With gold rising, will Fresnillo shares bottom out?

Russian troops entering Ukraine is another reason for investors to push up the price of gold. Do the shares of gold producers like Fresnillo stand to benefit?

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The response to Russia/Ukraine

So far, Russia has not gone for the full-scale invasion that the West repeatedly predicted. Although technically within Ukrainian borders, Russia can avoid a shooting war by sticking within the territory already controlled by separatists.

The first sanctions on Russia came from the EU, putting the delayed Nord Stream 2 pipeline into a further holdup. Sanctions on three small Russian banks followed this. The UK applied sanctions on five smaller Russian banks.

What sanctions mean for gold

Markets are generally drawing back because of uncertainty; it's unknown how far Russia will go and how strong the response will be. That has increased demand for safe-haven assets, including gold which neared a 9-month high. Notably Russia is the third-largest gold producer in the world.

It's speculated that if the West were to freeze Russia out of SWIFT, using gold would be one of the ways to access markets, alongside foreign currency-based alternatives to SWIFT. It would be thought that gold producers such as Fresnillo would stand to gain from the resulting higher price of gold. Notably, the harder the sanctions, the more Russia would have to resort to more traditional mediums of exchange.


No advantage

Fresnillo is unfortunately not in the best position to take advantage of the rising gold price. Production has been diminishing due to the Noche Buena mine coming to the end of its life. The Herradura and Cienaga mines have hit lower grades, which means that the company is forecasting less production this year than prior.

Production has also been affected by omicron sweeping across Mexico. Coupled with new labour reforms starting from September 1st, the company's guidance had to be re-evaluated. This led its market value down to 2-years lows.

NOTE: Former UK-listed gold and copper producer Antofagasta is holding up better, and could be more of a beneficiary of higher gold prices.

FRES near a 2-year Low

Fresnillo's stock trades above its 2-year low of 612p, at 680p. In a prominent bear market, the price has again dropped away from its 50-week moving average. The moving average alongside the July 2021 low both act as resistance.

Losing the most recent support at 665p would open the door to 540p. Below that, the next significant support lies at 460p, the multi-year low formed in 2020.

Source: Spreadex trading platform

Key takeaways

As long as Russia keeps war at bay, recent safe-haven gains may come unstuck but ongoing tensions could keep a floor under the price of gold. The current sanctions have not been a factor – but if the West decides to cut Russia out of SWIFT operations, demand for gold could increase.

Due to production issues, Fresnillo has been unable to benefit from recent gold strength and if gold has peaked over Russian tensions, Fresnillo shares could remain under pressure. However, should the price of gold really start to take off, all-else-equal – could turn things around for Fresnillo.