Image source: Getty Images
He Fresnillo (LSE:FRES) share price is at its lowest level since 2009. FTSE 100 The miner is the world's largest silver producer, but its performance has been affected by a series of problems in recent years.
I think the tide is starting to turn. In my opinion, Fresnillo's historically low share price could be providing a buying opportunity. Let me explain why.
Silver production increases
Fresnillo's Q4 update seemed reasonable to me and didn't highlight any new issues. Full-year production for 2023 met forecasts of 105.1 million ounces of silver equivalent, a measure that includes silver and gold.
After a period of investment, especially at the new Juanicipio mine, silver production rose 5% to 56.3 million ounces last year, offsetting a 4% drop in gold production to 610,600 ounces.
Reassuringly, gold production increased during the final quarter of last year, as higher ore grades at the Herradura mine offset decreased production at Noche Buena, which is closing.
In 2024, silver equivalent production is expected to be 101 to 112 million ounces, suggesting stable or positive performance. However, broker forecasts suggest that earnings are likely to rise sharply.
Profits will bounce back!
Silver and gold prices have been quite high since late 2020. But Fresnillo has not benefited as much as it would have hoped, due to some serious financial headwinds.
A big problem has been the revaluation of the Mexican peso against the dollar. In 2022, the company says it recorded an average exchange rate of 20.1 pesos per US dollar. Last year, that figure fell to 17.8 pesos per US dollar.
As a result, Fresnillo's revenue fell by about $125 million last year due solely to monetary factors.
These exchange rate movements also resulted in an effective increase in internal costs in Mexico, in addition to general cost inflation in areas such as energy and wages.
I can't be sure that these problems won't get worse in 2024, but I think this is probably unlikely. I think these headwinds are already in the rearview mirror, or at least unlikely to get much worse.
The brokers' forecasts are certainly positive. City analysts expect Fresnillo's pretax profits to rise from $356 million in 2023 to $603 million in 2024, an increase of 69%. That sets the share price at a forecast price-to-earnings ratio of around 15, which is below average for this business.
Fresnillo: why I feel tempted
This situation, of course, is not without risks. Gold and silver prices could fall and Fresnillo's focus on Mexico means all of its assets are exposed to similar risks.
Additionally, the company's concentrated ownership means that around 75% of the shares are controlled by Mexican billionaire Alberto Baillères and his family. In my opinion, outside shareholders are unlikely to have much influence.
Baillères could even choose to privatize Fresnillo if the share price does not rise. However, I think these risks are probably already reflected in Fresnillo's share price. After a period of investment, the company's spending is expected to decrease. Cost pressures may ease and management is targeting further savings.
This business seems like a good value to me at current levels. I think Fresnillo stock could do well in the coming years and is worth considering.
