Are Fresnillo shares a good buy?

Home > Analysis > Fresnillo

Yes, Fresnillo is a good share to buy, but on one condition. Don’t overpay for the stock. Why? Because the mining industry is a cyclical one. Investors should buy the sector when sentiment is bearish; and sell when it is bullish. There appears to be a ceiling (£20) and floor (£6) on Fresnillo’s long-term chart.

Fresnillo (FRES:LSE) share price versus real gold, fools gold and digital gold

The debate about which asset is better – digital gold, aka Bitcoin, or gold – is finally over, for now.

Any keen reader of news would have seen screens of plunging prices in the digital markets lately. Worse still, crypto exchanges are in big trouble. FTX, led by former billionaire Sam Friedman, is probably insolvent and in need of a multi-billion rescue. This is causing a contagion run in many other exchanges. Who’s next (see our Coinbase share price analysis here)? Nobody knows. Spooked, investors and speculators stampeded out of crypto into ‘safer’ assets like gold and silver.

Compare silver’s price move below against that of BTC. The former appears to have completed a multi-month base breakout by closing above the $21 resistance, while BTC sinks into 18-month lows. Silver’s relative performance is bullish.

Silver versus Bitcoin

Unsurprisingly, silver’s rally dragged up most other precious metal shares, including that of Fresnillo (FRES) – the world’s largest silver miner. Fresnillo first listed in 2008, and the Mexico-based company is currently listed in the LSE as a FTSE 100 component. Its market cap is a sizeable £6.3 billion. The main assets of Fresnillo are silver and gold mines located in Mexico.

Fresnillo mines

Source: Fresnillo

When is the best time to buy Fresnillo shares (LON:FRES)?

The best time to buy Fresnillo’s shares is when the entire precious metal complex is rising and when the stock market is not in a severe bear market.

Look at Fresnillo’s chart below and compare that to the silver price trend in the lower panel:

Fresnillo share price (FRES:LSE) versus silver

Fresnillo’s share price tends to rally when silver metal prices are rising. Three such instances were noted in the past decade: During 2010-11, 2016-17 and 2020-21. In each bull run, Fresnillo’s share price appreciated by more than 100%.

View another way, Fresnillo’s share is a “geared play” on silver. The best time to buy Fresnillo is when its share price breakouts of a base.

Is the (LON:FRES) Fresnillo share price overvalued or undervalued at the moment?

This is a matter of opinion at the moment.

For Fresnillo, its production of raw metal ores is steady; whilst its all-in margin remains healthy (see below). Moreover, there are some development projects in the pipeline (eg Juanicipio). By most statistics, Fresnillo appears to be a profitable miner (1H profit is $141 million).

Fresnillo (FRES:LSE) margin

Source: Fresnillo

But at the price-earnings ratio in excess of 30 and a dividend yield of just 2.6 percent, Fresnillo may seem a little pricey. That said, the stock market can value a miner highly for years. I would not be too perturbed by this.

Why has Fresnillo’s share price risen recently?

Fresnillo is doing relatively well these days because of three reasons:

  • Silver and gold are rallying into new multi-week highs
  • A rebound in stock markets
  • Stable production of silver and gold in Fresnillo mines.

More importantly, downside surprises were absent in Fresnillo’s recent report (released October 26). Hence, Fresnillo’s share price is rallying healthily along with silver.

What is Fresnillo’s share price prediction (LON:FRES)?

Until a few weeks ago, the market was soaked in negative sentiment. Investors were expecting very hawkish monetary policies; and gold and silver prices were on the cusp of a downside breakout.

That’s why most analysts are still putting a ‘Hold’ recommendation on Fresnillo.

Will Fresnillo’s base breakout change this? Perhaps. In markets, prices often run ahead of the fundamental reports. Should Fresnillo break above the psychological 1,000p ceiling, analysts may start to revise up their price targets.

Fresnillo share price (FRES:LSE) price prediction

Source: Financial Times

Date Broker name New Price Old price target New price target
26-Oct-22 Berenberg Bank  Hold 745 800 800
21-Oct-22 Barclays  Equal-weight 718 770 825
14-Oct-22 JP Morgan Cazenove  Neutral 702.2 800 750
06-Oct-22 Berenberg Bank  Hold 810 700 800
03-Aug-22 Citigroup  Underperform 676.6 620 560
03-Aug-22 Barclays  Equal-weight 676.6 770 770
Averages 721.4 743.3 750.8


Scroll to Top