen the San Carlos shaft were concluded. However, modifications to the shaft infrastructure to improve its functionality once in operation were approved and implemented, thus delaying its commissioning to 2Q23.

o  At Saucito, we continued with the project to deepen the Jarillas shaft to 1,000 metres with completion expected in 2025. This will reduce haulage costs by providing access to deeper levels of the mine where almost half of the reserves are located.

Delivering growth through development projects and advancing project pipeline

·    The tie in of the Juanicipio flotation plant to the national grid was concluded by end of 2022, with commissioning starting immediately afterwards.

·    Due to the prioritisation of the connection at Juanicipio, the tie in of the Pyrites plant at Fresnillo was delayed and start up is now expected in 2Q23.

·    Land access discussions continued at Rodeo and we are now in the process of developing a scoping study.

·    Several PFS level studies advanced as scheduled at Orisyvo, together with additional land acquisition and a strengthened community engagement plan. 6,000-metre drilling programme completed during the year and we are currently preparing the geotechnical model.

·    Expect to commence drilling at the Pilarica silver and the Supaypacha gold-copper projects in Peru, following delays caused by challenges with land access, and we anticipate posting resources at Capricornio in Chile during 2023.

·    Silver resources decreased 5.0% to 2,203.9 moz primarily due to mining depletion, higher costs and cut-off grades and a more conservative approach to resource estimation in Fresnillo, Saucito and Ciénega, balanced in part by positive exploration results at the Guanajuato exploration project. Silver reserves decreased 5.6% to 396.1 moz mainly from mining depletion and higher costs and cut-off grades at Fresnillo and Saucito, and depletion at San Julián (DOB), partly offset by increased reserves from exploration at San Julián veins.

·    Gold resources remained stable at 39.1 moz. Gold reserves increased 4.4% to 8.2 moz mostly as a result of resource model improvements at Herradura, balanced in part by mining depletion at Noche Buena.

Advancing and enhancing the sustainability of our operations

·    Our goal remains Zero Harm, supported by the ‘I Care, We Care’ programme that focuses on leadership, accountability, safety culture, high potential incident management, engineering systems and lessons learnt.

·    Core safety KPIs again saw a reduction in incidents, continuing our long-term trend.

·    Continued to implement best practice governance and engineering to manage our Tailings Storage Facilities (TSF). Reviews of our facilities by the Independent Tailings Review Panel have continued: TSF at Juanicipio became our first facility to fully meet Canadian Dam Association (CDA), Mining Association of Canada (MAC), International Commission on Large Dams (ICOLD) and International Council on Mining and Metals (ICMM) principles from the earliest days of its development, design and construction.

·    Initiated our Women for Women Mentorship Programme with a first generation of mentors and mentees to foster female talent.

·    Conducted thorough evaluations of technical and environmental factors in Noche Buena as part of its closure plan.

2023 outlook and longer term prospects

·    Attributable silver production expected to be in the range of 57.0 to 64.0 moz (including Silverstream).

·    Attributable gold production expected to be in the range of 590 to 640 koz.

·    Capital expenditure is anticipated to be approximately US$630 million as we continue to invest in mining works and sustaining capex, including replacing equipment from contractors, while exploration expenses are expected to be c. US$175 million.

·    Global macroeconomic and geopolitical factors likely to continue impacting our business:

o  Precious metals prices are expected to continue to be volatile and influenced by Government policies.

o  Inflationary pressures are expected to continue affecting our costs

·    We have undertaken a full scale appraisal of costs resulting in dozens of initiatives to reduce non-essential costs, including:

o  Optimisation of staffing plans, including rationalisation of contractor roles, to increase productivity and improve efficiency

o  An assessment in 2023 across all mines to confirm the optimal development rate

o  At Fresnillo:

– New pumping station commissioned which improves extraction efficiency

– Deepening of the San Carlos shaft leading to reduced haulage costs

o  At Saucito:

– Modifications to mine plan resulting in improved logistics within the mine

o  At Herradura:

– Optimisation of slopes leading to lower stripping and haulage costs

– Installation of duel fuel systems on trucks to reduce diesel consumption

– Modifications to mine plan resulting in improved logistics within the mine

·    Our proven ability to deliver development projects, the investments we are making into personnel and infrastructure, along with our extensive medium-term pipeline provide a base for considerable confidence in the long-term future of the business.

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