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Earnings Transcript for FRES.L - Q4 Fiscal Year 2020

Operator: Hello and welcome to Fresnillo FY ‘20 Preliminary Results. My name is Stefano and I will be your coordinator for today’s event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Octavio Alvídrez, CEO, to begin today’s conference. Thank you.
Octavio Alvídrez: Thank you. Good morning, everyone. This is Octavio Alvídrez, CEO of the company. Thank you for joining us today. I am joined as always with by Mario Arreguín, our CFO and I am pleased to be joined this time by our new COO, Tomas Iturriaga and Guillermo Gastelum, our new Vice President of Exploration. Once again, regret not to be there in person, but when travel restrictions change, we look forward to seeing you in person. Please to the disclaimer page please. As always I need to point out to our disclaimer before I begin. This is in page number, we will see it second page there. What I would like to quickly move on to slide where we will cover today’s in this presentation. Please to the agenda. In terms of our agenda, I will tell you through the key highlights in the year as well as addressing how we have managed the business through the pandemic. Tomas Iturriaga will then provide an operational update as well as an update on our development projects. Then Guillermo Gastelum would provide an update on our exploration programs. Then Mario will provide a financial update. I will then conclude and provide some comments on the outlook and then we can follow to Q&A. On the Slide 5, please. The investment proposition and I am sure you are familiar with our investment case. I believe in what remains compiling and consistent as it has been over more than a decade as a listed company, notwithstanding some of the challenges we have faced recently. We do benefit from a large portfolio of high-quality assets with 2.3 billion ounce silver ounces and resources and nearly 40 million ounces of gold in resources. We have strong EBITDA margins and low cost and remain very focused on running our operations very efficiently. We take up all the time a disciplined approach to investment through the cycles, we explore – we invest in explorations and therefore we maintain our portfolio growth and we have a proven track record of completing our projects. Both the Fresnillo optimization and the flotation plan of Fresnillo and the pyrites plants were completed on time and on budget though as we will explain later the connection of the new flotation throughput was delayed to minimize disruption of the Fresnillo mine last year. We will do it this year. And commissioning of the pyrites plant was pushed back due to COVID related delays and in Juanicipio, we are expecting to commission it this year in Q4. We also have a solid project pipeline of new projects and prospects in Mexico, Peru and Chile and Guillermo Gastelum will go over them. COVID show how important our role is in the communities. We implemented a huge number of measures to help not just our people, for our communities and indeed, the regions key part of our license to operate. Finally, we have a very strong balance sheet. We restructure of debt last year. We have a strong cash position, positive free cash flow unchanged and consistent dividend policy, having paid over $1 billion in the last 5 years. On Slide #7, please. I will not run through all of the production numbers in detail as though were released in our last production report. But I will say, we report a robust year in the face of difficult circumstances. For silver, production was in line with our guidance. And for gold, we also hit our guidance, although we revised it, as you know. And this was in spite of some large disruptions cost throughout the year due to the impact of the pandemic in Mexico. I will talk about this in a bit more detail shortly. But issues such as working restrictions, absences due to quarantine, distance, measures and regulatory delays have all had an impact, the absences especially having to place all of most of our workforce at a point in time due to some degenerative diseases as well in conjunction with the pandemic. We are pleased to welcome Tomas and Guillermo to the team as well as complete our two near-term development projects, the Fresnillo optimization and the plant, as I mentioned. We have had to revise our due to COVID related delays just 1Q. And outperformance improvement initiatives asset in our previous reports are having a positive impact. We remain committed to delivering a sustainable improvement in our operating performance and maintaining the momentum in the improvement plan into 2021. On the following slide, on the financial highlights, here, we will see the combination of higher commodity prices, gold and silver and lower costs has resulted in a significant rise in profitability during the year. Mario Arreguín will take us through the numbers in more detail. But I will say this is a robust performance in a challenging environment. We now have over $1 billion in cash and took action to further strengthen the balance sheet in the year by restructuring the debt. A final dividend, we have $173 million that combined to $190.1 million for the year, an implied payout ratio of 50.6%, in line with our stated policy. In short, we remain very profitable and have taken prudent action to further strengthen our filing. Please follow a slide so that we can describe some of our COVID actions during this pandemic. Our first priority, of course, is the well-being of our workforce and the communities in which we operate. Of course, there are a lot of actions. I will not go in great detail through all of what we’ve done as this would require very much a separate presentation. But I would like to say that while the pandemic has been a huge challenge for us as a business for home country, Mexico, I believe our response has been very good regarded. It has highlighted the huge role we have as a business play in our local communities, also the importance of working together with all stakeholders. And this crisis, a pandemic, has served to strengthen relationships and partnerships. It has not been easy. Mexico as a nation has seen a very large impact from COVID and this has had a direct impact in our business. We closely monitor the spread of the outbreak and implementing a range of set safety measure across our business, following guidelines in accordance with WHO and local Mexican authorities. One key element to really handle well the pandemic has been testing, testing, testing, all the different tests that we have, the PCRs, of course, the antibiotics and the antigen. And this has been key as long as with the great performance from our medical doctors and really the – our operational team embracing all of these actions. I have been hugely impressed with the rigor with which our teams have embraced this new way of working. They have adapted weekly with diligence. Please, the following page, to go over the health safety environment. Being a responsible operator central to our and the way we do business. We are proud established Mexican business, fully aware of the importance of acting responsibly and being a sound corporate citizen. We all confirm we believe in the positive benefits of operational community where we operate. We are deeply embedded in our local communities. I am proud to work with them. Our action during COVID prices illustrates what we can do. We have made major strides in 2020, and I expect this effort to continue into the future. Huge amounts of training of costs have been done, and we are working to install a new safety first culture throughout the business. We have described in the last 3 years how we are advancing in our I Care We Care program. And very glad to say that the safety indexes in terms of frequency and severity have coming down drastically in the last 3 years. We are not complacent. We will keep monitoring, testing, training and improving. Our focus on the environment remains key. We are now supporting and climate-related financial disclosure. We are still committed to our wind targets, though we not progress as fast as we thought because in Mexico, we have some headwinds in this regard. We competed with tailings review, which is very important for every single mining company. With improvements we can make across all of our mines in the tailings and storage facilities, we are now fully independent channel and a full governance system implemented for this regard. This is a large and very comprehensive program. Our community programs have been extensive in 2021 despite COVID crisis and all those initiatives in addition to the work we are doing to support the region with their COVID responses are ongoing. And with this, I would like to hand the presentation over to our Chief Operating Officer, who will provide an operating review. Please, Tomas.
