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REPORT FROM THE CHIEF EXECUTIVE
OFFICER:
THIRD QUARTER 2004 |
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(Figures in millions of
constant pesos)
• In January-September, gross earning rose 61.1%,
EBITDA 111.92% and operating income 672.7%, all compared to
the same quarter of 2003.
• Net earnings were Ps639.9, comparing well against
the year-earlier loss of Ps182.3.
• In the third quarter, Peñoles set new quarterly
production records for refined zinc, sodium sulfate, magnesium
oxide and magnesium sulfate.
• The company also concluded the capacity expansion
at the Fresnillo unit, raising silver production at this mine
from 32.0 million to 43.7 million ounces a year (+36.5%).
1.- EXECUTIVE SUMMARY
In January-September 2004, Peñoles reported sales of
Ps12,244.3 (not including the results of exchange-rate and
metals hedging activities), equivalent to US$1.0706 billion.
This is 27.3% higher than in the same period of 2003. Gross
earnings rose 61.1%, EBITDA 119.2%, and operating income 672.7%,
compared to the first nine months of 2003.Net earnings in
the first three quarters of 2004 were Ps639.9, comparing very
well against the loss of Ps182.3 in the same period of 2003.
These accrued results were driven by: higher
quotations on lead +81.4%, silver +36.4%, zinc +29.3%, and
gold +13.3%; a higher average exchange rate +5.8%; higher
sales volume of magnesium oxide +57.0%, silver +8.5%, lead
+6.1%, sodium sulfate +3.0% and zinc +2.8%; and lower foreign-exchange
losses because of a milder depreciation of the peso at the
close of the period (1.6% vs. 6.0%).
The following table sums up these results:
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3Q04 |
3YTD04 |
2Q04 |
3Q03 |
3YTD03 |
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Sales |
$3,883.2
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$12,053.0 |
(3.7) |
+21.8 |
+27.3 |
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Gross earnings |
1,040.2
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3,216.9
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+4.7 |
+43.1
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EBITDA |
679.6 |
2,137.2 |
+10.7 |
+78.2 |
+119.2 |
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Operating income |
388.4 |
1,276.1 |
+20.3 |
+227.1
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+672.7 |
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Total financing cost |
28.8 |
196.6 |
(82.3) |
(87.2) |
(53.4) |
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Net income |
213.4 |
639.9 |
172.9 |
n/a |
n/a |
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Comparing the operating results in the first
nine months of 2004 against those of the same period of 2003,
we have the following remarks:
The Mining division concluded its expansion
of the Fresnillo unit (from 4,500 to 7,000 metric tons per
day of milling capacity, an increase of 55.6%), which went
on line in the second half of September of this year.However,
in order to make the necessary equipment interconnections,
operations were suspended for 10 days. This, together with
the shutdown of the Las Torres and El Monte mines in 2003
due to the depletion of their reserves, meaning they did not
produce in 2004, led to an 11.1% decline in overall silver
content (4,049,450 ounces).
Additionally, there was a decline in the
production of lead content (35.0%) and zinc content (11.6%).
These reductions can be partially attributed to the above-mentioned
closure of the El Monte mine in March 2003, and lower production
at Naica and Francisco I. Madero, due to lower ore grade.
The grade is expected to improve, however, as new zones are
prepared and exploited.
At the Met-Mex metallurgical complex, the
foundry and lead-silver refinery, higher volume was treated
than in the same period of 2003, declining by 6.9% and 6.5%,
respectively. This was the result of adjustments necessary
to treat complex materials, due in turn to a worldwide shortage
of lead concentrates.Consequently, refined silver and lead
production rose 7.6% and 4.4%, respectively.At the zinc refinery,
an increased availability of concentrates and process improvements
allowed for a 6.1% rise in refined zinc output. The volume
of refined zinc produced in the third quarter of 2004 (62,446
metric tons) was a new quarterly record, confirming that the
Metals division has reached its goal of operating the refinery
at its new capacity of 240,000 metric tons per year. In addition,
at Química del Rey, the production of sodium sulfate
in this quarter (155,000 metric tons), magnesium oxide (22,392
metric tons) and magnesium sulfate (8,700 metric tons) were
all record levels.
