UPDATE 2-Fresnillo Q1 gold output hits record, seeks growth

* Gold production jumps 31.5 pct to 85,097 ounces

* Silver output up 3 pct to 9.5 mln ounces

* Growth projects on target, due to boost output by 70 pct

* Shares fall 0.2 pct, seen as overvalued

(Adds conference call, shares)

By Eric Onstad

LONDON, April 14 (BestGrowthStock) – Mexican precious metals miner
Fresnillo (FRES.L: ) posted record first quarter gold output
after the launch of a new mine, the first leg of an expansion
that will also boost silver production by up to 70 percent by
2018.

London-listed Fresnillo Plc, the world’s largest primary
silver producer, is focusing on organic growth after finding it
difficult to make quality acquisitions and plans to open a new
mine or expansion project each year until 2014.

“Attributable gold production has exceeded our expectations,
due to the better than expected initial operating results at
Soledad-Dipolos,” Chief Executive Jaime Lomelin said on
Wednesday in a production report.

Even though the new mine has performed better than
anticipated, the firm is remaining cautious and is not upgrading
its annual production target, Octavio Alvidrez, head of investor
relations, told a conference call.

The firm will keep its focus on silver in the long-term, but
the new mine is richer in gold and is due to boost the group’s
production of gold this year by about a fifth.

“Fresnillo’s two major growth projects are now ramping up,
providing strong growth into 2011, however… Fresnillo
continues to look expensive relative to its nearest silver peer
Hochshild (HOCM.L: ),” said analyst Dominic O’Kane at Liberum
Capital.

Fresnillo has a 2010 price earnings ratio of 23 compared to
12 for Hochschild, according to Thomson Reuters data.

Numis Securities said production was in line with
expectations, but it downgraded the shares to “Add” from “Buy”
due to recent share gains.

Fresnillo shares, which have surged 30 percent since
touching a low on Feb. 5, fell 0.2 percent to 844.5 pence at
0755 GMT, compared with a 1.4 percent rise in the UK mining
index (.FTNMX1770: ).

COST PRESSURES

Fresnillo, a unit of Mexican miner Penoles (PENOLES.MX: ),
reiterated its warning that costs would rise this year, partly
due to a stronger peso currency and higher power costs.

“We’ve seen inflationary pressures and we are expecting some
increases in labour and some other materials,” Alvidrez said.

“Over the year we are expecting a signficant increase (in
electricity costs).”

The firm is pressing forward with efficiency projects and
said on Wednesday a new water treatment plant at its flagship
Fresnillo mine achieved savings of $220,000 in the quarter.
During the quarter attributable silver production rose 3
percent to 9.5 million ounces and gold output soared 31.5
percent to 85,097 ounces after the start-up of Soledad-Dipolos.

Attributable gold production this year is due to increase by
around 20 percent to 330,000-335,000 ounces while silver output
in 2010 is expected to be flat after rising last year by 9
percent to 37.9 million ounces.

Fresnillo last month postponed a decision about its final
2009 dividend due to higher capital spending and uncertainly
over prices after posting a forecast-beating 141 percent rise in
2009 profit. [ID:nLDE6201ND]

The board would meet on April 28 to finalise the dividend
and the decision would be announced the next day, Alvidrez said.

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(Reporting by Eric Onstad; Editing by Jon Loades-Carter)

UPDATE 2-Fresnillo Q1 gold output hits record, seeks growth