Grupo Mexico SAB de CV

BMV:GMEXICOB

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon. Thank you for holding, and welcome to Grupo México's Third Quarter 2021 Earnings Conference Call. With us this afternoon are all of Grupo México's top executives who will discuss the third quarter 2021 financial performance of the company, giving you a summary of the latest news, and address any questions you may have at the end of the call.

Before we begin, I would like to remind you that information discussed on 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 a result of new information, future events or otherwise.

All results are expressed in the full U.S. GAAP. The presentation may be followed through our webcast. [Operator Instructions] A copy of the slides that the company will be reviewing today is available on the website at grupomexico.com. [Operator Instructions]

Now we will begin with Ms. Marlene Finny.

[Marlene de la Torre, executive]

Thank you, Gigi. Thank you so much, and good afternoon, everybody, and thank you for joining us today for Grupo México's third quarter earnings conference call. Here with -- as Gigi mentioned, here with me today are the top executives from our second division to comment on the different results. During the call, we will be following a presentation that can be downloaded from our website or followed by accessing the webcast at gmexico.com.

Today's detailed program can be found on Slide #3. And I will start on Slide #3 -- I will start with Grupo México's ESG scorecard and financial highlights for the quarter. Then Mr. Xavier Garcia de Quevedo will provide detailed information regarding our Mining division, its financial highlights, project updates, and comments on the industry's economic environment. He will then be followed by Mr. Genaro Guerrero who will go through the financial results and main events of our Transportation division. And finally, Mr. Francisco Zinser will comment on the relevant events that occurred during the quarter in our Infrastructure division. At the end, the line will be open for questions and answers.

Before we continue with our results, I want to highlight that Grupo México's capital investments that have exceeded $22 billion over the last 10 years, along with the [ volatile ] metal prices environment during the year, we have been able to achieve great results. This has enabled us to continue being an agent of change in the communities where we operate, driving job creation and economic growth.

With that being said, let's start with our ESG highlights in Slide #5. We have backed several programs and initiatives in the region where we operate in order to help communities face the COVID-19 pandemic. Our employees' vaccination rate has seen a relevant increase. In our Mining division, we have 87% of the workforce with at least one dose of the COVID-19 vaccine, followed by 74% and 68% (sic) [ 69% ] in our Infrastructure and Transportation division employees, respectively.

We reaffirm our commitment to preserve and improve the environment by generating a net positive impact on biodiversity through our mining operations. Also, something that we are glad about is that the semi-detailed Environmental Impact Study for the exploration project of Michiquillay in Peru has been approved by the Ministry of Energy and Mines.

In Mexico, the Mexican Mining Chamber acknowledged La Caridad mine, refinery and metallurgical plant for achieving the best safety performances in 2020. We are also recognized by the government of Sonora as a Culturally Responsible Company due to our volunteer initiatives implemented to promote and safeguard the state's history, culture and traditions.

These are just some of the examples of our continuous efforts to excel in ESG matters, and we'll continue to work hard to reach best practices as this is part of our strategy -- at the core of our strategy.

In the next slide, which is Slide #6, you can see the scorecard for the quarter, showing outstanding results as we achieved accumulated sales of $11 billion, an increase of 43% versus -- when compared to 2020, mainly driven by higher metal prices and the transportation volume recovery.

Our EBITDA totaled $6.74 billion during the first 9 months of 2021, an increase of over 85% versus the same period of last year, getting our EBITDA margin at 61.2%, an increase of over 470 basis points versus the same period.

On a cumulative basis, our operating income netted $5.6 billion, an increase of more than -- almost 113% versus the same third quarter of 2020. As you know, our Board approved to maintain a MXN 1.75 -- a dividend of MXN 1.75 per share, reinforcing our strong dividend program, which translates into a 7.4% dividend yield, which, if I'm not mistaken, we are the highest -- we have the highest dividend yield within the Mexican companies.

As for our copper production, it totaled 815,000 -- 816,000 tons for the first 9 months of the year. This implies a slight decrease of 2.8% versus the same period of 2020 as we have guided the market previously. We are expecting to close the year with almost 1.1 million tons of copper.

