Fresnillo plc (FRES) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today for our 2023 Interim report. Fresnillo plc. I'm Octavio Alvidrez, CEO of the company. And I'm pleased to be joined this morning by Mario Arreguin, our CFO; and Tomas Iturriaga, our Chief Operating Officer. I need to point to a disclaimer before I begin, but I will quickly move to the agenda we will cover this morning. In terms of our agenda, I will take you through the key operational and financial highlights and address some of our key recent HSECR initiatives as well as make some remarks on our exploration activities. Tomas will then cover some details of the operations and Mario will provide our financial update. I will then conclude with some comments on the outlook before we take on your questions -- on your questions. You will be familiar with our investment proposition. It remains consistent and compelling. Notwithstanding some of the recent challenges that we have in Mexico and in the mining industry. We are the largest producer of silver worldwide and Mexico's #1 gold minable. We benefit from the high-quality mining in our assets backed by our large resource base to 2.2 billion ounces of silver and nearly 40 million ounces of gold. We have strong EBITDA margins and low cost and remain very focused on running our operations efficiently. We take a disciplined approach to investment through the cycles, and we have a proven track record of completing our projects as it is our most recent addition to our portfolio, the Juanicipio projects. among some other projects in the past that we've been building and keeping up with our organic growth. We also have a solid project pipeline of new projects and prospects in Mexico, in Peru and in Chile. Of course, we are in a journey to further improve our sustainability performance and have a long track record of consistent, committed engagement with our local communities. This will be important for the upcoming project that we have in Mexico and especially in the scheme of a new mining law in which we have the indigenous consultation expert. Moving briefly to our HSECR initiatives. We have a good trajectory and the safety side, as you can see in the lower chart to the left. However, this is a good trajectory. I'm sad to report this year, two fatalities in our contractor employees. This is not acceptable and we more double our efforts to ensure a true culture of safety across all of our operations, so that we achieve our aspiration so far with a safety culture in all of our explorations and in Fresnillo PLC as a whole. On the environment side, work on improving our carbon emissions performance is also ongoing as we work towards decarbonizing our operations, improving water recycling rates on all of our mines and upgrading our mining fleets. This year, we are starting, and we aim to conclude an in-depth analysis of our two largest assets in Fresnillo and in Herradura, the opened pit. In order to understand better what kind of technologies we have available, what kind of objectives we can set in terms of decarbonization in our minds and along some other studies based on science, we are planning to come to a conclusion on what we can commit in terms of climate change initiatives. Some of the operating highlights. This has been, as I mentioned, a few challenging years. And these challenges remain as we continue to work through the inflationary environment we are currently in. Also with some condition, in terms of foreign exchange in our country in which we have seen the peso strengthening just recently. I'm really pleased with the overall performance of operations. We have achieved stability in Fresnillo. And in Saucito, we have seen a turning point, again, going to a positive side. I believe this shows how we have stabilized our operations, and we are now in a strong position to capitalize on further growth opportunities with the legacy operations all in a much better place. So operational performance was in line with expectations, and we are once again reconfirming our full year guidance. Clear. A key highlight was the commissioning and ramp-up of Juanicipio, which we still expect to hit nameplate capacity in the third quarter. We have also completed the commissioning of the new pyrites plant, and that is operating -- operational right now. Finally, we slightly front-ended some of our exploration investment, our full year guidance, but we will achieve something in the lines of our budget. On the financial highlights, despite the inflationary challenge, we are reporting robust numbers it leads, generating cash, maintaining our strong balance sheet while still paying a healthy dividend to our shareholders. And Mario will talk about more about this impact not only for inflation, but the strength of the peso. Moving to the exploration front. As I mentioned previously, we have slightly invested more in our exploration in this first half as we have had good results in Guanajuato and in Tajitos, who will be joining our pipeline of growth -- organic growth. More specifically, I'm also pleased to report that we have moved Orisyvo to the pre-feasibility stage. And this is as we are moving this project ahead. Looking to our exploration front as well. As I mentioned, this year, we are budgeting USD 175 million. As you can tell, most of that exploration budget goes into our mining operations and development projects and those still being explored. In order to increase the certainty of our resources and reserves and also grow on those that we are still exploring. As I mentioned, not only in Mexico, but we are also exploring in Chile and Peru. And with that, I will pass to Tomas Iturriaga to tell us more about the operation details.

