A surging gold price may be grabbing the headlines but looking back over 2009 as whole, fellow precious metal silver has actually posted superior price performance. Whereas gold has increased by around 40% in dollar terms, silver is up by close 70%. For Fresnillo this dynamic is the main reason why its shares are currently vying to become the FTSE 100’s second best performer of 2009.
Global silver production is dominated by three major players: Australia’s diversified miner BHP Billiton, Poland’s copper focused KGHM and Mexico’s Fresnillo. Whilst for BHP and KGHM’s silver production is really a side show, Fresnillo is the only of the three which classifies itself a silver miner first and foremost.
It is not often that we get to say this but looking at the share price comparisons between BHP and Fresnillo, BHP’s broad exposure to the almost the entire commodities spectrum has proved a disadvantage. Far more concentrated, the vast majority of Fresnillo’s production is silver and gold, with only a small fraction being made up of zinc and lead.
Earlier this year BHP reported that its silver production actually slipped. This offers stark contrast to Fresnillo’s 9% increase in output during the third quarter which set a new production record. In terms of the full year, management at Fresnillo has recently stated that the company is on track to produce over 40 million ounces, a marked increase over 2008.
The company’s operations are centred on three mines – Fresnillo, Herradurra, and Cienega (where output jumped 76% y-o-y during the 3Q). In terms of future production the miner has four development projects close to these mines all off which offer significant growth potential and we have every confidence the management will achieve their pre stated aim of doubling silver production by 2018!
No just a one trick pony, Fresnillo is also Mexico’s second largest gold producer. The company is expected to produce 265,000 ounces of gold in 2009 and once the group’s expansion projects have kicked, a revenue ratio of 55 per cent silver and 35 per cent gold is expected to be maintained.
Silver though is Fresnillo’s specialty and like gold, the precious metal has benefited from a huge surge in investment demand and we expect this to continue as paper currencies (most notably the US dollar) are debased. Silver also has a broad range of industrial uses and we expect the prevailing global economic recovery to provide its price with additional positive momentum.
Fresnillo’s tight grip on costs, its burgeoning production profile and vast exploration pipeline will in our view provide the catalyst for both continued operational success and long term earnings growth. And what’s more the company has no debt and almost $250 million in the kitty should any earnings accretive acquisitions appear on management’s radar.