Long-Term Gold Price Strength Will Drive Profitability And Earnings Outlook

Key Takeaways

• Operational discipline and infrastructure improvements are set to enhance production efficiency, lower costs, and potentially boost future net margins and earnings.
  
• Exploration success and strategic planning are anticipated to expand resource bases and stabilize production, supporting consistent revenue and earnings growth.
  
• Operational challenges and increased costs, alongside issues in key projects and agreements, could negatively affect Fresnillo's production, revenue, and net profit stability.

Catalysts

Fresnillo plc mines, develops, and produces non-ferrous minerals in Mexico.

• Fresnillo has implemented operational discipline measures, such as improving dilution control and reducing mine sections, which are expected to enhance production efficiency and lower costs, potentially benefiting net margins and earnings in the future.
  
• The reassessment of the strategic mine plan for Herradura, along with advances in sulphide processing, is anticipated to reduce costs and improve production efficiency, thereby positively impacting future earnings.
  
• The company's exploration efforts, particularly in areas like Ciénega and San Julian, have shown promising preliminary results that could extend mine life and increase resource and reserve base, potentially boosting future revenues and earnings.
  
• The receiving of pending environmental permits and infrastructure improvements at Juanicipio are expected to enhance operational efficiency and stabilize future production, which could support consistent revenue and earnings growth.
  
• Fresnillo's focus on cost control and operational efficiencies through infrastructure investments, such as the San Carlos shaft and Jarillas shaft, aims to maintain or widen margins, positively impacting net margins and earnings in future years.

Fresnillo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fresnillo's revenue will decrease by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 28.2% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.16) by about September 2028, up from $456.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $737 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, down from 45.0x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 11.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.24%, as per the Simply Wall St company report.

Fresnillo Future Earnings Per Share Growth

Risks

• Fresnillo faces operational challenges such as narrow veins leading to increased dilution and lower ore grades, which could negatively impact production and revenue.
  
• The transition from oxide to sulphide zones in Herradura has increased operational costs and complexity, potentially affecting net margins.
  
• Inflationary pressures and labor reform in Mexico have raised operational costs, impacting the company's earnings.
  
• The shortening mine life and change in ore mix at Ciénega, and issues with operational efficiency at San Julián, could limit growth in production and revenue.
  
• The uncertainty in the Silverstream agreement due to operational and financial challenges, and potential changes to terms, could result in variability in expected income from this stream, affecting net profit stability.

Valuation

• The analysts have a consensus price target of £14.181 for Fresnillo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £20.84, and the most bearish reporting a price target of just £9.33.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 9.2%.
• Given the current share price of £20.74, the analyst price target of £14.18 is 46.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.