Silver has performed very badly in recent months and has hit the lowest levels that we have seen since the start of 2016, but there are plenty of reasons why you should have some exposure to the metal in your portfolio. Often silver is treated purely as a precious metal and it does tend to follow gold price movements, but it is probably even more valuable for its industrial uses, and in particular electronics. The price has suffered as a result of the strong US Dollar, plus concerns over various trade disputes around the world, as has been the case with most other commodities, but to see where it is likely to go longer term it is more important to look at the supply and demand dynamics of the metal.
In terms of demand, as well as its uses in electronics it is also important in the manufacture of solar panels as well as semi-conductors, amongst other things, and demand in these areas is only likely to grow in future years. At the same time there isn’t much in the way of new supply coming online, although this year there have been some increases as a result of existing large mines either coming back online or producing from higher grade zones, but that is only likely to result in a temporary rise in supply, and at the same time supply from scrap metal has been falling. That means that although the price currently looks weak at around $14.89/oz, the supply and demand dynamics should mean that the price will be higher in the coming years, and quite likely significantly so, given that it has traded as high as in excess of $46/oz as recently as March 2011, and has been above $20/oz on a number of occasions since then. To take advantage of future strength you could of course just add physical silver to your portfolio, but I would rather get exposure via an equity position in one of the larger silver miners.
Mexican silver and gold miner Fresnillo (FRES) has seen plenty of share price weakness recently and the shares now trade at sub 950p, close to the 12 month lows, and at a market cap of below £7 billion – a far cry from the 1670p level which was hit around this time last year. Other than the persistent fall in the silver price there hasn’t been any real negative news from the company operationally apart from a slight downwards revision of 2018 guidance for silver from 67-70Moz to 64.5-67.5Moz, but at the same time gold production target was increased from 870-900Koz to 900-930Koz. Production was actually up on the same period in 2017, for the six months up until June 30 2018, and gross profit and EBITDA were also substantially higher, although net profit was down to $229 million as a result of deferred taxes plus the Mexican Peso to US Dollar exchange rate. The company does have some debt, with around $800 million relating to the credit facility from 2013, but it has very little in the way of current liabilities and nearly $690 million in cash and equivalents.
This company has always been a favourite of mine for exposure to silver, and especially so when I think the metal looks too cheap, and nothing fundamentally has changed here to alter that view. In the short term the share price could fall even lower and the safe play would be to wait until there are signs of a proper reversal in the silver price, but even jumping in at this share price I see plenty of potential for a very healthy profit in the long term – and that also applies to those already holding from higher share price levels.
Filed under: Fresnillo, FRES, Amigo Holdings, mythical wonders, Crawshaw, Andalas, Arcontech
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