Fresnillo plc (FRES) Earnings Call Transcript & Summary

Hello, and welcome to the Fresnillo Half Year '21 Interim Results. My name is Monique, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, CEO, Octavio Alvidrez, to begin today's conference.

Thank you, Monique. Good morning, everyone, and thank you for joining us today. I'm joined, as always, by Mario Arreguin, our CFO. He's also with me and pleased to have him, Tomas Iturriaga, our COO; and Guillermo Gastelum, our Vice President of Exploration. Once again, I have to apologize, we cannot be there in person. But when travel restrictions change, we look forward to seeing you over there in person. The slide, please. As always, I need to point out to our disclaimer before I begin, but I would like to quickly move to set out what I will cover in this presentation. On the agenda -- in terms of the agenda we will have today, I will take you through the key operational and financial highlights in the first half and address some of our key recent HSECR initiatives. Tomas then will provide an operational update as well as an update on our development projects. Guillermo will provide an update on our exploration program, and then Mario will provide a financial update. I will then conclude and provide some comments on the outlook. We then look forward to your questions. You will be familiar with our investment case. I believe it remains compelling and consistent as it has been over 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 ounces of silver resources and nearly 40 million ounces of gold resources. We have a strong EBITDA margins and low costs and remain very focused on running our operations efficiently. We take a disciplined approach to investment through the cycle. We have a proven track record of completing our projects. We also have a solid project pipeline of new projects and prospects in Mexico, in Peru and in Chile. But this year, and last year, of course, COVID showed how important our role is in the communities. We implemented a huge number of measures to help not just our people, our workers, but our communities and indeed their regions, the families, key part of our license to operate. And as always, safety, of course, remains our priority. Finally, we have a very strong balance sheet. We have restructured our debt last year, and we have a strong cash position, positive free cash flow, unchanged consistent dividend policy. Turning now to operational highlights in the first half. I want to go through the previous reported operating numbers in the detail here, as they were published last week. We reported a solid operational performance in the period, with silver production up over last year, driven mainly by a sharp improvement in all grades at San Julián, as we have gained access to higher grade areas at the core of the ore body. We continue to process development ore from our Juanicipio project, where construction of the processing plant remains on track for commissioning by the end of the year. The easing of COVID-related restorations also resulted in gold production increasing over the first half last year. As a result, we are maintaining our full year production guidance range for gold and for silver. In terms of our key development projects, construction of Juanicipio is on track, as mentioned, and the second phase of the optimization of the Fresnillo mine beneficiation plant was concluded first half '21 is now fully integrated. And as we guided last quarter, final permitting inspection for the Pyrites Plant was delayed due to COVID restrictions for final authority inspections, but we still expect this in the third quarter. Finally, a couple of things to be aware of going forward. Firstly, the regulatory changes, including the outsourcing law and energy reform, which may have some impact on personnel and costs. Secondly, as we have seen with the Pyrites Plant, permit is taking longer than what we are used to. On Slide #8 and turning to the financial highlights. We are reporting a strong set of numbers for the first half driven by higher production and, of course, higher commodity prices. Those factors have -- were reflected into higher numbers across the board, with profits and free cash flow all up heavily. Our balance sheet remains a major source of strength with liquidity of over USD 1.2 billion. And we were pleased to confirm an interim dividend of USD 0.099, in line with our stated policy. Moving to briefly HSECR update on Slide 10. We do continue to closely monitor the evolution of the pandemic in Mexico. Although working restrictions have eased, we are still taking huge care to look after our people with all the preventive measures, implementing, monitoring, social distancing, hygiene measures throughout the operations, and this have been successful to prevent any major spread. Just recently, we have been able to achieve with the authorities our operational centers to be defined as vaccination centers, and we have increased substantially the number of our people with full vaccinations. We are also progressing our other safety initiatives. The strong I Care, We Care program is still being brought out, and it's been a material success in terms of implementing and leading a true safety culture throughout the organization. Our work on improving our emissions performance is also ongoing. We work towards the organization or operations. We are currently undertaking a rigorous analysis of further decarbonization strategy and exploring science-based targets. We are due to have more information relating to this topic with our full year results. Our community relations efforts have really progressed during the pandemic and beyond. As I touched on last time we presented, the pandemic has highlighted the huge role we as a business play with our local communities, suppliers, contractors, our people, our families, the importance of working together with all stakeholders and while it has also served to strengthen relationships and partnerships. I will now hand over to Tomas for him to provide a more detailed update on our operations. Please, Tomas.

