Fresnillo plc (FRES) Earnings Call Transcript & Summary

Hello, and welcome to the Fresnillo 4Q '21 Production Analyst Call. [Operator Instructions] I'd now like to hand over to our host, Mr. Octavio Alvidrez to begin the call. Thank you.

Thank you, Kevin. Good morning, everyone, thank you for joining me today. This is Octavio Alvidrez, CEO of Fresnillo. And I'm joined today by Tomas Iturriaga, our Chief Operating Officer; and Mario Arreguin, our Chief Financial Officer; as well as Gabriela Mayor, our representative in London office. You all have seen the statement we issued this morning, I hope, and I will provide a summary of the production numbers, then I will be happy to take your questions. Of course, we report our full year production preliminary results on the 8th of March, but we will look to provide a much fuller update on our performance, strategy and outlook. So to summarize, 2021 was a challenging year for a number of reasons. We needed to manage the impact of COVID-19 on our business, which has been a major issue in Mexico and everywhere. And regrettably, we are now facing a fourth-wave driven by the highly contagious Omicron variant. We also have to manage the impact of the new labor reform in Mexico, which restricts the ability to subcontract labor and led to the requirement to internalize a high proportion of our contractors' workforce, resulting in varying degrees of impact across the operation in terms of staff vacancy leading to lower equipment availability and utilization rates as well. And finally, we faced a certain number of operational challenges during the year. Given all this, we believe we have delivered a creditable performance with silver very slightly below guidance, but gold above. We explained the factors driving that performance in this statement, but it does highlight the overall strength of our portfolio. Looking ahead, we do see those 3 challenges of COVID-19 and labor reform continuing to have an impact into 2022. In terms of COVID-19, we will continue to implement a restrict safety protocols across the business, mitigate the impact of the labor reform. We have been undertaking a large recruiting campaign to ensure we are fully staffed. These campaigns are proving effective, and we expect to have completed the staffing process at our underground mines in the third quarter. While our open pit mine, which we have seen a lesser impact, should be fully staffed in the first quarter. In terms of development, construction of the Juanicipio Plant was delivered on schedule. But as we have previously announced, the new commissioning timeline was extended around 6 months. I am pleased to confirm that we can make available and use plant capacity of the Fresnillo and Saucito operations to process mineralized materials to mitigate potential adverse effects. All these factors provide the context of our '22 guidance as set out in the statement. With that, we are happy to take your questions. Thank you.

[Operator Instructions] Our first question today comes from the line of Krishan Agarwal from Citibank. .

Octavio, as you mentioned, multiple reasons for production headwinds in 2022 including the labor shortages, COVID and Juanicipio. How should we think about the cost impact from this internalization of the labor force at the silver operation mostly? Is it getting higher than expectation? Or is it broadly in line to your expectations? And then could you also have a word on the cost inflation, I mean, which most of the other mining peers are starting to guide for '22? And how do you think about the cost inflation in general and the mining operation for this year?

Thank you, Krishan. On the cost inflation, I would like to ask Mario, maybe he can give us some words. Of course, this is production reports, but we can give you some color there. Mario? Mario, are you there?

Hello. Can you hear me now?

Yes.

So as you all know, right now, we're in the process of finalizing our financial statements for the year 2021. And of course, one of the things that we are calculating is our own inflation based on our own basket. We haven't concluded that yet in detail. We know also in the first week of March, we will be presenting our financial numbers to the market, and we will host another call. And at that point in time, we will be discussing in detail our own cost inflation together with changes in the most important variable of our income statement. And -- but right now, what I can tell you is that we definitely experienced, like everyone else, increasing the price of our most important intakes such as energy, diesel, electricity, labor cost, of course, contracts and the different items that have important increases. But until that time, I'm afraid we're going to have to wait until the first week of March so I can report in detail just how inflation affected us.

And if I may add, Krishan, yes, the structure we have for the contractors in our own business model in our mine is that they bring not only the workforce but also the equipment. So in the end, they charge for the equipment utilization and also for the labor force. All in all, if that were the only 2 components, we would expect very much the same cost as we transit with this labor reform. However, there is another component that is impacting our operations right now in this transition, which is the productivity they do have. Not all of the workforce we've enabled to internalize, and some of the contractors as well, they have preferred to go to some other mines to work. So we are lacking also that equipment that they were using in our mines. So that productivity as we recruit and then train and then put into our operations, we are losing right now. So this is the other component that is affecting more than the cost in our mine.

Understand. And then separately, can you help us in terms of your production guidance that how much of the production you have included from Juanicipio in the silver production guidance. And then assuming that the Noche Buena is going out of the mine life in 2022, how much of the production contribution is that mine doing for this year?