Tomas Iturriaga-Hidalgo: Thank you, Fabio and good morning everyone. My name is Tomas Iturriaga and I joined Fresnillo at the end of last year from Penoles, where I was the Chief Sustainability Officer for the Mining and Metals Group. And before then, I have a number of senior operational roles with Goldcorp, Capstone Mining and Endeavour Silver. And I have been fortunate to manage mining operations in Canada, the United States and of course, in Mexico. So, I do believe that my experience is well suited for the COO role at Fresnillo. I look forward to meeting you all in person as soon as we are able. Can we please move to Slide 13? So, starting with, first, safety, as you see, we have improved our performance year-on-year and we are seeing an improving trend for the last 3 years. My priorities include focusing on preventing fatal and serious accidents by implementing a high potential incidence program that was already initiated last year. This program is to step-up for Fresnillo and an extension of the effective I Care We Care program, which is helping to create a culture of safety throughout our operations. The company has a target of zero fatal accidents and I am going to do my best to help achieve that. The safety of our employees very much remains a core priority for Fresnillo and we retain a very sharp focus on safety. Next slide, please. The Fresnillo action plan update, so this action plan is a key operational priority for us. And this slide sets out a series of measures on how we are progressing on all of them. The Fresnillo action plan has already started to make an impact on operational performance, and we will continue to pay close attention to this, taking it further in search of even better performance. The thinking of the San Carlos is complete, and we are now working to complete the required infrastructure works to bring the shaft to the production at the deepest level. The boring machine is working well, but I still see some room for improvement. So we are working directly with the manufacturer to improve availability and performance of the machine. As for our dilution control program, we implemented a number of affirmative actions during the last year, ranging from workforce training to assigning dedicated supervisors in addition to aligning workforce incentives to schemes that promote a better performance and compensate our team’s actual performance. We have improved our dilution levels. Nevertheless, I still want to see higher rate of progress on this program. In addition to dilution control, stronger reserve calculation and short and near-term mine planning processes are giving us greater certainty over the ore grades in the production schedule. Alimak elevator is now fully operational. So we expect to start seeing the benefits in productivity as well as those benefits coming from some shifts now that we expect less COVID-19 related absences. Can we please move to Slide 15? So turning to the individual mines and starting with Fresnillo. The key point that I want to make here is that performance at Fresnillo is now far more stable as the improvement measures implemented during 2020 are taking greater effects. We continue to focus in our improvement plan, as we just described, controlling dilution, enhancing the blasting and drilling techniques to cope with narrower pains that in conjunction with the use of more efficient and adequate topographic. Further initiatives to increase efficiency and reduce downtime advanced with the use of 4 semi-automated drilling machines and 2 fully automated drilling machines, now operating and beginning to see improvements month-on-month. With all that, silver production was marginally up. Cost increased. So, all-in sustaining cost was down slightly. Profit impact included high average increase due to quarantine measures that we managed to maintain production throughout the year. Development rates were in the average of around 3,100 meters per month through the year as COVID related measures had an impact, but we are looking to increase this average to somewhere in the range of 3,300and 3,500 in 2021. Going forward, Fresnillo will also benefit from the interconnection of the beneficiation plant expansion and commissioning of the tailings flotation plan in the year. Construction of both projects, are complete and the later is just awaiting government permits to go live. We will talk in more detail about these two projects later in the presentation. Next slide, please. So we move to Saucito. So there, we guided silver production would come down to 220 due to lower grades as we move to deeper areas of the mine. Cost per ton was up, but cash costs are still very competitive. All-in sustaining cost is also very strong. We did have high absenteeism due to COVID measures, which impacted development rates and other areas of mining, but we anticipate this will improve in 2021. Our all performance improvement measures are ongoing, including control, equipment availability. And the deepening of the Haria shaft remains a key element as it gives us access to higher grade areas in the term. To Slide 17 please. So, we move to San Julián and performance at the San Julián veins and the disseminated ore body was as expected with stable production at the vein and increased production at disseminated old body. A key driver at the disseminated ore body was our decision 18 months ago to change the mining systems to increase brand stability. We have done that. We have regained higher grade area and higher production. As we reported in our production update, housing suffered from minor structural damage at the end of December and that only affected the provision impact resulting in a short promotion outage. This was only temporary and we are operating at a margin lower rate at nameplate capacity but we did see no impact to production in January. Following slide, please. We move to Ciénega, where silver and gold production was stable, while cash cost and all-in sustaining cost remained very low driven by the byproduct rate, a strict cost control initiative, and reduced sustaining CapEx in line with our plan. We have found significant space for drilling with good exploration potential. So exploration will remain as one of our priorities for 2021 along with cost control initiatives. We will also complete Phase 2 of our third tailings dam at Cénega. Slide 19, please. And we move to – now to the Herradura district, where the Noche Buena and Herradura mines saw the greatest COVID-related work restrictions. As we set out previously, we have to stop mining for about 6 weeks at the onset of pandemic due to regional working and transport restrictions, these resulting in a reviewed gold guidance for 2020. Once operations ramp backup, we were still able to produce 425,000 gold ounces in 2020, which I consider as strong performers under the circumstances. Cost per ton is still very competitive and all-in sustaining cost decreased mainly due to lower stripping as a result of working restrictions. Vibrating screens were installed at the first dynamic leach plant recently [indiscernible] and we continued with the construction of the path as COVID-19 restrictions are lower during the year. During this current year, we will look to conclude the installation of the Carbon in Column project helping to improve coal recoveries from the pads. Can we now move to Slide 20? So, Noche Buena. Noche Buena had to operate with the same restrictions as Herradura as we reported previously and we also reported probably there was a minor land sleep, which affected access to certain areas of the pit. Finally, as you all know, Noche Buena is almost at the end of its mine life. So, all these factors contributed to the gold production decrease that you see. The land