Morning, everyone. Thank you very much for being here. Glad to say that this morning I'm joined by Mario Arreguín, our CFO, and Tomás Iturriaga, our COO. Thank you for joining us for the half year interim results, Fresnillo plc. Before we begin, I would like to point out to you our disclaimer as usual. Then the agenda that we'll cover this morning. I'm sure you're familiar with our investment proposition. I'll give you some highlights in terms of the operations and also the financial results as of first half of this year, followed by some initiatives on the HSE&CR in our company, and also some exploration update.
Tomás Iturriaga then also will cover the operational performance and development projects, followed by Mario Arreguín on the financial performance, and I'll come back to close on the outlook. I'm sure you are familiar with our investment case after more than a decade of Fresnillo being listed in the London Stock Exchange. We do benefit from high quality assets all the way from the operations to projects and prospects. Large resource base, 2.3 billion ounces of silver, 39 million ounces of gold. Fresnillo is the largest worldwide silver producer, and we've been able to have a complete and solid position on gold as well. Two more projects coming downstream on the pipeline, Rodeo and Orisyvo. We focus on really making an efficient operation and therefore healthy margins, focus on controlling and mitigating costs.
We have a disciplined approach to development projects. We've been bringing on stream projects on budget and on time, doubling our production in the last 10, 12 years. Of course, sustainability is at the core of our operations, and we continue to strengthen the links to our community relations and also in our operations. I'm glad to report that we've been able to conclude almost all of our negotiations, yearly negotiations, with a talented workforce in a rather difficult or complex environment, labor environment in Mexico and a tight labor market as well.
Last but not least, of course, a strong balance sheet with a solid cash position over $1 billion, free cash flow position, and also a continuous dividend policy in terms of payout on approximately 50% of our net income in terms of interim and a final dividend. Some words on HSE&CR. As I mentioned, we continue to strengthen our initiatives in terms of health and safety, the I Care, We Care deployed at all of our operations. Of course, our aim is to build, in the end, a safety culture. As you can see, we've been having a good track record in terms of reducing our injury frequency rates all the way from 2017 to now.
This is a topic or an aspect that does not gives us really rest, and we should continue with the most stringent protocols in place at our operations and projects. In terms of environment, we do have two very good initiatives in terms of using eolic energy at all of our operations. Approximately 49%, just off 50% of our electricity needs come from eolic sources, and targeting 75% by 2030. We concluded a conversion, another project that is very well in terms of reducing our carbon footprint, converting our targeted haulage fleet at Herradura, in which we expect to have a reduction of 20% less carbon per truck in our open pit at Herradura.
The Tailings Storage Facility project and governance scheme continue to be in place more and more. I'm glad to report that the Juanicipio Tailings Storage Facility will be the first one in our company that will comply from design, as it is a new tailings storage facility, to ICMM and the rest of the protocols in the industry. Of course, water is also very important in our operations. We continue to build our recycling water across all of operations. In terms of climate, of course, that's something that we continue studying. We have a modeling project with the University of Arizona. We have joined the TCFD consortium as well.
In terms of community relations in this pandemic, these last two years has been more evident, closing and the links with our communities, supporting them through the different health initiatives, vaccination and so. I'm glad to say that now that we have been able to go back to the communities again, we have started the initiative in terms of bringing the foundation of the national university in Mexico in order to bring different initiatives in terms of help for our communities as well. We do work in terms of education and also in economic growth, building up entrepreneurial skills in our communities as well. Therefore, some highlights.
We are on track to meet our guidance for the year, 27.6 million ounces of silver and 309,000 ounces of gold. This production, of course, will step up with the time when we tie in the synergies to the Juanicipio operation and also the Pyrites Plant in the coming weeks. We expect to ramp up to the expected 85%-90% by year-end in terms of the main plant capacity at Juanicipio. We have continued investing in exploration, as is one of our core in our business, expected to invest $180 million in the year. Some financial highlights.
Of course, we do have a, as I mentioned, in our operations, we focus on controlling our costs, building up in our, EBITDA margins, of course. I'm glad to report that $365 million of gross operating profit, an EBITDA of $459 million, cash on hand of over $1.1 billion, and interim dividend according to our policy, as I mentioned, one-third as an interim portion of the dividend and a two-thirds on a final dividend. This time, interim dividend of $0.034 per share, equivalent to $25 million. As an exploration update, as I mentioned, $180 million we have budget for the year.
Most of it goes to increasing the certainty in our resources and also do the upgrade from resources at our mines. 55% approximately of this budget goes to along those lines, and the rest goes to develop or continue developing our projects. Juanicipio, of course, Rodeo and Orisyvo, and also we've been having good exploration results in Guanajuato recently and the rest of our portfolio at an earlier stage. Now I will pass the word to Tomás Iturriaga, so he can tell us more details about the operational performance this year.
Thanks, Octavio, and good morning, everyone. I'm glad to be back here and see you all in person. That's good. Maybe we can go to slide fourteen and start with an update on COVID matters to start with. After a few months of no positive cases, the fifth wave finally reached Mexico, and we saw 208 cases in June and over 1,000 in July. We maintain very strict protocols and preventive measures, and we trust that our very high 90% vaccination rate will continue to prevent severe illness and help us sustain short isolation periods, limiting absenteeism impact. Nevertheless, we cannot rule out some impact in the second half of the year. Our premises will continue to be that people wellness is first.
