Good morning, ladies and gentlemen. My name is Andrew Lindsay. I run Antofagasta's office in London. Today we bring you our half-year results webcast. This year, for the first time in many years, we are bringing it from Santiago. We have here Iván Arriagada, our Chief Executive, and Alfredo Atucha, our CFO, who will take you through the presentation. Hand you over to Iván.
Thank you for your introduction, Andrew, and welcome to Antofagasta webcast and conference. I would like to start with a brief overview of our performance during the first half of the year. Alfredo will take you through our financial results. I will talk about the copper market and our development options with a focus on value delivery and return. I will close with our guidance for the year, which is unchanged, and key messages before opening the floor for questions. I'm pleased to start by saying that there have been no fatalities at the group this year. Indeed, we have had no fatalities since 2016. We are working hard to ensure that this continues to be the case for the rest of the year and the years thereafter. We continue to focus on reporting high potential incidents and on the verification of critical safety controls.
We have extended the focus we apply to safety to also include health. This will further help our part efforts to prevent future risks of disease or injury as a result of tasks carried out today. As expected, it has been a challenging first half of the year, with lower grades impacting our performance. It is important to remember that we only said that 2018 would be a year of two very distinct halves. As we have been guiding previously, our production profile for the year is skewed to the second half as grades are projected to increase throughout the year, allowing us to meet full year guidance. This improvement in grades will also be maintained and carried into 2019. The greatest improvement in performance is expected at Centinela concentrates, where the increase in grade will be the most pronounced as mine moves into higher-grade areas of the Esperanza pit.
We also expect to achieve higher recoveries at Zaldívar and Antucoya. In both cases, processing conditions have been adjusted earlier in the year to optimize recoveries, but the typically more extended leaching cycles will result in improvements later in 2018. There are some headwinds, such as cost escalation from input prices and a stronger Chilean peso. We remain focused on costs, operating consistently and using all of the capacity at our operations. At the same time, we continue advancing our growth alternatives at Los Pelambres and Centinela and focus on returns to shareholders. You have all seen this slide before, it is central to how we operate and our decision-making process for capital allocation is simple.
Cash is applied first to maintaining our operations, including sustaining CapEx and mine development, and is then allocated to pay dividends according to our minimum committed payout ratio of 35% of underlying net earnings. We then consider capital investment in development options with a strict focus on returns. We then excess cash return to shareholders, typically by paying a larger final dividend. The 2017 total dividend, which was completed in May this year, was $500 million, equivalent to a pay ratio of 67%, and the interim dividend this year is $67 million, which represents 35% of net earnings. In the period, we also repaid some $310 million of debt. Turning to the highlights during this period. As I mentioned earlier, during this first half year, we had no fatalities. In terms of copper production, we produced 317,000 tons in half one.
As you will recall from the beginning of the year, we planned to produce 45% of the annual production during the first half of the year. If you allow for the 9,200 tons of copper in concentrate stockpile at Los Pelambres at June close, as a result of the pipeline blockage, we achieved this. Our production guidance is unchanged for the year at a range of between 705,000 and 740,000 tons and a net cash cost of $1.35 per pound. We had labor negotiations with the two main unions at Los Pelambres, which were completed successfully. Our next scheduled negotiation is not until next year.
As part of our plan for monetizing some of our infrastructure assets, in July, we announced that we came to an agreement to sell the open access and regulated sections of Centinela transmission lines for $117 million. We are considering divestment alternatives for some of our other energy and water assets. Social and environmental issues are important to the sustainability of our business. The way we approach this is key. At Zaldívar, we submitted an environmental impact assessment to the authorities to extend our water permit to match the life of mine, currently extending it to 2029. We also entered in Zaldívar into a renewable power agreement. During this first half of the year, we have continued working on optimizing our assets. Los Pelambres continued delivering high performance.
