Fresnillo's Resilience Amid Silver Output Declines: Strategic Operational Optimization in a Supply-Deficient Market

Fresnillo PLC, one of the world's largest primary silver producers, has navigated a challenging 2025 with a blend of operational discipline and strategic foresight. While silver output in Q2 2025 fell 4% below expectations, the company's focus on cost management, gold production diversification, and alignment with long-term silver market fundamentals positions it as a compelling investment despite short-term headwinds.

Operational Optimization: Mitigating Declines, Enhancing Efficiency

Fresnillo's ability to adapt to production constraints is evident in its operational restructuring. At the Herradura mine, the company achieved a 39.3% year-on-year increase in gold production for the first half of 2025, driven by higher selectivity and the recovery of oxidized high-grade ore from leaching pads. This optimization underscores Fresnillo's commitment to maximizing value from existing assets, even as silver output declines. The mine's gold ore grade is projected to remain within 0.50–0.70 g/t in 2025, a testament to its efficient resource utilization.

Meanwhile, the San Julián Veins operation saw a 14.4% quarter-on-quarter rise in gold production, fueled by improved ore grades and higher processing volumes post-maintenance. These gains highlight Fresnillo's proactive approach to operational efficiency, ensuring that gold—a commodity with stronger macroeconomic tailwinds—offsets weaker silver performance.

However, Silverstream operations remain a challenge, with silver production down 26.7% year-on-year due to lower ore grades and processing volumes. Fresnillo's ongoing discussions with Peñoles regarding the Sabinas mine suggest a willingness to address structural issues, though clarity is awaited. For now, the company's focus on high-margin gold production and cost discipline at low-cost mines like Juanicipio (with all-in sustaining costs of $6–$8 per silver ounce) provides a buffer against silver-related volatility.

Cost Management: A Shield Against Inflationary Pressures

Fresnillo's cost structure is a critical pillar of its resilience. Despite 40% of its costs being denominated in the Mexican peso (which appreciated 11% year-to-date), the company maintained gold production costs within the $1,200–$1,400 per ounce range, aligning with industry benchmarks. This efficiency is underpinned by strategic investments, such as the San Carlos shaft at the Fresnillo mine, which is expected to reduce haulage costs in 2025.

The company's 2024 results further validate its cost discipline: adjusted production costs fell 2.6% to $1.58 billion, demonstrating its ability to absorb inflationary shocks. With $458.3 million in net cash as of 2024, Fresnillo's robust balance sheet provides flexibility to fund operational improvements and weather macroeconomic volatility.

Gold's Macroeconomic Tailwinds: A Strategic Diversifier

Gold production has emerged as Fresnillo's key growth driver, with Q2 output exceeding consensus estimates by 12%. At 57% of full-year guidance, gold output is on track to outperform targets, bolstered by higher grades at Herradura and San Julián. This shift aligns with global macroeconomic trends, as gold's role as an inflation hedge gains prominence in a post-2024 landscape marked by geopolitical uncertainty and U.S. dollar volatility.

The company's dual-commodity model—leveraging both gold and silver—creates a natural hedge. While silver faces short-term supply constraints, gold's demand as a store of value is likely to remain resilient. Fresnillo's exposure to gold thus provides a stabilizing effect, insulating it from the volatility of silver markets while capitalizing on broader macroeconomic currents.

Silver Market Fundamentals: A Structural Upside

The silver market in 2025 is defined by a structural supply deficit of 149 million ounces, driven by surging industrial demand and depleted aboveground stockpiles. With industrial applications in photovoltaics, electric vehicles, and 5G infrastructure accounting for over 60% of total demand, silver's role in the green transition is irreplaceable. Mine production, meanwhile, is expected to grow by just 2% in 2025, far below the rate needed to close the gap.

Fresnillo's positioning in this environment is advantageous. While its silver output has declined, the company's cost-efficient operations and low-cost mines ensure profitability even at current prices ($36–$37/ounce). Analysts project silver could reach $40 by year-end, with longer-term potential exceeding $100 if the gold-silver ratio normalizes to historical averages (currently at 92:1).

Investment Implications: A Bullish Outlook

Despite near-term production challenges, Fresnillo's strategic operational optimization and alignment with long-term market trends justify a bullish investment outlook. Key takeaways include:
1. Cost Discipline: Fresnillo's ability to maintain low AISC and absorb currency fluctuations ensures margin stability.
2. Gold Diversification: Strong gold production provides a buffer against silver volatility and aligns with macroeconomic tailwinds.
3. Silver Market Fundamentals: A structurally tight supply-demand balance supports higher prices, benefiting Fresnillo's low-cost production profile.

Investors should monitor the company's interim results on August 5, which will provide clarity on plans to address silver portfolio challenges and progress at Herradura and Silverstream. For those with a medium-term horizon, Fresnillo's combination of operational resilience, macroeconomic alignment, and a supply-deficient silver market offers a compelling case for inclusion in a diversified portfolio.

In a world increasingly defined by resource scarcity and geopolitical realignment, Fresnillo's ability to adapt and optimize positions it as a standout player in the precious metals sector.