Fresnillo PLC
LSE:FRES
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Fresnillo PLC
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Good morning, everyone. Thank you very much for being here. I'm glad to say that this morning, I'm joined by Mario Arreguin, our CFO; and Tomas Iturriaga, our COO. Thank you for joining us for the half year interim results in Fresnillo plc.
So before we begin, I would like to point you out to our disclaimer, as usual, and then the agenda we'll cover this morning. I'm sure you are familiar with our investment proposition. I'll give you some highlights in terms of the operations and also financial results as of first half of this year, followed by some initiatives on the HSECR in our company and also some exploration update. Tomas Iturriaga then also will cover the operational performance and development projects, followed by Mario Arreguin on the financial performance, and I'll come back to close on the outlook.
I'm sure you are familiar with our investment case after more than a decade of Fresnillo being listed in the London Stock Exchange. We do benefit from high-quality assets, all the way from the operations to projects and prospects, large resource base, 2.3 billion ounces of silver, 39 million ounces of gold. Fresnillo is the largest worldwide silver producer. And we've been able to have a concrete and solid position on gold as well.
Two more projects coming downstream on the pipeline, Rodeo and Orisyvo. We focus on really making an efficient operation, and therefore, healthy margins, focus on controlling and mitigating costs. We have a disciplined approach to development projects. We've been bringing onstream projects on budget and on time, doubling our production in the last 10, 12 years.
Of course, sustainability is at the core of our operations, and we continue to strengthen the links between community relations and also in our operations. I'm glad to report that we've been able to conclude almost all of our negotiations. The only negotiation with the current workforce in a rather difficult or complex environment -- labor environment in Mexico and a tight labor market as well.
Last but not least, of course, a strong balance sheet, with a solid cash position, over $1 billion free cash flow position, and also a continuous dividend policy in terms of going out on approximately 50% of our net income in terms of interim and a final dividend.
Some words on HSECR. As I mentioned, we continue to strengthen our initiatives in terms of health and safety, the "I Care, We Care" deployed at all of our operations. Of course, our aim is to build in the end a safety culture. As you can see, we've been having a good track record in terms of reducing our injury frequency rates, all the way from 2017 to now. But this is a topic or an aspect that does not give us really rest and we should continue with the most stringent protocols in place at our operations and projects.
In terms of environment, we do have very good initiatives in terms of using eolic energy at all of our operations. Approximately 49% -- just off 50% of our electricity needs come from eolic sources, and targeting 75% by 2030. We concluded the conversion, another project that is very well in terms of reducing our carbon footprint, converting our targeted haulage fleet at La Herradura, in which we expect to have a reduction of 20% less carbon per truck in our open pit in La Herradura.
The tailings storage facility project and governance scheme continue to be in place more and more. I'm glad to report that Juanicipio tailing storage facility will be the first one in our company that will comply from design, as it is a new tailing storage facility, to ICOLD, ICMM and the rest of the protocols in the industry.
Of course, water is also very important in our operations. We continue to upbuild our recycling water across all of operations. And in terms of climate, of course, that's something that we continue aspiring. We have a modeling project with the University of Arizona, and we have joined the TCFD Consortium as well.
In terms of community relations, in this pandemic, these last 2 years have been more evident, closing the links with our communities, supporting them through the different health initiatives, vaccination, and so. And I'm glad to say that now that we have been able to go back to the communities, again, we have started the initiative in terms of bringing the foundation of the National University in Mexico in order to bring different initiatives in terms of help for communities as well. We do work in terms of education and also in economic growth, building up entrepreneurial skills in our communities as well.
Therefore, some highlights. We are on track of meeting our guidance for the year, 27.6 million ounces of silver and just off 309,000 ounces of gold. This production, of course, we'll step up with -- when we tie in the energy to the Juanicipio operation and also the Pyrites plant in the coming year -- weeks. And then after, we expect to ramp up to the expected 85%, 90% by year-end in terms of the nameplate capacity of Juanicipio. We have continued investing in exploration as this is one of our core in our business, expected to invest $180 million in the year.
Then some financial highlights. Of course, we do have a -- as I mentioned, in our operations, we focus on controlling our cost, building up in our EBITDA margins, of course, and I'm glad to report $365 million of gross operating profit and EBITDA of $459 million; cash on hand of over $1.1 billion; and interim dividend according to our policy, as I mentioned, 1/3 as an interim portion of the dividend and 2/3 in a final dividend. This time, interim dividend of USD 0.034 per share equivalent to $25 million.
As an exploration update, as I mentioned, $180 million we have budget for the year. Most of it goes to increasing the certainty in our resources and also do the upgrade from resources at our mines, 55% approximately of the budget goes to -- along those lines. And the rest goes to develop or continue developing projects. Juanicipio, of course, Rodeo and Orisyvo, and also, we've been having good exploration results in Guanajuato recently, and the rest of our portfolio at the earlier stage.
And now I will pass the word to Tomas Iturriaga so he can tell us more details about the operational performances.
Thanks, Octavio, and good morning, everyone. I'm glad to be back here and see you all in person. That's good. So maybe we can go to Slide 14, and start with an update on COVID matters to start with.
So after a few months of no positive cases, the fifth wave finally reached Mexico and we saw 108 cases in June and over 1,000 in July. We maintain very strict protocols and preventive measures, and we trust that we're very high 90% vaccination rate. We'll continue to prevent severe illness and help us sustain short isolation periods, limiting absenteeism impact. Nevertheless, we cannot rule out some impact in the second half of the year. Our premises will continue to be that people wellness is first.
