London Aug 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Fresnillo PLC earnings conference call or presentation Tuesday, August 4, 2015 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Octavio Alvidrez Fresnillo plc - CEO * Roberto Diaz Fresnillo plc - COO * Mario Arreguin Fresnillo plc - CFO * David Giles Fresnillo plc - VP, Exploration ================================================================================ Conference Call Participants ================================================================================ * Dan Major UBS - Analyst * Anna Mulholland Deutsche Bank - Analyst * Jason Bell BofA Merrill Lynch - Analyst * Leon Esterhuizen CIBC - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Fresnillo plc, 2015 interim results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Octavio Alvidrez; please, go ahead. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [2] -------------------------------------------------------------------------------- Good morning, everyone; thank you for attending Fresnillo's interim results presentation. Today, we are going to run through the presentation. First of all, I would like to draw your attention to the disclaimer as we'll have some forward-looking statements. The agenda for today, we have with us Roberto Diaz, our COO, that will cover the operational review; Mario Arreguin, our Financial Officer, will cover the financial review. And then after, going into the growth pipeline covered, firstly, by David Giles, our Vice President of Exploration, and the development projects by Roberto Diaz, before I will come and close the presentation with the conclusion and outlook, before opening up the -- for Q&A. Well, there is no doubt that this first-half 2015 has been a challenging time for all of the precious metals producers. However, in the case of Fresnillo, we have not changed our strategy. You will see that our strategy is still in good standing and, adapting to the circumstances, I think that we will be in good shape after this down part of the cycle. We saw, the first half, we've done 11% increase in silver production. This is due to the Saucito II, the startup, running at a faster pace than anticipated. When we told you back a couple of years that we are going to push Saucito II ahead of San Julian, that's because we realized that we could do so, and that would give us more flexibility on the silver side, recognizing that Fresnillo was coming down temporarily. This is one example in which we -- with the experience, we've been able to weather these issues at Fresnillo with more production coming out of Saucito II. On the gold side, we increased our gold production 37%. This is due to Herradura and the dynamic leaching plant comparing favorably to the first half of 2014, in which we had a temporary suspension, due to the explosives permit; and the dynamic leaching plant being already in shape to operate but not having ore, due to this temporary explosives permit as well. Of course, we did a larger gold production. We have increased our guidance to 715,000 to 730,000 ounces, 6-plus-% from the previous guidance. We have confirmed our guidance in terms of silver to 45 to 47 million ounces including the Silverstream. Turning into our financial performance, and despite significantly lower commodity prices, silver minus 18%, and gold minus 7.4%, we have been able to deliver positive earnings. We have also delivered on a robust profit margins as you can see in the slide. With lower cash generated from the operation, compared to 2014, but it's still significant at $315 million, our balance sheet remained strong with a cash position to June 30, of $476 million. With this cash position, with the measures that we've taken in 2015 to lower the CapEx investment, and with the projects that will come onstream with investment in 2016 and onwards, we have declared an interim dividend of $15.5 million approximately, which equivalent -- is equivalent to $0.021 per share. Now, going to cover some of the highlights for the growth pipeline; this also remains on track. The pyrites project we have advanced the project on the basic engineering on the detailed engineering. We are ready to place the long-lead time equipment order. This has allowed us to put some of the CapEx that we had anticipated spending on 2015 into 2016, without any effect to the pyrites project, and that will come on stream in 2017. A very strong project: 25% plus internal rate of return; and another project on the Fresnillo district that will bring us more silver at a very low cash cost. In drilling we have had good results with Cienega and Juanicipio. We expect some good increases in inferred resources in these two projects. Talking about Cienega, we have also postponed the expansion to 5,000 tonnes or 6,000 tonnes per day. We are evaluating these two cases. And in the meantime continue exploring, finding more resources. Then, after, turning into reserves and making this expansion a stronger case. For San Julian, however, we have evaluated the program. We started with some delays on the permitting process. Let's recall that we went ahead with this project one year-plus ago. The new administration was coming into Mexico, and that process has been a little bit slow; that impacted the permitting process. Then, after, we had some issues with the weather, heavy rain, as we were doing the foundations for the leaching plant. Also, we experienced some issues with the high turnover by the contractor's personnel. All of these issues impacted on a slight delay and, now, we are expecting to commission this project in first half of 2016. Regarding CapEx and realizing the kind of market in which we are, we have identified. We have lowered, the CapEx on the sustaining side, as well as on the expansionary side, by approximately $130 million, so that we are now looking to end the year with $570 million in CapEx. We will cover in more detail most of this. Now, I would like to hand over the presentation to Roberto Diaz. -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [3] -------------------------------------------------------------------------------- Thank you, Octavio. I will now take you through a review of our operational performance in the first half of 2015. There are areas that we will be focusing for each operating mine in the second half and further ahead. First half of Fresnillo performance. Fresnillo is one of the oldest continuous operating mines in the world and the largest primary silver mine. We saw lower production from the mine in the first half, due to lower silver ore grades and decrease in volume processed, this was due to the development delays, almost 70%, and stope instability caused for 29%; and also, a change in the geologic model, more or less 8%. This limited the access to the high-grade areas. This also impacted costs. But Mario will take you through the first-half costs in detail in the financial review. In the first half we continued to implement measures to improve the mine's performance, including enhanced contractor supervision, and measures to manage the stope instability. We were encouraged by the results these measures have already delivered, with the development rate reaching 4,150 meters per month. Also the outlook in Fresnillo, in the second half we expect to maintain development rates above 4,000 meters per month; an advancing the [time] declines in order to reach areas of higher ore grade. We expect to begin seeing an improvement in grades and production volumes in the fourth quarter of this year. Once operating and stope flexibility has been regained, we expect silver ore grades to readily move towards the reserves grade. About Saucito mine performance in the first half, Saucito is a key asset for us as we work toward our 2018 production target. We delivered a strong performance at Saucito in the first half, with Saucito plant ramping -- Saucito II concentrator plant ramping up well ahead of the three-year timeframe that we initially anticipate. We saw a dramatic increase in silver and gold ounces produced as Saucito II came on stream. We saw higher silver grade resulting from increased ore throughput from higher-grade ore veins. We also improved dilution control and enhanced milling efficiencies at our Saucito I plant with the addition of vibrating screens, called the Derrick screens. Our all-in sustaining costs per silver ounce was 22% lower at just under $6 per ounce. The outlook of Saucito in the first half of 2016, we plan to install the Derrick screens at the Saucito number II plant, similar to those used at Saucito number I plant. We expect to increase the nominal capacity of Saucito to reach 7,200 tonnes per day as a result. Ore grades and volumes processed were unusually high in the first half of the year 2015, and are not expected to remain in the levels going forward. We will continue to process ore coming from development and production stopes in the second half of 2015; and expect silver ore grade to average between 270 grams per tonne and 300 grams per tonne in the second half. Now I talk about the Cienega mine, the first-half performance. Remember that Cienega is a gold silver mine, with a large resource and reserve base in all-in sustaining costs of around $650 per ounce in the first half. Gold production decreased in this mine, due to the expected lower ore grade resulting from the depletion of the high grade gold areas with wider veins at Cienega main mine. Maintenance delays caused by a mill engine replacement in June also had a small impact on the production. Lower gold production was partially offset by increase in silver production, driven by expected higher silver ore grades, as richer veins were accessed at the San Ramon; San Ramon is a satellite mine; and slightly offset by the decrease in ore volume processed. In the outlook, in Cienega we are currently evaluating increasing capacity at Cienega, as Octavio mentioned, to either 5,000 tonnes per day or 6,000 tonnes per day, following the good exploration results. We are intensifying our