Thanks to the ongoing efforts to lower operating
costs, better metals prices and productivity enhancement programs,
the Mining division reported a 35.4% increase in the gross
margin of gold mines, a 48.9% rise in the margin at the silver
mine (Fresnillo) and a 218.1% growth in the margin at the
zinc-lead mines.Similarly, in the Metals-Chemicals division,
the margins for the foundry, lead-silver refinery, and zinc
refinery, grew 161.9%, 40.3%, and 282.8%, respectively, meaning
higher profitability at these plants.
Nevertheless, production costs at the Mining
and the Metals-Chemicals division have been affected by increases
during the present fiscal period in the costs of steel, electrical
energy, natural gas, metallurgical coke, diesel, reactives
and founders, and fluxes, resulting from higher demand stemming
from the growth of the Chinese economy.
Comparing the third-quarter results against
those of the second quarter of this year, we see a marked
improvement, as follows: gross earnings +4.7%, EBITDA +10.7%,
operating income +20.3%, and net income +172.9%.
These results were fueled by higher quotations
on lead, +15.0%, silver +3.8%, and gold +2.1%; higher sales
volume of zinc +11.4%, sodium sulfate +9.8%, and magnesium
oxide +9.2%; lower unit costs for natural gas -3.5%, and a
higher average exchange rate +0.7%.
Among the variables that negatively affected
results in the quarter were: lower zinc quotations -4.6%;
and higher unit costs on electrical energy +7.9% and coke
+16.1%.
Net earnings totaled Ps213.4 in the third
quarter of 2004, compared to Ps78.2 in the second quarter
of the year.The bottom line was also supported by lower foreign-exchange
losses, Ps77.4, due to a lower devaluation of the peso against
the dollar; higher monetary position gains, Ps47.7, due to
a higher inflation index; and lower SG&A expenses, Ps29.5.
At the close of the period, Peñoles
reported a total debt of US$423.8mn, mostly the result of
a private placement in 1997 totaling US$380.0mn, at a fixed
rate of 8.25%; the payment program on this debt begins in
2006 with quarterly payments of US$15.2mn.
The main projects are proceeding according
to schedule, including the expansion of capacity at Sabinas
(Zacatecas) from 27,171 to 32,000 metric tons a year of zinc
(+17.8%), slated for the fourth quarter of 2004, and La Ciénega
(Durango) from 132,200 to 176,600 ounces of gold per year
(+33.6%, second quarter of 2005).Construction of the Milpillas
copper project in Sonora is also on schedule, and will start
up in the fourth quarter of 2005; at present, it is 47% complete.This
mine will turn out an average of 55,600 metric tons of fine
copper per year.
On September 28, Industrias Peñoles
launched a Public Tender Offer (PTO) of shares through the
Lima stock exchange, for up to 51% of the capital of the Peruvian
company Minera Milpo, S.A.A. (ticker symbol: MILPO).
The acceptance period for the offer expired
on October 27, and although Peñoles did not meet its
goal of buying 51%, it decided to acquire the 138,950 shares
deposited in any case.
Independently of this transaction, Peñoles
will continue its exploration efforts and programs to raise
its stake in the Peruvian mining sector.
