Interim Results

RNS Number : 5806B

Fresnillo PLC

19 August 2008

Fresnillo Plc

28 Grosvenor Street

London W1K 4QR

United Kingdom

www.fresnilloplc.com

19 August 2008

Fresnillo plc interim results

for the six months to 30 June 2008

Highlights: Delivering on growth, increased EBITDA and cash flow, strong balance sheet, maiden dividend

· Adjusted revenue (revenue excluding hedging and treatment charges) up 29% to US$494 million

· Production costs¹ controlled despite industry-wide cost pressure:

o For underground mines, weighted average production costs per tonne of ore rose by 11.4%

o For the open pit mine, production costs per tonne of ore rose by 11.7%

· EBITDA² up 46% to US$212 million

· Profit attributable to equity shareholders of the Group up 56% to US$141 million

· Strong balance sheet with no bank debt

· Maiden interim dividend of 5.9 US cents per share, in respect of the entire six month period

· Total ore resources increased by 28% at Fresnillo I, 20% at Cienega and 3% at Herradura

· Development projects at Fresnillo II and Soledad and Dipolos remain on track

· Mineralisation extended at all three exploration prospects and a new Joint Venture has been added to the portfolio

· Committed to doubling production, on a silver equivalent basis, in the next 10 years

1) Production cost is defined as costs incurred directly during the mining process such as labour, raw materials, contractors, energy, freight and maintenance.

2) EBITDA is calculated as gross profit plus depreciation less administrative and exploration expenses.

Highlights for 1H 2008

$ million unless stated	1H 2008	1H 2007	% change
Silver Production* (koz)	17,437	17,425	0.1
Gold Production* (koz)	140	145	(3.6)
Total Revenue	424.21	311.62	36.1
Adjusted Revenue	493.83	382.89	29.0
EBITDA	212.06	144.97	46.3
Attributable Profit	140.97	90.11	56.4
Net Operating Cashflow	264.3	192.1	37.6
Basic and Diluted EPS (USD)**	0.215	0.142	51.2
DPS (USD)	0.059	--

*Fresnillo attributable production

**The weighted average number of shares for 1H 2008 was 656,131,000. For 2007, the EPS calculation has assumed that the ordinary shares in issue, pursuant to the Merger agreement dated 18 April 2008, had been in issue throughout the period.

Jaime Lomelin, Chief Executive Officer of Fresnillo Plc, said:

'During a key phase of corporate development, Fresnillo plc's operating and financial performance has remained on track. Production is in line with expectations, is supported by healthy commodity prices and has delivered a strong increase in earnings. This has allowed the board to approve a maiden dividend in respect of the entire six month period during which we listed on the London Stock Exchange.

At a time when the mining industry as a whole is facing inflationary pressures, I am particularly encouraged by our management team's efforts to contain structural and operational costs.

Fresnillo Plc has also made excellent progress in developing its future growth potential. We have expanded resources in our current operations and taken forward our development projects at Fresnillo II and Soledad and Dipolos.'

Outlook

We remain confident of achieving our 2008 production targets. The management team is resolutely focused on offsetting rising costs by enhancing the efficiency of our operations. The results from our exploration activities have been encouraging and the construction of infrastructure for our development projects is fully in line with the plans and timeframe set out at listing. In summary, Fresnillo Plc is delivering on its commitments made at the time of the company's listing on the London Stock Exchange in May, while continuing to build a strong platform for future growth.

For further information, please visit our website: www.fresnilloplc.com or contact:

Fresnillo plc Tel: +44(0)20 7399 2470

Octavio Alvidrez, Head of Investor Relations

Brunswick Tel: +44(0)20 7404 5959

Patrick Handley

Carole Cable

Webcast of presentation:

A live webcast of the interim results presentation starting at 9.00 am UK time on Tues 19 August can be accessed through the Fresnillo website at www.fresnilloplc.com

About Fresnillo plc

Fresnillo Plc is the world's largest primary silver producer and Mexico's second largest gold producer, listed on the London Stock Exchange under the symbol FRES.

Fresnillo has three producing mines, all of them in Mexico - Fresnillo, Ciénega and Herradura; two advanced development projects - Fresnillo II, Soledad & Dipolos; and three exploration prospects - San Juan, San Julian, Orysivo, as well as a number of other long term exploration prospects and, in total, has mining concessions covering approximately 1.3 million hectares in Mexico.

Fresnillo has a strong and long tradition of mining, a proven track record of mining development and reserves replacement, and a low cost of production, being in the lowest quartile of the cost curve for both silver and gold.

Fresnillo intends to maintain its position as the world's largest primary silver producer with the aim of approximately doubling production, on a silver equivalent ounce basis, within the next ten years and increasing its gold production.

Forward-looking statements

This document includes statements that are, or may be deemed to be, 'forward-looking statements'. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms 'believes', 'estimates', 'plans', 'projects', 'anticipates', 'expects', 'intends', 'may', 'will', or 'should' or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include, but are not limited to, statements regarding the Fresnillo Group's intentions, beliefs or current expectations concerning, among other things, the Fresnillo Group's results of operations, financial position, liquidity, prospects, growth, strategies and the silver and gold industries.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of the Fresnillo Group's operations, financial position and liquidity, and the development of the markets and the industry in which the Fresnillo Group operates, may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. In addition, even if the results of operations, financial position and liquidity, and the development of the markets and the industry in which the Fresnillo Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in regulation, currency fluctuations (including the US dollar and Mexican Peso exchange rates), the Fresnillo Group's ability to recover its reserves or develop new reserves, including its ability to convert its resources into reserves and its mineral potential into resources or reserves, changes in its business strategy, political and economic uncertainty.

Forward-looking statements may, and often do, differ materially from actual results. Any forward-looking statements in this document speak only as of the date of this document, reflect the Fresnillo Group's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Fresnillo Group's operations, results of operations, growth strategy and liquidity. Investors should specifically consider the factors identified in this document which could cause actual results to differ before making an investment decision. Subject to the requirements of the Prospectus Rules, the Disclosure and Transparency Rules and the Listing Rules or applicable law, the Fresnillo Group explicitly disclaims any obligation or undertaking publicly to release the result of any revisions to any forward-looking statements in this document that may occur due to any change in the Company's expectations or to reflect events or circumstances after the date of this document.

Commentary on the Group Results

Strong half year results, maiden dividend and resources upgrade

Over the period under review, Fresnillo plc has delivered strong operational and financial results. Following the Company's listing on the London Stock Exchange in May 2008, our commitment to our stakeholders has been strengthened by improving productivity and enhancing the efficiency of our operations resulting in higher earnings which benefit our shareholders, personnel and the communities in which we operate. Success in exploration was achieved over the half at all three operating mines where we have increased total ore resources thus increasing mine life further. We have announced a maiden dividend of 5.9 US cents per share which reflects Fresnillo's robust cash flow, earnings and balance sheet.

The first half of the year was characterised by a continuing environment of strong demand and high prices. Average silver and gold prices reached historical highs of US$17.4 per ounce and US$911.4 per ounce respectively. The impact of the high prices was partially offset by significant cost pressures that are affecting the mining sector as a whole. Despite this fact, Fresnillo's Gross Profit, EBITDA, and Net Profit for the period increased by +38.1%, +46.3% and +58.0% respectively against the first half of 2007.

Although the inflationary environment presents significant challenges across the global mining industry, the management believes Fresnillo is well-positioned to weather these circumstances and sustain margin growth. Furthermore, the Company is strengthening its operational strategy to control costs, improve operational efficiency and automate processes to enhance the productivity of all of its mines.

At Fresnillo and Ciénega, ore throughput was in line with expectations. In addition, mine development, which enables the company to prepare the mine for future growth, accelerated 10.8% and 7.7% respectively over the first half of 2007. In Herradura there was a substantial increase in the ore deposited in the pads, 21.4% resulting in record gold production. The stripping of the pit was also 9.6% above programme over the six month period and it is expected to bring development of the mine ahead of schedule.

Total silver production reached 17.4 million ounces, in line with the same period in the previous year. Gold production at 140,000 ounces was 3.6% below that that produced in the same period in 2007 due to lower grades in Ciénega, but this shortfall was partially compensated by record production from the Herradura mine.

Excellent exploration results were achieved over the period at all three operating mines, resulting in significant upgrades of total resources and thus increasing the life of the mines. Contained silver ounces at Fresnillo were increased by 22%, contained gold ounces at Ciénega were increased by 6% and contained gold ounces at Herradura were increased by 11%.

In line with our strategy of long term growth, the Company's investment in brownfield and greenfield exploration continued. Exploration expenditure for the first half of the year was US$25.0 million, as planned.

Encouraging results were obtained in Fresnillo II; resources were increased in the Valdecañas and Jarillas veins and two new veins (Madroño and Mezquite) were discovered. The development programme for Fresnillo II is on track and we are aiming to conclude a revised project study during 1Q 2009.

At Soledad and Dipolos within the Herradura Corridor, reverse circulation drilling is on schedule, helping to define reserves and prepare a mining plan. The Soledad and Dipolos project is on schedule with a feasibility study currently in preparation.

Exploration results at our pipeline of prospects San Juan, San Julián and Orisyvo were also encouraging.

Total personnel (union, non-union and contractors) increased by 66 employees from 2,738 in the first half of 2007 to 2,804 in the first half of 2008. The increase in the unionised group was mainly at Herradura as there is more equipment in operation and at Soledad and Dipolos for more training operators for the upcoming development. At the local level, the relations with the mining union have been cooperative and constructive.

Operational Review

Stable production, costs pressures contained, and resource upgrades at all operations

Production

During the first half of the year, silver production was stable and fully in line with the Company's expectations at 17.4 million ounces and the production of gold was 140,000 ounces. The table below shows the differences by product:

Production	1H 2008	1H 2007	% change
Silver (kOz)*	17,437	17,425	0.1%
Gold (kOz)*	140	145	(3.6%)
Lead (kt)	9	9	9.2%
Zinc (kt)	12	11	8.5%

*Fresnillo plc attributable production

The Fresnillo mine, which is the main contributor to the Group's silver production, was affected by a temporary slowdown in early January during the local union elections. However the lost silver production was recovered during the second quarter as the mining method was changed in part from cut and fill to the more productive longhole drilling mining method. Silver production at Ciénega increased due to higher ore grade and better recovery derived from our implementation of automated systems in the milling and flotation areas.

Attributable gold production decreased by 3.6% in the first half of 2008 compared to the same period in 2007. Lower ore grade for gold led to a decrease in gold production at Ciénega, which was partly offset by an increase at Herradura. The half year record production at this open pit mine was largely due to the addition of new equipment, such as trucks and front-end loaders.

Costs

Production costs* expressed in US$ per tonne milled increased by 9.5%, 11.7% and 17.5% at Fresnillo, Herradura and Ciénega respectively against the first half of 2007. The principal driver of cost inflation is the rising price of key supplies derived from the steel and petroleum industries. Particularly, personnel cost at these three operating mines rose due to an increase by 8% in salaries and was also impacted by the contributions to the new pension plan, while in 2007 a one off benefit was derived from an amendment to the Company's defined benefit pension plan. However, management has been diligent in cost control and, groupwide, increases are below the industry average.

