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Would I be mad to buy the FTSE 100’s worst-performing stock?

The share price of gold and silver miner Fresnillo  (LSE: FRES) has declined 68.75% over the last three years. It narrowly beats troubled British Gas owner Centrica (down 68.63%) to the title of worst-performing FTSE 100 stock over the period.

However, I think there’s a strong case for buying Fresnillo’s shares right now. This despite its failure to rally on surging gold and silver prices over the last couple of months, in contrast to its soaring FTSE 250 peer Hochschild  (LSE: HOC). The table below neatly summarises how things stand.

  Price at 31 May Price today Change
Gold (per ounce) $1,296 $1,441 +11.2%
Silver (per ounce) $14.48 $16.20 +11.9%
Hochschild (per share) 155p 202p +30.3%
Fresnillo (per share) 768p 611p -20.4%

As you can see, Hochschild’s shares have climbed 30% on the back of low double-digit rises for gold and silver. This is how it’s supposed to be, due to operational gearing making miners a leveraged play on the metals prices. So how come Fresnillo’s shares have fallen 20%?

Misfiring

Historically, Fresnillo has been a popular pick with long-term investors seeking exposure to precious metals, along with a dividend (current-year forecast yield 2.3%). It’s the world’s leading primary silver producer and Mexico’s largest gold producer, with seven operating mines and a high-quality pipeline of projects and prospects. As a FTSE 100 stock, the liquidity of its shares has also made it a favourite with shorter-term traders.

However, over the last 18 months or so, it’s got into an unwelcome habit of downgrading production guidance, due to such things as operational delays, and working through lower ore grades than expected in one or two areas of its operations. The persistence of these challenges has led many long-term investors to throw in the towel. Meanwhile, the last thing traders want in a leveraged play on strengthening gold and silver prices is a company that keeps falling short on its production guidance.

Looking to the long term

I don’t think the fundamental attractions of Fresnillo as a long-term investment have changed. I expect management’s cost reduction and productivity initiatives to come through in time, and with improved performance and reliability to see a return of long-term investors, as well as renewed interest from traders.

Fresnillo’s challenges could persist in the near term, and the share price could remain volatile for a while yet. However, I’d be happy to buy a stake today on the view that long-term returns could be very strong from the current level.

Firing on all cylinders

Mid-cap miner Hochschild operates three mines — two in southern Peru and one in southern Argentina — and has a good pipeline of long-term projects throughout the Americas. The company, which is my colleague Ambrose O’Callaghan’s top stock for August, is firing on all cylinders.

Last month’s production report told us: “Hochschild has continued its strong operational performance in the second quarter of 2019, with year-on-year increases at all three of our mines … Consequently we remain firmly on track to meet our annual production and cost targets.”

City analysts expect earnings to soar 80% this year, followed by 40% in 2020. There are dividends too (current-year forecast yield 1.6%). While the shares have risen 30% in just a couple of months, the strong operational performance and forecast rates of earnings growth suggest to me the stock is still undervalued. I’ve long admired the company, and continue to rate the shares a ‘buy’ at their current level.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.