A Review of 3 Stocks: Fresnillo PLC, Mitchells & Butlers PLC and Gem Diamonds Ltd

A Review of 3 Stocks: Fresnillo PLC, Mitchells & Butlers PLC and Gem Diamonds Ltd

 Fresnillo PLC

Fresnillo PLC (FRES) is a Mexico City, Mexico-headquartered precious metal group, which provides mining and exploration services and holds one of the largest precious metals land reserves in Mexico. It is the leading silver producer in the world and the largest gold producer in Mexico. With the aim of maximising the potential of these operations while maintaining its position as a leading low-cost producer, it operates seven mines, one development project and an extensive portfolio of high-quality exploration projects and prospects. The group ensures the longevity of its business by exploring and developing new projects and generates revenue by selling the metals contained in the ore which the company extracts and processes, and it develops high potential silver and gold projects into low-cost, world-class mines, with business model spanning the full mining value chain from exploration, construction and development, to mining operations. The operations of the group are differentiated in seven operating segments: Fresnillo mine, Ciénega mine, San Julián mine, Noche Buena mine, Soledad-Dipolos mine, Herradura mine and Saucito mine.

Production Update

Due to the expected lower ore grade at Saucito and lower ore grades at Fresnillo and San Julián, quarterly silver production (including Silverstream) was down by 14.5% versus 3Q18, while driven by a lower ore grade at Saucito and at San Julián Disseminated Ore Body, quarterly silver production of 13.3 moz (including Silverstream) was down by 7.9% against 2Q19. Reflecting a lower volume of ore processed at Noche Buena and a lower grade and lower volume of ore processed at both Herradura and San Julián veins, quarterly gold production was down by 6.9% versus 3Q18, while due to a lower ore grade at Herradura, quarterly gold production of 209.8 koz, was down by 5.2% against 2Q19.

Financial Highlights (H1 2019, in £m)

 (Source: Company Filings)

In the first half of the financial year 2019, due to lower ore grades at the Fresnillo and Saucito mines and lower volumes of ore processed, silver production in the first half decreased by 10.4% to 27.6 moz from 30.8 moz in H1 FY2018. As a result of a decrease in the volume of ore processed at Noche Buena, first-half gold production declined by 7.1% to 432 koz. Reflecting lower metal prices, excluding gold, and lower volumes of gold and silver sold, adjusted revenues decreased by 10.2% to $1,069 million in H1 FY2019 from $1,189.9 million in H1 FY2018. EBITDA declined by 45.7% to $307.9 million, reflecting higher exploration expenses and a decrease in gross profit. The net profit for the period decreased by 69.1% from $229.3 million in H1 FY2018 to $70.9 million in H1 FY2019. Adjusted earnings per share of $8.4 cents per share were down by 74.8%, and basic and diluted earnings per share from continuing operations were down by 69.4% to 9.5 cents per share.

Share Price Commentary

On 28 October 2019, at the time of writing (at 12:56 pm GMT, before the market closed), FRES shares were trading at GBX 677.4, down by 0.58 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,028.00 /GBX 570.00. The company's stock beta was 1.13, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £5.02 billion, with a dividend yield of 2.21 per cent.

Conclusion

The company reported that it expects a higher overall fourth quarter silver production due to higher grades at Saucito and Fresnillo and a higher volume of ore processed at Fresnillo, with FY 2019 gold and silver production likely to be at the lower end of the guided ranges of 880-910 koz gold and 55-58 moz (including Silverstream) respectively. The company reported that its exploration programme continued to produce good results and has the potential to contribute to the future value of the group significantly. Company's investments will gradually lead to a better efficiency and higher production levels. In the second half of the year, the company will be seeking to increase productivity by undertaking operational measures to control costs. With the developments currently undertaken by the company, it is in an excellent position to capitalise on the opportunities that will be presented in future. The group is committed to maintaining a strong exploration pipeline, which augurs well for future growth and is backed by a strong balance sheet and committed leadership. The group may face headwinds from political and economic factors.