Thank you, Octavio. I will provide a short update on safety performance and then give a more detailed review of our operations. So we continue to make positive progress in our ongoing efforts to improve safety across our operations. As you can see, the trends are positive in both total recordable and lost time injury frequency rates have seen continued improvements. Our I care, We Care program has been really effective not just in offering practical changes, but also in installing the safety culture in our operations. Our effective strategy to prevent fatalities and serious injuries is based on the management of high potential incidents and implementation of critical risk control protocols, with more than 1,200 people already trained to participate in the identification of high potential risks and application of corresponding control protocols. We recognize we still have work to do, but we will continue committed to the safety of our employees and the prevention of fatalities and serious injuries as our #1 goal. Next slide, please. So turning to the individual mines and starting with Fresnillo, I'm pleased to say dilution is improving. And as a result, we are seeing some great improvement from 186 grams per tonne to 202 grams per tonne year-on-year. We had some temporary issues to deal with in the period, impacting tons mined, such as temporary ventilation system failure, shaft and ramp-up viability issues and the presence of excess high-temperature water requires some special pumping to be done and additional ventilation in the map. All this is fixed now. In the positive side, our development meters went up 5% compared to the same period last year, and we are on track to reach between 3,300 and 3,500 meters per month development rates at the second half of the year. Next slide, please. In Saucito, silver production is compared -- is down compared to same period last year. And though this was in part expected, and we are anticipating a better second half of the year. As with the Fresnillo mine, we saw some temporary impact of excess high-temperature water, prompting the need for additional ventilation and geotechnical issues reported early in the year. Again, all these matters have been addressed successfully, and a better second half of the year is expected. Cost per tonne in Saucito were up, but gold, lead and zinc byproducts production have increased, which has had a positive impact in our cash cost. The sinking of the Jarillas shaft advance and remains on track for completion at the end of 2023. Moving to San Julián in the following slide. A very strong period in particular for the disseminated ore body operation. Part of the positive performance was expected due to our regaining access to higher-grade areas, although it has exceeded our own expectations. We saw a very positive grade variation of the geological model versus actual grades mined. And during the second half of the year, we will be completing a geological remodel of the disseminated ore body high-grade zone to be able to better estimate ore grades going forward. In addition to the higher grade benefit, our team at San Julián did an excellent job recovering from a structural issue and a temporary regional power outage early in the year. Moving to Ciénega. Very much business as usual here. No major issues to report. Our exploration programs continue to advance in the district, with some interesting results. Due to byproduct credits, our cash costs are much lower at Ciénega. Moving to Herradura, where we saw a very strong performance, as we have been able to normalize our operation after COVID-related working restrictions in the same period last year. Grade and mine volumes remain consistent, and we anticipate a strong second half of the year as well. Costs also are up, as we have been mining at full capacity again, with all of our people back on site. At Noche Buena, as you know, this mine is approaching closure, though still contributing in terms of cash generation. Costs are increasing, expected in a mine going to the end of line -- life, so our focus continues to be to contain this cost as we approach the end of the life of the mine. We still expect to stop depositing new mineral on the leach pad in mid-2022, and we expect to still recover gold for a couple of years thereafter. A condemnation drilling program is ongoing as part of our closure process. Slide 19, and we turn now to our growth projects. Construction of the Pyrites Plant Phase II in Fresnillo was completed on track and budget. And 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 on travel. These inspections are required in order to provide the energy supply permits needed to operate a plant. Once the final inspection by the authority is undertaken and electrical permits have been approved, we expect the plant to ramp up to full capacity within a quarter. Given the current COVID-19 situation in Mexico, we expect inspections to probably take place in Q3 this year, and this is reflected in our 2021 production outlook. We believe we can ramp up quickly when those permits are given. Once the plant is running, we expect an annualized production of 3.5 million ounces of silver and 13,000 ounces of gold at a very competitive cash cost. Turning now to the beneficiation plant optimization at Fresnillo. As you may remember, the main objective of this project is to increase processing capabilities of the plant to deal with the higher lead and zinc rates currently being mined at the deeper levels of the mine. Phase 1 and 2 have been completed as we guided. Connection of the new processing circuit consisting of Phase 2 was carried out in the first half of the year and is now fully integrated. The third and final stage of the optimization to increase the plant capacity to 9,000 tonnes per day is under study. Moving now to Juanicipio, where construction of the processing plant and infrastructure continues progressing, with mechanical completion expected by August, empty and water testing runs by September, to then enter into full commissioning by Q4 2021. Mine development continues progressing, with a new contractor plotting to secure required development rates. Development ore is being processed at the Fresnillo beneficiation plant and will continue doing so on the commissioning of the processing facility at Juanicipio. So safety of our employees will continue to be our main focus as well as cost control in each one of the operations. And with that, I will pass it on to Guillermo.

