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Executives

Octavio Alvídrez – Chief Executive Officer

Roberto Díaz – Chief Operating Officer

Mario Arreguín – Chief Financial Officer

David Giles – VP of Exploration

Fresnillo Plc (OTCPK:FNLPF) Q2 2014 Earnings Conference Call August 5, 2014 4:00 AM ET

Octavio Alvídrez

Thank you for joining. It’s always nice to be here and sometime review going into our results. As Carol mentioned we are doing some forward-looking statements. So, I will – maybe aware of the disclaimer and we will follow the same the same pattern as we followed before.

With me is Mario Arreguin our CFO with Roberto Diaz, our Chief Operating Officer and David Giles our Vice President of Investor Relations who will comment on the results we had for this first half of Fresnillo Plc.

But first of all, let me walk you a little bit through our model. We do have the same model of one that balances growth to return and (inaudible) based on the four pillars that we consider the foundation of our strategy and which has maximized potential for existing operations, deliver growth through development projects, expand the growth pipeline and advance sustainably.

And I would like to mention a couple of examples doing one of this related to this forecast of the year. In terms of maximizing the potential for operations for example we aim to operate at 100% capacity and this is happening in Fresnillo and – in combination of Fresnillo and Saucito.

While in Fresnillo we are having a little bit of trouble we’ve compensated that with Fresnillo making asset volumes and freight and so we can achieve 100% of the capacity where transporting some of the long-term (Inaudible) to Fresnillo.

Deliver growth to development projects, we are about to conclude and you may recall probably last year when we switched the two projects, San Julián and Saucito II in terms of findings that’s another strength not only for our assets but also from our management team in which we can achieve we are doing different things to accommodating different, different things to achieve the same objective that we were planning.

So I am happy to confirm that Saucito is almost raised that operation in the last quarter of this year. And this is not only the Saucito operator chain of all of the projects we developed before starting in 2010 we and this follows in 2011, Saucito, 2012 Noche Buena, and 2013 the Dynamic Leaching Plant.

Although we have started operating in the Leaching Plant in 2014. So all of these projects are being achieved and completed on time of the project which we are trying to do in the following period.

Well, expanded growth pipeline as we – this caused previously which grown our resources from around 1 billion ounces of silver in which we obviously built 2 billion ounces of resources at the start of the year and gold-wise, we’ve grown gold in our resources from 9 million ounces to 27 million ounces of resources. So tremendous effort also in the exploration.

And advance sustainable development, well, we can assure that all the way we are illustrating it’s important to this topic as well although the cost of the challenging situation in Mexico in communities land taxes on penalty. We are reinforcing a look at these as we have in this past year.

So for the first half of this year, we have achieved very good results. Gold and silver I’m glad to confirm that we will achieve our guidance that we set at the star of the year 43 million ounces of silver including the silver stream and 450,000 ounces of gold.

With the production coming out of the mine and without accounting the silver stream, last year we achieved 38.8 million ounces of silver and that place us in the first of the largest producer of silver, we used Fresnillo is the largest – to, say for the last year we achieved the number one production place worldwide. We are trying to do similar this year.

In terms of gold, we didn’t produce out of Herradura for the first three months, 2.5 to 3 months until we thought there was floated service back in this place. So the second half we are returning to – we are seeing this first half.

This first half when we compare it to last year, for the same period last year, you will core gold production a negative comparison, because last year we were operating all of our mines 100% capacity whereas in the first three months we didn’t have a length and we are not having still solid quarter.

So second half and we see a regular resume in operation. The story will be different. And we will be operating at Herradura and Noche Buena at 199% capacity and second half last year we didn’t have those operations.

In terms of the Fresnillo mine, we encounter some issues that we are resolving and that’s of course is optimizing the = not only the mining method but all of the activity around the mining method that controls of the dilution and the availability of the mine so that we can bring up Fresnillo up to a level that we have expected.

And of course, the program as well as the efficiency program this is continued effort around mines. You may recall last year we did some savings 29 million in cost of production savings, this year, we’ve been able to control the cost as well as we will report and Mario will go in more details on this.

And for the development projects as I mentioned we are looking forward to bringing Saucito in operation in the last quarter of this year. We have been at a mine at a construction site.

Everything looking good. Shows the last pieces of equipment being installed and so we will have a very nice expansion there. And in terms of the growth of the pipeline, David will report to you probably we can during in the first half.

Turn to the financial highlights. Of course, Fresnillo has not been immune to the main variable effect of the results. With softer lower gold and silver prices, that have impacted our results in such a way that have a slide of adjusted revenue by 23.6% to 750 million.