In terms of rotation and vacancy, we continue to battle the residual impact of labor reform in a very tight labor market in Mexico, driven by several government unemployment programs and historical levels of remittances flowing to Mexico from the U.S. But despite these various contexts, we are being proactive, and the actions we have taken are proven efficient. We will continue to be very focused in recruitment and training of our new personnel, and the mines will continue to be very well managed and operations is steady with only some limited impact expected in the second half.
Slide 15, please. So now turning to operations. I will start with the Fresnillo District, as this is where the key focus remains. At Fresnillo mine, good progress in the first half of the year. Throughput levels have been improving as well as grades. And while development meters are still a challenge, in Q2, we hit the lower end of our development grade guidance of 2,900 to 3,100 meters per month in average.
Our San Carlos shaft sinking project is progressing well, with the sinking itself now complete. And we are working in the civil works and equipment installation required for the shaft to be operational, which we expect in Q3 this year. Tie-in of the Pyrites plant is expected in the coming weeks, with ramp-up following right after.
Next slide, 16. So like I said, our San Carlos shaft is shortly coming into production at its lowest level. So we are very excited about the productivity and benefits that this will bring to our operations, such as reduced haulage costs, improved safety and lower greenhouse emissions because of less trucks running around our ramps and a faster access to some reserve funds. So with operational matters under better control now and the San shaft and Pyrites plant shortly online, I'm confident on more stable operations in Fresnillo going forward.
Slide 17. Saucito, also a reasonable good first half of the year in Saucito. We continued working very hard in our recruitment and training programs. And we kept the high seismicity areas well monitored and operational, and gained access to new mining areas to regain flexibility. Throughput levels are a little bit below original plans. However, reviewed mine planning settings and parameters indicate that we have a better case sustaining daily throughput of just around 7,000 tonnes per day, but with better head grades going to the plant facility as we are actually seeing in Saucito so far this year.
Next slide. Juanicipio. You all know that plant construction was finalized on the schedule last year, and we have been waiting Juanicipio's tie-in to the national power grid, which we expect in a few weeks' time. In the meantime, we have done everything possible to advance matters. And with the limited power now available, we have advanced commissioning of all individual process plant system except for the mills. Mine equipment required for the start-up is operational at site. Mine and process plant are well staffed and we have gained relevant metallurgical knowledge with the ore process in Fresnillo and Saucito.
So because of all these progress made, when we are connected to the grid and integral process plant systems are finally commissioned, we expect the ramp-up of the plant to go smoothly. Also, to mitigate any potential impacts caused by the tie-in delay, we will continue to make available to Juanicipio any process plant capacity available at Saucito and Fresnillo. As you know, the successful ramp-up of Juanicipio will drive increased silver production and lower consolidated cost. We will keep the market closely informed of progress here.
19, please. So in San Julián, we faced some mining challenges forcing us to prioritize wider veins with lower grades to keep metal content going to the mill at planned levels. And at the disseminated ore body, we run modified mining sequence that brought us to the high grade sort of the mine sooner than originally planned this year. But this effect will reverse in the second half of the year when we will see lower grades.
Aside of Saucito, La Cienega is the one mine site where we are facing the biggest challenge dealing with rotation and absenteeism. So that is impacting somehow ore development and production. We will continue to work very hard in recruitment and training to counterbalance that.
Herradura is operating for expectations according to the mine plant. And at Noche Buena, we will now continue mining until the end of the year because some extra ore found with our combination drilling program.
So in summary, I believe we reported a good first half of the year results that includes a solid wider performance in line with our expectations. We are progressing well with all of our plans and programs, hitting tonnes and great targets and regaining stability and control over operational matters in all of our mines.
And so as Octavio just expressed, we remain on track to meet our full year guidance of production. With that, I will pass it to Mario Arreguin. Mario, you're up.
If you don't mind, I'll stay here. Can everybody hear me well? Yes? All right. Good. Thank you. Well, let's go to the next slide, please.
Let me start by saying that the financial results that you see here on this slide are better than we had expected in terms of better prices than we budgeted for and better volumes of production than we initially expected in our budget for the first half of the year. However, in contrast to that, as you can see, compared to the previous year, we're below the different profit lines that you see in yellow there.
So for example, gross profit compared to the first half of the previous year was almost 40% below, operating profit was approximately 54% below last year, profit for the period was 54% below last year and EBITDA was almost 39% below last year. But I guess what I'm trying to say is that these results were foreseen and expected. And actually, we're doing a bit better than we initially budgeted for.
Now I would like to spend a few minutes to talk about inflation. This is what we're going to show you in the next slide. I know inflation is a very hot topic when companies are doing out the results. Bear in mind that this is based on our own basket of goods and services. We spend a lot of time to calculate the internal inflation in accordance with our own basket of goods and services. So this is comparing the average unit price of all of the items that you see there, and we compare that to the average price that we had in the first half of 2021.
And as you can see in the first column, for example, one of the items that had the most -- the highest inflation was operating materials. And here, we're talking about explosives. We're talking about reagents. We are talking about steel for milling, steel for drilling, et cetera, all the operating materials. And what we saw from 1 year to the other was an 18.9% increase.
