Fresnillo PLC (LSE:FRES), the world’s largest silver ore producer, has been downgraded to “sell” by UBS on concerns it will continue to "underperform, underestimate costs, and stretch silver production guidance".
“Operational issues and guidance downgrades have caused FRES to underperform gold peers by 75% over the last seven years,” said UBS.
The Mexican mining company saw its price target cut from £9 to £8.50 by the Swiss bank.
In 2022, Fresnillo predicted inflation to raise operating costs by more than 10%, but moving forward UBS’s greatest “concern is that consensus appears to factor in zero increase in group operating costs in 2023”.
The investment bank believes the company’s 2022 cost estimates were “US$100mln too low” causing UBS to forecast 2023 costs “27% above consensus”.
“It is unrealistic to believe that costs will be flat year on year in US$ terms despite the commissioning of a new mine [Juanicipio],” researchers at the bank added.
Juanicipio is a mining project in Mexico, 56% Fresnillo-owned, where commissioning was initially expected for 2022 but commercial production has been delayed until early February.
“Juanicipo provides FRES with its first volume growth for a number of years and will help dilute group unit costs,” UBS stated.
The bank warned, however, that the company's 2023 guidance of 65mln ounces of silver looks too high and it forecasts a reduced 61mln ounces.
UBS concluded: “Upcoming production results (25-Jan) and financial results (7-Mar) will act as negative catalysts for the stock.”
Fresnillo is currently trading at £8.98, down 4.7% today.