exploration effort at areas of influence around Cienega, such as the Cebollitas cluster and the [San Julian] cluster, which are expected to contribute to Cienega's future production as satellite mines. In the second half, we expect an average ore grade of around 2 grams per tonne of gold in Cienega and an average silver around 120 grams per tonne. About Herradura, the first-half performance. Fresnillo, as you will remember, owns the 100% of the Herradura mine, following the acquisition of Newmont's 44% stake in the Penmont joint venture in 2014. We saw gold production increase with the mine fully operational over the six months, with the temporary explosives permit suspension, which was lifted in March 2014, affected production in the first half of 2014. Dynamic leaching plant was also operational for the full half-year period post the start in March 2014, resulting in an increase in ore grade since the dynamic leaching plant process higher ore grade material coming from the pit and an increase in ore processed. We also saw an increase in the overall speed of recovery at the pads and higher ore grade from 0.71 grams per tonne in the first half of 2014 to 0.74 grams per tonne. In the outlook in Herradura mine, we are happy to say that we remain on track to reach a steady-state production at the Herradura in the fourth quarter of 2015. We are also controlling the planned inventory increase at the deep leach pads at Herradura, given the temporary solution processing restriction. We have determined that the inventory of around 170,000 gold ounces should allow us to achieve the optimal balance between the efficiency of the leaching process and our production cost. We see inventory reaching this level in the second half, once a steady state is reached. We expect an average gold grade of around 0.7 grams per tonne in the second half. About this first half performance on Noche Buena, Fresnillo now also owns 100% of the Noche Buena mine, following the acquisition of Newmont's 44% stake in Penmont. We saw increased gold production at Noche Buena in the first half as higher volume of gold were recorded, driven by the increased irrigation area that we are working from; and, higher volumes of gold were deposited in the leaching part, resulting from the lower than expected stripping ratio at the mine. This was partly offset for a lower ore grade as ore was deposited from higher bench to reduce haulage costs rather than going deep at the bottom of the pit. We continue to deliver cost saving at this mine with an [overall in] sustaining cost per gold ounce at the mine around-- well, exactly $941 per ounce, down from $969 per ounce in the first half of 2014. In the outlook, we continue to progress cost-cutting initiatives at Noche Buena, such as the mining of higher benches to reduce haulage costs. In the second half, we expect an average gold grade of around 0.41 -- sorry, 0.45 grams per tonne. About the advancing in sustainable development, finally I would like to conclude with an update of our health and safety and sustainable development performance in the first half. Our approach to sustainable development and working with communities around our operation is central to our strategy, and I am pleased to report excellent progress in the first half. Firstly, with regards to our health and safety performance in the first half, we have reported no fatal injuries and no new cases of occupational disease. We have seen an improvement in our carbon performance and, despite longer haulage distance in both operation, underground as well as open-pit mine, we have managed to contain the carbon intensity of our operation. To further improve our carbon footprint, we have secured an annual supply of 150 gigawatts an hour of wind energy. That will eliminate the emission of 75,000 tonnes of CO2 emissions. In the first half of this year, our communities team organized 238 communities activities. The chart here shows the different types of these activities. Finally, we are proud to be included as a constituent of the new Euronext-Vigeo EM 70 ESG Index launched in June. This organization is dedicated to companies from emerging markets. The index distinguished 70 companies from a universe of 900 listed companies in developing countries with the best performance in corporate responsibility based on ratings by Vigeo, the leading European corporate social responsibility rated agency. We view this as a great endorsement and recognition in our focus and effort in corporate and social responsibility. I would now -- I now like to hand over to Mario, who will run in the financials. -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [4] -------------------------------------------------------------------------------- Thank you, Roberto. I'm going to stand and talk to my friends the analysts over here. First slide, please. I'm going to skip the financial highlights, because I plan to go through it when I touch on the numbers. So let's move on to the income statement. As you can see, here on the income statement, and it comes as no surprise to anyone that we're down at every line. If you look at the operating profit, it was down [7.2%]. The operating profit, almost 17%. Profit for the period, 44%. The main reason for this were lower prices of gold and silver. But not all is bad news. If you look at the revenue line -- the adjusted revenues line, you will see that we had an increase of 8.6% (sic - see slide 15, "9.6%"), and this is despite the fact that we saw again lower prices of both gold and silver, so that means that volume more than compensated the decrease in prices. As a matter of fact, had it not been for the additional volume, you would have seen a $100 million decrease in adjusted revenues. Now, if you move down from the adjusted revenues, you will see that we had an increase in adjusted production costs, $24 million, and we'll go and take a look at that in more detail. We also had an increase in cost of sales of $96 million. As a matter of fact, why don't we go and look at this right now. To do that, I will make use of this graph, which you are already acquainted with. The good thing about the increase in adjusted production cost, and here remember the $24.8 million increase is graphically shown on the far right-hand side on the green bar, that's the $24 million. Like always, on the left-hand side, you have those variables, which had a negative impact and from the middle towards the right you have the positive variables, which had a favorable impact on the production cost. So the good thing is that most of this increase was related to additional volume, which is good. The first four bars that you see here are all related to additional volume coming out of our mines or the start-up of new mines. So you see, for example, Saucito representing around $28 million; Noche Buena around $11 million; the increased production at Herradura around $9 million; and the dynamic leaching plant $7.35 million, in terms of additional production cost. On the positive side, you see the benefit of the devaluation of the Mexican peso. As you know, quite an important part of our production costs are denominated in pesos. So the fact that we had an important devaluation generated this benefit. The second positive impact on production costs, and we're not very proud about this but still it helps bring down our absolute production cost, is the fact that we produced less at Fresnillo, so we incurred less variable costs. So that's why you see this effect right here. Now, we saw lower electricity and diesel prices, which had a positive impact of $4.57 million. And small, but important, efficiencies that were gained at our mines accounted for $3.22 million in terms of cost savings. That's pretty much the story in terms of production cost. If we look now at the gross profit margin or gross profit as a whole, you will see that we had a decrease of $21.5 million. This graph is a little bit different, because we move from left to right starting with the 2014 first-half gross profit and we end with the 2015 first-half gross profit. Again, positive things at the beginning, and negative things at the far right. So when we were talking about production costs we saw this [part] contributing to the increased production costs. Now let's see the benefit, and you can see it right here. The benefit is that the contribution of profit was generated by this additional production. As you can see here, in the case of Saucito this mine contributed with $95.7 million in gross profit increase; then Herradura $53.4 million; the exchange rate $16 million. And on the negative side, as I started this presentation, the most important negative factor was undoubtedly the lower gold and silver price, which impacted negatively by $273 million. The other factors that we show here on this slide are the lower ore volume processed at Fresnillo, of course; this generated a $41 million negative impact on our gross profit. The higher deprecation, $26 million; remember, we had the Saucito mine coming into operations and also the dynamic leaching plant, and that increased our depreciation rate. And the lower ore grade at Noche Buena, almost $13 million, etc. So these were the main reasons for the lower operating -- gross profit. Now, in terms of cost per tonne, we saw that we had the benefit of the lower electricity cost and the lower diesel cost and, of course, the devaluation, but we still saw some increases. For example, in Fresnillo, there was an increase of 7.8% in terms of cost per tonne. Main reason for that was the lower volumes, because when you divide -- and most of the costs are fixed costs, you divide the total cost by the lower volumes that is the main reason why you see that increase in cost per tonne. Exactly the opposite happened at Saucito. Saucito was by far the star player during this first half of the year, with an important increase in volume. That's why you see -- that was the main reason for the lower -- much lower cost per tonne year versus year, which is 31% lower. Cienega, 