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Earnings Transcript for FRES.L - Q4 Fiscal Year 2016

Executives: Octavio Alvídrez - Chief Executive Officer Mario Arreguín - Chief Financial Officer Roberto Díaz - Chief Operating Officer
Analysts: Anna Mulholland - Deutsche Bank Daniel Major - UBS James Bell - BofA Merrill Lynch Jatinder Goel - Citigroup Amos Fletcher - Barclays Tyler Broda - RBC
Octavio Alvídrez : Thank you very much, and good morning everyone and thank you for being here for the Preliminary Results Presentation 2016 of Fresnillo PLC. I am Octavio Alvídrez, CEO of the company and here with me we have, Mario Arreguín our Chief Financial Officer and Roberto Díaz, our Chief Operating Officer. Small word about the forward-looking statements and the disclaimer and this is the agenda we will cover today, an overview, followed that with a review of the operations, development projects and explorations and then I will pass the microphone to Mario to cover the financial review and then come back for the strategy and outlook and then we will open up the presentation for Q&A. Now just an overview, I am pleased to be presenting another set of record results today. Our very strong operational and financial performance in 2016 demonstrate the quality of our asset portfolio and our consistent strategy that allows to deliver results – good results to the commodity price cycle. Our long-term strategy has not changed and we continue to focus on five key pillars; low cost, flexible operations, high quality operations, a strong balance sheet that would allow us invest through the cycles, very stringent and disciplined approach t o development and also a commitment to sustainable business practices. We also continue to enhance our low cost and efficiencies control in all of the chain of the mining from exploration to development, construction and operations at our mines. 2016, I am happy to report record production in both silver and gold and also lead and zinc. Silver, we reached 50.3 million ounces of silver, up 7.1% to 2015. We are guiding for 2017 between 58 million and 61 million ounces of silver and as you can see, on the gold side, we’ve been able to reach 935,000 ounces of gold even higher than our revised guidance. For 2017, as we would not have the contribution of the reduction of gold inventories in the plants of Herradura, we are guiding to a likely lower number of 870,000 to 900,000 ounces of gold. San Julián, Phase 1 which was commissioned in all of last year. We are producing already 20% above design capacity and also it was good to see Fresnillo was stable for the year. We are starting to see the first results of the larger development rates at Fresnillo with higher number of production at stopes that will give us a good result this year. Turning to our financial numbers. I am also glad to report the strong financial results. As you can see, EBITDA of over $1 billion, up 88% to 2015 numbers. Adjusted earnings per share of $0.453 over 500% to the previous year and final dividend of $0.215 per share up 540%. With that, we were net cash positive of north of $400 million and we maintain our strong balance sheet and cash on hand. I am sad to report and this is a pending issue in a company, three fatalities during 2016. We continued to have and not meeting our objective of zero fatalities. We are implementing a new approach and a new safety system starting in Saucito in a couple of weeks. This is very sad that it’s still happening in our company. Of course, our priority is to return or keep all safely home and with these three fatalities these have been high and top in our company. So we are starting with this new approach in Saucito and we are expanding this new safety system into the rest of the company. You can see that we were able to make some good advances on the environment community relations aspects and we’ve been listed even in some of the indexes and some of the agencies for sustainability. Now I will give you a review of the operations and projects starting with Fresnillo as I mentioned, we were able to capitalize the mine operation and produce 15.9 million ounces of silver. We are started to see larger number of production at stopes going from 45 to 51and that will give us flexibility – operational flexibility to cope with some uncertainties and be able to hit the volume target that we are ambitioning for 2017 in such a way that we are expecting 7% to 10% increase in silver production this year. We are doing or we are continuing with our effort of strengthening the infrastructure at Fresnillo mine. We are deepening the San Carlos shaft. We are installing also in order to avoid haulage cost some vertical conveyors that mines and we are also advancing our ventilation and infrastructure in general. But I would like to point out or draw your attention to the large resource base that we have at the Fresnillo mine, almost 800 million ounces of silver and in reserve to 105 million ounces that – and that’s why we continue regard Fresnillo as the flagship operation in our company, it’s just a matter of making Fresnillo more efficient, more productive and have that operation for the next 20, 25 years with all that large resource base. In the case of Saucito, Saucito continues at similar level since 2015 producing almost 22 million ounces of silver and you can see that we reached 7,800 tons per day capacity which is well above the nominal capacity of 6,000 tons per day that we have in Saucito 1 and Saucito 2 and that’s what we do usually with operations in which through the bottlenecking and optimization of the facility we have we reached higher throughputs at our plants. Resource-wise, we have 421 million ounces of silver which is also a large silver base in the resource. And some things to draw your attention in Saucito is the very competitive position in terms of cash cost and I would like to get you back in the cash cost figures on Fresnillo, because you will see when we go, review the projects that those three that are coming on stream are not diluting the quality of our production. In Ciénega, Ciénega continues with the same trend producing a little bit less gold and producing a little bit more silver. This is the case for 2016 as well. In Ciénega, we continue developing the other deposits around the area and we continue to evaluate the possibility of increasing the throughput at Ciénega or installing another or a different flotation plant where we are finding this other deposits. We can talk about Taspana &Tajos with higher grades than Rosario & Las Casas. So once we develop this ore bodies, we will substitute part of the – where we are processing for Rosario & Las Casas in order to bring the grades higher. That should happen somehow at the mid to end of 2017. In San Julián, Phase 1, I am happy to report that we are running already that facility above the nominal capacity, let’s recall that the capacity be 3,000 tons per day and we are reaching 3,600 tons per day. It’s giving a good results and we are targeting commissioning the Phase 2 in the second quarter of this year. And for the Phase 1, through some other efficiency measures, we will try to reach 4,000 tons per day by year-end. Going to our open pits, I will start with Herradura, in which we had very good results from efficiency projects, the heap leach pads and we were able to reduce the inventory at the pads in such a way that the production reached 520,000 ounces of gold. You can see the cash cost figure quite competitive at $470,000 per ounce of gold and also