Fresnillo PLC

Silver has long been a symbol of being almost great, but not quite good enough. Athletic competitions like the Olympic Games award silver for the competitor who finishes second. Historians refer to a “Silver Age” when they discuss a period in a civilization’s history that was not quite as remarkable as its Golden Age. However, as the world’s largest primary silver producer, Mexico’s Fresnillo PLC would take issue with the idea of silver representing no better than second place.

“We are a leading precious metals group with significant experience and expertise in all aspects of mining, from exploration through to mine construction and operation,” the company explains. “Fresnillo PLC operates four producing mines, all of them in Mexico – Fresnillo, Cienega, Herradura and Soledad-Dipolos – one development project, Saucito; and five advanced exploration prospects – Noche Buena, San Juan, San Julian, Orysivo and Juanicipio – as well as a number of other long-term exploration prospects.

“In total, we have mining concessions covering approximately 1.86 million hectares in Mexico,” the company continues. “Fresnillo’s goal is to maintain the group’s position as the world’s largest primary silver company, producing 65 million ounces of silver and over 400,000 ounces of gold by 2018.”

The company’s history as a modern mining concern begins in the early 1960s, but its roots are much deeper than that. The company’s namesake mine dates back to 1554, when Captain Diego Fernandez de Proano began mining at the Fresnillo mining site.

In 1961, mining company Peñoles acquired an equity interest in the Fresnillo mining district after it acquired a majority share in Compañia Fresnillo. In 1987, Peñoles formed Penmont Joint Venture for Newmont Mining Corp., and by 1992 the company had begun construction of the Cienega mining community. The first full year of production at Cienega was 1995, with an annual capacity of 300,000 tons. The following year, Peñoles acquired the remaining shares of Compañia Fresnillo, and in 1997 began work on the Herradura mine. Capacity at the Fresnillo mine expanded from 1.5 million to 2.3 million by 2004.

In 2008, Peñoles underwent a corporate and administrative restructuring that resulted in the company’s precious metals business being separated out. This was to become Fresnillo PLC, which offered its IPO and was listed on the London Stock Exchange.

With its current strength in the mining market, Fresnillo says its strategy for continuing that success is clear. “One of the main drivers of the group’s growth is the investment in exploration and the development of projects and prospects with the potential to become low-cost operating mines,” it says. “Therefore, our disciplined approach to investment includes the evaluation of economic ore grades, maximum extraction costs and an established reserve base.”

A Strong Gameplan
Naturally, no company reaches the top of its industry by simply being there, and Fresnillo says it has qualities and strategies that have placed it at the top of its field and will be enough to keep it there for the foreseeable future. It says these qualities form the backbone of everything that it does.

The company says its “key strengths are:

  • “Our status as the world’s largest primary silver producer with the world’s largest primary silver mine;
  • “Vast growth potential through a range of development and exploration projects;
  • “A strong tradition of mining with a highly experienced management team;
  • “An attractive country environment along with local management expertise;
  • “A strong focus on costs driving Fresnillo’s profitability; and
  • “Responsibility towards employees, the environment and the communities in which we operate.”Looking to the future, Fresnillo has a series of goals that, once completed, will solidify its standing. According to the company, “our strategy to consolidate our position as the world’s largest primary silver producer is as follows:
  • “Doubling production, on a silver equivalent ounce basis, within the next 10 years and increasing our gold production, thus further diversifying our precious metal asset base;
  • “By the further development of our Saucito and Soledad and Dipolos assets and further exploration;
  • “Through maximizing the potential of our existing operations across Mexico;
  • “By seeking additional growth opportunities and expanding our resource base with joint ventures, continued exploration and selective acquisitions of opportunities in Mexico and potentially elsewhere in Latin America; and
  • “Maintaining operations with lowest cash cost quartile.”

Plentiful Projects
The centerpiece of Fresnillo’s operations is its Fresnillo mine, which is located approximately 60 kilometers northwest of Zacatecas City in the state of Zacatecas in Mexico. In 2009, the company reported an average of more than 890 people were employed by the company at the site, with more than 630 contractors also present. The mine features silver and gold contained in lead and zinc concentrates, and the company says that even though the mine has been in production since the 16th century, the true potential of the site has yet to be fully realized.

“Total annual silver production in 2009 reached a new record high of 35.4 million ounces as a result of the increase in ore milled,” the company says. “Lead production increased mainly as a result of higher ore grade, which zinc production remained stable. The preparation of additional slopes at Fresnillo has led to higher operational flexibility and better grade control.”

