In 2020 we carried out 61,911 meters of diamond drilling at Peñoles-operated mines, in order to ascertain proven blocks of reserves and generate mineral resources to ensure the operating continuity of our mining units.

A calculation of reserves of the mining units was conducted in January 2020 in order to support budget and operating plans for the year. To enhance the certainty of these estimates, mineral reserves and resources were calculated according to the International Code of the Joint Ore Reserves Committee (JORC version 2012) using MRO software, which optimizes and offers greater precision in locating economic blocks of minable reserves.

The calculation applied Peñoles’ long term price projections, more conservative than those assumed in the 2019 reserves calculation: gold US$ 1,250.00/ounce (-7.4%), silver US$ 17.00/ounce (-8.1%), lead US¢ 95.00/pound (-9.5%), zinc US$ 1.10/pound and copper US$ 3.10/pound. The cut-off grade increased by 8.3% on average, which, combined with assumptions of lower prices, higher production costs and treatment charges, resulted in estimated resources and reserves equivalent to 34 and 13 years of mine life, respectively, at the projected pace of production in five years—compared to 38 and 17 that were calculated in the 2019 assessment.

Excluding the Bismark, Madero and Milpillas units, mine life is 15 years of reserves and 39 years of resources. A table showing the calculation assumptions and breakdown of reserves appears on page 56 of this report.

With modifications in the economic parameters, the resource grades at Tizapa increased and some zones were lost in the Western Block, which were offset by the tonnage from the Central and Eastern blocks due to interpretation and good grades at the current cuts and drill sites. In Velardeña’s case, there was a reduction in reserves, mainly at Antares Norte, because of the elimination of surrounding non-minable land and extraction from the dike in longhole stopes. At Sabinas, the cut-off grade increased by more than the average, while at Capela adjustments were made to the geological models to correspond to the real timeline of the mine opening. In 2021, exploration resources will be added from sampling the works and exploratory drilling.

Metal content in Peñoles’ proven and probable reserves, including the Capela mine and the subsidiary Fresnillo plc, along with their change from 2019 to 2020, are as follows:

Rock mechanics

We continued to incorporate rock mechanics areas into our operating units this past year in order to guarantee the stability of the mining works and mitigate safety risks to our personnel, equipment and processes. The key activities in this area were:

• Update of the support and reinforcement guidelines for each mine.
• Preparation and publication of brochures on rock mechanics, reinforcement and support grids, in the interests of operating discipline and to comply with the Ministry of Labor and Social Planning NOM 023 standard.
• Development of a specialization course in rock mechanics and injections for the Peñoles and Fresnillo plc mines; online this year because of the pandemic.
• Support for the engineers-in-training program and for Mexican universities with earth sciences programs.
• Update of the database for developing geomechanical models at each of the Peñoles mines, and technical consultancy at the Fresnillo plc mining units.
• Training through virtual videos for contractors and engineers in training program.
• Interaction with corporate safety personnel on the use and handling of rockfall accident and incident logs.
• Creation of a virtual platform for understanding the impact of rock mechanics at Peñoles mines, including monthly follow-up with the work team aimed at eliminating rockfall.
• A campaign to prevent rockfall including sessions on risk identification, prevention of rockfall accidents, rock mass quality, and types and procedures for anchor installation.
• Rock mechanics diagnostics to evaluate zones of risk and strategic and priority areas at the mines.
• Creation of multi-disciplinary work teams to strengthen and standardize the support process at our mines.

Intelligent Mine Vision

In 2020, we reiterated our commitment to expanding, optimizing and automating processes, which is the basis for our Intelligent Mine Vision. The main actions this past year were:

• We strengthened and implemented the key-out system for locating personnel and vehicles within mines that continue operating: Tizapa, Velardeña, Sabinas and Capela, which involves monitoring from a safe operational center.
• Implementation of diesel dispatch systems was begun at Capela, having already been installed at our other operations. Currently, all our mines have this system, whose purpose is to monitor the yield of our diesel equipment and thus optimize our use of this fuel.
• XControl software was installed at all the mining units in order to optimize and oversee consumption of explosives and comply with legal provisions governing the use of this input by the National Defense Ministry.
• We conducted testing of the remote blasting process at Velardeña and Capela, which was proved to work well at Tizapa; its purpose is to eliminate risks to personnel and equipment.
• At Tizapa, Velardeña and Capela, we strengthened the system for scanning low-profile truck cargo from safe operation centers in order to monitor the performance of this equipment and increase their efficiency and availability. We also installed sleep sensors for drivers, to add another layer of safety to personnel transport at Sabinas and Velardeña.
• We strengthened the Mine Administration System in our mining units, including Capela, to provide the informational support for indicators on mining processes. The roll call and log of facilitators with mobile devices were added, along with control of short intervals to measure shift performance in real time.
• We began introducing the Operational Management System in our plants, in order to have a more efficient, real-time view of indicators for our processes and equipment and measure them against goals and budgets.
• Finally, we expanded our electrical and telecommunications infrastructure to cover operations at the Capela mine with fiber optics and Wi-Fi, enabling remote operation capacities for some equipment, soon to include longhole drilling. We also expanded the infrastructure of Velardeña’s work areas toward La Industria deposit, with full coverage of fiber optics and Wi-Fi.

