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REPORT OF THE CHIEF EXECUTIVE OFFICER FOR THE FOURTH QUARTER OF 2007
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(Figures in millions of constant pesos)
•In fiscal year 2007, net sales totaled Ps44,730.5, rising by +15.9% over the same period of 2006; gross income was Ps11.076.7, up +8.8%; EBITDA came to Ps8,376.6, rising +6.7%; and operating income was Ps6,654.5, up +3.1%.These are all record annual results for the company.
•Average metal prices in 2007 were higher than in 2006: lead +100.1%, silver +16.0%, gold +15.3% and copper +5.9%.
•Gold production in the mining division totaled 388,554 ounces, also a record level.
• In the metallurgical complex, production of refined gold came to 1.7 million ounces, and refined silver totaled 110.1 million ounces, both annual records.
1.- EXECUTIVE SUMMARY.
In January - December 2007, Peñoles reported Billed sales –not including the results of metal and FX hedging- of Ps48,518.4 +17.4% more than in 2006. Gross income was Ps11,076.7, higher by +8.8% and EBITDA was Ps8,376.6, up +6.7%.
In dollar terms, billed sales came to US$4,348.1 million, gross income US$992.4, EBITDA US$750.2 and operating income US$595.8 all of them record levels for this company's history.
Excluding extraordinary entries in both years and primarily the 2006 gain from the sale of the Pinos Altos project in Chihuahua, net income for the year came to Ps3,976.9, an increase of +9.1% over the same period of 2006; including net income, net income dropped -9.3% from the previous year.
The following are some of the operating and market aspects that favorably affected the company's operating results in January-December 2007:
(i)
Average price of gold (US$696.66 per ounce), silver (US$13.39 per ounce), lead (US$1.1703 per pound) and copper (US$3.2289 per pound) were higher than in 2006 by +15.3%, +16.0%, +100.1% and +5.9%, respectively.
(ii)
The Mining Business set record levels of production volume in gold (388,554 ounces) and copper content in concentrates (12,318 tons).
(iii)
The Metals Business set a record for production of refined gold (1,742,273 ounces) and refined silver (110.1 million ounces).
(iv)
In the Chemical Business, production of magnesium sulfate, 33,900 metric tons, was another record.
(v)
Higher revenues in the metal complex due to higher treatment fees and a rise in the volume of gold, silver and lead content processed for third parties.
(vi)
Lower unit cost of metal coke -8.1%.
(vii)
Lower income tax provision (-Ps377.4) because of a decline in earnings against 2006, when the results included extraordinary gains on the sale of the Pinos Altos gold project.
These positive aspects were offset in part by:
(a)
The expiration of metal hedge positions, generating an opportunity cost of Ps3,788.0, compared to Ps2,754.4 in 2006, because of a sharp rise in metal quotations. The hedges that expired were taken out in the past to guarantee the company's future margins. In any case, because more of its mining production was unhedged, the company enjoyed the benefits of rising metal prices on that unhedged volume.
(b)
Higher average unit cost of electrical energy (+5.4%). Note that the cost in this period was US$53.5 million lower than if Peñoles had purchased all of its electrical energy from the Comisión Federal de Electricidad (CFE).
(c)
Higher minority interest (+Ps142.6), because of lower results from Tizapa and Penmont, companies in which Peñoles has minority partners.
Meanwhile, the cost of goods sold rose +18.5% due to:
(a)
Higher Metals costs resulting from higher metals quotations and an increased volume purchased from third parties at the Met-Mex metallurgical complex in order to maximize its capacity utilization.
(b)
Higher Production costs (+12.1%) due to higher costs for subcontractors, operating material, major maintenance and royalties. The increase in costs was caused by higher production volume and a rise in unit costs of raw materials necessary for operations. Also, the 2007 results included the first full calendar year of production costs atMilpillas.
Internal inflation for Peñoles, which is calculated based on a basket of its most important inputs, was 10.70%, higher than the rise in the National Consumer Price Index (3.76%). The increase was due primarily to higher electricity costs, which led to an increase in production costs.
(c)
Higher treatment fees mitigated some of these cost pressures.
Depreciation of fixed assets rose +23.4% due to investments in fixed assets and the startup of the Milpillas mine.
