Fresnillo’s Profit Falls on Silver Output Decline

on Aug 2, 2012

Mexican miner Fresnillo Plc (FRES:LSE), the world’s largest primary silver producer, reported a 25 per cent drop in its first-half net profit on the back of lower silver output. The white metal’s production fell due to weaker average silver prices and rising costs, the company explained. As a result of decreased silver production and strong gold prices, the London-listed precious metals group registered the precedent of generating more in gold sales than silver.

Fresnillo’s core profit, or earnings before interest, tax, depreciation and amortisation (EBITDA), fell 9.2 per cent to $684.4 million (£438.5 million) in the first six months of the year. Meanwhile the Mexico-based miner’s net income dropped 25 per cent to $366.7 million (£234.9 million) from $488.7 million (£313.1 million) a year earlier. Price movements and lowered output of silver compounded those trends. The average selling price of silver fell 13.3 per cent to $30.97 (£19.84) an ounce in the first half of the year, while Fresnillo produced 20.1 million ounces of silver in the period, or 6.5 per cent less than a year earlier.

!m[](/uploads/story/233/thumbs/pic1_inline.png)The falling silver prices, combined with the increasing cost of labour and operating expenses, weighed on Fresnillo’s profit margin. The company, however, benefited from increased gold sales caused by the miner’s output of the yellow metal and the positive outlook for gold market prices. Investors’ preference for safe-haven assets pushed gold prices 12.5 per cent higher over the period. Fresnillo, which is also Mexico’s second-largest gold miner, produced a record 248,795 ounces of gold in the first half of the year, up 20.5 per cent. In total, for the six months to the end of June, the miner’s revenues rose 2.7 per cent to $1.09 billion (£698.4 million) from $1.06 billion (£679 million) over the same period last year.

Jaime Lomelin, Chief Executive Officer of Fresnillo, who is set to retire in August, said: “In the first half of the year, renewed economic concerns placed downward pressure on silver prices and, to a lesser extent, gold prices. Despite this trend, the average price of gold during the period was higher than during the first half of 2011, benefitting group revenues. However, this was offset by the decline in the silver price, which had a negative effect on our financial results.”

The Mexico-based miner also confirmed it was on track to meet its full-year production target of 41 million ounces of silver and 460,000 ounces of gold. “We reiterate our commitment to achieve our production targets for the full year, while continuing to invest in the sustainable growth of the Group. These efforts will contribute to the delivery of a strong set of results in 2012 and will ensure that we have a strong foundation to endure further economic volatility,” Lomelin said in a statement following the posted first-half profit figures.
Last week Fresnillo announced that after his retirement, CEO Lomelin will be replaced by Octavio Alvidrez, known to London’s financial community as head of investor relations at Fresnillo between its listing in 2008 and 2010. He joins as the company’s new boss from Penoles, the Mexican mining company which controls Fresnillo.


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