slip along with COVID related work stoppage has meant that we will expand the mine life for about 4 to 6 months. So, we have deferred the closure plan slightly. In the interim, the priority is to lower our costs in Noche Buena. Can we now move to Slide 21, please? So, turning now to our growth projects. Construction of the pyrites plant Phase 2 at Fresnillo was completed on track and on budget. As previously disclosed, the start of the operation has been deferred due to a delay in final inspections by the authorities as a result of COVID-19 restrictions in travel. These inspections are required in order to provide the energy permits needed to operate the plan. Once the final inspection by the authority is undertaking and electrical permits have been approved, we expect the plant to ramp up at full capacity within a quarter. Given the current COVID-19 situation in Mexico, we expect inspections to take place in Q3 and this is reflected in our 2021 production outlook. We can ramp up quickly when those permits are given. We expect an average annualized production of about 3.5 million ounces of silver and 13,000 gold ounces in Toro from both bases as a very competitive cash cost when fully operational. Slide 22, please. And so talking about the beneficiation plant optimization, the main objective of this project is to increase processing capabilities at the Fresnillo beneficiation plant to cope with higher leasing rates currently being mined at the deeper levels of the mine. Phase 1 of the three phases was completed in 2017 and now Phase 2 was also completed on time and on budget. As we previously set out, the connection of the new flotation required 15 days of stoppage of the existing beneficiation plant. Therefore, we decided to reschedule this activity to avoid the necessary interruptions to the normal operation of the plant. We will therefore undertake the connection sequentially during the regular planned maintenance of the plant in order to minimize the operational impact. We expect this to happen during the first few months of this year. The third and final stage will increase the plant capacity to 9,000 tons per day from the second state capacity of 8,000 tons per day throughout the installation of vibration screens, but this will only be undertaken when the mine is able to sustain a consistent level of [indiscernible] sufficient to support this higher level of processing capacity. Moving to Juanicipio, where mine development continues to advance last year also seeing some negative impact due to COVID-19 working and travel restrictions. As planned, development ore begun to be processed at the Fresnillo beneficiation plant in mid-2020 and commissioning of the plant is now expected by Q4 2021. Once commissioned, the plant is expected to reach about 40% to 50% of nameplate capacity in Q4 2021 and 90% to 95% of the nameplate capacity in 2022. In the next slide, we can see some pictures of the progress at Juanicipio. We see on top at the middle, the milling building in the front and the floatation cell in the background of the picture, to the right, the flotation cells lines, lead and zinc and some of the other progress in the filtration area, thickeners area and reagents section. So with this, I will hand it over to Guillermo Gastelum. Thank you.
Guillermo Gastelum: Thank you, Tomas and good morning or afternoon everyone. I too look forward to the day we can all meet in person. It’s a privilege to have been appointed as Vice President of Exploration at Fresnillo. Fresnillo has considerable exploration portfolio and I look forward to keeping you all up to speed as we capitalize on it. Given my history with Fresnillo and my understanding of our asset portfolio, I am pleased to say it has been a smooth transition from my predecessor, David, to do all new elements. Before we start reviewing the resources and reserve figures, I would like to say that I have three key priorities to our exploration drill programs
Mario Arreguín: Thank you, Guillermo. First of all, I would like to apologize, because I understand that the slides that you are seeing in your screen are coming out very, very blurry. So, in my case, I have a lot of numbers, and they are quite small. And what I suggest you do is go directly to the PDF presentation, access that. So you can follow me during the presentation. Otherwise, it’s going to be very difficult because, again, the slides are showing very, very blurry, and the numbers are quite small and it will be difficult for you to follow me. So again, please, if you can follow me in your PDF slide that you have available. Okay. Let’s move to the income statement, please. Here on Slide 31, we are showing the income statement for 2020 as it compared to 2019. And as you can see by the different levels of profit, which are outlined in yellow, it was a very good year, financially speaking. Gross profit went up by 90%. Operating profit went up by 278%. Profit for the period went up 82% and EBITDA went up 73%. I would like to spend some time with a couple of lines, which I consider to be the most important ones. Starting with adjusted production cost, and for that, I would like to go to Page 32 of the presentation, where we show a rainbow chart, which we used to analyze the variation from 1 year to the other. On the far right-hand side, you have a green column, which represents the total variation of $93.9 million lower compared to last year. If we go to the left-hand part of the graph, you will see the two main reasons, which are pointed out in Column 1 and Column 2. In Column 1, you see the effect of the lower volume being processed at as a consequence of the COVID-19 partial profits that we have for approximately 6 weeks in the first quarter – in the second quarter of the year. Again, that was due to the government has been asked to partially stop operations at that mine. So we incurred less variable costs, which are shown in the solid part of the bar number one and the small little part in that bar of $8.3 million is the fixed costs that we continue to incur mainly related to wages, salaries contractors that we did not file. We didn’t fire anyone during the dynamic as we incurred those fixed costs, but we reclassified those costs as some productive costs and were taken out of the adjusted production cost. Another important reason for the decrease in adjusted production cost has to do with the evaluation of the Mexican peso. And for this purpose, we basically use the average exchange rate. And in 2019, the average exchange rate was MXN19.8 per $1, whereas in 2020, it was MXN21.5, which represented an 11.6% devaluation of the – average devaluation of the Mexican peso and that had a total favorable impact of approximately $66.6 million. Now, if we go to the adverse part of the graph, which are shown in the red bars, the main reason for the increase was the additional development works and the additional maintenance that we had during the year compared to 2019. As you know, for us, in order to keep our mines operating efficiently, we needed to do more development and do more maintenance. So that represented an increase of $49.4 million, which partially offset the benefit of the favorable variables and that’s how we got to the $3.9 million decrease in adjusted production costs. If we can now move to Page at 33, I would like to spend a little bit of time explaining the variation in terms of gross profit. And again, on the right-hand side, you have the green bar, which represents the increase of $417 million in terms of gross profit and clearly, on the left-hand side, you can see the three main reasons for that or favorable reasons for that. Firstly, the higher silver and gold prices in the case of silver the average price in 2019, was $16 per ounce, whereas