The blockage of the concentrate pipeline was an isolated incident as we have moved to more intensive preventive maintenance practices and have adjusted our procedures to avoid this type of event recurring. Los Pelambres received approval for the environmental impact study for the phase one expansion. I shall refer to this in more detail in the growth alternatives section. At Centinela, we have added a second line of oxides with the addition of a new open pit mine and a plant, including crushing and heap leaching to feed the existing SXEW facility. Encuentro Oxides is ramping up and is expected to contribute some 30,000 tons of copper this year. The moly plant is also ramping up at Centinela. We shipped our first cargo of moly from Centinela in July.
As mentioned before and as part of our plans, we agreed to the sale of a section of the power transmission lines for $117 million at Centinela as well. At Antucoya, we are focused on further recovery optimization, and we're looking at ways to further improve dust management and spent ore disposal to cater for the high level of fines in the mined ore. At Zaldívar, we continue to optimize recoveries for high sulfide content ore. Actions taken include reducing the height of the leach pads and adding chloride following the M-ITIA patented process. During the first six months of the year, Zaldívar signed a new power purchase agreement, which will bring its energy cost down from 2020 onwards, and it will be the first mine in Chile to operate with 100% of renewable energy.
I will now hand over to Alfredo, who will give you some more detail on our financial performance.
Thank you, Iván. Let's now move to our financials. Let's start with a brief overview before going into more detail. Revenue rose by 3.6% to $2.1 billion for the year, while EBITDA was $904 million, 16% lower than in the same period last year. This is consistent with our previous guidance of lower sales tons and higher production costs impacting our first half EBITDA. Earnings per share totaled $0.194 per share, 34% lower than in the same period last year due to lower EBITDA and higher depreciation and amortization charges, as Encuentro Oxide is now in production. Operating cash flow at $890 million was down 22% because of lower EBITDA, and net cash costs were $1.52 per pound. Our EBITDA decreased by $175 million to $904 million in H1 2018.
The impact of higher realized copper, gold, and molybdenum prices was $239 million on revenue, partially offset by lower sales volume because of planned lower mining grades, which reduced revenue by $175 million. Mining costs increased by $191 million, partially due to the start of the Encuentros Oxide mine and plant. Costs were also impacted by the strengthening of the Chilean peso and higher input prices, especially energy and diesel, acid, and steel-based consumable like grinding balls. Additionally, we spent $19 million more on exploration and evaluation as we move to progress exploration work at what we consider a highly prospective target in Chile. Evaluation expenditure at Twin Metals also increased following the reaffirmation of the project right to renew its mineral lease. The contribution to our transport division associated and joint venture has also decreased by $9 million.
At the railway, although transport volumes increased by 2.2%, higher diesel costs reduced margin temporarily as this gets passed through to the customers. Turning to cost. The top graph shows the movement in our cash cost before the credit by mine. Cash cost before the credit was up $0.36 per pound compared with the same period last year. All operations were affected by the stronger local currency and higher input prices. In the case of Los Pelambres, in addition to costs, we were impacted by the one-off signing bonus. However, after by-product credit, Los Pelambres' unit cost of $1.04 per pound, was 5% lower in the first half compared to last year.
At Centinela, the stronger local currency and higher energy, diesel, and acid prices were combined with the new Encuentro Oxides mine and plant coming into production and ramping up to achieve full capacity later in 2018. In addition, lower grade resulted in lower absorption of fixed costs as copper production declined. At total group level, by-product credits were $0.40 per pound for the first half, $0.08 per pound higher than in 2017, which brought our net cash cost to $1.52 per pound. In the bottom graph, you can see the driver of the change in the cash cost. Our successful cost and competitiveness program achieved $54 million in savings, reducing costs by seven cents per pound during the first six months of the year.
Expected lower production for the first half of 2018 impacted unit cost by $0.29 per pound, while exchange rate, inflation, and input costs brought cost up by $0.13 per pound. As you know, we implemented our cost and competitiveness program back in 2014, and since then, nearly $580 million has been removed from our cost structure. These improvements are not just something that we do in the downturn, but are something that we strive to do all of the time, just in the same way as we always strive to improve safety. Our target this year is $100 million, of which $54 million has been captured so far, and a large portion of the annual target has been already identified for our team.
