Fresnillo plc (FRES) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today in this 2022 full year preliminary results Fresnillo plc. Here with me, I'm joined by Mario Arreguin, our CFO; Tomas Iturriaga, our Chief Operating Officer; Guillermo Gastelum, our Vice President of Exploration; along with our colleagues from the Investor Relations here in London. As always, I have to point out to a disclaimer before I begin. And then just a summary of the information and the agenda we have for today. I will give you some highlights regarding financial results, operational results, followed by Tomas Iturriaga, who will go in more detail about the operational details. Guillermo Gastelum will address some of the recent developments in our projects as well as resources and research, followed by Mario Arreguin, who will go in detail about our financial performance. And then I will close with some comments on the outlook before we go on to your questions as well. The investment proposition in Fresnillo, I believe it remains compelling and consistent as it has been over more than a decade of the listed company in London. Of course, notwithstanding some of the recent challenges in the operations that we faced, most notably, the labor reform in Mexico that given the business model that we have and that we've grown in Fresnillo plc, it had a significant impact in our operations. We benefit, of course, from a large portfolio of quality assets, 2.2 billion ounces of silver in resources and nearly 40 million gold resources. We are the world's leading silver producer and have built a solid position of gold production, the largest in Mexico. We have a strong EBITDA. We focus on running our operations as efficient and cost-efficient as possible. And therefore, we continue to generate healthy margins, as I mentioned, we are focused on cost mitigation and control in our operations. Of course, along with these quality assets, we have a large portfolio of exploration concessions in Mexico, but also in Peru and Chile. And we developed our projects, and we have a solid position to keep on consolidating, completing these projects, bring them into our production stream. The most recent, of course, Juanicipio that we will talk about in the Fresnillo District. Moving to health, safety, environment and community relations, I'm glad to report advance in all our sustainability framework. Health and safety, we keep on consolidating our culture through the "I Care, We Care" program, this across all of our operations as well as our exploration team and exploration offices. As you can see, and we continue to advance and have better statistics in this front, which is the most important to keep safe to all of our people that work in our operations and our teams. On the environment front as well, we continue to place great importance on reducing our carbon footprint due to some administrative issues. Due to the energy reform in Mexico, we have dropped our consumption of eolic energy. Currently, we stand at 35.6% of our total energy coming from eolic sources. But we aim -- we continue to target 75% of our energy use electricity by 2030. We place great importance on how efficient we are in the use of water in our mines. And also in terms of reducing our footprint at the mines. Now we have -- or we are in a better position to keep reducing the diesel in our haulage trucks in the open-pit mines. Now we have the permit to storage and use better our truck fleets that we have in Herradura, very much. And you will see that efficiency being captured down the road. We have a very strong and we continue to work in our governance framework around our tailings storage facilities. And I'm glad to report that Juanicipio will be the first or will have the first tailings storage facility that complies all the way from this side, construction and now operation through some of the international codes. And also in the community front and we will continue working on 4 pillars: 1 being, of course, health; the other one being locations, better educated community is the one that we can have an open and more direct dialogue in our -- around our mines. We also place a lot of importance of strengthening the entrepreneurial capabilities on the communities and people around our operations so that they can work and share the economic benefit of being around the mines. And also after we have not an operationally more in the area. And of course, water, drinking water, drinkable water in the area is another 1 of 4 pillars to go with community relations. Now some of the highlights. Once again I'm pleased to report that although this has been a challenging year, 2022, we've been able to achieve guidance that we gave to the market and place a solid number for results in our operations. Most notably, the case of Fresnillo, in which we have increased production. We have hit grades more consistently as well. And also, we have achieved our guidance in the rest of the corporations. Of course, these are running our operations efficiently gives us a possibility, as I mentioned, to have good cash flows and continue sourcing our broad pipeline. Glad to report 2 new projects that keep on advancing, a good exploration result in Guanajuato in which we increased substantially our silver resources. This is a ore body in an old mining district in which we have silver but also gold metal there. And one more, which is Tajitos what we talked about in the past. Also good drilling program in order to delineate these ore bodies over the second quarter of this year. And therefore, will give us the possibility to keep on advancing this project, PEA, pre-feasibility on those process. On the financial performance, we are not immune, of course, to inflation. And as I mentioned, some of the impact that we had in our operations on the labor reform which limits the use of contractors. And given the model that we have in Fresnillo, that placed a lot of challenges across all of our operations, especially in labor market, which is -- has its difficulties having to recruit, train and have this talented new workforce in place. Of course, being focused on cost in our operations, our EBITDA margins are quite attractive. We have a solid balance sheet and a cash position, a good cash position at the end of the year. And we have a consistent dividend policy with USD 0.133 per share, above market expectations and making the final -- well, the total dividend for the year, USD 0.167 per share. And with that, I will pass the microphone to my colleague, Tomas Iturriaga on the operations front.

