(Figures in millions of pesos)
1.- OVERVIEW. Sales--not including metals and FX hedging results--totaled Ps42,780.6 (US$4,064.9 million) and were the highest ever recorded by this company in a nine-month period. This is +16.9% higher than the YTD results for the same period of 2007. We also set a record for gross income, of Ps9,548.3 (US$909.5 million), EBITDA Ps7,465.0 (US$711.0 million) and operating income Ps6,155.8 (US$586.3 million). These were all higher than in the year-earlier period, +13.8%, +16.6% and +19.7%, respectively. The operating and market aspects that favorably influenced the results were: (a) The average prices of gold (US$897.4 per ounce), silver (US$16.6 per ounce) and copper (US$3.6164 per pound) were +34.7%, +26.4% and +12.4% higher than in the same period of 2007, respectively; Among the factors that negatively influenced the company's results in the period were: (a) The average price of zinc in the first nine months of the year (US$0.9546 per pound) was -39.0%. lower than in the first half of 2007. Zinc and silver have the greatest impact on Peñoles' results. (b) Lower revenues from treatment fees in the metallurgical complex due to a lower volume treated--due to preventive shutdowns in advance of possible strikes and a prolongation of a programmed maintenance shutdown at the zinc refinery, combined with the negative effect of the zinc price scale, due to the reduction in the average price of this metal;
(c) Production of refined zinc in the metals business declined -7.2% against the same period of last year, due to lower grades in the bodies of ore exploited at Francisco I. Madero;
(e)Higher unit cost of gas natural +44.6% and metal coke +26.5%; and (f) Lower average exchange rate (-4.0%) because our revenues are denominated mainly in dollars. Sales rose by Ps6,189.7 (+16.9%), due mainly to: higher average prices in the period on gold, silver, copper and chemical products, and higher sales volume of gold, silver, lead, zinc, cathode copper, sodium sulfate, refractory magnesium oxide, magnesium sulfate and ammonium sulfate. This volume includes the product sold by our new subsidiary Bal Holdings, which sells products in the United States and whose results are consolidated into those of Peñoles starting in this quarter. These effects were offset in part by the following: a lower average exchange rate (-4.0%), lower average quotations on zinc (-39.0%), lower zinc production in the Mining Business--which was affected by lower grade at Francisco I. Madero--and reduced production of refined zinc in the metals business due to shutdowns to prepare for a possible strike relating to wage revisions, combined with the prolongation of the shutdown for programmed maintenance. Metals and FX hedging had a favorable impact of Ps1,501.6 (+52.6%). 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; and The cost of goods sold rose by Ps6,531.2 (+25.8%), as a result of: (a) Higher cost of metals contained in concentrates and other materials purchased from third parties, which are fed into the Met-Mex metal complex to complement production out of Peñoles' own mines ($3,471.3). (b) Inclusion of the cost of goods sold from Bal Holdings (Ps1,977.3), which corresponds to the cost of the products that this company sells. The financial statements of Bal Holdings are consolidated into those of Peñoles starting in this fiscal year. (c) Higher production costs (Ps637.9) relating to items like personnel, operating materials, major maintenance and repairs, energy (mainly gas and metal coke) and contractors. Average internal inflation for Peñoles, which is calculated based on a basket of its most important inputs, was 9.50%, much higher than the rise in the National Consumer Price Index. As a result, gross earnings for the first nine months of 2008 were Ps1,160.1 (+13.8%) higher than in the same period of last year, also a new record for the company. Peñoles' disciplined exercise of administrative expenses is beginning to show its effects, and comparing the first nine months of 2008 against the same period of 2007 we have reduced this line by -1.28%. Prospecting investment rose +16.4%. This line includes the resources allocated to replenishing and expanding the reserves of Peñoles' operating mines and to study new deposits in both Mexico and in South America (Peru and Chile).