Throughout 2009, the Fresnillo mine underwent more than 105,000 meters of diamond drilling, which the company says resulted in a 55 percent increase in the mine’s resources. The mine’s resources rose from 34 million tons to 52.7 million tons. “Promising potential remains in the western zone of the mine,” the company says. “Based on proven and probable reserves, the expected life of the mine is 12.8 years, compared to 12.5 years in 2008.”

The company also has made several significant improvements and additions to the mine in the last few years to help boost production. These included a new water treatment plant, which was brought online in November 2009 at a cost of $4.3 million. “This project allows sewage water from the Fresnillo municipality to be obtained at no cost, and once treated, it is used in the milling process instead of fresh water,” the company says. “This preserves local aquifers, reduces the group’s fresh water costs and lowers the municipality’s water treatment costs. The plant has capacity to treat 150 liters per second, and cost savings from the reduction of fresh water consumption will be fully realized in 2010 onwards.”

A new shaft was initiated in the western zone of the mine’s San Carlos vein in late 2009. The $19.1 million project will reduce haulage costs for the mine and is expected to be completed by the first half of 2011. “The second stage of the project will be developed six or seven years after the shaft is operational, to access ore resources at deeper levels,” the company says.

The Cienega mine is located in the northwest corner of the state of Durango, approximately 325 kilometers from the city of Durango. Although the company says annual gold production at the mine decreased by 11.5 percent due to a decline in the ore grade in the early part of 2009, Fresnillo has taken measures to compensate. The company reports that the mine’s milling capacity was expanded in 2009 from 755,000 tons per year to more than 930,000 tons per year. “This expansion will further compensate for the lower ore grade and help stabilize gold production at around 110,000 ounces per year, while maintaining the mine life at over 10 years,” the company says.

On the other hand, silver production at the Cienega mine increased due to higher ore grade and ore milled. “Surface and in-mine diamond drilling totaled 56,712 meters in 2009,” the company says. “Based on proven and probable reserves, the expected life of the mine at current milling capacity is 13.5 years, compared to 13.2 years in 2008. Exploration was also conducted at areas of influence around Cienega, in Las Casas and San Raman.”

The company recently instigated a project to sink the mine’s shaft a further 300 meters to gain access to deeper ore reserves. Additionally, a new ore deposit has been discovered 10 kilometers west of the mine. “This new discovery has inferred resources of 66 million ounces of silver and 397,000 ounces of gold,” the company says. “In 2010, it will continue to be developed and further explored.”

Fresnillo’s Herradura mine is located in the state of Sonora, approximately 80 kilometers northwest of the city of Caborca. This open-pit gold mine has been one of the company’s highlights in the last few years.

“Attributable gold production at Herradura achieved new record levels in 2009, rising 18.6 percent due to the increase of ore deposited in the leaching pads from the Centauro pit, including the new adjacent Valles pit, and better recovery as a result of the expansion of the beneficiation plant,” the company says. “Higher ore grades and a better recovery rate drove silver production up by 38.5 percent.”

A seventh leaching pad was completed in late 2009 and an eighth was expected to be completed by the end of 2010. “We conducted ongoing drilling of 102,877 meters in the year,” the company says. “Based on proven and probable reserves, the expected life of the mine is 11.9 years, compared to 12 years in 2008.”

Approximately 9 kilometers northwest of the Herradura mine is Fresnillo’s newest development, the Soledad-Dipolos mine. The open-pit gold and silver doré heap leach operation shows a lot of potential so far, according to the company. “The construction of the Soledad-Dipolos mine was successfully concluded in December 2009 and the production tests were completed with positive results,” the company says. “The first doré bar was poured on Dec. 9, 2009, and commercial production started in January 2010, ahead of schedule and within budget.”

As is the case with the Herradura mine, Fresnillo’s interest in the Soledad-Dipolos mine is held through the Minera Penmont joint venture, with Fresnillo holding 56 percent of the mine and Newmont Mining Corp. holding the remaining 44 percent. The company says it expects great things from the Soledad-Dipolos mine once gold and silver production begins in earnest. “Anticipated annual production is expected to be 100,000 ounces of gold in 2010 and 130,000 ounces of gold from 2011 onwards,” the company adds.

Future Prospects
In addition to the projects Fresnillo already has in production, it has several properties in various stages of predevelopment and exploration. The furthest along is Saucito, which is located about 6 kilometers southwest of the Fresnillo mine. The company says it recently completed a pre-feasibility study, and currently is building on the site with the goal of beginning production in 2011.

