Fresnillo plc

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

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

Thank you very much. Good morning, everyone. If we can move, please, to the income statement. Okay. What you see in this slide is basically the income statement for the first half of the year, and we compare that to the previous year. And as you can see from all the different profit levels, which are outlined in yellow, we are below last year's first half results. Gross profit was below almost 23% compared to last year. Operating profit was almost 63% below last year. Profit for the period was 36% below last year. And EBITDA was close to 24% below last year. And in order to understand the decreases, I would like to start basically with gross profit. the $83 million decrease. If we move up that column all the way up to adjusted revenues, you will see that we had an increase of almost $82 million in adjusted revenues. That was basically due to volume. As Tomas reported, we had an increase in production of silver and gold. Whereas prices, even though silver and gold went up, in this first half, they were more than offset by the decrease in the price of zinc. So prices didn't really do that much for us this first half. It was more in terms of volume when justifying that increase in adjusted revenues. But I think the item that you are mostly interested in has to do with adjusted production costs. which increased by almost 17% or $114.5 million. And I think this is the line item that I would like to dedicate some time. So if we can please move to the, what we call the rainbow analysis. And what we show here in this slide is on the far right-hand side, That bar shows the increase in adjusted production costs, which was, again, $114.5 million. And if you move all the way to the left on this graph, you will see the different variables that impacted our costs, starting with bar number one, the most important one, which has the most important effect for the period. was the revaluation of the Mexican peso. I'm sure all of you are familiar with this. The peso has been one of the strongest currencies compared to the dollar, basically due to the fact that the interest that we pay in Mexico is much, much higher than the one paid in the U.S., So you can see that the average exchange rate for last year was 20.28 pesos per dollar, whereas for the first half of this year, it was 18.21. So that translates into a 10.2% revaluation, which had an impact, a negative impact of $45 million. Now what we show on bar number two is the... impact of what we call the underlying cost inflation. And the underlying cost inflation is the one where we exclude the impact of the Mexican revaluation. This is purely the increase in unit cost, assuming zero revaluation of the Mexican peso. And this underlying cost inflation for this first half of the year was 6.2% on an annualized basis. which had a negative impact of $41.6 million. If you look at these two first columns, you will see that you get to almost $97 million, which represents close to 76% of the total change in production costs. So by far, I would say these two elements were the most important ones in terms of impacting our adjusted production costs. If we continue to move on, you will see that on part number three, we're showing the increase in absolute production costs derived from the fact that the Juanicipio mine ramped up and had extracted more minerals during this first half of the year compared to the previous year. And you're also aware that this year we started the operation of the plant. So obviously behind that, there was a $19.6 million increase in absolute adjusted production costs. But we really don't need to worry about this particular increase because behind this increase, we saw a very important increase in our profits. Moving on to bar number four, and this has to do with a technical accounting adjustment, I would say. This first half of the year, For the Herradura mine, one of the most important components of the Herradura mine has stripping ratio, which was below the average life of mine stripping ratio. What that means is that for this year, we pretty much capitalized, I mean, expense, expense, took to the income statement. All of the costs incurred in stripping in this particular component, which is the most important at the Herradura mine, And as a result of that, when you compare the first half of the previous year, where we had exactly the opposite, you know, we had a higher stripping ratio, and a lot of that was capitalized. This year, that stripping ratio, again, was below the average life of mine stripping ratio, so we took more of the stripping cost to the income statement. And that had a negative impact of $19.5 million. The fifth column, what you see there, basically has to do with the current operations. So there was an increase in terms of the use of maintenance, contractors, operating materials, diesel. And this was basically due, as you are aware, of longer hours distances. and deeper mines, and we also doing more development. All of this had a negative impact of $16.7 million. And lastly, on column number six, we also saw higher ore volumes processed at some of our mines. Again, we don't really need to worry about this particular increase because behind it, there was an additional profit generated. And the two variables that somehow mitigated this adverse effects were, one, Nochebuena. As you know, we're in the process of closing that mine. So obviously, that mine incurred less production costs. And also, we reclassified part of the cost incurred at Herradura and Nochebuena. I'm sure you remember we had a stoppage, a legal stoppage for 14 days. And what we did there is those fixed costs, mainly salaries, we reclassified those to unproductive costs. So let