RBC downgrades Fresnillo, upgrades Hochschild on valuation shift

Investing.com -- Fresnillo (LON:FRES) plc has been downgraded to "sector perform" from "outperform" by RBC Capital Markets following a 36% year-to-date share price increase, outpacing silver peers, in a note dated Thursday. 

The rise has been driven by strong operational performance, a weakening Mexican Peso, and record profitability. 

However, RBC now sees limited further upside and highlights better risk-reward opportunities in Coeur Mining (NYSE:CDE), Hochschild Mining, and Pan American Silver (NYSE:PAAS).

Fresnillo ended 2024 in line with guidance, benefiting from cost savings and currency movements that drove record dividends. 

Despite expectations for a 10% decline in silver-equivalent production in 2025 and 2026, higher metal prices and further MXN weakness could sustain free cash flow yields at 8%. 

The company is projected to continue issuing special dividends, with an estimated 7% yield in 2025, much above sector peers. 

However, RBC does not expect Fresnillo to regain its historical premium valuation due to its cost structure and lack of near-term growth catalysts. Recent sector transactions have also provided more liquid silver exposure alternatives.

RBC has raised Fresnillo’s price target to 880p from 810p, reflecting revised commodity and FX forecasts and expectations of margin expansion. 

While the 7% dividend yield suggests an 11% total implied upside, RBC maintains its view that stronger opportunities exist elsewhere in the silver space.

Meanwhile, Hochschild Mining plc has been upgraded to "outperform" after a 20% year-to-date underperformance, making it the most inexpensive silver stock in RBC’s coverage. 

The decline was driven by disappointing cost and capital expenditure guidance, but RBC now sees these concerns as priced in, improving the risk-reward outlook.

Hochschild’s production forecast for 2025-2029 has been revised, incorporating higher gold and silver price expectations, which have increased by 7% and 2%, respectively. 

The life-of-mine projections for Royropata, Mara Rosa, and San Jose have been extended, and while Royropata’s first production has been delayed to 2028 due to permitting, RBC sees this as a long-term stabilizing factor.

The price target for Hochschild Mining has been increased to 270p from 260p, based on a blend of P/NAV and EV/EBITDA metrics.

Although partial hedging of 2025 production at $2,300/oz may limit immediate upside, RBC believes the commissioning of Royropata and Monte Do Carmo will enhance the company’s resilience and cash flow generation over the long term.

Hochschild’s cost guidance does not assume a devaluation of the Argentine peso, but if this occurs, it could result in cost reductions and improved margins.

With Fresnillo’s valuation now reflecting its recent outperformance and Hochschild’s risk-reward dynamic improving, RBC Capital Markets sees stronger upside potential in Hochschild, Coeur Mining, and Pan American Silver.

Shares of Frensillo were down 3.6%, while Hochschild was up nearly 1% at 09:31 ET (13:31 GMT).