Silver and gold mining giant Fresnillo (FRES) has always been a good leveraged play on commodity prices, and is a favourite amongst both investors and traders looking for exposure to precious metals. But shares in the FTSE100 company have taken a big hit as its report for the six months up to the end of June has disappointed the market, both in terms of the financials and also operationally...
You can either take the set of results to mean that the company is in trouble and with more of the same to come, or view it as a temporary blip and a buying opportunity. I am surprised that it has fallen quite so much off of the back of the news as the Q2 production report from a couple of weeks ago showed that silver production for the first half of 2019 was down 10.4% and gold by 7.1%, and that had already caused the share price to drop by almost 15% over a few days, from its previous level of around 920p.
The company had to reduce guidance for the year from 58-61Moz to 55-58Moz of silver, and 910-930koz of gold to 880-910koz, but Q2 did see an improvement compared to the previous three months and the company is expecting that production levels will slowly recover. Construction of the 56% owned Juanicipio project is on track to conclude by the end of next year, and progress is being made on the construction of the pyrites plant at Fresnillo, with commissioning also expected by the end of 2020. Lower production hasn’t been the only problem though, and a 10.2% drop in revenue for H1 2019 was related to lower prices almost as much as it was to the fall in output – gold may have been flying recently, but silver prices have continued to show weakness so far this year. The drop in production has been as a result to changes to the mining plan causing lower than expected grades and throughput, so it remains to be seen how this will be rectified, but I have seen other miners go through similar phases and then bounce back strongly.
Profit for the period fell by more than 69%, which I suspect is what really spooked the market, and stood at just under $71 million, and means that this is now trading off of a very high PE ratio. But PE ratios never tell the whole story and are just a snapshot of the value of the company at that point in time, rather than reflecting future value, and can change significantly from period to period. At the end of June the company had $362 million in the bank and has been engaging in cost cutting so as to maintain a strong balance sheet, and it still announced an interim dividend totalling $19.2 million. If like me you believe that this is just a temporary blip and that production will improve, as the company has stated, and are also bullish on silver prices longer term, then I see this as a good opportunity to either add more shares or to buy in, as I can still see plenty of future value here from this share price level. The main risks are that production will remain low or decline, which seems unlikely especially if you have patience as new production will be coming online. Or that silver prices will plummet, which again I see as being quite a low risk given the lack of new projects in general and a likely supply deficit in coming years as industrial demand for the metal rises.
Filed under: Fresnillo, BigDish, Barclays, Lloyds, ConvaTec, Stranger Holdings, 7digital, Woodford
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