me just go back a bit and I believe there are two questions that you might ask. One, How much of this was known by the market? And two of the changes that we show here in this slide, which do we consider to be structural or permanent? Which do we consider to be temporary or that can be reversed? Starting for the first question, how much did the market know about this? And if we start with bar number one, Well, this shouldn't be any surprise at all. I mean, this is public information in terms of the exchange rate, and everyone is very much aware of that. So this is no secret. Second, what we call the underlying cost inflation. In early March, when I was sitting here, some of you asked me what inflation was expected by the company, excluding the exchange rate effect. And I was lucky because I answered six. So this was pretty much known by the market too. So the market knew about these two first columns, which again represent 76% of the total increase. When the CPO might ramp up and the startup of the plant, of course the market knew about that. So obviously if you have a new operation, that would increase your absolute adjusted production cost. Column number four, the stripping, the increased stripping cost taken to the income statement. Well, maybe we, I believe we mentioned part of that in the March meeting that we have here. But again, that was a technical accounting issue. And again, the one that we're working on is the one shown in the In column number five, well, Tomas has explained certainly the actions that we're trying to make in order to mitigate that sort of deepening and longer distances in our mines. Now, question number two, how much, you know, how many of these bars are structural or permanent and which ones are temporary? Again, starting with column number one. From my point of view, I believe this is one of the variables that could be reversed. That is temporary. How long do we expect the PESO to maintain this strength? Well, it's hard to say. I can tell you that for the second half, it's going to be even worse because in the first half, we had an 18.21 average exchange rate. If you look at the exchange rate right now, it's 16.7. So it's even below the average of the first half. And we really don't see any reason for that to change in the short term. Of course, we're going to have elections next year, but we're not expecting that this political situation could have a negative impact on the exchange rate unless something unforeseen happens. But in the medium-long term, we don't believe that the peso can hold this strength. And eventually, you know, it will maybe come back at least to 21, 22 levels that we just saw six or seven months ago. So, again, this result, I believe, can be reversed. The second column, inflation, I think this is structural and permanent. Unless we start seeing deflation and lower unit prices, we really are not expecting to see that. The Guaricipio mine, again, it's a good thing. So that's permanent. It's going to stay there. But generating the profits, the stripping to cost, Well, that changes depending on if the stripping ratio is above or below the life of mine stripping ratio. So again, it comes to column number five. Our mines are already deep, and our open pit mines have increased the distances, and they will continue to do so. So once again, the only thing that we can do is try to mitigate those effects by implementing strategies to be more efficient and more productive. And again, Thomas just spoke about that a few minutes ago. So I hope this gives you a fair idea of where we see our costs going. If we can go back to the income statement, please. The other item that I think it's worth a while talking about is exploration expenses. As you can see, we had an increase of almost 25% or $19 million. So we spent close to $97 million in the first half, which is slightly above what we guided for at the beginning of the year. But we expect to, at the end of the year, pretty much be in line with what we guided you. So probably we will see lower exploration expenses in the second half to meet the guidance that we gave. But most of this increase has gone not to the operating mines, but rather to the new exploration projects that we are currently working on. Perhaps another line that would be interesting to talk about is the silver stream. You already are very much aware of this. This has no cash effect. Nevertheless, we have to value the market at the silver stream that we hold with Pena Sabina's mind. And given the fact that the prices, forward prices, when we did this valuation as of the close of June, forward prices were lower for silver. We had to incorporate that into the model and also the fact that Sabina says reported a bit lower reserves and resources that translates into a bit less silver coming out of that mine in the future. So all that was taken into consideration and the outcome was a $17 million reduction. However, compare that to the previous year where we had a a much bigger effect coming from lower silver price and an increase in the interest rates that we use to discount the cash flows. Believe it or not, that had a positive effect of $19 million. The other line items that I think we should comment on are income tax expense and mining rights. and I would say unique, to see positive numbers there. So I believe this will be one of the few companies that is reporting higher after-tax profit during this period. And the reason, compared to the profit before income tax, and the reason for that, and this is not the first time that this has happened, given the impact of the Revaluation of the Mexican peso on deferred taxes and also the impact of inflation. But most importantly, the revaluation of the Mexican peso. That has a tremendous impact in terms of the deferred taxes. So how do you