Fresnillo PLC (LON: FRES) – Creating value through disciplined growth, development, and exploration activities.

Fresnillo PLC is a FTSE-100 listed mining entity that produces precious metals, such as gold, silver, lead and zinc. It is listed on the London Stock Exchange as well as on Mexican Stock Exchange. It operates seven mines in Mexico, namely Saucito, Fresnillo, Herradura, Ciénega, San Julián, Noche Buena, and Soledad-Dipolos. The Company has six advanced exploration projects and three development projects. Fresnillo aims to maintain its position as the largest gold producer in Mexico and largest primary silver producer globally.

On 28 April 2021, Fresnillo expects to release its Q1 FY21 production report. The recommended final dividend per share of 23.5 US cents is scheduled to be paid on 1 June 2021.

 (Source: Company Presentation)

Growth Prospects and Risk Assessment

Despite the Covid-19 pandemic, Fresnillo demonstrated an excellent financial and operational performance in FY20. It has a healthy asset quality of gold and silver resources, while it delivered a solid EBITDA margin of over 48% in FY20. The Company has a disciplined approach to development with the optimisation of the Fresnillo plant project and Phase 1 completion of Pyrites plan construction. The new Juanicipio mine is also due for commissioning in Q4 FY21, and therefore, the Company has a solid project pipeline to capitalise on. Over the past five years, the Company has paid more than US$1 Billion in dividends, reflecting 33% - 50% of profit after tax each year.

However, there are certain risk and uncertainties to the business growth. The scale and continually evolving nature of COVID-19 pandemic are causing unprecedented disruption to the supply chain. It can also lead to reduced silver and 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, operational risk regarding production stoppages or equipment failures.

Now will analyse some key fundamental and shareholders statistics of Fresnillo PLC.

Recent Developments

22 December 2020: Guillermo Gastélum was appointed as Vice President of Exploration, following the retirement of David Giles. It came into effect from 1 January 2021.

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

Financial and Operational Highlights (for the year ended 31 December 2020, as on 2 March 2021)

 (Source: Company Website)

• With strong financial and resilient operational performance in FY20, Fresnillo remained committed to delivering development projects and achieving operational objectives.
• The total silver production remained in line with the guidance, and thus, the Company reported a 14.9% growth in FY20’s adjusted revenue against FY19. The resilient production was supported by the better metal prices as well.
• Subsequently, FY20’s gross profit grew by 90.5%, driven by lower cost and higher prices.
• The Company declared a total dividend per share of 25.8 US cents, comprised of 23.5 US cent in final dividend and 2.3 US cent in interim dividend.
• In terms of project pipeline, Fresnillo has concluded the initial production stope at Juanicipio mine, while its commissioning is due in Q4 FY21. It shall significantly support the Company’s silver production.
• The Company also maintained a robust financial position with cash and other liquid funds of US$1,070.4 million at the end of FY20, after spending US$107.3 million on exploration for future growth, paying US$104.7 million in dividends and investing US$412.3 million in capital expenditure.

Financial Ratios (FY2020)

Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 7 April 2021, at 8:25 AM GMT, Fresnillo PLC’s shares were trading at GBX 898.80, down by 0.13% against the previous day closing price. Stock 52-week High and Low were GBX 1,379.50 and GBX 645.40, respectively. From a technical standpoint, 14-day relative strength index (43.75) seems favourable and supporting the upside potential.

In the last one year, Fresnillo PLC’s stock price has delivered a return of ~29.43% return as compared to ~20.62% return of the FTSE 100 index and ~56.49% return of the FTSE All-Share Mining index, which shows that the stock has outperformed the benchmark index and underperformed the benchmark sector.

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

Business Outlook Scenario

In a nutshell, Fresnillo demonstrated a strong financial performance in FY20, supported by a robust operational performance and higher precious metal prices. Moreover, the Company is maintaining focus on project developments and operational improvement to deliver a sustainable growth.

Notwithstanding, the short-term outlook remained gloomy with Covid-19 impact in Mexico; however, the Company expects to product 675 to 725 kilo-ounces of gold and 53.5 to 59.5 million-ounces of silver as attributable production in FY21. Looking ahead, the Company also expects to enhance the silver production with Juanicipio mine and other operational improvements. Moreover, the potential new mines at Orisyvo and Rodeo shall also support the long-term prospects for gold.

(Source: Company Presentation) 

Considering the robust financial performance, resilient operational performance, strong pipeline, favourable metal prices, 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 898.80 (as on 7 April 2021 at 8:25 AM GMT) with lower double-digit upside potential based on 18.91x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).  

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

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

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