A Metal & Mining Stock to Look at Amid Economic Recovery

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With the discovery of the Covid-19 vaccine, the world has finally found a way to end the vicious circle of the awful virus. The global stock markets are on the path to recovery after witnessing a terrible 2020. The metal and mining businesses are slated to witness higher demand as the economies are expected to expand and climb out of recessionary cycles. Also, the world has been pushing harder going green in the post-pandemic world.

Amid the robust recovery in global stock markets, let us put our lens through FTSE 100-listed Fresnillo Plc (LON: FRES), metal & mining business.

What is hot about Fresnillo?

  • The stock has been generating better results than London’s broader equity benchmark index.
  • The stock offers decent dividends.
  • Investors might consider this stock now as it is not in the overbought zone.
  • The company's strong fundamentals, near-term growth prospects make it a low risk bet in the metal & mining space.

Business overview

Fresnillo Plc (LON: FRES) is an 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. Fresnillo aims to maintain its position as the largest gold producer in Mexico and largest primary silver producer globally.

Business Highlights for FY20

In a nutshell, Fresnillo demonstrated a strong financial performance in the fiscal year 2020, supported by robust operational performance and higher precious metal prices. Moreover, the company is maintaining a focus on project developments and operational improvement to deliver sustainable growth. The company expects to produce 675 to 725 kilo-ounces of gold and 53.5 to 59.5 million-ounces of silver as attributable production in the fiscal year 2021.

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’s filings, LSE)

With strong financial and resilient operational performance in the fiscal year 2020, 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 per cent growth year on year in adjusted revenue during the fiscal year 2020. The company’s production was supported by the surge in metal prices as well.

Subsequently, FY20’s gross profit surged by 90.5 per cent on the backdrop of lower operating costs and higher prices. The company declared a total dividend per share of 25.8 US cents (23.5 US cents in final dividend and 2.3 US cents in interim dividend) for 2020.

In terms of the project pipeline, Fresnillo has concluded the initial production stope at Juanicipio mine, while its commissioning is due in fourth quarter of 2021. This new asset shall significantly bolster the Company’s silver production over the upcoming years.

The company also maintained a robust financial position with cash and other liquid funds of US$1,070.4 million at the end of 2020, 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.

(Data Source: LSE) Copyright © 2021 Kalkine Media Pty Ltd.

Despite the unprecedented challenges presented by Covid-19 pandemic, Fresnillo demonstrated an excellent financial and operational performance in FY20. It has a healthy asset quality of gold and silver resources and therefore managed to deliver a solid EBITDA margin of over 48 per cent 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 the final quarter of 2021. Overall, the Company has a robust pipeline of projects to derive growth in the future.

(Source: Refinitiv, 1-Year Dividend Yield comparative chart)

Over the past five years, the company has paid more than US$1 billion in dividends, reflecting 33- 50 per cent of profit after tax each year. The upcoming Ex-dividend date is 22 April 2021. However, there are certain risk and uncertainties that can act as a deterrent to business growth.

The scale and continuously evolving nature of Covid-19 pandemic could cause unprecedented disruption to the supply chain which might lead the company to reduced silver and gold production as small-scale refineries and fabricators also halted their operations during 2020. The growth trajectory can also be impacted by various factors, such as increasing freight rates, change in government policies, the operational risk regarding production stoppages or equipment failures.

Fresnillo-Stock price performance

Comparative Chart as of 8-April-2021, after the market closed (Source: Refinitiv)

On 8 April 2020, Fresnillo shares closed at GBX 911.20 per share. Shares of Fresnillo outperformed the benchmark index in the past one year. Fresnillo’s market capitalisation stood at £6,705.73 million.

On 21 September 2020, the shares of Fresnillo have touched a new peak of GBX 1,379.50 and reached the lowest price level of GBX 645.40 on 9 April 2020 in the last 52 weeks. The company’s shares were trading at 33.95 per cent lower from the 52-week high price mark and 41.18 per cent higher the 52-week low price mark at the current trading level, as can be seen in the price chart.

Fresnillo shares exhibit the negligible amount of volatility in contrast to the index taken as the benchmark, as the beta of the company’s stock was recorded at 0.02 along with a dividend yield of 2.06 per cent. The company’s stock has yielded investors 38.82 per cent of positive return in the past one year.