2.- ECONOMIC ENVIRONMENT AND METALS
PRICES
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4Q03 |
1Q04 |
2Q04 |
3Q04 |
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Inflation in the period(%) |
1.64 |
1.57 |
0.06 |
1.65 |
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Exchange
rate (pesos/dollar): |
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Close |
11.2360 |
11.1540 |
11.4116 |
11.4106 |
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Average |
11.1887 |
10.9923 |
11.3772 |
11.4549 |
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Peso devaluation
(ah the close): |
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In the period |
+2.83 |
-0.73 |
+2.31 |
-0.009 |
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12 months |
+8.96 |
+3.59 |
+8.88 |
+4.42 |
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Devaluation-inflationspread
(points): |
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In the period |
+1.19 |
-2.30 |
+2.25 |
-1.66 |
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12 months |
+4.98 |
0.64 |
+4.51 |
-0.57 |
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Gold
( US$/Oz) |
Silver
( US$/Oz) |
Lead
( US$/lb) |
Zinc
( US$/lb) |
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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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3rd. quarter 2003 |
363.24 |
5.01 |
23.17 |
37.25 |
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4th. quarter 2003 |
391.93 |
5.28 |
28.75 |
42.19 |
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Average 2003 |
363.51 |
4.89 |
23.36 |
37.54 |
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1st. quarter 2004 |
408.44 |
6.71 |
38.30 |
48.54 |
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2nd. quarter 2004 |
393.14 |
6.25 |
36.78 |
46.61 |
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3er. trimestre 2004 |
401.29 |
6.49 |
42.29 |
44.44 |
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%Chge. 3Q004 vs 3Q003 |
+10.5 |
+29.5 |
+82.5 |
+19.3 |
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%Chge. 3Q004 vs 2Q004 |
+2.1 |
+3.8 |
+15.0 |
-4.6 |
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%Chge. 3YTD04 vs 3YTD03 |
+13.3 |
+36.4 |
+81.4 |
+29.3 |
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Remarks on key trends in the quarter:
Gold: the average quarterly average quotation rose +2.1% over
the second quarter of this year.In July-September, gold prices
were buoyed by several events: interest among mutual funds,
which focused on currencies and non-dollar assets; a negative
geopolitical climate; purchases by the Argentine central bank;
high fuel prices; and the publication of some negative economic
figures in the United States.
Silver: during the third quarter the average
price of silver was +3.8% higher than in the second quarter,
driven by the strong performance of gold prices and the interest
among speculative funds in taking up positions in “hard”
assets.
Lead: in the period, lead prices surpassed
zinc prices for the first time since the 1980s.The strength
of lead prices is linked to solid fundamentals, since inventories
have dropped sharply.Lead production has not grown much in
recent years, but demand continues to rise, in part because
of ongoing consumption by Chinese buyers.
Zinc: The average quotation dropped -4.6%
vs. the second quarter of this year, pressured by rising inventories
and news of the re-start of operations at the Portovesme plant
in Italy, which had been out of service.Nevertheless, it was
supported by strong performance among the other base metals.
3.- OPERATING RESULTS
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3QO3 |
2Q04 |
3Q04 |
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Mining Division |
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Ore milled |
(Mton) |
1,798 |
1,786 |
1,788 |
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Stacked deposited(a) |
(Mton) |
2,165 |
2,321 |
2,057 |
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Gold |
(kg) |
2,607 |
2,645 |
2,568 |
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Silver |
(ton) |
369.0 |
339.8 |
316.9 |
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Lead |
(ton) |
19,511 |
13,151 |
12,070 |
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Zinc |
(ton) |
53,967 |
52,657 |
52,327 |
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(a) La Herradura: open-pit
mine. |
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4567 |
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Metals & Chemicals Division: |
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Gold |
(kg) |
6,662 |
6,024 |
5,192 |
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Silver |
(ton) |
561.0 |
605.9 |
617.0 |
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Lead |
(ton) |
34,697 |
32,180 |
31,449 |
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Zinc |
(ton) |
55,945 |
51,328 |
62,446 |
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Sodium sulfate |
(ton) |
146,500 |
152,000 |
155,000 |
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Magnesium oxide |
(ton) |
14,639 |
19,037 |
22,392 |
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Ammonium sulfate |
(ton) |
44,473 |
59,805 |
54.844 |
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Magnesium sulfate |
(ton) |
6,600 |
7,800 |
8,700 |
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Mining Division (metallic content
in concentrates and other materials):
*Change 3Q04 vs. 3Q03:
-Silver (-14.1%): shutdown of Las Torres, lower grade and
milling at Fresnillo due to the interconnection of equipment
for capacity expansions, lower grade and milling at Naica
and lower grade at Tizapa.
