Good day, welcome to the Antofagasta Half Year Results 2019 conference call. This call is being recorded. At this time, I would like to turn the conference over to Mr. Iván Arriagada, CEO of Antofagasta. Please go ahead, sir.
Thank you. Thank you for joining our call. I'm here in Santiago. Alfredo Atucha, our CFO, is here with me. Before we open the line for questions, I would like to give you a brief recap of our results. Firstly, I would say we think we delivered a solid set of results. We had a first half, which has got record copper production, which increased by 22% to 387,000 tons. This improved production performance has been essentially driven by better performance at our plants, especially Pelambres and Centinela over the past six months, and higher grades at Centinela. Costs were down significantly. We had a unit cost of $1.19 per pound. That's $0.33 lower than the same period last year.
I think this is the result of higher production, but also, and very importantly, of our efforts on productivity and cost improvements, which we have sustained now since 2015. Which explain around $0.07 per pound of the cost reduction that we've shown in the first part of the year. This is very fundamental to the way that we're running our business, and we will continue to see benefits from our cost improvement program. We have a target, by the way, for the full year of $100 million, and we achieved $61 in the first six months, and therefore expect to be able to achieve our guided target or be slightly above. In terms of EBITDA, given the fact that we have higher production and lower cost, we had an EBITDA margin of 52%, which is up compared to the first half of last year.
This is despite a decrease in the realized copper price of around 6%. EBITDA up 44% to an EBITDA margin of 52%. On the project side, very briefly, we continue the construction of the Pelambres expansion project. Work has now commenced on site. We are 20% complete. The 20% complete is mostly around progress that has been made on the engineering and procurement, and construction work is now ramping up and picking up very quickly, which is good news. As a reminder, the Pelambres expansion involves adding milling capacity in Pelambres and also the construction of a desalination water facility, which will provide water for the expansion and serve as a backup. Water is very important, certainly, as a key enabler to our operations today and generally in Chile. We had a capital expenditure in the project of around $80 million in the first half.
As I say, we do expect that to pick up in the course of the year. Looking ahead, I think we've kept our guidance on production between 750,000 and 790,000 tons, which is a record production expected for this year. No change to that. We have adjusted our guidance on unit cost by $0.05 per pound, down to $1.25, which is reflective of the fact that we think that we can continue to carry through the cost savings that we've achieved in a way that we end up with a unit cost slightly lower than we had originally expected. We think we are, therefore, in a good momentum in terms of how our plants are running.
We've got the assets, the capabilities, and a disciplined approach to capital allocation to ensure that we continue to deliver shareholder value despite the more volatile macro environment that we're witnessing. With that, let me now turn it over for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please state your name and company name before posing your question. Once again, please press star 1 at this time to ask a question. We'll pause for just a brief moment to give everyone the opportunity to signal for questions. We'll now take our first question from Jatinder Goel. Please go ahead. Your line is open.
Hi. Jatinder Goel from Exane BNP Paribas. A couple of questions, please. Firstly, on potential monetization of infrastructure at Centinela, what's your thinking on the timeline, and would you consider a more realistic option after feasibility of Centinela concentrator is done, or could you actually execute it before that as well? Second question, are you able to direct towards 2020 unit costs? You've said production will approach towards 2018, but given you've been running cost improvement initiatives and also weaker currency, which direction would you see 2020 gross unit cost versus 2019 or 2018? Thank you.
Okay. On the monetizing infrastructure, I think we've talked in the past about our view that, especially when we think of the Centinela expansion, that we would like to see the possibility of monetizing the water supply, especially because on the back of the infrastructure we have today, the project would involve an expansion. We continue to be of the same view, so that's something which we're building into the project feasibility as we are progressing it. We would not think or see that we would anticipate that because I think to a very large degree, that is linked, we think, to the potential expansion, and therefore decoupling that, we think does create some difficulties. Let me also add that we're not expecting with respect to Centinela expansion to sanction a project before 2021.
We continue to work, and this is very important, on both optimizing cost performance in Centinela, and secondly, at looking at ways to optimize the design so that we make this as capital efficient as possible. Therefore, we are making good progress in that space, but we will continue to work in that same line for the remainder of this year and fully in 2020. We'll see where that takes us too. Monetizing infrastructure is a key component of that assessment. We don't expect to bring it forward, but we certainly will talk about that as we sort of progress that alternative over time and approach 2021. On unit cost and on 2020, I think directionally what we're saying is that in 2020, production is expected to be lower than what we have guided for this year.