And then we consider the specific weight that, that item has on our basket. In the case of operating materials, it's 18.8% to get to the weighted average of 3.6% in the case of operating materials. Again, I want to emphasize that this is not on an ounce basis, but this is actually based on unit cost compared to the previous year.
In the case of contractors, and remember, in our case, contractors is not only labor, but also contractors bringing their own operating materials and they bring in their own equipment. The inflation that we saw there was 6.9%. It continues to have an important weight on our basket of 30.5%. So the weighted average is 2.1%. So if you add operating materials and maintenance, you will see that those were the 2 main items behind the 7.57% inflation that we saw in Fresnillo on a consolidated basis for the year in dollar terms.
Having said that, now we can move to the next slide where we try to explain graphically the variation in the adjusted production cost. And as you can see on the green bar to the far right, we had an increase of $48.2 million compared to the first half of this year. And if you look at the red bars, which had an adverse effect on our costs, starting with column #1, you will see that inflation, which I just explained to you, had an impact of $44.1 million in terms of our adjusted production costs, just inflation alone.
In column #2, you see the additional cost that we incurred because we started the mining operations at Juanicipio this year. So obviously, that implies an additional cost compared to the previous year of $43.1 million. As you know, the plant hasn't started operations, but we are mining out the mineral, which is being processed in Saucito and in Fresnillo. And that meant an additional $43.1 million of cost. But of course, behind that cost, we will see that we were benefited by additional profits. So we really don't need to worry about column #2, which is not the case of column #1, of course. We don't generate [any ounces ] with inflation at all.
In column #3, you can see that independently of the inflation, we increased the use of contractors and the use of maintenance. One of the things that we're doing in terms of maintenance is making sure that we have the availability that we need to have the flexibility to operate our mines. So we've been increasing maintenance, again, that has nothing to do with inflation.
And infrastructure contractors, as you know, were making efforts to develop our mines name, again, to have more flexibility in terms of where the different areas that we mine in our operations. So those were increases related to the increase in the use of certain items.
Now turning to the blue bars, which mean that favorable effects. And in column #6, you will see that we had a lower cost because we also processed a lower volume mineral in some of our mines. This lowers our cost, but unfortunately, as you will see, this will also have an impact on our profit level.
And lastly, the lower stripping that we recognized in the income statement. In the first half of 2021, we pretty much hold the waste material at our open pit mines, basically at Herradura, the same volume. However, the big difference between this half and the previous half is that in this half, we capitalized half of that volume, which means that we're going to amortize through time. And the other 50%, we took that directly into the income statement versus last year where we had 100% of the stripping costs taken to the income statement. So that was the reason why that had a favorable effect. But when you look, for example, at all-in sustaining costs, that will definitely have no effect at all.
On the next page or the next slide, what we try to explain here is basically what was behind the lower gross profit, the $240 million which are represented by the green bar far right. And again, the red bars imply adverse effects. So if you look, for example, at bar 13 and 11, 13 is related to lower ore grades at our mines, in particular, I would say, at the Herradura mine, where we have the lower production of gold basically due to lower grade that I would say was definitely the most important adverse effect that we had compared to the previous year. And that goes together with column #11, where we had lower volume of ore processed. So if you have lower volume processed and lower ore grades, that gives you a lower production of the contained metals, and those 2 had an important adverse effect.
In contrast to that, if you look at column #1, you will see that the new Juanicipio operation had a positive effect of $77.7 million in terms of our profits. And when you look at prices, the lower silver price, which is shown on column 12, had an impact of $90 million. Again, in contrast to that, if you look at column #2, the higher gold, lead and zinc prices had a positive effect. Unfortunately, the effect of the lower silver price was a bit higher than the positive effect of the other metals.
The lower stripping ratio on column #3, I already spoke about, we also saw lower depreciation. And I guess, I would say, the main factors behind the lower gross profit. We can just go back for a minute to the income statement.
So far, we covered all the way up to gross profit. So if we continue going down the income statement, you will see that the main difference between the gross profit and the operating profit was the increase in exploration expenses for $16.8 million. Basically, that was all foreseen in our budget. Actually, we were a bit below our budget in terms of exploration expenses. So again, this was completely planned for. And that's what gets you to the $253 million below the previous year.
So up to now, everything here is pretty straightforward. And when you start going down the income statement, then you get to certain things that have nothing to do with the operations. For example, the Silverstream. And you see that the Silverstream revaluation for the first half of the year had a negative impact of $56.6 million. Remember that the Silverstream is considered for accounting purposes as a financial instrument, as a derivative. So we have to mark-to-market at the end of June and at the end of December.
So at the end of June, we looked at the silver prices, of course, and as you know, silver prices have come down, and there's a very strict procedure to calculate the value of Silverstream. So you take into consideration the forward prices plus the prices -- the consensus prices by the analysts, and all of those came down for silver. And also, I don't need to tell you because you know very well, interest rates have been going up, which means that the discount rate that we used to discount the cash flows to value this instrument went up. And those 2 effects, the lower silver price, the higher interest rate, were the reasons behind this $56 million loss.
Again, this is all in paper. It has nothing to do with our cash flow. And this has been generating volatility in our income statement, unfortunately, considering what happens with the prices or interest rates.
