At the beginning of 2024, gold was hovering around the $2,000 mark. Fast-forward 12 months and the price of the yellow metal has sky-rocketed 33%, comfortably outperforming the FTSE 100. The question I am asking myself now is how long it will be before precious metals mining stocks begin to really take off.
Gold and silver miner
Since Centamin got bought out by AngloGold Ashanti earlier this year, there aren’t many pure-play UK-listed precious metals miners to choose from. But one company I have liked for some time is Fresnillo (LSE: FRES).
Unlike many of its peers, Fresnillo mines both gold and silver; indeed, it’s the largest primary silver producer in the world.
This year, the price of silver has significantly underperformed gold. Yes, the metal has surged to trade in the low $30 range. Nevertheless, this is significantly below its all-time high of $50 last seen in 2011. But silver is like a coiled spring and when it moves, its literally a blink-and-you-miss move.
Silver’s unique attributes
One of the main reasons why I own gold mining stocks in my portfolio is because gold is a monetary metal. As the debt of Western economies continues to rise, owning a neutral asset which cannot be printed like a paper currency, is of vital importance.
Like gold, silver is a monetary asset. It’s also an asset that has a history of doing well in inflationary regimes. But silver is also an industrial metal, with a wide variety of applications.
With its excellent electrical and thermal conductivity, silver is a vital component in both solar photovoltaics and electric vehicles. Demand for both is expected to surge over the next 20 years.
Approximately 10% of a solar panel is composed of silver. China leads the way in solar panel production. But the US is also heavily investing in the technology.
In the first half of 2024, solar accounted for 59% of newly operating generating capacity in the US. The following chart highlights just how important solar is becoming in the US energy mix.
Source: US Energy Information Administration
Risks
As a relatively small precious metals miner, the company’s share price can exhibit wild volatility swings. For example, when silver and gold prices surged earlier in the year, its share price rose 50% in two months, only for it to crater as metal prices softened.
Soaring raw material costs, including for diesel and explosives, have hurt its margins. But as the price of its products rises, I expect margins to improve significantly next year.
Unlike many of its larger peers, it heavily invests in exploration. The challenges involved in undertaking such activities are enormous. Should an expected new mine fail to materialise in the years ahead, that could be disastrous for shareholders.
Investors remain wary of buying miners. But for me, mining stocks represent one of my highest conviction plays. When sentiment toward an entire sector is so low, that is when the greatest opportunities present themselves, in my opinion.
I have been buying huge chunks of Fresnillo’s shares throughout 2024. If I wasn’t so heavily invested already, I would be snapping up more of its cheap shares today. But I think investors should consider the stock as part of a diversified portfolio.
