The following two companies have enjoyed an explosive start to 2016. Can they keep up the pace?
After the gold rush
Mexican-focused silver and gold miner Fresnillo (LSE: FRES) is the brightest stock of 2017, outpacing the entire FTSE 100 to grow 27.4% in the first three months. The prospector’s share price has been driven by the surge in silver and gold prices, and further turbo-charged by the slump in the Mexican peso. US president Donald Trump is at the heart of both of these trends.
Precious metals prices have soared as the Trump honeymoon ends and nervous investors seek safety: gold is up 4.46% in the last 30 days, while silver is up 7.39% (Fresnillo is the world’s largest primary silver producer). The peso was hammered by Trump’s talk of walls and tariffs, falling 11% the day after the election, good news for Fresnillo as two thirds of its costs are peso-based.
Shine on
This isn’t just a Trump play. Fresnillo’s share price is up 75% over the past year, and 130% over two years. Last year it delivered record silver production of 50.3m ounces, while gold production of 935,500 ounces exceeded revised guidance. Adjusted revenues leapt 29.2% to $2.045bn and EBITDA profits soared 88.5% to $1.032bn, helped by cost reductions and productivity improvements.
Fresnillo continues to climb despite the recovery in the peso, following hints that the Trump administration isn’t planning a wholesale rewriting of the NAFTA free trade deal between the US, Canada and Mexico. Strong company management, global political uncertainty (which always props up precious metals), and forecast earnings per share growth of 22% this year and 36% in 2018 suggest that Fresnillo should continue to shine. However, it looks pricey at 44.4 times earnings.
Red hot Chilean miner
Chile-focused copper miner Antofagasta (LSE: ANTO) has also been rampant in 2017, its share price up 25% so far. Again, this continues a trend, as the share price has more than doubled in the past year. 2016 was a year of “operational delivery“, according to chief executive Iván Arriagada, with a 12.5% rise in copper production to 709,400 tonnes. It has also been helped by the restoration of King Copper, after the dark days of exile in 2015 and early 2016, and the across-the-board resurgence in commodity stocks as fears of a Chinese meltdown abate.
My concern is that the world’s biggest consumer of commodities is only kept on course by yet more unsustainable, bubble-inflating stimulus from the Chinese authorities. What cannot go on forever must one day stop. However, Antofagasta has worked hard to boost productivity, improve efficiency and reduce costs, with sustainable reductions of $176m last year. This helped boost cash flow from operations by 70% to a healthy $1.5bn, and fund dividend progression.
Lifecycles
As Arriagada points out, Antofagasta operates in a cyclical industry, but its cautious approach has given it a stable operating base and strong balance sheet. Again, the recent price surge leaves it trading at an expensive 31 times earnings, but with forecast EPS of 38% this year and 14% in 2018, and spirits rising in the global economy, this high price may still be right.
