Fresnillo PLC
LSE:FRES
Earnings Call Analysis
Q2-2023 Analysis
Fresnillo PLC
The company demonstrated resilience in its operations by managing to produce a commendable volume of gold even during a labor stoppage. They maintained some level of operations and achieved solid output. Efforts to reduce costs include numerous high-impact initiatives across several mines, promising annualized savings from improved productivity measures, ranging between $3 million to $10 million per mine. Continuous improvement, efficiency projects, and cost-containment remain top priorities.
The financials show a stark decline across key profitability metrics, posing concerns for investors. Gross profit plummeted by almost 23%, operating profit by a more alarming 63%, and EBITDA was down by around 24%, reflecting a considerable setback compared to the previous year's performance. These reductions cut across the board, pointing towards broader operational challenges rather than isolated issues.
The company's financials were significantly impacted by the revaluation of the Mexican peso, which strengthened against the US dollar, resulting in a notable negative effect of $45 million on the company's results. The second major headwind was underlying cost inflation, which amounted to 6.2% annually and negatively impacted the company by $41.6 million. Together, these two factors accounted for over three-quarters of the total increase in production costs.
In response to these cost pressures, the company is focused on launching strategies to enhance efficiency and productivity. This includes careful management of exploration expenses, which increased by 25%. Most additional funds were allocated towards new exploration projects rather than operating mines. Moreover, while some increase in adjusted production costs was observed due to new mine ramp-ups, this was offset by a rise in profits.
The company closed the first half of the year with $880 million in cash, though this reflected a decline from the beginning of the year. However, excluding $98 million in dividend payments, the cash position would have been net positive. This suggests that operational cash flows were sufficient to cover the dividends issued to shareholders.
The majority of cash usage was directed towards taxes and profit-sharing payments, which are necessary for the miner's operational continuity. Capital expenditures (CapEx) amounted to $228 million, largely driven by the necessity of mine development and updating plant and equipment.
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Good morning, everyone. Thank you for joining us today for our 2023 Interim Report, Fresnillo PLC. I'm Octavio Alvidrez, CEO of the Company. And I'm pleased to be joined this morning by Mario Arreguin, our CFO, and Tomas Iturriaga, our Chief Operating Officer. As always, I need to point to the disclaimer before I begin. But I will quickly move to the agenda we will cover this morning.
In terms of our agenda, I will take you through the key operational and financial highlights and address some of our key recent HSECR initiatives as well as make some remarks on our exploration activities. Tomas will then cover some details of the operations. And Mario will provide our financial update. I will then conclude with some comments on the outlook before we take on our questions -- with your questions.
You will be familiar with our investment proposition. It remains consistent and compelling, notwithstanding some of the recent challenges that we have in Mexico and in the mining industry. We are the largest producer of silver worldwide and Mexico's number one gold miner. We benefit from the high-quality mining in our assets backed by our large resource base, 2.2 billion ounces of silver and nearly 40 million ounces of gold.
We have a strong EBITDA margins and low cost and remain very focused on running our operations efficiently.
We take a disciplined approach to investment through the cycles. And we have a proven track record of completing our project, a series of most recent addition to our portfolio, the Juanicipio projects, among some other projects in the past that we've been building and keeping up with our organic growth.
We also have a solid project pipeline of new projects and prospects in Mexico, in Peru and in Chile, because we are in a journey to further improve our sustainability performance and have a long track record of consistent committed engagement with our local communities. This will be important for the upcoming projects that we have in Mexico, and especially, in the scheme of a new mining law in which we have the indigenous consultation.
Moving briefly to our HSECR initiatives, we have a good trajectory and the safety side, as you can see in the lower chart to the left. However, as this is a good trajectory, I'm sad to report, this year, two fatalities in our contractor employees. This is not acceptable and we must redouble our efforts to ensure a true culture of safety across all of our operations so that we achieve our aspiration so far of a safety culture in all of our explorations and in Fresnillo PLC as a whole.
On the environment side, the work on improving our carbon emissions performance is also ongoing as we work towards decarbonizing our operations, improving water recycling rates on all of our mines and upgrading our mining fleets. This year, we are starting and we aim to conclude an in-depth analysis of our two largest assets in Fresnillo and in Herradura, the open pits in order to understand better what kind of technologies we have available, what kind of objectives we can set in terms decarbonization in our mines and along some other studies based on science, we are planning to come to a conclusion on what we can commit in terms of climate change initiatives.
Some of the operating highlights, this has been, as I mentioned, a few challenging years. And these challenges remain as we continue to work through the inflationary environment we are currently in. Also, with some condition in terms of foreign exchange in our country in which we have seen the peso strengthening just recently. I'm really pleased with the overall performance of operations. We have achieved stability in Fresnillo and in Saucito, we have seen a turning point again going into a positive side.
I believe this shows how we have stabilized our operations and we are now in a strong position to capitalize on further growth opportunities with the legacy operations all in a much better place. So, operational performance was in line with expectations and we are, once again, reconfirming our full-year guidance.
Clear, a key highlight was the commissioning and ramp-up of Juanicipio which we still expect to hit name plate capacity in the third quarter. We have also completed the commissioning of the new Pyrites Plant and that is operating -- operational right now.
Finally, we slightly front added some of our exploration investment -- our full-year guidance. And but we will achieve something in the lines of our budget.
On the financial highlights, despite the inflationary challenge, we are reporting robust numbers site leads, generating cash, maintaining our strong balance sheet while still paying a healthy dividend to our shareholders. And Mario will talk about more about these impacts not only for inflation but the strength of the peso.
