Fresnillo Plc

Fresnillo Plc (FRES) is a Mexico-based precious metal group, which provides mining and exploration services.  The group has seven operating mines - all of them in Mexico - along with other development and exploration projects. It develops high potential silver and gold projects into low-cost, world-class mines, with business model spanning the full mining value chain from exploration, construction and development, to mining operations. The company primarily serves customers in the United Kingdom and Mexico.

Recent News
Fresnillo paid its shareholders an interim dividend on 6^th September 2019.

Financial Highlights – H1 Financial Year 2019 ($, million)

(Source: Interim Report, Company Website)

Due to lower ore grades at the Fresnillo and Saucito mines and lower volumes of ore processed, silver production in the first half decreased by 10.4 per cent versus 1H18 to 27.6 moz. As a result of a decrease in the volume of ore processed at Noche Buena, first-half gold production declined by 7.1 per cent against 1H18 to 432 koz. Reflecting lower metal prices, excluding gold, and lower volumes of gold and silver sold, adjusted revenues decreased by 10.2 per cent to $1,069 million in 1H19. While the average realised gold price remained flat at $1,320.7 in 1H19, the average realised silver price declined by 7.5 per cent to $15.2 per ounce in 1H19 from $16.5 per ounce in 1H8. As adjusted production costs rose by 31.8 per cent to $566.4 million in 1H19, cost of sales of $796.5 million rose by 30.0 per cent over 1H18, which resulted in a 59.1 per cent decline in gross profit to $205.5 million. Due to the intensive exploration programme was undertaken by the company, exploration expenses rose by 7.3 per cent over 1H18 to $84.0 million. EBITDA declined by 45.7 per cent to $307.9 million, reflecting higher exploration expenses and a decrease in gross profit. Profit from continuing operations before income tax declined by 83.3 per cent to $54.1 million in the first half of the year from $323.0 million in the corresponding period last year, while net profit for the period decreased by 69.1 per cent from $229.3 million in 1H18 to $70.9 million in 1H19. Adjusted earnings per share of $8.4 cents per share were down by 74.8 per cent, and basic and diluted earnings per share from continuing operations were down by 69.4 per cent to $9.5 cents per share.

Share Price Performance

Daily Chart as at 9^th September 19, before the market close (Source: Thomson Reuters)

On 9^th September 2019, Fresnillo Plc shares were trading at GBX 698.50 at the time of writing before the market close (at 11:25 AM GMT), down by 2.87 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,028.00/GBX 570.00. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.19.

Valuation Methodology


Conclusion
The company reported that its exploration programme continued to produce good results and has the potential to contribute to the future value of the group significantly. The profitability of the group was adversely impacted during the period because of higher costs and challenges at its Fresnillo, Saucito and Herradura mines.

In the second half of the year, the company will be seeking to increase productivity by undertaking operational measures to control costs. Due to the lower volume of ore processed and delay in the construction of a leaching pad at Herradura, guidance for gold production was decreased by around 3% to 880 - 910 thousand ounces.

Guidance for silver production was also revised down by 5% to 55-58 million ounces. Keeping in mind the recent uncertainties in the global macro environment, the gold prices are expected to increase. This augurs well for the company’s revenue.

Based on the above rationale, we have given a “HOLD" recommendation at the closing price of GBX 719.20 (as on 6th September 2019), based on 11.00x NTM Price/Cash flow multiple (approx.) on FY19E cash flow per share (approx.).

Hochschild Mining Plc

Hochschild Mining Plc (LSE ticker: HOC) is a precious metals producer company with business operations spread across the Americas for more than 50 years. The company is mainly focusing on good quality gold and silver deposits. The company is presently operating in 3 underground mines in southern Peru and one underground mine in southern Argentina. The company operates in epithermal vein mines and uses cut and fill mining method, and the extracted ore is processed into gold-silver concentrate. The company is headquartered at Lima, Peru and is having offices in Argentina and London as well.

Recent News
On 14th August 2019, Hochschild Mining announced its interim results ending June 30^th, 2019.
Financial Highlights – H1 Financial Year 2019 (US $, million)


(Source: Interim Report, Company Website)

In the first half of the financial year 2019, the company’s reported revenue declined by 5 per cent to $354,450 thousand from $372,328 thousand in H1 FY2018, driven by a decline in the average price of silver in the current financial year. Gross profit for H1 FY2019 dipped to $101,619 thousand from $105,069 thousand in H1 FY2018. In H1 FY2019, the adjusted EBITDA declined by 5 per cent to $153,734 thousand from $161,906 thousand in H1 FY2018, mainly due to the decline in the revenue and increase in the administrative and exploration expenses for the period. The reported operating profit for H1 FY2019 stood at $32,744 thousand against $64,628 thousand in H1 FY2018. The PBT (profit before tax) before exceptional items was down by $13,433 thousand to $41,467 thousand in H1 FY2019 from $54,900 thousand in H1 FY2018. The total PBT was down by 23.44 per cent to $29,518 thousand in H1 FY2019 from $38,554 thousand in H1 FY2018. The profit for the year before exceptional items stood at $25,085 thousand in H1 FY2019 against $22,242 thousand in H1 FY2018. The total net profit of the year was $16,661 thousand in H1 FY2019 versus $10,718 thousand in H1 FY2018. The total basic and diluted earnings per share stood at US$0.03 in H1 FY2019 versus US$0.03 in H1 FY2018. 

Share Price Performance

Daily Chart as at 9^th September 19, before the market close (Source: Thomson Reuters)

On 9^th September 2019, Hochschild Mining Plc shares were trading at GBX 198.10 at the time of writing before the market close (at 11:29 AM GMT), down by 5.48 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 232.20/GBX 146.65. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 2.23.

Valuation Methodology

*Peers: Hill & Smith Holdings Plc, Atalaya Mining Plc, Glencore Plc, United Company RUSAL Plc and Anglo-American Plc.

Conclusion
The company’s top-line and bottom-line performance declined in the first half of the financial year 2019. Despite the weak financial performance, the company is expecting a rise in demand for both gold and silver. With the global financial markets started experiencing volatility, the growth prospect of precious metals will improve in the year 2019.

In the H1 of the financial year 2019, the company’s cash balance was at $95.4 million as compared to $79.7 million in FY2018. The company had reduced its net debt to $62.4 million in H1 FY2019. The company’s growth strategy revolves around lower costs, optimising projects at earlier stages and strategic partnerships to maximize the shareholders’ value. 

Therefore, based on the above rationale and the valuation, we recommend investors to “HOLD” the stock, at the closing price of GBX 209.60 (as on 6th September 2019), based on 6.60x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).

*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.80974 GBP.

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