1.4% lower, very much in line with last year. Herradura, not really comparable this time, because, remember, in the first half of 2014 we had the situation due to the suspension of the explosives permit. So we took out all the unproductive costs to make that number related to what actually was produced and in the first half of 2015 we had a normal operation. But considering that, we had an 8.5% increase. If we were to include the unproductive cost in the first half of 2014, the increase would have been of only 3%. Noche Buena, you see an 8.2% decrease in the cost per tonne. There it's basically again the lower -- the exchange rate -- the lower exchange rate, also the lower diesel price and a slight increase in volume. In terms of cash costs, in the case of Fresnillo, despite the fact that we had a higher cost per tonne, you see a lower cash cost, 6.2%. The reason for that was that we credited more by-products. This mine, as you know, as it goes deeper it produces more lead and zinc, so that's credited back to costs, and that's the reason why you see a decrease in the cash cost. At Saucito, as you can appreciate on this slide, the cash cost is just incredible: $0.64 per ounce of silver. It came down more than 80%. So here's the combination of the lower cost per tonne, which we saw on the previous slide together with important by-products. Remember, this mine also produces gold, which is a nice by-product to credit back to cost. So all of that helps, and that's why you see a very low cash cost there. In terms of La Cienega, here we express Cienega in three different ways: first, as a by-product. As you can see here the costs at Cienega went up by 64%. But here it depends a lot on the by-products. This is a real, I would say, important metallic mine, the most important one is gold, of course, but the contribution of silver, lead and zinc, and a bit of copper, economically accounts for quite a bit, almost 40% or more. The lower prices of those by-products meant less credit back to the cash cost. But we also express it as dollar per ounce of gold in equivalent ounces. So we convert everything, zinc, lead and silver, to gold and if you look at it from that perspective, the increase was only 8.1%. You can also look at it as a co-product, separate gold and silver, assign cost to each one, and that's the sort of numbers that you would look at, if you wanted to see it that way. At Herradura you saw an increase of almost 21%. Again, this has to do with the extraordinary situation that we had in the first half, which is not really representative. In more normal operations it's the one that you see in the first half of (inaudible). In Noche Buena also had an increase of 21.8%, because of the lower ore grade, mainly. Last, we talk about the all-in sustaining costs. Remember, this is the cash cost plus additional items most importantly, CapEx, I would say. Of course, there is administrative expenses, but the most important part here is the fact that you add whatever you invested in CapEx during the year, and that's why you see an increase at Fresnillo. Remember, we're doing a lot of development work, so a lot of that is capitalized, but in terms of all-in sustaining costs we included whatever we spent in development in the year, we included in this calculation. In the case of Saucito it came down by 22%, and you can see the rest of the mines in that slide. For me, this slide number 19 I think it's the most important one, if I were in your place as an analyst, because this tells you how each one of the operating units is performing in terms of margin. So as you can see, Saucito had at -- despite -- the red line is the price of the metal, the prevailing metal. In the case of Saucito and Fresnillo the prevailing metal is silver; and in the case of Cienega, Herradura and Noche Buena the prevailing metal, of course, is gold. So the red line is how the price behaved from one year to the other. The blue bars are basically the all-in sustaining cost per ounce and, of course, the yellow arrows represent the margin. Below you see the production volumes for each one of the mines. So in the case of Saucito you can see that even though we had a lower price, the margin increased from 62% to 64% and the volume increased by 73%. So remember, in the first slide when I said we were increasing the volumes and that's why we were able to compensate the lower prices. The question there was, but are we increasing production profitably? And since most of the increase came from Saucito, which happens to have the largest margin, I think the answer to that question is yes, the increase in volume is obviously generating very good levels of profit. So we're not just increasing production for the sake of increasing production. In the case of Fresnillo, you can see a tightening of the margin. In the case of the other mines, in the case of the gold mines, I would say they're still good margins, Herradura had a 27.6% margin, which is reasonably good; Cienega 46%; and Noche Buena 22%. So that's the advantage of having low-cost mines. You're still able to produce healthy margins. Okay, we've been getting a lot of questions on foreign exchange effects and where does it impact in terms of the income statement; and when do you use the average exchange rate and when do you use the spot from beginning to end? Hopefully, this will give you a better idea of how, at least, we look at it. The average exchange rate is the one that impacts our production cost. It's not the spot at the beginning and at the end of the period, but rather the average that you saw during the full period compared to the average that you see here. Whereas the spot, beginning to end, will have an impact on this line, where you see the foreign exchange, gain or loss. It will also (inaudible) in the income taxes expense because remember, taxes in Mexico are paid based on peso accounting, and following Mexican IFRS rules. So those are the three main lines where you would see an important impact in terms of exchange effect. Also, we have been getting a lot of questions regarding the new mining rights. We have now three classifications of mining right. What we know as ordinary mining rights, those are the rights that we've had all along for many, many years. We've been paying those for a long, long time. The new mining rights are the so-called extraordinary mining rights, and the special mining rights. Those are the ones that came into effect in 2014. Now, the ordinary rights, again, the ones that we've been paying forever, [take us] in two lines here. One has to do with the production cost; this is the right that we pay to the government, which is directly related to mines, which are in operation, which are being exploited. It also impacts us in the exploration expenses, because we still have to pay for those rights, even though they're not being exploited, they're only being explored. So that's why you see those rights being expensed in those two lines. In terms of the extraordinary mining rights, that has an impact on selling expenses. And remember that's the one that is related to the 0.5% over sales of gold and silver. That's why we account for it in that particular line. And lastly, the special mining rights, which is the 1. -- [7.5%] over EBITDA; not exactly EBITDA, but it's close enough, and not at the consolidated level, but rather at each one of the particular operating units. So if you try to calculate 7.5% of the consolidated EBITDA, you will not get that number. I hope with this, you have a better idea of where -- how these mining rights are accounted for. In terms of cash flow, I think the Company has shown a good potential for generating cash. As you can see, the cash generated by operations, before changes in working capital, was around $315 million, which is only a decrease of 6.5%. Our working capital now increased only by $18 million, compared to the $71 million that we saw in the first half of 2014. And income tax and profit sharing, in terms of cash flow, this first half, was low, $33.5 million. The reason for that is that, at the end -- before the end of last year, we had a very important tax to be recovered; and also, business income tax was paid in excess of the final tax that was computed in March. As you know, in Mexico we pay provisional taxes on a monthly basis, based on an index. Those payments turned out to be higher than the actual computed income tax. So we've been receiving those monies back from the government. Also, value added tax that was pending to be recovered, we've been able to recover part of that during the first half of the year. So that's why you see only a very small amount in this particular line, in the first half of 2015. The Silverstream continues to be a good source of cash for us. And the other line that I would like to point out is the CapEx, the purchase of property, plant and equipment. As you can see, we've invested $229 million during the first half of the year, a little bit more than what we did in the first half of last year. Of course, we continue to pay dividends in accordance with our policy. And, we ended the first semester with $476 million in cash -- or almost cash. Lastly, the balance sheet; not much to comment here. We believe we have a very] strong balance sheet. So I'll leave it at that. David? -------------------------------------------------------------------------------- David Giles, Fresnillo plc - VP, Exploration [5] -------------------------------------------------------------------------------- Good morning. Exploration's an important strategy of our Company, and we invest in exploration throughout the cycles, the low cycles and the high cycles. Our production and financial results are based on the good exploration results that we've had over the years, to develop these new mines that you're hearing about. This triangle shows the most important 50 properties that the Company has. Really, it's just the upper part of the big iceberg of portfolio projects that we've got. There's 50 listed here. The ones in blue are the ones