But of course the EBITDA that we achieved, the EBITDA margin of 47.9 reflects the ability of the management to control costs. So that, the EBITDA margins does not hold as much as in revenue figures.

You may recall this period last year, we reported 52.5% EBITDA margins, so, that reflects the ability of the management to control costs so that the EBITDA didn’t suffer as much. In terms of generating cash flows, our operations are – has no suffered lines very efficient, very low cost and therefore we generated 337 million of cash before changes in working capital.

And with this combination, we have a strong balance sheet, we have 1,1 – little bit over 1.1 billion in cash at the end of the period and that’s why we are reviewing with the Board and the management, all of our needs not only for this year.

But also for the 2015 as we are constructing the two projects, Saucito and San Julián with a need we have for investment there or the sustaining CapEx and three the silver and gold prices which started – with a clear special dividend of $0.05 per share amounting to 36.8 million.

I would like to remind that this has not changed our dividend policy and this is a special dividend. And with this, I would like hand out to Roberto Diaz to walk you through a little bit more – in more detail about the operations results in this first half.

Roberto Diaz

Thank you, Octavio. Good morning everybody. I think 10.5 million ounces of silver in the first half this was down slightly on the previous year in line with our expectations and the reduction was in large part due to the lower ore grades.

As you know, we were looking at our mining methods to mitigate any further dilution and we are conducting further increase our confidence in our geological model. This has been filled really and we are very happy with it.

At Saucito we continue with extremely strong performance which is 6.3 million producers. As guided volume were immediate in the concentrated plants. Grades are expected to remain with a guided range for the remainder of the year.

At Ciénega district which includes Ciénega and the satellite mine of San Ramón, both silver and gold production went down during the period as a result of changes in the ore grades as expected. This was impart mitigated by increased million capacities and higher throughput of the concentrator plant. We are almost 4000 tons per day in order to remind in the content.

Finally, at Herradura, you are well aware of the issue which had a temporary effect in our explosives permit, this result in a lower production from Herradura in the first half compared to the same period in 2015.

For the financial performance to Mario.

Mario Arreguin

Thank you. Good morning. It’s always a pleasure to be back here in London especially with nicest weather, initial for London. In the first slide, we saw the income statement for the first half of the year and we compare that to the first half of the previous year.

This is most surprise when you want we can lower profit levels in every line of profit here that you see. And there were two main reasons for that. And Octavio has already covered them. The first reason and most important is that we saw silver and gold prices.

So that had a lot and the second reason is that the effect that we produced less gold due to the situation that we had at Canon as Herradura and Soledad-Dipolos both of which you are very well informed.

So, gross profit was down almost 43% to $123 million, but if you move up in the change column it will see that the most important factor was the adjusted revenues line which was down by $231 even larger than the change in gross profit. And I would say about 56% of the lower adjusted revenues were due to the lower price and the remaining 44% was basically related to the lower production volumes.

If we look further down the income statement we will see that profits – operating profit here was lower by 15%, 199 million and I think what is worthwhile commenting here is the fact that we had lower exploration expenses compared to the previous period.

In the first half of 2013 in that $115 million where this forecast – invested 69 that has to do mainly two things. One, the fact that David has been able to negotiate a lower running cost which means that we are able to drill the projects that we plan at lower cost. And the other factor deals with the lower budget that we plan for this year compared to the previous year to adjust for the lower priced environment.

If we continue to move down the income statement you will see that profit before income tax came down by only $21 million which is 16%. And the important factor here was that silver is being – revaluation for in this period.

In the first half of 2013, we had recorded a loss of $112.5 million whereas in the first half this year we are a recording a profit for $47 million. So that had a lot to do with the fact that the decrease in operating profit which was $187 compared to only $41 million difference when we look income tax – in profit before income tax line.

And last I would like to make a brief comment regarding EBITDA. EBITDA did go down by 33% to $161 million and it has to do with the main, for the same reasons that I mentioned a while ago.

And one operation has become a lot is how our cost inflation is behaving year-on-year. And as you see here, we are happy to report for the first time in quite a while, we have seen inflation, cost inflation settle down now. For the period, we’ve only recorded a point, maybe 1% increase which is I believe the lowest level we’ve seen for the half of the year, for the last five six years.

And what we show in this slide is different items that confirm our production costs. And you can see that some of the items did have important increases such as diesel which had an increase of 6.2% and fuel which is actually gasoline more than anything else that had an increase of 7.5%.

But the other items within the production cost as you can see were pretty much in control. Very small increases. I should mention that this is the inflation based in dollars. But in the case of labor, as you know labor is a component which is slightly pesos.

We had a 5.5% increase in wages and salaries for our workers. In peso terms of course, that when you can – fact of the exchange rate impact compared to the dollar for the period we only see 1% increase in cost of personnel. I am sure you all recall that last year it was exactly opposite.

