Silver Lining to Fresnillo’s Profits Fall

March 13, 2013 at 11:44


Last year Fresnillo the world’s biggest primary producer of the metal, was reaping the benefit of silver’s astounding run. The average price it realised for the metal rose 62.5pc to $34.75 (£23.35), the group reported.

The last 12 months have been rather more “volatile” for silver, in the words of Fresnillo’s management as it offered up the latest results yesterday. The silver price averaged $31.4 per ounce in 2012, down almost 10pc amid reduced industrial demand and economic clouds.

Fresnillo also produces gold, so would have seen a boost from last year’s near-6pc rise in the price it fetched for the metal, to an average $1,674.1 per ounce.

However, costs have continued to rise across the industry, squeezing margins. Fresnillo, in particular, has had the added burden of having to mine lower grades of silver ore at its flagship eponymous silver mine in Mexico – which was expected, given that the mine has now been active for 500 years.

So, while total revenues were relatively flat – edging down by 1.6pc to $2.2bn – profit before tax dropped more steeply, down by 24pc to $1.2bn.

But the picture was not entirely bleak. The company produced record amounts of gold, and also increased its reserves at what it described as a “double digit” rate as a result of investing nearly $320m in exploration last year.

The group’s balance sheet still has no debt, with its cash holdings standing at $613.8m as the end of last year. Furthermore, the total full-year dividend of 57.9 cents a share was above market consensus. That included a final dividend of 42.2 cents a share, payable on May 8.

As a result, Fresnillo is still seen by the market as quality company with good assets – and it is a view which Questor thinks is justified.

Today, the shares trade on a multiple of 21.5 and look attractive as they yield a prospective 2.7pc.

Keep an eye out for future buying opportunities thrown up by the next downward lurch in the silver price.