The higher unit cost at the Fresnillo mine was driven principally by higher personnel expenses, increased contractor costs due to additional mine development (2,750 metres) and maintenance of the general shaft, in addition to higher per unit costs charged by contractors. Also the higher consumption of cement used for shotcreting (cementing mine openings to ensure stability and safety of the stopes) and prices of steel raised the costs incurred relating to operating materials. These increases were marginally offset as a result of beneficial energy cost under a self supply power consumption agreement. Notwithstanding the foregoing, as anticipated in the IPO Prospectus, on 1 July 2008 Fresnillo's joint and several guarantee for payment of power invoices of non-Fresnillo entities and the such agreement was cancelled. As a result, starting on such date Fresnillo shall consume energy at prevailing market prices in Mexico. This may lead to higher electricity costs; however, the effects of this are not expected to be material.

Unit cost at Ciénega increased by 17.5% due to increases in personnel costs caused by higher premiums paid for medical insurance claims, and rises in contractor costs as a result of rock bolting and shotcreting to ensure stability of the stopes. The use of additional spare parts for in-mine equipment increased maintenance and repairs costs as well. Part of the higher cost was offset by a 3% production increase over the six month period.

The main factors which affected the unit cost at Herradura were operating materials, diesel, maintenance, personnel costs and the movement of higher volumes of inert materials related to stripping activities. Operating materials increased primarily due to higher prices and more intense use of truck tyres derived from longer haulage distances from the pit to the leaching pads, as well as additional use of the new equipment. Higher prices and increased consumption of explosives also affected operating materials costs. Longer haulage distances and the additional equipment resulted in greater diesel usage. This new equipment has also affected maintenance costs due to the need for an expanded inventory of spare parts and for the necessary additional personnel to operate it. Although these increases in costs were significant, they were partially offset by a 21.4% increase in production of ore against the first half of 2007, achieving record gold output.

As outlined in the Prospectus, employee profit sharing in Mexico is statutory and heavily influenced by moves in commodity prices. The increase in achieved silver and gold prices in the first half of the year and resulting jump in profitability has led to a substantial increase in profit sharing. Coupled with the operating cost increases referred to above, this has led to a 41% year on year increase in the silver cash cost on a co-product basis. Stripping out the increase in profit sharing and the profit generated by the change in the pension plan, cash costs have risen by 32%. Profit sharing in 2007, was reduced as a result of the loss incurred in unwinding the commodity hedging instruments, which for tax purposes was fully deducted. In addition, higher treatment and refining charges, which were settled according to international market benchmarks, had an adverse effect on costs.

*Production cost is defined as costs incurred directly during the mining process such as labour, raw materials, contractors, energy, freights and maintenance.

Cost reduction and efficiency projects

Fresnillo mine

In order to reduce haulage from 5,300 metres to 1,600 metres within the Fresnillo mine to reduce costs a development of a new shaft was approved in the West part of the San Carlos vein. The investment which is part of the sustaining capital expenditure is expected to be US$19.1 million, with an attractive return on investment. It is expected to take 3 years to complete.

A sewage water treatment plant at the Fresnillo mine was approved and will allow the Company to reduce costs and enhance sustainable development efforts. The sewage water will be obtained from the Fresnillo municipality at no cost and the treated water will be used in the milling process instead of using fresh water. This will both benefit the community by preserving the aquifers and the company by reducing costs. An investment of US$4.3 million is expected, and a one year construction time is expected.

Ciénega

An investment of US$13.3 million to sink the shaft an additional 300 metres was approved to develop and recover deeper ore reserves. The construction is expected to take three years. This investment is sustaining capital expenditure. The current hoisting equipment is already designed to operate at additional depths.

An investment of US$6.8 million will be made at Ciénega to improve the leaching circuit to increase gold and silver recoveries by an estimated 2.2% and 0.8% respectively; and an additional 0.3% in gold recovery will be achieved by the acquisition of a Knelson gravimetric concentrator. This new equipment will be operational in approximately 18 months' time.

Growth Projects

Fresnillo II

Due to the long delivery times of key milling equipment and based on the operating experience of Fresnillo I and current resources of Fresnillo II we have placed orders for a combined cost of US$12.0 million for mills and a substation. This will allow Fresnillo II to start production according to schedule in 2011. These expenditures are part of the overall investment program for Fresnillo II which is being updated and will be presented to the board for approval at first quarter 2009.

Soledad and Dipolos

After evaluating a number of alternatives and comparing contractors' quotes to our actual operational experience at Herradura, it was concluded that the most efficient way in which to develop Soledad and Dipolos would be for the Company to mine, haul and process the ore in the Soledad and Dipolos area either with contractors or the Company's own resources. This will require buying the mining equipment and constructing a facility to process the solution on site.

Investing in equipment and operating the complete process will require a higher capital expenditure but should incur lower operating expenses. The investment required for this project is being reviewed and will be presented to the board in September 2008. Also a US$5.3 million investment was approved to buy long-delivery time equipment. This expenditure is part of the total investment of the project.

Exploration

One of the main drivers of the Company's growth is the investment in exploration and the development of projects and prospects with the potential to become operating mines.

Exploration expenses increased 4.4% over the six months period. In addition it should be noted that US$49.2 million of expenses in the Saucito and Juanicipio areas of the Fresnillo II project have been capitalised.

Diamond drilling at the Fresnillo II project increased by 6.7 % to 28,800 metres during 1H08 compared to 1H07. Six holes were completed on the east and west extensions of the Valdecañas vein, successfully encountering economic silver-gold values between 1.5 and 6.5 metres vein width. The structure was extended by an additional 200 metres laterally in these directions on Fresnillo ground, and potential is open along the vein strike. Eight holes were completed on the central section of the same vein within the Minera Juanicipio claim (in which Fresnillo has a 56 % interest), that covers 1,200 metres vein length. Five of these holes intersected attractive silver-gold grades over 6.5 metres average width and drilling continues to define the resource.

At the Jarillas vein, 16 drill holes were completed in the west sector confirming continuity of mineralisation and increasing indicated resources by 8%.

Additionally, the Madroño and the Mezquite veins were discovered in January by drill testing one of the geophysical anomalies between the Valdecañas and Saucito veins. Mineralisation is open along the vein strike to the west and east. These discoveries confirm that the Fresnillo II district has further growth opportunities as new veins have been discovered.

The Saucito shaft has reached 530 metres while the service ramp is 3,000 metres in length. Engineering work at Fresnillo II is progressing well. Both, the Valdecañas ramp and the Jarillas shaft will initially be used to evaluate and upgrade reserves and, in the future, form part of the production infrastructure.

Reverse circulation drilling activities were maintained at the same strong rate at Soledad and Dipolos, compared to the first half of last year, helping to define reserves and a mining plan.

Regarding the advanced prospects, diamond drilling continues at the San Julian, Orisyvo and San Juan prospects.

In particular, at San Julian 68 diamond drill holes were completed during the first half of the year on eight of the gold-silver veins totaling 18,652 metres. As a result, 284,000 gold equivalent ounces are now indicated at the Todos Santos Vein. Two ore-shoots were identified along La Dura vein, while a possible ore body was found at the Maria Antonieta vein. Exploration work and results are currently being interpreted and will help in defining new drill targets.

At Orisyvo, 10,422 metres were drilled in order to define the extent of this significant gold prospect. Further drilling will continue to define morphology of the high grade core in the central zone. In addition, the north oxide zone was extended to the west and southwest.

A new mineralised area was discovered in the Lorena vein at the San Juan prospect in Durango. Mineralisation has been extended an additional 1,000 metres in which samples suggest high gold concentrations in several zones.

In May 2008, a joint venture agreement was signed with International Northair Mines Ltd to explore the India property at Durango State where a group of gold-silver bearing veins show potential. Fresnillo plc can gain up to an 80% interest in the project through property payments and by funding exploration in a four year option period.

In-Mine Exploration

Total ore resources, including measured, indicated and inferred, updated from 31 December 2007 were successfully increased by 28% at Fresnillo I. Resources increased from 32.6 million tonnes at 486.7 grams of silver per tonne to 41.6 million tonnes at 465 grams of silver per tonne.

Ciénega achieved an increase of 2.4 million tonnes of resources (20% increase), from 11.8 million tonnes at 5.48 grams of gold per tonne to 14.2 million tonnes at 4.81 grams per tonne, including 21% that comes from a higher mineralisation found at the Rosario, La Virgen and Las Casas veins.

Total ore resources at Herradura were increased by 5.2 million tonnes from 165.3 million tonnes at 0.78 grams of gold per tonne to 170.5 million tonnes at 0.84 grams of gold per tonne, which is a 3% increase excluding the Soledad and Dipolos project.

In terms of metal contained in the resources, an increase by 22% of silver ounces at Fresnillo was obtained, while at Herradura and Ciénega increases of 11% and 6% of gold ounces respectively were achieved during the first half of the year.

Health and Safety, Human Resources, Environment and Community Relations

The safety performance improved at Fresnillo and Herradura during the first six months of the year and no fatal accidents occurred during this period.

At Fresnillo, the injury rate fell from 2.26 in the first half of 2007 to 1.44 in the first half of 2008, while the number of lost days decreased from 1.12 to 0.79 days.

At Herradura, the injury rate decreased from 0.92 in 1H 2007 to 0.63 1H 2008 and lost days decreased from 0.11 to 0.05. For the fifth time, Herradura mine received the annual Silver Helmet Award granted by the Mexican Mining Chamber (CAMIMEX) for its improved safety indices in the category of open pit mines with more than 500 employees.

At Ciénega, the injury rate increased from 0.75 to 1.13 due to higher personnel turnover. Nevertheless the number of lost days decreased from 0.41 to 0.27 days. No fatal accidents occurred in this period.

Although the company's safety performance was a great achievement, we continue to work on training programmes to ensure that unsafe practices are eliminated.

Community development programmes in education, sports, culture, health and environment stewardship including the protection of species in danger of extinction and water usage efficiency continue. These activities are an important part of good relations to our employees and to the communities in which we operate.

Financial Review

Commentary on Financial Performance

The interim condensed consolidated financial statements of Fresnillo plc for the first half of 2008 and 2007 have been prepared in accordance with IAS 34 'Interim Financial Statements'. The financial information is presented in US dollars, and all values in this commentary are expressed in millions except where indicated.

Income Statement

Total revenues, gross profit, EBITDA and profit for the period increased by 36.1% 38.1% 46.3% and 58.0% respectively compared to the six months ended 30 June 2007. A summary of the consolidated income statement is shown below:

Income Statement Key Line Items

Six months ended 30 June

(in millions of US$)

	1H 2008	1H 2007	% change
Adjusted Revenue*	493.83	382.89	29.0
Treatment & Refining charges	(47.25)	(40.71)	16.1
Hedging	(22.37)	(30.56)	(26.8)
Total Revenues	424.21	311.62	36.1
Cost of sales	(150.51)	(113.44)	32.7
Gross Profit	273.70	198.18	38.1
EBITDA	212.06	144.97	46.3
Profit before income tax	201.62	138.62	45.4
Income tax expense	43.55	38.59	12.9
Profit for the period	158.07	100.04	58.0
Attributable profit	140.97	90.11	56.4
Basic and diluted Earnings per share (usd/share)**	0.215	0.142	51.2

* Adjusted revenue is revenue as disclosed in the income statement adjusted to exclude hedging effects and treatment and refining charges.

** The weighed average number of shares for 1H 2008 was 656,131,000. For 2007, the EPS calculation has assumed that the ordinary shares in issue pursuant to the Merger agreement dated 18 April 2008 have been in issue throughout the period.