Thank you, Octavio, and good morning, everyone. It's a pleasure to be here to talk about our report what I believe to be a solid first half of the year in the operations front. Of course, we acknowledge the cost pressures we are facing in all of our mines. But operationally, I think we are on sound footing now to go from there. I will start with the Fresnillo District as it is and still where our main focus remains in terms of performance. So starting with the Fresnillo mine, the mine continues to perform per our expectations. And I'm very pleased with the positive impact of our performance improvement plan that we implemented there. Development rates will -- for the second half of the year, will continue to be in the average of 3,100 meters per month showing the consistency of the mine. One of the key drivers at the Fresnillo improvement is the San Carlos shaft deepening project, which continues to progressing well and is expected to be complete by year-end after the shaft service infrastructure redesigned with it early in the year. So with a stable production base at Fresnillo, we are now focusing on several efficiency and cost containment initiatives that I will mention sometime later in the presentation. Moving to Saucito. I think the good news is that we have stabilized the performance at this mine as Octavio was mentioning earlier. We had a good first half of the year, and we expect to see further improvement in the second half. The higher [ transmit ] issues we had in some zones of the mine are well under control and causing no more further delays for a slowing for mining. Also, the flooring and pumping system missions we had in the past are behind us. So I believe we have a solid base now to continue increasing the tonnes out of the mine and therefore, the metal produced at Saucito. The deepening of the Jarillas shaft is progressing well also the Saucito. Moving to Juanicipio. I'm pleased to report that after commissioning in Q1, the ramp-up of the processing plant is going very well. We have not found any usual matters on the ramp-up. So we are in track to achieve nameplate capacity during Q3. Production in the first half of the year was strong at Juanicipio, as we delivered just over 4 million ounces of silver and 9,000 ounces of gold in the attributable basis. But we had, of course, the benefit of processing some ore in Fresnillo and Saucito. We are also benefiting from the higher grades in the upper levels of the mine, which will normalize as we mine down in the following years. So overall, it has been a good start of the Juanicipio mine as we were expecting. In San Julian, not much coming. I mean other than performance was in line with expectations, and we -- with some impact in the veins mine related to lower availability of equipment that it's overcome, and we expect that in the second half of the year. At Cienega, we have a more challenging first half of the year in the operations. Because we are seeing lower grades and then high hauling cost because some of the better grade ore is coming from satellite mines far away from the process plant area. So that challenging cost there in that operation. However, we believe that Cienega has a good future because we have -- we have a better grades on the reserves. So -- and we are analyzing how to get to that area sooner, maybe with a new access to the mine that we are analyzing. And we are also piloting new technology to pre-concentrate the high-grade ore that is coming from far away. So we could also reduce the holding cost impact in that portion of the operation. So we'll keep you a price of the progress in Cienega, where, like I said, we -- we're working to lock that value in the future, as we believe in the future of the Cienega. Finally, the operations Herradura, we have a good performance with almost 190,000 ounces of gold produced in the first half. And this despite the labor -- the labor stoppage that we had late in April and May that was properly reported. Despite that, the team there managed to some level of operations and the output was good. Now in the next slide, I want to provide a brief description of our cost containment, cost reduction, efficiency projects at Fresnillo. As I said before, the deepening of the San Carlos shafts is going to be very positive impact in the haulage cost. So whenever that is ready, we'll capture that benefit. In addition to that, we have about seven high-impact initiatives going on at Fresnillo worth $3 million to $5 million on savings on an annualized basis, for example, savings in the [ shaft quitting ] process by rationalizing the [ shaft quitting ] reduce pumping maintenance cost, then the tele-remote drilling and autonomous drilling project that is listed there could potentially produce an improved productivities representing up to $7.5 million in NOI savings. At Saucito, we have five projects having to do with the expediting of the mining cycle, which will improve the mine output, and therefore, the cost per ton. An example of those projects are the ground supporting cycle, improvement of that or the optimizing of the long-haul drilling cycle. We're also working on a project to reduce consumption of reagents in the dynamic leach plant. The haulage fleet weight tracking system itself that is already ongoing, could produce to an estimate of $3 million in savings in a full year. And that's efficiency in the holding reduced to cost savings. At Herradura, 12 initiatives ongoing. So just extended our entire life, extended truck fleet major components life, reduced diesel and natural gas logistics call -- cost, sorry. All of that representing an estimate of $10 million in savings -- cost savings on an annual basis. So -- and I'm just using those three mines to -- as the examples of the kind of projects that we are undertaking in all foreign mines to try to contain the cost inflation and the actual freight that is impacting us. So my final message would be that we can now count now on a solid operational performance of our portfolio of mines as a solid foundation to now focus on continuous improvements, efficiencies and cost containment. Thank you and over to our CFO, Mr. Mario Arreguin. Thank you.

