Fresnillo PLC (LON: FRES) – Provided increased production guidance for silver during FY21.

Fresnillo PLC is an FTSE-100 listed world’s leading silver producer and Mexico’s largest gold producer. Moreover, FRES is focused on mining and beneficiating non-ferrous minerals like silver, gold, lead, and zinc. FRES has seven operating mines in Mexico. Furthermore, 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 28 July 2021, FRES will release a production report for Q2 FY21.

(Source: Company presentation)

Recent trend of dividend payments - FRES will pay a final dividend of 23.5 US cents per share on 30 June 2021, while the ex-dividend date was 22 April 2021. The Company had already paid an interim dividend of 2.3 US cents per share, taking the total dividend to 25.8 US cents per share for FY20.

Growth Prospects and Risk Assessment

The Company has an exceptional portfolio of exploration and development projects. FRES had managed to accelerate the progress of the construction of the Juanicipio processing plant and civil works during Q1 FY21. Moreover, the commissioning of the plant would be expected by Q4 FY21. FRES had completed the flotation plant optimisation project to cope with higher content of lead and zinc during Q4 FY20, with the connection of this new circuit to the beneficiation plant got completed during Q1 FY21. Furthermore, the programming of the control loop system would be finalised by Q2 FY21. FRES updated regarding the advancement of deepening of the San Carlos Shaft and Jarillas shaft, which remained scheduled to be completed by 2022 and 2024, respectively.

(Source: Company presentation)

The Group is in a strong position, supported by a sound strategy, a positive culture, and an expert executive team.

FRES is undergoing several significant risks as the operations of FRES might get affected due to the lack of sufficient water resources to meet water consumption demands in a region. Moreover, the extreme heatwaves could create several operational headwinds and adversely impact the operations of several mines. The unexpected transformations of the economic, political, or social structure through radical changes, might impact the top-line business of the Company. FRES is also exposed to obsolete or outdated mining processes, which can impact productivity and efficiency levels. 

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Fresnillo PLC.

Q1 FY21 Production Highlights (for the three months ended 31 March 2021, as of 28 April 2021)

(Source: Company result)

• The silver production remained 2.4% lower during Q1 FY21 when compared with Q4 FY20.
• Moreover, the gold production rose by around 5.9% from 215.6 koz (“kilo ounces”) during Q4 FY20 to 228.2 koz for Q1 FY21, driven by higher ore grade at Herradura and Saucit.
• Meanwhile, the lead and zinc production increased by around 10.3% and 14.2%, respectively, during the period when compared with an equivalent period of the prior year.

FY20 Financial Highlights (released on 02 March 2021)

(Source: Company result)

• The Company had delivered a resilient financial performance, with adjusted revenue increased by 14.9% during FY20.
• On the profitability front, the Gross profit surged by 90.5% YoY, and EBITDA rose by 73.4% YoY during FY20.
• The strong financial performance in 2020 was driven by high precious metals prices, mainly gold and silver prices.
• Fresnillo has improved its financial position, with cash and other liquid funds of USD 1,070.4 million and net debt of USD 97.4 million as of 31 December 2020. 

Financial Ratios (FY2020)

 Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 05 May 2021, at 10:34 AM GMT, FRES’s shares were trading at GBX 842.40, down by 1.06% against the previous day closing price. Stock 52-week High and Low were GBX 1,379.50 and GBX 663.20, respectively.

FRES' prices are trading in a descending channel pattern for the past three months and recently started to move upside after testing the lower band of the pattern, indicating an upside direction for the stock. On the daily chart, the momentum indicator RSI (14-period) is trading at ~38 levels and recovered from the oversold zone.

In the last twenty years, FRES’s stock price has delivered a positive return of ~59.01%; and it has outperformed the FTSE All-Share Industrial Metals and Mining index with a return of negative of around 30.55% and the FTSE 100 index with a return of about 15.54%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company had produced stellar financial performance during FY20 with robust revenue growth, increase in cash equivalents, remarkable profitability growth and a significant reduction in net debt. Moreover, in FY21, the Company expects attributable production to be ranging from 675 koz to 725 koz of gold and silver production to be ranging from 53.5 moz to 59.5 moz. The silver production would be benefitted from the rising production at Juanicipio. The gold reproduction would be expected to witness a reduction because of reduced activity at Noche Buena and slightly lower volumes at Herradura. However, FRES remained cautious regarding the adverse impact of the Covid-19 pandemic in Mexico during FY21. Fresnillo witnessed a strong balance sheet with the pipeline of new mines and projects. Overall, the longer-term prospects for gold and silver are good, supported by the potential new mines at Orisyvo and Rodeo.

Considering the increased silver production guidance for FY21, strong balance sheet, bright prospects for gold and silver, robust profitability growth, strong development pipeline, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Fresnillo at the current price of GBX 842.40 (as on 05 May 2021 at 10:34 AM GMT), with lower-double digit upside potential based on 19.06x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

*The dividend yield is subject to change as per the stock price movement.

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