Earlier this month, Fresnillo (FRES) outlined why its free cash flow had surged on the back of buoyant precious metals pricing. The miner intends to return a goodly proportion of these flows to shareholders despite a decline in silver production. But it’s not unusual for precious metals miners to prioritise shareholder returns when prices are running in their direction, hence their attractiveness to active portfolio managers.
The direction of prices will also have a bearing on the degree to which Fresnillo’s Latin-American counterpart, Hochschild Mining (HOC), rewards shareholders when it releases its interim figures on 27 August. Both miners have seen their valuations run up strongly despite specific operational issues at some of their sites, as the prices of the underlying commodities still hold sway over market bulls.
Unfortunately, ongoing El Niño effects in Brazil have dampened prospects for Hochschild shareholders, given that production at the Mara Rosa open-pit gold mine was adversely affected by heavier than usual seasonal rainfall in the early part of the year.
Among other related drawbacks, the rains have restricted access to higher-grade zones within the pit. The mine was originally expected to produce 94,000-104,000 ounces (oz) of gold in 2025, but had only met around a quarter of those expectations by the end of June.
Activities at the mine’s processing facility were suspended in the last week of June in order for the company to carry out maintenance work and mechanical filter repairs, which are being temporarily overseen by chief executive Eduardo Landin. Costs linked to the remedial measures could entail a $15mn (£11mn) capex bill, according to analysis from RBC.
So we will have to wait until the end of the month to determine whether these issues will persist further into the year. Still, Hochschild shareholders can take solace in average realised prices through to the end of June, with gold up 28 per cent year on year to $2,832 an oz, and silver up by a quarter to $33.80 an oz.
Prices for the two precious metals have been broadly in lockstep in 2025, but gold has outstripped its less fancied rival over the past five years.
Both metals normally demonstrate an inverse correlation with the US dollar, but these types of historical relationships haven’t been quite so dependable of late. The impact of underlying prices on share price performance is probably more consistent.
Nonetheless, the current gold to silver ratio could indicate that the latter metal is undervalued in relative terms. There is no denying, however, that the ratio has fluctuated erratically from time to time. Five years ago, it stood at 70.5, but it has risen to 87.6 in the intervening period. The typical gold-silver range oscillates between 50 and 70 times, so it’s hard to ignore the current multiple, yet we should remain mindful that it’s a relative valuation – prices for both metals remain high in absolute terms.
Hochschild’s share price has retraced since the Mara Rosa update on 10 June stalled momentum, however briefly. The technical signals have been in positive territory since April 2023, yet the miner’s valuation still looks attractive relative to peers, with a forward enterprise value/cash profit (EV/earnings before interest, tax, depreciation and amortisation, or Ebitda) multiple of 4.47 set against the mean of 5.57 times, and the 7.63 rating ascribed to stablemate Fresnillo. In March, when we last reviewed the investment case, Alex Hamer noted that the EV/Ebitda multiple exceeded “five times during previous bull runs for gold and silver”.
Notwithstanding events at Mara Rosa, Hochschild has been responsible for relatively few earnings surprises over the past decade, negative or otherwise. All but two of the 10 sell-side analysts covering the stock are pitching a ‘buy’ recommendation, although the shares now change hands at a modest 14 per cent discount to the consensus target price.
Hochschild’s price/earnings growth (PEG) ratio of 0.4 would normally be indicative of a potentially mispriced asset, but the PEG ratio is less reliable where natural resource stocks are concerned due to the inherent volatility of their earnings, a consequence of fluctuating commodity prices and cyclical demand.
But there are plenty of indisputable positives. The group continues to pay down debt even though you wouldn’t contend that it’s overburdened in this regard with a current net leverage ratio equivalent to 0.43 times Ebitda at the end of June. And although a contracting quick ratio raises questions over coverage of its short-term liabilities from a liquidity perspective, its free cash flow yield is expected to more than double from the end of this year to 13.2 per cent in 2026. Perhaps the most concerning aspect in terms of Hochschild’s valuation was the suspension of the all-in sustaining cost guidance, but we can expect further details on this score within the interim release this coming Thursday.
