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REPORT FROM THE CHIEF EXECUTIVE
OFFICER:
THIRD QUARTER 2003 |
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(Figures
in millions of constant pesos)
* The results for the third quarter confirm a clear
uptrend in the last four quarters.
* The price of gold averaged US$363.24 per ounce in the quarter,
+15.6% higher than in the third quarter of 2002; silver averaged
US$5.03 rising +7.5%, lead US$0.2317 per pound, +18.8%, and
zinc US$0.3725 per pound.
* Production costs for the mining division were reduced sharply.
* EBITDA for the quarter was +30.9% higher, and operating
income rose +738.5% compared to the second quarter of this
year.
1.- OVERVIEW
In the third quarter of 2003, Industrias
Peñoles reported sales of Ps3,074.6 (not including
results from metals and exchange-rate hedging) which rose
12.5% over the same quarter of 2002. In dollar terms, this
is equivalent to US$285.8 million. Comparing the results for
the current quarter against those of the second quarter of
this year, the numbers are substantially better, as follows:
Sales were up +5.2%, Gross Earnings +13.9%, EBITDA +30.9%
and Operating Income +738.5%. This results confirm a clear
uptrend in results since the fourth quarter of 2002, a trend
that we believe will continue in coming quarters, given the
general economic climate.
In the current period (July - September),
counting the results of metals and foreign-exchange hedging
activity (an expense of Ps36.2 in the quarter, compared to
gains of Ps111.0 in the third quarter of 2002), Gross Earnings
of Ps692.8, EBITDA de Ps363.5 and Operating Income of Ps113.2
declined -2.7%, -10.2% and -15.7%, respectively. These operating
results were influenced not only by hedging results, but also
by a sharp rise in the cost of fuel and a reduction in the
treatment cost of concentrates due to a worldwide shortage
and heavy demand from China, as well as a number of operating
problems at our mines and metallurgical plants, which lowered
production volume. They were also affected by the shutdown
of the las Torres mining unit in the State of Guanajuato,
after 27 years of profitable operations, due to depletion
of its reserves.
The quarterly net result was a loss of -Ps10.72,
compared to a profit of +Ps25.3 in the same quarter of last
year, also affected by a total financing cost of Ps213.6,
+108.2% higher than in the year-earlier period, primarily
because of increased foreign-exchange losses stemming from
the peso's 4.3% devaluation against the dollar in that period,
which affected the dollarized liability position (US$483.8
million in outstanding financing). This is a non-cash effect,
however.
The results of our hedging activities were
influenced by the following (i) repurchase of gold futures,
which reduce the volume of future sales; (ii) payment of premiums
for the purchase of put options on silver, which guarantees
us a minimum price of US$5.0 per ounce for 10% of the mining
production budgeted in 2004, and would allows us to benefit
from all of the potential uptrend; and (iii) earnings on transactions
that expired in the quarter and served to partially finance
the two preceding points.
Comparing this quarter against the same
quarter of last year, among the variables that had a favorable
impact on Peñoles' results were: gold averaged US$363.24
per ounce, +15.6%, its highest quotation since the fourth
quarter of 1996, silver US$5.03 per ounce, +7.5%, highest
since the second quarter of 2000, lead US$0.2317 per pound,
+18.8%, the highest price since the second quarter of 1999,
and zinc US$0.3725 per pound, +7.2%, highest in seven quarters;
and a higher average exchange rate of Ps10.6969 (+8.2% vs.
the year-earlier period).
On the downside, there was the impact of
higher costs on electrical energy (+11.6%) and natural gas
(+49.6%); lower unit treatment fees, -11.2% for lead concentrates
and -7.4% for zinc; and a point-to-point devaluation of 4.3%
in the quarter, which affected the dollarized liability position,
causing foreign-exchange losses of Ps151.9
The following table sums up these results:
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(Millions
of pesos) |
3Q03 |
YTD03 |
2Q03 |
3Q02 |
YTD02 |
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Net Sales (*) |
$3,038.4 |
$9,018.8 |
+5.2 |
+6.8 |
+4.0 |
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Gross income |
692.8 |
1,902.7 |
+13.9 |
-2.7 |
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EBITDA |
363.5 |
929.2 |
+30.9 |
-10.2 |
-23.7 |
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Operating income |
113.2 |
157.4 |
+738.5 |
-15.7 |
-62.5 |
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Total Financing Cost |
213.6 |
402.2 |
n/a |
+102.5 |
-28.5 |
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Net Income |
(107.3) |
173.7 |
n/a |
n/a |
n/a |
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(*) Including metal and exchange-rate hedging
gains.
