Fresnillo’s silver lining is undercut by tax bill

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Fresnillo increased its silver resource base to more than 1bn ounces last year, strengthening its position as the world’s largest miner of a precious metal whose value has risen sharply this year.

But its financial position was undercut by a hefty tax bill and foreign exchange losses.

The Mexican silver mining company, which floated in May 2008, increased its pre-tax profits 13 per cent from $236m to $267m in the year ended December 31.

However, taxes rose more than 50 per cent to $115m, lowering earnings to $128m, compared with $144m the previous year.

The increase in taxes, said Mario Arreguin, finance director, largely related to a strengthening of the dollar against the Mexican peso, raising its Mexican tax bill for dollar-denominated assets. Noting analysts “need to understand the Mexican tax code” to be less surprised next year, Mr Arreguin said Fresnillo paid separate taxes for each of its subsidiary companies.

The charges cannot be consolidated at a group level because Penoles, the Mexican industrial group from which Fresnillo was spun off, still owns 77 per cent of shares. But its tax advisers are exploring ways to make the tax structure of Penoles and Fresnillo more efficient.

A boost in production at its namesake Fresnillo mine, which was first mined by imperial Spain in 1554, pushed total production up 1 per cent to 34.8m ounces. Gold production fell more than 5 per cent to 264,000 ounces.

The company forecast that production levels this year will be in line with last year.

Jaime Lomelin, chief executive, said its $212m (£147m) in cash gave it room to make targeted acquisitions this year. However, he said its focus was to “consolidate mining districts”, or buy up the few bits of Mexico’s silver and gold mining belts that the company did not already own.

The company is pursuing an offer for MAG Silver, its joint venture partner.

Basic earnings per share fell from 22.6 cents to 18.6 cents. The shares fell 6 per cent to 390p, compared with its initial public offer price of 555p less than a year ago.

●FT Comment

Fresnillo’s prospects are rooted in a simple comparison between cash costs, currently at about $5 an ounce of mined silver, and $14, the prevailing spot price. Silver prices, which have risen 28 per cent this year, might retreat, but are unlikely to endanger a healthy margin. Its exposure to both gold and silver, in a year when investment buying is increasing demand, makes its price earnings multiple of 19 times forecast 2009 earnings look anomalous next to Randgold, which is above 40 times. However, its costly vulnerability to movements between the peso and the dollar will remain destabilising for investors keen on a precious metals play.

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