Finally, I would like to highlight our net cash cost, which averaged $0.80 per pound of copper, an improvement of 6.6% versus the same period of last year. We are considering us as the leaders in the industry.

Moving forward to Slide #7. You can find a summary of our financial highlights, which are there for you to have in hand in case you need at any point during the presentation.

On Slide #8, you can see that Grupo México maintains a solid balance sheet with low leverage and a net debt-to-EBITDA ratio of 0.3x. This ratio has been decreasing as we generate a lot of cash flow because of higher metal prices and the pickup in volume from our Transportation division. You -- as you know, our debt is mainly issued in U.S. dollars, and it represents 81% of the total debt, while the rest is denominated in peso, which is mainly for the Transportation division and part of the Infrastructure division.

On this slide, you can also see the dividends paid from 2019 to 2021 and the increase we have been having in our dividend and the implied dividend yield, including the MXN 1.75 cash dividend for the quarter approved by the Board.

As for our debt maturity profile pictured on Slide #9, we continue to have comfortable maturity schedule with no payments of over $1 billion until 2035, and a cash flow generation during the quarter of around $600 million to total $6.2 billion at the end of the quarter.

Now I will let Mr. Xavier Garcia de Quevedo comment on the Mining division portfolio.

[Xavier García de Quevedo Topete, executive]

Thank you, Marlene. Hello, everyone, and thank you again for joining us today. Let me start with the Mining division operation and financial highlights on Slide 11.

First, I would like to highlight that we achieved the highest copper, moly, gold and silver quarterly production of the year. Besides these increases, we continue to see a reduction of 2.2% in copper production versus 2020, totaling 274,000 tons. This decline is due to the lower ore grades and recovery levels. The year-to-date decline in production has been offset by higher copper and byproduct prices, boosting our sales during the year and the quarter, ending the period in $3 billion, a 31% increase when compared to the same period of last year and almost reaching $9 billion for the first 3 quarters of the year, a 52% increase versus 2020 in accumulated sales.

Our net cash cost for the quarter ended at $0.77, a 6.1% decrease versus the third quarter of 2020. This was supported by higher byproduct credits, along with an effective cost control reinforcing our position of cost leaders in the industry worldwide. Higher metal prices and our cost efficiency focus led us to achieve a 110% increase in EBITDA when compared to the same period last year on a cumulative basis, reaching $5.7 billion and setting our EBITDA margin for the quarter at 62.5%.

We were able to generate $871 million of net income during the quarter and $2.78 billion for the first 9 months of 2021. The Mining division CapEx for the quarter netted $253 million and a total of $720 million for the first 9 months of the year.

I would like to continue talking about our projects and their progress in Slides 12 and 13. Let's first talk about our project intro. In Pilares, the construction of the road for mining trucks between the Pilares pit and the primary crushing plants in La Caridad has been completed. We expect it to start production in the second quarter of the year 2022. We had $81.4 million invested in Pilares out of the total of $159 million investment already deployed.

In our Buenavista Zinc project, which is expected to be operational by the third quarter of 2023, the engineering study has been completed. All the main equipment is on site. Construction site are in progress, and we have a 93% progress on procurement. Out of the $413 million CapEx plan for this project, we have invested $197 million so far. It is important to mention that additional preventive COVID-19 protocols continue in place to further advance the project with health and safety.

As for El Pilar, the results on the leaching pads confirmed that there is acceptable copper recovery. We finished all the metallurgical tests and the basic engineering is already completed. We are planning to start with detailed engineering and the construction of this project during the year 2023. As well, we have already -- our Environmental Impact Study has been approved already.

Continuing with our long-term projects, I would like to mention several highlights regarding our Michiquillay project. Michiquillay is expected to be operational by 2028, will produce 225,000 tons of copper per year, along with byproducts of molybdenum, gold and silver at a competitive cash cost. Back in 2018, the contract for the acquisition of the project was signed, and an initial payment of $12.5 million was made. Up to date, the second payment of $12.5 million have been made, allowing us to continue with our development of the project.

On September 4, 2021, we signed a social agreement with the community of Michiquillay, and we continue the dialogue, expecting positive results, with the La Encañada community to reach a similar agreement. All these considered, the company have good fine point to initiate an in-depth exploration program during the first quarter of 2022.