we're focusing on this year; the 17 projects we're focusing on. Our budget for 2015 is $160 million. That money's spent on geologists and staff. About half of the money goes on Diamond drilling exploration; and half the money is on development drifting. To give you an idea, we have 5 exploration offices: 4 in Mexico; 1 in Peru. We have a staff of about 200 people working in exploration, including 80 geologists. We have about 300 local people on the projects that are helping us out. On the right side of the triangle, you can see where we spend our money. About one-third of the money is spent around our mines and the San Julian advanced project. That's because our mining districts are still at an early stage of exploration, and they have a lot of potential. One-third of our budget, here on the right, is spent at the advanced exploration projects: Orisyvo; Juanicipio; in Cebollitas, in the Cienega mine; in the realm of Centauro Deep at the Herradura mine. And the last third of our budget is spent on drilling at other prospects, and prospecting, and looking for opportunities that -- at this time in the market, we're having a lot of properties offered to us. The next slide shows you where we're working, and these are with some comments. Of course, our districts, this is the Herradura district, on the northwest part of Mexico. Our Cienega district is in this area, here in Durango. And the big Fresnillo Saucito district is in Zacatecas. Coming down the chart. We've been drilling in the Herradura district, and we're having good results continue below the Centauro deposit. We call it Centauro Deep. We're hitting high grade mineral -- gold mineralization there. At the same time, we're exploring at Tajitos, which is an open-pittable deposit, to the east of Herradura. Coming down in the Chihuahua, Orisyvo a big disseminated gold deposit that we've been doing, drifting on this deposit and drilling, and it's looking very interesting. We've refined the geological model. The grade is better than what we expected from the infill drilling and we're doing a preliminary economic assessment there at Orisyvo. This afternoon, it's going to be announced that to near Orisyvo, our Company has optioned the property in the neighboring Uruachic district from a junior company called Golden Goliath, so you'll be hearing that this morning and in Canada later on today. That will add a lot of potential for around the Orisyvo project. We're drilling at San Julian, the new mine that we're building. This is a new district. It's got a large silver and gold resource and reserve now at San Julian, because it's a mine that's just starting up. However, on the south end of the district, there's a number of veins that we're drilling and having good results this year. At Cienega, to the north, the northwest of the Cienega mine, we're drilling and drifting at the Cebollitas cluster, that Roberto mentioned, which are a series of gold/silver veins that will be a satellite mine for the Cienega district. Rodeo is in Durango, in between Parral and the city of Durango. This is another interesting area that we're exploring. We have four properties in exploration at Rodeo with good potential for gold. Coming into the Fresnillo district itself, we're actually drilling half a dozen areas around the Herradura mine -- sorry, around the Fresnillo mine. This is our big silver district. We have had some promising results there, particularly south of the Saucito mine and to the northeast of the Fresnillo mine. To the west of the Fresnillo mine at Juanicipio, where we have a joint venture with the Canadian junior, MAG Silver, we've had good results this year. We're continuing to drill the main Valdecanas vein at depth and it opens up quite wide with lower silver values, but the gold and lead and zinc values continue. So we have some wide-spaced holes, which have increased in third resources there at Juanicipio, and we'll continue to explore there this year and the following years. In the Guanajuato district, which is in Central Mexico, it's north of Mexico City, we've been exploring there for quite some time and I put an example of what we're doing at Guanajuato. It's typical of the type of work that Fresnillo does where we are looking to drill a new district and an old district. It's about 30 kilometers northwest/southeast by 10 kilometers west. We're exploring in nine areas in the Guanajuato district. Last year, these are the resources that we had. We had about 45 million ounces of silver and 320,000 ounces of gold. We're over halfway towards finding a new Fresnillo [size] district for the Company. Our target is about 100 million ounces of silver. With the results this year that we've had at Cerro Blanco, Potrerillos and Opulencia, these resources have increased. They're in two colors and we're actually drilling at the red crosses here, and you can look [on yourselves], one, two, three, four; we're drilling at five red areas and these pink-colored areas are areas we're in the process of permitting for more drilling. That's one of the challenges in Mexico now to get permits for drilling and access to land is a challenge and it takes more time. But typically, at our projects, we have a number of areas we want to explore, and while we're getting the permits to drill the other ones, (inaudible). We're also looking for -- in the submittals, we're looking for possibilities of acquiring and consolidating early-stage projects around our districts where we're working, both in Mexico and Peru. Talking of Peru, we've having good results around the Pilarica silver project as well; that's the other place we're drilling in this area. So that's basically what we're doing. This year will be another good year. Last year, we found gold resources -- equivalent gold resources at the cost of $25 an ounce and that's our track record; we expect to do the same thing this year. The trick is to find good ounces, ounces with good grade close to where we have our operations, which permit us to develop low-cost projects. -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [6] -------------------------------------------------------------------------------- Thank you, David. This slide is not so familiar to you; it shows the program of all the projects that we have in our pipeline. As a reminder, here, with the investment CapEx, the initial and we have the expected average annual production. Also, the different stage of the projects that need to be observed, like the engineering -- detailed engineering, plant construction. In orange, we have the development of the mine; and in green, the start of the production. The main change in this graph in our growth projects is the commissioning of the San Julian leaching plant. That has moved from the last quarter of 2015 to the first quarter of 2016. Also, the Fresnillo optimization project has moved from 10,000 to 9,000 tonnes per day and a production of additional 3 million ounces of silver. The Cienega optimization project, now we expect it be commissioned in the late-2017. Okay, now I'm going to talk about the approved projects. We made good progression at our near-term projects in the first half in San Julian. Now, we have concluded the development work of the vein seal, as well as the massive hot iron ore body. We have developed it almost 76 kilometers of mining work and we make further advancement in plan infrastructure, including progress of the construction of the crushing; milling; agitator tank; water tank; foundation for resolution plant; and, of course, the Merrill-Crowe plant; as well as the road improvement and electric infrastructure. Also, we have a training program for the San Julian leaching plant and personnel has also taken place. We did -- as Octavio mentioned before, however, we have some experience in the execution of the projects in the first half, resulting in high rotation to another of the contractor personnel to -- of course, to the remote location of the project. Also, permitting delays and weather-related issues; it has been raining 75 days continuously very heavy rain. We now expect the Phase 1 of the project to be commissioned at the first half of 2015 and the Phase 2 remains on track to be commissioned in the fourth quarter of 2016. We also advanced our Pyrites project, which is expected to increase silver and gold recovery rates by processing both the old historical tailings and the ongoing tailings from production coming the Fresnillo and Saucito mines. We continue the tailored engineering work, and I am pleased to report that the project is on track to commence operations in 2017. The Pyrites plant would not only deliver operational efficiencies, but will be very important to us, because it will allow us to maintain, and even lower, our cost profile, because the cost per -- the cash cost per ounce is $2.51 per ounce. Now I'm going to talk about the potential brownfield expansions, as a key of part of our strategy to maximize the potential of our quality asset base and continue to deliver sustainable and low-cost growth. This slide shows some of our potential brownfield expansion projects that will contribute to our medium- and long-term growth. These projects currently remain subject to Board approval from the -- approval coming from the Board. Following the positive exploration from David Giles, results at Cienega and the potential we have seen at the Cebollitas cluster, we are currently conducting further exploration work to determine the size of our expansion plant in Cienega. We are evaluating two options for the optimization project: an expansion of the milling capacity to either 5,000 or 6,000 tonnes per day. And now we expect the project to be commissioned in the late of 2017. In addition, as I mentioned earlier, we're also intensifying our exploration program at areas of influence around Cienega, which are expected to contribute to Cienega's future production as satellite mines. In Fresnillo in the first half we analyzed alternative options for the Fresnillo optimization project. We now plan a smaller