Yes. Can you give you us some color on the Noche Buena, Tomas? Tomas, are you there?

Yes, I'm here. Can you hear me?

Can you -- yes, we can. Can you bring a comment on Noche Buena, what to expect this year?

Yes, we will continue mining until midyear or so. And Noche is had to condemn all the pit and extracting all the -- all that is still in the pit, and that will be midyear Q3, maybe. And then we'll go just leaching whatever is the residual or heap leach area content on the heap leach pad. Basically that's the plan for next year in Noche Buena.

Now Krishan, you asked about Juanicipio. And the way probably to visualize Juanicipio this year is unfortunately, as we mentioned, we do not have the energy so far. We are working in the most recent program that the regulator asked for and that is taking us to May, June, probably, pre-commissioning and commissioning and July onwards, we expect to be operating the mine and the flotation plant on a ramp-up program. So we may start in July at 40%, 45% of the main [ plate ] capacity, and we expect to finish the year at the 85%, 95% expected main [ plate ] capacity. Given that this is the first year of operations, we will continue to have all from the development work -- mining works, but also in combination with the production of stopes. We are not providing now that color, but we may be able to give you an update later on. But in terms of the volume, that's how we visualize operating Juanicipio this year.

Our next question today comes from the line of Kevin Kerdoudi from Bank of America.

So you spoke about the impact on production from COVID-19 from the labor reform, so 2 of those -- 2 issues were known. But you also added some lower ore grade at Saucito caused by an increased seismicity. So is it an issue that, like, you experienced only in the last few weeks? Or is it something that you experienced in 2021 as well? And if that's the case, what took you so long to update the market on that issue?

Yes. Thank you. Tomas -- go ahead, Tomas.

Yes. Well, this is the stability issue that we have been reporting consistently through the year is related to this nature of the activity, particularly in the Jarillas area of the mine. So what did happen late in the year is that the seismicity increased, so -- which forced us to further slowdown mining in that particular area, the Jarillas area of the mine. And so the sequence now were in that particular area is lower. And like I said, what did happen is that it increased towards the end of the year. And that's the impact that we are accommodating going forward into 2022.

Kevin, let me add to what Tomas mentioned. I mean, in terms of COVID, yes, the last wave on Omicron started later than some of the [indiscernible] here in Mexico, at least later than in U.K. So right now, from the probably first week in December, we saw an increased number of cases across all of our operations. And that has continued during this month, and that presents a challenge in terms of the program and the number of people that is out. Fortunately, we've seen the same behavior in some other places in which is not as severe. But for the time being, we will have people and personnel that is out on quarantine for 7 to 10 days depending on the case by case, and that affects the operation. We don't know if we expect that to cease quite soon, but we don't know. That's an uncertainty there. And in the labor reform, as I mentioned, that has affected in 2 ways. The operations one with the number of workers, of course, and also with the equipment availability. In terms of Saucito lower grade, let me tell you, and let's go back to a couple of years of Saucito. In Saucito, we produced, in 2019, 228 grams, that's another -- that's grade for the year. Then in 2020, 206 grams of silver per tonne, and we guided for 2021, 220 grams. We ended up producing 183 grams per tonne. In Saucito, the issue was the geomechanical issues, in the Jarillas vein that made us change the sequence that we have programmed for 2021. So that may continue for 2022, and that's why we are guiding lower grade. Jarillas, we was -- the Jarillas vein, we was the majority of the production. And unfortunately, we have to go to some other production blocks with lower grades and also with lower productivity. So for 2022, we are guiding in Saucito grade 175 to 195 grams. But also a lower tonnage, as I mentioned, due to these conditions in the mine.

We now have a question from the line of Daniel Major from UBS.

A few questions. First of all, just some specifics on the guidance. Can you give us a specific guidance number for Juanicipio production -- expected production volumes based on your ramp-up profile in 2022?

Given -- hi, Daniel. Given the uncertainty we have on energy, it is hard to provide guidance right now. As I mentioned, the best way to see Juanicipio this year and at this moment, probably would provide an update in our March prelim report and later on. But for the time being, I mean, we are seeing the possibility to have energy in May, then June pre-commissioning and commissioning, and July onwards ramping up the flotation plant. If that is the case, and given it's the first year of operation, we are expecting to -- from the flotation plant for probably 40%, 45% in the month of July. And in that December, 85%, 95% ramp-up capacity of the main [ plate ] capacity of Juanicipio. We had given, in the past, the average production to expect for Juanicipio. So with these numbers, this is the best way probably to try to visualize Juanicipio for the time being , Daniel.

