Hard work ahead for Fresnillo

On paper, global turmoil means higher profits for silver and gold miner Fresnillo (FRES). But operational challenges and a new Mexican labour law mandating workers are full-time employees mean the miner saw a decrease in gold production and flat silver production compared with last year. 

Its dividend did hit a four-year high, however, and management said it expects higher precious metals prices to support earnings this year after a “realistic floor” was established in 2021. Gold was trading around $2,000 (£1,527) an ounce (oz) this week, while silver is up just over 10 per cent since the start of February, to almost $26 an oz. 

Fresnillo has maintained its 2022 production guidance but was extremely cautious in its results announcement. “Inflationary pressures, the impacts of various laws and the attitude of the government in Mexico to mining all have the potential to influence our progress,” said chief executive Octavio Alvídrez. 

Costs were up for other reasons last year. Fresnillo’s key silver mine, Saucito, saw its cost of ore milled climb a quarter to $89.8 a tonne. The biggest contributor to sales, the Herradura gold mine, saw its costs climb almost a fifth. The Mexican peso falling in value was a significant part of these hikes, while at Saucito two floods also had an impact on costs. 

Fresnillo said the new labour laws prohibiting outsourcing had meant tough adjustments on the ground. “Subsequent contractor uptake [post 1 September, when the law came in] has varied, with underground mines more affected resulting in an increased number of vacancies and a higher workforce turnover,” the company said, adding a recruitment drive was in place to bring in more permanent workers. 

There is also uncertainty about when a new mine, Juanicipio, will be in production after being completed at the end of 2021 because the government has not approved its connection to the national power grid. Fresnillo has pushed back the mill commissioning timeline six months, which broker Peel Hunt said would likely see power coming on mid-year. Juanicipio will eventually produce 11mn oz of silver a year, a fifth of 2021 silver production. 

Peel Hunt forecasts a 9 per cent drop in cash profit this year, to $1.3bn, although at a stable margin of 53 per cent. 

This will likely be a tougher year than anticipated for Fresnillo, which has now lost most of its pandemic-era gains although is in a net cash position and has finished with a heavy capex period. Hold. 

Last IC View: Hold, 904p, 2 Mar 2021