Fresnillo PLC (LON: FRES)

Fresnillo PLC is an FTSE-100 index listed one of the 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 exploration projects in Chile, Peru, and Mexico.

Recent trend of dividend payments

FRES had paid a final dividend of 24.0 US cents per share on 27 May 2022, while the ex-dividend date was 28 April 2022. Moreover, the Company had already paid an interim dividend of 9.9 US cents per share. Thus, the total FY21 dividend remained around 33.9 US cents per share, an increase of around 29.07% from the prior-year levels.

 (Source: LSE, chart created by Kalkine Group)

Growth Prospects

• Development Projects: The Company has invested heavily on exploration projects and made an accelerated progress on next development projects at Rodeo and Orisyvo. It will boost the gold production in the coming years. Moreover, the new Juanicipio mine is expected to begin production by mid-2022.
• Growth Strategy: The company is focusing on growth strategies to reduce costs and generate more revenue in future. Moreover, the Company has strong cash flow generation and a robust balance sheet to capitalize on further growth opportunities.

Gold Industry Dynamics

• Hedging Benefits: The market volatilities would likely to continue because of concerns regarding inflation, recession, and geopolitics. Thus, the gold price is expected top get support from investor demand as it is a safe-haven asset
• Federal Reserve Meeting: The 75 basis points increase in interest rate by the US central bank announced last week led to a decline in gold price.
• Risk Factors: The outlook for the gold price seems vulnerable because of the rising interest rate prospect and strengthening of US Dollar.

(Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,835.60) is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the price. At the same time, the 14-days RSI stood at 46.62. 

Key Risks 

• Labour Reform: The labour reform in Mexico, which came into effect from 1st September 2021, has restricted the ability to subcontract labour.
• Covid-19 Pandemic: The fourth Covid-19 wave in Mexico at the end of 2021 had adversely impacted the operational performance of FRES.
• Federal Reserve Rate Hike: The Federal Reserve has announced its biggest interest rate hike since 1994, an increase of around 75 basis points, while also pointing to further steady rises this year. Moreover, the Bank of England also came up with a fifth consecutive interest rate hike of 0.25% on 16 June 2022.
• Weak UK GDP Numbers: According to the Office for National Statistics, the UK GDP grew only 0.2% for the three months through April 2022 after 0.8% in the previous three-month period.

Key Fundamental and Shareholders Statistics of Fresnillo PLC.

Industrias Penoles SAB de CV is the most significant shareholder as it holds nearly 552.60 million shares.

Q1 FY22 Production Report (for the three months ended 31 March 2022, as of 27 April 2022)

(Source: Company Filings)

• Decent Silver Production: The silver production witnessed a year-on-year growth of around 5.1% and a quarter-on-quarter increase of approximately 2.8% during Q1 FY22.
• Decline in Gold Production: The expected lower volume of ore processed and ore grade at Herradura caused a significant 34.4% year-on-year decline in gold production during Q1 FY22.

FY21 Financial Highlights (for the year ended 31 December 2021, as of 08 March 2022)

(Source: Company Filings)

• Top-Line Business: The Company’s top-line revenue grew by around 11.2% during FY21, driven by higher adjusted revenue combined with lower treatment and refining charges.
• Profitability: On the profitability front, the gross profit and the EBITDA has shown a year-on-year increase of around 6.5% and 3.2%, respectively during FY21.
• Balance Sheet: The net cash remained around USD 67.50 million as of 31 December 2021.

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 20 June 2022 at 08:49 AM GMT+1, FRES’s shares were trading at GBX 783.96, down by around 2.23% against the previous day closing price. Stock 52-week High and Low were GBX 997.60 and GBX 610.60, respectively.

On a daily chart, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Also, the MACD line has given a bullish crossover against the signal line.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative) 

Business Outlook

Fresnillo reported an increase in profitability during FY21, and it has also made solid progress with exploration activities. Moreover, the Company expects to ramp up operations to 85%-90% capacity for the Juanicipio plant by the end of FY22 once the required permits get granted. In terms of production guidance, FRES anticipates silver production in the range of 50.5 to 56.5 moz (“million ounces”) and gold production in the range of 600 to 650 koz (“kilo ounces”). Overall, the Company will continue to deliver long-term value to all the stakeholder despite ongoing challenges.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the decent top-line business, growth in the FY21 dividend, strong profitability, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Fresnillo PLC at the current market price of GBX 783.96 (as of 20 June 2022 at 08:49 AM GMT+1), with lower-double digit upside potential based on 21.46x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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

Note 2: Investment decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: 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 the 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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