Total financing cost rose +Ps114.1 due to: (1) Lower financial losses (net), -Ps173.3 primarily because of a greater amount of financial gains in the current quarter, stemming from interest on the investment of the proceeds from the primary and secondary offering of Fresnillo Plc., as was reported at the time. (2) Higher net foreign exchange-losses of +Ps108.1. As of the month of May, which is when the proceeds from the primary and secondary offerings of stock in Fresnillo Plc were entered, the company's position in foreign currency went from a net liability to a net asset. Despite this, in the period reported, Peñoles reported a loss on this position due to the following factors: a) the peso's appreciation against the dollar, +0.0743 at the close of the nine months covered by this report; and b) the difference between the exchange rates at the time the proceeds of those offerings were received and at the close of the reporting period. 3) In 2007, the company entered a monetary position gain of +Ps179.4; due to changes in the financial information reporting standards (eliminating Bulletin B-10, inflation effects), the results do not include any such amount in this quarter. Income taxes were +186.4% higher due mainly to the profit on the secondary offering of Fresnillo shares. Because of the placement of 22.9% of the capital of Fresnillo, Plc, the stake of minority shareholders rose, regardless of the results. The following table sums up the year-to-date data as of third quarters of 2008 and 2007, respectively.
(*) Includes hedging results Comparing the operating results for the first nine months of 2008 against those of the same period of 2007, we note the following changes: In the Mining business, metal contents of gold, silver and lead were similar to those of last year. In zinc, however, production was lower than in 2007 (-7.2%) because of lower grade in the areas exploited, and lower recovery of metals at Francisco I. Madero and Bismark. The company is currently preparing new areas for development in these mines, which should return them to their normal pace of production. In the case of cathode copper, greater operating continuity in the Milpillas mine allowed for a production increase of +5,823 metric tons (+133.0%). In the Metals Business, thanks to the reduction in inventories in process and higher entries of concentrates and semi-processed materials rich in metal content, production of refined gold and refined silver increased to record levels, while production of refined lead in the metal complex was slightly higher than the preceding year. However, production of refined zinc declined -4.6% because of preventive shutdowns at the zinc refinery due to the possibility of a strike over wage reviews, which fortunately did not take place, as well a prolongation of the programmed shutdown for annual maintenance. In the first nine months of 2008, the gross flow of cash from operations totaled Ps7,338.3, in addition to the net proceeds from the offering of Fresnillo Plc, which totaled Ps17,358.1. Among the main uses of funds in operations were the following: (i) Cash flow used in operations totaling Ps2,875.4, the main components of which were: The organizational restructuring begun on May 14 with the change in the company's CEO is now almost complete. Qualified personnel have been placed in key positions of the company, with extensive experience in their field of responsibility. This sold and renewed management team gives us a substantial competitive advantage. This report reflects a favorable climate and price conditions in the first nine months of the year, as well as the operating discipline and our ability to take advantage of opportunities in costs and expenses--all features that have characterized Peñoles since its beginnings. It is clear, however, that the company will be affected by the worldwide decline in metals prices and the negative global climate taking shape in the wake of recent events in the financial markets. We are already evaluating plans of action that will help us to mitigate these effects. The volatility of the financial markets in the early weeks of October has had a significant impact on peso-dollar parity and on European currencies as well. Most of this company's revenues are already denominated in foreign currency, however, which creates a natural hedge against this type of event. In addition, the company has no significant bank debt coming due in the next 2 years, its hedge positions are controlled and consistent with a philosophy of risk management, with volume and amounts congruent with the needs and size of the covered risks; and they are sufficiently disclosed in the public information issued. As a complement to the above, the company is working on a program of rationalizing cost and investments, and ensuring prudent operation of the business in keeping with these circumstances.
2.- ECONOMIC CLIMATE AND METALS PRICES.
Highlights of the quarter: Gold: The average quotation on gold in the quarter was -2.9% lower than in the second quarter of the year. This metal was effected by speculators' settlement of some long positions, the dollar's strength against the euro, the decline in crude oil prices and lower demand among consumers. Silver: Average quotations were down -13.1% from the second to the third quarter. Silver was affected by the downtrend in gold prices and weak fundamentals. Lead: The average quarterly price of lead fell -17.1% from the second quarter of the year. Quotations were affected by a resumption of work by striking Peruvian workers, settlement of some long positions by speculative investors, the strength of the U.S. dollar and weak fundamentals. Zinc: Average quotations down -16.2% from the second quarter, due to the resumption of labor by workers in Peru, weak fundamentals, a strong U.S. dollar and lower demand in Europe and Asian countries.
