Grupo Mexico SAB de CV

BMV:GMEXICOB

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon. Thank you for holding, and welcome to Grupo México Second Quarter Earnings Conference Call. With us this afternoon is our Vice President, Mr. Xavier Garcia de Quevedo; Mr. Oscar González; Ms. Marlene Finny; Mr. Isaac Franklin; Mr. Francisco Zinser; and other executives, who will discuss the financial performance of the company during the quarter, giving you a summary of the latest news and address any questions you might have at the end of the call.

Before we begin, I would like to remind you that information discussed in today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially and the company cautions not to place undue reliance on these forward-looking statements. Grupo México undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All results are expressed in full U.S. GAAP. [Operator Instructions]

So we will begin with Ms. Marlene Finny.

[Marlene de la Torre, executive]

Thank you and good afternoon, everybody, and thank you for joining us today for Grupo México's Second Quarter Earnings Conference Call. Joining me today are the top executives from our main divisions -- our 3 divisions.

For today's conference call, we will be following the presentation that can be downloaded from our website or via accessing the webcast. And you can go to our website that I take advantage because this is a brand-new website, so you can go in and download the presentation. And you can see the new website, which includes all the materials, the press release, the presentation for the earnings call and everything you might need.

So first of all, I wish that you and your loved ones are staying strong and healthy right now. I would also like to extend our gratitude to everyone who is in the frontline side during this pandemic and assure that we will continue to make extraordinary efforts for our workers, their families and the communities which we operate -- in which we operate, as we have been doing so far through this adverse time.

As for today's conference call, we will be following the program detailed on our Slide 3 in the presentation. So I will begin by providing an update regarding our fight against the COVID-19 pandemic, followed by our actions to support hospitals and vulnerable communities. And then I'll mention Grupo México's main highlights for the quarter. Then Mr. Xavier Garcia de Quevedo will provide detailed information regarding the Mining Division, commenting on the industry's economic environment, the Mining Division's financials and its highlights; followed by Mr. Isaac Franklin, who will be expanding on the financial results and the event of the Transportation Division; and finally, Mr. Francisco Zinser will comment on the relevant events that occurred during the second quarter in our Infrastructure Division and the financial highlights. Then the line will be open for questions and answers.

As more so -- as we move forward into Slide #5 -- okay. Open this slide. We would like to say that Grupo México continues to [ safeguard ] the health of all of our stakeholders and the communities where we operate. And the extraordinary efforts our management team and workforce have done has enabled us to operate all of our business units in compliance with local, regional and national emergency measures. Some of the measures we have carried out and we'll continue to do so, and we include active communication with our union to implement strategies through conducting visits for our workers, use of preventive equipment all the time at all the different operations, that means the Mining, the Transportation, Infrastructure in all of our different businesses. We have implemented the highest hygiene protocol to assure safety and sanitization in all of our different facilities.

So that has been very important. And important to note that we have [ covered ] all of our personnel and trying to keep everybody safe, and we have been doing a good job in that sense. To increase the COVID attention capacity in the places we have indicated we operate, we have also, through Fundación Grupo México, through the foundation of Grupo México, we have continued giving a lot of help, continuing manufacturing and helping improving COVID capacity in different states. We had 950 additional COVID beds across the country, we have given equipment for 3 hospitals in México City, Monterrey and Guadalajara. We have raised more than MXN 500 million in terms of donation to hospitals and communities, that include ventilators and medical equipment, medical kits, food, donation to different initiatives to help people be safe. We have given more than 800 -- 485,000 medical kits, 94,000 medical supplies and medical equipment as well as 60,000 prepared food and edible packages.

So I think that as we [Technical Difficulty] I'm hearing something strange, but hopefully, I don't hear anymore. So that has been our priority in keeping everybody safe as well as implementing very high hygiene protocols in all of our divisions. I should mention this, which is very important for us, we can go back to our -- to the 7 -- to the Slide #7. Thank you. And I think this shows -- and this is before commenting the highlights to Grupo México -- so here, we can see the strength as we face challenging times. We continue to have strong cash generation, a committed workforce, the world's largest copper reserves and a proven track record in executing those projects. And most importantly, we are the lowest cash cost producer in the industry worldwide. This is in terms of our copper in the Mining Division. In the Transportation Division, we have a diversified base of segments, of different segments, that we can service to. So that helps us when one particular segment is becoming always weak, we have the other one to be more defensive on the back of anything happening or different things that can happen. And that's the same case for our Infrastructure Division, in which we have different bits of line business there that gives us strength during difficult times.

Now moving forward to Slide #8. Here we show the scorecard for the second quarter. You can see our financial and production highlights, which will be discussed in more detail as we move forward in the presentation. I would like to emphasize that in order to transfer value to shareholders, our Board approved a cash dividend per outstanding share of MXN 0.80, reinstating a dividend that is pre-COVID level, translating into a 5.43% dividend yield.

