As a major silver and gold mining company, we are exposed to the market dynamics common to the global precious metals industry, In addition, given that the majority of our people and operations are located in Mexico, country specific factors can affect our strategy and outlook.
Demand for silver is primarily driven by fabrication (industrial applications, photography, jewellery and other applications) and investment, either directly through coins and bullion or via Exchange Traded Funds (ETFs). Mine output provides the majority of silver supply, while recycling and scrap amount for most of the remainder, with government sales a minor and unpredictable source.
For gold, demand is largely driven by its status as a safe haven, with consumers and investors buying the metal to protect their savings and purchasing power and as a means to diversify away from the US dollar. In some markets gold has strong cultural allure, with China and India leading the demand for gold jewellery. Mine output accounts for the majority of the global gold supply, with the remainder coming from recycling.
Market Size and Position
In silver, our peer group are other primary silver miners, although it should be noted that much of global silver production is derived as a by-product of gold, lead, zinc and copper mines.
In gold, we benchmark our performance against medium-sized global gold miners with similar levels of annual production.
To assess our competitiveness within our peer groups, we look primarily at the following two factors, neither of which are materially influenced by the aforementioned market dynamics:
Our average cash cost per metal:
We track all-in sustaining costs (AISC) as a means to monitor current production costs and preparations for future production; however, we continue to use the traditional cash cost metric as we believe it is more representative of the production costs incurred during the period, eliminating distortions caused by non-recurring sustaining costs. We define cash cost as the total cash cost (cost of sales plus treatment and refining charges, less depreciation), less revenues from by-products, divided by ounces of silver or gold sold. Our strategic objective is to remain in the lowest quartile of the cost curves.
The quality and quantity of our mineral assets:
Cash costs provide a picture of a company’s current ability to extract its resources at a reasonable cost, but longterm competitiveness is dependent on the actual size of the resource base. A strong indicator of future production is the ability to convert measured, indicated and inferred resources into proven and probable reserves. We continuously invest in exploration across price cycles to expand and strengthen our asset base, using strict cost criteria to ensure that extraction will be economically viable even in low metal price environments. As a result, our total resources and reserves have grown at a fairly steady pace and we have a range of organic growth projects that extend across the prospecting, drilling and resource definition stages, ensuring that we can benefit from the next cyclical upswing.
|Silver Institute (Fresnillo is a member of The Silver Institute)|
|World Gold Council|