expansion to 9,000 tonnes per day from the 10,000 we previously anticipated, although we expect to achieve this with less than one-third of the budget. I mean the CapEx will be reduced from $100 million to $30 million. This is a good example of optimization that we are seeking in order to reduce our capital expenditure. This project, as I've mentioned before, is expected to produce 3 million ounces of silver per annum and we expect the commission in late 2017. At Herradura we consider the Herradura life of mine extension as a natural evolution of the Centauro pit at Herradura. In the first half we progressed with the development of the optimal pit design, which we will continue to evaluate. We expect this $155 million project to start production in 2019 with an average annual production of 200,000 ounces of gold. Finally, at Centauro Deep we have continued to discover good grades at depth. The geological model is currently vein refined to allow us to more exact determination of the ore bodies, the envelopes that will be mined. This $365 million project is expected to start production in 2020 with an average annual production of 225,000 ounces of gold. In the advanced exploration projects -- looking in our advanced exploration projects, we made good progress, both at Juanicipio and Orisyvo, in the first half. In the first half we received positive drilling results at Juanicipio, which we expect to result in an increase in resource, David mention later. At Orisyvo we progressed the preliminary economic assessment and currently assessing and currently assessing of an 8,000 tonnes per day operation with a salination dynamic leaching plant facility, and we will focus on the higher-grade part of the resources. Now, I will hand you back to Octavio to provide more detail in the long-term targets. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [7] -------------------------------------------------------------------------------- Thank you, Roberto. Before just coming to the end and the conclusions, I would like to emphasize that these changes that we've seen and that we've gone through, will not have any impact in our strategic objective of reaching 55 million ounces of silver by 2018. You can see here that a key project reaching that objective is the San Julian project. You can also here notice that Fresnillo, we are expecting to bottom out this year. We can gladly say that we've reached the development grades that we were expecting, surpassing the 4,000 meters per month mark and trying to reach 4,500 meters per month. That will give us the possibility to open, this quarter, four more production stopes and two more in the last quarter of this year. With that we will regain operational flexibility, be able to put through [deportation] plant, a higher grade ore, lower the contribution of the development ore that have impacted our grades and then, ramp up Fresnillo in 2016. You can see here also the contribution of the expansion of Fresnillo. Now we changed from 10,000 to 9,000 with a significant lower CapEx, which is good in this price environment. So by 2017, with the contribution of all these mines, we will not only reach the 65 million ounces of silver, but will surpass this quite comfortably. And on the gold side, as well, here we see Herradura and the dynamic leaching plant going up to a higher capacity compared to last year. We also see that the contribution of San Julian on the gold side will make us reach, probably in 2016, 750,000 mark, ounce mark. Going into 2018, if Orisyvo continues to advance as it is now, we will very much go over the 900,000 ounce of gold. Here you can see also something to be noticed: the contribution of Saucito I and Saucito II. Although it's a silver mine, Saucito is producing already close to 90,000 ounces of gold, so that's very nice to have as well. Something else that we've done and that we can do is, depending on the price situation of metal prices, to be able to postpone or modify the projects without compromising our objective, like 2018 as we saw. Here is something that we've done this year, 2015, lowered from $700 million CapEx that we budgeted to $570 million. This is on the sustaining CapEx, one-third of that, probably, and two-thirds on the expansionary CapEx, mainly on performing Cienega and not extending what we have budgeted for the pilot plant this year. As I mentioned, we are trying to detail engineering; we are ready to place the order, but not commit to any payments until next year, which is good. Next year we will have a contribution on revenues and margins of San Julian, making it better -- a better year. This, which is not approved, is something that we can also play with in case of -- as we mentioned, we have a contingency plan, very defined, robust, in case of lower metal prices on a prolonged period. So in conclusion, we think Fresnillo remains with a long-term view, remains a Company with a balanced approach to growth -- quality growth, I would say, as we've seen, but also to returns for our shareholders. We continue with the long-term view and the objective of having low-cost quality assets; having the experience team that know how to act, in terms of the down part of the cycle; remain in investing in exploration through the cycle, because in that way we can assure that we only bring the best projects on stream, that -- with the ones that we generate according to the strict metrics that we have not diluting the correct quality of our assets. So we remain with the same strategy; a proven strategy. But this year you can see in this slide, the mix of optimization: a strategy of additional efficiency of near-term growth in the operation that have contributed to better results. Going to the conclusions and outlook, as I mentioned, we are prepared to operate on a challenging price environment. At least with the new production that is coming on stream, our cash position will be improved and, therefore, we will be in a stronger position to weather any challenging price environment. As I mentioned, we invest through the cycle, based on the low cost of the platform that we have, on the low cost of production of our operations. I would like to recall the exploration success we've had since we started with a 1 billion ounce of silver, now we are going with 2 billion ounces of silver. Gold-wise, we've gone from 9 million ounces of gold in resources to over 27 million ounces. There has been a very good success that gives us the possibility to develop on new project and new operations. We have the financial and operational flexibility to adapt to any market dynamic that we may have. As I mentioned, we're always putting in place a contingency plan in case we need to act or weather any more difficult times. All of this without comprising the strategic objective this year 45 million to 47 million ounces of silver; an increased guidance for gold: 715,000 to 730,000 ounces; and by 2018, as I mentioned, 65 million ounces of silver and 750,000 ounces of gold; we believe that we can achieve even a year earlier. Just a few words on the investment case: world class assets, strong organic growth pipeline; operational excellence; competitive cash flow performance; financial and operational strength and flexibility; and we have strong community support. And with this, we would like to open the session for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [1] -------------------------------------------------------------------------------- A couple of questions; Dan, UBS. First, looking for a bit more detail on the changes to your silver production profile, if I look at the page 32 and compare it to the same slide at your previous result, it looks like you've produced guidance for 2016 from about [59 to 55], and 2017 from about [79 to 73]. Most of that seems to be coming from the Fresnillo mine, in particular the substantial reduction in output from the expansion. Can you provide some more details on the grade profile you're expecting and things like the 8 million ounces to 3 million ounces on the expansion implies a substantially lower grade through the expansion and I guess it's the whole plant at Fresnillo? And the follow-on from that is, you expect the grades to improve towards [reserve] grade (inaudible). Do you expect a reduction in reserve grade at Fresnillo going forward and is that the main driver of your lower guidance in 2016 and 2017? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [2] -------------------------------------------------------------------------------- Yes, you know the lack of proportionality in the -- is the component of tonnage and grade, because we are stating 30% of the ore comes from the development and that kind of ore is lower in grade than the natural [stock] grades. That's the reason of the lack of proportionality between CapEx and grade -- onset of silver producers. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [3] -------------------------------------------------------------------------------- So that would imply that the (inaudible) grade, in total, you'd be processing at Fresnillo, post-expansion, will probably be lower than (inaudible)? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [4] -------------------------------------------------------------------------------- We are targeting 250 grams of silver at an average grade for life of mine, including the ore coming from development. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [5] -------------------------------------------------------------------------------- And then my second question is on Herradura, and the longer-term cost profile and the stripping -- you've started to [display] them on a quarterly basis, the stripping ratio. Could you tell us how that progresses over the next couple of years and how that changes when you move to the expanded pit? I mean (inaudible). -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [6] -------------------------------------------------------------------------------- The overall stripping ratio is 3.2 to 1. Right now, we are working with 4.2 to 1, because in the early stage of the pit we were with higher stripping rate. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [7] -------------------------------------------------------------------------------- How does it change when you move to the expanded pit, so 2018? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [8] -------------------------------------------------------------------------------- We are targeting the same overall ratio of 3.2 to 1, and we are extending the life of mine five years in the pit, with a movement of 120 million tonnes per year. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [9] -------------------------------------------------------------------------------- That would imply a relatively stable cost profile. -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [10] -------------------------------------------------------------------------------- A stable cost, yes. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [11] -------------------------------------------------------------------------------- Great, thanks. -------------------------------------------------------------------------------- Anna Mulholland, Deutsche Bank - Analyst [12] -------------------------------------------------------------------------------- Anna Mulholland, Deutsche Bank. Could you remind us please what your long-term price assumptions are for silver and gold? Whether you are reviewing those; what the risk of impairment is, given, obviously, the price weakness that we've had? Second question is on the status of Soledad-Dipolos, where are we in terms of getting those issues sorted out? And then one on Saucito costs -- Saucito cash costs (inaudible), which we know this far, where will they settle down in the next couple of years? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [13] -------------------------------------------------------------------------------- Yes, regarding your question about silver and gold prices going forward. We typically use as a starting point, the consensus pricing long term by the analysts. Of course, that changes through time, and changes so we -- so do we. But most importantly now we've seen volatility, and the threat of lower metal prices, what we think is a [low sensitivity] analysis. We've done analysis as far down as $900 gold and $12 silver, just to see how the Company would look under that scenario and what the impact of our contingency plan which our CEO has been talking about, what sort of effect we would see if we were to implement that contingency plan. So right now, the emphasis is on doing a lot of activity. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [14] -------------------------------------------------------------------------------- Regarding Soledad-Dipolos, well, we continue to strengthen the relations and the agreements with the neighboring community -- neighboring communities in the area. We haven't gone back to El Bajio to start any discussion or negotiation. So what we are concentrating on is strengthening the relations and the agreement with the ownership. We believe, and have reason to believe, in the mining claim owned by Fresnillo -- or concessions belonging to Fresnillo that eventually they will come to us with a different vision and at that time we may (inaudible). And on Saucito, the cost of -- extremely low cost has been -- it has been influenced by higher grade not only of silver, but also from the by-products, larger content of lead and zinc and gold as well, yes, as we mentioned. But on the longer term, when we tend to reach the grade of the reserve [base] that will come up (inaudible). I'm not sure if we have a number on the long-term Saucito? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [15] -------------------------------------------------------------------------------- Yes, on the long term is $3 per ounce of silver, and per tonne is $50. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [16] -------------------------------------------------------------------------------- But that also is influenced by the metal prices, as you know, so depending on the metal prices [constant] that you may have. -------------------------------------------------------------------------------- Jason Bell, BofA Merrill Lynch - Analyst [17] -------------------------------------------------------------------------------- Jason [Bell], Bank of America Merrill Lynch. On the CapEx cuts can you talk a little bit about what price assumptions you ran when you did those cuts? And obviously in terms of deferring the projects, you've got a little bit you can defer potentially this year and in 2016. What sort of price levels do you think you would defer those? And my second question is just on San Julian, in terms of -- obviously, it's been deferred to 2016. Are we -- what we're seeing in terms of total ounces next year, what's the sort of target there? And given it's been deferred or delayed slightly, are we going to see a slight creep in that CapEx above the $515 million figures? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [18] -------------------------------------------------------------------------------- Okay, regarding CapEx and the continued spend, what sort of deferrals we could see and which projects could be affected if we were to implement them. Well, here it depends on not only how much more prices could come down, and more importantly how prolonged the period of time that the low price environment remains. If we were to see (inaudible) when we're thinking about this, in one, even up to two-year period, and then prices picking up, the set of decisions that we would make are very different than if we thought the prices going down and staying for seven years. We've done both exercises, like I said. Worst case scenario we would defer -- our plan would incorporate deferring all of the projects except for two, which are, of course, San Julian which we need to conclude; and Juanicipio which is we believe a very profitable project. That would be the extreme case and defer everything else until we see better prices. And from there backwards it's [easier]. -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [19] -------------------------------------------------------------------------------- The lower CapEx that we've seen this year is easier to, for example, in the case of Cienega, we are [sitting on] exploring; we are having good results, more resources now. I believe a better case, with a higher base of reserves than resources. And then, by the way, if we should go to not only 5,000, but probably [50,000]. But we are in that stage. And regarding the pilot (inaudible), we have budgeted some CapEx for this year. We announced everything to the point in which we can now place the order and also taking advantage of not making any payments for that equipment until next year. So we have larger revenues and more margin contribution from San Julian. -------------------------------------------------------------------------------- Jason Bell, BofA Merrill Lynch - Analyst [20] -------------------------------------------------------------------------------- Just on San Julian, in terms of the target for ounces next year, given that we've got a delay. And then just are we happy with that CapEx figure of $515 million that there's going to be no changes there? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [21] -------------------------------------------------------------------------------- The ounces of silver you mean? -------------------------------------------------------------------------------- Jason Bell, BofA Merrill Lynch - Analyst [22] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [23] -------------------------------------------------------------------------------- The target of the next year is 4 million ounces of silver. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [24] -------------------------------------------------------------------------------- Roughly 1 million ounces of silver per quarter on the leaching facility. So depending on where we end up finalizing the project, we said perhaps; so it would be 1 million, 2 million or 4 million -- up to 4 million. And then after on the flotation, which is being commissioned on the last quarter of next year we are producing, we said, on average, 10 million ounces of silver, but that's on the average of the mine life of the project. Initially, we are going to start mining a higher grade than the reserve, so it also depends on the end of the floatation plan, but it's a higher pace than the 10 million ounces per year. -------------------------------------------------------------------------------- Jason Bell, BofA Merrill Lynch - Analyst [25] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Unidentified Audience Member [26] -------------------------------------------------------------------------------- There's a follow-up on my question, just around the CapEx (inaudible) has there been any at San Julian? And secondly also San Julian when is it going to start flowing through to the P&L, when you start capitalizing? And then thirdly I guess just looking at your -- if we have lower prices, looking at other Group projects, you said in the worst case scenario you'd stop spending on everything apart from San Julian and Juanicipio, if prices are slightly better. What's the backing order for the other Group projects if the prices are slightly higher? -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [27] -------------------------------------------------------------------------------- Made a note (laughter), now you answer the question. -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [28] -------------------------------------------------------------------------------- So when are we going to start capitalizing San Julian, that was one of the questions I believe. Well, as you know, there are two stages. Stage 1, we will start capitalizing when we start operations later -- I mean early next year. And same case in stage 2, once we conclude that stage later in last quarter of 2016, we will start capitalizing that particular part. Did you ask something about CapEx at San Julian? -------------------------------------------------------------------------------- Unidentified Audience Member [29] -------------------------------------------------------------------------------- Yes, it was just repeating the other question just around has there any been CapEx increase as a result of delay in the project? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [30] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [31] -------------------------------------------------------------------------------- Has it increased? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [32] -------------------------------------------------------------------------------- No it hasn't increased; no, it's the same budget and same [batting] order, and that's a difficult question. I guess we would do it based on which one has the best internal rate of return. We would start [batting] the lower internal rate of the two projects and then until we get to the extreme. -------------------------------------------------------------------------------- Unidentified Audience Member [33] -------------------------------------------------------------------------------- How would those rank when we look at (inaudible)? -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [34] -------------------------------------------------------------------------------- We could probably use this chart. I mean the good thing about this program, is that not everything is concentrated in the same year. That gives us the possibilities to (inaudible) or to continue de-risking this project, or some of those have exploration components. For example, Centauro we pass on [50%] down to-- -------------------------------------------------------------------------------- Unidentified Company Representative [35] -------------------------------------------------------------------------------- (Inaudible)-- -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [36] -------------------------------------------------------------------------------- We indicated up to 80% now. It has been fantastic, and increased 0.5 million ounces of gold. Then we only need to reach to this point, I mean we don't need to do anything to start developing the mine at the highest grade. We will maintain 120 million tonnes moved per year, and that will give us the possibility to evolve to this production that we -- adding 3.5 million ounces. When we were calling it Mega Centauro, it implied a high stage of treating and then after producing at a later year. Now, we will maintain the 120 million tonnes per year and that will give us the [proper focus]. We are reaching a better [decline] and with the possibility of extracting all these 3.5 million ounces in addition, that will give us the production from 2019 onwards. Another example, for example, Cienega, we were planning to bring that at an earlier stage, but then we said well there is no rush. This is $50 million investment --$55 million, but not adding too many ounces. We can probably keep on exploring, converting resources to a reserves, and then after that will give us the possibility to really decide if we got to 5,000 or 6,000. But there's no rush there. The pilot plant is a very attractive project, because of the return, because of the low cost of the ounces. Then we say well, given the financial position of the Company, which is $470-plus-million in cash, with the outlook that we have now for 2016, means with San Juan we'll be contributing to the revenues and margin, we can proceed with this now. But Cienega we'll play by ear and then see when shall we start, depending on the success of the exploration. We have [enough] already, so it's just making a stronger case. Orisyvo; it's a large core body with banking on the metallurgical part. We've increased the recovery there, so that's just turning to higher returns, for example. Looking at Orisyvo, we started looking at that as an open-pit mine with a large investment in infrastructure. Then we said, well, we think it is a concentrated ore body on the ore and the higher-grade [bauxite]. So we will mine -- or concentrate on mining approximately 4 million ounces-- -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [37] -------------------------------------------------------------------------------- 4 million ounces. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [38] -------------------------------------------------------------------------------- Of gold out of the [8 million], but that will considerably lower the CapEx. But it's just playing with all those variables. I mean it just depends on where you are. It is not an absolute, I would say, a [defined] criteria. -------------------------------------------------------------------------------- Leon Esterhuizen, CIBC - Analyst [39] -------------------------------------------------------------------------------- Leon Esterhuizen, CIBC. Could you just remind us what sort of balance sheet metrics you're comfortable with, given the potential flexibility in the CapEx profile? Is it net debt to EBITDA? Is it net debt to capital? Where do you feel comfortable with letting those metrics move to? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [40] -------------------------------------------------------------------------------- What we've been saying for some time now is that we would never like to see (inaudible) coverage ratio higher than 2. Let's try to keep it as close as possible to 1, but never, never go beyond 2; that would be a maximum. It's not a target, it's just a maximum. Target would be 1. -------------------------------------------------------------------------------- Leon Esterhuizen, CIBC - Analyst [41] -------------------------------------------------------------------------------- Sure, thanks. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [42] -------------------------------------------------------------------------------- Any more questions? -------------------------------------------------------------------------------- Unidentified Participant [43] -------------------------------------------------------------------------------- Just on the Centauro project parameters, could you just maybe give a bit more detail about the silver and gold price that you're taking into reserve for the 200,000 ounces extension and the 225,000 ounces extension? -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [44] -------------------------------------------------------------------------------- The price of the reserves? -------------------------------------------------------------------------------- David Giles, Fresnillo plc - VP, Exploration [45] -------------------------------------------------------------------------------- Yes, the reserves at Herradura we use [$1,150] for gold. It doesn't have much silver, so really it doesn't matter -- the silver. But for reserves this year we're using $17 at the other mines that were relevant at Herradura. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [46] -------------------------------------------------------------------------------- And those, frankly, are the ones that we use in the end of last year. So this year in October -- we have started the profit. In October, we will need to agree on what precious metal prices to use for the resource and reserve valuation, which will be lower. -------------------------------------------------------------------------------- Unidentified Audience Member [47] -------------------------------------------------------------------------------- (Inaudible), Bloomberg Intelligence. I was just wondering if you can give some comment on the price -- the silver price in the market. How long do you see the price still remain low? And do you have a benchmark price for your projects? Like you say you have a lot here. If we see low price continuing is there any of these projects that you can forego or any capital investment spending that you can actually delay to support your balance sheet, to support your dividend payments? Just wondering which of the projects you can let go? -------------------------------------------------------------------------------- David Giles, Fresnillo plc - VP, Exploration [48] -------------------------------------------------------------------------------- Well you know, regarding the question about prices and where we see prices going. It's very difficult to try to predict, but silver has been driven recently by investment demand. That was the main reason why you saw it pick up so much in so little time. What we're seeing is that if you look at the graphs of how much is invested in the years it really hasn't come down that much compared to gold, which is good. That means the type of investors going to silver are very different than the ones that go into the gold investment. But that might give us a little bit of support, because they're longer term [doing that] and try to speculate rather as a way to [store] well in the long term. Most of the silver comes as a by-product, so 70-something-%; it's a buy-product. Its supply is really not driven by the price of silver itself, but rather by the price of the other commodities, which are the main economic values for other mines. But we believe the price shouldn't go lower than [12] and not for a very long period of time, but that's what we would like to do with it. In the case of gold, we see $900 as being the bottom. That's where you start seeing most of the producers having cash costs higher than the actual price and we can't have that for a very prolonged period of time. But that's the way we see it. I can tell you one small thing though, we'll probably be wrong. (Laughter). -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [49] -------------------------------------------------------------------------------- Now, regarding the prices related to the projects. That's why we concentrate on the cost side, really, and that's