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Fresnillo Reached Record Silver Production in 2018

- By Alberto Abaterusso

Before the opening bell on Tuesday, Fresnillo PLC (FNLPF) released its operating and financial results for 2018.

The Mexican miner produced 922,527 ounces of gold, which was a 1.3% increase from 2017, and achieved an annual record of 61.8 million ounces of silver, which reflects 5.3% year-over-year growth.

While the company surpassed its guidance on gold production for the year, silver production missed the mark as a result of lower ore grades and some operating issues.

Fresnillo is producing precious metals from its mines located in Mexico.

These properties are the Fresnillo underground silver mine, the Cienega underground gold-silver mine, the Herradura open-pit gold mine, the Noche Buena open-pit gold mine, the San Julian underground silver mine, the Saucito underground silver mine and the Soledad-Dipolos open-pit gold mine.

2018 was challenging for Fresnillo from a financial standpoint as well.

Due to a higher volume of waste at Herradura, higher non-cash charges for depreciation and an increase in energy costs, the earnings before interest, taxes, depreciation and amortization margin fell 7.1 percentage points to 43.5% of adjusted revenues of $2.24 billion. Thanks to higher sales volumes, adjusted revenue increased 0.5%.

Compared to the industry median of about 25%, however, Fresnillo's EBITDA margin indicates operations are still strong.

Despite a 13.3% decrease in operating cash flow to $930.7 million, a 10.6% increase in capital expenditures to $668.7 million and $173 million spent on exploration, the company's balance sheet is still solid. It had $560.8 million in cash on hand and equivalents as of Dec. 31, 2018. During the year, Fresnillo also distributed $298.1 million in dividends.

The company noted total debt was $800.13 million and total equity was worth approximately $3.13 billion as of year-end 2018. Thus, the total debt-to-equity ratio is 26% versus an industry median of 34%.

In 2018, Fresnillo paid $50 million in interest expenses on the outstanding debt. Therefore, the interest coverage ratio, which measures the company's ability to cover the interest charges on its debt, is 25, indicating the Mexican miner doesn't have any problems doing so.

The company's pipeline of development and exploration projects is progressing well.

Fresnillo had total resources of 39.1 million ounces of gold and 2.2 million ounces of silver at the end of the year. Resources of gold increased 1.5% while silver decreased 5% from 2017. From its total mineral resources, Fresnillo is guiding for between 58 million and 61 million ounces of silver and between 910,000 and 930,000 ounces of gold in 2019.

To guarantee the regular execution of mining and exploration activities as well as the development of mineral projects, Fresnillo will spend approximately $710 million this year.

CEO Octavio Alvidrez predicts 2019 to be another challenging year as a result of lower precious metal prices, higher depreciation and energy costs and lower performance at certain mines.

In addition, Fresnillo paid a total dividend of 27.4 cents in 2018, which was about 57.7% of adjusted earnings per share of 47.5 cents. The adjusted earnings decreased 37.6% from 2017.

If held constant, the annual dividend, based on the closing share price of $12.7 on Monday, gives a forward dividend yield of 3.18% compared to an industry median of 3.14%.

The stock has fallen 34% for the 52 weeks through Feb. 25 and is now trading above the 200, 100 and 50-day simple moving average lines. The market capitalization is approximately $9.4 billion.

The 52-week range is $9.35 to $19.24. The 14-day relative strength index of 52.97 implies the stock is neither overbought nor oversold.

Wall Street has assigned an overweight recommendation rating.

Disclosure: I have no positions in any securities mentioned.

This article first appeared on GuruFocus.