In a report released today, Sandeep Peety from Morgan Stanley downgraded FRESNILLO (FNLPF – Research Report) to a Sell, with a price target of p540.00.
Sandeep Peety has given a Sell rating to FRESNILLO’s stock based on a combination of factors, which include significant and persistent cost pressures that are likely to continue affecting the company’s profitability. Despite a recent increase in silver prices, Peety anticipates that Fresnillo will face sustained inflationary pressures, with specific concerns over wage inflation, the expiration of energy subsidies, and the impact of local currency strength. Furthermore, there is skepticism regarding the company’s ability to sufficiently mitigate these pressures, as the current market consensus appears overly optimistic about the potential for cost reductions, which Peety contends is not reflective of the more likely scenario of increasing costs.
Moreover, Peety’s analysis points to structural challenges within Fresnillo, such as the limited growth in production volumes and an aging mine portfolio that demands more capital expenditure for sustaining operations. The projected compound annual growth rate (CAGR) for gold and silver equivalent volumes is notably lower when compared to industry peers, signaling a competitive disadvantage. Additionally, capital expenditure estimates from consensus forecasts are considered too conservative given the need for higher investment to extend the life of the mines. These factors, combined with a valuation that is perceived as rich when considering the risks, have led to the Sell rating and an underweight position on the stock.
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FRESNILLO (FNLPF) Company Description:
Fresnillo Plc is a holding company, which engages in the production of gold and silver. It operates through the following segments: Fresnillo, Saucito, Cienega, Herradura, Soledad-Dipolos, Noche Buena, and San Julia. The Fresnillo, and Saucito segments are located in the state of Zacatecas, an underground silver mine. The Cienega segment includes San Ramón satellite mine which are both located in the state of Durango, an underground gold mine. The Herradura, and Noche Buena segments are located in the state of Sonora, a surface gold mine. The San Julian segment operates on the border of Chihuahua/Durango states, an underground silver-gold mine. The company was founded on August 15, 2007 and is headquartered in Mexico City, Mexico.
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