In terms of rotation and vacancy, we continue to battle the residual impact of labor reform in a very tight labor market in Mexico, driven by several government unemployment programs and historical levels of remittances flowing to Mexico from the U.S. despite this adverse context, we are being proactive, and the actions we have taken are proven efficient. We will continue to be very focused in recruitment and training of our new personnel. The mines will continue to be very well managed, and operations are steady with only some limited impact expected in the second half. Slide 15, please. Now turning to operations, I will start with the Fresnillo district as this is where the key focus remains. At Fresnillo mine, good progress in the first half of the year.
Throughput levels have been improving as well as grades. While development meters are still a challenge, in Q2 we hit the lower end for development rate guidance of 2,900 to 3,100 meters per month on average. For San Carlos shaft sinking project is progressing well with the sinking itself now complete. We are working in the civil works and equipment installation required for the shaft to be operational, which we expect in Q3 this year. Tie-in of the Pyrites Plant is expected in the coming weeks, with ramp-up following right after. Next slide. 16. Like I said, our San Carlos shaft is shortly coming into production at its lowest level. We are very excited about the productivity and benefits that this will bring to our operations.
Such as reduced haulage costs, improved safety, and lower greenhouse emissions because of less trucks running around our ramps, and a faster access to some reserve stone, reserve stones. With operational matters under better control now and the San Carlos shaft and Pyrites Plant shortly online, I'm confident on more stable operations in Fresnillo going forward. Slide 17. Saucito. Also a reasonable good first half of the year in Saucito. We continued working very hard in our recruitment and training programs. We kept the high seismicity areas well-monitored and operational, and gained access to new mining areas to regain flexibility. Throughput levels are a little bit below original plans. However, reviewed mine planning settings and parameters indicate that we have a better case sustaining daily throughput of just around 7,000 tons per day.
With better head grades going to the plant facility as we are actually seeing in Saucito so far this year. Next slide. Juanicipio. You all know that plant construction was finalized on schedule last year. We have been waiting for Juanicipio's tie-in to the national power grid, which we expect in a few weeks' time. In the meantime, we have done everything possible to advance matters. With the limited power now available, we have advanced commissioning of all individual process plant systems except for the mills. Mine equipment required for the start-up is operational at site. Mine and process plant are well-staffed, and we have gained relevant metallurgical knowledge with the ore processed in Fresnillo and Saucito.
Because of all this progress made, when we are connected to the grid and integral process plant systems are finally commissioned, we expect the ramp-up of the plant to go smoothly. Also, to mitigate any potential impacts caused by the tie-in delay, we will continue to make available to Juanicipio any process plant capacity available at Saucito and Fresnillo. As you know, the successful ramp-up of Juanicipio will drive increased silver production and lower consolidated costs. We will keep the market closely informed of progress here. 19, please. In San Julián we faced some mining challenges forcing us to prioritize wider veins with lower grades to keep metal contents going to the mill at planned levels. At the disseminated ore body we ran modified mine sequence that brought us to the high-grade zone of the mine sooner than originally planned this year.
This effect will reverse in the second half of the year when we will see lower grades. Outside of Saucito, La Ciénega is the one mine site where we are facing the biggest challenge, dealing with rotation and absenteeism. That is impacting somehow our development and production. We will continue to work very hard in recruitment and training to counterbalance that. Herradura is operating per expectations according to the mine plan. At Noche Buena, we will now continue mining until the end of the year because some extra ore found with our condemnation drilling program. In summary, I believe we reported a good first half of the year result that includes a solid, wider performance in line with our expectations.
We are progressing well with all of our plans and programs, hitting tons and grade targets and regaining stability and control over operational matters in all of our mines. As Octavio just expressed, we remain on track to meet our full-year guidance of production. With that, I will pass it to Mario again. Or Octavio.
Mario.
Mario. Yeah. Mario, you're up. Thank you.
We have an explanation.
Okay. If you don't mind, I'll stay here. Can everybody hear me well? Yes? All right. Good. Thank you.
Well, let's go to the next slide, please. Let me start by saying that the financial results that you see here on this slide are better than we had expected in terms of better prices than we budgeted for and better volumes of production than we initially expected in our budget for the first half of the year. However, in contrast to that, as you can see, compared to the previous year, we're below the different profit lines that you see in yellow there. For example, gross profit compared to the first half of the previous year was almost 40% below. Operating profit was approximately 54% below last year. Profit for the period was 54% below last year, and EBITDA was almost 39% below last year.
I guess what I'm trying to say is that these results were foreseen and expected, and actually we're doing a bit better than we initially budgeted for. Now, I would like to spend a few minutes to talk about inflation. This is what we're going to show you in the next slide. I know inflation is a very hot topic when companies are giving out their results. Bear in mind that this is based on our own baskets of goods and services. We need to spend a lot of time to calculate the internal inflation in accordance with our own baskets of goods and services. This is comparing the average unit price of all of the items that you see there, and we compare that to the average price that we had in the first half of 2021.
As you can see in the first column, for example, one of the items that had the most, the highest inflation was operating materials. Here we're talking about explosives, we're talking about reagents, we're talking about steel for milling, steel for drilling, et cetera, all the operating materials. What we saw from one year to the other was an 18.9% increase. Then we consider the specific weight that that item has on our basket. In the case of operating materials, it's 18.8% to get to the weighted average of 3.6% in the case of operating materials. Again, I want to emphasize that this is not on an ounce per ounce basis, but this is actually based on unit cost, compared to the previous year.
