Hello. Welcome to Company Focus. My name is Aamer Nawid, Analyst at Fat Prophets and today I'm going to be taking a look at Mexican focused mining group Fresnillo.

As we discussed last week when I was looking at BSkyB, companies able to perform in the current climate, run efficiently, expand margins are likely to be subject to takeover interest. Fresnillo is an example of a company which is performing better than most and it's no surprise that rumours have come to the surface that Mexican billionaire Carlos Slim is potentially interested and is looking to put together an offer for the company which will basically equate to around about £12 per share.

As you can see from the chart, Fresnillo has basically picked up where it left off last year. One of the best performing stocks in the FTSE last year and the shares have continued to rally. They haven't reached the £12 mark which kind of suggests that the market is not giving these rumours much credence. However, in my opinion, where there is smoke there is fire and whether it is Carlos Slim or another concern, such has been the positive developments at Fresnillo of late, I wouldn't be surprised if a takeover offer does come to the fore sooner rather than later.

Let's focus on the key commodities, the precious metals that Fresnillo concerns itself with - gold and silver. As you can see from the chart, again, gold has actually outperformed silver so far this year 13 percent versus around about 9 percent. Silver is basically a bit more leveraged to the global economic recovery. It has more industrial uses and so it has kind of been hamstrung a little bit by fears of a European induced global economic slowdown. However, the outlook for both remains pretty positive. Increased investment demand will be a key factor and whichever one ends up outperforming over the course of the year, Fresnillo will be a key beneficiary given the exposure the company has to both.

For mining companies it's all about increasing production, increasing reserves, increasing resources. During the first quarter of this year, Fresnillo had very positive results. Its latest mine Soledade-Dipolos basically produced more gold than was expected. Good timing given that gold has recently taken out all time highs.

As this table here shows, it's been a pretty robust first quarter all round as far as production is concerned for Fresnillo. The only sort of blot on the copy book is really the fall in the silver contribution from Silverstream, the contract with Fresnillo's majority shareholder Penoles. Basically, Silverstream, Fresnillo receives the silver from Penoles's zinc and lead mining operations and due to lower grade of ore mined, this pullback was actually forecast, so it's not as bad as it first seems. Actually, if you look at the quarter-on-quarter performance, you'll actually see that it doesn't look bad at all. It's actually up 20 percent the contribution there. So a bit of perspective, different view on things.

Exactly the same thing regards zinc. Again, 6 percent down doesn't look great, but taking a nearer term view from the fourth quarter of last year, 9 percent increase is positive.

If any interested third parties have been impressed by Fresnillo's opening quarter to 2010 they're going to be salivating over the company's intentions and plans to expand. By 2018 management want to expand annual output of silver to 65 million ounces and gold to 400,000 ounces. In addition, they want to expand the existing mine or open a new mine in each of the coming four years. This level of activity, in order to reach these targets, Fresnillo needs to basically constantly exploring new prospects and developing new projects.

Saucito is on track to start producing next year. Exploration wise, the company is very active. The three key projects of San Juan, San Julian and Orysivo have also very, very positive developments. The company is looking to keep the expenditure going on exploration and it's a cost which I feel is worth footing for long-term outperformance.

Overall, there is plenty to be positive about in terms of Fresnillo's shares. The obvious is the leverage they provide to the bull market to gold and silver. Cost cutting initiatives are in place across all the four producing mines and if you combine this with increased commodities prices, it's not difficult to see why I believe margins and earnings will continue to strengthen.

On a price earnings sort of basis, there is an argument to say that Fresnillo's shares are a bit expensive. However, they are underpinned by dividend and should the company's forays into places like Peru and Chile prove as earnings accretive as the Mexican operations, I can once again see earnings and the share price continue to strengthen in the long-term and that's irrespective of any interest from any third parties.

Thanks for watching. Make sure you tune in again next week.