Fresnillo PLC

Fresnillo PLC (LON: FRES) is a FTSE 100 listed silver producer and Mexico’s largest gold producer.

On 27 October 2021, Fresnillo expects to release its update for Q3 FY21.

Rationale for Valuation – HOLD at GBX 843.00

• Recent US Dollar weakness, potential collapse of Evergrande Group, surging global inflation, mixed economic data, and early tapering of quantitative easing program can support the gold prices in the short-term.
• In H1 FY21, operating profit and net profit jumped 117.6% and 445.8% year-on-year, respectively.
• FRES remained on track to produce 675 to 725 koz (kilo-ounce) of gold and 53.5 to 59.5 moz (million-ounce) of silver.
• From a technical standpoint, Fresnillo’s stock price is trading above the 20-day EMA (GBX 808.20), reflecting a bullish price momentum.
• In H1 FY21, EBITDA margin and net margin were higher than the industry median of 33.4% and 13.4%, respectively.

Key Risks

• The increase in the US treasury bond yields has led to the massive plunge in gold prices. The US Dollar strengthening and earlier asset tapering by Federal Government can impact the gold prices in the short-term.
• The financial performance of FRES is highly dependent on gold prices, and the Gold market is cyclical and sensitive to economic changes and numerous factors, which are beyond the Company’s control.

Interim Results (for the six months ended 30 June 2021, as on 3 August 2021)

(Source: Company Website)

• Fresnillo reported strong financial results in H1 FY21, driven by higher metals prices and improved production performance.
• Subsequently, FRES declared a dividend of US$73.0 million to shareholders, while pursuing exploration and development projects.
• As on 30 June 2021, the Company held US$1,202.9 million in cash and other liquid funds.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion 

Fresnillo reported a sharp increase in profitability during H1 FY21, and it has also made solid progress with exploration activities to generate long-term returns. It is also on track to meet its full-year production guidance. Moreover, the Company has strong cash flow generation and robust balance sheet position to capitalize on further growth opportunities. The stock made a 52-week High and Low of GBX 1,369.11 and GBX 742.60, respectively.

Considering the robust financial performance, favourable metal price environment, reiterated production guidance, and support from the valuation as done using the above method, we have given a “HOLD” recommendation on Fresnillo PLC at the current market price of GBX 843.00 (as on 14 October 2021 at 09:33 AM GMT+1).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

*Dividend Yield may vary as per the stock price movement.

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