I would like to draw your attention to the large resource base that we have with almost 11 million ounces of gold according to the newest resource statement. And we see further potential there, that’s why one of our targets for this year is increase the exploration at Centauro and hopefully we can continue growing that resource this year. In the case of Noche Buena, well, Noche Buena is in the last stages of the mine life. We have just above three years of mine life in Noche Buena so the focus is in controlling and reducing the cost and you can see that from 2015 to 2016 we saw a good improvement this last year we reached $765 per ounce as the cash cost in Noche Buena to the west the highest cost producing mine in our portfolio. There are still some targets around the area, so we’ll continue to explore in the surrounding areas, but in order to – if we find something to be able to put that into the Noche Buena infrastructure. And now we will go and do a review of a different project, the start-up with San Julián Phase 1 and 2. As I mentioned, we are planning to commit – commission this flotation plant in the second quarter of 2017 and as this is an operation in which we don’t have history, we are guiding this time with some of the cost numbers for that we are expecting for this operation. And as you can see, expected all-in sustaining cost for 2017 $490 per ounce of silver and expected cash cost at 0.9 per ounce. The expected production for this year, 11.6 million ounces of silver and just of 64,000 ounces of gold. In this case, and as we are increasing the throughput in the Phase 1, we will do the same with the Phase 2. One worry is that, the resource base that we have and that’s why I would like to mention that for San Julián, we were able to go through the feasibility and approve this project and build a 515 infrastructure in the area with only the exploration that we did in 30% of the district. So still further potential to explore. This is one of the area so the district in which we are increasing our exploration budgets because we have a lot of mass in the area, but also we will go and try to explore for a lot of disseminated ore body in the area as well. Continuing with our projects, a few words about the Pyrites Plant in the Fresnillo district. You will know that this will help us increase the recovery of processing the ongoing flotation tailings as well as the historical tailings from the Fresnillo operation years ago. This is a $155 million investment project that will produce on average 3.5 million ounces of silver and 13,000 ounces of gold. And I would like to draw your attention to the cash cost number of $251 per ounce of silver. So you will see the projects we are bringing on-stream will improve the cost profile of the overall cost profile of the company. The other pyrite second dynamic leaching plant at Herradura of course, the first dynamic leaching plant is operating at capacity already, that’s why and having more transitional ore at depth as well as sulphide ore at depth in the Herradura ore deposits. We needed a second line. We have started the – that project was approved last year by our Board and we are starting as you can see the construction. We will see exactly a nearer plant to the first dynamic plant and that is targeted to be finished next year. For Juanicipio, the JV venture that we have in the Fresnillo district, we continue to develop the mine. We have had a second view about this project because of the ore or the additional ore we found at depth. That’s one of the reasons along with the permitting process that we are delayed to start the operation on the first half of 2018. As you can see, we have recognized through the exploration a similar behavior of the veins that we have in the Fresnillo district. Higher silver grades on the outer part of the vein, lower silver grades and higher presence of base metals, lead and zinc at depth. Total resource in terms of silver ounces at 248 million. To operate, a very good project that we will continue to develop and hopefully present very soon for approval to the Minera Juanicipio Board and the each one of the Boards of the operating companies. And now few words about exploration. We have this year budgeted $160 million of exploration. You will see the breakdown there, 36% goes into our current operations. Approximately, $55 million, $60 million and then on the base of the triangle there are lot of prospects that we have. We are investing 42% of that exploration budget in order to keep advancing the next project that we will be developing and hopefully going to the top of the pyramid with the current operations. And just to give you an example, this is one of the areas in Guanajuato in which we had good results. And this is a historical district, we were operating here 15 years ago. This is – while the scales of this map, you will see trending northwest, southeast of approximately 50 kilometers of different veins and we ambition how we see this district operating in the future, if exploration is successful or continues to be successful, we’ll probe the three flotation plants, one in the central part in which already we have done infrastructure. One in the north part and one on the south part, probably 2 to 2500 tons per day each one of this facilities depending on the success of the exploration. How we did hit exploration with reserves and resources? In general, you would see that in reserves where the similar level of last year. Silver-wise, we would do some research, reserves on 3% from 547 million ounces of silver to 530 million ounces of silver. So a slight decrease of the silver reserves at our mines and projects. In terms of gold, similar, 2015, 9.55 million ounces of gold and in 2016, 9.54, something that I would like to mention here is that while we gain somehow on the Saucito, it will have decrease on the Herradura and Noche Buena as well. But in general terms, their gold reserves were maintained. But it was a different story on resources. This year we’ve grown resources from 1.97 billion ounces of silver in resources to 2.17 billion at the end of last year. You will see where we increased in Fresnillo and Saucito and San Julián mostly due to exploration and also to the silver price and increase two new drilling on Guanajuato for example on the different project and also on Juanicipio. If we recall the minimum target we have to consider Fresnillo having a future mine in terms of silver resources, that is 100 million ounces of silver. So this increase of 200 million in resources could be regarded as equivalent of probably in the future having two new mines. And the gold resources, we also increased in almost 3 million ounces of gold from 35.5 million ounces in 2015 to 38.4 million ounces in 2016. Here some changes you will see in the central part of the graph is that what we gained in the open pit of the Herradura operation, it was coming mostly from the Centauro Deep which is good. As we still have potential for exploration depth in the Centauro ore body. And in terms of gold, we have mentioned before that 2 million ounce gold will be regarded as a minimum target to think about size operation for Fresnillo. So with 3 million ounces of gold in resources, it will be equivalent to 1.5 new mines as we use this benchmark. And with that, I will just like to mention that with a stronger production, with lower cost as we can control and also to external factors. With that introduction, I will pass the microphone to Mario Arreguín as he can address the financial results.
