Fresnillo plc vs Rio Tinto plc: which mining stock will make you the most money?

Royston Wild weighs up the investment prospects of Fresnillo plc (LON: FRES) and Rio Tinto plc (LON: RIO).

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Gold-and-silver-digger Fresnillo (LSE: FRES) was last seen trailing lower in Tuesday business, the stock 1% lower on the day despite the release of marvellous full-year financials.

The Mexican miner advised that revenues leapt 31.9% in 2016, to $1.91bn, Fresnillo benefiting from improved metal prices and surging production levels. Total silver output clocked in at 50.3m ounces, up 7.1% year-on-year, while gold production of 935,513 represented a 22.8% increase from 2015.

And Fresnillo expects metal volumes to keep rising in 2017 thanks to higher grades and project ramp-ups. Silver output of 58-61m ounces is currently expected, while gold production of 870,000-900,000 ounces is also estimated.

Furthermore, the precious metals play also continued to make progress on the costs front last year, assisted by a collapse in the Mexican peso versus the US dollar. Adjusted production costs dropped 2.5% in 2016, the average 17.7% drop in the value of the peso versus the North American currency providing a massive boost.

These factors helped pre-tax profits explode at Fresnillo last year, the firm reporting a 238.2% bottom-line surge to $718.2m.

Bravo Rio

But Fresnillo isn’t the only FTSE 100 mining goliath to release robust trading numbers in recent weeks.

Diversified giant Rio Tinto (LSE: RIO) announced this month that sprinting iron ore values had helped underlying earnings leap 12% during 2016, to $5.1bn. The steel-making ingredient is responsible for more a shade over three-quarters of earnings at the digger.

So which is best?

Well, the City expects earnings at both Fresnillo and Rio Tinto to keep rocketing in the medium term at least.

For 2016 the silver specialist is anticipated to print a 36% earnings rise, while Rio Tinto is predicted to enjoy a 47% earnings bump. However, I believe Fresnillo’s earnings outlook is on much sounder footing than that of its diversified peer.

While it is difficult to definitely predict where commodity prices will head in 2017, I believe precious metals are in great shape to gain ground as political and economic turbulence in the US and Europe drives demand for safe-haven assets. Indeed, these fears powered gold above the $1,250 per ounce marker for the first time since early November just this week.

I am far less optimistic concerning the price direction of Rio Tinto’s base metals in 2017 and beyond, however.

Although Chinese exports rose 8% in January, trade data over the past year has largely been patchy, casting concerns over the state of raw materials demand from the manufacturing Goliath looking ahead. And these fears have been fanned by the rising protectionist rhetoric exemplified by new US President Donald Trump.

At the same time, mega producers like Rio Tinto are also turbocharging expansion projects in segments like iron ore to capitalise on recent price strength. But such measures threaten to put values on the back foot again should demand fail to suck up existing oversupply.

So while Rio Tinto’s forward P/E ratio of 9.7 times is far more appealing than Fresnillo’s corresponding multiple of 32.8 times, I reckon the silver star is a much more ‘investible’ commodities pick at present.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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