Thanks, Octavio, and good morning, everyone. I'm very pleased to be here to share with you some of the highlights of our operations in 2022. I would say that with both silver and gold full year 2022 production within guided range. The operations performed according to expectations. And I think that during last year, resilience was the main attribute that we demonstrated as we were able to stabilize our operations after a very few challenging years, including a year 2021 when we needed to cope with the impacts of the labor reform and several operational challenges in our mines. Our hiring program continued performing well last year under a very tight labor market in Mexico, with our training programs taking more relevance as the younger employees are joining our workforce. Lots of work ahead of us, of course, and room for improvement, but I'm very pleased with the progress that we have made in last year. And I believe that our operations are in a stronger position now than they were in recent years. At Fresnillo mine, we continued improvement in our operations, sustaining a production increase of 13% year-on-year, with cash costs and all-in sustaining costs remaining stable despite the high inflationary environment and the strong Mexican peso. Our San Carlos shaft deepening project, progress was lower than expected due to lack of qualified personnel and incorporation of some redesigns to improve functionality once in operation. Commissioning of the shaft is now expected for the second half of this year. With mine operations now under better control, we foresee a 2023 as another year of improved results in Fresnillo mine. Moving to Saucito. The mine is well staffed now. And in 2022, we invested to acquire the remaining mine equipment needed to internalize the 100% of the mining work required by the labor reform, which will help to decrease rental costs once the equipment is delivered. During last year, we focused also in reviewing our short-term planning processes and parameters, which helped us improve the ore grade by 9.8% to partially offset 14% lower throughput, mainly due to lower productivity of our new personnel. The highest [indiscernible] area in [indiscernible] has been operating without any relevant seismic activity. So after 2022, with a stabilizing focus, we think that we have a base for an improved production in 2023 [indiscernible] at Saucito with an emphasis now in efficiency and cost containment. Moving to Juanicipio. We were very pleased to report the connection to the power grid last December and the commissioning of the process plant has been advancing during the last few weeks with achievement of nameplate capacity expected for Q3 this year. Silver grade at Juanicipio will start at around 200 grams per tonne as we will use lower grade stockpiles until we fine-tune the operation, the process plan. And the grade will increase to about 400 grams per tonne as the year advances. At San Julian, in the veins operation, based on to [tonne] value, we prioritize extraction of wider veins with higher silver grade but lower gold content. There, the impact in gold production in 2022 with the disseminated ore body operations showing an expected decrease in production due to lower grade ore in the mining schedule last year compared to 2021. Construction of the third stage of the tailings dam started last year and exploration continues with some good results in both the banks and the disseminated ore body operations. At La Cienega, we are seeing high workforce rotation and lower equipment availability from contractors, impacting productivity and ultimately impacting gold production year-on-year. In Noche Buena, we found additional tonnes through our combination drilling program last year with productivity improving due to shorter haul distances and lower resources employed for operations. Gold produce decreased 17% year-on-year as expected in Noche Buena due to the end of life of the operation. Finally, at Herradura, expected lower grades and higher sulfide content impacted production despite a 9% increase in tonnes processes resulting from positive ore body reconciliation and the mine gaining productivity by increased truck utilization. As we still expect inflation, cost pressures and a strong Mexican peso, all the mines will continue to focus on cost containment initiatives going from the day-to-day efforts to the investment in the more relevant infrastructure projects to improve cost and efficiency, such as the projects listed, therefore, examples for each of the mines. So with this, I will thank you for your attention, and pass now the voice to Guillermo Gastelum, who will tell us about resources update and exploration. Thank you.