Investment in prospecting was US$87.2 million, +33.9% higher than in 2006. Those resources were used to identify and study new deposits in Mexico and South America (Peru and Chile) and to replace and augment reserves in the operating mines. The main projects in Mexico were Saucito-Jarillas, Juanicipio, Velardeña, Orisyvo, San Julián and the Herradura corridor. Proven and probable reserves rose substantially at Tizapa (+257.4%), Fresnillo (+148.4%) and Naica (+75.3%).
Total financing cost was lower by -10.4% due to:
1)
Lower financial losses -net-, -Ps7.0.
2)
Lower net foreign-exchange gains -Ps14.0 due to the slight depreciation against the dollar, comparing well against the foreign-exchange loss in 2006.
3)
Lower net monetary gains, -Ps1.2 the result of a lower inflation index in 2007.
The table below sums up the above information:
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2007 |
2006 |
% Chge.
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Billed sales |
$ 48,518.4 |
$ 41,332.7 |
+ 17.4 |
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Net sales (*) |
44,730.5 |
38,578.3 |
+15.9 |
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Gross income |
11,076.7 |
10,185.3 |
+ 8.8 |
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EBITDA |
8,376.6 |
7,848.1 |
+ 6.7 |
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Operating income |
6,654.5 |
6,452.7 |
+ 3.1 |
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Total Fin. Cost |
170.8 |
190.6 |
-10.4 |
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Other Expenses (Proceeds) |
172.6 |
(855.2) |
n/a |
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Net income w/oextraordinary items (**)
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3,976.9 |
3,645.2 |
+9.1 |
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Net income |
3,869.4 |
4,264.9 |
-9.3 |
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(*)
Includes hedging results.
(**)
Includes extraordinary entries, primarily the sale of the project in 2006.
The following sums up the highlights of the company's operations in January-December of 2007, compared to those of the same period of last year.
Mining Business:
In the underground mines--not including Milpillas– a total of 8.5 million metric tons were milled, +2.7% more than the year before, primarily at Bismark +13.5%, Ciénega +6.7% and Fresnillo +4.8%. Milled ore -including Milpillas- totaled 9.4 million metric tons, +11.6% higher than in 2006. Deposited ore at La Herradura was 10.9 million metric tons, rising +23.7% over the preceding year.
Production of cold and copper content in concentrates reached record levels, and in general, the production of lead and silver was unchanged from 2006. Zinc production was lower by -5.7% due to lower production and grades in Naica, F.I. Madero and Sabinas. Production at Naica was affecting by flooding early in 2007, which lowered the content of silver, lead and zinc; starting in the second quarter, Naica was back to normal operations and capacity. The Sabinas unit temporarily cut back production for the startup of a new circuit of lead-copper concentrate separation in order to produce higher-quality concentrates. Note that Herradura and Tizapa were operating at an outstanding level, resulting in a rise in their production of content over the preceding year.
In the first calendar year of operations at Milpillas, the production of cathode copper was lower than the projected level.This was because in the year, production was affected by preparation of the mine and a longer learning curve, primarily because of instability in the ground that required further anchoring efforts and the application of shotcrete to guarantee the safety of our personnel.
Metals Business:
The company set new production records for refined gold (1,742,273 ounces) and refined silver (110.1 million ounces) due to greater entries of concentrates and materials rich in precious metal content form third parties. Production of refined lead in 2007 was similar to 2006, while production of refined zinc dropped slightly (-4.3%) due to shutdowns to provide unprogrammed maintenance in some areas of the zinc refinery, and problems in process controls.
At the close of the period, Peñoles had a total debt equivalent to US$695.8 million. Its current debt load is made up primarily of the following long-term portions:
(i)
US$87.7 million from a private placement in 1997.
(ii)
US$377.0 million from a private placement of bonds in the second quarter of 2006.
(iii)
US$142.5 million in credit taken out at the end of 2004 to build the Milpillas copper project.
At the close of 2007, the gross flow of cash generated by the company's operations came to Ps6,228.8, +10.4% more than in the same period of 2006. This amount, combined with the funds obtained through short-term bank loans to finance working capital and the sale of non-productive assets, was used to finance
:
(i)
An increase of Ps1,344.4in working capital, particularly:
(a)
Higher inventories (Ps1,885.2) due to higher prices on metals and entry of a higher volume of materials with precious metal content and lead. The increase in volume over the previous year was not significant.