Thank you, Tomas. Good morning, everyone. If we can move please to the income statement. Okay. What you see on this slide is basically the income statement for the first half of the year, and we compare that to the previous year. And as you can see from all the different profit levels, which are outlined in yellow, we are below last year's first half results. Gross profit was below almost 23% compared to last year. Operating profit was almost 63% below last year. Profit for the period was 36% below last year, and EBITDA was close to 24% below last year. And in order to understand the decreases, I would like to start basically with gross profit, the $83 million decrease. If we move up that column all the way up to adjusted revenues, you will see that we had an increase of almost $82 million in adjusted revenues. That was basically due to volume, as Tomas reported, we had an increase in production of silver and gold. Whereas prices, even though silver and gold went up in this first half, they were more than offset by the decrease in the price of zinc. So prices didn't really do that much for us this first half. It was more in terms of volume when justifying that increase in adjusted revenues. But I think the item that you are mostly interested in has to do with adjusted production costs, which increased by almost 17% or $114.5 million. Net income, This is the line item that I would like to dedicate some time. So if we can please move to the, what we call the rainbow analysis. And what we show here in this slide is on the far right-hand side, that bar shows the increase in adjusted production cuts, which was again $114.5 million. And if you move all the way to the left on this graph, you will see the different variables that impacted our costs, starting with the bar #1 and the most important one, which has the most important effect for the period was the revaluation of the Mexican peso. I'm sure all of you are familiar with this. The peso has been one of the strongest currencies compared to the dollar. Basically due to the fact that the interest that we pay in Mexico is much, much higher than the world paid in the U.S. So you can see that the average exchange rate for last year was MXN 20.28 per dollar, whereas for the first half of this year, it was MXN 18.21. So that translates into a 10.2% revaluation, which had an impact -- a negative impact of $45 million. Now what we show on bar #2 is the impact of what we call the underlying cost inflation. And the underlying cost inflation is the one where we exclude the impact of the Mexican revaluation. This is purely the increase in unit cost, assuming 0 revaluation of the Mexican peso. And this underlying cost inflation for this first half of the year was 6.2% on an annualized basis. Which had a negative impact of $41.6 million. If you add these two first columns, you will see that you get to almost $87 million which represent close to 76% of the total change in production costs. So by far, I would say these two elements were the most important ones in terms of impacting our adjusted production cost. If we continue to move on, you will see that on bar #3, was showing the increase in absolute production costs, you're right from the fact that the Juanicipio mine ramped up and has extracted more minerals during this first half of the year compared to the previous year. And you're also aware that this year, we started the operation of the plant. So obviously, behind that, there was $19.6 million increase in absolute adjusted production cost. But we really don't need to worry about this particular increase because behind this increase, we saw a very important increase in our profit. Moving on to bar #4. And this has to do with a technical accounting adjustment, I would say. This first half of the year, for the Herradura mine, one of the most important components of the Herradura mine has stripping ratio, which was below the average life of mine stripping ratio. What that means is that for this year, we pretty much capitalized -- I mean, expense, expense due to the income statement. [ Politic ] cost incurred in stripping in this particular component, which is the most important at the Herradura mine. And as a result of that, when you compare the first half of the previous year, where we had exactly the opposite. We had a higher stripping ratio and a lot of that was capitalized. This year, that stripping ratio again was below the average life of mine stripping ratio. So we took more of the stripping cost to the income statement. And that had a negative impact of $19.5 million. The fifth column, what you see there is basically has to do with the current operations. So there was an increase in terms of the use of maintenance, contractors, operating materials, diesel, and this was basically due, as you are aware, of longer haulage distances and deeper mines. And we're also doing more development. All of this had a negative impact of $16.7 million. And lastly, on column #6, we also saw higher ore volumes processed at some of our mines. Again, we don't really need to worry about this particular increase because behind there was an additional profit generated. And the two variables that somehow mitigated this adverse effects were one, Noche Buena. As you know we're in the process of closing that mine. So obviously, that mine incurred less production cost. And also, we reclassified part of the cost incurred at Herradura and Noche Buena. I'm sure you remember, we had a stoppage, legal stoppage for 14 days. And what we did there is those fixed costs, mainly salaries, we reclassified those to unproductive costs. So let me just go back a bit and as I believe there are two questions that you might ask. One, how much of this was known by the market, and two, of the changes that we show here in this slide, which do we consider to be structural or permanent and which do we consider to be temporary or that can be reversed. Starting for the first question, how much did the market know about this? And if we start with part number one, Well, this shouldn't be any surprise at all. I mean this is public information in terms of the exchange rate and everyone is very much aware of that. So this is not secret. Second, what we call the underlying cost inflation in early March when I was sitting here, some of you asked me what inflation was expected by the company. Excluding the exchange rate effect, and I was lucky because I answered six. So this was pretty much known by the market, too. So the market knew about these two first columns, which again represents 76% of the total increase. Juanicipio mine ramp-up and the startup of the -- of course, the market knew about that. So obviously, if you come a new operation that would increase your absolute adjusted production cost. Column #4,, the stripping -- the increased stripping cost taken to the income statement. Well, maybe we -- I believe we mentioned part of that in the March meeting that we have here. But again, that was a technical accounting issue. And I guess the one that we are working on is the brand shown in column #5 where Tomas has explained certainly the actions that we're trying to make in order to mitigate that sort of deepening and longer distances in our minds. Now question number two, how much of -- how many of these bars are structural or permanent, which ones are temporary. Again, starting with column #1. From my point of view, I believe this is one of the variables that could be reversed. That is temporary. How long do we expect the peso to maintain this strength? Well, it's hard to say. I can tell you that for the second half, it's going to be even worse because in the first half, we had 18.21 average exchange rate. If you look at the actual rate right now, it's 16.7. So it's even below the average of the first half. And we really don't see any reason for that to change in the short term. Of course, we are going to have elections next year. But we're not expecting that this political situation could have a negative impact on the exchange rate unless something unforeseen happens. But in the medium and long term, we don't believe that the peso can hold this strength. And eventually, they will maybe come back at least to '21, '22 levels that we just saw 6 or 7 months ago. So again, this first column, I believe, can be reversed. The second column inflation? I think this is structural and permanent unless we start seeing deflation and lower unit prices, where we really don't -- are not expecting to see that. The Juanicipio mine, again, it's a good thing. So that's permanent, is going to stay there, but generating good profits. The stripping to cost. Well, that changes depending on if the stripping ratio is above or below the long life of mine stripping ratio. So again, it comes to column #5. Our mines are already deep and our open pit mines have increased the distances, and they will continue to do so. So once again, the only thing that we can do is try to mitigate those effects by implementing strategies to be more efficient and more productive. And again, Tomas just spoke about that a few minutes ago. So I hope this gives you a clear idea of where we see our cost going. If we can go back to the income statement, please. The other item that I think is worthwhile talking about is exploration expenses. As you can see, we had an increase of almost 25% or $19 million. So we spent close to $97 million in the first half, which is slightly above what we guided for at the beginning of the year, but we expect that the end of the year pretty much in line with what we guided to you. So probably, we will see lower exploration expenses in the second half to meet the guidance that we gave. But most of this increase has gone not to the operating mines, but rather to the new exploration and projects that we are currently working on. Perhaps another line that would be interesting to talk about the silver stream. You already are very much aware of this. This has no cash effect. Nevertheless, we have to value to market the silver stream that we hold with Penoles, Sabinas mine. And given the fact that prices -- forward prices when we did this valuation as of the close of June, forward prices were lower for silver. We had to incorporate that into the model and also the fact that Sabinas has reported a bit lower reserves and resources that translates into a bit less silver coming out of that mine in the future. So all of that is taken into consideration and the outcome was a 17 million reduction. However, compared that to the previous year, where we had a much bigger effect coming from lower silver price and an increase in the interest rates that we use to discounted cash flows delivered a lot that had a positive effect of $19 million. The other line items that I think we should comment on our income tax expense and mining rates is very unusual, and I would say, unique to see positive numbers there. So I believe this will be one of the few companies that is reporting higher after-tax profit period. And the reason they compared to the profit before income tax. And the reason for that, and this is not the first time that this has happened. Given the impact of the revaluation of the Mexican peso on deferred taxes and also the impact of inflation, but most importantly, the revaluation of the Mexican peso that has a tremendous impact in terms of the deferred taxes. So that's how you get to $89.7 million of profit for the period, which is higher than the profit before income taxes. Again, if the peso goes back to the '21, '22 peso per dollar level, this will be completely reverted in the future. And that's what we expect to happen eventually. Okay. And if I skip some of the lines, I'm happy to answer those during the Q&A. Go to the next slide, please. The next slide. I just want to make sure that we are clear on what we understand by what we call consolidated cost inflation. In the rainbow that I explained to you, we separated what we call the structural or the underlying cost inflation from the evaluation of the Mexican peso. However, when you look at them together, combined, that's how we get to what we call the consolidated cost inflation, which again takes into consideration our own particular basket of inputs and the weighted average of each one of those, and that's how we get to the 13.35%. Again, if you take the revaluation on the Mexico peso effect out of this. That's how you get to the 6.2%. So hopefully, this concept is clear. And if we can look to the next slide. I think this is important to show very quickly. And by the way, the shaded part of the circle there is basically associated to contractors. So contractors obviously bring their own personnel, bring their own equipment, bring some of their own operating materials and also do part of the maintenance and they charge us for each one of those components. Anyway, as you can see, operating materials as a whole represents the most important component of our adjusted production, representing 23%, followed by personnel which represents 20% when you combine both our own personnel and contractors. Maintenance represents approximately 20%. Energy, basically meaning diesel more than electricity, represents 18% and a bunch of other things represent 12%. So when you model Fresnillo, we should take this into consideration and also take into consideration that between 40% to 45% of the production costs is denominated in and paid in pesos. And that's where we get hit with the peso revaluated. Move to the next slide, please. So to conclude let's look at the different factors that affected gross profit. So again, the green bar on the right-hand side represents the $83 million lower gross profit. So what that benefited us. Of course, the Juanicipio mine ramp-up and the trend start-up. Remember, when we spoke about production costs, I said that, that was a component that increased our costs. And at the end of the day, we more than covered the stack cost and generated an additional $59.2 million in gross profit. Also, the fact that at some of our current operating mines, we had a higher volume that also increased our costs. But it was more the compensate that compensated by the increase in sales, which obviously covered that and generated $42.6 million in additional profits. I spoke about higher metal prices. Of course, gold and silver were up a bit, 4.2 in the case of gold, 2.4 in the case of silver. However, if you look at column #10, the price of zinc almost came down by 30%, and that's becoming a very important byproduct. So the impact of the lower base metal prices, our byproducts had a negative impact of $51.3 million which more than offset the positive effect of the higher gold and silver prices, $38.5 million. We also have a what we call the gold inventory uplift at Herradura. So what we saw at our leaching pads was that the inventory was coming down, and down, and down. And we were going to get to a point where it was going to be 0 or negative. So we did an analysis to see how much really was our leaching pads. And we came to the conclusion that there was a bit more gold than what we initially estimated. Of course, this was audited by Ernst & Young, our auditors. And on the negative side, of course, you have, again, column 9 and 8, which represent the revaluation of the Mexican peso, the cost inflation and the higher stripping to costs, all of those factors, we spoke about in the previous slide. So this gives you an idea of the things that helped us and the things that went against us when it comes to gross profit. If we can move on, please? Yes, I'm not going to comment on this. I thought it would be good for you to know where we are investing in terms of exploration. And as I said, we are dedicating other resources to prospects and projects. That's where the increase was located. Next slide, please. Finally, in terms of cash flow, as you can see on the bottom first column, we closed the first half of the year with almost $890 million. which represented a decrease in the cash balance compared to what we had at the beginning of the year of $79.4 million. But if you consider that we paid dividends for $98 million, you could conclude that we were net cash positive, excluding the dividend payments, which were $98 million. So the main source of cash came obviously from the operations, $323 million. I would say, the main uses of cash were obviously taxes paid, profit sharing paid. Remember, this represents cash payments during [indiscernible], basically provisional tax payments. and also mining rights that we paid in March corresponding to 2022, but were paid in March this year. And the profit sharing corresponding to 2022, which was paid in May this year. Those basically are the concepts that formed the $192.3 million. And that's a very important news, of course, is CapEx, $228 million. Part of that is mine development and part of that is plant and equipment. And the dividends paid $98 million. Those were the main uses of cash. With that, I think I will leave it at that and if you have any doubts, questions I'm very happy to answer those during the Q&A.