We will give specific guidance on that figure in the third quarter. Directionally, it will be lower. That's what we've said at this stage. Obviously, when production does come down, you have an extra pressure on unit cost. We are running very efficiently on our costs, and therefore, we think that we can compensate that pressure next year partly out of the continuing efforts that come out of these cost and competitive program. Where we will come out, again, we will guide to that in the third quarter. Obviously, we're making every effort to keep costs at levels that do not exceed $1.30, which we had guided originally. If we are going to end up this year at $1.25 or thereabout, we think we still have scope to be in the range of the $1.30 next year despite the drop in production.
I don't want to, as I said, we'll give specific guidance on that in the third quarter or fourth quarter.
Great. Thank you.
We'll now take our next question from Jason Fairclough from Bank of America. Please go ahead, your line is open.
Good morning, gentlemen. [Non-English content ] Two questions for me, one on water, then just a second one on the Centinela project. First, you've talked about the drought in the Zona Central, which sounds pretty serious. I'm just wondering how much worse does it have to get before we get an actual impact on your production or for that matter, on the production of some of the other miners operating in the region? Ultimately, do we see a risk on this year's production guidance due to shortage of water? Secondly, just on Centinela. The last figure for this project was $2.7 billion. That's based on the 2015 pre-feasibility study, obviously out of date. I recognize here that you're still working on the feasibility studies, perhaps you could discuss how some of the key concepts and macro variables have changed since the pre-feasibility study.
Yeah. Okay. [Non-English content ] On the water, I would say that certainly drought in the central part of Chile has become an issue of significance. We've been under drought now for several years, and I think this particular year has been quite dry in terms of water supply. It's a risk and it's an issue. With respect to our operations, we don't think there is a risk on production this 2019. Therefore, in our particular case, we think we're well covered. We do hear and see a lot of noise from others in the industry about water shortages and what they might be doing or how they might be impacted this year. There seems to be certainly a very broad concern. In our case, for Pelambres this year, we do not see a risk. Moving beyond 2019 is very important.
If these conditions are sustained, then obviously that risk increases and we would have to see 2020, 2021. Now we are building a desalination plant and therefore, we do have a backstop as to when that plant is built. That is in 2021. Not in 2019. If this continues, I think for the industry this may become an issue in 2020. For us. Now, what are we doing? We are certainly very much focused on using water very efficiently. One of the things is that we are reducing the discharge of water in tailings at Pelambres, ensuring that we increase the percentage of solids that helps to recycle more water. Because we've got the technology in the way that we manage thickened tailings at Centinela, some of that we're able to move to Pelambres, and therefore be more efficient in the use of water and reduce your discharge.
Secondly, making sure that our intake and transport water system is very tightly managed, fully sealed, and we don't have any leakage of water through that system. We are managing water very consciously with respect to be able to recirculate, reuse the highest percentage of water. No risk in 2019 on production. If drought continues, the risk starts to increase for us and for everybody. We've got the desal plant under construction, which I think gives us also in the midterm, a good response to that. On Centinela, you are right. The number that we have still is the $2.7 billion. Our work has focused on trying to bring, in fact, that number down. A lot of what we're doing in terms of optimizing is geared towards improving on that figure, even though we do recognize it is a 2015 number.
When we look at the macro variables, I can only comment there that we certainly have seen labor rates have gone slightly up. However, the exchange rate, especially recently, is moving in the opposite direction. I probably think that those two elements tend to cancel out. The $2.7 billion does not include monetizing the infrastructure, we think that's an added benefit. Therefore, on balance, I would say that there are elements that have gone up and others are helping. I don't think that that figure in today's money would be dramatically different, maybe slightly up, but not materially. Our design work in the feasibility is intended to bring that figure down more structurally. Therefore, we still think that we would not be above that number.
Okay. [Non-English content ] Thank you very much.
We'll now take our next question from Danielle Chigumira from Macquarie. Please go ahead. Your line is open.