In the case of contractors, and remember, in our case, contractors is not only labor, but also contractors bringing their own operating materials, and they bring in their own equipment. The inflation that we saw there was 6.9%. It continues to have an important weight on our basket of 30.5%. So the weighted average is 2.1. So if you add operating materials and maintenance, you will see that those were the two main items behind the 7.57% inflation that we saw in Fresnillo on a consolidated basis for the year in dollar terms. In dollar terms. Having said that, now we can move to the next slide. We tried to explain graphically the variation in the adjusted production cost.
As you can see on the green bar on the far right, we had an increase of $48.2 million compared to the first half of this year. If you look at the red bars, which had an adverse effect on our costs, starting with column number one, you will see that the inflation, which I just explained to you, had an impact of $44.1 million in terms of our adjusted production costs. Just inflation alone. In column number two, you see the additional cost that we incurred because we started the mining operations at Juanicipio this year. Obviously, that implies an additional cost compared to the previous year of $43.1 million.
As you know, the plant hasn't started operations, but we are mining out the mineral, which is being processed in Saucito and in Fresnillo. That meant an additional $43.1 million of cost. Of course, behind that cost, we will see that we were benefited by additional profits. We really don't need to worry about column number two, which is not the case of column number one, of course. We don't generate any less with inflation at all. In column number three, you can see that independently of the inflation, we increased the use of contractors and the use of maintenance. One of the things that we're doing in terms of maintenance is making sure that we have the availability that we need to have the flexibility to operate our mines. We've been increasing maintenance.
Again, that has nothing to do with inflation. Infrastructure contractors, as you know, we're making efforts to develop our mines, more, again, to have more flexibility in terms of where the different areas that we mine in our operations. Those were increases related to the increase in the use of certain items. Now, turning to the blue bars, which mean favorable effects. In column number six, you will see that we had a lower cost because we also processed a lower volume mineral in some of our mines. This lowers our cost, but unfortunately, as you will see, this will also have an impact on our profit level. Lastly, the lower stripping that we recognized in the income statement.
In the first half of 2021, we pretty much hauled the waste material at our open pit mines, basically at Herradura, the same volume. However, the big difference between this half and the previous half is that in this half, we capitalized half of that volume, which means that we're going to amortize through time. The other 50%, we took directly into the income statement. Versus last year, where we had 100% of the stripping costs taken to the income statement. That was the reason why that had a favorable effect. When you look, for example, at all-in sustaining costs, that will definitely have no effect at all. On the next page or next slide, what we try to explain here is basically what was behind the lower gross profit.
If the $240 million, which are represented by the green bar, far right. Again, the red bars imply adverse effects. If you look, for example, at bar 13 and 11, 13 is related to lower ore grades at our mines. In particular, I would say at the Herradura mine, where we had a lower production of gold, basically due to lower grade. That, I would say, was definitely the most important adverse effect that we had compared to the previous year. That goes together with column number 11, where we had lower volume of ore processed. If you have lower volume processed and lower ore grades, that gives you a lower production of the contained metals. Those two had an important adverse effect.
In contrast to that, if you look at column number one, you will see that the new Juanicipio operation had a positive effect of $77.7 million in terms of our profits. When you look at prices, the lower silver price, which is shown on column 12, had an impact of $90 million. Again, in contrast to that, if you look at column number two, the higher gold, lead, and zinc prices had a positive effect. Unfortunately, the effect of the lower silver price was a bit higher than the positive effect of the other metals. The lower stripping ratio in column number three, I already spoke about. We also saw lower depreciation. I guess that, you know, those are, I would say, the main factors behind the lower gross profit.
We can just go back for a minute to the income statement. So far, we covered all the way up to gross profit. If we continue going down the income statement, you will see that the main difference between the gross profit and the operating profit was the increase in exploration expenses for $16.8 million. Basically, that was all foreseen in our budget. Actually, we were a bit below our budget in terms of exploration expenses. Again, this was completely planned for. And that's what gets you to the $253 million below the previous year. Up to now, everything here is pretty straightforward. When you start going down the income statement is when you get to certain things that have nothing to do with the operations.
For example, the silver stream. You see that the silver stream revaluation for the first half of the year had a negative impact of $56.6 million. Remember that the silver stream is considered for accounting purposes as a financial instrument, as a derivative. We have to mark to market at the end of June and at the end of December. At the end of June, we looked at the silver prices. Of course, as you know, silver prices have come down, and there's a very strict procedure to calculate the value of the silver stream. You take into consideration the forward prices plus the consensus prices by the analysts, and all of those came down for silver.
I don't need to tell you because you know very well, interest rates have been going up. Which means that the discount rate that we use to discount the cash flows to value this instrument went up. Those two effects, the lower silver price, the higher interest rate, were the reasons behind this $56 million loss. Again, this is all in paper. It has nothing to do with our cash flow. This has been generating volatility in our income statement, unfortunately, considering the price as, you know, it happens with the prices for interest rates.
If you continue to go down, when you see the income tax expense line, $6.8 million there, you will see that the effective tax rate is low of course, because our statutory tax rate is 30%. One of the things that happened was the fact that the inflation had an impact on our deferred taxes. In Mexico, you have the opportunity to update your assets, the value of your assets in peso terms, in accordance with the inflation. Which means that you can increase your depreciation in peso terms. Now, that doesn't happen obviously in dollar terms, and that generates that deferred tax. Also, the exchange rate has its own effects in terms of the effective tax rate.