Mario Arreguín: Thank you, Octavio. And so I am delighted to be here with you and more so on this occasion because with the numbers that I have to show, I am very excited because they were very, very good in 2016. But before we go to the income statement, let me first go through this slide on page number 25 because these are the variables that had an impact on our results. Of course, Octavio already spoke about the fact that we had an increase in the production volume of silver, 7% and gold 23%. I don’t mention those in this particular slide, but undoubtedly, those had a very favorable effect on our financial results. Besides the increasing volumes, you can see here that across all the metals, we experienced an important increase in terms of price. Gold and silver increased by 10% and also the base metals increased. The exchange rate in terms of the peso devaluation versus the dollar on an average devaluated by 17.7% and that together with the reduction that we saw in saw in the price of electricity of 16.6% and the reduction that we saw in the price of diesel of 15.6% had a very significant impact in terms of our production cost and you can see that in our last – in the last line in this slide. In terms of cost inflation for Fresnillo Plc, we see two consecutive years where we saw deflation actually 8.08% in 2016 and 8.4% in 2015. Unfortunately, we are not foreseeing this trend to continue in 2017, but it was good to see two consecutive years of deflation. Well with this numbers that we just saw here, we can now move on to the next slide to the income statement. And as you can see, all profit levels which are highlighted in yellow have gone up substantially, starting with gross profit, an increase of 103%, operating profit, 237%, in net profit by 512%, and EBITDA by 88%, very good results indeed. But let’s start with gross profit. And if you look at the second column from right to left, you will see that the increase in gross profit was $449 million and if you continue to move up that same column, you will see that most of that increase was due to the increase in adjusted revenues of $461 million, of that, 60% of that increase was due to an increase in volume and 40% of that was due to an increase in the price of the metals and we’ll touch on that in a little bit more detail in other slides. If you move down that same column, you will see that production cost – adjusted production cost came down by 15.6% or – by $15.6 million, sorry, or 2.5%. And this is despite the fact that we saw an increase in the volume of a mineral process at our underground mines which increased by 10% and also an increase in volume process at our open pit mines, which increased by 6%. So despite this increase, we were still able to see a reduction in adjusted production cost. Depreciation increased by $15.3 million, mainly because of the new projects coming into operation. Hedging, now that was a reduction in our cost of sales for $25.8 million and that was due to the fact, I am sure you remember that last time that we saw you, we reported that we would suspend the peso dollar hedge program. So we are not doing that anymore. The $2.8 million loss that you see in 2016 was just related to the position that we had for some time now, but we haven’t done anymore. Continuing to move down, you see an increase of $53.9 million in change in inventories and I consider that to be a good thing, because that’s related to the reduction in inventories that we had at our leaching pads, which allowed us to increase our sales. And lastly, others for $15.7 million. So that gets us to the – to our total gross profit, which increased by $449 million. Continuing to move down, the next item that I would like to talk about is exploration expenses and we’ll touch a little bit in detail this item later on, but for the time being, and you can see that we reduced that compared to that last year by $19 million and that’s related to the – what we call contingency plan that we implemented when we started to see prices come down. So that gets us basically to our operating profit which increased by $476 million. From there on down, we start seeing extraordinary events occurring during the year. For example, in the case of the gold hedging, you can see that in 2016, we recognized a loss of $41.1 million, which compared to the previous year when we closed in December 2015, we had recognized the profit of $59.8 million and that’s due to the fact that at the end of December, the price of gold in December 2015, the price of gold was $1062 per ounce. So the time value of that position represented that profit that we had back then and in December 2016, the price of gold had gone up to $1157, that’s why we had to recognize that loss. But again as you know, that’s purely paper. In terms of cash flow, we actually, most of the time have been within the band. As you know we have established a floor of 1100 and a ceiling averaging around 1400 and the price has been in that range. Only in one particular month, we saw it below 1100 and that’s when we cashed in approximately $400,000. But that’s been the only real impact of the gold hedge. And then moving down, you see the silverstream. First we account for the amortization effects during the year, which was $47.7 million, of which 50% was related to the fact that the prices in volumes that we included in our model were lower than what we saw in reality. So, during the year, we acknowledged that and also the fact that simply that one year had gone by and the financial effect on it because of the discount rate was also accounted here in the $47.7 million. More importantly though, the silverstream revaluation of $85.8 million, I would say that 80% of that $85 million was related to an increase in resources and reserves at the Sabinas Mine which is the mine that we have established the stream with and only 20% was due to prices. So that’s what you see that important recognition in the income statement. And that pretty much gets us to the profit before income tax which increased by $505.9 million. Now in terms of taxes, we have broken taxes down into current income tax and deferred tax, but if you sum all the taxes including the mining rights, you will see that we have an effective tax rate of 40.8% and if you do the same thing for 2015, you will see that that is equivalent to 67.3%, a much lower effective tax rate. And one of the reasons for that is the fact that we were able to credit to taxes for the first year, a special tax that is imposed on the consumption of diesel. So the Mexican government allowed companies to credit back the tax that they pay for the consumption of diesel into income tax and as you know, in our open pit mines, we consume a lot of diesel. So that had a very favorable effect in terms of the effective tax rate this year. Very