Identifying a cheap growth stock with huge potential requires careful monitoring of global events and political developments. Knowledge of the industry is one thing, but external factors often play a more critical role. With that in mind, I’m eyeing a smaller player in one of the world’s biggest industries.
UK’s mining industry enjoyed renewed growth this week, with FTSE 100 firms Antofagasta and Rio Tinto up 6% and 4% respectively. The boost is likely driven by the news of Chinese rate cuts in February. These could inject one trillion yuan worth of stimulus into the market.
These numbers are impressive, but I’m looking at a smaller fish that I think has more room to grow.
A golden opportunity?
Incorporated in the UK, Fresnillo (LSE:FRES) is a £3.6bn FTSE 100 constituent that operates non-ferrous mineral mines in Mexico. It’s the world’s leading producer of silver and one of the largest gold mining companies in Mexico.
With a rising demand for these metals in the production of electronics, the precious metals industry is projected to grow from $205bn to $379bn by 2032.
The Fresnillo share price is currently trading at £5 a share, down 43% over the past year. It recently fell to a new five-year low, hitting £4.77 on 19 January. Unlike most companies, Fresnillo thrived during the pandemic, climbing from £5.40 in March 2020 to £13.50 about six months later.
To me, this exhibits a company that knows how to capitalise on hard times – a skill that could prove valuable in the face of an uncertain future.
Currency fluctuations are a key factor that affected Fresnillo’s performance in 2023. The Mexican peso dropped from 20.1 pesos per US dollar to below 17.8 pesos a dollar, reducing Fresnillo’s revenue by $125m.
This likely offset profits Fresnillo could have recorded from an otherwise good year for gold and silver production.
In its fourth-quarter production report released this week, Fresnillo revealed a 4.7% increase in its silver production. This was driven largely by a new mine in Juanicipio but slightly offset by a 4% decrease in gold production at the soon-to-be-closed Noche Buena mine.
The report also notes two fatal accidents that occurred at Fresnillo mines in 2023. The incidents undoubtedly contributed to investor fears.
With an impressive balance sheet and a promising roadmap for expansion, I see a bright future for Fresnillo. It faces hurdles and tough competition within an aggressive industry but as a growth stock, I see a company with potential for decent returns.
Naturally, there are risk factors. These include a possible continued devaluation of the Mexican peso and the potential for more fatal accidents that could weaken investor confidence.
At 1.3 times, Fresnillo’s price-to-book (P/B) ratio is the lowest it’s been in years, indicating the company may soon become undervalued. At that point, it’s likely investor interest will increase, turning the share price around.
With earnings forecast to grow 40% per year, I’m looking to find a good entry point to buy Fresnillo shares in the coming weeks.