Thank you, Mario. And coming to the last part of our presentation. We've seen an increase in silver production this year level, I would say, production in gold. And as you can see in the behavior of lead and zinc. Silver, of course, increase coming after we are operating Juanicipio, ramping it up. And also, we will see some contribution from the pyrites plant as well. On the CapEx side, we've been reviewing our CapEx needs for this year, and this has come down from $630 million to $555 million. In terms of reviewing our needs, as I mentioned, as well as the program and the timing for that CapEx deployment. We are forecasting '24 and '25 at the same level as we had it before. In terms of the projects and how those are looking. As I mentioned, pleased to report that receivers are going to pre-feasibility. We are ramping and aiming to nameplate capacity Juanicipio in Q3 this year. As we mentioned, the pyrites plant is operating right now. And good to report good performance and projects being moved forward in the case of Guanajuato with some good exploration results as well as Tajitos. So in the coming months and years, we will see Tajitos and Rodeo somehow rivaling. Each one of those about the same size open pit projects that could turn into operations, Tajitos neighboring Herradura and Noche Buena, Rodeo in a very good area in terms of infrastructure, with energy, water and labor as well. Orisyvo, good challenges lying ahead in terms of infrastructure and investment, of course, is probably that we still have to derisk in terms of metallurgy and everything, but it's is looking good every time or better every time. And Guanajuato, an old mining district in the central part of Mexico. On the ground mine, good exploration results so far, and we will continue to making it grow. So to conclude, I mean, we are posting a good performance, I would say, as we mentioned all the way and the different links of the chain making good progress on the exploration a steady program with robust operational performance, better performance in Fresnillo turning Saucito, as we mentioned, to a more positive performance as well. And Juanicipio smooth ramp-up and aiming to achieve nameplate capacity in Q3. Our focus will be for the following months on cost control. We're deploying a number of initiatives across all of our operations. And according to all of this, we are reiterating our guidance for 2023. And with that, we can go into your questions. Thank you.

