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Fresnillo faced by an unholy trinity through 2022

Lower gold volumes and silver prices
August 2, 2022
  • Cost inflation and supply chain bottlenecks to persist
  • Gold grades down at Herradura and Saucito

The silver price has declined by around 15 per cent since its most recent high in March 2022, which may seem surprising given that inflation rates across the globe are at multi-year highs. However, although opinions differ on this score, it remains difficult to demonstrate – beyond cherry-picking historical figures – that prices for precious metals are correlated in any systematic way with inflation. When assessed soberly, the belief that precious metals provide an effective hedge against inflation seems more like an article of faith.

Some investors in Fresnillo (FRES) may see a positive correlation, but a miner relies on effective operational progress even if underlying prices support financial performance. Unfortunately, the silver price has not worked to the company’s advantage. Turnover for the Mexico-focused miner pulled back due to a lower volume of gold sales and an average 13.8 per cent year-on-year decrease in the silver price. By contrast, the average realised gold price rose 4.6 per cent to $1,871 (£1,546) an ounce (oz), but gold production fell back due to a decrease in the volume of ore processed, together with lower ore grades at Herradura and Saucito. The latter issue is perhaps unavoidable for precious metals producers as mines grow towards maturity.

Management warned that an unholy trinity of cost inflation, supply chain bottlenecks and a tight labour market could negatively impact performance through the second half. The company is guiding for annual output of 50.5mn-56.5mn/oz of silver and 0.6mn-0.65mn/oz. of gold, set against production 53.1mn/oz of silver and 0.75mn/oz of gold in 2021. A two-thirds drop in the interim payout would not have pleased shareholders and it’s difficult to identify any near-term price catalysts. Hold.

Last IC View: Hold, 770p, 8 Mar 2022

FRESNILLO (FRES)   
ORD PRICE:687pMARKET VALUE:£5.1bn
TOUCH:686-687p12-MONTH HIGH:998pLOW: 611p
DIVIDEND YIELD:6.1%PE RATIO:95
NET ASSET VALUE:479ȼNET DEBT:3%
Half-year to 30 JunTurnover ($bn)Pre-tax profit ($mn)Earnings per share (ȼ)Dividend per share (ȼ)
20211.4744541.09.90
20221.2615515.93.40
% change-14-65-61-66
Ex-div:11 Aug   
Payment:14 Sep   
£1=$1.22