Fresnillo plc (FRES) Earnings Call Transcript & Summary

Hello, and welcome to Fresnillo FY '20 preliminary results. My name is Stefano, and I will be your coordinator for today's event. Please note that this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the presentation. [Operator Instructions]. I will now hand over to your host, Octavio Alvídrez, CEO, to begin today's conference. Thank you.

Thank you. Good morning, everyone. This is Octavio Alvídrez, CEO of the company. Thank you for joining us today. I'm joined, as always, with -- by Mario Arreguín, our CFO. And I'm pleased to be joined this time by our new COO, Tomas Iturriaga; and Guillermo Gastélum, our new Vice President of Exploration. Once again, regret not to be there in person, but when travel restriction change, we look forward to seeing you in person. Please, to the disclaimer page, please. As always, I need to point out to our disclaimer before I begin. This is in page number -- we will see it second page there. But I would like to quickly move on to a slide of what we will cover today in this presentation. Please to the agenda. In terms of our agenda, I will take you through the key highlights in the year as well as addressing how we have managed the business through the pandemic. Tomas Iturriaga will then provide an operational update as well as an update on our development projects. Then Guillermo Gastélum will provide an update on our exploration program, then Mario will provide a financial update. I will then conclude and provide some comments on the outlook, and then we can follow to Q&A. On Slide 5, please. Investment proposition, and I'm sure you are familiar with our investment case. I believe it remains compelling and consistent as it has been over -- or more than a decade as a listed company. Notwithstanding some of the challenges we have faced recently. We do benefit from a large portfolio of high-quality assets with 2.3 billion ounce -- silver ounces in resources and nearly 40 million ounces of gold in resources. We have a strong EBITDA margins and low-cost and remain very focused on running our operations very efficiently. We take all the time, a disciplined approach to investment through the cycles, we explore and -- we invest in exploration. And therefore, we maintain our portfolio growth, and we have a proven track record of completing our projects. Both the Fresnillo optimization, in the floatation plant of Fresnillo and the pyrites plant were completed in time and on budget. Though as we will explain later, the connection of the new floatation circuit was delayed to minimize disruption at the Fresnillo mine last year. We will do it this year. And commissioning of the pyrites plant was pushed back due to COVID related delays. And on Juanicipio, we are expecting to commission it this year in Q4. We also had a solid project pipeline of new projects and prospects in Mexico, Peru, and Chile, and Guillermo Gastélum will go over that. COVID shows how important our role is in the communities. We implemented a huge number of measures to help not just our people, for our communities, and indeed, the regions key part of our license to operate. Finally, we have a very strong balance sheet. We restructure of debt last year. We have a strong cash position, positive free cash flow, unchanged and consistent dividend policy, having paid over USD 1 billion in the last 5 years. On Slide #7, please. I will not run through all of the production numbers in detail as though were released in our last production report. But I will say, we reported a robust year in the face of difficult circumstances. For silver, production was in line with our guidance. And for gold, we also hit our guidance, although we revised it, as you know. And this was in spite of some large disruption costs throughout the year due to the impact of the pandemic in Mexico. I will talk about this in a bit more detail shortly. But issues such as working restrictions, absences due to quarantine, distance, measures, and regulatory delays have all had an impact. The absences, especially having to place all of or most of our workforce at a point in time due to some degenerative diseases as well in conjunction with the pandemic. We are pleased to welcome Tomas and Guillermo to the team, as well as complete our 2 near-term development projects, the Fresnillo optimization and the pyrites plant, as I mentioned. We have had to revise our Juanicipio timetable due to COVID related delays just 1Q. And our performance improvement initiatives assets in our previous reports are having a positive impact. We remain committed to delivering a sustainable improvement in our operating performance and maintaining the momentum in the improvement plan into 2021. On the following slide, on the financial highlights. Here, we will see the combination of higher commodity prices, gold and silver, and lower costs has resulted in a significant rise in profitability during the year. Mario Arreguín will take us through the numbers in more detail. But I will say this is a robust performance in a challenging environment. We now have over $1 billion in cash and took action to further strengthen the balance sheet in the year by restructuring the debt. A final dividend, we have USD 173 million that combined to USD 190.1 million for the year, an implied payout ratio of 50.6%, in line with our stated policy. In short, we remain very profitable and have taken prudent action to further strengthen our finances. Please following a slide so that we can describe some of our COVID actions during this pandemic. Our first priority, of course, is the well-being of our workforce and the communities in which we operate. Of course, there are a lot of actions. I will not go in great detail through all of what we've done as this would require very much a separate presentation. But I would like to say that while the pandemic has been a huge challenge for us as a business for our home country, Mexico, I believe our response has been very good regarded. It has highlighted the huge role we have as a business play in our local communities, also the importance of working together with all stakeholders. And this crisis, a pandemic, has served to strengthen relationships and partnerships. It has not been easy. Mexico as a nation has seen a very large impact from COVID and this has had a direct impact in our business. We closely monitor the spread of the outbreak and implementing a range of set safety measure across our business, following guidelines in accordance with WHO and local Mexican authorities. One key element to really handle well the pandemic has been testing, testing, testing, all the different tests that we have, the PCRs, of course, the antibiotics and the antigen. And this has been key as long as with the great performance from our medical doctors and really the -- our operational team embracing all of these actions. I have been hugely impressed with the rigor with which our teams have embraced this new way of working. They have adapted sweetly with diligence. Please, the following page, to go over the health safety environment. Being a responsible operator is central to our ethos and the way we do business. We are proud established Mexican business, fully aware of the importance of acting responsibly and being a sound corporate citizen. We also firmly believe in the positive benefits our operations bring to the communities where we operate. We are deeply embedded in our local communities. I'm proud to work with them. Our action during COVID prices illustrates what we can do. We have made major strides in 2020, and I expect this effort to continue into the future. Huge amounts of training of costs have been done, and we are working to install a new safety-first culture throughout the business. We have described in the last 3 years how we are advancing in our 'I Care, We Care' program. And very glad to say that the safety indexes in terms of frequency and severity have coming down drastically in the last 3 years. We are not complacent. We will keep monitoring, testing, training, and improving. Our focus on the environment remains key. We are now supporting Task Force on Climate-Related Financial Disclosure. We are still committed to our wind targets, though we've not progressed as fast as we thought because in Mexico, we have some headwinds in this regard. We competed with tailings review, which is very important for every single mining company. With improvements we can make across all of our mines in the tailings and storage facilities. We're now fully independent channel and a full governance system implemented for this regard. This is a large and very comprehensive program. Our community programs have been extensive in 2021 despite COVID crisis and all those initiatives in addition to the work we are doing to support the region with their COVID responses are ongoing. And with this, I would like to hand the presentation over to Tomas Iturriaga, our Chief Operating Officer, who will provide an operating review. Please, Tomas.