On Slide 14, you can see all our upcoming projects and their impact to production, and we continue our journey to reach 2 million tons of copper production per year through the year 2028.

Before concluding the Mining division highlights, I would like to share with you a couple of quick remarks on the current copper market. For the third quarter of 2021, the LME copper price increased from an average of $2.96 per pound during the third quarter of '20 to an average of $4.25 per pound, an increase of over 40%. The way we are seeing copper prices at about $4.50 change, topping the year-to-date average price of $4.20 change per pound, implying a positive outlook for the company. We believe the following factors are influencing the market.

We are seeing a strong demand in the U.S. and Europe, particularly in terms CapEx consumption. China is expecting a notable reduction in the scrap import. Uncertainty regarding future production growth in Chile and Peru, which together represent about 40% of the world supply, 28% and 12%, respectively. The combined inventories of the LME, COMEX, Shanghai and Bonded warehouses remain at relatively low levels, falling from 907,000 [ points ] to only 568,000 [ points ] by the end of September, or 37% of reduction. The more relevant [indiscernible] for the copper market are expecting a market [indiscernible] about 200,000 [ points ] this year due to a recovery in the work.

If you happen to have any follow-up questions, we will be pleased to answer them during the Q&A session. I would like to close by reinforcing our full support to the communities where we operate and all of our collaborators.

Now please, Genaro will comment on our Transportation division.

[Genaro Guerrero;Grupo México, S.A.B. de C.V.;Head of Investor Relations and Financial Analysis, executive]

Thank you, Xavier, and good afternoon, everyone. For the Transportation division, on Slide 16, I would like to talk about our financial highlights for the third quarter that reflects a strong rebound from prior year and an excellent performance and recovery from the pandemic period.

First, I'm glad to announce that most segments showed positive variations in revenues, carloads and net ton kilometers. Revenues are $655 million for the quarter, increasing 1.7% quarter-over-quarter and 22% year-over-year. The quarterly increase was mainly driven by higher transported volume, led by the agricultural segment, which increased 994 million ton kilometers. On a cumulative basis, revenues are up 17% versus 2020.

Following the growth trend, our volume and carloads increased 14.3% and 9.3%, respectively, for the same period of the last year and 11.1% and 10.2% on a cumulative basis. EBITDA is $293 million, a 23.4% increase versus third quarter 2020, resulting in an EBITDA margin of 44.7%, an expansion of 50 basis points. Cumulative EBITDA reached $850 million, a 19.6% increase. Net income is $27 million, an increase of 45.8% year-over-year and 33.8% on a cumulative basis.

As we move forward to Slide 17, we have the main highlights for the quarter. In most of our business units, volumes have returned strong than pre-COVID levels, leading to record revenues, 10.4% increase in Mexican pesos year-over-year, thanks to market share volume gain, while our EBITDA reached MXN 5,873 million, an increase of 11.5% when compared to the same quarter of last year. Finally, a MXN 0.50 per share dividend was approved by the Board, up from MXN 0.30 authorized in the second quarter.

Continuing with the main variation on our revenues on Slide 18. All our segment's revenue grew during quarter, except automobile segment, decreasing 2% due to the global microchip shortage, which continue impacting manufacturers worldwide. The quarter top performance was the metals segment, which increased 62% due to higher volumes of raw materials and finished goods in Mexico, market share gains and a consumption recovery in Mexico. The other segments with double digits revenue growth were segment -- were cement for the higher Mexico exports due to the U.S. construction recovery, industrial due to market share gains in consumption products, agricultural with increases in shuttle train's import volumes, minerals due to reactivate iron ore imports and operating efficiencies and intermodal where demand and market share gains in the U.S. continued to grow while Mexico recovers from pre-COVID levels.

With medium growth, we have the energy segment increasing 7% due to increase in fuel oil exports, and chemicals with the same increase of 7% due to increase in volumes of basic chemicals and Mexico imports of plastic resins. In some segments including cement, industrials and intermodal goods, we are capped in capacity due to our fleet was completely utilized, even though the results show the aggressiveness toward gaining market. In intermodal, especially in Florida, we have faced labor shortage for intermodal terminals, including crane operators and first and last-mile delivery drivers. As volume coming back strong, we are focused to increase crews to continue gaining market share.