On the operating side, compared against
the same quarter of last year, in the Mining Division, the
production of metallic gold content dropped -12.6% (-12,120
pounces) due to lower production at Las Torres (shutdown of
the unit) and reduced output at La Herradura (dilution of
rich solution due to excess rains caused by cyclones in the
Pacific). Silver declined -9.8% (-1,282,170 ounces) because
of lower production at Las Torres and El Monte (both due to
shutdown) and lower grade at La Ciénega. Lead and zinc
production declined by -8.2% (-1,740 metric tons) and -19.8%
(-13,350 metric tons), respectively, because of the shutdown
of El Monte in 2002, and reduced output at Francisco I. Madero
following the partial collapse of one of the already-mined
cuts that blocked access to the production level (operations
are expected to return to normal in November) and at Bismark,
where work is under way to access other production cuts.
In the case of the Metals and Inorganic
Chemicals Division, gold and silver production fell by -12.7%
(-31.250 ounces) and -5.5% (-1,040,100 ounces), respectively,
both due to lower metallic content in concentrates and materials
received, as well as problems of impurity which affected the
quality of the mix fed into the lead foundry (these problems
have been resolved) and by problems with the quality of bricks
in the furnaces of the lead-silver refinery (these have been
replaced). Lead production rose +13.7% (+4,180 metric tons)
due to higher content in the concentrates received at the
foundry and direct entries of bullion to the lead-silver refinery.
In the case of magnesium oxide, production was +31.5% higher
(+3,520 metric tons) due to higher demand for refractory grade.
As concerns production costs: at the Mining
Division, due to an ongoing effort to make operations more
efficient and reduce concentrate treatment fees, production
costs were reduced as follows during the third quarter: the
cash cost of production of gold was reduced by -17.6%, silver
-2.8%, and zinc -13.5%. In the Metals-Chemicals Division,
the magnesium oxide plant reduced its unit production cost
by -15.0% because the plant was operated intermittently to
lower costs.
For the lead foundry, unit production costs
rose +7.1% over the third quarter of 2002, because the shortage
of concentrates has obliged us to treat concentrates acquired
from outside parties, which have a high content of impurities,
affecting the mix fed into the foundry. We have taken the
necessary measures to resolve the complicated problem of the
metallurgical mix, and in September we produced 15,000 metric
tons of bullion, the highest volume since early 1998. At the
zinc refinery, the lack of concentrates resulted in a lower
volume treated, and therefore a +5.4% rise in unit costs.
At the close of the quarter, Peñoles
had a total outstanding debt of US$483.8 million, most of
which came from a private offering of US$380.0 million in
1997 at a fixed rate of 8.25%, and whose payment program begins
in 2006 with quarterly payments of US$15.2 million.
Construction projects are proceeding on
schedule. In the Milpillas copper project (average 55,000
metric tons a year of copper / early 2005), the investment
in which will total US$193.0 million, we continued to deepen
the access ramp and extraction shaft, began preparation of
the mine and the detail engineering. Construction of the electrical
power plant, Termoeléctrica Peñoles (230 MW)
is complete, and load testing has begun: This thermoelectric
plant will guarantee the supply of electrical energy to our
plants, allow for more continuous operations, and reduce the
cost per Kwh. The Fresnillo mining unit took on a continuous-running
mining equipment for evaluation, which will help develop the
mine more quickly and safely than with the traditional process
of explosives.
2.- ECONOMIC ENVIRONMENT AND METALS
PRICES
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3Q03 |
2Q03 |
3Q02 |
YTD03 |
YTD02 |
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Inflation in the period (%) |
1.08 |
(0.07) |
1.27 |
2.34 |
3.94 |
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Exchange rate (pesos/dollar): |
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Close |
10.9272 |
10.4808 |
10.1667 |
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Average |
10.6969 |
10.4615 |
9.8879 |
10.6535 |
9.4897 |
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Devaluation-inflation exchange
rate(%): |
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In the period |
+4.26 |
-2.66 |
+2.06 |
+5.96 |
+11.2 |
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12 months |
+7.48 |
+5.21 |
+6.41 |
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Gold
( US$/Oz) |
Silver
( US$/Oz) |
Lead
( US$cts/lb) |
Zinc
( US$cts/lb) |
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1st. quarter 2002 |
290.36 |
4.47 |
22.27 |
36.04 |
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2nd. quarter 2002 |
312.78 |
4.73 |
20.63 |
35.45 |
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3rd. quarter 2002 |
314.20 |
4.66 |
19.51 |
34.76 |
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4th. quarter 2002 |
322.52 |
4.52 |
19.72 |
35.04 |
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Average 2002 |
309.96 |
4.60 |
20.53 |
35.32 |
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1st. quarter 2003 |
352.13 |
4.66 |
20.82 |
35.65 |
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2nd. quarter 2003 |
346.74 |
4.59 |
20.70 |
35.09 |
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2nd. quarter 2003 |
363.24 |
5.01 |
23.17 |
37.25 |
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Average 2003 |
354.04 |
4.75 |
21.56 |
36.00 |
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%Chge. 3Q003 vs 2Q003 |
+4.8 |
+9.2 |
+11.9 |
+6.2 |
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%Chge. 3Q003 vs 3Q002 |
+15.6 |
+7.5 |
+18.8 |
+7.2 |
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%Chge. 2Q003 vs 2Q002 |
+15.8 |
+2.9 |
+3.6 |
+1.6 |
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Mining Division share of sales |
21.6% |
39.8% |
6.7% |
29.6% |
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The following sums up conditions in the international
metals markets during the period in question:
Gold: During
the period, prices did well due to weakness in the U.S. economy
and in the dollar, an adverse geopolitical climate (news of
the death of Saddam Hussein's sons and the attack on the U.S.