Thank you, Octavio, and good morning, everyone. My name is Tomas Iturriaga and I joined Fresnillo at the end of last year from Peñoles, where I was the Chief Sustainability Officer for the Mining and Metals Group. And before then, I have a number of senior operational roles with Goldcorp, Capstone Mining and Endeavor Silver. And I have been fortunate to manage mining operations in Canada, The United States and, of course, in Mexico. So I do believe that my experience is well suited for the COO role at Fresnillo. I look forward to meeting you all in person as soon -- as soon we are able. Can we please move to Slide 13? So starting with, first, safety. As you see, we have improved our performance year-on-year, and we are seeing an improving trend for the last 3 years. My priorities include focusing on preventing fatal and serious accidents by implementing a high potential incidence program that was already initiated last year. This program is to step-up for Fresnillo and an extension of the effective 'I Care, We Care' program, which is helping to create a culture of safety throughout our operations. The company has a target of 0 fatal accidents, and I'm going to do my best to help achieve that. The safety of our employees very much remains a core priority for Fresnillo, and we retain a very sharp focus on safety. Next slide, please. The Fresnillo action plan update. So this action plan is a key operational priority for us. And this slide sets out a series of measures on how we are progressing on all of them. The Fresnillo action plan has already started to make an impact on operational performance, and we will continue to pay close attention to this, taking it further in search of even better performance. The thinking of the San Carlos shaft is complete, and we are now working to complete the required infrastructure works to bring the shaft to the production at the deepest level. The tunnel boring machine is working well, but I still see some room for improvement. So we are working directly with the manufacturer to improve availability and performance of the machine. As for our dilution control program, we implemented a number of affirmative actions during the last year, ranging from workforce training to assigning dedicated supervisors in addition to aligning workforce incentives to schemes that promote a better performance and compensate our team's actual performance. We have improved our dilution levels. Nevertheless, I still want to see higher rate of progress on this program. In addition to dilution control, stronger reserve calculation and short- and near-term mine planning processes are giving us greater certainty over the ore grades in the production schedule. Our Alimak elevator is now fully operational. So we expect to start seeing the benefits in productivity as well as those benefits coming from Sunday shifts now that we expect less COVID-19 related absences. Can we please move to Slide 15? So turning to the individual mines and starting with Fresnillo. The key point that I want to make here is that performance at Fresnillo is now far more stable as the improvement measures implemented during 2020 are taking greater effects. We continue to focus in our improvement plan, as we just described, controlling dilution, enhancing the blasting and drilling techniques to cope with narrower veins. That in conjunction with the use of more efficient and adequate topographic scans. Further initiatives to increase efficiency and reduce downtime advanced with the use of 4 semi-automated drilling machines and 2 fully automated drilling machines, now operating and beginning to see improvements month-on-month. With all that, silver production was marginally up. Cost increased. So all-in sustaining cost was down slightly. COVID impact included high average increase due to quarantine measures that we managed to maintain production throughout the year. Development rates were in the average of around 300 -- 3,100 meters per month through the year as COVID related measures had an impact, but we are looking to increase this average to somewhere in the range of 3,300 and 3,500 in 2021. Going forward, Fresnillo will also benefit from the interconnection of the beneficiation plant expansion and commissioning of the tailing's flotation plant in the year. Construction of both projects are complete, and the latter is just awaiting government permits to go-live. We will talk in more detail about these 2 projects later in the presentation. Next slide, please. So we move to Saucito. So there, we guided silver production would come down to 220 due to lower grades as we move to deeper areas of the mine. Cost per ton was up, but cash costs are still very competitive. All-in sustaining cost is also very strong. We did have high absenteeism due to COVID measures, which impacted development rates and other areas of mining, but we anticipate this will improve in 2021. Overall performance improvement measures are ongoing, including dilution control, equipment availability. And the deepening of the Jarillas shaft remains a key element as it gives us access to higher grade areas in the near-term. To Slide 17, please. So we move to San Julián and performance at the San Julián Veins and the disseminated ore body was as expected with stable production at the veins and increased production at Disseminated Ore Body. A key driver at the Disseminated Ore Body was over decision 18 months ago to change the mining systems to increase brand stability. We have done that. We have regained to higher grade area and higher silver production. As we reported in our production update, Soledad circuit housing suffered from minor structural damage at the end of December. And that only affected the condition impact resulting in a short promotion outage. This was only temporary, and we are operating at a margin lower rate though at nameplate capacity, but we did see some impact to production in January. Following the Slide, please. We move to Ciénega where silver and gold production was stable while cash costs and all-in sustaining costs remained very low driven by the byproduct ready rates, a strict cost control initiative and reduce sustaining CapEx in line with ore plan. We have found significant space for drilling with good exploration potential. So exploration will remain one of our priorities for 2021 along with cost control initiatives. We will also complete phase 2 of our third tailing at La Cienega. Slide 19, please? And we move to -- now to the Herradura district, where Noche Buena and Herradura mines felt the greatest COVID related work restrictions. As we set out previously, we have to stop mining for about 6 weeks at the onset of pandemic due to regional working and transport restrictions. These results in a review guidance for 2020. Once operations ramp and backup, we were still able to produce 425,000 gold ounces in 2020 which I consider a strong performance under the circumstances. Cost per tonne is still very competitive, and all-in sustaining cost decreased mainly due to lower stripping as a result of working restrictions. Vibration screens were installed at the first dynamic leach plant, risen the volume of 4 processors. And we continue with the construction of the path as COVID-19 restrictions are lowered during the year. During this current year, we will look to conclude the installation of the Carbon in Column project helping to improve coal recoveries from the pads. Can we now move to Slide 20? So Noche Buena. We -- Noche Buena had to operate with the same restrictions as Herradura as we reported previously. And we also reported probably there was a minor land sleep, which affected access to certain areas of the pit. Finally, as you all know, Noche Buena is almost at the end of its mine life. So all these factors contributed to the gold production decrease that you see. The land slip along with COVID-related work stoppage has meant that we will expand the mine life for about 4 to 6 months. So we have deferred the closure plan slightly. In the interim, the priority is to lower our costs in Noche Buena. Can we now move to Slide 21, please? So turning now to our growth projects. Construction of the pyrites plant Phase 2 at Fresnillo was completed on track and on budget. As previously disclosed, the start of the operation has been deferred due to a delay in final inspections by the authorities as a result of COVID-19 restrictions in travel. These inspections are required in order to provide the energy permits needed to operate the plant. Once the final inspection by the authority is undertaking and electrical permits have been approved, we expect the plant to ramp-up at full capacity within a quarter. Given the current COVID-19 situation in Mexico, we expect inspections to take place in Q3, and this is reflected in our 2021 production outlook. We can ramp up quickly when those permits are given. We expect an average annualized production of about 3.5 million ounces of silver and 13,000 gold ounces in total from both bases as a very competitive cash cost when fully operational. Slide 22, please. And so talking about the beneficiation plan optimization. The main objective of this project is to increase processing capabilities at the Fresnillo beneficiation plant to cope with higher leasing rates currently being mined at the deeper levels of the mine. Phase 1 of the 3 phases was completed in 2017 and now Phase 2 was also completed in on-time and on budget. As we previously set out, the connection of the new flotation required 15 days of stoppage of the existing beneficiation plan. Therefore, we decided to reschedule this activity to avoid the necessary interruptions to the normal operation of the plant. We will, therefore, undertake the connection sequentially during the regular planned maintenance of the plant in order to minimize the operational impact. We expect this to happen during the first few months of this year. The third and final stage will increase the plant capacity to 9,000 tonnes per day from the second state capacity of 8,000 tonnes per day throughout the installation of vibration screens. But this will only be undertaken when the mine is able to sustain a consistent level of 4 feet sufficient to support this higher level of processing capacity. Moving to Juanicipio, where we -- where mine development continues to advance last year also seeing some negative impact due to COVID-19 working and travel restrictions. As planned, development ore begun to be processed at the Fresnillo beneficiation plant in mid-2020 and commission of the plant is now expected by Q4 2021. Once commissioned, the plant is expected to reach about 40% to 50% nameplate capacity in Q4 2021. And 90% to 95% of the nameplate capacity in 2022, excuse me. In the next slide, we can see some pictures of the progress at Juanicipio. We see on top at the middle, the milling building in the front and the floatation cell in the back of the -- in the background of the picture to the right, the flotation cells lines lead and zinc and some of the other progress in the flotation area, thickeners area and reagents section. So with this, I will hand it over to Guillermo Gastélum. Thank you.