good. Let me now move very quickly to the following page, on Slide 27, just wanted to share with you very quickly the participation in terms of all the mines that we currently have in operations and also in terms of the metals that we sell and as you can see, 55% of our total revenue was related to gold and 35% to silver. And as you know, these percentages change through time as new projects come into operation and also as you see relative prices moving between silver and gold and you’ve seen that multiple of gold to silver ratio increase quite substantially in the last few years. And in terms of the mine participation, you can see now that we have quite a good diversified portfolio of mines. For the first time which only in San Julián – which only accounted for 3% of the revenue, but we started the operations in August and that participation really of course increase in 2017 and in the bottom part, you can see the participation for each one of the mines in terms of the metals – of each one of the metals. Now moving on to Page 28. I think this is an interesting graph, because it tells you in terms of our adjusted production cost where we had a $50.6 million decrease which is shown by the green bar at the far right, how we came about obtaining the reduction. Of course, we have practice which increased the adjusted production cost which was basically the increase in production, that’s the first bar that you see, which represented approximately $40 million and that’s related to the new San Julián project plus the increase in production coming out of other mines. But then after that, you see items which show reduction, cost deflation which we spoke about. We also have efficiencies that we were able to implement at different mines, but most importantly, you can see the effect of the impact of the peso devaluation versus the dollar. And if you look closely at this graph, you will be able to see that if it had not been for that devaluation we would have seen a $30 million increase in terms of production cost, which would have been 5% increase. In the following slide, we do a similar analysis but now for gross profit. Our gross profit as we said, almost doubled. It increased by $449 million and this is shown in the right-hand side bar, the green bar, $449 million and you can see all the elements which brought us to that increase starting with higher production which participated with $193 million of the $449 million. You can also appreciate the impact of the higher metal prices, which contributed $167.5 million, again the benefit of the peso devaluation with $45 million and the rest of the positive factors that we saw during the year. But at the end, 48% of those different factors were attributable to the operation, because of efficiencies or increases in volume and 52% were attributable to factors outside of our control, which are basically exchange rates and the metal prices. So it’s good to see a balance between our operations and factors outside of our control. On Page 30, we show a breakdown of gross profit in terms of each one of our operating units. As you can see here Herradura was the mine which contributed the most followed by Saucito and then Fresnillo. On Page 32, we see the cash flow and as you can see here, we also saw important increases in terms of net cash from operating activities 65% compared to last year. We can also see that we invested $434.1 million in CapEx during the year. We paid dividend for $88 million. The silverstream which does not have any direct – none of the sales that we get from the silverstream are recognized in the income statement. They are shown here in the cash flow represented $47.6 million. Most importantly, you can see that we were net flow positive and that we increased our cash balance by $412.5 million during the year. We haven’t seen that for a while. Last year we also saw a smaller number, $52 million and at the end of the year, we closed a balance with $912 million in cash, which is a very healthy balance. Page 34, we show our balance sheet. I have no comments there, except for the fact that it looks very, very strong. Moving to Page 35, and Octavio has already spoken about this, but I just thought I show you all the mines together in terms of cost per ton. This is one of our key variables that we use to measure how efficient we are in terms of controlling our costs. And as you can see, we had reductions at all of our mines. On the following page, we show the cash cost for each one of our mines. Some of them had impressive reductions as in the case of Saucito, in the case of Ciénega and even in the case of Fresnillo, very important reductions. Here you also see the effect of the byproducts, which are accounted for as credits, in terms of the cash cost computation. On Page 37, those who have been participating in these meetings have seen that we show this graph consistently and we – what we try to show here is the margins that each one of the mines are making by comparing the cash cost to the price that we had on any particular year and that where you get a clear view of the margins for each one of the mines and on the bottom part, the total production for each specific metal. So you can see the size of the margin and the contribution in terms of production and have a pretty good idea of how each mine is doing individually. On Page 38. We show the all-in sustaining cost. Important double-digit reductions at all of our mines. And lastly, on Page 39 we show the same analysis in terms of margins, except that we are now calculating this margin based on all-in sustaining cost and not just cash costs. This last slide shows the – what we call the consolidated cash cost and the consolidated all-in sustaining cost. As you know, I am not a big fan of showing this particular number, but due to popular demand, we have computed this for you and we did this in two different scenarios if you will, considering the company as a silver company, a pure silver company. So we converted all the gold into silver equivalent ounces. And if you look at it that way it’s 598 for 2016. We also show the equivalent silver ounces produced against converting gold into silver and crediting zinc and lead, we did not convert those into silver. And if you want to look at the company as a gold company, we did exactly the same exercise except for the fact that we converted silver ounces into gold ounces. And we show the total gold equivalent ounces produced again crediting zinc and lead. And as you can see, we had important decreases in both cash – consolidated cash cost and consolidated all-in sustaining cost and important increases in terms of volume in equivalent silver and gold ounces. So I hope this is helpful for those who were interested in obtaining this number. And with that, I conclude the financial numbers.
