Fresnillo PLC: An Investment for the Long term

By Bob Kirtley

01 November 2012

Introduction

Fresnillo PLC (LON: FRES) (FNLPF.PK) is a Mexican based mining company producing mainly silver and gold. Fresnillo has 7 operational mines, 2 development projects, 5 advanced exploration projects and a number of other long term exploration projects. The company’s name is derived from the Fresnillo mine in the city of the same name. The Fresnillo site is one of the world’s richest silver mines and has been producing as far back as the 16th century. In 2011 the Fresnillo mine accounted for 80% of total silver production and is the company’s flagship asset.

Touted as one of the world’s largest silver miners, many analysts overlook the importance of gold operations to Fresnillo’s bottom line. Silver production vastly exceeds that of gold, but gold’s much higher price means revenue from each metal is close (52% for silver and 44% from gold). The remaining 4% of revenue comes from zinc and lead which are produced as by products (zinc and lead are often found in deposits with silver).

Fresnillo lists on the London Stock Exchange (LSE) as FRES.L, is incorporated in the UK and is a component of the FTSE 100. The company’s debut on the LSE was made at a tumultuous time in 2008 following a successful, profitable and decade’s long track record as a wholly owned subsidiary of Industrias Peñoles, Mexico’s second largest mining company. Peñoles remains the majority shareholder.

Employees number 3051 with 2252 independent contractors.

Future Growth

Fresnillo’s goal is to maintain the group’s position as the world’s largest primary silver company, producing 65 million ounces of silver and 500,000 ounces of gold by 2018.

Recently the company said it was on track to hit its silver and gold production targets for 2012 and had a record year of gold production so far.

The miner announced attributable gold production of 375,637 ounces in the first nine months of the year, a 15.1% increase over the same period of 2011.

With 1 mine opened this year and 2 in the last, production is set to increase noticeably over the coming years as these sites start operating at full capacity and operational kinks are ironed out.

Financials

Revenue growth over the past few years has been significant:

Revenue:

Of course it’s only natural to see big increases in revenue and profit when your two main saleable commodities increase in value 3x over 7-8 years. However revenue and profit growth has exceeded the rise in the value of gold and silver as production has increased which bodes well for future growth.

Profit:

If Fresnillo a) achieves production targets over the next few years and/or b) silver and gold continue to rally, expect a considerable future return on your investment.

Key to Fresnillo’s success thus far is exemplary cost management and focus on efficiency and productivity. The USD cost per oz for the different mines is shown below:

The Market Capitalization is £13.53Bln, there are 717.16Mln shares outstanding with an average volume is 776k shares traded.

With zero debt, strong cash and metal reserves this is certainly a blue chip stock.

The forward P/E is good buying at 13.77, especially for a company of this size. The latest yearly dividend was 34p, for a forward yield of 1.8%. As so often is the case with companies operating in this sector of the market, high dividends are a secondary consideration with the hope of exceptional capital gain being the top priority and Fresnillo has certainly delivered that over the past few years.

Chart

The current share price is 1,887p, not far off last year’s high of 2,150p.

Those who got in early on in 2008, especially near the 100p low would be licking their lips today. With precious metals set to continue their run on the back of worldwide central bank monetary depreciation we believe Fresnillo has a long way to go before reaching its peak. There is no reason the performance of the last few years will not be repeated.

Management & Board

Fresnillo’s most notable board member is Chairman, Alberto Baillères, the 2ndrichest man in Mexico. Mr. Baillères is the also the Chairman, CEO and controlling shareholder of parent company Peñoles and brings a wealth of expertise to the company.


Other board members have considerable experience in mining, accounting, investment banking and business and there is a large majority of Mexican nationals on the board which ensures a vast amount of local knowledge and understanding of the cultural issues involved within the various mining jurisdictions.

The management team gives the company a strong foundation for further growth.

Recommendation

We like this stock for its solid base in a historical, financial, fundamental and strategical sense. Large metal reserves, strong growth prospects, low cash costs and a healthy financial backing ensure Fresnillo will be here for the long run generating a good return.

Fresnillo would make a nice addition to any portfolio as a less speculative, blue chip mining stock. For those in it for the long haul, now is good time to buy, with gold and silver pulling back slightly in the last few weeks. If entry point is of greater concern, then investors may want to wait for confirmation that the long term uptrend in precious metals has resumed with some gusto.

For disclosure purposes, we do not own this stock and have not owned in the past, but it is one of the many stocks on our watch list.

Have a good one.

Bob Kirtley

URL: www.skoptionstrading.com  

URL: www.gold-prices.biz

Email: [email protected]

Disclaimer: www.gold-prices.net or www.skoptionstrading.com makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.