Moving to the explorational front. As I mentioned previously, we have slightly invested more in our exploration in this first half. As we have had good results in Guanajuato and in Tajitos, who will be joining our pipeline of growth -- of organic growth. More specifically, I'm also pleased to report that we have moved Orisyvo to the pre-feasibility stage and this is, as we are moving this project ahead.
Looking to our exploration front as well, as I mentioned this year, we are budgeting $175 million. As you can tell, most of that exploration budget goes into our mining operations and development projects and those still being explored in order to increase the certainty of our resources and reserves and also grow on those that we are still exploring. As I mentioned, not only in Mexico, but we are also exploring in Chile and Peru.
And with that, I will pass to Tomas Iturriaga, who can tell us more about the operation details.
Thank you, Octavio, and good morning, everyone. It's a pleasure to be here to talk about a report of what I believe to be a solid first half of the year in the operational front. Of course, we acknowledge the cost pressures we are facing in all four mines. But, operationally, I think we are on sound footing now to go from there. I will start with the Fresnillo district series and still where our main focus remains in terms of performance.
So starting with the Fresnillo mine, the mine continues to perform per our expectations. And I'm very pleased with the positive impact of our performance improvement plan that we implemented there. Development rates will -- for the second half of the year, will continue to be in the average of 3,100 meters per month showing the consistency of the mine.
One of the key drivers of the Fresnillo improvement is the San Carlos shaft deepening project, which continues to progressing well and is expected to be complete by year end, after the shaft service infrastructure redesign we did early on the year. So with a stable production base at Fresnillo, we are now focusing on several efficiency and cost-containment initiatives that I will mention some of them later in the presentation.
Moving to Saucito, I think, the good news is that we have stabilized the performance at this mine as Octavio was mentioning earlier. We had a good first half of the year and we expect to see further improvement in the second half. The high seismicity issues we had in some zones of the mine are well under control and causing no more further delays for slowing of ore mining. Also, the floating and pumping system issues we had in the past are behind us. So I believe we have a solid base now to continue increasing the tonnes out of the mine, and therefore, the metal produced at Saucito. The deepening of the Jarillas shaft is progressing well also there at Saucito.
Moving to Juanicipio. I'm pleased to report that after commissioning in Q1, the ramp-up of the present plan is going very well. We have not found any usual matters on the ramp-up. So we are in track to achieve nameplate capacity during Q3. Production in the first half of the year was strong at Juanicipio as we delivered just over 4 million ounces of silver and metals and ounces of gold in the attributable basis. But we had, of course, the benefit of processing some ore in Fresnillo and Saucito, and we are also benefiting from the higher grades in the upper levels of the mine, which will normalize as we mine down in the following years. So overall, has been a good start of the Juanicipio mine as we were expecting.
In San Julian, not much comment. I mean, other than performance was in line with the expectations and we -- with some impact in the Veins mine related to low availability of equipment that that its overcome and we expect a good second-half of the year.
At Cienega, we have a more challenging first half of the year in the operations, because we are seeing lower grades, and then high hauling cost. Because some of the better grade ore is coming from satellite mines far away from the process plan area. So that's challenge cost there in that operation. However, we believe that Cienega has a good future, because we have better grades on the reserves.
So -- and we are analyzing how to get to that area sooner, maybe with a new access to the mine that we are analyzing. And we are also piloting new technology to pre-concentrate that high-grade ore that is coming from far away. So we could also reduce the hauling cost impact in that portion of the operation. So we'll keep you apprised of the progress in Cienega where, like I said, we are working to lock that value in the future, because we believe in the future of La Cienega.
Finally, the operations at Herradura, we have a good performance with almost 180,000 ounces of gold produced in the first half. And this despite the labor stoppage that we had late in April, May that was roughly reported. Despite that, the team there managed to keep some level of operations and the output was good.
Now, in the next slide, I want to provide a brief description of our cost-containment, cost-reduction efficiency projects. Now, at Fresnillo, as I said before, the deepening of the San Carlos shaft, it's going to be very positive impact in the haulage cost. So whenever that's ready we will capture that benefit. In addition to that, we have about seven high impact initiatives going on at Fresnillo worth $3 million to $5 million on savings on an annualized basis. For example, savings in the shotcreting process by rationalizing the shotcreting, reduce pumping maintenance cost. Then, the fairly remote drilling and autonomous drilling project that is listed there could potentially produce in improved productivities representing up to $7.5 million in annualized savings.
At Saucito, we have five projects having to do with the expediting of the mining cycle, which will improve the mine output and therefore, the cost per tonne and example of those projects are the ground supporting cycle, improvement of that, or the optimizing on the long-haul drilling cycle. We're also working on a project to reduce consumption of reagents in the dynamic leach plant. The haulage fleet weight tracking system itself, that is already ongoing could produce to an estimate of $3 million in savings in the full-year and that's efficiency in the hauling produced to cost savings.
At Herradura, 12 initiatives ongoing. So just extended an entire life, extended truck fleet major components life, reduce diesel and natural gas logistics cost -- sorry. All of that representing an estimate of $10 million and savings -- of cost savings in an annual basis. So -- and I'm just using those three mines to -- as the examples of the kind of projects that we are undertaking in all four mines to try to contain the cost inflation and the exchange rate that is impacting us.
So, my final message would be that we count now on a solid operational performance of our portfolio of mines as a solid foundation to now focus on continuous improvement, efficiencies and cost-containment.
Thank you, and over to our CFO, Mr. Mario Arreguin. Thank you.
