Fresnillo to cut costs amid falling precious metal prices

LONDON Tue Aug 6, 2013 6:18am EDT

LONDON (Reuters) - Fresnillo (FRES.L), the world's largest primary silver producer, said it would slash costs after posting a 29 percent drop in first-half earnings and cutting its dividend due to a plunge in precious metal prices.

Gold prices have fallen more than 20 percent so far this year, while silver has seen even steeper declines, putting Fresnillo and other miners under intense pressure to cut costs.

Fresnillo, also Mexico's second-largest gold miner, said it had already managed to reduce drilling contract prices and added it saw further savings from optimizing maintenance programs and milling processes, as well as using fewer explosives.

"Fresnillo's continued focus on cost cutting and operational efficiency remains more relevant than ever and we remain confident that our assets will continue to be amongst the lowest cost precious metals producers," Chief Executive Octavio Alvidrez said on Tuesday.

He gave no specific group cost-cutting targets.

As a low-cost producer, Fresnillo has so far avoided the hefty writedowns announced by a number of its precious metal peers such as Barrick Gold Corp (ABX.TO), and Alvidrez said gold prices would need to head below $900 an ounce on a long term basis before it would have to take such steps.

Gold was trading down 1 percent to below $1,300 an ounce on Tuesday, having hit a near three-year low in late June.

Silver has traditionally been Fresnillo's larger business but in 2012 gold accounted for around 49 percent of its revenues, with silver delivering 47 percent.

Fresnillo's core earnings, or earnings before interest, tax, depreciation and amortization (EBITDA), in the first six months of 2013 fell to $486.3 million, while attributable profit fell 34 percent to $225.6 million, hit by higher electricity and diesel costs as well as the weaker silver and gold prices.

The company said its interim dividend payout would be 68 percent lower, in line with its policy to pay out around one-third of a stated proportion of annual profits at the interim stage and two-thirds at the final dividend stage.

At 0605 ET, Fresnillo shares were down 5.4 percent at 980 pence, the biggest drop by a UK blue-chip stock .FTSE.

Fresnillo - one of the very few miners to hold no debt on its balance sheet - said its cash position stood at $570.8 million on June 30, which analysts at Canaccord called an "encouraging buffer".

"Whilst in line with market expectations, concerns remain over the continued cost inflation the company is experiencing in an environment where precious metal prices are depressed," they said.

Fresnillo said it would maintain its capital expenditure plans - it aims to spend between $700 million to $800 million this year and the same amount next - helping to keep it on track to meet a 2018 target to produce 65 million ounces of silver.

The company also said it expected to meet its 2013 silver production target of 41 million ounces, and its slightly lower gold output target of 465,000 ounces, following a downgrade from 490,000 ounces in July.

(Editing by Kate Holton and Mark Potter)