And if you continue to go down, when you see the income tax expense line, $6.8 million there, you will see that the effective tax rate is 4.17% (sic) [ 4.4% ] which is low of course because our statutory tax rate is 30%. So one of the things that happened was the fact that the inflation has an impact on our deferred taxes. Mexico, you have the opportunity to update your assets -- the value of your assets in peso terms, in accordance with the inflation, which means that you can increase your depreciation in peso terms. Now that doesn't happen, obviously, in dollar terms, and that generates that deferred tax.
Also, the exchange rate has its own effect in terms of the effective tax rate. So this is a very detailed exercise that we need to do again every half year and year. We have to look at all the different line items -- accounting line items to see which ones have been affected by inflation, subsidiary-by-subsidiary and then at the consolidated level. And that's the way we get to the effective tax rate.
So as you can see, these 2 last items that I mentioned to you are difficult to calculate, and we can appreciate that even ourselves, we have to spend some time to carry out all these numbers to get to this. And when we do our estimation for the year end, well, we tend to be very conservative in terms of these particular 2 variables. We would say, for example, we're not going to consider that the effective tax rate by year-end is going to remain perhaps at the level that the market is showing now.
We might want to consider a 20% effective tax rate just for purposes of being conservative. And also, the prices that we saw in the first half clearly have come down. So perhaps it won't be exactly just doubling those numbers that you see there because probably prices are going to be a bit lower than what we saw in the second half.
With that, I just want to move very quickly to the cash flow, just to give you an idea. By the end of the year, as you can see in the bottom line of the first column, we had a cash balance of $1.15 billion, which is a reduction of $83 million compared to the beginning of the year. Main sources of funds, clearly, the cash generated by the operations of $460 million, which is lower than the previous year for the reasons that I mentioned previously, 38.3%.
Main uses of bonds, of course, CapEx, the purchase of property, plant and equipment, almost $300 million this year. Dividends paid, here we have paid $176.9 million. Of course, income tax and profit sharing, again, remember this is cash flow, $141.2 million. So this is basically a provision of taxes and the profit sharing that we paid in May for the previous year. Then I would say those were the main sources and uses of funds.
In the following page, we've included a bit more detail so you can look at where we invested in terms of CapEx. Of course, the Silverstream, that's real, the $18.3 million that you see there, that's real cash flow that we get from the Silverstream regardless of the valuation. And of course, details regarding the decrease in working capital.
And I guess, those are, I would say, the most important features of our financial results this year. And I'll be happy to answer any questions during the Q&A.
Thank you, Mario. Coming to an end or before we take your questions, some brief comments about the outlook. Glad to confirm our guidance for this year, 2022, but as well, '23 and '24, unchanged. Next year, we expect that you see step up in terms of the silver production, 1 full year of operation of Juanicipio and the Pyrites plant as well in addition to an expected better -- an increased performance in Fresnillo also.
On the gold side, we were expecting some lower gold production as Noche Buena is going out of business, of course, depletion of reserves. But in the coming year, as I mentioned, Rodeo and Orisyvo are already in the pipeline, an expected production of 150,000 ounces roughly each mine and larger contribution of lead and zinc at our Fresnillo, Saucito and also Juanicipio mines in the following years.
CapEx, also, we maintain our projection for this year, just of $690 million. We still have to do some equipment purchases in this complex and challenging times for the procurement and supply equipment. And then in the following years, a bit lower CapEx needs for '23 and '24.
The chart in terms of the development projects as well. Juanicipio, we've talked about, this is in the final weeks in order to be connected to the national grid, of course, as well as the Pyrites plant, and then we will concentrate on bringing onstream -- developing and bringing on stream Rodeo and Orisyvo.
So to conclude, we are achieving and glad to be achieving our objectives this year, stabilize the production at our mines in the Fresnillo District, of course, something that Tomas and team have done very well somehow. Also with the financial performance, trying to control and mitigate cost as we saw, I mean, in this first half, we have a 7.6% inflation. However, I mean, we see a lagging effect somehow and we expect a bit more inflation in the second half, something that we are preparing for.
Proactive management and labor, of course, in this market, not only in Mexico, but I mean, worldwide, very tight labor market, and of course, and also the union side of the market in Mexico. However, as I mentioned, we finalized most of our yearly negotiations in terms of salary and fringe benefits with our labor at all of our mines.
Juanicipio, this time that we've not been able to connect Juanicipio in energy. I mean we got a very good information and knowledge about how to do the best recovery rates, more likely on Saucito, which is a more similar arrangement to this rotation plan that we will have in Juanicipio. So we expect to have a good commissioning and, therefore, a ramp up to 85%, 90% by year-end.
Of course, as Mario mentioned, I mean maintain and mitigate the cost effects in our operations. And just short- and medium-term production outlook and change and gives us the confidence that we will achieve these objectives.
With that, I mean, we can take your questions. Jason?
Just on the power connection, I feel like we've been waiting on this for quite a long time. And -- I mean -- if I went back and I -- I was just trying to do it right now. I looked at previous results. I feel like we should have been connected and running these plants. So what's the problem? Is it COVID? Is it just bureaucracy? Is it bad management? Why do we not have power on these plants yet?
I would say, many, many factors. And if you feel like this is taking so long, I mean, we do as well, Jason. And come to a period of somehow frustration, I mean, in times of COVID was one main issue, of course, not only related to ourselves, but also related to the federal electrical facility, of course, and their process and protocols of how to work in times of COVID, that was one main thing.