On Slide 19, please. We show our operating metrics of the second quarter since -- sorry, we show our operating metrics of the second quarter (sic) [ third quarter ] since 2019. We can see that most of our indicators show overall progress since then, thanks to our efforts to optimize our service master plan. Average train speed dropped 7% during the quarter, basically due to hurricanes and storms. There was excess rain in the Pacific and Central Mexico, and even though it did not cause the network to stop.

Dwell time increases from 21 hours to 28 hours. This is explained by 2 factors. First, the operating master plan increased the dwell time target to -- the dwell time target to allow to run longer trains more efficiently in terms of horsepower utilization. And additionally, the impact of the storms, capacity constraints and congestions in Florida intermodal terminals. We expect dwell time back to our target levels of around 24 hours.

Car velocity dropped as a result of the combination of average train speed and dwell time. Average train length improved 4%, and gross ton per train improved by roughly 7%. The crew starts increased 2.8%, considering a double-digit volume growth, which means we are running longer and heavier trains.

Regarding CapEx for 2021, now we anticipate to be able to invest roughly $290 million, 64% of the $450 million total planned. The CapEx estimated for 2022, we expect to invest around $450 million, where $294 million will be invested in maintenance projects such as new rail, ties and locomotive overhauls. $119 million will be invested in growth projects such as intermodal terminals to increase loading and unloading capacity and our Monterrey and Celaya Bypasses, while the $36 million will be invested in efficiency programs, including LNG locomotive conversion plan.

This concludes the general overview of the Transportation division. I will now let Francisco Zinser comment on the Infrastructure division. Thank you.

[Francisco Gonzalez, executive]

Thank you very much, Genaro, and good afternoon, everyone. I'll start by going through the financial highlights of the Infrastructure division on Slide #22. Our revenues for the quarter totaled $138 million, a 6.8% increase when compared to the same quarter of 2020. This increase was mainly driven by our energy and toll road business units, demonstrating once again the performance of their business models.

Year-to-date revenues totaled $410 million, a 4.7% increase compared to 2020, despite complicated ongoing circumstances due to COVID-19 and regulatory changes.

Our EBITDA totaled $56 million for the quarter and $174 million on a cumulative basis, which translates in a 6% decrease versus the third quarter of 2020 and a 14.5% increase -- sorry, reduction when compared to the first 9 months of 2020 and 2021. This reduction was due to the adjustments in Perforadora tariffs, a few projects that started later than expected in Constructora in the construction business and lower foreign exchange gains. The EBITDA margin for the quarter was 40.8%, and our cumulative net income totaled $24.3 million and showed net positive results for the third quarter in a row.

As we continue on Slide #23, I will go through the most relevant events of the division and a brief project update. In our Energy business unit, accumulated sales totaled $225 million, an increase of 34% versus last year. This was mainly driven by an increase in the price of natural gas and better operational performance and the wind factor at El Retiro wind farm. The business unit's cumulative EBITDA totaled $86.2 million. This represents an EBITDA margin of 38.3%.

Our Toll Road business unit finished the first 9 months of the year with $30.4 million in revenues and an EBITDA of $19.9 million (sic) [ $19.2 million ], a 24% and 13% increase year-over-year, respectively, and basically level with pre-COVID numbers. These recoveries were achieved mainly due to the easing of mobility restrictions, which led to a 14% increase in daily traffic when compared to 2020.

Continuing with our main project updates, our 168 megawatt wind farm, Fenisias located in Nuevo Leon, has already been completed, generating over 129,000 megawatt-hours from March 16 to September 30, 2021. This wind farm will supply electric power to IMMSA, the underground Mining division, and the metallurgical operations of the same business unit.

The construction of the Maya Train has started while the preliminary studies of topography, geotechnics and repair work of a geothermal fault are completed. The rail stockpiling started. We started also with road stripping works and the adaptation of the central lane, and everything is on schedule with respect to the programmed progress.

This concludes the Infrastructure division highlights. Now I will let Marlene proceed with her closing remarks. Thank you.

[Marlene de la Torre, executive]

Thank you, Xavier, Genaro and Francisco for your comments, and thank you, again, for your time. Now we will open the line for questions and answers.

