Fresnillo impacted by peso revaluation

The market gave Fresnillo’s (FRES) half-year report the thumbs down despite news that the precious metals miner had boosted its top line after it shifted increased volumes of gold and silver at higher prices. Indeed, the average realised silver price increased by 2.4 per cent from the 2022 half year to $22.80 (£17.81), while the average gold price ticked up by 4.1 per cent to $1,949 an ounce.

That’s the positive side of the ledger. Unfortunately, enhanced pricing for precious metals was offset to a degree by falling realised prices for the miner’s by-products, specifically zinc and lead, which saw price falls of 29.5 per cent and 4.7 per cent, respectively. However, the main factors that dampened profitability were the 10.2 per cent average revaluation of the Mexican peso against the US dollar and underlying cost inflation. Together, these factors fed through to a 13.4 per cent increase in production costs, equivalent to $86.6mn.

The heavier cost burden reflects rising maintenance and input costs, exacerbated by increased diesel consumption due to “longer haulage distances, deeper mines and increased development works”. The ramp-up at the new Juanicipio mine and increased stripping costs also kept a lid on profitability.

The greater capital demands are reflected in the steep fall in the cash margin, which came in at 26.1 per cent against 36.5 per cent over the same period in 2022. Meanwhile, free cash flow decreased from $93.5mn last time around to $18.7mn.

The long-term investment narrative remains in place, but there are signs that the US dollar could continue to soften as the year progresses. However, Fresnillo’s balance sheet strength and modest leverage leave it well placed to ride out any unfavourable currency effects. But perhaps management is slightly more circumspect in view of the cost pressures and has taken the decision to downwardly revise capital expenditure from $630mn to $555mn through 2023. Buy.

Last IC View: Buy, 618p, 20 Jul 2023