We were expecting this back in -- to be connected back in November, December. And therefore, when we said that was not happening that when we released the first note to the market, of course, we were in the middle of also energy reform that complicated things in a way, some issues with the supply of energy in the country, in the southeast part of Mexico, a year and 3 months ago that made the CFE to act very carefully about sourcing additional energy to our operations. So all of this contributed to the -- to not having the energy in time.
Now, I mean, we were working very proactively and actively with CFE and the regulator as well, CENACE. And I can tell you that we went through the last -- second to last major shutdown -- electrical shutdown. So with that, we would have a full set of activities in [ series ] that will end up in the connection. So there is no other way to do it. So that's why we are very confident in the following weeks we will have that energy source to be sourced to Juanicipio in the end.
We've been able to mitigate that effect, of course, processing ore in Saucito and Fresnillo. We have started, as you know, sending out of Fresnillo different arrangement, not the best metallurgical recoveries. Saucito is more like the sign that we will have for Juanicipio. So we are prioritizing that ore being processed at Saucito. So all in all, I mean, we've been able to mitigate this effect somehow. And as well, we are looking forward to ramping up this operation quite smoothly.
Just a second one, if I could. So the last couple of results, we've talked a lot about the operational issues around dilution and also the issues around development. Do you feel like we're past that? Is that fixed?
Do you want to talk about that Tomas? And I'll comment on....
Yes. I mean dilution is a day-to-day mire in the mines. I mean, so what I can say is that we have established the processes, we have incorporated technology to our mines and we are managing well our mines on a day-to-day basis. It's an operational mire that we deal with day-to-day, and I think it's under control.
And so again, the last time we were talking a lot about the confidence in the reserve grades, you're still confident in the reserve grades?
I am, and we are seeing some progress towards that and particularly in Fresnillo and Saucito, we're seeing -- we're not where we want or to be, still working, but we see progress and we have seen the grades improving in both mines through the year. It's on track.
Yes, that is correct. And if I may complement, I mean the expected grade for Fresnillo and Saucito is right there. I mean that gives us confidence that the mine sequences planned for this year gave us the expected grade. As I mentioned before, I mean in terms of Fresnillo going to the following years, I mean we should be seeing that increase in grades.
And an example of that is Juanicipio, if I may mention it. I mean Juanicipio, 580 grams is above the reserve grade, of course. And this is because this is the upper part of the vein, and that's a zoning in Fresnillo District veins that we have. So to have a possibility to Western Fresnillo veins, that will give us the opportunity to produce higher grade in the following years. In Saucito, it is the opposite. It depends on the year-to-year on the sequence that we plan.
Alan from Jefferies. I've got a couple. Getting to 3,100 meters of development at Fresnillo in the medium term and, hopefully, beyond thereafter, is that primarily a personnel issue? Or what's the main headwind to get in there?
Yes, go ahead, Tomas.
No, I wouldn't say it's a personnel issue. Actually, Fresnillo is one of the mines where we are more stable in terms of people. It's rather logistics of the mine. Whenever we are ready with the shaft fully operational, ramps, ventilation, power that we keep working. And again, functionally, we're seeing progress, and we are at the lower end of the guidance now and working towards the goal.
Juanicipio, you used the language that the ramp-up is within reach. Are you confident over that target? Or is that a stretch to get there by year-end, 85% to 90%?
I think we're confident on that. Like I said, we have progressed a lot on several fronts. We have good metallurgical information. People are there ready, equipment is ready. So we should be fine with the ramp-up and to get that -- to get to that target towards the end of the year.
And then just last one for me. How is the July production run rate, considering the increase in the COVID cases?
It's going well. I mean, like I said, I mean we are seeing this increase. Yet -- I guess, we have learned to manage it. Isolation times are less or lower nowadays. So we are seeing a limited impact now. So July is good in terms of production within the plants that we have.
So less impactful than it was in January?
Yes, definitely. And actually, the last week, we started to see a decrease already in cases. So coming from 400 average a week, we had 315 last week. So it's getting down there, but never as it was in January, February, now less. Very far away.
It's Amos from Barclays. I just wanted to ask a few questions. Firstly, you were saying about an expectation for OpEx inflation to pick up in the second half. What sort of run rates of inflation would you guide us to?
I was hoping you wouldn't ask that. It's difficult to [indiscernible]. For example, why don't you show the inflation slide? Yes, I forgot to make a couple of comments. For example, if you look at diesel, diesel has gone up for everyone everywhere except in Mexico, thanks to the government subsidizing the price of both diesel and gasoline, which is costing a lot to the government, several hundreds of millions of pesos.
So how long are we going to be able to keep that? I don't know. I guess, they're betting that oil prices will come down and that it will naturally come to an end. But if it doesn't, that subsidy will stop, and all of a sudden, you will see an increase in the price of diesel in our case.
In the case of maintenance, you see a pretty low inflation there. And the reason behind that is because we have inventories of spare parts with the previous costs. And as those inventories are exhausted and you start consuming the spare parts with the new prices, you will see a higher inflation, of course, which is the lagging effect that Octavio was talking about.
So what we try to do is try to implement certain strategies to try to mitigate the effect of inflation. But for me to say it's going to be 10% by year-on-year, I don't feel comfortable of saying 10%, I really don't know. It depends on whatever happens geopolitically and elsewhere in the world.
In a scenario, I'd say, where the diesel subsidy remains in place as it has done...