Right. Thank you for taking my question. A couple of questions from me. Firstly, on the Reko Diq award, what are the next steps that we should expect, and what are you expecting in terms of timing around payment? Specifically, what hurdles would have to be reached in order for you to recognize the award in some way in your accounts? Secondly, just talking about the Centinela second concentrator, I believe, and I'm sure you'll correct me if I'm wrong, but previously you said the feasibility study is due to be completed in 2020, and now you're talking about making a decision in 2021. Is that a real slippage in terms of timing, and if so, what has caused that?
Okay. On the Reko Diq, as you know, there are two components to that. One is a judgment on whether the licenses have been taken contrary to the terms in which they were granted, which was favorable to us. Then the second ruling around the amount of compensation, which came out later, and which talks of a figure close to $5.8 billion. I think our legal team and the team that's working on this from Teck and the company is actually working on the specific next steps. I'm unable to comment here because this is obviously not an unusual circumstance. The amount is significant. The ruling is binding on the parties. There are some legal steps that need to be followed, therefore I cannot comment on the specifics.
I think this will take some time according to how the legal procedural issues evolve and move forward. We're not expecting to book anything in the short term. We haven't done it at mid-year, unlikely by the end of the year, but we will have to see. We continue to work on this, but I can't give you specific timings as this is very procedural from a legal point of view, and there's a team working on this, which is just sort of taking up the ruling that came out. On the Centinela second concentrator. No, I don't think that we have changed what we said in the past. I think what we said is that we would spend 2020 completing the feasibility, and therefore we still expect to finish it in 2020.
Which means that we would take this for a decision not earlier than 2021. I don't think that we've changed that. This is something that we've been talking about consistently, that we would not take this for a decision next year. The reason being is that we think that there is work to be done to still continue to optimize both the design, but also how we structure this. One of the key features is that we certainly want to bring the front-end capital of any investment that we make at Centinela of this type lower, and monetizing the water system is one. Whether we, for example, buy the hauling equipment or we contract out the hauling equipment during certain phases of the project is something that we're considering as well.
We think there is genuine space for value optimization in the way that we designed this. I think what we've said is that we are building Pelambres. At this stage, we want to try to do this sequentially in the sense that it's better for us to be able to move some of the project execution team to undertake this, rather than doing it concurrently. We think that taking up two projects concurrently of this size is more complex and carries more risk. We still are of the view then that we will continue to work on the feasibility 2020, hopefully finish it by the end of the year, and then take it up for consideration in 2021.
Only if we have a project that we are comfortable with and that we've been able to reduce the front-end capital to levels which we think are the right ones, and there's work to do there. The other thing is that we've been working very strongly on reducing cost at Centinela. We think a lot of the value that we can make at Centinela, both today and in the future if we undertake a project, is by running it at lower costs. That's something that we continue to work, and we want to see evidence of sustained lower costs at Centinela for a longer period, i.e., this year and next year, before also we make a decision on expanding.
Right. Very clear. Thank you.
We'll now take our next question from Daniel Major from UBS. Please go ahead, your line is open.
Hi there. Thanks. A couple of questions. Firstly, on your cost guidance, you obviously made some comments around 2020. Can you just remind us what inputs in terms of gold price, molybdenum price, and FX are incorporated in the guidance for this year? Then, the second question on the Centinela concentrator, I think you've previously spoken around a return hurdle rate of around 10% at a consensus long-term copper price. Can you give us any more clarity on what your hurdle rate assumption is and where the project currently sits relative to your return expectations at defined copper price? Thanks.
Sorry, you got cut here on the second question. Can you briefly repeat that?
Yeah. Your return hurdle rate for the Centinela expansion, what level that sits at what copper price assumption?
Okay. Yeah. Let me maybe take that, and then I'll ask Alfredo to comment on the implied prices for cost guidance. On the hurdle rate, we've been working very hard on our capital allocation framework and the decisions around that. We would expect projects to be undertaken on the basis of being able to yield a return, which is, we've said double digits. Above a double-digit return of 10%. Therefore, that's what we continue to indicate and say. We're working, obviously, in Centinela to be well above that minimum, and that's really the key focus of the project and why we continue to see opportunities to continue to refine our design and how we operate that project. That's the sort of space in which we would move on that project for it to be considered to be taken to the board. Double-digit return.
Alfredo, you can comment on the...
Sure
question around cost guidance for this year.