Thank you, Tomas, and good morning or afternoon, everyone. I'm pleased to provide a short update on our exploration and development activities starting on Slide 22, please. You are familiar with this triangle, depicting a very strong portfolio of projects, showing the early stage exploration at the bottom and our operating mines at the top. Our exploration budget remains unchanged at $162 million, still focusing on the Fresnillo and Saucito district. We do see significant potential in otherwise underexplored districts where we are already present. We continue to undertake exploration activities in Peru and in Chile during the year, and we will see excellent potential in the areas where we have concessions in those countries. We are maintaining our budget forecast. As we expect, this will be weighted towards the second half as we begin with the drilling program around Rodeo, which I will come on to my next slide. In the year we have -- in the first half of the year, exploration program was very intense, so we drilled 383,000 meters across all of our brownfields and greenfield projects. As we move to Slide 23, I would like to point out what we can see in this slide. You can see our 3 most important projects. We continue to make good progress in our 2 main gold projects, Rodeo and Orisyvo. For the Rodeo project, the preoperative CapEx will be around $200 million. We target annual production in the 130,000 to 150,000 ounces gold range. The Rodeo drilling campaign is ready to go. We're just waiting for the go ahead. That is to say the land and access agreement with Tajitos and we have already environmental permit and have -- and we are working on the drilling programs -- drilling process, which is almost completed now. At Orisyvo, we're looking at conducting a 6,000 meter drilling program this year, which will be focused into technical aspects of the deposits, which, taken in conjunction with the metallurgical investigations almost completed now, will be -- will form the basis of an updated pre-feasibility study to be completed in early 2022. At Orisyvo, we are estimating a pre-operating CapEx expenditure of $430 million to $500 million with annual production in the 140,000 to 165,000 of the full range. I will now hand over to Mario to provide a financial update.