“Development work currently includes land acquisition, environmental studies, engineering studies and underground access to explore and define ground conditions,” the company says. “At the Jarillas area, a shaft is in construction and will have approximately 750 meters, the first stage of 550 meters will be in operation in early 2013. Engineering of the plant, tailings dam, access roads, electric lines and required infrastructure for a future mine has already begun, with all of the major equipment for the plant already been purchased.”

Among the company’s various prospect properties is Orisyvo, a gold exploration project in the southwest portion of the state of Chihuahua. “Orisyvo is a large, disseminated gold system outcropping in the remote area of the Sierra Madre which has considerable exploration potential,” the company says.

“In 2009, the oxide mineralization was extended to the north and west with interesting gold values. Additional intersections were made during [2009] on the high-grade sulfide ore and a scoping study [was] prepared in 2010.”

Another prospect is the company’s San Juan silver and gold project in Durango. “The prospect covers approximately 147,000 hectares, and the main area under exploration is known as the Lorena vein, which is part of an 18-kilometer structure,” the company says. “Fresnillo is evaluating potential areas for future exploration. By the end of 2009 resources were updated, showing a total of 9.5 million ounces of silver and 305,000 ounces of gold.”

Fresnillo’s San Julian silver and gold project on the boundary between Durango and Chihuahua came about after veins of significant gold and silver values were found in 2009. “Total resources contain 135.5 million ounces of silver and 375,000 ounces of gold,” the company says. “Almost 40 percent of silver resources are indicated.”

Located in the Fresnillo district is the Juanicipio exploration project, which consists of silver and gold veins. “Infill drilling on the Valdecañas vein has converted approximately 30 percent of the tons, which contain 46 percent of the silver ounces of the resource, into the indicated category on this vein,” the firm says. “Diamond drilling was also carried out on the Juanicipio vein and an adjacent structure without locating additional resources.

“During the year, narrow intervals of mineralization were encountered at the Juanicipio vein and deeper drilling has been initiated,” it continues. “A third-party scoping study recommended additional exploration at the Valdecañas vein to convert resources into the indicated category, which is currently in process to advance the project toward the pre-feasibility stage.”

At Noche Buena, a gold deposit located 23 kilometers southeast of the Herradura mine, Fresnillo says it believes it has found another project worth pursuing. “The present drill indicated resource is 600,000 ounces of gold, and additional exploration is planned in the area,” the company says. “Given the proximity to Herradura and the development potential, the acquisition of Noche Buena is consistent with Fresnillo PLC’s strategy to consolidate mining districts.”

Cleaner Mining
As one of the largest mining companies in the world, Fresnillo says it understands that its activities create some of the biggest impacts on the environment, as well. That’s why it strives to be responsible and maintains strict adherence to local environmental regulations wherever it mines.

“As with all other natural resource and mineral processing enterprises, our operations generate waste into the atmosphere, into the soil and into the water,” the company says. “We adhere strictly to all environmental laws and recommendations that address such matters as protection of the natural environment, air and water quality, emissions standards and disposal of waste. We not only comply with local regulations but also those set out by the World Bank in its Environmental, Health and Safety Guidelines for the Mining Industry.”

Not only that, but Fresnillo says it goes above and beyond the regulations that already exist in Mexico. “We also seek to exceed the standards set by Mexico’s environment legislation by developing plans, programs and activities of our own initiation which contribute to preservation of the environment,” the company says.

In all three of its operating sites, Fresnillo has established an environmental management system that is certified to ISO 14001:2004 standards. At the Fresnillo mine, for example, the chief environmental concern is the management of residues created by the mining process. To mitigate these issues, the company has instituted a program that includes reprocessing tailings and planting vegetation on and around closed tailing dams to help clean the water of impurities. Fresnillo says it also has developed a theme park constructed on several former tailing dams and instituted efforts to help recover endangered animal species on the site.

At the Cienega mine, Fresnillo’s use of cyanide in mining presents a threat to the forest environment. Mitigation efforts at this location include strict measures of cyanide management that are in line with the standards set by the Code of the International Cyanide Management Institute.

Cyanide also presents a challenge at Fresnillo’s Herradura mine, but the company’s environmental efforts there also include the transplantation of sahuaro and choya cactus species in the area. Also, the firm has conducted studies of the reproductive dynamics of certain migratory species that pass through the area, specifically the Sonoran pronghorn antelope. Rescuing and relocating plant species also is a key focus at its many exploration sites, along with reusing lubricants to keep them out of the ecosystem.

The company also has obtained Clean Industry Certificates from the Mexican Federal Environmental Protection Agency. In 2008, the company also allocated approximately 8.7 million pesos toward funding programs >> that focus on the reduction of water and energy consumption, reduction of greenhouse gases, and other environmental concerns.