One of the main goals of this program is to improve the structural competitiveness of the group. We believe that by embedding our program framework in the company, we will achieve this saving in a sustainable way. We are committed to continue working to improve our cost position. The total capital expenditure for the half year on a cash basis was $422 million, and we are on track to be at or below the $1 billion guidance for the year. As we explained at the beginning of the year, in 2018, sustained capital is projected to include a concentration of scheduled mine fleet investment and [Toby Dale well] enlargement costs during the year. Moving on to cash flow and the movement in the group net debt position.
Net debt decreased by $79 million before paying the final 2017 dividend of $400 million, which took the closing net debt to $781 million. Cash flow included EBITDA from associates of $845 million, plus a cash positive contribution working capital movement of $46 million. Main cash outflow included taxes paid during the period, which were higher than in the same period last year, even though pre-tax profit reduced. Current year provisional tax payments are based on prior year profit, which were higher in 2017. Tax payment also include $148 million of payment and settlement of the sustained balance in respect of the 2017 tax charge. It is not shown in the graph, scheduled debt repayments totaling a net of $308 million were made during the first half of this year.
As at the end of the period, our net debt/EBITDA ratio was 0.32 times, maintaining the strength of our balance sheet. I would like now to pass you back to Ivan. Thank you very much.
Thank you, Alfredo. I would like to say a few words about the copper market. The outlook for copper in the medium term remains very positive. China continues to grow strongly, as do the other major economies in the world, and the role of copper in a more sustainable and green economy is well-recognized. On the supply side, significant constraints remain given grade decline and the long lead times enveloping the low production expected from the new projects in the industry's pipeline. In the shorter term, we expect volatility in copper prices to persist. Uncertainty arising from the ongoing global trade negotiation is impacting all commodities. In the case of copper, although we have not seen any discernible impact on demand yet, the market seems to have already reacted.
To date, disruptions to global supply have been lower than normal, and currently everyone is watching labor negotiations here in Chile. The main risk, of course, is that a trade war may impact global trade and that will be negative for commodities, especially if it were to have a knock-on effect on economic growth in emerging markets. In the meantime, the impact is being felt through the short-term price decline. We are well positioned, especially with our improving grade profile, and in the long term, the outlook continues to look very positive for copper. I'll take you through our growth opportunities. During the year, we have continued progressing with our two main development projects, the Los Pelambres incremental expansion and the expansion alternatives at Centinela.
By the end of this year, we expect to approve the $1.3 billion Los Pelambres expansion, with production starting towards the end of 2021, adding 55,000 tons of copper production a year. At Centinela, we will decide on whether to expand the existing plant or build a separate one by the end of the year. In either case, we expect production to start in 2023. The second concentrator would add 180,000 tons of copper equivalent, and the alternative expansion would be smaller, and we're working on quantifying this at the moment. In addition, we have continued reshaping our portfolio, investing in mining projects and divesting some of our non-mining assets. We announced the sale of the Centinela transmission lines in July, and we're now considering monetizing the value of some of our other infrastructure and equity investments. Remaining focused on copper mining is core to our strategy.
On guidance, as I mentioned earlier, our guidance isn't changed. For the full year 2018, production guidance is in the range of between 705 and 740,000 tons, and net cash cost to be close to $1.35 per pound, assuming no further strengthening of the Chilean peso and current metal prices. For the second half of the year, you will see our production up as grades will grow quarter by quarter, and at the same time, our cost will decrease to reach our targets. Let me conclude then by summarizing the main points. As expected, this has been a challenging first half of the year, and grades are expected to improve in the second half of the year, and that will carry on into 2019. We remain focused on cost and operating consistency, using all of the spare capacity at our operations.
Our growth projects are on track, and we are committed to maintaining our financial discipline. We have low debt levels and have a flexible and robust balance sheet. Thank you for your time, and now I will be happy to take any questions that you may have.
Thank you. If you would like to ask a question on the call, please signal now by pressing star one on your telephone keypad. Press star one to ask a question. We can now take our first question from Daniel Major from UBS. Please go ahead.
