ii view: Should you back another recovery at Fresnillo?

This precious metal miner has underperformed rivals and has now halved the dividend. 

Full-year results to 31 December 2019

• Revenue up 0.8% to $2.12 billion
• Adjusted profit (EBITDA) down 26% to $674 million
• Silver production down 11.6%
• Gold production down 5.1%
• Total dividend for the year down 47% to 14.5 US cents per share

Chief executive Octavio Alvídrez said:

"2019 was a more challenging year as expected, but we remain determined and optimistic for the future. Production did not meet our expectations in 2019. 

“Our focus in 2020 is on maximising the potential of our existing operations. We are committed to working smarter and more efficiently in order to extract maximum value from our asset base. As previously guided, we expect silver production to be in line with 2019, before returning to growth in 2021. Gold is expected to decline. 

“While the broader macro-economic environment remains uncertain, we are confident on the outlook for mining in Mexico, where we have welcomed the on-going support of the Mexican Government.”

ii round-up:

Precious metals miner Fresnillo (LSE:FRES) missed city profit forecasts in these latest results as production for both silver and gold declined. 

We'd already had production numbers in January, but the share price still fell by more than 4% in early UK trading, adding to a 25% drop in the shares during 2019. Rival miners such as Polymetal International (LSE:POLY), Centamin (LSE:CEY) and Hochschild Mining (LSE:HOC) all enjoyed double-digit price gains over 2019. 

Operating a series of mines across Mexico, Fresnillo cut its production forecast four times during 2019 as it battled lower quality ore and construction delays. 

Guidance for 2020 was left unchanged from that given back at its late January fourth-quarter production update, but, with serious investment in infrastructure, bosses expect production to "stabilise in 2020 and start increasing during 2021".

Adjusted profit (EBITDA) of $674 million is a long way short of a consensus analyst estimate of $741 million, hindered by increased costs. As a result, the total full-year dividend payment was halved. 

Group revenue rose marginally thanks to price increases for both silver and gold. 

Management is now implementing a major performance improvement plan, including actions to address contractor productivity, reducing costs and investing in new tunnel boring machinery. 

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 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 such as Rio Tinto (LSE:RIO) and BHP Group (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 potential for 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 1.8%. The shares had also built some momentum until the wider stock market crash last month, so there does appear to be interest here. However, after plenty of past disappointments, backing management to get production growing again next year 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 year-over-year
• Currency movements can weigh on performance

The average rating of stock market analysts:

Hold