So during the second quarter, our sales show a decline of 11.5% versus the second quarter of 2019. This was mainly driven by a decrease in copper prices of roughly 12.6%. We will see this on an accumulated basis. During the first half of the year, our revenues fell 7.5%, while copper prices fell 10.7%. So all in all, we show, even though we have seen some decreases mainly reflecting lower copper prices and lower volumes and prices that have fallen roughly 25% each in the accumulated during the first half of the year, we have seen strong results coming from all of our divisions.

The next slide, Slide #9, is there for you so that you can have all the numbers in hand if you need to see them at any time of the presentation.

Moving on to Slide #10, you can see the company's highlights for the quarter ended in June -- Slide #10. Well, in our Mining Division, we were able to maintain our production roughly in line with the guidance, where successful strategies allow us to obtain 286,000 tons of copper. As for our cash cost, we were able to prove ourselves as efficient and cost-effective in a challenging time, decreasing almost 15% our net cash cost for the period. Higher production in Toquepala and Cuajone allow us to increase -- and Buenavista -- to increase the production of moly by 16% as well. We believe the production of -- on an accumulated basis during the first half of the year, the production of copper increased by 1.5%, mainly driven by higher production in Peru and higher ore grade and the expansion of our Toquepala concentrator.

Continuing with our Transportation Division, GMXT was able to improve operating metrics despite the volume decrease during the second quarter. The [ GMSI ] implementation continues to be a focus for the division. This quarter, we saw an improvement in diesel efficiency when compared to the previous year, achieved by optimizing horsepower per trailing ton. It is important for us to highlight the degree of efforts made during this quarter allow us to continue operating in terms of fundamental industries for our countries.

On the Infrastructure Division, we implemented continued operational efficiencies that allow us an 8% EBITDA growth year-over-year despite going on an accumulated basis, despite a slowdown in construction activities and lower traffic in the Salamanca-León toll road. We expect the Fenicias wind farm to be fully operational by 2021 and will supply clean energy to Grupo México's underground mines. So far, the project has a 41% progress. PEMSA, our oil-drilling business, achieved a strong 20% sale and EBITDA increase versus the first half of 2019, with an outstanding 99.5% operational efficiency.

Moving on to Slide 11. We note that Grupo México maintains a solid balance sheet in the low levels. Net debt-to-EBITDA ratio is 1.4x and have a comfortable payment schedule with no significant payments until 2035. As you may already know, Grupo México has a natural hedging structure, where 89% of our revenue is in dollars and only 47% of our costs are in U.S. dollars. You can see there, we have a debt maturity schedule on Slide 12, where you can see our -- I already mentioned the dividend, so we can skip to Page 12.

So you can see our maturity schedule, a very comfortable level. And then moving on to Page #13. You can see the revenue and costs breakdown for each of our divisions in terms of U.S. dollars and Mexican peso, and how you see our natural hedge in all of our divisions.

With this, I will now pass the call to Mr. Xavier Garcia de Quevedo, who is going to comment on our Mining Division highlights.

[Xavier García de Quevedo Topete, executive]

Thank you, Marlene. As we move forward with the Mining Division's financial highlights on Slide 15, we can see that sales totaled USD 1.89 billion in the second quarter of 2020, 6.8% lower than second quarter '19 due to the reduction in copper, zinc, moly prices.

I am very glad to say that production totaled 286,000 tons, a 1.3% decrease versus 2000 -- in second quarter '19. Copper production in Peru increased at Toquepala 11.8%, which has declined, but Toquepala has reached 100% of its designed capacity. Cuajone produced 6.4% above budget due to higher ore grade and recovery. The increase of 9% in production in Peru offset the 4.95% decrease in the Mexican mines. Asarco had a good performance in increasing copper recoveries and throughput emission and rate line, with a result of 6.8% increase in copper production.

Another accomplished for the quarter is our consolidated cash cost achieved a 14.7% decrease when compared to the second quarter $0.85 per pound, retaining our first place as the company with the lowest cash cost in our industry worldwide.

Now I'd like to make a quick comment on the current copper market. In the second quarter this year, the LME copper price decreased from an average of $2.77 per ton in the second quarter '19 to $2.42 per ton, a decrease of 12.6%. As of today, we are seeing prices slightly higher than $2.90 per ton, which reflect the impact of the COVID-19, prices from both the supply and demand for the copper. At this point, the copper price is to be driven by 2 parties, expectation of lack of supply in our major producing countries such as Chile and Peru due to COVID-19 outbreak and an increase in China demand in a scenario of economic recovery.

As of today, we have been able to sell all our production of concentrates of copper, except growth has been affected because the -- mainly because they are promoting really only one [ favored ] industry. China have demand more. Compared with last year, we have increased our sales from 48% to 61% in China. That [ relationship ] was mainly China. And also to reflect the demand, the Chinese segment have reduced the treatment and refining charges $16. This is reduced in good time for us. As the pandemic is affecting both supply and demand, at this point, it is difficult to assess the long-term effect of this crisis on the copper market and, consequently, on copper price.

