ii view: Fresnillo rally stalls amid Covid caution

This precious metal miner is now battling Covid-19, but the share price rally has thrashed the wider market.

AGM update

ii round-up:

Precious metals miner Fresnillo (LSE:FRES) expressed caution regarding the outlook given the ongoing corona crisis. 

In a statement accompanying its AGM, chairman Alberto Baillères noted that “The full impact of Covid-19 on the global economy is still not clear, though consensus is for a steep fall in GDP. It is therefore too early to determine exactly what impact this will have on Fresnillo operationally or financially, so we are planning cautiously.”

Fresnillo shares fell by more than 2% in early UK trading, although are up around 20% year-to-date as investors have looked to safe havens such as gold and silver in the worst economic downturn since the Great Depression. 

Fresnillo mines both silver and gold. It has seven operating mines, all of them in Mexico, three development projects and six advanced exploration projects. 

However, group performance was already lagging rivals before the outbreak of coronavirus. In 2019, both silver and gold production fell compared to 2018, mainly due to lower than anticipated ore grades at key mines. Profits also fell given increased costs as it battled operational challenges.

Fresnillo shares in 2019 dropped by 25%, compared to double-digit gains for rival precious metal miners Polymetal International (LSE:POLY), Petropavlovsk (LSE:POG) and Hochschild Mining (LSE:HOC).

Measures being taken to improve performance include actions to address contractor productivity and investing in plant and machinery, including a state-of-the-art tunnel boring machine. 

Environmental initiatives are also expected to contribute to efficiency, with 56% of electricity now coming from wind energy and a target of 75% being pursued by the current year-end. 

As for Covid-19, and with mining designated as essential in Mexico, a range of safety measures across the business have been adopted, including staff temperature screening and social distancing. The Board and senior management are all taking voluntary and temporary pay cuts, while the 2019 final dividend payment was previously reduced in order to conserve cash. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather and not to mention trying to second guess the direction of the commodity being extracted, can all impact financial performance. 

For Fresnillo specifically, a highly-concentrated portfolio of mined commodities adds to the risk when compared with more diverse rivals such as Rio Tinto (LSE:RIO) and BHP (LSE:BHP). 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 group volatility. 

For investors, exposure to precious metals in a world of central bank money printing offers some attraction and, despite the dividend cut, there is still a prospective yield of about 1.5% (not guaranteed). However, after plenty of past disappointments, backing management to get production growing again requires faith. Cautious investors, aware that operational difficulties remain a risk, might demand concrete evidence of a production and profit recovery before committing new money.

Positives: 

• Implementing a performance improvement plan
• Receiving support from the Mexican Government

Negatives:

• Production fell in 2019
• Currency movements can weigh on performance

The average rating of stock market analysts:

Hold