In that case, and I'm just giving you my best guess, please, in March don't say, "Hey, Mario, you said it was going to be 10%, it's 11%." Because most profitably, that will happen. My guess would be around 10% or lower.
And also, we are working on the operations to mitigate these effects. We talked about the deepening of the San Carlos shaft. Of course, that will bring some savings for Fresnillo. We are looking into optimizing the open pit at Herradura as well. So further news in terms of different mitigating activities of the operation...
And then I just have a follow-up question on the tax side. So if we assume that inflation rates stay where they are in Mexico and FX stays flat, what should we expect for your effective tax rate in the second half on the P&L?
Again, that's a tough question because you really have to do a very detailed analysis to calculate that number. But if inflation is around 9.5%, because at the end of the day, it's adjusted by consumer price index in Mexico, that's the official exchange rate.
But assuming it's around 9% or so and the exchange rate remains more or less where it is, I would say maybe at 10% -- between 5% and 10% effective tax rate, again, because the important impact that, that has in different taxes going forward.
Okay. And so -- I mean so I guess we saw in the first half, the cash tax payment being multiple times P&L accrual, should we expect that cash number to decline with a lag in forward -- future periods as well?
In terms of the actual cash payment?
Yes.
Yes.
Can we go to the lines, if that's okay, and then we'll come straight back to the room? Octavio?
Sorry?
We've got 2 questions from the lines. If we do that, then we can go back to the room.
Okay.
So operator, can we take the questions, please, from the lines?
First question comes from Krishan Agarwal from Citibank.
Hello, can you hear me?
Yes.
Yes. I mean a couple of questions have already been asked by Amos. So one question remaining is, you made a comment on mine sequencing, visibility is looking good. And then the operational issue seems to be behind. So is it fair to assume that the higher grades, which we have seen in the second quarter, and then the ore processing has also been higher, continues into the second half and has the potential to deliver production towards the upper end of the guidance?
Did you hear that question?
Did anyone hear the question well?
Are you going to be at the top end of your guidance?
Okay. That's easy.
Well, everything is looking good for -- to be within guidance. As Mario said, don't quote me on this, but we will see. But now, we are set for a good second half of the year. Everything is in place at the mines. Barring COVID compacts, which is out of our control and all that, I think we are in good position so far, right, to hit our guidance.
Yes. We built our '22 scenario. Let's not forget that we were coming from a tough start of the year with a lot of COVID cases, with the labor reform, just we needed to be adapting to that with a lot of uncertainty somehow in the labor that we could internalize from our contractors and all of that. So we projected a bit lower first half compared to the second half. So in the second half, we still have the challenge to meet that higher performance, I would say, in general and the mines.
Next question comes from Daniel Major from UBS.
Can you hear me okay?
Yes, Dan.
All right. Great. Yes, first question, just on the reserve grade debate, Fresnillo and Saucito. You mentioned your confidence in the reserve grade. And I guess it's been encouraging to see a pickup in mine grades of both assets during the second quarter. But if I look back at the annual reserve and resource statement that was, I guess, published after the interim results, one of the debates we've been having is this convergence between the reserve grade and the mine grade, does the reserve grade come down? Or does the mine grade come up? Or mix of the two?
I mean if I look at Saucito, you reported a 28% decline in the reserve grade with your FY '21 reserve resource statement. So 219 grams a tonne basically reserve grade is effectively pretty close to where you're guiding now. Is that something we should be expecting in Fresnillo as well? Fresnillo, your mine grade has remained below the reserve grade. But can you talk us through that, pretty meaningful downgrade to the reserve grade at Saucito with the full year update? And should we be really expecting just reserve grades to fall towards the kind of 200 level in both operations like we've seen in Saucito?
No, we are not expecting the same behavior in Fresnillo. I mean the one that we had in Saucito, Saucito being the newer mine, we started to hit some of the upper blocks in the mine. And therefore, some of the assumptions we had in terms of the reserves that we had at the top level of several mines in Saucito were now becoming true. And therefore, the mineralized area and the economic area on the veins -- on the top part of the veins were not coming through.
And therefore, in conjunction with the -- with some of the costing that we had, higher costing in Saucito and these areas that we're not coming as for, we needed to adjust that reserve grade in Saucito. We are not expecting the same in Fresnillo. We've done several of these veins and it's a different behavior, Dan.
Okay. Next question just on the -- back to the cost sort of debate. I mean I appreciate there's a lot of moving parts on the second half of this year, but you're guiding to a similar kind of rate. I mean if we look into 2023, I've been struggling for some time a little bit looking at kind of where the consensus sits on this.
I mean it appears, based on the consensus, that absolute level of dollar cost should be going down in 2023, yet you will have a full year of commissioning of Juanicipio. And I would guess some of these inflationary inputs, you should be similar.
So should we expect costs in 2023 to rise at least in line with production with your silver production lifting? And can you give us any thoughts on the delayed realization of some of these input cost pressures? How we should be expecting costs to trend into 2023?
Well, in terms of Juanicipio being a new operation, we will go back and reference to what we used to have in Saucito in the initial years. Of course, we would expect, and we've talked about this before, higher production -- higher grade and, therefore, higher production in the first years of Juanicipio operation. And then as we go deeper in the veins, that grade should come down as it is the case in the whole Fresnillo District.
