Fresnillo Plc (LON: FRES) – Jump in H1 FY2021 profit driven by higher metal prices.

Fresnillo PLC (LON: FRES) 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. Furthermore, FRES has a number of subsidiaries in both North and South America. The Company was established in 1887, with the headquarter in Mexico City.

On 27 October 2021, FRES would declare its Q3 FY2021 production report.

Recent trend of dividend payments

 (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by FRES from FY2017 to FY2020. The last dividend of FY2020, USD 0.235 per share, was paid on 30 June 2021 (final dividend). It had an ex-dividend date of 22 April 2021. The next interim dividend of FY2021, amounting to USD 0.099 per share, would be paid on 15 September 2021 with an ex-dividend date of 12 August 2021.

The current dividend yield of FRES at about 2.50% remains above the UK 10-year bond yield at about 0.5220%.

Growth Prospects

• Exceptional portfolio of projects: The Company has an exceptional portfolio of exploration and development projects. Also, the commissioning of Juanicipio processing plant is expected in Q4 FY2021.
• Strong liquidity position: The Company’s net debt/EBITDA of -0.02x in H1 FY2021 is in the negative zone. Hence, FRES could invest significantly in its projects or could initiate new exploration projects.
• Focus on cost control: FRES has a strong focus on cost control in its mines and operations. It leads to higher growth in net income than the growth in its revenues.
• Strong safety measures: The Company adopts strong safety measures for its personnel, including a comprehensive strategy to protect employees and contractors from Covid-19. Hence, there are fewer disruptions in the productivity of the Company.

Key Risks 

• Adverse weather conditions: Adverse weather conditions could lead to disruption in projects and consequently time and cost overruns.
• Volatility in metal prices: Precious metals, especially gold, have a volatile price environment. Any material decrease in the price of metals produced by the Company would affect its margins.
• Heatwaves in Mexico: Extreme heatwaves in Mexico could create operational headwinds for FRES’s operations. If multiple mines get affected, then it could have a substantial impact on revenues.
• Accidents in mines: There could be major accidents in mining operations despite the sound safety measures implemented by the Company. It could incur large expenses as well as dent the Company’s reputation.
  

Now we will analyse some key fundamental and shareholders statistics of Fresnillo Plc.

Financial and Operational Highlight (for six months ended 30 June 2021, as of 3 August 2021)

(Source: LSE Website)

• Gold and silver production were up YoY in H1 FY2021 by 12.3% and 2.7%, respectively.
• FRES achieved progress on the construction of the Juanicipio processing plant, with commissioning in Q4 FY2021 expected.
• The increased volume together with higher metal prices led to adjusted revenue rising 37.1% YoY in H1 FY2021.
• The higher revenue and ongoing focus on cost control resulted in net profit surging dramatically by 445.8% YoY in H1 FY2021.
• It led to an increase in free cash flow, which reached USD 305.1 million in H1 FY2021 from USD 265.7 million in H1 FY2020.
• It helped in enhancing the liquidity position of the Company. Cash and other liquid funds rose to USD 1,202.9 million in H1 FY2021 from USD 1,070.4 million in H1 FY2020.

Financial Ratios (H1 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 4 August 2021, at 9:45 AM GMT, FRES’s shares were trading at GBX 811.00, down by 3.27% against the previous day closing price. Stock 52-week High and Low were GBX 1,379.50 and GBX 742.60, respectively.

On a daily chart, FRES’s price is sustaining above 20-day EMA of about GBX 801.90 and 20-day SMA of about GBX 794.70, indicating the possibility of an upward movement.

In the last two years, FRES’s stock has delivered a decent positive return of ~31.00%. Also, it has outperformed the FTSE 100 index with a return of about negative 1.64%. 

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

Business Outlook Scenario

FRES delivered a robust performance in H1 FY2021, driven by higher silver and gold production as well as higher metal prices. With its solid profit conversion and strong cash generation, it has increased its free cash flow and has a negative net debt/EBITDA ratio. The management anticipates meeting the FY2021 expectations. The Company could benefit from its exceptional portfolio of projects, strong liquidity position, focus on cost control and strong safety measures to minimise disruptions for the rest of FY2021 and beyond. Also, Juanicipio plant is expected to be commissioned in Q4 FY2021.

Considering the Company’s solid growth opportunity, its strong liquidity position, good progress in the development pipeline, the better profitability, liquidity and leverage position of the business than the industry, 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 811.00 (as of 4 August 2021 at 9:45 AM GMT), with lower-double digit upside potential based on 17.15x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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

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

*The reference data in this report has been partly sourced from Refinitiv.

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