Taken long term position on Fresnillo and will add on declines



Fresnillo had a horrible H1 in 2019 and hence the lack of participation in the current gold rally. The punishment for taking a 24% depreciation charges and revising down production by 5% for upgrading various facilities and dealing with on-going short term issues is providing an excellent buying opportunity. The capex for the new mine which they own 56% will yield 6M ounces of silver per year from late 2020 at a cost of $5 AISC. The entire mine cost is repaid back in two years and has 9 years of follow on payback as a minima. It also adds 20,000 ounces of gold per year as the cherry on top. This development stabilises Fresnillo on its silver production side. The upgrade on one of its gold mines that is now happening should see production on gold stabilise next year to expected levels. The company is implementing cost controls across the business.

I will be going through the debt repayment schedule and other costs today. I agree with a lot of the broker coverage that Fresnillo is likely to very good value in 2020. I believe Fresnillo might actually be the best pick of miners for future investment and one to include on the list.



The earnings profile between Polymetal and Fresnillo in previous years are very similar. Both companies operate on investment debt models. The Fresnillo model has only 2/3 of the debt of Polymetal. Fresnillo debt repayments on 1.6B are broadly $50M on core debt and $130M on the recurrent debt also included in the total debt figures. Short term debt is not problematic for either company. This model works fine in a low bank interest environment and probably offers tax advantages as well. The free cash flow per year for Fresnillo is equivalent to 4 years on the total debt. The company reserves and resources have 38 years of life but allowing loss on conversions and exploration expenses say 29 years net. Once the current free cash flow is restored and its likely to be so in Q3 with the rise in precious metal prices than fair value at 830p or 22x earnings should be an anticipated target.


After going through the second quarter report my own calculations suggest that the correction on Fresnillo was overdone by around 70p. My assessment considered all the extra cost and loss of opportunity in making larger profits in H1. The company is not getting any credit for earning $50M more from higher precious metals prices. They are not getting any advanced credit on likely resource increases to be declared later in the year. The position of the company stating H2 production was likely to follow original annual plans has not been considered or weighted positively in the recent correction. These might happen later in the year.