ii view: precious metals miner Fresnillo cuts dividend

Shares for this silver and gold play are down around a fifth year-to-date. Buy, sell, or hold?

First-half results to 30 June

• Revenue down 14% to $1.26 billion
• Adjusted profit (EBITDA) down 38.5% to $459 million
• Silver production up 0.4% 
• Gold production down 28%
• Interim dividend down 66% to 3.4 US cents per share
• Net debt of $15.9 million, down from a net cash position of $67.5 million as of 31 December
• Full-year guidance unchanged

Chief executive Octavio Alvidrez said:

"We have remained committed to our purpose during the year, with the safety and well-being of our people the key priority in every decision we make as a company. Though the impact of the pandemic has reduced over time, the recent fifth wave in Mexico highlights how we must continue to support our people and our communities, in particular as we face new uncertainties in these challenging times.

"We benefit from a consistent strategy, exceptional assets, an exciting growth pipeline and a very strong balance sheet. We are well placed to deliver on our objectives this year. We look forward with determination and confidence."

ii round-up:

Precious metals miner Fresnillo (LSE:FRES) today reported both adjusted profit and a dividend payment below City forecasts as the price of silver fell, gold production declined, and costs rose.

First-half adjusted profit to the end of June fell 38.5% to $459 million, with an interim dividend payment of 3.4 US cents per share cut by two-thirds and equating to a payout of one-fifth of underlying earnings. That compares to analyst profit estimates nearer to $540 million with the dividend payment forecast to come in at around 7 US cents. 

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Fresnillo shares fell by more than 5% in early UK trading, leaving them down by around a fifth year-to-date. Shares for Chilean copper miner Antofagasta (LSE:ANTO) are down around 16% during 2022, while shares for miner and trader Glencore (LSE:GLEN) are up by around a fifth. The FTSE All World index has fallen by around 15%. 

Fresnillo operates a series of mines across Mexico and is the world's largest primary silver producer and Mexico's largest gold producer.

Management maintained its full-year production guidance of between 50.5 and 56.5 million ounces (moz) of attributable silver (including Silverstream) and 600 to 650 kilo ounces of attributable gold production. However, it did flag expected continuing supply chain issues and cost inflation during the second half, along with a potential increase in staff absenteeism given a fifth wave of Covid sweeping the country. 

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The FTSE 100 company expects to complete the connection of its Juanicipio and Pyrites Plants to the national electricity grid over the coming weeks, with the commissioning of the Juanicipio plant expected to follow soon afterwards and the ramping-up starting toward the end of the third quarter. 

A Q3 production update is scheduled for 26 October. 

ii view:

Fresnillo shares are listed on both the London and Mexican Stock Exchanges. It employs around 7,000 people across its operations. It operates four underground silver mines, Fresnillo, Saucito and Ciénega and San Julián, plus two gold mines at Herradura and Noche Buena. Juanicipio, a 56%/44% Joint venture with MAG Silver, is the company’s key growth project. 

For investors, a highly focused portfolio of mined commodities adds to the risks when compared with more diverse rivals such as Rio Tinto (LSE:RIO) or Glencore. A slashing of the interim dividend follows rivals in reducing the payout and comes after a 14% decline in the average realised silver price year-over-year, while the ongoing pandemic and elevated business costs need to be remembered. 

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On the upside, management action to aid government labour reform laws has been taken. Full-year production guidance has been maintained while its Juanicipio growth project is moving in line with management plans. On balance, and while some caution looks sensible given potentially reduced industrial demand for silver ahead of a feared recession, exposure to precious metals in highly uncertain times will likely continue to appeal to many investors.  

Positives: 

• Pursing a performance improvement plan
• Income generation and exposure to precious metals

Negatives:

• Lacks the product and geographical diversity of other miners
• Currency movements can impact

The average rating of stock market analysts:

Strong hold