Overview
Fresnillo PLC (FRES) is a Mexico-headquartered precious metal group, which provides mining and exploration services. The group became a listed company in 2008 when the wholly-owned operating division of Industrias Peñoles was spun off on the London Stock Exchange in a May 2008 IPO. The group holds one of the largest precious metals land reserves in Mexico and is the world's leading silver producer and Mexico's largest gold producer. It is listed on the Mexican Stock Exchange and a constituent of FTSE100 index.

The group's core operations are in Mexico, and it operates seven mines, one development project and an extensive portfolio of high-quality exploration projects and prospects, with the aim of maximising the potential of these operations while maintaining its position as a leading low-cost producer. It develops high potential silver and gold projects into low-cost, world-class mines, with business model spanning the full mining value chain from exploration, construction and development, to mining operations. The group ensures the longevity of its business by exploring and developing new projects and generates revenue by selling the metals contained in the ore, the company extracts and processes.

Key Statistics


Management
Alberto Baillères was appointed to the position of Non-Executive Chairman in April 2008. Octavio Alvídrez was appointed as the Chief Executive Officer in August 2012.
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Segments
The group’s operations are differentiated in seven operating segments: Fresnillo mine, Ciénega mine, San Julián mine, Noche Buena mine, Soledad-Dipolos mine, Herradura mine and Saucito mine. The Fresnillo mine is an underground silver mine; the Saucito mine is an underground silver mine; the Ciénega mine is an underground gold/silver mine; the Herradura mine is a surface gold mine; the Soledad-Dipolos mine is a surface gold mine; the Noche Buena mine is a surface gold mine; and the San Julián mine is an underground silver-gold mine.

Top Shareholders

 (Source: Thomson Reuters)

Trading Update – Q1 FY19
The first quarter production was slightly weaker than expected. However, the full year guidance remained unchanged. The company expects to have a positive impact on production in the second half from the investments it had made into infrastructure, equipment and drilling programme. Silver production was down by 14.8% to 13.1 moz. Driven by a slower overall speed of recovery on the leaching pads at Herradura and a lower volume of ore processed at Noche Buena, gold production was down 8.8% to 211.1 koz.

Key Financial Highlights (FY2018, in $m)
 
(Source: Company Filings)

During the year, the company was able to maintain a healthy cash and other liquid funds position and a low leverage ratio by following strict controls on cash, costs and expenses and while adhering to its capex budgets. Though the group achieved record annual silver production of 61.8 moz and a very strong gold performance of 923 koz in 2018, adjusted revenue rose only by 0.5% to $2,243.4 million due to lower metal prices. A more challenging operating environment reflected in the profitability of the company, with gross profit decreased by 15.6% to $780.7 million, and EBITDA decreased by 13.7% to $915.1 million. This was reflected in the profitability margins too, as EBITDA margin decreased from 50.6% in 2017 to 43.5% in 2018. In FY18, the group’s profit after tax stood at $350 million against $560.8 million reported last year, mainly due to Silverstream revaluation loss recognised in 2018 and lower profit from continuing operations. While adjusted EPS declined by 29.4% to $0.461, basic and diluted EPS from continuing operations decreased by 37.6% to $0.475. A final dividend of 16.7 cents per share was recommended by the Board.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The company's profitability margins declined during the year, reflecting a challenging operating environment, though margins remained strong in comparison to the industry median. Gross margin declined to 37.1% due to higher depreciation and increased cost inflation. Lower gross profit flowed down to operating margin as well which decreased to 24.1%. Despite an increase in revenue, profit for the year declined, resulting in a lower net profit margin. Though liquidity ratios declined, they were still more than the industry median. The leverage position of the group remained constant and was better than its peers. A lower asset turnover ratio indicates the company has room to improve its optimisation of assets. 

Valuation Methodology
Method 1:Price/Earnings Multiple Approach (NTM)
 

To compare FRES with its peers, P/E multiple has been used. The peers are Antofagasta PLC(NTM P/E was 15.15), Centamin PLC(NTM P/E was 17.28),Hochschild Mining PLC(NTM P/E was 21.62), Pan American Silver Corp(NTM P/E was 26.52) and SSR Mining Inc(NTM P/E was 26.92). The median of P/E (NTM) of the company’s peers was 21.62x (approx.).

Method 2: Price/Book Value Multiple Approach (NTM)


To compare FRES with its peers, P/B multiple has been used. The peers are Grupo Mexico SAB de CV(NTM P/B was 1.74), Agnico Eagle Mines Ltd(NTM P/B was 2.12),BHP Group PLC(NTM P/B was 2.36), Kaz Minerals PLC(NTM P/B was 2.50) and MAG Silver Corp(NTM P/B was 4.00). The mean of P/B (NTM) of the company’s peers was 2.54x (approx.).

*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at May-08-19, before the market closed (Source: Thomson Reuters)

On May 08, 2019, at the time of writing (before the market closed, at 12:15 pm GMT), FRES shares were trading at GBX 739.60, up by 0.40 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,364.50/GBX 726.40. At the time of writing, the share was trading 45.79 per cent lower than the 52w High and 1.81 per cent higher than the 52w low. Stock's average traded volume for 5 days was 1,054,056.40; 30 days 1,183,470.37 and 90 days – 1,248,682.74. The average traded volume for 5 days was down by 10.94 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 20.32x. The company's stock beta was 1.69, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £5.44 billion with a dividend yield of 2.89 per cent.

Risks Assessment and Growth Prospects
A decrease in precious metal prices, which is the primary risk driver could create an adverse impact on the company's sales and profits. The economic viability of projects can be potentially threatened. Revaluation of the Mexican peso and general inflation in Mexico can also impact profitability. Actions by the government, including more challenging processes for obtaining permits or more stringent regulations relating to the environment or explosives, can have an adverse impact on the company. Weakening economic climate has dampened demand for silver in China, which is expected to further intensify in the coming months. However, despite risks faced by the group, it is in an excellent position to capitalise on opportunities that will be presented in future. Company's investments and developments currently undertaken will gradually lead to better efficiency and higher production levels. As the company looks to consolidate its past achievements, silver and gold production may temporarily reduce, but that will prepare the ground for more significant growth in future years and improve the safety of workers. The group's strategy is supported by a disciplined approach to development, low cost and flexible operations, high-quality assets and a strong balance sheet.

Conclusion
The group is committed to maintaining a strong exploration pipeline, which augurs well for future growth, and is backed by a strong balance sheet and committed leadership. Based on strong prospects and supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 736.60 (as on 7^th May 2019) with high single-digit upside potential based on 2.54x NTM Price/Book Value (approx.) on FY19E book value per share (approx.) and 21.62x NTM P/E Value (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on May-08-19)

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