This is a very detailed exercise that you need to do again every half year and every end year. You have to look at all the different line items, accounting line items to see which ones have been affected by inflation, subsidiary by subsidiary, and then at the consolidated level. That's the way we get to the effective tax rate. As you can see, these two, let's say last items that I mentioned to you are difficult to calculate. We can appreciate that, even ourselves, we have to spend some time to carry out all this, you know, numbers to get to this. When we do our estimation for the year end, well, you know, we tend to be very conservative in terms of, you know, these particular two variables.
You know, we would say, for example, we're not going to consider that the effective tax rate by year end is going to remain, perhaps at the level that the market is showing now. We might want to consider 20% as the effective tax rate, just for purposes of being conservative. Also, the prices that we saw in the first half clearly have come down, so perhaps it won't be exactly, you know, just doubling those numbers that you see there, because probably prices are going to be a bit lower than what we saw in the second half. With that, I just want to move very quickly to the cash flow, just to give you an idea.
By the end of the year, as you can see in the bottom line of the first column, we have a cash balance of $1.15 billion, which is a reduction of $83 million compared to the beginning of the year. Main sources of funds, clearly the cash generated by the operations of $460 million, which is lower than the previous year for the reasons that I mentioned previously, 38.8%. Main uses of funds, of course, CAPEX, the purchase of property, plant, and equipment, almost $300 million this year. Dividends paid. This year we have paid $176.9 million. Of course, income tax and profit sharing. Again, remember this is cash flow. $141.2 million.
This is basically provisional taxes and the profit sharing that we paid in May for the previous year. I would say those were the main, you know, sources and uses of funds. In the following page, we've included a bit more detail, so you can look at, you know, where we invested in terms of CAPEX. Of course, the silver stream, that's real. The $18.3 million that you see there, that's real cash flow that we get from the silver stream, regardless of the valuation. Of course, details regarding the decrease in working capital. I guess those are the, I would say, the most important features so far, the sales financial results this year. I'll be happy to answer any questions during the Q&A.
Thank you, Mario.
Sure, Mario. Coming to an end or before we take your questions, some brief comments about the outlook. Glad to confirm our guidance for this year, 2022, but as well, 2023 and 2024 unchanged. Next year expect, as you see, a step up in terms of the silver production. One full year of operation of Juanicipio and the Pyrites Plant as well. In addition to an expected better an increased performance in Fresnillo also. On the gold side, as we were expecting some lower gold production as Noche Buena is going out of business, of course, depletion of reserves.
In the coming year, as I mentioned, Rodeo and Orisyvo are already in the pipeline. An expected production of 150,000 ounces, roughly each mine. Larger contribution of lead and zinc at our Fresnillo, Saucito, and also Juanicipio mines in the following years. CAPEX, also we maintain our projection for this year, just of $690 million, as we still have to do some equipment purchases in this complex and challenging times for the procurement and supply of equipment. In the following years, a bit lower CAPEX needs for 2023 and 2024.
The chart in terms of the development projects as well, Juanicipio we've talked about, and this is in the final weeks in order to be connected to the national grid, of course, as well as the Pyrites Plant. Then we will concentrate on bringing on stream, developing and bringing on stream Rodeo and Orisyvo. To conclude, we are achieving and glad to be achieving our objectives this year. Stabilize the production at our mines in the Fresnillo district, of course, something that Tomás and team have done very well somehow. Also with the financial performance, trying to control and mitigate costs. As we saw, I mean, in this first half, we have a 7.6% inflation.
However, I mean, we see a lagging effect somehow, and we expect a bit more inflation in the second half. Something that we are preparing for. Proactive management and labor, of course, in this market, not only in Mexico, but I mean, worldwide, very tight labor market and of course, also the union side of market in Mexico. However, as I mentioned, we finalized most of our yearly negotiations in terms of salary and fringe benefits with our labor at all of our mines.
Juanicipio, this time that we have not been able to connect Juanicipio with energy, I mean, we gather a very good information and knowledge about how to do the best recovery rates, more likely on Saucito, which is a more similar arrangement to the flotation plant that we will have in Juanicipio. We expect to have a good commissioning and therefore a ramp up to 85%-90% by year-end. Of course, as Mario mentioned, I mean, maintain and mitigate the cost effects in our operations. Just short and medium-term production outlook and change gives us the confidence that we will achieve these objectives. With that, I mean, we can take your questions, Jason.
Just on the power connection, I feel like we've been waiting on this for quite a long time. I mean, you know, if I went back and I was just trying to do it right now. If I looked at previous results, I feel like we should have been connected and running these plants. What's the problem? Is it COVID? Is it just bureaucracy? Is it bad management? Like, why do we not have power on these plants yet?
I would say many factors. If you feel like this is taking so long, I mean, we do as well, Jason. We come to a period of some frustration. I mean, in times of COVID, that was one main issue, of course, not only related to ourselves, but also related to the federal electrical facility, of course, and their process and protocols of how to work in times of COVID. That was one main thing. We were expecting this to be connected back in November, December.
Therefore, when we saw that was not happening, when we released the first note to the market, of course, we were in the middle of also of an energy reform that complicated things in a way. Some issues with the supply of energy in the country, in the southeast part of Mexico, a year and three months ago, that made the CFE to act very carefully about sourcing additional energy to our operations. All of this contributed to not having the energy in time. I mean, we were working very proactively and actively with CFE and the regulator as well, CENACE. I can tell you that we went through the second-to-last major electrical shutdown.