Continuing with our financial results, our EBITDA totaled $815 million, a 15% decrease compared to the second quarter a year ago. Our investment in the Mining Division totaled USD 124 million during the second quarter of this year.

Moving on to Slide 16, we show our short-term production profile for you, for you to use that as guidance. I would like to say that we don't expect significant delays in our strongest pipeline due to COVID-19. In Mexico, we have continued with the project of Pilares and as well with the El Pilar with 60 kilometers projects. We have at least 45 kilometers from Tia Maria. Talking about the same project, we have continued developing the mine, but we have not started the construction of the concentrator. We have deferred these because we are the [ prioritizing ] the safety and health of our workers and of course, our products. Between the 4 of our projects, including the Tia Maria, we will increase our copper production by more than 200,000 tons during the next 5 years. These 4 projects remain attractive for the company as they have low capital and improve our own cost structure to continue improving efficiency.

On Slide 17, you will find our long-term production profile. This project will lead us to our next milestone of reaching roughly 1.9 million tons of production, as they [ correlate ] with 545,000 additional tons of copper production.

I would like to close by reinforcing our full support to the community where we operate and all our collaborators. I hope all of you and your families are safe during this unusual time. Now I will pass to Isaac Franklin, for his comment on the Transportation Division. Thank you.

[Operator]

[Operator Instructions]

[Marlene de la Torre, executive]

But right now, we haven't finished. We -- now, Isaac will comment on the Transportation Division and then the Infrastructure Division and then we will open for Q&A.

So now, we're just waiting for Isaac to comment on the Transportation Division. I think Isaac is having some trouble with the line. So while he's unable to join us, I will comment on the Transportation Division.

And so I think it is good to start by emphasizing GMXT's extraordinary efforts to safeguard our full operations while taking care of the employees' health. So starting on Slide 19. I'd like to talk about our financial -- the financial highlights of GMXT for the second quarter of 2020.

As many of you know, several segments were strongly impacted by the COVID-19 crisis, reducing our transported volumes for those specific segments.

Can you hear me?

[Francisco Gonzalez, executive]

Yes. We can hear you.

[Marlene de la Torre, executive]

After the COVID, volume reduction was lessened by our presence in other strong performing segments, which we'll discuss in more detail in the following slides, and as a result of that, we extended the quarter with a decrease of 10% in our volumes versus the second quarter of 2019. This is measured in tons/kilometers. But if we see the accumulated numbers or the load volume in the accumulated numbers, this is only a reduction of 2.3%. So as we have a breakdown in several different segments, we are able to offset the lower one or the weaker one with the others with the strong segment.

The total revenues for the quarter reached $474 million, which translates into a 25% decrease. But then again, if we include it in an accumulated basis, our revenues accumulated during the first half of the year, $1.08 billion, which is a decrease of 10% compared to 2019 because of the lower volume. This was mainly driven by the slowdown of other opportunities in the automotive, intermodal and industrial segments, which was partially offset by the agricultural and energy segments.

When looking into our decrease in our revenues measured in Mexican peso, as you all would know, GMXT is registered in the Mexican Stock Exchange, and they post their numbers in Mexican pesos. We translate them into U.S. dollars for the consolidation with Grupo México. But we see the significant segment that we have, the reduction of the 25% during the quarter in revenues, it's translated into a reduction of 9% due to an exchange rate conversion.

The closure of the industries and the reduction in volumes caused by COVID-19 crisis resulted in a decrease of 34% of EBITDA and a 41% of our net income for the quarter, and for the half of the year of 12% in EBITDA and net income of 7% reduction. But we think that the work has already passed. We have seen a spike in our volumes in June and July. So next quarter should be better than what is seen in the second quarter, so I think this was already the worst one.

As we continue in to Slide #20, there you can see all the effects of the COVID-19 in our financial results of GMXT. Important to mention that the administrative expenses include a onetime MXN 300 million expense of pandemic crisis support for hospitals in impacted communities as well as a roughly MXN 95 million operating costs for salaries of vulnerable personnel isolated from work.

There was also an increase in market share from 20% to 24% due to new projects, which offset the decrease of the 11% in intermodal imports from Manzanillo. As I mentioned before, several industries suffered partial or total closure with the COVID-19 crisis. This includes a 2.5 months total shutdown of the automotive industry and a 75% drop of other industrial production. So that was what impacted the most for our numbers.

I will comment quickly on the main variations of the revenue base segment on Slide 21. So the energy segment, despite the lower demand, the segment shows a growth of 12% in revenue as a result of the increase in new routes for imported refined products. As well as the energy segment, the agricultural segment also showed an 11% increase in revenue, with the market share increase in local crops and ports. A truck-to-rail conversion resulted in a volume increase of sugar and molasses in Florida.

