Fresnillo PLC - Mexico’s Largest Producer and Well-Funded with Sufficient Cash Balance

FTSE 100-listed Fresnillo PLC (LON: FRES) is a Mexico-based leading precious metals company. The Company produces mainly gold and silver from mines. It has 7 operating mines, 3 development projects and 6 exploration prospects.

On 22^nd July 2020, the Group will release its Q2 FY20 production report.

Recent News
On 12^th June 2020, the Company published the report on payments to Government for the year 2019. This report provided an overview of the payments to governments made by the Group and its subsidiaries.

First Quarter Production Report

(Source: Company Website)

On 29^th April 2020, the Group provided the first-quarter production update for the three months ended 31^st March 2020, with a double-digit fall in production of the precious metal influenced by lower volumes at its Herradura mine in Mexico.Driven by a lower volume of ore processed at Saucito and a lower ore grade at San Julián Disseminated Ore Body (DOB), the silver production for the current quarter decreased by 4% to 13.2 moz (including Silverstream) against the previous quarter (Q4 FY19), while it was flat (+0.7%) as compared with the corresponding period of the last year (Q1 FY19). The quarterly by-product zinc production rose by 4.2% against the first quarter of 2019, driven by higher ore grades at both Ciénega and Fresnillo, partially offset by a lower ore grade at San Julián (DOB). The quarterly by-product lead production surged by 14.7% against the same period last year (1Q FY19).

Share Price Performance

1-Year Chart as at June-23-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Fresnillo PLC’s shares were trading at GBX 819.20 on 23rd June 2020 (before the market close at 8:30 AM GMT+1), which was up by 0.54% against the last day closing price. Stock 52 weeks High and Low are GBX 921.20/GBX 456.41.
From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Growth Catalysts and Key Risks
The Company is continuously improving and reshaping via acquisitions to increase its operational performance. The Group has shown a decent business model, and strong liquidity position makes it an attractive value proposition among the minerals and mining sector. FRES is cautious about the outlook for its key commodities in the short term but expects positive demand in the long-term.

Conclusion
The Group on 29^th May 2020 said it was too soon to determine the full impact of the COVID-19 mayhem on the company’s finances and operations. The Chairman stated FRES had not changed its dividend policy (had declared an interim dividend per share of 2.6 US cents and a final dividend per share of 11.9 US cents and bringing the total dividend per share of 14.5 US cents). After a more challenging 2019 than anticipated, the Company has taken an effective step to take production back to a satisfactory level in the near term. Despite these challenges, the Board has confidence in the Fresnillo’s underlying strength and is making good progress. Furthermore, the Company witnessed a decent production performance in the first quarter of 2020 and delivered a gold and silver production in line with the expectations. Hence, the Group’s development pipeline is progressing well, construction of new mines is on track.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current price of GBX 815.00 (as on 23rd June 2020, before the market close at 8:00 AM GMT+1) and will recommend fresh buying at the right time.
 
Premier Oil PLC – Slashed Price for BP Acquisition and Signed Agreement with Creditors

Premier Oil PLC (LON: PMO) is a FTSE All-Share listed Oil & Gas Exploration and Production Company with interest in South East Asia, North Sea, Mexico, Brazil, and the Falkland Islands.

The Company will hold its annual general meeting on 25^th June 2020.

Recent News
5^th June 2020: The Company has proposed the revised terms for the acquisition of the Shearwater assets and Andrew Area (together, the “BP Acquisition”) with cash payable reduced to USD 210 million and abandonment obligations decreased to around USD 240 million. The Group also reached a settlement agreed with ARCM (Asia Research Capital Management), to withdraw its appeal of the Court’s judgment approval of the acquisition and has undertaken to support the deal (BP PLC acquisitions) and the Stable Platform Agreement. The Company will also issue 82.2 million new shares, reflecting an 8.91 per cent stake, to ARCM at a price per share of 26.69 pence, to fund part of the proposed BP acquisitions.

Operations and Trading Update (for the period 1 January to 30 April 2020)
As on 13^th May 2020, the Company released its trading update for four months to 30^th April 2020 and updated that free cash flow is expected to be neutral for FY20 at current forward curve since 30 per cent of FY20 volume is hedged at USD 60 per boe (Barrel of Oil Equivalent), including around 50 per cent of Q2 oil production at USD 64 per bbl. At the end of April 2020, the liquidity was retained at approximately USD 160 million in unrestricted cash with USD 330 million of undrawn facilities. Also, the net debt was reduced to USD 1.91 billion (at 30^th April 2020) as against USD 1.99 billion (at 31^st December 2019).

Share Price Performance
 
Daily Chart as of 23^rd June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Premier Oil PLC’s shares were trading at GBX 52.04 on 23rd June 2020 (before the market close at 8.00 AM GMT+1), up by 0.39% versus the previous day closing price. Stock's 52 weeks High is GBX 120.70 and Low is GBX 10.02.

From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology
 
 
 
Valuation Metrics
 
(Source: LSE)

As on 29th May 2020, the Price/Earnings, EV/EBITDA and Price/Book multiples of the PMO were 1.7x, 2.3x and 0.3x, respectively, and the corresponding multiples were lower as compared with the Oil & Gas Producers industry. It is reflecting that the Company is trading at a lower multiple as compared to its peers.

Growth Catalysts and Risk Assessments
The Company expects to be cash-flow neutral for FY20 based on hedging programme and cost reduction measures implemented. Its production has not been materially impacted by the COVID-19. However, the weak oil prices amid the nosedived demand and oversupply concerns arising from the resurgence of COVID-19 cases can affect the profitability of the Company from short to medium term.

Conclusion
The Group continues to reduce costs to lower its free cash flow breakeven oil price. The full-year operating cost is projected to be around USD 100 million, which is under budget since unit cost reduced to USD 18 per boe from the original budget of USD 21 per boe. With cost reduction measures, the Company expect to reduce capital expenditure by USD 140 million in FY20. The Company will also seek covenant waivers, in necessary, to withstand the prevailing economic turbulence. However, the Company has substantial liquidity to navigate the demand downturn and price volatility.

Based on the above rationale, which are supported by valuation done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 52.04 (as on 23rd June 2020, before the market close at 8.00 AM GMT+1) with lower double-digit upside potential based 2.04x NTM Price/Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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