Everyone may be still talking about Rolls-Royce but I have my eye on a lesser-known FTSE 100 gem of a stock that has witnessed a meteoric rise. Since March 2024, the stock is up an eye-watering 248%. The stock in question is Mexican precious metals miner, Fresnillo (LSE: FRES). So, is it too late to join the party?
H1 results
Soaring gold prices helped propel the miner to report its best set of numbers ever. Revenues came in 27% higher at $2bn. Gross profit rose an astonishing 160% and earnings before interest, tax, depreciation, and amortisation (EBITDA) doubled.
After struggling with rising costs over the past several years, the company has now clearly turned a corner. Cost of sales were down $900m, while adjusted production costs fell 20%.
Contributing to the decline was a devaluation of the Mexican peso versus the US dollar. In addition, electricity costs fell 7% and diesel prices 12%. As a result, all-in sustaining costs (AISC) across most of its mines were lower, boosting profits.
Gold cycle
I have been anticipating higher gold prices for a number of years, but the extent of the recent surge has surprised me. But not the underlying reasons.
Many look at rising geopolitical tensions and tariff uncertainty for the rise in prices. They may have contributed but I don’t view them as a primary cause.
Over the last 15 years we have witnessed the most undisciplined monetary and fiscal policy in history. Ultra-low interest rates and helicopter money printing during Covid have led many global central banks to desert US Treasuries and buy gold instead. This has been most noticeable on the part of China and Russia.
On top of that, we are beginning to see sustained weakness in the US dollar against many other currencies. The growing challenge of managing rising interest payments is creating the conditions where a significant devaluation of the dollar is an increasing risk.
Silver
How much higher gold prices can go, I can’t tell. However, I remain convinced that gold’s cheaper cousin, silver, has yet to make its big move.
It is currently hovering around the high $30 range. If it can break through $40, then taking out its previous all-time high of $50 should be very much on the cards.
Silver has a long history of being unpredictable. Price movements tend to come quickly and explosively. The longer this gold cycle continues, the more likely investors will go further out on the risk curve to seek higher returns. I think that is where the future opportunity with Fresnillo lies.
Risks
Other than falling precious metals prices, one of the most important emerging risks the company faces relates to unfavourable actions of governments and regulators. With Fresnillo becoming a cash cow, there’s a distinct possibility that Mexico and other countries where it operates demand hefty payments as a condition of obtaining and maintaining licences.
Its extraordinary share price appreciation means that Fresnillo has now become the biggest holding in my Stocks and Shares ISA portfolio. I remain bullish in the long term, but I must acknowledge that a pullback is more than likely at some point. Therefore, I won’t be adding to my position at the moment. But I certainly won’t be selling, either.