Octavio Alvídrez : Thank you, Mario, in concluding, I would like to just go over this graph that we showed it what is that line and the timing for vein and streams the different projects. San Julián as you know, again we have the first start-up of the year. Flotation as planned in the second half, for the second quarter of the year. The pyrites plant, we are starting to bring that on-stream at the beginning of 2018, Centauro extension, the dynamic leaching plant is in construction. As we mentioned, those three projects are being approved by our Board. Fresnillo 9,000, we have stabilized the mine. We are starting to see the further results of the larger development rates with more production at stopes. We will prepare this year and mid-next year to go to the 9,000 tons per day due to both aspects as we mentioned, because we will be prepared to go to 9,000 but also to cope with larger contents of base metals, lead and zinc. So we are optimizing the flotation plant. Juanicipio, we have started with some of the permitting process as well, but as I mentioned as we found more ore at depth that we have to modify a little bit where we were ambitioning in terms of mine development and mine infrastructure in such a way that we believe we will have to move the starting point – or the starting of the production to second half – to the first half of 2019. I would like to draw your attention to this CapEx number which is based on the June 2012 the effect that is through public domain. We are updating that number. Ciénega, we will continue to have good exploration success around the area so that we still believe that we will increase processing facility there Centauro Deep and Orisyvo in the latter years in this graph. In such a way that the production profile for 2017, we have guided reaching and surpassing in 2018 of 65 million ounces of production without the silverstream and 2018 we ambition some silver growth production as well. On the gold side, we have already surpassed the 750,000 ounces of gold and as we can see, we maybe able to reach 1 million ounces at the end of this projection of this in 2020. CapEx figures, in terms of obtaining and growth CapEx, as you may recall, we were guiding higher in 2016, the CapEx numbers. So we are delaying some of that CapEx into 2017 and 2018. This would be the CapEx profile for the following years and you could have a good sense of while we are talking about looking at this graph a year. In 2017, we will see these projects advancing and probably being reflected in that CapEx numbers and likewise in 2018, and 2019. And finally, an outlook for 2017, as we mentioned very highly and very important the new safety approach and new safety systems starting in Saucito this month. Delivery in San Julián, Phase 2 I the second quarter of this year, advance the pyrites plant, construction of the second line of dynamic leaching plant, explore further potential at Centauro. We have good hopes there and the guidance of production for 2017, 58 million to 61 million ounces of silver and between 870,000 and 900,000 ounces of gold. Optimize and we will start seeing better numbers in Fresnillo this year and increase the milling capacity further at San Julián in the leaching parts and passing the flotation part as well. In concluding, we have seen this strong balance sheet that we have that enable us to invest through cycles. We saw the quality of our current production assets and we saw that the coming – upcoming projects will not be diluting the quality of our asset but will improve the cost profile – the overall cost profile of the company. We had good success in terms of exploration with all the resources growing. This year we will focus on improving the reserves – upgrading the resources and also being committed the sustainable business practice. As you can see, we have not changed our strategy. It’s a consistent strategy. It’s a strategy that’s been setting us apart from our peers and it’s a strategy that is giving us good results. And with that, I would like to open up for your questions.
Q - Anna Mulholland : Thank you. It’s Anna Mulholland from Deutsche Bank. I had two questions. The first is in terms of obviously the tailwind you’ve had in the cost deflation, the peso your efficiency gains. You mentioned that you are obviously not assuming the same rate of deflation to continue this year. What are your sort of base case assumptions in terms of overall – firstly, factors that you can’t control, like the peso, but also your efficiency gains, how much can you get out of your operations? And the second question is on the ownership structure of – Does it make sense to you to try that in a 100% of that project, why are you energizing either?
Mario Arreguín: Yes of course, we are not expecting that deflation trend to continue for 2017 unfortunately. I think the peso has devalued more than we – than anybody expected. Friend Trump had a bit to do with it at the end, but hopefully that will be digested and what we are actually expecting is to see the peso perhaps revaluing a little. So, that will work against this. And I am sure you saw in the news the very important increases in the price of gasoline and the price of diesel in peso terms and that’s because the Mexican government has decided to liberate those prices to reflect the market conditions. Electricity has also gone up in peso terms. So that will also hurt us. In terms of what we are expecting, when you put all of these factors together for 2017 is at least a 5% unity increase if you will in terms of our production cost, at least, hopefully, it will stay around that level, 5%. And with regard to the Juanicipio question, I’ll refer that to Mr. Alvídrez
Octavio Alvídrez: Thank you. We are used to work on that JV structure as well. The most for us it’s a 100% owned. Let’s recall that we were working for almost 18 years dependent with new ones under the same JV structure 56% Fresnillo, 44% new month. So we used also to work on this JV in a structural ownership. In the same way, we have a structure as well some other exploration projects and therefore we are comfortable working with that now in Juanicipio as well.