Good morning, ladies and gentlemen, I'm really happy to be here to share with you stories about the businesses and reserves of Fresnillo and the development of the exploration program. So let's get started with the silver. And as you know, Fresnillo has one of the largest silver resources base [indiscernible] now standing at 2.2 billion ounces. However, we're posting a 5% decrease on our silver resources when compared to 2021, resources were hit, in particular, by higher costs and higher cut-off grades associated with costs and also by depletion and locally by a conservative approach to the process estimation in particular in some sections Fresnillo and Saucito. The decrease was partially offset by good operating results at San Julian and at the Guanajuato project. Possible reserves stand at 396 million ounces, a 5.6% decrease due for the same reasons of the resources also by depletion of the disseminated deposit at San Julian that was partly mitigated by the good exploration results at the San Julian veins too. And we are posting a decrease of 23.7 million ounces. That means that our teams at mines despite the challenging cost environment, we are able to partially replace the reserves after producing more than 15 ounces of silver. We expect to go -- our resources remain stable, a significant increase at Guanajuato and an important resource conversion Noche here in the [indiscernible] ore bodies in Herradura District. Our gold reserves increased 4.4%, mainly due to resource model improvements at Herradura. Now I would say a few words about some of the projects that may become onstream in future deals, which were organically generated by the exploration team. I say a few words about Orisyvo, which is a world-class gold deposit in Sierra Madre Mountains of Mexico. We are advancing a good base, a number of PFS level studies. We have acquired some additional land and we have a strengthening community relations, programs and engagement also with the government at the local and state scales, we are having very good acceptance from all the communities and the government of [indiscernible]. Rodeo is a -- will be an open pit heap leach mine on over disseminate gold deposit. We are completing several studies for hydrological, metallurgy, infrastructure, access to energy, environmental and so forth. And we have strengthened regional local scale community relations program and we are building trust with local people in the region. While Guanajuato, you may have heard is a historic world class gold and silver district. We have a very intense drilling program in several exploration targets occurring throughout district with good results of the vein system themselves, but also other both mineable -- over both mineable deposits occurring at the up vein intersection and also in the hanging walls. We had a significant increase in both indicated and inferred gold and silver resources in this district. And finally, Tajitos that's located in the Herradura corridor in Northwestern Mexico and place where Fresnillo knows very well how to build and operate open pit heap leach mine. In Tajitos, we had significant progress here at Tajitos. We were able to consolidate some mining concessions and to purchase additional land as we speak. There is a very intense core and reverse circulation build program going on, which is aiming at fully delineated main zone of the resources by the middle of the year and then spinning up this project to the PEA and upper levels to bring them onstream also as fast as we can. Rodeo, Guanajuato and Tajitos have significant exploration potential for gold, and we are not only drilling there, doing community relations things as well, which is part of this. But in the core of our activities, we have traditional metallurgical investigations and preliminary [indiscernible] works as well. Now a few words about the full print portfolio and the budget allocation that we have for 2023. We are budgeting $175 million for exploration. And the focus will continue to be in our operations that will account for more than 50% of the budget that will be followed by the development in PAA projects I just mentioned, Orisyvo, Rodeo, Guanajuato and Tajitos. We will continue to install advanced exploration project. We haven't already displayed over 1 million ounces of gold equivalent in resources that will include [indiscernible]. Silver deposit in Peru. San Julian, which is the vein hosted gold and silver project front around mining in Central Mexico. And the Candamena and Rosarito disseminated gold and silver deposits amenable to open pit mining methods. We will invest smaller amounts of the budget on yearly exploration projects. We currently have 14 projects in drilling -- 14 projects in drilling, both in brownfields and greenfield areas. And they are budgeted according to the exploration potential in priorities. And of course, we will continue to be fitting the triangle with field work, really hard field work, doing geological mapping, some geological chemical sampling in several prospect areas in favorable [indiscernible] belts of Mexico, Peru and Chile. As the highlights for the 2022 on the right-hand side on the slide, well, you can see we invested $167 million, almost 20% when compared with 2021. And we're getting closer to drilling -- we are approaching 1 million meters of drilling over the year, and we were focusing in advancing -- the 89% was focused in advancing either advanced or early brownfield projects in our mines. We discovered new veins of San Julian, Cienega and all the programs the infill and step-out drilling programs [indiscernible] mines, were progressing well. The [indiscernible] to explore an early-stage projects where we're aiming at bringing them to the open [indiscernible]. And finally, I will mention that over the exploration program for investment for 2023, $175 million. We continue to focus in the brownfield project. And in the 4 advanced exploration projects I mentioned. We will continue with the drilling programs at our mines, focusing on the resource conversion from inferred to indicated and cost of reserve generation. And we will continue to strengthen performing all the engineering activities related to have a return -- to returning to have distribution reserves at all of our operations -- of underground operations. And having said this, I will leave the microphone in the hands of Mario Arreguin, who will tell us everything about the financial performance of Fresnillo. Thank you.

Thank you, Guillermo. Can you hear me well?

Yes.

