Gold and silver have always had an allure, for both a variety of cultures and as assets in investment portfolios. And in 2020, investors in either precious metal were handsomely rewarded.
The first half of 2020 saw substantial rallies in both gold and silver. In the midst of the initial chaos of the pandemic, both precious metals rallied and reached multi-year highs. With August came profit-taking. However, since December, the up move has started again. The bullish move in the shiny commodities has also translated into robust gains for miners.
Therefore today, we will discuss FTSE 100 member, Fresnillo (LON:FRES), (OTC:FNLPF), one of the best performers on the UK's leading equity index. In the past year, FRES shares returned more than 87%. On Jan. 12, the stock closed at 1,130p ($15.4 for U.S.-based shares).
By comparison the FTSE 100 is still down about 11% over the past 52 weeks.
Mexico-based Fresnillo is one of the most important silver miners worldwide. According to the company, “the Fresnillo mine has been producing silver for more than five centuries.” The mining heavyweight is also the country’s largest gold producer. Its market cap currently stands at £8.7 billion (or $11.9 billion).
Investors dazzled by the potentially lusterous outlook for either metal—but especially silver—could consider researching FRES further. Here's why:
How Recent Earnings Came
Fresnillo currently has seven operating mines, three development projects and six exploration prospects. Silver accounts for more than 15% of total adjusted revenue for the miner.
In July, it announced interim results for the six-month period ending June 30. Gross profit was $321.2 million, up 56.3% year-on-year (YoY). Profit before income tax of $127.9 million increased 136.6% YoY. Adjusted EPS was11.8 cents per share, up 40.5%. Free cash flow in the first half the year stood at $242.6 million. The board also declared an interim dividend of 2.3 cents per share.
On Oct. 21, Fresnillo released its Q3 production report. CEO Octavio Alvidrez said:
“Our silver mines are performing in line with the forecasts we set out at the beginning of the year and our silver production outlook is unchanged, despite the disruption of this pandemic. As we set out at our half-year results, we have seen some impact as a result of the additional working restrictions in place at the open-pit mines and this has affected our gold production, so we have marginally reduced our full-year guidance for gold.”
We are bullish on silver in the long run and we like Fresnillo with its established tradition of mining and low production costs.
However, given its run-up in price in 2020, short-term profit-taking could be likely. Forward P/E and P/S ratios are 18.90 and 5.41, making the stock's price frothy. A potential decline of 5%-7% from the current levels would improve the margin of safety. We could see a period of consolidation and a sideways move in the share price.
On Jan. 27, the company is expected to release its production report for Q4, and on Mar. 2 its FY20 preliminary results should be be announced. Potential investors may want to study the reports before committing capital into FRES shares.
Bottom Line
Precious metals have always been a safe haven for investors, and 2020 did not prove them wrong. However, it's too soon to tell how 2021 could shape up. Nevertheless, economists debate the potential effects of extreme monetary policies, negative real rates and unsustainable debt levels on the shiny commodities. In the long run, these factors could easily support higher gold and silver prices.
Investors who would rather invest in a basket of silver or gold miners could also consider investing in an exchange-traded fund (ETF) that focuses on miners. Examples are the ETFMG Prime Junior Silver Miners ETF (NYSE:SILJ), the Global X Silver Miners ETF (NYSE:SIL), the iShares MSCI Global Gold Miners ETF (NASDAQ:RING), the iShares MSCI Global Silver and Metals Miners ETF (NYSE:SLVP) and the VanEck Vectors Gold Miners ETF (NYSE:GDX).
Over the past 52 weeks, these four ETFs have returned 33.7%, 42.2%, 27.1%, and 24.7%, respectively.
Other mining names these funds would provide exposure to include Barrick Gold (NYSE:GOLD), First Majestic Silver Corp (NYSE:AG), Franco-Nevada (NYSE:FNV), Newmont Goldcorp Corp (NYSE:NEM), Pan American Silver (NASDAQ:PAAS), Polymetal International (OTC:POYYF), Wheaton Precious Metals (NYSE:WPM) and Yamana Gold (NYSE:AUY).