Octavio Alvídrez
CEO
Fresnillo plc
/
View from the Top

Long-term Policies to Promote Investment Needed

Thu, 10/17/2019 - 16:14

Q: What should Mexico do to gain competitiveness against other mining jurisdictions, such as Chile or Peru?
A: We are experiencing political and economic uncertainty at a global level, and Mexico is going through numerous changes internally. Although the country has a significant geological potential, so do Peru and Chile, as does Argentina, to a certain extent. Newcomers include Ecuador and Colombia. The US and Canada remain very competitive in designing and putting in place all the conditions necessary to invest in mining. Against this backdrop, it is crucial that Mexico create long-term mining policies that promote investment and guarantee legal and fiscal certainty. Right now, miners in Mexico have a burden of around 52 percent, considering income tax, mining rights for exploration-exploitation concessions, royalties, PTU and other factors. Alternative jurisdictions have burdens as low as 25 percent. They also provide incentives for exploration that Mexico lacks.
Fresnillo is known for placing exploration at the core of its business strategy. It is a crucial activity that we conduct throughout the industry’s cycles. That strategy enabled us to double the silver resources we had 11 years ago and more than triple our gold resources. It resulted in a doubling of production. Now, exploration is decreasing in Mexico, given lower prices for base metals and lack of incentives. Even Fresnillo will cut down moderately. A comprehensive fiscal plan to incentivize the industry is much needed. It would contribute to the objectives of the current administration: economic growth and job creation in areas of the country where often there is no investment because of their remote locations. Mining companies bring infrastructure and development to such regions.
Q: What changes in the Mining Fund would be appropriate so that it effectively fulfills its purpose?
A: The original design was sensible. Directing the levied resource to the communities was an important initiative. It must be said, however, that after almost five years of the fund’s implementation, Fresnillo, has not reduced its social investments in communities. The same can be said of almost all mining companies. This makes the fund an additional burden to an already heavily-taxed industry. Despite this, I believe these resources must be directed completely to the mining communities. The Mining Fund can be a great complement to the work already undertaken by mining companies. It is not so much about redesigning the fund, as of making sure it works transparently and effectively.
Q: What specific measures is Fresnillo taking to achieve its production targets for 2019?
A: We have had in 2019 somewhat difficult year. Therefore, our guidance for production was lower than in 2018, when we achieved 61.8moz of silver, including our silver stream, and more than 920,000 oz of gold. Our guidance for 2019 is between 55 and 58moz of silver and between 880,000 and 910,000 oz of gold, reflecting some difficulties we have had with operations, mainly at Fresnillo on the silver side and a softer production at Herradura. We also knew that Saucito would be performing with a lower silver grade, so that was not a surprise. Similarly, weaker silver production was expected at San Julián.
Of those mines, the only surprise was Fresnillo. We are putting in place concrete plans to correct that and make sure we reach our guidance for 2019. At Fresnillo specifically, we are implementing innovative maintenance programs to improve our equipment’s reliability. Moreover, we are introducing automatic drilling devices so we can continue drilling in between shifts and increase productivity. We are increasing our contractors’ efficiency and hiring some foreign mining contractors for development, which is the future of the mine. This is not to say that we do not prioritize a strong local supplier network. We work closely with the Zacatecas Mining Cluster, which has been reflected in a strong supplier network in Zacatecas and the neighboring states. That is a KPI we follow quite closely: how many of our goods and services come from local sources. But with respect to development specifically, we work with almost all the contractors in Mexico, and we have stretched them to capacity. We have had to hire foreign contractors to supplement those in Mexico.
Q: Juanicipio is among the most important projects in Fresnillo’s pipeline. What is the strategy for its development?
A: Fresnillo is cautiously bullish about the price of gold and silver in the near future. We expect prices to be at a good level in 2021, when Juanicipio will be in full production. It is an excellent project, sharing many traits with Fresnillo and Saucito: higher silver grade, wide veins, low costs. The project was approved in April 2019, with a US$395 million investment. This will result in a silver production average of 11.7moz and a gold production of 44,000 oz. The initial expected mine life is 12 years. There is good potential to expand this project’s reach and lifespan.
We are working jointly with MAG Silver, our JV partner on that project. It was the original owner of an exploration concession in that area and was already exploring around 12 years ago when we approached the company for an exploration agreement. We committed to some initial investment, which allowed us to earn the 56 percent share on the project that we now have.
JVs like that with MAG Silver are part of our growth strategy. Some years ago, we undertook a JV with Newmont in the Herradura district. It turned out successfully and after many years of our operation we ended up buying its share in 2013, making the project 100 percent Fresnillo-owned. Our approach to JVs is to create synergy: value must be generated that otherwise would be impossible or very time-consuming to generate if we did it alone. In the case of Herradura, we benefited from Newmont’s exploration experience in deposits similar to Herradura. We are open to those sorts of alliances.
Q: There are successful gold and silver projects in the south of Mexico. What conditions would warrant Fresnillo’s entry into those jurisdictions?
A: These jurisdictions are certainly more complex than others in Mexico. We have the capacity to explore, identify and develop operations in difficult and isolated areas, like Cienega. More than 20 years ago when we started operations there, we brought infrastructure there and made a considerable investment. San Julián is another project with similar characteristics. Perched high on the Sierra Tarahumara, it presented many intricacies, not least in terms of security. We do have some concessions in Guerrero and probably in the near future we will be able to explore there. But the circumstances there are very particular, even more so than those of the aforementioned projects. State and federal governments are working to improve conditions, like combating crime in certain areas, and working with communities to support our processes to obtain the social license to operate. More work is still needed, however.
Q: How will the new pyrites plant in the Fresnillo district further your overall production strategy?
A: This project is consistent with one of our central business pillars, which is to maximize the benefits of our current operations. Thanks to this plant, we will recover additional silver from what we have already mined. Fresnillo is an operation that goes back many decades, and we have tailings that will be reprocessed with this technology. Fresnillo has been operating for decades, but continuously since the 1920s or so, initially with amalgamation processes, and then with the flotation process. We installed top-notch technology there to achieve very fine milling: 15 to 20 microtons. This gives us the possibility of recovering more silver than previously. The plant represents a US$155 million investment. It will result in an annual production of 3.5moz of silver on average and close to 15,000 oz of gold at a very competitive cash cost of US$2.50 per ounce. We have already finished the first leg of this project, which is the pyrites plant at Saucito. The second leg will be completed in 2H20, namely, the flotation plant to process the old and current tailings of Fresnillo. It is very exciting to be able to use new technology to extract value from what has been mined in the past.  
Q: What is your perspective on the availability of human talent in the mining industry?
A: This remains one of the main challenges the company faces, given the fact that we doubled our size in a decade. The industry’s cycles impact the creation of talent. This begins at the university level, where the problem is aggravated due to a mismatch between a high cycle in the industry and the amount of talent being generated at institutions of higher learning. We have taken that into account and work with all universities in Mexico that have earth sciences programs. We support them through different schemes, like providing opportunities for students to come and work at our mines for certain periods of time or updating professors on the main industry trends. Moreover, when we acquire new technologies, we promote them in universities by introducing them to their labs. We also work with graduates through mentorship programs, where distinguished members of our personnel guide newcomers over nine months at one of our operations, after which they may be offered a position if there are openings and their performance was satisfactory.