Fresnillo PLC – Overstretched amid uncertainties and lower guidance. 

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.

Investment Rationale – Expensive at GBX 1,164.50

• From a technical perspective, 14-day RSI (57.885) is indicating a downward trend in the stock.
• In terms of trading multiples, EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples are higher than the corresponding multiples of the Metals & Mining industry.
• Due to Covid-19 pandemic related restrictions, gold production guidance has gone down for FY20.
• In H1 FY20, there was 20.30% decline in net profit, which was aggravated by the adverse effect of the devaluation of the MXN vs USD on deferred taxes.

Risk Assessment

• The scale and continually evolving nature of COVID-19 pandemic are causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations in FY20.
• The growth trajectory can also be impacted by various factors, such as increasing freight rates, and operational risk regarding production stoppages or equipment failures.
• The inability to integrate the acquired business successfully could lead to inefficiencies and can impact prospective returns.

Recent News

19 November 2020: Fresnillo confirmed the appointment of Tomás Iturriaga as Chief Operating Officer. Mr André Sougarret will remain with the Company for a short period of time to assist with the handover.

Q3 FY20 Production Update for the quarter ended 30 September 2020 (as on 21 October 2020)

 (Source: Company Website)

• Fresnillo reported a 2.3% decline in silver production and a 6.3% decline in gold production in Q3 FY20, as compared to Q2 FY20.
• Similarly, lead and zinc production decreased by 6.4% and 1.5% respectively vs. 2Q20. The Covid-19’s impact resulted in a lower volume of ore processed at Herradura and Noche Buena.
• On 28 July 2020, the Company provided an interim result for the six months to 30 June 2020, with a strong balance sheet, high-quality assets and healthy margins (supported by a focus on cost).
  • In the first half of 2020, the total revenue was increased by 5.2% year-on-year.
  • The Company reported a significant rise in the underlying profitability during the H1 FY20 due to higher commodity prices and lower costs.
  • Net profit for the period plunged 20.30% from US$70.9 million in H1 FY19 to US$56.5 million in 20. Moreover, the production at underground mines was relatively unaffected by COVID-19 in Q2 FY20.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In FY20, gold production is now expected to be in a range of 745 to 775 koz, while silver production guidance remained in the range of 51 to 56 moz. The gold production guidance has been declined due to the reduced number of mine operators at Herradura and lower than expected ore grades at the Dynamic Leaching Plant, combined with restricted access to deeper areas at the Noche Buena mine. Moreover, the Company reported a significant decline in net profit during the H1 FY20. As the development and availability of a vaccine remain uncertain, there is a significant risk to currency fluctuation and total production. Furthermore, the Company is trading near a 52-week high, raising doubts at the upside potential at current prices. Stock 52 week High and Low were GBX 1,379.50 and GBX 456.51, respectively.

Given the heightened level of uncertainties, we recommend a “Expensive” stance on Fresnillo PLC at the current price of GBX 1,164.50 (as on 3 December 2020, before the market close at 8.55 AM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.

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