Anna Mulholland : Thank you.
Daniel Major : Hi, it’s Dan Major from UBS. Couple of questions. Assuming CapEx, so let’s back out over the last couple of years, you’ve come in quite significantly below the original guidance, but in 2015 and in 2016, can you sort of give a sense of where that variances come from and what we should – put the guidance again this year, what are the variables around potentially coming in below that as you have done the last couple of years? Second question is on the dividend. Firstly, a reminder of which underlying earnings metric your payout ratio is based on the pre or post the silverstream revaluation and I guess, against both of those metrics, you are above 50% payout in this 2016. How should we be thinking about that? Are you looking at the dividend policy effectively being a minimum payout ratio and a top-up depending on where the balance sheet is? And the third question is on, Juanicipio, you haven’t revised the CapEx guidance, it looks slightly far more material at decks, how should we be thinking about starting through the projects going forward? Are we thinking a larger targeted production but also larger CapEx? What are you thinking at this point? Thanks.
Mario Arreguín: Okay, on the CapEx numbers, in the two previous years. Let’s recall that metal prices in 2015 and 2016 and even 2014, and all the way from 2011 were trending down. So, it came to the time of budgeting the following year, we have some CapEx in mind, but we were starting to be preventive of what could see as prices continue falling. We were starting the year late in terms of CapEx deployments. And we also talked some of those years, more specifically last year and in 2015 about plan A, B and C in terms of CapEx deployment. We were waiting, we were cautious about deploying the CapEx and that’s why some of that CapEx that we were considering which one of the years were passed into the following year. The same happened in 2016. Right now, I mean, we will have the last CapEx for San Julián. We will have the pyrites plant as well. The second dynamic leaching plant, large – you know that we are increasing the mining work at development rates at Fresnillo, at Saucito as well. In terms of infrastructure we are deepening the shaft in Fresnillo the Jarillas Shaft in Saucito as well. So that’s why we are getting to the $800 million investment. We pumped up or so increase the exploration as well. So with that and some of the capital that we refer – deferred in 2016 which is included in this 2017 number while getting to the $800 million. But that was we would have different position. We will be finishing San Julián Phase 1 and 2. Fresnillo coming to the ramp up finally and Saucito performing quite well and the rest of the operations.
Daniel Major : Would to like to be seeing a higher price environment in the probability of CapEx being pushed out is now lower, is that a fair assumption?
Mario Arreguín: No, I mean, as you know what, we are quit e disciplined in bringing our projects on-stream. If you see this chart from previous years, probably we have delayed a little bit six months to probably three quarters one of those, two of those projects. But generally are ranging in the same order as we were planning or ambitioning. And as you know, I mean, we deployed mostly 50% of our earnings to growth and 50% to returns. So the same strategy, consistent strategy.
Daniel Major : Okay. Is the payout ratio based on the underlying pre and post silverstream revaluation just is it from a modeling perspective going forward?
Mario Arreguín: What was your question again?
Daniel Major : The payout ratio and the dividends, is that pre or post silverstream typically in terms of what you…
Mario Arreguín: Oh, the dividend?
Daniel Major : Yes.
Mario Arreguín: Okay. Let me share with you, our management proposed the dividend to the Board of Directors. As you know, our policy is to payout 50% of net income when you add the interim dividend and the final dividend. However, we do some adjustments for extraordinary items and as I explain we saw two extraordinary items. One, related to the silverstream. So we take out the silverstream whatever effect that might be, either positive or negative, we are very consistent on that. And we would also take out the gold hedge effect, negative or positive. So we eliminate any extraordinary events. But, we do add up what we identify as being real, very real, and to me real means cash flow. So we will add the cash flow that we obtained from the silverstream, which is not reflected in the income statement and if you do that math, you will see that it comes out approximately to 50%. And the other question was the Juanicipio CapEx.
Daniel Major : Well, yes, scope of the project, in terms of how it’s developing.
Mario Arreguín: Yes, do you want to go into that?
Roberto Díaz: Yes, as you may notice in Juanicipio, the original production target was around 3,000 tons per day. And now we are thinking in an operation of 4,000 tons per day with a 15 years life of mine. So probably the final three years will be 33% above the original figure.
Octavio Alvídrez: With the larger resource base, it’s not a good thing about larger amount of mining works more infrastructure in place. So we are in that stage right now.
Daniel Major : Great. Thanks.
James Bell : Hi it’s James Bell from Bank of America Merrill Lynch. I have two questions. Just firstly at the Fresnillo mine, you talked about having built in more stopes for flexibility. I just wondered what data points should we be looking at on a quarterly basis to get a feeling for whether we are getting the improvement there and how will that fit into whether you see – we see a Board decision on the 9,000 tons per day and kind of when could we maybe expect that decision? And secondly, just at Juanicipio, I look at the diagram you’ve put up for the ore body, you’ve obviously got shaft cut-offs – boundaries of the JV, but presumably the ore body continues that with the JV, could you maybe talk about how you think about material that sits outside the JV license that’s likely to come into that mine plan and whether that will factor into the economics that you give us on Juanicipio?