The segment that impacted our growth were the automotive industry, which we already mentioned, with a 74% decrease, which suffered a complete shutdown, as I mentioned before, in April, May and half of June. Intermodal decreased 80% relating to the blank sailings from Asian ports. In the industrial segment, we had a reduction of 80%, -- we were 18%, sorry, 18%, impacted by the beer industry shutdown.

The GMXT team continues to improve their operating metrics, thanks to the constant efforts and actions to optimize the master service plant. As you can see on Slide 22, during the second quarter of 2020, the average train speed increased by 2.2%, while our dwell time decreased by almost 19%, leading to an increase of 14% of cars velocity for the quarter. If you have any additional questions about operating metrics, we can address them during Q&A, since we have already given our detailed information in the call in GMXT's call earlier before today.

Our investment plan for 2020 is shown on Slide 23. Through there, you can see that our capital expenditure plan has been adjusted to $372 million, of which $109 million have already been spent so far and $11 million are already completed. These investments will enable us to continue growing and improving our services as well as to keep raising our productivity indicators. Out of that, we are investing 88% to maintenance CapEx, 20% to efficiency program, 18% in growth, including shuttle terminal projects and 14% in strategic projects such as Monterrey and Celaya bypass.

With this, I conclude the general overview of the Transportation Division. We will have Isaac then for the Q&A if you have any further questions, but I hope this is clear enough.

And now I would like to pass our call to Francisco Zinser, who will comment on the Infrastructure division.

[Francisco Gonzalez, executive]

Thank you very much, Marlene. Can you hear me well?

[Marlene de la Torre, executive]

Yes. Perfect, Francisco.

[Francisco Gonzalez, executive]

Thank you, Marlene. Good afternoon, everyone. Sending out my thoughts to everyone and to your family to remain safe during this pandemic.

So starting with the financial highlights of the Infrastructure Division. On Slide #25, net revenues for the second quarter of 2020 totaled $126 million, a 7.8% decline compared to the previous year; an EBITDA margin of 50.1%, totaling $63 million, which is a decrease of 7.6% versus the second quarter of last year; and a net profit of $6 million. However, our accumulated EBITDA for the first half of the year totaled $143 million, which represents an increase of 8% versus the first half of last year. This is an important achievement, given the affections related to the COVID-19 crisis suffered during this past quarter.

Moving on to Slide #26. Commenting on our oil and gas division, PEMSA. We ended the quarter with 6 oil rigs in operation and a remarkable average efficiency of 99.5%, our highest accumulated efficiency ever. Sales were up 13.5% versus the second quarter of last year, reaching $49 million. And EBITDA totaled $24 million, a 10.5% increase versus the previous year. On a cumulative basis, sales and EBITDA showed an increase of 21% for both cases, respectively, versus the first half of last year.

In our Salamanca-León Highway operation, during the first half of this year, revenues totaled $17 million, a decrease of 24% versus last year. This was due to a decrease in traffic of 23%, which was affected by the sanitary contingency and the respective lockdowns, and also because of the Mexican peso depreciation versus the U.S. dollar of over 20% compared to last year.

On the energy generation business, 2Q '20 EBITDA reached $27 million, with a 48.4% margin. There was a 0.5% increase in energy generation, totaling 1,766 gigawatts per hour versus 1,762-gigawatt hour in the last year for the same period. As for the accumulated sales for the first half of this year, they totaled $110 million, a slight decrease of 1.5% versus last year.

Finally, it is also worth mentioning that thanks to new projects during this semester, our engineering company increased sales 54% for the first half of this year compared to last year, for a total of $12.4 million and an EBITDA margin of 39%.

Before closing, I would like to say that we continue to work on our project's pipeline. Our new Fenicias wind farm, which will produce 168 megawatts, is expected to be fully operational by the first quarter of next year and has a 41% progress so far. We also continue to develop our fuel storage terminals in Monterrey and in Guadalajara.

Thank you very much, everyone, for your time. And now I'll pass it on to Marlene for her closing remarks.

[Marlene de la Torre, executive]

Well, I would like to say thank you for joining us. I think we gave an overview of the different divisions, and now we will open the call for Q&A in case you have any further questions.

[Operator]

[Operator Instructions] And our first question will come from the line of Jon Brandt from HSBC.

[Jonathan Brandt, analyst]

Marlene, I wanted to ask you, I mean, you guys spoke a lot about the Transportation Division in the GMXT call, but I wanted to follow-up with that and just see if you could give us a bit more details on the Florida operations. Given the COVID pandemic that's really hitting them there, the potential trade issues between the U.S. and China, has that been performing sort of in line with other operations? What's the expectation for the rest of the year with Florida, and then FEC?