These effects were offset in part by:
(a)
Reduction in clients (Ps629.3) due to a recovery of export accounts.
(b)
Rise in suppliers (Ps138.9) due to the purchase of content from ore shippers.
(ii)
Investment in property, plant and equipment, Ps2,696.0 to replace equipment and projects primarily at Fresnillo, Met-Mex, Penmont, Tizapa and Química del Rey.
(iii)
Payment of dividends to shareholders totaling Ps2,443.0.
(iv)
Payment of short-term loans to IPSA and the short-term portion of a long-term credit taken out to finance the Milpillas project, for Ps5,609.9.
(v)
An increase of Ps786.2 in permanent stock investments. To guarantee the supply of energy from renewable sources, Peñoles acquired a 64% stake in a company that is developing an aeolic generation project in Oaxaca, with the intent of acquiring 100% of that company once it begins commercial operations.
Cash and temporary investments totaled Ps507.8 at the end of the period. Some of these funds will be used to make deposits relating to Peñoles' debt and metals hedges.
At the close of 2007 our total work force--including employees and collaborators--was 7,749 individuals, 130 more than in 2005. The increase was due to the startup of operations at Milpillas, a rise in production at La Herradura and the startup of operations at the lead-copper separation plant at Sabinas.
In 2007 we also carried out the following strategic projects
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Mining business:
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A sixth leaching yard was build at La Herradura, ensuring production of 200,000 ounces of gold a year.
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At Tizapa, a new tailings dam was build with a useful life of 10 years, and more work was done on preparing the mine for future expansion
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The second phase of the tailings dam at La Ciénega was completed, with an estimated useful life of 16 years.
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Testing was concluded on the lead-copper separation circuit at Sabinas, which allowed us to obtain higher quality concentrates
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Modifications were begun to enable lead-copper separation at Francisco I. Madero.
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Engineering work continued on expansions at Tizapa and Ciénega.
Metals Business:
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Sulfur dioxide absorption equipment was installed at the sulfuric acid plant in the lead circuit.
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Engineering work continued on expanding the gold and silver circuits.
Chemical Business :
*
At Química del Rey, work continued on building the flame-retardant magnesium hydroxide plant, with a capacity of 15,000 metric tons per year, and operations will begin in the first quarter of 2008.
*
Engineering work continued on the new coal.
2.-
ECONOMIC CLIMATE AND METALS PRICES.
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4Q06 |
3Q07 |
4Q07 |
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Inflation (%): |
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In the period |
1.55 |
1.62 |
1.52 |
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12 months |
4.06 |
3.80 |
3.76 |
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FX rate (peso/dollar): |
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Close |
10.8755 |
10.9203 |
10.8662 |
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Average |
10.8874 |
10.9599 |
10.8503 |
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Gold
( US$/Oz) |
Silver
( US$/Oz) |
Lead
( US$cts/lb) |
Zinc
( US$cts/lb) |
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1st. Quarter 2006 |
553.98 |
9.70 |
56.33 |
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2nd. Quarter 2006 |
627.40 |
12.22 |
49.91 |
149.33 |
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3rd. Quarter 2006 |
621.50 |
11.65 |
53.96 |
152.56 |
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4rd. Quarter 2006 |
614.47 |
12.59 |
73.80 |
190.67 |
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Average 2006 |
604.34 |
11.54 |
58.50 |
148.56 |
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1st. Quarter 2007 |
650.27 |
13.29 |
81.04 |
156.75 |
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2nd. Quarter 2007 |
667.24 |
13.32 |
98.70 |
166.18 |
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3rd. Quarter 2007 |
681.12 |
12.70 |
142.57 |
146.37 |
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4rd. Quarter 2007 |
788.02 |
14.24 |
145.81 |
118.99 |
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Average 2007 |
696.66 |
13.39 |
117.03 |
147.07 |
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%Chge. 4Q2007 vs 4Q2006 |
+28.2 |
+13.1 |
+97.6 |
-37.6 |
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%Chge. 4Q2007 vs 3Q2007 |
+15.7 |
+12.1 |
+2.3 |
-18.7 |
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%Chge. 4Q2007A vs 4Q2006A |
+15.3 |
+16.0 |
+100.0 |
-1.0 |
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Highlights of the quarter:
Gold:
Average quotations in the quarter rose +15.7% over the third quarter of 2007.Prices were driven higher jitters over wage negotiations between South African mining workers and gold producers in the region (Anglogold, Ashanti, Gold Fields and Harmony Gold), the strength of demand from Turkey and the United Arab Emirates, Israeli attacks on the Gaza Strip, increased investment in gold Exchange Traded Funds (ETFs), a reduction in gold production at the Elandsrand mine, owned by Harmony Gold, solid interest from investors and higher prices on energy and other commodities.
