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Fresnillo slumps on mining law proposals

Morgan Stanley has cut its forecasts for the Mexican precious metals giant
November 27, 2018

Shares in Fresnillo (FRES) fell by as much as a fifth last week, after a note published by analysts at Morgan Stanley suggested possible changes to Mexico’s mining laws could lead the country’s miners to “decouple from fundamentals”.

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Morena, the social democratic party headed by incoming president Andrés Manuel López Obrador, popularly known as Amlo, has put forward 11 bills or resolutions that could impact the sector, including a bid for increasing surveillance of mining activities and greater powers to indigenous communities and the state.

In its note, Morgan Stanley cited two specific proposals, which – if enacted – could result in an 11 per cent hit to Fresnillo’s prospective earnings per share in 2019. The first is a 2 per cent charge on earnings before interest, tax, depreciation and amortisation (Ebitda); the second, a 5 per cent revenue deduction to mining operations located in indigenous territories.

The bank added that two further bills – which would empower government ministries to revoke permits and concessions that have a negative social or environmental impact – could lead to further downgrades, and that the prospect “adds considerable uncertainty to the investment proposition”.

There is no indication that Fresnillo might be stripped of any of the licences at its silver and gold mines, and the company has not commented on the recent proposals. And analysts at RBC stated that the worst fears should not be overplayed, even if the new rules around concessions might result in a more “arduous” permitting regime.

“We see absolutely no indication that Fresnillo is, has been or ever will be in this situation,” wrote the bank in a note to investors. “In fact, we would argue that the group is well positioned versus peers in terms of stakeholder relations given its long history in Mexico.” RBC also flagged that Fresnillo’s mining permits for the next two years are “already in place”, and that the permitting process for its water reservoir at its San Julian mine was the first to conduct an indigenous consultation process in the country’s history.