And I guess my second question relates to, I guess, a court decision from a couple of weeks ago. So my understanding is that Grupo México and some subsidiaries are defendant in a lawsuit in the U.S. court. I'm wondering if that has been provisioned for? If there's any timing on that? If it's changed the way that Grupo México looks at and deals with related party transactions at all? Yes. Anything on that would be would be great.

[Marlene de la Torre, executive]

Sure. Thank you, Jon, for your question. I think Isaac is going to answer the one for Florida, the Transportation Division.

While Isaac joins the call, just to give you an idea, we think our volumes in Florida have been resilient, to say in some way. Isaac is that you out there?

[Isaac Franklin Unkind;General Director of Administration, executive]

Okay. Can you hear me? Marlene can you hear me?

[Marlene de la Torre, executive]

Yes. A little bit far but we can hear you.

[Isaac Franklin Unkind;General Director of Administration, executive]

Okay. I apologize for the technological problems. Well, I would say, regarding the Florida operation, as you know, Florida was -- most of the work is shut down. We -- our main -- one of the main segments we have over there is intermodal. So intermodal and the consumer product and retail was down in the first 2 months, starting probably the last 2 weeks of March and then April and May. And we start seeing some recovery in June and now, July, we see a real increase on much of our intermodal volumes. So we are recovering. We are -- as the economy opens in Florida, we are seeing that we're growing. Also construction, which is also very important for our bulk business, is ramping up. So we're expecting a good recovery for the third quarter and on.

[Marlene de la Torre, executive]

And answering -- thank you, Isaac. Answering your second question, Jon, which demand are you referring to?

[Jonathan Brandt, analyst]

So it was a decision a couple of weeks ago in a court in Delaware related to a related-party transactions between Southern Copper and some other Grupo México subsidiaries.

[Marlene de la Torre, executive]

Sure. This is part of a court decision...

[Francisco Gonzalez, executive]

No, if I may.

[Marlene de la Torre, executive]

Yes. Pardon?

[Francisco Gonzalez, executive]

No. Sorry, I was going to -- this is Francisco Zinser from Grupo, I was going to answer the question.

So probably the demand you are referring to, Jon, is the one that was originated a few years ago regarding related-party transactions between different subsidiaries of Grupo, as it's a -- okay. So I think it's public information. The important part of that demand, which was between our energy subsidiary and the Mining Division, that was settled last year, which represented the bulk of the situation. There are other few transactions that remained open, which are still going through their due process. And there's not really that much more to inform at this point in time unless, Marlene, you wanted to add something else.

[Marlene de la Torre, executive]

So I was going to mention that, that the main part was closed and settled last year. That is public information that Francisco was just mentioning. And the other one, we are following the natural process of the demand, and let's see what happens. We are very confident that we take -- we are very careful in all of our transaction, in everything that we do, so let's see how everything will go. There's not much more to say, Jon.

[Raul Jacob, executive]

Yes. This is Raul Jacob. We will be filing our 10-Q tomorrow, where an update on this and some other legal actions will be included.

[Operator]

And the next question will come from the line of Carlos De Alba from Morgan Stanley.

[Carlos de Alba, analyst]

So my first question is maybe for Xavier regarding Asarco. Xavier, could you comment on what the cash cost before byproducts were exactly in the second quarter? And then if you could also give us some color around the current situation with the unions. I think I read somewhere that, apparently, an agreement was close or maybe you have already reached an agreement. So what can you comment on that? And what is the output, the guidance for your production in 2020? And how do you see the Asarco production growing in the coming years?

And then maybe for Francisco. Francisco, what can you mention about the PEMSA situation regarding the PEMEX contracts? I think there were a few articles a month ago that suggested PEMEX was asking some of their suppliers to defer payment, so it could be interesting to hear if PEMEX has been asked to do so. And if any other changes to the contract, maybe tariffs, have been discussed?

And on the energy division, could you comment what would be the impact in case the company's legal efforts do not succeed in preventing the increase in the distribution of tariffs for renewable energy? I mean this case are all -- this situation will change the rules of the game and will affect the prospects of the Fenicias wind farm.

[Oscar González Rocha, executive]

Carlos, this is Oscar González. I will comment on Asarco. And if you -- and Mr. Garcia de Quevedo can complement if he feels it needs to.

On the breakeven, we are around 204 breakeven right now year-to-date, and we expect Asarco to continue with that, in that range, for the second half of the year. And regarding production, we are estimating to produce in 2020, 122,000 tons and for 2021, 151 metric tons -- 151,000 of metric tons. That's it.

[Xavier García de Quevedo Topete, executive]

Going with the -- with your first question, regarding the strike of Asarco. On July 6, we received a notification from the union, and the workers would like to return to work. So now we are in the process, negotiating with the union the terms, and we will keep you posted as we move forward on this. So I think there is good news.