Yes, of course. The cash cost guidance for this year was built based on some assumptions. In terms of the exchange rate, we have used CLP 650 per dollar as an assumption behind this calculation. The gold price at $1,300. The molybdenum $10.5. This is the three main non-controllable elements used in order to build the guidance cash cost for 2019.
Thanks. Very clear. Just to follow up on the 10% hurdle rate, is it fair to assume your copper price assumption is sort of in line with the consensus, which I think sits around $3 a pound long-term?
Well, yeah. We have our own rate and our projects, by definition, are tested within a range of copper prices and some are below what you quote as consensus and some are above. We want to make these projects resistant and resilient to low price scenarios, which are below the sort of consensus figure that you've just indicated. We would run them against a range of prices for long-term, including consensus and some below. We're very keen on actually making them resilient to lower prices.
Okay, thanks. Very clear.
We'll now take our next question from Alain Gabriel from Morgan Stanley. Please go ahead. Your line is open.
Yes. Hello, gents. Two questions from my side. Do you mind commenting on the grade progression at Pelambres into 2020? You have done so for Centinela, so should we assume that Pelambres will remain flat since you haven't said anything there? The second question is on the CapEx, going into next year. I know you guys give a guidance towards year-end, however, how should we think about the total spending, in the context of your earlier comments on the phasing of CapEx, relative to 2019, $1.2 billion? Is it going to be up or it's going to be lower than 2019? Thank you.
Yeah. Okay, on Pelambres, we are running Pelambres in very good condition. I think we've seen a steady improvement in plant performance, and which is great and also, there are higher grades, compared to last year. We think that we can carry that good performance of the plant through to next year and then compensate a slight decrease in grade for next year so that production is similar to what we've seen this year. We will provide, I guess, specific guidance later. The thing that we have next year in Pelambres is that we've got, as we're building the Pelambres expansion, we may have some tie-in works from the project, and that may actually create some extra requirements for downtime. That's exactly what we're modeling now as we understand better when and where those tie-ins will be.
Without factoring that in, we would expect Pelambres to be largely flat, maybe a slight improvement with the times that may have a marginal impact. As I say, we will provide specific guidance to that in the third quarter. On CapEx, we guided this year to $1.2 billion. The CapEx figure that we reported in the first half is $466 million. That's on a cash basis. I just want to make this clear because on an accrued basis, our capital expend is around $550 million. Much closer to 50%. Where do we expect to end up this year? We'd say that at the $1.2 billion or below. I think we're seeing that we can probably keep some of the savings. There's a bit of help on exchange rate as well. Our CapEx figure for this year, we expect it to be $1.2 billion or below.
For next year, we think we have the same base of sustaining and mine development, we will have a larger expenditure associated to the Pelambres expansion project. That's because the project is moving into a phase of much higher expenditure next year. Therefore, we'll guide to a number which is north of $1.2 billion, considering that we would need to have higher expenditure at Los Pelambres. We are expecting this year that Pelambres would probably spend around $300 million, and next year it will probably be two times that number.
Thank you.
We'll now take our next question from Liam Fitzpatrick from Deutsche Bank. Please go ahead. Your line is open.
Thanks for taking the time. Two sets of questions from me. Firstly, on costs, you are guiding to quite a big uptick in the second half versus the first half. I just wanted to understand how much of that relates to labor contract bonuses, versus sort of real underlying inflation. Definitely still on costs, at Antucoya it was 220 for the first half. It's beginning to look pretty high on the global cost curve. Where do you hope to get that asset by, or that mine by the end of the year? Then separately, just on sustaining CapEx, I think you just touched on it. Where do you think sustaining CapEx in 2020, sorry, 2019, is some way above the average we've seen for the last three or four years. Is 2019 the new sort of realistic base that we should expect going forward?
Final one briefly, just when you say towards 2018 production, at this stage, are you happy for us to use 2018 production as our 2020 estimates? Thank you.
Okay. On the costs in the second half, some of the certainly cost impacts are associated to the labor negotiations. We've got, as mentioned in the past, three of them that are taking place in the second part of the year. Yes, that will have an impact. How much? We can't estimate that precisely on the grounds that those negotiations are actually taking place as we speak. They will have an impact, and some of that is factored obviously into the number that we've provided. On Antucoya, yes, Antucoya is running at costs of around $2.20. I think this is a key focus. We want to bring Antucoya costs down. We think this is an asset that when we've done all that we think we can do, should be running at around $1.70, $1.75.