Thank you very much, Tomas. Good morning, everyone. If we can move please to the income statement, okay. What you see in this slide is basically the income statement for the first half of the year, and we compare that to the previous year. And as you can see from all the different profit levels, which are outlined in yellow, we are below last year's first half results. Gross profit was below almost 23% compared to last year. Operating profit was almost 63% below last year. Profit for the period was 36% below last year and EBITDA was close to 24% below last year.
And in order to understand the decreases, I would like to start basically with gross profit, the $83 million decrease. If we move up that column, all the way up to adjusted revenues, you will see that we had an increase of almost $82 million in adjusted revenues. That was basically due to volume. As Tomas reported, we had an increase in production of silver and gold. Whereas, prices, even though silver and gold though went up in this first half, they were more than offset by the decrease in the price of zinc.
So prices didn't really do that much for us this first half. It was more in terms of volume when justifying that increasing adjusted revenues. But, I think, the item that you are mostly interested in has to do with adjusted production costs, which increased by almost 17% or $114.5 million. And I think, this is the line item that I would like to dedicate some time.
So if we can please move to the -- what we call the rainbow analysis. What we show here in this slide is on the far right hand side that bar shows the increase in adjusted production costs, which was again $114.5 million. And if you move all the way to the left on this graph, you will see the different variables that impacted our costs.
Starting with the Bar 1, and the most important one, which had the most important effect for the period was the revaluation of the Mexican peso. I'm sure all of you are familiar with this. The peso has been one of the strongest currencies compared to the dollar, basically due to the fact that the interest that we pay in Mexico is much, much higher than the one paid in the U.S. So you can see that the average exchange rate for last year was $20.28 pesos, whereas for the first half of this year, it was $18.21. So that translates into a 10.2% revaluation, which had an impact -- a negative impact of $45 million.
Now, what we show on Bar 2. Yes, the impact of what we call the underlying cost inflation. And the underlying cost inflation is the one where we exclude the impact of the Mexican revaluation. This is purely the increase in unit cost, assuming zero revaluation of the Mexican peso. And this underlying cost inflation for this first half of the year was 6.2% on an annualized basis, which had a negative impact of $41.6 million.
If you add these two first columns, you will see that you get to almost $87 million, which represent close to 76% of the total change in production costs. So by far, I would say, these two elements were the most important ones in terms of impacting our adjusted production costs.
If we continue to move on, you will see that on Bar 3, we're showing the increase in absolute production costs derived from the fact that the Juanicipio mine ramped-up. It had extracted more mineral during this first half of the year compared to the previous year. And you're also aware that this year, we started the operation of the plant. So, obviously, behind that, there was a $19.6 million increase in absolute adjusted production cost, but we really don't need to worry about this particular increase because behind this increase, we saw a very important increase in the profit.
Moving on to Bar 4, and this has to do with a technical accounting adjustment, I would say. This first half of the year for the Herradura mine, one of the most important component of the Herradura mine, a higher stripping ratio which was below the average life-of-mine stripping ratio. What that means is that, for this year, we pretty much capitalize -- I mean, expense due to the income statement. All of the cost incurred in stripping in this particular component, which is the most important at the Herradura mine.
And as a result of that, when you compare the first-half of the year -- of the previous year, where we had exactly the opposite, we had a higher stripping ratio and a lot of that was capitalized. This year, that stripping ratio again was below the average life-of-mine stripping ratio. So we took more of the stripping costs to the income statement. And that had a negative impact of $19.5 million.
The fifth column, what you see there is basically has to do with the current operations. So there was an increase in terms of the use of maintenance, contractors, operating materials, diesel. And this was basically due as you are aware of longer haulage distances and deeper mines. And we're also doing more development. All of this had a negative impact of $16.7 million.
And lastly on column number six, we also saw a higher ore volumes process at some of our mines. Again, we don't really need to worry about this particular increase, because behind that there was an additional profit generated. And the two variables that somehow mitigated these adverse effects were one Noche Buena as you know we're in process of closing that mine. So obviously that mine incurred last production costs. And also we reclassified part of the cost incurred at the Herradura and Noche Buena, where I'm sure you remember we had a stoppage, a legal stoppage for 14 days. And what we did there is those fixed costs mainly salaries. We have reclassified those to unproductive costs.
So let me just go back a bit, and -- so I believe there are two questions that you might ask. One, how much of this was known by the market? And two, of the changes that we show here in this slide, which do we consider to be structural or permanent, and which do we consider to be temporary or that can be reversed? Starting for the first question, how much did the market know about this? And if we start with Bar 1. Well, this shouldn't be any surprise at all. I mean, this is public information in terms of the exchange rate and everyone is very much aware of that. So this is not secret.
Second, what we call the underlying cost inflation. In early March, when I was sitting here, some of you asked me what inflation was expected by the company. Excluding the exchange rate effects, and I was lucky because I answered six. So this was pretty much known by the market too. So the market knew about these two first columns, which again represents 76% of the total increase. Juanicipio mine ramp-up and the startup of the plant also market knew about that. So obviously if you have a new operation that would increase your absolute adjusted production costs.
Column number four, the stripping. The increased stripping costs taken to the income statement. Well, maybe we -- I believe we mentioned, part of that in the March meeting that we had here. But again, that was technical accounting issue. And again the one that we're working on is the one showing in column number five. Well, Tomas has explained certainly the actions that we're trying to make in order to mitigate that sort of deepening and longer distances in our mines.
Now, question number two how many of these bars are structural or permanent and which ones are temporary. Again, starting with column number one.
From my point of view, I believe this is one of the variables that could be reversed or that is temporary. How long do we expect the peso to maintain this strength? Well, it's hard to say. I can tell you that for the second half it's going to be even worse, because in the first half, we had an 18.21 average exchange rate.