Mitchells & Butlers PLC

Mitchells & Butlers PLC (MAB) is a Birmingham, United Kingdom-headquartered operator of managed restaurants and pubs which provides a wide choice of eating and drinking-out experiences through its well-known brands, including All Bar One, Toby Carvery, Harvester and Browns. The group is the leading restaurant and pub company in the UK as under a wide range of brands and formats, it has around 1,700 restaurants and pubs in the UK and Germany which seeks to deliver great service, quality and value for money to its guests.

Trading Update

During the 51 weeks ended 21 September 2019, total sales have increased by 4.0% in the year-to-date, while like-for-like sales rose by 3.6%. While like-for-like sales from Food rose by 3.5%, revenue from Drink increased by 3.3%. The company made good progress on its investment programme and the operating profit margin is expected to be at a similar level to last year despite cost headwinds.

Financial Highlights (H1 2019, in £m)

 (Source: Company Filings)

As total like-for-like sales grew by 4.1% with food sales up by 3.5% and drink sales by 4.5%, total revenue of £1,186 million were 5.0% higher than the first half last year, with average spend per item on food was up by 4.6%, and average drink spend was up by 4.8%. Benefiting from the absence of cold weather and snow experienced last year, adjusted operating profit for the first half was 7.1% higher than the same period last year to £151 million, while reported operating profit was £140 million (H1 2018: £137 million). Inflationary cost pressures for the year remained in line with expectations and adjusted operating margin of 12.7% was 0.2ppts higher than last year. Reported profit before tax was £75 million (H1 2018: £69 million), while adjusted profit before tax was reported at £86 million against £73 million in the prior year. Adjusted earnings per share were 16.1p, 15.8% higher than last year, while basic earnings per share were 14.3p (H1 2018: 13.0p). Representing 3.8 times adjusted EBITDA (H1 2018: 4.1 times), net debt was £1,627 million at the half year (H1 2018: £1,718 million), while the company generated £217 million of EBITDA.

Share Price Commentary

On 28 October 2019, at the time of writing (at 12:58 pm GMT, before the market closed), MAB shares were trading at GBX 418, up by 0.12 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 435/GBX 236.50. The company's stock beta was 0.68, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £1.79 billion.

Conclusion

During the period, sales focused initiatives driving improved performance across the portfolio and improved returns from the capital programme with 208 projects completed. The company continues to drive an innovation agenda, instil a more commercial culture and build a more balanced business, and helping the group to post strong performance.

Gem Diamonds Ltd

Gem Diamonds Ltd (GEMD) is a UK based mining company. The company owns Ghaghoo mine in Botswana and Letšeng diamond mine in Lesotho. The company undertake all its activities related to manufacturing, sales and marketing in Belgium, while the Letšeng diamond mine is the highest average dollar per carat kimberlite diamond mine in the world, proving to be a very important asset for the group. The operations of the group are differentiated in four operating segments, namely Lesotho, Botswana, Belgium, and BVI, RSA, UK and Cyprus.

Financial Highlights (H1 2019, in £m)

Revenue was $91.3 million ($167.7 million in H1 2018) during the period with the recovery of a 13.32 carat pink diamond. The company achieved an average price of $1,697 per carat and underlying EBITDA was reported at $25.3 million ($70.7 million in H1 2018). Basic earnings per share were 4.8 US cents from continuing operations (19.4 US cents in H1 2018) as attributable profit from continuing operations was reported at $6.6 million ($26.8 million in H1 2018). Net debt position stood at $0.7 million. Total cash balance was recorded at $25.8 million and drawn down facilities of $26.5 million.

Share Price Commentary

On 28 October 2019, at the time of writing (at 12.59 pm GMT, before the market closed), GEMD shares were trading at GBX 60.4, down by 2.58 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 117.50/GBX 59.40. The outstanding market capitalisation was around £86.36 million.

Conclusion

With commissioning and ramp-up planned for latter part of Q3 2019, construction of the detecting diamonds within kimberlite pilot plant at Letšeng was completed, and the company was on track to deliver the planned US$100 million in revenue, productivity and cost saving by 2021 as it successfully concluded implementing the Business Transformation programme. While in the short-term, supply is expected to decrease with the depletion of existing mines, rough diamond prices are expected to be supported by the favourable demand/supply fundamentals in the medium term.

 

Comparative Share Price Performance

(Source: Thomson Reuters)

 

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