Hi there. Thanks very much for the call. A few questions. Can you give us any guidance on your expected expenditure in exploration and evaluation and also corporate and other lines in the second half of this year and into next year? Secondly, on cost, I believe there were a number of one-off items that are not captured in the net cash cost guidance, some increases in provisions, environmental expenditure, et cetera. Can you give us any guidance on those cost items going forward, whether they will be repeated? The third question, we're over halfway through the year. Can you give us any preliminary guidance on CapEx in 2019, assuming that you approve the Los Pelambres expansion in line with your plans by the end of the year? Thanks.
Okay. Look, on costs, the first thing I would stress is that if you look at our unit cost performance in the first half of this year compared to the prior year, 80% of that is linked to lower production volume. Therefore, as we move into the second half, the rate of absorption of our fixed costs increases due to higher grade and higher production, and therefore, we expect to see that therefore removed from our cost increase and cost base. The balance of the cost increase on a unit basis is exchange rate and input costs, and about between half and two-thirds of that was actually compensated by our cost and competitiveness program. As you mentioned, we've had a few one-off items. There was some environmental compliance expenditure.
We also spent some amount in what's the sort of closure of some material assets, and those are one-off, and therefore, we do not expect those to recur in the second half. We're not expecting any material, I would say, one-off items or charges as we move into the second half. The rate of absorption out of higher production, which is the main component of the unit cost increase in the first half, we think will help our cost come down quite significantly in the second half. In terms of exploration and evaluation, we have increased our spend in exploration.
I think we got a few targets which we have been working on now for a few years in Chile, and we feel those are very attractive and prospective, and therefore we are spending more money on drilling, which is where we want our exploration money to go. I think the trend of spend or the run rate that you've seen in exploration spend in the first half is likely to continue in the second half, maybe slightly lower, but in that order of magnitude. As I say, it's very much driven and directed towards specific targets that we've been looking at for quite some years, and which we're now moving into doing some very significant drilling there. On the capital expenditure, I think we will provide guidance when we release later in the year our third quarter production figures as we normally do.
Therefore, I am unable now to share specific numbers. I think we have been keeping our capital expenditure figures within guided figures. We've guided for this year that it would be in the range or around $1 billion, and we're probably coming at a number which is slightly below that. If you look at next year, we expect to have spend on sustaining CapEx and among development. I think different to this year, where we have some specific mine replacement activity and also the enlargement of some of our tailings dam. Some of that spend will not be there next year. We will add, on the other hand, the development of the Pelambres incremental expansion. Figures I think will compensate and therefore, we don't expect to see great differences in CapEx year-on-year.
Specific numbers, we will give guidance as we move into the later part of the year and release our third quarter production results.
Great. Thanks. Just to follow up on the CapEx, going into that mine development sustaining CapEx is expected to drop sequentially year-on-year in 2019 versus 2018. Is that correct?
If you can repeat that. Sorry, we didn't get that.
You expect mine development and sustaining capital to sequentially drop year-on-year in 2019. Is that correct?
In the case of sustaining CapEx, yeah, to the extent that we don't have a concentration of capital replacement on mine fleet, which we're having this year, we would expect that to get reflected in the numbers for next year. Mine development, probably at similar levels as to what we've seen this year.
Great. Thank you very much.
Okay.
We can now take our next question from Alain Gabriel from Morgan Stanley. Please go ahead.
Yes. Good morning, gentlemen. Two questions from my side. Firstly, on the sale of energy and water assets, do you mind giving us a sense of the scale of the capital release that we should be expecting in the next 2 years as a result of those sales? The 2nd question is on the grade profile going into 2019. You gave us a bit of a teaser, saying that the grade strength is likely to continue well into 2019. Are you able to put some numbers behind that, at least for the 2 major mines Centinela and Pelambres? Thank you.
Okay. Look, in the case of the sale of energy and water assets, I think we are giving the 1st steps in that direction by means of having divested, 1st of all, some of our equity stakes in power assets which we had in the past. We continue to move in that direction. We've also sold the transmission lines at Centinela and the portion of the transmission lines which is of open access. In the case of water assets, we're exploring the options there. I'm a bit reluctant to give a specific number because that's something that we're looking at as we speak, and I think it will be very much driven by the specific opportunities that we see.