Thank you, Tomas, and good morning or afternoon, everyone. I too look forward to the day we can all meet in person. It is a privilege to have been appointed as Vice President of Exploration of Fresnillo. Fresnillo has a considerable exploration portfolio, and I look forward to keeping you all up to speed as we capitalize on it. Given my history with Fresnillo and my understanding of our asset portfolio, I am pleased to say it has been a smooth transition from my predecessor, David, to do all new elements. Before we start reviewing the resources and reserve figures, I would like to say that I have 3 key priorities for our Brownfields exploration drill programs: first, converting resources into reserves; second, increasing the total resources, of course; and third, refining the geological and grade distribution models to improve the certainty for short and medium-term mine planning. Let's go to the next one, please, next slide. In silver, resources were up slightly, mainly due to the positive exploration results at Saucito and Ciénega, which mitigated the decrease at Fresnillo resulting from higher cut-off grades. It is worth noting that resources at Guachichil were not included within the silver and gold resource figure this year following the completion of the layback agreement with Orla Mining in December 2020. Clearly, excluding the so-called drops, we will have seen higher increases across the board. Reserves were down 5.5% to 457 million ounces, which represent 9 years of equivalent production. This was mainly due to mining depletion at Fresnillo and San Julián with design changes at San Julián Disseminated Ore Body and the Saucito gain offsetting the Fresnillo depletion. We took a number of actions during the year. We continued to work towards a standardizing and improving our resource and reserve estimation processes. We are strengthening our dedicated cross-functional ore reserve team and we have also initiated engineering studies at our operating assets, including the modeling of geotechnical and hydrogeological conditions and costs, assuring the monthly input of data to update the resulting model and reductions will continue in 2021 and beyond. Next one, please. In gold, resources were stable at 39 million ounces, with reserves down 9% to 8.4 million ounces, still representing 11 years of equivalent of production. This reduction was mainly due to mining depletion at Herradura Noche Buena. Furthermore, resources at Herradura were impacted by the application of a more stringent deal of technical and cost considerations, resulting in an updated smaller resource pit shell. However, some of the ounces lost from the pit were incorporated into the resources of the underground Centauro project. This, together with good exploration results there led to 17.5% increase in gold resources at Centauro. Next one, please. Turning to our exploration pipeline. The identification and development of new mines, such as Juanicipio are essential to the long-term strategy of the group. So pretty soon we're going to see Juanicipio on the top of the triangle you're seeing. Despite the pandemic and our focus and on the continuous improvement of our existing operations, exploration activities have continued to take these, not only in Mexico, but also in South America. And we have increased the exploration budget for 2021, following the planned decrease in 2020, which was in fact exacerbated by COVID-related restrictions. Although our focus remains on brownfield exploration, as I discussed before, our renewed effort will be made in greenfield discovery and development in under-explored district where we are already present and where we see significant exploration potential. We are currently exploring several agreements of this type greenfield projects of this type in Mexico, Peru, and Chile, whose exploration potential is in line with the strategy of growth strategies. Let's move on to the next slide, please, Slide 29. I'm pleased to say that 2 new gold projects have moved closer to reality over the last year. The potential mine at Rodeo is on track for both approval in mid-2022. We are currently consulting with local communities on the permitting process while our exploration and project development teams are planning a detailed road map to take this project to the prefeasibility level. Although Rodeo will be a relatively small mine with the initial operation in a life of around 7 to 10 years, it offers a number of advantages. This includes good metallurgical characteristics in oxide ores, low stripping ratio and expected low CapEx because we intend to refocus existing mining equipment from Noche Buena, which, as you know, it's near the end of its life. Developing the potentially much larger mine at the receivable will require more CapEx mainly related to the building of roads and infrastructure, but we are now increasingly confident that Orisyvo will join our portfolio of operational mine in the next few years. At the Guanajuato world-class district, 21.3 kilometers of coal were drilled in 2020 to increase both the total and indicated resources. We will continue our exploration program there, as we have had some promising results and exploration potential remains open. Having said this, I will now hand over to Mario, who will provide a financial update.