So right now we see the benefits of the valuation of the Mexican peso.

Now let me just spend a couple of minutes on the two slides that you had in this presentation, slide 14 and 15. As you are aware the Spanish words which I use to explain variations from one period to the other. And in this different case, we are talking about adjusted production cost which went down by 40% - almost $47 million.

This is shown here in the last column, the green column, the $47.7 million and as you can see there were three main reasons for that increase. One has to do with the fact that Soledad-Dipolos which did not operate in the first half of this year. So obviously, we did not incur in those operating costs. So that was estimated at around $50 million continue thus far.

Here also and it has Herradura disrupted during the first two-and-a-half months of the period. So, the variable cost is not incurred in that same period that was around $13 million and the fixed cost for Herradura which we didn’t incur were reclassified as unproductive cost when we took them out of production cost which has been last been at year end.

Those were the main reasons why production costs in as per the term inline from one period to the other. Of the remaining bars, on the left hand side of the chart here, has to do with either increases in production volumes, increases in the volume of four process or specifically in the items that confirm our production costs. So, you can see the detail here of each one of those components.

Until the cost goes down at these one of our mines. Another disciplined thing that we use internally to measure how (inaudible) in terms of controlling our costs. We’ve explained this in great detail in our internal reports. So I would encourage to read that. In fact that there are playing detailed why in some of our mines because there is some stuff for them.

But I would guess like this view as an example where you see a 3.4% decrease from the first half of 2013 to 2014. And this has to do mainly with the increase in volumes of four processes at Fresnillo.

Remember that at Fresnillo we are suffering lower ore grades uncertainty this period. So one of the ways we try to make up for that as Roberto said, is by increasing the volumes four to profit.

With that, we obtained certain economies of scale which I think the other thing today frankly to a lower cost per ton. We also follow very closely the cash cost per ounce. And again in our interim report, we spend some time claiming variation for the mines for purpose for this certification and we use Fresnillo as an example. We get off on the previous slide that cost per ton actually went down by more than 3%, but in terms of cash cost, the cash cost went up by 12.3%.

And there two main reasons for that. One has to do that that we had the second lower ore grade. So the silver content per ton of ore went down. Which automatically translates to higher cash costs and the other reason had to do was the fact that, treatment and refining charges.

Most of the refining charges went us from one year to the other. And remember treatment and refining charges are not taken into the calculation when we do the cost per ton because that is a variable other than our power control. But it is part of our cash cost.

If there are any questions regarding the valuations I will be happy to answer them in the Q&A.

On Page 18 we show here the margins that we have that is for the mine particularly (inaudible). It summarizes what went as is one of our mines. So with the cost here you can see the cash cost from one year to the other. And again, if use Fresnillo as an example, you can see that it went up from 546.6 in 2013.

Then which also the price of silver ore depending on the type of mine. In the case of Fresnillo of course we are talking about silver, the price of silver went down from $24.57 to $20.26.

There you can measure the margin that we have this year for Fresnillo, we had a margin of $19 per ounce. And it went down to $14. In terms of percentage sold, it went down from $78 to almost $70.

You can see now that Saucito, the Saucito mine is a mine that has the highest – one of the highest margins, 91% and 83%. So even though we are looking at lower margins we believe that they continue to be very strong healthy, high at some of our mines and on the bottom part which shows the volumes that was reduced at one of our mine. You might have the full story here,

And maybe I would like to spend a few minutes analyzing the irrigation gross profit. There are a lot of things you don’t see directly in the financial statement. That’s why we like to issue this again; we just show the adverse effect that occurred during the period and also the favorable effects that we saw during the year. The first, column is the gross profit in the previous year and the green column at the right is the gross profit for 2014.

So as you can see, the thing is that of course and we spoke about this was related to the lower prices of gold and silver. So $223 million reduction in gross profit and 23 more or less where I said a few minutes ago related to the lower prices of gold and silver.

The you see this effect of not being able to operate our gold mines which we estimated at around $78 million, following that, we see the higher depreciation that we saw over the period but the lower ore grade that we saw we feel negative. This was the impact in terms of gross profits annually. And then, with the higher depreciation that I was talking about the million dollar impact in lower grade at Fresnillo I think that was approximately $26 million.

The fact that we had at Soledad-Dipolos completely stopped during the period had an impact of approximately $22 million. And I was talking about the higher refining charges that had a negative impact of cost in $17 million.

And on the positive side, this speaks very well about the operations trying to compensate for the adverse effect. You can see the favorable impact of higher volumes or new operations coming such as the plant in Herradura.

