Fresnillo

Four working mines in northern and central Mexico; the giant Minera Fresnillo, discovered in the 1550s by the conquistador Francisco de Ibarra, plus the much smaller mines, Ciénega, Herradura and Soledad-Dipolos (Fresnillo has a 56% stake in the latter two mines whilst Newmont Mining Corporation owns the other 44%).
floated on in May 2008 at 555p

today's price of around 860p where they yield 1.7%.

Industrias Peñoles, a mining and chemicals company, remains the majority shareholder with a 77.1% stake.

Many international mining companies choose to list on the London Stock Exchange because of the City of London's expertise in metals. Not only is the London Metal Exchange the world's largest market for metals but the large number of overseas mining companies which are already listed here, such as the Chilean copper miner Antofagasta (LSE: ANTO), means that London has developed an excellent infrastructure to support mining companies.

Show Me The Money

In 2009 Fresnillo produced 37.9 million ounces of silver and 276,584 ounces of gold, the sales of which respectively produced 56% and 38% of the company's turnover (the remaining 6% comes from lead and zinc).

Fresnillo's results for the last two years are summarised below. Note that whilst the company's accounts are produced in US dollars, UK shareholders receive their dividends in sterling.

Year 2009 2008

Total Sales ($ millions) 850 720

Basic earnings per share 44.9c 18.6c

Adjusted earnings per share 43.0c 18.6c

Dividend per share 21.45c 13.6c

The company estimates that 60% of the growth in turnover in 2009 was caused by rising silver and gold prices whilst the other 40% came from increased production (silver production increased by 8.8%, gold by 4.9%).

Fresnillo has an exceptionally strong balance sheet, holding $1,543 million of assets compared to a mere $166 million of liabilities and no debt.

Earnings per share of about 30p puts Fresnillo's shares on a PE ratio of 28.6 which seems a bit high given that its most recent reserves represent roughly 11 years of silver production and 15 years of gold production.

However there is a very good reason for the high price; Fresnillo has ambitious plans to dramatically boost its production and reserves (and thus its profits).

The Grand Expansion

Fresnillo is in the middle of a major expansion program and is on target to start producing from a new Mexican mine in each of the next four years. The Saucito development is expected to commence operations in early 2011 whilst San Juan, San Julian, Orisyvo are pencilled in for 2012 to 2014. Fresnillo also has big plans to expand into Peru.

It anticipates that the effect of these new mines, plus increased production from its existing mines, should see annual production rise to 65 million ounces of silver and 400,000 ounces of gold by 2018. Furthermore when these new mines come into production they will significantly increase Fresnillo's reserves.

The Soledad-Dipolos mine started operations in January and has had an immediate impact, as can be seen in the production figures for the first quarter of 2010, with gold production jumping by 31.5% compared to the same quarter last year.

Unfortunately Fresnillo doesn't produce quarterly financial results so we can't see the exact financial impact but if gold prices remain around their current levels for the rest of the year then 2010 should see a substantial increase in profits.

So whilst Fresnillo's share price appears rather pricey if you're looking through the rear-view mirror, as long as gold and silver prices hold up and its expansion occurs as planned over the next four years, Fresnillo's earnings per share (and hopefully dividends) are set to grow substantially over the next decade.

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