Silver:
average quotations in the quarter rose +12.1% over the preceding quarter. Silver prices benefits from the strength of crude oil prices and buying interest among physical consumers and investors.
Lead:
average quarterly prices of this metal rose +2.3% over the third quarter of 2007. Quotations were helped by the loss of the operating license at the Australian port of Esperance, a fire at the Isa mine, owned by Xstrata, and an announcement by various refineries like Xinling lead, that due to restrictive measures adopted by the Chinese government and high prices of lead concentrates, they had decided to suspend expansion plans for the coming months.
Zinc:
average prices fell -18.7% from the preceding quarter.This metal was affected by a production surplus, a reduction in imports from china due to increased interest in galvanized steel and the settlement of long positions by mutual funds.
3.-
OPERATING RESULTS - PRODUCTION VOLUME.
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Unidad |
4Q06 |
3Q07 |
4Q07 |
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Mining Division : |
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Milled ore |
(Mton) |
1,993 |
2,187 |
2,129 |
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Deposited ore (a) |
(Mton) |
2,639 |
3,022 |
3,005 |
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Gold |
(kg) |
2,822 |
2,805 |
3,037 |
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Silver |
(ton) |
324.9 |
361.2 |
367.0 |
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Lead |
(ton) |
13,665 |
15,845 |
16,706 |
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Zinc |
(ton) |
50,688 |
50,328 |
46,483 |
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(a)
Herradura: open-cut mine |
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Metals and Chemicals Division : |
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Gold |
(kg) |
11,668 |
13,831 |
13,911 |
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Silver |
(ton) |
778.5 |
845.3 |
861.6 |
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Lead |
(ton) |
31,487 |
35,441 |
35,389 |
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Zinc |
(ton) |
56,515 |
58,272 |
57,015 |
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Sodium sulfate |
(ton) |
155,500 |
149,000 |
158,000 |
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Magnesium oxide |
(ton) |
23,316 |
14,892 |
20,312 |
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Ammonium sulfate |
(ton) |
41,192 |
43,649 |
45,601 |
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Magnesium sulfate |
(ton) |
4,700 |
8,050 |
9,600 |
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Mining Business (metal content in concentrate and other materials):
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Change 4Q07 vs. 4Q06 YTD :
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Gold (+2.1%): higher milled ore at Penmont and higher recovery at Tizapa.
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Zinc (-5.7%): lower recovery and grades at Sabinas, Fresnillo and Ciénega, lower milled ore and grade at Naica and lower grade at F.I Madero.
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Silver (-0.7%): lower grades and recovery at Sabinas, Ciénega and Bismark, lower grade at Fresnillo and lower milled ore and grade at Naica.
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Change 4Q07 vs. 4Q06:
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Lead (+22.3%): higher milled ore, grades and recovery at Ciénega and Tizapa, higher recovery at Sabinas, higher grade and recovery at Naica and higher grade at F.I Madero.
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Silver (+12.9%): higher milled ore and recovery at Fresnillo, higher milled ore and grades at Ciénega and Sabinas, higher milled ore, grade and recovery at Tizapa and higher grade and recovery at Naica.
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Gold (+7.6%): higher milled ore and recovery at Penmont and Tizapa.
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Zinc (-8.3%): lower milled ore, grade and recovery at F.I Madero and lower grade in Bismark and Naica.
* Change 4Q07 vs. 3Q07:
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Gold (+8.3%): higher milled ore and recovery at Penmont and Ciénega.
