Interactive Investor

Chart of the week: why this FTSE 100 stock could double in value

1st August 2022 11:19

John Burford from interactive investor

After underperforming much of the mining sector in 2022, analyst John Burford believes this blue-chip just got interesting.

Is sleepy Fresnillo about to be re-awakened?

FTSE 100 silver miner Fresnillo (LSE:FRES) is an old friend and has been under the cosh in recent weeks as the silver price has languished. But with the very recent sharp improvement in the precious metals, are the shares finally set for a re-rating?

Very unusually for an important industrial commodity, silver is trading today at the same price as it did in 2013. But with silver being an essential component in the production of electric vehicles, or EVs (currently 55 million ounces used annually), the outlook is for even higher demand for the metal as EV demand increases. 

One fly in the EV ointment is the capacity production constraints imposed by the supply bottlenecks of lithium mining where prices are shooting ever higher.

Also, silver is used extensively in electronic devices, and with Apple's recent better-than-expected iPhone sales data, growth in this market seems unexpectedly back on a positive track.

Fresnillo’s recent setback has been inspired by forecasts of a global recession and the hawkish tone of the Federal Reserve who has raised interest rates into the current price inflation scenario.

Here is the long-range chart that strongly suggests the shares are poised for a major third-wave rally phase, provided they can break above the upper tramline. Remember, third waves tend to be long and strong which makes them reasonably identifiable on the charts.

For instance, the silver price is in a third wave up off the 14 July low of $18 (currently over $20).

Fresnillo’s sharp move up to wave 1 earlier in the year contained a third wave which was long and strong. The decline off that wave 1 high appears to be a classic three down a-b-c pattern to the wave 2 low. And now the market is advancing in what should be wave 3.

Past performance is not a guide to future performance.

This would be confirmed by a sharp move above the 'b' wave high at £10 which should set up my pink target at £14 with higher potential. Only a move below the £6 mark would see me heading towards the exit.

Near term, the company will report interim earnings on 2 August. It currently pays a 3.6% dividend.

John Burford is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.