Three months ago, relatively few of us had heard the word coronavirus, let alone Covid-19 (which was only named in February). Those of us who had are unlikely to have expected the global consequences it has thrown up. Yet here we are in April with the FTSE 100 index down 24%. This bear market has taken so many firms lower with it. But there have been some notable exceptions, one of which is Fresnillo (LSE: FRES).
Running the numbers shows us that the Fresnillo share price has rallied 11% in the past three months. This is a strong performance for any period. Yet when you take into account that the average FTSE 100 firm has lost 24% in the same period, it becomes an eyebrow raiser. So what has happened here?
Mining for gems
I try to mine for stock gems to invest in. Fresnillo mines for gold, silver and other base metals. This in itself has been one source of the share price rally we have seen recently. Over three months the share price is up, but if we pull it out over six months we see a similar rally.
If you overlay the prices of gold and silver, you can see a correlation. Gold is the obvious one, trading below $1,500 per ounce six months ago but above $1,700 per ounce last week. Silver has not performed as well over six months (moving from $17 to $15), but certainly has not seen the value significantly erode. Investors are therefore likely anticipating a boost to revenue and profit for the firm when the first-half earnings report comes out later this year.
Another factor to to take into account when thinking about why Fresnillo shares have held up is the 2019 earnings report. This came out in early March and showed mixed results. Revenue was up 0.8% but gross profit fell almost 41%. Yet the market actually took the mixed results well, with no sudden drop in the share price.
An aspect that will have encouraged investors not to sell the stock as the virus drove the FTSE 100 sell-off during March was the financial position of the firm. As of the end of 2019, the firm had $336m in cash/near cash funds. Added to this was $142m set aside for dividends, and $717m for capital expenditure and exploration.
This is a healthy position to be in, and covers a lot of investors’ demands. Those holding the stock for income will be happy with not having the dividend cut. Those buying for longer-term growth will be happy to see the investment in exploration. Finally, for investors buying for safety, the cash position should allow it to see out turbulent times.
Is Fresnillo still a buy?
Given the stock has already rallied, is there further potential? Well yes, I think so. The gold price should remain supported while the global situation remains unsettled, which could last for a long time. The firm is also not in a sector whereby it relies on public interaction too much, so 2020 earnings should not be overly impacted. Thus, we could see further upside and is worth considering to buy, I feel.
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Jonathan Smith does not own shares in Fresnillo. 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.