Silver stocks take a trashing

London-listed Mexican miner Fresnillo has seen its market value pull back by USD 2bn in the past fortnight, as selling hits silver bullion, and sentiment sours towards one of the hottest pockets in global resources.

Author: Barry Sergeant
Posted: Thursday , 18 Jun 2009

JOHANNESBURG -

London-listed Mexican miner Fresnillo's market value advanced from USD 1.1bn during the darkest hours of November 2008 to a peak of USD 8.7bn in the very early days of June 2009. Since then, there has been some kind of a trashing.

Fresnillo's market value has declined by nearly a quarter in just weeks, from a 12-month high, yielding a contraction of USD 2.1bn in market value. The sense of contagion has spread across the listed primary silver sector, in sympathy with a silver price that has declined from around USD 16/oz early this month to test, and break, USD 14/oz.

Typical headlines around on Wednesday included the likes of silver in a "one month trough" below USD 14/oz, on a weaker dollar and slacker investment demand. Sister metal gold bullion has also seen price declines over the past few weeks, but silver bullion and listed primary silver producers are classically behaving in a "beta" fashion, overshooting gold counterparts (in either direction).

Within the sector, premium-rated Fresnillo's value contraction over the past fortnight has outflanked stock price losses racked up by other silver miners, where the average decline stands at 41%, compared to an average of 35% for listed gold stocks.

Silver bullion, which briefly traded above USD 20/oz during March 2009, when gold bullion traded at record levels, would more than halve to around USD 9/oz during the latter parts of 2008, horribly overshooting the experience for gold bullion. But even at current levels around USD 14.18/oz, the metal changes hands at prices 68% above its lows, ranking as one of the better "bounces" in prices for mainstream metals.

But what is starkly clear is that not a single primary silver stock now trades at less than 10% below its 12-month high stock price. There are, by contrast, a good few dozen listed gold stocks trading within the 10% bracket, including some with substantial market values such as Zhongjin, Allied Nevada, Shandong Gold, Alamos, JSC Polymetal, Allied Nevada, Lake Shore Gold, Kingsgate, Andean, and Alamos.

Within the primary silver universe, with its current investible global market value of USD 20bn, Fresnillo ranks, as mentioned, as the least battered price wise, with the exception of a couple of more esoteric silver names, S. Métallurgique d'Imiter, and Henan Yuguang, and also the relatively tiny, and interesting, S American Silver.

Fresnillo continues to rank as the world's biggest producer of primary silver; in absolute terms it falls into third place after BHP Billiton and KGHM Polska Miedź, which both produce silver as a co- or by-product. Fresnillo is in practice a diversified miner, producing a relatively attractive overall bouquet, given current metals pricing, in the forms of silver, gold, zinc and lead.

Fresnillo listed late in 2007 in London, where it raised USD 902m after implementing a structure to consolidate the precious metals interests of Mexico's Industrias Peñoles, which, at the end of 2008, still held 77% of Fresnillo. The benefits to Peñoles, and Fresnillo's new shareholders, have been material, notwithstanding the current stock price corrections.

Fresnillo's group numbers for 2008 show revenues of USD 840m, operating profit of USD 284m, and EBITDA (earnings before interest, tax, depreciation and amortisation) of USD 337m. The company made USD 407m in equity distributions to shareholders during the year, which ended on 31 December 2008 with Fresnillo holding cash and cash equivalents of USD 212m, and no debt.

The smart money started to go back into Fresnillo's listed stock very late in 2008, at a point when an increasing number of brave investors started pricing in a more robust outlook for metals prices. Assuming current metal pricings apply across 2009, and that Fresnillo's 2009 output matches that posted for 2008, group revenue would compute at USD 801m, not far from the number for 2008, with a 61% contribution from silver, 31% from gold, and 4% each for lead and zinc.

With its huge 40% EBITDA margin recorded for 2008, Fresnillo is set to make good money again during 2009, as things stand now. During the first quarter of 2009, Fresnillo's output of gold, zinc and lead fell back somewhat, in line with austerity measures taken by practically every mining company in the world, but silver output increased by 9% compared with both the first and fourth quarters of 2008.

For those rare investors that take a longer term view, Fresnillo's intention is "to maintain its position as the world's largest primary silver producer with the aim of approximately doubling production, on a silver equivalent ounce basis by 2018 and increasing its gold production". Within that, Fresnillo no doubt will continue on the acquisition trail, most recently seen in its bid for MAG Silver.

But for the meantime, sentiment for all things silver in the investment markets has soured. Valuations for the world's best performing mining subsector over the past 12 months are retracing under hurricane-type forces. Momentum buying dried up and turned south two weeks ago, with no particular end in sight, for now.