Great. First of all, good morning, and I'm delighted to be here to be able to share our financial numbers, which were just released this morning. And as you can see on the first slide that we're going to show, this is basically the income statement. If you look at the different profit levels, which are highlighted in yellow, you will see that we were built off last year. But I guess this was pretty much expected by the market. And as a matter of fact, we were better than what the consensus had predicted. So at least we're happy about that. Nevertheless, gross profit compared to the previous year was almost 43% below last year. Operating profit was 57.5% below last year. Profit for the period was almost 30% below last year, and EBITDA was below almost 38% compared to last year. And what I would like to do today -- this morning is briefly comment on what I consider to be the main features or the main changes compared to the previous year. So I will focus, first, on adjusted production costs and try to explain to you what was behind that 15% increase compared to last year. How much of this was due to inflation? How much of this was due to the increase of production volumes? And how much of this was due to other operating issues. And the other line item that I would like to focus on is the change in gross profit, that 42% decrease. How much of this was due to change in metal prices, how much of this was due to inflation, how much of this was due to other operational issues. So before I do that, if we can move to the next page, please. Of course, inflation is one of the most discussed topics and all industries were subject last year to a very high inflation. What we show here in this slide is basically the inflation based on our own basket. In other words, the increase in unit price of each individual item or component of our production costs. And as you can see, in the case of Fresnillo plc, at a consolidated level, our only inflation was almost 8.4% in dollar terms. And what we show here is the impact on each one of the items that conform our production costs. For example, operating materials was one of the most important item in terms of the increase in inflation. Followed by contractors, remember, in our case, contractors not only bring in their labor, but they also bring in their equipment, their own operating materials. So just wanted to give you an idea of what the inflation was for us. Now having that in mind, if we can move to the next slide, please. What we show here is a rainbow where we tried to explain the change in the total production cost. And the increase is represented by the green bar at the far right, this was 100 -- almost $91 million. And if you look at the first red bar, where we showed the impact of inflation on a stand-alone basis. In other words, if everything else has remained exactly the same and we only had to increase in unit price of the things that we consider in our production cost, the increase in production costs would have been of $101.2 million. So that 8.4% inflation I just explained, translating to an impact of $101 million. Now on the following bar, you will see the impact of bringing Juanicipio -- the Juanicipio mine into operation. Of course, that operation did not exist in 2021. So obviously, our absolute cost of production increased by $85.7 million. We really don't need to worry about this increase because behind it, we had an increase in profit of approximately $99 million. So nothing to worry there. Let me skip to Slide #4. Here, we show the impact of higher volume process at Fresnillo and San Julián. Again, a good thing because behind this increase in volume, which impacted production costs by $22 million. Behind this increase, there was an increase in profit of $19 million. The bar that I will focus your attention on is to one shown in bar #3, which represents the increase in the use of contractors, the use of operating materials and repairs, the increase in the use of diesel. Excluding inflation effects, this is purely the increase in the use of these items. And this is pretty much related to our mines -- run lines being deeper and deeper. Our open pit mines having longer haulage distances, et cetera. So this is the one that we are looking at and trying to compensate with being more efficient. Lastly, a very brief comment on the 2 blue bars, which were the ones that somehow decreased our production cost. First, bar #6. We processed at a lower volume at some of our mine, Saucito, Ciénega and San Julián, of course, this lower volume decreased our production cost by $47.5 million. But again, behind this decrease, there was also a decrease in our profit levels for approximately $75 million, which is related to this. And lastly, on bar #7, we show the impact of capitalizing less volume of waste haulage. In other words, in 2021, 7.3%, a very small percentage of our haulage movement was capitalized. In 2022, we capitalized 28.4% of the total waste material moved. In other words, had we kept the 7.3% that we had in 2021 capitalized, our costs would have been higher by $53.5 million. Now if we can move to the next page, and again, what we show here is basically an analysis of the decrease in the gross profit of $400 million. Again, the -- I mean, the green bar at the far right-hand side represents a decrease of $400 million. And if you look at the first 3 red bars on the right-hand side, too, those, I would say, are the main reasons behind that decrease. So starting with lower metal prices. Most importantly, the lower silver price, which decreased almost 13% compared to the previous year. That had a negative impact of $157 million. Of course, this was mitigated if you look at bar #4 by the increase in the price of zinc and slightly increase in price of gold. Then on bar #10, you see the impact of the lower ore grade and the lower recovery rate at Herradura, which basically was the main reason behind the 15% decrease in gold production. So those had a negative impact of $135.7 million. And the third most important reason, and I mentioned this when we spoke about production cost was cost inflation, again, that meaning the increase in unit price of our production cost components. So I would say those are the 3 main reasons behind our decreasing in profit. If we can now briefly go back to the income statement. What I would like to point out now is something really unusual, which is the income tax expense line. If you look at it, you will see that, that is a positive number. In other words, the profit for the period was larger than the profit before income tax, which is very, very, very unusual. And the reason behind this positive income tax is basically based on 3 factors: firstly, the inflation that we had in Mexico, measured by the official CPI index, which was 7.91%; secondly, the revaluation of the Mexican peso, and we measure that you see the spot exchange rate at the beginning of the year versus the spot exchange rate at the end of the year, and if you do that, you will see that there was a revaluation of the Mexican peso of almost 6%; and the third and last reason has to do with the tax benefit for companies located in the northern border zone. And we do have a couple of mines that fall in that particular zone, which is the Herradura mine in the Noche Buena operations. And in that particular zone, companies are subject to a 20% tax instead of the 30% statutory tax. And in terms of [BIT] instead of being subject to 16%. It's only subject to 8%. So when you put these 3 factors that I just explained together, that's how you get to the positive $67.4 million in taxes. We don't expect that to happen again. However, the peso continues to be very, very strong. Right now, it's below 18. And at the beginning of the year, it was MXN 19.36 per dollar and is currently trading just slightly below 18. So we will continue to see that effect this year, I guess, if it remains strong throughout the year. Now if we can move very briefly to the cash flow statement, please. Okay. If you look at the first column in the bottom, you will see that our cash balance at the end of the year was $970 million, which meant a reduction of $266 million compared to the initial balance. But if you take out what we paid out in dividends, we were very close to being net cash neutral. The main source of funds, of course, was the cash generated by the operations on the top line, $743 million, which is lower than compared to last year by almost 39% for the reasons that I explained before. In terms of the main uses, you will see that the CapEx was the main use of funds, $592 million, of which $236 million were basically mine development and $356 million were the plant and equipment. The other use of funds was dividend payments for $202 million and income tax and profit sharing for 100 -- almost $75 million. Well, those, I believe, were the main highlights regarding our income statement and cash flow statement. Our balance sheet, which is shown on the last page continues to be very, very strong. And if you have any questions on issues that I didn't cover, I'm more than happy to answer those during the Q&A. .