Prices, Inflation and Exchange Rates

Metal prices for silver and gold have remained strong during the first half of the year, reaching historical highs. The increases in average prices compared to the same period last year of 30.7% for silver and 38.3% for gold were driven primarily by demand for new industrial uses, US dollar weakness, global political tensions and the influence of a rising platinum price.

The mining industry has suffered significant cost pressures in equipment and operating materials. Fresnillo has faced these costs pressures together with higher local inflation which is running in excess of 5.37%. This places pressure on input prices denominated in both US dollars and Mexican pesos. In addition, the average exchange rate for the Mexican peso against the US dollar appreciated by 2.98% compared to the corresponding period in 2007. As certain costs are denominated in Mexican pesos, the strengthening of the peso leads to higher costs for Fresnillo plc whose functional currency is the US dollar.

Revenues

Sales volumes

Six months ended 30 June

	1H 2008	1H 2007	% change
Gold (Oz)	180,849	173,042	4.5%
Silver (Oz)	16,342,764	16,017,229	2.0%
Lead (MT)	8,091	7,691	5.2%
Zinc (MT)	10,078	9,649	4.4%

The combination of sales volumes for the first half of 2008 being higher than those experienced in the first half of 2007 and higher metal prices drove sales before hedging and treatment charges up by 29.0% to US$493.8m. Although Fresnillo plc unwound its commodity hedging contracts with Peñoles in 2007, International Accounting Standard 39 (IAS 39) requires the Company to defer the hedging losses relating to the terminated hedging instruments in equity at the date of termination, and reflect them in the income statement in line with the occurrence of the transaction to which they were related. As a result, a non-cash charge of US$22.4m has been reflected in sales for the period ended 30 June 2008, as compared to a cash charge of US$30.6m in the same period in 2007. In addition, higher treatment and refining charges, which are being settled in-line with international benchmarks, also reduced sales.

Net sales, after hedging and treatment charges, increased to US$424.2m, 36.1% up when compared to the six months ended 30 June 2007.

Cash due as part of the Silverstream contract during the period amounted to US$16.1m. This cash is not reflected as revenue in the income statement, but is credited against the carrying value of the Silverstream asset.

Cost of Sales

Cost of goods sold increased by 32.7% when compared to the same period last year. This increase of US$37.1m was driven by a number of factors:

Employee profit sharing increased significantly in the first half of 2008 to US$17.8m (H1 2007: US$7.8m) principally due to: (i) Deductible losses incurred with relation to hedging activities during 2007, including the termination of derivatives, which decreased the profit base for calculating profit sharing, whereas in H1 2008, there were no comparable deductions, despite accounting charges continuing to be reflected in the income statement for the period; (ii) Saucito exploration expenses were no longer allocated to the Fresnillo mine; (iii) higher operating profit.
Personnel costs, other than employee profit sharing, increased by US$5.6m, largely due to an accounting benefit arising in 2007 as a result of amendments to the defined benefit pension plan, an increase of 8 per cent in workers' salaries and an increase in the number of workers at the Herradura mine.
An increase of US$7.0m in the cost of operating materials due to higher prices of most of the inputs used at our operating mines. Particularly, the average price of tyres increased by 20%, while the cost of explosives increased by between 11% and 20% (excluding ammonium nitrate used at Herradura which increased by 30%). In addition, prices of steel balls used at our mills increased by 20% and the steel used for drilling activities rose approximately 13.0%. Further, there was an increase in the use of operating materials by our mines, due to: (i) more mine development and preparation compared to the first half of 2007; (ii) longer hauling distances for minerals; and (iii) higher volumes of ore and waste moving longer distances at La Herradura.
The cost of contractors increased by US$3.8m mainly due to: (i) additional works related to the preparation and development of our operating mines critical to future production; (ii) works related to the safety of our workers including rock bolting and shotcreting; and (iii) the hiring of additional contractors to haul ore and waste.
Maintenance and repair costs increased by US$1.8m, primarily due to the use of additional spare parts and components to service a higher quantity of equipment.
Energy expense increased by US$1.9m due to a higher cost of diesel and additional consumption at La Herradura related to stripping activities in new mining zones, larger haulage distances and additional equipment that was purchased to meet operating requirements.

EBITDA

In the first six months of 2008, EBITDA, which is calculated as gross profit plus depreciation less administrative and exploration expenses was US$212.1m, an increase of 46.3% compared to the comparative period (H1 2007: US$145.0m)

EBITDA & EBITDA Margin

Six months ended 30 June

(in millions of US$)

	1H 2008	1H 2007	% change
Gross Profit	273.70	198.18	38.1
+ Depreciation	21.75	23.60	(7.9)
- Administrative Expenses	(58.38)	(52.86)	10.4
- Exploration Expenses	(25.01)	(23.95)	4.4
EBITDA	212.06	144.97	46.3
EBITDA Margin	49.99%	46.52%

Administrative Expenses

Administrative expenses totaled US$58.4m during the first half of the year, up 10.4% when compared to the same period last year. This increase largely resulted from trademark royalties charged by Peñoles during the first four months of the year and which were determined by reference to revenues. From May 2008 no trademark royalties can be charged by Peñoles. The new Services Agreement between Peñoles and Fresnillo plc became effective as of 1 May 2008 and is expected to result in lower administrative expenses in the future.

Exploration Expenses

Exploration expenses, which amounted to US$25.0m in the period, increased by 4.4% over the previous period in line with expectations due to the planned more intensive exploration at Soledad and Dipolos.

Taxation

The effective tax rate for the period was 21.6% (H1 2007: 27.8%), which is lower than the statutory Mexican tax rate of 28%, due to tax credits applied in the six months to 30 June 2008. The overall tax charge was US$43.6m, an increase of US$5.0 million (+12.9%) compared to the comparative period, and was primarily as a result of the increase in taxable earnings.

Dividends

The Directors recommend an interim dividend of 5.9 US cents per share, amounting to US$42.31 m, which will be paid on 19 September 2008.

The interim dividend will be paid in UK pounds sterling to shareholders on the register on 29th August 2008. Whilst the dividends are declared in US dollars, unless a shareholder elects to receive dividends in US dollars, they will be paid in UK pounds sterling with the declared dividend being converted into UK pounds sterling at the prevailing exchange rate at the time of payment.

As stated at the time of Listing, the Company´s dividend policy takes into account the profitability of the business and underlying growth in earnings of the Company, as well as its capital requirements and cashflows, while maintaining an appropriate level of dividend cover. Interim and final dividends will be paid in the approximate proportions of one-third and two-thirds of the total annual dividend, respectively.

Cash Flow

A summary of the key line items from the cash flow is set out below:

Cash Flow Key Line Items

Six months ended 30 June

(in millions of US$)

	1H 2008	1H 2007
Net cash from operating activities	264.3	192.1
Shares issued and paid	901.1	-
Silverstream contract	16.1	-
Purchase of Property, Plant & Equipment	(48.2)	(31.5)
Distribution to shareholders	(406.7)	4.7
Net increase in cash during the period	275.0	(13.6)
Cash at 30 June	286.6	24.5

Net cash generated from operating activities increased by 37.6% during the first half of 2008 to US$264.3m (H1 2007:US$192.1m) primarily as a result of an increase in profits and a decrease in working capital. Other important sources of funds were proceeds from the IPO (US$901.1m) and the Silverstream Contract (US$16.1m). The main uses of funds were related to the purchase of equipment (US$48.2m), the payment of transaction costs related to the IPO (US$35.0m), and the payment of the loans granted by related parties which were originally used to fund the distribution to shareholders' payments (US$406.7m) and the investment in the Silverstream Contract (US$350.0m).

Balance Sheet

Fresnillo plc continues to have a very strong balance sheet with no bank debt. Total equity was US$1,050.1m as at 30 June 2008, an increase of US$627.2m (148.2%) compared to 31 December 2007, mainly reflecting the share premium which resulted from the IPO process.

Cash and cash equivalents increased by US$281.8m over the period from $4.8m at 31 December 2007. This increase was mainly represented by the cash generated from operating activities and the silver stream contract.

Property, plant and equipment increased by 7.2% to $383.5m over the period. These resources were spent primarily in mining and development works, purchase of new equipment, construction of the tailings dams at Fresnillo and La Ciénega, purchasing of surface land, and the construction of the sixth leaching pad at La Herradura.

Board of Directors

Alberto Baillères Non-Executive Chairman

Jaime Lomelín Chief Executive Officer

Lord Cairns Senior Non-Executive Director

Héctor Rangel Non-Executive Director

Fernando Ruiz Non-Executive Director

Javier Fernández Non-Executive Director

Rafael MacGregor Non-Executive Director

Juan Bordes Non-Executive Director

Arturo Fernández Non-Executive Director

Guy Wilson Non-Executive Director

Senior Management team

Mario Arreguín Chief Financial Officer

Manuel Luévanos Vice President, Operations

David Giles Vice President, Exploration

Statement of directors' responsibilities pursuant to DTR 4.2.10

The Directors of the Company as listed on page 16 of the Interim Report hereby confirm that to the best of their knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union; and

(b) the interim management report includes a fair review of the information required by DTR 4.2.7 (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principle risks and uncertainties for the remaining six months of the year) and DTR 4.2.8 (being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period).

On behalf of the Directors,

Jaime Lomelin

Chief Executive Officer

7 August 08

INDEPENDENT REVIEW REPORT TO FRESNILLO PLC

Introduction

We have been engaged by Fresnillo plc to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 which comprises the interim consolidated income statement, interim consolidated balance sheet, interim consolidated cash flow statement, the interim consolidated statement of changes in equity and the related notes 1 to 26. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with guidance contained in ISRE 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 2a, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Ernst & Young LLP

London

18 August 2008

SECTION B: 30 Jul 08

Interim Consolidated Income Statement

	Notes	For the six months ended 30 June
		2008 (Unaudited)	2007 (Unaudited)
		(in thousands of US dollars)
Revenues	4	424,205		311,615
Cost of sales	5	(150,510 )		(113,437)

Gross profit		273,695		198,178
Administrative expenses	6	(58,375 )		(52,859)
Exploration expenses	7	(25,006 )		(23,945)
Other income	8	5,638		6,431
Other expenses		(1,691)		(752)
Profit before net finance costs and income tax		194,261		127,053
Finance income	9	4,797		9,682
Finance costs	9	(10,004)		(2,294)
Foreign exchange gain		12,562		4,180

Profit before income tax		201,616		138,621
Income tax expense	10	(43,550 )		(38,585 )

Profit for the period		158,066		100,036

Attributable to:
Equity shareholders of the Group		140,969		90,111
Minority interest		17,097		9,925

		158,066		100,036

Earnings per share: (US$)

Basic and diluted earnings per ordinary share

from continuing operations 11

0.215

0.142

Interim Consolidated Balance Sheet


	Notes	As of 30 June 2008 (Unaudited)	As of 31 December 2007 (Unaudited)
		As of 30 June 2008 (Unaudited)	As of 31 December 2007 (Unaudited)
		(in thousands of US dollars)
ASSETS
Non-current assets
Property, plant and equipment	12	383,544	357,686
Available for sale financial assets	13	22,936	31,311
Silverstream contract	14	290,845	310,200
Deferred tax asset		9,657	–
Other assets		643	1,168

		707,625	700,365

Current assets
Inventories		30,284	36,481
Trade and other receivables	15	110,380	231,484
Prepayments	16	3,173	10,782
Derivative financial instruments		26	–
Silverstream contract	14	43,100	39,800
Income tax refunds due		17,447	23,166
Cash and cash equivalents	17	286,639	4,802