Dan from UBS. The first one, just to recap on the cost subject. Your production guidance implies pretty much flat or similar levels of production in the second half. Therefore, should we assume a similar run rate high $700 million to $800 million in kind of production costs in the half on half, obviously, the year-on-year, there was a big cost step-up due to inflation this time last year. Is that broadly speaking, the right kind of run rate to expect in the second half. Okay. And then just into 2024, when you looked at those variables, obviously, no one is in control of the exchange rate. Looking at your other if we were just to assume similar run rates on the FX rate. You would still see inflation on your overall cost base in dollar terms in 2024. Is that correct? Because you got a full year of production at Juanicipio and I guess inflation is not 0. Is that the right way of thinking about it?

In terms of absolute terms?

Yes, dollar terms.

But absolute, not unit costs.

No, dollar terms. Just your production is broadly flat. Should we assume that dollar costs are at least flat or up next year?

Flat or up slightly, I hope. And hopefully, we will see some of those projects that Tomas was talking about resulting in some sort of savings.

Okay. And then just next one on your Herradura in particular. You mentioned that stripping ratio is down relative to previous periods. The one sustaining cost of the asset is over $750 an ounce. And if you were at the below the life of mine stripping ratio, I guess that has to come up at least be similar going forward. Doesn't feel there's a lot of DCF value in the asset at current gold price as if that's the kind of run rate where do you expect the medium-term trajectory in terms of CapEx cost? And is there a risk, again, impairment of the asset at the full year results?

At the Herradura mine?

Yes.

Well, I think you're right in your assessment. I'm not sure exactly how this stripping ratio is going to behave in the next following years, if it's going to be a cover below but that might require a certain investment teams in CapEx impacts.

So we should assume a cash breakeven cost similar or higher than where we see in the first half of this year, $1,700, $1,800 an ounce.

Around that yes, going forward.

Going forward then. And is there a risk we see an impairment, if you don't rebase your long-term assumptions to at least that kind of level. Because I guess by definition, there's not much value in the asset of it.

I don't think we'll get to that point to recognizing an impairment.

Okay. I'll leave it that.

As in the open pits, I mean this year was a higher stripping ratio than the average of the mine life. But in the coming periods, I mean, that will be decreasing, of course. And we will have a better stripping ratio than the mine life average. And also the other study that we are waiting is the...

Optimization that we are undergoing right now and that potentially lead to less ways to be removed from the pit.

Although as it has happened in the past with Herradura with the exploration we do, we usually turn some of the blocks that were not supposed to be ore, around the open pit, and that gives us additional ore mainly. So all of those variables are playing right now. So we expect a better performance in the future.