Thank you, Mario. So looking ahead for the rest of the year. You will see that we have somehow stable production with the next couple of years. On the silver side, however, I mean, we have some alternatives on 2025 that we are looking into in order to increase production. In San Julián mine, also on the Fresnillo mine with the ramp-up that we have achieved so far and the projection we have to that year as well as in Saucito and Juanicipio. So we'll be looking in more detail of the following months in order to achieve a step-up in production in 2025. On the gold side, we have the effect of Noche Buena going out of reserves. In fact, this is the last year in which the mine will be operating. And as you see on the bottom part of the slide, higher contributions of base metals, zinc, specifically and then lead as well with the addition of Juanicipio in the following years. In terms of CapEx, you will notice that some of the portion of what we were expecting to deploy in 2022. It's been transferred to 2023. And as we experienced some of the supplier chain issues with mobile equipment, we transferred some of that CapEx into 2023. We were expecting 2022 higher CapEx in the range of $680 million, so those $90-plus million are being transferred to 2023 and the rest of the year 2024 and 2025. In terms of the chart that we usually present for the project delivery, you will see Rodeo and Orisyvo as the next projects, growth projects in our portfolio. So there, we're still in discussion with [indiscernible] for Orisyvo. We are acquiring some of the land in the area, to strengthen the project, we can have better metallurgical results. But I would like to point out to Tajitos and Guanajuato. Tajitos, as we mentioned in 1 of the slides, we will finalize the delineation of the ore body very soon in Q2. Then after, we will continue with all the process of PEA feasibility, et cetera. This is an area that we know well in the neighbor of Herradura and Noche Buena. And that's a project that we could advance, we believe that comes faster probably than the other two that we mentioned before. And Guanajuato, an old mining district with good exploration success this year in 2022, we continue exploring with trying to increase the resources and then continue with the process to see how the economy of this project is. And I would like to conclude by reiterating our key strengths and priorities and also some of the challenges of this year. This is what we've shown a robust performance in the period. Of course, I emphasize that our mining operations have certainly stabilized. And in the case of Fresnillo, reverted that trend that we had with the previous 2, 3 years, which is very good. Saucito as well with the operational issues that we had and resolved in second half of last year. We are in a much better position to capitalize on the growth portfolio of projects -- prospects employees that we have in our exploration side as well. So we have extensive development mine in front of us backed by our strength in our operations. And with that, I will open up for questions, please. Dan?

Dan from UBS. A couple of questions. First, on the production profile you show on page 32. If we look at 2024, there's about a 10 million-ounce lower expected production versus your the latest guidance at the interim stage. Can you walk us through where the reduction comes from and perhaps give any state of the output of profile for particularly for Fresnillo, Saucito, you're adding a whole new mine here, production is kind of going to be lower than it is in -- was in 2021. That's the first question.

In 2020?

2020, 2021, I think you're about 60 million ounces, correct? Group silver production.

And you're looking at which...

2025 at sub 60 million ounces. So you've added on the CPO production is lower.

Yes. You will realize that in San Julián, the disseminated ore body, we are running out of reserves there. And therefore, any CPO production at cities now does not compensate that lack of tonnage and rate that we have in San Julián. In fact, in 2024, we have a lower production in San Julián and in '25 as well. But as we stated in this report, we continue exploration in San Julián. We have some initial success, something that is not reflected here. And among some other opportunities as we tried to point out in this slide. Those are related to Fresnillo in which this year, we are increasing -- aiming to increase the production, and we will continue to get that trend. Also in Juanicipio, we're looking at different alternatives as well. So we believe we will be in the following months to be able to give more information in order to increase the production for 2025 on the silver side.

Okay. So essentially stable production at Saucito, Fresnillo, ramp-up of Juanicipio but then depletion of the DOB at disseminated ore body.

Higher production in Fresnillo. We believe we can achieve.

What will you guide in 2023?

2023.

Yes, higher than '23? Okay.

Correct. Yes.

Okay. And then the second one on cost. Can you give us any guidance on your expected trajectory in adjusted production costs for 2023? I have another question.

Yes. We believe that we will continue to have some inflationary pressures. And in our budget, we are including a 6.5% increase in average for the components of our production costs. But we do have plans to create mitigate that adverse effect by being more productive and efficient. And I don't know if Tomas, you would like to comment on those because the only way to find is trying to be more efficient. And we do have in place certain ideas. So hopefully, with that, we will be able to mitigate not all, most of that inflation pressure. .

Yes. Thank you, Mario. And yes, of course, in all the mines, we have day-to-day focus on cost containment. In addition to that, we have specific projects which impact the cost, for instance, the chart coming into operations at Fresnillo is going to improve overall cost per tonne. That the mine lower haulage cost whenever that comes to lines and then the pumping system also in Fresnillo that we just commissioned last year, saving us power needs to have 3 stage pump in system compared to the 1 premium, more efficient than for Fresnillo and Saucito and now that we have overcome the challenges of the high seismic zone that had us investing there to stabilize the area installed require monitoring equipment and all that, that has gone. So we're more efficient there and as well we updated the pumping system in Saucito. So we have a better structure now at the mine. But Fresnillo, we are being able to increase the [indiscernible] mine, which had an impact on efficiencies right on a per tonne basis, cost is better because we are able to move more at Herradura, deeper in size. It's a broad still, but we think that when we -- during the year, there will be best steeper pit angles that I think could save good amount of waste to be removed from the pit, and that having can impact the cost. And then also, we just got duel fuel station approved. We will be able to deploy the permits. So natural gas improved the logistics of serving the mine with that. So a lot of projects here and there and like Mario said, I mean, it's a tough environment, high inflation, strong peso, but we are very focused to contain the cost during the year.

