Fresnillo PLC (LON: FRES)

Fresnillo PLC is a FTSE-100 index 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 26 January 2022, the Company will release the Q4 FY21 production report, and on 08 March 2022, FRES will come up with FY21 preliminary results.

Recent Trend of Dividend payments

FRES had paid an interim dividend of 9.90 US cents per share on 15 September 2021, while the ex-dividend date was 12 August 2021. In comparison, the Company had paid an interim dividend of 2.3 US cents per share during H1 FY20. Thus, it represented interim dividend growth of around 330% during H1 FY21.

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

Growth Prospects

• Decent Guidance: The Company remained committed to meeting its full-year guidance of 53.5 to 59.5 moz (“million ounces”) of silver and 675 to 725 koz (“kilo ounces”) of gold for FY21. The combination of efficiency measures, high volume of ores, and increase in silver ore grades supported FRES to reach the range of full-year guidance.
• Development Projects: FRES had shown accelerated progress regarding the next flagship mining project Juanicipio, and plan to initiate commissioning of the plant by the end of 2021, subject to the timely power connection by the national grid.

Key Risks

• Record Inflation: British Consumer Price inflation surged to 5.4% in December 2021, putting pressure on the Bank of England to raise interest rates again.
• Safety Issue: The Company had reported a fatal accident at the Fresnillo mine during Q3 FY21.
• Omicron Variant: The increased number of Omicron cases worldwide could delay the drilling activities.
• Project Execution: Failure to effectively manage the development projects could result in delays and bring down the bottom-line profitability.
• Operational Headwinds: The new labour reforms in Mexico had adversely impacted the performance of the Fresnillo and Saucito mines during Q3 FY21.
  

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Fresnillo PLC.

 Industrias Penoles SAB de CV is the most significant shareholder as it holds nearly 552.59 million shares as of 31 December 2021.       

Q3 FY21 Production Highlights (as of 27 October 2021)

 (Source: Company result)

• Impressive Gold Production: The YTD gold production rose by around 8.5% to 600,890 ounces and YTD silver production increased by approximately 0.2%.
• Strategic Focus: The Company has started focusing from construction to no-load and water testing, with full load commissioning with ore expected by year-end.

H1 FY21 Financial Highlights (for the six months ended 30 June 2021, as of 03 August 2021)

 (Source: Company result)

• Top-Line Business: The total revenue of the company has increased by 39.1% to USD 1,466.8 million in H1 FY21 as compared to USD 1,054.2 million in H1 FY20, driven by the high metal prices and high volumes of metals sold.
• Reduced Estimated Capex: The Group has reduced its estimated capex from USD 680 million to USD 580 million approximately to reflect the lower rate of capital deployment.
• Strong Balance Sheet: The company has generated operating cash flows of USD 750.4 million in H1 FY21, which is 64.5% higher as compared to USD 456.2 million in H1 FY20. In addition, net debt was USD 35.1 million in H1 FY21 as compared to USD 97.4 million in H1 FY20.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Data Source: REFINITIV, Analysis by Kalkine Group)

On 19 January 2022, at 11:03 AM GMT, FRES’s shares were trading at GBX 811.70, down by around 1.46% from the previous day closing price. Stock 52-week High and Low were GBX 1,193.50 and GBX 742.60, respectively.

From a technical perspective, the 14-day RSI of ~39.05 is inching towards the oversold zone, supporting the upside potential in the stock price. Moreover, the stock price is hovering around the lower standard deviation of the Bollinger Bands.

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Business Outlook

Fresnillo reported a sharp increase in profitability during H1 FY21, and it has also made solid progress with exploration activities. The Company remained on track to meet the full-year production guidance. Moreover, the Company has strong cash flow generation and a robust balance sheet to capitalize on further growth opportunities. Also, the group is monitoring the recent labour reform by new recruitment campaigns and investment in new equipment. The company is focusing on growth strategies to reduce costs and generate more revenue in future. However, the stock price may undergo sizeable corrections because of a surprise increase in the interest rates by the Bank of England and a record Covid-19 cases in the UK. Thus, it depends on the risk appetite of the clients to take a reasonable position in this Company having robust fundamentals.

Considering the robust top-line business, growth in the interim dividend, strong profitability, 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 811.70 (as on 19 January 2022, at 11:03 AM GMT), with lower-double digit upside potential based on 18.38x Price/NTM Earnings per share (approx.) on FY21E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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