embassy in Liberia). In September the speculative long position
on the COMEX reached its highest level on record, and funds
strongly favored this market. The price gold hit US$393.75
per ounce in the month, its highest level since August 1996.
This increase was related, among other factors, to OPEC production
cuts and the early settlement of hedge positions by some large
producers. At the end of the period, prices were slightly
affected by news that the central bank of Switzerland was
planning to sell another 284 metric tons (9.13 million ounces)
before the agreement with Washington expired.
Silver:
Early in the period, silver prices caught the attention of
participants in the precious metals market when they reached
US$5.15 per ounce, fueled by speculation among fund traders.
Later, silver showed a closer correlation with gold, and reached
US$5.35 per ounce in late September, higher than it had been
since early 2000.
Lead: Prices
on this metal benefited from news like the reduction of refined
output by various producers and intense rumors of the possible
shutdown of the Porto Vesme refinery in Italy, which turns
out 120,000 metric tons a year. Inventories continue to move
steadily downward, and according to studies by the International
Lead and Zinc Study Group (ILZSG), the deficit seen in recent
months continues to rise. Analysts believe that the recent
increase is fully justified. In July, the price of lead reached
US$0.2395 per pound, an 18-month high.
Zinc: At
the start of the period, this metal was strong due to the
suspension of operations at the Porto Vesme refinery, which
turns out around 180,000 metric tons a year, and rumor has
it this plant will be closed for a year. Zinc prices were
kept high by the trend in other industrial metals and analysts'
optimistic expectations about the rest of the year.
3.- OPERATING RESULTS
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3Q02 |
YTD02 |
2Q03 |
3Q03 |
YTD03 |
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Mining Division: |
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Ore milled |
(Mton) |
1,996 |
5,860 |
1,998 |
1,798 |
5,710 |
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Stacked deposited
(a) |
(Mton) |
2,094 |
6,126 |
2,185 |
2,165 |
6,323 |
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Gold |
(kg) |
2,984 |
8,642 |
2,696 |
2,607 |
8,032 |
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Silver |
(ton) |
409 |
1,229 |
400 |
369 |
1,136 |
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Lead |
(ton) |
21,250 |
63,607 |
21,660 |
19,511 |
62,134 |
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Zinc |
(ton) |
67,315 |
192,398 |
61,617 |
53,967 |
177,667 |
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Copper |
(ton) |
2,900 |
8,563 |
2,857 |
2,368 |
7,940 |
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(a)
La Herradura: open-pit mine. |
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Metals-Industrial
Chemicals Division: |
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Gold |
(kg) |
7,634 |
25,146 |
7,018 |
6,662 |
21,694 |
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Silver |
(ton) |
593 |
1,814 |
573 |
561 |
1,756 |
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Lead |
(ton) |
30,516 |
93,344 |
32,381 |
34,697 |
95,914 |
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Zinc |
(ton) |
54,910 |
155,593 |
49,267 |
55,945 |
160,260 |
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Copper |
(ton) |
1,876 |
5,668 |
1,687 |
2,116 |
5,461 |
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Cadmium |
(ton) |
209 |
603 |
196 |
247 |
637 |
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Bismuth |
(ton) |
284 |
823 |
272 |
270 |
788 |
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Sodium sulfate |
(ton) |
139,500 |
406,000 |
144,000 |
146,500 |
435,600 |
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Magnesium oxide |
(ton) |
11,115 |
28,882 |
15,451 |
14,639 |
37,215 |
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Ammonium sulfate |
(ton) |
55,161 |
179,326 |
38,579 |
44,473 |
166,797 |
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Magnesium sulfate |
(ton) |
7,500 |
16,307 |
7,350 |
6,600 |
16,945 |
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Mining Division (metallic content in
concentrates and other materials):
*Change 3Q03 vs. 3Q02:
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-Gold (-12.6%): lower production at Las Torres -due to shutdown-
and lower recovery at Herradura because of dilution of the
rich solution due to cyclones that affected operations.
