Fresnillo Plc (LON: FRES): High-quality portfolio of development projects

Fresnillo Plc is an FTSE-100 listed world’s leading silver producer and Mexico’s largest gold producer. The Company is engaged in mining and beneficiating non-ferrous minerals like silver, gold, lead and zinc. FRES has seven operating mines in Mexico. Moreover, it has three development projects and four advanced exploration projects. The Company has its exploration projects in Chile, Peru, and Mexico. FRES is listed on the London and Mexican Stock Exchange.

On 02 March 2021, FRES will announce full-year FY20 results.

(Source: Company Website)

Growth Prospects and Risk Assessment

The Company has an exceptional portfolio of exploration prospects and development projects. FRES had delivered resilient operational performance during Q4 FY20 with gold and silver production came as per the expectations. Moreover, the Company had accelerated its progress on the development pipeline in 2020. It managed to complete the pyrites plant and optimise the beneficiation plant during Q4 FY20 without any delay.

(Source: Company Presentation)

Furthermore, the Company had forecasted higher silver production for 2021 than the levels achieved in 2020.

However, the performance can be substantially impacted by the principal risk of emerging regulations in Mexico, disruption to supply chain, increasing freight rates, production stoppages, equipment failures, acquisition risk. The Group is also exposed to an emerging risk of the water crisis. FRES has an overall risk of Covid-19 uncertainties which may cause a significant delay in various development projects. 

Industry Outlook Dynamics

With reference to Grand View Research’s latest report, the global precious metal industry’s market size was USD 182.10 billion in 2019. The industry is forecasted to grow at a CAGR of 9.0% for the period from 2020 to 2027. The key growth drivers would be the rising demand for jewellery applications. The jewellery sector accounted for approximately 40% share in the U.S. precious metals industry in terms of volume during 2019. Silver prices had recently hit its 8-year high as it touched USD 30 per ounce on 01 February 2021.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Fresnillo Plc.

A Glimpse of Business Segments (H1 FY20)

Q4 FY20 Production Update (for the three months ended 31 December 2020, as on 27 January 2021)

(Source: Company Website)

• In the final quarter of the financial year 2020, the Company saw a robust operational performance, with both gold and silver production in line with expectations.
• In Silver, the attributable quarterly production (including Silverstream) decreased by 2.5% QoQ to 13.0 moz, while it was also down by 6% YoY. Therefore, the attributable silver production (including Silverstream) for FY20 declined by 2.9% YoY to 53.1 moz.
• In Gold, the attributable quarterly production increased by 24.8% QoQ to 215.6 koz, driven by the higher volumes of ore processed, ore grade and recovery rate at Herradura. However, the attributable gold production for Q4 FY20 reduced by 7.8% as compared with the corresponding period of the last year. Overall FY20 attributable gold production was down by 12.1% YoY to 769.6 koz, due to the aforementioned issues at Noche Buena and Covid-19 related working restrictions.
• Led by higher ore grades at Saucito and Fresnillo, the quarterly attributable by-product zinc and lead production surged by 18.1% and 18.9%, respectively, against the previous quarter, while it was also up by 25.2% and 20.1%, respectively, as compared with the previous year.
• The Company saw continued progress in the Juanicipio processing plant and expects the commissioning of the plant by Q4 FY21.
• The construction of the Pyrites plant (phase II) was in line with the budget.

Financial Highlights (for the six months to 30 June 2020 (H1 FY20), as on 28 July 2020)

(Source: Company Website)

• The Company delivered an excellent financial performance in the first half of 2020, with an increase of 5.3% YoY in total revenues. This growth was driven by higher gold and silver prices, and higher volumes of zinc and lead sold.
• In H1 FY20, the gross profit, operating profit, EBITDA and profit before income tax (including the adverse effect of the Silverstream valuation) increased by 56.3%, 232.1%, 52.6% and 136.6%, respectively.
• However, the profit for the period was down by 20.3% YoY, due to the adverse effect of the devaluation of the MXN vs USD on deferred taxes.
• The Company saw a strong balance sheet, with cash and other liquid funds of US$514.7 million as of 30 June 2020 and net debt/EBITDA of 0.34x.
• The Board has declared an interim dividend per share of 2.3 US cents.
• Moreover, the production at underground mines was relatively unaffected by Covid-19 in Q2 FY20. 

Financial Ratios (H1 FY2020)

Share Price Performance Analysis

On 17 February 2021, at the time of writing (before the market close, at 8:01 AM GMT), Fresnillo Plc shares were trading at GBX 995.20, down by 0.93% against the previous day closing price. Stock 52-week High was GBX 1,379.50, and Low was GBX 456.51, respectively.

From the technical standpoint, 14-day RSI stood at 36.26, which is supporting the upside movement.

In the last one year, Fresnillo Plc’s stock price has delivered a return of ~50.74% as compared to a negative ~9.25% return of FTSE 100 Index and a ~36.78% return of FTSE All-Share Mining index, which shows that the stock has outperformed the benchmark sector and the benchmark index. In the last nine months, Fresnillo Plc share price has delivered a positive return of around 24.29%.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

For FY21, the Company expects an attributable silver production (including Silverstream) to be in the range of 53.5 to 59.5 moz and attributable gold production to be between 675 to 725 koz. The Company delivered a robust operational performance in Q4 FY20, with the production in line with the expectations. During the year, it has shown good progress in the development pipeline. Moreover, Fresnillo has successfully completed its construction in the Pyrites Plant and optimised the beneficiation plant, which was also completed on time and was in line with the budget. The optimisation plant is expected to start operations in February 2020. Furthermore, we believe that the fundamentals of the Gold and Silver bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption. Overall, the Gold and Silver industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, coronavirus resurgence cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold and Silver, as a safe-haven investment. Meanwhile, Fresnillo had started FY21 with a strong financial position and robust operational performance. The Company is well-positioned to capitalize on the opportunities through diversification and expansion of its production base as it has a strong balance sheet, limited capital requirement and high ore grade areas at San Julián and Shalom.

Considering the uptick in gold and silver prices, strong financial performance, robust operational performance, sound business model, shown decent growth rate trajectory, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Fresnillo Plc at the current price of GBX 995.20 (as on 17 February 2021, before the market close at 8:01 AM GMT), with lower-double digit upside potential based on 8.21x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.). 

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

*Dividend Yield may vary as per the stock price movement.

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