Thank you, Guillermo. And for that, I would like to go to the next page, please. In this slide, we show the income statement for the first half of 2021 compared to the first half 2020. And as you can see in the different profit levels, which are highlighted in yellow, the financial results were quite good. Gross profit increased by almost 89% or $285 million. Operating profit increased by 117% or $255 million. Profit for the period increased almost 446% or $252 million and EBITDA increased by 59% or $277 million. I would like to take some time now to touch on 2 very important items. One is the adjusted production cost, which increased by 20 -- almost 21% or $105 million, and what I would like to do is to show you which part of this $104 million was due to price inflation or to the increase in production volumes or how much of this was related to the revaluation of the Mexican peso. And the other line item, for which I would like to spend a little bit of time, is related to the gross profit to see how much of the $286 million was due to price increases in the metal prices, how much of that was due to an increase in the sales -- in the increase in sales volume. But before we go to adjusted production costs, I would like to show you the following slide. This slide shows Fresnillo's price inflation basket of goods and services, including the effect of the revaluation of the Mexican peso and is expressed in dollar terms. So in the first column, what we have there is the different items that are part of our production costs. In the second column, we show the unit price increase that we saw in the first half of this year compared to the average prices that we had in the first half of 2020. And for example, in the case of diesel, we had quite an important increase of 25.3%. In the case of electricity, we had an increase of 18%. In the case of labor and, in particular, unionized personnel, we had an increase of 14.1%. And let me be clear on this particular item. This is an item that is basically denominated in Mexican pesos, and the actual increase in wages for unionized personnel was around 6.5% in peso terms. But that, combined with the fact that we had a revaluation of the average exchange rate between the peso and the dollar of 6.6%, when you compound the 2 effects, that's how you get to the increase of 14.1%. Well, when you consider all this basket and the specific weight that each item has, you arrive at a total inflation rate of 8.56%. Again, this is including the effect of the revaluation of the Mexican peso. If we take out that effect, assuming the exchange rate had stayed at the same level that we saw last year, then cost inflation would have been, as we point out in the bottom part of this slide, 4.43%. We're showing the last column of -- which represents the inflation for the first half of 2020 because there's a quite contrasting issue here between the first half of this year compared to the first half of last year. In the first half of last year, we saw a deflation of 6.14%, which is obviously related to the fact that last year, we had an average exchange rate devaluation of the Mexican peso versus the dollar of 12.7%. And the reason I'm mentioning this is because it's important to take this into consideration when comparing costs during the first half of this year to the first half of the previous year given the contrasting events that occurred in each period. Having said that, I would now like to move to the following slide, which basically shows a rainbow chart to explain the main causes behind the increase in the adjusted production cost. In the green bar at the far right, we are representing the increase in adjusted production cost of $104.5 million. And I would like to start with columns 3 and 4, which I just talked about. Column 3 represents the impact of cost inflation, and excluding the revaluation of the Mexican peso, only including the 4.43% inflation that we just described, and that had an impact of $21.3 million itself. Now the revaluation of the Mexican peso had a negative impact of $19.5 million. So when you combine those 2 columns, you get to $40.8 million, which is the effect of the 8.56% cost inflation, including the revaluation of the Mexico peso and which basically accounts for 40% of the total increase in adjusted production cost. Now if we move to column #1, you will see the impact of the increase in volume, and this increase in volume is related to the additional -- to the higher volume that we processed at Herradura. I'm sure you remember that during the first half of last year, we had to stop temporarily depositing mineral at the leaching pads in the Herradura mine, and that lasted for about 8 weeks. This year, we've been operating continuously, so that meant an increase of volume processed this year, which represented an increase in our cost of $52.8 million, which is perfectly normal because it's related to additional volume being processed. And the second column has to do with an increase in contractor costs, basically related to an increase in development works. And as you know, development is key to us in order to optimize and to have flexibility in our operations, and that represented an impact of $25 million. A typical question that we get is which of these bars are permanent, and the answer to that, if you go column by column, would be in the case of the first column, if we're expecting to maintain continuous operation at Herradura and not being impacted by any COVID-19-related event, then this would be a permanent increase. If you look at the second column, in terms of development cost, if we are planning to maintain the same rhythm that we have gained up to now, or even perhaps increase it, then, again, this would be a permanent increase. If you look at the third column, cost inflation, well, that will depend on what we believe our inflation is going to be. And basically, in the case of diesel, where we believe the price of oil will be, or the future increases in wages for our workers, which, as you know, has typically been around Mexican inflation plus 1%. And in terms of the fourth column, well, that's the most difficult one to predict because it has to do with the behavior of the Mexican peso. From our point of view, the peso will remain within the MXN 20 per dollar range. We're not expecting any important devaluations or revaluations, but the exchange rate has been quite volatile, and that's why you see this impact in our income statement. Now moving to the next page, please. This is where we explain the reasons behind the increase in our gross profit. And again, the green bar represents the $285.6 million increase. I'm just going to concentrate on the 3 most important factors, which are the first 3 bars. And clearly, the most important positive impact came from the higher metal prices, which had an impact -- a positive impact of close to $317 million. Here, we saw an increase in the realized prices of 57% in the case of silver, 6.7% in the case of gold, 44% in the case of zinc and 23% in the case of lead. So those were substantial increases, which obviously translated into an important benefit for the company. On the second column, that has to do more with the operations. And if you consider the effect of the higher ore grades that we saw in some of our mines and, more in particular, in the case of Penmont and Herradura. the open pit mine, that had a positive impact of close to $92 million. And as you know, on the third column, we started to process mineral coming out of the development works at the Juanicipio project, and that -- those -- that mineral is being sold to Fresnillo and being -- and has been processed at the Fresnillo mine. And this represented a benefit to us for the first half of the year of $16.4 million. So these were the 3 main reasons behind that increase in our gross profit. And if you have any questions regarding the rest of the columns, I'm happy to answer those during the Q&A. Moving now to the next page, Gaby. Okay. Here we show the cash flow for the year. And as you can see at the bottom part of the first column, we ended the first half with a cash balance close to $1.2 billion, which represented a $132.5 million increase compared to the initial cash balance. Main -- the main source of this cash was generated by the operations, as you can see on the top line, $750 million, which represented a very important increase compared to last year of almost 65%. In terms of the uses of funds, of course, you have income tax, profit sharing and mining rights that have used cash in the first half of the year for $253.5 million. The next most important use, I would say, is the purchase of property, plant and equipment CapEx, which was $256.8 million. 45% of that number was dedicated to the Juanicipio project. Another important use of cash was, of course, the payment of dividends, and the $172.6 million was basically the 2020 final dividend, which was paid in June. Basically, those were the main sources and uses of cash during the period. Lastly, a very brief comment in relation to our cash balance, as you can see, very solid. Net debt, which was just a little bit above 20 -- I mean, net debt was actually positive because our cash balance is greater than our total debt, which resulted from our senior note. So net debt to EBITDA is slightly below 0 on the negative area, so that signals a very strong financial position for the company. And with that, I conclude, and I return it back to Octavio.

