Earnings Call: H1 2019

Aug 22, 2019

Good day, and 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. Ivan Arriaga, CEO of Antal. Agusta, please go ahead, sir. Thank you. Thank you for joining our call. I'm here in Santiago, and Alfredo Tucci, 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 is it's got record copper production, which increased by 22% to 387,000 tons. And this improved production performance has been essentially driven by better performance at our plants, especially Pelambres and Centinela over the past 6 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. And 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 and which explain around $0.07 per pound of the cost reduction that we've shown in the 1st part of the year. This is very complementary 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 $100,000,000 and we achieved $61,000,000 in the 1st 6 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. And this is despite a decrease in the realized copper price of around 6%. So EBITDA up 44% to an EBITDA margin of 52%. On the project side, very briefly, we continue the construction of the Los 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 $80,000,000 in the first half. And 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. And 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 are witnessing. And so with that, let me now turn it over for questions. Thank you, sir. Potential monetization of infrastructure at the Centinela. What's your thinking on the time line? 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? And 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. So 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. Now 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. However, 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. And 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. So, we'll see where that takes us to. And monetizing infrastructure is a key component of that assessment. So, 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 2020, I think we directionally, what we're saying is that in 2020, production is expected to be lower than what we have guided for this year. And we will give specific guidance on that figure in the Q3. So directionally, it would be lower. That's what we've said at this stage. Now 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 this cost and competitive program. Where we will come out? Again, we will guide to that in the Q3. But 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 dollars or thereabout, we think we still have scope to be in the range of the $1.30 next year despite the drop in production. But I don't want to, as I said, we'll give specific guidance on that in the Q3 or Q4. Great. Thank you. We'll now take our next question from Jason Farclough from Bank of America. Please go ahead. Your line is open. Good morning, gentlemen. Buenos dias. Two questions for me. 1 on water and 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 $2,700,000,000 that's based on the 2015 pre feasibility study. So obviously out of date, recognize here that you're still working on the feasibility studies, but perhaps you could discuss how some of the key concepts and macro variables have changed since the pre feasibility study? Yes. Okay. So on the and Guana Diaz, 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. So it's a risk and it's an issue. With respect to our operations, we don't think there is a risk of on production this 2019. We 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. So there seems to be certainly a very broad concern. But in our case, for Pelambres this year, we do not see a risk. Now the 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, as you know, building a desalination plant, and therefore, we do have a desalination plant, and therefore, we do have a backstop as to when that plant is built, but that is in 2021. So 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. And because we've got the technology in the way that we manage fricking tailings at Centinela, some of that we're able to move to Palamedes and therefore be more efficient in the use of water and reduce your sort of the discharge. And then 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. So 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. But we've got the diesel plant under construction, which I think gives us also in the sort of the midterm a good response to that. On Centinela, you are right. I mean, the number that we have still is the $2,700,000,000 Our work has focused on trying to bring, in fact, that number down. So 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. Now when we look at the macro variables, I can only, I mean, comment there that we've certainly have seen labor rates have gone slightly up. However, the exchange rate, especially recently, is moving in the opposite direction. So I probably think that those two elements tend to cancel out. The $2,700,000,000 does not include monetizing the infrastructure. So we think that's an added benefit. And therefore, on balance, I would say that there are elements that have gone up and others are helping. So I don't think that, that figure in today's money would be dramatically different, maybe slightly up but not materially. And our design work in the feasibility is intended to bring that figure down more structurally, yes? So therefore, we still think that we would not be above that number. And muchas gracias, thank you very much. We'll now take our next question from Danielle Chigumala 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 Ricoh Deeq award, what are the next steps that we should expect? And what are you expecting in terms of timing around payment? And specifically, what hurdles would have to be reached in order for you to recognize the award in some way in your account? And secondly, just talking about the Centinela 2nd 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. I mean on the RECCO dig, we just got the as you know, the word there are 2 components to that. I mean, 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. And then the second ruling around the amount of compensation, which came out later and which talks of a figure close to $5,800,000,000 Now I think our legal team and the team that's working on this from TETI and 