Rising Costs And Delays Will Hamper Orisyvo And Guanajuato Sur

Key Takeaways

• Persistent permitting delays, rising costs, and regulatory hurdles threaten project delivery, compress margins, and delay growth across Fresnillo's mine portfolio.
  
• Weakening ore grades, declining metal demand, and political risks undermine profitability, placing long-term pressure on revenues and future shareholder returns.
  
• Favorable market demand, supply constraints, strong operational efficiency, and a positive regulatory climate collectively position the company for sustained growth and resilience.

Catalysts

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

• Rising capital expenditures for major growth projects like Orisyvo and Guanajuato Sur, both of which face significant permitting hurdles and complex social and environmental consultations, are likely to drive up development timelines and costs, eroding long-term net margins and delaying expected revenue growth.
  
• Declining ore grades at legacy mines such as Fresnillo and Saucito, combined with unstable ground conditions and ongoing access issues, will force the company to process greater volumes of lower-quality material, pushing up cost per ounce and compressing profitability through higher adjusted production costs.
  
• The accelerating global shift to stricter decarbonization policies and new environmental standards will increase regulatory compliance costs and may introduce further permitting delays, directly threatening the pace of production ramp-up in Fresnillo's development pipeline and putting sustained pressure on future earnings.
  
• Advancements in alternative materials for electronics and jewelry could gradually reduce demand growth for silver and gold, while increased supply from world recycling and a growing circular economy threatens the need for primary mining, resulting in structural downside risk for Fresnillo's long-term top-line revenues.
  
• Significant exposure to political and fiscal risk in Mexico, including potential for mining tax increases, royalty hikes, or renewed community opposition, introduces persistent uncertainty around after-tax profits, cash flows, and future dividend capacity.

Fresnillo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Fresnillo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Fresnillo's revenue will decrease by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.6% today to 23.4% in 3 years time.
• The bearish analysts expect earnings to reach $780.5 million (and earnings per share of $1.06) by about August 2028, up from $456.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 37.0x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 9.7x.
• 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 9.25%, as per the Simply Wall St company report.

Fresnillo Future Earnings Per Share Growth

Risks

• Global trends toward electrification, solar energy, and increased use of silver in high-growth sectors like electronics are supporting a secular rise in demand for silver, which is likely to sustain or boost Fresnillo's revenues and long-term earnings.
  
• Persistent supply constraints in both gold and silver, coupled with multi-year market deficits and limited new supply, position Fresnillo-with its vast silver and gold reserves-as a key beneficiary, underlining strong pricing power and the potential for resilient top-line growth.
  
• Ongoing and successful cost-control initiatives, increased operational efficiency, and brownfield expansions (including at Herradura and Valles underground) are driving higher EBITDA margins and support a long-term trend of improved or stable company profitability.
  
• Strong balance sheet, prudent financial management, and robust free cash flow generation (with almost $2.3 billion cash expected by year-end) provide resilience against commodity price cycles and enable investment in both organic growth and sustained shareholder dividends, bolstering long-term earnings visibility.
  
• Positive regulatory environment in Mexico, with constructive dialogue with the new administration and improving relations with local communities, reduces operational risk, supports project permitting, and underpins consistent production and revenue generation over the coming years.

Valuation

• The assumed bearish price target for Fresnillo is £9.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Fresnillo's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 £9.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $780.5 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of £17.01, the bearish analyst price target of £9.2 is 85.0% 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.