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Consider Fresnillo for Gold Exposure in 2019

- By Alberto Abaterusso

If you foresee gold prices pushing over $1,350 in 2019, as Kitco.com says the majority of Wall Street does, then I suggest you look for publicly traded gold miners that tend to outperform the industry during a gold bull market.


One of these players is Fresnillo PLC (FNLPF) (FRES.L), a Mexican developer, explorer and producer of gold and other precious metals.

When the bullion soared 22% over the span of a few months to $1,335 an ounce in summer 2016, followed by another bull market in which the precious metal surged more than 10% to $1,315 an ounce over the first nine months of 2017, Fresnillo thrashed the VanEck Vectors Gold Miners exchange-traded fund (GDX).

The Yahoo Finance chart shows Fresnillo outperformed the benchmark for gold stocks in the first and second gold bull markets over the last five years.

Source of the chart: Yahoo Finance

Fresnillo also beat the ETF on the London Stock Exchange, as illustrated in the Yahoo Finance chart below.

Fresnillo operates assets situated in the most prolific geographical areas for gold and silver mining in Mexico.

These assets are the Fresnillo underground silver mine, the Saucito underground silver mine, the Cienega gold-silver underground mine, the Herradura gold open-pit mine, the Noche Buena open-pit gold mine, the Soledad-Dipolos open-pit gold mine and the San Julian underground silver mine.

The company has total proven and probable reserves consisting of 11.7 million ounces of gold and 501.7 million ounces of silver.

For full-year 2018, Fresnillo is guiding consolidated gold production of 900,000 to 930,000 ounces and total silver production of 64.5 million to 67.5 million ounces.

Mine projects and higher mineral processing rates at several mines are driving production. In the first nine months of 2018, production increased 1.7% to 690,501 ounces of gold and 10.6% to 43.4 million ounces of silver compared to the corresponding period of 2017. Including silver stream, production of the grey metal increased 8.5% to about 46.3 million ounces.

Fresnillo reported lead production increased 7.4% to 13,076 tons and zinc production grew nearly 38% to 22,935 tons.

The same operating improvements, in addition to increased throughput and metal recoveries, should continue to perform well in 2019, giving the stock another catalyst.

The company is already proving to be more operationally profitable than most of its competitors, even when compared to senior mining companies. For the trailing 12 months of operations through the second quarter of 2018, Fresnillo beat the industry in terms of higher gross and operating margins of 43.73% and 31.78%. The industry delivered a median of -13.35% for the gross margin and -9.86% for the operating margin.

The company is also doing much better in regard to operating income and the earnings before interest, taxes, depreciation and amortization margin. Fresnillo produced a five-year average of 47.44% versus an industry median of 27.99%.

These figures indicate Fresnillo has profitable assets and a competitive cost structure.

Fresnillo is engaged in the development of the Pyrites Plant project, where it is targeting improved overall gold and silver recovery rates through the reprocessing of tailings from the Fresnillo and Saucito mines, which will begin in the second half of 2019.

In its pursuit of growth, the company also plans to advance exploration activities as well as make strategic acquisitions.

A quick look at the balance sheet shows Fresnillo has about $690 million available in cash on hand and short-term securities and total debt of about $800 million. The business is leveraged, but less than most of its competitors since its total debt-to-equity is 26.4% compared to an industry median of 43.9%. Further, I have calculated the trailing 12-month interest coverage ratio is 19.4 versus an industry median of 12.66, which means the company doesn't have any problems paying interest expenses on outstanding debt.

Wall Street analysts issued an overweight rating for Fresnillo, which means the stock is expected to outperform its industry or the market. The target price is approximately $13.82 per share, which is the average of 16 estimates ranging from $9.03 to $17.05. The target represents an upside of roughly 23% from its closing prices of $11.35 per share in the U.S. and 8.83 British pounds ($11.11) on the London Stock Exchange on Thursday.

Following a drop for the 52 weeks through Jan. 3, the stock is trading far below the 200-day simple moving average line but still slightly above the 50- and 100-day lines on both the U.S. and London exchanges.

Source: Yahoo Finance.

Source: Yahoo Finance.

The 52-week ranges are $9.35 to $19.93 and 7.38 to 14.61 British pounds . The stock has a price-book ratio of 2.76 versus an industry median of 1.74 and an Enterprise Value-to-EBITDA ratio of 7.19 compared to an industry median of 9.3.

The company has also paid a dividend since 2008. With the exception of 2014, the free cash flow has been distributed every year. As of Thursday, the payment leads to a forward dividend yield of 3.5% versus an industry median of 3.4% and S&P 500 index's dividend yield of 2.1%.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.