Therefore, in terms of cost per ounce should be very competitive initially. And therefore, as we source less grade, less ounces and more base metal content, that should be the opposite, but still very competitive. Also being in the upper part of the veins gives you less haulage cost and less energy and less ventilation as being in the deeper part of the veins. So that's what I can tell you in terms of the expected -- in general terms, the expected cost at Juanicipio, Dan.
I'll ask the question in a slightly different way. I get the unit cost should see some dilution on a group basis through the commissioning of Juanicipio. But if we look at it in absolute terms, dollar terms, is there any reason the costs on a group basis should go down in 2023, which is what's currently kind of factored into the consensus?
Being all equal, I mean we should see what the end result in terms of the FX and also the cost of the operations because, I mean, it's normal. I mean that we go deeper in all of our operations every year, the cost should increase. But then balancing that in a different direction should be the infrastructure projects.
As we mentioned, I mean the San Carlos steepening of the shaft should help us in terms of our cost and also the optimization of the Herradura open pit as well, something that we are aiming to conclude at the end of the year and then put in place for next year if everything goes feasible.
So all in all, it would depend on the -- on these different factors. Mario, I don't know if you have any [indiscernible]?
No, I think you pretty much covered it. In the short term, we would expect the cost, for example, I'm not sure when [ that could come down ] in absolute terms. And of course, the Juanicipio operations, I would expect to bring down in the short term given the high grade, the average cash cost.
Yes. No, I mean the unit cost should come down. But my question is, when I look at your guidance, you've got around 10% higher silver production implied in the guidance, kind of similar gold production. Yes, Noche Buena comes off [indiscernible] simple question. In U.S. dollar term, not unit cost terms, would you expect costs to lift in 2023 relative to 2022 with the higher volumes even though you have some cost dilution?
In dollar terms, I would say it's going to go up. I mean just higher production rates. Yes, in dollar terms -- absolute dollar terms, yes.
Okay. That's very clear.
[indiscernible] production.
Yes, that's clear. And then just a final one on Juanicipio. When would be the kind of latest you would need to get the electricity hooked up for it not to create risks to the guidance for 2022 and 2023? What would the deadline be?
We don't see any risk to the guidance as we are looking into a program -- a very well-defined program in order to get to the connection. As I mentioned, the big milestone was this electrical shutdown, the blackout we had a week-and-a-half ago. And after that is a series of activities that cannot be stopped or deferred and, therefore, our assurance to be connected and not having any risk on the guidance.
Sandeep Peety from Morgan Stanley. So I had one question, which is a clarification. You mentioned second half of the year, you expect the inflation to be increased by 10%. Is that year-on-year?
On an annual basis, January to December.
Okay. Compared to the previous year.
Yes, because second half of the year last year was much elevated.
Okay. Okay. That's clear. And secondly, on this -- so you mentioned that 50% of the stripping cost was capitalized this year versus 100% last year. Can you clarify that why was that the case? And going forward, what's the expectation?
Yes, of course. In accordance with accounting principles, what you have to do is you have to define the expected long-term average stripping ratio for the life of the mine. So when there's a change in the mine plan and that number changes, we have to adjust. So when every year, on a yearly basis, above the expected average stripping ratio to capitalize that portion. And vice versa, when you're below, you amortize that portion.
So given the fact that there was a change in the mine plan, which in turn generated a change in the average long-term life of mine stripping ratio, that's what was behind the reason for capitalizing this year versus last year.
Okay. And going forward, probably it's going to be 100% expensed because I guess you don't revalue that every year?
Again, we will have to -- look, if the mine plan doesn't change, then obviously the average long-term stripping ratio won't change. So if the stripping ratio next year is at or below the average, we will have 100% expense only if it's above.
Okay. Okay. That's very clear.
You have to look at it annually, right?
Yes. Yes. Yes. That's well noted. And secondly, on the working capital. So you have seen outflow of around -- inflow of around $77 million. So is it going to be -- like can you explain the different moving parts first? And what is the expectation for the [indiscernible]
The reason behind that reduction in working capital was the fact that we were able to recuperate some of the value-added tax that was owed to us historically. That was the main reason. We're going to continue to put pressure to try to recover as quick as we can the value-added tax that is owed to us because we are typically value-added tax positive, because the sales of gold are 0 VAT. But we pay VAT when we purchase certain things in Mexico. So that generates [indiscernible] VAT all the time, and we need to push to recuperate that as quickly as we can. But that was the main reason behind the...
So probably in the high commodity price scenario, you'll have higher VAT recoverable?
Probably. Yes.
Okay. Okay. That's clear. And finally, just on the depreciation because it matters for the dividend payout. So what's the normalized dividend like for the company after the growth projects are up and running?
What's the approximate, sorry?
Normalized depreciation level.
Depreciation level?
Yes.
Okay. That depends also on the depletion. As you know, we depreciate our assets based on the depletion factor, which is based also on the reserves, which gives you the mine life -- expected mine life. If you have a reduction in volume extracted from the mines, that will have an impact on depreciation on the depletion factor. So -- and that's a bit of the reason behind the lower depreciation I showed you in the slide.
But if we go back to normal levels of extraction, I think we will have a more stable depreciation, of course, with the Juanicipio project coming in. And once we start up that plant and it starts to depreciate, which we hope will be this year, depreciation will go higher based on -- just on the fact that the Juanicipio plant will be operating in the second half of the year. Just a combination of factors.
