It might be hard to see silver and gold miner Fresnillo (LSE: FRES) as a value stock. Broker forecasts put it on a price-to-earnings (P/E) ratio of more than 40 for 2023. And the dividend yield is just 2.2%.
In its Q3 production report released today (October 25), Fresnillo saw silver and gold output both falling from Q2. Silver though, was at least up 2% on the same period last year.
Despite the fall in output in the period, the board says the firm is on to hit its full-year targets.
The firm expects to reach attributable silver production of 57 to 64 moz for the year, with attributable gold production between 590 and 640 koz.
The share price
The Fresnillio share price has slumped more than 40% so far in 2023, but that seems to be due to things beyond its control.
It stems from the firm’s operations being in Mexico, and the financial upsets it’s faced there. And that’s all about the devaluation of the Mexican peso.
It hit profits in the first half of the year. In this quarter update, CEO Octavio Alvídrez said: “We continue to address the ongoing impact of inflation and the revaluation of the Mexican peso, which we expect to remain headwinds going into 2024.“
It shows one of the key risks of buying shares in rare metals miners. They’re often based in less developed parts of the world, with varying economic, governmental, and regulatory conditions.
Still, these can be short-term risks. And they can give us opportunities for the long-term.
A lot depends on a firm’s balance sheet, and how well it can work through the hard times. And that’s another of the many reasons I don’t like to buy shares in firms with high debt.
In this case though, I don’t think things look bad at all.
At the end of the first half, Fresnillo had cash and other liquid funds of $890m. And it put its net debt to EBITDA ratio at 0.42x. That was up on the end of last year, but it’s nowhere near as stretched as I see at a lot of firms.
So I don’t think I’m too worried about Fresnillo’s liquidity right now.
So are Fresnillo shares good to buy now? That has to hinge on the economic situation. Metals are priced in US dollars. And Fresnillo’s local costs are in a currency that’s weak against the dollar.
At least the prices of silver and gold have held up. And that’s at a time when high interest rates can make bonds and cash investments look safer havens for scared investors.
Might that be a risk in the next few years if interest rates stay higher for longer? I think it might.
Still, forecasts show Fresnillo’s P/E dropping as low as 13 by 2025. And I think that could make it a good long-term value buy to consider now.
But I do think the shares might get even cheaper, and maybe give us better buying opportunities.