in 2020, it was $21.3 per ounce. This represents a 32.3% increase. And in the case of gold, the average realized price in 2019 was $1,418 per ounce whereas in 2020, it was $1,782, a 26.4% increase. So by far, this was the most important reason behind the increase, which represented $510 million. On second column, we show the effect that the reassessment of gold inventory we had on the income statement, on the gross profit. I’m sure you remember that we reported that we have found additional 119,000 ounces on our leaching pads, which were not accounted for in our inventories, on our physical inventories. So this generated a positive effect of $91 million. And the third factor, which I already mentioned, was the devaluation of the Mexican peso, which we touched on the previous slide. On the adverse side, if you move to the right-hand side of the graph, you will see that the main reason, several reasons behind which, let’s say, mitigated the favorable effect that I just described. Firstly, the increase in development works and maintenance, which I already spoke of when I spoke about the adjusted production costs at a negative effect of $49 million. On you see the effect that the lower ore rate that we’re finding as the dynamic leaching plant at San Julián and those lower ore grades had a negative effect of $47 million. The decrease in volume that I spoke about in our adjusted production cost rate at which lowered the adjusted production costs. In contrast, had a negative effect when we talk about gross profit, which we didn’t have or did not – were not benefit by due to that lower volume process was almost $46 million. The higher treatment and refining charges, which are shown on bar number eight, had a negative effect of almost $36 million. Here, let me just briefly tell you that premium charges in the case of lead concentrates went up by 51%. And in the case of zinc concentrates, it went up by 18%. Also filter refining charges went up by 9%. So, all of this together represented approximately $36 million negative. So with this, I hope you get a sense of the reasons, the positive and negative reasons behind the increase in the gross profit. If I may, I would like to go very quickly back to the income statement on Page 31 so I can continue moving down from gross profit. You will see that the variation in gross profit, again, was $417 million, and the variation in operating profit was $478 million and the main reason for that was the lower exploration expenses that we incurred in 2020 versus 2019. Here, at the beginning of 2020, we didn’t know exactly how the year was going to look at the beginning of the year we thought it was going to be a very tough year. But fortunately for us, prices have increased substantially. But back then, given that uncertainty, we decided to cut a bit the budget that we already have to find for exploration expenses. And also, the second reason for that was COVID-19 did not allow us to access certain areas that were targeted for the year. On Page 47, if you are interested, you will see a detailed breakdown of the exploration expenses. Now if we continue to move down, and if you can please go to the first column, I would like to talk about some of the financial aspects that we saw during the 2020 year. Starting with the field stream, the field stream, we have broken down into two. Field stream amortization, which is basically the unwinded of the – unwinding of the discounted values, that had a positive effect of $47.1 million. And this would have happened, no matter what, because this is not the part that is related to the update of certain variables. That bar is shown in the revaluation, which again is an update of certain variables, which are incorporated into the model when we led you the Silverstream, basically, the price of silver, the discount rate, among others. And this showed a profit of $23.9 million basically due to the higher silver price and the effect of the discount rate that we use and the LIBOR rate that we use in terms of the discount rate. Below that, you have the finance income expense of $129 million, which shows a very important increase compared to what we had last year. And the reason for that to that $82.6 million increase was behind the restructuring of our debt. As you know, in September of last year, we issued a new 30-year bond. And part of the profit is coming of the $850 million new bond were used to buy back part of the bonds that were outstanding and due to mature in 2023. So in order to buyback those bonds, we had to pay a premium based on market price, that premium was approximately $60 million. So that’s the main reason behind that increase. And we knew that we were going to incur that additional cost. But considering the fact that we were looking at historical low interest rates and also historical low spreads with the decided back then that it would be economically beneficial for us to incur that cost compared to waiting until 2023 until the bond matures and under different market conditions, most probably with higher interest rates and higher spreads we believe – firmly believe that the benefit of doing this earlier, more than compensated the cost that we had to incur. And I am sure you have seen that the base 30-year bond has increased substantially since September. So we believe that it was a very good decision. In terms of the foreign exchange gain and loss, the $40 million loss there that you see is basically related to the effect that the devaluation of the Mexican peso had on certain accounts receivable that we have denominated in peso. Basically, value-added tax that that the government owed back to us, which is denominated in pesos were worth less dollars, and that’s the main reason behind that foreign exchange loss. Moving down to mining rights and income tax expense, you will see that the income tax expense of $140 million contrasts very much to the $8 million tax credit that we had in 2019. Remember, in 2019, we had a very important evaluation in that year, which had an effect on the deferred taxes. And at the end of the day, we registered a tax credit of 8. This year, it was the opposite. And that’s why you see that important change from 1 year to the other. With that, I would like to move to the cash flow statement on Page 35. Here, you can see on the bottom part, the bottom – on the first half at the bottom, you can see that we ended this year just above $1 billion, $1.07 billion, which represented an increase of $733.8 million. The main sources of that were of course the cash generated by operations, which was $1.16 billion, an increase of 70% compared to last year. And another important inflow of cash was the, like I said, we said restructuring. Net of the repurchase of the older bonds we obtained $350 million together with the capital contributions, mainly silver contributions to the project for $63.8 million. And the cash flow generated by the [indiscernible] of $33.8 million. I would say those were the main uses, I mean, the main sources of cash. In terms of uses, by far, the most important one was the CapEx, purchase of property, plant and equipment of $412 million. Also, the dividends paid for $105 million. Remember what we are seeing here is the final dividend that was paid in the first half of the year, the final dividend for 2019. And the interim dividend for 2020, which was paid in the second half of the year, totaling $104.7 million. I think those are the main issues behind the cash flow statement. Lastly, on Page 35, the balance sheet. no major comment here, continue to have a very solid balance sheet and financial position. And with that, subject to any questions that you might have later on in the Q&A section, I will pass it on to Octavio Alvídrez for the outlook.