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Lead (+5.4%): higher grade, recovery and milled ore at Ciénega and higher grade and recovery at Tizapa and Naica.
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Silver (+1.6%): higher grades and recovery at Tizapa and Fresnillo, higher milled ore, grade and recovery at Ciénega and higher grade in Sabinas.
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Zinc (-7.6%): lower milled ore, grades and recovery at F.I Madero and Tizapa and lower grade and recovery at Bismark.
Metals and Chemicals Business (production of refined metal):
* Change 4Q07 vs. 4Q06 YTD:
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Gold (+11.2%): higher content in semi-processed materials from third parties and inventory reduction (annual record).
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Silver (+10.8%): higher silver content in semi-processed materials from third parties (annual record).
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Zinc (-4.3%): lower content due to a shutdown for corrective maintenance in some areas of the zinc refinery .
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Magnesium sulfate (+2.7%): higher due to reaction-based production for the purpose of improving product availability.
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Magnesium oxide (-13.0%): lower due to heavy rains that diluted solution, and maintenance of the rotating furnace.
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Ammonium sulfate (-8.9%): lower because production had been higher in 2006 due to a reduction of acid inventories and higher receipts of solution.
* Change 4Q07 vs. 4Q06:
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Gold (+19.2%): higher receipts of semi-processed materials from third parties .
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Lead (+12.4%): higher receipts of content in concentrates received from third parties at the lead-silver refinery.
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Silver (+10.7%): higher receipts of content in concentrates received from third parties at the lead-silver refinery.
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Magnesium sulfate (+104.3%): higher because of an increased volume produced via reaction, and the fact that production was lower in 2006 because inventories were sufficient.
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Ammonium sulfate (+10.7%): higher receipts of solution at the lead foundry.
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Magnesium oxide (-12.9%): due to corrective maintenance on the rotating furnace, and an adjustment to sales levels, compared to a period in 2006 when operations were continuous.
*
Change 4Q07 vs. 3Q07:
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Silver (+1.9%): higher receipts of content in concentrates received from third parties at the foundry and the lead-silver refinery.
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Zinc (-2.2%): lower entries of semi-processed materials from third parties at the zinc refinery.
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Magnesium oxide (+36.4%): higher because of excess rains in the third quarter, which diluted the solution.
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Magnesium sulfate (+19.3%): higher because of increased reaction-based production and low magnesium concentrate in the brine during the preceding quarter.
-Sodium sulfate (+6.0%): higher because of operating continuity, because various types of maintenance were performed on the plant during the third quarter.
- Ammonium sulfate (+4.5%): higher production due to market demand and the availability of sulfuric acid.
4.-
FINANCIAL RESULTS .
A)
Comparison of results for 4Q07 YTD vs. 3Q07 YTD:
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(Million pesos) |
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4QYTD07 |
4QYTDA06 |
Chge ($) |
% Chge. |
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Net Sales (*) |
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$44,730.5 |
$38,578.3 |
6,152.1 |
+15.9 |
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Gross Income |
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11,076.7 |
10,185.3 |
891.3 |
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Gross Margin |
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24.8% |
26.4% |
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EBITDA |
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8,376.6 |
7,848.1 |
528.5 |
+6.7 |
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EBITDA Margin |
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18.7% |
20.3% |
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Operating Income |
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6,654.5 |
6,452.8 |
201.7 |
+3.1 |
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Operating Margin |
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14.9% |
16.9% |
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Net Income |
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3,869.4 |
4,265.0 |
(395.6) |
(9.3) |
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Net Margin |
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8.7% |
11.1% |
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(*)
Includes metals and FX hedging results.
The main changes are discussed below:
Higher Net sales, +Ps 6,152.1 (+15.9%) rising from P 38,578.3 to Ps44,730.5. The increase breaks down as follows:
a)
Higher sales volume +Ps1,845.8 due to higher sales of gold, silver, cathode copper and magnesium sulfate;
b)
Higher prices +Ps5,971.8 on practically all the products sold except zinc;
c)
Higher losses from metals and FX hedges -Ps1,033.6;
d)
Higher average FX rate +Ps90.4 (Ps10.9274 vs Ps10.8994 per dollar); and
e)
Effects of restating figures of the past year in constant pesos of December 30, 2007 and other effects, -Ps722.2.
