Fresnillo hunts for overlooked silver in copper giant Chile

* Currency effect likely to fade to zero as dollar weakens

* Peru prospect so far not big enough to be viable

By Barbara Lewis

LONDON, Aug 1 (Reuters) - Mexican miner Fresnillo (Amsterdam: FN6.AS - news) hopes to begin exploring in Chile (Stuttgart: 704599.SG - news) later this year as it believes the country, the world's biggest copper producer, is overlooking its potential for silver, its CEO said on Monday.

A weak Mexican peso relative to the dollar has helped to shelter Fresnillo (Frankfurt: A0MVZE - news) from costs as about 45 percent of its expenses are in its local currency, while a relatively strong dollar has boosted its gold and silver revenues.

That effect could be fading as political tensions surrounding U.S. President Donald Trump's policies mount and weaken the dollar.

Fresnillo, which produces silver and gold from six mines in Mexico, says it has not hedged its currency risk, but is seeking to expand its geographical base - into Chile, Peru and to a lesser extent Argentina, its CEO Octavio Alvidrez said in a telephone interview.

Chile is a mature copper prospect where many producers have been struggling with declining ore quality, but its silver potential is relatively untapped.

"We believe they may be overlooking the potential for silver," Alvidrez said, adding he hoped they would start to explore there this year.

In Peru, Fresnillo, which holds around 350,000 hectares, already has the largest concessions of any miner there, Alvidrez said.

So far its biggest prospect is 50,000 million ounces, which falls short of its minimum target for silver of 100 million ounces of silver or 2 million ounces of gold equivalent.

The prime aim of new reserves is not so much to meet demand in markets renowned for having a limited appetite for new metal as to contain costs by focusing on the highest, most economic grade to preserve profits throughout market volatility.

Adjusted production costs increased by 14.4 percent in the first half of the year compared with a year ago as new output came online, the amount of ore processed increased and power and wage costs rose, Fresnillo said in its results statement on Tuesday.

The wage impact was partly offset by the fall in the Mexican peso relative to the dollar - an impact that CFO Mario Arreguin said could be cancelled out this year if dollar weakness continues.

While a relatively strong peso could add to costs, prospects of a weaker dollar are boosting gold and silver.

(Editing by Susan Thomas)