Right. So the strip ratio is coming down relative to what we saw during this period. Okay.

Jason Fairclough, Bank of America. Just a couple of questions around the global projects because I guess what I'm hearing today is that you've got a bunch of old mines and you're sort of running to stand still in terms of costs. In fact, you're not costs just continue to work against you. I feel like the way the organization used to offset this was by having a pipeline of new projects coming through. And obviously, Juanicipio helps. What's next? Like if I look at your slide here with the outlook and the growth projects, there's a bit of a hole, right? And even if I look at Rodeo, you're seeing production in 2025, but you're still studying it, right? So are you concerned about that, Octavio? Like it feels like more should be happening stuff should be approved right now. Again, it doesn't feel like things are ready. Is that fair or unfair?

It is -- It is on -- I mean, if we look back for the last 15 years. I mean, we used to have almost a new project every other year, coming on stream. We have, in the beginning. Soledad-Dipolos, Noche Buena, Saucito, Saucito expansion of course, and San Julian. Yes. Now we are facing some 2, 3 years with our new project coming on stream. And at the same time, is 2, 3 years. I mean we have continue doing what we can do in Fresnillo, as I mentioned, better performance, a bit more grade, Saucito, turning point. So we will concentrate on operating more efficient and better the Fresnillo, Saucito and the current operating portfolio. Now in terms of growth, yes, we do have those 2, 3 years without the project coming on stream. Next one, in terms of the less difficult discussion them is Rodeo, of course, whenever we struck a deal with the land access, it will be a matter of exploring 6, 7 months, turning those simpler resources into indicated around the pre-feasibility, not a large CapEx project. In the meantime, we keep on advancing a receivable. But yes, it's 2, 3 years, which we do have that...

Just to push on this case, because I want to understand. Is the problem and underinvestment in exploration? Is the problem you're just being unlucky here, you're not finding good projects? Is the problem, a lack of resource for the project team? Or is the problem actually just Mexico and you feel like, well, let's just slow down, and we're not going to be in a rush to invest.

I think it's a combination of things. Number one, I mean, Rodeo is community-related issues not being able to concrete the land access. Orisyvo, although it is a large resource base, we needed time to strengthen to the levels in which we like the Fresnillo assets to run them through pre-feasibility. So we needed to derisk that I see in terms of recoveries, the logical recoveries, something that we are doing right now, looking better every time. So you all take time to go to pre-feasibility. So that's technical issues, I would say, on derisking that project. And the other one is just Tajitos that we needed to consolidate with different ownerships in terms of money concession, something that we don't have those recently. And Guanajuato is just the exploration and how that has evolved. So it's a combination. Mexico still is not playing a large aspect in terms of challenges right now. I mean, because it's not -- has to do with when we can -- or how we can develop the portfolio. So it's those other aspects. Particular to the different projects, but in different aspects, I would say.

So you think it's the assets. You don't think there's an organizational issue where you're under resourcing the project teams.

No, not really. I mean, if we look back at the resource we have devoted in terms of exploration is at a good level. And we've maintained the resource base, I would say. However, not being lucky here or successful in order to concrete one project to bring in the following year or year that after.

Can you give us a bit more details about the drivers behind your decrease in CapEx guidance for the year? And maybe as an extension of that, do you see any potential for CapEx guidance in 2024 and '25 to be reduced?

Yes. The -- yes, the reduction this year is just based on our review or forecast for the rest of the year. I mean improvements in time tables, devise engineering, some projects, reducing the actual spend through the year basically. And yes. For next year, I would say I don't foresee any major increase. I mean, it should remain for the guidance as we see it today. Main expenses next year would be failing them, some mine equipment, basic sustaining CapEx in addition to whatever we define for new projects.

Yes, that is mainly sustaining. And if we keep on advancing our projects, of course, that would be in addition to what we saw in what has to do with the stages of pre-feasibility and some CapEx deployment at each, particularly specific project.

It's Daniel Chigumira from Credit Suisse. Another question on the projects. So what we've seen is you speed up the exploration spend and slow down the CapEx spend in the first half of this year. Should we interpret that as you needing to increase the quality of the remaining projects, your project pipeline essentially.

We had the permits, which is good to explore Guanajuato and Tajitos. We are doing good exploration results there. So we speed up a bit more the exploration phase in those two projects. But in order to come to our budget, I think we will, in the second half of the year, we reduce the pace. We will be able to post an increase in resources in these two projects. And the rest mainly is in the operations. As I mentioned, and in some other projects like San Juan, Candamena but at a slower pace. Also, we are exploring in Chile and Peru. But the main two projects that where are reflected in the higher exploration investment in the first half was related to Guanajuato and Tajitos.

And you've kind of mentioned that Rodeo and Tajitos are similar would be [ completing ] the capital. But as it stands on the project pipeline, we are at very different time lines. But we do as in 2025 and casino. So how likely is it that Rodeo is delayed materially in order so that there is a similar time line so that you can evaluate them side by side.

It is related to the kind of project. I mean, Tajitos, we are very familiar with exploring in that area. As I mentioned, we have the land there, the surface, the permits, everything. So the exploration could be quite quick in order to go from inferred resources into indicator. If we do not have -- we are not successful in Rodeo in the following months. I think we will see Tajitos outpacing Rodeo. So that's the only question. That's why, I mean, as an earlier project, Tajitos, it is not a time line reflected in the chart that we presented.