In dollar terms, net sales came to US$4,008.4 million, made of a record level of (billed) sales of US$4,348.1 million and hedging losses of US$339.7 million.
The higher cost of goods sold, +Ps 5,260.8 (+18.5%) was the result of:
a)
Higher production costs, +Ps1,111.7 (+13.6%) due to an increase in the cost of contractors, operating material, reactives and maintenance;
b)
Higher Metals costs –net of treatment fees- +Ps5,063.7 primarily because of higher prices and a greater volume purchased from third parties; y
c)
Inventory movements, consolidation and restatement effects -Ps914.6.
Because the rise in net sales (+Ps6,152.1) was greater than the increase in the cost of goods sold (+Ps5,260.8), the 11,076.7 increase in gross income was +Ps891.3 (+8.8%), higher and the gross margin (as a percentage of sales) rose to 24.8 percent.
Operating expenses--not including depreciation-- totaled Ps2,700.0, an increase of +Ps362.8 (+15.5%) due to:
a)
Higher Prospecting expenses +Ps246.2 mainly because of a higher pace of prospecting within Mexico and abroad (the Inca Gold project in Chile)
; and
b)
Higher SG&A expenses +Ps 116.7 mainly because of higher fees paid to corporations in connection with the sale of real property and building maintenance.
The rise in gross income (+Ps891.3), more than offset the increase in operating expenses (+Ps362.8), so EBITDA came to Ps8,376.6 rising by +Ps528.5 (+6.7%), and the EBITDA margin (in proportion to sales) was 18.7 percent.
The rise in EBITDA (+Ps528.5) offset the increase in depreciation and amortization (+Ps326.8), so the operating income of Ps6,654.5 was higher by +Ps201.7 (+3.1%), and the operating margin (in proportion to sales) was 14.9 percent.
Total financing cost of Ps170.8, was lower than in 2006 by -Ps19.8; the change breaks down as follows:
a)
Net FX losses of Ps11.8, compared to a loss of Ps25.8 in the same period of 2006
;
b)
Lower net monetary position gains -Ps1.2 due to lower inflation (3.76% in 2007 vs. 4.06% in 2006); and
c)
Lower net interest expense -Ps7.0 due to a higher yield on investments, higher interest form third parties and lower bank commissions.
The other expenses (income) line showed a net outlay of Ps172.6 compared to a net gain of -Ps855.2 in the previous year. In 2006, the company entered a profit on the sale of the Pinos Altos project to Agnico Eagle, while in 2007 those expenses were made up mainly of provisions for the retirement of fixed assets.
In addition, employee profit-sharing provisions rose +8.2% from Ps489.4in 2006 to Ps 529.3 in 2007 due to higher results.
Equity in the results of unconsolidated associates rose in this period, chiefly due to the recognition of profits among the companies in which Peñoles owns a minority stake, totaling Ps139.2, compared to a loss of -Ps76.6 reported in 2006.
The income tax and profit sharing (net) line contained a charge of Ps1,674.4, lower by -Ps377.4 than in the same period of the preceding year. This change was due to lower pretax income Ps5,921.0 reported in 2007, compared to an income of Ps6,551.4 in 2006.
Minority interest in 2007 was Ps377.2compared to Ps234.6 in 2006. The increased earnings came chiefly from better operating results at Tizapa and Penmont.
B)
Comparative analysis of results for 4Q07 vs. 4Q06:
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(Million pesos) |
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4Q07 |
4Q06 |
Chge ($) |
% Chge. |
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Net Sales (*) |
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$11,431.8 |
$10,741.5 |
690.3 |
6.4 |
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Gross Income |
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2,796.9 |
2,535.7 |
261.2 |
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Gross Margin |
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24.5% |
23.6% |
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EBITDA |
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2,055.4 |
1,987..2 |
68.2 |
3.4 |
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EBITDA Margin |
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18.0% |
20.3% |
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Operating Income |
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1,576.9 |
1,613.5 |
(36.6) |
(2.3) |
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Operating Margin |
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13.8% |
16.7% |
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Net Income |
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918.9 |
981.5 |
(62.6) |
(6.4) |
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Net Margin |
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8.0% |
9.0% |
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(*)
Includes metals and FX hedging results.
