This could counteract the impact of an increasingly hawkish Federal Reserve, which would normally be expected to cause interest-paying assets to become more attractive relative to the precious metal; there is no “opportunity cost” of owning gold when interest rates are zero. Fresnillo also enjoys a degree of scarcity value thanks to the dearth of precious metal miners in the FTSE 350, so its shares could become increasingly popular among defensively minded investors.

In terms of valuation, the company’s forecast price-to-earnings ratio of 17 initially appears unappealing, in isolation at least. However, two of the world’s largest gold miners, Newmont and Barrick, both listed in America, trade at 27 and 22 times forecast earnings respectively. 

While Fresnillo faces clear operational challenges in the short run and is a smaller producer of gold than its two rivals, its valuation has scope to rise as new projects begin to increase its production capabilities.

Undoubtedly, the company’s share price will be heavily influenced by gold and silver prices. They in turn are highly dependent on how events in Ukraine affect the world economy and investors’ sentiment.

So far, Fresnillo has been held back by operational challenges. While they may continue to inhibit its financial and share price performance in the short run, on a long-term view the company offers an attractive balance between risk and reward.

Questor says: buy

Ticker: FRES

Share price at close: 730.2p

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