-Silver (-9.8): lower production at Las Torres and El Monte
-due to shutdown-, lower grade at La Ciénega and lower
production at Tizapa.
-Lead (-8.2): lower production at El Monte -due to shutdown-.
-Zinc (-19.8): lower production at Francisco I. Madero due
to the partial collapse of one of the previously-mined cuts,
which blocked the main access, and at Bismark due to the development
of work to access other production cuts.
*Change 3Q03 vs. 2Q03:
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-Gold (-3.3%): lower production at Las Torres -due to shutdown-
and lower recovery at Herradura because of dilution of the
rich solution due to cyclones that affected operations.
-Silver (-7.8%): lower production at Las Torres -due to shutdown-
and lower grade at Fresnillo, Sabinas and Ciénega.
-Lead (-9.9%): lower grade at Naica and lower production at
Francisco I. Madero.
-Zinc (-12.4%): lower milling and grade at Fresnillo and lower
production at Francisco I. Madero and Bismark.
*Change YTD03 vs. YTD02:
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-Gold (-7.1%): lower production at Las Torres -due to shutdown-
and lower milling at Tizapa.
-Silver (-7.6%): lower production at Las Torres, El Monte
and Encantada -all due to shutdown of operations -- and lower
milling at Tizapa.
-Lead (-2.3%): lower production at El Monte -due to shutdown-.
-Zinc (7.7%): lower production at El Monte -due to shutdown-
and at Tizapa due to lower milling.
Metals Division
(production of refined metal) and Industrial Chemicals:
*Change 3Q03 vs. 3Q02:
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-Gold (-12.7%): lower metallic content in concentrates at
the lead foundry and in semi-processed material that directly
enter the lead-silver refinery.
-Silver (-5.4%): lower metallic content in concentrates at
the lead foundry and in semi-processed material that directly
enter the lead-silver refinery.
-Lead (+13.7%): higher content in concentrates at the lead
foundry and entries of bullion from outside sources to the
lead-silver refinery.
-Sodium sulfate (+5.0%): higher demand from export markets
(Latin America).
-Magnesium oxide (+31.7%): higher demand from both domestic
and export markets for refractory grade.
-Ammonium sulfate (-19.4%): production adjusted to market
demand in order to avoid excess output.
-Magnesium sulfate (-12.0%): operating problems with the centrifuges,
hampering the continuity of operations.
*Change 3Q03 vs. 2Q03:
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-Gold (-5.1%): lower metallic content in concentrates at the
lead foundry and in semi-processed material that directly
enter the lead-silver refinery.
-Silver (-2.1%): Lower content in concentrates received at
the lead foundry.
-Lead (+7.2%): Higher content in concentrates received at
the lead foundry.
-Zinc (+13.6%): Continuous operations but a scarcity of concentrates
notably reduced inventories of concentrates.
-Magnesium oxide (-5.3%): lower production of caustic grade.
-Ammonium sulfate (+15.3): greater availability of solution
at Met-Mex and increased sales to the primary market.
-Magnesium sulfate (-10.2): operating problems with the centrifuges,
hampering the continuity of operations.
*Change YTD03 vs. YTD02:
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-Gold (-13.7%): lower volume treated at the lead foundry due
to dosing problems (poor quality of concentrates) and mechanical
difficulties; and concentrates with a lower metallic content
at the lead foundry combined with lower receipts of rich materials
at the lead-silver refinery.
-Silver (-3.2%): lower volume treated at the lead foundry
due to dosing problems (poor quality of concentrates) and
mechanical difficulties; and concentrates with a lower metallic
content at the lead foundry combined with lower receipts of
rich materials at the lead-silver refinery.
-Sodium sulfate (+7.3%): greater operating continuity and
higher domestic demand.
-Magnesium oxide (+28.9%): higher demand for refractory and
electro-smelting grade at the domestic and export markets.
-Ammonium sulfate (-7.0%): Initially because of a late rainy
season and later due to excess rain in primary markets.
-Magnesium sulfate (+3.9%): higher domestic sales of agricultural-grade.
4.- FINANCIAL
RESULTS
A) Comparison of results 3Q03 vs. 2Q03:
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(Millions
of pesos) |
3Q03 |
3Q02 |
Chge.
