ii view: silver boom drives Fresnillo profits higher

A rise in precious metal prices over 2020 helped this popular miner which also pays a dividend.

Full-year results to 31 December 2020

• Revenue up 14.6% to $2.43 billion (£1.75 billion)
• Adjusted profit (EBITDA) up 73% to $1.17 billion (£842 million)
• Final dividend of 23.5 US cents per share
• Total for the year up 72% to 25.8 cents per share (18.58p)

Chief executive Octavio Alvidrez said:

"Against a backdrop of the significant challenge presented by Covid-19, we have prioritised the wellbeing of our people and communities while delivering a robust financial and operating performance. By engaging with all our stakeholders, we have been able to keep people safe and minimise the impact of the pandemic on our business. Even in the face of such an unprecedented challenge, I am pleased to report that we have largely stabilised production, a key priority. We remain committed to achieving our operational objectives and delivering our development projects.”

ii round-up:

Silver and gold miner Fresnillo (LSE:FRES) today reported a 73% jump in full-year earnings, buoyed by double-digit gains in both the silver and gold prices as investors fled to safe haven assets during the pandemic. 

The average realised silver price rose by 32.3% to $21.3 per ounce and for gold it was up by 26.4% to $1,792.4 per ounce. Adjusted earnings of $1.17 billion marginally exceed City forecasts. 

A 72% hike in the final dividend left the total payment over the year at 25.8 cents, marginally shy of the 27 cents paid during 2018 and significantly above the 15 cents total payment of 2019. 

Fresnillo shares gained by just over 1% on the news, having gained by more than 40% over the last year.  Shares for fellow precious metal miner Petropavlovsk (LSE:POG) are up by a similar amount. Shares for diversified miner and sector mammoth BHP (LSE:BHP) are up by more than 60% over the last year.

Fresnillo has seven operating mines, all of them in Mexico. Gold production over 2020 fell by 12%, hit by preventive Covid-19 measures and reduced staff numbers at its Herradura mine. Silver production dipped by under 3%. 

Central banks action to print money under the pandemic is likely to have fed into the rise in finite asset prices such as silver and gold. 

Measures being taken to improve performance at Fresnillo include addressing contractor productivity and investing in plant and machinery. It recently took delivery of a $22.7 million tunnel boring machine which has begun operations at its Fresnillo mine. The miner’s core goal is to maintain its position as the world's largest primary silver company and Mexico's largest gold producer.

Management also announced a locking in, or hedge, for 7% of its silver production over 2021. A floor of $20 per ounce has been agreed, along with an average price ceiling of approximately $50 per ounce. Silver currently stands around $26 per ounce.

Accompanying outlook comments proved cautious near term given the ongoing pandemic in Mexico but confident longer term. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather and now the challenges and disruption caused by a global pandemic to operations. 

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. 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 volatility. 

For investors, exposure to precious metals in a world of central bank money printing offers attraction. A dividend yield in the region of 2% following this latest final dividend payment is also not to be ignored. That said, vaccine development success announced in early November has seen the shares fall by around a fifth since late October, highlighting an inverse relationship with the pandemic.  While central bank action to battle the virus may well have peaked.  

Positives: 

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

Negatives:

• Both silver and gold production retreated
• Lacks the product and geographical diversity of other miners

The average rating of stock market analysts:

Hold