A lot of scope, yes, to be able to bring costs down from Antucoya. Now, some of it involves making some upgrades in infrastructure that we're doing today to manage dust and waste ore, optimizing those activities. Some of that we're doing in the course of this year. The other factor that we think it's going to help is that we completed the renegotiation of the energy supply contract, and we're seeing some of the benefit feed into those numbers. We will see more of that because there is a stair of price reduction, more of that next year. Energy plays a big part, and that contract has already been locked in at revised terms. That is the second element. Then the third one is acid consumption.
We did have an increase in acid price, which was quite significant in the first part of the year. Antucoya is very intensive on acid consumption, which is a very important component of cost. We're seeing prices of acid ease since May, June, as a result of some smelters in Chile and elsewhere which were on maintenance, which are coming back into production, especially at Codelco. We do expect to get back to more normalized levels on acid price. Still space to go. We want to see this acid at around $1.70, $1.75. We are at $2.20. Some of that will associate to energy, acid prices, and then further improvements in the plant itself, where I believe that when we will get to $1.75, $1.70, I think in 2020.
I don't think that we will see those results this year, but we will expect to see a trend in that direction by the end of this year, but not numbers like those ones that I've quoted still. Very much a focus of what we're doing today bringing costs down at Centinela in the way that I suggest. On sustaining CapEx, the average base, if you consider sustaining and mine development, you're right, is somewhat up compared to prior years. I would say that likely to be similar next year, but then not beyond that. The reason being is that there are a couple of expenditures which are non-recurring, which we're making. The main one I would point out, which is material, is we are spending CapEx in the tailings dam at, or tailings deposit at Centinela. Building two enclosure walls, primary and secondary enclosure walls.
Obviously those construction happen only once. Subsequent to that, over certain periods, we will need to raise that wall, and that's planned in the mine plan. We have that piece of investment of sustaining CapEx, which is being undertaken this year and next, which is non-recurring, and which is somewhat more material than the sort of minor expenditure in other items. I would expect to see a level similar to this year, next year, that we will revert back to the numbers that we've seen before because of the presence of this particular project that we are undertaking. The other question was on-
It was just on your volumes for 2020, whether-
Oh, yes.
Are you saying lower than this year, or should we be using 2018 as kind of the base?
I think at this stage we're saying lower than 2019. We are honestly, we do expect to be in between 2018 and 2019. We will guide specifically to that in the next quarter.
Okay. Thank you. That was very useful.
We'll now take our next question from Ian Rossouw from Barclays. Please go ahead, your line is open.
Hi, guys. Just a question on working capital. Apart from the VAT refunds, I know Alfredo sort of talked about in the past trying to bring that working capital down. It looks like on my numbers, the working capital overall is probably the lowest it's been in four or five years. Is this now a sustainable level, or do you expect some reversal of some of the improvements in that working capital figure, excluding obviously the VAT refunds? Just a second question on, just coming back to Alain's question on CapEx. When you said you're looking to spend roughly double Los Pelambres for next year, and if you use the same sustaining CapEx and stripping as this year. Looking at the project slide, there's quite a few more projects overlapping with in 2020, like the chloride leach.
As you said, Iván, the tailings dam, sort of wall construction. Also the Esperanza strip stripping. Does that imply CapEx could be over $1.5 billion for next year?
Okay. Do you want to take the working capital?
Yeah. Okay. Well, in terms of the working capital, leaving out the VAT recovery, because as you know, this was a very specific situation. We have been working hard over the last three or four years in improving the working capital situation. Now, the figures we are presenting in the half year reflect some improvement compared to the past period, the last year. Especially, we have been working hard in terms of inventories, stocks, spares, receivables, depending on the trade, depending on the copper price and the sales volume. On the payables, we also are being more disciplined in terms of maintaining our payment terms intact. A lot of effort continuously working on the working capital and specifically on the stocks. I think that we will be able to maintain this discipline.
Perhaps we can have some variation, specific variation, depending on the production or the level of activity. Our focus is to maintain as a minimum possible the working capital, because it's very important in order to generate cash.