get that? That's how you get to $89.7 million of profit for the period, which is higher. than the profit before income taxes. Again, if the peso goes back to the 21, 22 peso per dollar level, this will be completely reverted in the future. And that's what we expect to happen eventually. Okay. And if I skip some of the lines, I'm happy to answer those during the Q&A. Go to the next slide, please. The next slide. I just want to make sure that we are clear on what we understand by what we call consolidated cost inflation. In the rainbow that I explained to you, we separated what we call the structural or the underlying cost inflation. from the evaluation of the Mexican peso. However, when you look at them together, combined, that's how we get to what we call the consolidated cost inflation, which again takes into consideration our own particular basket of inputs and the weighted average of each one of those. And that's how we get to the 13.35%. Again, if you take the revaluation of the Mexican peso effect out of this, that's how you get to the 6.2. So hopefully, you know, this concept is clear. And if we can move to the next slide. I think this is important to show very quickly. And by the way, the shaded part of the circle there is basically associated to contractors. So, you know, contractors obviously bring their own personnel, bring their own equipment, bring some of their operating materials, and also do part of the maintenance, and they charge us for each one of those components. But anyway, as you can see, operating materials as a whole represents the most important component of our adjusted production, representing 23%, followed by personnel, which represents 20%, you know, when you combine both our own personnel and contractors. Maintenance represents approximately 20%. Energy, basically meaning diesel more than electricity, represents 18%. And a bunch of other things represent 12%. So, you know, when you model Fresnillo You should take this into consideration and also take into consideration that between 40 to 45% of the production cost is denominated in and paid in pesos. And that's where we get hit when the peso re-evaluates. Move to the next slide, please. So to conclude, Let's look at the different factors that affected cross-profit. So, again, the green bar at the right-hand side represents the $83 million lower cross-profit. So, what benefited us? Of course, the Juanisipio mine ramped up and the plant started up. Remember when we spoke about production costs, I said that that was a component that increased our costs. But at the end of the day, we copied more than covered that cost and generated an additional $59.2 million in gross profit. Also, the fact that at some of our current operating mines, we had a higher volume, that also increased our cost, but it was more than compensated by... by the increase in sales, which obviously covered that, and generated $42.6 million in additional profits. I spoke about higher metal prices. Of course, gold and silver were up about a bit, 4.2 in the case of gold, 2.4 in the case of silver. However, if you look at column number 10, the price of zinc almost came down by 30%, and that's becoming a very important byproduct. So the impact of the lower base metal prices or byproducts had a negative impact of 51.3, which more than offset the positive effect of the higher gold and silver prices, $38.5 million. We also have what we call a gold inventory uplift at Herradura. So what we saw at our reaching paths was that the inventory was coming down and down and down. And we were going to get to a point where it was going to be zero or negative. So we did an analysis to see how much really was at our reaching paths. And we came to the conclusion that there was a bit more gold than what we initially estimated. Of course, this was audited by Ernest and Young, who are our auditors. And on the negative side, of course, you have, again, Column 98, which represents the revaluation of the Mexican Pencil, the cost inflation. And the higher stripping to cost, all of those factors we spoke about in the previous slide. So this gives you an idea of the things that helped us and the things that went against us when it comes to gross profit. If we can move on, please. Yes. I'm not going to comment on this. I thought it would be Good for you to know, you know, where we are investing in terms of exploration. And as I said, we are dedicating a lot of resources to prospects and projects. That's where the increase was located. Next slide, please. Finally, in terms of cash flow, as you can see on the bottom first column, we closed the first half of the year with almost $690 million, which represented a decrease in the cash balance compared to what we had at the beginning of the year of $79.4 million. But if you consider that we paid dividends for $98 million, you'll could conclude that we were net cash positive, excluding the dividend payments, which were $98 million. So the main source of cash came, obviously, from the operations, $323 million. I would say the main uses of cash were, obviously, taxes paid, profit sharing paid. Remember, this represents cash revenues. payments during the process, basically provisional tax payments, and also mining rights that we paid in March corresponding to 2022, but were paid in March this year. And the profit sharing corresponding to 2022, which was paid in May this year. Those basically are the concepts that formed the $192.3 million contract. Another very important use, of course, is CAPEX, $228 million. Part of that is mine development, and part of that is planting equipment. And the dividends paid, $98 million. Those were the main uses of cash. With that, I think I will leave it at that. And if you have any doubts, questions, I'm very happy to answer those during the Q&A.