[Francisco Gonzalez, executive]

Okay. And then, Carlos, if -- going to your second and third question -- this is Francisco speaking, so regarding the PEMSA situation with PEMEX, I mean as I commented during the presentation, this was a very good first semester. It's very important for PEMEX, what we have achieved, which is, again, a historical efficiency of just shy of 100%. As it is well known, PEMEX is in a difficult situation, and they've been reaching out to their different suppliers and contractors, including us. We are -- as of today, and what we expect is to continue to have the fixed oil rigs in operation. We are having some conversations with PEMEX regarding payment schedule and the temporary adjustment of tariffs, which we are still -- I mean in the final stages, but still not 100% finalized with them.

And I mean we are confident that we have always been good partners with PEMEX, and we will be able to reach a solution that allows them to go through these difficult times. But at the same time, we make sure that we keep our different equipment and our people employed and working for PEMEX. So we are -- we know the situation is complicated, but we are cautiously optimistic that we will be able to manage this situation going forward.

And regarding your third question, as you well commented, we filed an injunction for our wind farm in Oaxaca, which was given a final suspension. So basically, the effects of this increase in wind do not apply at this point in time. The cost of transmission, depending on the PPA, is somewhere around 5% of the total cost. And so increasing that -- what would apply for us is a 5% increase based on the attention that we give energy to our clients. And so that would have an increase of 15%, more or less. However, I mean, for the El Retiro, as I already commented, the status on farm Fenicias, we are evaluating our options. And we -- the fundamentals of the project are good enough, so that in any case, this project is still worth undertaking, and that's why we continue to invest in building the wind farm. Yes. So I'm not sure if that answers your question.

[Carlos de Alba, analyst]

Yes. That has been answered. Just, first, could you repeat the percentages, please? I missed those.

[Francisco Gonzalez, executive]

Yes. And again, don't take them as a fixed number in PPA, they have different variables. Just as an order of magnitude, they represent roughly 5% of the cost. And so if you multiply that times 5, it increase it around 20% of the cost. Again, we -- for the El Retiro, which is in operation, it does not apply. And we are evaluating the options for Fenicias, which -- I mean Fenicias, as you know, it's a new wind farm, it's much more efficient, it's larger turbines. So the gap there, it's a bit more flexible to accommodate.

[Operator]

Our next question comes from the line of Thiago Ojea from Goldman Sachs.

[Thiago Ojea, analyst]

My first question, I'm just curious about the mining region. We saw that -- maybe this is for the group -- we saw that most of the byproducts increased, except for zinc. I'm just curious, what happened specifically on zinc? And more broadly, in terms of capital allocation, I don't know if you can provide what we're considering for CapEx for this year and maybe next year, and if you foresee any change on buybacks, dividend policy or at least a fraction.

[Marlene de la Torre, executive]

Sure, Thiago. Thank you for your question. Regarding the dividend policy and the buyback, and I will start by the last part of your question. And we -- as you know, this quarter, we gave an MXN 0.80 dividend per share. And this is like roughly a [ $5.5 billion ] yield. We are going back to pre-COVID levels of dividend. We don't have a dividend policy in stone. So this depends on the cash generation, the cash mix and our CapEx needs as well. So that is developed on an quarterly basis during the Board meetings.

As of now, we don't see -- or we are not expecting a change in our dividend or buyback policy. But this will depend on how everything evolves and how everything goes in our different operations and the cash generation and copper prices and a lot of things. So we will realize that on the next quarter -- on the next Board meeting.

[Thiago Ojea, analyst]

Any guidance on CapEx for next year? Sorry, I didn't understand.

[Marlene de la Torre, executive]

No, I was only mentioning the third part, the buyback and dividend policy. Regarding the guidance for CapEx next year, give me just one second so I could provide it to you.

[Oscar González Rocha, executive]

Marlene, while you look at that, Thiago, regarding the zinc credit, it's basically priced the realized price. So last year it was $1.30 and right now is it's $0.98. We've been producing and selling about the same amount of zinc. So it's just a 30% drop in price.

[Thiago Ojea, analyst]

But I think production volumes were lower for the year, right? I saw something like 10% or 11% below, while all the other projects actually increased year-over-year.

[Raul Jacob, executive]

Yes. Let me comment on that. This is Raul Jacob from Southern Copper. We had a strike on the second quarter at the Charcas mine. That strike was solved at the end of April. That affected a little bit our Charcas production. And in Santa Eulalia, it's an operation that we shut down in -- due to a flooding. That operation alone was about 6,500 tons of zinc. So if you add the impact of the strike plus the nonproduction of the -- the absence of production from Santa Eulalia, even though we had a very good mark by the San Martin mine, that increased its production by up to 6,672 tons, we couldn't offset the total losses of zinc coming from Charcas and Santa Eulalia.

As I'd say, the Charcas production is already restored. In the case of Santa Eulalia, the company is looking for new options to supply the Santa Eulalia concentrator. We will be reporting on this as we get some advances on this matter.

[Thiago Ojea, analyst]

That's clear, Raul.

