Something quite extraordinary is happening in the gold and silver market. Gold prices don’t move by a $1,000 in just over a year, for no reason. Rather than pay expensive storage fees for buying the physical stuff, I am much more interested in the metal in the ground. As a miner of both gold and silver, this FTSE 100 stock remains one of my favourites.
Cash cow
Surging gold prices have been a tonic for the Fresnillo (LSE:FRES) share price. Up over 100% in a year, I think the bull run is just getting going.
Considering its small market cap, the amount of cash flow that the company is generating dwarfs the Magnificent 7 stocks, including the mighty Nvidia.
The key to its growing cash pile is not all down to metal prices. In 2024, efficiencies resulted in cost savings of $40m.
All-in sustaining cost (AISC), a key measure in the mining industry, has been moving in the right direction too. In 2024, gold AISC was in the ballpark of $1,800 across its mines. Yes, there are some extra expenses on top of that. But essentially for every 1 troy ounce of gold it mines it’s making $1,000 profit today.
Run on gold
There are many ideas out there for the unprecedented surge in gold prices. Tariffs and trade wars together with sticky inflation are undoubtedly contributing. But I think there is something much more fundamental at play.
For years, non-Western central banks have been accumulating gold. Since the election of Trump, however, something fundamentally has changed.
Countries across the globe are repatriating their gold from London and New York vaults. The London Bullion Markets Association, the oldest gold exchange in the world, is simply unable to ship gold and silver out fast enough. Settlement dates that use to be transaction plus 1 day (T+1) are turning into T+8 weeks.
Tier one asset
I believe the reason behind the repatriation is that trust in the system is breaking down. In the past, countries would be happy to exchange their gold reserves for US dollars. But not anymore. They want the real thing deposited in their vaults.
Outside of US dollars and Treasuries, gold is the only tier one asset out there. And unlike the former two, it can’t be sanctioned or inflated away. Gold has absolutely no counterparty risk.
Risks
Picking individual precious metals miners is much harder than just buying a sector ETF, like the Van Eck Gold Miners. Fresnillo may be the largest primary silver producer in the world, but it’s a small player in the industry.
Outside of falling metal prices, one of the bigger risks to its share price is its large exploration portfolio. If future drill results disappoint, or it encounters challenges bringing a new mine online, then future production targets could be affected.
When it comes to mining stocks, I believe that the train is just about ready to leave the station. Relative to the movement in underlying metal prices, the Fresnillo share price has barely moved. For me, it has a lot of catching up to do. That is why I continue to buy more of its shares when finances allow.