This slide talks about a bit of the contribution of the volume of our mines in the first half year. And as you can see here, Fresnillo continues to be the most important mine in contribution in the overall gross profit.

But now, Saucito is second at 1.41. Of course at Herradura we – again it’s little bit unfair is that we are comparing Herradura also in with disrupted operation during the first half of the year versus the first half of the year 2013, where we saw Herradura hopefully at full capacity without any problems.

With regard to cost of the mines, further down in our income statement is that we saw some inflation expenses. I’ve already explained to you that we have decreased from one into the other. But it would be good to show that $69 million were spent, large portfolio of projects going on right now and as you can see the efforts of us through the portfolio exploration projects.

And then, I also spent a little bit of time regarding the silver team this time around the profit has to do with the higher – lower prices of silver that we saw as we can remember this is measured eventually using the price of silver as of the end of the period.

Remember that this is basically an extensive cash flow analysis whey be buy the assets and compare it to the previous period. And one of the variables that we used in order to discount that cash flow or to this finally discount rate rather, the LIBOR rate, we adjusted that will go down.

And we also saw higher volumes of production coming out of the Sabinas mine which is the mine that has to do related to the silver field. And that also helped to get to this number.

In terms of cash flow, we talk about that on Page 24 and 25. I think to make a very good comment here. In terms of working capital, we saw an increase of 70 – almost $72 million that has to do mainly with the increase in trade and other receivables. Remember that during the last two months of the period, Herradura started operation and started selling back to the smelting and refining company.

So that meant an increase in accounts receivables accordingly which compared to the balance at the beginning of the year that translated into an increase in working capital for us.

We also see an increase in inventories. When we talk about inventory we were basically talking about inventories at the leaching pad. And again the fact that we are starting to see Herradura run and starting operations and that we are building up those pads, building up those inventories of full content. In order to the fact that we are increasing production at Noche Buena which is exactly the same story.

And those two first reasons were partially compensated by an increase in our play in other tables. So that’s how we get to the working capital.

Income tax and profit sharing that came down to 36 million because we are making the profits in the previous period. Remember this is cash flow we are talking more about provisional payments for the six months of the year.

Silverstream contract, we’d like to point it just because this is a nice source of cash generated during the first half of the year $31 million. Another item that I think is of interest to you is the CapEx item which is probably from plant and equipment which added up to $212 million and we very briefly comment on where that money was invested in Herradura, Saucito and Fresnillo and Ciénega basically.

And another important news of cash flow was it’s different than what so important was the special dividend that we paid back in May and of course you know that we announced another dividend which will be paid in September.

And finally this just the balance sheet continues to be quite strong recurring the holding cash and investment approximately $1.16 billion and as you know we issued that May last year for $800 million senior year notes.

Other than that, I don’t think there is anything more to comment really on the balance sheet. Like I said, it looks very strong and healthy. Okay.

About the (Inaudible) process, I think they said – the underground mine alignment – we have that allotted more than 36 kilometer of underground working and we have worked very hardy in this structure of the project in the underground mine.

We have a solid and new 8000 GPM pumping station as well as a maintenance charge and all the ancillary buildings that we need for the underground production. And about steadfast construction and infrastructure I will take advantage of these photographs.

You can see the new premium belt conveyor for the new stockpile and you just see also the structure where the shooting mill has inflated and also the rotation belt with a depression plant and now we are working in electricity and instrumentation wiring. In the left side, it’s now showing the photograph that we have also the – for saving plans and concentrate.

And we feel that this project will start in October within the project, and to expense rate which is the quality designed. Of course, I want to remind that a strong performance and we have an economies in this project the internal rate of returns will be 2.1% and the extremely all in cash cost of $3.70 per ounce.

Okay, and on the San Juan project, also the underground working has advanced very well. Right now, we have more than 44,000 meters in development work. This main – ore body is completely totally in operational development and for the main system field; we plan to finish the development at the end of this year.

We already placed all the orders of delivery equipment and acquires for the new reservoir water dam as we start also with the construction of the leaching plant with in nature and we are on track for the second half of 2015 start up.

Also this period has a healthy rate of return 70.4% and this will give us another a multiple evolution of 10.3 million ounces of silver and of course there are two call over there 44,000 ounces per year and the good news is that as we persist with the exploration we have continue to find these small new base so that is the reason we want to emphasize the investment in this new lease because it is a Greenfield project and of course will deliver always. Thank you.

David Giles

Good morning. The good exploration results to the foundation of the growth of this company. Our focus this year is around our mining districts at the top of triangle, the six districts there you can see listed, and the San Julian project all our districts are under explored and that’s why each year we continue to grow.

