Fresnillo plc (FRES.L) Earnings Call Transcript & Summary

Hello, and welcome, everyone, to today's call. My name is Becky, and I'll be your operator today. [Operator Instructions] I will now hand over to your host, Octavio Alvidrez, CEO, to begin. Please go ahead.

Thank you, Becky. Good morning, everyone, and thank you for joining us today. I'm very excited to share the details of Fresnillo's proposed acquisition of Probe Gold Inc., a transaction that marks a milestone in our growth strategy. Probe is a gold developer that is listed in the Toronto Stock Exchange and owns the Novador Gold project and a large exploration land package in Quebec and Ontario in Canada. Before we begin, I want to remind everyone that today's presentation contains forward-looking statements as we are seeing the slide right now. I encourage you to read the cautionary statements in this slide. Today, I'm joined by Mario Arreguin, our CFO; Marcelo Ramos, Senior Vice President of Business Development; and Guillermo Gastelum, Senior Vice President of Exploration. Let me start with the highlights of this transaction. Fresnillo will acquire all outstanding shares of Probe Gold in an all-cash deal through a plan of arrangement under Canadian laws, which is analogous to a scheme of arrangement in the U.K. We are excited to add a high-quality project to our existing world-class operations and development pipeline in Mexico. We are also excited that our first major acquisition outside Mexico is in Canada, a country with a strong partnership with Mexico and a global reputation for mining excellence. And there may be no better region to make this strategic entry than the prolific Val-d'Or mining camp in Quebec. Val-d'Or is renowned for its rich gold mining history, skilled workforce and excellent infrastructure. Probe Gold brings a large resource base of 10 million ounces, including 8 million ounces at its flagship Novador project. We are also excited about the large and unexplored land package of approximately 1,800 square kilometers in Baldor adjacent to major gold operations. This significant exploration potential provides for Fresnillo with a unique opportunity to leverage our technical expertise and exploration capabilities in a highly prospective region. On Slide 5 and moving on to the summary of the transaction, Fresnillo will acquire all outstanding shares of Probe Gold for cash with a total equity value of CAD 780 million, which is approximately USD 560 million. Each Probe shareholder will receive CAD 3.65 of cash per share of Probe held. This represents a 24% premium on a 30-day VWAP to Probe's closing price. The transaction has unanimously support from Probe's Board of Directors and is subject to certain conditions, including obtaining Probe shareholder and court approvals. Current Probe management and directors and El Dorado, which owns approximately 12% of the shares outstanding have entered into voting support agreements payments to vote their shares in favor of the transaction. The deal includes customary protections, and we are targeting completion of this transaction in Q1 of 2026. On Slide 6 and 7, we will review at the mining concessions. The Novador project is located just 25 kilometers east of Val-d'Or city, benefiting from proximity to highways, power and rail, very good infrastructure. The deposits are [ mesothermal ] and amenable to both open pit and underground mining. Probe has released an updated PEA in 2024, which demonstrates robust economics and potential. We are going to optimize the project and undertake work to add resources and further derisk the project. On Slide 9, the exploration upside and optimization highlights Fresnillo long-standing core competency, as you know, is exploration and Probe's assets offer considerable exploration upside due to the substantial unexplored land package in a Tier 1 mining jurisdiction. We have undertaken significant due diligence, and we see opportunities to extend mineralization at depth and laterally and to add open pit resources at higher gold price. In terms of timing, we anticipate mailing in the management information circular to shareholders in December with the shareholder vote expected in January 2026 and closing targeted for Q1 2026. We have always taken a disciplined and long-term view to capital allocation, and I want to confirm that we will continue to do so in the future. To reiterate, this transaction provides Fresnillo with a foothold in Canada, a large and growing resource base through the addition of high-quality development projects and underpinned by substantial exploration upside. While today's announcement is about growth and our entry into a new Tier 1 mining jurisdiction, I want to emphasize that Mexico remains our home base. Our commitment to our existing operations, projects, communities and stakeholders in Mexico is unwavering. This acquisition completes our portfolio and enhances our ability to deliver sustainable value, both at home in Mexico and in Canada. We are confident this will generate attractive returns and create long-term value for our shareholders. I will now pass it back to Becky, our operator, who is going to open the floor for Q&A.

[Operator Instructions] Our first question comes from Marina Calero from RBC.

I just have 2 questions from my side. The first one, the assets you've acquired are located near the properties of other mining companies. To what extent have you engaged with those parties? And do you see any potential opportunities for cooperation or synergies with them? And then the second question I have is related to your growth projects in Mexico. What does this mean for the other projects you have in the pipeline? And how do you see the sequencing of the different growth options you have.

