Penoles Poised for Payback From Gold and Silver Rally

After two punishing years for Industrias Penoles SAB investors, the stock is poised for a rebound as the world’s biggest silver miner is having the best start in eight years from surging metal prices.

Penoles, the operator of seven silver, zinc and lead mines in Mexico, has returned 4.9 percent this year through Wednesday, the stock’s best start to a year since 2007. The eighth-best performer on Mexico’s benchmark IPC index this year, Penoles was the worst performer on the index the prior two years when it tumbled 56 percent.

The turnaround for Torreon, Mexico-based Penoles, founded in 1887, is linked to rising gold and silver prices, according to Fernando Bolanos, an analyst at Grupo Financiero Monex SAB. Silver has increased 8 percent in 2015 after sliding 48 percent the previous two years. Gold prices have climbed 9.2 percent through Jan. 27 after falling 29 percent.

“In the short term, gold is going to continue to rise, and there is more room to keep increasing,” Bolanos said in an interview from Mexico City. “As metal prices increase, so, too, do the shares of Penoles.”

Gold is forecast to rise to $1,295 an ounce in the fourth quarter, according to the average estimate of analysts compiled by Bloomberg. Silver is expected to be $18.22 an ounce in the fourth quarter. Gold futures fell 0.3 percent to $1,288.21 an ounce on the Comex in New York. Silver was little changed at $18.016.

“We live in a world where we don’t control the prices of metals,” Arturo Vaca, Penoles director of energy and technology, said in a Jan. 12 wind energy presentation in Mexico City. “Similar to what is happening to the oil prices, it happens to us all the time in terms of prices for zinc, lead, silver and gold.”

Flooded Mine

Bolanos, the top rated of Penoles analysts surveyed by Bloomberg, raised Monex’s recommendation to buy from sell last month. He also forecast the stock’s price target to rise to 326 pesos from a current 302 pesos.

Penoles has three buy ratings, seven hold recommendations and one sell rating from analysts, according to data compiled by Bloomberg. Penoles fell 2.2 percent to 295 pesos in Mexico City.

Penoles said Jan. 1 that production at its Unidad Minera Naica mine was halted because of partial flooding. The mine, located in the northern state of Chihuahua, produces lead, zinc and silver, and is known for containing giant selenite crystals.

The company is working to stabilize the mine and reduce flooding, Leopoldo Lopez, a spokesman for Penoles, said in a phone interview from Torreon. The company doesn’t have an estimate for when production will resume, Lopez said.

The production stoppage will probably be offset by improved gold and silver prices, according to Monex’s Bolanos.

High Margins

Penoles, which owns 75 percent of Fresnillo Plc, the London-traded unit accounting for most of the company’s profit, posted third-quarter net income of 1.16 billion pesos ($79 million), which was pinched by slumped prices, according to a company presentation on Oct. 28. Penoles’ quarterly sales slid 1.3 percent to 15.5 billion pesos from a year ago.

The company has proven resilient amid fluctuating prices, said Jean-Baptiste Bruny, a BBVA Research analyst.

“Despite volatile prices Penoles has been able to maintain high margins,” Bruny, who has a buy rating on the stock, said in a phone interview from Mexico City. “They are a well-balanced company that has been able to maintain their projects despite price falls.”

Renewable Energy

Penoles expects that its 200-megawatt wind energy project, which it is constructing with Energias de Portugal SA, will be completed by the first quarter of 2016, Vaca said Jan. 12. Penoles expects the project will help it trim electricity costs that exceed $300 million annually, he said.

Mexico has the potential to generate as much as 20,000 megawatts of wind energy by 2020, according to Eduardo Reyes, director of infrastructure and energy strategy at PricewaterhouseCoopers LLP.

According to legislation passed by Mexico in 2013 to open the energy industry to private investment, new mining projects must generate a percentage of their electricity through renewable sources or purchase corresponding clean energy certificates, Reyes said in a phone interview from Mexico City. There will probably be a significant boom in renewable projects, particularly among mining companies, he said.

Mexico hopes that 35 percent of the country’s energy will be generated by renewable sources by 2024, Energy Minister Pedro Joaquin Coldwell said in September.

“Our strategy has been to be a low-cost producer,” Vaca said. “Wind energy will continue to be the best option for us for our need of electric energy.”

There are high hopes for Penoles this year as silver and gold prices rebound, BBVA’s Bruny said.

“Penoles has had some difficult years, not only for the company but for all of the sector,” he said. “As prices return to normal, Penoles will continue to recover.”

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