Roberto Díaz: First off, Juanicipio, I will answer the question of Juanicipio. Yes, the mineral inspection continues to the west. So we are deploying a very intensive exploration program in our property. Right now, we have a heat pad at the same quality and the same width of ore body to the west. So that’s our main target to continue the exploration to the west. About Fresnillo, as mineralized we increase the number of the stopes from 45 to 51 and we are right now, around 55% of the way preciously comfortable point. We think that this year we are going to produce 17.5 million ounces and the next year we increase 2 million ounces more in order to reach the steady stage of 21 million ounces in Fresnillo.
James Bell : And when do you think we could get a Board decision on the 9,000 tons? And maybe on Juanicipio as well when could…
Roberto Díaz: Already have Alvídrez said the expenditures are for the optimization of the plant because as of target state, we have an increase in lead and zinc grades. So, we are moving to – earnings and adding flotation sales. So the capacity will be a matter of justifying the screens to move the capacity from 8,500 actually to 9,000 tons per day.
Octavio Alvídrez: The – sort of the cases, it go with larger content so far I think. So the – Roberto referring about is the thickener mainly. So what we can call those x zinc y and then it will come to the actual expansion which is the some of the vibrating screens help the sag mill that we have and with that we’d be prepared to handle the 9,000. But the – I mean, the main thing is to be able to cope with that larger amount of zinc and at the same time in parallel develop the mine and be able to jump to the 9,000 number.
James Bell : All right. And just for Board decision on Juanicipio, do you have a feeling for when that might come?
Octavio Alvídrez: Hopefully, in the next three to four months.
James Bell : Thank you.
Octavio Alvídrez: Anymore questions.
Luke Nelson: Luke Nelson from J.P. Morgan. Just on net cash, the cash balance $900 million obviously they are extra. Just would like to get a sense of where you would say that balance by year end assuming what we talked about in terms of the 5 – at least 5% unit cost inflation, obviously you have the CapEx out there now and production gotten and maybe assuming your internal reviews of the Mexican peso, where you are seeing that net cash balance by year end? And then maybe, sort of flowing into the dividend question, previously, as this – so much, that it can be deployed in terms of CapEx, is the 33%, 36% of profit after tax still reasonable in the context of such a high cash balance?
Mario Arreguín: Yes, well, you just saw in the slides in the presentation the program that we have for the next three years in terms of CapEx. So for 2017, if we do invest the amount of money that we have budgeted. We expect to end with a cash balance of around $600 million, which means that we will have a reduction in our cash balance because of the very high budgeted CapEx figure for next year. And as you know, - as you saw in the slides, you also saw that 2018 is also going to be a year in which we will be investing quite a bit of CapEx. So regarding your question of reconsidering the possibility of paying an extraordinary dividend, we are going to wait and see how we are in two years time before we make a decision like that, because of the important amounts of money that we will be investing in those three years in terms of CapEx and the uncertainty regarding where prices are moving. But at least, we will continue to comply with the current policy.
Luke Nelson: And then just a modeling question. The $160 million exploration spend this year, just the breakup of what will be capitalized what will be expensed?
Mario Arreguín: All capitalized. A small amount, $8 million, $10 million.
Jatinder Goel: Hi, Jatinder Goel from Citigroup. Two questions please. On the Mexican peso hedge, since you mentioned it might revalue or appreciate, is that just a policy decision? Or cost of the hedge prohibits you from getting into further hedges? And secondly on tax rate guidance, is there anything you can give for 2017 both for income statement and cash tax? Thank you.
Mario Arreguín: Yes, we made the decision to suspend that Mexican peso dollar hedge that we did in the past, that was heavily related – in 2015. Given the volatility and the uncertainty, I don’t think we are going to lift that suspension in the near-term and so we are comfortable with seeing such instability. So, short answer to your question would be for the time being and for the next foreseeable future, we will maintain that suspension. And what was the second question again please?
Jatinder Goel: Tax rate guidance on the income statement and cash taxes.
Mario Arreguín: Tax guidance?
Jatinder Goel: Yes, tax rates.
Mario Arreguín: Tax rates.
Jatinder Goel: Yes.
Mario Arreguín: Yes. So assuming that we won’t see any more devaluations, we won’t see that impact on the deferred taxes as we’ve seen in the past two years. I would say, it should be around 30% unless something special happens during the year, especially considering that we will continue to credit the special tax on diesel, crediting that to income tax.
Jatinder Goel: The tax rate is it similar to book tax?
Mario Arreguín: Yes. At least that’s the expectation, but we’ll just have to wait and see. Yes.
Unidentified Analyst: [Indiscernible] from UBS. Just very brief follow-up on your reserves and resource timing. Can you tell us if your price assumptions has changed to – on what price assumptions you are using in your 2016 reserve and resource calculation?
Roberto Díaz: Sure. We use in gold, $1250 and in silver, $17.5 US, unless you don’t remember these figures.
Unidentified Analyst: Or a little bit lower?
Roberto Díaz: Low.
Mario Arreguín: 16, I believe.
Unidentified Analyst: All right.
