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Fresnillo’s results for the first half of 2013 are not particularly inspiring, but the consensus seems to be that the company is doing as well as can be expected.
Like it or not, when a company releases its financial and operating results — be they for a quarter, half a year or a full year — it opens itself up to both judgment and commentary. Just ask Fresnillo (LSE:FRES), the world’s largest primary silver producer, which yesterday put out its results for the first six months of 2013.
As even a cursory glance at the Mexico-focused company’s press release reveals, it has been hit fairly hard by the mid-April drop in silver prices. Case in point: its average realized silver price came in at US$24.67 per ounce, down 20.3 percent from the year-ago period, as a result of “the decline in precious metals prices resulting from the economic volatility that has been driven in large part by the speculation about central bank sales, ETF liquidations and the potential end of quantitative easing.”
Lower gold and silver prices also caused a 14-percent fall in adjusted revenue and were partially responsible for a substantial decline in Fresnillo’s recorded earnings before interest, tax, depreciation and amortization (EBITDA), which sunk 29.1 percent, hitting $486.3 million. Octavio Alvídrez, the company’s CEO, also cited “higher production costs associated with higher volumes from the expanded business and higher electricity and diesel prices” as contributing factors.
Perhaps most notably, company directors have recommended an interim dividend of 4.9 cents per share, equivalent to $36.11 million, a sizeable decrease from the $304.1-million dividend paid to shareholders in the first half of 2012.
Despite those factors, Fresnillo’s press release ends on a positive note, emphasizing the importance of focusing on the market’s long-term outlook and noting that it will “continue to focus on [its] strong operational performance, while reducing costs and improving efficiencies, and always with the utmost attention to safety.”
The company expects to meet its 2013 silver production target of 41 million ounces, but in July lowered its gold production target to 465,000 ounces from 490,000 ounces.
Glass half full or half empty?
General consensus regarding Fresnillo’s results seems to be that the miner is doing about as well as it could be, given the current market environment.
For instance, Andrew Peaple, writing for The Wall Street Journal, notes that the company is “responding sensibly” to lower silver prices by “cutting costs and reducing its planned exploration budget for the year to $242.8 million from $279.8 million.” Expanding on those efforts, Reuters states that Fresnillo has reduced drilling contract prices and has saved money by optimizing maintenance programs and milling processes, as well as using fewer explosives.
Peaple also points out that Fresnillo is currently debt free — one of the few miners to hold that distinction, according to Reuters — and holds $570.8 million in cash and cash equivalents. Further, it has avoided the type of “embarrassing” writedowns recently taken by Barrick Gold (TSX:ABX,NYSE:ABX) and other major miners.
However, the Financial Times quotes Canaccord Genuity as saying that there are some concerns surrounding cost inflation at Fresnillo, while Peaple writes that “there is no denying times are getting tougher,” and that even though Fresnillo takes cost-cutting measures, there is not much it can do about revenue, especially with “financial investors losing faith in precious metals.”
With shares in Fresnillo down 50 percent since the beginning of 2013, including almost 11 percent following yesterday’s announcement, it remains to be seen whether in the long-term “as good as can be expected” is good enough.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.