Octavio Alvídrez: Thank you, Mario. We can go to the following slide, please. Here, you will see a silver production trending up in – well, I would say very much all of the metals; silver, lead, zinc, but gold. In the case of silver, we have a step-up in production expected in 2022. This comes from a year or a full year production of Juanicipio and also the Paras plant, but glad to say that we are expecting a bit more production out also from Fresnillo and Saucito. Then on the increased production of lead and zinc, as we mentioned before, we expect more production of base metals at depth in Fresnillo and Saucito and also a bit in Cienega and also the contribution of Juanicipio on these two metals. And as far as gold, we see a trend down. You know that Noche Buena is out of reserves in 2023. So that’s the largest impact there. But glad to say that the 2 projects that you will see in the following pages that are coming out of our growth pipeline are on the gold side, and as well. What can I say here? Well, Herradura is also producing a bit less from lower tonnage of ore deposited in the following years. And that’s about it. The following page, please. You will see here that the – in terms of CapEx, 2020 was a very special year because all of the effects that we were mentioning in our presentation, very much what we did not deploy in terms of CapEx in 2020. We are deploying in 2021. You will see the largest portion of growth CapEx there related to mostly Juanicipio. And then on the following years, ‘22 and ‘23 very much sustaining CapEx for all of our operations. Next, please? In terms of the timetable for the growth pipeline, you see the 3, first 2 very much accomplish the plants on the Fresnillo base optimization flotation plant and then Juanicipio that we have talked about. And on the bottom part, you have the 2 new projects and the expected timetable to be developed which we have mentioned before, is quite handy and not complex project to develop. Very much the size of what was Noche Buena in the past and then Orisyvo, our largest ore body, more complex project to bring on stream. You’ll see that the CapEx numbers expected according to the pre economic assessment that we have done in these two projects as well as the production expected for each one of those in terms of average production for the mine. Next, please. And just to conclude, before going to Q&A, of course, COVID has clearly been the core focus for the management team and the company as a whole. I believe Brazil has weathered this storm well and above all, we remain faithful to our corporate purposes. We will continue to do all we can to support our people, our community and our country as we enter into a recovery phase from this pandemic. And just to recap I mean we talked about stability in our operations. The plan deployed for Fresnillo is giving us first good results. We are expecting a little bit more production there and lower cost as all the infrastructure is coming to fruition there, Saucito as well in the coming years, a bit more production. Then our largest project that we are very excited about Juanicipio to be completed this year and commissioned and then a full year production in ‘22 and onwards. As we mentioned, despite the fact that we have lower gold production in the following years, 2 projects in our pipeline, quite robust, quite exciting. Of course, we have seen also the increase in the margins that – across all of our operations and a decrease in all-in sustaining cost across all of our operations, but not [indiscernible] the CapEx also coming down in the following years. So with that, I believe we can expect improvement in the financials and the economy of the company to continue with the efficient and trying to capture as much synergies across all of our operations as we can. And with that, we can go into Q&A, please.
Operator: [Operator Instructions] The first question comes from the line of Alan Spence from Jefferies.
Alan Spence: Good afternoon. Thanks for taking the questions. I’ve got three, but I’ll just take them one at a time. And the first one is around the silver guidance for 2022 and 2023. In the presentation, you have hopefully provided the nameplate assumption for 2022 for Juanicipio, I’m assuming it’s 100% for 2023. But are you just multiplying that by life of mine average production rates? Or is there anything you’re kind of including within those years about perhaps higher or lower grade first reserves in the early years of its mine life?
Octavio Alvídrez: Okay. Thank you, Alan. No, not really. I mean, we are not putting those graphs, the expected average production for the mine life. As Juanicipio, and we have talked about this before and is the same behavior as in Fresnillo and Saucito. In the higher part of the veins, we have a higher silver grades and at debt, of course, we have a higher content of base metals and lower silver grade. So for ‘22 and ‘23 is what we are expecting according to our latest resource reserve statement.
Alan Spence: Okay. And the second one around costs and when we think about the $1 per ton basis, for next year. I think in your concluding remarks, you called out Fresnillo, but what other mines do you think there is a good opportunity to lower that dollar per ton cost in the next 12 months?
Tomas Iturriaga-Hidalgo: Well, I can answer your questions related to the investment we’ve done or we are doing still in our operations. In Fresnillo, as we have in one of those tables, we have a large set of actions with the objective of increasing the efficiency and lower the cost. As Tomas was explaining, I mean, we have the San Carlos shaft deepening that would give us the possibility to out the ore from the mine instead of now a share for production coming through ramps. The tunnel boring machine as well, I mean, has given us the possibility to develop to the west at the 695 level, and that would give us the possibility to prepare 695 up some of the blocks with better grade that we have in Fresnillo. So all of those investments are coming into fruition and will give us a better cost structure in Fresnillo in the coming years. And then Juanicipio, of course, we know that it has a fantastic cash cost and all-in sustaining costs. It’s a new operation as well. And also, I would talk about the pyrites plant as we have in one of those slides, expect that $2.5 per ounce of silver produced. The rest of the mines, we continue with the cost control effort as it is in Cienega and San Julian. In San Julian, we have just to talk about San Julián in the disseminated ore body. We do not have any more development to do. So that also will contribute to a better cost structure there in San Julián. The rest of the operations, I can also give you a comment on Herradura, on Herradura, probably the opposite. We will have a higher stripping ratio in ‘22 and ‘23, then leveling out in ‘24, so a bit more cost perspective in Herradura.
Alan Spence: Okay, really helpful. And my last one is one for Mario. Inventories seemed quite high at the end of the year. Was this just kind of being cautious on 2022 and bulking up on the likes of reagents, maybe that’s completely wrong? If so, tell me. And do you think there is an opportunity to perhaps unwind some of those in the next year or 2?
