Fresnillo board confident as investors gather for AGM

Investors in Fresnillo were gathering in London for the company’s annual general meeting on Tuesday, with Alberto Baillères set to update them on the firm’s progress amid a period of volatile metals prices.

The FTSE 100 firm’s chairman said that, whilst precious metals prices remained volatile in 2016, they did recover during the year, reversing the downward trend seen for “several years”.

Fresnillo remained focused on its long-term goal to maintain its position as the “world's largest primary silver company”, and a “leading gold producer” in Mexico in a profitable and sustainable manner, he explained.

“Our average realised gold and silver prices rose 10.7% and 10.3% respectively when compared to 2015.

“Against this background, we delivered record silver production of 50.3 million ounces, in line with our guidance and an increase of over 7% vs 2015, and gold production of 935.5 thousand ounces which exceeded our revised guidance and was almost 23% higher than in 2015,” Baillères said.

As a result of the record production, higher metal prices and the devaluation of the Mexican peso during the year, Fresnillo saw “robust” financial results for 2016.

“We generated over $2bn in adjusted revenues, a rise of 29% over 2015, with a 505% increase in profit attributable to shareholders,” Baillères explained.

“We almost doubled the cash generation from our mines in 2016, which more than offset our capital expenditure and the payment of dividends, resulting in Fresnillo being net cash flow positive with a closing cash balance of $912m by year end.

“Our strong financial performance in 2016 led the board to declare an interim dividend of 8.6 cents per share and a final dividend of 21.5 cents per share, totalling $158.4m.”

Looking at the company’s operational performance in more detail, Baillères said its record silver production reflected the initial contribution of San Julián phase I and higher grades at Fresnillo and Ciénega.

The company also reported record gold production for the year, mainly a result of reduced inventories at Herradura, the chairman pointed out.

“San Julián phase I was commissioned in the third quarter and it is now operating at levels above its designed capacity.

“Despite the unfortunate circumstances which lead to the delay of the startup of San Julián phase II, we are pleased to report that this second phase is on track to be commissioned at the end of the second quarter of this year.

“We remain confident that San Julián will be a successful new mine and will open up additional growth potential in the district.”

At the Fresnillo mine, despite reporting a slight improvement in silver production in 2016, Baillères said the company continued to experience some issues that impacted the delivery of its turnaround plan.

However, management did implement additional measures to increase mine preparation and now expected a “gradual improvement” in production during 2017.

“As reported in our 1Q 2017 production report, the mine continues to show positive signs with two consecutive quarters of increased ore grades and silver ounces produced and three consecutive quarters of increased ore processed.

“Our target of reaching 4,800 metres of development per month by the end of 2017 remains on track.”

Looking further at the company’s production results for the first quarter of 2017, the board reported quarterly silver production of 13.5 million ounces - including Silverstream - up 10.7% against the first quarter of 2016, and quarterly gold production of 222,300 ounces.

“We remain on track to achieve our production guidance for 2017, with silver production of between 58-61 million ounces including Silverstream, and gold production of between 870,000-900,000 ounces,” Baillères said.

“Our capital expenditure is anticipated to be approximately $800m and exploration expenses of around $160m, including the capitalised portion.”

The chairman said that regrettably, Fresnillo reported three fatalities in 2016 and one in early 2017, representing a “major setback” to its safety programme.

Following investigations, he said the management team had taken “decisive steps” to prevent the type of human errors that were invariably a root cause in the accidents.

“Safety continues to be our highest priority, above production and profitability.

“We recognise that even with best-in-class systems and practices in place, our safety culture must be further strengthened and deeply embedded within the company.”

As a result, Baillères said the board's health, safety, environment and community relations committee was continuing to review the safety culture and values at the company.

“In 2016 we continued to optimise our operations.

“Not only did we make good progress with our development projects but we also increased our resource base.

“The pyrites plant and second line of the dynamic leaching plant at Herradura advanced largely according to plan, with commissioning of both due in 2018.”

Baillères said the board received “positive results” from its exploration programme in 2016, with an 8.2% and 10.2% increase in total gold and silver resources respectively.

“Gold reserves remained stable, whilst silver reserves decreased 3.2%.

“Our resource base remains very sound as we progress towards our 2018 goals.”