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Fresnillo grades suffer again

CEO Octavio Alvídrez set a downbeat tone with the miner's full-year numbers
February 26, 2019

Preliminary numbers were accompanied by a familiar sinking feeling for investors in Fresnillo (FRES), as the miner’s shares dropped on signs that last year’s operational challenges will be hard to shake. Fears of higher mining costs and depreciation charges, which conspired to knock gross profits by 15.6 per cent in 2018, now threaten to tarnish the longer-term growth story.

IC TIP: Buy at 884p

This year, silver output is expected to decline to 58-61 million ounces (Moz), from 61.8Moz in 2018, while gold production guidance is flat at 910-930,000 ounces (koz) against 923koz last year. Owing to rising precious metals prices, optimism around the cost base, or a mixture of both, there was little market reaction to these forecasts when they were released a month ago, which included a renewed warning of persistent “lower than expected ore grades at the Fresnillo and Saucito mines”.

But with chief executive Octavio Alvídrez warning of “another challenging year”, marred by low prices, higher inflation and higher depreciation costs, a vague commitment to “work through operational issues and lower grades at certain mines” seems like a recipe for further disappointment. A light final dividend of 16.7¢ probably added to the sense of foreboding, while the five fatalities during the year – against an average employee headcount of 5,161 – is worrying, particularly for a company already subject to rising political scrutiny.

Numis expects adjusted earnings per share of 54¢ this year, down from 58¢ in 2018.

FRESNILLO (FRES)   
ORD PRICE:884pMARKET VALUE:£ 6.51bn
TOUCH:884-887p12-MONTH HIGH:1,365pLOW: 738p
DIVIDEND YIELD:2.4%PE RATIO:24
NET ASSET VALUE:414¢NET DEBT:8%
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
20141.410.2514.73.0*
20151.440.219.65.5
20161.910.7257.930.1
20172.090.7476.140.4
20182.100.4847.527.4
% change+1-35-38-32
Ex-div:25 Apr   
Payment:24 May   
£1=$1.31. *Excludes special dividend of 5¢ in 2014