Mario Arreguín: I am sorry, there was a slight noise and I couldn’t quite catch your question. Was it about inventories?
Alan Spence: Yes. Just the year-end inventory seemed quite high. I was wondering if that was due to COVID related caution in terms of stocking up on reagents and other items and or if that’s a wrong assumption? And if maybe that line item could unwind in the next year or 2?
Mario Arreguín: Yes. That will unwind in the next year or 2. And also bear in mind, the effect that the 119,000 additional ounces had on inventories. But I would say that, that was one of the reasons why we saw the increase in inventories.
Alan Spence: Okay.
Mario Arreguín: And if you want, I can send you a detail do variations in the inventories. So you can see the effect of the additional 119,000 ounces.
Alan Spence: Yes. I would like that. If you could send that later on. Thank you.
Mario Arreguín: Yes, of course.
Operator: The next question comes from the line of Jason Fairclough from Bank of America.
Jason Fairclough: Good morning, guys. We are well. Look, a couple of quick questions from me. And they are related to the reserves. Could you just talk to us a little bit about the prices that you’ve used to calculate your new reserves in both gold and silver and the extent to which that’s changed from the last time you calculated your reserves?
Octavio Alvídrez: Guillermo.
Guillermo Gastelum: Yes, I can comment. Thank you, Jason. The prices used this in 2020 for resources and reserves were $1,400 per ounce gold and $1,750 per ounce of silver for most of or for all of the operations. At Herradura, we used $1,600 for both resources and reserves. In 2019, we used $250 per ounce for gold and $17 – if I remember correctly, correctly, if I’m wrong, will be 2019 silver price reduced, it was $17.
Jason Fairclough: Sorry, and what was the gold price in 2019?
Guillermo Gastelum: $1,250.
Jason Fairclough: $1,250. So your gold price went up, but the reserve still went down, yes?
Guillermo Gastelum: Yes.
Jason Fairclough: Okay. Just a follow-up question, if I could. So what is your confidence on these new numbers, right? Because I guess the real question we’ve had in the market is whether you would get the dilution under control at the Fresnillo area mines. And ultimately, you will get back to mining at reserve grades. Or should we be thinking about just permanently mining lower grades at the Fresnillo area mines. Can you give us a bit of an update on that?
Octavio Alvídrez: Yes, we can, Jason. Yes. So we have large confidence in our resource and reserves. I mean every year, we audit by a third party, SRK, every time the protocols and the requests are more stringent. This year, this past year, we have embarked in strengthening the – all the protocols in terms of the of the cost calculation, matching the cause by two models. One is top-down and the other is bottom up. Also part of the law that we have on the gold side in terms of resources and reserves has to do with design criteria for the mine that used to be not taken into account. So that took part of the reserve that we used to have. I mean all to say that we have a large confidence in our resource and reserve process and a statement. Now in terms of Fresnillo, we have had a good result, I would say, in 2019 and 2020 because as we mentioned, I mean, we have been able to accomplish our objective and our guidance in terms of guidance for grade. And as we said, in the case of Fresnillo, in the – given us the possibility to prepare those blocks up of 695 that will contribute – will bring a higher grade. So as you can see in the particular slide in Fresnillo, the grade is coming up in 2021. We have there in the slide, but ‘22, ‘23, ‘24 and ‘25 will be the same trend giving us a possibility to closing the gap to the resource and reserve statement. We also will give you an update on the dilution control. And as we mentioned, if we were not to achieve our objectives in terms of dilution, that would mean that we would have the same number of ounces, but with lower grade I mean, but our objective, as I mentioned, is to accomplish what we have planned for the operation.
Jason Fairclough: Okay. Thanks for the color, guys. That’s really helpful. Appreciate it.
Octavio Alvídrez: Thank you, Jason.
Operator: The next question comes from the line of Amos Fletcher from Barclays.
Amos Fletcher: Yes. Good afternoon and good morning, guys. I have a few questions. First one was just on – a little follow-up to Jason, I guess, with respect to the reserve base. Is it still the case you haven’t got any proven reserves? And can you explain why you don’t and what that means?
Octavio Alvídrez: Do you want to answer, Guillermo?
Guillermo Gastelum: Yes. I can do that. Yes, with all of our reserves still probable, but we have received a number of requests more of the stringent one as Octavio mentioned from our auditor and we have been involved in a really strong and intense process of achieving – getting to this, meeting this with ones of our auditors. So, we expect to be returning to having our proven reserves this year by November 2021 when we expect to finish the resource and reserve estimation. So, for wishing that, for meeting these requirements, we have really enforced the dedicated resource and reserve team from 6 members in 2019 to 23 in 2020 and it will be strengthened further. So, what we are doing is to accelerate the development of these missing reserve elements that have been requested by our auditors. We have initiated the studies to fulfill them all, which will be basically the development of geotechnical and geological ventilation. And as Octavio mentioned, cost multiples, which are very precise, which will have big impact to all these studies will be the return to having proven reserves.
Octavio Alvídrez: And just to complement, Amos, thank you for your question. I mean, we from the start, we defined a 2-year program, 2019 and 2020 to come into proven reserves again. So we are expecting to have proven reserves across all of our operations next year, for the next year statement.
Amos Fletcher: Okay, understood. Thank you. And then sort of following up on that, the gold reserves at Herradura, they went down despite the gold price assumption going up from $1,250 to $1,600. Can you explain why that is?
Guillermo Gastelum: Yes. The main reason for it is the application of more strict or technical and cost considerations. Application led to a resulting updated to smaller resource pit, but technical studies are still in progress, will be completed in 2021, and we will see the fruits of its completion by the end of this year. So basically, it’s because of this cost consideration.
Amos Fletcher: Okay. Understood. Thank you. And then I wanted to ask about the fact you said you booked $72 million into EBITDA from inventory gains from reassessing Herradura’s recoverable production. Can we expect any more of those type of gains to be booked into the P&L in 2021?
