Should You Buy Fresnillo?


LONDON -- I believe bargain hunters should remain clear of Fresnillo , the world's largest dedicated silver producer, despite recent weakness in the stock price.

The shares have collapsed more than 25% since mid-December as the metal price has come under sustained pressure. However, I believe the stock still remains overbought given current earnings projections.

Although I expect precious-metals prices to tread higher over the long term, the possibility of further volatility in the silver price in the meantime could also put the Mexican miner under fresh pressure.

Falling ore grades smack production
Fresnillo announced in last month's production report that attributable silver production declined to 41 million ounces in 2012, down from 41.9 million ounces in the previous year.

Particularly concerning was the 13% production dip at the firm's flagship Fresnillo mine to 26.4 million ounces, which was attributed to falling ore grades.

And average silver ore grades are forecast to dip heavily again in 2013 following the 17% drop to 328 grams per tonne last year. In addition, a projected figure of 281 grams per tonne for this year is expected to persist throughout the remainder of the life of the mine, Fresnillo said.

The silver producer expects production this year to remain stable at 41 million ounces based on projected output increases at its Saucito asset, and it is hoping to commission the Jarillas shaft at the site during the current quarter.

Although Fresnillo is targeting attributable silver production of 65 million ounces by 2015, any hiccups within the ramping-up process is likely to send the share price tumbling again.

An expensive choice
Earnings are forecast to leap over the medium term after a difficult 2012 -- results released on March 12 are expected to show earnings per share dip 12% to 63 pence, according to City brokers.

But earnings are expected to bounce 14% to 71 pence per share this year before advancing an additional 20% to 86 pence per share during 2014 due to more mined metal volumes.

Even so, I believe Fresnillo remains critically overvalued at current levels. A P/E ratio of 24 for last year is anticipated, and although this is expected to fall to 21 this year, it remains at a premium to a forward earnings multiple of 19.6 for the wider mining sector.

As well, problems with bringing new production online, allied to the prospect of further weakness in precious-metals prices, could undermine these ungenerous numbers still further.

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