[Marlene de la Torre, executive]

Going back to your CapEx guidance for next year, 2021, we have a $2.5 billion budget. This is coming roughly $1.9 billion from the Mining Division, $350 million for the Transportation Division and $231 million for the Infrastructure Division.

[Operator]

And our next question will come from the line of Thiago Lofiego from Bradesco BBI.

[Thiago Lofiego, analyst]

Can you hear me well, Marlene?

[Marlene de la Torre, executive]

Yes. I can hear you.

[Thiago Lofiego, analyst]

Okay. All right. So two questions here. Just on the Transportation Division, if you could tell us how volumes are evolving now in July, and how it's looking to evolve in August, just to understand the recovery pace here. And when do you expect to be back to pre-COVID levels?

And the second question on the Mining Division. We've been seeing reports of rising COVID-19 cases in Arequipa, do you think this is a potentially -- this could potentially be an issue for mining production in that region? I'm talking about in general or in your view the worst in terms of the pandemic in Peru is over.

[Raul Jacob, executive]

Thiago, this is Raul Jacob. I think that the pandemic in Arequipa, it's, as you have mentioned, on the rise. As you know, Southern Copper doesn't have, at this point, any operations at this region. We do have it in -- at the Tacna and Moquegua regions that are a little bit to the south of Arequipa. And over there, even though there is still a rise on cases, we haven't had any impact of them in our operations so far. So we are controlling it. As I mentioned in the prior conference call, we have been very careful in terms of the protocols to follow by our own workforce as well as the labor from our contractors.

[Isaac Franklin Unkind;General Director of Administration, executive]

Well, regarding your question on Transportation, on volumes, again, I can give you some numbers regarding carloads. For example, in the first quarter of 2020, with COVID, we were having around 4,900 carloads per day, at that average. On the bottom of the -- in the middle of the pandemic in May, we were having 3,900. Now by June, we are 4,600; in July, 4,750; and we are expecting to keep growing as the economy starts to reopen. So probably this year, we will be back on the pre-COVID volumes.

So what we are seeing here is we're improving, our daily carloads are growing. So we're sure that the worst part has already being passed, and we're ramping up at a very good pace.

[Thiago Lofiego, analyst]

Raul, if I can go just back quickly to the question, a very clear answer, thank you. Just trying to elaborate a little bit more. Do you think there's a -- there could be a copper supply risk in general, maybe in that region, but maybe in other regions in Peru, from smaller miners or even from larger miners? Just given the fact that you're on the ground there, you're closer to the situation, just to understand exactly what the sentiment is regarding these rising cases in these regions. Again, not specifically to your operations, but maybe just a general comment.

[Raul Jacob, executive]

Generally speaking, I think that the mining companies that are operating at the southern part of Peru are very aware of what is going on and have to extreme their precautions. So I think that if we have any impact, it will be limited. The same is at the northern part of Chile, where 50% of the copper supply of that country is obtained. They are also taking some action on the outbreaks, but that takes a while. And in the meantime, it may affect the production of the Chilean North.

[Operator]

And our next question will come from the line of Jean Bruny from BBVA.

[Jean Baptiste Bruny, analyst]

Maybe a follow-up on the prior question. Basically -- and I'm sorry because I couldn't connect to the Southern Copper conference call. Can you give us a little bit of an idea of discussions about the copper market currently? We've heard there's a lot of capacity, which is currently idle in Latin America. Do you have a view on this, what the quantity, the exact quantity which is currently not operating, the needs of the markets, and what will happen when this capacity will be reactivated?

And the second one, maybe focusing more on Grupo México. You've done a great job in terms of production in the second quarter. I think it was quite impressive. But I noticed in your presentation that you just expect a small increase in terms of capacity in the next 5 years, which is basically contribution from Tia Maria, about all the other big projects, basically, you don't keep an exact date for the ramp up of the start-up. Can you elaborate a bit on this? You're still mentioning the 1.7 million, 1.9 million tons of target, but when exactly do you see it in terms of timing?

[Raul Jacob, executive]

Let me -- this is Raul Jacob. Let me comment on the copper market. And as we indicated in the Southern Copper's call a couple of hours ago or so, this is a different price crisis that -- than what we had in the past. If you say, for instance, on the 2008-2009 financial crisis, the demand for copper decreased significantly, but supply was unaffected until -- due to cost or due to lower prices, operations worldwide initiated a shutdown process of the most expensive operations. In this case, the pandemic is affecting not only demand...

[Marlene de la Torre, executive]

Raul?

[Francisco Gonzalez, executive]

Hello, can you hear us?

[Marlene de la Torre, executive]

Yes, on this call. It is actually Raul.

[Francisco Gonzalez, executive]

I think Raul was cut off.

[Operator]

Yes. Raul disconnected.

