Should I buy Fresnillo shares amid recession forecasts?

Fresnillo shares tanked on Tuesday after its earnings report. But maybe I should consider buying this precious metals miner as global economies slow?

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Fresnillo (LSE:FRES) shares started falling on Tuesday morning and were 4.8% down after one hour of trading. That came after the FTSE 100 miner reported some disappointing numbers with falling profits, but it did maintain its guidance for the year.

So let’s take a closer look at the earnings report, and why I’m considering this stock for my portfolio.

Profits dive

On Tuesday, Fresnillo announced that pre-tax profit had fallen for the first half of 2022. The Mexico-headquartered miner posted earnings dipping to $155.2m, from $445.4m for the first half of 2021.

The company attributed the fall to lower revenue, higher cost of sales and increased exploration expenses. EBITDA also dropped to $459.1m from $747m in the year-prior period. Revenue fell to $1.26bn from $1.47bn a year ago. 

Falling revenue was attributed to lower gold volumes and silver prices. However the firm recognised the positive impact of higher gold and zinc prices.

The interim dividend was cut to 3.40c a share, down from 9.90c a year prior.

However, the gold and silver miner said that it was on track to meet its 2022 production guidance, but noted some concerns for the second half. Fresnillo highlighted a fifth wave of Covid-19 in Mexico, supply chain issues and inflation as negative impactors.

Why I’m considering Fresnillo

Fresnillo said it would produce between 50.5m-56.5m ounces of silver and 600,000-650,000 ounces of gold in 2022. The company is the world’s largest producer of silver from ore and Mexico’s second-largest gold miner. 

And this interests me because we’re currently seeing negative economic forecasts around the world, from the UK and Germany, to slowing economic growth in China. Generally, amid economic downturns, investors turn to gold as a safe haven.

So, normally, I’ve looked to have more exposure to gold miners in such a situation.

However, we’re not seeing the general hallmarks of a recession right now. Employment indicators are positive in many parts of the world, including the US and UK, and interest rates are rising. At this moment investors are seeing more attractive alternatives to gold in the higher interest rate environment.

But that doesn’t necessarily mean that gold won’t become more attractive with investors later in the year. Gold is currently trading near its six-month low, around $1,769 per ounce.

The general outlook for the firm is decent too. Later this year, a major new mine, Juanicipio, comes on line. This will boost gold and silver production significantly — 43.5 koz of gold and 11.7 moz silver per year.

Silver is also more than just a pretty, shiny metal for making jewellery. It has the greatest electrical and thermal connectivity of all metals, making it a key component in solar panels, semiconductors and electric vehicles.

The stock is considerably down from its pandemic highs, and now trades around its pre-pandemic levels. But, for me, now looks like a good time to add this stock to my portfolio.

Despite production challenges and inflation, I see the gold price increasing towards the end of the year, and silver demand increasing over the decade. That’s why I think Fresnillo is a good buy for my portfolio.

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 considered so you should consider taking independent financial advice.

James Fox 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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