With that, we will have a full set of activities in series that will end up in the commission. There is no other way to do it. That's why we are very confident in the following weeks we will have that energy source to be sourced to Juanicipio in the end. We've been able to mitigate that effect, of course, processing ore in Saucito and Fresnillo. We started, as you know, sending ore to Fresnillo, different arrangement, not the best metallurgical recovery. Saucito is more like the design that we will have for Juanicipio, so we are prioritizing that ore being processed at Saucito. All in all, I mean, we've been able to mitigate this effect somehow. As well, we are looking forward to ramping up this operation quite soon.
Just, a second one, if I could. The last couple results, we've talked a lot about the operational issues around dilution and also the issues around development. Do you feel like we're past that? Is that, is that fixed?
Do you wanna talk about that, Tomás? I will compliment.
Yeah.
I mean, dilution is a day-to-day matter in the mines. I mean, what I can say is that we have established the processes. We have incorporated technology to our mines, and we are managing well in all our mines on a day-to-day basis. It's an operational item that we deal with day to day, and I think it's under control.
The last time we were talking a lot about the confidence in the reserve grades. You're still confident in the reserve grades?
I am, and we are.
Okay.
We are seeing some progress towards that, and particularly in Fresnillo and Saucito. We are seeing. We're not where we want or should be, still working, but we see progress and we have seen the grades improving in both mines through the year.
If I may.
It's on track.
Yeah.
Yep.
That is correct. If I may comment, I mean, the expected grade for Fresnillo and Saucito is right there. I mean, that gives us confidence that the mine sequence is planned for this year, gives us the expected grade. As I mentioned before, I mean, in terms of Fresnillo going into the following years, I mean, we should be seeing that increase in grades. An example of that is Juanicipio, if I may mention it. I mean, Juanicipio, the 580 grams is above the reserve grade, of course. This is because this is the upper part of the vein, and that's a zoning in the Fresnillo district veins that we have.
To have a possibility to go west on Fresnillo veins, that will give us the opportunity to produce a higher grade in the following years. In Saucito, it's the opposite. It depends on the year to year on the sequence that we plan.
Thank you.
Yes.
Thanks. I got a couple. Getting to 3,100 meters of development at Fresnillo in the medium term and hopefully beyond there after that. Is that primarily a personnel issue? Or what's the main headwind to get in there?
Yes. Go ahead.
No, I wouldn't say it's a personnel issue. Actually, Fresnillo is one of the mines where we are more stable in terms of people. It is rather logistics of the mine. Yeah. Whenever we are ready with the shaft, fully operational ramps, ventilation, power that we keep working. Again, fortunately, we are seeing progress, and we are at the lower end of the guidance now and working towards the goal.
One COO, you used the language that the ramp-up is within reach. Are you confident over that target or is that a stretch to get there by year-end, 85%-90%?
I think we're confident on that. Like I said, we have progressed a lot on several fronts. We have good metallurgical information. People are there, ready. Equipment is ready. We should be fine with the ramp-up and to get to that target towards the end of the year.
Okay. Just last one from me. How is the July production run rate considering the increase in the COVID cases?
It's going well. I mean, like I said, I mean, we are seeing this increase. I guess we have learned to manage it. You know, isolation times are less or lower nowadays. We are seeing a limited impact now. July is good in terms of production within the plans that we have.
Less impactful than it was in January.
Yes.
Oh, yeah. Definitely. Actually, last week, we started to see a decrease already in cases. Coming from 400 average a week.
We had 315 last week. It's getting down there, but never as it was in January, February. Yeah, no, that's very far away. Yeah.
Okay. Thank you.
Sure.
Hi there. It's Amos from Barclays. I just wanted to ask a few questions. Firstly, you were saying about an expectation for OPEX inflation to pick up in the second half. What sort of run rate of inflation would you guide us to?
I was hoping you wouldn't ask that.
Sorry.
You know, it's difficult to try to predict. For example, why don't you show the inflation slide? Yes. I forgot to make a couple of comments. For example, if you look at diesel. Diesel has gone up for everyone everywhere, except in Mexico, thanks to the government subsidizing the price of both diesel and gasoline. Which is costing a lot to the government, several hundred billion of pesos. How long are they going to be able to keep that? I don't know. I guess they're betting that oil prices will come down and that it'll you know, naturally come to an end. If it doesn't, that subsidy will stop, and all of a sudden you will see an increase in the price of diesel in our case.
In the case of maintenance, you see a pretty low inflation there. The reason behind that is because, you know, we have inventories of spare parts with the previous costs. As those inventories are exhausted and you start consuming, you know, the spare parts with the new prices, you will see a higher inflation, of course, which is the lagging effect that Octavio was talking about. What we try to do is try to implement certain strategies to try to mitigate the effect of inflation. For me to say, you know, it's going to be 10% year-on-year, I really don't know. Depends on whatever happens, you know, geopolitically and elsewhere in the world.
In a scenario, let's say, where the diesel subsidy remains in place as it has done.
In that case, and I'm just giving you my best guess. Please, in March, don't say, "Mario, you said it was going to be 10% and it was 11%.
Sure.
Because most probably that will happen. My guess would be around 10%.
Yeah.
For the one.
Thanks.
Also we are working on the operations to mitigate these effects. We talked about the deepening of San Carlos shaft, of course. That will bring some savings for Fresnillo. We are looking into optimizing the open pit at Herradura as well. Further news in terms of different mitigating activities at the operation level.