[Marlene de la Torre, executive]

What Raul wants to mean is that during this pandemic, we not only saw a decrease in our volume, in the volumes in general, from the supply, we have also seen slower demand and slower demand increase, which have created a tighter market or no. We have seen a lot of supply going out of the market from Chile, from Peru and from a lot of countries because of the pandemic, and that has created a tight balance in the copper industry.

Regarding the copper growth in our operations, we do have the volumes coming from Tia Maria. So this is part of the growth that we have in our pipeline. But we also have a strong pipeline with projects in Mexico, which are El Pilar, Pilares and Buenavista Zinc, that will add up roughly 100,000 tons of copper with capacity going forward in the next year. So they do not only have a significant component in terms of additional production, they also have a significant component in terms of improving our cost structure. Buenavista Zinc will more than double our zinc production when it kicks in. Pilares has a roughly 0.76% -- this is high in my head, so if I'm mistaken, I will give you the exact number in a minute, but roughly 0.76% ore grade when compared to La Caridad, which is much lower. So when we combine the minerals coming from Pilares and La Caridad, we will have a mineral with a higher ore grade, which will improve our cost structure as well.

And El Pilar, well, this is an SX/EW facility, and all of these 3 projects will have roughly 100,000 tons plus Tia Maria, another 120,000. And then we have the long-term projects, which is Michiquillay, Los Chancas in Peru and El Arco in Mexico, those are 3 significant projects, very large projects. We do not have the exact timing of those because there are different -- each project has several issues that we have to solve or define. And we are still going through different phases of those projects, but definitely something that we have in our pipeline. And I think we are -- it's not the -- I think we're one of the strongest companies, if not the strongest company, when talking about a pipeline of projects to develop -- feasible projects to develop in the next, let's say, 10 years.

Just so I -- we don't give a specific date, but let's say, in the next 10 years or so, we have those that will increase by roughly 800,000 or a little bit more tons ore production all in all.

[Operator]

And our next question will come from the line of Alfonso Salazar from Scotiabank.

[Alfonso Salazar, analyst]

I have 2 questions. The first one is regarding the railway division. When we're expecting a GDP contraction in Mexico of around 8% to 10% for the year, how can we reconcile that with a gradual recovery in volumes? What are the company -- what is the company doing to gain market share? If you can tell us a little bit about the initiatives or what are you seeing ahead with this big GDP contraction, and how you're going to plan to offset this drastic decline?

And then if you can provide also EBITDA and CapEx projections for the Infrastructure Division for the coming years, that would be very helpful.

[Marlene de la Torre, executive]

Sorry. Alfonso, for what division? The guidance?

[Alfonso Salazar, analyst]

Sorry, Marlene?

[Marlene de la Torre, executive]

For which division you want guidance, in which division?

[Alfonso Salazar, analyst]

Infrastructure.

[Marlene de la Torre, executive]

Okay. Perfect.

[Francisco Gonzalez, executive]

I'm not sure. Isaac, do you want to answer the first question?

[Isaac Franklin Unkind;General Director of Administration, executive]

Yes. Yes, I will answer this question. Regarding the contraction of the GDP and for some of the volumes on our segments that might be affected, what we're doing in order -- not only to offset the contraction of the GDP and rather to keep growing, is we have our greatest opportunities in conversion from traffic, from truck to rail. So what we are doing is a part of our CapEx goes to invest in some of our line. As you can see, with all the [ VSR ] and all the operational improvements that we have been doing along these couple of years, our line is in a very good shape and with very high capacity. What we are doing is we need to -- in order to do this conversion, to invest and then bring some customers in the origin and destination of the products in order for them to carry railcars or have some growth on or some truckloading activity.

So what we are doing is in order to convert this traffic, we are reaching out to the customers and growing intermodal and growing some other traffics. So what we expected besides the GDP contraction, we will gain market share in the land transportation against the truck.

[Francisco Gonzalez, executive]

So Alfonso, your second question regarding guidance for the Infrastructure Division for the following years. So this year, we are expecting to finish our CapEx in around $300 million. Most of it comes from the Fenicias wind farm and the start of construction of our terminals. Next year, we also have an aggressive plan of roughly $230 million, which is when we finish these projects as well. And then from that year onwards, I mean, we will see how things evolve. But we're expecting CapEx of somewhere in the ballpark of $50 million to $55 million per year.

On the EBITDA, we are expecting next year to close roughly around $270 million, which will increase to $300 million by when the projects are operating in 2023, and sales to jump from $585 million to roughly $640 million in the same time period.

[Operator]

And I have no further questions on my end.

[Marlene de la Torre, executive]

Thank you, everybody. If there are no further questions, I do want to thank you. I just want to clarify that I mentioned 0.76% for the ore grade of Pilares, while in reality it is 0.78%. So it is actually higher, just to clarify that number.

And then I want to thank you, everybody, for joining us today, and wishing you all the best, hoping everything and you and your family are safe and keep safe.

[Operator]

Ladies and gentlemen, this concludes our today's conf call. Thank you for participating. You may now disconnect.