Philosophy of Service
Fresnillo’s efforts to lessen its impact on the environment is only part of the company’s overriding philosophy of service. The company says it understands that it has enormous responsibilities to match its enormous presence in the mining industry, because living up to those responsibilities is essential to the company’s sustained success.

“The health and safety of our employees, respect for our environment and active involvement with the local communities are fundamental to our long-term success – thus, we strive to maintain a culture of sustainable development and teamwork,” the company says. “The policy of Fresnillo is to guarantee health and safety in the workplace, protect the environment and maintain good relations with the communities in which we operate, basing our processes on regulatory compliance within a culture of sustainable development, teamwork and continuous improvement.”

These efforts are overseen by Fresnillo’s Health, Safety, Environment and Community Relations Committee, which consists of three of its executive directors and CEO Jaime Lomelin. According to the company, this committee is responsible for ensuring compliance with regulations, evaluating independent performance audits and recommending policy, among other duties.

Giving Back
Part of those efforts is what Fresnillo does for the communities in which it works. “We believe that active, long-term engagement with local communities and other stakeholders is fundamental to the success of our business, and we devote considerable time and resources to such engagement,” the company says. “Fresnillo therefore engages in a number of different projects with the local communities around our three operating mines. Each of the operations has an established development plan that is designed to improve the quality of life of its local communities’ while respecting ideology and culture.”

Fresnillo’s community involvement takes the form of education and public health initiatives. The company says its direct investments in these programs in 2008 totaled nearly $688,000. Additionally, Fresnillo’s employees contributed another 299,000 pesos to a United Way campaign for those communities.

In terms of its contributions to education causes, the company gives its time and resources to the development of infrastructure and programs. For instance, one of Fresnillo’s largest educational contributions of 2008 was the remodeling of Ortega Gonzalez Elementary School in the city of Fresnillo. In all, more than 30 schools received contributions from the company that year, benefiting more than 12,500 students.

“We have promoted events on environmental education and awareness,” it adds. “Throughout 2008, events were organized during Environment Week, National Conservation Week and World Water Day, among others, to promote awareness about the clean-up, recycling and forestation and care of forests, including related festivities and visits. These activities were attended by about 224,000 people from our operations and the neighboring communities.”

In addition to the work Fresnillo does for the education of its communities, the company also contributes to the physical health of their residents as well as its employees. In 2008, the company says, more than 17,600 Fresnillo employees and residents in neighboring communities took part in the company’s preventative health programs. These include vaccination campaigns, nutritional advice, violence prevention programs, first aid courses and youth wellness centers. Along with courses in catering, entrepreneurship and art, these youth centers also feature team sports and other athletic opportunities.

“Fresnillo regards its involvement in activities designed to promote wellbeing as an investment in health maintenance,” the company says. “Such activities include the promotion of sport and social pastimes. The group has sought to encourage participation in sporting activities through the sponsorship of a variety of events including athletics meetings, football, baseball, basketball, speed football and golf tournaments and the National Triathlon. In addition, funding has been provided for the maintenance of sports facilities.

“Approximately 11,200 employees and members of the community have benefited from the Group’s investment in sport during the year,” the firm adds.

Local Assistance
Along with the broader initiatives Fresnillo undertakes to benefit its communities, the company also ensures that it takes more focused efforts to help each community more specifically. For example, its efforts to be socially responsible in the area of the Fresnillo mine include supporting the city’s youth soccer team, repaving a local street and reducing dust emissions from its operations.

In Cienega, Fresnillo contributed numerous improvements to living conditions in the community. These included paving a large section of the mining camp, building a swimming pool and gymnasium, remodeling sports fields and donating new equipment to schools.

For everything it does for the community, however, Fresnillo says the safety of its employees is its most important responsibility. Befitting the weight of that responsibility, the company places a high value on safety. “Fresnillo places significant emphasis on the health and safety of its work force,” the company says. “We are required to comply with a range of health and safety laws and regulations, and have a health, safety and risk management system for our underground and surface mining operations that integrates ISO 14001 norms.

“Beyond compliance, however, we have a culture of safety that is embedded in our processes, with a zero-tolerance approach as part of our operational discipline,” the company adds. “This permits any employee or contractor to interrupt any operation or activity that endangers his or others’ safety.”

Among the numerous safety programs Fresnillo enacts in its operations are the STOP and Take Two for Safety programs from DuPont. The company also has initiated a self-managed industrial safety program at its Cienega mine and is in the process of expanding it to its other mines. In addition, the company has 10 brigades and 17 20-to-30-person-capacity mine refugee stations in its Fresnillo and Cienega mines.