Thank you, Guillermo. First of all, I would like to apologize because I understand that the slides that you are seeing in your screen are coming out very, very blurry. So in my case, I have a lot of numbers, and they are quite small. And what I suggest you do is go directly to the PDF presentation, access that. So you can follow me during the presentation. Otherwise, it's going to be very difficult because, again, the slides are showing very, very blurry, and the numbers are quite small, and it will be difficult for you to follow me. So again, please, if you can follow me in your PDF slide that you have available. Okay. Let's move to the income statement, please. Here on Slide 31, we are showing the income statement for 2020 as it compares to 2019. And as you can see by the different levels of profit, which are outlined in yellow, it was a very good year, financially speaking. Gross profit went up by 90%. Operating profit went up by 278%. Profit for the period went up 82%, EBITDA went up 73%. I would like to spend some time with a couple of lines, which I consider to be the most important ones. Starting with adjusted production cost. And for that, I would like to go to Page 32 of the presentation, where we show a rainbow chart, which we used to analyze the variation from 1-year to the other. On the far right-hand side, you have a green column, which represents the total variation of $93.9 million lower compared to last year. If we go to the left-hand part of the graph, you will see the 2 main reasons, which are pointed out in Column 1 and Column 2. In Column 1, you see the effect of the lower volume being processed at Herradura as a consequence of the COVID-19 partial stoppage that we have for approximately 6 weeks in the first quarter of the -- in the second quarter of the year. Again, that was due to the government has been asked to partially stop operations at that mine. So we incurred less variable costs, which are shown in the solid part of the bar #1 and the small little part in that bar of $8.3 million is the fixed costs that we continue to incur mainly related to wages, salaries, contractors that we did not buy. We didn't fire anyone during the pandemic as we incurred those fixed costs, but we reclassified those costs as unproductive costs and were taken out of the adjusted production costs. Another important reason for the decrease in adjusted production cost has to do with the evaluation of the Mexican peso. And for this purpose, we basically use the average exchange rate. And in 2019, the average exchange rate was MXN 19.8 per $1, whereas in 2020, it was MXN 21.5, which represented an 11.6% devaluation of the -- average devaluation of the Mexican peso and that had a total favorable impact of approximately $66.6 million. Now if we go to the adverse part of the graph, which are shown in the red bars, the main reason for the increase was the additional development works and the additional maintenance that we had during the year compared to 2019. As you know, for us, in order to keep our mines operating efficiently, we needed to do more development and do more maintenance. So that represented an increase of $49.4 million, which partially offset the benefit of the favorable variables. And that's how we got to the $93.9 million decrease in adjusted production costs. If we can now move to Page 33, I would like to spend a little bit of time explaining the variation in terms of gross profit. And again, on the right-hand side, you have the green bar, which represents the increase of $417 million in terms of gross profit. And clearly, on the left-hand side, you can see the 3 main reasons for that or favorable reasons for that. Firstly, the higher silver and gold prices. In the case of silver, the average price in 2019 was $16 per ounce, whereas in 2020, it was $21.3 per ounce. This represents a 32.3% increase. And in the case of gold, the average realized price in 2019 was $1,418 per ounce whereas in 2020, it was $1,782, a 26.4% increase. So by far, this was the most important reason behind the increase, which represented $510 million. On second column, we show the effect that the reassessment of gold inventory at the Herradura that had on the income statement, on the gross profit. I'm sure you remember that we reported that we have found additional 119,000 ounces on our leaching pads, which were not accounted for in our inventories, on our physical inventories. So this generated a positive effect of $91 million. And the third factor, which I already mentioned, was the devaluation of the Mexican peso, which we touched on the previous slide. On the adverse side, if you move to the right-hand side of the graph, you will see that the main reason -- several reasons behind which, let's say, mitigated the favorable effect that I just described. Firstly, the increase in development works and maintenance, which I already spoke of when I spoke about the adjusted production costs had a negative effect of $49 million. On bar 10 you see the effect that the lower ore grades that we're finding as the Herradura dynamic leaching plant at San Julián Veins and Ciénega those lower ore grades had a negative effect of $47 million. The decrease in volume that I spoke about in our adjusted production cost rate at Herradura which lowered the adjusted production costs. In contrast, had a negative effect when we talk about gross profit, which we didn't have or did not -- were not benefit by due to that lower volume process was almost $46 million. The higher treatment and refining charge, which are shown on bar #8, had a negative effect of almost $36 million. Here, let me just briefly tell you that premium charges in the case of lead concentrates, went up by 51%. And in the case of zinc concentrates, it went up by 18%. Also silver refining charges went up by 9%. So all of this together represented approximately $36 million negative. So with this, I hope you get a sense of the reasons, the positive and negative reasons behind the increase in the gross profit. If I may, I would like to go very quickly back to the income statement on Page 31 so I can continue moving down from gross profit. You will see that the variation in gross profit, again, was $417 million, and the variation in operating profit was $478 million. And the main reason for that was the lower exploration expenses that we incurred in 2020 versus 2019. Here, at the beginning of 2020, we didn't know exactly how the year was going to look at the beginning of the year, we thought it was going to be a very tough year. But fortunately for us, prices have increased substantially. But back then, given that uncertainty, we decided to cut a bit the budget that we already have to find for exploration expenses. And also, the second reason for that was COVID-19 did not allow us to access certain areas that were targeted for the year. On Page 47, the annexes, if you're interested, you will see a detailed breakdown of the exploration expenses. Now if we continue to move down, and if you can please go to the first column, I would like to talk about some of the financial aspects that we saw during the 2020 year. Starting with the Silverstream. The Silverstream, we have broken down into 2. The Silverstream amortization, which is basically the unwinded of the -- the unwinding of the discounted values, that had a positive effect of $47.1 million. And this would have happened, no matter what, because this is not the part that is related to the update of certain variables. That bar is shown in the Silverstream revaluation, which again is an update of certain variables, which are incorporated into the model when we led you the Silverstream. Basically, the price of silver, the discount rate, among others. And this showed a profit of $23.9 million basically due to the higher silver price and the effect of the discount rate that we used and the LIBOR rate that we used in terms of the discount rate. Below that, you have the finance income expense of $129 million, which shows a very important increase compared to what we had last year. And the reason for that $82.6 million increase was behind the restructuring of our debt. As you know, in September of last year, we issued a new 30-year bond. And part of the profit is coming of the $850 million new bond were used to buy back part of the bonds that were outstanding and due to mature in 2023. So in order to buy back those bonds, we had to pay a premium based on market price, that premium was approximately $60 million. So that's the main reason behind that increase. And we knew that we were going to incur that additional cost. But considering the fact that we were looking at historical low interest rates and also historical low spreads, we decided back then that it would be economically beneficial for us to incur that cost compared to waiting until 2023 until the bond matured and under different market conditions, most probably with higher interest rates and higher spreads we believe -- firmly believe that the benefit of doing this earlier, more than compensated the cost that we had to incur. And I'm sure you've seen that the base 30-year bond has increased substantially since September. So we believe that it was a very good decision. In terms of the foreign exchange gain and loss, the $40 million loss there that you see is basically related to the effect that the devaluation of the Mexican peso had on certain accounts receivable that we have denominated in peso. Basically, value-added tax that the government owed back to us, and which is denominated in pesos were worth less dollars, and that's the main reason behind that foreign exchange loss. Moving down to mining rights and income tax expense. You will see that the income tax expense of $140 million contrasts very much to the $8 million tax credit that we had in 2019. Remember, in 2019, we had a very important revaluation in that year, which had an effect on the deferred taxes. And at the end of the day, we registered a tax credit of 8. This year, it was the opposite. And that's why you see that important change from 1-year to the other. With that, I would like to move to the cash flow statement on Page 35. Here, you can see on the bottom part, the bottom -- on the first column at the bottom, you can see that we ended this year just above $1 billion, $1.07 billion, which represented an increase of $733.8 million. The main sources of that where, of course, the cash generated by operations, which was $1.16 billion, an increase of 70% compared to last year. And another important inflow of cash was the, like I said, the debt restructuring. Net of the repurchase of the older bonds we obtained $350 million together with the capital contributions, mainly MAG silver contributions to the Juanicipio project for $63.8 million. And the cash flow generated by the of Silverstream of $33.8 million. I would say those were the main uses, I mean, the main sources of cash. In terms of uses, by far, the most important one was the CapEx, purchase of property, plant and equipment of $412 million. Also, the dividends paid for $105 million. Remember what we are seeing here is the final dividend that was paid in the first half of the year, the final dividend for 2019. And the interim dividend for 2020, which was paid in the second half of the year, totaling $104.7 million. I think those are the main issues behind the cash flow statement. Lastly, on Page 35, the balance sheet. No major comment here, continue to have a very solid balance sheet and financial position. And with that, and subject to any questions that you might have later on in the Q&A section, I will pass it on to Octavio Alvídrez for the outlook.

