Fresnillo's buried treasure

That may be little comfort to long-term Fresnillo backers. Although a looming supply deficit should be bullish for silver miners, the current price of $15.30 (£11.80) an ounce is about as bad as it has been this decade. For the world’s largest producer of the metal, this has eroded profit margins. Worse, although operating cash flow climbed 7 per cent to $576m in the six months to June, all-in sustaining costs rose 9.6 per cent on a gold-equivalent basis, as  a stronger peso, higher income tax and other cost inflation conspired to dent profits. 

Production figures also confirmed what has been apparent for some time: that Fresnillo’s ageing mines are no longer the reliably high-grade operations they once were. While gold output came in ahead of forecasts, issues at Saucito, Cienega and Fresnillo (in operation since 1554) meant silver output missed targets. Failing to produce what you say you will is never good for a miner, and the 4 per cent drop in full-year silver guidance that followed prompted a sell-off in the shares.

But peer past a disappointing first half, and Fresnillo has been growing. On budget and with little delay, management commissioned a pyrites plant to increase silver and gold recovery rates. At Herradura, a dynamic leaching plant project will boost gold output and extend the mine life by 12 years. Despite teething problems with process water availability at San Julián, ramp up at the mine’s second phase is set to boost second-half production. And by 2020, we can expect first production from Juanicipio, 8km from Fresnillo, which will add 10m ounces of silver to annual production. Two more low-cost projects are in development, and the group has dozens of exploration options for the years ahead.

In other words, Fresnillo’s focus is to consistently grow output, supplemented by the lucrative Silverstream refining contract with Peñoles. This is sustainable, because debts are negligible and costs are manageable. Plus, paying taxes and investing for the long term is the best chance a gold and silver miner has of winning support from the socialist government of Andrés Manuel López Obrador.