-Lead (-38.1%): lower grade and milling at Naica.
*Change 3Q04 vs. 2Q04:
-Silver(-6.7%): due to the interconnection of equipment for
capacity expansions, lower grade and milling at Naica and
lower grade at Tizapa.
-Lead(-8.2%): lower milling and grade at Naica.
*Change 3Q04 vs. 3Q03 year to date:-
- Silver (-11.1%): shutdown of the Las Torres and El Monte
units, and lower grade at Fresnillo, Tizapa, Naica and Sabinas.
-Lead (-35.0%): lower grade at Naica, Francisco I. Madero
and Sabinas.
-Zinc (-11.6%): lower grade at Francisco I. Madero and Naica,
and shutdown of El Monte.
Metals Division (production of
refined metal):
*Change 3Q04 vs. 3Q03:
-Gold (-22.1%): lower receipts of semi-processed, content-rich
materials.
-Silver (+10.0%): reduction of inventories in process and
continuity of operations.
-Lead (-9.4%): lower entries of content in concentrates.
-Zinc (+11.6%): higher entries of content in concentrates
from third parties at the zinc refinery.
-Sodium sulfate (+5.8%): higher demand on export markets.
-Magnesium oxide (+53.0%): to meet the rise in demand for
refractory-grade and caustic magnesium oxide from South America,
the United States and Europe.
-Ammonium sulfate (+23.3%): higher demand from the primary
market.
-Magnesium sulfate (+31.8%): better control over brine concentration
at the crystallization dams.
*Change 3Q04 vs. 2Q04:
-Gold (-13.8%): lower direct entries at the refinery of semi-processed,
content-rich materials.
-Zinc (+21.7%): higher entries of content in concentrates
from third parties at the zinc refinery and continuity of
operations.
-Magnesium oxide (+17.6%): to meet the rise in demand for
refractory-grade and caustic magnesium oxide.
-Magnesium sulfate (+11.5%): better control over brine concentration
at the crystallization dams.
*Change 3Q04 vs. 3Q03 year to date:
-Gold (-16.9%): lower direct entries of semi-processed at
the refinery.
-Silver (+7.6%): higher entries of raw material from third
parties and continuity of operations.
-Zinc (+6.1%): higher entries of raw material from third parties
and continuity of operations.
-Magnesium oxide (+43.2%): higher demand for refractory-grade
on domestic and export markets, and for and caustic magnesium
oxide on the domestic market.
-Magnesium sulfate (+17.5%): Better evaporation conditions
at the brine crystallization dams
-Ammonium sulfate (+38.5%): higher demand from the farming
industry.
4.- FINANCIAL RESULTS
A) Comparison of year-to-date
results as of 3Q04 vs. same period of 2003:
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(Millions
of pesos) |
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3YTD04 |
3YTD03 |
Chge. ($) |
% Chge. |
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Net sales (*) |
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$12,053.0 |
$9,464.3 |
2,588.7 |
27.3 |
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Gross income |
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3,216.9
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1,996.7 |
1,220.2 |
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Gross margin |
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26.7% |
21.1% |
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EBITDA |
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2,137.2 |
975.1 |
1,162.1 |
119.2 |
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EBITDA margin |
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17.7% |
10.3% |
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Operating income |
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1,276.1 |
165.1 |
1,111.0 |
672.7 |
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Operating margin |
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10.6% |
1.7% |
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Net income |
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639.9 |
(182.3) |
822.2 |
n/a |
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Net margin |
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5.3% |
(1.9%) |
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(*) Includes metal and exchange-rate hedging
gains.
