Should You Buy Fresnillo?

09/27/2013 12:00 pm EST

Focus: COMMODITIES

The world's number one silver producer is not shining as brightly as it once did, but Harvey Jones of The Motley Fool UK, wonders if that means now is a golden time to buy or not.

I'm out shopping for shares again, and here's the question I'm asking right now. Should I buy Fresnillo (FNLPF)?

Silverado

It's been a desperate 12 months for silver and gold miner Fresnillo, whose share price is down 43% in that time. Luckily, I saw it coming. When I last reviewed this stock back in January, I said it was too expensive at 27 times earnings, given challenges, such as rising costs and perilous precious metals prices. It's a lot cheaper today, however, trading at a comparatively modest 17.8 times earnings. Should I buy it?

Fresnillo, the world's largest primary silver producer and Mexico's second-biggest gold miner, recently reported a 29% fall in interim earnings to $486 million, due to falling metals prices and rising production costs. The silver price is down 36% in the last 12 months and, despite a recent recovery, has fallen 9% in the last 30 days to $21.75 an ounce. Gold is down 24% in one year, and 7% in the last 30 days to $1,325 an ounce.

There's not much Fresnillo can do about that, aside from cutting costs, which it has been doing with gusto. Chief executive Octavio Alvidrez is aiming to make the company "amongst the lowest cost precious metals producers." Fresnillo is in a strong financial position, with zero debt and a cash position of $578 million. But it still cut its interim dividend by a whopping 68% to 4.9 cents per share. Currently, it yields 3.6%.

All that glistens

The cycle is moving against Fresnillo, but it is an experienced miner that has been through this kind of thing before. It remains confident, investing up to $800 million this year and the same next year, to hit its target of producing 65 million ounces of silver in 2018.

Operating margins of 48.5% and a 37% return on capital employed both impress.

Earnings per share are forecast to drop a mighty 46% this year, but recover to grow 9% in 2014. If you're in a speculative mood, you could take a punt in the hope that the precious metals cycle swings in Fresnillo's favor. But this level of volatility isn't for me.

Harvey doesn't own shares in any company mentioned in this article.

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