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San Julian, Juanicipio Boost Production Pipeline

Octavio Alvídrez - Fresnillo
CEO

STORY INLINE POST

Sat, 10/28/2017 - 14:31

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Q: World silver production fell by 0.6 percent to 885.6 million ounces in 2016, the first drop since 2002. What was Fresnillo’s reaction?

A: From 2011 until 2016, metal prices dropped on a yearly basis and the global mining industry was faced with real challenges. During this extended downturn, many mining companies were cutting exploration budgets and pausing ongoing projects. This trend impacted global output and caused it to fall for the first time in 15 years in 2016. In many ways, Fresnillo bucked the trend. While many mining companies were focusing on strengthening their balance sheet and cutting debt, we have always targeted a positive net cash flow. Adhering to a long-term strategy, during the slow years we continued with our balanced approach to growth based on investment in exploration and project development, and that helped us to continue growing and to increase our output to a record 50.3 million ounces of silver in 2016. In the past nine years, we have doubled our silver resources to 2 billion ounces and more than tripled our gold resources from 9 million ounces to over 34 million ounces. This is now reaping rewards because the silver price turned a corner in 2016 and has continued on the same trajectory in 2017. Every year, we reinvest approximately 50 percent of our net profit into the company and its projects. The remaining 50 percent is paid out in dividends to our shareholders. This is a strategy that has brought success over the years and we will not be diverging from this approach.

Q: How pleased has the company been with initial operations at San Julian and what impact will Phase 2 have on the project?

A: San Julian has been a challenging project from the outset. It is the largest investment in the group, with US$515 million, and it is located in an extremely isolated area. We initiated Phase 1 during 2016 and Phase 2 during 2H17. Combined, the two phases will add 10 million oz/y of silver to our production level for the next few years but we will also be heavily exploring the district because we estimate that only 30 percent of the area has been explored. There is a lot of potential to increase resources and we feel that this project will become one of our flagship assets in the coming years.

Q: How is the Juanicipio JV with MAG Silver progressing and what role does it have in Fresnillo’s long-term growth pipeline?

A: Juanicipio is a very exciting project, with a resource base of approximately 240 million ounces of silver. Although it is smaller than some of the other assets in our portfolio, it is in a terrific silver district with an exceptionally high-grade ore body. We are applying for the final permits and will soon be submitting our plans to the board for approval, with construction set to begin during 4Q17. If all goes to plan, operations will begin during 1H19.

This is one of our key assets in our project pipeline but we are planning to develop a number of early stage projects in the coming years. Historically, roughly 90-95 percent of our growth has been organic and we continue to invest in exploration. In 2017, we will invest US$160 million on exploration. These resources will be split evenly between our current operations, our development-phase projects and on greenfield exploration. Around 5-7 percent of this figure is invested in Peru, where we have been exploring for the past eight years and have a project with 50 million ounces of silver. We are also considering some activity in Chile and Argentina but the vast majority of the funds will be invested in Mexico.

Q: How is the turnaround at the Fresnillo mine progressing and what long-term aspirations does the company have for this historic asset?

A: The Fresnillo district has been mined continuously since the 1500s and it remains an outstanding ore deposit and mine. We have identified close to 800 million ounces of silver in resources at the deposit, which equates to a mine life of at least 25 years. In the past couple of years, we had some issues at the mine, falling short of our development targets. We have now increased our development rate to regain operational flexibility and last year we were able stabilize production. Our aim is to increase silver output by 7-10 percent in 2017. It is now a very efficient and productive operation and given that there is still strong exploration potential in the area, we believe that the Fresnillo mine will continue to provide the base for growth for several decades to come. It has always been a flagship project and this will not change.

Q: Mexico’s silver production fell 3 percent in 2016 but it still holds the top spot globally. What must Mexico do to ensure its place as a leading silver producer?

A: In terms of geological potential, Mexico is in an extremely privileged position, and in most of the country there are also strong links to water, energy and other vital resources for mining operations. The country needs to combine this strong infrastructure and geology with policies that encourage mining and mining investment. Unfortunately, during the past few years a number of new taxes have been introduced that have taken away the competitive advantage that Mexico enjoys over other countries. We need to see policies that promote and encourage exploration, which are in place in other jurisdictions. If this happens, Mexico will start to meet its mining potential and we will see the industry playing a more significant role in national economic development. I am confident that the public sector will provide the necessary regulatory support.

Q: Fresnillo is one of Mexico’s leading gold producers, with the company’s production rising 22 percent to 935,500 ounces in 2016. What role does gold play in the company’s overall growth plan?

A: Fresnillo was the largest gold producer in Mexico in 2016 and gold has always held an important position in our portfolio. When we listed on the London Stock Exchange in 2008, our growth plan was to double silver production to 65 million ounces and double gold production to 250,000 ounces of gold by 2018. We are now aiming to produce 1 million ounces of gold in 2018 – 300 percent more than we had initially targeted – so that reflects the vital role that this commodity has to play for the company. We expect our silver production to grow at a much greater speed than gold but we are certainly bullish on this commodity. This confidence is driven by a number of factors, including the announcement in 2016 to make gold available as an investment to the Islamic investor community for the first time. Every time we see a new investment tool, such as the Exchange Traded Funds (ETFs) a few years ago, we expect to see a pickup in investment demand. We view this issue as a positive development and we believe the demand for gold as an investment will grow as this new market begins to make its presence felt. In a world in which there is more and more uncertainty, precious metals play the role of safe haven and this helps to support prices.

Q: What are the primary long-term objectives that will drive the company’s strategy going forward?

A: We are on track to achieve our goal of reaching annual production of 65 million ounces silver and 1 million ounces of gold by 2018. We are now in the process of defining what comes beyond 2018. Given our rate of growth over the past 10 years, it will certainly be a challenge to maintain the same level of expansion but I am confident that Fresnillo will continue to grow efficiently and productively by adding exceptional projects to the portfolio. One of the key objectives is to avoid diluting the quality of our asset base, so we will only bring online projects that will drive long-term growth.

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