There’s more to a safe work environment than ensuring the mines are safe, and Fresnillo says it doesn’t ignore situations outside of the mines. For example, the company has instituted a no-smoking environment in all of its offices, and has campaigns to encourage its employees to be vaccinated. “In total, Fresnillo imparted 59,300 man-hours of health and safety training during the year,” the company says. “As a result of classroom and job site efforts, the lost-time injury rate and fatality rate have declined over the past four years.”

Safety Recognition
Fresnillo’s efforts in the area of safety have not gone unnoticed by the rest of the industry. Among its numerous awards and recognitions for safety and health is first place in the 2008 Silver Helmet Awards from the Mining Chamber of Mexico. The company received the award in the category of open pit mines with more than 500 workers.

Additionally, Fresnillo received awards that same year at the IX National Meeting of Mine Safety Rescue Teams. The company’s Cienega mine received first place in the mine rescue category and second place in treatment of fractures. The Herradura mine received first place in cardiopulmonary resuscitation and first place in best practices, while the Fresnillo mine received first place in individual BG4 tests for self-contained breathing equipment.

Fresnillo also participated in the sixth International Mine Rescue Competition in Reno, Nev. The company’s team competed alongside teams from Australia, Poland, the United States, Canada, Peru, Ukraine, India, South Africa and Mongolia. Out of the 13 teams participating in the event, Fresnillo’s Ciengea team received fifth place, the company says.

Experienced Leadership
Along with the company’s physical holdings such as its real estate and equipment, the third component of Fresnillo’s unique strength is its people. The company’s executive leadership comprises decades of experience in the mining and precious metals sectors, and provide the core of the company’s expertise.

For example, Lomelin spent 36 years at Peñoles before the formation of Fresnillo, 21 of those years as CEO. “He previously served as group vice chairman of the metals and chemicals division for four years,” the company says. “Lomelin holds a bachelor of science degree in chemical engineering from the Universidad Nacional Autonoma de Mexico and postgraduate studies in business administration at the University of Wisconsin and the Stanford Executive program and Stanford University.”

CFO Mario Arreguin spent 17 years at Peñoles as CFO and group treasurer. “Prior to joining Peñoles, Arreguin worked in banking and chemical engineering,” the company says. “Arreguin has a bachelor of chemical engineering, holds an MBA from the University of Chicago and attended the Stanford Executive Program at Stanford University.”

The company’s vice president of operations, Manuel Luevanos, was a 30-year veteran of Peñoles and held a number of senior management positions within the company before the creation of Fresnillo, according to the company. Vice President of Exploration David Giles is another 30-year veteran of Peñoles.

The company’s board of directors complements Lomelin’s experience with decades of experience of their own in various aspects of the mining industry. Chairman Alberto Baillères, for example, served on the board of Peñoles for more than 40 years, and still holds the majority interest in Fresnillo’s parent company. “In addition to Peñoles, as part of the BAL group of companies, Baillères has interests in Grupo Palacio de Hierro, a chain of department stores mainly located in Mexico City, Grupo Nacional Provincial, a leading Mexican insurance company, Grupo Profuturo, a pensions and annuities business and other businesses relating to financial services and agriculture,” the company says.

Director Rafael MacGregor brings a high level of experience from previous positions, such as CEO of Valores Mexicanos Casa de Bolsa, corporate director at Grupo Financiero Inverlat and manager of investment strategies of Operadora de Bolsa. “Since 1999, MacGregor has been a member of the board of Mexican Stock Exchange and, since 2005, he has been vice chairman of Mercado Mexicano de Derivados,” the firm says. “MacGregor holds a bachelor of science degree in business administration from ITAM and attended the Stanford Executive Program at Stanford University.”

Director Arturo Fernandez also is a member of the executive committee of Industrias Peñoles, Grupo Nacional Provincial, Grupo Profuturo, El Palacio de Hierro, Valores Mexicanos Casa de Bolsa and Crédito Afianzador, according to the company, and his financial experience has been of significant value to the company. “Fernández has been the rector of ITAM, an independent not-for-profit higher education institution, for 16 years,” it says. “He has also previously served as the head of the tax policy office at the Mexican Ministry of Finance and as head of the economic deregulation office at the Mexican Ministry of Trade.”

Juan Bordes, another member of the board, is a former CEO of Artes Graficas Unidas and Fabricas de Papel Lorteto y Pena Pobre, and the company says his experience in business and chemical engineering serve it well. “Bordes holds a bachelor of science degree in chemical engineering from Universidad Nacional Autónoma de Mexico and attended the Stanford Executive Program at the University of Stanford,” Fresnillo says.