Okay. So it's more Tajitos has pulled forward a bit and Rodeo is pushed back a little.

That is correct.

Okay. And from a decarbonization perspective, you mentioned doing studies at Fresnillo, Herradura to see what firm targets you can give around those operations around decarbonization, which is great to see. When do you think you would start and finish that same work for the balance of the portfolio.

Yes. We have started this analysis and this third research with ENGIE are starting in detail as I mentioned, for Fresnillo and the opportunities that we have there as an underground mine and being the largest in the portfolio and also in Herradura. With those two aspects, I mean, we will be able to gather very important information, hopefully, by the end of the year or beginning of next year. And with other studies that we are doing in terms of climate change in the areas, the University of Arizona and some other initiatives science-based we will have all the information hopefully earlier next year in order to define our way forward.

And final one for me. For those of us who weren't Mexican economists, what gives you the conviction in that medium term, the pace that will revert back to weaker levels.

We're not actually sure that, that we will have that. But the peso has strengthen due basically the different -- I would say, the difference in interest rates that are being paid in Mexico versus the U.S. main. And we can't keep that rate at 11.5% risk-free government paper being paid out. So that -- those rates eventually will come down. And when they do come down, maybe we think that as a consequence, peso will lose some of the strength. And again, I'm not an economist. That's the way I see it. And there are certain other factors, political. You never know what could happen there. We have an election year coming up next year. So that's an additional factor that we have to take into consideration.

This is Sandeep Peety from Morgan Stanley. So I had three 3 questions. Firstly, on the labor reforms. Can you let us know what are the new labor terms. When do you expect them to be effective? And on Slide 21, what level, like is it only the labor that gets impacted? Or is it also the contractors and maintenance.

Well, actually, the labor reform came into effect in 2021. Basically that was at the end of 2021, September, October of 2021. Basically, what affected us was the fact that the law for big companies from hiring contractors to carry out what the government calls the main activities of the company or the core activities, called business of the company. And in our particular case, we had a very large base of contractors performing core business activities. So we had to substitute those [indiscernible] our own workers. But again, that took place basically in 2022. We're pretty much done with that. So that was one of the most important aspects of the new labor law.

I was more referring to the labor terms that was settled recently, the labor hikes or the...

The increase in wages?

Increase in wages. Yes.

Okay. I thought you said -- okay, now we have an annual review of contracts. Every 2 years, we review more that the contracts, the fringe benefits everything. And every year, we do negotiate the increase in wages. Typically, what we use to negotiate that as a basis as the previous year's inflation. So in 2022, we had an 8% or a bit higher inflation in Mexico according to the consumer price index. So that's why we granted an 8.5% increase in peso terms, right? But when you combine that 18.5% in peso terms and compounded by the revaluation of the Mexican peso, that's how you get close to the 20% in dollar terms.

Okay. Okay. And does it only apply to the labors or also to the contractors and maintenance, the bucket that you have provided on Slide 21.

I'm not sure I understood.

So does it also apply to the contractors and maintenance. So the bucket that you have provided on Slide 21, if you go back to Slide 21.

Each contractor company negotiates their salary increases on their own. I mean, we have negotiated salary increases for our unionized personnel and the rest of the companies negotiate for each one of their earlier workforce. But we can assume that it's approximately a similar increase.

And maybe you are referring to a minimum wage increase of [ 30% ] that the government announced earlier in the year, but that has nothing to do with us because not for personal mix, minimum wage. So it's different, right? It doesn't apply. Maybe that's what is confusing.

Okay. And then one clarification on the absolute production costs. So the $800 million for 2H that you have guided for, is that considering the spot FX rate? Or is it considering 1H FX rates?

Considering that the exchange rate remains at around 17% as per [indiscernible]

Patrick Jones, JPMorgan. I know there was some proposal changed mine legislation recently, I think back in late May, early June. Could you just give a bit of update as to where those stand and what you see as the potential outcomes of that impact?

Yes. We -- it depends, I would say you cannot take a general approach. It depends on each one of the mining companies. For example, in the case of Fresnillo, in which we have a large mining concession, it would not -- we would not be impacted by the current administration, not granting new mining concessions in Mexico, for example. So with the concessions we have on hand in the case of Fresnillo, we will be able to explore for the following years with no problem, of course. But for a new mining company, of course, we represent a very a lot of challenge, a very large challenge. All for those mining companies that like to deal and increase their mining holdings, of course. In terms of the other aspects like the indigenous consultation. In the case of Fresnillo, of course, we've gone through one of those process, the first one in the mining industry in Mexico back when we needed to build a water pond or reservoir for San Julian. We went through that process as well, and it was a good learning experience something that we are prepared for. And at the same time, as I mentioned this, that would not be impact in the case of Fresnillo through the mining chamber in Mexico, and in a good dialogue with the current administration, we are defining the operating rules for that new mining law. So that we believe we can get to a good outcome for making the new mine law, good to operate still as it is. At the same time, of course, we are also consistent at searching for a bill, we're going through a [ law ] process in order to appeal to this mining law.

Can we go back to the income statement. There's just a couple of numbers there. I wanted a clarification on. So the unproductive cost there -- is that a one-off that reverses, Mario?