Thank you, Mario. Now turning out to outlook. As we mentioned, full year guidance is maintained for 2021, both gold, silver, zinc and lead, and further ahead still unchanged. We expect silver production to increase as we see the impact of Juanicipio and also the Pyrites Plant coming on stream. And more importantly, in 2022 and 2023, as you can see in the graph, we expect a larger increase for silver, of course. In gold, we continue to see a bit lower production at Herradura, as we are accessing ore from the sulphide zones. And more importantly, Noche Buena, as we stopped in the following year the operation, we see this lower trend in gold production. But as we saw -- or we will see, we have 2 good gold projects on Rodeo and Orisyvo, expected production and subject to all the pre-feasibility, feasibility and finally Board approval in 2024 and '25 subject to Board approval. So this lower trend in gold production should be reversed in the following years. In terms of our CapEx, in the following slide, only modest changes here. We have reduced our CapEx from USD 680 million to approximately USD 580 million to reflect the lower rate of capital deployment at different mines and projects, and this is a process that we always do. Subject to a review of the different projects that we have and we see no impact, we postpone or cut on that CapEx deployment. And therefore, which we have now this USD 580 million CapEx for -- expected CapEx for this year. The following years, '22 and '23, at the levels we have stated before. On Slide #33, the consolidated outlook. Longer term remains very consistent. We don't see any changes to our project time line right now, with Juanicipio to be commissioned by the end of the year. And as I mentioned, the 2 gold projects, Rodeo and Orisyvo, still on the pre-feasibility and feasibility path. As you can see, a nice and good expected production in both Rodeo about the same size of Noche Buena and being brought on stream also to match the stop of production in Noche Buena. And Orisyvo, a year later in 2025, more challenging project, but we continue to make a stronger case of this one with higher metallurgical recoveries, as we mentioned before. So on the last page and to conclude before going to the Q&A, I'm pleased with the overall performance of the business, and we are confident in our ability to meet our full year targets. As ever, we remain very focused on maximizing the value of our existing assets and delivering on our long-term growth projects, Rodeo and Orisyvo, but also very good exploration portfolio. As mentioned at the beginning of the presentation, we will see some headwinds of potential regulatory changes, and some that are in due course, but we will continue to monitor and provide updates on the possible impact in our operations. Safety is key as is well-being and health for people. We have been tested in this pandemic, but with great success in our personnel and also in our communities, and we will continue to do all we can to support them. We remain confident that our company's strong fundamentals and financial flexibility will give us the opportunity to continue working towards achieving our purpose, contributing to the well-being of people through the sustainable mining of silver and gold. And with this, operator, now, we can follow into our Q&A.

[Operator Instructions] Our first question comes from the line of Jason Fairclough from Bank of America.

Two questions for me. First one is just on the projects and the second is just on the grade at Fresnillo. So first on the projects, looking at your 2 growth projects, Rodeo and Orisyvo, when should these go to the Board for approval to allow them to come online in 2025 and 2026? And if we look at Guanajuato, what's the time line here on the project and the earliest we could talk about first metal production? So that's the first question. Maybe you want to answer that, and I'll ask the other one.

Okay. Thank you, Jason. On the projects, yes, Rodeo, I mean, we explore now, and we finished that exploration probably a couple of years ago. We -- then we were devoting our efforts to -- for the access to the land, but we are about to finish. What we will do after finishing that is finishing the exploration, upgrading our resources from inferred to -- upgrade on our resources and then going to the pre-feasibility. We expect to present this to the Board for a Board approval in, hopefully, October of next year or latest in February of 2022. And for the case of Orisyvo, this is a project that we've had in our portfolio for a long time. We finished the exploration. We saw at that time the challenges on the metallurgical recoveries. We continue doing testing and everything. And recently, we have found a good metallurgical process to increase the recoveries from the sulphides, making it a strong -- a stronger case for this project. It's in a more challenging area, so it will be subject to a larger CapEx deployment. We believe we can present this for Board approval mid-'22 and then going to -- into construction. But this, as I mentioned, is some -- with the information that we have now, Jason.