Just to complement a little bit on what you just said. Inflation in Mexico last year was close to 8%. So we're currently negotiating contracts with the union. We usually cared a little bit about inflation in the previous year. So you're talking about perhaps an 8.5% increase in wages in peso terms. Last year, the average exchange rate was MXN 20.1 per dollar. Currently, like I said, it's a little bit below MXN 18. That was translating to a 10% revaluation of the Mexican peso, considering the average exchange rate. So if you combine that and take the compost effect, you're talking about a very important increase in terms of wages in dollar terms. So that's why I'm saying that the inflation overall and 40% of our production cost is based on in pesos. So when you combine all of that, that's how we get to our expected 6.5% inflation both for the following year. Okay. I hope that gives you a good idea.

Yes. I mean just to follow up on that slide, that $1.45 billion was your adjusted production cost metric that you talked to. You've got inflation but cost mitigating measures, but you're also bringing on one in CPO. I mean -- how should we be thinking about that number mid-single-digit increase if we add up those moving parts? Is that a reasonable assumption?

That would be reasonable if the plant at Juanicipio will be fully operational. So that will be an additional cost in the production cost in that terms. But hopefully, with the actions that we just described by Tomas, like we said, we will be able to mitigate hopefully, most of the inflation effect.

One more question on adjusted production costs. So you have clearly alluded to the fact that inflation will be around 6.5% for your cost base and you're thinking that this will be offset by the initiatives that you're planning. So within that, can you guide us what are you expecting in terms of energy cost for contractors and materials in those 3 buckets?

Energy cost, well, energy, it's difficult to predict as it depends on the international price. So what we are considering in terms of diesel or budget, for example, there's an increase in -- for about 7%. Remember, in Mexico, we have a subsidy from the government last year. We are pretty much they maintain the price of diesel and gasoline pretty much stable when everyone -- prices had increased quite substantially. And of course, that meant sacrificing resources that the government would have received, so that was subsidized. And it did hit the finances of the government in an important manner. So this year, we're not expecting that subsidy to continue. So that's why we're budgeting 7% increase in terms of the price of diesel. And in terms of operating materials, like cyanide explosives, still for drilling, still from milling tires, reagents, et cetera. What we are budgeting for is close to 7% in dollar terms. Again, that's based on unit prices. .

Perfect. And maybe can you guide on treatment and refining charges for 2023? Are you expecting it to remain stable or higher once Juanicipio is fully ramped up?

Well, as we mentioned before, I mean, we do have a long-term -- we follow a long-term benchmark treatment charges defined negotiated by internationally. And this last year, I mean, we have an impact on the same side, but not on the left side. We believe with more mining production coming on the stream and probably less of the -- more demand from the smelters to have a stable treatment charges.

Amos from Barclays. I just had a couple of questions. So first one was just around the capitalized stripping at Herradura. You mentioned obviously that provided quite a benefit to the P&L in '22. What can we expect to happen to that in '23?

We will see, let's say, a difference between -- that's what we expected. We won't see a difference between what is capitalized. In other words, if we capitalize 20-something percent in 2022, we would expect to capitalize again this year by the same percentage or around the same percentage.

And then regarding the 6.5% inflation number, is that due to flat currency, so excluding the movement in peso?

No, that's including a very slight devaluation. When we did the budget back in October, we never saw the peso being so strong. So we only used the 0.6% revaluation but it's looking, but it's going to be much higher than that. So if the peso continues to be at 18%, which is substantially below what we budgeted for then that inflation will be high in dollar terms.

Okay. And then I just wanted to ask, could you give us a bit of an update on the 2 projects: Rodeo and Orisyvo in terms of when we could be at a point for these projects go to the board for approval.

Yes. In Rodeo, I mean, first, we need to define the discussions for land access. As soon as we do that, we expect to do that in the following few months. We should deploy the exploration in order to upgrade the resources to measure an indicator. And then after will be in a position to do the prefeasibility and present to the both for approval as we advance the project. So very much by the end of the year, beginning of next year, I think we'll be in that position. And for Orisyvo, fortunately, the land acquisition is going better. And at the same time, we have had better results, metallurgical results with new metallurgical process that we are exploring as well increasing the recoveries from the sulfide area. That will give us the possibility to mine probably more than the 4 million ounces that we initially thought in an ore body of 8 million ounces to 8.5 million ounces. So that project keeps looking stronger and stronger. And I believe we can present that for approval next year.

Okay. And then final one supposed to ask is around the dividend policy. You're paying dividends based on a P&L profit number. But as you said, cash flow generation is basically close to neutral, i.e., slightly negative. Is that sustainable? Is that something you're prepared to continue to?

Yes. So we will continue with our dividend policy, the way we have stated it in the past, which is paying out 50% of net profit. This year, of course, when I explained that we saw that positive tax number, which increased the pretax number. We not want to take that into consideration because it was a very special circumstance. So we adjusted a bit for that. But still, I believe we paid the dividend, which was much higher than what was expected by the market. But in general terms, we tend to maintain that policy.

Looking forward beyond 2023 and your cost for the sort of fading production profile, do you expect the projects you're coming online to be sufficiently lower cost despite your lowering production profile all-in costs for silver would be lower than they are now. We've given a falling production profile, should we assume a continuing elevation in costs?

