This management discussion and analysis of the results of Industrias Peñoles, S.A.B. de C.V. and Subsidiaries (“Peñoles” or “the Company”) in fiscal year 2020 is based on the financial statements prepared according to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In accordance with IAS 21, the functional currency must be identified for each one of the consolidated entities based on the currency in the principal economic environment in which the entity operates. For all subsidiaries, with exception of certain non-operating companies and certain companies that provide services, the functional currency is the U.S. dollar.
The Company changed its reporting currency to US dollars (functional currency) starting from January 1st, 2019. The present analysis of the consolidated financial results is made accordingly, and financial results obtained in 2020 are compared with those of 2019 in millions of US dollars, unless otherwise indicated. The term "US$" refers to dollars of the United States of America.
It is recommended that this section be read in conjunction with the consolidated financial statements and their accompanying notes.
Peñoles is a publicly trading company whose shares have been listed on the Mexican Stock Exchange (BMV) since 1968 under the ticker symbol: PE&OLES.
Peñoles operates principally in the following sectors:
Prices and macroeconomic variables
The main variables that had a bearing on Peñoles’ results were:
2020 | 2019 | % chg. | |
---|---|---|---|
Close | 19.9487 | 18.8452 | 5.9 |
Average | 21.4886 | 19.2616 | 11.6 |
2020 | 2019 | |
---|---|---|
Annual | 3.15 | 2.83 |
Consolidated results
In 2020 the COVID-19 outbreak spread rapidly around the world. Countries took various measures to protect the population from contagion, and the confinement put a brake on consumption and industrial activity, especially during the first half of the year. The uncertainty generated around the evolution of the pandemic caused great volatility in financial markets and a sharp drop in metal prices in the first half of the year. In the case of base metals, only copper recovered due to better fundamentals, while gold and silver, as safe haven, increased significantly. The final impacts of the pandemic are still uncertain.
The Mexican government restricted on certain economic activities considered non-essential as of March 30. At the end of May, mining was included as an essential activity, requesting certain sanitary requirements and protocols that the Company fully complied with for the safe and staggered return to work. In this context, Peñoles took a series of measures to safeguard the health of its employees, contractors and nearby communities, in addition to taking care of liquidity by reducing costs, expenses and investments to those strictly essential for the maintenance of operations and the execution of approved projects.
This affected the Company's operating rhythm, and as a result, production and sales volumes were lower than expected. Gold was the most affected, due to the extension of the operating restrictions for open-pit mines. The Company's revenues fell in the first half of the year and recovered during the rest of the period, favored by the rebound in gold and silver prices. In this way, the lower volumes sold and the effect of the contraction in zinc and lead prices were offset, so that annual revenues exceeded those of the previous year. Hedging transactions on metals prices and exchange rate—which are intended to reduce volatility in EBITDA—reported an opportunity cost higher than that recorded in 2019.
The Company decided to suspend the operations of Madero (zinc) and Milpillas (cathode copper producer) mining units because the sharp drop in base metal prices made them unprofitable for the moment. Milpillas stopped mining extraction and continued producing cathodes from previously deposited copper ore that was being leached in patios. Also, as planned, operations were stopped at Bismark, a zinc mine, and the unit shutdown process began due to the depletion of its mineral reserves.
The cost of sales was lower than the previous year, due to the measures applied to reduce costs, the higher average exchange rate that decreases the value in US dollars of the portion of costs incurred in pesos (approximately 50% of the production costs), the suspension of operations in the aforementioned mines and lower consumption, in addition to a credit derived from the recognition of gold inventories in the Herradura leaching patios. Operating expenses were also lower, due to the slower pace of exploration activities, lower sales and the savings measures implemented.
Peñoles and its subsidiary Fresnillo plc took advantage of the favorable market conditions and solid credit profile to issue bonds and restructure its long-term debt, therefore financial expenses increased due to the costs incurred in these transactions. Likewise, there was a higher charge for impairment of assets, at the Madero and Milpillas mining units mainly derived from the suspension of operations, as well as in the Fuerza Eólica del Istmo plant.