If you look at the H1's rate right now is 16.7%. So it's even below the average of the first half. We really don't see any reasons for that to change in the short term. Of course, we're going to have Elections next year, but we're not expecting that this political situation could have a negative impact on the exchange rate unless something unforeseen happens. But in the medium-long-term, we don't believe that the peso can hold this strength and eventually it will maybe come back at least to '21, '22 levels that we just saw six or seven months ago. So, yes, this first half, I believe can be reversed.
The second column, inflation. I think this is structural and permanent unless we start seeing deflation and lower unit prices. But we are not expecting to see that. The Juanicipio mine, again, it's a good thing. So that's permanent. It's going to stay there, but generating good profits.
The stripping to costs, well, that changes depending on -- if the stripping ratio is above or below the long -- the life of mine stripping ratio. So again, it comes to column number five. Our mines are already deep and our open-pit mines have increased the distances. And they will continue to do so. So, once again, the only thing that we can do is try to mitigate those effects i.e. implementing strategies to be more efficient and more productive. And again, Tomas, just spoke about that a few minutes ago. So I hope this gives you a clear idea of what we see our cost going. If we can go back to the income statement, please?
The other item that I think it's worthwhile talking about is exploration expenses. As you can see, we had an increase of almost 25% or $19 million. So we spent close to $97 million in the first half, which is slightly above what we guided for at the beginning of the year. But we expect to, at the end of the year, pretty much be in line with what we guided you. So probably we will see lower exploration expenses in the second half to meet the guidance that we gave.
But most of this increase has gone, not to the operating mines, but rather to the new exploration projects that we are currently working on. That's another line that would be interesting to talk about, is the Silverstream. You already are very much aware of this. This has no cash effect. Nevertheless, we have to value to market the Silverstream that we hold with the -- with Penoles' Sabinas mine.
And given the fact that the prices -- forward prices, when we did this valuation, as of the close of June, forward prices were lower for silver. We had to incorporate that into the model and also the fact that Sabinas has reported a bit lower reserves and resources that translates into a bit less silver. I mean that mine in the future.
So all of that was taken into consideration and the outcome was a $17 million reduction. However, compare that to the previous year, where we had a much bigger effect coming from lower silver price and then increasing the interest rates that we used to discount the cash flows. Believe it or not, that had a positive effect of $19 million.
The other line items, that I think you should comment on are income tax expense and mining rights. It's very unusual and, I would say unique to see positive numbers there. So I believe this will be one of the few companies that is reporting higher after tax profit during the period. And the reason -- when compared to the profit before income tax.
And the reason for that, and this is not the first time that this has happened. Given the impact of the revaluation of the Mexican peso on deferred taxes and also the impact of inflation. But most importantly, the revaluation of the Mexican peso. That has a tremendous impact in terms of the deferred taxes. So, how we get that -- that's how you get to $89.7 million of profit for the period, which is higher than the profit before income taxes. Again, if the peso goes back to the '21, '22 peso per dollar level, this will be completely reversed in the future. And that's what we expect to happen eventually.
And if I skip some of the lines, I'm happy to answer those during the Q&A. On to the next slide, please. The next slide. I just want to make sure that we are clear on what we understand by what we call consolidated cost inflation.
In the Rainbow that I explained to you separated, what we call the structural or the underlying cost inflation from the revaluation of the Mexican peso. However, when you look at them together, combined, that's how we get to do what we call the consolidated cost inflation. Which again takes into consideration our own particular basket of inputs. And the weighted average of each one of those and that's how we get to the 13.35%.
Again, if you take the revaluation of the Mexican peso effect out of this, that's how you get to the 6.2. So, hopefully, this concept is clear. And if we can move to the next slide. I think this is important to show very quickly. And by the way, the shaded part of the circle there is basically associated to contractors. So, contractors, obviously bring their own personnel, bring their own phone equipment, bring some of their own operating materials and also do part of the maintenance and they charge us for each one of those components.
But anyway, as you can see, operating materials as a whole represents the most important component of our adjusted production representing 23%, followed by personnel, which represents 20%. When you combine both our own personnel and contractors. Maintenance represents approximately 20%. Energy, basically meaning diesel more than electricity represents 18%. And a bunch of other things, represent 12%. So, when you model Fresnillo, you should take this into consideration and also take into consideration that between 40% to 45% of the production costs is denominated in and paid in pesos. And that's where we get hit when the peso revaluates.
Move to the next slide, please. So to conclude, let's look at the different factors that affected gross profit. So again, the green bar on the right hand side represents the $83 million lower gross profit.
So what benefited us? Of course, the Juanicipio mine ramp up and the plant startup. Remember when we spoke about production cost, I said that that was a component that increased our cost, but at the end of the day, it more than covered up that cost and generated an additional $59.2 million in gross profit.
Also the fact that at some of our current operating mines, we had a higher volume, that also increased our costs, but it was more compensated by the increase in sales, which obviously covered that and generated $42.6 million in additional profits.
I spoke about higher metal prices. Of course, gold and silver were up a bit, 4.2 in the case of gold, 2.4 in the case of silver. However, if you look at Column number 10, the price of zinc almost came down by 30%, and that's becoming a very important byproduct.
So the impact of the lower base metal prices or byproducts had a negative impact of 51.3, which more than offset the positive effect of the higher gold and silver prices, $38.5 million. We also had what we call a gold inventory uplift at Herradura.
So what we saw at our leaching pads was that the inventory was coming down and down and down, and we were going to get to a point where it was going to be zero or negative. So we did an analysis to see how much really was at our leaching pads, and we came to the conclusion that there was a bit more gold than what we initially estimated.