Okay. On the CapEx for next year. As part of the capital allocation, we have a system whereby our basically both sustaining and development projects do get prioritized and scrutinized. There's a lot of interrogation that goes into those projects. Therefore, we're constantly prioritizing and doing those which have the most impact. We've been implementing, that's been part of the reason why our capital expenditure has been within the figures that we've guided consistently. I would expect that in going through that process, which we still have to complete for next year, that we would certainly not be north of $1.5 billion. That's something that we still have to compete and we will guide. My view at this stage is that we would not exceed the $1.5 certainly, and we will be therefore below that number.
Okay. That's clear. Thank you.
Just as a reminder, ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypad. We'll now take a follow-up question from Danielle Chigumira from Macquarie. Please go ahead. Your line is open.
Hi. Thanks very much. Just a quick question on the cost improvement that you've already achieved. On the slide where you show the pro forma unit cost excluding the CP effect, does that also exclude the FX benefit that you've got? Of the $0.05 unit cost reduction, how much of that was due to FX? How much of that was due to better than expected delivery on the cost improvement program?
Well, first of all, when we are talking about the BCC program and the cost reduction, we are leaving out the impact coming from the exchange rate. All the $100 million we have as a target for this year or the $61 million captured so far is fully related to effective cost reduction, and not including the exchange rate. Of course, the exchange rate has been impacting positively our cost performance this year, in $0.04. The most important impact is coming from our BCC program with $0.07 positive impact in our cost performance. Cost is our focus. It's a priority. It's a strategic imperative. We will continue to work in this hard. It's part of our core activities. We think that we will be able to maintain this level of cost efficiency over the next year.
Of course, we are continually looking for new alternative, new efficiencies, contract negotiations, increasing our purchasing level in China, better uses of mining and resources. It's a combination of many activities in order to attack continuously our cost performance. For broadly, now we are thinking to start working in a digital transformation program in order to improve and increase our automation process. Of course, to capture some other benefits in the future of this program. BCC is key for the performance of the company, and we will continue to be completely focused on that.
I think just to complement, Alfredo was saying that if we had a unit cost reduction of, I think it's around $0.26 per pound, four of them come from exchange rate and inflation, four out of 26. How much is the cost program saving? It's seven out of 26, and those seven are hard savings, so they exclude any impact of exchange rate, which is separately accounted for in that initial figure that I mentioned. We think there is scope when we look forward, especially for more cost improvements to come. As Alfredo was saying, we have been working on some digital transformation of support functions, and then other automation opportunities at our sites. We think this will feed a pipeline of projects which will continue to enable us to reduce cost. We set a target this year of hard savings of $100 million.
We're going to aim certainly to have a number which is at least $100 million next year, and continue to work on this space, which is crucial. We're also getting some benefits, and this is important, on energy as we decarbonize our energy supply contracts. We've done that for Zaldívar and Antucoya we've mentioned, and we are also working on our contracts at our other sites, especially at Centinela. If we are successful at doing that, we do expect to get help on energy costs as well.
Great. Thank you for the comment.
We'll now take our next question from Jatinder Goel. Please go ahead. Your line is open.
Hi, thanks. A couple of follow-ups, please. Some of the media reports suggested you have done interim TCRC settlement for 1H of next year. Just trying to understand what's your thinking behind that. Would you be moving away from the benchmark, or is it just a one-off on some limited volumes for Pelambres? Second one, on Zaldívar, obviously the chloride leach is dependent on your water right extension beyond 2025. Do you expect a decision this year? You're aiming to present it to the board this year, but if you don't get the approval and it's still in process, it moves to next year? Thank you.
Yeah. On TCRC, I think what we've seen certainly is a downward trend in TCRCs, reflective of the fact that clean concentrates, especially in China, are in shortage. Now, the way that we are approaching our negotiations is that we've introduced some changes. We essentially are for a system which reflects the reality of market supply and demand for concentrates in the region in which we sell the product. Therefore, we have now closed negotiations in some instances outside what would be the normal season in which the benchmark gets established. Yes, we are moving to a system which is different, and I think the purpose is to be able to better reflect the exact market conditions which determine price given the supply and demand available in specific regions.
