Fresnillo weak as UBS downgrades to ‘sell’ from ‘neutral’ on valuation grounds

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Fresnillo PLC (LON:FRES) saw some of the shine taken off its share price on Monday by a UBS recommendation downgrade to ‘sell’ from ‘neutral’ on valuation grounds, with its analyst feeling that structural challenges are likely to persist for the Mexico-focused precious metals producer.


The Swiss bank also reduced its target price for the FTSE 100-listed firm to 700p from 1,100p, with the shares currently trading at 1,022.50p, down 0.7% from Friday’s close.


READ: Fresnillo expects lower gold production after land slip and permit delays


In a note to clients, the UBS analysts pointed out that Fresnillo has underperformed the GDX index by around 75% over the last three years reflecting consistent production guidance downgrades and a dramatic shift in its cost position.


They said: “In our view the drivers of this underperformance are structural; we see limited scope for FRES to materially improve its cost position, it offers modest growth (10-15% 3yrs) but our confidence in this growth is low after years of downgrades.”


The analysts noted that despite a poor track record in recent years, the firm’s shares trade at a price/net present value (NPV) and enterprise value (EV)/EBITDA premium to EMEA/SA peers and has a modest (around 3%) dividend yield.


They added: “In our view this suggests the market is expecting an operational turnaround that is unlikely to materialise.”


The analysts concluded that Fresnillo’s valuation is not compelling at top of the cycle gold/silver prices and they believe price risks are skewed to the downside over the next 1-2 years.


They added that Fresnillo’s high-cost position makes it vulnerable if the gold price cycle turns creating unattractive risk versus reward.

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