Of course, this was audited by Ernst & Young, who are auditors. And on the negative side, of course, you have again Columns 9 and 8 which represent the revaluation of the Mexico peso, the cost inflation and the higher stripping to costs, all of those factors we spoke about in the previous slide.
So this gives you an idea of the things that helped us and the things that went against us when it comes to gross profit. If we can move on, please. Yes, I'm not going to comment on this. I thought it would be good for you to know where we are investing in terms of exploration. And as I said, we are dedicating a lot of resources to prospects and projects. That's where the increase was located.
Next slide please. Finally, in terms of cash flow. As you can see on the bottom, first column. We closed the first half of the year with almost $880 million which represented a decrease in the cash balance compared to what we had at the beginning of the year of $79.4 million. But if you consider that we paid dividends for $98 million, you could conclude that we were net cash positive excluding the dividend payments, which were $98 million.
So the main source of cash came obviously from the operations, $323 million. I would say the main uses of cash were obviously, taxes paid, profit-sharing paid. Remember, this represents cash payments during the first half, basically provisional tax payments and also mining rights that we paid in March corresponding to 2022, but were paid in March this year, and the profit sharing corresponding to 2022, which was paid in May this year.
Those basically are the concepts that form the $192.3 million. And at the very important news, of course is CapEx, $228 million, part of that is mine development, and part of that is plant and equipment, and the dividends paid is $98 million. Those were the main uses of cash.
And with that, I will leave it at that and if you have any doubts or questions, I'm very happy to answer those during the Q&A.
Thank you, Mario. And coming to the last part of our presentation, we've seen an increase in silver production this year level, I would say production in gold. As you can see the behavior of lead and zinc. Silver, of course increased coming after we are operating Juanicipio, ramping it up and also we will see some contribution from the Pyrites plant as well.
On the CapEx side, we have been reviewing our CapEx needs for this year and this has come down from $630 million to $555 million. In terms of reviewing our needs, as I mentioned, as well as the program and the timing for that CapEx deployment. We are forecasting '24 and '25 at the same level as we had it before.
In terms of the projects on how those are looking, as I mentioned, pleased to report that Orisyvo is going to pre-feasibility. We are ramping and aiming to nameplate capacity Juanicipio in Q3 this year. We mentioned the Pyrites plant is operating right now. And good to report good performance and price being moved forward in the case of Guanajuato with some good exploration results as well as Tajitos.
So in the coming months and years, we will see Tajitos and Rodeo somehow rivalry each one of those, about the same size open-pit projects that could turn into operations, Tajitos neighboring Herradura and Noche Buena. Rodeo in a very good area in terms of infrastructure with energy, water, and labor as well.
Orisyvo, good challenges lying ahead in terms of infrastructure and investment, of course is a project that we still have to de-risk in terms of metallurgy and everything, but is looking good every time or better every time. And Guanajuato, an old mining district in the Central part of Mexico, underground mine, good exploration results so far and we will continue to making it growth.
So to conclude, I mean we are posting a good performance, I would say. As we mentioned, all the way and the different links of the chain are making good progress on the exploration, a steady progress with robust operational performance, better performance in Fresnillo, turning Saucito as we mentioned, to a more positive performance as well and Juanicipio smooth ramp-up and aiming to achieve nameplate capacity in Q3. Our focus will be for the following months on cost control. We're deploying number of initiatives across all of our operations. And according to all of this, we are reiterating our guidance for 2023.
And with that, we can go into your questions. Thank you.
Thanks. Dan from UBS. The first one, just to recap on the cost subject. Your production guidance implies pretty much flat or similar levels of production in the second half. Therefore, should we assume a similar run rate, high $700 million, $800 million in kind of production costs in half-on-half. Obviously, the year-on-year there was a big cost step up due to inflation this time last year. But is that, broadly speaking, the right kind of run rate to expect in the second half?
Okay. And then just into 2024, when you looked at those variables, obviously no one's in control of the exchange rate. Looking at your other, if we were just to assume similar run rates on the FX rate. You would still see inflation on your overall cost base in dollar terms in 2024, is that correct? Because you got a full-year of production at Juanicipio, and I guess inflation is not zero. Is that the right way of thinking about it?
In terms of absolute terms?
Yes, dollar terms?
But absolute, not unit cost.
No dollar terms just over your production is broadly flat. Should we assume that dollar costs are at least flat or up next year?
Flat or up slightly, I hope -- and hopefully we will see some of those projects that Tomas was talking about resulting in some sort of savings.
Okay. Thanks. And then just next one on your Herradura in particular, you mentioned that stripping ratio is down relative, obviously to previous periods. To be honest sustaining cost of the assets over $750 an ounce. And if you're at the below the life of mine stripping ratio, I guess that has to come up or at least be similar going forward. It doesn't feel there's a lot of DCF value in the asset at current gold prices if that's the kind of run rate, where do you expect the medium term trajectory in terms of CapEx costs? And is there a risk began impairment at the asset at the full-year results?
At the Herradura mine?
Yes.
Well, I think you're right in your assessment. I'm not sure exactly how this stripping ratio is going to behave in the next following years, if it's going to be above or below, but that mine will require certain investment in CapEx. Yes.
So we should assume a cash breakeven cost similar or higher than where we see in the first half of this year $1,700 $1,800 an ounce?
Around that, yes.
Going forward?
Going forward.
Okay. And is there a risk we see an impairment if you don't rebase your long-term assumptions to at least that kind of level? Because I guess by definition, there's not much value in the asset if it.
I don't think we'll get to that point to be recognizing an impairment.