And Guanajuato, first metal, when?

Well, Guanajuato, we have a nice resource there. But unfortunately, up to now, it is in 3 different areas. If we had already this resource in terms of gold and silver concentrated in one area, we would have already gone through a pre-feasibility at least. We do have a good asset there, a flotation planned from the past years, so this is a good project as well. So we will continue to do some exploration here, increase the resources. We will see which of the 3 areas we can grow better, so that we have a sized project for Fresnillo. Guillermo, I don't know if you want to complement that -- what we are doing on Guanajuato.

Well, we continue to explore at Guanajuato. We have 7 rigs currently spinning at the different areas of Guanajuato, namely the North, Central and South. And we are having good exploration to [indiscernible], and the exploration is driven by the use of the geological model of the upper epithermal model, what we call it, which allows us to predict where gold and silver veins will be located at that below barren alteration zones at the surface. So this methodology is succeeding, so we are having good results on that end. So it looks strong in Guanajuato. It has a great exploration potential, no doubt about that.

Okay. Look, last quick one for me. Just at Fresnillo, could you tell me to what extent, if at all, was the grade flattered by including development ore from Juanicipio?

No. That development ore in Juanicipio is not accounted in the Fresnillo results. So what you are seeing as great for Fresnillo is pure Fresnillo ore.

And are you able to give us a little bit of color as to -- so how much is the Juanicipio contributing to the development ore? Is it material?

No. It's not material. But like I said, it's not reporting in Fresnillo results. Juanicipio is accounted separate. So what you see as Fresnillo in terms of tonnes and grade is pure Fresnillo ore. And we are -- the processing of Juanicipio ore in Fresnillo is about 14,000 tonnes per month average.

To give you, Jason, a little bit more color. We are glad to see Fresnillo silver grade going up in 2019, 185 grams per tonne. 2020, it went up to 194. And 2021, as we guided, we are expecting something in between 180 and 210. So what we are doing is controlling dilution of cost in Fresnillo and, as we mentioned, pointing out to our geological model and the research we have there, expect that this trend to continue in the following 3 to 5 years. Grades are slightly lower trending up. And in terms of Juanicipio, I mean, the expected production that we have there for 2021 is between 1.5 million and 2.5 million ounces of silver, the attributable to Fresnillo. And as Tomas mentioned, I mean, being processed on the development side -- from the development in Juanicipio and processed in the Fresnillo plant and later on through the own Juanicipio flotation plant.

Our next question comes from the line of Krishan Agarwal from Citigroup.

Can you hear me?

Yes. We can hear you.

Yes. We can hear you.

Okay, okay. My first question is on the cost. I mean, the adjusted cost have gone up by 20%, and Mario has given a lot of details around that. My question is on a full year basis, how much is your expectation for the cost to go up? I mean, this is in the context of 10% guidance you have given last time.

Mario?

Yes. Thank you. Well, for the full year, it will depend on how the exchange rate behaves and also how oil prices continue to behave because they are directly related to the diesel prices that we have to pay. Difficult to project those 2. In terms of wages, the wages have been defined for the rest of the year, so we don't see any additional increases there. In terms of operating materials, we don't see important increases there, operating materials. If anything, it should be 3%, 4% higher, no more than that. But in general, excluding the exchange rate, I would say something around 8% perhaps or a bit lower than that. That's what I would expect for the full year.

Yes, yes. Mario, I think the line was not clear. So did you mention what percentage in general for the full year?

I'm afraid I couldn't catch that question. Your voice is not very clear. Can you repeat that again?

Yes. I mean, I think we missed the last part of the cost guidance, I think. What is the full year expectation for the cost increase?

For the full year?

Yes.

Yes, around perhaps 8%, excluding -- I mean, if you look at the -- I'm talking about inflation. If you're talking about the absolute number in tough -- in terms of cost of production, then that's a different matter because in the first half, due to volume increases that came out of Herradura, which got a very important and significant impact there, that's why you saw that 20-plus increase. Now that should be diluted because in the second half of both years, we've had full operations. So if you want me to tell you how much we are expecting the absolute number of cost of production to go up high, I would say, around 14%, 13%.