Thanks. I just want a follow-up question on the tax side. If we assume that inflation rates stay where they are in Mexico and FX stays flat, what should we expect for your effective tax rate in the second half on the P&L?
Again, that's a tough question because it's. You really have to do a very detailed analysis to calculate that number. If inflation is around 9.5, because at the end of the day, it's adjusted by consumer price index here in Mexico. That's the official exchange rate. Assuming you have around 9% or so, and the exchange rate remains more or less where it is, I would say, maybe 10%, between 5% and 10% effective tax rate. Again, because the important impact that that has, you know, three different taxes going forward.
I mean, I guess we saw in the first half the cash tax payment being, you know, multiple times the P&L accrual. Should we expect that cash number to decline with a lag in forward future periods as well?
In terms of the actual cash payment?
Yeah.
Yeah. I think that's just.
Can we go to the lines if that's okay, and then we'll come straight back to the room? Octavio?
Sorry.
We've got two questions from the lines. If we do them, then we can go back to the room.
Okay.
finish up. Operator, can we take the questions, please, from the lines?
First question comes from Krishan Agarwal from Citibank.
Hello. Can you hear me?
Yes.
Yeah. I mean, a couple of questions have already been asked by Amos and others. The one question remaining is you made a comment on mine sequencing is visibility is looking good and then the operational issue seems to be more behind. Is it fair to assume that the higher grades which we have seen in the second quarter and then the ore processing has also been higher continues into the second half and has the potential to deliver production towards the upper end of the guidance?
Do you hear that well? Did anyone hear the question well?
Yeah. Are you gonna hit the top end of your guidance?
Okay. That's easy.
Well, everything is looking good to be within guidance. As Mike said, don't quote me on this. We will see. No, we are set for a good second half of the year. Everything is in place at the mines, you know, barring COVID impacts and all that. I think we are in good position so far, right, to hit our guidance.
Yes. We've built our 2022 scenario. Let's not forget that we were coming from a tough start of the year with a lot of COVID cases, with the labor reform. Just, we needed to be adapting to that with a lot of uncertainty somehow in the labor that we could internalize from our contractors and all of that. We projected a bit lower first half compared to the second half. In the second half, we still have the challenge to meet that higher performance, I would say, in general in the mines.
Okay. Well, thanks a lot.
Thank you. One more. Yes.
Next question comes from Daniel Major from UBS.
Hi there. Can you hear me okay?
Yes, Daniel.
Yes.
Hi there. Great, thanks. Yeah, first question, just on the reserve grade debate, Fresnillo and Saucito. You mentioned your confidence in the reserve grade, and I guess it's been encouraging to see a pickup in mine grades at both assets during the second quarter. If I look back at the annual reserve and resource statement that was, I guess, published after the interim results, you know, one of the debates we've been having is this convergence between the reserve grade and the mine grade. Does the reserve grade come down, or does the mine grade come up or a mix of the two? If I look at Saucito, you've reported a 28% decline in the reserve grade with your FY 2021 reserve and resource statement.
At 219 grams a ton, basically reserve grade is effectively pretty close to where you're guiding now. Is that something we should be expecting in Fresnillo as well? You know, Fresnillo, your mine grade has, you know, remains below the reserve grade. Can you talk us through that pretty meaningful downgrade to the reserve grade at Saucito with the full year update? And should we be really expecting just reserve grades to fall towards the kind of 200 level in both operations like we've seen in Saucito?
No, we are not expecting the same behavior in Fresnillo. I mean, the one that we had in Saucito. Saucito being a newer mine, we started to hit some of the upper blocks in the mine. Therefore, some of the assumptions we had in terms of the reserves that we had at the top level of several mines in Saucito were not becoming true. Therefore, the mineralized area and the economic area on the veins, on the top part of the veins were not coming through.
Therefore, in conjunction with some of the costing that we had, higher costing in Saucito and these areas that were not coming as ore, we needed to adjust that reserve grade in Saucito. We are not expecting the same in Fresnillo, as we've done several of these veins. It's a different behavior, Dan.
Okay. Thanks for that. Our next question, just on the back to the cost sort of debate. I mean, I appreciate there's a lot of moving parts on, you know, on the second half of this year, but you're guiding to a similar kind of rate. I mean, if we look into 2023, I've been struggling for some time a little bit, looking at kind of where the consensus sits on this. I mean, it appears based on the consensus that absolute level of dollar costs should be going down in 2023, yet you'll have a full year of commissioning of Guanacepe. I would guess some of these inflationary inputs, you should be similar.
You know, should we expect costs in 2023 to rise at least in line with production, with your silver production lifting? Can you give us any thoughts on, you know, the delayed realization of some of these input cost pressures, how we should be expecting costs to trend into 2023?
Well, in terms of Juanicipio, being a new operation, we will go back and reference to what we used to have in Saucito in the initial years. Of course, we would expect, and we've talked about this before, higher production, higher grade, and therefore higher production in the first years of Juanicipio operation. As we go deeper in the veins, that grade should come down as it is the case in the whole Fresnillo district. Therefore, in terms of a cost per ounce should be very competitive initially. Therefore, as we source more less grade, less ounces and more base metal contents, that should be the opposite. It's still very competitive.
Also, being in the upper part of the veins gives you less haulage costs and less energy and less ventilation as being in the deeper part of the veins. That's what I can tell you in terms of in general terms, the expected cost at Juanicipio mine.