We are also exploring in the Guanajuato district. You can see there drilling and where it faces prospects in drilling. Guanajuato is a place where geologists work the mine closed down at the end of 90, known in the last few years we’ve been exploring that and it’s looking good. That’s in the near term or the medium term future we can reopen that one.

We are also exploring in two new properties which are on the triangle there in prospects in drilling the Rodeo project, it’s a gold project in Durango and the Pilarica silver project which is in Peru.

So those have moved up the triangle from early stage now they are in drilling. Also we have added on the bottom part of the triangle the Bellavista project which is Sonora and it’s a very promising gold project which is starting up to build right now.

Fresnillo as usual has a large budget for exploration $225 million. We think it will come it at about 10% from the budget because of the repeat cost of the drill. So we will complete the drilling program we’ll comment on the drilling budget.

As usual, we estimate our resources and calculate our reserves end of the year and audit it by an external company SRK. So that process hasn’t started yet, but I anticipate that our resources will grow at all our mines and at least the reserves will be maintained or increased at the same.

Just to give you an idea of the activity, the top two photos are drilling around the Herradura mine and the photo on the left is drilling on the Centauro pit on the right is drilling on the Pyrites pit. And this is where we are increasing the resources at Herradura.

Similarly at Fresnillo in the South Vein Plateros and Huisache was find in New Vein and we are doing additional drilling on the San Gregorio vein in the Fresnillo mine. At Ciénega, the San Ramón satellite mining continues to grow we found on the parallel veins the main San Ramon vein and we are exploring another nearby cliff vein, Cebollitas, silver vein with gold value.

And as Roberto mentioned in new district, San Julián where in construction of the mine, there is a number of veins still to be explored and we are exploring on close to the new plan at Última Tierra and María Antonieta.

Those are places that got some isolated holes with good values and we are doing the follow-up drilling right now. The bottom three photos show you the kind of the where we are busy in Guanajuato. In this district we use portable drills, so that we can advance quickly and get the permitting quickly, because less disturbing the surface, there are underground targets and there are a lot of people working there.

Just to mention the new ones where the photos, the Rodeo district, this one I mentioned in Durango, here we are finding wide-spread oxidized gold value near surface. Again, we are using portable drills that you can see on the left and we move them around by helicopter that’s the photo on the right.

And that district is growing very nicely where I expect we will have a result at the year over half a million ounces there of gold. Our target in Fresnillo is minimum two million ounces of gold or a minimum of 100 million ounces of silver. That’s our target that remains on any new project.

The Peru, in Peru, the Pilarica project and I was speaking for the – yesterday we just authorized to continue the drill program because of the good results and that’s silver values have simple metallurgy in a near surface mode in a very accessible part of Peru.

Our projects with resources and assessments have achieved the large gold projects in Chihuahua and we continue to do metallurgical testing and initial drilling there. This year, at the end of the year we will do a preliminary economic assessment on that one. We are looking to that being a simple operation underground mine.

And also the Lucerito project which is in Durango, not too far away from the smelter and that’s an ore from repeatable gold, silver project that’s also in metallurgical studies and preliminary effects.

And in this state of the mining industry we are receiving several offers from – for joint ventures et cetera and we are looking at those with a team of engineers and geologists. Not only in Mexico but also in Peru and Chile. As a result of update the table probably at the end of the year we published in the first quarter of the next year.

Octavio Alvídrez

Thank you David. Well, we have to conclude this is a chart that we like a lot, because you can see the nine projects we have in the near future up to 2018. And as I mentioned, this is just a continuation of the five projects we deliver on time and on budget in 2010.

And with this, is you can see that’s a nice combination of brown hill projects with the Greenfield projects as well and basically taking a lot of care in this project would contribute to create value, do not dilute the quality of recurring assets. So, we are looking forward to continue on the developments on the stability and on the construction on each one of these project.

Saucito, somewhat a reality, San Julian, is also on track. The expansion of Ciénega, we will present for approval very soon. The expansion at Fresnillo to 10,000 tons per day to deal with larger quantities of white metals and compensate also on the silver. Pereñita at Fresnillo saw large production of silver.

The Pyrites Plant which is a great project because we chose to take advantage of the savings that we have in Fresnillo, the history of that operation, Fresnillo has attracted additional silver through what we already mined. The expansion of the Centauro Deep which is also right now in the ability and we expect to also present for approval very soon. Centauro Deep which meets more developments and more exploration.

But it’s looking good as well. And finally, Juanicipio and Orisyvo which are coming back in the years of 2018.

And this is just to say that we are confident in achieving our objective by 2018 of producing 50 or reaching 55 million ounces of silver. You can see the breakdown here. Key to the 65 million ounces of silver by 2019 the Saucito II, which is right here in red and San Julian. With these two projects, and the sale of operations that we have right now, we expect to achieve not even in 2018 more likely in 2017 the 65 million quality ounces of silver.