Thank you, Mario. We can go to the following slide, please. Here, you will see the silver production trending up in -- well, I would say very much all of the metals; silver, lead, zinc, but gold. In the case of silver, we have a step-up in production expected in 2022. This comes from a year or a full year production of Juanicipio and also the Pyrites plant, but glad to say that we are expecting a bit more production out also from Fresnillo and Saucito. Then on the increased production of lead and zinc, as we mentioned before, we expect more production of base metals at depth in Fresnillo and Saucito and also a bit in Cienega and also the contribution of Juanicipio on these 2 metals. And as far as gold, we see a trend down. You know that Noche Buena is out of reserves in 2023. So that's the largest impact there. But glad to say that the 2 projects that you will see in the following pages that are coming out of our growth pipeline are on the gold side, one Rodeo and one Orisyvo as well. What else can I say here? Well, Herradura is also producing a bit less from lower tonnage of ore deposited in the following years. And that's about it. The following page, please. You will see here that the -- in terms of CapEx, 2020 was a very special year because all of the effects that we were mentioning in our presentation. Very much what we did not deploy in terms of CapEx in 2020, we are deploying it in 2021. You will see the largest portion of growth CapEx there related to mostly Juanicipio. And then in the following years, '22 and '23, very much sustaining CapEx for all of our operations. Next, please? In terms of the timetable for the growth pipeline, you see the 3, first 2 very much accomplish the Pyrites plants and the Fresnillo base optimization flotation plant and then Juanicipio that we have talked about. And on the bottom part, you have the 2 new projects and the expected timetable to be developed. Rodeo, which we have mentioned before, is quite handy and not complex project to develop. Very much the size of what was Noche Buena in the past. And then Orisyvo, our largest ore body, more complex project to bring on stream. You'll see that the CapEx numbers expected according to the pre-economic assessment that we've done in these 2 projects as well as the production expected for each one of those in terms of average production for the mine life. Next, please. And just to conclude, before going to Q&A, of course, COVID has clearly been the core focus for the management team and the company as a whole. I believe Fresnillo has weathered this storm well and above all, we remain faithful to our corporate purposes. We will continue to do all we can to support our people, our community and our country as we enter into a recovery phase from this pandemic. And just to recap, I mean we talked about stability in our operations. The plan deployed for Fresnillo is giving us first good results. We are expecting a little bit more production there and lower cost as all the infrastructure is coming to fruition there. Saucito as well in the coming years a bit more production. Then our largest project that we are very excited about Juanicipio, to be completed this year and commissioned and then a full year production in '22 and onwards. As we mentioned, despite the fact that we have lower gold production in the following years, 2 projects in our pipeline quite robust, quite exciting. Of course, we have seen also the increase in the margins that -- across all of our operations and a decrease in all-in sustaining cost across all of core operations, but Noche Buena, the CapEx also coming down in the following years. So with that, I believe we can expect improvement in the financials and the economy of the company, to continue with the efficient and trying to capture as much synergies across all of our operations as we can. And with that, we can go into Q&A, please.