Okay. Right. Next, just on the gold production guidance. So, I think, 600,000 to 650,000 ounces implies -- was about 100,000 to 150,000 ounce decline year-on-year. I guess you obviously guided to the lower contribution from Noche Buena finishing midyear, but can you give us any other steer on -- on the -- at an asset level, particularly Herradura? What's your expectation there from a sort of annual delta in production? Are you expecting stable or processing volumes and recoveries?

And that...

Do you want to mention something, Tomas?

In Noche Buena, in -- specifically. Is that -- is that only or is there because, really, the main effect we have in both of [indiscernible] is, as you said, Noche Buena. Where we were seeing the last of the -- we are going to see the last of the live ore coming from mine during the year until Q3, end of Q2, Q3. In terms of grade, it would be similar grade to what we have seen. Probably the only impact is that, as we are extracting the remaining space in the heap leach, you will stack up faster and you caught a little bit to your leaching sectors to just delay a little bit the production, but you don't invest more in heap leach pad. So at the end, we cut mining and we leach to do work and do maintenance on mining in the next 2 or 3 years, basically.

And yes, to what Tomas mentioned that follow [indiscernible].

So more specifically, I mean, if you just think of that bridge, it's 100,000 to 150,000 ounces lower. You produced less than 100,000 ounces that Noche Buena and you're going to produce some this year. So the rest of the portfolio gold production has to be coming down. I'm assuming that's coming from Herradura, right?

That's Noche Buena, Herradura is -- it's a little bit here and there across the portfolio. And like as I said, we'll give you more color in March discussions that -- it's really Noche Buena, the main impact, and the rest of it is a little bit here and there, and the rest of the portfolio.

And to what Tomas mentioned, Daniel, this is correct. I mean, the larger effect in Noche Buena, but we are operating only for half the year. Probably, if you would be -- a guidance on gold rate, we are providing volumes for the -- expected volumes for the other mines. We will have 4,000 less to 8,000 less on the rest of the mine. Cienega, Fresnillo, the Pyrites Plant at Fresnillo, also on Saucito. Compensated on the offer and to -- for San Julian veins. And Herradura is basically producing the same, a little bit more, but the larger effect, as I mentioned, is Noche Buena. And then 4,000 to 6,000 ounces per mine and the rest of the mines, as I mentioned.

Okay. All right. Then just a couple of kind of slightly longer-term conceptual questions. I mean, if I look back at the last 5 years, a pretty consistent trend of downgrading your production guidance on a sort of a 3-year forward basis. I look back on 5 years ago, you expected to produce 80 million ounces of silver in 2020 and you kind of produced about 50 million. Your latest guidance is 2023, sort of 70 million ounces of silver. I mean, is this really realistic or achievable?

That's what we are working right now. 2022, the different factors coincided to the worst. As we mentioned, I mean, we have hopes to manage or have better reforms for the labor reform However, it is showing a larger impact in our operations. That, we believe, is transitory, the labor reform. We own a bit more, acute in beyond the current mine. Unfortunately, we see the same trends as have -- somewhere else will be difficulty to have personnel. We are recruiting, but that would be a program that lasts for the probably 3, 4 quarters of the year. Then we have the training on top of that, so the productivity goes down. So a number one factor. The other one is COVID. As I mentioned, we see the same behavior as Omicron in some other places. We expect that to finish for the time being. In this guidance, we are projecting probably an effect of the -- on the first quarter. So we will see a lower Q1 and then -- and a higher Q2, 3 and 4. And for 2023, given that we consider '22 to be a transition, 2023, we can -- are working -- we're working on that, and we believe that will be definitely a higher production. How that -- we'll provide in March. Right now, we are still working on that. As I mentioned, the other issues on our operations at Saucito, we are developing some other fronts and production blocks as well away from the Jarillas vein and that specific area in the Jarillas vein that is causing some geomechanical issues. So Saucito, we should see it in this year, and therefore, in 2023, going up in terms of volumes and also in grade for many years. As well as Fresnillo, we are expecting higher production in 2023. One full year of production of Juanicipio, given that we will have, of course, energy in mid year, as I mentioned, so a full year production of Juanicipio. The Pyrites Plant as well, we are forecasting this year only from July onwards. But in 2023, a full year of production and the rest of the mine has more. So we believe we can definitely have a larger production of silver in 2023, and we will give you the more details in our March report.

And Tomas here. In addition to what Octavio just mentioned, another major impact in the guidance this year is due to the lack of power and so -- in Juanicipio, and the Fresnillo Pyrites Plant. We were accounting initially for a full year, which is not going to happen. So that -- we should update in the guidance of all the factors. And Saucito, I think that, you said, you should find that this physical activity combined with the lack of -- led us to require more meters that, in conjunction with the lack of personnel, is what made this year's complexes, particularly 2022, but that's going to be fixed through the year to position the mine for a much better 2022.