		491,049	346,515

Total assets		1,198,674	1,046,880

EQUITY AND LIABILITIES
Capital and reserves attributable to equity shareholders of the Group
Capital stock	18	358,680	634,270
Share premium	18	826,974	–
Capital reserve		(526,910)	(526,910)
Net unrealised gains/(losses) on cash flow hedges		(34,714)	(50,847)
Unrealised gains/(losses) on available for sale financial assets		4,582	10,623
Foreign currency translation reserve		234	(111)
Retained earnings		340,418	293,133

		969,264	360,158
Minority interest		80,880	62,883

Total equity		1,050,144	423,041

Non-current liabilities
Provision for mine closure cost		15,544	14,295
Provision for pensions and other post-employment benefit plans		3,182	2,570
Deferred tax liability	10	77,190	99,623

		95,916	116,488

Current liabilities
Trade and other payables	20	33,781	27,843
Interest bearing loans and borrowings	23	–	455,921
Employee profit sharing		18,833	23,587

		52,614	507,351

Total liabilities		148,530	623,839

Total equity and liabilities		1,198,674	1,046,880

Interim Consolidated Cash Flow Statement


	Notes	For the six months ended 30 June
		2008 (Unaudited)	2007 (Unaudited)
		(in thousands of US dollars)
Net cash from operating activities	24	264,276	192,062

Cash flows from investing activities
Purchase of property, plant and equipment		(48,152)	(31,502)
Purchase of available for sale instruments		(15)	(1,047)
Proceeds from the sale of property, plant and equipment and other assets		9,137	10,972
Loans granted to related parties		(321,538)	(571,951)
Proceeds from repayment of loans granted to related parties		353,980	494,449
Silverstream contract		16,055	–
Interest received		3,791	2,279
Other proceeds		2,032	2,558

Net cash generated from / (used in) investing activities		15,290	(94,242)

Cash flows from financing activities
Loans granted by related parties		782,652	6,094
Repayment of loans granted by related parties		(1,238,102)	(109,139)
Capital contribution		900	–
Dividends paid		–	(11,122)
Share issued and paid pursuant to the Global Offer		901,081	–
Distribution to equity shareholders of the Group		(406,718)	4,694
Transaction cost associated with issue of share		(34,962)	–
Interest paid		(9,383)	(1,932)

Net cash used in financing activities		(4,532)	(111,405)

Net increase / (decrease) in cash and cash equivalents during the year		275,034	(13,585)
Net foreign exchange difference		6,803	(1,241)
Cash and cash equivalents at 1 January	17	4,802	39,277

Cash and cash equivalents at 30 June	17	286,639	24,451

Interim Consolidated Statement of Changes in Equity


		Attributable to equity holders of the Group
	Notes	Equity share capital	Share premium	Capital reserve	Net gains/ losses on revaluation of cash flow hedges	Unrealised gains/ losses on available for sale financial assets	Foreign currency translation reserve	Retained earnings	Total	Minority interest	Total equity
		(in thousands of US dollars)
Balance at 1 January 2007 (Unaudited)		634,270	–	(526,910)	(79,235)	5,476	–	278,848	312,449	50,676	363,125

Net unrealized loss on cash flow hedges (net of tax)	25	–	–	–	959	–	–	–	959	–	959
Net loss on cash flow hedges recycled to income statement (net of tax)	25	–	–	–	22,008	–	–	–	22,008	–	22,008
Fair value gains on available for sale financial assets (net of tax)		–	–	–	–	3,636	–	–	3,636	–	3,636
Foreign currency translation		–	–	–	–	–	602	–	602	–	602

Net income recognised directly in equity		–	–	–	22,967	3,636	602	–	27,205	–	27,205
Profit for the period		–	–	–	–	–	–	90,111	90,111	9,925	100,036

Total income and expense for the period		–	–	–	22,967	3,636	602	90,111	117,316	9,925	127,241
Distribution to equity shareholders of the Group								6,139	6,139		6,139
Dividends paid		–	–	–	–	–	–	–	–	(11,122)	(11,122)

Balance at 30 June 2007 (Unaudited)		634,270	–	(526,910)	(56,268)	9,112	602	375,098	435,904	49,479	485,383


Balance at 1 January 2008 (Unaudited)		634,270	–	(526,910)	(50,847)	10,623	(111)	293,133	360,158	62,883	423,041

Net loss on cash flow hedges recycled to income statement (net of tax)	25	–	–	–	16,133	–	–	–	16,133		16,133
Fair value gains on available for sale financial assets (net of tax)		–	–	–	–	(6,041)	–	–	(6,041)	–	(6,041)
Foreign currency translation		–	–	–	–	–	345		345	–	345

Net income recognised directly in equity		–	–	–	16,133	(6,041)	345		10,437	–	10,437
Profit for the period		–	–	–	–	–	–	140,969	140,969	17,097	158,066

Total income and expense for the period		–	–	–	16,133	(6,041)	345	140,969	151,406	17,097	168,503
Capital contribution		–	–	–	–	–	–	–	–	900	900
Issue of share capital		100	–	–	–	–	–	(100)	–	–	–
Capital reduction	18	(317,135)	–	–	–	–	–	317,135	–	–	–
Distribution to equity shareholders of the Group		–	–	–	–	–	–	(410,719)	(410,719)	–	(410,719)
Shares issued as part of Global Offer, net of transaction costs	18	41,445	826,974	–	–	–	–	– -	868,419	–	868,419

Balance at 30 June 2008 (Unaudited)		358,680	826,974	(526,910)	(34,714)	4,582	234	340,418	969,264	80,880	1,050,144

Notes to the Interim Condensed Consolidated Financial Statements

1 Corporate Information

Fresnillo plc ('the Company') is a public limited company that was incorporated on 15 August 2007 under the Companies Act 1985 and registered in England and Wales and is the holding company for the Fresnillo subsidiaries detailed below ('the Group').

On 14 May 2008 the Company's shares were admitted to the Official List of the United Kingdom Listing Authority ('UKLA') and to trading on the main market of the London Stock Exchange (this process being referred to as 'the Global Offer' or the 'Initial Public Offering', ('IPO')).

Peñoles S.A.B. de C.V.('Peñoles') currently owns 77 percent of the shares of the Company and the ultimate controlling party of the Company is the Baillères family, whose beneficial interest is held through Penoles.

In preparation for the Global Offer, Peñoles conducted a reorganisation, which completed on 18 April 2008, whereby the companies comprising the precious metals mining business of Peñoles were reorganised under the Company (the 'Pre-IPO Reorganisation'). As such, prior to 18 April 2008, the Company did not control the entities it acquired pursuant to the Pre-IPO Reorganisation.

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2008, were authorised for issue by the Board of Directors of Fresnillo plc on 18 August 2008.

The Group's principal business is the mining and beneficiation of non-ferrous minerals, and the sale of related production. The primary contents of this production are silver, gold, lead and zinc. The Group has three fully developed operating mines: Fresnillo, Herradura and Ciénega.

The principal activities of the entities included in the interim condensed consolidated financial statements are as follows:


Company	Principal activity	Country of incorporation	Equity interest
			%
			As of 30 June 2008	Year ended 31 December 2007
Minera Fresnillo, S.A. de C.V.	Production of lead/silver and zinc concentrates	Mexico	100	100
Minera Penmont, S. de R.L. de C.V.	Production of doré bars (gold/silver)	Mexico	56	56
Minera Mexicana La Ciénega, S.A. de C.V.	Production of lead and zinc concentrates and silver precipitates	Mexico	100	100
Minera Saucito, S.A. de C.V.	Mining project	Mexico	100	100
Minera Juanicipio, S.A. de C.V.	Mining project	Mexico	-	-
Comercializadora de Metales Fresnillo, S.A. de C.V.	Holds rights over silver production from Peñoles' polymetallic Sabinas mine	Mexico	100	100
Exploraciones Mineras Parreña, S.A. de C.V.	Exploration services	Mexico	100	100
Minera El Bermejal, S. de R.L. de C.V.	Mining equipment leasing	Mexico	56	56
Compañía Minera Las Torres, S.A. de C.V.	Closed Mines(*)	Mexico	100	100
Servicios Administrativos Fresnillo, S. A de C.V.	Administrative services	Mexico	100	100
Fresnillo Management Services	Administrative services	London	100	-

(*) Certain of these mines are currently operated on a small scale by a third party under a leasing agreement.

2 Significant Accounting Policies

(a) Basis of preparation and statement of compliance

The Company became the holding company for the Group pursuant to the Pre-IPO Reorganisation completed 18 April 2008, as detailed in Note 1. As this was a reorganization of businesses under common control, the pooling of interests method of accounting has been applied in the presentation of the interim condensed consolidated financial statements for the six months ended 30 June 2008 and 30 June 2007 which presents the results of the Group's businesses as if the Company had always been the holding company. For periods prior to the Pre-IPO Reorganisation, consolidated financial statements were not prepared for the Group. The accompanying interim condensed consolidated financial statements present the results and changes in equity of the Company and its subsidiaries as if the Group had been in existence throughout the periods presented and as if the Pre-IPO Reorganisation had occurred as at 1 January 2007.

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2008 have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all the information required for full annual financial statements for the Group, which are prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The basis of preparation and accounting policies used in preparing the interim condensed consolidated financial statements are set out below. These accounting policies have been consistently applied to all the periods presented unless otherwise stated.

The interim condensed consolidated financial statements have been prepared on a historical cost basis, except for certain classes of property, plant and equipment that have been stated at deemed cost under IFRS1, derivative financial instruments, available-for-sale financial instruments and defined benefit pension scheme assets which have been measured at fair value.

The Group's transition date to IFRS was 1 January 2007. The rules for first-time adoption of IFRS are set out in IFRS 1 First-time Adoption of International Financial Reporting Standards.

IFRS 1 allows certain exemptions in the application of particular Standards to prior periods in order to assist companies with the transition process. The Group has applied the following exemptions: i) Certain classes of property, plant and equipment had been revalued at 1 January 2005. Deemed cost at the date of transition is determined by reference to the revaluation as of 1 January 2005 that was performed at the time of the initial public offering of the Group, adjusted for depreciation for the period until the date of transition and ii) The cumulative translation differences for foreign operations have been deemed to be zero at the date of transition: any gains or losses or subsequent disposals of foreign operations will not therefore include translation differences arising prior to the transition date.

Reconciliations to the previous GAAP for equity as at the date of transition and the profit and loss account for previous periods are not presented as the Group has not previously reported consolidated financial statements.

The interim consolidated financial information is presented in US dollars ($) and all values are rounded to the nearest thousand ($000) except when otherwise indicated.

The impact of the seasonality on operations is not regarded as significant on the interim condensed consolidated financial statements

(b) Significant accounting judgements, estimates and assumptions

Many of the amounts included in the interim consolidated financial information involve the use of judgement and/or estimation. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances, with regard to prior experience, but actual results may differ from the amounts included in the interim consolidated financial information. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the interim consolidated financial information.

