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Investing in precious metals mining stocks has been deeply frustrating over the past three years. However, with gold prices surging to multiple all-time highs and silver like a coiled spring, this FTSE 100 stock looks primed for lift off.
Record shareholder returns
When I last covered Fresnillo (LSE: FRES) back in May 2024, the stock had moved 25% in just a month. Silver prices, which had been doing nothing for years, had just popped from $22 to $34. Since then, the cheaper cousin to gold has remained in the $30 range, a feat not seen since back in 2011.
Off the back of surging metal prices, the miner’s 2024 results were simply off the Richter scale. Gross profit was up 150% to $1.2bn. Earnings before income tax, depreciation, and amortisation (EBITDA) more than doubled to $1.5bn. And net cash from operating activities more than tripled to $1.3bn.
With the business simply gushing free cash flow, shareholders are set to receive bumper returns. On top of a final ordinary dividend, it intends to pay out a one-off special dividend of 41.8 cents. Excluding the already paid interim dividend, that means the yield for 2024 will be 6.2%.
Demand for gold
Gold prices have surged off the back of unprecedented demand from foreign central banks, including China.
Scott Bessent, the US Treasury Secretary, has a long history of managing a hedge fund. He has made it known that his funds had been accumulating gold before he took the position in Trump’s government.
Bessent has made it clear that the US is in the last chance saloon when it comes to dealing with its public debt mountain. He has even talked about the possibility of a Bretton Woods realignment in the years ahead.
I don’t expect gold to take on the role of a currency like it did before the Bretton Woods system was scrapped in 1971. But that doesn’t mean that gold won’t have some kind of potential role to play in the future. And on top of mounting geopolitical risks, I don’t rule anything out by this US Administration.
Gold to silver ratio
If someone had told me a year ago that the price of gold would be near $3,000 and yet the ratio of gold to silver would sit above 90, I would have laughed it off. With that ratio sitting at historically record levels, I can’t see anything other than it falling in the coming years. That means higher silver prices.
Silver has one huge advantage over gold – it’s used in multiple industrial applications. For example, silver makes up 10% of solar panels, demand for which is growing.
Investing in Fresnillo doesn’t come without significant risks. Operational challenges at several of its mines have beset it for years. If silver prices do explode in the years ahead, governments might well remove concessions or demand a greater slice of the pie.
Despite the huge risks investing in precious metals miners, I have been accumulating shares in Fresnillo for over two years now. If metal prices continue to climb, I wouldn’t be surprised to see special dividends becoming more of a regular feature in the coming years.