I am of the belief, we are of the belief that these assets, which used to be part of the core infrastructure required for mine and plant development, and therefore part of normal investment, will progressively, in our case, be done and the bulk of those investments done by others. It's moving in sort of that direction that we intend to continue. In the case of water assets, we've got a water supply system at Centinela which is based on seawater, and therefore it does involve installations in the port, a line, and pumping facilities. In the case of Pelambres, we are now developing a water supply system which does involve the construction of a desalination plant. While we've decided to build it ourselves, we believe that once it's built and construction risk is removed, it will be a good opportunity for others to take.
The replacement cost of a desalination or seawater, in that case, facility tends to be around $1 million per liters per second. That's the sort of replacement value that those assets tend to have. In the case of Pelambres, we are building a plant which roughly will be able to pump around 500 liters per second. In the case of Centinela, our water system has the capacity of, depending on usage, between 800 and 1,000 liters per second. That will sort of give you a feel of where those magnitudes might be. Again, we will be communicating and share those opportunities as we see them specifically arise. Grade, yes, we have been indicating for a while, especially at Centinela, which is the site that shows most of the grade variability, that we're moving now into a higher-grade zone.
We've guided that Centinela will have a grade, on average, for this year of around 0.52. I think for next year, we expect to see a number which is closer to 0.6 and slightly above 0.6. That's the sort of grade change that we expect to see. We went through a very low-grade zone earlier in the year, and obviously that fed through into the numbers, and that was part of the guidance that we had provided previously. Now we are into a much higher-grade zone, which will carry on into 2019 with grades north of 0.6, which is quite a significant change compared to what we were feeding at the beginning of this year.
Thank you. Pelambres, do you have any sense of the grade development? A bit more flattish year-on-year?
In the case of Pelambres, we tend to see much more stability, in terms of grade. We are mining today at around 0.67. While there's expected to be a slight increase, it's probably gonna be one or two points, so maybe 0.68, but not significantly changing from what we're feeding today. Pelambres, as we've seen, had a great first quarter. Production was slightly down on grade as we had guided, but in fact, costs were very competitive. The Pelambres unit cash cost remained close to $1 in terms of per pound basis and a very good cash generation. We don't expect to see a lot of variation or the variability that we see in Centinela at Pelambres. Next year, a slight tick-up in grade, but of around one percentage point or thereabout.
Thank you. Very clear. Thank you.
Thank you. Next question comes from Tyler Broda from RBC. Please go ahead.
Great. Thank you. Thank you very much for the conference call. Just to follow up on the last question there. In terms of when you monetize those water assets, am I correct in understanding there'll be an associated increase in cash costs once you, if you sold those? Can you just give an extent of exactly how much the cost comes from those, right? Secondly, if you could perhaps comment, Centinela's seen a bit of up and down in terms of production, the throughput rates. Do you expect that to stay relatively elevated the second half?
Okay. I didn't get the second part of the question. It didn't come across very clearly. It was around throughput. Is that Centinela or Pelambres?
Yes. The audio is very bad. Sorry about this, I think.
Yes, I mean, the arrangements, if we move into monetizing some of these non-core mining investments, we convert those investments into a variable cost based on the consumption of water or whatever specific supply, very much as we do with energy today. We would be expected to see some impact on cost, and that's exactly the sort of trade-off and assessment that we will do in making these choices. We believe that some of these assets are very attractive for some investors, and therefore, on the back of a supply contract, which is a solid commitment to purchase water or energy, as the case may be, there may be a good opportunity for us to enter into a transaction which is very value accretive, which creates value rather than the opposite. That's exactly what we want to ensure that happens.
Some of the ways in which these investments get discounted by different parties are different to the ones that we use in mining, Therefore, we think this can be done with the delivery also of value accretion. Therefore, that is the choice and trade-off that we will make. We would not go into these transactions, we would not do these investments if that hurdle of being value accretive would not be achieved or accomplished. We believe that the maturity of the investors and operators around these assets today in Chile is changing, such that that can be accomplished. On the throughput, I didn't get the question precisely, but I will comment on throughput at Centinela. I mean, we have installed capacity of 105,000 tons a day. We've been running, if you look at our figures as we reported them, at numbers which are below that full capacity.