[Operator Instructions] The first question comes from the line of Alan Spence from Jefferies.

I've got 3, but I'll just take them 1 at a time. And the first one is around the silver guidance for 2022 and 2023. In the presentation, you hopefully provided the nameplate assumption for 2022 for Juanicipio, I'm assuming it's 100% for 2023. But are you just multiplying that by life-of-mine average production rates? Or is there anything you're kind of including within those years about perhaps higher or lower grades first reserves in the early years of its mine life?

Okay. Thank you, Alan. No, not really. I mean we are not putting those graphs, the expected average production for the mine life. As Juanicipio, and we have talked about this before, is the same behavior as in Fresnillo and Saucito. In the higher part of the veins, we have higher silver grades and at depth, of course, we have a higher content of base metals and lower silver grade. So for '22 and '23 is what we are expecting according to our latest resource reserve statement, Alan.

Okay. And the second one is around costs. And when we think about them on a dollar per tonne basis for next year, I think in your concluding remarks, you called out Fresnillo, but what other mines do you think there's a good opportunity to lower that dollar per tonne cost in the next 12 months?

Well, I can answer your questions related to the investment we've done or we are doing still in our operations. In Fresnillo, as we have in one of those tables, we have a large set of actions with the objective of increasing the efficiency and lower the cost. As Tomas was explaining, I mean we have the San Carlos shaft deepening that would give us the possibility to haul out the ore from the mine instead of now a share of production coming through ramps. The tunnel boring machine as well, I mean, is giving us the possibility to develop to the West at the 695 level, and that would give us the possibility to prepare 695 up some of the blocks with better grade that we have in Fresnillo. So all of those investments are coming into fruition and will give us a better cost structure in Fresnillo in the coming years. And then Juanicipio, of course, we know that it has a fantastic cash cost and all-in sustaining costs. It's a new operation as well. And also, I talked about the Pyrites plant. As we have in one of those slides, expect that $2.5 per ounce of silver produced. The rest of the mines, we continue with the cost control effort as it is in Cienega and San Julián. In San Julián, we have -- just to talk about San Julián, in the disseminated ore body we do not have any more development to do. So that also will contribute to a better cost structure there in San Julián. The rest of the operations, I can also give you a comment on Herradura. On Herradura, probably the opposite. We will have a higher stripping ratio in '22 and '23, then leveling out in '24, so a bit more cost expected in Herradura.

Okay. Really helpful. And my last one is for Mario. Inventories seemed quite high at the end of the year. Was this just kind of being cautious on 2022 and bulking up on the likes of reagents? Maybe that's completely wrong. If so, tell me -- and do you think there's an opportunity to perhaps unwind some of those in the next year or 2?

I'm sorry, there was a slight noise and I couldn't quite catch your question. Was it about inventories?

Yes. Just the year-end inventory seemed quite high. I was wondering if that was due to COVID-related caution in terms of stocking up on reagents and other items and -- or if that's a wrong assumption? And if maybe that line item could unwind in the next year or 2?

Yes. That will unwind in the next year or 2. And also bear in mind, the effect that the 119,000 additional ounces had on the inventories. But I would say that, that was one of the reasons why we saw the increase in inventories. And if you want, I can send you a detail of the variation [ turn ] in the inventories, so you can see the effect of the additional 119,000 ounces.

Yes. I would like that, if you could send that later on.

Yes, of course.

The next question comes from the line of Jason Fairclough from Bank of America.

Look, a couple of quick questions from me and they're related to the reserves. Could you just talk to us a little bit about the prices that you've used to calculate your new reserves in both gold and silver and the extent to which that's changed from the last time you calculated your reserves?

Guillermo?

Yes, I can comment. Thank you, Jason. The prices used this -- in 2020 for resources and reserves were $1,400 per ounce of gold and $1,750 per ounce of silver for most of the -- or for all of the operations. At Herradura, we used $1,600 for both resources and reserves. In 2019, we used [ $250 ] per ounce of gold and 17 -- if I remember correctly. Just correct me if I'm wrong, will be -- 2019 silver price I believe, it was $17.

Sorry, and what was the gold price in 2019?

$1,250.

$1,250. So your gold price went up, but the reserve still went down, yes?

Yes.

Okay. Just a follow-up question, if I could. So what is your confidence on these new numbers, right? Because I guess the real question we've had in the market is whether you would get the dilution under control at the Fresnillo area mines and ultimately, you will get back to mining at reserve grades. Or should we be thinking about just permanently mining lower grades at the Fresnillo area mines? Can you give us a bit of an update on that?

Yes, we can, Jason. Yes. So we have large confidence in our resource and reserves. I mean every year, we audit by a third party, SRK. Every time the protocols and the requests are more stringent. This year -- this past year, we have embarked in strengthening the -- all the protocols in terms of the -- of the cost calculation, matching the cost by 2 models, one is top-down and the other is bottom-up. Also part of the loss that we have on the gold side in terms of resources and reserves has to do with design criteria for the mine that used to be not taken into account. So that took part of the reserves that we used to have. I mean all to say that we have a large confidence in our resource and reserve process and the statement. Now in terms of Fresnillo, we have had a good result, I would say, in 2019 and 2020 because as we mentioned, I mean, we have been able to accomplish our objective and our guidance in terms of guidance for grade. And as we said, in the case of Fresnillo, in the following years and according to the sequence in the operation we have, I talked about the tunnel boring machine developing to the West and being -- giving us the possibility to prepare those blocks up of 695, that will contribute -- will bring a higher grade. So as you can see in the particular slide in Fresnillo, the grade is coming up in 2021, we have there in the slide, but '22, '23, '24 and '25 will be the same trend giving us a possibility to closing the gap to the resource and reserve statement. We also will give you an update on the dilution control. And as we mentioned, if we were not to achieve our objectives in terms of dilution, that would mean that we would have the same number of ounces, but with lower grade -- I mean, but our objective, as I mentioned, is to accomplish what we have planned for the operation.

The next question comes from the line of Amos Fletcher from Barclays.

I have a few questions. First one was just on -- a little follow-up to Jason's, I guess, with respect to the reserve base. Is it still the case, you haven't got any proven reserves? And can you explain why you don't and what that means?

