UPDATE 1-Fresnillo profit down, battles cost inflation

Tue Mar 4, 2014 5:05am EST

LONDON, March 4 (Reuters) - Mexican precious metals mining firm Fresnillo reported a 64 percent drop in profit on Tuesday and said it expected silver production to be flat this year, sending its shares down nearly 10 percent.

The company, which prides itself on having one of the lowest production costs in the industry, said certain operational costs including for energy and labour were likely to rise by 7 percent this year. It vowed to offset that increase by improving efficiency at its mines to cut $30 million in costs.

Gold and silver miners were hit by falling prices last year, but Fresnillo also suffered from a land dispute with the local Mexican community that led to a ban on the use of explosives and halted mining at one of its gold mines. The ban was lifted last week.

Analysts at Citi wrote in a note, "2013 was a tough year for Fresnillo, which has had to face challenges on royalties and on legal issues, which restrained production. Nevertheless, the results were poor even after taking those issues into account."

The analysts rated Fresnillo as over-valued and had a sell recommendation on the stock.

The company has a price to earnings multiple of 44.13, well above the average of its peers at 19.65, according to Thomson Reuters data.

Silver production is seen flat in 2014, with increased capacity from the completion of Saucito II project offset by lower grades at its Fresnillo mine, the company said.

The full effects of the completed Saucito II mine will be felt in 2015, with attributable silver production rising to 45 million tonnes from 43 million, Chief Executive Octavio Alvidrez told reporters.

The miner said pretax profit for 2013 was $419 million on revenue of $1.6 billion. A Thomson Reuters I/B/E/S poll of analysts had estimated profit before tax of $520 million on $1.6 billion in revenue.

The miner said it was on track to produce 43 million ounces of attributable silver and 450,000 ounces of attributable gold in 2014.

Fresnillo also recommended a special dividend of $50.1 million, equivalent to 6.8 cents per share.

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