Our aim is to obviously use all that latent capacity. Those 105,000 tons a day are based on a certain level of hardness in the ore, Therefore, when we feed harder ore, that obviously does have a trade-off with throughput. What's happened in the first half is that we had lower grade at Centinela and also had harder ore, Therefore, that's reflected in the performance of the plant. I think the good news is that as we move into the second half, we'll see higher grades and softer ore, which will allow us to capture that extra throughput capacity for that period. That's what we expect will happen in terms of throughput. In the case of Los Pelambres throughput rate, the plant is running at quite interesting rates in the first half.
We did see an increase when we compare it to the first half of 2017, and we believe the plant is running actually operationally very well. That's positive from the point of view of what we can expect in the balance of the year and then going into 2019. Really, we do expect to see higher growth, Therefore, we do want our plants to be running at full capacity.
Great. That answers the question. Thank you very much. Appreciate it.
Next question comes from Jason Fairclough from Bank of America. Please go ahead.
Yep. Good morning, guys. Thanks for the opportunity. Just first, I did just want to say congratulations on the safety record and the zero fatality record. Antofagasta really does stand out here versus some mining industry peers. Two questions from me. First on the projects, could you give us some color around sensitivity to inflationary pressures? To what extent should we see higher steel, higher oil, stronger Chilean peso feed through into your CapEx budget? Have you locked in any prices? Second question, could you give us some color on sulfuric acid and the market locally in Chile? Just tell us whether you buy sulfuric acid on spot or on longer-term contracts.
Okay. Thanks for the comment, Jason, on safety. I think certainly that's very important. It is the first and foremost priority. We're certainly pleased with what we're seeing in terms of safety record. On the projects, I think in the case of Pelambres, which we expect to take to the board for approval, we did, as you will recall, review that capital cost estimate. In doing that, we mentioned at the time that we had de-risked, in our view, the capital cost. Therefore, we are very much locked into values that are consistent with delivering the capital cost estimate that you know. We're not expecting, anticipating to see impacts on that cost coming out of appreciation of the Chilean peso or, for that matter, steel, beyond what we've already incorporated as escalation into that cost estimate.
We have and are reviewing that very closely, we see no change to that figure out of cost escalation or further cost escalation or inflation, which it was exactly the purpose of reviewing that number when we did. No change there expected. On sulfuric acid, I think what we're seeing in Chile in the first half is that there's been more imports than you would normally have seen compared to the prior year. I think part of that has to do with the fact that some of the smelters in Chile have been making some upgrades as the norm, the regulatory norm on environmental emissions is changing. Therefore, there have been some stoppages. Imports have come up in the first part of this year. We expect that situation to be relatively transitory, and we're looking at that very closely.
The way that we purchase sulfuric acid is that around 70%-75% is on term contracts. The spot component is around between 20% and 25%. Most of it we do commit the supply on a term basis. The price of acid has been up. That's what we've seen as a result of the lower availability of acid locally. As I say, as these smelters get back into production at full capacity, we expect some of that to ease. In the longer term, the acid is used mostly for leaching operations in oxide. As you know, those oxide operations are coming down as those mines age, and therefore what we expect over time is that imports in Chile will actually come down as we move into the future.
Thanks very much. Very clear.
Next question comes from Edward Sterck from BMO. Please go ahead.
Good morning. Thank you. Most of my questions have been asked and answered. Just to drill down on a couple of things here, starting with exploration. If you look beyond 2018 and say potentially beyond 2019, is the exploration spend going back up to the historical range of $150 million-$200 million per annum? On the topic of asset sales, just to confirm that it is only power and potentially the port, so power and water assets that you might look at selling and not the rail or transload business?