Thank you, Marina. Yes, that area, we have several mining companies as we do always in Mexico and in some other jurisdictions, for example, in Chile and Peru, we are open to a collaboration as it will be the case also in Quebec. We believe we have the technical capabilities to develop this project in Quebec, starting with more exploration. And then as we all know, we have a very good track record in developing, constructing and operating assets as we've seen in Mexico in which we doubled the number of operations we had in 10 years. And we expect to have or apply these technical capabilities in this new endeavor. In regards to the pipeline that we have of growth projects in Mexico, we will continue to develop as planned these projects. We do have the resources and also the technical capabilities. Let me remind the growth projects that we have in Mexico, which are [ Juanicipio ], the Chihuahua state, Rodeo, future mining operation in Durango, Tajitos in the Herradura cluster and the recent discovery of Guanajuato South in the Guanajuato state. We're also adding some other projects in some other jurisdictions like Lucerito, as we mentioned. And our target, as we mentioned in our last calls, will be to first develop brownfield project that we have on hand, specifically in the Herradura area with the [ badges ] underground operation. But thank you for the question.

Our next question comes from Alain Gabriel from Morgan Stanley.

I have a couple of questions. One is how comfortable are you with the pre-feas studies that were published by Probe Gold? And are you adopting their key metrics such as CapEx, annual production, et cetera? Or do you envisage a proper overhaul of these metrics. I guess this question is more about the due diligence you've done on this project and the key metrics. And the second question is, clearly, you have a very rapidly increasing cash balance on your balance sheet. What does this acquisition mean for your year-end capital returns to shareholders in terms of special dividends? How should we think about the cash that you expect to return to shareholders at year-end.

Thank you, Alain. Yes, we review truly and in-depth all the information -- public information that we have from Probe. And we'll review it quite with the technical or, I would say, in the interdisciplinary technical team. It was over several months that we did. Of course, with our technical capabilities, we were able and a disciplined approach that we have to reviewing projects. We had a chance to really take into account all those key metrics that you mentioned and adjust according to our knowledge or experience or database in some others. But in general, we took what is -- what they had in the PEA that they have. In terms of cash balance, yes, at the end of June, we had approximately USD 1.8 billion. With the good operating performance in our current operations, we -- and the current metal prices for gold and silver and also just recently also zinc, we expect to have a very good cash balance at the end of this year so that we will be able to probably and according to projections, have a similar dividend amount for next year as we did in this 2025.

Next question comes from Amos Fletcher from Barclays.

I guess a couple of questions. The first one, slightly to follow up on what Alain was saying. Should we assume that this transaction reduces your final dividend for this year by $560 million. And then the second question was just to ask, is this the start of a strategy to diversify the group internationally on a bigger scale? Should we expect more activity outside Mexico going forward? Or is this sort of -- do you envision this as a sort of a one-off deal?

Thank you for your question, and I will ask Mario Arreguin, our CFO, to take on the first one. Please, Mario.

Thank you, Octavio. And in terms of our cash balance, assuming this remain currently where they are, we are expecting to close the year with a cash balance of approximately $2.8 billion. So this acquisition, the payment is due in January or the first quarter of the year. So -- and we expect this to be around $560 million. So after we make the payment, we still have a very robust cash balance of around $2.2 billion. In that regard, our dividend policy would not have any effect at all. We will maintain the same dividend policy that we put in place on the day of the IPO 18 years ago, which is balancing growth with returns to our shareholders. In other words, we invest in 50% of our profit and returning back to our shareholders 50%. That is our policy. And as always, based on our needs at that point in time, after considering the different commitments that we have in terms of our budgeted exploration and our budgeted CapEx for 2026. At that point in time, we will analyze the cash balance and propose something to our Board of Directors. But we don't expect this to have any impact at all on our dividend policy.

Thank you, Mario. And in terms of the strategy and our entrance in a new jurisdiction with today's announcement, if we review some of the annual reports, I mean, it's been several years in which we have been evaluating opportunities to go into some other different jurisdictions. Of course, this announcement today, I mean, ticks all the boxes that we look forward to having in our portfolio. As I mentioned, the merits of the project, the merits of the land package, the merits of the jurisdiction, Canada, Quebec and specifically Val-d'Or area, ticks all the boxes. In the past, and as you know, I mean, we have been exploring in Peru for some years, also in Chile, in which we have some -- even a JV for exploration. So we are looking all the time for these kind of opportunities. Of course, this represents a major acquisition compared to the previous one that we've done in some of these other countries that I mentioned. But as I said, we will also will remain Mexico as our home base and our main playground, but we have the ability with the technical team that we have to go in Tier 1 jurisdiction as kind of. So we will continue looking. I mean, this is a very good opportunistic acquisition that we have done.

Our next question comes from Richard Hatch from Berenberg. We have lost connection to Richard. [Operator Instructions] We currently have no further questions. So I'll hand back to Octavio for closing remarks.

Well, we thank you all the participants in this call. We continue to be open to question and answers in our London office. Thank you very much all.