Key points
- With lower trailing and forecast P/E ratios than a major competitor, the firm may be undervalued
- For the 2021 calendar year, pre-tax profits stood at $611.5m, up 10.9% compared to the 2020 figure
- The 2021 full-year dividend increased to ¢33.9 from ¢25.8 the previous year
Silver mining company Fresnillo (LSE:FRES) is one of the biggest precious metal firms in the FTSE 100 index. Operating in Mexico, recently its share price has increased because of the tragic escalating military conflict in Ukraine. It’s up 15% in the past month, but down 23% in the last year. At the time of writing, it trades at 720p. Why do I think that I should spend £500 on Fresnillo shares? Let’s take a closer look.
Are Fresnillo shares cheap?
By referring to price-to-earnings (P/E) ratios, we can better understand if businesses are over- or undervalued. Simply put, P/E ratios are found by dividing the share price by historical or forecast earnings. This gives us the trailing or forward P/E ratio respectively.
Fresnillo has a trailing P/E ratio of 11.65 and a forward P/E ratio of 36.63. In isolation, these numbers don’t tell me all that much. When placed next to those of a major competitor, however, they may show if Fresnillo shares are cheap.
Hecla Mining, one of the largest silver firms in the US, has trailing and forward P/E ratios of 108.17 and 61.73. Given Fresnillo’s ratios are significantly lower, this may indicate that Fresnillo shares are in fact cheap. As a potential investor, I’m drawn to this possible bargain.
Recent results
In a trading update for the three months to 31 December 2021, the company said it expected silver production to be below guidance. This was primarily due to a change in labour laws in Mexico and the Covid-19 pandemic. Both factors resulted in increased absenteeism of workers.
In addition, RBC downgraded the firm on the back of this update, slashing its target price from 1,025p to 575p. It’s also worth noting that any further serious Covid-19 outbreaks in Mexico could again disrupt mining operations and negatively impact Fresnillo shares.
In the 2021 calendar year results, released on 8 March, the company reported pre-tax profits of $611.5m, an increase of 10.9% year on year. Furthermore, revenue grew to $2.7bn, up 11.2% compared to 2020.
The business also increased its full-year dividend payment to ¢33.9, from ¢25.8 the previous year. Despite this, silver output for the year remained flat and gold production fell by 2.4%.
Overall, Fresnillo exhibits consistent growth in profit and revenue. While past performance is not necessarily an indicator of future performance, these results are attractive to me as a potential investor. What’s more, the firm may well be cheap at current levels. Given all these factors, I will be using my £500 to buy Fresnillo shares without delay. This will add more diversity to my long-term portfolio.