That's -- that's a one-off. Like I said, due to the stoppage that we had at we took out of the adjusted production costs and reclassified that.

So it's not really the adjusted production. If anything, we'd be adjusting the adjusted production cost up by 21.5 million as those things come back online.

Together with additional further action because of the 14 days that we stopped. Yes.

Okay. And then the other one was just, if you look below the line, you've got other income expense, 33.5 million. So it's not a small increased 26.3. So what's in that number?

Okay. I believe we reported that there was some illegal extraction of gold at our Soledad-Dipolos pit.

So that's a theft?

Yes, that's another word that you can use. Okay. Do you remember that Soledad-Dipolos, it's been, let's say, put on hold because there is there are people there who claimed that that's their land, right? What we've seen is that and identified is that there is being a certain activity going on in terms of extracting illegally the gold content at those leaching pads, which are currently not operating. So we had an inventory have called there recognized in our balance sheet. We estimated as we could. How much of that inventory has been lost due to these illegal extraction activities, and that's what is included in there.

So that's a noncash expenses.

It's a noncash but it's -- it's real gold inventory that's inspected of the leaching pads at Soledad-Dipolos.

Okay. And then conversely, we've got a write-back of $22 million of inventory in Herradura.

Yes, that was due to the uplift in inventories.

It has happened before. [indiscernible].

But this one is a bit unusual, right?

It is. It is. Yes.

And ultimately, it's a financial loss for the company and its a theft. Or is that might be...

I said it's an estimate that we've done because what we've seen in the area. And we are in the process of discussing this, in fact, with the authority as well. And at the same time, we have this dialogue with the communities in order to go back to the area as well. So all that is involved. But while we are -- and our objective is to ask the authorities to intervene and sees, of course, that illegal activity.

Yes. I've got a question on the lines if we can take that one.

Yes.

Operator, can we take the question online, please?

[Operator Instructions] Our first question comes from Amos Fletcher from Barclays.

A couple of questions. First one on Juanicipio. Growths were a bit above expectations. Can you give us any guidance on grade for the second half and into 2024, please?

Yes. The grade is going to remain at the same level as we saw in the first half. And we maybe a little bit better as we use less stockpile for which we had low grade that we used to start the plant until we, until we normalize the [indiscernible] of the plant. So I would say a little bit better in the second half, but not much, right? Around the same.

Yes. Amos, thank you. Let me give you a little bit more color going forward as well. I mean -- and how we started the operation, we have started processing some development or with lower grade initially. I mean that -- and then we have started mining the stopes, of course, that come fresh production from the mining stopes. That's why we saw an increase in the grade. Going forward in the following years as it is in the Fresnillo District, we will see a similar trend, higher grade initially for the following 2 to 3 years and then coming down at depth the silver grade and more or increase in the base metals as well. That's why we mentioned in the past as a reference a metal content average per year in terms of silver and gold, but we will see the same behavior. Initially higher silver grade and then after the following years, start decrease and increase in base metals.

Okay. And then one follow-up is just around Cienega. Ore sustaining cost was over $3,000 an ounce. Is there anything you can do to bring that back down?

Yes. Yes, it has been unusually high this year because of our investment in [ telling ] them infrastructure basically and some increased development. That's temporarily on. So we should be done with the expanded capacity retailing them year and then will normalize.

Okay. And then final question was just to ask on tax. You've been booking some material positive accruals in the P&L for the last 2 halves, but at the same time, making big cash tax payments. Is that sustainable? And should those 2 align at some point? And if they do, does that mean cash tax payments are going to reduce? Or should we expect the P&L tax to normalize to go back to outflows?

I'm not sure I understood the question.

There's a mismatch between the cash payments and tax versus the positive accrual in tax, does that normalize?

Well, like I said, tax payments are basically related to provisional tax payments. So Mexico, what you do is basically based on your previous year profit level. There's a formula where you can calculate a certain factor that you apply to sales on the following year in order to pay provisional taxes during the year. At the end of that year, and in March of the following year, when you prepare your tax statements, you compare the real number that you get versus provisional tax payments. And if you pay more, you recuperate that bond. If you pay less, you pay up. So cash taxes should go down.

Yes. Do you have any guidance for effective tax rate on a cash basis 2024?

No at this point in time.

But should be comparable to your P&L guidance range or else April in terms of what we know with FX and all that.

We'll work on that, and I can get back to you. I'm not prepared to answer that question right now. Sorry.

Can I ask one question. So on caution initiatives. Last time that you mentioned was that the inflation is going to be around 6%, which will be offset by the cost savings. So now the cost savings have moved to 2024. Is that right?

Well, part of the cost savings will be incorporated this year as we won the projects and the figures that I mentioned were calculated on a full year basis. But those are ongoing initiatives that will capture as we progress through the year and through the projects.

So when do you plan to finish them completely? Is it '24, '25?

I would say most of them during this year. I mean that's our plan. But yes, I would say second half and first quarter of next year until we finish all. And then it's sustainable, right, once we are done with the projects, the benefits to stay in the operations.

Our next question comes from Christian Argo from Citibank. Please proceed. Christian, your line is now open, please proceed with your question.

Okay. Let's move on.

We currently have no further questions registered. So I would like to hand the call back for final remarks.

Thank you all. Thank you very much.