Ask the question slightly different way. I get the unit cost should see some dilution on a group basis through the commissioning of Juanicipio. If we look at it in absolute terms, so dollar terms, is there any reason the costs on a group basis should go down in 2023, which is what's currently kind of factored into the consensus?
All else being equal, I mean, we should see what the end result in terms of the effects and also the cost of the operations. Because, I mean, it's normal. I mean, that we go deeper in all of our operations every year, the cost should increase. Balancing that or in a different direction should be the infrastructure projects. As we mentioned, I mean, the San Carlos deepening of the shaft should help us in terms of the cost and also the optimization of the Herradura open pit as well, something that we are aiming to conclude at the end of the year. Put in place for next year if everything goes feasible.
All in all, it would depend on this, on these different factors. Mario, I don't know if you have any other idea on this.
No, I think you pretty much covered it. In the short term, we would expect the cost, for example, at Noche Buena to come down in absolute terms. Of course the Juanicipio operations will, I would expect it to bring down in the short term, given the high grade, the average cash cost.
Yeah. No, I mean.
During the whole-
The unit cost should come down. My question is when I look at your guidance, you got around 10% higher silver production implied in the guidance, kind of similar gold production. Yes, Noche Buena comes off, but full year of Juanicipio. Just simple question. In U.S. dollar terms, not unit cost terms, would you expect costs to lift in 2023 relative to 2022 with the higher volumes even though you have some cost dilution?
Dollar terms, yeah.
In dollar terms, I would say it's gonna go up. I mean, just higher production rates. Yeah. In dollar terms, it means absolute dollar terms, yes.
Perfect. That's very clear.
Increase in production. Right.
Yeah. Yeah, that's clear. Thank you. Just a final one on Juanicipio. When would be the kind of latest you would need to get the electricity hooked up, for it not to create risks to the guidance for 2022 and 2023? What would the deadline be?
We don't see any risk to the guidance, as we are looking into a program, a very well-defined program, in order to get to the connection. As I mentioned, the big milestone was this electrical shutdown, the blackout that we had a week and a half ago. After that is a series of activities that cannot be stopped or deferred. Therefore, our assurance to be connected and not having any risk on the guidance.
Okay, great. Thanks a lot.
Thank you, Dan. Yes.
Sandeep Peety from Morgan Stanley. I had one question which is related to recent data. You mentioned second half of the year you expect the inflation to increase by 10%. Is that year on year? I'm checking this.
On an annual basis.
On an annual basis.
January to December.
Okay.
Compared to the previous year.
Yeah, because second half of the year last year was much elevated. Okay. That's clear. Secondly, on this, so you mentioned that 50% of the stripping cost was capitalized this year versus 100% last year. Can you clarify that, why was that the case? Going forward, what's the expectation?
Yes, of course. In accordance with the,
You know, accounting principles. What you have to do is you have to define the expected long-term average stripping ratio for the life of the mine. When there's a change in the mine plan and that number changes, you have to adjust. Whenever you're on a yearly basis above the expected average stripping ratio, you capitalize that portion. Vice versa, when you're below, you amortize that portion. Given the fact that there was a change in the mine plan, which in turn generated a change in the average long-term life of mine stripping ratio, that's what was behind, you know, the reason for capitalizing this year versus last year.
Okay. Going forward, probably it's going to be 100% expense because I guess you don't revalue that every year.
Again, we will have to. If the mine plan doesn't change, then probably the average long-term stripping ratio won't change. If the stripping ratio next year is at or below the average, we will have 100% expense. Only if it's above.
Okay. That's very clear.
You have to look at it annually, right?
Yes. That's well noted. Secondly, on the working capital. You have seen inflow of around $77 million. Is it going to be, like, can you explain the different moving parts first and what is the expectation for this?
The main reason behind that reduction in working capital was the fact that we were able to recuperate some of the value-added tax that was owed to us, historically. That was the main reason. We're going to continue to put pressure to try to recover as quick as we can the value-added tax that is owed to us because we are typically a value-added tax positive. Because the sales of gold are zero VAT, but we pay VAT when we purchase you know certain things in Mexico. That generates another payable into VAT all the time. We you know need to push to recuperate that as quickly as we can. That was the main reason behind the
Probably in the high commodity price scenario, you'll have higher VAT recoverable.
Probably.
Yes. Okay. That's clear. Finally, just on the depreciation because it matters for the dividend payout. What's the normalized dividend, like for the company after the growth projects are up and running?
What's the approximate, sorry?
Normalized depreciation level.
Depreciation level?
Yeah.
Okay. That depends also on the depletion. As you know, we depreciate our assets based on the depletion factor, which is based also on the reserves, which gives you the mine life, expected mine life. If you have a reduction in volume extracted from the mines, that will have an impact on depreciation, on the depletion factor. That's a bit of the reason behind the lower depreciation that I showed you in the slide. If we go, you know, back to normal levels of extraction, I think we will have a more stable depreciation.
Of course, with the Juanicipio project coming in, and once we start up that plant and it starts to depreciate, which we hope it will be this year, depreciation will go higher based on the fact that the Juanicipio plant will be operating in the second half of the year. Just a combination of factors.
Okay. Thank you.
Yes.
Just first one on Rodeo. Obviously, it's been in the pipeline for a while, and timeline's moved out maybe just a little bit. It's only about two and a half years or so until commercial production. Can you just talk about a little bit about the pathways forward there?