Octavio Alvídrez: Yes, and that’s why we pointed out in some of the slides which one of the increases was due to the silver price increase and which was due to trailing. In general, I would say that 70% approximately was due to training and exploration and 30% was due to the rising in the prices.
Unidentified Analyst: Those assumptions in reserves, right, and your resources?
Roberto Díaz: And resource are the same as said for the open pit mines, we use $1400 per vault.
Octavio Alvídrez: Any other questions?
Operator: [Operator Instructions] We got questions from the telephone lines. Okay, we have Amos Fletcher from Barclays.
Amos Fletcher : Yes, morning guys. I have one question just with respect to your maintenance CapEx. It looks like you’ve sort of roughly doubled the maintenance CapEx guidance to 2017 and also put in some quite big increases for 2018. Can you just describe why that’s happening? And then, secondly, you were referring to one of the earlier questions there is also a big delta between cash tax and P&L tax in 2016. Is that likely to – are those numbers likely to match each other in 2017 going forward? Or will see any catch-up on the cash number in 2017 for the shortfall we saw in 2016? Thank you.
Roberto Díaz: Yes, the sustaining CapEx is operation cost for Fresnillo as a placement of as we meant and dependent of the shaft, the acquisition of a tunnel boring machine and the deployment of a vertical conveyor belt. In Saucito, we are going to spend $160 million, mostly it’s in the deepening of the Jarillas Shaft and the construction of two ventilation shafts plus six clients going to the depth of the ore body. In Herradura, mostly is replacement of equipment - of mining equipment and in Ciénega, also replacement of equipment as well as in Noche Buena. In San Julián, also is sustaining and development jobs, works, mining works, sorry. That’s it.
Mario Arreguín: I am not sure if I understood the question regarding the effective tax rate, but let me give a shot to see if I can manage to answer what you asked. For this year, what we are expecting again is perhaps the peso to remain where it is or revalue. That is the case, important impact that we saw in the two previous years regarding deferred taxes, we might not see happening again. So that will help us to obtain the statutory tax rate of 30%. Now when I talk about the tax rate, I am referring to the – specifically to the income tax rate. Not adding the mining rights. If you add the mining rights, you might see a larger number there, because it’s computed in addition to the 30% on pretax profits. But overall, I would say that at least for budgeting purposes, we are considering around 30%.
Amos Fletcher : Okay, thanks.
Mario Arreguín: The other question?
Amos Fletcher : Yes, that question was just to clarify will there be any catch-up for the shortfall between the cash tax and P&L tax in 2016 as of the course of 2017?
Mario Arreguín: I am not sure, again what you mean by catch-up.
Amos Fletcher : Does the P&L tax was higher than the cash tax in 2016? Sorry. So will there be any catch-up for that difference?
Mario Arreguín: I guess, we don’t expect to see any difference this time out in 2017 unless something special happens.
Amos Fletcher : Okay, cool. All right. Thank you.
Operator: And our next question comes from Tyler Broda from RBC.
Tyler Broda : Great, thanks very much for the presentation. Two questions, both related to costs. And I just wanted to get a bit more understanding around the diesel and the potential delta that has in 2018 when the government subsidies are removed. How much is that subsidy? And how much does that account for your total cost base? And then secondly, with the inflation in Mexico getting up to 5%, 4.7% in December, do you have any wage negotiations that are due in the near-term? And how do you expect labor to evolve here in this period? Thank you.
Mario Arreguín: Okay, in terms of diesel, we are expecting a significant increase of around at least 15% in peso terms during the year. That’s what we are expecting. And in terms of the wage negotiations, I’ll let Octavia answer that question, but we are obviously negotiating, because we do that on a year-by-year basis and this year was being no exception.
Octavio Alvídrez: Yes, what we saw in the task, where you show is 1% above the expected inflation rate in terms of labor negotiations. This year, we are currently doing so and we haven’t finished any of the negotiations. It is difficult right now as we’ve – there are some variables still moving or adjusting to see what we will have as an inflation rate for this year and therefore the negotiations are being more – taking longer than expected.
Tyler Broda : Okay and just to follow-up on the first question, in terms of the total cost base, how much the diesel as a percentage of the total cost base roughly?
Octavio Alvídrez: Diesel should be around – I would say, 15% of total production cost approximately.
Tyler Broda : All right, great.
Mario Arreguín: Energy in general is 23% and then from there diesel is the largest share. And then it depends from mine-to-mine because the open pits, it’s even higher than the underground and that rates 150 million liters per year, for example to give you an idea, it’s not even 10% of that in the underground mine.
Tyler Broda : Now that’s definitely a material level of consumption. And just, you answered, you said it was 15% in peso terms during the year, that’s for 2017 and then 2018 that’s going to be the same level as 2017, so the effects come up through in 2017, is that fair?
Mario Arreguín: Yes.
Tyler Broda : Okay. Thank you very much.
Octavio Alvídrez: Thank you.
Operator: No further questions at this time from the audio lines.
Octavio Alvídrez: Okay, if there are no further questions, we thank you very much being with us here for this preliminary report. Thank you.
Mario Arreguín: Thank you.
Octavio Alvídrez: If you have further questions, here is Gabby and Patrick and the London office. So, they are available on a 24 hour basis.
Operator: For any follow-up questions and you can drop a e-mail or a follow-up. Thank you