Of all the companies in the FTSE 100, Fresnillo (LSE:FRES) holds the unwelcome title of worst performing company in 2023 to date. The mining company has struggled this year as surging strength in the US dollar outweighed local costs, which are mostly in the Mexican peso. So is there an end in sight for the declining share price, or is there more pain ahead?
Currency difficulties
Fresnillo mines, develops, and produces non-ferrous minerals in Mexico, primarily exploring for silver, gold, lead, and zinc concentrates.
The company was founded in 1887 and is headquartered in Mexico City. With the company’s revenue based in one currency, and the end product priced on the global market in US dollars, there is a huge vulnerability to currency fluctuations. With the level of inflation and volatility experienced globally in recent years, the company has really felt the brunt of this vulnerability.
In the last three months alone, the company’s shares are down over 52%. Commodities such as gold have typically been a great place for investors to ride out volatility, but due to the Mexican peso falling well behind the dollar, this hasn’t been the case for Fresnillo investors.
Of course, the significant decline in the share price could quickly rebound if the currency situation starts to balance out. However, with fears of a recession never far away, many stock market and currency based investors are far happier holding onto the relatively safe haven of the dollar than taking any risks in emerging markets.
How healthy is the company otherwise?
Macroeconomic factors, such as currency fluctuations, will clearly continue to influence companies in the FTSE 100, but they don’t necessarily matter over the long term. A quality company will most likely shine through in the end, but a company with a rocky balance sheet might never make it through these difficult times.
By looking at the price-to-earnings (P/E) ratio of Fresnillo (22.6 times), we see a company that is fairly expensive relative to the average of the mining sector (8.4 times). Similarly, the discounted cash flow calculation, which calculates an approximation of fair price, suggests that the share price of £5.54 is as much as 24% above the fair value of £4.46.
This makes me nervous, since even after such a hefty decline, the company may still be overvalued.
How does the future look?
Despite having one of the worst records of the FTSE 100 in 2023, Fresnillo actually has a fairly optimistic earnings growth forecast for the next year. At 34% growth, the company eclipses the sector’s average forecast of only 2%.
The company also has a fairly healthy debt situation, which could be a major obstacle to success for many in a high interest rate environment. This may change if the expected rise in earnings doesn’t happen, but for now it could present an opportunity.
Am I buying?
Of all the companies in the FTSE 100, I think Fresnillo could be one of the most interesting opportunities. Clearly the company has struggled of late due to some variables beyond its control, but I would want to see this begin to improve before I get involved. However, this could be a tremendous opportunity if the strength of the dollar begins to fade, so I’ll be adding it to my watchlist.