The main changes are discussed below:
Las Net sales de Ps11,431.8 rose +Ps690.3 (+6.4%) which breaks down as follows:
a)
Higher sales volume, +Ps299.9 primarily of gold, silver and magnesium sulfate;
b)
Higher prices +Ps869.5 on most of the products sold, except zinc;
c)
Lower average exchange rate (Ps10.8503 vs Ps10.8874 per dollar) Ps33.1;
d)
Lower metals and FX hedging losses, +Ps24.6; y
e)
Effects of restating figures in constant pesos of the current quarter and others, -Ps470.6.
In dollar terms, net sales totaled US$1,007.9 million, made up of net (billed) sales of US$1,093.7 million and hedging losses of US$85.8 million
.
The cost of goods sold rose +Ps429.1 due to the following change:
a)
Higher Production costs +Ps134.6 (+6.0%) due to higher costs of energy, contractors, reactives and maintenance;
b)
Higher Metals costs –net of treatment fees- +Ps529.4 because of an increase in the volume of metal purchased from outside sources; and; y
c)
Inventory movements, consolidation and restatement effects, -Ps234.9.
Because the +Ps690.3 rise in net sales was slightly lower than the +Ps429.1, increase in the cost of goods sold, gross incomerose +Ps261.2 and the gross margin (as a percentage of sales) was 24.5 percent.
Operating expenses--not including depreciation effects--came to Ps741.5, rising +Ps193.0 due to:
a)
Higher SG&A expenses +Ps142.3 ;
b)
Higher Prospecting expenses +Ps50.7 primarily at the Fresnillo, Naica and Chilean mines (international prospecting).
Because of higher gross income (+Ps261.2) which offset the rise in operating expenses (+Ps193.0), EBITDA was Ps2,055.4, up by +Ps68.2 (+3.4%), and the EBITDA margin was 18.0 percent.
A rise in depreciation charges (+Ps104.9) resulting from the first complete year of operation at Milpillas and higher investment in equipment within the mine, operating income sank -Ps36.6, to 13.8% of sales.
Total financing cost (Ps0.5) in the period in question compares negatively against the 4Q06 gain of -Ps18.9. The -Ps19.0 change was the product of:
a)
Lower net financial losses -Ps67.5 due to a higher return on investment, gains on derivative trading at market value, and higher income from third parties and accounts receivable;
b)
A decline of Ps5.7 in foreign-exchangelosses, compared to the 2006 gain of Ps48.2, due to a less pronounced appreciation of the peso against the dollar, creating a negative change of +Ps42.5; y
c)
Lower net monetary gains, +Ps44.0.
The other expenses (proceeds) line shows a charge of Ps39.7 compared to Ps46.7 in the fourth quarter of last year. Allocations to the employee profit-sharing reserve in 2007 came to Ps193.6, +Ps97.6 higher than in the previous year, when it was Ps96.0.
The net income tax reserve showed a charge of Ps 425.4, lower by -Ps15.1 than in the year-earlier period, due to lower profits.
Equity in the income of unconsolidated associates was Ps87.1, lower than the year-earlier charge of -Ps112.3 con compared to the year-earlier loss of de Ps25.3, mainly because of a change in the results of the companies in which Peñoles owns a minority position.
Minority interest totaled gains of Ps86.4, compared to the 4Q06 profit of Ps42.5, due to better results at Tizapa and Penmont.
C)
Comparison of results for 4Q07 vs. 3Q07:
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(Million pesos) |
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4Q07 |
3Q07 |
Chge ($) |
% Chge. |
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Net Sales(*) |
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$11,431.8 |
$11,445.8 |
-14.0 |
(0.1) |
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Gross Income |
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2,796.9 |
2,587.8 |
209.1 |
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Gross Margin |
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24.5% |
22.6% |
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EBITDA |
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2,055.4 |
1,866.5 |
189.0 |
10.1 |
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EBITDA Margin |
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18.0% |
16.3% |
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Operating Income |
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1,576.9 |
1,419.1 |
157.7 |
11.1 |
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Operating Margin |
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13.8% |
12.4% |
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Net Income |
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918.9 |
791.0 |
127.9 |
16.2 |
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Net Margin |
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8.0% |
6.9% |
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(*)
Includes metals and FX hedging results.
