The FTSE 100 has a new star performer, and it’s not a name most investors would have picked a year ago. Precious metals miner Fresnillo (LSE: FRES) has the Midas touch, smashing the index with gains of 33% in September alone and an eye-watering 265% over 12 months.
The Mexican group, listed in London, is the world’s largest primary silver producer, with gold, lead and zinc providing extra support. When it unveiled interim results on 5 August, profits had rocketed almost 300% to $467.6m. The board tripled the dividend from 6.4 cents to 20.8 cents. Management credited the surge to strong gold output, tighter cost control and operational discipline. Investors loved it.
Fresnillo shares are shining
The gold rally is showing no sign of slowing. It’s climbed another 8% in September to trade at just over $3,829, while silver surged 13% to $46.8. Over the year, the two metals are up 43% and 47%, respectively. Persistent central bank buying, stubborn inflation and anxiety over US debt have all given the sector a powerful lift. Dollar weakness has added fuel, and geopolitical uncertainty continues to strengthen demand for safe havens.
No stock climbs at this speed forever. The price-to-earnings (P/E) ratio is now an eye-watering at around 85 on a trailing basis, but the forward P/E drops to a more palatable 24. Even so, this is far from cheap.
Reasons for caution
I’ve seen plenty of metal rallies before, and they don’t last forever. The higher the Fresnillo share price climbs, the riskier the whole proposition looks. This is a famously cyclical sector. Normally, I’d say investors should consider miners when they’re out of favour, not at the top of the tree. The problem is that the world’s lust for gold shows few signs of fading. With politics becoming more divisive, war fears growing and economies struggling, it’s hard to see what might knock gold off course.
Another factor is monetary policy. As interest rates fall, investors have less to lose from holding bullion, which pays no income at all. With bond and cash returns easing, gold looks more attractive. If central bankers keep topping up their reserves, that adds another source of support.
Personal dilemma
This leaves me conflicted. I can’t quite bring myself to buy at these levels, because I’m haunted by the idea of being the last investor to jump on board the bandwagon. The downside of this approach is that I’ve missed out on plenty of momentum stocks as a result. Fresnillo can now join that list.
Other investors might see this differently, and consider buying even at these heady highs. Certainly, anybody who climbed on board a month ago will be delighted with themselves today. At The Motley Fool, we always encourage people to think years ahead when picking shares, instead of trying to make a quick buck. So bear this in mind when deciding how to approach this bright shining FTSE 100 share.