On the other hand, the Company made a voluntary correction to the tax treatment of the mining work carried out from 2013 to 2019, which implied a higher provision for income taxes in the period, in addition to an increase in deferred taxes due to the devaluation of the peso against the dollar.
Due to the aforementioned factors, the financial results for the year 2020 and their variations with respect to 2019 were as follows: net sales US$ 4,673.3 (+ 4.5%), gross profit US$ 1,249.0 (+ 43.4%), EBITDA US$ 1,456.7 (+ 50.4%), operating income –not including other expenses and income nor impairment loss – US$ 742.6 (+ 170.0%) and net loss of the controlling interest -US$ 34.4, unfavorable compared to the net income of US$ 35.5 obtained in 2019.
Income statement
The following rainbow chart shows the variation by item of results and its influence on the change in net income from 2019 to 2020 (in millions of dollars):
(1) Other expenses include impairment losses.
(2) Cost of Metal is net of Revenue from Treatment Charges, Income on inventories and other items.
(3) Financial expenses include Exchange result.
The variations are discussed below:
Net sales amounted to US$ 4,673.3, of which 86.5% were exports. The variation of +US$ 201.4 (4.5%) compared to 2019 sales is explained as follows:
The cost of sales of US$ 3,424.3, had a variation of -US$ 176.8 (-4.9%) for the reasons described below:
Higher revenues and lower costs favored the gross profit, which registered an increase of +US$ 378.1, (+ 43.4%) compared to the figure obtained in 2019. The gross profit margin on net sales was 26.7%, favorable compared to the 19.5% of the previous year.
Operating expenses (not including other expenses and income) totaled US$ 506.4, a figure 15.0% lower (-US$ 89.4), as a result of:
EBITDA for the year amounted to US$ 1,456.7, favorable at +US$ 488.0 (+ 50.4%); EBITDA margin on net sales of 31.2% was above 21.7% in 2019. Similarly, the operating profit of US$ 742.6 increased by + US$ 467.5 (+ 170.0%) with which the operating margin on net sales improved from 6.1% to 15.9%.
There were impairment losses on long-lived assets totaling -US$ 166.4 mainly at the Milpillas and Madero mining units, derived from the suspension of their operations due to the sharp fall in prices of industrial metals, in addition to the company Fuerza Eólica del Istmo due to the increase in electricity generation costs. These losses were +US$ 99.8 higher than those of the previous year by -US$ 66.6 in the Madero, Milpillas and Bismark units. In the latter, assets are totally impaired.
The item of other income (expense), net (excluding losses from impairment of long-lived assets) of -US$ 14.7 was lower compared to -US$ 19.8 of the previous year, derived from:
Net financial income (expenses) amounted to -US$ 283.8, an increase of US$ 175.5 compared to -US$ 108.2 in 2019, and is made up of:
In the interest in the results of associated companies, a loss of -US$ 3.3 was recorded, higher than the one obtained the previous year of -US$ 1.1.
With the above, income before taxes amounted to US$ 274.4, an increase of + US$ 195.2 compared to US$ 79.2 of the previous year.
The provision for income taxes of US$ 184.8 was higher by US$ 217.9 compared to the provision in favor of -US$ 33.1 in 2019, which is attributed to the following factors:
Due to the aforementioned factors, the consolidated net profit for fiscal year 2020 was US$ 89.6, lower by -US$ 22.8 (-20.3%), of which -US$ 34.4 correspond to a loss of the controlling interest (unfavorable in comparison to the income of US$ 35.5 in 2019) and US$ 124.0 to income of non-controlling interests (higher compared to the income of US$ 76.9 in fiscal year 2019).
Cash flow statement
As of December 31, 2020, the Company had cash and cash equivalents for US$ 1,592.7, representing an increase in cash of +US$ 1,066.4 compared to the balance at the end of 2019 of US$ 526.3 (including -US$ 0.6 from conversion effects).
The most relevant concepts of the period were as follows:
Company/ Unit |
US$ M | Application |
---|---|---|
Fresnillo plc | 401.4 |
|
Met-Mex | 50.8 |
|
Capela | 45.1 |
|
Química del Rey | 16.4 |
|
Tizapa | 14.1 |
|
Velardeña | 8.3 |
|
Sabinas | 7.9 |
|