Poor Man’s Precious Metal Will Make Fresnillo and Silver Backers Rich

Poor Man’s Precious Metal Will Make Fresnillo and Silver Backers Rich

Reprinted from the FT – 24/07/2020

Shiny, grey stuff outguns gold pro tem; why Stagecoach will not stage a rebound. Silver is often dubbed the poor man’s precious metal. Fresnillo and Polymetal, extractors of the shiny, grey stuff, are often deemed the poor man’s precious metal miners. They are not looking so poor now. The silver price is up 80 per cent since March. And this week it hit a six-year high above $22 an ounce. Analysts at Citi reckon it could hit $25/oz in short order.

In March, the price of gold was about 125 times the price of silver. Now one ounce of gold is worth nearer 90 ounces of the white metal. When investors cast about for haven assets during moments of crisis and negative real yields, they buy gold first, then silver.

But about half of the demand for silver is industrial. It is used in electronics and solar panels. When there is a glimmer of hope for economic recovery, silver prices surge. Would-be buyers prone to hyperventilation should always keep paper bags on hand.

Low liquidity in the silver market makes it volatile. In 2011, it hit a high of $48 on one day and fell $12 the next. Investing in it is an exercise in raised hopes and dashed expectations. That goes for buying shares in silver miner Fresnillo of Mexico. Silver is still only a third of revenues, but it is about the largest and purest of London-listed silver extractors.

The group’s shares are up about 80 per cent year to date. They rose again on Wednesday after its silver output in the second quarter to June beat expectations, though gold extraction was weaker. Its underground silver operations were able to carry on despite Covid-19, unlike its open-pit gold mines.

Analysts remain nervy, though. For at least two years the company has persistently over-promised and under-delivered, largely because of problems at the eponymous Fresnillo mine, which was first mined in 1554.

The shares are yet to touch the highs of £20 seen in 2016 when its silver production last peaked. Fresnillo tends to touch the nerves of corporate governance conquistadors, too. It has beefed up its operational management.

Nonetheless, about three-quarters of the shares are owned by the Baillères family.

Russian rival Polymetal has a more consistent production record and yields more to boot. Silver brings in about 15 per cent of revenues. Gold brings in the rest. For all its heritage and the relative softness of the yellow metal, Polymetal is probably a more solid investment.

Stagecoach stand-off The 1939 John Wayne movie Stagecoach delivered all the thrills and spills of a classic western. Stagecoach the business has all of the spills and none of the thrills. The UK bus operator predicted on Wednesday that the pandemic would have a lasting impact on travel. It reckons it will be some time before demand for its services returns to pre-coronavirus levels. Some analysts believe that is unduly pessimistic.

But shareholders should worry about passenger numbers bouncing back. Public transport use fell sharply during lockdown as customers heeded advice to stay at home. Now it is starting to return — but not at speed. Mileage on regional services — a measure of how many buses are running — is back to 80 per cent of last year’s levels. Passenger numbers, however, have not recovered to this level. Ticket sales are up, but only to 40 per cent of last year. State support explains the discrepancy — the government has paid to keep services running. That has offset losses. Support will end eventually, though.

Operators such as Stagecoach are hopeful that date is a while away yet since social distancing is the main constraint on passenger numbers. Homeschooling, home shopping, and homeworking have all hit transport use. So have virtual GP appointments, says Stagecoach. Not all of these losses will be made up. The government cited online shopping as a cause for falling bus use as early as 2017. Stagecoach is optimistic that state backing for buses will see it through in other ways. The government’s “leveling-up” agenda to encourage regional growth is a reason it might continue to support public transport. So too are climate change and emissions concerns. But passenger numbers have been declining since 2014. Social distancing only adds to the list of headwinds. If the level of state financial support remains high, it may be hard to justify high profits and prices to the public and politicians. Investors recognise the risks. The shares are down two-thirds since the start of the year. They trade at roughly a third of the five-year average price/earnings multiple, calculates Liberum analyst Gerald Khoo.

In Stagecoach, John Wayne survives a shootout where the odds are stacked against him. That only happens in Hollywood.