Higher Net sales +$2,588.7 (+27.3%) from
$9,464 to $12,053. This increase breaks down as follows:
a) Higher prices +$2,318.8 on virtually all the products sold;
b) Higher average exchange rate +$472.4 ($11.2748 vs. $10.6535
per dollar);
c) Higher sales volume +$357.7 due to higher sales of silver,
lead, zinc and magnesium oxide, and of concentrates from the
Mining Division to third parties, making up for lower gold
sales due to the lower availability of finished product;
d) Higher losses from metals and exchange-rate hedging, -$40.6;
and
e) Effects of restatement at constant pesos of September 30,
2004 -$519.6.
In dollar terms, net sales totaled US$1,053.8
million, made up of US$1.070.6 million in (billed) sales and
hedging losses of US$16.8 million.
The +$1,368.5 (+18.3%) rise in the Cost
of Goods Sold was due to:
a) Higher production costs, +$302.0 due
to a rise in costs on the contractor line (personnel working
on capacity expansions and development in the Mining Division),
fuel (higher unit costs of coke and diesel, and higher consumption
of electrical energy), higher cost of raw materials at Fertirey
(ammonia, whose price is linked to that of natural gas) and
higher costs on direct materials at the Mining Division;
b) Higher cost of metal –net of treatment fees- +$1,129.3
primarily due to higher prices, a higher exchange rate, and
an increased volume of metals purchased from outside parties;
and
c) Inventory movements, consolidation and restatement effects
-$62.8.
Because of the increase in Net sales (+$2,588.7)
and a less pronounced increase in the Cost of Goods Sold (+$1,368.5),
gross earnings totaled $3,216.9, rising by +$1,220.2 (+61.1%),
so the Gross Margin (as a percentage of sales) went from 21.1
to 26.7 percent.
Operating expenses -excluding depreciation-
totaled $1,079.6, rising+$58.1 (+5.7%) because of:
a) Higher exploration expenses, +$69.7 primarily due to higher
activity in the areas of Fresnillo, La Ciénega and
La Herradura; and
b) Lower SG&A expenses, -$11.6.
As a result of the rise in net income (+$1,220.2),
which more than made up for the increase in Operating expenses
(+$58.1), EBITDA came to $2,137.2, increasing by +$1,161.9
(+119.2%), and bringing the EBITDA margin (as a percentage
of sales) to 17.7%, much higher than the 10.3% reported one
year earlier.
Total Financing Cost totaled $196.6, declining
from its level in 2003 of $422.0; this change of -53.4% breaks
down as follows:
a) Lower foreign-exchange losses, -$190.2 because the peso
devalued only 1.55% in 2004, compared to 5.96% in 2003;
b) Lower interest expenses +$25.0; and
c) Higher monetary position gains +$10.3.
The other expenses (proceeds) line shows
an expense of $17.6, compared to $80.7 the year before. The
lower outlay in 2004 was due primarily to the sale of shares
in Minera Metalline, the recovery of taxes and insurance,
and revenues from the penalization of the operators of Termoeléctrica
Peñoles for the delayed startup; offset in part by
an adjustment in the book value of certain property, plant
and equipment.
The income tax and profit-sharing lines
(net) showed a charge of $413.5, compared to a credit of $89.9
in the same period of last year. This change is due to pretax
earnings of $1,061.9 in 2004, compared to a loss of-$337.6
in 2003.
Equity in the Results of Unconsolidated
Affiliates dropped by -$40.1 primarily due to the recognition
of lower earnings by the companies in which Peñoles
owns a minority stake.
The minority interest line shows a higher
profit in 2004, of $38.8, compared to $4.4 in 2003.The earnings
were due to better operating results from the Tizapa and Rey
de Plata companies, in turn mainly because of higher metals
quotations and a higher average exchange rate.
B) Comparison of results for 3Q04 vs.3Q03:
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(Millones
de pesos) |
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3Q04 |
3Q03 |
Chge. ($) |
% Chge. |
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Net sales (*) |
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$3,883.2 |
$3,188.5 |
694.7 |
21.8 |
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Gross income |
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1,040.2 |
727.1 |
313.1 |
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Gross margin |
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26.8% |
22.8% |
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EBITDA |
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679.6 |
381.5 |
298.1 |
78.1 |
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EBITDA margin |
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17.5% |
12.0% |
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Operating income |
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388.4 |
118.8 |
269.6 |
226.9 |
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Operating margin |
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10.0% |
3.7% |
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Net income |
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213.4 |
(112.6) |
326.0 |
n/a |
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Net Margin |
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5.5% |
(3.5)% |
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(*) Includes metal and exchange-rate hedging
gains.