On the power and the assets that we look at, I think are, I would say primarily power and water. There may be some other infrastructure, it's not really at this stage, probably material. Therefore, we're focused on those two areas when we think of infrastructure, which is supportive of operations and which could eventually be owned by other parties. On exploration, I think we have made some important changes in the way that we approach exploration, which would lead overall, I think, to lower spend compared to what probably has been the spend taken over a longer period of time in the past. We're very much focused on what we call the Americas, therefore have, to some extent, diminished and removed expenditure that we were incurring on traditionally or typically doing exploration outside the Americas.
In the Americas, I think this is primarily Chile and also we're doing some in Peru, in Mexico and in Canada. Therefore, I would think that the level of exploration expenditure that we would see this year is probably in the sort of feeling of what you would expect to see going forward. As I say, we've readjusted our exploration strategy so that we're much more focused in the Americas and especially pursuing targets which we believe are prospective here in Chile and in the region.
Great. Thank you.
Next question comes from Jatinder S. Bhogal from Exane BNP Paribas. Please go ahead.
Hi, good morning. Two questions, please. Firstly, on your volume guidance for 2018, it's very wide range, given you are almost eight months down into the year. Was there no point in narrowing this down? How comfortable are you with the top end of guidance versus your first half performance? Secondly, do you still stand by your gross unit cost guidance of $1.65 indicated earlier in the year, but haven't seen that number in subsequent releases? Thank you.
Okay, in terms of guidance, we have reaffirmed our guidance on volume. We have not narrowed or changed the range. I think from that point of view, we will move, as we've said in the past, in the second half, to mine higher grade areas, and therefore, that range captures the sort of variability that we think is still relevant for these purposes. The midpoint of that range, which is I guess the expected number, remains unchanged, and we have not really felt the need to narrow that at this stage. In terms of cost, I think we're guiding to $1.35 on C1. I think that's been mostly our focus. These numbers, these are single points, and these numbers do vary according to issues like exchange rate, input prices and the like.
Therefore, our guidance is focused more on C1 cost, which is really our cash cost, which is relevant as it makes it through our cash flow from operations. Therefore, that's the figure that we're focusing on. I think we don't expect to see variations which are significant at the level of the gross or pre-credit cost of $1.65. Our main updates and what we're focusing in on is the net unit cash cost.
Thanks. Very clear.
There are no more questions on the line at this time. I would now like to turn the call back to the host for any additional or closing remarks.
We just got one question here, which is about the markets. Just ask you to give a bit more color on your perspective in long-term copper price and about long-term net cash costs. Okay. On the market, I think we believe copper remains very much a supply story. I think supply is constrained in copper very much more than in other cyclical commodities. Therefore, what we've seen this year is the physical market is starting to move into deficit, and therefore we're positive on the copper market performance. If you would recall, we have declining grades, and therefore every year that passes, we do get volume out of our market, out of grade decline, with everybody keeping production up. Mid-term, long-term, very positive on copper as we think these fundamentals will prevail.
I think the other comment I would make in the more shorter term is that around 80% of the copper that goes into emerging economies, and especially when we think about copper consumption in China, is actually used for domestic purposes, and therefore is very much linked to the ability of those economies to continue to develop infrastructure and continue to grow, which is also therefore some more isolated copper from the sort of trade wars that we're seeing which are taking place. I think there's also an element there which is favorable for copper. Therefore, we remain very positive in our outlook for the copper market. We however, believe that what we control is what we should focus on, and therefore costs remain very important. We are seeing some cost pressures out of exchange rate movements in half one and input prices, as we've mentioned.
Some of that is starting to ease as the dollar has gotten stronger out of the monetary changes and growth in the U.S. We've seen that the local currency has started to depreciate again at levels today which is similar to what we were seeing last year. In our particular case, most of our unit cost increase comes out of production decline in the first half. That is something that we expect to see reverse in the second half as more production and higher grades allow us to achieve a higher rate of absorption of fixed costs. Yes, there is some cost escalation, but I think in our numbers, around 80% of what we're seeing in terms of cost increase is volume related and therefore that's where our attention is. We need to get our volumes up.
We have the grade profile to accomplish that in the second half of this year and into next year, and we think that will be a tremendous self-help in terms of managing our costs down. Okay. Thank you then very much, and we expect to see you in September.