This is not a on or off or white or black and white, but we are trending in that direction, and I think that's positive in the sense that TCRCs better reflect, or the process is a better mechanism to discover the right price considering the supply and demand conditions prevailing at any particular time. On Zaldívar, we have continued to progress our permitting. We will have to make a decision by the end of this year. We probably won't have the final say on the permit, but we would only make it on a clear indication and view, at that time, that the permit is sort of forthcoming or likely. We are going to have to take that perspective. As I say, we do expect that that's going to be favorable.
We're not going to have the permit on firm terms, I think by the end of the year is a bit too soon. We're working the process, and the process does involve a period of questions and engagement with the relevant agencies, and we are working with them, providing answers to their questions and providing all the sort of hard evidence on the supporting hydrogeological models and the like. We think that process will move into 2020, and therefore, we will have to make a decision before. If done, it would be on a view that this is trending in the right direction.
Okay, thank you. If I could just be a bit more clear on that. Is there a necessity to approve it this year? Why not wait for the permit?
Well, our view is that this is a project which creates significant value and has a very high return because it does impact our recoveries significantly. Therefore, we want to do it as soon as we can. Now, the payback of the investment is probably within the timeframe of when our water rights expire. From that point of view, we think there is some protection there, even on a downside case where the permit not to be extended. That's an added component of why we think we can move ahead with this decision if we see things trending favorably. The payback of the investment is within the timeframe when we still have the valid permanent waters in place.
Understood. Thank you so much.
We'll now take our next question from Patrick Jones. Please go ahead. Your line is open.
Hi, good afternoon. Just a follow-up on the issue around Centinela and you're obviously quite keen to take out more cost there. Just sort of tying that into the approval around Esperanza South pit and that project. Just tying these together, do you think there's any potential that the reduced variability and the increased production will at least offer a decent amount of cost savings there, or production unit costs? That's it for me.
Yeah. I think the project of opening up the Esperanza South pit is an important one because it does, in our view, provide flexibility of feed into the Centinela concentrator. By doing that, we are actually able to smooth some of the variation in grade that we experience. Variability in mining is important because normally, the lower variability, the more stable and the better you can manage your costs. Variability tends to mean higher costs normally. From that point of view, yes, it does have an impact on our ability to sustain costs at lower level. The other benefit is flexibility and therefore, less reliance on one source of feed for the plant. A lot of benefits we think coming out from Esperanza.
One of the other things that our team is doing in Centinela is that we're now running with two pits for the concentrator. Our team is now doing the mine planning in such a way, and it has evolved in such a way, that we are actually able to make some level of optimization or achieve a level of optimization, which we were not achieving before. In the sense that we're able to manage the district as a single district, or say one ore body, even though you have two pits and you're able to change the sequence or resequence how you feed the plant. That means that you're able to essentially, get better grade earlier into the plant. Lots of benefits from having another pit like Esperanza South for the concentrator, both on cost, flexibility, smoothing of grades, but also optimization of higher grade sequencing.
Okay. Thank you.
We'll now take a follow-up question from Ian Rossouw from Barclays. Please go ahead. Your line is open.
Thanks, guys. Just a quick follow-up on what Alfredo said in response to the question on the assumptions within the cost guidance. The numbers he gave seems to be different from what you actually provided in the Q2 production statement. I just wanted to double check if you could just make sure or check whether those numbers are the correct ones he's given us.
Let me see. I don't see any.
I think the numbers you gave, Alfredo, was from the Q4 production statement last, in the beginning of the year.
Yep. Let us check. You got the.
I can follow up offline. That's fine.
Yeah, no, I think we've got one-
The only change we have made is basically the net cash cost, bringing to $1.30 per pound.
I see your point. Yeah. Alfredo gave you the assumptions on the $1.30.
That's right.
Is that, yeah.
The assumption in terms of gold price and moly price and exchange rate.
That's what he gave you. I think the numbers he gave you on moly price and gold and exchange rate are the ones supporting the $1.30.
Okay.
That was the question? Or what was your question?
Yeah, the updated guidance is what you said in the Q2 statement, which uses essentially H1 actual prices and.
Yeah. No, exactly.
Okay. That's fine.
The question is Yeah. No, what we've said is what we've used for the revised guidance is the real prices during the first half.
Okay. That's perfect. Thank you.
Yeah. Okay. Sorry, we got confused of what the question was. I hope that's clear, eh?