I hate chasing the latest thing. A far better strategy in my view when picking FTSE 100 stocks is to take a contrarian view.
That way, I might be able to buy shares in a solid company that’s ripe for a share-price bounce-back.
Fresnillo (LSE:FRES), the Mexico-based precious metals miner, has seen its share price collapse by 36% this year. Although the company has undoubtedly had a tough time of it, I see more than a glimmer of hope on the horizon.
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A bump in the road
A strike by a small group of Fresnillo’s employees put a stop to operations at its Herradura gold mine earlier this year.
This strike, which impacted production, resulted in an estimated 1% decrease in total sales volume in terms of annual equivalent gold ounces.
However, the company has managed to maintain its production guidance for 2023, and the strike has now ended with all production activities resumed.
While the strike caused a disruption, it seems to have been a minor hurdle in the grand scheme of things.
Mining law changes and the big picture
Recent changes in Mexico’s mining laws have also raised concerns. The good news is that analysts say they’re unlikely to significantly impact mining heavyweights like Fresnillo.
Fitch Ratings says that most of Fresnillo’s concessions aren’t materially affected by the new law, although exploration activity may face some challenges.
Its operations have a long-standing history, with its flagship mine in operation for nearly 500 years.
Such a track record demonstrates the company’s ability to navigate through changing regulations and adapt to evolving circumstances.
Strong production and attractive financials
Fresnillo has had a solid start to the year, with both gold and silver production showing positive growth compared to the previous quarter.
The company has benefited from a higher contribution from the new Juanicipio mine and a strong performance at the Herradura gold mine.
Yet its share price has experienced a significant decline, currently trading at 612p, down 36% from this year’s high of 967p.
However, I think this presents an opportunity for me as the stock appears cheap based on its price-to-book ratio of 2. Comparatively, in 2020, the ratio was 3.3, and in 2017, it was 4.73, indicating that the stock is historically inexpensive at present.
Moreover, Fresnillo’s debt-to-equity ratio of 0.35 indicates a relatively healthy balance sheet, providing a level of financial stability. Additionally, the company boasts a return on equity of 7.75%, which is a positive sign of efficient capital use.
Looking forward, the business is maintaining its production guidance for 2023, with projected attributable silver production expected to be in the range of 57m to 64m ozs and attributable gold production in the range of 590k to 640k ozs.
Of course, investing in mining companies isn’t for the faint hearted. Commodity markets are viciously volatile, and by extension so are the share prices of mining companies.
Still, I plan to buy Fresnillo stock in the near future. I see the company as being undervalued and a solid way to get leveraged exposure to gold and silver.