The outstanding changes are discussed below:
Net sales were $3,883.2, rising +$694.7
(+21.8%) due to the following:
a) Higher prices +$643.8 on all products sold;
b) Higher average exchange rate ($11.4549 vs. $10.6969 per
dollar) +$234.9;
c) Higher sales volume +$81.2 primarily of silver, concentrates
sold by the mining division, and purified water;
d) Lower losses from metals and exchange-rate hedging activity,
+$16.1; and
e) Effect of restatement in constant pesos of the current
quarter -$281.3.
In dollar terms, net sales totaled US$336.6 million, made
up of (billed) sales of US$338.5 million and hedging losses
of US$1.9 million.
The Cost of Goods Sold grew by +$381.6,
as follows:
a) Higher Production Costs +$182.3 (+13.6%)
due to higher consumption and costs of operating material
for the Mining Division, and higher costs on electrical energy,
gas, coke and diesel; shipping and contractors, because of
a more intense pace of activity in the Mining Division;
b) Higher Cost of metal --net of treatment fees-- +$233.7,
due to higher prices on metals purchased from outside parties,
in line with higher quotations and a higher average exchange
rate; and
c) Inventory movement, restatement and consolidation effects,
-$34.4.
Because the +$694.7 rise in sales was higher than the +$381.6
increase in the cost of goods sold, gross earnings increased
by+$313.1 bringing the Gross Margin (as a percentage of sales)
from 22.8 to 26.8 percent.
Operating expenses –excluding depreciation-
were $360.5, an increase of +$14.9, because of:
a) Higher Exploration Expenses +$30.4 primarily at Fresnillo,
La Herradura, and Pecobre, offset partially by less exploration
outside of Mexico;
b) Lower SG&A Expenses -$15.5.
Because of higher Gross Earnings (+$313.1),
slightly offset by a rise in operating expenses (+$14.9),
EBITDA rose +$298.1 (+78.1%), to$679.6, and the EBITDA margin
went from 12.0 to 17.5 percent.
With EBITDA higher by (+$298.1), making
up for some of the rise in depreciation charges (+$28.5),
operating income rose +$269.6, to 10.0% of sales.
During the period in question, Total Financing
Cost came to $28.8, below the $224.2 reported in 3Q03. The
-$195.4 change breaks down as follows:
a) Lower Interest Expense (-$27.5);
b) Foreign-exchange losses of $1.6, lower than the $159.4
seen in 3Q03 (a change of -$157.8). The higher loss in the
year-earlier quarter was due to a more pronounced devaluation
of the peso ($0.4464 per dollar); and
c) Higher monetary position gains (+$10.0).
The “other expenses” line shows an outlay of $2.3,
compared to $51.2 in the same quarter of last year. The lower
expense stems from the recovery of insurance by the Mining
Division; sale of byproducts and services; and tax refunds.
This line was also higher in the third quarter of 2003 because
of the shutdown of the Las Torres mining unit and an adjustment
in the value of some assets.
The income tax and profit-sharing provisions—net—line
shows a charge of $149.6compared to a benefit of $42.4in the
year-earlier quarter. This change is the result of pretax
profits of $357.3 in2004, compared to a loss of $156.6 in
the same period of last year.
Equity in the Results of Unconsolidated
Affiliates totaled $16.8, an increase of +$4.6 chiefly because
of the recognition of higher profits from the companies in
which Peñoles owns a minority stake.
The Minority Interest line shows a gain
of $11.2, compared to $10.7 in the third quarter of last year.
The earnings of this most recent quarter were due to higher
income from the companies Bal-Ondeo, Tizapa and Rey de Plata,
offset in part by lower income from La Herradura and Pecobre.
