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The Fresnillo share price looks cheap to me. I might buy

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When the Covid-19 pandemic arrived and the stock market crashed in 2020, not all shares lost ground. Silver miner Fresnillo (LSE: FRES) didn’t. In fact, it soared, as investors abandoned shares and rushed to buy precious metals. Looking back over the past couple of years, the Fresnillo share price is a lot like a mirror opposite of the FTSE 100.

That extends to the past few months too. As lockdowns have been opening and shares in general recovering, Fresnillo shares have been on a slide again. Over the past five years, the Fresnillo share price has lost 18% while the Footsie has gained 14%. Would I buy Fresnillo shares now that everyone is selling them? The contrarian in me wants to say yes.

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I would never buy a precious metal, for one main reason. The metal itself does not create any new wealth, it just sits there gaining or losing in value. But I would buy shares in a precious metals miner. They produce new silver and gold, adding to the world supply, making profits, and paying dividends. And they can do that even when prices are falling.

Fresnillo share price vs silver?

So if I hold silver while silver prices fall, the value of my investment will fall too. But if I buy Fresnillo shares instead, when the metal falls, profits will fall, sure. But as long as the miner’s production costs are low enough, it can still generate profits. And it can still pay dividends. The Fresnillo share price would very likely drop, but as long as I’m getting my dividends I’ll still be happy.

Curiously, though the price of silver climbed in 2020 when shares were falling, it has not yet retreated as shares are gaining. The gold price hasn’t either, but why? Maybe low interest rates have something to do with it. Cash investments are not providing a very good alternative these days. Bond yields aren’t great either, though they are starting to pick up. Investors who like to allocate their funds across a variety of asset classes like these may well still see gold and silver as attractive holdings.

What are the risks?

When economies get going again, and interest rates rise, I wonder if we’ll see a change. Will precious metals prices follow the Fresnillo share price downwards? I’m just not going to try to guess where precious metal prices are going to head in the next few years. But what safety margin is there in investing in Fresnillo?

Fresnillo’s puts its production cost for silver “in the lowest quartile of the cost curve“. That’s what I’d look for in a precious metals miner — a decent buffer against falling prices. There are certainly risks associated with future falls in silver (and gold) prices. And if prices fall I’d expect the Fresnillo share price to suffer too.

But I’m keeping an eye on where silver prices go, and if we do see any falls, I’ll be seriously tempted to buy Fresnillo shares. I’m actually tempted anyway.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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