Fresnillo's shine dims

But Mexico-focused Fresnillo has not seen this. Its share price is down a fifth in the year to date even after recovering slightly from the a low of 600p at the end of July. The focus on the valuation is important, because Fresnillo is already valued well above most of its sector peers, according to S&P CapitalIQ, at 34 times forward rolling-12-month earnings, with fellow London-listed precious metals miners Polymetal on 12 times and Centamin (which has had its own operational issues) on 22 times. 

This magazine has covered Fresnillo’s production issues extensively, and the guidance cut after the first half showed these aren’t over. In the first six months of the year, the company struggled with lower grades, a delay in building critical new infrastructure (a new leach pad at Herradura) and lower overall throughput than expected. 

Costs went up across the company’s operations in the first half. The smallest increase in cost per tonne of ore milled was 13 per cent, at the San Julian operation. The largest operation, the eponymous Fresnillo mine, saw costs climb a quarter. The operation’s cost per tonne through the mill in the first half of 2019 climbed over $10m on the year before for 5 per cent less ore processed, and at a lower grade. The mine's all-in sustaining cost per ounce (oz) of silver produced almost doubled year on year, but this was partly explained by the expansion works at the mine. 

This more expensive, lower level of production comes at a time when investors were expecting production from the Fresnillo mine to grow from 15m ounces (oz) of silver production last year to 16m oz this year. They will get 14-14.3m oz, as per guidance. Management has confirmed production will be that level in 2020 as well. Overall group guidance for 2019 silver production fell 5 per cent to 55-58m oz and was down 3 per cent for gold at 880,000-910,000 oz.

By the time the Fresnillo mine is back on track, the Noche Buena gold mine will be in its last years. The new Juancipio mine is being built right now but won’t replace the output. More promising is the Fresnillo expansion, adding 2m oz silver a year for capital expenditure of $35m. 

While going bearish on any gold company is a contrarian stance when momentum behind the yellow metal is strong, we’re not alone in this view on Fresnillo. At the end of July, RBC Capital Markets dropped it as a top pick and cut its target price from 1,150p to 650p. The broker noted “with Fresnillo mining at circa 20 per cent below reserve grade and Saucito mining circa 11 per cent below we see a risk ongoing infill drilling could improve geological understanding but also lead to downgrades that flow through to both production and street NAV”.