We will now move on to our next question. Our next question comes from the line of Dan Shaw from Morgan Stanley.

First one, just on the contractor issues there. You're talking about equipment availability issues. So will this feed through into your CapEx number potentially as well? Are you having to buy some of this equipment off the contractors or place orders for your own equipment in order to mitigate the shortages that you're seeing there? .

We did in the last year -- we did place orders for our own equipment ever since last year, so we will acquire our own equipment, which we will start receiving during the year because like I said, we placed order last year. And whenever necessary to come up or see if it is some of the equipment that maybe delay went from contractors from another maybe but the main plant to buy your own equipment.

Okay. So was that -- is that already baked into your -- the CapEx guidance that you've given to the market so far? Or is that going to be potentially in addition? Okay, thanks. And then second one, just a clarification when you're talking about returning the mines to being fully staffed. I think you said -- can you just clarify, did you say Q1 for the open pit mines? And did you say Q3 was your best guess for the underground mines?

Yes. That is correct.

Thank you very much. [Operator Instructions] We now have a question from the line of Jason Fairclough from Bank of America.

Just sort of a bit of a question about your relationship here with the stock market, right? So the shares opened down, they traded to down 15%, and we've now triggered a circuit breaker. So do you think it's fair to say that you've surprised the market today? And what do you think about critiquing the way that you've kept us up to date over the year in terms of these developments?

Jason. Well, unfortunately, yes, I -- we -- I think we have hope that the -- for contracting labor reform, we could have better results in terms of retaining the workforce and also retaining some of the contractors. But this is doing us -- are wrong somehow, and we are lacking that personnel right now, so that has had an impact. And also, as I mentioned, some of the contractors on different fronts. Some of the contractors were able to maintain the equipment as well, so we are lacking, just to give you some examples, mechanical mechanics now to maintain the equipment. Also the contract to bring the replacement, so we're lacking that equipment for the time being. As Tomas mentioned, and we have placed orders at the end of last year once we realized that we were going to have these issues, but that will take some time to have the equipment in our facilities. And then this last wave, as I mentioned, of Omicron. Yes, it's proven to be very severe in terms of the number of people that we have with this disease. And as I mentioned, that takes 7 to 10 days once we have a person with that disease, so that is disrupting some our operations. Definitely more on the underground mines, which means the silver production. And that's why in combination with some of the operational issues that we were communicating over the year, I mean, has created somehow the situation in which we are right now. But given all those factors, I think it's fair to say that we are surviving somehow with the effect that we are experiencing right now in the operation.

Okay. So if I could just follow up, Octavio, so the -- on costs, I know you're not giving cost guidance today, but if I look more generally, your peers are guiding for costs up by 10% to 15% year-on-year. A combination of tight labor markets, fuel and general inflation. How does that sound to you? Is that a crazy number if you think about your operations? Or are there fundamental differences, which should mean that cost inflation would be lower at your operations?

Well, we are experiencing inflation on the same cases that we mentioned. Labor force in 2 ways, our own labor force but also in the possibility to recruit faster and larger numbers as well. Also in fuel, of course. In fuel, we have the advantage of the project that we put in operations at Herradura in where we have the dual system for the larger trucks and the use of liquified natural gas somehow mitigate that effect in the operation in which we consume the larger volumes of diesel fuel. But nonetheless, we are expecting as well and we are still in inflation, as you mentioned. I don't know if Mario has been able to rejoin the call, but the numbers that we mentioned, we believe, can be on the lower end, but we are providing that detail on March, Jason. Mario, I don't know if you want to add something, if you were able joined the call?

Well, Octavio, I think you covered the question very well. I agree that we should expect to see our cost going up somewhere in the lower part of the range that Jason just mentioned in terms of unit cost, yes.

And just to emphasize, Jason, that we see 2022 affected as -- according to the guidance. But as I mentioned, 2023 will be a different year to -- as I mentioned with the number of situations at the mines.

Thank you very much for all your questions today. All questions have now been answered. So I'd like to hand back to our host, Mr. Octavio Alvidrez, for any closing remarks.

Well, just to thank you all for being in the call, and then I look forward to seeing you on March again where we will have our full year preliminary results with all the details in terms of the financials and cost and CapEx and anything else and further detail on the operations as well. Thank you very much.

Thank you very much for joining today's Fresnillo conference call. You may now disconnect your lines. Speakers, please stay connected. .