Judgements

Areas of judgement, apart from those involving estimations, that have the most significant effect on the amounts recognised in the combined historical financial information are:

• Determination of functional currencies - note 2(d);

Estimates and assumptions

Significant areas of estimation uncertainty made by management in preparing the combined historical financial information include:

• Determination of useful lives of assets for depreciation and amortisation purposes - note 2(e);

• Determination of ore reserves - note 2(f);

• Review of asset carrying values and impairment charges - note 2(i);

• Estimation of the amount and timing of mine closure costs - note 2(l) ;

• Pension and post-employment benefit valuation assumptions - note 2(n);

• Income tax - notes 2(u) and 10;

• Valuation of derivative financial instruments - note 2(w); and

• Contingent liabilities regarding claims from tax authorities - note 22.

The interim condensed consolidated financial statements set out the Group's financial position as of 30 June 2008, and operations and cash flows for the period then ended.

Entities that constitute the Group are those enterprises controlled by the Group regardless of the amount of shares owned by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Entities are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.

The interim condensed consolidated financial information of the entities that constitute the Group has been prepared for the reporting periods using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses, including unrealised profits arising from intra-group transactions, have been eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.

Minority interests represent the portion of profit and loss and net assets not held by the Group and are presented in the income statement and within equity in the consolidated balance sheet, separately from amounts attributable to the equity shareholders of the Group. These interests primarily represent the interests in Minera Penmont, S. de R.L. de C.V., Minera El Bermejal, S. de R.L. de C.V. and Minera Juanicipio, S.A. de C.V. not held by the Group. In the event of a purchase of minority shareholders' interest when the Group holds the majority of shares of a subsidiary, any excess over the Group's share of net assets is recorded in retained earnings in equity.

(d) Foreign currency translation

The Group's interim condensed consolidated financial statements are presented in US dollars. The functional currency for each entity in the Group is determined by the currency of the primary economic environment in which it operates. For all operating entities, this is US dollars; for one non-operating and one administrative services entity it is the local currency of the country in which activities are performed.

Transactions denominated in currencies other than the functional currency of the entity are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rate of exchange ruling at the balance sheet date. All differences that arise are recorded in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated into dollars using the exchange rate at the date when the fair valued is determined.

For entities with functional currencies other than US dollars, as at the reporting date, assets and liabilities are translated into the reporting currency of the Group by applying the exchange rate at the balance sheet date and the income statement is translated at the average exchange rate for the year. The resulting difference on exchange is included as a cumulative translation adjustment in equity. On disposal of an entity, the deferred cumulative amount recognised in equity relating to that operation is recognised in the income statement.

(e) Property, plant and equipment

Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment in value. Cost comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. For certain assets, the cost or deemed cost of property, plant and equipment (hereafter referred to as 'cost') at 1 January 2007, the date of the Group's transition to IFRS, was determined by reference to the revalued amounts as at 1 January 2005, as prepared for the purposes of the initial public offering of the Group, then depreciated for the period until the date of the transition. Economical and physical conditions of these assets had not changed substantially over this period.

The cost less its residual value of each item of property, plant and equipment is depreciated over its useful life. Each item's estimated useful life has been assessed with regard to both its own physical life limitations and the present assessment of economically recoverable reserves of the mine property at which the item is located. Estimates of remaining useful lives are made on a regular basis for all mine buildings, machinery and equipment, with annual reassessments for major items. Depreciation is charged to cost of sales on a unit of production (UOP) basis for mine buildings and installations, plant and equipment used in the mining production process or on a straight line basis over the estimated useful life of the individual asset when not related to the mining production process. Changes in estimates, which mainly affect unit of production calculations, are accounted for prospectively. Depreciation commences when assets are available for use. Land is not depreciated.

The expected useful lives are as follows:


	Years
Buildings	5-12
Plant and equipment	4-11
Mining concessions and mine development costs	3-9
Other assets	2-7

An item of property, plant and equipment is de-recognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising at de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year that the asset is de-recognised.

Non-current assets or disposal groups are classified as held for sale when it is expected that the carrying amount of the asset will be recovered principally through sale rather than through continuing use. Assets are not depreciated when classified as held for sale.

Disposal of assets

Gains or losses from the disposal of assets are recognised in the income statement when all significant risks and rewards of ownership are transferred to the customer, usually when title has been passed.

Mineral properties and mine development costs

Payments for mining concessions are expensed during the exploration phase of a prospect and capitalised during the development of the project when incurred.

Mining concessions, when capitalised, are amortised on a straight line basis over the period of time in which benefits are expected to be obtained from that specific concession.

Expenditure on mine development is capitalised as part of property, plant and equipment. Upon commencement of production, capitalised expenditures and costs are depreciated using the unit of production method based on the estimated economically proven and probable reserves to which they relate.

Construction in progress

Assets in the course of construction are capitalised as a separate component of property, plant and equipment. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment. Construction in progress is not depreciated.

Subsequent expenditures

All subsequent expenditure on property, plant and equipment is capitalised if it meets the recognition criteria, and the carrying amount of those parts that are replaced is derecognised. All other expenditure including repairs and maintenance expenditures are recognised in the income statement as incurred.

Stripping costs

In open pit mining operations, it is necessary to remove overburden and other waste in order to access the ore body. During development and pre-production phases, these costs are capitalised as part of the initial mine investment and they are depreciated based on the mine's production once commercial operations begin.

Removal of waste material normally continues throughout the life of a mine. This activity is referred to as production stripping and commences at the time that saleable material begins to be extracted from the mine. The costs of production stripping are charged to the income statement as operating costs.

Further development of a mine may occur following initial extraction of saleable material and during the production phase. Stripping costs associated with such development activities are capitalised and depreciated based on the related production.

(f) Determination of ore reserves

The Group estimates its ore reserves and mineral resources based on information compiled by internal competent persons in conformity with the Joint Ore Reserves Committee (JORC) code. Reports to support these estimates are prepared each year. For the purposes of the Global Offer, an independent competent person verified the reasonableness of these reports as at 31 December 2007.

Reserves are used in the unit of production calculation for depreciation as well as for the determination of the timing of mine closure and impairment analysis.

There are numerous uncertainties inherent in estimating ore reserves. Assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated.

(g) Impairment of non-financial assets

The carrying amounts of assets are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. At each reporting date, an assessment is made to determine whether there are any indications of impairment. If there are indicators of impairment, an exercise is undertaken to determine whether the carrying values are in excess of their recoverable amount. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of those from other assets or groups of assets, and then the review is undertaken at the cash generating unit level.

If the carrying amount of an asset or its cash generating unit exceeds the recoverable amount, a provision is recorded to reflect the asset at the recoverable amount in the balance sheet. Impairment losses are recognised in the income statement.

Calculation of recoverable amount

The recoverable amount of assets is the greater of their value in use and fair value less costs to sell. Fair value is based on an estimate of the amount that the Group may obtain in a sale transaction on an arm's length basis. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independently of those from other assets, or groups of assets, the recoverable amount is determined for the cash generating unit to which the asset belongs. The Group's cash generating units are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Reversal of Impairment

An assessment is made each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the Group makes an estimate of the recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in estimates used to determine the asset's recoverable amount since the impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to the recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised in previous years. Such impairment loss reversal is recognised in the income statement.

(h) Financial assets

Financial assets are recognised when the Group becomes party to the contracts that give rise to them and are classified as financial assets at fair value through profit or loss; loans and receivables; held-to maturity investments; or as available-for-sale financial assets, as appropriate. The Group determines the classification of its financial assets at initial recognition and re-evaluates this designation at each financial year-end. When financial assets are recognised initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs.

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Financial assets at fair value through profit or loss

Financial assets classified as held for trading and other assets designated as such on inception are included in this category. Financial assets are classified as held for trading if they are acquired for sale in the short term. Derivatives are also classified as held for trading unless they are designated as hedging instruments. Financial assets are carried in the balance sheet at fair value with gains or losses recognised in the income statement.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available for sale.

After initial measurement such assets are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Current trade receivables are carried at the original invoice amount less provision made for impairment of these receivables. Long-term receivables are stated at amortised cost.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as such or are not classified in any of the preceding categories and are not held-to-maturity investments.

Available-for-sale financial assets represent investments that have a quoted market price in an active market, therefore a fair value can be reliably measured. After initial measurement, available for sale assets are measured at fair value with unrealised gains or losses being recognised as a separate component of equity.

Fair value

In determining estimated fair value, investments in shares or portfolios of listed securities are valued at quoted bid prices. When quoted prices on an active market are not available (and for listed non-actively traded securities), fair value is determined using a valuation technique. Valuation techniques include using a recent arm's length transaction, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If the range of reasonable fair value is significant and the probabilities of the various estimates cannot be reliably assessed, the investment is not re-measured at fair value.

(i) Impairment of financial assets

The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.

Assets carried at amortised cost.

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss is recognised in profit or loss.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

Available-for-sale financial investments

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available for sale are not recognised in the income statement. Reversals of impairment losses on debt instruments are reversed through the income statement if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the income statement.

(j) Inventories

Inventories are measured at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of work in progress and finished goods (ore inventories) is based on cost of production and excludes borrowing costs .

For this purpose, the costs of production include:

• personnel expenses, which include employee profit sharing, materials and contractor expenses which are directly attributable to the extraction and processing of ore;

• the depreciation of property, plant and equipment used in the extraction and processing of ore; and

• related production overheads (based on normal operating capacity).

Net realisable value is the estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion and disposal.

(k) Cash and cash equivalents

For the purposes of the balance sheet, cash and cash equivalents comprise cash at bank, cash on hand and short-term deposits held with banks that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value. Short-term deposits earn interest at the respective short-term deposit rates between one day and three months.

For the purposes of the cash flow statement, cash and cash equivalents as defined above are shown net of outstanding bank overdrafts.

(l) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Mine closure cost

A provision for mine closure cost is made in respect of the estimated future costs of closure and restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) based on a mine closure plan, in the accounting period when the related environmental disturbance occurs. The provision is discounted and the unwinding of the discount is included in finance costs. At the time of establishing the provision, a corresponding asset is capitalised where it gives rise to a future economic benefit and depreciated over future production from the mine to which it relates. The provision is reviewed on an annual basis by the Group for changes in cost estimates, discount rates or life of operations.

Other

Other provisions are accounted for when the Group has a legal or constructive obligation for which it is probable there will be an outflow of resources for which the amount can be reliably estimated.

(m) Financial liabilities

The Group recognises financial liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. Financial liabilities are initially recognised at the fair value of the consideration received, including any transaction costs incurred.

Interest bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.

(n) Employee benefits

The Group operates the following plans:

Defined benefit pension plan

This funded plan is based on each employee's earnings and years of service. This plan was closed to new entrants on 1 July 2007. For members as at 30 June 2007, benefits were frozen at that date subject to indexation with reference to the Mexican National Consumer Price Index (NCPI).

The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method and prepared by an independent actuarial firm as at each year end balance sheet date. The discount rate is the yield at the reporting date on credit-rated bonds that have maturity dates approximating the terms of the Group's obligations and that are denominated in the same currency in which the benefits are expected to be paid. Actuarial gains and losses are recognised as income or expense in the period in which they occur.

Past service costs are recognised as an expense on a straight line basis over the average period until the benefits become vested. If the benefits have already vested following the introduction of, or changes to, a pension plan, the past service cost is recognised immediately.

The defined benefit asset or liability comprises the present value of the defined benefit obligation less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

Defined contribution pension plan

A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss when they are due. The contributions are based on the employee's salary.

This plan started on 1 July 2007 and it is voluntary for all employees to join this scheme.