Octavio Alvídrez: Not in 2021. This come from the inventory of the ore that we have placed over the life of Herradura, the 22 years plus of operation in Herradura in pads 1 to 13 – 1 to 12, sorry. And of course, when you have a new operation, you start with what the metallurgical tests are giving you in terms of recoveries. If you start recovering more as we have in this case, then you update your recovery, estimated recovery. And that we have done in this case. For the next 3 to 4 years, we don’t expect new inventories to come up as we change the recovery, estimated recovery, in this case, for the inventory that Mario was talking about.
Mario Arreguín: And just to complement your – just to complement what Octavio said, in terms of the 119,000 ounces that we found in 2020 about 80% of the benefit was accounted for in that year. We will continue to have a small benefit this year, very small compared to the one that we had in 2020 still rise from the 119,000, and it will be diminishing in the following years.
Amos Fletcher: Okay. Understood. And then last question was to ask if you can give us some guidance on constant currency cost inflation for 2021 on a dollar per ton mill basis. Thanks.
Octavio Alvídrez: You’re muted, Mario.
Mario Arreguín: Sorry about that. As you know, we do a calculation of our inflation cost based on our own basket. And what we expect to see next year is an inflation of around [indiscernible] 5%. So that is assuming an exchange rate of about MXN20.3 per $1. Now I think the exchange rate is one of the most difficult variables to try to predict or to estimate for the year. It depends on so many factors that are very difficult to predict. It could go anywhere. But assuming the peso stays around MXN20.3 that would mean a revaluation of the average exchange rate of approximately 5%, which will have an impact on our cost based on the peso-denominated part of the adjusted production cost. Considering all of that, we should see an inflation-based on our basket, 4.8% or around that area, 4.7%.
Amos Fletcher: Okay, that’s’ very clear. Thank you.
Operator: The next question comes from the line of Daniel Major from UBS.
Daniel Major: Hi, thanks very much. First question, just a quick one following from Jason and other questions on the reserve grade, what is the latest reserve grade at the Fresnillo and Saucito mines? How has that changed year-on-year? I don’t think that’s included in the statements? And secondly, just to be really clear on the difference between your confidence in the reserve grade versus the mine grades. Is it correct to say that you factor in your stated milling capacity that you will process development or throughout the life of the mine plan, and therefore, by definition, it’s impossible to achieve reserve grade.
Octavio Alvídrez: Do you want to talk about that one, Tomas, about the mine grade versus the reserve rate?
Tomas Iturriaga-Hidalgo: In terms our constant level or I mean, yes, like it has been explained, I mean, we have improved overall our reserve calculation processes in all of our mines. And that is also linked to better short and mid-term mine planning at all of the mine site. So that is giving us a greater a greater level of confidence overall in our processes. As for development ore, so that’s accounted for in our estimations of mining schedule. However, the dilution control also applies to that developmental ore. So whenever we talk about controlling dilution and so that having an impact on grades that includes development ore.
Daniel Major: Right. But just to be – if you are processing development ore through the plant, that is below the reserve grade because of dilution, then you can’t achieve reserve grade? Is that the wrong way of thinking about it? Because that’s the message we’ve always had previously is that you consistently plan within the mine plan to process or a proportion of development ore through the plant. So when we calculate the plant capacity times by the grade, if you’re producing some development ore, then you can’t achieve reserve grade? Is that the wrong way of thinking about it?
Tomas Iturriaga-Hidalgo: Well, it certainly has an impact. And – but – and I don’t have the specific numbers, but I would say that development ore, the percentage of development ore going through the plan is very low compared to coming from actual stock. So yes, it would have an impact. However, I do believe that based on that low percentage compared to ore coming from stocks, the impact should be should be a minimum. And we – when we continue applying our dilution program and our reserve calculation processes are fully mature, we should be mining close to reserve grade.
Daniel Major: Okay, thank you.
Octavio Alvídrez: Let me expand on that, Daniel. Thank you for your question. I mean, as we mentioned, yes, of course, we do have reserves and resources calculate with certain inputs. One of those, very important is dilution, of course. And we mentioned a couple of years ago that we were having problems controlling the dilution in the case of Fresnillo and Saucito because of narrower pains. What we did to study the case in great detail, and we are achieving a lower dilution when we mine Fresnillo and Saucito. If we don’t achieve what we are targeting as objective and would be the dilution we import for our resource and reserve calculation, then we would need to change that input to a higher dilution, and that would mean, what would that mean? Number one, we would still have the same number of ounces if we believe that those centers are economic to be mined out, but we will have the same number of ounces. But of course, we will have a negative effect in terms of cost. What we are experiencing in these 2 years in Fresnillo, as we mentioned, is in 2019 and 2020, very much achieved the guided grade. And then what we have in our sequencing for the mine in Fresnillo and according to our geological model is the following years, ‘22, ‘23, ‘24 and ‘25. Higher grade blocks, and that would mean that, that grade would – or that trend in the grade would continue gradually being increasing Fresnillo. In Saucito, it’s a different story, and it depends year-to-year to what we are planning to mine. So we will update you in every year about the respective grade.
Daniel Major: Okay. Great, thanks. Second question, on costs, I guess you’ve provided some details on the sort of cost inflation, etcetera. If we just cut it back to group adjusted production costs, your $1,079 in 2020. You provided, I think, last year, some guidance on this number on a 12-month forward basis. What should we be thinking on that number? Is it that number plus 5%? Or can you give any explicit guidance on the group level basis for adjusted production cost for 2021?
Octavio Alvídrez: Yes, of course. In general terms, yes, we should be expecting that additional 5% cost inflation. And in absolute terms, just bearing in mind that there will be operations running for the full year compared to last year, for example, for Juanicipio, where we only have few months or a few weeks. This year, it will be running the full year and also the pyrites plant at [indiscernible]. So in general terms, I would say, yes, 5%, plus the additional volume for additional months of operations for those that started last year and are fully operational this year.
Daniel Major: Got it. Okay. So perhaps closer to – on the 1.1079 maybe closer to high single digit, 10% increase in that number year-on-year?
Octavio Alvídrez: Correct, more or less.
