Fresnillo loses status as leading bank's top precious metals pick, but remains highly rated

JP Morgan has replaced Fresnillo PLC with AngloGold Ashanti as its top EMEA gold miner pick, citing Fresnillo's limited valuation upside and potential cost pressures from a strengthening Mexican peso. While JPM remains bullish on gold, forecasting prices to reach $3,600/oz by 2026, it now favors AngloGold's more attractive valuation and superior free cash flow yield, placing it on 'positive catalyst watch' ahead of its half-year results. Fresnillo shares declined 3.5% on the news, reflecting the shift and broader profit-taking.

Analysis

JP Morgan has revised its top pick in the EMEA precious metals sector, replacing Fresnillo PLC with AngloGold Ashanti, signaling a shift in relative value preference rather than a bearish view on the sector. The downgrade of Fresnillo is predicated on two primary concerns: valuation and operational costs. The company's enterprise value to EBITDA multiple has expanded to over seven times with a free cash flow yield of approximately 6%, a significant deterioration from the 4.5x multiple and 9% yield observed a year ago, suggesting limited further upside. Furthermore, the strengthening of the Mexican peso since April poses a tangible risk to Fresnillo's cost structure, potentially forcing management to raise cost guidance during the upcoming second-quarter results. In contrast, AngloGold Ashanti is now favored for its more attractive valuation, low net debt to EBITDA ratio, and a superior free cash flow yield near 10%. JP Morgan has consequently placed AngloGold on a 'positive catalyst watch' ahead of its August results. This selective rotation occurs within a bullish macro context for gold, with the bank forecasting prices to potentially exceed $4,000 per ounce by Q2 2026, underscoring that this is a stock-specific recommendation.

Key Decisions for Investors

• Investors holding Fresnillo should reassess their positions in light of its stretched valuation and the identified risk of rising costs due to the strong Mexican peso, which could limit near-term upside.
• Consider rotating capital from Fresnillo to AngloGold Ashanti, which now presents a more compelling investment case based on its attractive valuation, superior free cash flow yield of nearly 10%, and a potential positive catalyst from its upcoming results.
• Monitor the upcoming Q2 results for precious metals miners closely, with a specific focus on cost guidance and the realized impact of currency fluctuations on operating margins.
• Maintain a long-term bullish stance on the gold sector, as the analyst's underlying commodity price forecast remains strong, but prioritize companies with favorable relative valuations and manageable operational risks.