Well, with Juanicipio, I mean, of course, the profile -- the cost profile consolidated for the whole company will be improved significantly and more on the silver side. Right now, total revenues are very much similar gold and silver and to a total of 84%, 85% and the rest being zinc and lead. So we anticipate profile -- consolidated profile cost will be improved. And of course, in the following years, mining our mines deeper and with more horizontal distances. Of course, that those costs are expected to increase. At the same time, we put infrastructure in place that will compensate that. Of course, Tomas talked about the put in operation the San Carlos shaft that will be in the second half of this year that will save in haulage cost this year for the Fresnillo mine. In Saucito, we are also investing in deepening of the Jarillas shaft that will come in a few years from now as well, compensated some of the cost that we go our mining deeper of course. And also Tomas mentioned the other initiatives on Herradura. So net net, I think we make efforts every year to compensate that higher natural cost. In Juanicipio we have a setup in terms of the I mean a better position in terms of cost. And then after Rodeo and Orisyvo will also be improved.

I would add that in the future, we expect Rodeo to be a low-cost operational well and shallow [indiscernible] would be heap leach pad. So that will help more cost profile.

And Tajitos as well, we are placing a lot of emphasis now.

This is Marina Calero from RBC Capital Markets. I have a question on your Fresnillo mine. You were guiding for development rates to stay at 3,000 meters per month in the foreseeable future. I think your old targets from a couple of years ago were a lot higher, were around close to 4,000. Do you still think those targets are achievable? And what would you need to do to get that? .

Yes. I think that the targets are still achievable. However, what we are doing, we are starting doing engineering studies to define the right level of development. By now in the short, midterm, we don't think we need more than that. right now until we [indiscernible] what's opting right? Because yes, I mean, it's a minor dream to have your mine full developed. However, it's going to come at a cost. And we are storing what that right level. But I still think that those wells are [kilos] whether it's convenient or not to invest in that. So we will define that during the year for all the mines, we want to do more engineering to define better define what's a right balance for meters that we means and the cost, and we just have that flexibility at the right cost, I would say. .

We are working along the border lines that we mentioned before with technology as well in order to increase our productivity. So precise for an optimum development level hopeful with technology that would give us or improve our productivity. I think it's the -- that's the mix that we are trying to look at. We mentioned before for Fresnillo, the semi-automatic drilling that is giving us more and more tonnages as well and [indiscernible] union, which has been quite positive on that, working 7 days of the week, which we were not doing before in Fresnillo, working on the Sundays as well, is giving also additional tonnage. And as a result, I mean, we've been able to turn on that trend that we had before for Fresnillo.

A couple of follow-ups, if I could. First on the reserve and resource statement. Are you -- and apologies if I've missed it in the details. Are you now including, re-including the silver reserves as proven? They've not been in a proven component of the R&R statement for the last few years. So they've re-included as proven reserves.

Only proven reserves on the Juanicipio mine. The rest, the reserves.

Why is that? For a number of years, I guess, you've been indicating that you would be able to prove to your auditors that the reserves should be classified as proven once you provided more data, that was the explanation last year. And I think the year after, why have you not convince them this year that it should be included in the proven category? .

Well, we have made a lot of progress on the reserve estimation. Those are significant positive steps. We have completed the cost models from top down and the bottom up. We have hired and trained a team of professionals to introduce more detailed information required to bring this logs in category however, but we managed to do that at Juanicipio. So teams know how to do it, of course. But there are still 2 issues pending that have not been fully ended, I should say, we have a good progress in those. One, will be the details -- your technical characteristic of in each individual section of the mine, and that has to be translated into a cash cost, into a cost model and after-tax cost model. . We've taken into account the characteristics of [indiscernible] grid wall section of the mine. And although we have these models, we process to receive the updated model from our consultants, but it has not been fully implemented yet. So we're working towards it. And the second issue is that would be reconciliation. We have developed over the year a very good system for reconciliation since we've been tested right now, has been proven. However, for reconciliation, we have to have a lot of information from [indiscernible]. So although we have some positive indicators for this due to reconciliation procedure, I should say, is not, again, 100% operational everywhere but we're working on it. That [indiscernible]

We'll continue to work on that, Dan. And let me tell you that from the projection and the production expectations, we have advanced substantially despite the fact of not having proven reserves in the underground mines. Before we were having quite some issues in order to project, we had a lot of variability in the grades. And in the last 1.5 years to 2 years, I mean, we work on all of that. We have been quite precise in order to forecast more tonnages and grades specifically in Fresnillo. And as a result, I mean we've been able to hit consistently those trades to the ones that we guided a year ago, for example. So that gives us comfort that despite the fact of not having proven reserves in the underground mines, I mean we do have a geological model stance where it speaks for itself, and we are continuing to work on proven reserves.

And just 1 more from my side, if I could. You commented on the progression of all-in sustaining costs, obviously, some improvement at one [CP] of some inflationary pressures on the core operations. If I look at Herradura, Ciénega, I mean, Ciénega ASC north of $2,000 an ounce, Herradura core gold miner greater than $1,500. What assumptions are you using for impairment testing for your auditors, are these assets at risk of being impaired. I can't see how you can generate a huge amount [NGB] with those sort of all-in sustaining costs improving. And would you consider closing Ciénega if you can't improve the cost because it must be burning cash at this point? .