($) |
%
Chge. |
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Net sales (*) |
3,038.4 |
$2,845.0 |
193.4 |
6.8 |
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Gross income |
692.8 |
712.2 |
(19.4) |
-2.7 |
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Gross margin |
22.8% |
25.0% |
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EBITDA |
363.5 |
404.6 |
(41.1) |
-10.2 |
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EBITDA margin |
12.0% |
14.2% |
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Operating income |
113.2 |
132.1 |
(18.9) |
-14.3 |
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Operating margin |
3.7% |
4.6% |
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Net income |
213.6 |
118.7 |
94.9 |
79.9 |
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Total Financing Cost |
(107.3) |
25.3 |
(132.6) |
n/a |
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Net margin |
-3.5% |
0.9% |
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(*) Includes metal and exchange-rate hedging
gains.
The principal changes are discussed below:
Net sales (including hedging gains) of Ps3,038.4
were +Ps193.4 higher (+6.8%) breaking down as follows
a) Higher prices, +Ps212.9 mainly on gold,
silver, lead, zinc and ammonium sulfate;
b) Higher average exchange rate in 2003 (Ps10.6969 vs Ps9.8879
per dollar) +Ps210.4;
c) Higher volume, +Ps23.8 mainly of zinc, sodium sulfate,
lead and concentrates which made up for reductions in gold
and silver;
d) Lower gains from hedging in metals and the exchange rate
-Ps147.2; and
e) Effect of restatement at constant pesos of the current
quarter and others, -Ps106.5;
In dollar terms, net sales were US$282.4
million (+2.8%) made up of sales of US$285.8 and a metals-hedging
expense of US$3.4 million.
The cost of goods sold rose +Ps212.8 (+10.0%)
due to the following factors:
a) Higher production costs +Ps40.7 mainly
in the area of fuel and electrical energy, due to a higher
unit cost (+11.6%) and fuel oil as a substitute for natural
gas-, increased maintenance and repairs to preserve the useful
life of assets, raw materials--higher cost of ammonia--and
operating materials
b) Higher metals costs -- net of treatment
fees-- +204.2 due to higher volume of silver, lead and zinc
purchased from outside suppliers, a higher average price of
gold and lead, and a higher average exchange rate; and;
c) Inventory movements, re-statement and
consolidation effects, -Ps32.1.
As a result of the rise in Sales (+Ps193.4)
and a more pronounced increase in the cost of good sold (+Ps212.8)
combined with the above-mentioned operating problems, Gross
Earnings were down by -Ps19.4 reducing the gross margin (as
a percentage of sales) from 25.0% to 22.8%.
Operating expenses -excluding the effects
of depreciation- were Ps329.3, rising +Ps21.7, due to increased
SG&A expense +Ps12.3 caused by higher charges for communication
and informatics (network and telecommunications services);
and increased exploration expenses +Ps9.5 at La Ciénega
and Fresnillo for studies to locate reserves.
Mainly because of the drop in Gross Earnings
(-Ps19.4) and increase in operating expenses (+Ps21.7), EBITDA
was Ps363.5, off by -Ps41.2 (-10.2%), and the EBITDA Margin
moved down from 14.2% to 12.0%.
Lower depreciation, -Ps20.0, mainly because
of the shutdown of mining units (El Monte, and Las Torres).
With EBITDA -Ps41.2 lower, erasing some
of the benefits of the -Ps20.0 reduction in depreciation charges,
operating income declined -Ps21.1, to Ps113.2, and the operating
margin was 3.7%.
Total Financing Cost was Ps213.6 in the
period, comparing poorly against the lower amount reported
for the third quarter of 2002 (Ps105.5). This change (+Ps108.1)
breaks down as follows:
a) Higher foreign-exchange loss, +Ps68.4
due to the peso's Ps0.4464 depreciation against the dollar
compared to a depreciation of Ps0.2052 per dollar in the year-earlier
period;
b) Lower monetary position benefit, -Ps29.0, because of a
lower inflation index; and
c) Higher net interest expense, +Ps10.7.
The "other expenses" line shows
a charge of Ps48.8 vs. Ps17.5 in the year-earlier period.
This increase (+Ps31.3) is due primarily to an adjustment
in asset value and non-productive costs due to the shutdown
of the Las Torres unit.
A credit of -Ps40.4 on the income tax and
profit-sharing line was the result of lower pre-tax earnings,
in turn caused by a drop in gross earnings, a rise in total
financing cost, and an increase in other expenses.