[Operator]

[Operator Instructions] Our first question comes from the line of Carlos de Alba from Morgan Stanley.

[Carlos de Alba, analyst]

The first question is if you could remind us or tell us what the cash cost for Asarco before and after byproducts in the quarter was.

The second question I have is on the expected production for this year and for the coming years of Asarco.

And then finally, if you could please comment on the impact or the potential impact of the proposed energy reform in Mexico on the different businesses of the Infrastructure division, like your Energy business, the Fuel division -- the Fuel business that you are also investing on.

[Leonardo Contreras Lerdo de Tejada, executive]

Carlos, this is Leonardo Contreras. With regards to your question about the cash cost for the quarter for Asarco. Before byproducts, the cash cost was $2.45 and after byproduct $2.34.

And to your follow-up questions with regard to the guidance in production for 2022, we should be around 125,000 tons in Asarco.

[Carlos de Alba, analyst]

Sorry, that was for 2022 or 2021?

[Leonardo Contreras Lerdo de Tejada, executive]

You would like the guidance for 2021? It would be around 126,000 tons.

[Carlos de Alba, analyst]

Okay. 126,000 and 125,000.

[Francisco Gonzalez, executive]

Thank you, Carlos. This is Francisco. Regarding your last 2 questions, about the energy reform, as you know, it is still a proposal that is being discussed. As you know as well, the assets that we have in the Energy division are under the self-supply scheme. But an important difference is that we are under what is called an authentic or pure self-supply scheme where we own 100% of the generating assets, the wind farms and the combined-cycle power plant, and also 100% of the demand of the Mining division. They are all under the same group and control group.

So we are optimistic that this reform will differentiate between these 2 schemes, and we will be able to continue operating. We are closely following the changes that this law could have. As you know, the current party does not control all the necessary votes to do the changes. So we expect some changes to be made, including, hopefully, these ones and separating these 2 self-supply schemes from other schemes that are more a simulation.

Regarding your second question about the fuel storage terminals, as you know as well, there have been some recent changes in the regulation, which we continue to monitor. We are being very close to these changes and analyzing with a lot of detail how they could impact us and being very prudent in our capital allocation until we have certainty of exactly how the rules are going to be played out. And we will keep you posted, but we have been slowing down the development until we have more certainty on how things are going to play out.

[Carlos de Alba, analyst]

That makes sense. Just if I may, another question. On the Energy division, what was the energy generation in total in megawatt-hours that you guys did achieve in the third quarter?

[Francisco Gonzalez, executive]

In the third quarter itself, let me just check that. If you want -- if it's okay, if we can continue, and I will look up for the specific data, and I will reply to you in a minute.

[Marlene de la Torre, executive]

We will give you that information, Carlos. We can continue with our questions, and we will give you information before we end the call. Thank you.

[Operator]

Our next question comes from the line of Isabella Vasconcelos from Bradesco BBI.

[Isabella Vasconcelos, analyst]

I have a couple of questions. The first one on capital allocation. Of course, you have a very robust cash position. I was wondering if the idea is really to continue to ramp up dividend payments or whether the group sees opportunities for M&A in their already operating segments or if you are considering potentially entering new segments as well.

And the second question, I'm sorry if I've missed this, but on the Transportation division, do you already have any guidance in terms of revenue, volume growth in 2022? Those are my questions.

[Marlene de la Torre, executive]

Thank you so much, Isabella. Regarding your first question of capital allocation, the dividend, M&A and growth, as you know, our #1 priority and focus is always to invest in our growth. And afterwards, we give -- we don't want to hoard cash or sit on a big stockpile of cash. That's why we have been increasing the dividend as we generate more cash flow. But that doesn't mean we are not -- or we are -- our #1 priority is not our CapEx and our growth in the pipeline that we have.

At the same time, we keep an eye open to all the M&A opportunities at the different divisions and at the different levels. So this is something that we are looking constantly. We have a very strong team in terms of M&A. So we see a good opportunity that we could be participating as well if it makes sense with the assets that we have and at a good valuation. But that's all we are looking -- we're always looking to new opportunities that make sense.

