Fresnillo (LSE: FRES) shares have massively underperformed the FTSE 100 since the turn of the year. They’ve fallen by 31.25% versus a 2.65% gain for the blue-chip index. Over three years, the stock has lost nearly half its value. And it has also disappointed over a longer timescale.
At first glance, I find the share price performance of the Mexico-based precious metals miner somewhat surprising. I mean, central banks have been printing money for years, and when a lot of money is put into the system, inflation follows. At least under traditional economic theory.
High inflation, as we’ve seen in recent times, has a powerful influence over precious metals. It often pushes the price of gold and silver up as investors seek out safe-haven assets.
Fresnillo is the world’s top silver ore producer and Mexico’s largest gold producer. So is there an opportunity here for me to snap up a bargain?
Q2 results
On 26 June, the Mexican miner released its second-quarter production report covering the three months to the end of June. And it was a bit of a mixed bag.
Silver production increased 12.9% over the previous quarter, but there was a 12% fall in quarterly gold output.
The higher silver production was largely due to the ongoing ramp up of its new Juanicipio mine. Despite being built in 2021, the processing plant there has only been operational for a little over six months. It is now expected to reach capacity output in the next quarter.
The drop in gold production was a result of its Herradura gold mine operations being temporarily blocked by strikes in May. This resulted in several days of lost output.
Nevertheless, the company is still backing its full-year guidance. That is for attributable silver production in the range of 57m to 64m ounces, and 590,000 to 640,000 ounces of gold.
The stock
On paper, the stock currently looks expensive, with a forward-looking price-to-earnings (P/E) ratio of 30. Last year, however, outsized higher costs related to new projects depressed its earnings.
Next year, as costs are reduced, the P/E ratio is expected to fall to around 18. That’s not screamingly cheap, but it’s obviously a lot better.
Plus, the balance sheet remains in very good shape, with minimal debt and a large cash position.
Will I buy the shares?
In future, the use of silver is expected to reach new highs in industrial applications, specifically renewable energy sources and vehicle electrification. And Fresnillo has plenty of silver left in reserve to meet this demand.
Plus, given the uncertainty in the global economy, I expect gold to move back above the psychologically significant $2,000 per ounce level by next year. It could well surge higher from this symbolic price, though metals prices are inherently unpredictable and volatile.
That said, I already have a fair bit of exposure to gold and silver through exchange-traded funds (ETFs), as well as a large holding in BlackRock World Mining Trust.
But if that wasn’t the case, I think now could be a good time to consider adding Fresnillo shares to my portfolio.