Do you want to answer, Guillermo, and I'll complement you?

Yes. I can do that. Yes, with the -- all of our reserves are still probable, but we have received a number of requests, more stringent ones that Octavio mentioned from our auditor, and we have been involved in a really strong and intense process of achieving -- getting this -- meeting this requirements of our auditors. So we expect to be returning to having proven reserves this year by November 2021, when we expect to finish the resource and reserve estimation. So for reaching that, for meeting these requirements, we've enforced the dedicated resource and reserve team from 6 members in 2019 to 23 in 2020, and it will be strengthened further. So what we are doing is to accelerate the development of this missing reserve elements that have been requested by our auditors. We have initiated the studies to fulfill them all, which will be basically the development of geotechnical and geological ventilation. And as Octavio mentioned, at cost multiples, which are very precise, which will have -- the impact of all these studies will be the return to having proven reserves.

And just to complement, Amos, thank you for your question. I mean from the start, we defined a 2-year program, 2019 and 2020 to come into proven reserves again. So we are expecting to have proven reserves across all of our operations next year, for the next year statement.

Okay. Understood. And then sort of following up on that. The gold reserves at Herradura, they went down despite the gold price assumption going up from $1,250 to $1,600. Can you explain why that is?

Yes. The main reason for it is the application of more strict geotechnical and cost considerations. whose application led to a resulting updated smaller resource pit, but the geotechnical studies are still in progress, will be completed in 2021, and we will see the fruits of its completion by the end of this year. So basically, it's because of this cost and geotechnical considerations.

Okay. Understood. And then I wanted to ask about the fact you said you booked $72 million into EBITDA from inventory gains from reassessing Herradura's recoverable production. Can we expect any more of those type of gains to be booked into the P&L in 2021?

Not in 2021. This comes from the inventory of the ore that we have placed over the life of Herradura, the 22-plus years of operation at Herradura in pads 1 to 13 -- 1 to 12, sorry. And of course, when you have a new operation, you start with what the metallurgical tests are giving you in terms of recoveries. If you start recovering more, as we have in this case, then you update your recovery, estimated recovery. And that's what we have done in this case. For the next 3 to 4 years, we don't expect new inventories to come up as we change the recovery -- estimated recovery, in this case, for the inventories that Mario was talking about.

And just to complement your -- just to complement what Octavio said, in terms of the 119,000 ounces that we found in 2020, about 80% of the benefit was accounted for in that year. We will continue to have a small benefit this year, very small compared to the one that we had in 2020 derived from the 119,000, and it will be diminishing in the following years.

Okay. Understood. And then last question was to ask if you can give us some guidance on constant currency cost inflation for 2021 on a dollar per tonne mill basis?

You're muted, Mario.

Sorry about that. As you know, we do a calculation of our inflation cost based on our own basket. And what we expect to see next year is an inflation of around 5% or so, that is assuming an exchange rate of about MXN 20.3 per $1. Now I think the exchange rate is one of the most difficult variables to try to predict or to estimate for the year as it depends on so many factors that are very difficult to predict. It could go anywhere. But assuming the peso stays around MXN 20.3, that would mean a revaluation of the average exchange rate of approximately 5%, which will have an impact on our cost based on the peso-denominated part of the adjusted production cost. Considering all of that, we should see an inflation based on our basket of 4.8% or around that area, 4.7%.

The next question comes from the line of Daniel Major from UBS.

First question, just a quick one following from Jason's and other questions on the reserve grade. What is the latest reserve grade at the Fresnillo and Saucito mines? How has that changed year-on-year? I don't think that's included in the statements. And secondly, just to be really clear on the difference between your confidence in the reserve grade versus the mine grades, is it correct to say that you factor in your stated milling capacity that you will process development or throughout the life-of-the-mine plan, and therefore, by definition, it's impossible to achieve reserve grade?

Do you want to talk about that one, Tomas, about the mine grade versus the reserve grade?

In terms our constant level or -- I mean, yes, like it has been explained. I mean we have improved overall our reserve calculation processes in all of our mines. And that is also linked to better short- and mid-term mine planning at all of the mine sites. So that is giving us a greater level of confidence overall in our processes. As for development ore, so that's accounted for in our estimations of mining schedule. However, the dilution control also applies to that development ore. So whenever we talk about controlling dilution and -- so that's having an impact on grades, that includes development ore.

Right. But just to be -- if you are processing development ore through the plant that is below the reserve grade because of dilution, then you can't achieve reserve grade? Is that the wrong way of thinking about it? Because that's the message we've always had previously, is that you consistently plan within the mine plan to process ore and a proportion of development ore through the plant. So when we calculate the plant capacity tonnes by the grade, if you're producing some development ore, then you can't achieve reserve grade? Is that the wrong way of thinking about it?

Well, it certainly has an impact. And -- but -- and I don't have the specific numbers, but I would say that development ore, the percentage of development ore going through the plan is very low compared to coming from actual stopes. So yes, it would have an impact. However, I do believe that based on that low percentage compared to ore coming from stopes, the impact should be minimum. And we -- when we continue applying our dilution program and our reserve calculation processes are fully mature, we should be mining close to reserve grade.

Let me expand on that, Daniel. Thank you for your question. I mean as we mentioned, yes, of course, we do have reserves and resources calculated with certain inputs. One of those, very important is dilution, of course. And we mentioned a couple of years ago that we were having problems controlling the dilution in the case of Fresnillo and Saucito because of narrower veins. While we delve to study the case in great detail, and we are achieving a lower dilution in -- when we mine Fresnillo and Saucito, if we don't achieve what we are targeting as objective and would be the dilution we input for our resource and reserve calculation, then we would need to change that input to a higher dilution, and that would mean -- what would that mean? Number one, we would still have the same number of ounces if we believe that those ounces are economic to be mined out, but we will have the same number of ounces. But of course, we will have a negative effect in terms of cost. What we are experiencing in these 2 years in Fresnillo, as we mentioned, is in 2019 and 2020, very much achieved the guided grade. And then what we have in our sequencing for the mine in Fresnillo and according to our geological model is the following years, '22, '23, 24 and '25 higher-grade blocks, and that would mean that, that grade would -- or that trend in the grade would continue, gradually being increasing in Fresnillo. In Saucito, it's a different story, and it depends year to year to what we are planning to mine. So we will update you in every year about the respective grade.