In the meanwhile, we will keep on investing. We have a very strong pipeline of projects, as Mr. Xavier was mentioning in the Mining division as well as Transportation and keep on investing to improve our operating metrics and in Infrastructure as well. So we will keep on investing in our CapEx. We will keep on -- we have also exploration projects in the Mining division in Ecuador -- in Peru, Mexico and the U.S., but also in Ecuador and Argentina and Chile. So we continue investing in exploration as well to keep on growing our pipeline. So that's interesting.

In the meanwhile, as I was mentioning, we feel comfortable at these current levels of debt. So that's why we have been increasing the $1 billion copper in GMXT. We have the highest dividend yield within the Mexican companies. So this should continue as we generate more cash flow.

On the GMXT guidance, Isabella, we have a guidance for 2022 of volume growth from 5% to 7% and on revenue growth from 10% to 12%. And this implies a CapEx of $450 million for next year.

[Isabella Vasconcelos, analyst]

Yes, very quick follow-up, sorry, Marlene, just to make sure that I got it right. You mentioned that you're also working on exploration in Argentina and -- mining explorations in Argentina, Chile and Ecuador. Is that right?

[Marlene de la Torre, executive]

Yes, that is correct.

[Xavier García de Quevedo Topete, executive]

Yes. We have in Ecuador the [indiscernible]. And we have finished already with the exploration, and we are in the process of doing the [indiscernible] installed to start next year -- with an agreement with the government to start with the [indiscernible] for this company. In Argentina, we have in Rio Negro 2 projects for gold and silver with good grade of gold and silver as well as a copper deposit that we are exploring called [ Estrella ]. And in Chile, we are continuing with our exploration program in the area of [indiscernible]. That's what we have.

[Francisco Gonzalez, executive]

And sorry, this is Francisco Zinser. Carlos, I have the answer that you requested. The generation for the third quarter in our combined cycle power plant was 841 gigawatt-hours. That's only in the third quarter, and accumulated on a yearly basis is 2,429 gigawatt-hours.

[Operator]

Our next question comes from the line of Jon Brandt from HSBC.

[Jonathan Brandt, analyst]

First question is on the Mining division. As it relates to Michiquillay, was the approval of the Environmental Impact Study, did that come earlier than expected? And I guess if you could sort of elaborate on next steps and the possibility of potentially bringing this project forward and starting before 2028, that will be great.

And then the second question on the transportation assets. If you could just -- I know when there's a fuel cost pass-through. But I'm wondering if that also applies to the natural gas prices. We use natural gas for some of your locomotives. And if that has changed the increase that we've seen in natural gas prices, has that changed the competitiveness of rail assets versus trucks?

And then just staying on the transportation side of things. The Kansas City-Canadian Pacific deal, I guess, as it relates to your M&A, would you consider some sort of partnership, some sort of agreement with the U.S. or Canadian rail line in order to mimic what they're doing?

[Marlene de la Torre, executive]

Thank you, Jon. I think Genaro will comment on -- yes.

[Genaro Guerrero;Grupo México, S.A.B. de C.V.;Head of Investor Relations and Financial Analysis, executive]

Yes. Thank you, Marlene. Well, no, the environmental impact assessment that we have received for the Michiquillay project, it's basically on time. This is a first study that we have to conduct in order to initiate exploration. We presented all the proper documentation at the beginning of this year, in February, and it was approved as the government usually does or the agencies of the government usually does in that time frame.

For -- the following steps are, well, the exploration program, that should last about 2 years. After that, once we understand well the deposit and how can we -- we will address the issue through feasibility study, also understanding what kind of facility should we build in Michiquillay in order to maximize the value of this deposit over time. And after that, we will present all the paper work for the environmental impact assessment. So it's -- there are ahead of us at least 4 years of work regarding Michiquillay to begin the construction of the project.

[Leonardo Contreras Lerdo de Tejada, executive]

For the second part of the question in relation with the fuel surcharge, we don't have a fuel surcharge for LNG price variation. But we're never going to use or we're never going to use 100% LNG in our operations. We always have to use a combination of diesel and LNG. And even that we don't have the fuel surcharge for LNG, we have other -- and a very convenient benefit in the -- to have this flexibility in terms of using LNG or diesel. But I don't know if that clarify your question.