Net sales totaled Ps11,431.8 a slight decline of -Ps14.0 (-0.1%) due to the following elements:
a)
Lower sales volume -Ps581.3 primarily because of a lower volume of zinc sold;
b)
Higher prices +Ps610.0 on gold, silver, and lead;
c)
Lower average FX rate -Ps109.1 (Ps10.8503 vs. Ps10.9599 per dollar);
d)
Lower losses on trading metals and FX derivatives (futures and options), +Ps171.9; y
e)
Effects of restating figures in constant pesos of the current quarter and others, -Ps105.6.
The cost of goods sold declined by -Ps223.2 due to:
a)
Lower Production costs -Ps30.0 (-1.2%) because of a decline in the cost of operating material, electrical energy and maintenance;
b)
Lower Metals costs –net of treatment fees- -Ps339.7 due to a lower volume of metal purchased from outside sources; y
c)
Inventory movements, consolidation and restatement effects, +Ps146.5.
Despite the reduction in net sales (-Ps14.0), a more pronounced reduction in the cost of goods sold (-Ps223.2) allowed gross income to rise by +Ps209.1 and the gross margin (in proportion to sales) was 24.5 percent.
Operating expenses –not including depreciation- totaled Ps741.5, an increase of +Ps20.2 caused by:
a)
Higher SG&A expenses in +Ps19.6 due to higher fees paid to corporations;
b)Higher Prospecting expenses, +Ps0.6.
With the rise in gross income (+Ps209.1) which offset the slight rise in operating expenses (+Ps20.2), EBITDA went from Ps1,866.5 to Ps2,055.4, an increase of +Ps189.0, and the EBITDA margin (in proportion to sales) was 18.0 percent
.
Total financing cost in the third quarter Ps7.9, 99.4% higher than in the fourth quarter. The change of -Ps7.9 breaks down as follows:
a)
Higher net financial losses, +Ps15.9 due to higher interest on bank loans and a lower return on investment;
b)
The change of -Ps55.8 due to foreign-exchange gains of Ps5.7, compared to a loss of Ps50.1 in the immediately preceding quarter; and
c)
Lower net monetary gains, -Ps32.0. In the fourth quarter of 2007 this line showed a benefit of -Ps112.5 due to a lower inflation index, comparing poorly against the monetary gain of -Ps144.6 reported in the third quarter.
The other expenses (income) line showed an expense of Ps39.7 compared to a higher expense of Ps115.6 in the preceding quarter, due to an adjustment in the valuation of fixed assets and mining works.
The income tax provision showed a charge of Ps425.4 compared to Ps339.1 in the preceding quarter. The higher charge in the fourth quarter (+Ps86.3) was due to an increase in pretax income to Ps1,430.6, compared to Ps1,206.2 in the preceding quarter.
Equity in the income of unconsolidated associates was Ps87.1 (+85.3) higher than in the preceding quarter, because of a change in the results of the companies in which Peñoles owns a minority position.
Minority interest totaled gains of Ps86.4 compared to the Ps76.2 reported in the preceding quarter, due to higher profits from Tizapa and Penmont.
5.-
PROJECTS
Mining business:
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A sixth leaching yard was build at La Herradura, ensuring production of 200,000 ounces of gold a year.
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At Tizapa, a new tailings dam was build with a useful life of 10 years, and more work was done on preparing the mine for future expansion.
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The second phase of the tailings dam at La Ciénega was completed, with an estimated useful life of 16 years.
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Testing was concluded on the lead-copper separation circuit at Sabinas, which allowed us to obtain higher quality concentrates.
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Modifications were begun to enable lead-copper separation at Francisco I. Madero.
- Engineering work continued on expansions at Tizapa and Ciénega.
Metals Business:
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Sulfur dioxide absorption equipment was installed at the sulfuric acid plant in the lead circuit.
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Engineering work continued on expanding the gold and silver circuits.
Chemical Business:
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At Química del Rey, work continued on building the flame-retardant magnesium hydroxide plant, with a capacity of 15,000 metric tons per year, and operations will begin in the first quarter of 2008.
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Engineering work continued on the new coal.
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