Got it, got it. That's pretty clear. My second question is on one of the headwinds you have mentioned in the presentation on energy reforms, where you have said that it's becoming harder to source renewable energies. Can you discuss this in a bit of detail, especially in the context that you have your renewable energy sourcing arrangement from the Peñoles Group in the next 2 to 3 years?

Yes. I mean, the energy reform, I mean, is kind of promoting, let's say, initially the use of more expensive energy sources and then at last the use of cleaner energy sources and less expense. That's why, let's recall that in 2020, we reported an approximately 65% of our energy coming from cleaner sources. And then last year, we dropped to 58% because of these administrative issues in terms of sourcing energy, despite the fact, as you mentioned, that the group has some cleaner energy producing facilities. We cannot use them up to now in some of the latest operations, i.e., San Julián. But I mean, we do not expect this to remain, and we continue dealing with this issue. And we continue to have good expectations to sourcing our energy from these cleaner sources and less expensive in such a way that we are back to our 75% expectations of use of cleaner energy in our operations in some years. Also we are working on converting or using less fossil fuels. This is in a different energy front, in our trucks, all of our fleet in Herradura, and that is going very well. That project, that has given us the possibility to consume less diesel and use more liquified natural gas, reducing our carbon footprint as well. But in terms of energy, good thing, I would say, we have the energy in the group, the facilities, cleaner energy and less expensive. And we only have to deal with this energy reform and the administrative issues, so that we can go back to the possibility of sourcing this energy and less expensive as well. It's hard to tell you right now when would that happen, but I mean, the expectation is still for that possibility.

Our next question comes from the line of Alan Spence from Jefferies.

A question about capital allocation. You just tipped into net cash commission, CapEx will be rolling over next year and production should be higher. It all sounds quite positive for more free cash flow. So what have you been doing with this, let's call it, excess cash? Are these new on the balance sheet?

Yes. Alan, as we mentioned, I mean, we restructured of debt last year very successfully, taking advantage of the market and very good timing as well. Of course, we had at the time last year, more uncertainty in the following years. So what to expect the following years, I think a certain degree of uncertainty still remains. We are prepared to deal still with pandemic and the uncertainty it brings in terms of economic recoveries. Therefore, we review more accurately the expected CapEx deployment we have at all our operations. We identified several items in order to reduce or cut that CapEx that we had already in our expectation just to have more cash in hand for whatever uncertainty we have in the near future. At the same time, let's recall that we have some debt coming due in 2023 as well, so we have -- we want to have all of the pieces in place, so that we can react as the outlook or depending on the outlook when it comes in terms of uncertainty, Alan.

So if we're sitting here in 6 months' time after final results, and everything looks better from a COVID-related front, would you think about perhaps increasing shareholder returns?

Well, we do have a very well stated dividend policy, but let me tell you what is not reflected in the CapEx deployment graphs for the following years is what Rodeo or Orisyvo may need. We reflect this CapEx needs once it is Board approved. And therefore, if we are thinking Rodeo to bring it onstream in 2024, we should expect some CapEx in that year '24, but also in 2023. And for Rodeo, '25, we should expect some CapEx and as it is a larger CapEx project in '22, '23 and -- I mean, '23, '24 and '25.

Okay. Fine. And production guidance for gold, you had a very, very strong first half. I know the expectation is that Herradura won't continue to produce at that rate. But even if it normalizes, is there some chance for upside risk to the gold production guidance this year?

Well, we analyze that possibility, but what we have ahead in the following months for Herradura is a bit lower grade. Just recalling the grades we've had in Herradura on a consolidated basis. '19, we have 0.8 grams per tonne; in 2020, 0.77; and in '21, we guided 0.7 to 0.75. So a bit lower grade in the following 5 months and also with a combination of a bit higher stripping as well. So we decided not to modify the guidance for gold for the full year.

Okay. Fine. If I read between lines, it's a maybe. It's not ruling out. And I know you won't confirm that. But my last one is just kind of a clarification around this subcontract labor law change. I know you don't want to put numbers to it, but can you just confirm the reading of it as that if it was to go ahead, it would be -- the employee profit sharing would have to be shared with the non-unionized employees. Is that the way to think about it as well?