Equity in the earnings of associates totaled
Ps11.7 dropping by -Ps2.2 due to lower revenues from the Coahuila-Durango
railway line and the water business for ASIM.
The minority interest line shows a gain
of Ps10.2, compared to a loss of Ps11.7 in the year-earlier
period. Earnings in this quarter were driven by increased
profits at the Penmont (Herradura) mining unit because of
higher gold quotations.
B) Comparison of results for 3Q03 vs. 2Q03:
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(Millions
of pesos) |
3Q03 |
2Q03 |
Chge.
($) |
%
Chge. |
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Net sales (*) |
$3,038.4 |
$2,887.5 |
150.9 |
5.2 |
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Gross income |
692.8 |
608.4 |
84.4 |
13.9 |
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Gross margin |
22.8% |
21.1% |
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EBITDA |
363.5 |
277.6 |
85.9 |
30.9 |
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EBITDA margin |
12.0% |
9.6% |
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Operating income |
113.2 |
13.5 |
99.7 |
738.5 |
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Operating margin |
3.7% |
0.5% |
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Net income |
213.6 |
(11.5) |
225.1 |
n/a |
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Total Financing Cost |
(107.3) |
17.4 |
(124.7) |
n/a |
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Net Margin |
-3.5% |
0.6% |
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(*) Includes metal and exchange-rate hedging
gains.
The primary changes are discussed below:
Net sales (including hedge transactions) totaled $2,857.2
dropping -$203.7 (-6.7%) due to the following factors:
a) Lower volume -$182.0, resulting from
lower sales volume of gold, silver and mineral concentrates,
offset slightly by higher lead volume;
b) Lower average exchange rate -$82.7;
c) Lower prices -$19.3 primarily of silver, gold and sodium
sulfate;
d) Effects of restating the 2002 figures at constant pesos
of the present quarter and others, -$15.2; and
e) Change in the result from derivatives trading (futures
and options) in metals and the exchange rate, +$95.5.
The decline in the cost of goods sold, which
was -$210.4 (-8.5%), was caused by:
a) Lower costs of metal purchased form third
parties--net of treatment fees---$248.7 due mainly to lower
prices, especially gold;
b) Inventory movements, consolidation and restatement effects,
-$26.5; which was offset by:
c) Higher production costs, +$64.8, mainly electrical energy
due to a rise in the unit cost of electricity (+12.72%), and
increased production of magnesium oxide and metric tonnage
treated in the lead-silver circuit, higher charges for maintenance
and major repair to prolong the useful life of assets, operating
material (mainly reactants and direct materials for the Mining
division, shipping and independent contractors).
The reduction in sales was completely offset
by a corresponding drop in the cost of goods sold (-$210.4),
so the gross margin (in proportion to sales) rose from 19.4%
to 21.1%, and gross income advanced +1.1% to $602.0.
Operating expenses -not including depreciation-
totaled $327.3, rising +$17.2 (+5.5%) due mainly to higher
SG&A expense +$15.8 chiefly on the personnel lines (salary
increases) and travel, communication and computer expenses,
relating to the implementation of ERP PeopleSoft modules.
Primarily because of a rise in operating
expenses (+$17.2), EBITDA went from $285.1 to $274.7, while
the EBITDA margin rose from 9.3% to 9.6% of sales.
In the second quarter, total financing cost
was $11.4, turning around from a loss of $197.9 in the first
quarter. The $186.5 change breaks down as follows:
a) A $4.3 decline in net interest expense,
due to a reduction of interest payments;
b) A $262.5 rise in foreign-exchange gains, mainly the result
of the peso's appreciation against the dollar (-$0.2863) compared
to its depreciation in the first quarter (+$0.4546); this
was offset by:
c) Higher monetary losses $57.5 due to lower inflation and
a more moderate monetary liability position.
The income tax and profit-sharing line was
reported at $7.0, due to higher pre-tax earnings, in turn
primarily because of an increased benefit on the total financial
cost line.
Equity in the results of unconsolidated
affiliates totaled $7.9, declining by -$39.0 due to the recognition
of lower profits for the companies in which Peñoles
owns a minority stake. In this quarter, the most notable change
was in profits from Serelliab.
The minority interest line showed a loss
of $12.6, compared to a profit of $6.6 in the preceding quarter.
The second-quarter loss came from the companies that own the
minority share of the water business.
C) Comparison of year-to-date results as
3Q03 vs. 3Q02:
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(Millions
of pesos) |
YTD03 |
YTD02 |
Chge.