Seniority premium for voluntary separation

This unfunded plan corresponds to an additional payment over the legal seniority premium equivalent to approximately 12 days of salary per year for those unionised workers who have more than 15 years of service. Non-unionised employees with more than 15 years of service have the right to a payment equivalent to 12 days for each year of service. For both cases, the payment is based on the legal current minimum salary.

The cost of providing benefits for the seniority premium for voluntary separation is determined using the projected unit credit actuarial valuation method and prepared by an independent actuarial firm as at each year end balance sheet date. Actuarial gains and losses are recognised as income or expense in the period in which they occur.

Other

Benefits for death and disability are covered through insurance policies.

Termination payments for involuntary retirement (dismissals) are charged to the income statement, when incurred.

(o) Employee profit sharing

In accordance with local legislation, companies in Mexico must provide for employee profit sharing equivalent to ten percent of the taxable income of each year. This amount is charged to the income statement and is considered deductible for income tax purposes.

(p) Leases

The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date including whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

c. There is a change in the determination of whether fulfilment is dependent on a specified asset; or

d. There is a substantial change to the asset.

Group as a lessee

Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property, or if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.

Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.

Group as a lessor

Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

Where a reassessment is made, lease accounting commences or ceases from the date when the change in circumstances gave rise to the reassessment for scenarios a), c) or d) and at the date of renewal or extension period for scenario b) above.

For arrangements entered into prior to 1 January 2005, the date of inception is deemed to be 1 January 2007, in accordance with the transitional requirements of IFRIC 4.

(q) Contingencies

Contingent liabilities are not recognised in the consolidated financial information and are disclosed in notes unless their occurrence is remote.

Contingent assets are not recognised in the consolidated financial information, but they are disclosed in notes if they are deemed probable.

(r) Revenue recognition

Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of consideration received excluding discounts, rebates, and other sales taxes.

Sale of goods

Revenue is recognised in the income statement when all significant risks and rewards of ownership are transferred to the customer, usually when title has been passed. Revenue excludes any applicable sales taxes.

The Group recognises revenue on a provisional basis at the time concentrates, precipitates and doré bars are delivered to the customer's smelter or refinery, using the Group's best estimate of contained metal. Revenue is subject to adjustment once the analysis of the product samples is completed, contract conditions have been fulfilled and final settlement terms are agreed. Any subsequent adjustments to the initial estimate of metal content are recorded in revenue once they have been determined.

In addition, sales of concentrates and precipitates throughout each calendar month, as well as doré bars that are delivered after the 20th day of each month, are 'provisionally priced' subject to a final adjustment based on the average price for the month following the delivery to the customer, based on the market price at the relevant quotation point stipulated in the contract. Doré bars that are delivered in the first 20 days of each month are finally priced in the month of delivery.

For sales of goods that are subject to provisional pricing, revenue is initially recognised when the conditions set out above have been met using the provisional price. The price exposure is considered to be an embedded derivative and hence separated from the sales contract. At each reporting date the provisionally priced metal is revalued based on the forward selling price for the quotational period stipulated in the contract until the quotation period ends. The selling price of the metals can be reliably measured as these are actively traded on international exchanges. The revaluing of provisionally priced contracts is recorded as an adjustment to revenue.

Royalties

Income derived from royalties is recognised only at the time when it is probable that the amounts related to certain rights will be received, usually when the event has already occurred. Currently the Group receives royalties based on a percentage of the sales of concentrates from the El Cedro, Peregrina and Sirena small scale mines rented to a third party.

Rental income

Rental income arising from operating leases on a small scale mine rented to a third party is accounted for on a straight line basis over the lease term.

Interest income

Interest income is recognised as interest accrues (using the effective interest method; i.e., the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).

Dividend income

Dividend income is recognised when the Group´s right to receive the payment is established.

(s) Exploration expenses

Exploration activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource.

Exploration expenses are charged to the income statement as incurred and are recorded in the following captions:

(i) Cost of sales- costs relating to in-mine exploration, that ensure continuous extraction quality and extend mine life, and

(ii) Exploration expenses:

a. Costs incurred in geographical proximity to existing mines in order to replenish or increase reserves, and

b. Costs incurred in regional exploration with the objective of locating new ore deposits in Mexico and Latin America and which are identified by project. These exploration expenses, which include exploratory drilling, sample testing and pre-feasibility studies, are charged to the income statement until the mineral reserves of that specific project are economically recoverable.

(t) Finance income and costs

Finance income and costs comprise interest expense on borrowings, interest income on funds invested and gains and losses from the change in fair value of derivative instruments.

Interest income and costs are recognised as accrued, taking into account the effective yield on the asset or liability.

(u) Income tax

Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred income tax

Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences, except:

(i) where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of transaction, affects neither the accounting profit nor taxable profit loss; and

(ii) in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except:

(i) where the deferred income tax asset relating to deductible temporary differences arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

(ii) in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part the deferred income tax asset to be utilised.

Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

v) Derecognition of financial assets and liabilities

A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss.

The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the income statement.

(w) Derivative financial instruments and hedging

The Group has historically used derivatives to reduce certain market risks derived from changes in prices of metals which impact its financial and business transactions. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains and losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting are taken directly to the income statement.

Derivatives are valued using valuation approaches and methodologies (such as Black Scholes) applicable to the specific type of derivative instrument.

The Group's derivative activities were limited in volume and confined to risk management activities. Usually, hedges were designed to protect the value of expected production against the dynamic market conditions.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for the undertaken hedge. The documentation includes identification of the hedging instrument, the hedge item or transaction, the nature of the risk being hedged and how the entity will asses the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

Cash flow hedges

For derivatives that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of derivative instruments is recorded as a component of equity and is included in the income statement at the settlement date. For hedging of revenues, this is included as part of revenues. The ineffective portion of changes in the fair value of cash flow hedges is recognised in the income statement of the related period.

If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss recognised directly in equity from the period that the hedge was effective remains separately in equity until the forecast transaction occurs, when it is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Embedded derivatives

Contracts are assessed for the existence of embedded derivatives at the date that the Group first becomes party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. Embedded derivatives which are not clearly and closely related to the underlying asset, liability or transaction are separated and accounted for as stand alone derivatives.

(x) Value added tax

Revenues, expenses and assets are recognised net of the amount of value added tax

The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

(y) Finance costs

Finance costs are generally expensed as incurred except where they relate to the financing of construction or development of qualifying assets requiring a substantial period of time to prepare for their intended future use.

In the case of such qualifying assets, finance costs are capitalised up to the date when the asset is ready for its intended use. The amount of finance costs capitalised (before the effects of income tax) for the period is determined by applying the interest rate applicable to appropriate borrowings outstanding during the period to the average amount of accumulated expenditure for the assets during the period.

3 Segment Reporting

The Group's activities are principally related to mining operations which involve the beneficiation of non-ferrous minerals and the sale of related production. The primary contents of this production are silver, gold, lead and zinc. Products are subject to the same risks and returns and are sold through the same distribution channels. As such, the Group has only one business segment as its primary reporting segment. The Group operates primarily in Mexico. During the period certain minor exploration activities were also undertaken in Latin America.

4 Revenues

Revenues reflect the sale of goods, being concentrates, doré, slag, and precipitates of which the primary contents are silver, gold, lead and zinc.

a) Revenues by product sold

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Lead concentrates (containing silver, gold, lead and by-products)	315,158	236,830
Doré and slag (containing gold, silver and by-products)	104,777	68,595
Zinc concentrates	16,902	30,895
Precipitates	9,749	5,861
Effects of hedging	(22,381)	(30,566)

	424,205	311,615
		________

In 2008 and 2007 all lead concentrates, precipitates, doré and slag, were sold to Peñoles' metallurgical complex for smelting and refining.

b) Value of metal content in products sold

For products other than refined silver and gold, invoiced revenues are derived from the value of metal content adjusted by treatment and refining charges incurred by the metallurgical complex of the customer. The value of the metal content of the products sold, before treatment and refining charges is as follows:

	Six months ended 30 June
	2008		2007
	(in thousands of US dollars)
Silver(1)	282,081	191,423
Gold(2)	154,194	109,826
Zinc	15,253	34,723
Lead	19,926	16,351
		____________
Value of metal content in products sold	471,454	352,323
Adjustment for treatment and refining charges	(47,249)	(40,708)

Total revenues	424,205	311,615

(1) Includes hedging losses of US$9.2 million in 2008 and US$20.4 million in 2007.

(2) Includes hedging losses of US$13.1 million in 2008; US$10.1 million in 2007.

The average realised prices for the gold and silver content of products sold, including the effects of hedging but prior to the deduction of treatment and refining charges, are:

	Six months ended 30 June
	2008	2007
	(in US dollars per ounce)
Gold	925.27	693.21
Silver	17.83	13.23

5 Cost of Sales

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Depreciation (note 12)	21,751	23,604
Personnel expenses(1)	36,624	21,053
Maintenance and repairs	19,451	17,626
Operating materials	23,979	16,953
Energy	15,336	13,478
Contractors	14,827	11,006
Freight	3,714	2,729
Mining rights and contributions	2,433	2,866
Change in work in progress and finished goods (ore inventories)	6,980	29
Other	5,415	4,093

	150,510	113,437

(1) Personnel expenses include employees´ profit sharing of US$17.8 million for the six months ended 30 June 2008 (six months ended 30 June 2007: US$7.8 million). The six months ended 30 June 2007 includes a US$3.1 million benefit as a result of the amendment to the defined benefit pension plan as at 30 June 2007 (see note 2n).

6 Administrative Expenses

Administrative expenses in the six months ended 30 June 2007 included costs of US$21.9 million relating to trademark royalties payable for the use of the Penoles' trademark name, design and logo to the Penoles Group, and charges of US$30.7 million relating to administrative services provided by the Penoles Group for administration, management and other services.

Administrative expenses in 2008 include charges of US$31.2 million and US$25.2million, relating to trademark royalties and administrative services respectively, which were charged on a comparable basis to 2007 for the period prior to the initial public offering of the Group. Following Admission on 14 May 2008, certain services, comprising administrative and non-administrative services, are being provided by Servicios Industriales Peñoles S.A. de C.V. ('SIPSA') to the Group under a Transitional Services Agreement entered into on 15 April 2008. The services are to be provided to the Group by SIPSA for a period of 12 months from the date of Admission for a global fee of US$34 million. Of this amount, approximately US$10 million relates to engineering and construction, technical research and development and central workshop costs, which are considered non-administrative services. The remaining US$24 million relates to administrative expenses. Following Admission, trademark royalties are no longer payable to Penoles,

7 Exploration Expenses

Exploration expenses were mainly incurred in increasing the reserves and mine life of the Fresnillo, Herradura and Ciénega mines, as well as studying the Juanicipio and El Saucito gold - silver projects in Mexico. Minor exploration expenses of $4.4 million were incurred in the six months ended 30 June 2008 elsewhere in Latin America (six months ended 30 June 2007: $2.0 million).