Yes. In terms of the impairment, what you're using, of course, is the long-term mine plan that is provided to us by the operations. And estimation of the cost based on the efficiencies that we expect to get. So that was taken into consideration in our models, and that's what we showed in our audit, and we have no impairments there. In terms of closing down a mine, hopefully, we won't get to that. But if it does come to that, we will definitely consider it. hopefully, with the mine plan and the efficiencies CNA will continue to generate positive cash flow. .

I will add to that, that we are looking specifically at Ciénega in this year to every different ways to mine to reduce cost. And when you look at the future of the mine, this year and last year wasn't a good year. Still, we have an orebody there and we'll look through the year on how do we mine in more efficiently before anything else, right? We will not get to that point of course in the mine.

One issue that we have right now specifically in Ciénega is a large investment that we've done for the tailings storage facility. I mean it's the one that put some stress in terms of covering that investment. In the following years, I mean now with that tailings storage facility in place and operational. I mean, we have now the 6 years of reserves, of course, Ciénega has further exploration potential. And we have those 6 years in front of us in order to achieve what Tomas is looking to more detail. How to make that operation more efficient. So we are confident that we'll continue to generate good cash flows in the following years in CNA.

[indiscernible] I'm just looking at higher CPO -- and given the exploration potential of that asset, and obviously, the footprint, the plant, et cetera, like that. In fact, you already owned 56%. How do you get to monetize highly exploration potential because you've only explored about 5% of the land package. And obviously, the footprint implies that there are expansion potentials even though you haven't actually fully ramped up the operation yet. But how do you get to really monetize that asset whereas the other assets in the portfolio seems to be under the fall.

Well, yes, of course, when we compare what we can do out of Juanicipio, with Juanicipio represent to the company. A new mine, of course, better grades as we had Saucito from years ago, of course, we can see what represent to the mine. We do have exploration potential there that we are focusing on initially at depth on the same Valdecanas Vein. But we also have some additional targets. So now which was -- which we have achieved the milestone of getting that asset operational, we will go into further explore the potential that we have when CPO makes sense. Initially, at that because it is a continuation of that same vein. We have very good, stable and continuous vein depth as well, but also, as I mentioned, in some other targets in the area. At the same time and not to have all the emphasis on what the assets can do for our company. We do have Fresnillo, making it more and more efficient. You have seen the profile of how the contribution of Fresnillo is being reflected in the results 2 years ago to what we have now. So that's another asset that we will continue on making more and more efficient. Saucito as well. We have good sized resources there and in order to continue improving or translating those results into reserve will give us a good mine life in front of us and make that operation efficient. And the new projects have come on stream and also Herradura as well. So we have a good mix. And of course, every time we have a new operation that is reflected in a better position cost wise and production in our company as well. Yes?

Just on the 2025 silver production, you obviously mentioned the potential additional production-related initiatives. Just on that, if you can -- did you perceive those implying any upside risk to CapEx in 2024 or 2025?

For what we are reflecting our silver production or just in general?

For that potential additional production would that -- to deliver that, would that require some additional CapEx?

Okay. Talking about San Julián, what we do have is some additional tonnage there. However, it's not of the same quality in terms of rate to the 1 that we are mining now. So we require only some efficiency measures so that we can translate that noneconomic or into economics. So that would not acquire, it is more efficiency measure, more than investment. The additional exploration potential that we have in San Julián will require some development that we are doing currently doing right now. I think we will hit by the end of this year and probably that ore body that is being explored right now. So this is an investment that we are doing is only mining works and then the preparation of that ore body if we prove to be economic. And then we will have ready for 2025 that some of that alternatives that we're looking at. Fresnillo, it will just require the development that we are doing along with the current mining plan, and continue making that more efficient in order to bring those additional ounces for 2025. And what else I can do -- yes. So there's no large investment to bring those alternatives into stream.

Last one. Can you just talk a little bit about the pathway to going from 36% of electricity from renewables up to 75% by 2030.

Yes. We do have the -- I mean, the group, the group -- the group that we belong to, in the end, [indiscernible] has and other company that produces eolic energy. And we do have that eolic energy in order to supply not even 75% or even a larger percentage of our needs. It's only the some administrative process that we have to accomplish with the current energy regulator in Mexico in order to be able to include some of our mines in that eolic source. But I mean the energies are already being produced eolic. It's just the administrative process within the energy reform that we have to accomplish.

Just one follow-up on CPO. So are there any bottlenecks to achieve maintenance capacity in 3Q and what is the production profile looks like for the next 3 years for that particular mine?

Next for Juanicipio, I mean, we are expecting some mining equipment. Yes. It's not a one, but we still are expecting some mine equipment trucks, a couple of trucks during the year. And that's just bringing the finishing the commissioning of the plant and we started the ramp up to not have any particular bottleneck other than, like I said, finishing the commissioning of the plant, which is going well. We have been working on that for the last month or so. No manual findings in the [indiscernible] so we should be fine, nameplate capacity 4,000 tonnes per day. Of course, as we always do, and is 1 more for pillars. I mean is trying to optimize to create better value out of the investments that we do. As we did in Saucito, we will analyze if we can go above that capacity with the current infrastructure that we have there. Okay. Are there any questions? Okay. If there are no more questions, we thank you for being here. And any follow-ups. I think Gabriela and Mark are always here. Yes. Thank you very much. Nice to seeing you.

Thank you.

Thank you.