[indiscernible], obviously, it's been in the pipeline for a while, and time lines moved out just a little bit. But it's only about 2.5 years or so until potential production. Can you talk about a little bit of that pathway forward there?
Yes, unfortunately, we've not been able to complete the land access with the agrarian communities in the area. Something that we are aiming to conclude in this year. Fortunately, I mean, the ore body is shallow. And therefore, we require not a largest stripping. It would be a low stripping ratio. So what we need to do after we have land access is have the exploration crew and convert those inferred to indicated resources and, therefore, reserves and do the liability.
So we are also bringing the equipment from Noche Buena. So we are aiming to have a low CapEx project into operation. And therefore, that's why the timeline that we have in the chart.
And then maybe just secondly, on the renewable energy target, 75% for 2030. Can you just talk about pathway to that? Is that being internally driven? Do you need to rely -- how much do you rely on the regulators in the utility and things like that? Or are you going to [indiscernible]?
No, we do have the source and the energy are ready. It's just a matter of passing on some of the administrative controls and regulations that have become a bit more difficult with the energy reform in Mexico.
[ Thomas Streeter from Streeter Research ]. A question for Mario. Just what was the new discount rate on the Silverstream?
What is the new discount rate? I don't have it on top of mind. But let me get back to you and give you the exact discount based on LIBOR plus spread considering the Mexico risk. I don't have it on top of mind. I'll send it to you.
Danielle Chigumira from Crédit Suisse. A short question on Juanicipio. So given the experience that you have with Saucito, what is the shortest time that you think it will take in order to ramp up the plant to 85%?
It would depend. It would depend. I mean, in Saucito, the second line of Saucito was very quick. It was within 2 months or so. But it would depend. I mean the information we've gathered from this time being able to process the ore in Fresnillo and Saucito has given us a good opportunity Also, we've been commissioning all -- I would say, all of the equipment except by the mill, which we need the energy from the grid. So it's only that last part and, therefore, that's why we are confident in reaching that 85%, 90% ramp.
That's useful. And just from a safety perspective, one of the areas which you've seen for the last few years is around occupational illnesses. So could you talk about how that's been trending year-to-date -- occupational illnesses?
Occupational -- sorry?
Illnesses.
Illnesses.
Occupational illnesses. Well, that's something that we've been taking care of for many years. We do have -- that have drastically dropped, of course, through the years. Those illnesses from the mining in the past are not present now in any of our mines. That's something in general that I could tell you.
Gabby, I don't know if we have something more in particular about illnesses in the workplace?
[indiscernible].
Yes. We can send you further detail, of course.
Yes, we will do.
I just wanted to ask a question about Juanicipio. Once it's up and running, what should we expect the dollar per tonne milled cash cost to be? Is it going to be in line with where Saucito is now or potentially where Saucito was when the second line started up, for example? What's sort of sensible...
Yes, we have not released that information. However, we have pointed out to that reference as being similar to Saucito. Of course, as I mentioned, this is a new operation. So we expect to do better than that. But just as a reference, that's what we are pointing out. It's the same vein -- at the same vein. So you're passing the way to Juanicipio, but at the higher part of the vein, of course, initially.
Okay. And then I just wanted to ask as well, is there an effect from putting the tonnages from Juanicipio through the Saucito plant that sort of affected the efficiency of operations at Saucito over the course of the last year or not?
Tomas?
No. Not at all. We have only used any spare capacity available at Saucito. So Saucito is not sacrificing anything by processing those tonnes.
Jason?
Just to come back to your triangle on Page 12. If we go back to the time of the listing, you guys went through a period of very rapid growth of bringing projects online quite quickly. What's your feeling on Mexico? What we're hearing from other regions is it's taking much longer to bring projects online. Is that true in Mexico? And is it possible to feel like give a little bit more impetus to getting these projects through the pipeline more quickly?
Most definitely, I mean, it's taking longer in Mexico than before. In average, I mean, in previous years, we used to have the economic impact assessment approved and everything within a year. Now it's taking longer, 2 years, 2.5 years. And therefore, you have to plan for those longer periods of permitting process in order to bring on stream the projects. From those around the time [indiscernible] We are now on the land access stage of those 2 projects.
Guanajuato, as I mentioned, we are having good exploration results. In fact, I mean, I should mention that we are planning for an Investor Day, to be confirmed the date, in which we would talk about -- more about details about exploration and operations as well, probably in November or so. We will keep you posted. But yes, I mean, right now, instead of pushing it, it's more to plan for that permitting -- longer permitting process on those projects, Jason, unfortunately.
So if we look at the third level down, so that's the PEA feasibility level. You're saying 4 to 5 years before we get first metal from those projects from today, yes? And then if we look at the next level down, is that 9 or 10 years?
No, I would say less than that. For example, Tajitos is in the Herradura District. Similar to Herradura in the initial stages, we are working to consolidate that property there. We are already working there. [indiscernible] in Peru, yes, that would take longer, I would say. We have the -- some communities around and more and more work to do there. So it depends.
I would say Orisyvo, Rodeo was right there reflected in the chart. Guanajuato probably next, in the next probably 4, 6 years, and then Tajitos probably along the lines of Guanajuato. San Julián [indiscernible] the ones that we are kind of pushing now.
Do we have questions on the line? Okay. So with that, we thank you very much for joining us for this interim results of Fresnillo. Thank you.
Thank you, all.