3.- OPERATING RESULTS: PRODUCTION VOLUME.
Mining Business (metal content in concentrates and other materials): *Change 3Q08 vs. 3Q07:
*Change 3Q08 vs. 2Q08: Metal Business (production of refined metal):
*Change 3Q08 vs. 3Q07:
*Change 3Q08 vs. 2Q08:
Chemical business (production of chemical products): *Change 3Q08 vs. 3Q07: *Change 3Q08 vs. 2Q08:
4.- FINANCIAL RESULTS. A) Comparative analysis 3Q08 vs. 3Q07
(*) Includes the results of metals and FX hedging activities. The most important changes are discussed before: Net sales totaled Ps12,495.6 rising +1,286.6 (+11.5%), which breaks down as follows: In dollar terms, net sales came to US$1,214.1 million, which breaks down into billed sales of US$1,245.8 million and hedging losses of US$31.7 million. The Cost of goods sold rose +Ps614.4 because of the following elements: Because the +Ps1,286.6 increase in net sales was greater than the increase in the cost of goods sold, which was +Ps614.4, gross income rose by +Ps672.2. Operating expenses totaled Ps723.6, excluding depreciation, which was an increase of +Ps14.9 resulting from: Because of the rise in Gross income (+Ps672.2) and the slight increase in operating expenses (+Ps14.9), EBITDA was Ps2,469.6, an increase of +Ps657.3 (+36.3%), and the EBITDA margin was 19.8 percent. With EBITDA higher (+Ps657.3) and depreciation also rising slightly (+Ps39.4), operating income gained +Ps617.9, coming in at 15.9% of sales. In the period in question, total financing cost was Ps39.8, which is higher than the charge of Ps5.1 reported in the same quarter of the preceding year. The +Ps34.7 change is the result of the following: a) A net financial gain of Ps68.9 in the third quarter of 2008, compared to a net charge of Ps99.8 in the same period of last year, which was a positive change of +Ps168.7, mainly because of lower commissions and interest on bank loans, and higher yields on investment of the proceeds of the Fresnillo offering. The other expenses (proceeds) line showed a charge of Ps90.0, compared to a charge of Ps116.9 in the third quarter of the preceding year. Allocations to the profit-sharing reserve were a charge of Ps201.7, +Ps113.6 more than in the year-earlier period. Equity in the earnings of unconsolidated affiliates was Ps26.6, an improvement of +Ps25.7 over the Ps0.9 figure entered one year earlier. This came primarily from the entry of results of companies in which Peñoles owns a minority stake. The net income tax provision represented a charge of Ps642.9, +Ps315.5 higher than in the same period of last year, because pretax earnings were higher in 3Q08 than in 3Q07. Finally, the minority interest line showed again of Ps141.9, compared to the 3Q07 figure of Ps73.4, because of an increase in minority interest stemming from the placement of Fresnillo Plc.
5.- PROJECTS. In this period, Peñoles continued to invest heavily in exploring new deposits in Mexico, Peru, and Chile, in project development, and in extending its mineral resources in the areas of influence surrounding its current mining operations. In Velardeña, Durango, we are carrying out mining work and an intense drilling program of 90,000m in the Antares and Santa María bodies to define whether there is enough zinc ore present to begin a new mining unit. From bore prospecting in the areas of influence surrounding the Milpillas unit in 6.- DIVIDEND PAYMENT As was announced at the appropriate time, in accordance with the faculties assigned by the General Ordinary Shareholders' Meeting of Industrias Peñoles, S.A.B. de C.V., held March 31, 2008, the Board of Directors agreed to pay a cash dividend of Ps17.00 pesos (seventeen pesos 00/100) on every one of the 397,475,747 shares issued and outstanding, as of July 23, 2008; the dividend was paid out of the net fiscal earnings (CUFIN) account.
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