Peñoles - Sustainable Development Report 2020

102-7-a.iv, 102-45, 103-1, 103-2, 103-3,
201-1-a, 203-1, 203-2
At Peñoles, we work in a socially responsible and ethical manner, and generate shared value for our stakeholders: shareholders, employees, communities, customers, suppliers, government and financial institutions.

The Fourth Financial Statement^1,2, presented here shows the value generated by Peñoles and contributed to Mexico’s economic development, and how it was distributed among its various stakeholders:

Technical notes:

The data reported for costs include only tangible goods and services used in production.
A distinction is made between national and international costs, depending on whether the good or service was purchased in Mexico or if it was imported from another country.
The “Reinvestment in the company” item includes profits for the 2020 fiscal year that will be made available to the Board of Directors in accordance with the powers delegated to it by the Shareholders Meeting.

The attached notes are an integral part of the Fourth Financial Statement and explain the details about the components of value generation and distribution.

More information about the macroeconomic environment, as well as of the company’s operating and financial performance can be found in the 2020 Annual Report and at www.peñoles.com.mx

201-1-a Value generated* (US$ 000)
	2020	%	2019	%
Net sales	4,673,309	100	4,471,948	100
Domestic costs and expenses	1,649,056	40	1,773,055	40
Foreign costs and expenses	224,871	5	241,780	5
Total costs and expenses	1,873,927	45	2,014,835	45
Total value generated	2,799,382	55	2,457,113	55

* Data include operations of Industrias Peñoles and its subsidiaries.

201-1-a Value distributed* (US$ 000)
	2020	%	2019	%
Employees	383,813	13.71	392,632	16.0
Contractors	904,904	32.33	1,034,101	42.1
Government	243,597	8.70	18,430	0.8
Shareholders	33,842	1.21	236,858	9.6
Community and environment	63,061	2.25	77,154	3.1
Reinvestment in the company	887,206	31.69	591,889	24.1
Interest	282,959	10.11	106,049	4.3
Total value distributed	2,799,382	100	2,457,113	100

* Data include operations of Industrias Peñoles and its subsidiaries.

US$ 2.8 B

total value generated and distributed among stakeholders.

Work team Level 1520, Milpillas mine

Note 1: Origin of revenue

a) Revenue
In 2020, we reported a total of US$ 4.67 billion in ordinary sales revenues.

b) Prices
Due to the pandemic, metal prices dropped sharply, particularly in the first quarter of the year. In the case of industrial metals, prices recovered gradually; zinc and lead quotations recovered some of their value, but on average ended the year 11.2% and 8.7% lower, respectively, than the year before. For copper, with better market conditions, the average price grew slightly (2.7%). As for precious metal prices, although they dropped initially, they recovered to levels higher than in the recent past. The price of silver gained 27.7%, and gold, considered a safe haven asset, increased 27.1%, buoyed by widespread uncertainty over the pandemic.

c) Production
Refined gold output fell to 957,209 ounces (-14.0%), due primarily to lower treatment of doré at the Herradura and Noche Buena mines. Some remitters temporarily suspended the supply of concentrates, and although the situation returned to normal around mid-year, we had some trouble supplying the necessary amount and quality needed for mixtures to be processed at the lead smelting plant. With this, lead and silver production declined by 2.4% and 6.2%, to 70.6 million ounces and 111,538 metric tons, respectively, from their levels in the previous year.

The following details show how revenue was generated according to the different markets we supply.

Sales by market* (US$ 000)
	2020	%	2019	%
Domestic	629,201	13	711,611	15.91
United States	2,347,724	50	3,060,145	68.43
Asia	429,632	9	287,426	6.43
Europe	629,123	13	371,330	8.30
South America	40,493	1	20,897	0.47
Canada	583,362	12	433	0.01
Others	13,774	0	20,106	0.45
Total	4,673,309	100	4,471,948	100

Sales by product (%)
Product	2020	2019
Silver	31	26
Gold	35	35
Zinc	13	16
Lead	5	6
Ore concentrates	7	7
Copper	2	3
Sodium sulfate	2	3
Other products	5	5
Total	100	100

27.7%

increase in price of silver and 27.1% in gold.

Note 2: Cost components

a) Costs
The following table shows the change in costs for the years 2020 and 2019:

Operating costs (US$ 000)
	2020	%	2019	%
Metal	1,019,928	1,019,928	945,992	47
Energy	378,985	20	416,381	21
Operating materials	345,973	18	374,662	19
Raw materials	31,428	2	34,063	2
Others	97,613	5	243,737	12
Total	1,873,927	100	2,014,835	100

The following tables describe the breakdown of energy resources, operating materials and raw materials:

Energy resources (US$ 000)
	2020	2019
Electricity	211,435	191,564
Natural gas	21,710	26,599
Coke	18,363	21,809
Diesel	111,753	155,682
Fuel and lubricants	15,724	20,726
Total	378,985	416,380

