Fresnillo loses shine but analysts hopeful on 2023

Miner Fresnillo (FRES) can hardly be accused of having a silver tongue – the company warned investors of tougher conditions throughout 2022 and now its profits have tumbled. Weaker silver prices, lower gold production and higher costs at its Mexican mines knocked cash profits for the year by 38 per cent to $751mn (£626mn). 

But the company has managed to exceed dividend expectations with its final payout for the year, coming in at 13.4ȼ, beating Peel Hunt’s 10ȼ forecast. 

The silver price trended downwards through the year after spiking in the months following Russia’s invasion of Ukraine – Fresnillo saw its average realised price come down 13 per cent on the prior year.

The squeeze on profits came from costs climbing by 15 per cent on the year before. On top of the usual input cost rises seen across the industry, Fresnillo had to fork out more for workers after a change in Mexican laws limited its use of sub-contractors – the company said its mines were now all “fully staffed or close to it”, even in a “hot labour market”. 

More difficult was the wait for power hook-ups at two expansion projects, which kicked them into this year. One, the new Juanicipio mine, is now in operation, but the new plant at the eponymous Fresnillo mine is not yet turned on. 

Chief executive Octavio Alvídrez was optimistic about precious metals prices in the coming months, saying they had “established a realistic floor”. While other miners have reported inflation cooling already this year, Alvídrez added that it was likely to continue cutting into the bottom line this year. 

Silver had a positive start to 2023, hitting $25 an ounce (oz) in January, but is now back around $20. Gold has largely held onto its higher price established after a run-up from around $1,600 an oz in November to $1,950 despite some weakness recently. 

The company’s outlook is for better silver production this year (57mn-64mn oz against 53.7mn oz in 2022) while gold output will remain weaker. Peel Hunt analysts forecast a rebound in cash profits to $1.16bn and total dividend to 20ȼ for 2023, but flag a higher capital spending estimate from Fresnillo for the year, which could drag on payouts and profits. Hold. 

Last IC View: Hold, 770p, 3 Aug 2022