The growth in (EBITDA) (+Ps313.0) was offset
partly by higher depreciation charges (+Ps13.5), which brought
operating income to +Ps299.5, equivalent to 8.1% of sales.
C) Comparison of results for 3Q04 vs.2Q04:
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(Millions
of pesos) |
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3Q04 |
2Q04 |
Chge. ($) |
% Chge. |
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Net sales (*) |
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$3,883.2 |
$4,033.6 |
(150.4) |
(3.7) |
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Gross income |
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1,040.2 |
993.7 |
46.5 |
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Gross margin |
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26.8% |
24.6% |
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EBITDA |
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679.6 |
613.7 |
65.9 |
10.7 |
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EBITDA margin |
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17.5% |
15.2% |
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Operating income |
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388.4 |
322.9 |
65.5 |
20.3 |
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Operating margin |
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10.0% |
8.0% |
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Net income |
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213.4 |
78.2 |
135.2 |
172.9 |
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Net Margin |
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5.5% |
1.9% |
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(*) Includes metal and exchange-rate hedging
gains.
In quarter-to-quarter terms, net sales (including
hedging gains) totaled $3,883.2, a decline of -$150.4 (-3.7%)
because of the following factors:
a) Higher prices +$98.5 primarily on silver,
lead and gold;
b) Lower losses from derivatives trading (futures and options)
in metals and the exchange rate, +$50.0;
c) Higher average exchange rate +$24.1($11.4549 vs. $11.3772
per dollar);
d) Effect of restating the figures in constant pesos of the
current quarter and others -$2.7;
e) Lower volume -$320.3 due to lower sales volume de gold,
lead, and concentrates in the Mining Division to third parties
and in the water business.
The Cost of Goods Sold dropped -$196.9 because
the company purchased less metal from outside parties (-$179.0),
and also brought in higher revenues from treating concentrates
for this parties than it had in the preceding quarter (+$91.4),
in addition to inventory movements and restatement effects
and (-$44.3); partly offset by higher Production Costs (+117.8).
The reduction in the Cost of Goods Sold
(-$196.9) was greater than the decline in Sales (-150.4),
so Gross Earnings were up +$46.5 bringing the gross margin
from 24.6 to 26.8 percent of sales.
Operating expenses –not including depreciation charges-
totaled $360.5, a reduction of -$19.5 caused by
a) Higher Exploration Expenses +$10.0, primarily
at Fresnillo and La Herradura, in connection with geology
studies; and
b) Lower SG&A Expenses -$29.5; because professional fees
(organizational and development consulting, investment projects
and metals studies) and communication and information technology
expenses (software installation and licenses) were all higher
in the second quarter than in the third.
With gross earnings higher (+$46.5), and
operating expenseslower (-$19.5), EBITDA rose from $613.7
to $679.6, an increase of +$65.9, and the EBITDA grew from
15.2 to 17.5 percent of sales.
Total financing cost was $28.8 in the quarter,
comparing well against a cost of $162.5 in the immediately
preceding quarter; the quarter-to-quarter change of -$133.7
breaks down as follows:
a) A decline of -$8.6 in interest expense;
b) A decline of-$77.4 in foreign-exchange losses due to a
slight appreciation of the peso against the dollar (-$ 0.001
per dollar) compared to a devaluation in the immediately preceding
quarter (+$0.2576 per dollar); and
c) An increase of +$47.7 in monetary position gains.
The “other expenses” line shows an outlay of $2.3,
down from $34.8 in the second quarter. In the third quarter,
this line included insurance reimbursements, sale of other
products and services, and tax refunds, offset partly by an
increase in charges from the restatement of book value on
certain property, plant and equipment.
The income tax and profit-sharing provision
brought a charge of $149.6compared to $61.3 in the preceding
quarter. The increase in the charge for the third quarter
(+$88.3) was caused by higher pretax earnings, in turn the
result of greater gross earnings and lower total financing
cost.