why it is very important to have -- not to dilute the improving quality of the assets. That's why we're only bringing on stream those projects that are similar quality. For example, San Julian, we don't have now in this presentation, because the cost expected at San Julian, silver-wise is similar to Fresnillo. We have right here on page 18 the all-in sustaining cost, which is a metric that we like to use, and you see Fresnillo here at $11 this first half per ounce of silver. Then after we have Saucito and Saucito will be producing more. Right now ,the nominal capacity of the two plants is 6,000 tonnes per day. So there will be some [people] making with some minor CapEx investment. Right now, we are at 7,200. So that's a 20% increase on the capacity, -- on the nominal capacity which is not a major investment. That's, as we say, as we saw in the presentation, [a major] metrics in terms of all-in sustaining costs $5.95, so that's coming on stream as well, the higher rates. Cienega, for example, $650 as an all-in in terms of per ounce of gold. Herradura $870 (sic - see slide 7, "$873") and we are having more at Herradura at a later stage by here and Centauro's expansion. Juanicipio, on the Fresnillo district, will have very good cost metrics. Orisyvo is the one that we're still finding probably to make it a more competitive project. So from all that [chart], probably Orisyvo is the one that we need either to keep on improving the recovery or to keep lowering the cost with the best [metal] we can find. -------------------------------------------------------------------------------- Unidentified Audience Member [50] -------------------------------------------------------------------------------- So, Orisyvo is your weakest link? -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [51] -------------------------------------------------------------------------------- Orisyvo, up to now, we have the beauty of having a large resource base, but we need to work on the -- improving on the recovery or lowering the cost with the mining [method]. -------------------------------------------------------------------------------- Unidentified Audience Member [52] -------------------------------------------------------------------------------- (inaudible). One follow-up please. When you develop the mine at Fresnillo, what are the risks that you can't say will have to (inaudible) [ready]? What are the key areas where you might (inaudible)? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [53] -------------------------------------------------------------------------------- The key areas are they going to the bottom in the turn around that we have? It's a natural evolution of the mine. The main challenge is to provide infrastructure for pumping and ventilation. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [54] -------------------------------------------------------------------------------- Initially, we were struggling to get efficient contractors. We used to have good contractors that were giving us 3,000 meters per month. Then after, for some -- various reasons, some of them were lowering their efficiency. We've got this offering the development rate came to 2,500 per month. We tried to hire a large contractor company in Mexico, but the price -- or the cost was not feasible. Then after we worked from to bring one with a lot of experience, and that's the ones that we have. With that one in place, and another one smaller one, or medium, we are reaching 4,100. But the permit is 4,500. To understand what we need to do in Fresnillo, it's because of the width of the vein come -- -------------------------------------------------------------------------------- David Giles, Fresnillo plc - VP, Exploration [55] -------------------------------------------------------------------------------- Narrow. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [56] -------------------------------------------------------------------------------- So the volume you can get per meter of development is lowering. So we need to catch up with that [position] of development. -------------------------------------------------------------------------------- Unidentified Audience Member [57] -------------------------------------------------------------------------------- Does it sense to [Fresnillo] becoming an operation to try to make that a big development contract, so your employees, keep them permanent? -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [58] -------------------------------------------------------------------------------- We have a portion of the 4,000 with our own people, and we are trying to improve that ratio. But on a strategic, let's say, strategic mission, we are also evaluating the possibility of tearing up the contract (inaudible). -------------------------------------------------------------------------------- Unidentified Audience Member [59] -------------------------------------------------------------------------------- A follow-up. Is -- that 4,500 meters per month, is that enough for you to go ahead with 9,000 tonnes per day expansion at Fresnillo? Or will it have to rise even further and for presumably 12 months to 18 months to build up sufficient space availability before you can do the expansion? -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [60] -------------------------------------------------------------------------------- We need 4,500 meters to support the 9,000 tonnes per day. -------------------------------------------------------------------------------- Unidentified Audience Member [61] -------------------------------------------------------------------------------- If you could follow-up, in terms of what we have to view [sold less] silver and less gold production in the first half, but there wasn't a huge change in working capital? What should we be expecting in terms of working capital into the second half of the year? The second one, when do you expect to make an investment decision or go to the Board on (inaudible)? -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [62] -------------------------------------------------------------------------------- Working capital, you know the -- we say that in terms of working capital the most important factor has been the inventories, especially at the deep leaching mine. As we said, we are getting close to obtaining the steady-state status at Herradura. So with that we shouldn't see very important variations in inventories at the heap leaching mine: Herradura and Noche Buena. So in the near future I don't expect that to increase a great deal. -------------------------------------------------------------------------------- Unidentified Audience Member [63] -------------------------------------------------------------------------------- (inaudible) working capital, you have about 1.5 million ounces of silver production in itself in the first half. -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [64] -------------------------------------------------------------------------------- 1.5 million ounces of silver, both will be sold next year; that's a temporary effect. The most important one is, like I said, the gold -- the metal gold content in the heap leach. Everything else is pretty much sold immediately. When are we going to move gold to the port? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [65] -------------------------------------------------------------------------------- Well, you know, with Juanicipio we do have a pre-feasibility study in place. We are developing that project on a standalone basis. All of the decisions have to go through the Technical Committee on the operational side, and then on the Board for the approval of the rest of the decisions. We haven't had -- we do not have a permanent base at the surface. According to that plan that we have on the slide, we would need to probably come to a decision by the time we get -- and the basic engineering, and we are ready to place the equipment orders. That is when we need to go through the feasibility and see if we approve the project. -------------------------------------------------------------------------------- Unidentified Audience Member [66] -------------------------------------------------------------------------------- End of this year/early next? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [67] -------------------------------------------------------------------------------- I would say in the first half of 2016, probably. -------------------------------------------------------------------------------- Unidentified Audience Member [68] -------------------------------------------------------------------------------- Do you think your JV partner at that operation is good for their share of CapEx? -------------------------------------------------------------------------------- Roberto Diaz, Fresnillo plc - COO [69] -------------------------------------------------------------------------------- Yes. We'll get the money. As long as they have us as partners, I'm sure the market will see that very favorable. They won't have any problem bringing their portion of the CapEx that they need to put in to the [baby]. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [70] -------------------------------------------------------------------------------- Let's see if we have any questions from the line. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- (Operator Instructions). We have no questions over the audio. -------------------------------------------------------------------------------- Octavio Alvidrez, Fresnillo plc - CEO [72] -------------------------------------------------------------------------------- Thank you, operator. And further questions over here? Well, thank you very much. Thanks very much for attending this presentation. -------------------------------------------------------------------------------- Mario Arreguin, Fresnillo plc - CFO [73] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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