September 12, 2014 / 8:00 AM / 3 years ago

UPDATE 2-Fresnillo to buy out Mexican gold mines partner Newmont for $450 mln

* Post-acquisition expects annual output of 750k oz by 2018

* Technical issues to shave gold output target for 2014

* Fresnillo says it may hedge some gold output (Adds details, quotes from analyst and chief executive)

By Esha Vaish and Silvia Antonioli

BANGALORE/LONDON Sept 12 (Reuters) - Silver miner Fresnillo Plc has agreed buy Newmont Mining Corp's 44 percent stake in Penmont, their Mexican gold mining joint venture for $450 million in cash.

As well as three mines, the deal gives the London-listed miner complete control of exploration projects and other prospects in and around the Herradura corridor in northern Mexico.

Fresnillo, which currently makes the bulk of its profits from silver mining, expects gold will represent about half of its earnings by 2018 as a result of the Newmont deal.

"The acquisition ... would significantly enhance our gold production and be central to our growth," Chief Executive Octavio Alvídrez said.

"In line with our disciplined growth strategy, the acquisition is earnings accretive, and provides Fresnillo with significant exploration and development potential in a region where we are experienced operators."

However, the company said that some technical issues at a processing plant at Penmont's Herradura mine are currently reducing its gold production a little. This will likely result in a 4-8 percent reduction in its gold production target of 450,000 ounces for 2014 but Fresnillo expects it can make up for this next year.

"Assuming that it goes through the approval process, they'll have a 100 percent of their assets in the joint venture, so their capital expenditure and their production will go up a bit," said analyst Sheldon Modeland at VSA Capital.

"At the end of the day it probably doesn't change a whole lot, but it's a good idea."

Once its gets full control of the joint venture Fresnillo will have an annualised production capacity of around 600,000-620,000 ounces of gold before ramping up to 750,000 ounces by 2018. The latter target could be raised further once the board approves development of the Mega Centauro and Centauro Deep projects, a spokesman said.

Prior to the Newmont deal Fresnillo's gold output target was already 500,000 ounces for 2018. A spokesman said the new targets were being more conservative in not yet including the Centauro projects, which go to the board for approval next year.

Fresnillo operates three other mines in Mexico and expects to produce 43 million ounces of silver this year.

HEDGING GOLD

Fresnillo is considering hedging part of the extra gold production it will get through the acquisition.

An increasing numbers of precious metals miners, battered by last year's drop in prices, are selling planned output forward to better control their cash flow.

"When we did the IPO there was a clear message from most major shareholders: there was no desire for the company to do any hedging since they wanted full exposure to the price of gold and silver," he said.

"However in this particular case, given the size of the investment we definitely would consider doing it and we'll go back to shareholders to check what the appetite is."

Shares in Fresnillo rose as much as 1.5 percent in early trading on Friday, before falling back to trade at 820 pence by 1023 GMT, a rise of 0.12 percent.

The Newmont deal, expected to close by early October, will add to earnings immediately, Fresnillo said. The pretax profit attributable to Newmont's stake in the project was $33.4 million in 2013.

Newmont, the biggest U.S. gold miner, is selling some assets to help fund other operations such as a new gold mine in Suriname, raising $1.3 billion so far from such sales. (Additional reporting by Karen Rebelo; Editing by Rodney Joyce and Greg Mahlich)

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