ii view: Fresnillo profit justifies share price surge

Production has fallen, but this is more about exposure to finite precious metals.

First-half results to 30 June

• Revenue up 5.2 to $1.05 billion
• Adjusted profit (EBITDA) up 52% to $470 million
• Silver & gold production down 2.7% & 12% respectively
• Interim dividend down 11.5% to 2.3 cents per share

Chief executive Octavio Alvidrez said:

"Covid-19 has presented a challenge to Fresnillo in the first half. However, we have come together as a company and I am proud of the way we have adapted to this new environment. 

"The combination of higher commodity prices and lower costs has resulted in a significant rise in profitability during the first half. Our performance improvement initiatives we have set out in previous reports are having a positive impact. We remain committed to delivering a sustainable improvement in our operating performance and maintaining the momentum in the improvement plan into the second half."

ii round-up:

Precious metals miner Fresnillo (LSE:FRES) today posted a 52% hike in adjusted first-half profit despite hindrance to production caused by the coronavirus pandemic. 

Both gold and silver production fell, with gold particularly hit as open mine activity was impacted by a six-week closure. Activity has since recommenced. Fresnillo operates seven mines, all of them in Mexico.

But a combination of cost cutting and double-digit gains for both silver and gold prices during 2020 pushed profits higher. Silver has gained by nearly 80% in US dollar terms since population lockdowns in late March, and gold is up by a quarter since the turn of the year. 

Central bank money printing to bolster economies has seen investors heading towards the finite historical safe haven assets. 

Fresnillo shares were down by 3% in early afternoon UK trading, having more than doubled since late March. Shares for fellow precious metal miners Polymetal International (LSE:POLY), Petropavlovsk (LSE:POG), Centamin (LSE:CEY) and Hochschild Mining (LSE:HOC) are all up by more than 50% year-to-date. 

Measures being taken to improve performance at Fresnillo 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. 

Under Covid-19, safety measures adopted across the business include staff temperature screening and social distancing. The Board and senior management have all taken voluntary and temporary pay cuts, while the 2019 final dividend payment was previously reduced in order to conserve cash. 

The latest half-year dividend was cut by just over 10%. The dividend for 2019 totalled 15 US cents, down from 27 cents the year before.  

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 focused portfolio of mined commodities adds to the risks 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 attraction. A forecast dividend yield in the region of 1% (not guaranteed) is still a return not generated if holding a precious metal directly. But Fresnillo’s operational underperformance compared to rivals, and a more than doubling in the share price over recent months, are worth bearing in mind.  

Positives: 

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

Negatives:

• Both silver and gold production retreated
• Currency movements can weigh on performance

The average rating of stock market analysts:

Hold