($) |
%
Chge. |
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Net sales (*) |
9,018.8 |
$8,675.1 |
343.7 |
4.0 |
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Gross income |
1,902.7 |
2,161.9 |
(259.2) |
-12.0 |
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Gross margin |
21.1% |
24.9% |
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EBITDA |
929.2 |
1,218.0 |
(288.8) |
-23.7 |
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EBITDA margin |
10.3% |
14.0% |
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Operating income |
157.4 |
419.6 |
(262.2) |
-62.5 |
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Operating margin |
1.7% |
4.8% |
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Total Financing Cost |
402.2 |
562.2 |
(160.0) |
-28.5 |
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Net income |
(173.7) |
62.9 |
(236.6) |
n/a |
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Net margin |
-1.9% |
0.7% |
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(*) Includes metal and exchange-rate hedging
gains.
The following is a discussion of the primary
changes in this period:
Higher net sales (including hedging gains),
+Ps343.7 (+4.0%) rising from Ps8,675.1 to Ps9,018.8; the result
of:
a) Higher average exchange rate +Ps884.7;
b) Higher prices +Ps422.4 mainly on gold, silver, ammonium
sulfate and zinc, making up for reductions in sodium sulfate
and magnesium oxide;
c) Lower sales volume -Ps124.4 primarily of gold, silver and
ammonium sulfate, slightly offset by a rise in sales volume
of zinc, magnesium oxide and sodium sulfate;
d) Effects of restatement in constant pesos of the current
quarter and others -Ps271.2; and
e) Change in the results of derivatives transactions -futures
and options- in metals and the exchange rate, outlays for
costs and losses in 2003, Ps143.6, vs. revenues from unrealized
profits in 2002, totaling Ps424.2 (-Ps567.8).
In dollar terms, net sales totaled US$837.4
million (-3.0%) made up of sales of US$850.7 and hedging losses
of US$13.3 million.
The +Ps602.9 (+9.3%) increase in the cost
of goods sold was caused by:
a) Higher production costs, +Ps248.0 (+7.0%)
due to the increased cost of fuel -electrical energy increased
due to higher unit costs (15.3%) and fuel oil as a substitute
for natural gas-, higher charges relating to operating materials,
mainly in the mining division, such as reactives and direct
materials, as well as major maintenance and repairs performed
to prolong the useful life of assets.
b) Higher metals costs --net of treatment fees-- +Ps425.9,
due to a higher volume of silver and zinc purchased, a rise
in the average price of all metals, and a higher average exchange
rate.
c) Inventory movements, consolidation and restatement effects,
-Ps71.0.
Due to the above factors, and because of
lower profit margins for some units due to the above-mentioned
operating problems, gross earnings dropped to Ps1,902.7, down
-Ps259.2, and the gross margin (as a percentage of sales)
shrank from 24.9% to 21.1%.
Operating expenses -excluding depreciation-
totaled Ps973.5, +Ps29.6 (+3.1%) higher, because of:
a) Increased SG&A expense +Ps18.3, on the lines of travel
expenses and communication and informatics--both in connection
with software applications and external consultants hired
to introduce the ERP PeopleSoft modules, which were offset
in part by reduced payroll expenses;
b) Higher Exploration expenses +Ps11.3 mainly at Fresnillo,
Ciénega and Herradura to build up ore reserves.
Due mainly to the drop in Gross Earnings
(-Ps259.2) and increase in operating expenses (+Ps29.6), EBITDA
was Ps929.2, falling -Ps288.8 (-23.7%), and the EBITDA margin
dropped from 14.0% to 10.3%.
Total Financing Cost came to Ps402.2, improving
from a loss of Ps562.2 in 2002; this change breaks down as
follows:
a) Lower Foreign-exchange loss -Ps209.0
due to the peso's Ps0.6147 slippage against the dollar, vs.
Ps1.0244 per dollar in the year-earlier period; and
b) Lower net interest expense -Ps0.8 due to the effect of
capitalization of expansions at the Mining Division; offset
by:
c) Lower Monetary position benefit -Ps49.8 due to a lower
inflation index.
The "other expenses" line shows
a charge of Ps76.9, rising Ps37.6 in the period. The charge
in 2003 stemmed from the shutdown of the Las Torres mining
unit and adjustment in the value of asset of Química
del Mar and Minera Antares; a charge from the previous year
relating mainly to an adjustment in the assets of the Rey
de Plata and Dolorey due to shutdown of operations.
The credit on the income-tax and profit-sharing
line (net) totaling Ps85.1 was -Ps41.4 lower than in the period
of comparison. This YoY reduction is due to the effect reflected
in 2002 of deferred taxes stemming from a change in tax laws
in which the income tax rate was gradually reduced from 35%
to 32%, the effect of the deferred tax was calculated by applying
the corresponding rate for each year.