8 Other Income

	Six months ended 30 June
	2008		2007
	(in thousands of US dollars)
Other income:
Gain on sale of mining assets(1)	1,391	3,125
Gain on sale of property plant and equipment and other assets(2)	1,468	-
Loyalty incentive	1,796	1,824
Royalties	188	473
Rentals	365	351
Discounts for early payment	430	369
Other	-	289

	5,638	6,431

(1) Sale of Mining Assets - In May 2007, Compañía Minera Las Torres, S.A. de C.V., Exploraciones Mineras Parreña, S.A. de C.V. and Química Magna, S.A. de C.V. (a related-party) sold the Bolañitos and Cebada mines (gold and silver mines respectively), located in the State of Guanajuato, to the Canadian mining company Endeavour Silver Corp. (TXS: EDR, AMEX: EXK, DBFrankfurt: EJD). The small-scale Bolañitos and Cebada mines had been shut down in 1999 and later were leased to a third party until the date of their disposal. The fair value of the Endeavour shares received in consideration for the disposal was US$4.3 million. The gain on the sale was US$3.1 million.

In January 2008, Compañia Minera las Torres sold the La Guitarra mine to La Guitarra Compañia Minera S.A. de C.V. The consideration received was cash US$1 million and shares of Genco Resources LTD with a fair value of US$0.4 million. The gain on the sale was US$1.4 million.

(2) Relate to those assets sold at the end of their operating life and replaced by new ones.

9 Finance Income and Finance Costs

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Finance income:
Interest on loans to related parties (note 23)	1,876	7,908
Interest on short term deposits	1,727	1,052
Other	1,194	722

	4,797	9,682

Finance costs:
Interest on loans from related parties (note 23)	9,078	1,508
Unwinding of discount on provisions	622	360
Other	304	426

	10,004	2,294

10 Income Tax

The major components of income tax expense are:

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Consolidated income statement:
Current income tax:
Current income tax charge	79,421	43,847
Adjustments in respect of current income tax of previous years	(1,945)	1,588
Credit for income tax paid on dividends	(6,032)	(5,584)

	71,444	39,851

Deferred income tax:
Relating to origination and reversal of temporary differences	(27,894)	(1,266)

	(27,894)	(1,266)

Income tax expense reported in the income statement	43,550	38,585

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Consolidated statement of changes in equity:
Deferred income tax related to items charged or credited directly to equity:
Recycling of net loss on valuation of cash flow hedges to income	(6,266)	(8,558)
Cost from issue of ordinary shares of the initial public offering	12,702	-
Net loss arising on valuation of cash flow hedges	(7)	(373)
Unrealised loss /(gain) on available for sale assets	2,349	(1,414 )

Income tax expense reported in equity	8,778	(10,345)

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to the same fiscal authority.

	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)
Deferred income tax assets	9,657	-
Deferred income tax liabilities	(77,190)	(99,623)

	(67,533)	(99,623)
	___________	____________

Business Flat Tax (“impuesto Empresarial a Tasa Unica” or “IETU”)

Effective 1 January 2008 a new alternative minimum corporate income tax called the Flat Rate Business Tax was introduced in Mexico to replace the existing business asset tax. From this date companies are required to pay the greater of their mainstream corporate income tax liability for the year or their liability to IETU.

IETU is calculated at the rate of 16.5% for the calendar year 2008, 17% for 2009 and 17.5% for subsequent years and applies to the sale of goods, rendering of independent services and temporary use or enjoyment of goods. In calculating the charge to IETU, deductions are allowed for certain expenses incurred in generating income.

In respect of the Group, management has undertaken calculations to determine the impact of the new IETU provisions on the Group. As a result of such analysis, management has concluded that there should be no material impact on the Combined Group, since in all instances, the mainstream corporate income tax liability for each group company is forecast to be greater than the future potential IETU charge. Accordingly, no IETU liability should arise in the foreseeable future.

11. Basic and Diluted Earnings per share

Earnings per share ('EPS') is calculated by dividing profit for the period attributable to equity shareholders of the Company by the weighted average number of ordinary shares in issue during the period.

As described in note 18, the share capital for the Company in the periods prior to the Pre-IPO Reorganisation on 18 April 2008 is presented as if this reorganisation was completed as at 1 January 2007. The number of shares used for the EPS calculation is on this basis.

The company has no dilutive potential ordinary shares

As of 30 June 2008 and June 2007, earnings per share have been calculated as follows:

		Six months ended 30 June
		2008 2007

Profit from continuing operation attributable to equity holders of the Company (US$000)

Weighted average number of ordinary shares in issue* (ooo)

Basic and diluted earnings per share.

140,969

656,131

0.215

90,111

634,270

0.142

*For 2007 the EPS calculation has assumed that the ordinary shares in issue pursuant to the Merger agreement dated 18 April 2008 have been in issue throughout the periods.

12 Property, Plant and Equipment.

The significant changes in Property, Plant and Equipment during the six months ended 30 June 2008 are additions of US$48.2 million (six months ended 30 June 2007: US$31.5 million) and depreciation of US$21.8 million (six months ended 30 June 2007: US$23.6 million)

13 Available-for-sale financial assets

Available-for-sale financial assets represent equity securities in a number of listed Canadian companies. The reduction in the carrying value of available-for-sale financial assets in the six months to 30 June 2008 reflects a reduction in the fair value of these assets of US$8.4 million. The related charge has been taken to equity, which net of tax is US$6.0 million.

14 Silverstream contract

On 31 December 2007, the Group entered into an agreement with Peñoles through which it is entitled to receive the proceeds received by the Peñoles Group in respect of the refined silver sold from the Sabinas Mine ('Sabinas'), a base metals mine owned and operated by the Peñoles group, for an upfront payment of US$350 million. In addition, a per ounce cash payment of $2.00 in years 1 to 5 and $5.00 thereafter (subject to an inflationary adjustment commencing on 31 December 2013) is payable to Peñoles. Under the contract, the Group has the option to receive a net cash settlement from Peñoles attributable to the silver produced and sold from Sabinas, to take delivery of an equivalent amount of refined silver or to receive settlement in the form of both cash and silver. If, by 31 December 2032, the amount of silver produced by Sabinas is less than 60 million ounces, a further payment is due from Peñoles of US$1 per ounce of shortfall.

The Silverstream contract represents a derivative financial instrument which has been recorded at fair value and classified within non-current and current assets as appropriate. Changes in the contract's fair value, other than those represented by the realisation of the asset through the receipt of either cash or refined silver, are charged or credited to the income statement. In the six months ended 30 June 2008 total proceeds received were US$16.1 million.

15 Trade and Other Receivables

	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)
Loans and interest due from related parties (note 23)	-	30,555
Trade receivables from related parties (note 23)	78,151	149,474
Value Added Tax receivable	14,169	27,545
Advances to suppliers	7,044	2,113
Other receivables from related parties (note 23)	1,769	12,455
Other receivables	9,373	9,468

	110,506	231,610
Provision for impairment of 'other receivables'	(126)	(126)

	110,380	231,484

16 Prepayments

The prepayments balance as at 31 December 2007 included costs incurred with relation to the initial public offering of the Group of US$10.1 million. These costs were subsequently transferred to share premium upon issuance of new shares on 14 May 2008.

17 Cash and Cash Equivalents.

	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)
Cash at bank and on hand	470	522
Short-term deposits	286,169	4,280

Cash and cash equivalents	286,639	4,802
		_________________

Cash at bank earns interest at floating rates based on daily bank deposits. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

18 Equity

Share capital and share premium.

As described in note 2, the pooling of interests method of accounting has been applied in the presentation of the interim condensed consolidated financial statements and this method presents the results of the Group as if the Company had been the holding company of the Group since 1 January 2007. For the periods presented prior to 18 April 2008 when the Pre-IPO Reorganisation was completed, the share capital presented reflects that issued pursuant to this reorganization.

The authorised and issued share capital of the Company as at 30 June 2008 is as follows:

Authorised Issued

Class of shares	Number	Amount	Number	Amount
Ordinary shares each of US$0.50	1,000,000,000	$500,000,000	717,160,159	$358,580,080
Sterling Deferred Ordinary Shares each of £1.00	50,000	£50,000	50,000	£50,000

At 30 June 2008, all issued shares with a par value of $0.50 each are fully paid.

The changes in share capital are as follows:

		Share	Share	Share
	Number	capital	capital	premium
	of shares	£000	US$000	US$000
Deferred Ordinary shares of £1 each issued and fully paid
Ordinary shares issued to the initial shareholder	1	-	-	-
Allotment and issue of ordinary shares on 1 January 2008	49,999	50	-	-
Ordinary shares of £1 each issued and fully paid prior to re-designation as 50,000 £1 deferred ordinary shares on 4 March 2008	50,000	50	-	-
As at 30 June 2008	50,000	50	-	-

Ordinary shares of US$1.00 each issued and fully paid
Shares issued pursuant to the Merger Agreement on 18 April 2008	634,270,000		634,270	-
Ordinary shares prior to capital reduction effective 24 April 2008	634,270,000		634,270	-

Ordinary shares of US$0.50 each issued and fully paid
Shares following capital reduction effective 24 April 2008	634,270,000		317,135	-
Shares issued and paid pursuant to the Global Offer dated 9 May 2008	82,890,159		41,445	859,636
Transaction cost associated with issue of shares				(32,662)
As at 30 June 2008	717,160,159		358,580	826,974

Creation of Company and Pre-IPO Reorganisation

The Company was incorporated and registered in England and Wales on 15 August 2007 with an authorised share capital of £100 divided into 100 ordinary shares of £1.00 each. 1 share of £1.00 was issued. On 11 January 2008 the authorised share capital of the Company was increased to £50,000 and 49,999 shares were allotted and issued to Penoles.

On 4 March 2008 the authorised share capital of the Company was increased by the creation of 1,000,000,000 ordinary shares of US$1.00 each and the 50,000 ordinary shares of £1.00 each were re-designated as 50,000 deferred shares of £1.00 each.

On 18 March 2008 the Company entered into a Merger Agreement with Compania Fresnillo S.A. de C.V., the then holding company of subsidiaries constituting the precious metals mining business of Penoles, completing the Pre-IPO Reorganisation. Pursuant to the Merger Agreement, the Company became the holding company of the Group through the allotment and issue of 634,270,000 ordinary shares paid up as to their nominal value.

Reduction of share capital

Effective 24 April 2008, the share capital of the company was reduced by US$317,135,000 in accordance with Chapter 2 of Part 13 of the Companies Act 2006, by cancelling and extinguishing the paid up capital to the extent of US$0.50 upon each of the ordinary shares of US$1.00. The nominal value of each of the ordinary shares of the Company, whether issued or unissued, was reduced to US$0.50.

Re-registration of the Company as a public company

On 15 April 2008 the Company was re-registered as a public company.

Issuance of shares on IPO

On 14 May 2008 the Company successfully completed its IPO and Listed on the London Stock Exchange. A total number of 82,890,159 shares with a par value of US$0.50 each were issued at US$10.87 for total proceeds of US$901.1 million. Costs, net of deferred tax, related to the issuance of new shares taken against share premium amounted to US$32.7 million.

19 Dividends paid

No dividends were paid by Fresnillo Plc during the periods presented.

20 Trade and Other Payables

	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)
Trade payables	19,278	20,840
Other payables to related parties (note 23)	3,801	1,478
Accrued expenses	9,044	4,020
Other taxes and contributions	1,658	1,505

	33,781	27,843
		___________________

21 Commitments

(a) Capital expenditure

A summary of capital expenditure commitment is as follows:

	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)
Minera Saucito, S.A. de C.V.	20,090	24,420
Minera Penmont, S. de R.L. de C:V.	11,242	15,930
Minera Mexicana La Ciénega, S.A. de C.V.	8,947	12,835
Minera Fresnillo, S. A. de C.V.	12,726	10,726

	53,005	63,911
		________________

(b) On 23 June 2000, a trust engaged in business activities was created for the construction and operation of a thermoelectric plant to be run by Termoeléctrica Peñoles, S. de R.L. de C.V. (TEP). The trust agreements specify that certain Group companies and related parties must jointly purchase 230 megawatts of electricity per year for a period of 20 years, from December 2007. The purpose of the trust is to provide a competitive and constant supply of electric energy. The estimated expenditure commitment under the trust arrangements, relating to the Fresnillo and Ciénega mining operations during 2008 is US$11.1 million.