Value creation projects

In line with our philosophy of teamwork and the priority of improving key administrative processes to ensure correct documentation and definition of indicators, 61 value creation projects were incorporated into mines operated by Peñoles in 2020 using the Seis Sigma methodology. Particularly important among these because of their economic benefit, with 100% of non-unionized personnel participating, were:

• Velardeña (US$ 2.3 M): Safety, mine and plant productivity, optimization of tailings deposit, development and stripping.
• Tizapa (US$ 3.5 M): Resource generation, safety, mine management system, gold recovery and working environment.
• Bismark (US$ 2.5 M): Safety, metal content, equipment availability and zinc recovery.
• Sabinas (US$ 500,000): Availability of jumbos and anchoring equipment, optimization of granulometry at Plant 1 and arsenic control.
• Milpillas (US$ 1.5 M): Safety culture and cathode production.
• Capela (US$ 3.0 M): Stabilization of plant process, rock mechanics, equipment availability, ore inventory control.

Cost indicators

In terms of pounds of zinc equivalent⁽¹⁾ sales by the Peñoles-operated mines increased 15.3% compared to the previous year, from 629.2 million to 725.2 million. This was due to new production from Capela and increases at Tizapa and Sabinas, which, being polymetallic units, benefited from the increase in precious metal prices. Velardeña produced and sold a higher volume of zinc metal. These four mines offset lower production from Bismark and Madero.

Pounds of copper equivalent⁽²⁾ at Milpillas declined 45.4% from 2019, because of the reduction in cathode production resulting from the suspension of operations.

(1) Pounds of zinc equivalent: gross total sales/average zinc price.
(2) Pounds of copper equivalent: gross total sales/average copper price.

Production costs at the mines totaled US$ 461 million, 18.3% lower than the year before, largely because of cost-saving measures, along with the peso’s depreciation against the dollar, which had a positive impact on peso-denominated costs (approximately 50% of the total).

The Milpillas, Madero and Bismark units reported lower costs due to the above-mentioned operating shutdowns. However, the unit cost per ton of processed ore was higher for the first two, primarily because of the creation of personnel retirement reserves. At Velardeña, unit costs were lower because of the higher volume of processed ore, while Tizapa was able to reduce consumption of key inputs like energy and diesel besides lower processing. At Sabinas, costs rose because of investment in tailings deposits improvement measures.

As for cash costs(1), these were higher at both Madero and Milpillas (comparing the months in which they were operating against the same period of 2019), supporting the decision to shut down operations. Indicators from the other units reflect the benefits of a higher volume of pounds equivalent sold and lower production costs, which offset the increase in treatment charges for the concentrates sold and the reduction in the price of industrial metals.

Tailings facilities

To incorporate the best domestic and international standards, since 2019 Peñoles and Fresnillo started a new process to manage tailings facilities, aligned with the standards and rules of the International Commission on Large Dams (ICOLD), the Canadian Dam Association (CDA), the Canadian Mining Association (MAC), and the International Council on Mining and Metals (ICMM).

Substantial progress was made in implementation of governance and management of tailings and mining-metallurgical waste. Some of the key actions were the following:

• Creation of a Corporate Tailings Deposit Department which is responsible mainly for establishing internal guidelines on management and governance, as well as coordinating the activities of the Independent Tailings Dam Review Panel.
• Creation of seven Regional Tailings Management Departments, which will apply and ensure the governance guidelines in the processes of site selection, design, construction and operation, closure and post-closure of tailings deposits.
• Even during the pandemic, the Independent Tailings Dam Review Panel completed its program of activities, which included remote review mechanisms and online presentations of conditions at each site.
• Creation of a Tailings Review Committee, to ensure that Peñoles applies the most appropriate practices for tailings management and tailings deposits.
• Creation of a system for following up on recommendations of the independent reviews, which shows the progress made toward improving the design, construction, operation and closure of tailings deposits.
• Peñoles remained up to date on the launch of the Global Mining Industry Standard on Tailings Management and agreed to its principles. We are preparing a plan to implement and comply with it when possible, which depends primarily on the availability of technical resources.
• With the strategies and actions implemented, Peñoles proves its commitment to adhere to the best international guidelines and practices, promoting an operation based on sustainability and governance principles for tailings and mining-metallurgical waste.