The Minority Interest line shows a loss
of Ps4.2 vs. a loss of Ps66.5 the year before. The improvement
was due to improved results at Minera Penmont, lower non-productive
costs at Rey de Plata, and a reduction in exploration expenses
at Minera Pecobre.
Among the primary sources of cash flow generation
during the year were gross operating cash flow and short-term
financing. The primary uses of cash were in investment in
property, plant and equipment, a rise in working capital--
mainly inventories, because of late entries of materials rich
in precious metals, and end-of-month sales, as well as advance
payment to suppliers of gold-rich materials-- and a dividend
payment.
5.- SHUTDOWN
OF THE LAS TORRES UNIT
Industrias Peñoles suspended operations
at the Las Torres mining unit beginning on September 15 of
this year. This mining company, which produces primarily gold
and silver concentrates, is located in the municipality of
Guanajuato in the state of Guanajuato, and is wholly owned
by Grupo Peñoles.
Since 1548, Guanajuato has been a mining
district with a history that dates back to the colonial period,
and it continues to have considerable geological potential.
Fluctuations in the prices of precious metals have always
affected the mines of this region, and in recent years uncertainty
and a general decline in quotations have placed producers
under difficult financial constraints, limiting their investment
in exploration and infrastructure.
After 27 years of operations, activity at
the Las Torres mining unit will be suspended because of the
exhaustion of its economically exploitable reserves. Although
a substantial exploration effort has been under way in recent
years in the hopes of sustaining the unit, and it has been
a present force in mining in the state of Guanajuato, the
results of these efforts have not been sufficient to guarantee
continuing operation.
Grupo Peñoles' solid financial structure
will not be affected by the suspension of operations. The
Las Torres unit processes 600,000 metric tons of ore each
year, and the revenues from the sale of its gold and silver
content made up less than 2.0% of the total sales of Industrias
Peñoles.
Peñoles is interested in maintaining its presence in
the state of Guanajuato and its great mining tradition, and
will continue its exploration projects there.
6- PROJECTS
*Milpillas (Copper / Sonora): works continue
on deepening the ramp (current depth is 2,796 meters) and
the extraction shaft (295 meters out of a total of 600 meters
so far). Preparation of the mine and detail engineering were
continued, and orders have been placed for the most important
equipment, including the extraction winch, the crushers and
the extraction by solvent section, among others. To date,
ore has been crossed in the first level of the mine's development.
Preliminary estimates are that the project will require a
total of US$193.0 million, and start up in the second half
of 2005, with a production capacity of 55,000 metric tons
of cathode copper per year. A total of US$38.0 million has
been invested in this project to date.
*Termoeléctrica Peñoles (TEP):
This electrical plant will supply Peñoles' facility
with energy and is being developed by Alstom (France) and
Sithe (United States). Investment in the project will total
US$320.00 million, beginning on January 1, 2001. The project
has a capacity of 230 MW of electrical power. Construction
of this plant is complete, and load testing has begun; it
has already generated electrical energy. Startup was originally
programmed for August 2003, but was put off till December,
since equipment testing revealed the need to re-design some
equipment. This thermo-electric plant will guarantee the supply
of electrical energy and reduce the volatility of energy costs
per kwh. Ownership of the plant will revert to Peñoles
after 20 years.
7.- ENVIRONMENTAL ACTIVITIES AND RECOGNITIONS
The following are the highlights of our
environmental activities during the period:
At Met-Mex, we maintained and strengthened
environmental control systems at the Met-Mex metallurgical
complex. In the case of atmospheric emissions: sack house
emissions were within the limits established by the Mexican
environmental authorities (PROFEPA), which are well below
those of the NOM on fixed-source particle emissions; emissions
of sulfur dioxide from our smokestacks were kept below the
limits set forth by the environmental authorities.
Regarding air quality outside the plants,
we obtained the following results:
Lead: the average in the July-September
period was 0.487 Ugr/m3, compared to a NOM limit of 1.5 Ugr/m3.
Sulfur dioxide averaged 0.01250ppm, compared to a NOM standard
of 0.13ppm.
During the same quarter, we treated 976,000
cubic meters of city sewage, to be re-used in industrial processes
of the complex.
We signed an agreement with the National
Institute of Forestry, Agriculture and Livestock Research
(INIFAP), to incorporate the property surrounding the La Ciénega
mining unit into the Sustainable Forest program.
We also obtained ISO 14000 certification
for 6 of the 7 plants that still require certification in
the Metallurgical-Chemical group. These plants were: the lead
foundry, electrolytic zinc refinery, lead-silver refinery,
Fertirey and Bermejillo.
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