[Jonathan Brandt, analyst]

Yes. So you can use either diesel or LNG in the locomotives. So if you don't have the LNG pass-through, does it make -- financially, does it make more sense for you to use diesel where you have the fuel pass-through?

[Genaro Guerrero;Grupo México, S.A.B. de C.V.;Head of Investor Relations and Financial Analysis, executive]

Well, remember that the fuel pass-through is just only for variation in the price. Then if we have -- we are having a very high flexibility between the price of fuel and the price of LNG that permit us to continue having financial benefits when we use LNG in our operations.

[Marlene de la Torre, executive]

Thank you. I think, Jon, your -- you had another question regarding M&A, if I'm not mistaken. I'm sorry. Well, let us go with Alfonso. And if Jon has another question, we will return to that.

[Operator]

Our next question comes from the line of Alfonso Salazar from Scotiabank.

[Alfonso Salazar, analyst]

I have a couple of questions. The first one is regarding Asarco. You mentioned that the cash cost is around $2.45 per pound. So those -- so there is $0.11 of byproducts. Can you remind us what products it's related to? Is it silver or zinc? If I'm not mistaken, you have Silver Bell, which is only assets is on review. So you have the Mission mine and the Ray mine. Which of these are these byproducts coming from?

Also regarding Asarco, any comments on potential expansion at grade? That's something that probably have been asked in several times, but basically, you can't mention anything regarding that front.

And finally, just one clarification on the electricity reform. If I'm not mistaken, as it stands and as it was proposed, it says that they want to cancel all contracts in self-supply and only the commission, the Federal Commission, can sell electricity. Should I understand that you expect this to be relaxed? Is that your base case based on your comments?

[Leonardo Contreras Lerdo de Tejada, executive]

Alfonso, this is Leonardo. In regards to your first question about byproducts for Asarco, the main byproduct of Asarco is silver. And in addition to that, what we have is [ Maquila ] as we do Amarillo in terms of rock plants. So that would be the effect in byproduct.

In regards to the expansion or the potential in Asarco, at the moment, we're foreseeing an expansion at the Ray mine. However, we're still in very preliminary basis as well as we are also envisioning the potential for Silver Bell. But at the moment, I do think that it's very preliminary and it's probably not worth to take a risk into those.

[Francisco Gonzalez, executive]

And Alfonso, this is Francisco. Regarding your last question about the -- what they want to do with the electricity reform. We have read it very carefully. Your appreciation is correct in the fact that in some of the articles or instances included in the reform, they mentioned that CFE will be buying the power from all the private producers and then selling it to their consumers.

However, if you read it carefully, and I think that's part of the discussion that is currently happening, there are other parts in the reforms that do differentiate between the simulation and the true self-supply.

So it's one of the questions that is currently being discussed right now. My comment was that we are optimistic that the self-supply scheme under the authentic option that I described before will continue as it is right now. In fact, we have had some preliminary conversations with some of the relevant stakeholders making the decision, and we have had confirmation that, that is the true spirit of the self-supply scheme. But it's something that will still need to be discussed and confirmed in the -- hopefully, in the following weeks.

[Alfonso Salazar, analyst]

Right. In any case, it still needs to be approved by Congress and -- yes.

[Francisco Gonzalez, executive]

And by Congress and then by the different congresses of the different states. There's still a long way to go. And we believe based on the amounts of votes that are needed, that there will be some negotiation, and this is hopefully one of the things that will be certain.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Marlene Finny for closing remarks.

[Marlene de la Torre, executive]

Well, thank you so much. I hope this clarifies some of your concerns. In case you need anything else, please let us know. We'll keep in touch, and hope to hear you again on the next quarter. Just one -- Francisco?

[Francisco Gonzalez, executive]

Sorry to complement my previous answer, but it's something that I think is worth clarifying. All the off-takers that we have for electricity have a contract with CFE. So regardless of whatever happens in the Infrastructure division, and again, we're optimistic, the supply of power to the different mines that we have is guaranteed, either through us or through CFE. So I think -- sorry to complement that answer, but I think it's an important and relevant thing to clarify for everyone.

[Marlene de la Torre, executive]

Thank you. And thank you, everybody.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.