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. And therefore, I cannot comment on the specifics, but I think this will take some time according to how the legal procedural issues evolve and move forward. So we're not expecting to book anything in the short term. We haven't done it at midyear, unlikely by the end of the year, but we will have to see. So 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 has just sort of taken 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 then we would take this for a decision not earlier than 2021. So 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. And 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. And 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 1, 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. So we think there is genuine space for value optimization in the way that we designed this. And also, 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 2 projects concurrently of this size is more complex and carries more risk. So 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. And 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. We'll now take our next question from Daniel Major from UBS. Please go ahead. Your line is open. Hi, there. Thanks. 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? And then the second question on the Centinela concentrator. I think 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 relative to your return expectations at a defined copper price? Thanks. Sorry, I didn't get exactly sorry, you got cut here on the second question. So it's the can you repeat that? Yes. Your return hurdle rate for the Centinela expansion, what level that sits at? What cover price extension? Yes. Okay. Okay. On the so let me maybe take that, and then I'll ask Alfero to comment on the implied prices for cost guidance. The on the hurdle rate, I mean, we've been working very hard on our capital allocation framework and the decisions around that. And we would expect projects to be undertaken on the basis of being able to yield a return, which is sort of, we've said, double digits. So above a double digit return of 10%. And therefore, that's what we continue to indicate and say. Now we would 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. So 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. So double digit return. And Alfredo, you can comment on the question around cost guidance for this year. Yes, of course. Well, the cash cost guidance for this year was built based on some assumptions. In terms of the exchange rate, we have used a Ps. 650 per dollar as an assumption behind this calculation. The gold price at 1300 dollars and the Moriteno $10.5 So this is the 3 main elements, non controllable elements used in order to build the guidance cash cost for 2019. Thanks. Very clear. Just a follow-up on 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, yes, we have our own rate, but yes, we have our own rate and our projects by definition are tested within a range of copper prices and some below what you quote as consensus and some are above. And we want to make those and these projects resistant and resilient to low price scenarios, which are below the sort of consensus figure that you've just indicated. But we will run them against a range of prices for long term, including consensus and some below. And we're very keen on actually making them resilient to lower prices. We'll now take our next question from Alan 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 great progression at Pelambres into 2020? You've done so for Centinela. So should we assume that Pelambres will remain flat since you haven't said anything there? And 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, dollars 1,200,000,000 is it going to be up? Or it's going to be lower than 2019? Yes. Okay. On Pelambres, yes, I mean, we are running Pelambres in very good condition. I think we've seen 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 very or a slight decrease in grade for next year. So the production is similar to what we've seen this year. Now 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. So that's exactly what we're modeling now as we understand better when and where those targets will be. But without factoring that in, we would expect parameters to be largely flat, maybe a slight improvement with the times that may have a marginal impact. And as I say, we will provide specific guidance to that in the Q3. On CapEx, I mean, we guided this year to 1.2 percent. The CapEx figure that we reported in the first half is 4.66 dollars That's on a cash basis. I just want to make this clear because on an accrued basis, our capital spend is around 550,000,000 euros so much closer to 50%. So where do we expect to end up this year? We'd say that at the $1,200,000,000 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. So our CapEx figure for this year, we expect it to be 1.2 or below. For next year, we think we have the same base of sustaining and mine development, but we will have a larger expenditure associated to the San Andres expansion project. And that's because the project is moving into a phase of much higher expenditure next year. And therefore, we probably I mean, we will guide to a number which is north of $1,200,000,000 considering that we would need to have higher expenditure at Los Pelambres, all right? We are expecting this year that Pelambres will probably spend around $300,000,000 and next year, it will probably be 2x that number. 