Okay, I'll leave it there.
As in the open pits, this year was higher stripping ratio than the average of the mine life. But in coming periods, I mean, that will be decreasing, of course, and we will have better stripping ratio than the mine life average. And also, the other study that we are waiting is the slope…
Slope optimization that we are undergoing right now, and that could potentially lead to less waste to be removed from the pit. Yes.
Also, as it has happened in the past with Herradura, with the exploration we do. We usually turn some of the blocks that were not supposed to be or around the open pit, and that gives us additional mean. So all of those variables are playing right now. So we expect better performance in the future.
All right. So the stripping ratio is coming down relative to what we saw during this period. Okay.
Yes.
Sir, I'm Jason Fairclough of Bank of America. Just a couple of questions around the growth projects, because I guess what I'm hearing today is that you've got a bunch of gold mines. You're sort of running to stand still in terms of costs. In fact, you're not. Costs just continue to work against you. I feel like the way the organization used to offset this was by having a pipeline of new projects coming through.
And obviously Juanicipio helps. What's next? Like, if I look at your slide here with the outlook and the growth projects, there's a bit of a hole, right? And even if I look at Rodeo, even you're saying production in 2025, but you're still studying it, right. So are you concerned about that Octavio? Like it feels like more should be happening, stuff should be approved right now, yet it doesn't feel like things are ready. Is that fair or unfair?
It is. Jason, I mean, if we look back for the last 15 years, we used to have almost a new project every other year coming on stream. We had in the beginning, Soledad & Dipolos, Noche Buena, then Saucito then the Saucito expansion, of course, in San Julian. Yes, now we are facing some two, three years without a new project coming on stream.
And at the same time, these two, three years I mean we'll continue doing what we can do in Fresnillo, as I mentioned, better performance, a bit more grade Saucito turning point. So we'll concentrate on operating more efficient. And better the Fresnillo, Saucito and the current operating portfolio.
Now in terms of growth, yes, we do have those two, three years without a project coming on stream. Next one in terms of less difficulties is Rodeo. Of course, whenever we struck a deal with the land access, I think it would be a matter of exploring six, seven months, turning those inferred resources into indicated run the prefeasibility, not a large CapEx project. In the meantime, we keep on as balancing or receivable. Yes, these two, three years, we do have that gap.
Just to push you on this again, it's because I want to understand, is the problem an underinvestment in exploration? Is the problem you're just being unlucky here, you're not finding good projects? Is the problem a lack of resource for the project team? Or is the problem actually just Mexico? And you feel like, well, let's just slow down and we're not going to be in a rush to invest?
I think it's a combination of things. Number one, I mean, Rodeo is community related issues. Not being able to concrete the land access. Orisyvo, although it is a large resource base, we needed time to strengthen to the levels in which we like the Fresnillo assets to run them through prefeasibility to feasibility. So we needed to risk that asset in terms of recoveries the logical recoveries, something that we are doing right now, looking better every time. So it just takes time to go through prefeasibility.
So that's technical issues I would say along the risking that project. And the other ones is just Tajitos that we needed to consolidate with different ownerships in depth of money concession. Something that we've done just recently. And Guanajuato is just the exploration and how that has evolved. So it's a combination. Mexico is still not playing a large aspect in terms of challenges right now. I mean because it has to do with how we can develop the portfolio. So it's those other aspects particular to the different projects, but in different aspects, I would say.
So you think it's the assets? You don't think there's an organizational issue where you're under resourcing the project teams?
No, not really I mean if we look back at the resource we have devoted in terms of exploration, it's been at a good level. And we maintained the resource base I would say, however not being lucky or successful in order to concrete one project to bring in the following year, year and a half.
Thank you.
Yes.
Thank you. Can you give us a bit more details about the drivers behind your decrease in CapEx guidance for the year? And maybe as an extension of that, do you see any potential for CapEx guidance in 2024 and '25 to be reduced?
Yes, the reduction this year is just based on a review for forecast for the rest of the year. Improvements in timetables, revise engineering some projects, reducing the actual spend through the year, basically. And yes, for next year, I would say, I don't foresee any major increase. I mean, should remain per the guidance as we see it today. Main expenses next year would be tailings dam, some mine equipment, basic sustaining CapEx in addition to whatever we find for new projects.
Yes, that is mainly sustaining. And if we keep on advancing our projects, of course, that would be in addition to what we saw in the chart. It has to do with the stages of prefeasibility and some CapEx deployment at each particular specific project.
Thank you.
Yes.
Thanks. It's Danielle Chigumira from Credit Suisse. Another question on the projects. So what you've seen is you speed up the exploration spend and slow down the CapEx spend in the first half of this year. Should we interpret that as you needing to increase the quality of the remaining projects, your project pipeline essentially?
We had the permits, which is good to explore Guanajuato and Tajitos. We are doing good exploration results there. So we speed up a bit more the exploration pace in those two projects. But in order to come to our budget, I think we will in the second half of the year we reduced the pace. We will be able to post an increase in resources in these two projects, and the rest mainly is in the operations as I mentioned and in some other projects like San Juan, Candamena at a lower pace. Also we are exploring in Chile and Peru, but the main two projects that are reflected in the higher exploration investment in the first half was related to Guanajuato and Tajitos.
All right. And you kind of mentioned that Rodeo and Tajitos are similar would be competing for capital. But as it stands on the project pipeline, they're at very different timelines. Rodeo is supposed to be 2025 and Tajitos is not on the page. So how likely it is, is it that Rodeo is delayed materially in order so that there are similar timelines so that you can evaluate them side-by-side?
