Fresnillo PLC

Fresnillo PLC (LON: FRES) is an FTSE 100 index-listed mining entity. It is the world’s largest silver producer and Mexico’s largest gold producer.

The Company expects to announce its full-year 2021 results on 8 March 2022.

Investment Rationale for Valuation – Buy at GBX 620.80

• Silver Production in FY21: The silver production stood at 53.1 million ounces (moz) in FY21, marginally short of guidance, flat versus FY20, with the better ore grade at San Julián Disseminated Ore Body.
• Gold Production in FY21: Gold production stood at 751.2 koz (thousand ounces) in FY21, ahead of guidance, down 2.4% versus FY20, due to a lower ore grade at Ciénega, and a lower ore grade and volume of ore processed at San Julián Veins.
• Advancement in Development Pipeline: The company has achieved additional progress on its development pipeline in FY21, driven by the construction of the Juanicipio plant, which was delivered on time and within budget.
• Technical Indicator: From the technical standpoint, the 14-period RSI was stood at ~26.81, indicating that the stock is in the oversold territory.

Key Risks

• Operational Challenges: The Covid-19 pandemic, recent Government labour reform initiatives and specific operational issues impacted the production in Q4 FY21.
• Adverse Climate Change: The company expects its operations and projects to face acute physical risks from extreme events.

Recent Developments

• On 27 December 2021, the company and MAG Silver Corp. provided a commissioning update on the Juanicipio Project with the Juanicipio Project team delivering the plant commissioning project on schedule.

Q4 FY21 Production Update (for the three months ended 31 December 2021, as on 26 January 2022)

• Quarterly attributable silver production (including Silverstream) came in at 12.9 moz, up 2.1% versus Q3FY21 supported by the higher contribution of development ore from Juanicipio, while the production remained flat against Q4FY20.
• Quarterly attributable gold production reduced by 12.9% and 30.3% versus Q3FY21 and Q4FY20 respectively to 150.3 koz, primarily on the expected lower ore grade, decreased volume of ore processed and lower recovery rate at Herradura.
• The Company’s lower ore grades and reduced ore processed volumes drove lead and zinc production down by 34.3% and 26.4% in Q4FY21, respectively, compared to Q4FY20.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion

The company reported a mixed bag of results for Q4 FY21. The new labor reforms and labor absenteeism has impacted production. Nevertheless, the company has shown further progress on the development pipeline with the construction of the Juanicipio plant, which was delivered on time and within budget. Currently, it is awaiting consent to finish the tie-in to the national power grid, which is expected at the end of the second quarter. The stock made a 52-week low and high of GBX 612.60 and GBX 1,193.50, respectively.

Considering the factors above, we give a “Buy” recommendation on the stock at the current market price of GBX 620.80 per share (as of 4 February 2022 at 8:02 AM GMT).

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.

Note 4: Target Price refers to a price level which 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. 

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 unfavorable movement in the stock prices.

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