Yeah. Unfortunately, we've not been able to complete the land access with the agrarian communities in the area. Something that we are aiming to conclude in this year. Fortunately, I mean, the ore body is shallow and therefore will require not a large stripping. It would be a low stripping ratio. What we need to do after we have the land access is have the exploration crew and convert those inferred to indicated resources and therefore reserves and do the viability. We are also bringing the equipment from Noche Buena. We are aiming to have a low CAPEX project into operation.
That's why the timeline that we have in the chart.
Okay. Maybe just secondly, on the renewable energy target, 75% by 2030. Can you just talk about pathway to that? Is that gonna be internally driven? Do you need to rely? How much do you need to rely on the regulators and the state utility and things like that? Or are you gonna get by PPAs?
No, we do have the source and the energy already. It's just a matter of.
Passing on some of the administrative controls and regulations that have become a bit more difficult with our energy reform in Mexico.
Thank you.
Yes.
Hi. Thomas Streeter from Streeter Research. Question for Mario. Just what is the new discount rate on the silver stream?
What is the new discount rate? I don't have it top of mind. Let me get back to you and give you the exact discount. It's based on LIBOR plus spread considering the Mexico risk. I don't have it top of mind.
Okay.
I'll send it to you.
Yeah. Thank you.
Happy to do that. Yes. In the back, please.
Sonia from Credit Suisse. A short question on Juanicipio. Given the experience that you had in Saucito, what is the shortest time that you think it would take in order to ramp up the plant to the 85%?
It would depend. I mean, in Saucito, the second line of Saucito was very quick. It was within two months or so. But it would depend. I mean, the information we've gathered from this time, being able to process the ore in Fresnillo and Saucito has been a good opportunity. Also, we've been commissioning all, I would say, all of the equipment except by the mill, which we need the energy from the grid. It's only that last part, and therefore that's why we are confident in reaching that 85.5% ramp up.
Thank you. That's useful. Just from a safety perspective, one of the areas which you seem to have fears is around occupational illnesses. Could you talk about how that's been trending year to date, occupational illnesses?
Occupational, sorry.
Illnesses.
Oh, occupational illnesses. Well, that's something that we've been taking care of for many years. We do have that have drastically dropped, of course, through the years. Those illnesses from the mining in the past are not present now in any of our mines. That's something general that I could tell you. Gaby, I don't know if we have something more in particular about illnesses in the workplace.
We've probably got enough report.
No.
Today. Yeah.
Yes.
Thank you.
We can send you further detail.
Yeah.
Of course.
Yeah. Yeah. Will do.
Yes.
Thanks. I just wanted to ask a question about Juanicipio. Once it's up and running, what should we expect the dollar per ton mill cash cost to be? Is it gonna be in line with where Saucito is now or potentially where Saucito was, you know, when the second line started up, for example? What's a sort of sensible?
Yeah.
We have not released that information. However, we have pointed out to that reference as being similar to Saucito. Of course, as I mentioned, this is a new operation, so we expect to do better than that. Just as a reference, that's what we are pointing out to. It's the same vein, just passing all the way to Juanicipio, but at the higher part of the vein, of course, initially.
Okay. I just wanted to ask as well, you know, is there an effect from putting the tonnages from Juanicipio through the Saucito plant that sort of affected the efficiency of operations at Saucito over the course of the last year, or no difference?
Tomás.
No. Not at all. We have only used any spare capacity that we have at Saucito. Saucito is not sacrificing anything by processing those tons.
Okay. Great. Thanks.
Jason.
Okay. Just to come back to your triangle on page 12. If we go back to the time of the listing, you guys went through a period of very rapid growth of bringing projects online quite quickly. What's your feeling on Mexico? Like, what we're hearing from other regions is it's taking much longer to bring projects online. Is that true in Mexico? Is it possible to, if you like, give a little bit more impetus to getting these projects through the pipeline more quickly?
Most definitely. I mean, it's taking longer in Mexico than before. On average, in previous years, we used to have the economic impact assessment approved and everything within a year. Now it's taking longer, two years, 2.5 years. Therefore, you have to plan for those longer periods of permitting process in order to bring onstream the projects. From those that are on the triangle, of course, Rodeo and Orisyvo are reflected in our chart. We are now on the land access stage of those two projects. Guanajuato, as I mentioned, we are having good exploration results.
In fact, I mean, I should mention that we are planning for an Investor Day. We confirm the date in which we would come talk about more about details about exploration and operations as well, probably November or so. We will keep you posted. Yes. I mean, right now instead of pushing it is more to plan for that permitting, longer permitting process on those projects, Jason, unfortunately. Yeah.
If we look at the third level down, that's the PEA feasibility level.
You're saying four to five years before we get first metal from those projects from today?
Yeah.
If we look at the next level down, is that nine or 10 years?
No, I would say less than that. For example, Tajitos is in the Herradura District. Similar to Herradura in the initial stages. We are working to consolidate that property there. We are already working there. Pilarica in Peru, yes, that would take longer, I would say. We have some communities around and more and more work to do there. So it depends. I would say Orisyvo, Rodeo is right there reflected in our chart. Guanajuato probably next, in the next probably four to six years. Then Tajitos probably along the lines of Guanajuato. San Julián, Juanicipio are the ones that we are kind of pushing now.
Okay. Thank you.
Do we have questions online? Okay. With that, we thank you very much for joining us for this interim results preview. Thank you. Thank you.
Thank you.