ii view: Fresnillo fails to shine

by Keith Bowman from interactive investor |

Silver and gold miner Fresnillo cuts production forecasts and raises cost estimates.

Second-quarter production 

  • Total silver production down 6% on a year ago to 14,418 kilo ounces (koz)
  • Gold output down 5.4% to 221,307 ounces (oz)
  • Lead down 1.4% to 13,039 tons
  • Zinc fell by 6.2% to 20,654 tons 

Chief executive Octavio AlvĂ­drez said:

"Production has continued to recover towards target levels since the first quarter as we begin to see the positive impact of operational measures and investments we have made into infrastructure, equipment and infill drilling, in particular at our Fresnillo and Saucito mines."

ii round-up:

Established in 2008, Fresnillo (LSE:FRES) is a one of the world's largest silver mining companies. Headquartered in Mexico, it is also the country's largest gold producer. 

The company currently has seven operating mines, two development projects and three exploration prospects. 

It's second-quarter production update failed to impress investors and, having enjoyed a good run since the end of May, the share price was down 3% in early afternoon UK trading. 

Production broadly across its products fell for the most recent three-month period compared to the second quarter of 2018, although production for every metal was up quarter-on-quarter, except zinc.  

For the full-year, management reduced its production guidance. 

Silver output is now expected to fall to 55-58 million ounces (moz) from 58-61 moz, mainly due to lower ore grades and ore throughput at the Fresnillo mine. 

Gold production is expected to fall to 880-910 koz from 910-930 koz, driven by delays in building a leaching pad at Herradura and lower ore processed.

Management also raised its forecast for production costs in the first half of 2019 by around $135 million due to a series of factors including general cost inflation, growth initiatives and an accounting reclassification.

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, geographical risk, staff difficulties, the weather and the price direction of the commodity being extracted, can all impact financial performance. 

For Fresnillo specifically, a highly focused portfolio of mined commodities adds to the risks when compared with more diverse rivals. Currency movements between commodities priced in US dollars, costs priced in Mexican Pesos and the share price listed on the UK stock market in sterling add further to investor risks and forecasting.

However, a prospective dividend yield of nearly 2%, not guaranteed, and with exposure to precious metals, may hold attraction for some investors within the confines of a diverse portfolio, especially those seeking exposure to gold in an equities market downturn.

Positives: 

  • Exposure to precious metals
  • Pays a dividend

Negatives:

  • Production expected to fall and costs rise
  • Currency exposure is complicated 

The average rating of stock market analysts:

Weak buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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