The Fresnillo (LSE: FRES) share price is at its lowest level since 2009. The FTSE 100 miner is the world’s largest silver producer, but performance has been hit by a number of problems over the last couple of years.
I think the tide’s starting to turn. In my view, Fresnillo’s historically low share price could be providing a buying opportunity. Let me explain why.
Silver production’s up
Fresnillo’s fourth-quarter update looked reasonable to me and didn’t highlight any fresh problems. Full-year production for 2023 hit forecasts of 105.1m silver equivalent ounces – a measure that includes silver and gold.
After a period of investment, notably in the new Juanicipio mine, silver production rose by 5% to 56.3m ounces last year, offsetting a 4% drop in gold production to 610,600 ounces.
Reassuringly, gold production rose during the final quarter of last year, as higher ore grades at the Herradura mine offset declining production at Noche Buena, which is closing down.
In 2024, silver equivalent production is expected to be 101-112 million ounces, suggesting a flat or positive performance. However, broker forecasts suggest profits are likely to rise sharply.
Profits set to bounce back!
Silver and gold prices have been quite high since late 2020. But Fresnillo hasn’t benefited as much I would have hoped, due to some serious financial headwinds.
One big problem has been the revaluation of the Mexican peso against the dollar. In 2022, the company says it saw an average exchange rate of 20.1 pesos per US dollar. Last year, that dropped to 17.8 pesos per US dollar.
As a result, Fresnillo’s revenue fell by around $125m last year due to currency factors alone.
These currency movements also resulted in an effective increase in domestic costs in Mexico, in addition to general cost inflation in areas such as energy and wages.
I can’t be sure these problems won’t worsen in 2024. But my feeling is that this is probably unlikely. I reckon these headwinds are now in the rear-view mirror – or at least they’re unlikely to get much worse.
Broker forecasts are certainly positive. City analysts expect Fresnillo’s pre-tax profit to rise from $356m in 2023 to $603m in 2024 – an increase of 69%. That prices the stock on a forecast price-to-earnings ratio of around 15, which is below average for this business.
Fresnillo: why I’m tempted
This situation isn’t without risk, of course. Gold and silver prices could fall and Fresnillo’s focus on Mexico means that all of its assets are exposed to similar risks.
In addition, the company’s concentrated ownership means that around 75% of shares are controlled by Mexican billionaire Alberto Baillères and his family. Outside shareholders are unlikely to have much influence, in my view.
Baillères might even choose to take Fresnillo private if the share price doesn’t pick up. However, I think these risks are probably already reflected in Fresnillo’s share price. After a period of investment, the company’s spending is expected to fall. Cost pressures may ease and management is targeting further savings.
This business looks good value to me at current levels. I think Fresnillo shares could perform well over the next few years and are worth considering.