Operating materials (%)
	2020	2019
Explosives and detonators	49,127	61,191
Balls and bar mills	35,844	35,682
Tires and inner tubes	17,598	19,173
Other materials	14,709	14,856
Sodium cyanide	23,456	26,502
Steel and drilling bits	14,967	16,589
Slaked lime	7,130	8,218
Cement	3,286	4,583
Safety equipment	13,620	14,273
Other reagents	24,514	25,062
Steel and iron	7,446	10,908
Hoses and accessories	7,331	11,527
Construction materials	8,920	11,014
Magnesium-calcium alloy	2,119	2,434
Zinc	5,060	6,004
Mills and crusher armor	14,879	15,468
Anchors	8,704	11,586
Others	87,263	79,591
Total	345,973	374,661

Raw materials (US$ 000)
	2020	2019
Ammonia	19,599	21,421
Copper cement	4,404	3,906
Magnesium oxide	4,226	5,331
Zinc slag	1,514	1,682
Sulfuric acid	214	175
Others	1,471	1,547
Total	31,428	34,062

b) Purchases
We had a total of 30,498 suppliers, more than the 29,890 of the previous year. The breakdown of suppliers by type of purchase for 2020 and 2019 is detailed in the following table:

Registered suppliers
	2020	%	2019	%
Supplies	11,055	36.2	10,881	36.4
Transport	1,202	3.9	1,193	4.0
Contractors	1,389	4.6	1,358	4.5
Customs agents	216	0.7	213	0.7
Services	16,094	52.8	15,709	52.6
Fixed assets	40	0.1	40	0.1
Concentrates	502	1.6	496	1.7
Total	30,498	100	29,890	100

Peñoles promotes the country’s development by creating jobs and business opportunities for different domestic industries. We have domestic suppliers distributed across Mexico.

As for suppliers outside of Mexico, the United States ranks first, with 58% of the total, followed by Canada, with 9%, the United Kingdom with 5% and other 64 countries collectively accounting for the remaining 28%.

Note 3: Value distribution indicators

a) Employees
At Peñoles, we generate dignified and fair job opportunities. During 2020 we paid a total of US$ 383.8 million to direct employees and other employees working for the company.

Value distribution to employees (US$ 000)
	2020	2019
Wages	108,056	114,553
Salaries	57,092	59,000
Benefits	90,816	96,956
Subtotal	255,964	270,509
Overtime	15,126	14,352
Other benefits	83,119	89,705
Profit-sharing	29,604	18,066
Total	383,813	392,632

b) Contractors
In 2020, we paid a total of US$ 904.9 million for outsourced services. The following table shows the different services received and amounts paid:

Contractors (US$ 000)
	2020	%	2019	%
Development and works	455,197	50	504,078	49
Maintenance	240,069	27	264,915	26
Major repairs	70,359	8	77,137	7
Fees	77,859	9	87,458	8
Security	16,627	2	16,786	2
Other items	44,793	5	83,727	8
Total	904,904	100	1,034,101	100

c) Government
Total tax payments in 2020 were US$ 243.6 million.

d) Shareholders
Peñoles is a public company whose shares have been listed on the Mexican Stock Exchange (BMV) since 1968 under the PE&OLES ticker symbol.

Distribution of ordinary dividents (US$ 000)
	2020	2019
Shareholders - controlling entity	3	155,243
Non-controlling interest	33,839	81,615
Total	33,842	236,858

e) Community and the environment
The following table reflects the different contributions made by the company in connection with our responsible and sustainable commitment to the environment:

Contributions to the community and the environment (US$ 000)
	2020	2019
Community	7,984	11,232
Environment	6,967	7,561
Depreciation of social assets	56,098	47,368
Provision for ecological expense	-7,988	10,993
Total	63,061	77,154

US$ 296 million in fixed assets for social use or social purposes.

In accordance with the Peñoles Sustainable Development Policy, there is a provision that is used to progressively restore the mining units up to the date when it is estimated that their mineral reserves will be depleted. In 2020, this provision totaled US$ 460.6 million.

f) Reinvestment in the company
Items that provide for the regeneration or survival of the company’s production capacity, capital or social value are included; essentially, earnings net of dividend distribution and fiscal year depreciations (including the results in the cancellation of fixed assets)

Reinvestment in the company (US$ 000)
	2020	2019
Depreciation, amortization, depletion and others	955,432	793,275
Income from operations	-34,384	35,472
Less controlling entity shareholder dividends and noncontrolling interest	-33,842	-236,858
Total	887,206	591,889

US$ 383 M

paid to direct employees in 2020.

US$ 904.9 M

paid to contractors.

Retained earnings remain at the disposal of the Board of Directors, in accordance with the powers delegated to it by the Shareholders Meeting.

g) Interests
In 2019 and 2020 we paid US$ 106 and US$ 283 million, respectively in interest payments and foreign exchange losses. It also considers the company’s obligations to financial institutions and other capital suppliers or third-party financing and the payment of special, additional and extraordinary rights to mining companies for the constitution of the Mining Fund for Sustainable Regional Development, whose investment goal is to favor physical investment with a positive social, environmental and urban development impact for mining municipalities.