And gold-wise, you see here that the set of projects we have surpassing why it confidently the 500,000 ounces that we set our objective in 2018. But as I mentioned, we care a lot about the quality ounces. So this is not the dilution to the quality of the ounces we are producing.

And just to conclude, you see through this set of results that the business is doing very good, good weather, the cyclicality of our industry, and this in combination with the ongoing efforts of cost control achieving additional efficiencies at our operations. We experience an ability for management through weather and niche uses that are in problem for the projects the developments of the operations, gives us confidence on having also a good deal.

We are looking forward to the start-up of Saucito II very soon, September, October as Roberto mentioned and continue with our approach or strategy to balance the current sort of stakeholders and growth. And with this we are open the session for your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions)

Unidentified Analyst

Thanks very much. Couple of questions around Fresnillo. The issues with the contractor in the first half, what were those and what do you see as the remedies to that, when you need to change contractor or can it be resolved with this operator? And secondly, the geological model reconciliation issues with Fresnillo, how significant do you think they are and what are planning to do to, do some more detailed efforts?

Octavio Alvídrez

I will go with – and then I will leave the program for (inaudible). In terms of the contractors and Roberto can comment as well here. We have good contractors in Fresnillo. However for personal reasons, some of them for a lack of a good maintenance program in another one, they felt from the rate this contractor were getting us. At the timing which we would need more development at a month. As you know we go deeper. We go along the veins, larger distances, so only with these two reasons we need us to increase them, but on the contrary, the contractor we have at the mine fell on the rate for different reasons. So we are trying to support them and finally we decided to bring a new contractor which now is in – he is very, very sincere in the mine. So that we can revert – instead of hoping for the contractor that are ready there to be on the development rates searching a new which is we believe that it will open more doors. We will bring the development rates from 3200 meters per month to 4000 which we are expecting. So that the mine is manageable in terms of the source that we need for production and production to accelerate. For the geological model, I don’t know if there is anything additional Roberto?

Roberto Diaz

No, I will have to say this one about the price and the more of the continuation in Peru.

David Giles

We know the Fresnillo mine very well as for many years. The geological model, the upper parts of the mine was richer in silver and it’s going down from silver to silver led zinc, the decrease in the silver grade increase in the led zinc will renew for many years of exploration.

As we are going down in the mine, what we plan is that we are having more dilution than expected. So what we are doing is we doing more instantly drilling to predict what the ore ups are going to be so that we can have the best money in what method and at the same time be sure of the grades.

But the model is checking out well. But at the same time the Saucito mine is a great – a much better now than Fresnillo, not only in a mining district it combines it together. So you would see the one compensates to the other.

That we preferred in a Fresnillo district to keep the two mines separate on how the grade and reserve model is so that we can get on top of both and one which that where we get.

Unidentified Analyst

And the split in exploration expenditures between H1 and H1 reflects just the natural cost of work or with our decision to perhaps keep the budget down in H1 and see what happened with silver prices or what…

Roberto Diaz

I can just give you a little bit more detail, because we are focused now on the name and maintenance of the project. We were held up in the Guanajuato district getting permitting, that challenge is being resolved and that’s one reason that project is behind.

But we are on a number of scheduling, number which starts off the year when we just calculated reserves. We start-off at the beginning of the year at a rate in which I had to drill as the year goes by. For example, this summer at the Fresnillo mine we doubled the number of drills.

We did have 10 rigs drilling there, now we have 20 rigs drilling at the surface in the Fresnillo mine. And in total we have about 45 rigs running right now as we are talking. It’s just a normal plan with the exception is one?

Unidentified Analyst

Yes, couple of questions. Your prudent CapEx spend in the first half was lower, if you look at your full year guidance of $640 million, can you give us any color of whether that guidance has changed and where, I guess, you are spending perhaps less than you thought you might have been in the first half?

Mario Arreguin

I would say that we have a strategy to lower bit especially in this sustaining part as we are able to – without acquiring any risk on the operations, we want to make sure that we guarantee the continuous operations several months, but at the same time, in our equipment that can last for a little bit longer.

We will then disperse the replacement of that equipment again and likely very, very carefully that that does not translate into a West Atlantic monsoon occur. That’s with regard to sustaining CapEx. Now with regard to our projects, the development programs on schedule.

We expect by the end of the year to have spent something close to 600 in CapEx - because most of the investment in CapEx actually in relation to our new projects. Next year, we will invest quite a bit in CapEx especially in some of these projects that incrementally have pending issues of authorization and we expect they will.

