Last updated: March 1, 2011 7:26 pm

Fresnillo: adding to the family silver

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There’s no time like the present for adding to the family silver. But Jaime Lomelín, chief executive of London-listed Mexican silver miner Fresnillo, hardly needs to remind investors of that. The precious metal’s sustained rise – it reached a 31-year high of $34.44 an ounce on Tuesday – is driven by industrial and financial demand. Silver used in mobile phones (80m of them in Mexico alone), electronic gizmos and medicine, explains the secular demand. Fresnillo, the world’s largest primary silver producer, estimates as much again comes from financial investors who invest via exchange-trade funds or buy coins.

Fresnillo is profiting. Its cash cost is among the lowest in the industry: $3.34 an ounce last year, when the silver price averaged $20.24 an ounce. That translated into a pre-tax profit margin of 59 per cent. The 2010 net income, on record production, of $665m was enough to pay for $340m of capital expense and a near doubling of the dividend – with money to spare. Unlike some more diversified miners, Fresnillo was not tempted by cheap money, preferring to fund expansion internally. Even so, cash increased from $312m to $560m.

The silver price can go down as well as up; it fell below $15 as recently as 2008, during the post-Lehman sell-off. If financial investors lost interest in silver, prices could fall sharply. Also, rising oil, energy and labour costs could dent profitability. But for now investors hardly seem to be worried. Fresnillo’s shares rose by 3.2 per cent early on Tuesday. The gain reflects the company’s status as a proxy for silver demand, and also the shares’ relative illiquidity. They already trade at a punchy 24 times current year earnings, almost double the multiple of comparable gold producers. But no one is taking profits yet.

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