It is related to the kind of project. I mean Tajitos, we are very familiar with exploring in that area. As I mentioned, we have the land there at the surface, the permits, everything. So the exploration could be quite quick in order to go from inferred resources into indicated. If we do not have -- we are not successful in Rodeo in the following months, I think we will see Tajitos outpacing Rodeo. Okay, so that's the only question that's why I think as an earlier project Tajitos it is not a timeline reflected in the chart that we presented.
Okay, so it's more likely that Tajitos is pull forward a bit.
That is correct.
Okay. And from a decarbonization perspective, you mentioned doing studies at Fresnillo, Herradura to see what firm targets you can give around those operations around decarbonization, which is great to see. When do you think you would start and finish that same work for the balance of the portfolio?
Yes. We started this analysis and this research with NG. The study in detail was I mentioned Fresnillo and the opportunities what we have there as an underground mine and being the largest in the portfolio and also in Herradura. With those two aspects, I mean we'll be able to gather very important information, hopefully by the end of the year or beginning of next year. And with other studies that we are doing in terms of climate change in the areas the University of Arizona and some other initiatives science-based, we will have all the information hopefully earlier next year in order to define our way forward.
Thank you. And then final one from me. And for those of us who aren't Mexican economists, what gives you the conviction that medium-term the peso will revert back to weaker levels?
We're not actually sure that that will happen, but the peso has strengthened due basically to difference. I would say to difference in interest rates that are being paid in Mexico versus the U.S. Mainland. And we can't keep that rate 11.5% risk free government paper being paid out. So those rates eventually will come down. And when they do come down, maybe we think that that's as a consequence, peso will lose some of its strength. But then, again, I'm not an economist. That's the way I see it. And there are certain other factors political, you never know what could happen there. We have an election year coming up next year, so that's an additional factor that you have to take into consideration.
Good morning. Thank you for taking my question. This is Sandeep Peety from Morgan Stanley. So I had three questions. Firstly, on the labor reforms, can you let us know what are the new labor terms? When do you expect them to be effective? And on Slide 21, what level is it only the labor that gets impacted, or is it also the contractors and maintenance?
Actually, the labor reform came into effect in 2021. Basically, that was at the end of 2021, September, October of 2021. Basically what affected us was the fact that the law forbidden companies from hiring contractors to carry out what the government calls the main activities of the company or the core activities, core business of the company. In our particular case, we had a very large base of contractors performing core business activities, so we had to substitute those with our own workers. But again, that took place basically in 2022. We're pretty much done with that. So that was one of the most important aspects of the new labor law.
I know, I was more referring to the labor terms that were settled recently. The labor hikes or…
The increase in wages.
Increase in the wages? Yes.
Okay. I thought you said. Okay, now we have an annual review of contracts. Every two years, we review more in depth the contracts, the French benefits, everything. And every year we do negotiate the increase in wages. Typically, what we use to negotiate that as a basis is the previous year's inflation. So in 2022, we had an 8% or a bit higher inflation in Mexico according to the Consumer Price Index. So that's why we've granted an 8.5% increase in peso terms. Right? But when you combine that 8.5% in peso terms and compounded by the devaluation of the Mexican peso that's how you get close to the 20% in dollar terms.
Okay, okay and does it only apply to the labors or also to the contractors and maintenance the bucket that we have provided on Slide 21?
I'm not sure I understood.
Does it also apply to the contractors and maintenance? So the bucket that you have provided on Slide 21, if you go back to Slide 21?
Yes, each contractor company negotiates their salary increases on their own, I mean, we've negotiated the salary increases for a unionized personnel and the rest of the companies negotiate for each one of the called earlier workforce. But we can assume that is approximately similar increase.
Okay, okay. And maybe you are returning to a minimum wage increase of 37% that the government announced earlier in the year, but that has nothing to do with us, because none of our personnel makes minimum wage, so it's a different, right? It doesn't apply. Maybe that's what is confusing.
Okay, thank you. And then one clarification on the absolute production cost. So the $800 million for 2H that you have guided for, is that considering the spot FX rate or is it considering 1H FX rates?
Considering that the exchange rate remains at around MXN17 per dollar, remains the same.
Thank you.
Yes. Hi. Patrick Jones, JPMorgan. I know there is some proposal changed mining legislation recently I think back in late May or early June, could you just give a bit of update as to where those stand and what you see as the potential outcomes of that impact?
Yes. It depends -- I would say if you cannot take a general approach. It depends on each one of the mining companies, for example in the case of Fresnillo in which we have a large mining concession. It would not -- we will not be impacted by the current administration not granting new mining concessions in Mexico, for example.
So with the concessions we have on-hand in the case of Fresnillo, we will be able to explore for the following years with no problem, of course, both for a new mining company, of course, that represent very a lot of challenge -- a very large challenge or for those mining companies that like to deal and increase their mining holdings, of course.
In terms of the all aspects like the indigenous consultation, in the case of Fresnillo of course, we've gone through one of those process. The first one in the mining industry in Mexico back when we needed to build a water pump reservoir for San Julian.
We went through that process as well and it was a good learning experience, something that we are prepared for. And at the same time as I mentioned this, that would not be impact in the case of Fresnillo. Through the mining chamber in Mexico and a good dialog with the current administration, we are defining the operating rules for that new mining law, so that we believe we can get to a good outcome for making the new mining law good to operate still as it is. At the same time, of course, we are also consistent pattern searching for a bill, we are going through a legal process in order to appeal to this mining law as well.
Yes. Can we go back to include statements? Just a couple of numbers there with clarification so the unproductive costs there. Is that a one-off that reverses, Mario?