Such as the Las Casas and the Centauro Profundo projects. Those will require investments in 2015, so in 2015, we believe we will be close to between $900 million to $1 billion spending on the projects that are actually approved and when they approved.

Unidentified Analyst

If you would exclude unapproved projects what would your CapEx spend next year interestingly?

Mario Arreguin

If we take off the projects that still require approval, we see here, we will be – probably close to 600.

Unidentified Analyst

Just a similar level.

Mario Arreguin

Similar level. And hopefully, those projects will be approved as we go ahead.

Unidentified Analyst

About the second question on your all in sustaining costs, so you finally game some guidance for this year and next year for your key operations on all-in sustained cost, so the same from the numbers in the first half which actually a little bit low on the sustained cost numbers.

If there are any updates, have you changed your full year guidance on internal assumptions on the way you think, or spending cost will be for your drilling operations?

Mario Arreguin

Right, remember that, all in sustained cost, or basically the cash cost plus three additional volumes. CapEx, development, and corporate as well. Now, we managed a bit our sustaining CapEx, maybe that’s one of the reasons why we are already (inaudible). And also in developments, we are developing in accordance to the mine plan since we spent whatever we budgeted.

All in sustaining cost should be looked at very, very carefully, because you might be – be or come to the wrong conclusion. The fact that we have an increase from one year – from one place to the other doesn’t mean that you are not controlling the cost, simply means that you are doing something in your mine plan that requires either more CapEx or more development.

Of course, growth on the industry is not able to control the developments cost, but in our particular case, especially on our open pit mines, where we have to invest in terms of $1.50 billion and the ratios move up and down quite substantially in certain years. That’s’ why you see variations in terms of all in sustaining cost in our open pit mines.

That’s stable, for us it’s very important for people like you to understand the – what we call the long-term life of mine because that gives you a much broader idea of not guess what has essentially in one year, but rather what rather what you can expect throughout the life of the mine.

And that’s why we reported to this in total, so people are aware.

Unidentified Analyst

Okay, thanks.

Unidentified Company Representative

Thanks Mario. (Multiple Speakers)

Unidentified Analyst

Thank you. Yes, just a couple of follow-up questions. In fact, just on the CapEx again Mario, for Saucito II and San Julian, how much we have left to spend?

Mario Arreguin

For Saucito II and San Julian, for Saucito we are spending $117 million so far and for San Julian we have spent $48 million. Of course, we have committed in San Julian and San Juan for the big equipment, which has not been expended. It’s committed.

Unidentified Analyst

Thank you. And then a question sorry back on the call again, Mario just, I think that in terms of dollar per ton numbers you guidance forward a 7% increase that’s the savings we are going to get for the 3% to 3.5% this year. Where do you think they’ve obviously coming better than you’ve expected. So do you think it’s going to shut now or the end of the year?

Mario Arreguin

Are we going to finish up with the end of the year? I think you probably to be pretty much – likely to tell that is wrong in the forecast. We expect to continue with the same trend. That’s my expectation. I don’t see any reason why the dollar is picking up in the latter half of the year.

Unidentified Analyst

Great. Thanks.

Mario Arreguin

We have targeted 3.5% per ton cost reductions before inflation at the mine and I believe we are falling a little bit short of pay down.

Unidentified Analyst

Okay, and then just a following question, just on, you’ve got quite a fragmented cash balance now, obviously a special dividend, it’s nice, very nice to see. But how do you see that shaping up now with your credit pipeline?

Are you obviously feeling a bit more comfortable in that way where metal prices are headed in cycles? So just in terms of sort of use to fund what you plan to do with that?

Mario Arreguin

Well, in terms of CapEx, we continue to pass a budget for the remaining – remainder of this year, the following year. If you add those two up, little bit north of $1 billion plus, we can maybe count provision budget which we set to be from $220 million for the full year, this year and we expect to budget something close to $200 million next year. So that would be an important use of our funds. If prices more or less remain where they are, it’s very difficult to choose, because we are considering the stability, solid risk weighting.

And it’s difficult to predict where the price of gold will be. But if they continue to be more or less around the $1300 level, we think to grow than just north of 20 – from $250. We will try to continue to generate free cash flow at this level, even better as Herradura will eventually ramp up with full capacity, to steady state; we expect to see that in that in the capital plan.

The Saucito expansion, of course will be coming in co-operation because this doesn’t have to give in force during 2015 it will ramp up in full capacity. So we hope to have a good cash generation from the operating cost.

Unidentified Analyst

Yes, so, I suppose my question was more given they are going to be generating a lot more positive cash flow in pensions that you might use.

