With the FTSE 100 near an all-time high, many investors might legitimately be starting to ask themselves, where are all the bargains! But what if I said that the index’s best-performing stock in 2025 could still be a bargain. Would you think I was having a laugh?
Silver
When gold hit $4,000 last week, it was all over the headlines. Fast-forward a few days and despite silver hitting $50, there is very little coverage.
In the last 50 years, silver has only ever twice breached that magical number. Today, at nearly $51, it is at an all-time high.
Only six weeks ago, the metal broke through the all-important psychological barrier of $40. A 25% move in that time frame highlights its extraordinary volatility.
Back of envelope calculations
Over the next few years, Fresnillo (LSE: FRES) is expecting to mine 50moz of silver per year.
Across its numerous silver mines, all-in sustaining cost (AISC) ranges from $11 to $23. So let us assume that its AISC is in the range of $17.
If silver prices just stayed where they are today, then gross profit from silver production alone should be in the ballpark of $850m.
Of course, a number of factors will influence that headline number, both positively and negatively. For example, the effect of foreign exchange volatility is important because, as a Mexican producer, its base currency is the peso. Nevertheless, this headline figure highlights just how much of a cash cow the miner is.
Silver prices
A couple of years ago, there was a huge amount of scepticism around gold. At the time, I argued that such negativity was presenting contrarians with a buying opportunity.
But after gold broke out, investors started to worry about why silver did not follow along. Just a few months back, 100 ounces of silver were needed to buy just one ounce of gold. Today, that ratio is 80. In my opinion, a ratio at that level is just extraordinarily bullish for the metal. In other words, silver at $50 is just way too cheap.
What gives me the conviction to make such a bold statement?
Demand
Demand for silver is increasing. This is coming from multiple angles. As a monetary metal, central banks are big buyers.
But on the industrial side, demand is coming from the US as it ramps up its industrial base in response to deglobalisation and onshoring trends. It is also coming from solar expansion across the globe.
As a key industrial commodity, a major risk for silver is that a recession could result in weaker demand, pushing prices lower. Indeed, any major pullback is likely to be much more pronounced for silver than for gold, simply because of its volatile nature. That would pressure on Fresnillo’s margins.
Bottom line
Fresnillo remains an enigma for most retail investors. Until recently, it was a stock hardly mentioned in the mainstream media. Now, after its meteoric rise, all the talk is about a pullback.
For me, that is just the wrong way to look at it. What drives a stock price higher in the long run is improving fundamentals. For investors with a strictly long-term mindset, and who can tolerate undoubted share price volatility, it is a stock worthy of further research.
