Friday, March 3, 2017

Fresnillo plc And Its Fresnillo Mine Problem

Fresnillo plc, one of the largest world's gold / silver miners, published its preliminary 2016 results. In my opinion, they were very good but in this post I would like to discuss one of the main assets, the Fresnillo mine.

I guess that the company's management has a real weakness for this operation. Look at the chart showing Fresnillo plc capital expenditures, starting from 2008:

As the chart shows, since 2008 the company has allocated as much as $0.84 billion to improve the Fresnillo mine operations. It was the largest amount of money spent on any mine in the company's mineral portfolio.

To be more specific, here is the chart showing the Fresnillo mine Capex:

The chart shows that the highest Capex was in 2012, 2014 and 2015. In 2016 the management came to its senses and spent "only" $52.8 million. I think it is the right decision because the Fresnillo mine performance has been in graduate deterioration for many years:

The main problem are silver grades. The Fresnillo mine is a silver producer operating since 1554. Despite its long history, a few years ago the mine was able to deliver silver grading above 500 grams per ton of ore, which was an excellent, high grade. Now it is producing silver grading around 220 grams per tone of ore so the deterioration is impressive. 

Of course it does not mean that this mine is worth nothing. Quite contrary, it is still a decent operation but the question is:

"Is it still worth spending so much money on it?"

In my opinion, it is not.

Last but not least - the company plans to improve Fresnillo / Saucito operations (both mines are close to each other) through construction of the so-called Pyrites plant. The planned Capex stands at $155 million and the plant should be commissioned in 2018. I would like to see a business plan for this project...(contrary to Canadian miners, Fresnillo plc does not disclose technical reports, PEAs etc.)

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