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. Secondly, still on costs at Anticoia, it's 220 for the first half. It's beginning to look pretty high on the global cost curve. I mean, where do you hope to get that asset by or that mine by the end of the year? And then separately, just on sustaining CapEx, I think you just touched on it. But where do you think sustaining CapEx in 2020 sorry, 2019 is somewhere above the average we've seen for the last 3 or 4 years? Is 2019 the new sort of realistic base that we should expect going forward? And then 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? Yes. Okay. So 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, 3 of them that are taking place in the 2nd part of the year. So yes, that will have an impact. And how much? We can't estimate that precisely on the grounds that those negotiations are actually taking place as we speak, but they will have an impact. And some of that is factored, obviously, into the number that we've provided. The on Antucoia, yes, Antucoia is running at costs of around 2 $20 And I think this is a key focus. I mean, we want to bring Antucoia 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 So a lot of scope, yes, to be able to bring costs down. Now some of it involves making some upgrades in the structure that we're doing today to manage dust and waste ore, optimizing those activities. And some of that we're doing in the course of this year. The other factor that we think is 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. And we will see more of that because there is a stare of price reduction, more of that next year. So energy plays a big part, and that contract has already been locked in at revised terms. So that is the second element. And then the third one is asset consumption. We did have an increase in asset price, which is quite significant in the 1st part of the year. And Antigoya is very intensive on asset consumption, which is a very important component of cost. Now we're seeing prices of asset ease since May, June as a result of some smelters in Chile and elsewhere, which we are in maintenance, which are coming back into production, especially at Kolenco. So we do expect to get back to more normalized levels on asset price. So still space to go. We want to see this asset at around $1.70, dollars 1.75 We are at $2.20 Some of that will associate to energy, asset prices and then further improvements in the plant itself, where I believe that we are when we will get to $1.75, $0.70 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. But very much a focus of what we're doing today, bringing costs down at Santinela 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. And I would say that likely to be similar next year, but then not beyond that. And the reason being is that there are a couple of expenditures, which are nonrecurring, 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 2 enclosure walls, primary and secondary enclosure walls. And obviously, those construction happen only once. Subsequent to that, over certain periods, you will need to raise that wall and that's planned in the mine plan. But we have that piece of investment of sustaining CapEx, which has been undertaken this year and next, which is nonrecurring and which is somewhat more material than the sort of minor expenditure in other items. So I would expect to see a level similar to this year, next year, but then 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. And then on the other question was on It was just on your volumes for 2020, whether are you saying just lower than this year? Or should we be using 2018 as kind of the base? I think yes, I think at this stage, we're saying lower than 20 19. We don't honestly, we do expect to be in between 2018 2019, and we will guide specifically to that in the next quarter. We'll now take our next question from Ian Russell from Barclays. Please go ahead. Your line is open. Hi, guys. Just a question on working capital. I mean apart from the VAT refunds, I know Alfredo sort of talked about in the past sort of trying to bring that working capital down. And it looks like on my numbers, the sort of working capital overall is probably the lowest it's been in 4, 5 years. Is this now a sustainable level? Or do you expect some reversal on of some of the improvements in that working capital figure, excluding obviously that refunds? And then just a second question on just coming back to Alain's question on CapEx. When you said you're looking to spend roughly double loss per Lambres for next year, and if you use the same sustaining CapEx in stripping as this year and looking at the project slide, there's quite a few more projects overlapping with in 2020 like the chloride leach. As you said, Ivan, the tailings dam sort of wall construction. And then also the Esperanza sewer stripping. So does that imply CapEx could be over EUR 1,500,000,000 for next year? Okay. Do you want to take the capital? Yes. Okay. Well, in terms of the working capital, we're leaving out the VAT recovery because, as you know, this was a very specific situation. We have been working hard over the last 3 or 4 years in improving the working capital situation. Now the figures we are presenting in the half year reflects 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, on the sales volume. And on the payables, we also are being more disciplined in terms of maintaining our payment terms intact. So 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. But 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, the what we're we have a as part of the capital allocation, we have a system whereby our basically both sustaining and development projects do get prioritized and scrutinized. And there's a lot of interrogation that goes into those projects. And therefore, we are constantly prioritizing and doing those which have the most impact. So 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. So 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 1,500,000,000 dollars But that's something that we still have to compete and we will guide. But my view at this stage is that we would not exceed that 1,570,000,000 and we will be therefore, below that number. Okay. That's clear. Thank you. We'll now take a follow-up question from Danielle Chugamira from Macquarie. Please go ahead. Your line is open. Hi, thanks very much. And just a quick question on the cost improvement that you've already achieved. So on the slide where you show the pro form a unit cost excluding the CPP effect, does that also exclude the FX benefit that you've got? And of the $0.05 unit cost reduction, how much of that was due to FX? And how much of that was due to better than expected delivery on the cost improvement program? Yes. Well, 1st of all, when we are talking about the PCC program and the cost reduction, we are leaving out the impact coming from the exchange rate. So all the $100,000,000 we have as a target for this year or the $61,000,000 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 But the most important impact is coming from the PCC program with $0.07 positive impact in our cost performance. Cost is our focus. It's a priority. It's a strategic imperative. And