Equity in the Results of Unconsolidated Affiliates rose +$2.6,
due to the recognition of lower profits from the companies
in which Peñoles has a minority position.
The minority interest line reflects a gain
of $11.2, compared to $0.4 in the preceding quarter. The increase
was due mainly to better operating results from the mining
and water businesses.
5.- PROJECTS
Fresnillo (silver/Zacatecas):
In September, the unit successfully concluded and started
up an expansion of milling capacity from 4,500 to 7,000 metric
tons a day, with an investment of US$22.8mn. The expansions
are to conclude in the third quarter of 2004.This project
will raise annual production from 27.2 to 42.3 million ounces.
*La Ciénega (gold/Durango):
a) Work was completed on construction of
an extraction shaft to support the future growth of these
operations and reduce extraction costs. Startup testing of
the equipment will begin in October 2004. Investment will
total US$3.1mn at the conclusion of the project.
b) A 34.6% expansion of milling capacity,
from 520,000 to 700,000 metric tons a year. This expansion
will increase gold production from 132,200 to 176,600 ounces
a year.It will require a total investment of US$14.4mn and
the project is expected to start up in the second quarter
of 2005.
*Sabinas (zinc/Zacatecas):
A 21.0% expansion of milling capacity, from
950,000 to 1,150,000 metric tons of ore per year. This expansion
will allow the plant to turn out 32,000 metric tons of zinc
a year, along with 4.3 million ounces of silver.The investment
is estimated at US$3.7mn; construction should be complete
by the fourth quarter of 2004.
La Herradura (gold/Sonora):
In the fourth quarter of 2003, we began
an additional expansion of capacity for the leaching yards,
at an investment of US$2.5mn.This project is expected to start
up operations in the fourth quarter of 2004.
Milpillas (copper mine/Sonora):
Work continued on deepening the access ramp
and the extraction shaft, as well as preparing the mine and
detail engineering. The total investment in this project is
estimated at US$203.0 million, and it is expected to begin
operations in the fourth quarter of 2005, with a production
capacity of 55,600 metric tons a year of cathode copper. To
date, we have invested US$87.1mn, and it is 47% complete.
6.- ENVIRONMENTAL
ASPECTS
On Saturday, September 11, the Fresnillo unit opened the first
phase of the “Los Jales” ecological park.In attendance
were the governor of Zacatecas, Ricardo Monreal Avila, and
the Chief Executive Office of Industrias Peñoles. The
purpose of this park is to provide the residents of and visitors
to Fresnillo a place for recreation, leisure, and environmental
education.
Peñoles took part in meetings of
the International Council on Mining and Metals, the International
Lead and Zinc Research Organization, the Global Reporting
Initiative and the InternationalLeadManagementCenter in London,
in order to learn about worldwide trends in sustainability
in the mining industry.
The company also continued to work on its
“SustainableForest” program at the Ciénega
unit.
Another activity was participation in the
Commission on Environmental Cooperation at the Instituto Tecnológico
y de Estudios Superiores de Monterrey and FUNTEC, in an event
organized by the Mexican Mining Industry Chamber of Torreón,
Coahuila, to include our suppliers in the sustainability chain.
The office of the Vice President for Mexican
Pacific and International Exploration completed the formal
auditing process necessary to obtain Environmental Administration
System certification under ISO 14001:1996 standards, and according
to the scope of the certification established by the Register
Accreditation Board (ANSI RAB). In addition, the La Herradura,
Ciénega and Química del Rey units received their
ISO 14000 re-certification.
The Naica Mining Unit renewed its Clean
Industry certificate for a new period that will end on June
1, 2006.In addition, the La Herradura, Ciénega and
Bismark units received their Clean Industry re-certifications.
Finally, the company completed the last
draft of the document entitled: “Compendium for the
Environmentally Friendly Handling of Lead and its Compounds
in Small and Mid-Sized Industry,” in collaboration with
the International Lead Management Center, the Mexican Mining
Industry Chamber, and the Instituto Tecnológico y de
Estudios Superiores de Monterrey.
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