Fresnillo USD0.50 (FRES)

Company overview

Fresnillo has been mining in Mexico since 1887. It is recognised as one of the world’s largest primary silver producers and Mexico's second largest gold producer. The group operates four producing mines, all of them in Mexico - Fresnillo, Ciénega, Herradura and Soledad-Dipolos; one development project at Saucito; and three exploration prospects - San Juan, San Julian, Orysivo, as well as a number of other long term exploration prospects. In total, mining concessions cover approximately 1.75 million hectares across the country. Fresnillo is listed on the London Stock Exchange and is a constituent of the FTSE100 index.

HL Comment (12 October 2011)

In a recent (12 October) interim management statement and production report, precious metals miner, Fresnillo cut its silver production target for 2011. The Mexican based miner said it expected to produce 41 million ounces of silver, down from the original target of 44 million while it reinforced safety conditions. Its silver output in the third quarter fell 5.8% from the year earlier to 10,067 ounces, mainly due to the slowdown of production at its largest mine, Fresnillo. It expected to return to normal operations at the Fresnillo mine by the end of October. Meanwhile, the miner raised its total gold production target to 430,000 ounces from 400,000 for the year, due to the ramp-up of production at the Saucito and Soledad-Dipolos mines.

Negative Points:

• While Fresnillo's revenue will be driven by the global demand for silver and gold, its cost base will be influenced by local currency rates, as well as country-specific economic issues such as labour availability, wages and inflation.
• All of Fresnillo’s operations are in Mexico. The revenue stream is denominated in US$ and upwards of 70% of the cost base is denominated in Mexican pesos, therefore any significant shift in the US$ /Peso exchange rate could impact profitability.
• The group faces operational risk at its existing mines and execution risk on its growth projects.

Positive Points:

• The group’s exploration programme continued to progress on schedule with cost reduction initiatives on target.
• The company said the construction of the Noche Buena gold mine remained on schedule for completion in the first half of 2012.
• The construction of the San Carlos shaft remained on schedule to be concluded in the fourth quarter of this year. This US$19.1 million project will reduce haulage and hoisting costs by providing direct access to the western zone of the San Carlos vein.

Consensus:

On balance, market consensus indicates a cautious buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: US dollar.