The business in question is precious metals miner Fresnillo (LSE: FRES). It has seen its share price tumble fairly consistently from 1,200p 12 months ago to its current level of 780p, a decline of around 35%. The FTSE 100 has returned 20% in this timeframe. So, what have been the reasons for the miner’s woes?
Losing its shine
Fresnillo operates seven mines in Mexico and is the world’s largest primary silver producer. It also has significant gold operations, which contributed 46.7% of its revenues in H1 2021, with silver accounting for 40.7%.
Total revenues were up almost 40% on H1 2020, which gives the impression of a strong performance by Fresnillo. Miners have always profited (and suffered) from fluctuations in metal prices, however, which goes a long way to explaining the company’s recent good financial performance. The majority of the increase in revenue in H1 was accounted for by higher commodity prices in the first six months of 2021, compared to H1 2020. This masks the fact that silver prices especially have fallen over the past few months, but still remain above early 2020 lows. Clearly, many investors have been shying away from Fresnillo over fears that this trend will continue.
Weakened demand may have been accentuated by China’s recent economic instability, which has seen the stocks of companies such as iron ore giants Rio Tinto and BHP suffer. Having been elevated for a while, it seems that many people are expecting a further fall in precious metal prices, as shown by Fresnillo’s flagging share price. Unfortunately, no one knows for sure what will happen.
Therefore, have investors overestimated the potential for a crash in commodity prices and is this a good time to buy this FTSE 100 stock?
Reasons for optimism
Despite fears over prices, Fresnillo has shown resilience by increasing its output this year and building a pipeline of new projects outside Mexico. These should increase its long-term resilience and help to maintain its position as a low-cost producer well into the future. Gold prices haven’t fallen over the past six months, which is also a positive sign for Fresnillo. Therefore, Fresnillo’s stock may have been unfairly over-sold recently, as silver actually accounts for a smaller proportion of its revenues than gold, despite its position as the world’s largest silver producer! Long-term demand for precious metals is also unlikely to go away, which should offer reassurance to potential investors.
My conclusion
Fresnillo’s position as a primary producer means that its fortunes are cyclical. A significant amount of the recent weakness in Fresnillo’s share price has undoubtedly been caused by the belief that gold and silver prices are at an apex and may continue to fall from August 2020 highs in the near future.
Although I like Fresnillo’s ambition to increase its geographical footprint with new mines, I’m staying on the sidelines for now. I think that there are better bargains on offer in the FTSE 100.