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Fresnillo's Saucito mine set to come into production imminently
Despite being identified first and foremost as a silver producer Fresnillo only has one producing mainly silver mine. This may soon change though with the Saucito mine set to come into production imminently and the long-term target is for a two-thirds increase in silver output by 2018. Gold production performed well in 2010 whilst the group’s exploration programme also remains robust.
With a market cap of around £9.3bn, Fresnillo is the UK’s thirty-ninth largest listed company and the largest precious metals producer. Having listed in May 2008 the stock has more than doubled in price as gold prices have improved and silver has performed even more strongly.
A focus on Mexico has also provided a relatively stable country in which to explore and produce precious metals. In fact according to The Silver Institute Mexico overtook Peru in 2010 to become the world’s largest silver producing country.
The recent election of a left-wing leader in Peru looks set to attract continued investment in Mexico at the expense of Peru. Clearly Mexico has risks but compared to Africa and many Latin American countries the picture looks relatively stable.
Turning to Fresnillo’s results in 2010 and silver production increased only marginally while gold performed strongly with a 43.7% jump in output. The skew towards gold in terms of its revenue contribution this year (44% versus 51% for silver) is partly due to higher sales than output as the timing of sales varies.
The company’s focus, though, is on growing silver output and not gold with a target of silver production of 65m ounces by 2018 - an increase of 68% on 2010. As part of meeting this goal Fresnillo is due to start production at its second silver mine imminently (the target has been put at the end of June). This is the Saucito mine which has 361.5m ounces of silver resources and while initial production is set to come in at 4m ounces this should increase to 9m by 2013.
With silver performing strongly the company, as an unhedged producer, has been financially robust. Realized silver prices were US$21.39 in 2010 - a 40% rise on the year before while gold improved by 26.6% - which compares to current prices of around US$35. By comparison the group realized average silver prices of US$15.27 in 2009 and US$14.71 in 2008.
The group also notes that silver isn’t dependent on one industry, as it was when the key use was photography, and that new uses for silver in electronics, cell phones and water purification are growing. Silver in ETF holdings has increased rapidly from 150m ounces in 2007 to just under 600m ounces today.
This article was produced by Senior Research Analyst, Andrew Latto