Okay. Great. Second question, on costs. I guess you've provided some details on the sort of cost inflation, et cetera. If we just cut it back to group adjusted production costs, your $1,079 in 2020. You provided, I think, last year, some guidance on this number on a 12-month forward basis. What should we be thinking on that number? Is it that number plus 5%? Or can you give any explicit guidance on the group level basis for adjusted production cost for 2021?

Yes, of course. In general terms, yes, we should be expecting that additional 5% cost inflation. And in absolute terms, just bear in mind that there will be operations running for the full year compared to last year. For example, for Juanicipio, where we only have few months or a few weeks. This year, it will be running the full year and also the Pyrites plant at Fresnillo. So in general terms, I would say, yes, 5%, plus the additional volume for additional months of operations for those that started last year and are fully operational this year.

Got it. Okay. So perhaps closer to -- on the $1,079, maybe closer to high single-digit, 10% increase in that number year-on-year?

Correct, more or less.

Okay. Yes. Very clear. And then final question on CapEx. You've, I guess, got CapEx stepping up a little bit in 2023. I'm assuming that's kind of scheduling. But if we think about the business as a whole following the ramp-up of Juanicipio and I appreciate there's always going to be annual fluctuations in sustaining CapEx. But is there any update on that level? I think previously, you'd spoken to around $450 million mark. Is there any updates on where you would see that sustainable kind of group CapEx number post 2023?

Yes, we believe that's sustainable, Daniel. And as we mentioned in the vein system [ actually at the ] Juanicipio, we more or less can project what we've had in past years in Saucito or even at Fresnillo, $50 million to $60 million, but then you would have to take into account, if we are doing a major CapEx deployment like shaft sinking or more ramps to going to depth or so, that would increase. But a good number is between $50 million and $64 million for Juanicipio in the following years.

So is that $50 million and $64 million? So group CapEx?

No, no, no. Group CapEx is $50 million and $60 million per operation. So the $444 million to $485 million is -- and up to $500 million is like a good number for the group.

The next question comes from the line of Tyler Broda from RBC.

Most of my questions have been asked. I was just curious on Orisyvo. If you could just go through maybe a bit of detail around what still needs to be done in terms of permitting? I mean how confident are you on that side of the equation? And when would we sort of reasonably expect that to start into construction?

Guillermo, do you want to mention something about Orisyvo?

I think I didn't quite get the question, Octavio.

Okay. Tyler, yes, regarding the permitting we are expecting, look, Orisyvo is in the -- in an indigenous area in the state of Chihuahua. So one of the permits that we will have to go through is the indigenous consultation for -- to bring up a project into operation in that area. We do have in Mexico that as a new protocol for mining companies and for mining projects. We do have favorably the experience that we went through in San Julián. In San Julián, which is, I would say, in a similar area, similar zone in Chihuahua, we did indigenous consultation when we were building our water dam for the operation and it was successful. It was the first one to be done in Mexico for a mining company. So we do have that experience, but that would be one of the permits that probably would take us a little bit longer to go through. The rest are the usual, the change of land and the environmental impact assessment, as we do have in all of the mining projects. But this one in particular and -- is the one that we believe is more challenging.

And how long?

Yes, how long? Probably the best timetable is to relate that to table in Slide 39, in which we have 1, 2, 3, 4 years. And expected production, this is just to give you an idea, in 2025.

And I guess, the question being how long is construction going to take? Is that a 2-year process then, give or take [ a year? ]

Yes, probably a little bit more. We do have in the area which is quite isolated in that part of the country, we would need to bring roads, electricity and everything compared to Rodeo, for example, in which it is very well located in terms of infrastructure. But in Orisyvo, yes, we will bring to -- we will have to build and bring all of the infrastructure. So to -- for construction of the project, 2.5 to 3 years. Also one challenging piece of infrastructure for Orisyvo would be the tailings storage facility.

The next question comes from the line of Jason Fairclough from Bank of America.

Just a follow-up, guys, and thanks for your patience here. And I guess, I'm following on from Tyler. So if we look at these 3 projects that are maybe possible on a 5-year view. So you've got Orisyvo, Rodeo and Guanajuato, do you think that these actually lead to an increase in group output? Or do they more just offset depletion and lower production that we're going to be seeing elsewhere in the company?

From previous production, Jason, on the gold side, it would take us probably back to what we were doing where we were producing close to 1 million ounces per year. So as you can see, the projection that we have there in 2023 is up to 600,000 ounces. And then if we think Rodeo can do 140,000, 150,000 and then Orisyvo 150,000, then with Guanajuato probably that would offset going into the 1 million mark again. In terms of silver, though with Juanicipio and the -- it will be probably to that level, an increase in case of Guanajuato because that's a silver and gold project.

Our final question comes from the line of Alfonso Salazar from Scotiabank.

Yes, thank you for the presentation, and most of the questions I'd have been answered by now, but I have just 1 follow-up -- 1 on energy. As you know, there is an energy law now under review in Congress and is now at the Senate and already passed in the lower house. So I just wonder, what are the implication of this law as it is to your clean energy targets? What measures do you need to take? Or what changes you may need to make there -- to reach your long-term goals in that regard in clean energy? Do you expect or you can anticipate higher costs in the future because of the law? Any comment on that would be very helpful.

Yes. Thank you. That's obviously a challenge in our country and the headwinds that I mentioned when I covered this aspect very briefly. Of course, we are in the start of this, let's say, initiative by the government. And I would probably answer in 2 parts. One, the facilities from where we are sourcing the clean energy have already been built. So those are built, and those would not be subject to this new initiative. However, also, there is a consideration in terms of the CFE, the utility from the government supplying energy despite the fact that you may have a less costly, more efficient and cleaner energy source. So we are, of course, going into the legal front on that regard. But those are the initial steps, and there is not much to say, but we will defend somehow our rights to source our operation from cleaner and less costly energy.

We have no further questions on the line. So I'll hand over to your host to conclude today's conference.

Okay. Thank you very much. If you have further follow-up questions, you know that you can get a hold of Gaby Mayor and Patrick in the London office as well as ourselves in -- any time. Thank you very much.

Thank you for joining today's call. You may now disconnect.