Daniel Major: Okay. Yes. Very clear. And then final question on CapEx, you’ve, I guess, got CapEx stepping up a little bit in 2023. I’m assuming that’s kind of scheduling. But if we think about the business as a whole, following the ramp-up of Juanicipio? And I appreciate there is always going to be annual fluctuations in sustaining CapEx. But is there any update on that level? I think previously, you’d spoken to around $450 million mark. Is there any update on where you would see that sustainable kind of group CapEx number post 2023?
Octavio Alvídrez: Yes, we believe that’s sustainable, Daniel. And as we mentioned in the vein system as it is Juanicipio, we more or less can project what we’ve had in Saucito or even at Fresnillo, 50 to 60, but then you would have to take into account, if we are doing a major CapEx deployment like thinking or more ramps to going to debt or so, that would increase. But a good number is between 50 and 64 for Juanicipio in the following years.
Daniel Major: So is that 50 and 64? So group CapEx?
Octavio Alvídrez: No, no, no. For group CapEx is 50 and 60 per operation. So the $444 million to $485 million is an up to $500 million, like a good number for the group.
Daniel Major: Sorry. Thank you. Okay, thanks a lot. Appreciate it.
Octavio Alvídrez: Thank you.
Operator: Our next question comes from the line of Tyler Broda from RBC.
Tyler Broda: Hi, thanks. Most of my questions have been asked. I was just curious on Orisyvo. If you could just go through maybe a bit of detail around what still needs to be done in terms of permitting? I mean how confident are you on that side of the equation? And when would we sort of reasonably expect that to start into construction? Thank you.
Octavio Alvídrez: Guillermo, do you want to mention something about Orisyvo?
Guillermo Gastelum: I think I didn’t quite get the question, Octavio.
Octavio Alvídrez: Okay. Tyler. Yes, regarding the permitting we are expecting. Look, Orisyvo is in the indigenous area in the state of Chihuahua. So, one of the permits that we will have to go through is the indigenous consultation for – to bring up a project into operation in that area. We do have in Mexico that as a new protocol for mining companies and for mining projects. We do have favorably the experience that we went through in San Julián. In San Julián, which is, I would say, in a similar area, similar zone in Chihuahua. We did the indigenous consultation when we were building our water dam for the operation. And it was successful. It was the first one to be done in Mexico for a mining company. So we do have that experience, but that would be one of the permits that probably would take us a little bit longer to go through. The rest are the usual, the change of land and the environmental impact assessment, as we do have in all of the mining projects. So this one is particular and is the one that we believe is more challenging.
Tyler Broda: And how long?
Octavio Alvídrez: Yes. How long? Probably the best timetable is to relate that to table Slide 39, in which we have 1, 2, 3, 4 years. And expected production, this is just to give you an idea, in 2025.
Tyler Broda: And I guess the question being how long is construction going to take? Is that a 2-year process then, give or take?
Octavio Alvídrez: Yes, probably a little bit more. We do have in the area, which is quite isolated in that part of the country. We would need to bring roads, electricity and everything compared to Rodeo, for example, in which it is very well located in terms of infrastructure. But in Orisyvo, yes, we will bring to – we will have to build and bring all of the infrastructure so to – for construction, the project, 2.5 to 3 years. Also one challenging piece of infrastructure for Orisyvo would be the tailings storage facility.
Tyler Broda: Great. Thank you very much.
Octavio Alvídrez: Thank you, Tyler.
Operator: The next question comes from the line of Jason Fairclough from Bank of America.
Jason Fairclough: Hi, just a follow-up, guys, and thanks for your patience here. And I guess, I’m following on from Tyler. So if we look at these 3 projects that are maybe possible on a 5-year view. So you’ve got Orisyvo, Rodeo and Guanajuato, do you think that these actually lead to an increase in group output? Or do they more just offset depletion and lower production that we’re going to be seeing elsewhere in the company?
Guillermo Gastelum: From previous production, Jason, on the gold side, it would take us probably back to what we were doing – we were producing close to 1 million ounces per year. So as you can see, the projection that we have there in 2023 is up to 600,000 ounces. And then if we think Rodeo can do 140,000, 150,000 and then Orisyvo 150,000, then with Guanajuato would offset going into the 1 million mark again. In terms of silver, though with Juanicipio and the – it will be probably to that level, an increase in case of Guanajuato because that’s a silver and gold project.
Jason Fairclough: Okay, perfect. Thank you very much.
Octavio Alvídrez: Thank you, Jason.
Operator: Our final question comes from the line of Alfonso Salazar from Scotiabank.
Alfonso Salazar: Yes, thank you for the presentation and most of the questions have been answered by now, but I have just one follow-up, one on energy. As you know, there is an energy law now on the review in Congress and is now at the [indiscernible] already passed the lower house. So I just wonder, what are the implications of these low assets to your clean energy targets? What measures do you need to take or what changes you may need to make – to reach your long-term goals in that regarding clean energy? Do you expect or you can anticipate higher costs in the future because of the law? Any comment on that would be very helpful.
Octavio Alvídrez: Yes. Thank you. That’s obviously a challenge in a country and the headwinds that I mentioned when I very briefly. Of course, we are in the start of this, let’s say, initiative by the government. And I would probably answer in two parts. One, the facilities from where we are sourcing the clean energy have already been built. So those are built, and those would not be subject to this new initiative. However, also, there is a consideration in terms of the CFE, the utility from the government supplying energy despite the fact that you may have a less costly, more efficient, cleaner energy source. So we are, of course, going into a legal front on that regard. But those are the initial steps, and there is not much to say, but we will defend somehow our rights to source our operation from cleaner and less costly energy.
Alfonso Salazar: Okay, that’s very clear. Thank you very much.
Operator: We have no further questions on the line. So I’ll hand over to your host to conclude today’s conference.
Octavio Alvídrez: Okay. Thank you very much. If you have further follow-up questions, you know that you can get a hold of Daniel Major and Patrick in the London office as well as ourselves in any time. Thank you very much all.
Operator: Thank you for joining today’s call. You may now disconnect.