we will continue to work in this hard. It's part of our core activities. And 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. So it's a combination of many activities in order to attack continuously our cost performance. Probably now we are thinking to start working in a digital transformation program in order to improve and increase our automation process and, of course, to capture some other benefits in the future of this program. So PCC is key for the performance and for the performance of the company, and we will continue to be completely focused on that. Yes. And I think just to complement, I mean, as Fedor was saying, so if we had a unit cost reduction of, I think it's around $0.26 per pound, 4 of them come from exchange rate and inflation, 4 out of 26. And how much is the cost program saving? It's 7 out of 26. And those 7 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, and 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 $100,000,000 We're going to aim certainly to have a number which is at least $100,000,000 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 Saltiva and Tucoya, we've mentioned. And we are also working on our contracts at our other sites, especially at Centinela. So if we are successful at doing that, we do expect to get help on energy costs as well. We'll now take our next question from Yatindir 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 and would you be moving away from the benchmark or is it just a one off on some limited volumes for lembres? Second one, on Zaldivar, obviously, the chloride leach is dependent on your water right extension beyond 2025. Do you expect a decision this year? Because 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, then it moves to next year? Thank you. Yes. So 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. And therefore, we have now in some instances outside what would be the normal season in which the benchmark gets established. So 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're trending in that direction. And I think that's positive in the sense that TCRCs better reflect all the process is a better mechanism to discover the right price considering the supply and demand conditions prevailing at any particular time. On Saldivar, yes, 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. So we're going to have to take that perspective. As I say, we do expect that's going to be favorable, but we're not going to have the permit on firm terms, I think, by the end of the year. It's a bit too soon. We're working the process. 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. But if done, it would be on a view that this is trending in the right direction. Okay. 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 is it creates significant value and has a very high return because it does impact our recoveries significantly. And therefore, that we want to do it as soon as we can. Now the payback of the investment is probably within the time frame of when our water rights expire. So from that point of view, we think there is some protection there even on a downside case where the permit not to be extended. So that's an added component of why we think we can move ahead with this decision if we see things trending favorably because the payback of the investment is within the time frame when we still have the valid permitting 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 sort of on the issue around Centinela and you're quite keen to take out more costs there. Just sort of tying that into the approval of Esperanza pit and that project. So 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 is it production in unit costs? That's from that's me. Yes. I think we've the project of opening up Esperanza Sur pit is an important one because it does, in our view, provide flexibility of feed into the Centinela concentrator. And by doing that, we are actually able to smooth some of the variation in grade that we experienced. And variability in mining is important because normally, the lower variability, the more stable and the better you can manage your costs. So variability tends to mean higher costs normally. So from that point of view, yes, it does have an impact on our ability to sustain costs at lower level. But the other benefit is flexibility and therefore less reliance on one source of feed for the plant. So lots of benefits, we think, coming out from our cancer. One of the other things that our team is doing in Centinela is that we're now running with 2 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 was we were not achieving before. And in the sense that we're able to manage the district as a single district or say one ore body even though you have 2 pits and you're able to change the sequence or re sequence how you feed the plant. And that means that you're able to essentially get better grade earlier into the plant. So lots of benefits from having another pit like Esperanza stood for the concentrator, both on cost, flexibility, smoothing of grades, but also optimization of higher grade sequencing. We'll now take a follow-up question from Ian Rousseau 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 you gave seems to be different from what you actually provided in the Q2 production statement. So 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? Yes. Let's just check I can follow-up offline, sorry, that's fine. Yes. No, I think we've got one The only change we have made is basically the net cash cost, bringing to $1,030,000,000 in total per pound. But we I see your point. Yes. As Pedro gave you the assumptions on the 130. That was is that yes, what do we The assumption is then of both price and mortgage price and exchange rate. Yes. Is that that's what he gave you. Those are I think the numbers he gave you on copper price sorry, on moly price and gold and exchange rate are the ones supporting the 130. That was the question. What was the question? Yes. Just so then the updated guidance is what you said in the Q2 statement, which uses essentially H1 actual prices and fixed Yes. No, exactly. Exactly. Yes. So the question is yes. No, what we said is what we've used for the revised guidance is the real prices during the first half. Okay. That's perfect. Perfect. Thank you. Okay. Sorry, we got confused of what the question was, but I hope that's clear.