22 Contingencies

As of 30 June 2008, the Group has the following contingencies:

(a) The Group is subject to various laws and regulations which, if not observed, could give rise to penalties.

(b) Tax periods remain open to review by the Mexican tax authorities in respect of income taxes for five years following the date of the filing of the corporate income tax return, during which time the authorities have the right to raise additional tax assessments including penalties and interest. Under certain circumstances the reviews may cover longer periods.

In addition, because a number of tax periods remain open to review by the tax authorities, there is a risk that transactions, and in particular related party transactions, that have not been challenged in the past by the authorities, may be challenged by them in the future, and this may result in the raising of additional tax assessments plus penalties and interest. It is not practical to determine the amount of any such potential claims or the likelihood of any unfavourable outcome. However, management believes that its interpretation of the relevant legislation is appropriate and that the Group has complied with all regulations and paid or accrued all taxes and withholdings that are applicable.

(c) On 8 May 2008, the Company and Peñoles entered into the Separation Agreement (the 'Separation Agreement'). This agreement relates to the separation of the Group and the Peñoles Group and governs certain aspects of the relationship between the Fresnillo Group and the Peñoles Group following the initial public offering in May 2008 ('Admission'). The Separation Agreement provides for cross-indemnities between the Company and Peñoles so that, in the case of Peñoles, it is held harmless against losses, claims and liabilities (including tax liabilities) properly attributable to the precious metals business of the Group and, in the case of the Company, it is held harmless by Peñoles against losses, claims and liabilities which are not properly attributable to the precious metals business. Save for any liability arising in connection with tax, the aggregate liability of either party under the indemnities shall not exceed US$250 million in aggregate

Peñoles has agreed to indemnify the Fresnillo Group in relation to (i) any tax charge, subject to certain exceptions, the Company may incur as a result of the Pre-IPO Reorganisation (including as a result of a transaction following Admission of a member of the Fresnillo Group, provided that Peñoles has confirmed that the proposed transaction will not give rise to a tax charge, or as a result of a transaction of a member of the Peñoles Group on or after Admission), the Global Offer or Admission and (ii) certain tax aspects of certain other pre-Admission transactions. Peñoles' liability under these indemnities and in respect of general tax liabilities arising pre-Admission which are not properly attributable to the precious metals business of the Fresnillo Group shall not exceed US$500 million. If a member of the Fresnillo Group forming part of Peñoles' tax consolidation pays an intra-group dividend in excess of its CUFIN account after Admission and is relieved of tax as a result of the consolidation, it is required to pay Peñoles an amount in respect of that tax.

(d) Minera Fresnillo, S.A. de C.V. and Minera Mexicana La Cienéga, S.A. de C.V. along with certain members of the Peñoles Group, benefit from beneficial power supply arrangements with Termoelectrica Peñoles S. de R.L. de C.V. ('TEP') and are parties to the TEP power supply agreement (the 'PSA') (the 'TEP Arrangements'). The total amount of electricity available at a discounted rate under the TEP Arrangements is 230MWh in aggregate and the allocation is split between all the beneficiaries. Minera Penmont, S. de R.L. de C.V. (the owner of the Herradura mine) and Compañia Minera Las Torres, S.A. de C.V. are also parties to the PSA but is not allocated any electricity on beneficial terms. All the off-takers under the these arrangements are jointly and severally liable for any liabilities arising under these arrangements. Accordingly, Minera Fresnillo, S.A. de C.V., Minera Mexicana La Cienéga, S.A. de C.V., Minera Penmont, S. de R.L. de C.V. and Compañia Minera Las Torres, S.A. de C.V. have an exposure to any failure of members of the Peñoles Group to fulfil their obligations under the TEP Arrangements. On 18 April 2008, Peñoles served a notice on TEP of its intention to extract Minera Fresnillo, S.A. de C.V., Minera Mexicana La Cienéga, S.A. de C.V., Minera Penmont, S. de R.L. de C.V. and Compañia Minera Las Torres, S.A. de C.V. from the TEP Arrangements and to enter into new and separate power supply agreements with TEP with no committed power allocation on beneficial terms. As discussed in note 26, this became effective on 1 July 2008. Extracting Minera Fresnillo, S.A. de C.V., Minera Mexicana La Cienéga, S.A. de C.V., Minera Penmont, S. de R.L. de C.V. and Compañia Minera Las Torres, S.A. de C.V. from the TEP Arrangements and entering into new and separate power supply agreements extinguishes the joint and several liability for these companies and these companies cease to have the benefit of the beneficial power arrangements.

23 Related Party Balances and Transactions

(a) Related party accounts receivable and payable

The Group had the following related party transactions during the six months ended 30 June 2008 and 30 June 2007 and balances as at 30 June 2008 and 31 December 2007. Related parties are those entities owned or controlled by the ultimate controlling party, as well as those who have a minority participation in Group companies. All related party accounts receivables and payable, aside from those relating to Met-Mex Penoles, SAB de CV, with whom trade is continuing, have been settled as at 30 June 2008.

	Accounts Receivable		Accounts Payable
	As of 30 June 2008	As of 31 December 2007	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)
Trade:
Met-Mex Peñoles, S.A. de C.V.	78,151	149,474	-	-

Loans granted / received and interest:
Industrias Peñoles, S.A.B. de C.V.	-	27,380	-	105,921
Minas Peñoles, S.A. de C.V.	-	-	-	350,000
Servicios Industriales Peñoles, S.A. de C.V.	-	3,175	-	-

	-	30,555	-	455,921

Expenses incurred relating to IPO:
Minas Peñoles, S.A. de C.V.(1)	-	11,310	-	-
Endorsement commissions:
Industrias Peñoles, S.A.B. de C.V.	1,045	-	-	-

Administrative services:
Servicios Industriales Peñoles, S.A. de C.V.	-	-	3,314	514

Other	724	1,145	487	964

Sub-total	79,920	192,484	3,801	457,399
Less-Current portion	79,920	192,484	3,801	457,399

Non-current portion	-	-	-	-

(1) Includes VAT added upon invoicing of IPO expenses from Minera Fresnillo, S.A. de C.V. to Minas Peñoles, S.A. de C.V.

Other balances and operations with related parties:

	As of 30 June 2008	As of 31 December 2007
	(in thousands of US dollars)


Unrealised result on valuation of hedges:
Industrias Peñoles, S.A.B. de C.V.	-	70,621

Silverstream contract:
Industrias Peñoles, S.A.B. de C.V.	333,945	350,000

Principal transactions between affiliates are as follows:

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Income:
Sales:(1)
Met-Mex Peñoles, S.A. de C.V.	451,231	339,457

Interest on loans to related parties:
Industrias Peñoles, S.A.B. de C.V.	1,876	7,550
Minas Peñoles, S.A. de C.V.	-	331
Other	-	27

	1,876	7,908

Other income	2,369	1,226
-
Total income	455,476	348,591

(1) Figures do not include hedging losses, which are presented as an expense since they were contracted with another related party.

	Six months ended 30 June
	2008	2007
	(in thousands of US dollars)
Expenses:
Administrative services:
Servicios Industriales Peñoles, S.A. de C.V.	27,781	32,421

Trademark royalties:
Industrias Peñoles, S.A.B. de C.V.	31,232	21,916

Realised result on derivatives:
Industrias Peñoles, S.A.B. de C.V.	22,381	30,566

Energy:
Termoelectrica Peñoles, S. de R.L. de C.V.	4,962	5,844

Interest on loans from related parties:
MinasPeñoles,S.A. de C.V.	6,014	-
Industrias Peñoles, S.A.B. de C.V.	3,064	829
Met-Mex Peñoles, S.A. de C.V.	-	169
Other	-	510

	9,078	1,508

Other expenses:	6,925	3,887

Total expenses	102,359	96,142

24 Notes to the Consolidated Cash Flow Statement

	Notes	Six months ended 30 June
		2008	2007
		(in thousands of US dollars)
Reconciliation of profit for the year to net cash generated from operating activities
Profit for the period		158,066	100,036
Adjustments to reconcile profit for the period to net cash inflows from operating activities:
Depreciation	5	21,751	23,604
Employee profit sharing	5	17,807	7,810
Income tax expense	10	43,550	38,585
Gain on sale of mining assets	8	(1,391)	(3,125)
Gain on the sale of property, plant and equipment and other assets		(1,468)	-
Other gains		(1,088)	(2,554)
Net finance costs /(income)	9	5,207	(7,388)
Foreign exchange		(12,562)	(4,180)
Difference between pension contributions paid and amounts recognised in the income statement		371	751
Non cash movement on derivatives		22,381	-
Working capital adjustments
Decrease in trade and other receivables		89,160	42,259
Increase in prepayments and other assets		(3,836)	(4,454)
Decrease / (increase) in inventories		6,197	(1,020)
Increase in trade and other payables		5,468	62,012
			_____________
Cash generated from operations		349,613	252,336
Income tax paid		(62,498)	(38,889)
Employee profit sharing paid		(22,839)	(21,385)
			_____________
Net cash from operating activities		264,276	192,062

25 Financial Instruments

Hedging activities- cash flow hedges

The Group has historically entered into derivative transactions with the purpose of managing commodity price risk. All derivative hedging instruments were terminated during the second half of 2007 resulting in a cash payment of US$81.3 million at the date of termination. The cumulative hedging losses relating to the terminated hedging instruments are deferred in equity and reclassified to the income statement when the forecast transaction occurs.

Following the termination of the derivative instruments, there is no unrealised result on cash flow hedges taken to equity in 2008 (US$0.9 million net of tax for the six months ended 30 June 2007). In the six months ended 30 June 2008 hedging losses of US$22.4 million (US$16.1 million net of tax) were recycled to the income statement from equity (six months ended 30 June 2007: US$30.5 (US$22.0 million net of tax)).

The pre-tax hedging losses, amounting to US$48.2 million at 30 June 2008 (31 December 2007: US$70.6 million), are expected to be charged to income in future periods as follows:

	(in thousands of US dollars)
2008
1 July - 31 December		23,220
2009
1 January - 30 June		12,442
1 July - 31 December		12,577

26 Subsequent Events

On 1 July 2008, Peñoles Minera Fresnillo, S.A. de C.V., Minera Mexicana La Cienéga, S.A. de C.V., Minera Penmont, S. de R.L. de C.V. and Compañia Minera Las Torres, S.A. de C.V. were extracted from the TEP Arrangements discussed in note 22 and entered into new and separate power supply agreements with TEP with no committed power allocation on beneficial terms. Extracting Minera Fresnillo, S.A. de C.V., Minera Mexicana La Cienéga, S.A. de C.V., Minera Penmont, S. de R.L. de C.V. and Compañia Minera Las Torres, S.A. de C.V. from the TEP Arrangements and entering into new and separate power supply agreements extinguishes the joint and several liability for these companies and these companies cease to have the benefit of the beneficial power arrangements.

This information is provided by RNS

The company news service from the London Stock Exchange

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