Mario Arreguin

Well again, if – remember if the $1,2 billion in terms CapEx for the next year, year and a half right, around $400 million this year and next year in terms of operation expenses that should use quite a bit that. And if we continue to generate free cash flow, instead of paying the dividend, more useful.

Hopefully, that won’t be the case; we want this in cash for a very long period of time to take our shareholders who have a very useful cash and investing it 0.1% or whatever you are able to obtain very short-term investment.

But we are not in a rush to spend our line, as you know we are very cautious on how we invest our money and if there are opportunities out there that we might find, we would consider those seriously and only if they are acquainted to our shareholders.

As David mentioned, I mean, more and more in other revenues, more and more companies are approaching due to the generation of cash and cash on hand we have with three months reported. We raising another – at small level, license from Peru, in Chile, as I mentioned, they like those, in the earlier stage, which are geologies that like and we believe that also of the 100 contribute larger to (Inaudible) some opportunities.

Unidentified Analyst

Great, thanks very much,

Unidentified Analyst

I wanted to ask one on San Julian, if you can comment on the estimate and on the replenishment from this project, you are going to seek approval?

Roberto Diaz

Well, we are on the order of magnitude right now; we are in the latest stage of fixed duration. We have economics in an area assessment, but we are going to see an operation of based on tons per day producing 200,000 ounces of gold. We are working right now just in the interior and we haven’t done any economical assessment of the structure.

Unidentified Analyst

Okay and the CapEx…

Roberto Diaz

Well, because it was just part of the integral mine, it will be in the order of 200 million.

Unidentified Analyst

Basically, four of the present…

Roberto Diaz

Page 34, yes,

David Giles

It is that contextual level, we need to more to 200 tons from the ore body. So far it’s been interesting reflection, but more than that. And you are at a conceptual stage. We envision because we have an 8,000 tons with a Dynamic Leaching plan.

And we believe that another one in that range would be needed or bid for project. But still a lot of exploration to do and more developments on this project, the ore body and then go submit a following stage.

As of today, we don’t know we guess the mine will need a new cost and better plan, in that case it was a better plan with the cost $135 million, this 200 of the remain. The total CapEx is around $135 million.

Unidentified Analyst

And then my second question is regarding Fresnillo mine. I think you give us (Inaudible) to make sure that cash cost will perform as in our expansion capability for the next five years. And how do you expect it by further compositions you have to change has to go lower.

Mario Arreguin

The best indication of momentum we target them to one that we have in all-in sustaining ….

David Giles

19.

Mario Arreguin

Page 19 that’s correct. That takes into account, where we have in the life of mine weighted average all in sustained recovery. That takes into account that we will see expanding the capacity from 8000 tons per day to 10,000 tons per day. That will take into account that in future deals we will have a larger quantity of this metal, led and zinc.

And complementing that, the chart as you can see on page 35in which Fresnillo without expansion, Fresnillo with the expansion we will bring the silver content from approximately 22 million ounces to around 26, 27 million ounces. This gives the findings of that approach is but more or less this is a figure would change.

Unidentified Analyst

Do you (inaudible) in the first half with significant and whether Fresnillo can you give us some color on what you are thinking went into the second half which is more of that and then could you also remind us about on hedging of gold and silver content a little bit?

Mario Arreguin

And we felt like the last quarter, in terms of hedging gold and silver, we have a very strict policy that we will not hedge any silver or gold production at least for the time-being. And we don’t see that policy changing in the short-term. With regards to byproducts, let’s just thinking that, yes, we did start to hedge.

I am sure you follow the behavior of the price of zinc and led and how they picked up and it reached a level at which we feel comfortable. Actually what we did there was what we call a minimum. We guarantee that minimum price.

And we continue to benefit if the prices to continue to go up to a certain level and from thereon, we simply let someone else to go with that. But, I think we guarantee certain levels, remember it’s only 6% of our total sales and do that both zinc and led. So, we just thought that it’s a good time we will start cashing part of the production.

Unidentified Analyst

Can you just give us a little bit color on how the third business going in terms of sort of a reacting on what the key on a milestone we need to achieve in order to get the production back and sustainable?

Roberto Diaz

It’s our expectation is to have this operation back. However, one thing that I can tell you and we cannot comment as much as we wanted because we are still in that problem. We have sold the equally important – this has been taking longer than expected. But it’s our expectation that probably around next year; we can bring up the operation.

But it’s still just an expectation. So far, what I can tell you right now is that, we are still following the court order. We are expecting the great. And at the same time we are strengthening the relations as I mentioned with the communities around the area. But so far for Soleded-Dipolos, we hope to bring an operation again and we cannot comment much than that.

Unidentified Analyst

Thanks.

Octavio Alvídrez

Okay if there are no further questions, I would like to thank you all for coming and joining us and thank you all.

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