There’s something about gold, and indeed other precious metals such as silver and platinum, that sets our pulses racing. There’s a romanticism that allows people to conveniently ignore the blood and sweat that still goes in to extracting the raw materials from the ground, often in conflict-riven parts of the world, to decorate our fingers and necks with sparkling jewels.
While mining has become more sophisticated, involving renewable energies and often driverless trucks or trains, in the case of gold, at least, there’s no getting away from the need to blow up tonnes of rock in search of a few grains of the precious metal. Miners still lose their lives in the process.
With deposits dwindling, discoveries are becoming more expensive to find; hence, the assumption that the price will rise. For many investors, the only question is how best to get exposure other than by buying the commodity: through an exchange-traded fund, perhaps, or a listed miner.
The reality is somewhat different. The gold price is complicated because it is denominated in dollars and has fluctuated heavily in the past 12 months along with the fortunes of the greenback. Gold, off a touch at $1,220 an ounce yesterday, is 3.8 per cent lower than at this time last year. So, too, is silver, which, at $15.57 an ounce, has fallen by 7 per cent over the same period.
Into this picture comes Fresnillo. Founded as a single mine in Mexico in 1887, the group is the world’s biggest silver producer and among the top 20 in goldmining. It operates six mines in Mexico and has the rights to silver produced at another mine, Sabinas. It is exploring for gold and silver in Mexico and Peru and also produces lead and zinc. Listed on the stock exchange in 2008, it is a member of the FTSE 100 and last year made pre-tax profits of $741.5 million on revenues of more than $2 billion.
Its first-half numbers were decent. It boosted silver production by 9.7 per cent to 30.8 million ounces and gold output rose by 4.4 per cent to 465,000 ounces. It slightly increased its annual gold target to up to 930,000 ounces and lopped a bit off its maximum likely silver production this year to 67.5 million ounces, from 70 million ounces.
While revenues, gross profits and cash generated rose healthily, Fresnillo’s pre-tax profits fell by 16.6 per cent to $323 million, hit by its latest six-monthly valuation of Sabinas. Nevertheless, investors liked the update and the shares rose 42¼p, or 4.2 per cent, to £10.39 yesterday.
Diversified miners are complex beasts. Their shares fluctuate in response to commodity prices, oil, the dollar and changes in political sentiment. In the past five years, Fresnillo’s price has moved between more than £20 a share and a low of 590p.
Fresnillo offers an attractive exposure to gold, but it has to compete for investors’ attention with Randgold Resources and Centamin. A more important quality is the exposure to silver, used as much in industrial processes as it is in wedding bands and necklaces.
Its costs of production are low relative to those miners chasing and unearthing deposits in Africa and its balance sheet is healthy, with net debts of $90.9 million at the end of June, strong cash generation and plenty of available facilities to draw on if it needs to ramp up expenditure.
Yet while its long-term growth seems assured, Fresnillo has had a tendency recently to surprise with production downgrades, it has wrestled with lower-than-hoped-for grades of silver and gold at some of its mines and has been battling with disappointing production by contractors at its Fresnillo facility in southern Mexico.
ADVICE Hold
WHY Attractive in the long term, but there are clear risks
Provident Financial
By rights, if Provident Financial had applied for one of its own doorstep loans at any point during the past 12 months, it should have had to turn itself down on the ground of diminished responsibility (Miles Costello writes). It has lurched from crisis to crisis, many of its own making. Only now are there signs that it is putting the worst of its troubles behind it.
Provident Financial, based in Bradford, was established 138 years ago as a specialist lender to those with poor or patchy credit histories, shut out of the mainstream banking market. It has three businesses: Consumer Credit, effectively doorstep lending and online loans; Vanquis Bank, mainly credit cards; and Moneybarn, which lends to money-strapped car buyers.
Its problems emerged last year, when a botched reorganisation led to a mass departure of staff and customers and prompted the first of several profit warnings. Then Vanquis came under investigation by the Financial Conduct Authority for add-on charges to its credit cards, culminating in a £157 million restitution programme to 1.2 million customers. If that wasn’t enough, the regulator then began examining Moneybarn’s affordability checks and how it treats customers in difficulty; £20 million has been reserved to cover a fine or settlement. In short, the dividend was suspended, the shares collapsed and Provident hurtled straight out of the FTSE 100.
Now look. It has a new chairman in Patrick Snowball, a former Aviva executive with a history of turning businesses around, a new chief executive in Malcolm Le May and two new independent directors, including Angela Knight, former chief executive of the British Bankers’ Association. It has overhauled doorstep lending, which, while loss-making, should receive full FCA authorisation inside five months and turn a profit next year. Profits at Vanquis and Moneybarn are on the up. It is the other side of a £331 million rights issue and a £250 million bond issue, which mean its balance sheet has been repaired.
Provident is being open about its failings and is fixing them. The shares, up 53p to 670p yesterday, were above £23.88 only 14 months ago. They could get there again.
ADVICE Buy
WHY When fixed and growing again, has massive potential
