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Mexican silver producer and FTSE 350 denizen Fresnillo dropped 4 per cent on its maiden results as earnings disappointed despite production being in line with earlier expectations. The company also reiterated full-year 2008 production guidance and declared an interim dividend of 5.9¢ a share.
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Fresnillo only listed on the main board in May this year when it was spun out of Mexican mining group Peñoles, which still retains 77 per cent of the company. It is currently the world's largest silver producer and Mexico's second-largest gold producer, also producing significant quantities of zinc as a by-product. The company intends to double its production, as measured in silver-equivalent ounces, over the next decade.
Fresnillo currently operates three mines, all in Mexico, including the flagship Fresnillo operation in an area where silver has been mined for 450 years. It also has two ongoing expansion projects and three near-term exploration prospects. Highlights from the interims include ore resources, and therefore mine life, being increased across the three producing mines, mineralisation being extended across the exploration prospects, and increases in cash costs per tonne of ore being restrained to 11-12 per cent.
CITIGROUP
BUY: Our target price for Fresnillo is £5.50, a blend of net present value (NPV) and PE multiple calculations. NPV-derived valuation of £5.67 is 1.9x base case NPV, as gold stocks typically trade on such multiples. The PE-derived valuation is £5, reflecting 20x 2009 EPS - that's above the gold sector average, but Fresnillo deserves this premium due to its growth profile, exploration upside and exposure to spot silver prices. Expect 2008 EPS of 44¢, rising to 53¢ in 2009 and 67¢ in 2010.
EVOLUTION SECURITIES
NOT RATED: Attributable net profit for the first six months of 2008 increased 56 per cent to US$141m from US$90m last year, but was lower than analysts' expectations of US$180.4m. Cost pressures and recent falling metal prices could impact the company further, because Fresnillo derives most of its earnings from silver and zinc, and both commodities have weakened considerably in the past month or so. The company aims to produce 34m ounces of silver and 280,000 ounces of gold in 2008, but in July Fresnillo reported flat first-half attributable silver production.
Fresnillo's shares have fallen 30 per cent since listing, and it is now among the lowest-rated silver miners. As we expect the silver price to enjoy a seasonal boost at some point heading into autumn, at 348p shares offer short-term good value.
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-IC-2.1.3g-prod - 17/03/2010 18:13:09 - ben.wheeler