That's what's that's the one-off. Like I said due to the stoppage that we had at the Herradura and Noche Buena mine, we took out of the adjusted production costs and reclassified that.
So it's not really the adjusted production, so if anything we'd be adjusting the adjusted production costs are up by $21.5 million, as those things come back online?
Together with additional [indiscernible] because of the 14 days back that we stopped.
Yes, okay, and then the other one was just, if you look below the line, we've got other income expense $33.5 million. There's not a small increase to $26.3 million. So what's in that number?
Okay. I believe we reported that. It was some illegal extraction of gold at our Soledad-Dipolos pit.
That's effect?
Yes, that's another word that you can use.
Okay.
You remember that Soledad-Dipolis been, let's say, put on hold because there is -- there are people there who are claiming that that's their land, right? What we've seen is that -- and identified is that there could be certain activity going on in terms of extracting illegally the gold contents at those leaching pads, which are currently not operating. So we had an inventory of gold there recognized in our balance sheet. We've estimated as best as we could, how much of that inventory has been lost due to these illegal extraction activities. And that's what is included in there.
So, that's a non-cash expenses, is it?
It is a non-cash, but it's real gold inventory that's been extracted of the leaching pads at Soledad-Dipolis.
Okay and then conversely, we've got a write-back of $22 million of inventory in Herradura?
Yes, that was due to the uplifting inventories.
Okay.
That's happened before.
Sort of fine with that. But this one is a bit unusual, right?
It is, it is, yes.
And ultimately, it's a financial loss to the company in its effects or is that might be anything?
It is an estimate that we 've done because -- but we've seen in the area. And we are in the process of discussing this in fact with the authority as well and at the same time, we have this dialog with the communities in order to go back to the area as well. So all of that is simple. But what we are --our objective is to ask the authority to intervene and cease of course that illegal activity, yes.
Okay. Thank you.
Got a question on the lines, if we can take that one. Operator, can we take the question online, please?
Certainly. [Operator Instructions]. Our first question comes from Amos Fletcher from Barclays. Amos, your line is now open. Please proceed.
Hi there guys. Couple of questions, first one on Juanicipio, the grades were a bit above expectations, can you give us any guidance on grades for the second half and into 2024, please?
Yes, the grade is going to remain at the same level that we saw in the first half and we may be a little bit -- a little bit better as we use less stockpile ore, which we had low-grade that we used to start the plant until we normalized the mineralogy of the plant. So I would say a little bit better in the second half, but not much, right, there are on the same.
Yes, Amos. Thank you. Let me give you a little bit more color going forward as well. I mean, and how we have started the operation. We have started our process in some development ore low-grade with lower grade initially. I mean that and then we have started mining the stopes, of course that come fresh production from the mining the stopes. That's why we saw an increase in the grade.
Going forward in the following years, as is it in the Fresnillo District, we will see a similar trend, higher grade initially for the following two to three years and then coming down at that the silver grade and more increase in base metals as well. That's why we mentioned in the past as a reference a metal content average per year in terms of silver and gold . But we will see the same behavior, initially higher silver grade and then after the following years start decrease in -- increase in base metals.
Okay, thank you. And then one follow-up is, just around Cienega all-in sustaining costs was over $3,000 an ounce, is there anything you can do to bring that back down?
Yes. Yes, it has been unusually high this year because of our investment in tailings dam infrastructure basically and some increased development that's temporarily obviously. So we should be done with the expanded capacity of the tailings dam this year and then will normalize.
Okay and then final question was just to ask on tax. You've been booking some material, positive accruals in the P&L for the last two halves. But at the same time making big cash tax payments, is that sustainable and should those two align at some point, and if they do, does that mean, cash tax payments are going to reduce, so should we expect the P&L tax to normalize to go back to outflows? Thanks.
I'm not sure I understood the question.
It's mismatch between the cash payments in tax versus the positive accrual in tax. Does that normalize?
Well, like I said, tax payments are basically related to provisional tax payments. So in Mexico, what you do is basically based on your previous year profit level. And there's a formula whereby you calculate a certain factor that you apply to sales on the following year in order to pay provisional taxes during the year. At the end of that year and in March of the following year when you prepare your tax statements, you're comparing the real number that you get versus your provisional tax payments. And if you paid more you recuperate that part that. If you paid less, you pay up.
So cash taxes should go down?
Yes.
Can we get guidance for your effective tax rate on a cash basis 2024?
Not at this point in time.
But should be comparable to your P&L guidance range, all else equal in terms of what we know with FX and all of that.
Well, we'll just work on that thing and get back to you. I'm not prepared to answer that question right now. Sorry.
Can I ask one question? So on cost initiatives last time that you mentioned was that the inflation is going to be around 6%, which will be offset by the cost savings. So now the cost savings have moved to 2024, is that right?
Well, part of the cost savings will be incorporated this year as we evolve in the projects and the figures that I mentioned were calculated in a full-year basis, but those are ongoing initiatives that will capture as we progress through the year and through the projects.
So when do you plan to finish them completely? Is it '24 or '25?
I would say most of them during this year, I mean, that's what we plan, but yes, I would say, second half and first quarter of next year until we finish all of it and then it's sustainable, right? Once we are done with the projects, the benefit is to stay in the operations.
Thank you.
Any one from new line please.
Our next question comes from Krishan Agarwal from Citibank. Krishan, your line is now open. Please proceed. Krishan, your line is now open. Please proceed with your question.
Okay. Let's move on.
Krishan, we noticed -- okay. We currently have no further questions registered. So I would like to hand the call back for final remarks.
Thank you all. Thank you very much.
Thank you.